UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the fiscal year ended September 30, 2009

o		Transition report under Section 13 or 15(d) of the Exchange Act.

For the transition period from                      to                     

CENTRAL IOWA ENERGY, LLC

(Name of small business issuer in its charter)

Iowa		71-0988301
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3426 EAST 28TH STREET N.
NEWTON, IOWA (Address of principal executive offices)		50208 (Zip Code)

(641) 791-1010
(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:

Securities registered under Section 12(g) of the Exchange Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o Yes þ No

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

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

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 December 1, 2009, the aggregate market value of the membership units held by non-affiliates (computed by reference to the issuer’s offering price of such membership units in its 2006 state registered offering, as no current trading market exists for such membership units) was $23,559,000.

As of December 1, 2009, there were 26,672 membership units outstanding.

 

 

Table of Contents

PART I			3
ITEM 1. BUSINESS			3
ITEM 1A. RISK FACTORS			27
ITEM 2. PROPERTIES			39
ITEM 3. LEGAL PROCEEDINGS			40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			40
PART II			40
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			40
ITEM 6. SELECTED FINANCIAL DATA			41
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			69
ITEM 9A(T). CONTROLS AND PROCEDURES			69
ITEM 9B. OTHER INFORMATION			70
PART III			70
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE			70
ITEM 11. EXECUTIVE COMPENSATION			74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS			75
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE			76
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES			78
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES			78
SIGNATURES			79
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

AVAILABLE INFORMATION

Our website address is www.centraliowaenergy.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), are available, free of charge, on our website under the link “SEC Compliance,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this annual report on Form 10-K.

PART I

ITEM 1. BUSINESS

Business Development

Central Iowa Energy, LLC was formed as an Iowa limited liability company on March 31, 2005 for the purpose of developing, constructing, owning and operating a 30 million gallon per year biodiesel production plant and engaging in the production of biodiesel and crude glycerin near Newton, Iowa. References to “Central Iowa Energy,” “we,” “us,” “our” and the “Company” refer to the entity and business known as Central Iowa Energy, LLC. Since April 2007, we have been engaged in the production of biodiesel and its primary co-product, glycerin.

On April 5, 2007, our biodiesel production plant was substantially complete, and we commenced operations of the plant. Our plant is capable of producing biodiesel from both vegetable oil, including soybean oil and corn oil, and animal fats. We sold our first shipment of biodiesel on April 20, 2007. On June 20, 2007, construction of our plant and pretreatment systems was 100% complete and we were issued a certificate of completion from our design-builder, Renewable Energy Group, Inc. (“REG”). Our plant has a nameplate production capacity of 30 million gallons of biodiesel per year and is able to pretreat crude vegetable oil, including soybean oil and corn oil, and crude animal fats for use in the biodiesel production process. This ability provides us flexibility to produce biodiesel from lower-cost feedstock in place of higher-cost feedstock to optimize our profits when engaging in ordinary biodiesel production.

We have earned BQ-9000 Accreditation from the National Biodiesel Board and National Biodiesel Accreditation Committee. BQ-9000 is a voluntary quality assurance program which demonstrates that the quality control processes in place at a plant provide confidence that the biodiesel produced at the facility will consistently meet applicable American Society of Testing and Materials (“ASTM”) biodiesel specifications.

We have engaged REG to manage and direct the general operations of our plant pursuant to our Management and Operational Services Agreement (“MOSA”) executed in August 2006. Pursuant to the MOSA, REG is required to manage our plant, acquire feedstock and chemicals necessary for the plant’s operation, sell and market our products and perform certain administrative functions in exchange for a fixed fee per gallon of biodiesel produced at our plant. However, REG previously delivered notice of intent to terminate the MOSA on approximately May 1, 2010. Due to our significant reliance on REG for the management of our plant, the procurement of our inputs, and the sale and marketing of our biodiesel, this could have a material adverse affect on our ability to operate and generate revenues in the event we are not able to negotiate a new MOSA with REG or enter into an agreement for similar services with another third party.

During periods in which we are engaged in ordinary biodiesel production (meaning that we are not producing pursuant to tolling arrangements, but rather ordinary biodiesel sales contracts), our revenues are derived primarily from the sale and distribution by REG of our biodiesel throughout the United States and abroad. However, for fiscal year 2009, most of our revenues were derived from our production of biodiesel pursuant to a tolling arrangement with REG Marketing and Logistics, LLC (“REG Marketing”), an entity affiliated with REG, pursuant to which REG Marketing orders biodiesel production from certain types of feedstock supplied by REG Marketing, in exchange for which we are entitled to receive a fixed fee per gallon of biodiesel produced. See “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” The fixed fee per gallon of biodiesel payable under the MOSA does not apply to biodiesel produced under the tolling agreement with REG Marketing. For the fiscal year ended September 30, 2009, we had produced a total of 5,014,686 gallons of biodiesel at our plant, of which 3,988,292 gallons of biodiesel were produced pursuant to tolling arrangement with REG Marketing and 1,026,394 gallons were produced pursuant to ordinary biodiesel sales contracts. Based upon our nameplate production capacity of 30,000,000 gallons of biodiesel per year (or 2,500,000 gallons per month), we produced approximately 17% of our production capacity for the fiscal year ended September 30, 2009. For the first and second quarters of fiscal year 2010, we expect that we will continue to operate substantially below our nameplate capacity and that most, if not all, of any biodiesel production at our plant will be pursuant to tolling arrangements.

On November 20, 2009 we entered into a Second Amended and Restated Asset Purchase Agreement with REG, REG Newco, Inc., a Delaware corporation (“Newco”), and REG Newton, LLC, a wholly-owned subsidiary of Newco and an Iowa limited liability company (“REG Newton”) pursuant to which we anticipate consolidating our business and operations with REG under Newco. The proposed consolidation will occur through the acquisition by REG Newton of substantially all of our assets and certain liabilities. The Second Amended and Restated Asset Purchase Agreement also contemplates the potential consolidation under Newco of the business and operations of two other biodiesel plants, Western Iowa Energy, LLC and Blackhawk Biofuels, LLC. Please see “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Overview — Proposed Consolidation with REG” for more information regarding this proposed transaction.

We are subject to industry-wide factors that affect our operating and financial performance. These factors include, but are not limited to, the available supply and cost of soybean oil, animal fats and corn oil from which our biodiesel and glycerin are produced; dependence on our biodiesel and glycerin marketer to market and distribute our products; the timely expansion of infrastructure in the biodiesel industry; the intensely competitive nature of the biodiesel industry; current and future legislation at the federal, state and/or local level; changes in biodiesel supports and tax incentives and the cost of complying with extensive environmental laws that regulate our industry. We are also affected by domestic and global economic conditions, such as the current U.S. economic recession and the unfavorable credit environment.

Principal Products, Demand and Market

The principal products that we produce at our plant are biodiesel and crude glycerin. Our plant located near Newton, Iowa in Jasper County is designed to have an annual capacity to produce approximately 30,000,000 gallons of biodiesel.

Biodiesel

According to the National Biodiesel Board, biodiesel is a high-lubricity, clean-burning alternative fuel produced from domestic, renewable resources and is primarily used in compression ignition (diesel) engines and may also be used as home heating oil. Biodiesel provides environmental benefits over petroleum-based diesel, including reduced emissions of carbon dioxide, carbon monoxide, particulate matter, and sulfur. Biodiesel is comprised of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats. A chemical process called transesterification removes the free fatty acids from the base oil and creates the desired esters. Transesterification is the reaction of vegetable oil or animal fat with an alcohol, such as methanol or ethanol, in the presence of a catalyst. The process yields four products: mono-alkyl ester (biodiesel), glycerin, feed-quality fat and soapstock, a by-product of refining the incoming oil. Biodiesel can be used in neat (pure) form or blended with petroleum-based diesel.

Biodiesel that is in neat form is typically designated in the marketplace as B100. The “100” indicates that the fuel is 100% biodiesel. Biodiesel is frequently blended with petroleum-based diesel. When biodiesel is blended, it is typically identified in the marketplace according to the percentage of biodiesel in the blend. For example, “B20” indicates that 20% of the fuel is biodiesel and 80% is petroleum-based diesel.

Biodiesel’s physical and chemical properties, as they relate to operations of diesel engines, are similar to petroleum-based diesel fuel. As a result, B20 biodiesel may be used in most standard diesel engines without requiring any engine modifications. Biodiesel demonstrates greater lubricating properties, referred to as lubricity, than petroleum-based diesel. This could lead to less long-term engine wear as biodiesel creates less friction in engine components than petroleum-based diesel. Biodiesel also demonstrates greater solvent properties. With higher percentage blends of biodiesel, this may cause breakdowns in certain rubber engine components such as seals. The solvent properties of biodiesel also can cause accumulated deposits from petroleum-based diesel in fuel systems to break down. This could lead to clogged fuel filters in the short-term, so fuel filters should be checked more frequently when first using biodiesel blends. These problems are less prevalent in blends that utilize lower concentrations of biodiesel.

General Demand for Biodiesel

The biodiesel industry is still relatively new and unknown especially when compared to the ethanol industry. In 2008, the Renewable Fuels Association reported that a record 9.2 billion gallons of ethanol were produced in the United States. However, the biodiesel industry only produced approximately 700 million gallons of biodiesel in 2008, constituting only a small part of the 60 billion gallon per year U.S. diesel fuel market and a fraction of the amount of 2008 ethanol production. Total 2008 biodiesel production was also significantly less than current national biodiesel production capacity. The National Biodiesel Board estimates that as of June 22, 2009 (the latest date for which information is available), national biodiesel production capacity totaled approximately 2.69 billion gallons per year. Some plants are currently closed and some do not currently operate at full capacity due to this excess production capacity and other economic and market factors. The National Biodiesel Board estimates that production capacity could increase by another 427.8 million gallons once the plants currently under construction or engaged in expansion, if completed, begin production.

Several factors could lead to an increase in biodiesel demand. Biodiesel has received attention from consumers and policymakers in recent years for several reasons. Biodiesel is made from renewable sources and provides environmental benefits over petroleum-based diesel, including reduced emissions of carbon dioxide, carbon monoxide, particulate matter and sulfur. In addition, a 2007 study by the U.S. Department of Energy (“DOE”) and the U.S. Department of Agriculture (USDA) found that biodiesel has a positive energy balance: for every 3.5 units of energy produced, only 1.0 unit of energy is consumed in the production process. Biodiesel mixes easily with diesel fuel at rates between 2% and 100%, and it improves the lubricity of petroleum-based diesel fuel at levels as low as 3%. The increased lubricity reduces friction of petroleum-based diesel fuel and may result in longer equipment life and protection of fuel injectors. Further, the Environmental Protection Agency (“EPA”) Ultra Low Sulfur Diesel Mandate seeks to reduce sulfur emissions through regulations that take effect over the next several years. Because low-sulfur diesel and ultra-low-sulfur diesel have lubricity problems, biodiesel may be an attractive alternative to satisfying the requirements of the mandate. However, EPA regulations are subject to change. If the mandate was cancelled or suspended, or if waiver of the mandate requirements were allowed, future biodiesel demand may be less than expected.

We also anticipate that the Renewable Fuel Standard may increase demand for biodiesel, as it provides for a minimum usage requirement for biodiesel and other types of biomass-based diesel. See “Federal Biodiesel Supports” below.

Historically, the demand for biodiesel follows a seasonal trend. Due to its cold flow properties, demand for biodiesel is typically lower in colder climates and typically declines in the colder fall and winter months and increases in the warmer spring and summer months. See “The Effect of Cold Flow on Biodiesel Markets” below.

We also believe that the recent economic recession and the disruption of credit markets has depressed demand for biodiesel and fuel in general.

Biodiesel Markets

Biodiesel is primarily used as fuel for compression ignition (diesel) engines. It is produced using renewable resources and provides environmental advantages over petroleum-based diesel fuel, such as reduced vehicle emissions. Our ability to market our biodiesel is heavily dependent upon the price of petroleum-based diesel fuel as compared to the price of biodiesel, in addition to the availability of economic incentives to produce and use biodiesel.

Biodiesel is frequently used as fuel in transport trucks, ships, trains, in farming activities and in many government vehicles. Government legislation that seeks to encourage the use of renewable fuels could lead to an expansion of the market for biodiesel in the future. Biodiesel has been identified as a potentially good substitute for diesel fuel in underground mining operations because it burns cleaner and leads to less air pollution, a feature that is very important in confined places such as mines. Further, biodiesel may be safer to handle in a mine setting where fire can be disastrous. Additional markets may become available as a result of growing environmental concerns by American consumers as well as an increased awareness of energy security and the United States’ ability to supply its own fuel needs. However, biodiesel still only accounts for a very small percentage of the diesel fuel market as a whole. The biodiesel industry will need to continue to grow demand in order to sustain the price of biodiesel into the future.

Wholesale Market/Biodiesel Marketers. The wholesale market involves selling biodiesel directly to fuel blenders or through biodiesel marketers. Fuel blenders purchase B100 biodiesel from biodiesel production plants, mix it with petroleum diesel fuel according to specifications, and deliver a final product to retailers. There are few wholesale biodiesel marketers in the United States. Three examples are World Energy of Chelsea, Massachusetts; Eco-Energy, Inc. of Franklin, Tennessee; and REG of Ames, Iowa. These companies use their existing marketing relationships to market the biodiesel of individual plants to end users for a fee. Under the MOSA, REG has agreed to market the biodiesel we produce at our facility.

Retail Market. The retail biodiesel market consists of biodiesel distribution primarily through fueling stations to transport trucks and jobbers, which are individuals that buy products from manufacturers and sell them to retailers, for the purpose of supplying farmers, maritime customers and home heating oil users. Retail level distributors include oil companies, independent station owners, marinas and railroad operators. The biodiesel retail market is still in its very early stages as compared to other types of fuel. If biodiesel demand were to increase, present marketing and transportation network must expand significantly in order for our company to effectively market our biodiesel to retail users. Areas that would require expansion include, but are not limited to:

•

additional rail capacity;

•

additional storage facilities for biodiesel;

•

increases in truck fleets capable of transporting biodiesel within localized markets;

•

expansion in refining and blending facilities to handle biodiesel; and

•

growth in service stations equipped to handle biodiesel fuels.

The substantial investments required for these infrastructure changes and expansions may not be made or they may not occur on a timely basis. Any delay or failure in making the changes to or expansion of infrastructure could hurt the demand or prices for our products, impede our delivery of products, impose additional costs on us or otherwise have a material adverse effect on our results of operations or financial position.

International Markets. Through our marketer, REG, a portion of any biodiesel produced pursuant to ordinary production may be sold abroad to international markets, including Europe. We are unable, however, to track precisely where such biodiesel is delivered or how much of it is exported to Europe or other international markets. The European Union has, as a result of its investigation into alleged unfair trade practices engaged in by the U.S. biodiesel industry, imposed tariffs and duties on biodiesel produced in the U.S. that is exported to Europe. See “RISK FACTORS.” This is expected to significantly reduce REG’s ability to market our biodiesel in the European market at a profit.

Government/Public Sector. The government has increased its use of biodiesel since the implementation of the Energy Policy Act (“EPACT”) of 1992, amended in 1998, which authorized federal, state and public agencies to use biodiesel to meet the alternative fuel vehicle requirements of EPACT. Although it is possible that individual plants could sell directly to various government entities, it is unlikely our plant could successfully market our biodiesel through such channels. Government entities have very long sales cycles based on the intricacies of their decision making and budgetary processes.

The Effect of Cold Flow on Biodiesel Markets. Biodiesel has different cold flow properties depending on the type of feedstock used in its manufacture. “Cold flow” refers to a fuel’s ability to flow easily at colder temperatures and is an important consideration in producing and blending biodiesel for use in colder climates. The pour point for a fuel is the temperature at which the flow of the fuel stops. Therefore, a lower pour point temperature means the fuel is more flowable in colder temperatures. The pour point of 100% soy-based biodiesel is approximately 30ºF. The pour point for No. 2 petroleum diesel fuel, the non-biodiesel fuel currently used in machines, is approximately -30ºF. When diesel is mixed with soy-based biodiesel to make a 2% biodiesel blend, the pour point is approximately -25ºF. To provide biodiesel with an acceptable pour point in cold weather, we will need to blend our biodiesel with petroleum-based diesel. Generally, biodiesel that is used in blends of 2% to 20% will provide an acceptable pour point for the Iowa market. Cold flow additives can also be used seasonally to provide a higher level of cold weather protection, similar to the current practice with conventional diesel fuel. Demand for our biodiesel typically diminishes in colder climates and during the colder fall and winter months as a result of cold flow concerns. Animal fat-based biodiesel has a higher pour point temperature than other types of biodiesel. For example, the pour point of 100% tallow-based biodiesel is approximately 61ºF compared to approximately 30ºF for 100% soy-based biodiesel. Accordingly, demand for animal fat-based biodiesel may fluctuate by season more than demand for biodiesel made from other types of feedstock.

Crude Glycerin

Crude glycerin is the primary co-product of the biodiesel production process and equals approximately 10% of the quantity of biodiesel produced. It is highly stable under typical storage conditions, compatible with a wide variety of other chemicals and comparatively non-toxic. Glycerin possesses a unique combination of physical and chemical properties that are used in a large variety of products. It is an ingredient or processing aid in cosmetics, toiletries, personal care, pharmaceuticals and food products. In addition, new uses for glycerin are frequently being discovered and developed due to its versatility. Many of these uses, however, require refined glycerin. Our plant only produces crude glycerin and does not have the capability to refine glycerin. This could therefore limit the potential uses for glycerin produced at our plant.

Glycerin Demand and Markets

Under our MOSA, REG is required to market the glycerin produced at our plant. However, oversupply of glycerin and low glycerin prices may limit our ability to generate revenues through the sale of our primary co-product. This may negatively affect the profitability of our business.

We are not capable of refining crude glycerin produced at our plant. Prices for refined glycerin are typically higher than prices for crude glycerin, which is the type produced by our plant. As of late December 2009, according to the Jacobsen Biodiesel Bulletin, average refined glycerin prices were approximately 32 to 36 cents per pound whereas crude glycerin prices were approximately 5 to 6 cents per pound. Relatively higher refined glycerin prices have prompted some of our competitors, such as Cargill Inc. and Archer Daniels Midland Co., to expand their glycerin refining capacities. These biodiesel producers may therefore have a competitive advantage over plants like ours that do not have glycerin refining capabilities.

Additional uses for glycerin are being researched. Research has been underway to develop technology that converts glycerin, a byproduct of biodiesel production, into ethanol. Ethanol made from glycerin may be cheaper to produce than ethanol made from corn, as glycerin does not require the extensive pre-processing steps required for corn. Research has also been underway to develop methods of converting glycerin into propylene glycol, which is a compound used in a variety of industrial products, including paints, polyester resins, lubricants, antifreeze and cosmetics. More recently, researchers have commenced development of processes that would convert the byproduct to chemicals such as butane, acetone, and acrolein, the latter being used as a base in acrylic acid. Accordingly, development of these technologies could increase the demand for glycerin. However, such technologies are still currently under development and there is no assurance that such technologies will become readily available or that they would increase demand for glycerin.

Distribution of Principal Products

Under the MOSA, REG must utilize its best efforts to market all biodiesel, glycerin and fatty acids produced at our plant at established prices. With respect to such services, REG agrees to provide:

•

Market analysis of biodiesel supply and demand;

•

Market access to REG’s developed biodiesel distribution channels;

•

Analysis and audit of biodiesel customers, including for creditworthiness, and bulk transportation providers;

•

Marketing specialists and sales representatives to attain and establish sales opportunities and relationships for our products;

•

Arrangements for transportation, logistics, and scheduling of biodiesel shipments;

•

Arrangements for leased tankers for rail shipments, where advantageous;

•

Oversight and reconciliation of shipments, invoicing and payments on a weekly basis; and

•

Invoicing and accounts receivable management for biodiesel shipments.

Under the terms of the agreement, REG takes title to our products when loaded for delivery FOB the plant. REG previously delivered notice of its intent to terminate the MOSA and we therefore expect that it will terminate on or about May 1, 2010. Due to our significant reliance on REG for the management of our plant and other services, including the sale, marketing and distribution of our products, this could have a material adverse affect on our ability to operate and generate revenues in the event we are not able to negotiate a new MOSA with REG or enter into an agreement for similar services with another third party.

Our products can be delivered by truck or rail. Our property is located northeast of Newton, Iowa and is situated approximately 4.75 miles north of U.S. Interstate 80. Rail service is also available near our site by the Iowa Interstate Railroad (“IAIR”). We installed track to establish rail service directly to the plant so that we are able to ship biodiesel to our customers. We have entered into an industrial track agreement with the IAIR for the use, operation, and maintenance of track to serve the plant. Under such agreement, we will bear the cost and expense of maintenance of the railroad track extending from the point of switch and ending at our plant.

Sources and Availability of Raw Materials

Feedstock Cost and Supply

The cost of feedstock is the largest single component of the cost of biodiesel production, accounting for 70% to 90% of the overall cost of producing biodiesel. As a result, increased prices for feedstock greatly impact the biodiesel industry. Soybean oil is the most abundant and widely used feedstock available in the United States. Our plant is capable of pretreating crude vegetable oil, including soybean oil and corn oil, and animal fats and utilizing the same to produce biodiesel. Refined animal fats and alternative vegetable oils have generally been available to us at better prices than soybean oil. Accordingly, we have typically used these alternative feedstocks when, based on prevailing feedstock prices and market conditions, such use would generate greater profit margins. We expect to continue to be susceptible to changes in the price of feedstock when we engage in ordinary biodiesel production.

Our inability to obtain adequate supplies of feedstock at affordable prices for sustained periods of time may materially impair our ability to operate profitably and could force us to shut down our plant temporarily or permanently. When we operate pursuant to tolling arrangements, however, the third party ordering biodiesel production is typically responsible for supplying feedstock. Therefore, feedstock costs do not typically impact our revenues from toll processing biodiesel production, pursuant to which we only receive a fixed fee per gallon of biodiesel produced.

Soybean Oil

The ten-year average price for soybean oil is approximately 26 cents per pound. However, in June 2008, the price of soybean oil reached a new record high of 62 cents per pound. Soybean oil prices have fallen since then, but remain volatile. The USDA December 2009 Oil Crops Outlook report provides that the average November 2009 soybean oil price was approximately 36.59 cents per pound, which is significantly below the 2008 peak price. The drop in soybean oil prices were likely caused by the changing global economic conditions triggered by the sharp decline in petroleum prices, the failure of various major U.S. financial institutions, the passage of the federal government’s $700 billion bailout plan, the tightening of credit markets and the economic recession experienced by the U.S. and other countries. According to the USDA’s National Weekly Ag Energy Round-Up report, crude soybean oil prices in Iowa for the week of December 11, 2009 were approximately the same, ranging from 35.59 to 38.15 cents per pound. The USDA forecasted that these soybean oil prices during the 2009/2010 marketing season will range from 35.5 to 38.55 cents per pound. The charts below show average U.S. soybean oil prices over the past ten years and for each month in the 2008/2009 marketing year to November 2009:

Marketing Year		Price (cents)
1998/99			19.90
1999/00			15.60
2000/01			14.15
2001/02			16.46
2002/03			22.04
2003/04			29.97
2004/05			23.01
2005/06			23.41
2006/07			31.02
2007/08			52.03
2008/09			32.16
2009-10(1)			35.5-38.5	(1)

Month		Price (cents)
November			31.55
December			29.30
January			32.16
February			28.93
March			28.23
April			32.76
May			36.06
June			35.66
July			31.08
August			33.69
September			30.96
October			33.15
November(1)			36.59(1)

(1)		Preliminary Price

Data provided by USDA, Oil Crops Outlook Report, December 11, 2009

Because it takes more than seven pounds of soybean oil to make a gallon of biodiesel, continued increases in soybean oil costs significantly reduce the potential profit margin on each gallon of biodiesel produced from soybean oil and sold. Any increase in the price of soybean oil without a corresponding increase in the price of biodiesel will negatively impact our ability to generate revenues and profits from soybean oil-based biodiesel. Conversely, if soybean oil prices drop, this would have a positive impact on revenues generated from ordinary biodiesel production of soybean oil-based biodiesel.

Increased competition with other biodiesel plants may result in increased prices for soybean oil. Accordingly, the number of acres of soybeans planted and harvested can impact the price of and competition for soybean oil. In its December 2009 Oil Crops Outlook report, the USDA reported that 74.7 million soybean acres were harvested in the 2008-2009 crop year. The portion of that used to make biodiesel is not expected to increase significantly due to the competition from other vegetable oils and animal fats being used as alternative sources of feedstock.

Animal Fats and Other Alternative Feedstocks

Due to the volatility of soybean oil prices, we also use alternative forms of feedstock, including animal fat and, to a lesser extent, corn oil. However, prices for these alternative feedstocks have tended to correlate with the cost of soybean oil. Like soybean oil prices, animal fat prices peaked in 2008 and declined thereafter as domestic and global economic conditions worsened. Nonetheless, animal fat prices remain volatile. The USDA December 2009 Oil Crops Outlook report provides that the average November 2009 prices for lard and edible tallow were 30.07 and 29.65 per pound, respectively. The USDA predicted lard and edible tallow prices could increase slightly for 2009/2010, ranging from 28.5 to 31.5 cents per pound for lard and 29.5 to 32.5 cents per pound for edible tallow. Increases in animal fat prices would have a negative impact on revenues generated from ordinary production of animal fat-based biodiesel.

The charts below show average U.S. lard and edible tallow prices over the past ten years and for each month in the 2008/2009 marketing year:

Average Lard & Edible Tallow Prices for Past Ten Years

		Lard				Edible Tallow
Marketing Year		(cents)				(cents)
1998/99			14.66				15.14
1999/00			13.64				13.21
2000/01			14.61				13.43
2001/02			13.55				13.87
2002/03			18.13				17.80
2003/04			26.13				22.37
2004/05			21.80				18.48
2005/06			21.74				18.16
2006/07			28.43				27.32
2007/08			40.85				41.68
2008/09			26.72				25.47
2009/10(1)			28.5-31.5	(1)			29.5-32.5	(1)

Average Lard & Edible Tallow Prices for 2008-2009
Marketing Year

		Lard				Edible Tallow
Month		(cents)				(cents)
November			26.40				18.13
December			20.00				17.50
January			25.36				23.36
February			20.31				21.40
March			19.49				19.42
April			23.36				23.77
May			29.00				28.92
June			30.06				30.14
July			27.63				27.64
August			32.20				34.14
September			29.73				34.21
October			25.75				27.63
November(1)			30.07	(1)			29.65	(1)

Data provided by USDA, Oil Crops Outlook Report, December 11, 2009

We expect that corn oil may from time to time be a less costly feedstock alternative to soybean oil. The USDA December 2009 Oil Crops Outlook report provides that the preliminary average November 2009 price for corn oil was 38.12 cents per pound, which was higher than the November 2009 price for soybean oil. The National Weekly Ag Energy Round-Up for the week of December 11, 2009 indicates that crude corn oil prices in the Midwest were slightly higher ranging from 39.5 cents to 40.5 cents per pound. Corn oil-based biodiesel has similar cold flow properties to those of soybean oil-based biodiesel and, accordingly, corn oil may be an acceptable alternative feedstock in the fall and winter months when demand for animal fat-based biodiesel tends to decrease. Corn oil, however, tends to cause a waxy substance to build-up during the production process. The unique characteristic of corn oil could cause corn oil to be a less desirable feedstock than soybean oil and animal fat. The available supply of corn oil will likely depend upon the number of ethanol plants that install corn oil extraction equipment at their plants and the extent to which such ethanol plants market their corn oil.

Hedging

Due to fluctuations in the price and supply of feedstock, we may utilize forward contracting and hedging strategies to manage our commodity risk exposure and optimize finished product pricing and supply. Hedging means protecting the price at which we buy feedstock and the price at which we will sell our products in the future. It is a way to attempt to reduce the risk caused by price fluctuations. The effectiveness of such hedging activities is dependent upon, among other things, the cost of feedstock and our ability to sell sufficient amounts of biodiesel. Although we attempt to link hedging activities to sales plans and pricing activities, such hedging activities can themselves result in costs because price movements in feedstock contracts are highly volatile and are influenced by many factors that are beyond our control. We may incur such costs and they may be significant. The market for soybean oil trades 18 months into the future. The animal grease market has no futures trade. However, there is a quoting system through the USDA that provides for price discovery for animal grease. There is not enough volume of biodiesel produced to currently justify a futures market. As such, there is no spot biodiesel price, making current price discovery limited.

Feedstock Procurement.

We expect to utilize various types of feedstock in the production of biodiesel. Under the MOSA, REG is responsible for arranging the purchase and procurement of the feedstock and chemical inputs necessary to produce biodiesel at our plant. These services include, without limitation, analysis and audit of feedstock suppliers, purchase of feedstock meeting specifications and in adequate quantities to fill our plant’s production facility, negotiation of discounts, and providing transportation, logistics and scheduling of feedstock deliveries. REG previously delivered notice of its intent to terminate the MOSA and we therefore expect that it will terminate on or about May 1, 2010. Due to our significant reliance on REG for the procurement of our feedstock at economical prices, this could have a material adverse affect on our ability to operate and generate revenues in the event we are not able to negotiate a new MOSA with REG or enter into an agreement for similar services with another third party. When we operate pursuant to tolling arrangements, however, the third party ordering biodiesel production is typically responsible for supplying feedstock and, accordingly, we are not responsible for feedstock procurement in such circumstances.

Pretreatment Costs

Crude vegetable oils, such as crude soybean oil and corn oil, and all animal fats need to be pretreated before being processed into biodiesel. Pretreatment takes crude soybean oil, corn oil and any animal fat or grease, removes the impurities and prepares the feedstock to go through the biodiesel production process. Some types of feedstock need more treatment than others. The cost of the process is driven by the structure of the feedstock and the impurities in the feedstock.

For soybean oil, the pretreatment process results in refined and bleached (RB) oil. The price differential between RB soy oil and crude soy oil is ordinarily 5 cents per pound. Our processing plant has pretreatment capabilities allowing us to utilize crude vegetable oil and many types of fat or grease as feedstock in our facility. This added flexibility allows us to choose the feedstock that will produce biodiesel in the most cost-effective manner possible.

Utilities, Energy & Infrastructure

Electricity. Our plant requires a significant supply of electricity to operate our plant. In May 2006 we contracted with Interstate Power and Light Company, a wholly-owned subsidiary of Alliant Energy Corporation, to install a new primary electric service at our facility, including an overhead metering location, transformers, cabling, and switchgear. We also entered into a separate agreement with Interstate Power and Light Company to supply our electricity needs, which is still in effect.

Water. Our plant requires approximately 120 gallons of water per minute. We entered into an agreement with Central Iowa Water Association in June 2006 to supply our water needs at a minimum of 50,000 gallons per month. The fee to connect to the Association’s existing water distribution system was $4,000 and we pay a minimum price of $246.91 per 50,000 gallons per month.

Natural Gas. Our plant requires a significant supply of natural gas to operate. We estimate that our plant requires approximately 1,750,320 therms of natural gas per year. In August 2007, we entered into a Natural Gas Transportation Service Agreement with Aquila, Inc. d/b/a Aquila Networks under which Aquila, Inc. agreed to transport and deliver natural gas supplies obtained by the Company for operation of our biodiesel plant. In exchange for Aquila, Inc.’s services, we agreed to pay Aquila, Inc. $150 per month for administration costs related to transportation services, the applicable sales tariff basic monthly charge, a capacity charge as set forth in the applicable sales tariff schedule, and a delivery charge for all volumes of natural gas received as set forth in the applicable sales tariff rate schedule. We will also be obligated to pay for fixed gas costs assigned to us under the applicable sales tariff rate and any charges that Aquila, Inc. incurs from a pipeline on behalf of the Company. The agreement was in effect for an initial term of one year from the date of commencement of services and continues thereafter from year to year until canceled by either party with notice.

Sewer. Pursuant to a private redevelopment agreement dated November 21, 2006, Jasper County agreed to construct sewer improvements for our biodiesel project site. The agreement authorizes Jasper County to finance these improvements through the issuance of bonds or notes. In return for these improvements, we were required to construct a thirty million gallon per year biodiesel plant requiring a total investment of at least $38,000,000 and to create at least twenty new full-time jobs at our plant and maintain such jobs until June 30, 2015. Also, we were required to enter into an assessment agreement with Jasper County to establish a minimum actual value of our property and related improvements for purposes of the calculation and assessment of our real property taxes. Our failure to comply with or satisfy any condition or covenant contained in the agreement will constitute an event of default. In such event, the County can exercise any one or more remedies against the Company, including, without limitation, holding the Company responsible for repayment of an amount equal to the sum of all costs incurred by Jasper County in connection with the construction of the sewer improvements or any other legal, equitable or administrative remedy available to it under the agreement or applicable law. We are currently in default of this Agreement. See “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”

Energy Management. In November 2009, we entered into an energy management services agreement with U.S. Energy Services, Inc. (“U.S. Energy”) under which U.S. Energy provides natural gas and electricity supply management services. Among these services, U.S. Energy manages supply and transportation of natural gas, reviews natural gas invoices for discrepancies, determines the most beneficial rate structure and method for securing natural gas supplies, negotiates transportation agreements and rates with natural gas pipelines and suppliers, provides cost and usage analysis, advises the Company on trade credit issues, and provides risk management services for natural gas, including making hedging recommendations. U.S. Energy also manages supply and transportation of electricity reviews electricity, invoices for discrepancies, determines the most beneficial rate structure and method for securing electricity, investigates market conditions and negotiates favorable agreements with electricity suppliers, and analyzes electricity cost and usage. U.S. Energy also evaluates energy tax exemption opportunities. Under this agreement, our monthly service fee is approximately $0.06/MMBtu consumed with a $450 monthly minimum. The monthly service fee will increase 4% annually on each November 1st the agreement remains in effect. The agreement also authorizes U.S. Energy to manage the Company’s assets as part of U.S. Energy’s larger portfolio when the same would result in lower energy costs to the Company and would otherwise be in the Company’s best interest. The agreement also governs the purchase and sale of natural gas between the Company and U.S. Energy. This agreement will continue in effect for two years and thereafter for successive one-year terms unless terminated by either party with at least 60 days prior written notice prior to the expiration of the applicable term. Under the agreement, we appoint U.S. Energy to act as its agent for purposes of managing our energy supplies and dealing with third parties in connection with energy-related matters.

Patent, Trademarks and Licenses.

As part of our design-build agreement with REG, Inc., REG, Inc. agreed to provide us a perpetual and irrevocable license to use any and all of its technology and propriety property related to or incorporated into the plant in connection with our operation, maintenance and repair of the plant.

Federal Biodiesel Supports

The biodiesel industry is dependent on economic incentives to produce biodiesel, including federal biodiesel supports. The Energy Policy Act of 2005, the Energy Independence and Security Act of 2007 and the American Jobs Creation Act have established the groundwork for biodiesel market development.

Renewable Fuels Standard

The Energy Policy Act of 2005 created the Renewable Fuel Standard (“RFS”) which required refiners to use 7.5 billion gallons of renewable fuels by 2012. The Energy Independence and Security Act of 2007 (“EISA”) expanded the existing RFS (sometimes referred to as “RFS2”) to require the use of 9 billion gallons of renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022. The EISA requires that 600 million gallons of renewable fuel used in 2009 must come from advanced biofuels other than corn-based ethanol, such as ethanol derived from cellulose, sugar or crop residue and biomass-based diesel (which includes biodiesel and renewable diesel), increasing to 21 billion gallons in 2022. The EISA further includes a requirement that 500 million gallons of biodiesel and biomass-based diesel fuel be blended into the national diesel pool in 2009, gradually increasing to one billion gallons by 2012. In 2008, however, the EPA announced that the RFS program in 2009 would be applicable to producers and importers of gasoline only, which meant that the 500 million gallons of biomass-based diesel required by the RFS2 under EISA was not required to be blended into U.S. fuel supplies in 2009. This was due to the fact that the regulatory structure of the original RFS program does not provide a mechanism for implementing the EISA RFS2 requirement for the use of 500 million gallons of biomass-based diesel. In May 2009, the EPA proposed regulations to implement the EISA RFS2 biomass-based diesel requirements; however, as of the date of this report, no final regulations have been issued. Accordingly, it is uncertain when the EISA biomass-based diesel requirements will be effective.

EISA required as part of RFS2 that advanced biofuels reduce life cycle greenhouse gas emissions by 50% relative to gasoline sold or distributed in transportation. In May 2009, the EPA proposed rules that took into account indirect land use changes when calculating greenhouse gas emissions. Based on the EPA’s preliminary findings, soy-based biodiesel was found to reduce greenhouse gas emissions by only 22%, which would disqualify it from counting towards the RFS2. Biodiesel from animal fat was found to reduce greenhouse gas emissions by approximately 80%. The EPA’s preliminary results did not measure biodiesel produced from corn oil. Although the EPA previously announced that it intended to publish final rules implementing RFS2 prior to the end of 2009, final rules have not been issued as of the date of this report. The EPA has suggested that the final rules will take into account estimates for the uncertainty of the inclusion of indirect land use changes in its calculations of greenhouse gas emissions. However, it is uncertain whether soy bean oil-based biodiesel will qualify for the RFS2.

We anticipate that the RFS may increase demand for biodiesel in the long-term, as it sets a minimum usage requirement for biodiesel and other types of biomass-based diesel. However, there can be no assurances that demand for biodiesel will be increased by the RFS or RFS2, once final rules are implemented. As of June 22, 2009, the National Biodiesel Board estimated that national biodiesel production capacity was approximately 2.69 billion gallons per year, which already exceeds the 2012 biodiesel and biomass-based diesel use mandate contained in EISA. Accordingly, there is no assurance that additional production of biodiesel and biomass-based diesel will not continually outstrip any additional demand for biodiesel that might be created by the RFS program. Furthermore, any additional delays in the EPA’s implementation of the RFS2 biomass-based diesel rules could hinder the stimulation of additional biodiesel demand. If the final rules adopted to implement RFS2 do not significantly increase demand compared to increases in supply, the RFS2 will not likely lead to an increase in biodiesel demand. We also anticipate that the RFS2 will be primarily satisfied by ethanol, including both corn-based and other types of ethanol. The amount of corn-based ethanol that may be used to satisfy the RFS requirements is capped at 15 million gallons starting in 2015 and, accordingly, other types of ethanol, including cellulose-based ethanol, will likely be used to satisfy any requirements over and above the 15 million gallon corn-based ethanol cap.

The RFS system will be enforced through a system of registration, recordkeeping and reporting requirements for obligated parties and renewable producers (“RIN generators”), as well as any party that procures or trades renewable identification numbers, either as part of their renewable purchases or separately. Any person who violates any prohibition or requirement of the RFS program may be subject to civil penalties for each day of each violation. For example, a failure to acquire sufficient RINs to meet a party’s renewable fuels obligation would constitute a separate day of violation for each day the violation occurred during the annual averaging period. The enforcement provisions are necessary to ensure the RFS program goals are not compromised by illegal conduct in the creation and transfer of RINs. The EPA has assigned “equivalence values” to each type of renewable energy fuel in order to determine compliance with the RFS. The equivalence values used ethanol as the base-line measurement (such that one gallon of ethanol is equivalent to one credit towards RFS compliance) and assigned biodiesel an equivalence value of 1.5, such that each gallon of biodiesel used by an obligated party will be equal to one and one-half gallons credit towards its RFS compliance.

Production of biofuels, including both biodiesel and ethanol, may continue to increase at a faster pace than the RFS2 requirements. Should the supply of biofuels increase more rapidly than demand for biofuels, including biodiesel, it may lead to decreases in the selling price of biodiesel.

Biodiesel Tax Credits

The Energy Policy Act of 2005 provided for a tax subsidy for small agri-biodiesel producers with total annual production capacities of 60 million gallons or less. The subsidy is applicable to the first 15 million gallons of biodiesel produced annually and is available through December 31, 2010. The subsidy is equivalent to a 10 cent credit per gallon of biodiesel produced annually and the maximum annual subsidy per biodiesel producer is $1.5 million. This tax credit may foster additional growth and increase competition among biodiesel producers whose plant capacity does not exceed 60 million gallons per year. Because Central Iowa Energy is organized as a limited liability company, this credit passes through to its members and may be used as a credit against their federal income tax liability, subject to various limitations.

The American Jobs Creation Act of 2004 originally created the biodiesel blenders’ excise tax credit known as the Volumetric Ethanol Excise Tax Credit (“VEETC”). The blenders’ tax credit provides a tax credit of $1.00 per gallon for biodiesel. The blenders’ tax credit may be claimed in both taxable and nontaxable markets, including exempt fleet fuel programs and off-road diesel markets. The desired effect of the blenders’ tax credit is to streamline the use of biodiesel and encourage petroleum blenders to blend biodiesel as far upstream as possible, which will allow more biodiesel to be used in the marketplace. The blenders’ tax credit also streamlines the tax refund system for below-the-rack blenders to allow a tax refund of the biodiesel tax credit on each gallon of biodiesel blended with diesel (dyed or undyed) to be paid within 20 days of blending. Below-the-rack blenders are those blenders that market fuel that is for ground transportation engines and is not in the bulk transfer system. The blenders’ tax credit was extended until December 31, 2009 as part of the Emergency Economic Stabilization Act of 2008 (“EESA”). The blenders’ tax credit, as extended by EESA, contained a few significant changes, including the closure of the so-called “splash and dash” loophole, which refers to those instances in which biodiesel produced in foreign countries was transported to the United States, blended with a small percentage of diesel to claim the tax incentive, and then shipped to a third country for sale and use. Pursuant to EESA, biodiesel produced outside the United States will no longer qualify for the biodiesel tax incentive. The law also reduces the credit for biodiesel co-processed with petroleum feedstock from $1.00 to 50 cents. As of the date of this report, no legislation has been enacted to renew it beyond December 31, 2009 and there can be no assurance that it will be renewed again in the future. However, a bill known as the Biodiesel Tax Incentive Reform and Extension Act of 2009 (Senate Bill 1589) has been introduced to the Senate Finance Committee. The loss of the biodiesel tax incentive provided by the blenders’ tax credit, or a decrease in the benefits provided by any renewed or extended version of the blenders’ tax credit, would increase the cost of biodiesel production and would have a negative impact on the biodiesel industry’s ability to compete with petroleum-based diesel. This would have an adverse impact on our ability to generate a profit and could reduce the value of our members’ investment.

Biofuels Interagency Working Group

The White House has recently announced that it has directed Secretary of Agriculture Tom Vilsack to spearhead a Biofuels Interagency Working Group, to combine the efforts of the Department of Agriculture, Department of Energy, and the EPA to increase the nation’s energy independence, accelerate the investment in the production of biofuels and increase rural economic development. Secretary Vilsack was directed to expedite and increase production of and investment in biofuels development efforts by refinancing existing investments in renewable fuels to preserve jobs in ethanol and biodiesel plants, electricity generation plants, and other supporting industries; and making renewable fuels energy financing opportunities from Food, Conservation and Energy Act of 2008 available within 30 days. While the specific details on what the Biofuels Interagency Working Group expects to accomplish remain unclear, it is possible that the biodiesel industry may benefit from this taskforce’s activities.

Commodity Credit Corporation Bioenergy Program

The Farm, Nutrition and Bioenergy Act of 2008 reauthorized the Commodity Credit Corporation, or CCC, Bioenergy Program. The program provides $55.0 million in funding in both 2009 and 2010, $85.0 million in funding in 2011 and $105.0 million in funding in 2012 for producers of advanced biofuels derived from renewable biomass, including biodiesel, other than corn kernel. Biodiesel producers must apply for this credit and will be paid based on the quantity and duration of advanced biofuel production and on net nonrenewable energy content of the advanced biofuel. Funding to a single eligible producer may be limited to ensure equitable distribution of funding. Producers with production capacity of less than 150 million gallons will be eligible for 95% of the funds provided under the program. In late December 2009, subsequent to the period covered by this report, Central Iowa Energy received approximately $114,200 in funds pursuant to the CCC Bioenergy Program.

State Legislation

Several states are currently researching and considering legislation to increase the amount of biodiesel used and produced in their states. Minnesota was the first state to mandate biodiesel use. The Minnesota legislation, which became effective in September 2005, requires that all diesel fuel sold in the state contain a minimum of 2% biodiesel. In 2008, Minnesota passed additional legislation to increase biodiesel content of diesel fuel sold in the state from 2% to 20%, which is the highest in the nation, by 2015. The 2% soy biodiesel blend has nearly the same cold flow properties as No. 2 petroleum diesel, which allows it to be used in Minnesota’s colder climate much the same as petroleum diesel throughout the year. Similarly, in 2008 Massachusetts signed a law that requires all home heating oil and diesel fuel in the state to consist of 2% biodiesel by 2010 and 5% biodiesel by 2013. However, the Massachusetts Department of Energy Resources will be entitled to delay those requirements if it determines that fuels are not available to meet these requirements.

In 2006, several laws were passed in Iowa for the purpose of expanding and funding consumer access to biodiesel and ethanol-blended fuels. These laws provide retailers with an opportunity for cost-sharing grants. In addition, the laws provide certain incentives such as an Iowa RFS starting at 10% in 2009 and increasing to 25% by 2019; a retail tax credit for biodiesel blends of $0.03 per gallon for retailers whose diesel sales include 50% or greater biodiesel blends; and an expanded infrastructure program designed to help retailers and wholesalers offset the cost of bringing E85 and biodiesel blends to customers. While this legislation does not specifically require increased use of biodiesel, it encourages renewable fuels usage in Iowa, including increased biodiesel consumption.

Other states have enacted legislation to encourage (but not require) biodiesel production and use. Several states provide tax incentives and grants for biodiesel-related studies and biodiesel production, blending, and use. In addition, several governors have issued executive orders directing state agencies to use biodiesel blends to fuel their fleets.

Effect of Government Incentives and Regulation

The biodiesel industry and our business depend upon continuation of the state and federal biodiesel supports discussed above. These incentives have supported a market for biodiesel that might disappear without the incentives. Alternatively, the incentives may be continued at lower levels than at which they currently exist. The elimination or reduction of such state and federal biodiesel supports would make it more costly for us to produce our biodiesel and would increase our net loss and negatively impact our future financial performance.

Additionally, environmental laws such as the Clean Air Act Amendments that are aimed at lowering fuel emissions may also promote biodiesel consumption. The Clean Air Act Amendments of 1990 required the EPA to regulate air emissions from a variety of sources. In a 2001 rule, the EPA provided for the decrease of emissions from vehicles using on-road diesel by requiring the reduction in the sulfur content of diesel fuel from 500 parts per million (ppm) to a significantly lower 15 ppm commencing in June 2006, and 10 ppm by 2011. Reducing the sulfur content of petroleum-based diesel leads to a decrease in lubricity of the fuel, which may adversely impact motor engines. On the other hand, biodiesel contains no sulfur (and therefore does not emit sulfur dioxide) and is able to supply lubricity, which makes biodiesel an attractive blending stock.

Furthermore, environmental regulations that may affect our company change frequently. It is possible that the government could adopt more stringent federal or state environmental rules or regulations, which could increase our operating costs and expenses or might eliminate provisions such as the Clean Air Act Amendments that may promote the use of biodiesel. The government could also adopt federal or state environmental rules or regulations that may have an adverse effect on the use of biodiesel. Furthermore, the Occupational Safety and Health Administration (OSHA) will govern our plant operations. OSHA regulations may change such that the costs of the operation of the plant may increase. Any of these regulatory factors may result in higher costs or other materially adverse conditions affecting our operations, cash flows and financial performance. These adverse effects could decrease or eliminate the value of our units.

Competition with Other Biodiesel Producers

We operate in a very competitive environment. Because biodiesel is a relatively uniform commodity, competition in the marketplace is predominately based on variables other than the product itself, such as price, consistent quality and, to a lesser extent, delivery service. Accordingly, the uniform nature of the product limits the competitive advantage that may be gained based upon unique or improved product features. Nevertheless, the consistent high-quality biodiesel produced by BQ-9000 certified plants is becoming the standard in the industry.

In 2008, approximately 700 million gallons of biodiesel were produced in the United States. As of June 22, 2009 (the latest date for which data is available), the National Biodiesel Board reported that there were 173 operating biodiesel plants in the United States with a total annual production capacity of 2.69 billion gallons. One of these plants was undergoing expansions to increase its annual production capacity. Another 29 plants were reported to be in the planning stages or under construction as of June 2009. The additional combined capacity of these plants under construction or expansion is estimated at 427.8 million gallons per year. Accordingly, biodiesel supply may already far exceed demand for biodiesel. Currently, there are 15 existing biodiesel plants in Iowa, including our plant. However, several of these plants may not be operating, may not be operating at full capacity, or may never begin operations due to economic and market conditions. We expect that additional biodiesel producers may enter the market if the demand for biodiesel increases. As additional biodiesel plants are constructed and brought on line, we expect the supply of biodiesel to increase. The absence of increased demand may cause prices for biodiesel to decrease. We may not be able to compete successfully or such competition may reduce our ability to generate the profits necessary to operate our plant.

We must compete with other biodiesel producers in the industry not just in the sale of our biodiesel, but also in the acquisition of soybean oil, animal fats and other feedstocks and raw materials. A majority of biodiesel plants, including many of the largest biodiesel producers, utilize soybean oil. This may change over time as high soybean oil prices are encouraging biodiesel producers to find ways to utilize alternative and less costly types of feedstock. Furthermore, producers may design their plants with the capability to use multiple feedstocks. Nonetheless, we expect that increased biodiesel production will continue to increase the demand and cost of not only soybean oil, but also animal fats and other inputs. We expect this will make it more expensive for us to produce our biodiesel from soybean oil alternatives, such as animal fat, and will reduce our profit margins when we are engaged in ordinary biodiesel production. This is because there is little or no correlation between the cost of feedstock and the market price of biodiesel and, therefore, we cannot pass along increased feedstock costs to our biodiesel customers. In order to stay competitive in the diesel industry, biodiesel must be competitively priced with petroleum-based diesel. Therefore, biodiesel prices fluctuate more in relation to petroleum-based diesel market prices than with feedstock market prices. As a result, increased feedstock costs may result in decreased profit margins when we are engaged in ordinary biodiesel production. If we continue to experience high feedstock costs for a sustained period of time, such pricing may reduce our ability to generate revenues and our profit margins may significantly decrease or be eliminated.

Many current plants are capable of using only vegetable oil for feedstock. Our plant is able to use both vegetable oils and animal fats to produce biodiesel, allowing us to use whichever types of feedstock provide the greatest return at any given time when we are engaged in ordinary biodiesel production (as opposed to biodiesel production pursuant to toll processing arrangements pursuant to which the third party ordering production supplies us with feedstock). This is beneficial because the cost of feedstock is the highest cost associated with ordinary biodiesel production. Our ability to utilize animal fats is also significant because animal fat-based biodiesel has some favorable advantages over soybean oil-based biodiesel, such as better lubricity and lower nitrogen oxide (NOx) emissions. However, some purchasers of animal fat-based biodiesel may believe that it is not suitable for use during the winter months in colder climates due to its tendency to gel at higher temperatures than soybean oil-based biodiesel. This could limit our ability to sell animal fat-based biodiesel during winter months.

We compete with large, multi-product companies and other biodiesel plants with varying capacities. Some of our competitors have greater resources than we currently have or will have in the future. Large plants with which we compete include the 85 million gallon per year Archer Daniels Midland Co (“ADM”) canola-based plant in Velva, North Dakota; the 90 million gallon per year Green Earth Fuels multi-feedstock plant in Galena Park, Texas; the 100 million gallon per year multi-feedstock Imperium Grays Harbor plant in Grays Harbor, Washington; the 100 million gallon per year multi-feedstock plant in Las Vegas, Nevada; and the 180 million gallon per year multi-feedstock RBF Port Neches plant in Port Neches, Texas.

Although most biodiesel plants are not equipped to process raw materials (such as soybeans) into feedstock (such as soybean oil), there are several of our competitors that have soy-crushing facilities and are therefore not reliant upon third parties for their feedstock supply like we are. As a result, we face a competitive challenge from biodiesel plants owned and operated by the companies that supply our inputs, such as Cargill, Inc. (“Cargill”), Ag Processing, Inc. (“AGP”) and ADM. Cargill, AGP and ADM have significant crush capabilities throughout North America and are large suppliers of soybean oil and own and operate their own biodiesel plants in the Midwest. Cargill, Inc. owns a 37.5 million gallon plant in Iowa Falls, Iowa and AGP owns a 30 million gallon per year plant in Sergeant Bluff, Iowa, both of which process soy oil into biodiesel. ADM has constructed an 85 million gallon plant in Velva, North Dakota which processes canola oil into biodiesel. Also, increasing feedstock costs have spurred, and will likely continue to spur, additional development of crush facilities throughout the country. Such vertical integration provides these plants with greater control over their feedstock supplies, thereby providing them with a competitive advantage over plants like ours that do not have soy-crushing capabilities, especially as prices and competition for soybean oil and other feedstocks have increased.

Furthermore, we must compete with REG, the entity that currently manages our plant, procures our inputs and markets our products pursuant to the MOSA. We have also entered into a toll processing agreement with an entity affiliated with REG. REG owns a plant located in Ralston, Iowa which produces biodiesel primarily from feedstock produced at its soybean crushing facility and has an annual production capacity of 12 million gallons. REG has also announced its intention to increase its ownership of biodiesel production facilities. In June 2008, REG acquired a 35 million gallon per year plant in Houston Texas which now operates under the name REG Houston. Its previous plans to construct two additional biodiesel plants in Kansas and Louisiana were put on hold due to unfavorable economic and industry conditions. However, under our proposed consolidation transaction with REG, it is contemplated that REG could acquire up to two additional biodiesel plants in addition to Central Iowa Energy’s, including Western Iowa Energy, LLC and Blackhawk Biofuels, LLC, even if our consolidation transaction does not close. Accordingly, we will be in direct competition with REG for the acquisition of inputs and the sale of our products. Our MOSA does not prohibit REG from providing marketing and sales services for our competitors. If REG cannot market all of the biodiesel produced at its own biodiesel production facilities or at the facilities of other plants managed by REG, then those plants managed by REG, including Central Iowa Energy, are at risk that this loss will be allocated to them.

Commercial Biodiesel Production Plants (December 7, 2009)

The following list produced by the National Biodiesel Board indicates the locations of most of the active plants in the United States as of December 7, 2009. Active plants are those companies that are actively producing biodiesel. Companies in the earlier stages of the process are not represented on this map.

Ann.

Production

Company

City

State

Capacity

Feedstock

Start date

BQ9000

Allied Renewable Energy, LLC

Birmingham

AL

15,000,000

Soy

May-07

Eagle Biodiesel, Inc.

Bridgeport

AL

30,000,000

Multi Feedstock

Apr-07

N.A.B. Energy Group, Inc.

Florence

AL

Delta American Fuel, LLC

Helena

AR

40,000,000

Multi Feedstock

Mar-09

Amereco Biofuels Corp

Arlington

AZ

15,000,000

Multi Feedstock

Sep-07

Environmental Development Group

Tucson

AZ

1,500,000

Recycled Cooking Oil

Aug-09

Grecycle Arizona, LLC

Tucson

AZ

2,500,000

Yellow Grease

May-09

Performance Biofuels, LLC

Chandler

AZ

1,500,000

Recycled Cooking Oil

Dec-08

Baker Commodities

Los Angeles

CA

10,000,000

Multi Feedstock

Dec-10

Biodiesel Industries of Ventura, LLC

Port Hueneme

CA

3,000,000

Full Spectrum, including but not limited to yellow grease, jatropha & algae

Aug-09

Community Fuels

Stockton

CA

10,000,000

Multi Feedstock

Jun-08

Crimson Renewable Energy, LP

Bakersfield

CA

30,000,000

Multi Feedstock

3Q 2009

Eco Energy Biodiesel, Inc.

Adelanto

CA

1,000,000

Multi Feedstock

3Q 2009

Enviro Fuels Enterprises, LLC

Fresno

CA

3Q 2009

GeoGreen Biofuels, LLC

Vernon

CA

3,000,000

Recycled Cooking Oil

Apr-09

Imperial Western Products

Coachella

CA

8,000,000

Multi Feedstock

Oct-01

*

Manning Beef, LLC

Pico Rivera

CA

Tallow

3Q 2009

New Leaf Biofuel, LLC

San Diego

CA

Dec-08

Noil Energy Group

Commerce

CA

5,000,000

Multi Feedstock

2Q 2009

Promethean Biofuels Cooperative Corporation

Temecula

CA

Renewable Energy Products, LLC

Santa Fe Springs

CA

10,000,000

Multi Feedstock

Jul-08

Simple Fuels Biodiesel, Inc.

Chilcoot

CA

3Q 2009

Whole Energy Fuels

Pacifica

CA

3,000,000

Recycled Cooking Oil

2Q 2009

Wright Biofuels, Inc.

San Jacinto

CA

5,500,000

Multi Feedstock

Sep-07

Ann.

Production

Company

City

State

Capacity

Feedstock

Start date

BQ9000

Yokayo Biofuels, Inc.

Ukiah

CA

350,000

Recycled Cooking Oil

Apr-06

Hawaiian Islands Bioenergy, Inc.

Parker

CO

1,000,000

Multi Feedstock

May-09

BioDiesel One Ltd.

Southington

CT

4,000,000

Recycled Cooking Oil

Feb-09

BioPur Inc.

Bethlehem

CT

1,000,000

Multi Feedstock

Jul-06

Clayton

Clayton

DE`

11,000,000

Multi-Feedstock

Jan-10

Agri-Source Fuels, Inc.

Dade City

FL

10,000,000

Multi Feedstock

Oct-07

New Eden Energy, LLC

St. Cloud

FL

1,000,000

Recycled Cooking Oil

Dec-08

Smart Fuels, LLC

Fruitland Park

FL

3Q 2009

Southern Biodiesel Corporation

Miami

FL

4Q 2009

Alterra Bioenergy of Middle Georgia, LLC

Gordon

GA

15,000,000

Multi Feedstock

Aug-07

Alterra Bioenergy of Plains Georgia, LLC

Plains

GA

30,000,000

Soy

4Q 2008

BullDog BioDiesel

Ellenwood

GA

18,000,000

Multi Feedstock

Jan-08

Down to Earth Energy, Inc.

Monroe

GA

2,000,000

Multi Feedstock

Aug-09

ECO Solutions, LLC

Chatsworth

GA

25,000,000

Multi Feedstock

Aug-07

Middle Georgia Biofuels

East Dublin

GA

1,500,000

Poultry Fat, Tallow

Apr-06

Peach State Labs

Rome

GA

Soy

Jan-05

*

Perfect Circle Renewable Energy, LLC

Atlanta

GA

Recycled Cooking Oil

Jul-09

Seminole Biodiesel

Bainbridge

GA

10,000,000

Multi Feedstock

Jan-08

AGP

Sergeant Bluff

IA

30,000,000

Soy

Aug-96

*

Cargill

Iowa Falls

IA

37,500,000

Soy

Jun-06

*

Central Iowa Energy, LLC

Newton

IA

30,000,000

Multi Feedstock

Apr-07

*

Energy Tec, LLC

Maquoketa

IA

37,000

Sep-08

Iowa Renewable Energy, LLC

Washington

IA

30,000,000

Multi Feedstock

Jul-07

*

Maple River Energy, LLC

Galva

IA

5,000,000

Soy

May-09

Nova Biosource Clinton County

Clinton

IA

10,000,000

Multi Feedstock

Apr-06

REG Ralston, LLC

Ralston

IA

12,000,000

Multi Feedstock

2002

*

Riksch BioFuels, LLC

Crawfordsville

IA

10,000,000

Multi Feedstock

Dec-06

Sioux Biochemical, Inc.

Sioux Center

IA

2,000,000

Corn, Soy

Dec-06

Western Dubuque Biodiesel

Farley

IA

30,000,000

Crude or Refined Vegetable Oils

Aug-07

*

Ann.

Production

Company

City

State

Capacity

Feedstock

Start date

BQ9000

Western Iowa Energy, LLC

Wall Lake

IA

30,000,000

Multi Feedstock

Jun-06

*

BiofuelBox Corporation

American Falls

ID

1,000,000

Waste Vegetable Oil, Brown Grease

Feb-09

Blue Sky Biodiesel, LLC

New Plymouth

ID

10,000,000

Soy

Jul-06

Pleasant Valley Biofuels, LLC

American Falls

ID

1,500,000

Recycled Cooking Oil, Tallow

Aug-08

BioVantage Fuels, LLC

Belvidere

IL

5,000,000

Multi Feedstock

3Q 2009

Blackhawk Biofuels, LLC

Danville

IL

45,000,000

Multi Feedstock

Nov-08

*

Incobrasa Industries, Ltd.

Gilman

IL

31,000,000

Soy

Jan-07

Midwest Biodiesel Products, Inc.

South Roxanna

IL

30,000,000

Multi Feedstock

May-07

Nova Biosource Seneca

Seneca

IL

60,000,000

Multi Feedstock

Apr-08

*

Stepan Company

Millsdale

IL

22,000,000

Multi Feedstock

Jan-01

*

Alternative Fuel Solutions, LLC

Huntington

IN

3Q 2009

e-biofuels, LLC

Middletown

IN

15,000,000

Multi Feedstock

Jun-07

Integrity Biofuels

Morristown

IN

10,000,000

Soy

Aug-06

Kingsbury Energy Group, LLC

La Porte

IN

Soy

Dec-08

Louis Dreyfus Agricultural Industries, LLC

Claypool

IN

80,000,000

Soy

Jan-08

*

Healy Biodiesel, Inc.

Sedgwick

KS

1,000,000

Recycled Cooking Oil

Jun-07

REG Emporia, LLC

Emporia

KS

60,000,000

Multi Feedstock

2Q 2010

Griffin Industries

Butler

KY

1,750,000

Multi Feedstock

Dec-98

*

Owensboro Grain

Owensboro

KY

50,000,000

Soy

Jan-08

REG New Orleans, LLC

New Orleans

LA

60,000,000

Multi Feedstock

2Q 2010

Baker Commodities

Billerica

MA

15,000,000

Multi Feedstock

Dec-10

Baystate Biofuels, LLC

North Andover

MA

10,000,000

Multi Feedstock

3Q 2009

Biofuels of New England, LLC

Newburyport

MA

300,000

Recycled Cooking Oil

Nov-08

MBP Bioenergy, LLC

Attleboro

MA

500,000

Recycled Cooking Oil

Nov-06

Eagle Creek Fuel Services, LLC

Baltimore

MD

Recycled Cooking Oil, Multi Feedstock

Aug-08

Greenlight Biofuels, LLC

Princess Anne

MD

4,000,000

Multi Feedstock

Oct-07

Michigan Biodiesel, LLC

Bangor

MI

10,000,000

Multi Feedstock

Jan-07

TPA Inc.

Warren

MI

20,000,000

Multi Feedstock

Jul-08

Ann.

Production

Company

City

State

Capacity

Feedstock

Start date

BQ9000

Ever Cat Fuels, LLC

Isanti

MN

3,000,000

Multi Feedstock

Aug-09

FUMPA BioFuels

Redwood Falls

MN

3,000,000

Multi Feedstock

Dec-04

Minnesota Soybean Processors

Brewster

MN

30,000,000

Soy

Aug-05

*

AGP

St. Joseph

MO

29,900,000

Soy

Sep-07

*

American Energy Producers, Inc.

Carrollton

MO

50,000,000

Soy

4Q 2009

Global Fuels, LLC

Dexter

MO

3,000,000

Multi Feedstock

Apr-07

Mid America Biofuels, LLC

Mexico

MO

30,000,000

Soy

Dec-06

*

Paseo Cargill Energy, LLC

Kansas City

MO

37,500,000

Soy, Animal Fats

Apr-08

*

Prairie Pride

Deerfield

MO

30,000,000

Soy

Dec-07

*

Producers’ Choice Soy Energy LLC

Moberly

MO

5,000,000

Soy

Jun-09

Terra Bioenergy, LLC

St. Joseph

MO

30,000,000

Multi Feedstock

4Q 2009

Delta Biofuels, Inc.

Natchez

MS

80,000,000

Multi Feedstock

May-07

*

GreenLight Biofuels, LLC

Meridian

MS

Mar-09

Scott Petroleum Corporation

Greenville

MS

20,000,000

Multi Feedstock

Oct-07

*

Earl Fisher Bio Fuels

Chester

MT

250,000

Canola, Camelina, Safflower, Sunflower

Apr-08

Blue Ridge Biofuels

Asheville

NC

1,000,000

Multi Feedstock

May-06

Evans Environmental Energies, Inc.

Wilson

NC

3,000,000

May-07

Foothills Bio-Energies, LLC

Lenoir

NC

5,000,000

Multi Feedstock

Sep-06

Leland Organic Corporation

Leland

NC

30,000,000

Multi Feedstock

Sep-08

Patriot Biodiesel, LLC

Greensboro

NC

1,500,000

Multi Feedstock

Dec-08

Piedmont Biofuels

Pittsboro

NC

4,000,000

Multi Feedstock

Nov-06

*

Triangle Biofuels Industries, Inc.

Wilson

NC

3,000,000

Multi Feedstock

Jan-08

ADM

Velva

ND

85,000,000

Canola

Aug-07

*

Atlantic Biodiesel

Salem

NH

3,000,000

3Q 2009

White Mountain Biodiesel, LLC

North Haverhill

NH

3Q 2009

Fuel Bio One, LLC

Elizabeth

NJ

50,000,000

Multi Feedstock

Mar-07

Innovation Fuels

Newark

NJ

40,000,000

Multi Feedstock

Jul-04

*

ARFuels, LLC

Clovis

NM

30,000,000

Multi Feedstock

3Q 2010

Ann.

Production

Company

City

State

Capacity

Feedstock

Start date

BQ9000

Rio Valley Biofuels, LLC

Anthony

NM

750,000

Multi Feedstock

Jul-06

Bently Biofuels

Minden

NV

1,000,000

Multi Feedstock

Nov-05

Biodiesel of Las Vegas

Las Vegas

NV

100,000,000

Multi Feedstock

4Q 2009

Metro Fuel Oil Corp.

Brooklyn

NY

2009

Northern Biodiesel, Inc.

Ontario

NY

20,000,000

Jun-08

TMT Biofuels, LLC

Port Leyden

NY

250,000

Recycled Cooking Oil

Sep-08

Agrifuels, LLC

Bremen

OH

1,000,000

Multi Feedstock

Mar-07

Ambiol Flex Fuels, LLC

East Toledo

OH

2,000,000

Soy

Feb-08

American Ag Fuels, LLC

Defiance

OH

7,000,000

Multi Feedstock

Jul-05

Arlington Energy, LLC

Mansfield

OH

4,000,000

Multi Feedstock

Jul-08

Center Alternative Energy Company

Cleveland

OH

5,000,000

Soy, Choice White Grease, yellow grease, tallow

May-07

Jatrodiesel Inc.

Miamisburg

OH

5,000,000

Multi Feedstock

Jun-07

Peter Cremer NA

Cincinnati

OH

30,000,000

Soy

Oct-02

*

PK Biodiesel

Woodstock

OH

5,000,000

Multi Feedstock

Aug-08

Twin Rivers Technologies Natural Ingredients, LLC

Cincinnati

OH

60,000,000

Multiple Feedstocks

Dec-06

*

High Plains Bioenergy

Guymon

OK

30,000,000

Multi Feedstock

Mar-08

*

South East Oklahoma Biodiesel

Valliant

OK

5,000,000

Multi Feedstock

Nov-08

Tulsa Biofuels, LLC

Tulsa

OK

Nov-07

Beaver Biodiesel, LLC

Albany

OR

1,200,000

Multi Feedstock

Feb-09

Green Fuels of Oregon, Inc.

Klamath Falls

OR

1,000,000

Canola, Waste Vegetable Oil

Mar-07

Biodiesel of Pennsylvania, Inc.

White Deer

PA

1,500,000

Multi Feedstock

Mar-07

Eagle Bio Diesel

Kane

PA

2Q 2009

Keystone BioFuels, Inc.

Shiremanstown

PA

Multi Feedstock

Mar-06

Lake Erie Biofuels

Erie

PA

45,000,000

Soy

Sep-07

*

Middletown Biofuels, LLC

Middletown

PA

4,000,000

Soy

Jun-07

Mother Earth Energy, Inc.

Chester

PA

3,500,000

Recycled Cooking Oil, Vegetable Oils

3Q 2009

Pennsylvania Biodiesel, Inc.

Monaca

PA

25,000,000

Multi Feedstocks

Jul-09

Soy Energy, Inc.

New Oxford

PA

1,500,000

Soy

Feb-07

Ann.

Production

Company

City

State

Capacity

Feedstock

Start date

BQ9000

United Biofuels, Inc.

York

PA

3,000,000

Multi Feedstock

Apr-06

United Oil Company

Pittsburgh

PA

5,000,000

Multi Feedstock

Dec-05

US Alternative Fuels Corp.

Johnstown

PA

4Q 2008

Lantic Green Energy, LLC

West Greenwich

RI

1Q 2009

Newport Biodiesel, LLC

Newport

RI

500,000

Recycled Cooking Oil

Jan-08

Cateechee Biofuels, LLC

Central

SC

3Q 2009

Ecogy Biofuels, LLC

Estill

SC

30,000,000

Soy

Dec-07

Green Valley Biofuels, LLC

Warrenville

SC

10,000,000

Multi Feedstock

3Q 2009

Greenlight Biofuels, LLC

Laurens

SC

10,000,000

Multi Feedstock

4Q 2008

Greenpath Biofuels of Myrtle Beach, Inc.

Conway

SC

Recycled Cooking Oil

4Q 2009

Southeast BioDiesel, LLC

North Charleston

SC

8,000,000

Multi Feedstock

Jan-07

Midwest BioDiesel Producers, LLC

Alexandria

SD

7,000,000

Multi Feedstock

Mar-06

Milagro Biofuels of Memphis

Memphis

TN

5,000,000

Multi Feedstock

Oct-06

Southern Alliance for Clean Energy

Knoxville

TN

380,000

Recycled Cooking Oil

Jul-09

SunsOil, LLC

Athens

TN

1,500,000

Multi Feedstock

Oct-07

Agribiofuels, LLC

Dayton

TX

12,000,000

Multi Feedstock

Dec-06

AgriMax Fuels, LLC

Channelview

TX

3,000,000

Soy

Mar-07

Beacon Energy

Cleburne

TX

12,000,000

Multi Feedstock

Mar-06

*

Biodiesel of Texas, Inc.

Denton

TX

360,000

Multi Feedstock

3Q 2009

BioSelect Fuels (GBBLP)

Galveston

TX

30,000,000

Multi Feedstock

May-07

Brownfield Biodiesel, LLC

Ralls

TX

2,000,000

Cottonseed, Soy, Canola

Apr-06

Direct Fuels

Euless

TX

10,000,000

Multi Feedstock

Feb-08

*

Global Alternative Fuels, LLC

El Paso

TX

5,000,000

Multi Feedstock

Mar-09

Green Earth Fuels of Houston, LLC

Galena Park

TX

90,000,000

Multi Feedstock

Jul-07

Greenlight Biofuels, Ltd.

Littlefield

TX

5,000,000

Multi Feedstock

Aug-07

Hardin Fuels, Inc.

Kountze

TX

Mar-08

Mississippi Investment Petroleum Co., LLC

Houston

TX

5,000,000

Poultry Fat, Recycled Cooking Oil

3Q 2009

New Fuel Company

Dallas

TX

250,000

Multi Feedstock

Apr-06

Ann.

Production

Company

City

State

Capacity

Feedstock

Start date

BQ9000

Organic Fuels, LLC

Galena Park

TX

45,000,000

Multi Feedstock

Jan-06

*

RBF Port Neches, LLC

Port Neches

TX

180,000,000

Multi Feedstock

4Q 2008

Red River Biodiesel Ltd.

New Boston

TX

15,000,000

Multi Feedstock

May-08

REG Houston, LLC

Seabrook

TX

35,000,000

Multi Feedstock

Jul-08

Texas Green Manufacturing, LLC

Littlefield

TX

1,250,000

Tallow

Apr-09

The Sun Products Corp.

Pasadena

TX

15,000,000

Palm

Jun-05

*

TM Chemicals LP

Deer Park

TX

7,000,000

Tallow

Dec-08

Denali Industries, LLC

American Fork

UT

3,800,000

Multi Feedstock

Jul-07

Chesapeake Custom Chemical

Ridgeway

VA

5,500,000

Multi Feedstock

Jan-06

RECO Biodiesel, LLC

Richmond

VA

10,000,000

Multi Feedstock

Dec-06

Red Birch Energy, Inc.

Bassett

VA

2,500,000

Multi Feedstock

Jun-08

REVNOVA Biofuels, LLC

Remington

VA

Oct-08

Synergy Biofuels, LLC

Pennington Gap

VA

3,000,000

Multi Feedstock

Dec-08

Virginia Biodiesel Refinery

West Point

VA

7,000,000

Multi Feedstock

Oct-03

General Biodiesel Seattle LLC

Seattle

WA

5,000,000

Multi Feedstock

Jun-09

General Biodiesel Seattle LLC

Seattle

WA

5,000,000

Multi Feedstock

3Q 2009

Gen-X Energy Group, Inc.

Burbank

WA

15,000,000

Multi Feedstock

Jun-07

Imperium Grays Harbor

Hoquiam

WA

100,000,000

Multi Feedstock

Aug-07

*

Inland Empire Oilseeds, LLC

Odessa

WA

8,000,000

Canola, Soy, Camelina

Nov-08

Whole Energy Fuels

Bellingham

WA

Recycled Cooking Oil

1Q 2009

Best Biodiesel, Inc.

Cashton

WI

10,000,000

Multi Feedstocks

Jan-08

Bio Blend Fuels Inc.

Manitowoc

WI

2,600,000

May-09

Sun Power Biodiesel, LLC

Cumberland

WI

3,000,000

sunflower, canola

Dec-09

Walsh Bio Fuels, LLC

Mauston

WI

5,000,000

Multi Feedstock

May-07

AC & S, Inc.

Nitro

WV

3,000,000

Soy

Dec-07

Source: National Biodiesel Board

Competition from Other Fuel Sources and Additives

The biodiesel industry is in competition with the diesel fuel segment of the petroleum industry. Historically, biodiesel prices have correlated to the prices of petroleum-based diesel. Over the past several years, according to the Energy Information Administration, the price of diesel fuel steadily increased until reaching a record high average price in July 2008 of approximately $4.70 per gallon for No. 2 ultra low sulfur diesel, and thereafter declined to approximately $2.75 as of December 7, 2009. Although the price of diesel fuel has decreased over the past several months, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. Following the trend of diesel prices, biodiesel prices steadily increased over the past year to their peak in the summer of 2008, after which time they decreased. As of December 11, 2009, the National Weekly Ag Energy Roundup reports that B100 biodiesel prices in Iowa ranged from $3.25 to $3.50 per gallon, which is up from a range of $2.65 to $2.84 approximately one year ago. If the diesel fuel industry is able to produce petroleum-based diesel fuel with acceptable environmental characteristics, we may find it difficult to compete with diesel fuel due to its price advantage. Moreover, if the $1.00 blenders’ tax credit is not renewed or extended following its expiration on December 31, 2009, biodiesel will be even more costly to produce and biodiesel prices will be even less competitive with diesel fuel prices. In addition, other more cost-efficient domestic alternative fuels may be developed and displace biodiesel as an environmentally-friendly alternative. If diesel prices do not continue to increase or a new fuel is developed to compete with biodiesel, it may be difficult to market our biodiesel, which could result in the loss of some or all of our ability to operate profitably.

At least one large oil company has previously announced its intent to produce renewable diesel, another form of diesel with which we may be required to compete. Renewable diesel has characteristics similar to that of petroleum-based diesel fuel and can be co-processed at traditional petroleum refineries from vegetable oils or animal fats mixed with crude oil through a thermal de-polymerization process. As a result of an Internal Revenue Service interpretation of the application of certain biodiesel tax credits created under the Energy Policy Act of 2005, renewable diesel processed in traditional petroleum-refining equipment is currently eligible for the blenders’ tax credit. Opponents of the recent IRS interpretation argue that the blenders’ tax credit was intended for specific, limited production technologies, including the methyl ester biodiesel production process, and that the recent interpretation will allow a large subsidy of conventional petroleum refinery capacity at the expense of free-standing producers of biodiesel. In 2007, ConocoPhillips announced its plans to add technology to some of its refineries to produce approximately 175 million gallons of renewable diesel per year. Because renewable diesel is eligible for the blenders’ tax credit (at the reduced rate of 50 cent per gallon as compared to $1.00 per gallon for biodiesel), other large oil companies may also decide to add production capacity for renewable diesel. These large petroleum refiners likely have greater financial resources than we do and may be able to devote greater production capacity to the production of renewable diesel than the typical biodiesel plant, which on average has an annual production capacity of 30 million gallons. Accordingly, if renewable diesel proves to be more cost-effective than biodiesel, our revenues and our ability to operate profitably may be adversely affected.

In addition, the EPA has issued regulations to reduce the amount of sulfur in diesel fuel in order to improve air quality. The removal of sulfur from diesel fuel also reduces its lubricity which must be corrected with fuel additives, such as biodiesel, which has inherent lubricating properties. We expect to compete with producers of other diesel additives made from raw materials other than soybean oil having similar lubricity values as biodiesel, such as petroleum-based lubricity additives. Some major oil companies produce these petroleum-based lubricity additives and strongly favor their use because they may be used in lower concentrations than biodiesel. In addition, much of the infrastructure in place is for petroleum-based additives. As a result, petroleum-based additives may be more cost-effective than biodiesel. Therefore, it may be difficult to market our biodiesel as a lubricity additive, which could result in the loss of some or all of our members’ investment.

Glycerin Competition

Excess production of glycerin, a co-product of the biodiesel production process, may cause the price of glycerin to decline, thereby adversely affecting our source of revenue from glycerin. It is estimated that every one million gallons of biodiesel produced adds approximately another 100,000 gallons of crude glycerin into the market. Accordingly, as biodiesel production has increased, the glycerin market has become increasingly saturated. As a result, glycerin prices dropped dramatically in 2006, with crude glycerin prices hovering around 2 cents per pound or less. Some plants were forced to give away glycerin, and according to the Jacobsen Publishing Company’s Biodiesel Bulletin, others paid 3 cents to 4 cents per pound to dispose of crude glycerin. However, as of December 2009, according to the Jacobsen Biodiesel Bulletin, average crude glycerin prices increased to approximately 5 to 6 cents per pound. REG markets the glycerin produced at our plant under our MOSA. When we produce biodiesel pursuant to our toll processing agreement with REG Marketing, we are able to retain and sell the glycerin that is produced as a result of the biodiesel toll processing. The average sales price we received for our glycerin during fiscal year 2009 was approximately 5 cents per pound.

Excess glycerin production capacity may limit our ability to market our glycerin co-product, and we may even be forced to pay to dispose of our glycerin if prices decrease as they did in 2006. Low glycerin prices may also limit our ability to generate revenues through the sale of our co-product. This may negatively affect the profitability of our business. Additionally, some of our competitors, such as Cargill and ADM, have expanded their glycerin refining capacities due to relatively higher prices for refined glycerin when compared to the price of crude glycerin. In Iowa Falls, Iowa, Cargill has built a 30 million pound per year glycerin refinery near its 37.5 million gallon per year biodiesel production plant. These biodiesel producers may therefore have a competitive advantage over plants like ours that do not have glycerin refining capabilities.

Research and Development

We do not conduct any research and development activities associated with the development of new technologies for use in producing biodiesel and glycerin.

New Products and Services

We have not introduced any new products or services during the fiscal year ended September 30, 2009.

Dependence on One or a Few Major Customers

We are highly dependent upon REG for the successful marketing of our products and the procurement of adequate supplies of the inputs needed to produce our products under the MOSA. We do not have our own sales force or any other agreements with any third party for the marketing and sale of our products or the supply and procurements of our inputs. Our lack of a sales force and reliance on a third party to sell and market our products and procure our inputs may place us at a competitive disadvantage.

REG has provided us written notice of its intent to terminate the MOSA on approximately May 1, 2010. Due to our significant reliance on REG for the management of our plant, the procurement of our inputs, and the sale and marketing of our products, this could have a material adverse affect on our ability to operate and generate revenues in the event we are not able to negotiate a new MOSA with REG, to enter into an agreement for similar services with another third party or to consummate our proposed consolidation transaction with REG. See “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” for a description of our proposed consolidation with REG.

Furthermore, we are in direct competition with REG due to its ownership and management of other existing biodiesel plants and proposed biodiesel plants, and any failure by REG to comply with the terms of our MOSA could negatively impact our ability to generate revenues. The MOSA does not prohibit REG from providing services to our competitors, and its does not provide any procedures as to how REG will address any conflicts of interest that may arise during REG’s service to our plant and competitor plants. If REG places the interests of other biodiesel plants which it owns or manages ahead of our interests, our profitability may be negatively impacted.

Costs and Effects of Compliance with Environmental Laws

We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the plant. We have obtained all of the necessary permits to conduct plant operations, including air emissions permits, a NPDES permit, and boiler permits. We also entered into an agreement with the City of Newton for the discharge of our wastewater into its wastewater disposal system. We are now subject to ongoing environmental regulation and testing. Thompson Environmental Consulting, Inc. assisted us in obtaining all of our required permits and continues to provide us assistance in ongoing permitting matters. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources on complying with such regulations. We estimate that we will spend approximately $20,000 in complying with federal, state, and local environmental laws over the next twelve months.

The government’s regulation of the environment changes constantly. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which would increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of biodiesel. There is always a risk that the EPA may enforce certain rules and regulations differently than Iowa’s environmental administrators. Iowa or EPA rules are subject to change, and any such changes could result in greater regulatory burdens on plant operations.

We could also be subject to environmental or nuisance claims from adjacent property owners or residents in the area arising from possible foul smells or other air or water discharges from the plant. Such claims may result in an adverse result in court if we are deemed to engage in a nuisance that substantially impairs the fair use and enjoyment of real estate.

Employees

As of December 15, 2009, we had 22 full-time employees, which is a reduction in the size of our staff from our fiscal year 2008. In January 2009, we reduced the size of our staff by six persons in order to save costs due to our liquidity constraints, our lack of biodiesel sales contracts and our plant’s operation at significantly below its nameplate capacity. The chart below summarizes the type and number of positions that we employ as of December 15, 2009.

JOB TITLE		NUMBER EMPLOYEES
Process Operator			12
Supervisor/Management			5
Shipping/Receiving			1
Maintenance			2
Laboratory Technician			1
Office			1
Total			22

Our general manager and operations manager are employed by REG and placed at our facility pursuant to our MOSA. Our current general manager, Derek Winkel, and operations manager, Phil Abels, were both hired by REG. We directly employ all other employees and have sole responsibility for the terms and conditions of their employment. Pursuant to the MOSA, REG assists us in hiring and training our personnel and provides human resources and payroll assistance. The compensation and benefits associated with the position of general manager and operations manager are paid by REG. We are responsible for other staff and personnel costs.

The functions of the general manager under our management and operational services agreement are:

•

Utilize his or her ongoing best efforts to successfully and profitably manage the plant in our best interests;

•

Develop an annual budget for presentation to and approval of our board;

•

Attend meetings of our board and provide information upon its request;

•

Insure that all raw product costs are minimized and that all finished product revenues are maximized;

•

Work with us to formulate our mission and goals;

•

Manage the plant’s resources to efficiently achieve such mission and goals;

•

Manage our duties and rights under agreements with third parties relating to the plant;

•

Assist with regulatory affairs monitoring and compliance;

•

Hire, terminate and replace plant personnel as necessary and in all cases in accordance with the policies of our board;

•

Management of governmental relations, including USDA’s biodiesel programs; and

•

Such other duties as may be agreed upon.

The functions of the operations manager are:

•

Planning and scheduling biodiesel production to meet our needs and marketing goals;

•

Monitor and improve quality control;

•

Oversee facility and equipment maintenance;

•

Assist with budgeting and the monitoring of labor and other expenses in the operation;

•

Implement processing changes and new technologies as they evolve, and plan for new projects relating to biodiesel production; and

•

Such other duties as may be agreed upon.

In March 2007, we entered into an Industrial New Jobs Training Agreement with Des Moines Area Community College (DMACC) in Ankeny, Iowa for the establishment of a new jobs training program to educate and train employees of Central Iowa Energy. The services provided pursuant to this program include management and supervisory training, technical and safety training, and professional job skills training. The program will also include training materials. Up to $76,000 is available for training under this program. The agreement provides that DMACC will issue training certificates to provide funding for the project. DMACC’s project costs will be paid by incremental property taxes to be derived from the Company’s business, the receipt of a portion of the increased payroll withholding tax revenues resulting from the creation of the new jobs, and, if such funds are insufficient, the Company’s funds. The term of the agreement will not exceed ten (10) years. The Company will be required to pay the project costs to the extent that the new jobs credit from withholding and incremental property taxes are insufficient to pay the project costs, including the principal and interest on the certificates. DMACC has issued training certificates and raised funds for the program. We are currently diverting payroll withholding tax for payment towards the program costs. Approximately $75,000 of funds remain available for training cost reimbursement under this program.

ITEM 1A. RISK FACTORS.

You should carefully read and consider the risks and uncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we may face. The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operations.

Risks Related to Our Business

There are doubts about our ability to continue as a going concern and if we are unable to continue our business, our units may have little or no value. As discussed in Note 9 to the accompanying financial statements, our non-compliance with the loan covenants contained in our financing agreements with our lender and our failure to make payments of principal under such agreements since January 2009 has raised doubts about our ability to continue as a going concern. We have failed to comply with all of our loan covenants as of September 30, 2009, including the working capital, tangible owner’s equity, and tangible net worth covenants and the fixed charge ratio. Failure to comply with these loan covenants, as well as failure to make payments of principal when due, constitutes an event of default under our financing agreements entitling our lender, at its election, to accelerate all of the unpaid principal loan balance and accrued interest under the financing agreements or to foreclose on its mortgage and security interest in the real and personal property securing our loans. If such an event occurs, we may be forced to permanently shut down the plant and our members could lose all of their investment. Furthermore, the blenders’ tax credit, upon which the biodiesel industry has been reliant, is expected to expire on December 31, 2009, subject to action by Congress to renew or extend the tax credit. There can be no assurance that the blenders’ tax credit will be extended or renewed at all or at the same level currently in effect. The loss of the blenders’ tax credit, or a reduction in the benefits provided by such tax credit, could adversely affect our ability to profitably produce and sell biodiesel. The expiration of this blenders’ tax credit also raises doubts about our ability to continue as a going concern.

Liquidity constraints could require us to cease operations. We are currently experiencing liquidity problems due to our lack of working capital, our failure to generate significant funds from our ongoing operations, and the unavailability of additional credit. Our current lack of working capital and ongoing liquidity constraints have made it difficult or impossible for us to acquire adequate inputs and feedstock to produce biodiesel and, accordingly, our plant is typically only producing biodiesel pursuant to toll processing arrangements under which the other party has the right to order the production of biodiesel from us from feedstock supplied by such other party. Our lack of working capital may even make it difficult to operate pursuant to a toll processing arrangement. We have exhausted our funds available under our debt facilities and we do not have further commitments for financing from any lender. Should we lack adequate funds to operate our plant or become unable to satisfy our obligations as they become due, we may have to cease operations, either on a permanent or temporary basis.

The second amended and restated asset purchase agreement entered into by the Company, REG, and certain other REG affiliates is subject to a variety of closing conditions and may not close. On November 20, 2009 the Company entered into a Second Amended and Restated Asset Purchase Agreement pursuant to which the Company is expected to consolidate its business and operations with REG under a newly formed holding company, REG Newco, Inc., a Delaware corporation. The Company thereafter intends to dissolve, liquidate and wind up as soon as immediately practicable following the receipt of the requisite unit holder approval for the same and the close of the consolidation transaction. The proposed consolidation transaction, however, is subject to multiple closing conditions, including the certain regulatory approvals and the approval of the Company’s unit holders and REG’s shareholders, among other conditions. In the event that any one or more of the conditions to closing are not satisfied or any event giving rise to a party’s right to terminate the agreement arises, the consolidation transaction may not close and the Company will have to evaluate other alternatives to cope with its financial difficulties. Furthermore, the longer that the consolidation transaction closing or termination is delayed, the greater the Company’s liquidity constraints will likely become and the more difficult it may become for the Company to find suitable alternatives.

Unit holder approval of the Company’s dissolution, liquidation and winding up is not a condition to the closing of the Company’s proposed consolidation with REG. Unit holder approval of the Company’s dissolution, liquidation and winding up is not a condition to the closing of the proposed consolidation of the Company’s business and operations with REG under REG Newco, Inc. and, accordingly, it is possible that the Company could remain in existence indefinitely following a future successful closing of the consolidation transaction. Although REG Newco, Inc. has agreed to pay for certain mutually agreeable ongoing costs for a period of up to six months following the closing of the consolidation transaction, there is no guarantee that the Company will obtain the requisite unit holder approval during such time period. In such event, the Company would not have any active business operations or assets (other than REG Newco stock to be issued as part of the consolidation transaction) to support any ongoing costs which it may incur as part of its continuing existence.

We may be required to write down our long-lived assets and these impairment charges would adversely affect our operating results. We account for the impairment of long-lived assets to be held and used in accordance with ASC Topic 360. In accordance with ASC Topic 360, an asset (other than goodwill and indefinite-lived intangible assets) is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not deemed recoverable, the asset is adjusted to its estimated fair value. Fair value is generally determined based upon estimated discounted future cash flows. At September 30, 2009 the carrying amount of our fixed assets is $34.7 million. In determining if there has been an impairment, we have projected future cash flows assuming that we are able to obtain sufficient working capital to operate our plant until the planned merger and our expectations related to the extension of the blenders credit and favorable RFS 2 legislation. If conditions or events change and we have to reconsider our plans, the projected cash flows could change requiring the assets to be adjusted to the estimated fair value. As a result, the amount of any annual or interim impairment could be significant and could have a material adverse effect on our reported financial results for the period in which the charge is taken.

We do not have sufficient working capital to engage in ordinary biodiesel production. We expect to continue operating on an as-needed basis for toll processing orders for the foreseeable future. We do not expect to have sufficient working capital on hand in the foreseeable future to acquire feedstock to produce biodiesel other than pursuant to a toll processing arrangement, which generally shifts the risk of feedstock costs and biodiesel prices to the other party but do not guarantee us any minimum biodiesel toll processing orders. It is also uncertain whether we will maintain sufficient funds to cover the non-feedstock costs of production associated with biodiesel production under toll processing arrangements. Our inability to engage in ordinary biodiesel production for biodiesel sales contracts may have an adverse effect on our ability to generate revenues. Our lack of working capital could also adversely affect our ability to operate profitably even pursuant to tolling arrangements, which could reduce the value of our members’ investments.

We have a limited operating history. We organized our company in March 2005 and commenced production of biodiesel at our plant in April 2007. Accordingly, we have a limited operating history from which you can evaluate our business and prospects. Our prospects must be considered in light of the risks and uncertainties encountered by an early-stage company and in rapidly growing industries, such as the biodiesel industry, where supply and demand may change substantially in a short amount of time. Our operating results could fluctuate significantly in the future as a result of a variety of factors, including those discussed throughout these “RISK FACTORS.” Many of these factors are outside of our control. There is no assurance that our future financial performance will improve. If we cannot successfully address these risks, our business, future results of operations and financial condition may be materially adversely affected.

We have a history of losses and may not ever operate profitably. For our fiscal years ended September 30, 2009 and 2008, we incurred a net loss of $7,923,496 and $2,414,438, respectively. There is no assurance that we will be successful in our efforts to operate the biodiesel plant or that we will be able to operate profitably. The biodiesel industry is experiencing volatile feedstock prices, decreasing demand and lower biodiesel prices. Market conditions may continue to result in a situation where the costs of producing biodiesel are more than the price we receive for biodiesel. Decreased demand for biodiesel may also impair our ability to enter into tolling arrangements for biodiesel production. If unfavorable market conditions persist, we may have to continue to scale back or cease operations at the biodiesel plant, either on a temporary or permanent basis. This may affect our ability to generate revenues and could decrease or eliminate the value of our units.

We could be forced to consider filing for bankruptcy protection in the event that economic conditions and our liquidity problems do not improve. Various biofuels companies across the company have filed for bankruptcy, which is likely due in part to the unfavorable economic climate and market conditions. We are currently experiencing liquidity problems due in large part to our lack of working capital and available credit, decreased biodiesel demand, and lack of biodiesel sale contracts. We anticipate operating at significantly below our nameplate production capacity for the first several quarters of 2010 due to these factors. We expect that most, if not all, of any biodiesel production during such periods will be pursuant to tolling arrangements. Although we currently anticipate consolidating our business and operations with those of REG under a newly formed holding company, REG Newco, Inc., there can be no assurances that such consolidation transaction will ever close. If our current liquidity problems persist and we are unable to generate sufficient revenues from the sale of our biodiesel or tolling arrangements, we may have to consider bankruptcy as an option to cope with our financial difficulties. This would reduce or eliminate the value of our members’ investment in the Company.

We are currently in default of our agreement with Jasper County, Iowa. Jasper County, Iowa constructed certain sewer improvements for our plant site pursuant to a private redevelopment agreement which obligates us to pay Jasper County for the total cost of improvements constructed by Jasper County in the event of our default under the agreement. We are currently in default under this agreement due to our failure to pay property taxes due September 30, 2009. We also failed to timely file an annual report required under the agreement. Accordingly, if Jasper County elects to declare an event of default, we would be obligated to pay approximately $745,000. In such event, we would not likely have sufficient funds to pay this amount and this would have a material adverse effect on our ability to operate and generate revenues, and our members could lose all or some of their investment.

We have defaulted in the payment of property taxes due as of September 30, 2009. The Company failed to pay property taxes in the amount of approximately $130,000 due and payable on September 30, 2009. As of December 15, 2009 the Company had still not yet paid such property taxes. The Company’s delinquent property tax payment amount will accrue interest until satisfied in full, which will be added to the unpaid balance of such property taxes. The Company’s failure to pay property taxes could result in a tax judgment and/or lien being filed against the property which could hinder the Company’s ability to transfer property to third parties in the future, including as part of the Company’s proposed consolidation transaction with REG. Additionally, if the Company continues to fail to pay its delinquent property taxes, the Company’s property may be subject to a tax sale under Iowa law. If the property is not redeemed within the period required by Iowa law and the delinquent property tax amount remains unpaid, the purchaser in the tax sale may be able to initiate foreclosure proceedings on the Company’s property. This would adversely affect the Company’s ability to operate and could cause the business to fail.

Our business is not diversified. Our success depends largely on our ability to profitably operate our biodiesel plant. We do not have any other lines of business or other sources of revenue. If we are forced to continue to operate at significantly less than our nameplate capacity or cease operations at our biodiesel plant for any reason, our ability to produce revenue will be adversely affected and our members could lose some or all of their investment.

Our business is sensitive to demand for biodiesel and glycerin. Our results of operations and financial conditions are significantly affected by the demand for our biodiesel and glycerin. For the 2009 fiscal year, we operated at approximately only 17% of our nameplate production capacity due in part to decreased demand for biodiesel. Due to market forces, as well as our ongoing liquidity concerns, we expect to continue to operate substantially below our production capacity in the 2010 fiscal year, although we expect that most, if not all, biodiesel production in the foreseeable future will be pursuant to tolling arrangements. If demand for biodiesel remains low or decreases further, we will likely continue to operate at less than full capacity. If we operate at less than full capacity for a sustained period of time, our ability to generate revenues will be adversely affected.

Our business is sensitive to feedstock costs. Changes in the prices and availability of our feedstock may hinder our ability to generate revenue. Our results of operations and financial condition are significantly affected by the cost and supply of feedstock when we engage in ordinary biodiesel production. Biodiesel production at our plant requires significant amounts of feedstock. Changes in the price and supply of feedstock are subject to and determined by market forces over which we have no control. Because there is little or no correlation between the costs of feedstock and the price of biodiesel, we cannot pass along increased feedstock costs to our biodiesel customers. As a result, increased feedstock cost may result in decreased profits. If we experience a sustained period of high or volatile feedstock costs, such pricing may reduce our ability to generate revenues and our profit margins will decrease, and these decreases may be significant. We also expect that competition for feedstock from other biodiesel producers may increase our cost of feedstock and harm our financial performance and reduce our profits. Any inability to obtain adequate quantities of feedstock at economical prices will result in increased costs and result in increased losses.

We are in competition with REG, our plant manager and product marketer, which could place us at a competitive disadvantage and cause a conflict of interest for REG. We have contracted with REG for management, feedstock procurement and marketing services for our plant. We are highly dependent upon REG to procure our inputs and market our products. We are also highly dependent upon REG’s experience and relationships in the biodiesel industry and its knowledge regarding the operation of the plant, as REG was also the design-builder of our plant. Further, if our plant should fail to operate at the level anticipated by us in our business plan, we will rely on REG to adequately address such deficiency. REG operates its own biodiesel production facilities in Ralston, Iowa and Houston, Texas and anticipates increasing its biodiesel production through wholly-owned and third-party managed biodiesel plants in the future. This means that REG, our current plant manager and product marketer, is in competition with us in many aspects of our business, including feedstock procurement and biodiesel production and marketing. We also have to compete with REG for employees. Because REG operates its own biodiesel production facilities and competes with us in many aspects of our business, REG may have a conflict of interest in managing our plant and marketing our products. Although we have entered into a MOSA with REG for management and marketing services, there is no assurance that REG’s performance of these services is not, or will not be, compromised by its own biodiesel production operations.

We have limited experience in the biodiesel industry, which increases the risk of our inability to operate the biodiesel plant. We are presently, and will likely continue to be, dependent upon our directors to govern the business of the biodiesel plant. Most of our directors are experienced in business generally but have limited or no experience in operating a biodiesel plant or in governing and operating a public company. Most of our directors have no expertise in the biodiesel industry. In addition, certain directors on our board of directors are presently engaged in business and other activities that impose substantial demands on the time and attention of such directors. Pursuant to the MOSA, REG previously hired Derek Winkel to be general manager and Phil Abels to be operations manger of our plant, each of whom do have experience with production facilities. However, REG may not be successful in retaining such individuals because of the competitive market for such individuals. New plants are continually being constructed and there are a limited number of individuals with expertise in this area. In addition, REG may have difficulty in attracting other competent personnel to relocate to Iowa in the event that such personnel are not retained. REG’s failure to attract and retain such individuals could limit or eliminate any profit that we might make and could result in our failure. If Central Iowa Energy fails, our members could lose all or substantially all of their equity interest.

Our exclusive reliance on REG to manage our plant, procure our inputs and market our products could damage our profitability if REG fails to perform its obligations under the MOSA. We are highly dependent upon REG to manage our plant, procure our inputs and market our products pursuant to our MOSA. We do not have a soy crushing facility to supply our own raw soybean oil and we do not have any arrangements with other suppliers of feedstock. Rather, we depend upon REG to acquire our feedstock from third parties. If REG is unable to provide us with adequate feedstock or other inputs, we may have to decrease or halt operations which would adversely affect our ability to generate profits and adversely affect our financial obligations.

In addition, we do not have a sales force of our own to market our biodiesel and glycerin and are highly dependent upon REG to market our products. If REG breaches the terms of the MOSA or does not have the ability, for financial or other reasons, to market all of the biodiesel and glycerin we produce, we will not have any readily available means to sell our biodiesel and glycerin. Our lack of a sales force and reliance on REG to sell and market our products may place us at a competitive disadvantage. Our failure to sell all of our biodiesel and glycerin products may result in less income from sales, reducing our revenue, which could adversely affect our financial position.

If REG does not perform its obligations as agreed, we may be unable to specifically enforce our agreement. Our reliance on REG may place us at a competitive disadvantage. Any loss of this relationship with REG may result in the failure of our business. Significant costs and delays would likely result from the need to find other plant managers, feedstock suppliers, consultants or product marketers. In addition, any failure to perform under our MOSA by REG may reduce our ability to generate revenue and may significantly damage our competitive position in the biodiesel industry such that our members could lose all or substantially all of their investment in the Company.

We may engage in hedging transactions which involve risks that can harm our business. We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on commodities in the biodiesel production process, such as soybean oil and home heating oil. Hedging activities themselves can result in increased costs because price movements in soybean oil contracts, home heating oil contracts, and other commodity contracts are highly volatile and are influenced by many factors that are beyond our control. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of soybean oil, home heating oil and other commodities. However, it is likely that commodity cash prices will have the greatest impact on the derivative instruments with delivery dates nearest the current cash price. We may incur such costs and they may be significant. If we realize losses with respect to our derivative instruments, our net loss could increase.

The effectiveness of our hedging strategies with respect to soybean oil is dependent upon the cost of soybean oil and other commodities and our ability to sell sufficient amounts of our products to use all of the soybean oil for which we have futures contracts. There is no assurance that our hedging activities will successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high soybean oil prices. Alternatively, we may choose not to engage in hedging transactions. As a result, our results of operations and financial conditions may also be adversely affected during periods in which soybean oil prices increase.

Risks Related to Operation of the Biodiesel Plant

We depend on key suppliers, whose failure to perform could force us to abandon our business, hinder our ability to operate profitably or decrease the value of our units. We are highly dependent upon REG’s experience and relationships in the biodiesel industry and its knowledge regarding the operation of the plant. Further, if our plant does not continue to operate to the level anticipated by us in our business plan, we will rely on REG to adequately address such deficiency. REG may not be able to address such deficiency in an acceptable manner. Failure to do so could cause us to cease production of biodiesel, either temporarily or permanently, which could damage our ability to generate revenues and reduce the value of our units.

We are highly dependent upon REG to procure our inputs and market our products. If REG does not perform its obligations pursuant to our MOSA we may be unable to specifically enforce our agreement which could negatively affect the value of our units. Our reliance on REG may place us at a competitive disadvantage. Our reliance on REG is of particular concern given that REG owns and operates biodiesel plants near Ralston, Iowa and Houston, Texas, and previously announced its desire to increase biodiesel production through additional wholly-owned and third-party managed biodiesel plants. This means that REG and its affiliates are competitors for many aspects of our business including: feedstock procurement, biodiesel marketing, management services and employees.

REG has provided notice of its intent to terminate the MOSA. On April 7, 2009, we received written notice of REG’s intent to terminate the MOSA on or about May 1, 2010. Although REG has indicated it may consider entering into a new mutually agreeable agreement with us, it is likely that the terms of any such new agreement would be less favorable to us than those in our current MOSA. If our consolidation with REG does not close and we do not renegotiate a new agreement with REG, we may be unable to enter into agreements with a new plant manager or suitable product marketers or supplier at all or on favorable terms. We will likely be highly dependent upon any new manager or product marketer we may hire and if they do not adequately perform their duties, or if we cannot find a new marketer or manager, we will likely experience increased losses and our business may fail.

Changes in production technology could require us to commit resources to updating the biodiesel plant or could otherwise hinder our ability to compete in the biodiesel industry or to operate at a profit. We expect advances and changes in the technology of biodiesel production to occur. Such advances and changes may make our biodiesel production technology less desirable or obsolete. The plant is a single-purpose facility and likely has no use other than the production of biodiesel and associated products. Much of the cost of the plant is attributable to the cost of production technology which may be impractical or impossible to update. The value of our units could decline if changes in technology cause us to operate the plant at less than full capacity for an extended period of time or cause us to abandon our business. Further, more efficient technologies might be developed in the future that we cannot implement that would allow our competitors to produce biodiesel in a more cost effective manner than us.

Risks Related to Biodiesel Industry

The economic recession and tightening of credit markets has caused demand for biodiesel to decline, which may adversely affect our ability to generate revenues. The collapse of various major financial institutions and the federal government’s bailout and takeover of troubled financial institutions and corporations over the past year have caused economic upheaval in the United States and abroad. The United States is currently in an economic recession and credit markets remain constricted. We believe that these economic factors have contributed to a decrease in demand for fuel in general, including biodiesel, which may persist throughout all or parts of fiscal year 2010. It is uncertain for how long and to what extent these economic troubles may negatively affect biodiesel demand in the future. If demand for biodiesel remains low or declines further, we may be forced to temporarily or permanently cease operations and you may lose some or all of your investment.

The European Commission has imposed definitive anti-dumping and countervailing duties on biodiesel imported into Europe, which may negatively impact biodiesel demand and our revenues. In March 2009, the European Commission imposed anti-dumping and anti-subsidy tariffs on biodiesel produced in the U.S. These tariffs have reduced European demand for biodiesel produced in the U.S. In July 2009, the European Commission decided to extend these tariffs beyond their July 2009 expiration until 2014. These duties significantly increase the price at which U.S. biodiesel producers may be able to sell biodiesel in European markets, making it difficult or impossible to compete with European biodiesel producers and thereby increasing the supply and reducing overall demand for biodiesel produced in the U.S. Accordingly, these duties on U.S. biodiesel imported into Europe could significantly harm our financial performance.

The EPA’s recent findings that soy-based biodiesel does not meet the requirements under the RFS to reduce greenhouse emissions could reduce demand for soy-based biodiesel and reduce our profitability. The EPA recently issued findings that soy-based biodiesel fails to meet targets for reducing greenhouse emissions, as required under the RFS. The RFS requires that biodiesel reduce greenhouse gas emissions by 40% to 50% when compared to conventional biodiesel in order to count towards the RFS mandate. The EPA found soy-based biodiesel to reduce greenhouse gas emissions by only 22%. If the EPA implements final rules providing that soy-based biodiesel does not count towards the RFS, demand for biodiesel made from soy oil will likely be reduced. If animal fat-based biodiesel demand increases as a result, animal fat prices may increase to the extent that we cannot produce animal fat-based biodiesel profitably. The results could significantly harm our revenues and financial performance and reduce the value of your investment.

The decline in crude oil and diesel prices may affect our ability to sell biodiesel at profitable prices. The price for biodiesel is correlated to the price for diesel, as biodiesel is used primarily as a diesel additive. The price of biodiesel tends to increase as the price of diesel increases, and the price of biodiesel tends to decrease as the price of diesel decreases. Diesel prices are typically influenced by crude oil prices. The global economic downturn has resulted in a rapid decline in crude oil and diesel prices. In November 2008, crude oil prices fell to their lowest level in more than three years, dropping below $50 a barrel, down from approximately $150 a barrel in July 2008. Currently crude oil prices are approximately $75 per barrel. Additionally, average retail diesel prices declined by approximately 40% from July 2008 until December 2008, since that time diesel prices have risen slightly. If crude oil and diesel prices remain low or decline even further, biodiesel prices will also likely remain low or decline further. This could make it difficult for us to produce and sell biodiesel at a profit and you could lose some or all of your investment as a result.

If demand for biodiesel fails to grow at the same rate as planned supply, the excess production capacity will adversely impact our financial condition. In 2008, approximately 700 million gallons of biodiesel were produced in the United States, according to the National Biodiesel Board. Our biodiesel plant alone could produce almost 4% of the 2008 domestic production if we operated at our annual nameplate production capacity. The National Biodiesel Board estimates the current dedicated U.S. biodiesel production capacity of existing biodiesel plants as of June 22, 2009 (the latest date for which information is available) is approximately 2.69 billion gallons per year. Further, plants under construction and expansion as of June 22, 2009, if completed, are expected to result in another 427.8 million gallons of annual U.S. biodiesel production capacity, for total annual production capacity of approximately 3.12 billion gallons. Thus the current annual production capacity of existing plants far exceeds 2008 annual biodiesel consumption, and will likely far exceed 2009 biodiesel consumption. As production capacity increases, our competition with other biodiesel producers for the sale of our products increases, especially if there is not a corresponding increase in demand for biodiesel. Many biodiesel plants do not operate at full capacity due to the discrepancy between annual domestic biodiesel consumption and annual U.S. biodiesel production capacity, among other factors. Several biodiesel plants have even been forced to completely shut down or declare bankruptcy, which may be due in part to an increase in national excess production capacity without a corresponding increase in biodiesel demand in combination with the worsening economic conditions. If biodiesel production capacity continues to expand at its current pace, and demand does not grow to meet the available supply, we may be forced to suspend production at our plant and the value of your units could be decreased or eliminated.

Excess capacity in the biodiesel industry may cause increased competition for inputs and decreased market prices for biodiesel. Biodiesel production at our plant requires significant amounts of soybean oil and other inputs. If overproduction of biodiesel occurs, we will face increased competition for inputs which means we may be either unable to acquire the inputs that we need or unable to acquire them at profitable prices. In addition, if excess capacity occurs, we may also be unable to market our products at profitable prices. If the demand for biodiesel does not grow at the same pace as increases in supply, we would expect the price for biodiesel to decline. Any decrease in the price at which we can sell our biodiesel will negatively impact our future revenues. Increased expenses and decreased sales prices for biodiesel will result in decreased revenues and increased losses.

Excess production of glycerin, a co-product of the biodiesel production process, may cause the price of glycerin to decline, thereby adversely affecting our ability to generate revenue from the sale of glycerin. It is estimated that every million gallons of biodiesel produced adds approximately another one hundred thousand gallons of crude glycerin into the market. As biodiesel production has increased, the glycerin market has become increasingly saturated, resulting in significant declines in the price of glycerin. The Jacobsen Company reported average glycerin prices of 5 to 6 cents in December 2009. However, if the price of glycerin declines, our revenues will be adversely affected and we could even be forced to pay to dispose of our glycerin. Any further excess glycerin production capacity may limit our ability to market our glycerin co-product and could negatively impact our future revenues.

The biodiesel manufacturing industry is a feedstock limited industry. As more plants are developed and go into production there may not be an adequate supply of feedstock to supply the demands of the industry, which could threaten the viability of our plant. The number of biodiesel manufacturing plants either in production or in the planning or construction phase continues to increase. As more plants are developed and go into production, and as more existing plants expand their production capacities, there may not be an adequate supply of feedstock to supply the demand of the biodiesel industry. Consequently, the price of feedstock may rise to the point where it threatens the viability of our plant. This is because there is little or no correlation between the price of feedstock and the market price of biodiesel and, therefore, we cannot pass along increased feedstock costs to our biodiesel customers. We cannot pass along increased feedstock costs to our biodiesel customers because in order to stay competitive in the diesel industry, biodiesel must be competitively priced with petroleum-based diesel. Therefore, biodiesel prices fluctuate more in relation to petroleum-based diesel market prices than with feedstock market prices. As a result, increased feedstock costs may result in decreased profit margins. If we experience a sustained period of high feedstock costs, such pricing may significantly decrease or eliminate our profit margins. Furthermore, REG currently owns and operates two biodiesel plants and has also announced its desire to increase biodiesel production through wholly-owned and third-party managed biodiesel plants. This means that our plant manager and product marketer, REG and its affiliates, are competitors for a limited supply of feedstock.

The biodiesel industry is becoming increasingly competitive and we compete with some larger, better financed entities which could impact our ability to operate profitably. We face a competitive challenge from larger biodiesel plants and from biodiesel plants owned and operated by the companies that supply our inputs, such as soybean oil. We also expect to compete with plants that are capable of producing significantly greater quantities of biodiesel than the amount we expect to produce. Moreover, some of these plants may not face the same competition we do for inputs as the companies that own them are suppliers of the inputs. Such competition could result in lower prices for biodiesel, which would adversely affect our ability to generate profits and adversely affect our financial obligations.

Risks Related to Biodiesel Production

Declines in the demand for and prices of biodiesel and its primary co-product will have a significant negative impact on our financial performance. When we are able to engage in ordinary biodiesel production, our revenues will be greatly affected by the price at which we can sell our biodiesel and its primary co-product, glycerin. These prices can be volatile as a result of a number of factors over which we have no control. These factors include the overall supply and demand, the price of diesel fuel, level of government support and continuation of government incentives and tax credits (including the blenders’ tax credit), and the availability and price of competing products, and domestic and global economic conditions. The total production capacity of biodiesel continues to expand at this time. Demand may not rise to meet the increase in supply, and increased production of biodiesel may lead to lower prices. Any lowering of biodiesel prices may negatively impact our ability to generate profits.

We believe that the recent U.S. recession and global financial market turmoil may also depress biodiesel demand and prices. We expect that we will operate below our nameplate capacity throughout our fiscal year 2010. If we continue to operate at less than full capacity, this would have a negative impact on our revenues.

In addition, increased biodiesel production has lead to increased supplies of co-products from the production of biodiesel, such as glycerin. These increased supplies have led to lower prices for glycerin. If the price of glycerin declines, our revenue from glycerin may substantially decrease. Increased expenses and decreased sales prices for our products will result in decreased revenues.

Because of volatile soybean oil prices, we may use alternative feedstocks, such as corn oil, to produce our biodiesel, which may have risks and disadvantages of which we are not yet fully aware. We may produce some of our biodiesel from corn oil that we obtain from ethanol plants or other sources. Corn oil, however, poses several unique challenges due to its moisture and solid content, as well as its elevated free-fatty-acid levels. Furthermore, unlike many other oil sources, corn oil from ethanol plants contains waxy compounds and sterols. This tends to cause a waxy substance to build-up in the process equipment during the production process. The technology utilized by the ethanol plant which extracts the corn oil may also cause the suitability of the corn oil for the biodiesel production process to vary. These characteristics could cause corn oil to be less desirable than other types of feedstock. Furthermore, special technologies may be necessary to pretreat corn oil for utilization in the biodiesel production process. Accordingly, our use of alternative feedstocks such as corn oil may require us to make modifications to our equipment, purchase new equipment or repair equipment that could unexpectedly be damaged by the use of different feedstocks. There may be disadvantages to the use of corn oil as a feedstock of which we are not yet aware. If as a result of the unique characteristics of alternative feedstocks like corn oil the demand or price we are able to receive for biodiesel produced from such feedstocks is less than what we can receive for biodiesel produced from other types of feedstock, our revenues could be negatively affected.

Our business is sensitive to feedstock costs and the availability of adequate supplies of feedstock. Changes in the cost and availability of our feedstock may hinder our ability to generate revenue and reduce the value of our units. Our results of operations and financial condition are significantly affected by the cost and supply of feedstock when we are engaged in ordinary biodiesel production. Changes in the cost and supply of feedstock are subject to and determined by market forces over which we have no control. REG has agreed to procure adequate quantities of feedstock for our plant at competitive prices. We still pay for our feedstock when engaging in ordinary biodiesel production, however, and may be required to pay varying prices for it. Because there is little or no correlation between the cost of feedstock and the price of biodiesel, we cannot pass along increased feedstock costs to our biodiesel customers. We cannot pass along increased feedstock costs to our biodiesel customers because in order to stay competitive in the diesel industry, biodiesel must be competitively priced with petroleum-based diesel. Therefore, biodiesel prices fluctuate more in relation to petroleum-based diesel market prices than with feedstock market prices. As a result, increased feedstock costs may result in decreased profitability. If we experience a sustained period of high feedstock costs, such costs may reduce our ability to generate positive margins and our profit margins may significantly decrease or be eliminated, which could decrease or eliminate the value of our units.

If we are forced to continue to temporarily cease operating our biodiesel plant, we might not be able to meet our current liabilities and our losses may be increased. Our plant has not been continuously operating during the past fiscal year due to our liquidity concerns, decreased biodiesel demand and lack of sales contracts. If we are forced to temporarily cease operations at our biodiesel plant for sustained periods of time, either due to our inability to sell the biodiesel we are producing, feedstock costs, our lack of working capital and available credit, defects in our equipment at the plant, elimination or reduction of governmental incentives or tax credits, violations of environmental law, or any other reason, our ability to produce revenue would be adversely affected. We do not have any source of revenues other than production of biodiesel and glycerin at our biodiesel plant. If our plant continues to cease production for sustained periods of time, we will not generate significant revenue and we might not be able to pay our debts as they become due. If the plant is forced to cease to operate for enough time, we might not be able to re-start operations at the plant and our members could lose some or all of their investment.

We are at a disadvantage in marketing our glycerin because our plant will not produce pharmaceutical grade glycerin, thereby decreasing the market for the glycerin we produce. A major use of glycerin is in the production of drugs. The glycerin our plant produces, however, is not pharmaceutical grade glycerin. This limits our ability to market the glycerin produced by our biodiesel plant. The glycerin we produce has to be purified in order for it to be used in pharmaceutical applications. Since the market in which we can sell our glycerin is limited, we might not be able to sell all of the glycerin we produce or we may not be able to sell our glycerin at a favorable price.

Competition from other sources of fuel may decrease the demand for our biodiesel. Although the price of diesel fuel has increased over the last several years and reached near record high prices earlier in 2008 before sharply decreasing in the fall and winter of 2008, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. In addition, other more cost-efficient domestic alternative fuels may be developed and displace biodiesel as an environmentally-friendly alternative. If diesel prices do not continue to increase or a new fuel is developed to compete with biodiesel, it may be difficult to market our biodiesel, which could result in decreased revenues.

Asian soybean rust and other plant diseases may decrease our ability to obtain a sufficient feedstock supply. Our feedstock supply is highly dependent upon the availability and price of soybeans. Asian soybean rust is a plant fungus that attacks certain plants including soybean plants. Asian soybean rust is abundant in certain areas of South America, and is present in the United States. Left untreated, it can reduce soybean harvests by as much as 80%. Although it can be killed with chemicals, the treatment increases production costs for farmers by approximately 20%. Increases in production costs and reduced soybean supplies could cause the price of soybeans to rise and increase the cost of soybean oil as a feedstock to our plant. Such increase in cost would increase the cost of producing our biodiesel and increase our loss from operations.

Concerns about fuel quality may impact our ability to successfully market our biodiesel. Industry standards impose quality specifications for biodiesel fuel. Actual or perceived problems with quality control in the industry may lead to a lack of consumer confidence in the product and hinder our ability to successfully market our biodiesel. An inability to successfully market our biodiesel will lead to decreased revenues and may adversely impact our ability to operate at all.

Cold weather may cause biodiesel to gel, which could have an adverse impact on our ability to successfully market our biodiesel. The pour point for a fuel is the temperature at which the flow of the fuel stops. A lower pour point means the fuel is more flowable in cold weather. The pour point of 100% soy-based biodiesel is approximately 27ºF to 30ºF. The pour point for tallow-based biodiesel is approximately 61ºF. The pour point for No. 2 petroleum diesel fuel, the non-biodiesel fuel currently used in machines, is approximately -30ºF. When diesel is mixed with soy-based biodiesel to make a 2% biodiesel blend, the pour point is -25ºF. Therefore, we believe we will need to blend soy-based biodiesel and animal fat-based biodiesel with petroleum diesel in order to provide a biodiesel product that will have an acceptable pour point in cold weather. Generally, biodiesel that is used in blends of 2% to 20% is expected to provide an acceptable pour point for colder markets comparable to the No. 2 petroleum diesel pour point. In colder temperatures, lower blends are recommended to avoid fuel system plugging. This may cause the demand for our biodiesel in northern markets to diminish during the colder months.

The tendency of biodiesel to gel in colder weather may also result in long-term storage problems. At low temperatures, fuel may need to be stored in a heated building or heated storage tanks. This may result in a decrease in demand for our product in colder climates due to increased storage costs.

Automobile manufacturers and other industry groups have expressed reservations regarding the use of biodiesel, which could negatively impact our ability to market our biodiesel. Because it is a relatively new product, the research on biodiesel use in automobiles and its effect on the environment is ongoing. Some industry groups, including the World Wide Fuel Charter, have recommended that blends of no more than 5% biodiesel be used for automobile fuel due to concerns about fuel quality, engine performance problems and possible detrimental effects of biodiesel on rubber components and other parts of the engine. Although some manufacturers have encouraged use of biodiesel fuel in their vehicles, cautionary pronouncements by others may impact our ability to market our product.

In addition, studies have shown that nitrogen oxide emissions increase by 10% when pure biodiesel is used. Nitrogen oxide is the chief contributor to ozone or smog. New engine technology is available and is being implemented to eliminate this problem. However, these emissions may decrease the appeal of our product to environmental groups and agencies who have been historic supporters of the biodiesel industry, which may result in our inability to market our biodiesel.

Competition from other diesel fuel lubricity additives for ultra low sulfur diesel may be a less expensive alternative to our biodiesel, which would cause us to lose market share and adversely affect our ability to generate revenues. The Environmental Protection Agency (“EPA”) has issued regulations to reduce the amount of sulfur in diesel fuel in order to improve air quality. These regulations affect all diesel fuel available for retail sale since October 2006. The removal of sulfur from diesel fuel also reduces its lubricity which must be corrected with fuel additives, such as biodiesel which has inherent lubricating properties. Our biodiesel plant is expected to compete with producers of other diesel additives made from raw materials other than soybean oil having similar lubricity values as biodiesel, such as petroleum-based lubricity additives. Many major oil companies produce these petroleum-based lubricity additives and strongly favor their use because they may be used in lower concentrations than biodiesel. In addition, much of the infrastructure in place is for petroleum-based additives. As a result, petroleum-based additives may be more cost-effective than biodiesel. Therefore, it may be difficult to market our biodiesel as a lubricity additive, which could adversely affect our ability to generate revenues.

Risks Related to Our Financing Plan

We are in default under our financing agreements. We have undertaken significant borrowings to finance the construction of our biodiesel plant. We have failed to make any payments of principal required under our financing agreements since January 2009, which constitutes an event of default. Although we have made all payments of interest required under our financing agreements as of September 30, 2009, there can be no assurance that we will be able to continue satisfying future interest payments. Our financing agreements require the Company to maintain minimum levels of working capital, tangible net worth and tangible owner’s equity, as well as a fixed charge coverage ratio. As of our year ended September 30, 2009, we failed to comply with all such covenants, which also constitutes an event of default. These defaults have led to our auditor raising doubt about our ability to continue as a going concern, as expressed in Note 9 to the accompanying financial statements. For so long as we remain in default under our financing agreements, our lender may elect to exercise any one or more remedies provided by the financing agreements and applicable law, which include acceleration of the principal and interest payments due under our financing agreements or foreclosure on the lender’s mortgage and security interests in all of our assets. Such actions would have a material adverse impact on our operations and could cause our business to fail. Accordingly, our members could lose some or all of their investment in the Company in the event we continue to be in default under our financing agreements.

We may be unable to obtain additional credit or raise capital to fund our operations. We have exhausted all of the funds available under our debt facilities and we do not have further commitments for additional credit from any lender. Subsequent to the period covered by this report, our former $2,000,000 revolving line of credit matured in October 2009, but we have failed to repay the amounts outstanding or otherwise enter into a renewal or extension of such revolving line of credit. Our failure to repay the principal and interest amounts outstanding on our revolving line of credit on the maturity date constitutes an event of default under our financing agreements with our senior lender. We are experiencing liquidity problems due to our lack of available credit and working capital, our lack of biodiesel sales contracts and decreased biodiesel demand. We are currently operating pursuant to tolling arrangements under which we are not responsible for purchasing feedstock for biodiesel production; however, our lack of funds may make it difficult to even continue operating in this capacity. We expect that the current economic recession, along with our continuing default under our financing agreements and our auditor’s doubts about our ability to continue as a going concern, may make it difficult for us to obtain additional credit from our current lender or other lenders or to otherwise raise capital. If we are unable to obtain additional credit facilities or acquire additional capital to fund our operations, we may be forced to temporarily or permanently shut down our plant and our members could lose some or all of their investment.

Our auditor has raised doubts about our ability to continue as a going concern and if we are unable to continue our business, our units may have little or no value. As discussed in the accompanying financial statements, we have generated significant losses for the 2009 fiscal year and have experienced significant increases in our input costs and undertaken significant borrowings to finance the construction of our biodiesel plant. These liquidity issues, along with our continuing defaults under our financing agreements, raise doubts about our ability to continue as a going concern. See Note 9 to the financial statements. Moreover, our long-term debt is classified as a current liability due to our auditor’s doubts about our ability to continue as a going concern, as GAAP requires long-term debt to be listed as a current liability when a company has such a going concern disclosure. In the event our lender declares a default under our financing agreements and elected to accelerate our payments or take possession of our assets securing the loans, we may be forced to shut down the plant and our members could lose some or all of their investment. These factors have raised doubts as to our ability to continue as a going concern.

Risks Related to Regulation and Governmental Action

The EPA’s delay in issuing RFS2 rules implementing the 500 million gallons biomass-based diesel blending requirements may hinder stimulation of demand for biodiesel that may have otherwise been created by the 2007 amendments to the RFS program. The Energy Independence and Security Act of 2007 (“EISA”) amended the Renewable Fuel Standard program originally created by the Energy Policy Act of 2005 by increasing the amount of biofuels that are required to be blended into the national diesel pool annually through 2022 (“RFS2”). EISA created a biodiesel mandate requiring that 500 million gallons of biomass-based diesel fuel be used in on-road fuel in 2009, increasing to 1 billion gallons in 2022. However, in November 2008, the EPA announced that the 500 million gallons of biomass-based diesel required by EISA would not have to be blended into U.S. fuel supplies in 2009. The EPA indicated that this is due to the fact that the regulatory structure of the original RFS program does not provide a mechanism for implementing the EISA RFS2 biomass-based diesel mandate. The EPA issued proposed rules to implement the RFS2 in May 2009; however, as of the date of this report, no final rules have been issued. The EPA’s delay in implementing these rules may hinder any growth in biodiesel demand that may have otherwise been created if the RFS2 mandates were in effect. Any future delays in the implementation of the RFS2 biomass-based diesel mandate could cause stagnant biodiesel demand, which could adversely affect our ability to generate profits.

Loss of or ineligibility for favorable tax benefits for biodiesel production could hinder our ability to operate at a profit and reduce the value of our units. The biodiesel industry and our business are assisted by various federal biodiesel incentives. One such incentive is the Volumetric Ethanol Excise Tax Credit (“VEETC”), also known as the “blenders’ tax credit”, which provides a tax credit of $1.00 per gallon of biodiesel. The blenders’ tax credit is set to expire on December 31, 2009 and there can be no guarantees that Congress will act to extend the tax credit beyond this date. These tax incentives for the biodiesel industry may not continue, or, if they continue, the incentives may not be at the same level. The elimination or reduction of tax incentives to the biodiesel industry, including the blenders’ tax credit, could significantly reduce the market for biodiesel and could materially impair our ability to profitably produce and sell biodiesel. The loss or reduction of the blenders’ tax credit would make it more costly or difficult to produce and sell biodiesel and we could be forced to take significant cost savings measures or temporarily or permanently cease production at our plant. Demand for biodiesel tolling, which is the only way which we anticipate producing biodiesel in the foreseeable future, could also be reduced significantly. If federal biodiesel tax incentives, including the blenders’ tax credit, are eliminated or sharply curtailed, we believe that a decreased demand for biodiesel will result, which could depress biodiesel markets and negatively impact our financial performance.

A change in environmental regulations or violations thereof could be expensive and increase our losses. We are subject to extensive air, water and other environmental regulations. In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operation changes to limit actual or potential impact to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns. To the best of our knowledge, we have at all times been in complete compliance with these laws, regulations or permit conditions and we have all permits required to operate our business. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to invest or spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to increase our losses and negatively affect our financial condition.

Risks Related to Conflicts of Interest

We may have conflicts of interest with REG, which may cause difficulty in enforcing claims against REG. We expect that one or more employees or associates of REG will continue to advise our directors. We anticipate REG to continue to be involved in substantially all material aspects of our operations. We have entered into a MOSA with REG under which REG acquires feedstock and the basic chemicals necessary for our operation, and to perform the sales and marketing functions for our plant. It is possible that REG may purchase more of our units. There is no assurance that our arrangements with REG are as favorable to us as they could have been if obtained from unaffiliated third parties. In addition, because of the extensive roles that REG has in the operation of the plant, it may be difficult or impossible for us to enforce claims that we may have against REG. Such conflicts of interest may increase our losses and reduce the value of our units and could result in reduced distributions to investors.

REG and its affiliates may also have conflicts of interest because employees or agents of REG are involved as owners, creditors and in other capacities with other biodiesel plants in the United States. We cannot require REG to devote its full time or attention to our activities. As a result, REG may have conflicts of interest in allocating personnel, materials and other resources to our biodiesel plant.

Risks Related to Tax Issues in a Limited Liability Company

We expect to continue to be taxed as a partnership, however, if we are taxed as a corporation we would be subject to corporate level taxes which would decrease our net income and decrease the amount of cash available to distribute to our members. We expect that our company will continue to be taxed as a partnership. This means that our company does not pay any company-level taxes. Instead, the members are allocated any income generated by our company based on the member’s ownership interest, and would pay taxes on the member’s share of our income. If we are not taxed as a partnership, our company would be liable for corporate level taxes which would decrease our net income which may decrease the cash we have to distribute to our members.

We are not in compliance with the job creation requirements of our agreement with the Iowa Department of Economic Development and members may receive a reduction in the amount of investment tax credit available to be claimed over the life of such tax credit. Under our agreement with the Iowa Department of Economic Development (“IDED”), we were eligible to receive a refund of a portion of the sales tax paid in connection with the construction of our facility and our members were eligible to receive certain investment tax credits upon the condition that we create and maintain a certain number of jobs. However, we fell short of such requirements by approximately 14% and, accordingly, the Iowa Department of Revenue has notified that Company that an amount equal to 14% of the investment tax credit available to be claimed by our members should be deducted from the remaining portion of the tax credit available to members over the remainder of the life of such tax credit. This will result in a reduction in the amount of tax credit available to members. The Company is also obligated to repay approximately 14% of the sales tax refunds received by the Company pursuant to its agreement with IDED, plus accrued interest, which will adversely affect the Company’s ability to manage its ongoing liquidity problems.

Members may be allocated a share of our taxable income that exceeds any cash distributions received, therefore members may have to pay this tax liability using their personal funds. We expect to continue to be taxed as a partnership. This means members are allocated a percentage of our taxable income or losses based on their ownership interest in our company. Members may have tax liability based on their allocation of this income. We may make distributions that are less than the amount of tax members owe based on their allocated percentage of our taxable income, or we may not make any distributions at all. If this is the case, members would have to satisfy this tax liability using their personal funds.

If we are audited by the IRS resulting in adjustments to our tax returns, this could cause the IRS to audit members’ tax returns, which could lead to additional tax liability for our members. The IRS could audit our tax returns and could disagree with tax decisions we have made on our returns. This could lead to the IRS requiring us to reallocate items of income, gain, losses, deductions, or credits that could change the amount of our income or losses that is allocated to members. This could require adjustments to members’ tax returns and could lead to audits of members’ tax returns by the IRS. If adjustments are required to members’ tax returns, this could lead to additional tax liabilities for members as well as penalties and interest being charged to members.

We do not anticipate declaring distributions to members in the foreseeable future. We have incurred a net loss of $7,923,496 as of our fiscal year ended September 30, 2009. We do not anticipate that our board of directors will be declaring distributions to members in the foreseeable future. Accordingly, members will not likely receive distributions on their units and, in the event that members incur any tax liability as a result of their ownership of units in the company, members may be required to satisfy such liability with their personal funds.

ITEM 2. PROPERTIES

Our property consists primarily of our biodiesel plant and the real estate upon which the plant sits near Newton, Iowa in Jasper County. The plant is located on an approximately 35 acre rural site located north of Newton, Iowa approximately 4.75 miles from Interstate 80. We commenced construction of the plant at our site in June 2006 and completed construction in April 2007. Our plant has capacity to produce a total of 30 million gallons of biodiesel per year. The plant’s address is 3426 East 28th Street North. The site is near the main line of the Iowa Interstate Railroad line, which provides rail access to the plant. We have entered into an industrial track agreement with the Iowa Interstate Railroad for the use, operation, and maintenance of track to serve the plant. See “Distribution of Principal Products” under “Item 1. BUSINESS” above.

The plant consists of the primary buildings and improvements listed below, which are in good working condition:

	•		Principal office building
	•		Processing building
	•		Pretreatment building
	•		Loading/receiving building
	•		Storage warehouse
	•		Storage tank farm

Substantially all of our property, real and personal, serves as the collateral for our debt facilities with our senior lender, including our term loan, term revolving loan and revolving line of credit. We are currently in default under our financing agreements for our debt facilities and, accordingly, our senior lender could elect to foreclose on its security interest in our property or take any one or more other remedies to which it is entitled under our financing agreements or applicable law. See “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources” for information regarding our debt facilities and our defaults under our financing agreements.

ITEM 3. LEGAL PROCEEDINGS.

From time to time in the ordinary course of business, Central Iowa Energy may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the directors that could result in the commencement of legal proceedings.

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

On August 19, 2009, we held our 2009 Annual Meeting of Members for the purpose of electing three Group I directors to serve for a term of three years. Votes were solicited in person and by proxy. The three persons identified below were nominated by the Company’s board of directors to fill the open director positions. Each of the three nominees previously served as directors prior to the 2009 Annual Meeting. The three director nominees elected to serve on our board of directors for their respective terms, and the votes cast for each such nominee, were as follows:

		For				Against				Abstain
James Johnston			8,957				371				372
Craig Hamilton			9,170				210				320
Don Huyser			9,270				190				240

There were no broker non-votes with respect to this proposal.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

There is no public trading market for our units. We have created a private qualified online matching service in order to facilitate trading of our units. This service has been designed to comply with federal tax laws and IRS regulations concerning qualified matching services, as well as state and securities laws. Our online matching service consists of an electronic bulletin board that provides information to prospective sellers and buyers of our units. We do not receive any compensation for creating or maintaining the matching service. We do not become involved in any purchase or sale negotiations arising from our qualified matching service. In advertising our qualified matching service, we do not characterize the Company as being a broker or dealer in an exchange. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating the online matching service. We do not use the bulletin board to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements. We have no role in effecting the transactions beyond approval, as required under our amended and restated operating agreement, and the issuance of new certificates. So long as we remain a public reporting company, information about the Company will be publicly available through the SEC’s filing system. However, if at any time we cease to be a public reporting company, we will continue to make information about the Company publicly available on our website. Only one sale transaction has been completed pursuant to the Company’s qualified matching service since its establishment. This transaction occurred in the first quarter of fiscal year 2008 and the sale price was $1,200 per unit. No such transactions occurred during the 2009 fiscal year.

There are detailed timelines that must be followed under the qualified matching service rules and procedures with respect to offers and sales of membership units. All transactions must comply with the qualified matching service rules, our amended and restated operating agreement, and are subject to approval by our board of directors.

As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status. Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof). All transfers are subject to a determination that the transfer will not cause Central Iowa Energy to be deemed a publicly traded partnership.

Unit Holders

As of December 15, 2009, we had 567 unit holders of record and 26,672 units issued and outstanding.

Distributions

We have not declared or paid any distributions on our units. Under our amended and restated operating agreement, our board of directors has discretion over the timing and amount of distributions to our unit holders, subject to the covenants contained in our debt financing agreements and any restrictions imposed by law. However, our amended and restated operating agreement provides that the board of directors will endeavor to make cash distributions at such times and in such amounts as will permit our unit holders to satisfy their income tax liability in a timely fashion. Our financing documents with our lender restricts our ability to declare or pay dividends. See “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources.”

Equity Compensation Plans

We do not have any equity compensation plans under which equity securities of Central Iowa Energy are authorized for issuance.

Sale of Unregistered Securities

We did not make any sales of equity securities that were unregistered during the fiscal year ended September 30, 2009.

Repurchases of Equity Securities

Neither we nor anyone acting on our behalf has repurchased any of the Company’s outstanding units.

ITEM 6. SELECTED FINANCIAL DATA.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.

ITEM 7. 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 fiscal year ended September 30, 2009. This discussion should be read in conjunction with the financial statements and related notes for the fiscal year ended September 30, 2009.

Cautionary Statements Regarding Forward Looking Statements

This report contains forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described under “ITEM 1A. RISK FACTORS” and elsewhere in this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us may include:

•

Changes in interest rates or the availability, terms and conditions of credit;

•

Our ability to generate free cash flow to invest in our business and service our debt;

•

Our ability to raise additional equity capital proceeds;

•

Overcapacity within the biodiesel industry resulting in increased competition and costs for feedstock and/or decreased prices for our biodiesel and glycerin;

•

Decrease in the demand for biodiesel;

•

Actual biodiesel and glycerin production varying from expectations;

•

Availability and cost of products and raw materials, particularly soybean oil, animal fats, and methanol;

•

Changes in the price and market for biodiesel and its co-products, such as glycerin;

•		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 such as:

	•		national, state or local energy policy;
	•		federal and state biodiesel tax incentives;
	•		legislation establishing a renewable fuel standard or other legislation mandating the use of biodiesel or other lubricity additives; or
	•		environmental laws and regulations that apply to our plant operations and their enforcement;

•

Total U.S. consumption of diesel fuel and biodiesel, fuel prices, and consumer attitudes regarding the use of biodiesel;

•

Fluctuations in petroleum and diesel prices;

•

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

•

Results of our hedging strategies;

•

Our liability resulting from litigation;

•

Our ability to retain key employees and maintain labor relations;

•

Changes and advances in biodiesel production technology;

•

Competition from alternative fuels and alternative fuel additives;

•

The occurrence of events of default under our financing agreements, our failure to comply with loan covenants contained in our financing agreements and the response of our lender to such defaults and non-compliance;

•

Our ability to continue to export our biodiesel and the European Commission’s imposition of tariffs or other duties on biodiesel imported from the U.S.;

•

Current unfavorable domestic and international economic conditions;

•

Our ability to enter into toll processing agreements or other arrangements that shift responsibility for feedstock procurement and costs to other parties;

•

Changes in plant production capacity or technical difficulties in operating the plant for any reason, including changes due to events beyond our control or as a result of intentional reductions in production or plant shutdowns;

•

The closing, or the failure to close, of the transaction contemplated by the Second Amended and Restated Asset Purchase Agreement entered into by the Company with REG and certain other parties affiliated with REG;

•

Our ability to obtain the requisite unit holder vote to liquidate, dissolve and wind up if our proposed consolidation with REG is approved by the unit holders and successfully closes;

•

Our defaults under other material agreements, including our agreement with Jasper County, Iowa and the Iowa Department of Economic Development;

•

Our ability to generate profits;

•

Our reliance on REG for management, marketing and procurement services and our ability to successfully operate the plant in light of REG’s intent to terminate our current Management and Operational Services Agreement; and

•

Other factors described elsewhere in this report.

We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report, the documents that we reference in this report, and the documents we have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

Central Iowa Energy, LLC was formed as an Iowa limited liability company on March 31, 2005. References to “Central Iowa Energy,” “we,” “us,” “our” and the “Company” refer to the entity and business known as Central Iowa Energy, LLC. We own and operate a 30 million gallon per year biodiesel production plant near Newton, Iowa. We have been engaged in the production and sale of biodiesel and its primary co-product, glycerin, since April 2007. Our plant is capable of producing biodiesel from both vegetable oil, including soybean oil and corn oil, and animal fats. Our facility is also capable of pretreating crude vegetable oils, including soybean oil and corn oil, and animal fats. Pursuant to our Management and Operational Services Agreement (“MOSA”) with Renewable Energy Group, Inc. (“REG”), REG is required to manage our plant, acquire feedstock and chemicals necessary for the plant’s operation, sell and market our products and perform certain administrative functions in exchange for a fixed fee per gallon of biodiesel produced at our plant. On April 7, 2009, REG provided the Company with twelve months written notice of its intent to terminate the MOSA. We expect the MOSA will terminate on or about May 1, 2010. Due to our significant reliance on REG for the management of our plant, the procurement of our inputs, and the sale and marketing of our biodiesel, this could have a material adverse affect on our ability to operate and generate revenues in the event we are not able to negotiate a new MOSA with REG or enter into an agreement for similar services with another third party and we do not close on our proposed consolidation transaction with REG. During the fiscal year ended September 30, 2009 we paid only $58,512 under the MOSA, and no amounts were payable under the MOSA as of September 30, 2009 due to the fact that for most of the 2009 fiscal year we did not produce biodiesel other than pursuant to a toll processing agreement entered into with an entity affiliated with REG. Under the toll processing agreement, the per gallon fixed fee provided for in the MOSA that is typically applicable to each gallon of biodiesel produced at our plant does not apply to the gallons of biodiesel produced under the toll processing agreement.

We are subject to industry-wide factors that affect our operating and financial performance. Our operating results are typically driven by the prices at which we sell our biodiesel and glycerin and the costs of our feedstock and operating costs. Our revenues are typically impacted by such factors as the available supply and demand for biodiesel, the price of diesel fuel (with which biodiesel prices often correlate), general economic conditions, the weather, our dependence on one major customer who markets and distributes our products, the intensely competitive nature of our industry, the extensive environmental laws that regulate our industry, possible legislation at the federal, state and/or local level, and changes in federal biodiesel supports and incentives. To the extent that we continue to produce biodiesel exclusively pursuant to tolling arrangements, however, our revenues will not be dependent on variable feedstock costs and biodiesel prices. Current feedstock costs, combined with falling biodiesel prices and demand, have generally made profit margins small or nonexistent in the biodiesel industry. Demand for biodiesel has also decreased due to the unfavorable economic conditions that are prevailing in the U.S. and abroad.

We incurred a net loss of $7,923,496 for the fiscal year ended September 30, 2009. We are currently experiencing liquidity concerns due to our lack of working capital, our failure to generate significant funds from operations, and the unavailability of additional short-term financing and credit. For the fiscal year ended September 30, 2009, we produced a total of approximately 5,014,686 gallons of biodiesel, of which 3,988,292 gallons of biodiesel were produced pursuant to our tolling arrangement with an affiliate of REG and 1,026,394 gallons of biodiesel were produced pursuant to ordinary biodiesel sales contracts. Based upon our nameplate production capacity of 30,000,000 gallons of biodiesel per year (or 2,500,000 gallons per month), we produced biodiesel at approximately 17% of our production capacity for the fiscal year ended September 30, 2009.

We only engaged in ordinary biodiesel production in October and November 2008; for the remainder of the 2009 fiscal year, our only biodiesel production was pursuant to a toll processing agreement with REG Marketing & Logistics, LLC (“REG Marketing”), an entity affiliated with REG, pursuant to which REG Marketing has the right to order from the Company the production of biodiesel meeting certain specifications and yield requirements from certain types of feedstock supplied by REG Marketing, in exchange for which we are entitled to receive a fixed fee per gallon of biodiesel produced. The term of this toll processing agreement will continue until March 30, 2010 and will continue thereafter month-to-month unless terminated by either party at least one month in advance of the termination date. However, the toll processing agreement does not guarantee that we will receive any minimum amount of biodiesel orders. Approximately 80% of all biodiesel produced during our fiscal year ended September 30, 2009 was pursuant to our tolling agreement with REG Marketing; the other 20% was produced pursuant to ordinary biodiesel sales contracts.

For the first quarter of fiscal year 2010, we anticipate that we will continue to operate at or below approximately 40% of our nameplate production capacity. We do not currently have any open biodiesel contracts and we therefore expect that most, if not all, of our biodiesel production during the first quarter of 2010 will be pursuant to the toll processing agreement with REG Marketing or similar arrangements, although there can be no assurances that we will obtain any orders pursuant to such tolling arrangements.

We previously entered into a toll processing agreement with an entity affiliated with REG for the pre-treatment processing of corn oil from time to time, for which we will receive a fixed fee per pound of corn oil delivered minus the amount from the sale of materials obtained from the pre-treatment processing. Throughout the fiscal year 2009, we also from time to time pretreated feedstock for another REG network plant on a tolling basis. We may continue to operate under this same or similar arrangements throughout the 2010 fiscal year, although there can be no assurances that we will obtain any orders pursuant to such tolling arrangements.

We expect to continue operating on an as-needed basis for toll processing orders for the foreseeable future until general biodiesel demand increases and our liquidity situation has improved. We do not expect to have sufficient working capital on hand in the foreseeable future to acquire feedstock to produce biodiesel other than pursuant to a toll processing arrangement, which generally shifts the risk of feedstock costs and biodiesel prices to the other party. It is also uncertain whether we will maintain sufficient funds to cover the non-feedstock costs of production associated with biodiesel production under toll processing arrangements. Decreased demand for biodiesel, our failure to obtain biodiesel purchase contracts or toll processing orders and our lack of working capital may continue to have a material adverse affect on our ability to generate revenues.

Proposed Consolidation with REG

On November 20, 2009 we entered into a Second Amended and Restated Asset Purchase Agreement with REG, REG Newco, Inc., a Delaware corporation (“Newco”), and REG Newton, LLC, a wholly-owned subsidiary of Newco and an Iowa limited liability company (“REG Newton”) (the “Asset Purchase Agreement”) pursuant to which we anticipate consolidating our business and operations with REG under Newco (the “Transaction”). REG currently provides biodiesel plant management, feedstock procurement and product marketing services under our MOSA. REG was also the design-builder of our plant. The proposed consolidation will occur through the acquisition by REG Newton of substantially all of our assets and certain liabilities. The Asset Purchase Agreement also contemplates the potential consolidation under Newco of the business and operations of two other biodiesel plants, Western Iowa Energy, LLC (“WIE”) and Blackhawk Biofuels, LLC (“Blackhawk”).

Under the Asset Purchase Agreement, we will receive in consideration of the Transaction an aggregate of approximately 4,414,345 shares of Common Stock of Newco and 164,197 shares of Preferred Stock of Newco (subject to adjustment for fractional shares) for distribution to our unit holders as provided below. Based on the assumption that the Transaction and the other consolidation transactions involving WIE and Blackhawk close, we will receive in the aggregate approximately 1.20% of the total issued and outstanding shares of Newco Preferred Stock and approximately 11.89% of the issued and outstanding shares of Newco Common Stock. We expect to distribute two percent (2%) of the Newco shares of Common Stock and Preferred Stock to our financial advisor, Houlihan Smith & Company, Inc., for certain financial advisory services rendered to the Company, including services rendered in connection with the Transaction, and we may also be required to distribute, liquidate or hold back additional Newco shares to satisfy any claims or liabilities of the Company that remain outstanding following the close of the Transaction. It is expected that the balance of the Newco shares will be distributed to our unit holders in proportion to their respective positive capital account balances in connection with our anticipated dissolution, liquidation and winding up following the close of the Transaction. We plan to seek unit holder approval of our dissolution, liquidation and winding up at the same meeting we seek unit holder approval of the Transaction; however, such approval is not a condition to closing of the Transaction. If the requisite unit holder approval for our dissolution, liquidation and winding up is not obtained at the time the Transaction is approved by the unit holders, we expect to seek such unit holder approval at a later date, although there can be no assurances that it will be obtained. If the Company has not obtained the requisite unit holder approval prior to closing on the transaction, the Company will receive Newco Stock certificates issued in its name and the Newco Stock will not be distributed to the Company’s unit holders until the dissolution approval has been received. Any shares that we are required to distribute or liquidate in satisfaction of liabilities or claims arising or incurred prior to our dissolution and liquidation

will reduce the number of shares of Newco Stock available for distribution to unit holders. Upon receipt of the requisite unit holder approval, we plan to dissolve, liquidate, wind up and terminate our existence as soon as is reasonably practicable after the closing of the Transaction. Until we are dissolved and our existence is terminated, Newco has agreed to pay certain mutually agreeable ongoing costs for a period up to six months following closing of the Transaction. In the event we are not dissolved, liquidated and wound up by the end of this six month period, Newco will be under no obligation to continue to pay for any of our ongoing costs. In the event that the Transaction is approved, but the dissolution, liquidation and winding up is not approved at the same time, the Company could be forced to continue its existence without any ongoing business operations or assets to support any costs or expenses that it may incur as part of its ongoing existence.

The closing of the Transaction is subject to variety of conditions, including without limitation the receipt of the approval of the Transaction by our unit holders and REG’s shareholders and the closing of the proposed REG consolidation with Newco prior to or simultaneously with the Transaction. Closing of the Transaction is not conditioned upon the closing of the WIE or Blackhawk consolidations or upon the Company’s dissolution and liquidation. There can be no assurances that the Transaction will ever close. The foregoing description of the Asset Purchase Agreement is qualified in its entirety by reference to the full text of the Second Amended and Restated Asset Purchase Agreement, which was filed as an exhibit to the Company’s Form 8-K filed on November 23, 2009.

Results of Operations for the Fiscal Year Ended September 30, 2009 and 2008

The following table shows the results of our operations and the percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our statements of operations for the fiscal year ended September 30, 2009 and 2008:

		Fiscal Year Ended								Fiscal Year Ended
		September 30, 2009								September 30, 2008
Statement of Operations Data		Amount				Percent				Amount				Percent
Revenues		$	10,684,528				100.00	%		$	84,562,559				100.00	%
Cost of Goods Sold			14,844,628				138.94	%			82,373,776				97.41	%
Gross Profit (Loss)			(4,160,100	)			(38.94	%)			2,188,783				2.59	%
Operating Expenses			1,993,762				18.66	%			2,420,758				2.86	%
Operating (Loss)			(6,153,862	)			(57.60	%)			(231,975	)			(0.27	%)
Other (Expense)			(1,769,634	)			(16.56	%)			(2,182,463	)			(2.59	%)
Net (Loss)			(7,923,496	)			(74.16	%)			(2,414,438	)			(2.86	%)

Revenues

The following table shows the sources of our revenues for the fiscal years ended September 30, 2009 and 2008:

		Fiscal Year Ended								Fiscal Year Ended
		September 30, 2009								September 30, 2008
Revenue Source		Amount				% of Revenues				Amount				% of Revenues
Biodiesel Sales		$	6,576,666				61.55	%		$	71,186,907				84.18	%
Glycerin, Fatty Acid and Soap Stock Sales			1,214,440				11.37	%			3,926,966				4.65	%
Toll Processing Service Fees			1,703,162				15.94	%			0				0.00	%
Federal Incentives			1,190,260				11.14	%			9,448,686				11.17	%
Total Revenues		$	10,684,528				100.00	%		$	84,562,559				100.00	%

Revenues from operations for the fiscal year ended September 30, 2009 totaled $10,684,528 compared with $84,562,559 for the fiscal year ended September 30, 2008. Total revenues were significantly lower for the fiscal year ended September 30, 2009 compared to the same period in 2008 due to reduced biodiesel production, decreased biodiesel demand, decreased biodiesel sales contracts, and our production of biodiesel almost exclusively under tolling arrangements for the fiscal year ended September 30, 2009. Under tolling arrangements, we produce biodiesel using feedstock supplied by the party ordering biodiesel production. The other party pays for the feedstock and we pay for the other costs of production, receiving a fixed fee per gallon of biodiesel produced. We may also from time to time pretreat or process feedstock pursuant to similar tolling arrangements. We produced approximately 75% less biodiesel for the fiscal year ended September 30, 2009 (taking into account production under tolling arrangements) compared to the fiscal year ended September 30, 2008.

The portion of our revenues for the fiscal year ended September 30, 2009 relating to biodiesel sales reflects the sale of biodiesel inventory during fiscal year 2009 that was produced early in the 2009 fiscal year or during periods prior to the 2009 fiscal year. Although biodiesel sales represents the largest component of our revenues for the fiscal year ended September 30, 2009, we only actually produced biodiesel pursuant to ordinary biodiesel sales contracts in October and November 2008; for the remainder of the fiscal year ended September 30, 2009 we did not produce any biodiesel other than pursuant to our tolling arrangements with REG Marketing. This is a significant contrast to fiscal year 2008, in which we solely engaged in ordinary biodiesel production pursuant to biodiesel sales contracts.

The second largest component of our revenues for the fiscal year ended September 30, 2009 came from toll processing service fees, as compared to the same period in 2008 in which we earned no revenues from toll processing services. Under biodiesel tolling arrangements, we only receive a fixed fee per gallon of biodiesel produced, and we do not receive a variable price per gallon that fluctuates based on prevailing biodiesel prices. We expect to continue operating on an as-needed basis for toll processing orders for the foreseeable future, as we do not expect to have sufficient working capital on hand in the foreseeable future to acquire feedstock to produce biodiesel other than pursuant to a toll processing arrangement.

The expiration of the blenders’ tax credit on December 31, 2009 could adversely impact our ability to profitably produce and sell biodiesel, whether pursuant to ordinary biodiesel contracts or tolling arrangements. The loss or reduction of the blenders’ tax credit will make biodiesel production more costly and make it less competitive with petroleum-based biodesel. Demand for biodiesel tolling, which is the only way which we anticipate producing biodiesel in the foreseeable future, could also be significantly reduced if the tax credit is not renewed or its benefits are reduced. We could be forced to take significant cost savings measures or temporarily or permanently cease production at our plant in the event that Congress does not act to renew or extend the blenders’ tax credit in 2010. The loss or reduction of the blenders’ tax credit would likely decrease our ability to generate revenues.

Under our biodiesel tolling agreement with REG Marketing, we are entitled to retain the byproducts of biodiesel production, including glycerin (subject to the payment of certain by-product payments). Accordingly, we continue to sell these by-products from time to time, along with any inventory of such by-products from biodiesel production in early fiscal year 2009 or periods prior to the period covered by this report. This is the reason why the sale of glycerin, fatty acids and soap stock continues to be a component of our revenues despite our shift to production of biodiesel pursuant to tolling arrangements in the fiscal year ended September 30, 2009.

Under tolling arrangements, the other party ordering biodiesel production is typically entitled to receive the federal incentive payments associated with such production. The $1,190,260 in federal incentives included in our revenues for the fiscal year ended September 30, 2009 relates to federal incentive payments receivable in connection with our sales of B99 biodiesel inventory that we produced in the first two months of fiscal year 2009 or during periods prior to the period covered by this report. The $8,258,426 decrease in federal incentives from the fiscal year ended September 30, 2008 to the fiscal year ended September 30, 2009 is reflective of our decrease in ordinary biodiesel production and our shift to production of biodiesel almost exclusively pursuant to tolling arrangements.

Because biodiesel is primarily used as an additive to petroleum-based diesel, biodiesel prices have generally correlated to diesel fuel prices. Although the price for diesel fuel has increased over the last several years, reaching record highs, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. According to the USDA’s Weekly Ag Energy Round-Up report, the average price for B100 biodiesel in Iowa for the week of December 18, 2009 was approximately $3.20 to $3.46 per gallon. However, according to the Energy Information Administration, the average diesel price for the Midwest was approximately $2.75 as of December 7, 2009, which is lower than the price per gallon for biodiesel. Demand for biodiesel has been and will likely continue to be reduced as a result of this price difference. The price disadvantage of biodiesel will be even greater if the $1.00 blenders’ tax credit is not renewed or extended beyond its expiration date of December 31, 2009. Additionally, current economic conditions have resulted in decreased demand for biodiesel and other fuels. Combined with the lack of demand for biodiesel is an increased supply of biodiesel and increased competition for and costs of our inputs, which has also led to difficulty in marketing biodiesel at profitable prices. Moreover, demand for biodiesel typically decreases even further in the winter months because blenders decrease their biodiesel blend percentages due to cold flow concerns. We expect these trends to continue for our 2010 fiscal year. Decreased demand for biodiesel may negatively impact our ability to profitably produce and/or sell biodiesel, either pursuant to biodiesel tolling arrangements or ordinary biodiesel sales contracts.

Moreover, the EPA recently issued preliminary findings that soy-based biodiesel fails to meet targets for reducing greenhouse emissions, as required under the Renewable Fuel Standard (“RFS”). If these findings are implemented into the proposed revisions to the RFS (“RFS2”) such that soy-based biodiesel is not counted toward the RFS, demand for our biodiesel and our tolling services could be reduced as a result. Additionally, RFS2, which would have required the blending of 500 million gallons of biomass-based diesel for 2009, was delayed by the EPA’s previous extension of the comment period to September 25, 2009. As of the date of this report, no final rules for RFS2 have been issued by the EPA and it is still uncertain whether soy-based biodiesel will count towards the RFS under the anticipated new rules. The EPA previously indicated that it intended to issue the RFS2 rules by the end of 2009; however, as of the date of this report, no final rules have been so issued. Demand for biodiesel may also be harmed by the European Commission’s decision to extend anti-subsidy and anti-dumping tariffs on U.S. biodiesel imported into Europe through 2014, which has significantly increased the price at which U.S. biodiesel producers will be able to sell biodiesel in European markets, thereby likely significantly reducing overall demand for biodiesel produced in the U.S.

Cost of Goods Sold

The primary components of cost of goods sold from the production of biodiesel are typically raw materials (soybean oil, animal fats, corn oil, methanol and other chemicals), energy (natural gas and electricity), labor and depreciation on process equipment.

Cost of goods sold for our products for the fiscal year ended September 30, 2009 was $14,844,628 which is a significant decrease from $82,373,776 for the fiscal year ended September 30, 2008. This decrease is a result of a 91% decrease in biodiesel sales volume experienced for the fiscal year ended September 30, 2009 as compared to the same period for 2008 and our shift from ordinary biodiesel production in fiscal year 2008 to production of biodiesel in fiscal year 2009 almost exclusively under tolling arrangements.

Under biodiesel tolling arrangements, the other party supplies the feedstock at its own cost and we typically pay for the other costs associated with biodiesel production. Most of the costs for which we are responsible under tolling arrangements are fixed costs rather than variable costs, such as feedstock costs, and such variable costs are typically the greatest cost component associated with ordinary biodiesel production. Because of this difference and our shift from ordinary biodiesel production to biodiesel production almost exclusively pursuant to toll processing arrangements, our cost of goods sold and gross profits for the fiscal year ended September 30, 2009 and 2008 are not comparable.

The following table shows the components of our cost of goods sold for the fiscal year ended September 30, 2009 and 2008:

		Fiscal Year Ended								Fiscal Year Ended
		September 30, 2009								September 30, 2008
Component of Cost of Goods Sold		Amount				Percent				Amount				Percent
Feedstock and Chemical Inputs		$	10,474,038				70.6	%		$	72,137,199				87.6	%
Plant Wages and Salaries			1,014,896				6.8	%			1,216,125				1.5	%
Utilities			1,117,104				7.5	%			1,997,029				2.4	%
Fees-Procurement, Operation Management			15,398				0.1	%			401,937				0.5	%
(Gain) Loss on Derivative Financial Instruments			(1,171,039	)			(7.9	%)			2,117,833				2.6	%
Depreciation			2,567,102				17.3	%			2,550,512				3.0	%
Freight			300,875				2.0	%			1,170,431				1.4	%
Maintenance, Supplies and Other Expenses			526,254				3.6	%			782,710				1.0	%
Total		$	14,844,628				100	%		$	82,373,776				100	%

Feedstock typically makes up the greatest cost component of biodiesel production, but biodiesel toll processing arrangements generally shift the risk of variable feedstock costs to the other party. For the fiscal year ended September 30, 2008, feedstock costs and other chemical input costs account for approximately 88% of our cost of goods sold. However, during the fiscal year ended September 30, 2009 in which we operated almost exclusively pursuant to tolling arrangements (other than in October and November 2008), the primary components of our cost of goods sold were the cost of sales of biodiesel inventory produced in the first two months of the 2009 fiscal year or during periods prior thereto, chemical inputs, depreciation, plant wages and salaries and utilities. We expect that any biodiesel production in the first quarter of fiscal year 2010 will be primarily or exclusively pursuant to tolling arrangements with other third parties. Accordingly, we expect that fixed and overhead costs such as depreciation, labor costs and utilities, along with chemical inputs, will continue to comprise a large part of our cost of goods sold for the first quarter of our 2010 fiscal year and that variable feedstock costs will not significantly impact our cost of goods sold.

Prices for feedstock can be volatile. According to the USDA’s National Weekly Ag Energy Round-Up report, the price for crude soybean oil in Iowa for the week of December 18, 2009 ranged from 34.89 cents to 37.34 cents per pound, up slightly from the 27.20 cents to 29.70 cents per pound range posted for the same week a year ago. The prices for animal fats tend to move in relation to the price of other feedstocks such as soybean oil. According to the USDA’s December 11, 2009 Oil Crops Outlook report, estimated average lard and edible tallow prices for November 2009 were 30.07 cents and 29.65 cents per pound respectively, down from the August 2008 average high prices of 32.20 and 34.14 cents per pound, respectively. Based on recent trends, we expect that cost of goods sold on a per-gallon of biodiesel sold basis may decrease or stay the same for the 2010 fiscal year with regard to any biodiesel that is not produced pursuant to a toll processing agreement. We expect that feedstock prices will remain volatile, however, throughout the 2010 fiscal year, as domestic and global economic conditions and commodities affect pricing.

For the fiscal year ended September 30, 2009, we experienced a $1,171,039 net gain related to our derivative instruments. This hedging net gain consisted of a realized gain of $1,241,595 and a reduction to unrealized gains of $70,556 as the Company’s positions were liquidated and gains were realized. We experienced a $2,117,833 net loss during the fiscal year ended September 30, 2008 related to our derivative instruments.

Operating Expenses

Operating expenses for the fiscal year ended September 30, 2009 totaled $1,993,762 as compared to operating expenses of $2,420,758 for the same period in 2008. This decrease in operating expenses is the result of a $336,016 increase in professional fees which was offset by a $763,012 reduction in general and administrative expenses. In light of our reduced production and biodiesel output the Company has trimmed costs where possible, which has resulted in the decrease in general and administrative expenses. Our increase in professional fees is primarily related to legal fees incurred in connection with the proposed Transaction.

Other Income (Expenses)

Our other expenses for the fiscal year ended September 30, 2009 totaling $1,769,634 were 16.56% of our revenues. This expense resulted primarily from interest expense totaling $1,783,935, which is down from $2,182,463 for the fiscal year ended September 30, 2008. The decrease in interest expense is a result of a drop in the interest rates applicable to our credit facilities and a reduction in the average balance outstanding of our credit facilities. We received $14,319 in interest income for the fiscal year ended September 30, 2009.

Changes in Financial Condition

The following table highlights the changes in our financial condition from September 30, 2008 to September 30, 2009:

		September 30, 2009				September 30, 2008
Current Assets		$	941,934			$	10,476,632
Current Liabilities		$	26,020,150			$	29,787,038
Members’ Equity		$	9,519,628			$	17,443,124

Current Assets. Current assets totaled $941,934 at September 30, 2009 down from $10,476,632 at September 30, 2008. The decrease during this period is in part a result of a significant decrease in inventory from $7,776,472 at September 30, 2008 to $226,871 at September 30, 2009 stemming from our significant decrease in production levels and shift to production of biodiesel pursuant to tolling arrangements. Further, trade account receivables in the amount of $161,974 at September 30, 2009 was significantly less than the amount of trade account receivables of $1,200,587 at September 30, 2008. This decrease in trade accounts receivables is primarily due to the decrease in biodiesel sales for the fiscal year ended September 30, 2009 as compared to the fiscal year ended September 30, 2008.

Current Liabilities. Current liabilities totaled approximately $26,020,150 at September 30, 2009, down from approximately $29,787,038 at September 30, 2008. The decrease of $3,766,888 during this period resulted primarily from reduced accounts payable due to our decrease in biodiesel production and due to the reduction in our outstanding debt, including our term loan and our revolving line of credit. Due to the going concern opinion contained in Note 9 to the financial statements, all long-term debt has been classified as current. Our line of credit was due on October 13, 2009, however, as of the date of this report we have not yet repaid the $550,000 that was outstanding as of September 30, 2009, nor have we formally extended or renewed the agreement.

Members’ Equity. Total members’ equity as of September 30, 2009 was $9,519,628, down from $17,443,124 as of September 30, 2008. The decrease in total members’ equity is a result of our net loss realized during the period.

Cash Flows

Cash Flow from Operating Activities. Net cash flow provided by operating activities for the fiscal year ended September 30, 2009 totaled $3,507,793. This was the result of an operating loss of $7,923,496, non-cash items of $2,723,677, and a $8,707,612 increase in working capital components. The working capital component increase is primarily due to a reduction in inventory and receivables during the fiscal year ended September 30, 2009.

Cash Flow from Investing Activities. Net cash flow used in investing activities for the fiscal year ended September 30, 2009 totaled $503,378, which was primarily related to an increase in our restricted cash balance due to our senior lender’s requirement of a pledge of a certificate of deposit as collateral for our irrevocable line of credit which secures our loan from the Iowa Department of Economic Development.

Cash Flow from Financing Activities. Net cash used in financing activities for the fiscal year ended September 30, 2009 totaled $3,284,384, which was the result of payments totaling $2,450,000 on our revolving line of credit, which were made in connection with the reduction in our maximum line of credit amount and in order to reduce the borrowing base on our line of credit, and the payment of $834,384 on our long-term debt with our lender.

Liquidity and Capital Resources

Short Term and Long-Term Debt Financing Sources

We currently have a term loan, term revolving loan and revolving line of credit outstanding with our current lender, AgStar Financial Services, PCA (“AgStar”), which purchased the interests of our former lender, F & M Bank — Iowa, in such loans and related financing agreements.

Our $22,000,000 term loan with AgStar accrues interest at a variable base rate equal to the LIBOR Rate plus 325 basis points. The LIBOR Rate is generally defined as the One Month London Interbank Offered Rate reported on the 10^th day of the month preceding each interest period by the Wall Street Journal in its daily listing of money rates, defined therein as the average of interbank offered rates for dollar deposits in the London market. We are required to make equal monthly payments of principal and interest on the term loan until the maturity date on May 1, 2012, at which time any outstanding and unpaid principal, interest or other charges owing under the term loan will be due and payable. The principal payments are equal to an amount that fully amortizes the outstanding principal balance of the term note over a period not to exceed 10 years, together with accrued interest on the term loan. As of the fiscal year ended September 30, 2009, there was a principal balance of $18,616,731 on the term loan. We have failed to make any principal payments required under our term loan since January 2009, from which date we have only made payments of interest. As of September 30, 2009, we were current on all required payments of accrued interest on our term loan. Failure to make payments required on our term loan is an event of default under our financing agreements with our lender. We have failed to cure our default arising from our failure to make principal payments when due.

Advances under our term revolving loan with AgStar, up to the amount of $5,000,000, may be used for cash and inventory management purposes. We pay interest on the term revolving loan each month. The term revolving loan bears interest at a rate equal to the LIBOR Rate plus 325 basis points. The term revolving loan will mature on May 1, 2012. On the maturity date, any outstanding and unpaid principal, interest and other charges owning thereunder will be due and payable. As of the fiscal year ended September 30, 2009, we had drawn the full $5,000,000 on the term revolving loan and do not have any additional credit available thereunder.

In October 2008 our lender extended us a $2,000,000 revolving line of credit. As of September 30, 2009, $550,000 was outstanding on our line of credit. Since December 2008, we were out of compliance with our borrowing base requirements with respect to our revolving line of credit, which constitutes an event of default that we failed to cure. Our revolving line of credit loan accrued interest at a rate equal to the LIBOR Rate plus 400 basis points. Interest payments were required to be made monthly and any outstanding and unpaid principal, interest or other costs owing under the line of credit was due and payable on October 13, 2009. However, as of the date of this report, we had not paid the principal balance outstanding on the line of credit, which constitutes a default under our financing agreements. We have also not formally extended or renewed our revolving line of credit.

We have exhausted the credit available under our debt facilities, as no amount remains available under our term revolving loan. We are unable to draw on the additional $1,450,000 under our $2,000,000 revolving line of credit due to the fact that we are out of compliance with the applicable borrowing base requirements. We do not have further commitments for additional credit facilities from any lender. There is no assurance that we will be able to obtain other sources of short-term financing. The current U.S. economic recession and the ongoing credit crisis have created an unfavorable credit environment that may make it more difficult to obtain additional debt facilities. Unfavorable conditions in the biodiesel industry, including decreased demand, increased competition and decreasing biodiesel prices, may also limit our ability to obtain additional debt financing.

In connection with our financing agreements, we executed a mortgage and a security agreement in favor of F&M Bank, whose interests have been acquired by our current lender, AgStar, granting a security interest in all of our assets, including without limitation our real estate, our plant, fixtures located on our property, any rent or income we might receive in connection with the use or occupancy of our land, and all of our personal property. This security interest secures our obligations under the financing agreements, including the term loan, the revolving term loan, and the revolving line of credit loan.

Certain covenants in our financing agreements with our lender may restrict our operating flexibility. Certain of these covenants restrict our ability to declare and pay any dividends to our members or make any other distribution of assets to our members, make certain capital expenditures, enter into certain transactions, or incur additional debt financing or further pledge our assets. We are permitted to make dividends and distributions only in limited circumstances, and provided that no event of default exists under the agreements.

We are also required to comply with certain financial covenants and ratios contained in our financing agreements, including the maintenance of certain levels of “working capital, “tangible net worth” and “tangible owner’s equity” (as each of those terms is defined in our financing agreements). We are also required to maintain a “fixed charge ratio” (as that term is defined in our financing agreements) of not less than 1.25 to 1.00. As of September 30, 2009, we were in default under our financing agreements for failure to satisfy all of the loan covenants and ratios with which we are obligated to comply. Our failure to comply with these covenants and ratios constitutes an event of default under our financing agreements and we have failed to cure such defaults. Our lender has not waived our failure to comply with these loan covenants and ratios.

We have received multiple written notices of default from AgStar indicating that it is entitled to take any one or more remedies to which it is entitled under our financing agreements and applicable law. Our continuing default under our financing agreements has resulted in our lender’s imposition of a 2% increase in the interest rate applicable to our debt facilities, which has been in effect since approximately July, 2008. For so long as we continue to be in default under our financing agreements, our lender will also be entitled to take any one or more remedies afforded to the lender under our financing agreements, including, without limitation:

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acceleration of the unpaid principal balance under the financing agreements and all accrued interest thereon and all other amounts payable thereunder;

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withholding of any one or more advances to which the Company may otherwise be entitled under the financing agreements, or termination of the lender’s obligation to make any advances under the financing agreements;

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appointment of a receiver to take possession of the collateral securing the loans from our lender, including without limitation, our real estate, plant, and equipment;

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requiring the Company to pledge to the lender as additional security immediately available funds equal to the maximum amount available to be drawn under all outstanding letters of credit under our financing agreements;

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foreclosure on the lenders’ mortgage on and security interest in the Company’s property securing our loans, including our real estate, improvements, equipment and other assets and personal property; and

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any and all other rights and remedies afforded to our lender applicable law or equity.

Our lender’s exercise of any one or more of the foregoing remedies would have a material adverse impact on the Company’s financial condition and results of operations and could result in the loss of the assets securing our loans and a permanent shut-down of our plant. This could cause our members to lose all of their investment in the Company.

Although our lender has refrained from exercising its other rights and remedies under the financing agreements as of the date of this report (other than the imposition of a default interest rate), there can be no assurance that our lender will continue to forbear from accelerating the principal and interest due under our loans or foreclosing on and taking possession of the collateral securing our loans. Our continuing default has caused doubts about our ability to continue as a going concern. See Note 9 to the financial statements accompanying this report.

We are currently experiencing liquidity problems due to the lack of cash being generated from our continuing operations and our lack of available credit. We do not currently believe that our cash flow from continuing operations will alone be sufficient to fund our operations over the next twelve months. If we are unable to obtain sufficient capital, credit or short-term financing to cover the cost of our future operations and improve our liquidity, we may have to temporarily or permanently cease operations at our plant. Accordingly, our members could lose some or all of their investment in the Company. Please also see “Overview — Proposed Consolidation With REG” for a description of a Second Amended and Restated Asset Purchase Agreement we entered into on November 20, 2009 providing for the consolidation of our business and operations with those of REG, and potentially two other biodiesel production facilities, under a newly formed holding company. If the consolidation is consummated, we intend to liquidate, dissolve, and wind up as soon as is reasonably practicable after receipt of the requisite unit holder approval for the same, and to distribute as part of our liquidation the Newco Stock received in consideration of the Transaction to our unit holders, less the number of shares we are required to distribute to our financial advisor, Houlihan Smith & Company, Inc., for certain financial advisory services rendered in connection with the Transaction and to satisfy any other outstanding claims or liabilities of the Company that may remain or arise following closing of the Transaction. However, the closing of the consolidation is subject to numerous conditions and there is no assurance that the Transaction will ever close. We do not expect to distribute any Newco Stock to our unit holders until the Company has received the requisite unit holder approval for the Company’s dissolution, liquidation and winding up.

Agreements with Governmental Entities

Agreement with Iowa Department of Economic Development

We entered into a loan agreement with the Iowa Department of Economic Development (“IDED”) for a total of $400,000, $300,000 of which is a zero interest loan and $100,000 of which is a forgivable loan. The $300,000 zero interest loan must be repaid in sixty monthly installments of $5,000. As of September 30, 2009, we owed approximately $215,000 to IDED. To receive a permanent waiver of the forgivable loan, the Company must meet certain conditions, including the creation and maintenance of 14 full-time equivalent jobs which pay qualifying wages. In September 2009, however, the Company received a written notice of default from IDED specifying that the Company fell short of satisfying its job creation obligation as of the measurement date specified in the IDED agreement by creating only 12 full-time equivalent jobs, which constitutes a 14% deficiency and renders the Company ineligible for a full waiver of the forgivable loan amount. IDED notified the Company that due to its job creation shortfall, an amount equal to 14% of the forgivable loan amount (or $14,000), plus accrued interest at the rate of 6% from the date of disbursement of funds, is immediately due and payable by the Company. The Company has been advised that the amount which it is obligated to repay, with accrued interest, will be amortized into the monthly payments for the remaining life of the zero-interest loan payable to IDED. These loans are secured by a $400,000 irrevocable standby letter of credit for the benefit of IDED issued by Bank Iowa on account of the Company; however, the Company was required to pledge to Bank Iowa a $400,000 certificate of deposit as collateral for the letter of credit.

Under our agreement with IDED, we were further eligible to receive a refund of a portion of the sales tax paid in connection with the construction of our facility and our members were eligible to receive approximately $2,350,000 in tax incentives and assistance pursuant to IDED’s High Quality Job Creation Program. Pursuant to this program, our members may claim an investment tax credit up to 5% of certain qualifying expenditures directly related to new jobs created and maintained as a result of our business, provided that certain conditions are met. The Company’s failure to create and maintain the requisite number of jobs, however, has resulted in the Company’s obligation to repay 14% of the sales tax refunds received by the Company, plus accrued interest, for a total of approximately $75,920 due as of September 30, 2009. In September 2009, the Company accrued the $75,920 liability upon receiving a notice from the Iowa Department of Revenue seeking to collect such amounts. Furthermore, the Iowa Department of Revenue has notified the Company of its proposal that an amount equal to 14% of the investment tax credit available to be claimed by the Company’s members be deducted from the remaining portion of the tax credit available to members over the remainder of the life of such tax credit. This may result in a deduction in the amount of the tax credit available to members.

Private Redevelopment Agreement with Jasper County

Pursuant to a private redevelopment agreement dated November 21, 2006 between the Company and Jasper County, Jasper County agreed to construct certain sewer improvements for the Company’s plant site, which improvements were to be financed through the issuance of bonds or notes. In return for Jasper County’s construction of these improvements, the Company was obligated under the agreement to construct a 30,000,000 gallon per year biodiesel plant having a total investment amount of at least $38,000,000 and to create at least 20 new full-time jobs at the Company’s plant and maintain such jobs until June 30, 2015. The private redevelopment agreement provides that in the event of the Company’s default, the Company could be required to pay Jasper County for the total cost of improvements constructed by the County, or approximately $745,000. In connection with the private redevelopment agreement, the Company was obligated to enter into an assessment agreement with Jasper County to establish a minimum actual value of the Company’s property and related improvements for the purpose of calculating and assessing the Company’s real property taxes. The Company is currently in default of the private redevelopment agreement due to its failure to timely pay property taxes as required by the agreement. As of December 15, 2009, the Company had not paid its most recent property tax installment in the amount of approximately $130,000, which was due September 30, 2009, plus accrued interest. Furthermore, the Company failed to timely file with Jasper County an annual report required by the agreement, but which report was subsequently filed after the filing deadline. The Company has not received notice from Jasper County declaring an event of default under the agreement or otherwise indicating that it intends to pursue any remedies against the Company, including requiring the Company repay the cost of the sewer improvements. However, in the event that Jasper County elects to seek repayment of such improvement costs, the Company will not likely have available cash on hand to pay such obligation, which could have a material adverse effect on the company’s ability to continue to operate.

Commodity Price Risk Protection

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as soybean oil, and finished products, such as biodiesel, through the use of derivative instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases, they do not qualify for hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We treat our hedge positions as non-hedge derivatives, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of goods sold. The immediate recognition of hedging gains and losses under our treatment of our hedge positions can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

For the fiscal year ended September 30, 2009 we recognized a net gain of $1,171,039 on our derivative instruments. This is due primarily to realized gains on our hedging positions taken with respect to home heating oil and soybean oil. There is currently no futures market for biodiesel. Home heating oil is high sulfur diesel, which is the closest commodity to biodiesel for which there is such a futures market. Therefore, we entered into certain derivative instruments with respect to home heating oil to hedge against fluctuations in the sale price of our biodiesel.

There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of soybean oil, natural gas or biodiesel. However, it is likely that commodity cash prices will have the greatest impact on the derivative instruments with delivery dates nearest the current cash price. As we move forward, additional protection may be necessary. As the prices of these hedged commodities move in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are intended to produce long-term positive growth for the Company.

As of September 30, 2009, the Company did not have any outstanding derivative contracts due to its almost exclusive operation under tolling arrangements for the fiscal year ended September 30, 2009 and its intent to continue to operate in such a manner through the first quarter of the fiscal year ended September 30, 2010.

Distribution to Unit Holders

As of September 30, 2009, the board of directors of the Company had not declared any dividends.

Critical Accounting Estimates

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses.

Revenue Recognition

Revenue from the production of biodiesel and its co-products is recorded when title transfers to customers. Biodiesel and its co-products are generally shipped FOB from the plant.

Derivative Instruments and Hedging Activities

Current accounting guidance requires a company to evaluate its contracts to determine whether the contracts are derivatives. Certain derivative contracts may be exempt as normal purchases or normal sales, which are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. At this time, our forward contracts related to the purchase of soy oil and natural gas are considered normal purchases and, therefore, are exempted from the accounting and reporting requirements that would be required if they were considered derivative instruments.