Granite Falls Energy, LLC - Quarter Report: 2008 April (Form 10-Q)

Filed by Bowne Pure Compliance

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the fiscal quarter ended April 30, 2008


o		Transition report under Section 13 or 15(d) of the Exchange Act of 1934.

Commission file number 00051277

GRANITE FALLS ENERGY, LLC

(Name of small business issuer in its charter)


Minnesota (State or other jurisdiction of incorporation or organization)		41-1997390 (I.R.S. Employer Identification No.)

15045 Highway 23 SE
Granite Falls, MN (Address of principal executive offices)		56241-0216 (Zip Code)

320-564-3100
(Issuer’s telephone number)

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

þ Yes o No

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


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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of June 1, 2008 there were 31,156 membership units outstanding.

INDEX


	Page

PART I — FINANCIAL INFORMATION		3

Item 1. Financial Statements		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3. Quantitative and Qualitative Disclosures About Market Risk		24

Item 4T. Controls and Procedures		25

PART II — OTHER INFORMATION		26

Item 1. Legal Proceedings		26

Item 1A. Risk Factors		26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 3. Defaults Upon Senior Securities		27

Item 4. Submission of Matters to a Vote of Security Holders		27

Item 5. Other Information		27

Item 6. Exhibits		27

SIGNATURES		27

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

GRANITE FALLS ENERGY, LLC

Condensed Balance Sheet


	April 30,		October 31,
	2008		2007
	(Unaudited)
ASSETS

Current Assets
Cash and cash equivalents	$	5,148,773	$	3,963,425
Restricted cash		3,045,017		1,929,493
Accounts receivable — primarily related party		4,642,721		4,975,624
Inventory		5,020,372		3,811,770
Prepaid expenses and other current assets		1,155,728		1,221,367

Total Current Assets		19,012,611		15,901,679

Property, Plant and Equipment
Land and improvements		3,490,107		3,490,107
Railroad improvements		4,127,738		4,127,738
Process equipment and tanks		58,293,194		58,209,666
Administration building		279,734		279,734
Office equipment		135,912		130,732
Rolling stock		554,058		554,058
Construction in progress		406,656		268,128

		67,287,399		67,060,163
Less accumulated depreciation		15,746,461		12,382,375

Net Property, Plant and Equipment		51,540,939		54,677,788

Other Assets
Deferred financing costs, net of amortization		37,093		38,493


Total Assets	$	70,590,643	$	70,617,960


LIABILITIES AND MEMBERS’ EQUITY

Current Liabilities
Current portion of long-term debt	$	73,188	$	72,612
Accounts payable		1,201,742		1,411,455
Corn payable to FCE — related party		1,542,905		968,557
Derivative instruments		4,157,194		247,038
Accrued liabilities		1,764,543		1,977,181
Distribution payable		—		6,231,200

Total Current Liabilities		8,739,572		10,908,043

Long-Term Debt, less current portion		482,129		518,868

Commitments and Contingencies

Members’ Equity, 31,156 units authorized, issued, and outstanding		61,368,943		59,191,049


Total Liabilities and Members’ Equity	$	70,590,643	$	70,617,960

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

GRANITE FALLS ENERGY, LLC

Condensed Statements of Operations


	Three Months			Three Months
	Ended			Ended
	April 30,			April 30,
	2008			2007
	(Unaudited)			(Unaudited)

Revenues — primarily related party	$	19,018,497		$	23,829,298

Cost of Goods Sold — primarily related party		19,027,679			18,519,632


Gross Profit (Loss)		(9,182	)		5,309,666

Operating Expenses		566,866			546,186


Operating Income (Loss)		(576,048	)		4,763,480

Other Income (Expense)
Other income		43,824			20,633
Interest income		6,883			136,686
Interest expense		(27,545	)		(228,272	)

Total other income (expense), net		23,162			(70,953	)


Net Income (Loss)	$	(552,886	)	$	4,692,527


Weighted Average Units Outstanding — Basic and Diluted		31,156			31,156


Net Income (Loss) Per Unit — Basic and Diluted	$	(17.75	)	$	150.61

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

GRANITE FALLS ENERGY, LLC

Condensed Statement of Operations


	Six Months			Six Months
	Ended			Ended
	April 30,			April 30,
	2008			2007
	(Unaudited)			(Unaudited)

Revenues	$	43,317,367		$	50,651,747

Cost of Goods Sold		39,910,492			34,366,501


Gross Profit		3,406,875			16,285,246

Operating Expenses		1,222,296			1,140,809


Operating Income		2,184,579			15,144,437

Other Income (Expense):
Other income		43,426			43,633
Interest income		25,437			257,763
Interest expense		(75,548	)		(688,044	)

Total other expense, net		(6,685	)		(386,648	)


Net Income	$	2,177,894		$	14,757,789


Weighted Average Units Outstanding		31,156			31,156


Net Income Per Unit	$	69.90		$	473.67

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

GRANITE FALLS ENERGY, LLC

Condensed Statements of Cash Flows


	Six Months			Six Months
	Ended			Ended
	April 30,			April 30,
	2008			2007
	(Unaudited)			(Unaudited)

Cash Flows from Operating Activities:
Net income	$	2,177,894		$	14,757,789
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		3,365,486			3,200,608
Change in fair value of derivative instruments		1,686,025			(5,931,961	)
Changes in assets and liabilities:
Restricted cash		(115,524	)		(69,044	)
Derivative instruments		2,224,131			10,762,989
Accounts receivable		332,903			(64,758	)
Inventory		(1,208,603	)		(1,466,679	)
Prepaid expenses and other current assets		65,638			(434,585	)
Accounts payable		364,635			(867,716	)
Accrued liabilities		(212,638	)		140,939

Net Cash Provided by Operating Activities		8,679,947			20,027,580

Cash Flows from Investing Activities:
Capital expenditures		(88,708	)		(71,118	)
Construction in process		(138,528	)		(4,749,963	)

Net Cash Used in Investing Activities		(227,236	)		(4,821,081	)

Cash Flows from Financing Activities:
Restricted cash		(1,000,000	)		—
Payments on long-term debt		(36,163	)		(17,381,666	)
Member distributions paid		(6,231,200	)		(3,115,600	)

Net Cash Used in Financing Activities		(7,267,363	)		(20,497,266	)


Net Increase (Decrease) in Cash and Cash Equivalents		1,185,348			(5,290,765	)

Cash and Cash Equivalents — Beginning of Period		3,963,425			13,403,414


Cash and Cash Equivalents — End of Period	$	5,148,773		$	8,112,649


Supplemental Cash Flow Information
Cash paid during the period for:
Interest	$	66,793		$	688,044


Supplemental Disclosure of Noncash Investing, Operating and Financing Activities
Transfer of construction in process to fixed assets	$	—		$	5,880,703

Construction costs in accounts payable	$	87,485		$	166,017

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

GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2008

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed financial statements of Granite Falls Energy, LLC have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As used in this report in Form 10-Q, the “Company” represents Granite Falls Energy, LLC (“GFE”).

Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been consolidated or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended October 31, 2007, contained in the Company’s annual report on Form 10-KSB for 2007.

In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. The results reported in these interim condensed financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.

Nature of Business

Granite Falls Energy, LLC is a Minnesota limited liability company operating an ethanol manufacturing facility near Granite Falls, Minnesota. On November 13, 2005, the Company began plant operations and is currently producing fuel-grade ethanol and distillers grains for sale. GFE’s plant has an approximate production capacity of 50 million gallons per year, although its current environmental permit is for 45 million gallons of undenatured ethanol annually. The Company sells its production of ethanol and distillers grains to marketers located within the United States.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Significant estimates that may change in the near term include the contingency disclosed in Note 8.

Revenue Recognition

Revenue from the sale of ethanol and distillers grains is recorded when title and risk of ownership transfers to the customer, which occurs when the product is fully loaded into the railcar or truck. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, revenue from the sale of ethanol is recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of distillers grains are included in cost of goods sold.

In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, commissions due to the marketers are deducted from the gross sales price at the time payment is remitted to the Company. Ethanol sales are recorded net of commissions of approximately $149,000 and $166,000 for the three months ended April 30, 2008 and 2007, respectively. Ethanol sales are recorded net of commission of approximately $331,000 and $346,000 for the six months ended April 30, 2008 and 2007, respectively. Distillers grain sales are recorded net of commissions of approximately $53,000 and $36,000 for the quarters ended April 30, 2008 and 2007, respectively. Distiller grain sales are recorded net of commission of approximately $75,000 and $51,000 for the six months ended April 30, 2008 and 2007, respectively.

GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2008

Amounts received under incentive programs from the United States Department of Agriculture are recognized as other income when the Company has sold the ethanol and completed all the known requirements of the incentive program.

Derivative Instruments

The Company accounts for derivatives in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires the recognition of derivatives in the balance sheet and the measurement of these instruments at fair value.

In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of derivatives that do not qualify as a hedge, or is not designated as a hedge, are recorded currently in earnings.

Additionally, SFAS No. 133 requires a company to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales 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. Contracts that meet the requirements of normal are documented as normal and exempted from the accounting and reporting requirements of SFAS No. 133, and therefore, are not marked to market in our financial statements.

Income Taxes

The Company is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements. During the third quarter of fiscal year 2007, the Company changed its tax year to December 31, however the financial reporting year end will not change from October 31. In fiscal year 2007, the Company was required to make a federal income tax deposit of $787,757, which is included in prepaid expenses and other current assets as of April 30, 2008. This deposit is anticipated to be refunded after the second quarter of fiscal 2008, due to the December 31 tax reporting year end.

Differences between financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the modified accelerated cost recovery system method (MACRS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences.

Legal Contingencies

As required by Financial Accounting Standards Board Statement No. 5 “Accounting for Contingencies” (FAS 5), the Company determines whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and the loss amount can be reasonably estimated. Estimates of potential outcomes of these contingencies are developed in consultation with outside counsel. While this assessment is based upon all available information, arbitration is inherently uncertain and the actual liability to fully resolve this arbitration cannot be predicted with any assurance of accuracy. Final settlement of these matters could possibly result in significant effects on the results of operations, cash flows and financial position.

GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2008

2. INVENTORY

Inventories consist of the following at April 30, 2008:


	April 30, 2008		October 31, 2007
Raw materials	$	2,353,935	$	1,595,185
Spare parts		428,173		461,601
Work in process		935,354		515,665
Finished goods		1,302,910		1,239,319

Totals	$	5,020,372	$	3,811,770

3. DERIVATIVE INSTRUMENTS

As of April 30, 2008, the Company has entered into derivative instruments to hedge 5,175,000 bushels of its future corn purchases through December 2008, and 6,421,000 gallons of its future ethanol sales through December 2008 to the extent considered necessary for minimizing risk from future market price fluctuations. The Company has used various option contracts as vehicles for these hedges.

At April 30, 2008, the Company had recorded a liability for these derivative instruments discussed above of $4,157,194. At October 31, 2007, the Company had recorded a liability for these derivative instruments discussed above of $247,038. Although the derivative instruments may not be designated as, and accounted for, as a fair value or cash flow hedges, management believes they are effective economic hedges of specified risks. The Company has recorded a decrease in revenue of $3,884,447, and an increase in revenue of $658,308 related to the change in fair value of its ethanol related derivative instruments for the three months ended April 30, 2008 and 2007, respectively. The Company has recorded a decrease in revenue of $7,307,659, and an increase in revenue of $17,869 related to the change in fair value of its ethanol related derivative instruments for the six month periods ended April 30, 2008 and 2007, respectively. The Company has recorded a net decrease in cost of goods sold of $4,853,224 and $957,275 related to the change in fair value of its corn derivative instruments for the three month periods ended April 30, 2008 and 2007, respectively. The Company has recorded a net decrease in cost of goods sold of $8,993,684 and $5,914,092 related to the change in fair value of its corn derivative instruments for the six month periods ended April 30, 2008 and 2007, respectively.

The Company is required to maintain cash balances with its broker related to derivative instrument positions. At April 30, 2008 and October 31, 2007, restricted cash related to this requirement totaled $2,045,017 and $1,929,493, respectively. This amount is included in restricted cash on the balance sheet as of April 30, 2008 and October 31, 2007, respectively.

4. CONSTRUCTION IN PROCESS

The Company entered into construction agreements with contractors to design and install an oil separator system to recover crude corn oil from syrup. The project will be funded from cash flow from current operations. The Company’s construction in process is comprised of the costs incurred for this project as of April 30, 2008. Subsequent to our fiscal quarter ended April 30, 2008, we completed the installation and start-up of our corn oil separation equipment at our ethanol plant. Our corn oil separator system recovers crude corn oil from our distillers syrup. The total cost of the oil separator system will be approximately $775,000.

5. REVOLVING LINE OF CREDIT

On November 26, 2007, the Company entered into a Loan Agreement with Minnwest Bank M.V. of Marshall, MN (the “Bank”). Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $10,000,000 available and is secured by substantially all of the Company’s assets. The interest rate on the revolving line of credit is at 0.75 percentage points under the prime rate as reported by the Wall Street Journal, with a minimum rate of 6.0%. The interest rate on the revolving line of credit at April 30, 2008 was 6.0%, the minimum rate under the terms of the agreement. At April 30, 2008 and October 31, 2007, the Company had no outstanding balance on this line of credit. The Company is required to maintain a $1,000,000 savings account balance with the Bank to serve as collateral on this line of credit. This amount is included in restricted cash as of April 30, 2008 and October 31, 2007.

GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2008

As of October 31, 2007, the Company had a credit facility with First National Bank of Omaha (“FNBO”) for the issuance of up to $1,000,000 in stand-by letters of credit, of which the Company had issued a total of $891,103. On December 7, 2007, Trinity released its letter of credit in the amount of $281,250 (as discussed in Note 7). Trinity’s release of its letter of credit reduced the total balance of issued letters of credit to $610,750. During the quarter ended January 31, 2008, the Company transferred the remaining letters of credit totaling $610,750 from FNBO to Minnwest Bank.

6. LONG-TERM DEBT

Long-term debt consists of the following:


	April 30, 2008			October 31, 2007
Economic Development Authority (“EDA”) Loans:
City of Granite Fall / MIF	$	382,618		$	412,209
Western Minnesota RLF		83,771			87,689
Chippewa County		88,928			91,582

Total EDA Loan		555,317			591,480

Less: Current Maturities		(73,188	)		(72,612	)

Total Long-Term Debt	$	482,129		$	518,868

The estimated maturities of long term debt at April 30, 2008 are as follows:


2008	$	73,188
2009		74,362
2010		75,568
2011		76,807
2012		78,081
Thereafter		177,311

Total	$	555,317

EDA Loans:

On February 1, 2006, the Company signed a Loan Agreement with the City of Granite Falls, MN (“EDA Loan Agreement”) for amounts to be borrowed from several state and regional economic development authorities. The original amounts are as follows:


City of Granite Falls / Minnesota Investment Fund (“MIF”):
Original Amount:		$500,000
Interest Rate:		1.00%
Principal and Interest Payments:		Semi-Annual
Maturity Date:		June 15, 2014

Western Minnesota Revolving Loan Fund (“RLF”):
Original Amount:		$100,000
Interest Rate:		5.00%
Principal and Interest Payments:		Semi-Annual
Maturity Date:		June 15, 2016

Chippewa County:
Original Amount:		$100,000
Interest Rate:		3.00%
Principal and Interest Payments:		Semi-Annual
Maturity Date:		June 15, 2021

GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2008

Amounts borrowed under the EDA Loan Agreements are secured by a second mortgage on all of the assets of the Company.

7. LEASES

On October 3, 2005, the Company signed a lease agreement with Trinity Industries Leasing Company (“Trinity”) for 75 hopper cars to assist us with the transport of distiller’s grains by rail. The lease is for a five-year period once the cars have been delivered and inspected in Granite Falls, MN. Based on final manufacturing and interest costs, the Company will pay Trinity $673 per month plus $0.03 per mile traveled in excess of 36,000 miles per year. Rent expense for these leases was approximately $149,000 and $164,000 for the three months ended April 30, 2008 and 2007, respectively. Rent expense for these leases was approximately $297,000 and $315,000 for the six month periods ended April 30, 2008 and 2007, respectively.

At April 30, 2008, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year:


Periods Ending April 30,
2009	$	605,700
2010		605,700
2011		308,760

Total minimum lease commitments	$	1,520,160

8. COMMITMENTS AND CONTINGENCIES

Construction Contract for Plant

As of April 30, 2008, $87,485 is included in payable to construction contracts and will be paid upon final determination of amounts due to a warranty claim. Subsequent to our fiscal quarter ended April 30, 2008, this claim has been settled and the full amount paid to the contractor.

Construction Management and Operations Management Agreement

In August 2004, the Company entered into a Consulting Agreement and an Operating and Management Agreement with Glacial Lakes Energy, LLC (“GLE”), who is also a member. Under the Consulting Agreement, GLE provided assistance in planning and directed and monitored the construction of the Company’s fuel ethanol plant. The Company paid GLE $10,000 plus pre-approved expenses per month. The Consulting Agreement terminated upon the effective date of the Operating and Management Agreement under which GLE began to operate and manage the Company’s plant, which was mutually determined to be August 8, 2005. The Company paid GLE $35,000 per month plus 3% of the plant’s net income (payable annually) under the Operating and Management Agreement. The initial term of the Operating and Management Agreement was for five years and was to automatically renew for successive one-year terms unless terminated 180 days prior to the start of a renewal term. On December 22, 2006, key management personnel from GLE resigned from their positions as executive officers of the Company pursuant to the Operating and Management Agreement between GLE and the Company. On May 21, 2007, GLE made a demand for arbitration against the Company under the Commercial Arbitration Rules of the American Arbitration Association in Yellow Medicine County, Minnesota to resolve a dispute regarding this Operating and Management Agreement between the two entities.

GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2008

GLE claims the Company wrongfully terminated the Operating and Management Agreement and seeks damages of approximately $5,300,000 in lost revenues and lost profits, of which $1,143,290 was accrued as of October 31, 2007, and remains accrued as of April 30, 2008, based on management estimates. Granite Falls is vigorously defending itself in this action and has filed its answering statement and counterclaim in response to GLE’s demand for arbitration on December 17, 2007. The counterclaim requests judgment against GLE for (a) the $300,000 paid to the Minnesota Pollution Control Agency (“MPCA”) plus expenses, (b) at least $1,000,000 in economic harm associated with the “ramp down” in production required by the MPCA, and (c) at least $10,000,000 in economic harm associated with lost capacity associated with improper permitting, all of which Granite Falls claims are costs that should have been avoided had GLE properly managed the environmental permitting process while it was managing the construction and startup of operations of Granite Falls as required by the operating and management agreement.

As of April 30, 2008, the Company has accrued $1,143,290 for services previously provided under this agreement of which $59,839 and $1,083,451 was charged to fiscal 2007 and 2006 operations, respectively.

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

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and six month periods ended April 30, 2008, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company’s Annual Report on Form 10-KSB for the fiscal year ended October 31, 2007.

Disclosure Regarding Forward-Looking Statements

This report contains historical information, as well as forward-looking statements. These forward-looking statements include any statements that involve known and unknown risks and relate to future events and our expectations regarding future performance or conditions. Words 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 are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to:

•

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

•

Changes in plant production capacity or technical difficulties in operating the plant;

•

Additional increases in the price of corn as the corn market becomes increasingly competitive;

•

Our inelastic demand for corn, as it is the only available feedstock for our plant;

•

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

•

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

•

Changes in the availability and price of natural gas and corn, and the market for ethanol and distillers grains;

•

Changes in the availability of credit to support the level of liquidity necessary to implement our risk management activities;

•

Changes in the financial stability of our suppliers, marketers and other partners;

•

Changes in federal and/or state laws (including the reduction or elimination of any federal and/or state ethanol tax incentives, tariffs or other supports);

•

Overcapacity within the ethanol industry and decreases in the price of ethanol;

•

Changes and advances in ethanol production technology that may make it more difficult for us to compete with other ethanol plants utilizing such technology;

•

Our liability resulting from any litigation or arbitration; and

•

Competition in the ethanol industry and from other alternative fuels.

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations. 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 and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

Granite Falls Energy, LLC is a Minnesota limited liability company currently producing fuel-grade ethanol and distillers grains for sale. Our plant has an approximate production capacity of 50 million gallons per year, although our environmental permits currently only allow us to produce up to 45 million gallons of undenatured ethanol on an annualized basis.

Our operating results are largely driven by the prices at which we sell ethanol and distillers grains and the costs related to production. Historically, the price of ethanol has fluctuated with the price of petroleum-based products such as unleaded gasoline, heating oil and crude oil. The price of distillers grains is primarily influenced by the price of corn as a substitute livestock feed. We expect these price relationships to continue for the foreseeable future, although recent volatility in the commodities markets make historical price relationships seem less reliable. Our largest costs of production are corn, natural gas, depreciation and manufacturing chemicals. The cost of corn is largely impacted by geopolitical supply and demand factors. Prices for natural gas, manufacturing chemicals and denaturant are tied directly to the overall energy sector, crude oil and unleaded gasoline.

As of the date of this report, we have 36 full time employees and two part time employees. Ten of these employees are involved primarily in management and administration. The remaining employees are involved primarily in plant operations. We do not currently anticipate any significant change in the number of employees at our plant.

Results of Operations for the Six Months Ended April 30, 2008 and 2007

The following table shows the results of our operations and the approximate percentage of revenues, costs of sales, operating expenses and other items to total revenues in our unaudited statements of operations for the six months ended April 30, 2008 and 2007:


	Six Months						Six Months
	Ended April 30, 2008						Ended April 30, 2007
Income Statement Data	Amount			Percent			Amount			Percent
Revenues	$	43,317,367			100.00	%	$	50,651,747			100.00	%

Cost of Goods Sold		39,910,492			92.14	%		34,366,501			67.85	%


Gross Profit		3,406,875			7.86	%		16,285,246			32.15	%

Operating Expenses		1,222,296			2.82	%		1,140,809			2.25	%


Operating Income		2,184,579			5.04	%		15,144,437			29.90	%

Other Expense, net		(6,685	)		(0.02	)%		(386,648	)		(0.76	)%


Net Income	$	2,177,894			5.03	%	$	14,757,789			29.14	%

The following table shows additional data regarding production and price levels for our primary inputs and products for the six months ended April 30, 2008 and 2007.


	Six Months		Six Months
	ended		ended
Additional Data	April 30, 2008		April 30, 2007
Ethanol sold (thousands of gallons)		22,848,677		23,360,682
Dried distillers grains sold (tons)		62,892		60,719
Modified distillers grains sold (tons)		900		8,072
Ethanol average price per gallon (net of hedging activity)	$	1.92	$	1.96
Dried distillers grains average price per ton	$	107.08	$	75.93
Modified distillers grains average price per ton	$	27.23	$	28.97
Corn costs per bushel (net of hedging activity)	$	3.40	$	2.60

The decrease in revenues of 14.5% for the six months ended April 30, 2008 compared to the six months ended April 30, 2007 is due primarily to an approximately 512,000 gallon reduction in the amount of ethanol sold and the recognition of a $7,307,659 loss on ethanol derivatives compared to $17,896 of revenue for the same period one year ago. Revenue from sales of our co-products increased in the six months ended April 30, 2008 compared to the six months ended April 30, 2007, despite lower production levels, primarily due to an increase of approximately 41% in the price of our dried distillers grain as a result of the increasing cost of corn as a comparable feed product.

Ethanol prices were relatively steady during our six month period ended April 30, 2008, as compared to six months ended April 30, 2007, which is primarily due to strong demand for ethanol, created by a number of factors, including the high price of crude oil and gasoline. However, ethanol prices are still down significantly from the 2006 price levels and we cannot guarantee that the price of ethanol will not decline further due to factors beyond our control.

Management expects ethanol prices to remain steady through 2008 because of strong energy pricing. As a result, we conservatively expect the percentage of revenues from the sale of fuel ethanol and the percentage of revenue from the sale of distillers grains to remain steady during the fiscal year 2008. We expect the sale price of distillers grain to remain strong during the remainder of fiscal year 2008 and to fluctuate in tandem with the price of corn.

Management believes the industry will need to continue to grow demand and further develop an ethanol distribution system to facilitate additional blending of ethanol and gasoline to offset the increased supply brought to the marketplace by additional production. We expect ethanol demand to continue to grow and ethanol distribution to continue to expand as a result of the large spread that currently exits between the price of ethanol and the price of gasoline.

Cost of Sales

Our costs of goods sold as a percentage of revenues were approximately 92% and 68% for the six months ended April 30, 2008 and 2007, respectively. Our two largest costs of production are corn (61.6% of cost of goods sold for our six months ended April 30, 2008) and natural gas (12.8% of cost of goods sold for our six months ended April 30, 2008). Our cost of goods sold increased by approximately $5,543,991 in the six months ended April 30, 2008 as compared to the six months ended April 30, 2007, even though our revenue decreased by approximately $7,334,380. This increase in the cost of goods sold is primarily a result of significantly higher corn prices. Our total corn costs, net of gain on our corn derivative positions of $8,993,684, increased by approximately 30.8% for the six months ended April 30, 2008 as compared to the same period for our 2007 fiscal year. Our increasing cost of goods sold combined with anticipated steady or declining ethanol prices will continue to place pressure on our operating margins.

The rise in corn prices motivated farmers to plant additional corn acres in 2007. The United States Department of Agriculture (“USDA”) estimated the 2007 corn crop at approximately 13.07 billion bushels raised on approximately 93.6 million planted acres. In its May 9, 2008 crop production report the USDA announced its estimate of corn acres planted for the 2008 growing season at approximately 86 million acres, which is an 8.1% decrease from 2007. Even if these corn acres are ultimately planted, planting progress in currently behind schedule and the 2008 corn crop will be contingent on a number of weather related uncertainties. Accordingly, management expects to continue to endure high corn prices for the remainder of the 2008 fiscal year.

For the six months ended April 30, 2008, our natural gas costs decreased as a percentage of our cost of goods sold by approximately 4.4% compared to the six months ended April 30, 2007. This decrease in our cost of natural gas as a percentage of our cost of goods sold is a result of our increasing cost of corn and our corresponding increase in our cost of goods sold.

We engage in hedging activities with respect to corn, natural gas, and ethanol sales. We recognize the gains or losses that result from the changes in the value of our derivative instruments in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Operating Expense

Our operating expenses as a percentage of revenues were slightly higher for the six month period ended April 30, 2008 than they were for the same period ended April 30, 2007. These percentages were 2.82% and 2.25% for the six months ended April 30, 2008 and 2007, respectively. In addition to fluctuations in our revenues, this increase in operating expenses is primarily due to additional professional fees incurred in connection with our Sarbanes-Oxley compliance, Glacial Lakes arbitration, our ongoing permit amendment discussions with the MPCA, as well as additional maintenance expenses and compensation paid to the risk manager we hired in August 2007. We expect that going forward our operating expenses will remain fairly constant.

Operating Income

Our income from operations for the six months ended April 30, 2008 was approximately 5% of our revenues compared to approximately 30% of our revenues for the six months ended April 30, 2007. This decrease in our net income from operations is primarily due to lower revenues and increased costs of production. Our lower level of ethanol production is a result of maintaining compliance with the 45 million gallon limit on undenatured ethanol produced within any twelve month period, calculated on a rolling sum basis, as required by the Minnesota Pollution Control Agency. Our increased costs of production are primarily a consequence of increased corn prices.

Interest Expense and Interest Income

Interest expense for the six months ended April 30, 2008, was approximately 0.17% of our revenue and totaled $75,548. Interest expense for the six months ended April 30, 2007 was approximately 1.4% of our revenue and totaled $688,044. This reduction in interest expense is due primarily to a reduction in our outstanding debt. Going forward, we expect this percentage to decrease as we make the quarterly payments on our outstanding EDA loans. Interest income for the six months ended April 30, 2008, totaled $43,426, which was the result of available funds held in cash equivalents.

Results of Operations for the Three Months Ended April 30, 2008 and 2007

The following table shows the results of our operations and the approximate percentage of revenues, cost of sales, operating expenses and other items to total revenues in our unaudited statements of operations for the three months ended April 30, 2008 and 2007:


	Fiscal Quarter Ended						Fiscal Quarter Ended
	April 30, 2008						April 30, 2007
Income Statement Data	Amount			Percent			Amount			Percent
Revenues	$	19,018,497			100.00	%	$	23,829,298			100.00	%

Cost of Goods Sold		19,027,679			100.05	%		18,519,632			77.70	%


Gross Profit (Loss)		(9,182	)		(0.05	)%		5,309,666			22.30	%

Operating Expenses		566,866			3.00	%		546,186			2.30	%


Operating Income (Loss)		(576,048	)		(3.00	)%		4,763,480			20.00	%

Other Income (Expense), net		23,162			0.12	%		(70,953	)		(0.30	)%


Net Income (Loss)	$	(552,886	)		(2.90	)%	$	4,692,527			19.70	%

Revenues

Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of distillers grains. The following table shows the sources of our revenue for the three months ended April 30, 2008.


			Percentage of
Revenue Sources	Amount		Total Revenues

Ethanol Sales	$	16,070,600		84.50	%
Distillers Grains Sales		2,947,897		15.50	%

Total Revenues	$	19,018,497		100.00	%

The following table shows the sources of our revenue for the three months ended April 30, 2007:


			Percentage of
Revenue Sources	Amount		Total Revenues

Ethanol Sales	$	21,446,368		90.00	%
Distillers Grains Sales		2,382,930		10.00	%

Total Revenues	$	23,829,298		100.00	%

The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended April 30, 2008 and 2007.


	Three Months		Three Months
	ended		ended
Additional Data	April 30, 2008		April 30, 2007
Ethanol sold (thousands of gallons)		9,916,430		11,211,640
Dried distillers grains sold (tons)		25,283		30,777
Modified distillers grains sold (tons)		415		732
Ethanol average price per gallon (net of hedging activity)	$	2.00	$	2.00
Dried distillers grains average price per ton	$	117.57	$	80.46
Modified distillers grains average price per ton	$	27.65	$	27.83
Corn costs per bushel (net of hedging activity)	$	3.82	$	3.27

The decrease in revenues of 20.2% for the three months ended April 30, 2008 compared to the three months ended April 30, 2007 is due primarily to a reduction in the number of gallons of ethanol sold of approximately 1,295,000 gallons and the recognition of a $3,884,446 loss on ethanol derivatives compared to a $658,307 loss for the same period one year ago. Revenue from sales of our co-products increased slightly in the three months ended April 30, 2008 compared to the three months ended April 30, 2007, despite lower production levels, primarily due to an increase of approximately 46% in the price of our dried distillers grain as a result of the increasing cost of corn as a comparable feed product.

Cost of Sales

Our costs of goods sold as a percentage of revenues were approximately 100% and 77.7% for the three months ended April 30, 2008 and 2007, respectively. Our two largest costs of production are corn (68.8% of cost of goods sold for our three months ended April 30, 2008) and natural gas (14.4% of cost of goods sold for our three months ended April 30, 2008). Our cost of goods sold increased by approximately $508,047 in the three months ended April 30, 2008 as compared to the three months ended April 30, 2007, even though our revenue decreased by approximately $4,810,800. Our total corn costs, including the offset gain on corn derivative positions of $4,853,224 and $957,275, respectively, increased by approximately 16.8% for the three months ended April 30, 2008 as compared to the same period for our 2007 fiscal year.

For the three months ended April 30, 2008, our natural gas costs increased as a percentage of our cost of goods sold by approximately 1.0% compared to the three months ended April 30, 2007.

Operating Expense

Our operating expenses as a percentage of revenues were slightly higher for the period ended April 30, 2008 than they were for the period ended April 30, 2007. These percentages were 3.00% and 2.30% for the three months ended April 30, 2008 and 2007, respectively. As mentioned above, this increase in operating expenses is primarily due to additional professional fees incurred in connection with our Sarbanes-Oxley compliance, Glacial Lakes arbitration, our ongoing permit amendment discussions with the MPCA as well as additional maintenance expenses and compensation paid to the risk manager we hired in August 2007.

Operating Income (Loss)

Our income (loss) from operations for the three months ended April 30, 2008 was a loss of 3% of our revenues compared to income of 20.0% of our revenues for the three months ended April 30, 2007. We incurred a net loss from operations for the three month period ended April 30, 2008. Our net loss from operations is primarily due to lower revenues and increased costs of production.

Interest Expense and Interest Income

Interest expense for the three months ended April 30, 2008, was equal to approximately 0.03% of our revenue and totaled $5,813. Interest expense for the three months ended April 30, 2007 was equal to approximately 0.96% of our revenue and totaled $228,272. Interest income for the three months ended April 30, 2008, totaled $6,883, which was the result of available funds held in short-term investments.

Changes in Financial Condition for the Six Months Ended April 30, 2008

The following table highlights the changes in our financial condition for the six months ended April 30, 2008 from our previous fiscal year ended October 31, 2007:


	April 30, 2008		October 31, 2007
Current Assets	$	19,012,612	$	15,901,679
Current Liabilities	$	8,739,572	$	10,908,043
Long-Term Debt	$	482,129	$	518,868
Members’ Equity	$	61,368,943	$	59,191,049

Total assets were approximately $70,591,000 at April 30, 2008 compared to approximately $70,618,000 at October 31, 2007. Current assets totaled approximately $19,013,000 at April 30, 2008, an increase from approximately $15,902,000 at October 31, 2007. The change resulted primarily from an increase in restricted cash set aside for our derivative instruments account.

Total current liabilities totaled approximately $8,740,000 at April 30, 2008 compared to approximately $10,908,000 at October 31, 2007. This decrease resulted primarily from having paid out the distribution payable recorded at October 31, 2007, which was partially offset by an increase in the liability recorded for our derivative instruments at April 30, 2007. Long term debt decreased slightly from approximately $519,000 at October 31, 2007 to $482,000 for our three months ended April 30, 2008.

During fiscal 2008, we have paid an aggregate of $ 6,231,200 in cash distributions to our unit holders.

Plant Operations

Management anticipates our plant will continue to operate at our currently permitted capacity of 45 million gallons per year. We expect to have sufficient cash generated by continuing operations, current lines of credit and cash reserves to cover our usual operating costs, which consist primarily of our corn supply, our natural gas supply, staffing expense, office expense, audit and legal compliance, working capital costs and debt service obligations.

Strategies: Corn Oil Separation

Subsequent to our fiscal quarter ended April 30, 2008, we completed the installation and start-up of our corn oil separation equipment at our ethanol plant and we are presently operating the new equipment. Our corn oil separator system recovers crude corn oil from our distillers syrup. We have not yet received the final invoices for all of the equipment, but we expect the total cost of the oil separator system will be approximately $775,000. Corn oil will be used primarily as an ingredient in animal nutrition or as a feedstock for biodiesel production facilities with possible future uses as an ingredient in margarines and salad dressings and as a cooking oil. We presently expect to market our corn oil on the spot market.

Since the board of governors decided to install this equipment, the price of corn oil has increased dramatically making our anticipated return on investment much better than initially expected. We have financed this project with cash from operations and expect this additional stream of revenue to be reflected in our financial statements for the period ended July 31, 2008.

Trends and Uncertainties Impacting the Ethanol and Distillers Grains Industries and Our Future Revenues

Our revenues primarily consist of sales of the ethanol and distillers grains we produce. Ethanol sales constitute the majority of our revenues. Subsequent to our fiscal year end, ethanol prices have generally remained steady. Strong demand, firm crude oil and gas markets and positive political signals have all contributed to the relative stability of ethanol prices. However, due to the anticipated increase in the supply of ethanol from new ethanol plants scheduled to begin production and the expansion of currently operational plants, current price levels are subject to downward pressure during our fiscal year ended October 31, 2008. In order to sustain current price levels, management believes the industry will need to continue to grow demand to offset the increased supply brought to the market place by additional production.

Ethanol production continues to grow as additional plants become operational. According to the Renewable Fuels Association (as of May 28, 2008), there are currently 151 ethanol plants in operation nationwide that have the capacity to annually produce approximately 8.7 billion gallons. In addition, there are 51 new ethanol plants and 7 expansions of existing ethanol plants under construction constituting another 4.9 billion gallons of annual capacity. According to the May 2008, Renewable Fuels Association report, there are currently 17 ethanol plants in operation within the State of Minnesota with the approximate annual production capacity of 662 million gallons and there are another 5 ethanol plants under construction or expansion with an anticipated annual production capacity of approximately 440 million gallons. Excess capacity in the ethanol industry may have an adverse effect on our results of operations.

The U.S. fuel ethanol industry has experienced rapid growth, increasing from 1.3 billion gallons of production in 1997 to approximately 6.5 billion gallons produced in 2007, with year-end 2007 production capacity of 7.5 billion gallons annually. Ethanol blends accounted for approximately 4.8% of the U.S. gasoline supply in 2007. The growth in ethanol usage has been supported by regulatory requirements dictating the use of renewable fuels, including ethanol. The Energy Independence and Security Act of 2007 signed into law on December 19, 2007, increased the mandated minimum use of renewable fuels to 9 billion gallons in 2008 (up from a 5.4 billion gallon requirement, which was the previous mandated 2008 requirement under the Energy Policy Act of 2005). The mandated usage of renewable fuels increases to 36 billion gallons in 2022. The upper mandate for corn based ethanol is 15 billion gallons by 2015. However, on May 2, 2008 twenty-four U.S. senators requested the Environmental Protection Agency (EPA) to waive or restructure these renewable fuels mandates. If the EPA does change or suspend the renewable fuels mandates, then ethanol demand may not increase as anticipated.

It is expected that annual ethanol production capacity in the U.S. will total in excess of 12 billion gallons annually by the end of 2008. This additional capacity may cause supply to exceed demand. If additional demand for ethanol is not created, through either additions to discretionary blending (through increased penetration rates in areas that blend ethanol today or through the establishment of new markets where little to no ethanol is blended today), or through additional governmental mandates at either the federal or state level, the excess supply may cause ethanol prices to decrease, perhaps substantially.

Increased ethanol production has led to increased availability of distillers grains. Continued increased supply of dried distillers grains from other plants could reduce the price we will be able to charge for our distillers dried grains. This could have a negative impact on our revenues. However, during the fiscal quarter ended April 30, 2008, prices for distillers grains in our local market have increased as more users of animal feed (for cattle, poultry and swine) are becoming familiar with distillers grains and beginning to incorporate our distillers grains into their rations instead of using corn. We expect the price for distillers grains in our local market area to remain strong during the remainder of our 2008 fiscal year.

The U.S. Congress is in the process of passing the Food, Conservation, and Energy Act of 2008, otherwise known as the Farm Bill. The proposed Farm Bill contains several elements affecting the ethanol industry, including provisions regarding a reduction in the blender’s credit, an extension of the tariff on fuel ethanol and the integration of sugar as a feedstock for domestic ethanol production facilities. As of the date of this report, the new Farm Bill had not yet become law and therefore the implication of this proposed legislation on our business is still uncertain.

Consumer resistance to the use of ethanol may affect the demand for ethanol which could affect our ability to market our product and reduce our revenues. Certain individuals believe the use of ethanol will have a negative impact on prices at the pump or that it will reduce fuel efficiency to such an extent that it costs more to use ethanol than it does to use gasoline. Some also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more energy, such as oil and natural gas, than the amount of energy contained in the ethanol produced. Currently, there is also a public debate about whether the production of ethanol from corn is to blame for recent increases in price levels for food. These consumer beliefs could potentially be wide-spread. If consumers choose not to buy ethanol, it will affect the demand for the ethanol we produce which could negatively affect our ability to sell our product and negatively affect our profitability.

Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Future Cost of Goods Sold

Our costs of our goods consist primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers grains for sale. We grind approximately 1,350,000 bushels of corn each month. We expect corn prices to remain at current price levels well into the summer of 2008. For the quarter ended April 30, 2008, our average cost of corn, net of hedging activity, was approximately $3.80 per bushel, which is approximately $0.55 higher than our cost of corn for the same period ended April 30, 2007. Any further increases in corn prices may negatively impact our profitability by increasing our cost of goods and reducing our net operating income. We attempt to use hedging strategies to minimize our exposure to corn price movements; however, there is no guarantee or assurance that our hedging strategies will be effective.

Natural gas is also an important input commodity to our manufacturing process. Our natural gas usage is approximately 115,000 million British thermal units (mmBTU) per month. We continue to work to find ways to limit its natural gas price risk through efficient usage practices, research of new technologies, and pricing and hedging strategies. We have secured a marketing firm and an energy consultant for our natural gas procurement and will work with them on an ongoing basis to mitigate our exposure to volatile gas prices.

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. In early 2007, we disclosed that we had received a Notice of Violation from the Minnesota Pollution Control Agency (“MPCA”) notifying us of alleged violations discovered by the MPCA staff during its inspection of the plant in August 2006 while the plant operations were under previous management.

Since January 2007, Granite Falls has actively cooperated with the MPCA to resolve the alleged violations and has taken measures to address the concerns raised in January 2007. On November 28, 2007, we received confirmation that the MPCA had agreed to a stipulation agreement, therefore settling the dispute. In settling the dispute, we did not admit that the alleged violations occurred, but did agree to pay $300,000 to the MPCA. The $300,000 paid to the MPCA consisted of $65,000 in civil penalties and a $235,000 economic benefit charge. We worked cooperatively with the MPCA and are currently in full compliance with all of our environmental permits.

In connection with the stipulation agreement we applied for a permit amendment in early January 2008, which we expect to be subject to a public comment period in June or July of 2008. The permit amendment application requests additional fermentation tank capacity, corrects process throughput parameters, requests authorization for wetcake production, and requests a production capacity increase of 4.9 million gallons per year of undenatured ethanol. In August 2008, we will also be applying for a renewal of our NPDES water discharge permit. Based on initial discussions with the MPCA we believe the renewed permit will be more restrictive that our current NPDES permit. Granite Falls’ management considers environmental compliance a top priority and views the resolution of the MPCA’s allegations as a significant step toward its goal of consistently meeting each of the MPCA’s applicable environmental standards.

We are also subject to oversight activities by the United States Environmental Protection Agency (“EPA”). There is always a risk that the EPA may enforce certain rules and regulations differently than Minnesota’s environmental administrators. Minnesota 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 have adverse results in court if we are deemed to have engaged in a nuisance that substantially impairs the fair use and enjoyment of real estate.

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 could increase our operating costs and expenses. It is also possible that federal or state environmental rules or regulations could be adopted and have an adverse effect on the production or use of ethanol. For example, changes in the environmental regulations regarding the required oxygen content of automobile emissions could have an adverse effect on the ethanol industry. Furthermore, plant operations are governed by OSHA. OSHA regulations may change such that the cost of operating the plant may increase.

Contracting Activity

Farmers Cooperative Elevator Company supplies our corn. Aventine Renewable Energy markets our ethanol, and CHS, Inc. markets our distillers grains by rail. Each of these contracts is critical to our success and we are very dependent on each of these companies. Accordingly, the financial stability of these partners is critical to the successful operation of our business. We are independently marketing a portion of our distillers grains to local markets; however, if local markets do not support competitive prices we may market all of our distillers grains through CHS, Inc. We independently market a small portion of our production as E-85 to local retailers. Currently, the volume of our local E-85 sales is approximately 40,000 gallons per quarter. Subsequent to our fiscal quarter ended April 30, 2008, we entered into an agreement for consulting services with Highwater Ethanol, LLC. We have agreed to assist Highwater Ethanol, LLC with the development of the ethanol plant it is currently constructing near Lamberton, Minnesota.

Commodity Price Risk Protection

We seek to minimize the risks from fluctuations in the prices of corn, ethanol and natural gas through the use of derivative instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. We do not use hedge accounting which would match the gain or loss on our hedge positions to the specific commodity contracts being hedged. Instead, we are using fair value accounting for our hedge positions, which means that 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 fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As of April 30, 2008, the fair values of our derivative instruments are reflected as a liability in the amount of $4,157,194. As of October 31, 2007, we also recorded a liability for our derivative instruments in the amount of $247,038. There are several variables that could affect the extent to which our derivative instruments are impacted by fluctuations in the price of corn, ethanol or natural gas. 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 expected to produce long-term positive growth for the Company.

As of April 30, 2008, we had entered into derivative instruments to hedge (a) 5,175,000 bushels of our future corn purchases through December 2008, and (b) 6,421,000 gallons of our future ethanol sales through December 2008, to the extent considered necessary for minimizing risk from future market price fluctuations. We have used various option contracts as vehicles for these hedges.

As of April 30, 2008, we had price protection in place for approximately 27% of our natural gas needs through July 2008. As we move forward, we may determine that additional price protection for natural gas purchases is necessary to reduce our susceptibility to price increases. However, we may not be able to secure natural gas for prices less than current market price and we may not recover high costs of production resulting from high natural gas prices, which may raise our costs of production and reduce our net income.

The hedge accounts are reported at fair value as designated by our broker. We have categorized the cash flows related to the hedging activities in the same category as the item being hedged. We expect substantially all of our hedge positions outstanding as of April 30, 2008 to be realized and recognized by December 30, 2008.

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. The most significant accounting estimates used in the financial statements relate to contingencies regarding a termination of a management contract with Glacial Lakes Energy, LLC. The fair value of our cash and cash equivalents and derivative instruments approximates their carrying value.

Liquidity and Capital Resources

The following table shows cash flows for the six months ended April 30, 2008 and 2007:


	2008			2007
Net cash provided by operating activities	$	8,679,947		$	20,027,580
Net cash used in investing activities	$	(227,236	)	$	(4,821,081	)
Net cash used in financing activities	$	(7,267,363	)	$	(20,497,266	)

Net increase (decrease) in cash and cash equivalents	$	1,185,348		$	(5,290,767	)

Operating Cash Flows. Cash provided by operating activities was $8,679,947 for the six months ended April 30, 2008, which was a decrease from $20,027,580 provided by operating activities for the six months ended April 30, 2007. This decrease resulted from the decrease of net income from the same period last year of approximately $12,580,000, an increase in inventory, and the payment of accounts payable as the plant’s raw materials became more expensive. Our capital needs are being adequately met through cash flows from our operating activities and our currently available credit facilities.

Investing Cash Flows. Cash used in investing activities was $227,236 for the six months ended April 30, 2008, compared to $4,821,081 for the six months ended April 30, 2007. This decrease in cash used resulted from a decrease in funds needed for construction activity. In the six month period ended April 30, 2007, we used cash from operating activities to construct our water intake structure, water pipeline, and water treatment facility, which became operational in February 2007.

Financing Cash Flows. Cash used in financing activities was $7,267,363 for the six months ended April 30, 2008, compared to $20,497,266 for the six months ended April 30, 2007. In both periods cash was used to pay member distributions and for the six months ended April 30, 2008, we also used cash to pay down long term debt.

Indebtedness

Short-Term Debt Sources

On November 26, 2007, the Company entered into a Loan Agreement with Minnwest Bank M.V. of Marshall, MN (the “Bank”). Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $10,000,000 available and is secured by substantially all of the Company’s assets. The interest rate on the revolving line of credit is at 0.75 percentage points under the prime rate as reported by the Wall Street Journal, with a minimum rate of 6.0%. At April 30, 2008, the Company had no outstanding balance on this line of credit. The Bank is also holding letters of credit for our benefit in the amount of approximately $610,750.

Long-Term Debt Sources

Summary of notes payable under our Economic Development Authority (“EDA”) Loans:

Note payable to City of Granite Falls/Minnesota Investment Fund, bearing interest of 1.00% due in semi-annual installments of $4,030, payable in full on June 15, 2014, secured by a second mortgage on all assets. The outstanding balance at April 30, 2008 was $382,618.

Note payable to City of Granite Falls/Western Minnesota Revolving Loan Fund, bearing interest of 5.00% due in quarterly installments of $15,807, payable in full on June 15, 2016, secured by a second mortgage on all assets. The outstanding balance at April 30, 2008 was $83,771.

Note payable to City of Granite Falls/Chippewa County, bearing interest of 3.00% due in semi-annual installments of $6,109, payable in full on June 15, 2021, secured by a second mortgage on all assets. The outstanding balance at April 30, 2008 was $88,928.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Interest Rate Risk

We are generally exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our revolving line of credit and letters of credit with Minnwest Bank. As of April 30, 2008, we did not have an outstanding balance on this revolving line of credit and had approximately $610,750 in outstanding letters of credit. The specifics of these credit facilities are discussed in greater detail in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Short-Term Debt Sources.”

Commodity Price Risk

We are also exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process. We are also exposed to ethanol and distillers grains price risk as our revenues consist primarily of ethanol and distillers grain sales. Currently, we seek to minimize the risks from fluctuations in the prices of corn and ethanol 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 are not designated as such for hedge accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. 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 can cause net income to be volatile from quarter to quarter due to the timing of changes in the value of derivative instruments relative to the cost and use of the commodity being hedged. At April 30, 2008 and October 31, 2007, the fair value of our derivative instruments for corn and ethanol was a liability in the amount of $4,157,194 and $247,038, respectively. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or ethanol. However, it is likely that commodity cash prices will have the greatest impact on the derivative instruments with delivery dates nearest the current cash price.

To manage our corn price risk, our hedging strategy is designed to establish a price ceiling for our corn purchases. We have taken a net long position on our exchange traded futures and options contracts, which allows us to offset increases in the market price of corn. We estimate that our expected corn usage will be approximately 16.25 million bushels per year for the production of 45 million gallons of ethanol. We have price protection in place for a portion of our expected corn usage for fiscal year 2008 using forward contracts, CBOT futures and options and over-the-counter option contracts. As corn prices move in reaction to market trends and information, our income statement will be affected, depending on the impact such market movements have on the value of our derivative instruments. As we move forward, additional price protection may be required to solidify our margins in the current and future fiscal years. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

To manage our ethanol price risk, our hedging strategy is designed to establish a price floor for our ethanol sales. We manage our ethanol price risk with reformulated gasoline blendstock for oxygen blending (RBOB) futures contracts and over-the-counter ethanol swaps, which allow us to effectively offset decreases in the market price of ethanol.

To manage our natural gas price risk, we enter into natural gas purchase agreements with our suppliers. These purchase agreements fix the price at which we purchase natural gas. We have purchased a portion of our fiscal year 2008 natural gas requirements utilizing cash, futures or options contracts.

A sensitivity analysis has been prepared to estimate our exposure to corn and ethanol price risk. The table below presents the net fair value of our derivative instruments as of April 30, 2008 and October 31, 2007 and the potential loss in fair value resulting from a hypothetical 10% adverse change in such prices. The fair value of the positions is a summation of the fair values calculated by valuing each net position at quoted market prices as of the applicable date. The results of this analysis, which may differ from actual results, are as follows:


			Effect of Hypothetical
			Adverse Change —
	Fair Value		Market Risk
April 30, 2008	$	4,157,194	$	(415,700	)
October 31, 2007	$	247,038	$	(24,700	)

Item 4T. Controls and Procedures.

Our management, including our Chief Executive Officer and General Manager (the principal executive officer), Tracey Olson, along with our Chief Financial Officer (the principal financial officer), Stacie Schuler, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of April 30, 2008. Based upon this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred as of April 30, 2008 and there has been no change that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Changes In Internal Controls Over Financial Reporting

We are currently undergoing a comprehensive effort in preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. This effort, under the direction of senior management, includes documentation, and testing of our general computer controls and business processes. We are currently in the process of formalizing an internal audit plan that includes performing a risk assessment, establishing a reporting methodology and testing internal controls and procedures over financial reporting.

Except as described above, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred in the fiscal quarter ended April 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

On May 21, 2007, Glacial Lakes Energy, LLC (“Glacial Lakes”) made a demand for binding arbitration against Granite Falls Energy, LLC (“Granite Falls”) under the Commercial Arbitration Rules of the American Arbitration Association in Yellow Medicine County, Minnesota to resolve a dispute over an operating and management agreement between the two entities. On December 17, 2007, Granite Falls filed an answering statement and counterclaim in response to Glacial Lakes’ demand for arbitration.

Commencing August 8, 2005, Glacial Lakes began management of plant operations in anticipation of plant start-up pursuant to the terms on an operating and management agreement entered into on July 9, 2004. Under the operating and management agreement between Granite Falls and Glacial Lakes, Granite Falls was to pay Glacial Lakes $35,000 per month plus an annual payment equal to 3% of the plant’s net income from operations for an initial term of five years. The December 2006 resignation of Glacial Lakes’ key management personnel from their positions as executive officers of Granite Falls effectively terminated the operating and management agreement. In January 2007, Granite Falls formally recognized the termination of the operating and management agreement. Glacial Lakes claims that Granite Falls wrongfully terminated the agreement and seeks damages of approximately $5,300,000 in lost revenues and lost profits, of which $1,143,290 has been accrued as of April 30, 2008 based on management estimates. Granite Falls is vigorously defending this action and has filed its answering statement and counterclaim in response to Glacial Lakes’ demand for arbitration. The counterclaim requests a judgment against Glacial Lakes for (a) the $300,000 paid to the Minnesota Pollution Control Agency (“MPCA”) plus expenses, (b) at least $1,000,000 in economic harm associated with the “ramp down” in production required by the MPCA, and (c) at least $10,000,000 in economic harm associated with lost capacity associated with improper permitting, all of which Granite Falls claims are costs that should have been avoided had Glacial Lakes properly managed the environmental permitting process while it was managing the construction, startup and operations of Granite Falls as required by the operating and management agreement.

Item 1A. Risk Factors.

The following risk factor is provided due to material changes from the risk factors previously disclosed in our Annual Report on Form 10-KSB. The risk factor set forth below should be read in conjunction with the risk factors section and the Management’s Discussion and Analysis section for the fiscal year ended October 31, 2007, included in our Annual Report on Form 10-KSB.

Negative media attention associated with the use of corn in the ethanol production process may lead to decreases in demand for the ethanol we produce which could negatively affect our profitability. Recent media attention associated with the use of corn as the feedstock in ethanol production has been unfavorable to the ethanol industry. This negative media attention has focused on the alleged effect ethanol production has on domestic and foreign food prices. Ethanol production has previously received favorable coverage by the news media which may have increased demand for ethanol. The negative perception of ethanol production may have a negative effect on demand for ethanol which may decrease the price we receive for our ethanol. Decreases in the selling price of ethanol may have a negative effect on our financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

We held our Annual Members’ Meeting on March 27, 2008. The only matter submitted to a vote of our members was to elect two governors to serve until the 2011 Annual Members’ Meeting. The two nominees receiving a plurality of the membership units voted in person or by proxy were elected. There were 14,997 membership interests entitled to vote in the election of governors represented at the meeting in person or by proxy, which constituted a quorum. Ken Berg and Shannon Johnson were both reelected to the board of governors by a plurality vote of 11,249 and 11,443, respectively. Accordingly, our elected governors currently include Paul Enstad, Ken Berg, Scott Dubbelde, Julie Oftedahl-Volstad, Rodney Wilkison and Shannon Johnson. Our appointed governors currently include Chad Core, Terry Mudgett and Mark Schmidt. Our alternate governors are currently Terry Little and Myron Peterson.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following exhibits are included herein:


Exhibit No.		Description

	31.1	Certificate Pursuant to 17 CFR 240.15d-14(a).

	31.2	Certificate Pursuant to 17 CFR 240.15d-14(a).

	32.1	Certificate Pursuant to 18 U.S.C. § 1350.

	32.2	Certificate Pursuant to 18 U.S.C. § 1350.

SIGNATURES

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


	GRANITE FALLS ENERGY, LLC
	/s/ Tracey L. Olson
June 12, 2008	Tracey L. Olson
	Chief Executive Officer

	/s/ Stacie Schuler
June 12, 2008	Stacie Schuler
	Chief Financial Officer

Granite Falls Energy, LLC - Quarter Report: 2008 April (Form 10-Q)

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