UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2011


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

For the transition period from to

Commission file number 000-53039

FIRST UNITED ETHANOL, LLC

(Name of registrant as specified in its charter)


Georgia		20-2497196
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

4433 Lewis B. Collins Road, Pelham, Georgia		31779
(Address of principal executive offices)		(Zip Code)

(229) 522-2822
(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes þ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o 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 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	Smaller reporting company þ
		(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 May 23, 2011 there were 81,984 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			17

Item 3. Quantitative and Qualitative Disclosures about Market Risks			29

Item 4. Controls and Procedures			30

PART II — OTHER INFORMATION			30

Item 1. Legal Proceedings			30

Item 1A. Risk Factors			30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33

Item 3. Defaults Upon Senior Securities			33

Item 4. Removed and Reserved			33

Item 5. Other Information			33

Item 6. Exhibits			33

SIGNATURES			34

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION


Item 1.		Financial Statements.

FIRST UNITED ETHANOL, LLC AND DEBTOR-IN-POSSESSION SUBSIDIARY
CONSOLIDATED BALANCE SHEETS


	March 31, 2011			September 30, 2010
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	3,168,875		$	586,466
Trade receivables, net of allowance for doubtful accounts of approximately $67,000 and $30,000, respectively		6,843,872			5,088,073
Due from broker		457			457
Inventory		14,215,718			9,859,841
Other assets		2,728,598			1,100,281


Total current assets		26,957,520			16,635,118


PROPERTY AND EQUIPMENT
Office building, furniture and equipment		1,103,781			1,103,781
Land and improvements		2,508,148			2,508,148
Plant buildings and equipment		161,556,201			161,476,853

		165,168,130			165,088,782
Less accumulated depreciation		(21,915,009	)		(17,528,484	)

		143,253,121			147,560,298

RESTRICTED CASH AND CERTIFICATES OF DEPOSIT		443,860			2,779,643

FINANCING COSTS, net of amortization of $- and $2,894,432		—			3,723,703


TOTAL ASSETS	$	170,654,501		$	170,698,762


LIABILITIES AND MEMBERS’ EQUITY

CURRENT LIABILITIES
Liabilities not subject to compromise — debtor-in-possession financing	$	8,850,000		$	—
Liabilities not subject to compromise — accounts payable and other		4,096,508			—
Revolving line of credit		—			13,634,129
Current portion of long-term debt		—			11,081,911
Current portion of capital lease obligations		—			1,706,620
Current portion of interest rate swap liability		—			525,658
Accounts payable and accrued expenses		—			11,979,176
Accrued interest		—			847,363
Deferred revenue		—			411,423


Total current liabilities		12,946,508			40,186,280


INTEREST RATE SWAP LIABILITY		—			131,414

CAPITAL LEASE OBLIGATIONS		—			2,007,748

ACCRUED INTEREST		—			1,374,686

LONG-TERM DEBT		—			94,481,878

LIABILITIES SUBJECT TO COMPROMISE		134,780,900			—


TOTAL LIABILITIES		147,727,408			138,182,006

COMMITMENTS AND CONTINGENCIES

MEMBERS’ EQUITY
Membership contributions, 81,984 units issued and outstanding		77,520,849			77,422,691
Accumulated deficit		(54,593,756	)		(44,905,935	)

Total members’ equity		22,927,093			32,516,756


TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	170,654,501		$	170,698,762

See Notes to Unaudited Consolidated Financial Statements.

FIRST UNITED ETHANOL, LLC AND DEBTOR-IN-POSSESSION SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

Three months

Six months

ending March 31,

2011

2010

2011

2010

(Unaudited)

Revenues

73,108,140

51,017,401

144,980,641

108,451,918

Cost of goods sold

73,929,949

49,810,521

143,179,793

97,300,934

Gross profit

(821,809

)

1,206,880

1,800,848

11,150,984

General and administrative expenses

715,491

1,062,210

1,739,250

2,252,375

Operating income (loss)

(1,537,300

)

144,670

61,598

8,898,609

Other income (expense)

Unrealized gain (loss) on interest rate swap

(4,533

)

250,653

231,572

592,055

Interest expense (contractual interest expense was approximately $3,558,00 and $10,470,000 for the three and six months ended March 31, 2011, respectively

(2,183,095

)

(2,067,790

)

(9,095,114

)

(4,201,566

)

Interest income

4,194

351

4,428

(2,187,617

)

(1,812,943

)

(8,863,191

)

(3,605,083

)

Income(loss) before reorganization items

(3,724,917

)

(1,668,273

)

(8,801,593

)

5,293,526

Reorganization items

Professional fees

886,228

—

886,228

—

Net income (loss)

(4,611,145

)

(1,668,273

)

(9,687,821

)

5,293,526

Net income (loss) per unit (Basic and Diluted)

(56.24

)

(20.35

)

(118.17

)

64.57

Weighted average units outstanding

81,984

See Notes to Unaudited Consolidated Financial Statements.

FIRST UNITED ETHANOL, LLC AND DEBTOR-IN-POSSESSION SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six months ending			Six months ending
	March 31, 2011			March 31, 2010
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(9,687,821	)	$	5,293,526
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Pre-petition accounts payable		7,158,584			—
Pre-petition accrued interest		4,948,732			—
Depreciation		4,386,526			4,368,742
Amortization of deferred financing costs		3,873,702			533,768
Non-cash compensation expense		98,158			98,165
Unrealized (gain) on interest rate swap		(231,572	)		(592,055	)
Provision (recovery) of doubtful receivables		37,000			(8,500	)
Changes in assets and liabilities:
(Increase) decrease in trade receivables		(1,792,799	)		203,630
Increase in due from broker		—			(213,893	)
Increase in inventory		(4,355,877	)		(10,977	)
Increase in other assets		(1,628,317	)		(387,227	)
Decrease in accounts payable and accrued expenses		(7,882,668	)		(4,537,369	)
Increase in accrued interest payable		(1,528,215	)		511,159
Decrease in deferred revenue		(411,423	)		—
Decrease in derivative financial instruments		—			(41,190	)


Net cash provided by (used in) operating activities		(7,015,990	)		5,217,779


CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificates of deposit		—			(50,000	)
Purchase of property and equipment, net of returns		(79,348	)		(102,136	)


Net cash (used in) investing activities		(79,348	)		(152,136	)


CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations		(2,460,328	)		(3,319,281	)
Payment of financing costs		(300,000	)		(258,000	)
Proceeds from debtor-in-possesion financing		9,000,000			—
Proceeds from revolving line of credit		1,065,862			—
Release (funding) of restricted cash balance		2,372,213			(4,203	)
Excess of outstanding checks over bank balance		—			(81,555	)


Net cash provided by (used in) financing activities		9,677,747			(3,663,039	)


Increase in cash and cash equivalents		2,582,409			1,402,604

Cash and cash equivalents, beginning of period		586,466			—


Cash and cash equivalents, end of period	$	3,168,875		$	1,402,604


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	2,494,729		$	3,895,389

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Repayment of notes and interest payable paid by Bond Trustee	$	1,365,264		$	1,338,750

See Notes to Unaudited Consolidated Financial Statements.

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

First United Ethanol, LLC and its subsidiary (sometimes the “Company”) is located near Camilla, Georgia. The Company operates a 100 million gallon name plate capacity ethanol plant with distribution within the United States. The Company formally began ethanol operations in October 2008.

The Company was formally organized as a limited liability company on March 9, 2005 under the name Mitchell County Research Group, LLC. In September 2005, the Company formally changed its name to First United Ethanol, LLC. In November 2007, the Company’s wholly owned subsidiary, Southwest Georgia Ethanol, LLC (“SWGE” or the “Debtor”) was formed in conjunction with the debt financing agreement with West LB. First United Ethanol, LLC transferred substantially all of its assets and liabilities to Southwest Georgia Ethanol, LLC.

Petition for Relief Under Chapter 11

During the first quarter of the fiscal year ending September 30, 2011, the Company continued to suffer losses from operations thus continuing liquidity restraints due to limits on its working capital line which was up for renewal in February 2011. Faced with these constraints, on February 1, 2011, SWGE, the wholly owned subsidiary, filed a voluntary petition for relief (the “Bankruptcy Filing”) under Chapter 11 (“Chapter 11”) of the United States Bankruptcy Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the Middle District of Georgia Albany Division (the “Bankruptcy Court”). Under Chapter 11, certain claims against the Debtor in existence before the Bankruptcy Filing are stayed while the Debtor continues business operations a debtor-in-possession. These claims are reflected in the March 31, 2011 balance sheet as liabilities subject to compromise. Additional claims (liabilities subject to compromise) may arise after the filing date resulting from rejection of executory contracts, including leases, and from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor’s assets (secured claims) also are stayed, although the holders of such claims have the right to move the court for relief from the stay. Secured claims are secured primarily by liens on the Debtor’s real property, plant and equipment. The Debtor received approval from the Bankruptcy Court to pay or otherwise honor certain of its prepetition obligations, including employee wages and certain trade accounts payable. Reorganization items include professional fees directly related to the Chapter 11 proceedings. Debt issuance costs are considered valuation accounts of the related debt.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business. Our ability to continue as a going concern is dependent upon, among other things, (i) our ability to secure the remainder debtor-in-possession financing; (ii) our ability to comply with the terms and conditions of any debtor-in-possession financing entered by the Bankruptcy Court in connection with the Chapter 11 cases; (iii) our ability to maintain adequate cash on hand; (iv) our ability to generate cash from operations; (v) our ability to obtain confirmation of and to consummate a plan of reorganization under the Bankruptcy Code; (vi) the cost, duration and outcome of the reorganization process; and (vii) our ability to achieve profitability. Uncertainty as to the outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern. We are currently evaluating various courses of action to address the operational and liquidity issues the Company is facing and there can be no assurance that any of these efforts will be successful. The accompanying consolidated financial statements do not include any adjustments that might result should we be unable to continue as a going concern.

Basis of Presentation

The consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America.

The accompanying financial information of the Company is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations. The results of operations for the three and six months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the full year. These statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2010.

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its 100% owned subsidiary. All material inter-company accounts and transactions are eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities and other items, as well as the reported revenues and expenses. Actual results could differ from those estimates.

Cash and Cash Equivalents and Restricted Cash and Certificates of Deposit

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash balances are maintained in bank depositories and periodically exceed federally insured limits. The Company has not experienced losses in these accounts. The Company segregates cash held in escrow, cash restricted and certificates of deposit restricted for use by debt agreements as non-current.

Trade Accounts Receivable

Trade accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering customers financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables written off are recorded when received.

Inventories

Ethanol and related products, raw materials and work-in-process are valued using methods which approximate the lower of cost (first-in, first-out) or market. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.

Financing Costs

Financing costs associated with the loans discussed in Note 6 have been recorded at cost and include expenditures directly related to securing debt financing. On February 1, 2011, the Debtor’s Bankruptcy Filing provided relief (see Note 1) from the loans which gave rise to the deferred financing costs. In conjunction with this filing, the Company expensed the existing net book value of its deferred financing costs as of December 31, 2010, which was recorded as additional interest expense of approximately $3,724,000 for the six months ended March 31, 2011. During the three months ended March 31, 2011, the Company paid approximately $300,000 of financing costs associated with its debtor in possession financing. These costs have been netted against the face amount of that financing arrangement. The financing costs associated with the debtor in possession financing are being amortized over the estimated term of the debtor in possession financing.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives:


Buildings		20 Years
Plant and Process Equipment		5-20 Years
Office Furniture and Equipment		3-10 Years

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. The present value of capital lease obligations are classified as long-term debt and the related assets are included in property and equipment. Amortization of assets under capital lease is included in depreciation expense.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. In accordance with Company policies, management has evaluated the plant for possible impairment based on projected undiscounted future cash flows from operations. Management has determined that its projected undiscounted future cash flows from operations exceed the carrying value of the plant and that no impairment exists at March 31, 2011. However, due to the Debtor’s recent Bankruptcy Filings, there can be no assurances that the value of the plant will be recovered through future cash flows.

Investment in Commodities Contracts, Derivative Instruments and Hedging Activities

The Company is exposed to certain risks related to its ongoing business operations. The primary risks that the Company manages by using forward or derivative instruments are price risk on anticipated purchases of corn and natural gas.

The Company is subject to market risk with respect to the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products. In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow the Company to pass along increased corn costs to our customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.

Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting 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 purchases or sales are documented as such and exempted from the accounting and reporting requirements of derivative accounting.

The Company enters into firm-price purchase commitments every month with its natural gas suppliers under which they agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered. The Company accounts for these transactions as normal purchases and, accordingly, does not mark these transactions to market nor does the Company record the commitment on the balance sheet.

The Company enters into short-term cash, options and futures contracts as a means of securing corn pricing for the ethanol plant and managing exposure to changes in commodity prices. The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations. The Company’s specific goal is to protect the Company from large moves in commodity costs. All derivatives will be designated as non-hedge derivatives for accounting purposes and the contracts will be accounted for at fair value. Although the contracts will be effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

As part of its trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market value of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

To ensure an adequate supply of corn to operate the plant, the Company enters into contracts to purchase corn from local farmers and its major suppliers. At March 31, 2011, the Company had fixed price contracts totaling approximately $9,824,000 based upon the average per bushel price.

The Company has also managed a portion of its floating interest rate exposure through the use of interest rate derivative contracts. The Company’s forward LIBOR-based contract reduces risk from interest rate movements as gains and losses on the contract offset portions of the interest rate variability of our variable-rate debt. The notional amount of the swap at December 31, 2010 and September 30, 2010 was $19,788,737 and $25,182,610, respectively. The effect of the swap was to limit the interest rate exposure on the LIBOR component to a fixed rate of 4.04% compared to a variable interest rate. The swap is designated as a non-hedge derivative and is accounted for as mark to market. The estimated fair value of this agreement at September 30, 2010, was a liability of approximately $657,000. The swap’s notional amount decreased to $13,974,750 at February 2, 2011, at which time the counterparty exercised an early termination clause triggered by the Company’s Chapter 11 filing. Under the early termination clause, the interest rate swap was terminated and a fixed penalty of $425,500 is owed. The Company has included this amount in liabilities subject to compromise on its consolidated balance sheet.

Derivatives not designated as hedging instruments at September 30, 2010 were as follows:


	Balance Sheet	September 30,
	Classification	2010

Interest rate swap	(Current Liabilities)	$	(525,658	)
Interest rate swap	(Non-Current Liabilities)	$	(131,414	)

Six

Three

Months

Statement of

Ended

Operations

March 31,

Classification

2011

2010

2011

2010

Net realized and unrealized gains (losses)

Revenues

—

(52,272

)

—

(52,272

)

Related to futures and options contracts

Cost of goods sold

—

38,696

—

151,146

Net realized and unrealized gains (losses) related to the interest rate swap

Other non-operating (expense)

231,572

(262,141

)

(4,533

)

(147,339

)

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured.

Revenue from the production of ethanol and related products is recorded at the time title and all risks of ownership transfer to customers, which is typically upon loading and shipping of the product from the facility. Commissions are included in cost of goods sold. In addition, shipping and handling costs incurred by the Company for the sale of ethanol and related products are included in cost of goods sold.

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Revenue by product is as follows for the six and three months ended March 31, 2011 and 2010:

Six

Three

Months

Ended

March 31,

2011

2010

2011

2010

Ethanol

115,500,327

90,850,163

58,030,553

42,285,797

Distillers’ grain

28,839,845

17,588,735

14,785,337

8,723,011

Other

640,469

13,020

292,250

8,593

Total

144,980,641

108,451,918

73,108,140

51,017,401

Interest income is recognized as earned.

Net Income (Loss) per Membership Unit

For purposes of calculating basic and diluted net income (loss) per member unit, units subscribed and issued by the Company are considered outstanding on the effective date of issue and are weighted by days outstanding.

Income Taxes

The Company is organized as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, the Company’s 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.

Management has evaluated the Company’s tax positions under the Financial Accounting Standards Board issued guidance on accounting for uncertainty in income taxes and concluded that the Company has taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. Federal, state or local authorities for the years before 2007.

Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, derivative instruments, trade receivables, accounts payable and accrued expenses. Management believes the fair value of each of these financial instruments approximates their carrying value on the balance sheet as of the balance sheet date. The fair value of current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments. The Company believes it is not practical to estimate the fair value of the long-term debt.

Risks and Uncertainties

The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market.

The Company’s operating and financial performance is largely driven by the prices at which we sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. Our largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs, and our risk management program used to protect against the price volatility of these commodities.

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The current U.S. economic condition has reduced the nation’s demand for energy. In addition, the VEETC credit of $0.45 is set to expire in December 2011, creating additional uncertainty to the future of ethanol production. The ethanol boom of recent years has spurred overcapacity in the industry and production capacity is currently exceeding the RFS mandates. As such, the Company may need to evaluate whether crush margins will be sufficient to operate the plant and generate enough debt service. In the event crush margins become negative for an extended period of time, the Company may be required to reduce capacity or shut down the plant. The Company will continue to evaluate crush margins on a regular basis.

NOTE 2. INVENTORIES

A summary of inventories at March 31, 2011 and September 30, 2010 is as follows:


	March 31,		September 30,
	2011		2010

Corn	$	6,418,977	$	4,943,188
Denaturant and chemical supplies		570,752		432,434
Work in process		2,255,329		1,902,712
Ethanol		3,730,880		1,618,807
Distiller grains		1,239,780		962,700

Total	$	14,215,718	$	9,859,841

NOTE 3. MEMBERS’ EQUITY AND SUBSEQUENT EVENTS

On May 2, 2011 the Company received approval from the Securities and Exchange Commission to proceed with the filing of its definitive proxy statement regarding the proposed reclassification and reorganization of the Company’s membership units. The Company will be giving notice to the unit holders of a special meeting to be held on June 22, 2011 at which time they will be asked to approve a proposed Third Amended and Restated Operating Agreement. If approved by the members, the result of such amendment and restatement will be the reclassification of the Company’s units into newly authorized Class A, Class B and Class C Units. If the transaction is completed, the units of the Company’s unit holders of record who hold 100 or more of common equity units will be renamed as Class A Units. Unit holders of record who hold at least 99 units but no more than 21 units will receive one Class B Unit for each common equity unit held by such unit holders immediately prior to the effective time of the reclassification. Unit holders of record who hold 20 or fewer units will receive one Class C Unit for each common equity unit held by such unit holders immediately prior to the effective time of the reclassification. The effect of the reclassification will be to reduce the recorded number of unit holders of the Company’s common equity units to less than 300. This would enable the Company to voluntarily terminate the registration of its units under the Securities and Exchange Act of 1934 and remove its public reporting obligations.

NOTE 4. RELATED PARTIES

An entity which has common ownership with Fagen, Inc., the Company’s principal vendor in the construction of the ethanol facility, is also a Member of the Company and holds approximately 1.2% of the outstanding units. In addition, the Company has a subordinated promissory note due Fagen, Inc. in the amount of $3,977,545 as of March 31, 2011 and September 30, 2010.

The Company purchased corn at market prices in the amount of $772,455 and $770,974 for the three months and $1,691,512 and $1,502,394 for the six months ending March 31, 2011 and 2010, respectively, from certain Directors in the normal course of business.

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5. LEASES

The Company leases operating machinery under a lease agreement with De Lage Landen which is accounted for as a capital lease. The lease will expire in 2013. The assets have a capitalized cost of $157,664 included in property and equipment as of March 31, 2011 and September 30, 2010. Accumulated depreciation totaled $39,416 and $31,532 as of March 31, 2011 and September 30, 2010, respectively.

The Company entered into an Excess Facilities Charge Agreement with Georgia Power Company in which Georgia Power installed a power substation to augment the Company’s power system. The cost of the substation is charged to the Company over a three year period requiring annual payments of principal and interest totaling $686,309 beginning June 30, 2009. The Company has accounted for this agreement as a capital lease. The present value of future payments due under the lease of $1,834,512 is included in property and equipment as of March 31, 2011 and September 30, 2010. Accumulated depreciation totaled $229,313 and $183,451 as of March 31, 2011 and September 30, 2010, respectively.

The Company also entered into a Natural Gas Facilities Agreement with the City of Camilla for a high pressure gas main to serve the plant and purchase natural gas from the City of Camilla. The City of Camilla owns and operates the gas main and leases its usage to the Company. The agreement calls for a monthly facilities charge, in addition to the normal consumption charges, equal to the cost of the installation of the gas main over an 80 month period beginning June 2009 and requiring principal and interest payments of approximately $43,000 each month. The Company has accounted for the facilities lease charges as a capital lease. The present value of future payments under the lease of $2,777,960 is included in as an asset in property and equipment as of March 31, 2011 and September 30, 2010. Accumulated depreciation totaled $347,244 and $277,796 as of March 31, 2011 and September 30, 2010, respectively.

A summary of capital leases as of March 31, 2011 and September 30, 2010 is as follows:


	March 31,			September 30,
	2011			2010

De Lage Landen Financial Services, 60 months, interest rate of 7.5%	$	81,155		$	96,778
Georgia Power Substation lease, 36 months, interest rate of 5.85%		661,417			1,299,364
Natural Gas Facilities lease, 80 months, interest rate of 6.59%		2,134,185			2,318,226

		2,876,757			3,714,368
Less amounts included in liabilities subject to compromise		(2,876,767	)
Less current portion		—			(1,706,620	)

	$	—		$	2,007,748

The Company also entered into operating leases with Trinity Industries Leasing Company for the use of rail cars and tanker cars. The tanker car lease expires November 2017 and the rail car lease expires February 2012.

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6. DEBT FINANCING ARRANGEMENTS

The Company’s prepetition long-term debt outstanding as of March 31, 2011 and September 30, 2010 is summarized as follows:


	March 31,			September 30,
	2011			2010

West LB Term Loan, variable interest rates from 4.00% – 4.28%	$	90,600,000		$	92,200,000
Subordinated Fagen note, 4% through June 30, 2010 and 8% thereafter		3,977,545			3,977,545
Subordinated debt facility, interest rate of 7.5%, described below		8,615,000			9,250,000
Subordinated payable to Regions Bank, Trustee of the 2008 Mitchell County Development Authority Bonds, as described below		1,365,264			—
Notes payable John Deere Credit, interest rate of 5.3%, described below		113,528			136,244

		104,671,337			105,563,789
Less amounts included in liabilities subject to compromise		(104,671,337	)
Less current portion		—			(11,081,911	)

	$	—		$	94,481,878

West LB Credit Arrangement — Senior Debt

SWGE entered into a senior credit agreement that provided for (1) a construction loan facility in an aggregate amount of up to $100,000,000, which converted to a term loan on February 20, 2009 (“Conversion Date”) that matures on February 20, 2015 (the “Final Maturity Date”); and (2) a working capital loan in an aggregate amount of up to $15,000,000 which matured on February 20, 2011. The primary purpose of the credit facility was to finance the construction and operation of the Company’s ethanol plant.

The principal amount of the term loan facility is payable in quarterly payments of $1,600,000, which began September 30, 2009, and the remaining principal amounts are fully due and payable on February 20, 2015. Interest is payable quarterly. SWGE has the option to select between two floating interest rate loans under the terms of the senior credit agreement: Base Rate Loans bear interest at the Administrative Agent’s base rate (which is the higher of the federal funds effective rate plus 0.50% and the Administrative Agent’s prime rate) plus 2.75% per annum. Eurodollar Loans bear interest at LIBOR plus 3.75%. The Company entered into an interest rate swap with WestLB to effectively convert a portion of the variable rate interest into a fixed rate, with the LIBOR component fixed at 4.04% (See Note 1), however, this interest rate swap agreement was terminated on February 2, 2011 in conjunction with the Chapter 11 filing.

Under the terms of the senior credit agreement, SWGE has agreed to pay a quarterly commitment fee equal to .20% per annum on the unused portion of the working capital loan. SWGE’s obligations under the senior credit agreement are secured by a first-priority security interest in all of the Company’s assets, including its equity interest in SWGE.

The senior credit agreement also required SWGE to enter into an accounts agreement among SWGE, Amarillo National Bank, as the Accounts Bank and Securities Intermediary, and WestLB as the collateral agent and administrative agent. Among other things, the accounts agreement establishes certain special, segregated project accounts and establishes procedures for the deposits and withdrawals of funds into these accounts. Substantially all cash of SWGE is required to be deposited into the project accounts subject to security interests to secure obligations in connection with the senior credit. Funds are released from the project accounts in accordance with the terms of the accounts agreement.

As of March 31, 2011 and September 30, 2010, the Company had drawn $14,699,991 on the $13,784,129 working capital loan.

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On June 7, 2010, the Company executed the Sixth amendment to its Senior Credit Agreement and its Fourth amendment to its Accounts Agreement with WestLB. Pursuant to the amended agreements, the Company was required to maintain a certain level of working capital. Pursuant to the amended loan agreements, the Company was required to have a working capital deficit of ($9,000,000) or less as of September 30, 2010, and ($7,000,000) or less subsequently for the term of the loan.

In the event the Company is unable to meet the level of working capital required under the amended loan agreements the Company will be assessed a five percent (5%) interest fee on the outstanding loans for any quarter for which it is not in compliance. This fee payment is in addition to the interest the Company is required to pay on its outstanding debt pursuant to the original loan agreements. This additional interest fee is accrued and due February 2015, the final maturity date for the Company’s outstanding term loan with West LB. Furthermore, and regardless of whether the Company has maintained the required level of working capital, the Company was required to make an additional quarterly principal payment of $150,000 toward its outstanding working capital loan balance for each quarter beginning September 30, 2010. This arrangement is distinct from the borrowing base formula and borrowing base certificates previously utilized to monitor compliance with the Company’s working capital loan. This amendment also removes the borrowing base financial covenant from the terms of the loan, thereby removing the requirement for waivers.

The Company did not meet the working capital deficits of ($7,000,000) and ($9,000,000) required as of December 31, 2010 and September 30, 2010, respectively. The resulting penalty fees of approximately $1,375,000 per quarter were charged to interest expense as of December 31, 2010 and as of September 30, 2010 and are included as current liabilities. No such penalty was assessed for the quarter ending March 31, 2011 due to the Company’s Chapter 11 filing in February 2011.

On February 1, 2011, SWGE filed a voluntary petition for relief (“Bankruptcy Filing”) under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Georgia. The Bankruptcy Filing is a result of the Company’s ongoing liquidity constraints and the willingness of the Company’s lending group to provide SWGE with debtor-in-possession financing and to cooperate in the restructuring of SWGE’s financing facility. SWGE’s Bankruptcy Filing constituted an event of default under the Company’s loan agreement and related documents. Under the terms of the loan agreement, the Bankruptcy Filing caused the Lenders’ term loan commitments and working capital loan commitments to be terminated automatically, and the principal amount of the loans and all other obligations then outstanding together with accrued interest thereon and any unpaid accrued fees owed to Lenders as of the Bankruptcy Filing automatically became immediately due and payable. However, pursuant to the Bankruptcy Code, this default provision and the acceleration provisions applicable to the debt obligations described above are generally unenforceable, and any remedies that may exist related to such default are stayed under section 362 of the Bankruptcy Code. This senior debt facility has been classified at its prepetition amount within Liabilities subject to compromise on the consolidated balance sheet.

Subordinated Debt Facility

The Company has a subordinated payable to which the Mitchell County Development Authority issued $10,000,000 of revenue bonds that were placed with Wachovia Bank. The Company is required to maintain a debt service reserve with the Bond Trustee of at least $1,180,000. The balance at March 31, 2011 was $443,860. The Bond Trustee made the annual interest and principal payment to the bond holders of approximately $1,339,000 in December 2009 from the debt service reserve. The annual principal and interest payment due to the bond holders for December 2010 was funded by the Mitchell County Development Authority to the extent funds were not available in the debt service reserve account. The subordinated payable is due December 1, 2021 and bears interest at 7.5%. Any remaining funds held in the Bond Trustee account are classified as non-current restricted cash and cash equivalents in the Company’s consolidated balance sheet. This subordinated payable has been classified at its prepetition amount within Liabilities subject to compromise on the consolidated balance sheet as of March 31, 2011.

Subordinated Fagen Note

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other Notes Payable

The Company financed the acquisition of certain equipment through two identical notes payable to John Deere Credit. The notes amortize over four years (maturity in August 2012) with monthly principal and interest payments and are secured by the equipment. The interest rate is 5.3%. The combined outstanding balance on these two notes payable is $113,525 and $136,244 as of March 31, 2011 and September 30, 2010, respectively. These notes payable have been classified at its prepetition amount within Liabilities subject to compromise on the consolidated balance sheet as of March 31, 2011.

Debtor in Possession Financing

In conjunction with the Chapter 11 filing, a group of SWGE’s secured bank lenders have agreed to support the Company’s on-going restructuring efforts with a $10 million debtor-in-possession financing facility. The facility bears interest at 13% and is intended to provide financing for an initial period of six months but a two month extension has been requested so that the facility will be in place until a plan of reorganization is confirmed. The Company has drawn $9 million as of March 31, 2011. The face amount of the debt is reduced by the $150,000 of unamortized financing costs paid to the lenders. This financing is presented within Liabilities not subject to compromise on the consolidated balance sheet.

NOTE 7. LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise as of March 31, 2011, consist of the following:


Senior credit agreement, term loan and revolver	$	105,299,991
Subordinated debt facility		9,980,264
Subordinated Fagen note		3,977,545
Other notes payable		113,526
Capital lease obligations		2,876,757
Trade accounts payable, accrued interest and other miscellaneous claims		12,532,817

	$	134,780,900

NOTE 8. FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilized certain assumptions that participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observable inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:


Level 1 Observable inputs —		unadjusted quoted prices in active markets for identical assets and liabilities;

Level 2 Observable inputs —		other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and

Level 3 Unobservable inputs —		includes amounts derived from valuation models where one or more significant inputs are unobservable.

FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company has no financial instruments that require fair value disclosures as of March 31, 2011.

As of September 30, 2010, the Company classified its investments in marketable securities and derivative instruments into these levels depending on the inputs used to determine their fair values. The Company’s investments in marketable securities consist of money market funds restricted by the bond holders which are based on quoted prices and are designated as Level 1. The Company’s derivative instruments consist of commodity positions. The fair value of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 and the fair value of the interest rate swap is based on quoted prices on similar assets or liabilities in active markets and discounts to reflect potential credit risk to lenders and are designated as Level 2.

The following table summarizes fair value measurements by level at September 30, 2010:


	Level 1		Level 2		Level 3		Total
Assets:
Investments in marketable securities, included in restricted cash	$	258,476	$	—	$	—	$	258,476


Total assets	$	258,476	$	—	$	—	$	258,476


Liabilities:
Derivative instruments:
Interest rate swap	$	—	$	657,072	$	—	$	657,072


Total liabilities	$	—	$	657,072	$	—	$	657,072

Certain financial assets and liabilities are measured at fair value on a non-recurring basis; that is the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment.


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 March 31, 2011, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the consolidated financial statements and the Management’s Discussion and Analysis section for the fiscal year ended September 30, 2010, included in the Company’s Annual Report on Form 10-K.

Cautionary Statements Regarding Forward-Looking Statements

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

•

Our ability to continue as a going concern;

•

Our ability to operate pursuant to the terms and conditions of any debtor-in-possession (DIP) financing order entered by the Bankruptcy Court in connection with the Bankruptcy Cases;

•

Our ability to obtain Court approval with respect to motions in the Chapter 11 proceedings prosecuted by us from time to time, including approval of motions relating to the priority of the lender’s security interest under any DIP financing;

•

Our ability to obtain and maintain normal terms with vendors and service providers;

•

Our ability to maintain contracts that are critical to our operations;

•

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

•

Volatility of corn, natural gas, ethanol, unleaded gasoline, distillers grains and other commodities prices;

•

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

•

Our ability to generate sufficient liquidity to fund our debt service requirements and capital expenditures;

•

Our ability to comply with our loan covenants and to obtain waivers from our lender for any non-compliance with those covenants;

•

Our ability to maintain liquidity and operate our business;

•

The results of our hedging transactions and other risk management strategies;

•

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 operations;

•

The effects of mergers or consolidations in the ethanol industry;

•

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

•

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

•

Changes in or elimination of federal and/or state laws (including the elimination of any federal and/or state ethanol tax incentives);

•

Overcapacity within the ethanol industry;

•

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 reliance on key management personnel;

•

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

•

Competition in the ethanol industry and from other alternative fuel additives.

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

Available Information

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

Business Overview

First United Ethanol, LLC (“we,” “us,” “FUEL,” “First United,” or the “Company”) was formed as a Georgia limited liability company on March 9, 2005, for the purpose of raising capital to develop, construct, own and operate a 100 million gallon per year ethanol plant near Camilla, Georgia. In November 2007, the Company’s wholly owned subsidiary, Southwest Georgia Ethanol, LLC (“SWGE”) was formed in conjunction with the debt financing agreement with West LB. First United Ethanol, LLC transferred substantially all of its assets and liabilities to Southwest Georgia Ethanol, LLC. We completed construction of our ethanol plant in October 2008 and plant operations commenced on October 10, 2008.

Our revenues are derived from the sale and distribution of our ethanol and distillers grains primarily in the southeastern United States. Our ethanol plant currently operates at or near its nameplate capacity. A significant percentage of our corn is supplied to us by train and is originated primarily from the eastern Corn Belt; however, we are able to originate an increasing percentage of our corn from local producers. Currently, approximately 99% of our ethanol is being shipped out of our facility by truck to local and regional blending terminals. Additionally, as of the date of this report, approximately 100% of our dried distillers grains are being shipped out of our facility by truck to local livestock and poultry operations.

Recent Events

Chapter 11 Bankruptcy

On February 1, 2011, SWGE, a wholly owned subsidiary of the Company, filed a voluntary petition for relief (the “Bankruptcy Filing”) under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Middle District of Georgia Albany Division (the “Bankruptcy Court”). SWGE’s chapter 11 case (the “Case”) is being administered by the Bankruptcy Court as Case No. 11-10145. SWGE is continuing to operate its business and manage its assets as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

The Bankruptcy Filing is a result of the Company’s ongoing liquidity constraints and the willingness of the Company’s lending group to provide SWGE with debtor-in-possession financing and to cooperate in the restructuring of SWGE’s financing facility. SWGE’s Bankruptcy Filing constituted an event of default under SWGE’s loan agreement and related documents with WestLB AG, New York Branch, AgCountry Farm Credit Services, FCLA, AgFirst Farm Credit Bank, Bank of Camilla, CoBank, ACB, Farm Credit Bank of Texas, Northwest Farm Credit Services, PCA, and Planters and Citizens Bank (collectively referred to herein as “Lenders”). WestLB AG, New York Branch (“WestLB”) is the servicing agent for the loans evidenced by SWGE’s loan agreement and related documents with its Lenders. The primary loan agreement is the Senior Credit Agreement (the “Loan Agreement”) dated November 20, 2007. The Loan Agreement initially provided SWGE with a construction loan of approximately $100 million, which was subsequently converted to a term loan, and a $15 million working capital loan (the “Loans”). The Loan Agreement and its amendments contain various covenants and restrictions with which SWGE is obligated to comply. The Loans are secured by a mortgage and security interest granted by SWGE in favor of the Lenders in all of SWGE’s real property and personal property. Pursuant to a Pledge and Security Agreement also dated November 20, 2007, the Company pledged its equity interest in SWGE to the Lenders as additional collateral for the Loans to SWGE. As of February 1, 2011 SWGE’s outstanding obligations to the Lenders were approximately $108 million.

Under the terms of the Loan Agreement, the Bankruptcy Filing caused the Lenders’ term loan commitments and working capital loan commitments to be terminated automatically, and the principal amount of the loans and all other obligations then outstanding together with accrued interest thereon and any unpaid accrued fees owed to Lenders automatically became immediately due and payable. However, pursuant to the Bankruptcy Code, this default provision and the acceleration provisions applicable to the debt obligations described above are generally unenforceable, and any remedies that may exist related to such default are stayed under section 362 of the Bankruptcy Code. The Company and SWGE have been in communication with WestLB, which has agreed to work with SWGE in support of SWGE’s on-going reorganization efforts in the Case.

Debtor-in-Possession Financing

On February 4, 2011, SWGE entered into a Debtor-In-Possession Credit Agreement (the “DIP Credit Agreement”) with WestLB, AgFirst Farm Credit Bank and Farm Credit Bank of Texas (collectively the “DIP Lenders”) for a debtor-in-possession revolving credit facility. WestLB is also serving as the administrative agent and collateral agent under the DIP Credit Agreement. On February 23, 2011 the Bankruptcy Court entered a final order approving the DIP Credit Agreement.

The DIP Credit Agreement provides for commitments to provide debtor-in-possession financing to SWGE in the maximum amount of $10,000,000 (the “DIP Loan”), subject to the terms and conditions set forth in the DIP Credit Agreement and related documents. The DIP Loan may be used to fund, subject to limitations set forth in the DIP Credit Agreement, the financing of SWGE’s post-petition working capital, general corporate purposes, the administration of the Case and such pre-petition expenses as are approved by the Bankruptcy Court and paid in accordance with the applicable budget. The obligations under the terms of the DIP Credit Agreement and related documents constitute “superpriority” claims under the Bankruptcy Code and are secured by a lien in favor of the DIP Lenders on collateral constituting substantially all of SWGE’s assets.

The DIP Loan matures six months from the date the DIP Credit Agreement was executed unless it becomes due earlier by reason of acceleration or pursuant to certain procedural triggers connected to the Case. SWGE’s debt obligations outstanding under the DIP Credit Agreement shall generally accrue interest at a rate equal to the LIBOR rate plus 9.0 percent per annum. As of the date the DIP Credit Agreement was executed by the parties, the calculated annualized interest rate was approximately 13%. SWGE will pay to WestLB, as the administrative agent, and to the DIP Lenders, for their own account, certain fees, including a facility fee, a structuring fee as well as a monthly commitment fee.

Under the DIP Credit Agreement, SWGE is subject to certain affirmative and negative covenants, an obligation to deliver financial statements and operating budgets at specified intervals, and other terms and conditions. The failure to meet certain covenants or the occurrence of other specified events could constitute an event of default and may result in the DIP Loan becoming immediately due and payable.

The foregoing description of the DIP Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the DIP Credit Agreement and related documents, which were filed as exhibits to our quarterly report for the period ended December 31, 2010.

Deregistration

On May 2, 2011 we received approval from the Securities and Exchange Commission to proceed with the filing of our definitive proxy statement regarding our proposed reclassification and reorganization of the Company’s membership units. The proposed transaction will provide for the reclassification of the Company’s membership units into three separate and distinct classes. The definitive proxy statement was filed with the Securities and Exchange Commission on May 10, 2011 and we have scheduled our special meeting of the members for June 22, 2011. The members of the Company will have an opportunity to vote on the proposed reclassification and reorganization of the Company’s membership units at this special meeting of the members. The proxy materials will be mailed to each of our members on approximately May 25, 2011.

If the proposed reclassification is approved by the Company’s members, we expect that each member of record holding 100 or more units will receive one Class A unit for each common equity unit held by such unit holder prior to the reclassification; each member of record holding 21 to 99 units will receive one Class B unit for each common equity unit held by such unit holder immediately prior to the reclassification; and each member of record holding 20 or fewer units will receive one Class C unit for each common equity unit held by such unit holder immediately prior to the reclassification.

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

If the Company’s members approve the proposed amendment to the Company’s operating agreement and the reclassification is implemented, we expect that Class A unit holders would be entitled to vote on all matters for which unit holder approval is required under the Company’s operating agreement or state law; Class B unit holders would be entitled to vote on the election of the Company’s governors and the voluntary dissolution of the Company; and Class C unit holders would be entitled to vote only on the voluntary dissolution of the Company. With respect to potential future dividends, each membership unit will receive its equal portion of a declared dividend, regardless of its class.

Results of Operations for the Three Months Ended March 31, 2011 and 2010

The following table shows the result of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three months ended March 31, 2011 and 2010:


	Three Months Ended						Three Months Ended
	March 31, 2011						March 31, 2010
	(Unaudited)						(Unaudited)
Statement of Operations Data	Amount			Percent			Amount			Percent
Revenues	$	73,108,140			100.00	%	$	51,017,401			100.00	%
Cost of Goods Sold	$	73,929,949			101.24	%	$	49,810,521			97.6	%
Gross Profit (Loss)	$	(821,809	)		(1.12	)%	$	1,206,880			2.4	%
General and Administrative Expenses	$	715,491			0.98	%	$	1,062,210			2.1	%
Operating Income (Loss)	$	(1,537,300	)		(2.10	)%	$	144,670			0.3	%
Other (Expense)	$	(2,187,617	)		(2.99	)%	$	(1,812,943	)		(3.6	)%
Reorganization Expense	$	(886,228	)		(1.21	)%		—			—
Net Income(Loss)	$	(4,611,145	)		(6.31	)%	$	(1,668,273	)		(3.3	)%

The following table shows the sources of our revenue for the three months ended March 31, 2011 and 2010:

	Three Months Ended						Three Months Ended
	March 31, 2011						March 31, 2010
	(2011 Fiscal Year)						(2010 Fiscal Year)
Revenue Source	Amount			% of Revenues			Amount			% of Revenues
Ethanol Sales	$	58,030,553			79.4	%	$	42,285,797			82.9	%
Dried Distillers Grains Sales		13,529,564			18.5	%		8,084,113			15.8	%
Wet Distillers Grains Sales		1,255,773			1.8	%		638,898			1.3	%
Other Revenue		292,250			.4	%		8,593			.1	%
Total Revenues	$	73,108,140			100.00	%	$	51,017,401			100.00	%

Revenues

Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of distillers grains.

During our fiscal quarter March 31, 2011, our total revenue increased significantly compared to the first fiscal quarter of our 2010 fiscal year. Management attributes this increase in total revenue primarily with a significant increase in the average price we received per gallon of ethanol sold during our fiscal quarter ending March 31, 2011. Our total revenue was approximately $73,108,000 for the fiscal quarter ended March 31, 2011 and $51,017,401 for the fiscal quarter ended March 31, 2010, an increase of approximately 43%.

Ethanol

The total gallons of ethanol that we sold during our fiscal quarter ended March 31, 2011 was approximately equal to our ethanol production during our fiscal quarter ended March 31, 2010. We experienced an increase of approximately 35% in the average price we received per gallon of ethanol sold during our fiscal quarter ended March 31, 2011 compared to our fiscal quarter ended March 31, 2010. Management attributes this increase in the average price we received per gallon of ethanol with higher gasoline prices and increased ethanol exports and increases in oil and gasoline prices during the fiscal quarter ended March 31, 2011 compared to our fiscal quarter ended March 31, 2010.

The ethanol industry relies on the Federal Volumetric Ethanol Excise Tax Credit (“VEETC”) to reduce the cost of ethanol to fuel blenders. Accordingly, VEETC causes increased demand for ethanol related to what is called discretionary blending. Discretionary blending is where fuel blenders use ethanol to increase octane in the fuels that are produced as well as reduce the price of gasoline at levels beyond what is mandated by the renewable fuels standard. However, when the price of ethanol increases relative the price of gasoline, after taking into account the VEETC, the amount of discretionary blending by fuel blenders decreases thereby decreasing ethanol demand. As a result, if the VEETC is not renewed past December 31, 2011, management anticipates that the price of ethanol will decrease. Management anticipates ethanol production will be steady during our 2011 fiscal year provided the ethanol industry can maintain current ethanol prices. However, in the event ethanol prices decrease significantly, we may be forced to reduce ethanol production during times when our operating margins are unfavorable. Further, our operating margins also depend on corn prices which can affect the spread between the price we receive for our ethanol and our raw material costs. In times when this spread decreases or becomes negative, we may reduce or terminate ethanol production until these spreads become more favorable.

Distillers Grains

We produce distillers grains for sale primarily in two forms, distillers dried grains with solubles (DDGS) and wet distillers grains (WDG). During our fiscal quarter ended March 31, 2011, we experienced a shift in the mix of distillers grains we sold in the form of DDGS versus WDG compared to our fiscal quarter ended March 31, 2010. During our fiscal quarter ended March 31, 2011, we sold more of our total distillers grains in the form of DDGS than we did for the same period in 2010. Conversely, during our fiscal quarter ended March 31, 2011 we sold less of our total distillers grains in the form of WDG than we did for the same period in 2010. Management attributes this shift in the mix of our distillers grains sales with an increase in local demand for DDGS during our fiscal quarter ended March 31, 2011 compared to our fiscal quarter ended March 31, 2010. The mix of DDGS and WDG sold within our local market is dependent upon the seasonal demands of livestock producers in our area.

Management anticipates demand for distillers grains will remain steady or increase, especially if corn prices remain high during our 2011 fiscal year. Management believes that increased revenue from distillers grains sales during times when corn prices are high helps us to somewhat offset our increased cost of goods sold from the higher corn prices.

Cost of Goods Sold

Our cost of goods sold was approximately $73,930,000 or 101% of our revenues for the three month period ended March 31, 2011. Our two primary costs of producing ethanol and distillers grains are the cost of corn and natural gas. Approximately 82.3% of our cost of goods sold is attributable to corn costs and approximately 4.7% is attributable to natural gas costs. Our per gallon cost of for corn during our fiscal quarter ended March 31, 2011 was approximately 66% higher than the amount we paid during our fiscal quarter ended March 31, 2010. Our higher per gallon cost of corn is primarily due to increased corn prices. This dramatic increase in the price of corn has caused tight or negative operating margins for our Company.

Management attributes this increase in corn prices to decreased 2010 corn production in some parts of the United States and uncertainty regarding the 2011 corn production. Both of these factors have been exacerbated by a strong export market and strong domestic demand. These factors have led to fears regarding an imbalance between corn supply and demand. Management anticipates that corn prices will continue to be volatile through the 2011 corn planting season and thereafter will be subject to weather factors that may influence corn prices during the 2011 growing season.

Management anticipates that natural gas prices will remain steady during our 2011 fiscal year unless demand significantly increases due to improved global economic conditions. Management anticipates that our natural gas consumption may increase during our 2011 fiscal year due to increased ethanol and distillers grains production compared to our 2010 fiscal year.

Our other costs of goods sold include denaturant, process chemicals, electricity, transportation, and direct labor. Together these costs represent approximately 7.9% of our cost of goods sold. We do not anticipate these costs to be as volatile as our corn and natural gas expenses. However, our transportation, electrical and denaturant costs are directly tied to the price of energy generally and, therefore, may fluctuate along with the price of petroleum based energy products.

General and Administrative Expenses

Our general and administrative expenses as a percentage of revenues were 0.98% for the three month period ended March 31, 2011, and our general and administrative expenses as a percentage of revenues were 2.1% for the three month period ended March 31, 2010. Operating expenses consist primarily of payroll, employee benefits, and professional fees and have been decreasing since beginning operations due to our ability to make our internal operations more efficient.

Operating Income

Our operating income for the three months ended March 31, 2011 was approximately (2.1)% of our revenues, compared to an operating income of 0.3% of our revenues for the three months ended March 31, 2010. Our operating income is the result of negative operating margins. Our operating margins deteriorated from our three months ended March 31, 2010 to our three months ended March 31, 2011 as corn prices increased more rapidly that ethanol prices.

Other (Expense)

We had total other expense for the fiscal quarter ended March 31, 2011 of approximately $2,188,000 resulting primarily from our interest expense for the period. Interest expense for the period was approximately $2,183,000 which was offset by an unrealized gain of approximately $4,500 for the change in fair value of our interest rate swap agreement.

Reorganization Expense

We incurred approximately $886,000 in reorganization expense associated with our bankruptcy case for the three month period ended March 31, 2011. This expense consists primarily of professional fees. We expect to incur additional reorganization expense during our period ended June 30, 2011.

Net Income (Loss)

Our net loss for the three months ended March 31, 2011 was approximately 6.31% of our revenues, compared to our net loss of approximately 3.3% of our revenues f or the three months ended March 31, 2010. Our net loss is primarily the result of our negative operating margins and our significant interest expense and financing costs relative to our revenues during our three months ended March 31, 2011.

Additional Information

The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended March 31, 2011 and 2010.


	Percentage of Increase (Decrease) for
	comparison of Three Months Ended
	March 31, 2011 to March 31, 2010
Production:
Ethanol sold (gallons)		(0.39	%)
Dried distillers grains sold (tons)		11.90	%
Wet distillers grains sold (tons)		(42.35	%)
Revenues:
Ethanol average price per gallon		34.91	%
Dried distillers grains revenue per gallon of ethanol sold		68.27	%
Wet distillers grains revenue per gallon of ethanol sold		96.43	%
Total revenue per gallon of ethanol sold		43.90	%
Costs:
Corn cost per gallon of ethanol sold (including freight)		65.91	%
Overhead and other direct costs per gallon of ethanol sold		6.17	%
Total cost per gallon of ethanol sold		49.01	%

During the quarter ended March 31, 2011, our market price of ethanol increased approximately 35% compared to the three month period ended March 31, 2010. If our average price received per gallon of ethanol had been $0.10 lower, our gross margin for the quarter would have decreased by approximately $2,280,802, assuming our other revenues and costs remained unchanged.

During the quarter ended March 31, 2011, the market price of dried distillers grains increased approximately 68% compared to the three month period ended March 31, 2010. If our average price received per ton of dried distillers grains had been $1.00 lower, our gross margin for the quarter would have decreased by approximately $66,563, assuming our other revenues and costs remained unchanged.

During the quarter ended March 31, 2011, the market price of corn on a per gallon basis increased by approximately 66% compared to the three month period ended March 31, 2010. If our average price paid per bushel of corn had been $0.25 higher, our gross margin for the quarter would have decreased by approximately $2,049,550, assuming our other revenues and costs remained unchanged.

Results of Operations for the Six Months Ended March 31, 2011 and 2010

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 March 31, 2011 and 2010:


	Six Months Ended						Six Months Ended
	March 31, 2011						March 31, 2010
	(Unaudited)						(Unaudited)
Statement of Operations Data	Amount			Percent			Amount			Percent
Revenues		144,980,641			100.00	%	$	108,451,918			100.0	%
Cost of Goods Sold		143,179,793			98.76	%		97,300,934			89.7	%
Gross Profit (Loss)		1,800,848			1.24	%		11,150,984			10.3	%
General and Administrative Expenses		1,739,250			1.20	%		2,252,375			2.1	%
Operating Income (Loss)		61,598			0.04	%		8,898,609			8.2	%
Other (Expense)		(8,863,191	)		(6.11	%)		(3,605,083	)		(3.3	%)
Reorganization Expense		(886,228	)		(0.60	%)		—			—
Net Income (Loss)		(9,687,821	)		(6.68	%)		5,293,526			4.9	%

Revenues

In the six month period ended March 31, 2011, ethanol sales comprised approximately 80% of our revenues and distillers grains sales comprised approximately 18% of our revenues. For the six month period ended March 31, 2010, ethanol sales comprised approximately 84% of our revenue, without accounting for ethanol hedging, and distillers grains sales comprised approximately 16% of our revenue. Our revenues were higher for our first half of fiscal year 2011 compared to the same period of 2010 primarily as a result of our increase in ethanol production and an increase in the sales price of our ethanol.

The average ethanol sales price we received for the six month period ended March 31, 2011 was approximately 21% higher than our average ethanol sales price for the comparable 2010 period. Management attributes this increase in ethanol prices with the increase in commodity prices generally as a result of the gradually improving economic situation in the United States. Management anticipates the price of ethanol may increase during the second half of our 2011 fiscal year as a result of an increase in fuel demand as we move into the summer driving season which, historically, has positively affected the market prices of crude oil and gasoline.

The price we received for our dried distillers grains increased by approximately 28% during the six month period ended March 31, 2011 compared to the same period of 2010. Management attributes this increase in the price of our dried distillers grains to an increase in the demand for our distillers grains outside of our local market area. The price of dried distillers grains changes in proportion to the price of corn, which has increased in the six month period ended March 31, 2011. Accordingly, we anticipate that the market price of distillers grains will continue to be volatile as a result of changes in the price of corn and competing animal feed substitutes such as soybean meal.

Cost of Sales

Our costs of goods sold as a percentage of revenues were approximately 99% for the six month period ended March 31, 2011 compared to approximately 90% for the same period of 2010. Our two largest costs of production are corn (82.1% of cost of goods sold for our six months ended March 31, 2011) and natural gas (5.4% of cost of goods sold for our six months ended March 31, 2011). Our cost of goods sold increased by approximately 43% in the six months ended March 31, 2011, compared to the six months ended March 31, 2010, and our revenue for the same period increased by approximately 34%. This increase in the cost of goods sold is primarily a result of higher corn prices.

The following table shows additional data regarding production and price levels for our primary inputs and products for the six months ended March 31, 2011 and 2010:


	Percentage of Increase (Decrease)
	For comparison of Six Months
	Ended March 31, 2011 to March 31, 2010
Production:
Ethanol sold (gallons)		4.7	%
Dried distillers grains sold (tons)		16.2	%
Wet distillers grains sold (tons)		(28.7	%)
Revenues:
Ethanol average price per gallon		21.4	%
Dried distillers grains revenue per gallon of ethanol sold		51.5	%
Wet distillers grains revenue per gallon of ethanol sold		136.9	%
Total revenue per gallon of ethanol sold		27.5	%
Costs:
Corn cost per gallon of ethanol sold (including freight)		55.3	%
Overhead and other direct costs per gallon of ethanol sold		2.6	%
Total cost per gallon of ethanol sold		42.1	%

General and Administrative Expenses

Our general and administrative expenses as a percentage of revenues were lower for the six month period ended March 31, 2011 than they were for the same period ended March 31, 2010. These percentages were approximately 1.2% and approximately 2.1% for the six months ended March 31, 2011 and 2010, respectively. This decrease in general and administrative expenses is primarily due to the increase in our revenues and to overall reductions in general and administrative expenses. Our management and staff continue to increase our operating efficiencies in an effort to lower our general and administrative expenses. We expect that going forward our general and administrative expenses will remain relatively steady.

Operating Income (Loss)

Our income from operations for the six months ended March 31, 2011 was approximately 0.04% of our revenues compared to loss of approximately 8.2% of our revenues for the six months ended March 31, 2010. This decrease in our profitability is generally attributable to increases in the price of corn outpacing increases in the price of ethanol for our six months ended March 31, 2011 compared to the six months ended March 31, 2010.

Other (Expense)

Other expense for the six months ended March 31, 2011, was approximately 6.11% of our revenue and totaled approximately $8,863,000. Other expense for the six months ended March 31, 2010 totaled approximately $3,605,000 and was approximately 3.3% of our revenues. The increase in other expenses is primarily attributable to more interest expense incurred during the period ended March 31, 2011 and to the write off of deferred financing expenses. Interest expense for the six months ended March 31, 2011, was approximately $9,095,000. Interest expense for the six months ended March 31, 2010 was approximately $4,202,000. This increase in interest expense is due primarily to bringing current our derivatives interest.

Reorganization Expense

We incurred approximately $886,000 in reorganization expense associated with our bankruptcy case for the six month period ended March 31, 2011. This expense consists primarily of professional fees. We expect to incur additional reorganization expense during our three month period ended June 30, 2011.

Changes in Financial Condition for the Six Months Ended March 31, 2011

Our current assets at March 31, 2011 increased significantly compared to our fiscal year ended September 30, 2010. As of March 31, 2011, we had an additional $2,582,000 in cash on hand and $4,356,000 in additional inventory.

Our net property and equipment was approximately $4,307,000 lower at March 31, 2011 compared to September 30, 2010 as a result of depreciation expense taken for the quarter. We do not expect any significant additional capital expenditures as our plant is now complete.

We experienced a significant increase in our total liabilities on March 31, 2011 compared to September 30, 2010, primarily as a result of the debtor-in-possession financing we obtain in February 2011 in connection with our reorganization proceeding. At March 31, 2011, we had approximately $147,727,000 outstanding in the form of total liabilities, compared to approximately $138,182,000 at September 30, 2010.

Liquidity and Capital Resources

The following table shows cash flows for the six months ended March, 2011 and 2010:


	Six Months Ended
	March 31
	2011			2010
Net cash provided by (used in ) operating activities	$	(7,015,990	)	$	5,217,779
Net cash (used in) investing activities	$	(79,348	)	$	(152,136	)
Net cash provided by (used in) financing activities	$	9,677,747		$	(3,663,039	)
Net increase in cash and cash equivalents	$	2,582,409		$	1,402,604
Cash and cash equivalents, end of period	$	3,168,875		$	1,402,604

Operating Cash Flows. We experienced a significant decrease in net cash provided by operating activities and an increase in cash used in operating activities during the six months ended March 31, 2011 compared to the same period of 2010. This decrease in net cash provided by operating activities was primarily a result of the $9,688,000 net loss we experienced during the six months ended March 31, 2011. Cash used in operating activities was approximately $7,016,000 for the six months ended March 31, 2011 compared to cash provided by operating activities of approximately $5,218,000 for the same period in 2010.

Investing Cash Flows. Cash used in investing activities was approximately $79,000 for the six months ended March 31, 2011. This amount is similar to the amount of cash used in investing activities for six months ended March 31, 2010.

Financing Cash Flows. Cash provided by financing activities was approximately $9,828,000 for the six months ended March 31, 2011. This cash was primarily provided by drawing on our revolving line of credit, the release of restricted cash and the proceeds from our debtor in possession financing, each of which were partially offset by the repayment of long term debt and capital lease obligations. During our six months ended March 31, 2010 we were able to repay approximately $2,400,000 of our long terms debt and capital lease obligations.

Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs.

Senior Credit Facility

On November 20, 2007, First United and Southwest Georgia Ethanol, LLC (“SWGE”), our wholly owned subsidiary, entered into a senior credit agreement with WestLB that provides for (1) a construction loan facility in an aggregate amount of up to $100,000,000, which converted to a term loan on February 20, 2009 (“Conversion Date”) that matures on February 20, 2015 (the “Final Maturity Date”); and (2) a working capital loan in an aggregate amount of up to $15,000,000 which matures February 20, 2011. The primary purpose of the credit facility was to finance the construction and operation of the Company’s ethanol plant.

The principal amount of the term loan facility is payable in quarterly payments ranging from $1,500,000 to $1,600,000 beginning September 30, 2009, and the remaining principal amounts are fully due and payable on February 20, 2015. Interest is payable quarterly. SWGE has the option to select between two floating interest rate loans under the terms of the senior credit agreement: Base Rate Loans bear interest at the Administrative Agent’s base rate (which is the higher of the federal funds effective rate plus 0.50% and the Administrative Agent’s prime rate) plus 2.75% per annum. Eurodollar Loans bear interest at LIBOR plus 3.75%.

Under the terms of the senior credit agreement, SWGE has agreed to pay a quarterly commitment fee equal to 0.50% per annum on the unused portion of the construction loan/term loan and .20% per annum on the unused portion of the working capital loan. SWGE’s obligations under the senior credit agreement are secured by a first-priority security interest in all of the Company’s assets, including its equity interest in SWGE.

As of March 31, 2011 and September 30, 2010, the Company had drawn $14,699,991 on the $13,784,129 working capital loan.

Subordinated Debt

The Company has a subordinated payable pursuant to which the Mitchell County Development Authority issued $10,000,000 of revenue bonds that were placed with Wachovia Bank. The Company is required to maintain a debt service reserve with the Bond Trustee of at least $1,180,000. The balance at March 31, 2011 was $443,860. The Bond Trustee made the annual interest and principal payment to the bond holders of approximately $1,339,000 in December 2009 from the debt service reserve. The annual principal and interest payment due to the bond holders for December 2010 was funded by the Mitchell County Development Authority to the extent funds were not available in the debt service reserve account. The subordinated payable is due December 1, 2021 and bears interest at 7.5%. Any remaining funds held in the Bond Trustee account are classified as non-current restricted cash and cash equivalents in the Company’s consolidated balance sheet. This subordinated payable has been classified at its prepetition amount within Liabilities subject to compromise on the consolidated balance sheet as of March 31, 2011.

On June 30, 2009, SWGE entered into a subordinated promissory note agreement in the amount of $3,977,545 due Fagen, Inc., a related party, for the remaining design-build contract balance. The note bears interest at 4% through June 30, 2010 and 8% thereafter through maturity on June 30, 2011. Interest is payable quarterly. The first principal payment of $500,000 was due as of September 30, 2009 along with an annual principal payment of $1,738,772 that was due June 30, 2010. The final payment of $1,738,772 is due June 30, 2011. This note is subordinated to the West LB debt agreement, which currently prohibits the Company from making the principal payments on the schedule described above. The note of $3,977,545 is included in current maturities of long-term debt per the agreement. However, the earliest any payment will likely be made is in 2014.

Other Notes Payable

The Company financed the acquisition of certain equipment through two identical notes payable to John Deere Credit. The notes amortize over four years (maturity in August 2012) with monthly principal and interest payments and are secured by the equipment. The interest rate is 5.3%. The combined outstanding balance on these two notes payable is $136,244 and $202,050 as of September 30, 2010 and 2009, respectively.

The Company’s long-term debt outstanding as of March 31, 2011 and September 30, 2010 is summarized as follows:


	March 31,			September 30,
	2011			2010

West LB Term Loan, variable interest rates from 4.00% – 4.28%	$	90,600,000		$	92,200,000

Subordinated Fagen note, 4% through June 30, 2010 and 8% thereafter		3,977,545			3,977,545

Subordinated debt facility, interest rate of 7.5%, described below		8,615,000			9,250,000

Subordinated note payable to Mitchell County Development Authority		1,365,264			—

Notes payable John Deere Credit, interest rate of 5.3%, described below		113,528			136,244

		104,671,337			105,563,789
Less amounts included in liabilities subject to compromise		(104,671,337	)

Less current portion		—			(11,081,911	)

	$	—		$	94,481,878

Summary of Critical Accounting Policies and 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 fair value of our cash and equivalents approximates their carrying value.

Derivative Instruments

We occasionally enter into short-term cash grain, option and futures contracts as a means of securing corn for the ethanol plant and managing exposure to changes in commodity. We may also enter into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices. All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

As part of our trading activity, we use futures and option contracts offered through regulated commodity exchanges to reduce our risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using cash and futures contracts and options.

Unrealized gains and losses related to derivative contracts for corn purchases are included as a component of cost of goods sold and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements. The fair values of derivative contracts are presented on the accompanying balance sheet as derivative financial instruments.

Lower of cost or market accounting for inventory and forward purchase contracts

With the significant change in the prices of our main inputs and outputs, the lower of cost or market analysis of inventories and purchase commitments can have a significant impact on our financial performance. The impact of market activity related to pricing of corn and ethanol will require us to continuously evaluate the pricing of our inventory and purchase commitments under a lower of cost or market analysis.

Impairment Analysis

Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. In accordance with our policies, management has evaluated the plant for possible impairment based on projected future cash flows from operations. Management has determined that its projected future cash flows from operations exceed the carrying value of the plant and that no impairment exists at March 31, 2011.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. In accordance with Company policies, management has evaluated the plant for possible impairment based on projected undiscounted future cash flows from operations. Management has determined that its projected undiscounted future cash flows from operations exceed the carrying value of the plant and that no impairment exists at March 31, 2011. However, due to the Company’s recent filing for Bankruptcy protection, there can be no assurances that the value of the plant will be recovered through future cash flows.

Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, derivative instruments, other receivables, accounts payable, accrued expenses and long-term debt. Management believes the fair value of each of these financial instruments approximates their carrying value in the balance sheet as of the balance sheet date. The fair value of current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments. The fair value of derivative financial instruments is based on quoted market prices. The fair value of the long-term debt is estimated based on anticipated interest rates which management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and the other market factors.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.


Item 3.		Quantitative and Qualitative Disclosures about Market Risks

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 4.		Controls and Procedures.

Management of FUEL is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.

Our management, including our Chief Executive Officer, Murray Campbell, along with our Chief Financial Officer, Larry Kamp, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a — 15(e) under the Exchange Act of 1934, as amended) as of March 31, 2011. 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 person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1.		Legal Proceedings.

On February 1, 2011, SWGE, a wholly owned subsidiary of the Company, filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Georgia Albany Division. The chapter 11 case is being administered by the Bankruptcy Court as Case No. 11-10145. SWGE intends to continue to operate its business as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As a result of the filing, attempts to collect, secure, or enforce remedies with respect to pre-petition claims against SWGE are subject to the automatic stay provisions of section 362 of the Bankruptcy Code.


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 operation.

SWGE filed for reorganization under Chapter 11 on February 1, 2011 and is subject to the risks and uncertainties associated with the Bankruptcy Case. For the duration of the Bankruptcy Case, our operations and our ability to execute our business strategy will be subject to the risks and uncertainties associated with bankruptcy. These risks include:

•

our ability to continue as a going concern;

•

our ability to operate within the restrictions and the liquidity limitations of any DIP financing arrangement in connection with the Bankruptcy Case;

•

our ability to obtain Bankruptcy Court approval with respect to motions filed in the Bankruptcy Case from time to time;

•

our ability to develop, prosecute, confirm and consummate a plan of reorganization with respect to the Chapter 11 case;

•

our ability to obtain and maintain normal payment and other terms with customers, vendors and service providers;

•

our ability to maintain contracts that are critical to our operations;

•

our ability to attract, motivate and retain key employees;

•

our ability to attract and retain customers; and

•

our ability to fund and execute our business plan.

We will also be subject to risks and uncertainties with respect to the actions and decisions of our creditors and other third parties who have interests in the Bankruptcy Case that may be inconsistent with our plans.

These risks and uncertainties could affect our business and operations in various ways. For example, negative events or publicity associated with the Bankruptcy Case could adversely affect our relationships with our vendors and employees, as well as with customers, which in turn could adversely affect our operations and financial condition. Also, pursuant to the Bankruptcy Code, we need Bankruptcy Court approval for transactions outside the ordinary course of business, which may limit our ability to respond timely to events or take advantage of opportunities. Because of the risks and uncertainties associated with the Bankruptcy Case, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 reorganization process will have on our business, financial condition and results of operations, and there is no certainty as to our ability to continue as a going concern.

A long period of operating under Chapter 11 could harm our business. A long period of operating under Chapter 11 could adversely affect our business and operations. So long as the Bankruptcy Case continues, our senior management will be required to spend a significant amount of time and effort dealing with the Bankruptcy Case instead of focusing exclusively on business operations. A prolonged period of operating under Chapter 11 will also make it more difficult to attract and retain management and other key personnel necessary to the success of our business. In addition, the longer the Bankruptcy Cases continue, the more likely it is that our vendors will lose confidence in our ability to successfully reorganize our business, and they may seek to establish alternative arrangements for providing us with goods and services, including alternative payment arrangements, which in turn could have an adverse effect on our liquidity and/or results of operations. Our having sought bankruptcy protection may also adversely affect our ability to negotiate favorable terms from suppliers, contract or trading counterparties and others and to attract and retain customers and counterparties. The failure to obtain such favorable terms and to attract and retain customers and other contract or trading counterparties could adversely affect our financial performance.

We have substantial liquidity needs and may be required to seek additional financing. Our principal sources of liquidity have historically consisted of cash provided by operations, cash and cash equivalents on hand and available borrowings under our credit agreements. Our liquidity position is significantly influenced by our operating results, which in turn are substantially dependent on commodity prices, especially prices for corn, ethanol, natural gas and unleaded gasoline. As a result, adverse commodity price movements adversely impact our liquidity. We face uncertainty regarding the adequacy of our liquidity and capital resources and have limited access to additional financing. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with the Bankruptcy Case and expect that we will continue to incur significant professional fees and costs. We cannot assure you that the amounts of cash available from operations, together with any DIP financing, will be sufficient to fund our operations, including operations during the period until such time as we are able to propose a plan of reorganization that will receive the requisite acceptance by creditors and be confirmed by the Bankruptcy Court.

We may not have sufficient cash to service our indebtedness and other liquidity requirements. Our ability to service any DIP financing indebtedness and successfully consummate a plan of reorganization will depend, in part, on our ability to generate cash. We cannot be certain that cash on hand together with cash from operations will by itself be sufficient to meet our cash and liquidity needs. If we are unable to generate enough cash to meet our liquidity needs, we could be forced to discontinue some or all of our operations.

Our DIP financing imposes significant operating and financial restrictions on us, compliance or non-compliance with which could have a material adverse effect on our liquidity and operations. Restrictions imposed by the terms of our DIP financing could adversely affect us by limiting our ability to plan for or react to market conditions or to meet our capital needs and could result in an event of default under the DIP financing. These restrictions will limit our ability, subject to certain exceptions, to, among other things:

•

incur additional indebtedness;

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make prepayments on or purchase indebtedness in whole or in part;

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make investments;

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enter into transactions with affiliates on other than arm’s-length terms;

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create or incur liens to secure debt;

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consolidate or merge with another entity;

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lease, transfer or sell assets and use proceeds of permitted asset leases, transfers or sales;

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incur dividend or other payment restrictions;

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make capital expenditures beyond specified limits; and

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engage in specified business activities.

These limitations could have a material adverse effect on our liquidity and operations. If we fail to comply with the restrictions under any DIP financing and are unable to obtain a waiver or amendment or a default exists and is continuing under the DIP financing, the lenders could declare outstanding borrowings and other obligations under the DIP financing immediately due and payable. Our ability to comply with these restrictions may be affected by events beyond our control, and any material deviations from our forecasts could require us to seek waivers or amendments of covenants or alternative sources of financing or to reduce expenditures. We cannot assure you that such waivers, amendments or alternative financing could be obtained, or if obtained, would be on terms acceptable to us. If we are unable to comply with the terms of the DIP financing, or if we fail to generate sufficient cash flow from operations, or, if it became necessary, to obtain such waivers, amendments or alternative financing, it could adversely impact the timing of, and our ultimate ability to successfully implement, a plan of reorganization.

Risks Relating to Our Business

If the Federal Volumetric Ethanol Excise Tax Credit (“VEETC”) expires on December 31, 2011, it could negatively impact our profitability. The ethanol industry is benefited by VEETC which is a federal excise tax credit of 45 cents per gallon of ethanol blended with gasoline. This excise tax credit is set to expire on December 31, 2011. We believe that VEETC positively impacts the price of ethanol. If VEETC is allowed to expire, it could negatively impact the price we receive for our ethanol and could negatively impact our profitability.

We have a significant amount of debt, and our existing debt financing agreements contain, and our future debt financing agreements may contain, restrictive covenants that limit distributions and impose restrictions on the operation of our business. The use of debt financing makes it more difficult for us to operate because we must make principal and interest payments on the indebtedness and abide by covenants contained in our debt financing agreements. The level of our debt may have important implications on our operations, including, among other things: (a) limiting our ability to obtain additional debt or equity financing; (b) placing us at a competitive disadvantage because we may be more leveraged than some of our competitors; (c) subjecting all or substantially all of our assets to liens, which means that there may be no assets left for unit holders in the event of a liquidation; and (d) limiting our ability to make business and operational decisions regarding our business, including, among other things, limiting our ability to pay dividends to our unit holders, make capital improvements, sell or purchase assets or engage in transactions we deem to be appropriate and in our best interest.

Our financial performance is significantly dependent on corn and ethanol prices and generally we will not be able to pass on increases in input prices to our customers. Our results of operations and financial condition are significantly affected by the cost and supply of corn and the market price of ethanol. Changes in the relative prices of corn and ethanol are subject to and determined by market forces over which we have no control.

The spread between ethanol and corn prices can vary significantly. Our gross margins depend principally on the spread between ethanol prices and corn prices. The spread between the price of a gallon of ethanol and the cost of corn required to produce a gallon of ethanol will likely continue to fluctuate. A protracted reduction in the spread between ethanol and corn prices, whether a result of an increase in corn prices or a reduction in ethanol prices, would adversely affect our results of operations and financial condition.

Risks Related to Ethanol Industry

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

Overcapacity within the ethanol industry could cause an oversupply of ethanol and a decline in ethanol prices. Excess capacity in the ethanol industry would have an adverse impact on our results of operations, cash flows and general financial condition. Excess capacity may also result or intensify from increases in production capacity coupled with insufficient demand. If the demand for ethanol does not grow at the same pace as increases in supply, we would expect the price for ethanol to decline.

Risks Related to Regulation and Governmental Action

Changes in environmental regulations or violations of the regulations could be expensive and reduce our profitability. We are subject to extensive air, water and other environmental laws and 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 impacts 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. In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.


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

None.


Item 3.		Defaults Upon Senior Securities.

None.


Item 4.		Removed and Reserved


Item 5.		Other Information.

None.


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


Exhibit No.		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

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


	FIRST UNITED ETHANOL, LLC
Date: May 23, 2011	/s/ Murray Campbell
	Murray Campbell
	Chief Executive Officer

Date: May 23, 2011	/s/ Lawrence Kamp
	Lawrence Kamp
	Chief Financial Officer

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FIRST UNITED ETHANOL LLC 10-Q