Summary of GREENHUNTER ENERGY, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes associated with them contained in our Form 10-K for the year ended December 31, 2007 and with the financial statements and accompanying notes included herein. The discussion should not be construed to imply that the results contained herein will necessarily continue into the future or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our management. The discussion contains forward-looking statements that involve risks and uncertainties (see "Forward-Looking Statements" above). Actual events or results may differ materially from those indicated in such forward-looking statements. Overview
Prior to April 13, 2007, we were a start up company in the development stage pursuant to Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises." Our plan is to acquire and operate assets in the renewable energy sectors of wind, solar, geothermal, biomass and biofuels. We currently have ongoing business initiatives at GreenHunter in wind through GreenHunter Wind Energy, LLC ("Wind Energy") and Wheatland Wind Power, LLC ("Wheatland"), in biodiesel and methanol through GreenHunter BioFuels, Inc. ("BioFuels"), and in biomass through GreenHunter Mesquite Lake, Inc, ("Mesquite Lake"). It is our goal to become a leading provider of clean energy products.
We believe that our ability to successfully compete in the renewable energy industry depends on many factors, including the location and low cost construction of our planned facilities, development of strategic relationships, achievement of our anticipated low cost production model, access to adequate debt and equity capital, and recruitment and retention of experienced management.
BioFuels
We completed building and began commissioning a 105 million gallon per year (nameplate capacity) biodiesel refinery at our Houston BioFuels campus during 2008 as well as 638 thousand barrels of product bulk storage for our terminal operations. We also have the ability to process up to 18 million gallons per year of contaminated methanol (a chemical used in biodiesel production). We also plan to construct a 20 million gallon per year capacity glycerin (a byproduct of biodiesel manufacturing) refinery on site if additional financing can be obtained.
The overhaul of an existing distillation process on the site was begun in April 2007. This process was commissioned and began processing contaminated methanol in September 2007. Commissioning of the biodiesel process was begun in mid June 2008, and commercial production of biodiesel began during August 2008. However, our refinery was almost immediately shut down as a result of Hurricane Ike on September 13, 2008. The refinery remained down for repairs through November 2008 and the facility resumed biodiesel production and the commissioning process the last week of that month.
If capital is available, we expect a technical grade glycerin project production unit to be completed and commissioned in 2009, and to have a glycerin distillation project which will produce US Pharmaceutical Grade Glycerin - Non Certified, in 2009 - also pending availability of funding for the glycerin project. All 638 thousand barrels of the Houston Terminal Project bulk storage tanks are presently erected. There remains some minor piping, pumps, instruments, containment and lighting yet to be completed for final completion of the Houston terminal project.
We do not expect to operate at a profit before our biodiesel and glycerin refineries are completely constructed and operational. Due to current economic conditions of both available capital and the biodiesel markets overall, we

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made the decision during March 2009 to suspend operations of the biodiesel refinery until the biodiesel market conditions recover. Until the refinery resumes operations, we plan to provide terminal and distillation services at the refinery to provide a base level of cash flow. BioMass
In May 2007 we acquired Mesquite Lake, an inactive 18.5 megawatt (nameplate capacity) biomass plant located in El Centro, California, which we began refurbishing during 2008. During 2008 we found that the existing air permit for the plant was not sufficient to support our planned operations, and we are currently going through a re-permitting process with the appropriate governmental agencies. Due to this lengthy process, we are able to incorporate a possible expansion of up to 7 megawatt ("MW") as well as to terminate the existing power purchase agreement in order to pursue improved pricing for our output. Accordingly, we put this project on hold during the fourth quarter of 2008 while we go through the re-permitting process; we expect the new air permit to be issued in the latter half of 2009. We were successful at cancelling the prior existing power purchase agreement. We expect to sign a new power purchase agreement in the second quarter of 2009 and to resume construction sometime during the fourth quarter of 2009, assuming additional sources of funding are obtained.
Wind Energy
Until April, 2007, our primary business was the investment in and development of wind energy farms. We continue to own rights to potential wind energy farm locations in Montana, Wyoming, Texas, China, and California and continue to operate and gather data produced from wind measurement equipment located on these sites. We also continue to seek additional potential development sites, particularly those that would be near our other renewable energy projects. The nature of these wind energy projects necessitates a longer term horizon than our other projects before they become operational, if ever. We expect to commence construction on at least one of our Texas wind farms in 2009 which would involve construction of a 35 MW wind farm. We would anticipate this wind farm to become operational by the first quarter of 2010, assuming adequate funding can be obtained.
Results of Operations
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008:
BioFuels Revenues
For the quarter ended March 31, 2009, we had total revenues of $3.2 million, consisting of $2.9 million in biodiesel sales, terminal services of $167 thousand, including storage and material handling charges, and biodiesel toll distillation revenues of $166 thousand. Revenues in the prior year period consisted of $130 thousand in methanol sales and terminal revenues of $48 thousand.
BioFuels Costs of Sales and Services
For the quarter ended March 31, 2009, we had costs of sales and services of $5.4 million compared to $152 thousand during the quarter ended March 31, 2008. Our 2009 costs included $4.3 million of costs related to our inventory consumption and losses which includes a lower of cost or market impairment of $1.5 million related to decreases in the value of both our raw materials on hand and the biodiesel produced at the plant, and $2.8 million in costs, including feedstock and chemicals, which are directly related to the production of our biodiesel which was sold during the quarter. The remaining $1.1 million in costs of sales and services were related to our terminal operations and excess capacity while our refinery was operating, including utilities, direct labor and other production costs. The prior year cost of sales and services consisted of $113 thousand in material and freight costs and $39 thousand in operating expenses related to our terminal and methanol processing activities during the period.

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Wind Energy Project Costs
We incurred project costs associated with our wind energy projects of $127 thousand in the 2009 period compared to $74 thousand in the 2007 period. The increase was due to the acquisition of additional wind projects in Shanghai, China, Texas, and Wyoming during the second half of 2008.
Hurricane repairs and losses
We recorded a credit of $1.5 million to hurricane repairs and losses, during the first quarter of 2009 as a result of our decision to not make certain repairs to our plant which had been accrued during the fourth quarter of 2008. The repairs were accrued during the prior quarter as a result of our Houston BioFuels campus being hit by Hurricane Ike during September of 2008.
Depreciation Expense
Depreciation expense was $1.1 million during the 2009 period compared to $88 thousand during the 2008 period; the increase was due primarily to depreciation on our biodiesel refinery and terminal which began during August 2008.
Loss on Asset Impairments
We recorded a loss on asset impairments of $1.7 million during 2009. An impairment of $1.5 million was related to our Port Sutton lease option which expired during April 2009 while $170 thousand was related to a decline in the value of our cogen equipment.
Selling, General and Administrative Expense Selling, general and administrative expense ("SG&A") was $4.2 million during the 2009 period versus $7.8 million during the 2008 period, a decrease of $3.6 million.
Unallocated corporate SG&A decreased approximately $4.4 million between the two periods, decreasing from $6.8 million down to $2.4 million. Approximately $5.0 million of this decrease was due to employee stock option expense fell to $691 thousand from $5.7 million; primarily as a result of options which were granted during the first quarter of 2008 which vested prior to 2009. Salaries and personnel-related costs increased $418 thousand as a result of adding staff at our corporate headquarters to address the increased scope of operations and our public reporting requirements during 2008.
BioFuels SG&A increased $655 thousand, up from $680 thousand during 2008 to $1.3 million during 2009. This increase was primarily due to increases in property taxes and the use of professional consultants at our BioFuels campus during the current quarter.
BioMass SG&A was approximately $163 thousand during the 2009 period versus approximately $124 thousand during the 2008 period due to construction and planning of the Mesquite Lake biomass plant.
Wind Energy SG&A increased approximately $30 thousand, up to $283 thousand as we added personnel as a result of the increased number of projects for this segment during 2008.
Operating Loss
Our operating loss was $7.8 million in the 2009 period versus a loss of $8.0 million in the 2008 period, due principally to decreases in stock compensation as well as credits related to hurricane repair estimate revisions which were partially offset by the inventory valuation losses, asset impairments and increases in other SG&A related to our increased scope of operations and public reporting requirements.
Our BioFuels segment generated operating losses of $3.1 million and $694 thousand, respectively, during 2009 and 2008 due to decreased inventory valuations as well as increases in SG&A and depreciation on the plant.

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Our Wind Energy segment generated an operating loss of $434 thousand during 2009 as compared to an operating loss of $337 thousand during 2008 due to increased personnel-related costs as a result of staffing additions throughout 2008.
Our BioMass segment generated operating losses of $164 thousand during 2009 and $124 thousand during 2008; the increase was due to increased SG&A costs related to the Mesquite Lake project.
Our unallocated corporate operating losses were $4.1 million and $6.8 million during 2009 and 2008, respectively. The decrease was primarily due to decreases in our SG&A as a result of lower stock compensation.
Interest and Other Revenues
Interest and other revenues were $37 thousand during the 2009 period and $288 thousand during the 2008 period primarily due to higher cash balances on hand during 2008 as a result of our financing activities during the first quarter of 2008.
Interest, Accretion and Other Expense Interest, accretion and other expense increased from $364 thousand during the 2008 period up to $1.5 million during the 2009 period. This was a result of increases in our redeemable debentures, construction note, and working capital line of credit between the two periods.
Discontinued Operations
We recorded losses from discontinued operations of $210 thousand related to operating costs of our Telogia plant prior to its sale during the February of 2009. These costs were primarily composed of payroll and utility expenses at the plant.
Gain on Sale of Discontinued Operations We recorded a gain of $859 thousand on the sale of our Telogia plant during February of 2009.
Net Loss
We realized a net loss from continuing operations before noncontrolling interests of $9.2 million in the 2009 period compared to a net loss of $8.0 million during the 2008 period due to the increased operating losses at our BioFuels plant as well as impairment charges on our expired Port Sutton lease option which were partially offset by the decrease in stock compensation in the current period.
Preferred Stock Dividends
Dividends on our preferred stock were $250 thousand in the 2008 period versus $247 thousand in the 2009 period. The decrease was the result of the conversion of 400 shares of Series A Preferred Stock during March of 2009.
Net Loss to Shareholders
Our net loss to common stockholders was $8.7 million in the 2009 period versus $8.3 million in the 2008 period, primarily due to increased operating losses and depreciation expense at our BioFuels plant and impairments on our Port Sutton lease option which were partially offset by decreased stock compensation. Our net loss per share was $0.42 for both periods. Liquidity and Capital Resources

Cash Flow and Working Capital

As of March 31, 2009, we had cash and cash equivalents of approximately $1.2 million and a working capital deficit of $53.5 million as compared to cash and cash equivalents of $11.7 million and working capital of $20.4

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million as of March 31, 2008. A significant component of our working capital deficit at March 31, 2009 was $42.9 million in non-recourse debt at our BioFuels location. This debt is non-recourse to GreenHunter Energy and is secured by certain assets at our biodiesel refinery. Changes in our cash and working capital during the quarter ended March 31, 2009 are described below. Operating Activities
During 2009, we used $3.0 million in operating activities versus $5.4 million during 2008. This decrease in cash used was principally due to the cost-cutting measures across the organization as well as temporarily suspending operations at our biodiesel refinery during the first quarter of 2009 until the capital markets and biodiesel markets improve.
We continue to have no operating sources of income with which to pay our operating costs other than those revenues generated at our biodiesel refinery, and the use of those revenues are restricted under our credit agreement with a bank. As a consequence, we are required to use cash provided by financing or investing activities to fund a significant portion of our operating activities. Financing Activities
During the three months ended March 31, 2009, we provided cash of $573 thousand under our financing activities. These activities included issuing $1.7 million in redeemable debentures, payment of $137 thousand in deferred financing costs related to these debentures, and repayment of approximately $1.0 million under our notes payable. Details of these activities are described below:
Notes Payable
During 2008, we financed our annual insurance premiums in the amount of $1.6 million. This note bears interest at a fixed rate of approximately 3.84% and is payable in monthly installments through March 15, 2009. We paid the remaining balance of this note of approximately $421 thousand during the first quarter of 2009.
9% Series B Senior Secured Redeemable Debentures During July 2008, we announced the offering of our 9% Series B Senior Secured Redeemable Debentures. These notes have a term of five years. These debentures are non-recourse to GreenHunter Energy and are secured by a second lien on our Mesquite Lake common stock. During the first quarter of 2009, we raised $1.6 million, net of selling expenses, under this program.
Nonrecourse Term Loan and Working Capital Loan BioFuels has a credit agreement with a bank which provides for a $33.5 million construction/term loan facility and a $10 million working capital facility in connection with the development, construction and operation of our BioFuels campus. The construction/term loan portion of the facility is for a term of six years and the working capital facility revolves annually upon conversion of the construction loan to a term loan. Both facilities have prime (prime plus 3%) and LIBOR (LIBOR plus 4%) based interest rate options. During 2009, we made repayments of $564 thousand under the construction/term loan facility. During March 2009, we determined that we were not in compliance with certain covenants of the credit agreement and have accordingly classified the entire balance due as a current liability. We are currently in discussions with the lender regarding remedies for this situation with a proposed amendment to the existing credit agreement.
Investing Activities and Future Requirements Capital Expenditures
During 2009, we invested approximately $358 in capital expenditures, which was primarily comprised of a glycerin desalting project at our BioFuels campus.

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Forecast
For 2009, we have not adopted a formal corporate budget due to our current lack of capital resources. We have formulated specific project budgets and will adopt a formal corporate project budget upon securing necessary financing commitments.
BioFuels
While we do not have a formal budget in place, we plan to seek financing for approximately $850 thousand in capital projects at our Houston campus. These projects would consist of $400 thousand for glycerin desalting, $300 thousand for a water wash system, and $150 thousand for tank upgrades. If sufficient capital is available, we would also pursue completion of our glycerin refinery for a total cost of approximately $8.5 million. Currently, due to lack of operating capital and the current biodiesel market, we estimate that our Houston campus will be restricted to toll processing, terminal storage, and methanol processing activities for most of 2009.
BioMass
BioMass is seeking financing for approximately $40 million in capital expenditures in 2009, which would include refurbishment and expansion costs of $24 million for the Mesquite Lake biomass facility in El Centro, California as well as the potential acquisition of an operating biomass plant located in the Northeastern U.S.
Wind Energy
Wind Energy is pursuing financing for approximately $65 million in 2009 to construct a wind farm project in Texas. This capital budget includes the purchase of the wind turbine equipment.
Obligations Under Material Contracts
Below is a brief summary of the payment obligations under material contracts to which we are a party, other than the debt and convertible debt obligations described above.
Consulting Agreement with former owner of Mesquite Lake We have granted the former owner of Mesquite Lake the non-exclusive right to represent us in the location and development of renewable energy projects. This individual shall be responsible for locating, analyzing and delineating the business viability, as well as providing an adequate development strategy for these projects in exchange for a quarterly fee of $98 thousand. The quarterly payments began June 30, 2007 and are scheduled to continue every quarter thereafter until the last payment is due on March 31, 2012. During the fourth quarter of 2008, we suspended these payments to this individual pending resolution of a contractual dispute regarding the validity of the existing air permits that were in place at Mesquite Lake on the date of our acquisition. As of March 31, 2009, we have accrued $294 thousand in fees related to this contract.
Port Sutton
In association with our purchase of the Port Sutton lease option, we agreed to issue restricted shares to the Seller worth $2 million, subject to a floor price of $14.25 and a ceiling of $25. These shares will be issued the sooner of 18 months from the October 2008 close date or upon the first biodiesel production or storage at the site. Accordingly, we will issue an additional 80,000 up to an additional 140,351 shares. This lease option expired during April 2009.
Weaknesses and Uncertainties that May Affect our Financial Condition and Ability to Continue as a Going Concern
The execution of our business plan is contingent upon our ability to obtain the requisite capital to design, construct and operate our BioFuels, BioMass, and Wind Energy projects as well as to fund our general and administrative expenses, financing costs and preferred dividend payments until these projects become profitable.

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At March 31, 2009, we had a working capital deficit of approximately $53.5 million, which includes $42.9 million in debt that is non-recourse to GreenHunter Energy, Inc., and we did not have significant cash flows from any operating assets. We currently do not have sufficient cash reserves to meet our existing obligations or to fund operating and capital projects for fiscal year 2009, and we will not be able to rely on cash flows from our biodiesel refinery until market conditions for biodiesel improve dramatically. As a result, we will have to secure additional capital sources to provide for both working capital needs and any planned project development. While we believe that our Houston site will provide sufficient cash flows from tolling and terminal services to cover its obligations, we do not currently have any assurance that these cash flows will be sufficient to cover these obligations. We also were in technical default under our non-recourse working capital and construction notes payable as of March 31, 2009 and were unable to make the interest payments on our Series A Redeemable Debentures during April 2009. We will most likely default on these debentures during May 2009. These factors raise substantial doubt about our ability to continue as a going concern.
We are in the process of seeking additional capital, particularly with respect to the development of our Mesquite Lake Biomass asset. We may also seek capital through issuance of common or preferred equity or equity-linked securities, project financing, joint venture projects, sales of certain projects, or strategic business combinations. We are also currently seeking an amendment agreement with the lender of our non-recourse notes payable which would cure our current technical default and other expected defaults and allow us time to either dispose of our Houston biodiesel assets in an orderly manner or arrange for alternative financing of the asset and its working capital needs. We also have been offered a insurance settlement of $10.75 million for property and business interruption claims at our Houston biodiesel refinery. We are currently in negotiation with our lender on the ultimate use of these funds.
Due to the deterioration in the debt and equity capital markets for alternative energy companies, there can be no assurance that we will be successful in raising additional capital in fiscal year 2009.
The assumptions that we have used in our business plan have not been tested as we only recently commenced production at our Houston refinery and have not begun operations at any of our other projects. As a result, we have based our business plan on agreements that are not yet operational as well as on proposals that have not yet been finalized or implemented. Definitive versions of such agreements, documents, plans, or proposals may never be finalized or, when finalized, may contain terms or conditions that vary significantly from our assumptions or may not prove to be profitable or may otherwise not perform in accordance with our assumptions.
We face uncertainty as to the actual construction cost for our proposed production facilities. Construction cost overruns may occur due to (i) change orders approved by us or (ii) delays in the construction of our proposed production facilities caused by numerous factors, including, but not limited to force majeure, the destruction of the production facilities by fire or other hazards, or an inability to obtain materials or labor in a timely manner.
Additionally, our financial condition may be adversely impacted by delays in the completion of our production facilities. We have developed an ambitious timetable for completion of the financing, regulatory, design and engineering, and construction phases of our production facilities which is dependent upon the following factors: (i) how quickly we can obtain debt and equity-based capital required for the financing and construction of our production facilities;
(ii) weather and seasonal factors that generally affect construction projects and (iii) construction delays or other events beyond our control. If it takes longer than we anticipate to complete the financing, obtain necessary permits, build the proposed production facilities or achieve commercial operations at the facilities, our costs of capital could increase. We could also be forced to seek additional sources of capital and would lose the additional revenues related to the products to be produced at the facilities, each of which could harm our business and make it more difficult to service our debt obligations. In our BioFuels business, we face additional uncertainty as to the cost and availability of feedstock and chemicals to produce biodiesel and glycerin as well as in the demand for and price of these products. Our ability to

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produce biodiesel profitably also depends on the continued availability of the $1 per gallon federal tax credit for blenders of biodiesel. This tax credit was renewed during 2008 and has an expiration date of December 31, 2009. This credit is currently being considered for another extension until December 31, 2010 or later by the United States government. The government might also restrict the availability of this credit in a manner that might interfere with our plans to . . .