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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

 

| **(Mark One)** | ** **                                                                                          |
|----------------|-----------------------------------------------------------------------------------------------------|
| **x**          | **Annual Report Pursuant  to Section 13 or 15(d) of the Securities Exchange Act of 1934** |

** **

**For the fiscal year ended December 31, 2008**

 

| **o** | **Transition Report Pursuant  to Section 13 or 15(d) of the Securities Act of 1934** |
|-------|------------------------------------------------------------------------------------------------|

** **

**Commissionfile number 0-50711**

 

**NorthernGrowers, LLC**

(Exact name of registrant as specified in its charter)

 

| **South Dakota**                                                | ** ** | **77-0589881**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**48416144th StreetP.O. Box 356Big Stone City SD 57216605-862-7902**

(Address ofPrincipal Executive Offices) (Zip Code)

 

**(605)862-7902**

(Issuer’sTelephone Number, Including Area Code)

 

Securitiesregistered under Section 12(b) of the Exchange Act:

**None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

**Class ACapital Units**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.o Yes    x No

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.o Yes    x No

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained in this form, and no disclosurewill be contained, to the best of registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K     x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions ofaccelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2of the Exchange Act.

 
| o  Large Accelerated Filer | x  Accelerated Filer | o  Non-Accelerated Filer | o  Smaller Reporting Company |
|--------------------------------------|--------------------------------|------------------------------------|----------------------------------------|
|                                 |                           | (do not check if a  smaller        |                                   |
|                                 |                           | reporting company)                 |                                   |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).o Yes     x No

 

The aggregate marketvalue of the registrant’s common stock held by non-affiliates at June 30,2008 was approximately $60,979,380. The aggregate market value was computed byreference to the last sales price during the registrant’s most recentlycompleted second fiscal quarter.

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date. As of the date of this filing, there were50,628,000 Class A capital units of the registrant outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Part III of Form 10-K- Portions of the Information Statement for the 2009 Annual Meeting of Members.

 

 

 

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**CAUTIONARYSTATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

This Annual Report on Form 10-K and other reports issued byNorthern Growers, LLC (including reports filed with the Securities and ExchangeCommission (the “SEC” or “Commission”), contain “forward-looking statements”that deal with future results, expectations, plans and performance. Forward-looking statements may include statements which use words such as “believe,”“expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,”“should,” “could,” “may,” “future,” “potential,” or the negatives of thesewords, and all similar expressions. These forward-looking statements are madebased on our expectations and beliefs concerning future events affecting us andare subject to uncertainties and factors relating to our operations andbusiness environment, all of which are difficult to predict and many of whichare beyond our control, that could cause our actual results to differmaterially from those matters expressed in or implied by these forward-lookingstatements. We do not undertake any responsibility to release publicly anyrevisions to these forward-looking statements to take into account events orcircumstances that occur after the date of this report. Additionally, we do notundertake any responsibility to update you on the occurrence of anyunanticipated events which may cause actual results to differ from thoseexpressed or implied by the forward-looking statements contained in thisreport.  Important factors that couldcause actual results to differ materially from our expectations are disclosedunder “Risk Factors” and elsewhere in this report.  As stated elsewhere in this report suchfactors include, among others:

 
| · |   | Excess  growth, production capacity and supply in the ethanol industry;                                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                            |
| · |   | The  price volatility and uncertainty of raw materials used in the production  process, particularly corn, natural gas and steam;               |
|   |   |                                                                                                                                            |
| · |   | Fluctuations  in oil and gasoline prices;                                                                                                       |
|   |   |                                                                                                                                            |
| · |   | Changes  in the weather or general economic conditions impacting the availability and  price of commodities, particularly corn and natural gas; |
|   |   |                                                                                                                                            |
| · |   | The  results of our risk management or hedging strategies;                                                                                      |
|   |   |                                                                                                                                            |
| · |   | Competition  from alternative fuels and alternative fuel additives;                                                                             |
|   |   |                                                                                                                                            |
| · |   | Fluctuations  in U.S. oil consumption and petroleum prices;                                                                                     |
|   |   |                                                                                                                                            |
| · |   | Changes  in plant production capacity due to variations in steam supply provided by  the adjacent power plant;                                  |
|   |   |                                                                                                                                            |
| · |   | Changes  in the availability of credit and interest rates;                                                                                      |
|   |   |                                                                                                                                            |
| · |   | The  availability of additional capital to support capital improvements and  development;                                                       |
|   |   |                                                                                                                                            |
| · |   | The  availability and adequacy of our cash flow to meet our requirements;                                                                       |
|   |   |                                                                                                                                            |
| · |   | Changes  or developments in laws, regulations or taxes in the ethanol, agricultural or  energy industries;                                      |
|   |   |                                                                                                                                            |
| · |   | Damage  to or loss of our plant due to casualty, weather, mechanical failure or any  extended or                                                |

 

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|   |   | extraordinary  maintenance or inspection that may be required;                                 |
|--------|--------|------------------------------------------------------------------------------------------------|
|   |   |                                                                                           |
| · |   | An  increase in environmental regulation and scrutiny from federal and state  governments; and |
|   |   |                                                                                           |
| · |   | Other  factors discussed below under the item entitled “Risk Factors.”               |

 

We are not under any duty to update the forward-looking statementscontained in this report, nor do we guarantee future results or performance ofwhat future business conditions will be like. We caution you not to putundue reliance on any forward-looking statements, which speak only as of thedate of this report.

 

### **PART I**

###  

**Item 1.  Business.**

 

**Overview**

 

NorthernGrowers, LLC (“Northern Growers”) is a South Dakota limited liability company,consisting of 968 members who principally reside in South Dakota and the upperMidwest. Northern Growers owns and manages a 77.16% interest in its subsidiary,POETTM Biorefining - Big Stone (“Big Stone”), an ethanol and distillers grainsplant (the “plant” or “our plant”) located near the city of Big Stone City,South Dakota. (Northern Growers and Big Stone are referred to collectively inthis report as “we,” “our,” or “us”).

 

Ourrevenues are derived from the sale and distribution of ethanol and distillersgrains to customers primarily located in the U.S.  Corn for our plant’sproduction process is supplied primarily from local agricultural producers andfrom purchases on the open market. After processing the corn, ethanol is soldto POETTM Ethanol Products, LLC, which subsequently markets and sells theethanol to gasoline blenders and refineries located throughout the continentalU.S.  All of our distillers grains are sold through our marketing agent,POETTM Nutrition, Inc., which markets and sells the product to livestockfeeders primarily located in the continental U.S. The day-to-day operations ofour plant are managed by POETTM Plant Management, LLC, of Sioux Falls, SouthDakota.

 

 Our operating results are largely driven bythe prices at which we sell ethanol and distillers grains and the costs relatedto their production.  Historically, the price of ethanol tends tofluctuate in the same direction as the price of unleaded gasoline and otherpetroleum products.  The greatest effecton the price of ethanol is the supply and demand for ethanol in the U.S.markets. Our two largest costs of production are corn and natural gas, althoughour use of natural gas is offset by the use of steam supplied directly from theadjacent energy power plant called Big Stone Plant. The price of distillersgrains is generally influenced by supply and demand, the price of substitutelivestock feed, such as corn and soybean meal, and other animal feed proteins.

 

**GeneralDevelopments of Business**

 

NorthernGrowers was originally organized in 2000 as a South Dakota cooperative for thepurpose of owning and managing its interest in Big Stone and providing a majorsource of corn supply to the plant. Northern Growers was subsequentlyreorganized in 2003 as a South Dakota limited liability company at which timeit became subject to the reporting requirements under the Securities Act of1933 and Securities Exchange Act of 1934. Northern Growers is taxed as a partnership for federal income taxpurposes, meaning that all of its income is subject to single-level, passthrough tax treatment at the member level rather than at the company level.

 

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Construction of our plant was completed and operations commenced in July 2002.  Our plant was originally built with an annualname-plate production capacity of 40 million gallons of ethanol. Since thattime, we have made significant capital improvements.  In March 2006, we completed a railexpansion project, which provided our plant with additional capacity to storerail cars for the shipment of products. In October 2006, we completed construction for the incorporation ofBPXTM technology into the production process. In addition to reducing energycosts, BPXTM releases additional starch content, increases the protein contentand quality of by-products and decreases plant emissions.  In May 2007, we completed theconstruction on our plant expansion, increasing its annual name-plate capacityfrom 40 million to 75 million gallons of ethanol.  In October 2007, we increased our grainstorage capacity by adding two grain bins. The design and construction of the BPXTM, grain storage and expansionprojects, was completed by POETTM Design and Construction, Inc., of SiouxFalls, South Dakota.

 

In2008, our industry experienced significant change, which adversely affected ouroperations. The continued increase in production capacity in the ethanolindustry caused by new or expanding plants was one factor that helped drivecorn prices higher and ethanol prices lower. During the first half of 2008, corn prices were significantly higherthan in prior years which increased our costs of production. Similarly, in thesecond half of 2008, ethanol prices were significantly lower than in prioryears which adversely impacted our revenues. In addition, U.S. financial markets experienced a severe downturn in thelatter part of 2008. Businesses across many sectors experienced a lack ofaccess to credit causing a series of liquidity crises.  This situation,coupled with increased production capacity in our industry, may adverselyaffect our industry in 2009.  Further, in connection with the marketdownturn, commodities prices, including corn, ethanol and unleaded gasoline,have decreased, some dramatically, which will likely affect our industry andoperations in 2009.

 

**Principal Products**

 

The principal products produced at our plant are fuel grade ethanol anddistillers grains.

 

***Ethanol***

 

Ethanol is ethyl alcohol. Ethanol is produced from starch or sugar-based feed products such ascorn, potatoes, wheat, and sorghum, as well as from agricultural waste productsincluding sugar, rice straw, cheese whey, beverage wastes and forestry andpaper wastes. Historically, corn has been the primary source of producingethanol because of its relatively low cost, wide availability and ability toproduce large quantities of carbohydrates that convert into glucose more easilythan other products.  Today, approximately 90% of the ethanol produced inthe U.S. is produced from corn.

 

Ethanol is used for three primary purposes: 1) as an oxygenated fueladditive; 2) as an octane enhancer in fuels; and 3) as a non-petroleum basedgas substitute. Approximately 95% of all ethanol is used for blending withunleaded gasoline and other fuel products. Ethanol has been utilized as a fueladditive since the late 1970s when its value as a product extender for gasolinewas discovered during the OPEC oil embargo crisis.  In the 1980s, ethanolbegan to see widespread use as an octane enhancer, replacing otherenvironmentally harmful components in gasoline such as lead and benzene. Ethanol’s use as an oxygenate continued to increase with the passage of theClean Air Act Amendments of 1990, which required the addition of oxygenates togasoline in the nation’s most polluted areas.  Because ethanol containsapproximately 35% oxygen, its combination with gasoline increases thepercentage of oxygen in gasoline.  As a result, the gasoline burns cleanerand releases less carbon monoxide and other exhaust emissions into theatmosphere.

 

For fiscal years ended December 31, 2008, 2007 and 2006, our revenuefrom sales of ethanol as a percentage of total revenue was approximately 80.0%,84.0%, and 86.1%, respectively.

 

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***Distillers Grains***

 

A principal by-product of the ethanol production process is distillersgrains.  Distillers grains are a high protein, high energy feed supplementmarketed primarily to the dairy, beef, sheep, swine, and poultryindustries. It is a popular animal feed supplement, with millions of tonsproduced in North America annually.  Most of the distillers grainsproduced in the U.S. are sold for use in animal feeds within the continentalU.S., although a growing percentage is exported to countries such as Canada andMexico and countries in Asia and Europe.

 

Dry mill ethanol processing produces, generally, three forms ofdistillers grains, all of which differ in moisture content and shelflife: 1) dried distillers grains with solubles, otherwise known as DDGS;2) distillers wet grains or “wet cake”; and 3) modified distillersgrains.  Distillers wet grains are processed corn mash that does not gothrough a drying process and contains approximately 70% moisture content. Distillers wet grains have a short shelf life of approximately three days andcan be sold only to livestock producers within the immediate vicinity of aplant.  Modified distillers grains are distillers wet grains that aredried to a 50% moisture content.  Modified distillers grains have aslightly longer shelf life and are often sold to nearby livestock producers.DDGS is distillers wet grains that are dried to an 8-10% moisture content. DDGShave an almost indefinite shelf life and may be sold and shipped to any marketregardless of its vicinity to a plant.

 

Forfiscal years ended December 31, 2008, 2007 and 2006, our revenue from thesale of distillers grains as a percentage of total revenue, was approximately19.6%, 15.5%, and 13.3%, respectively.

 

**Marketingand Distribution**

 

***Ethanol***

 

Theethanol produced at our plant is sold to POETTM Ethanol Products, LLC, the termsof which are governed by an ethanol marketing agreement. After purchasingthe ethanol from us, POETTM Ethanol Products markets and sells the ethanol tomajor, multi-national oil companies with blending and refinery facilitieslocated throughout the continental U.S. The price that we receive from the saleto POETTM Ethanol Products is based upon various contracts between POETTM EthanolProducts and its customers, and is fixed upon the transfer of title to POETTMEthanol Products.

 

The ethanol produced at our plant is shipped by POETTM Ethanol Productsusing rail cars operated by POETTM Ethanol Products or trucks supplied bycompanies with which POETTM Ethanol Products contracts.  Transfer of titleand risk of loss shifts to POETTM Ethanol Products upon the loading of ethanolonto railcars and trucks at the plant.  Our plant is served by railfacilities and connections to the Burlington Northern Santa Fe railroad system,which facilitates the transportation of ethanol to customers’ terminals, and bymultiple South Dakota state highways and Interstate Highway 29, which providetransportation links in all directions.

 

The marketing agreement with POETTM Ethanol Products is in effect until July 2012,renewing automatically for five-year terms unless either party provides atleast ninety days written notice of termination prior to the end of theterm.  POETTM Ethanol Products charges us a marketing and service fee basedupon each gallon of ethanol sold. POETTM Ethanol Products also charges us a feefor each gallon of ethanol to which renewable identification numbers, or RINS,are assigned, which is necessary for complying with the federal renewable fuelsstandard and the U.S. Environmental Protection Agency’s enforcement of suchstandard.   Shipping costs relating tothe transportation of ethanol are borne by us and are included in our grossrevenues and cost of revenues.  In the event that the contractualrelationship with POETTM Ethanol Products is interrupted for any reason, webelieve that another entity or entities to purchase or market the ethanol couldbe

 

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located. Any interruption, however, could temporarily disrupt the sale of ethanol andadversely affect our business and operations.

 

***Distillers Grains***

 

The distillers grains produced at our plant are sold through POETTMNutrition, Inc., the terms of which are governed by a distillers grainsmarketing agreement. As our exclusive marketing agent, POETTM Nutrition marketsand sells the distillers grains to customers. By marketing through POETTMNutrition, we are not dependent upon one or a limited number of customers. Theprice received from the sale of distillers grain is the price received from thecustomers with which POETTM Nutrition has negotiated and entered into a contractfor sale.

 

We produce three variations of distillers grains which are marketedthrough POETTM Nutrition: 1) DDGS; 2) Dakota GoldTM; and 3) distillers wetgrains. Dakota GoldTM is DDGS which POETTM Nutrition certifies to as meetingcertain quality standards and specifications.

 

POETTM Nutrition markets distillers grains to local, regional, nationaland international markets.  We sell and ship a substantial majority of ourdistillers grains to customers in the southwestern and western parts of theU.S., the remainder of which is shipped to other areas of the U.S. and toMexico. Shipments to national and international markets are primarily completedby the use of rail due to a longer shelf life, whereas shipments to local orregional markets are primarily completed by truck.  We also contract withPOETTM Nutrition for the use of railcars in the shipping of DDGS and DakotaGoldTM, paying POETTM Nutrition a flat fee per railcar in connection with eachshipment.

 

The marketing agreement with POETTM Nutrition is in effect until March 2012,renewing automatically for additional five-year terms unless discontinued byeither party upon at least three months prior written notice.  POETTMNutrition charges us a marketing fee based upon a percentage of gross monthlysales of distillers grains less shipping costs. All shipping costsassociated with the transportation of distillers grains are borne by us and areincluded in our gross revenues and cost of revenues, and POETTM Nutrition isresponsible for invoicing all loads and receiving payments from the customers,the payment of which is remitted to us.

 

**Risk Management**

 

Due to fluctuations in the price of corn and natural gas, we use a riskmanagement program, including hedging strategies, to minimize our commodityrisk.  Hedging is a means of protecting the price at which corn andnatural gas is bought in the future.  All of the commodity risk managementservices relating to corn and natural gas are provided by POETTM Risk Managementin accordance with a corn and natural gas price risk management agreement.  Under the agreement, we pay POETTM RiskManagement an annual flat fee. The agreement is in effect until January 2012,renewing automatically for additional five-year terms unless discontinued byeither party upon written notice prior to the expiration of the term.

 

**Dependence Upon a Single or Few Customers**

 

We, as discussed above, are substantially dependent upon POETTM EthanolProducts for the purchase, marketing and distribution of ethanol. POETTM EthanolProducts purchases 100% of the ethanol produced at our plant, all of which ismarketed and distributed to its customers.

 

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**Financial Information about Geographic Areas**

 

Allof our operations are domiciled in the U.S.  All of the products sold toour customers for fiscal years 2008, 2007 and 2006 were produced in the U.S.,and all of our long-lived assets are domiciled in the U.S. In addition, 95% ofour total revenues was derived from sales to customers in the U.S., whereas 5%was derived from sales to customers in Mexico.

 

**Sources and Availability of Raw Materials**

 

***Corn***. Our major raw material forthe production process is corn.  To operate our plant at full name-platecapacity, we require the supply of approximately 27 million bushels of cornannually.  We purchase a majority of our corn from producers innortheastern South Dakota, where our plant is located, and westernMinnesota. We believe that corn producers in proximity to our plant willcontinue to provide us with sufficient corn for the foreseeable future.

 

***Steam.*** Our production processrequires a constant supply of steam.  Steam is used for the cooking,evaporation, and distillation processes.  While the production of steam inthe ethanol production process is generally received from an ethanol plant’son-site boilers, our plant receives a substantial portion of its steam from BigStone Plant, a coal fired, electrical generating facility located immediatelyadjacent to our plant. Big Stone Plant is co-owned by three utilities,namely, Otter Tail Corporation, Montana-Dakota Utilities and NorthWesternCorporation. The benefit of a steam supply from Big Stone Plant is that itreduces our dependence on natural gas for operations.  In 2008, forexample, 41% of our natural gas requirements for operations were replaceddirectly with steam from Big Stone Plant, compared to 39% of our requirementsin 2007.

 

Big Stone Plant generally provides us with a consistent supply of steamto meet our requirements except during its semi-annual maintenance shutdowns.When Big Stone Plant shuts down for any prolonged period of time, or if thetransfer of steam is unexpectedly diminished or interrupted, we use two on-siteboilers powered by natural gas to generate steam. However, as discussed belowunder “Natural Gas,” when we are required to rely on our on-site boilers togenerate steam, our natural gas supply can prevent us from generating asufficient volume of steam to operate at full name-plate production capacity.

 

The purchase of steam is governed by a steam sale agreement between usand Big Stone Plant.  The rate is set ata fixed rate based on specified volume used, above which it is set at a marketrate as determined by Big Stone Plant. The agreement’s ten year term ends on June 1,2012, but automatically renews for two additional five-year terms unlessterminated by either party by providing 12 months advance notice.

 

***Natural Gas****.* Our productionprocess requires a constant supply of natural gas.  Natural gas is theprimary energy source for the drying of distillers grains. It is primarilyresponsible for powering the two on-site boilers for the generation of steam inthe event that additional steam is necessary or the supply of steam from BigStone Plant is unexpectedly diminished or interrupted. We contract with CenterPointEnergy Services, Inc., of Houston, Texas, for the supply and distributionof natural gas to the plant.  The agreement with CenterPoint terminates in2012.

 

Prior to the completion of our expansion in May 2007, we did notexperience any interruption or shortage of natural gas supply.  Since completion, however, we haveexperienced shortages of supply.  Whenour plant’s supply of steam from Big Stone Plant is interrupted for anyprolonged period of time, such as during Big Stone Plant’s general maintenanceshut downs, our plant’s natural gas capacity can be insufficient to allow ourplant to operate at its full 75 million gallon name-plate production capacity.In such instances, our plant is required to scale back production, typicallybased on the capacity of our natural gas supply. We are currently exploringoptions to increase our natural gas supply to operate at full name-plateproduction when Big Stone Plant cannot supply us with adequate steam.

 

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***Electricity***. Ourproduction process requires a constant supply of electricity.  Electricityis necessary to generate lighting and to power the machinery and equipment atthe plant.  We contract with Otter Tail Power Company of Otter Tail,Minnesota, to provide us with all of our electric power requirements.  Theagreement automatically renews for one year terms unless terminated by eitherparty by providing 12 months advance written notice. Since operations werecommenced, we have not had interruptions or shortages in the supply ofelectricity.

 

***Water***. The production processrequires a constant supply of water.  Water is necessary for the slurryand cooking processes, cooling towers and boiler operations.  We contractwith the city of Big Stone City and Big Stone Plant to supply our plant withwater for the production process.  The agreement with the city of BigStone City is in effect until 2012, and automatically renews for two, five-yearterms unless terminated by either party with 12 months advance writtennotice.  Since operations were commenced, the city of Big Stone City andBig Stone Plant have provided us with an ample and consistent supply of waterto meet operational requirements.

 

**Research and Development**

 

We do not conduct any research and development of our own relating tothe production of ethanol and distillers grains. Instead, we rely on POETTMResearch, Inc., of Sioux Falls, South Dakota, to research and develop newtechnologies in order to improve the production process and end products. POETTMResearch provides us this technology through a license agreement, where we payPOETTM Research a licensing fee quarterly. The license agreement terminates on June 30, 2015.

 

**Competition**

 

***Domestic***

 

We are in direct competition with numerous other ethanol and distillersgrains producers.  As of February 2009, the ethanol industry hasgrown to 172 production facilities in the U.S., compared to 141 productionfacilities as of February 2008 and 113 production facilities as of February 2007.  Additional gallons are set to come into production in the next 12-18 months, but ona far lesser scale than originally projected given unfavorable marketconditions.  In South Dakota, excluding our plant, there are currently 12plants in full production, all of which have a combined production capacity ofapproximately 759 million gallons.  We believe that, in spite of thisconcentration and growth, we will continue to compete favorably with otherethanol and distillers grains’ producers because of our plant’s existingefficiencies, the use of new technology from POETTM Research, and the marketingand service arrangements with the companies owned by POETTM, LLC.

 

***International***

 

Ethanol production is expanding internationally.  Brazil has longbeen the world’s largest producer and exporter of ethanol; however, since 2005ethanol production in the U.S. has exceeded Brazilian production. Ethanol isproduced more cheaply in Brazil than in the U.S. because of the use ofsugarcane, a less expensive raw material alternative to corn. However,because of various tariffs on the importation of ethanol into the U.S., theprice of ethanol produced in the U.S. is currently more competitive thanethanol imported from Brazil.  In the event that these tariffs are reducedor eliminated, which are scheduled to expire in January 2011, the price ofethanol produced in the U.S. may become less competitive, which could adverselyimpact our ability to sell ethanol.

 

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In addition, the Caribbean Basin Initiative, or CBI, allows for ethanolproduced in 24 participating Caribbean Basin countries to be imported into theU.S. duty free. While the CBI caps the amount of duty free ethanol importedinto the U.S. at 7% of total U.S. production from the previous year, as totalproduction in the U.S. grows, the amount of ethanol produced from the Caribbeanarea and sold in the U.S. will grow accordingly, which could impact our and theindustry’s ability to sell ethanol.

 

***Alternative Production Methods and Fuels***

 

Alternative ethanol production methods, fuels and gasoline oxygenatesare continually under development. The current trend in ethanol productionresearch is to develop an efficient method of producing ethanol fromcellulose-based biomass, such as agricultural waste, forest residue, municipalsolid waste, and energy crops. This trend is driven by the fact thatcellulose-based biomass is generally cheaper than corn, and producing ethanolfrom cellulose-based biomass may create opportunities to produce ethanol inareas which are unable to grow corn. In addition, beginning in 2010, the EnergyIndependence and Security Act of 2007 (HR 6) requires that a specific volume ofthe renewable fuels standard, or RFS, be met by ethanol derived from cellulosicfeedstocks. If an efficient method of producing ethanol from cellulose-basedbiomass is developed, we may not be able to compete effectively with companiesthat incorporate this production method.

 

Further,a number of automotive, industrial and power generation manufacturers aredeveloping alternative clean power systems using fuel cells, clean burninggaseous fuels, or electricity.  Like ethanol, the emerging fuel cellindustry offers a technological option to address increasing worldwide energy costs,the long-term availability of petroleum reserves and environmentalconcerns.  Fuel cells have emerged as a potential alternative to certainexisting power sources because of their higher efficiency, reduced noise andlower emissions. Fuel cell industry participants are currently targeting thetransportation, stationary power and portable power markets in order todecrease fuel costs, lessen dependence on crude oil and reduce harmfulemissions.  If the fuel cell and hydrogen industries continue to expandand gain broad acceptance and hydrogen becomes readily available to consumersfor motor vehicle use, we may not be able to compete effectively.  This additional competition could reduce thedemand for ethanol, which would negatively impact our profitability.

 

***Distillers Grains***

 

We also face direct competition with numerous ethanol producers thatproduce distillers grains as a by-product of the production process. Sales ofdistillers grains are highly dependent on product quality, availability, andprice of competing feed ingredients such as corn and soybean meal. As domesticethanol production increases, the amount of distillers grains entering themarket is expected to increase.  Ifsupply exceeds demand, we may be required to search for new markets, including internationalones.

 

**Federal and State Government Supports**

 

Various federal and state laws, regulations, and programs have led toan increasing use of ethanol in fuel, including subsidies, tax credits,policies and other forms of financial incentives.  Some of these lawsprovide economic incentives to produce and blend ethanol and others mandate theuse of ethanol.

 

***The Renewable Fuels Standard***

 

The most recent ethanol supports are contained in the EnergyIndependence and Security Act of 2007 (HR 6) which was signed into law on December 19,2007. The bill increases the renewable fuels standard, or RFS, which sets theannual requirements for the amount of renewable fuels produced and used inmotor vehicles. The first RFS was established under the Energy Policy Act of2005, which required that 4 billion

 

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gallonsof ethanol and biodiesel be used in 2006 and 7.5 billion gallons be used by2012. Under HR 6, the RFS is increased further, requiring 11 billion gallons ofrenewable fuels in 2009 and progressively increasing to 36 billion gallons by2022.  Beginning in 2010, a specificvolume of the annual mandate is required to be met by ethanol derived fromcellulosic feedstocks, as opposed to corn. The specified volume of cellulosicethanol use required increases incrementally, culminating in the use of 16billion gallons of cellulosic ethanol annually in 2022. While the RFS may causeethanol prices to increase in the short term due to additional demand, futuresupply could outweigh the future demand for ethanol. This would have a negativeimpact on our earnings.

 

***TheVolumetric Ethanol Excise Tax Credit***

 

Theuse of ethanol as an alternative fuel source has been aided by federal taxpolicy, which directly benefits gasoline refiners and blenders, and increasesdemand for ethanol. On October 22, 2004, H.R. 4520 was signed into law,which contained the Volumetric Ethanol Excise Tax Credit (“VEETC”) and amendedthe federal excise tax structure effective as of January 1, 2005. Prior toVEETC, ethanol-blended fuel was taxed at a lower rate than regular gasoline(13.2 cents on a 10% blend). Under VEETC, the ethanol excise tax exemption waseliminated. In place of the exemption, the bill created a volumetric ethanolexcise tax credit of 5.1 cents per gallon (4.5 cents per gallon beginning on January 1,2009) of ethanol blended at 10%. Refiners and gasoline blenders apply for thiscredit on the same tax form as before, only it is a credit from generalrevenue. The VEETC is expected to allow much greater refinery flexibility inblending ethanol since it makes the tax credit available on all ethanol blendedwith all gasoline, diesel and ethyl tertiary butyl ether (“ETBE”). The VEETC isscheduled to expire on December 31, 2010.

 

***Small Ethanol Producer Tax Credit***

 

The Energy Policy Act of 2005 expanded who qualifies for the smallethanol producer tax credit. Historically, small ethanol producers were alloweda 10-cents-per-gallon production income tax credit on up to 15 million gallons ofproduction annually. The size of the plant eligible for the tax credit waslimited to 30 million gallons. Under the Energy Policy Act, the size limitationon the production capacity for small ethanol producers increased from 30million to 60 million gallons. The tax credit is capped at $1.5 million peryear per producer. We are no longer eligible for this credit because of ourplant’s expansion in May 2007.

 

***Clean-Fuel Vehicle Refueling Equipment Tax Credit***

 

The Energy Policy Act of 2005 created a new tax credit that permitstaxpayers to claim a 30% credit (up to $30,000) for the cost of installingclean-fuel vehicle refueling equipment, such as an E85 fuel pump, to be used ina trade or business of the taxpayer or installed at the principal residence of thetaxpayer. Under the provision, clean fuels are any fuel at least 85% of thevolume of which consists of ethanol, natural gas, compressed natural gas,liquefied natural gas, liquefied petroleum gas and hydrogen and any mixture ofdiesel fuel and biodiesel containing at least 20% biodiesel. The provision iseffective for equipment placed in service until January 1, 2010. Thecredit has helped raise consumer awareness of alternative sources of fuelincluding ethanol.

 

***Imported Ethanol Tariffs and Quotas***

 

Currently, there is a $0.54 per gallon tariff on imported ethanol,which is scheduled to expire in 2011.  In addition, ethanol imports from24 countries in Central America and the Caribbean region are exempted from thistariff under the Caribbean Basin Initiative or CBI, which provides thatspecified nations may export annually to the U.S. an aggregate of 7.0% ofU.S. ethanol production, with additional exemptions from ethanol producedfrom feedstock in the Caribbean region over the 7.0% limit.

 

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***StateLegislation Banning or Limiting MTBE Use***

 

As of February 2009, 25 states,including California and New York, have banned or significantly limitedthe use of MTBE due to environmental and public health concerns. Ethanol hasserved as a replacement for much of the discontinued volumes of MTBE and isexpected to continue to replace future volumes of MTBE that are removed fromthe fuel supply.

 

***South Dakota***

 

In South Dakota, the state provides an incentive production payment toethanol producers operating in South Dakota. The production incentiveconsists of a direct payment to South Dakota ethanol producers of up to $0.20per gallon, which is divided among producers of fuel ethanol within SouthDakota up to a maximum of $1 million per year per plant (a maximum of $83,333per month in 2008) and a maximum of $10 million over the life of a plant. The program caps the payments that can be distributed to all plants based inSouth Dakota in a program year to no more than $7 million in payments each year(program year ends on June 30). The payments are distributed to each plantin proportion to the total number of gallons of ethanol produced and marketedannually by all the plants in South Dakota.  If additional plants commenceproduction, or existing plants increase production, each plant receives a lowerproportionate share of the maximum payment under the program. Conversely, ifexisting plants terminate operations, or decrease production, each plantreceives a higher proportionate share of the maximum payment under the program.Because at least one plant in South Dakota terminated production recently, weanticipate receiving a slightly larger payment in 2009 compared to 2008.

 

**Environmental Regulation and Costs**

 

We are subject to extensive environmental regulation at the federal andstate levels.  The federal environmental regulations with which we mustcomply were promulgated by the U.S. Environmental Protection Agency (EPA)pursuant to the Clean Air Act.  The state environmental regulations withwhich we must comply, in contrast, are promulgated by the South DakotaDepartment of Environment and Natural Resources (DENR). The EPA and the DENRregulate air quality, particularly our plant’s emissions into the air. The DENR also regulates water collection and discharge. In addition to its ownenforcement authority under this law, the EPA has delegated permitting andenforcement authority to the DENR.  To conduct operations, we are requiredto have the following permits from these and other agencies:

 

·*Title Five Operating Permit from the DENR*.  In South Dakota, the Title Five OperatingPermit serves as the air quality and operation permit for our plant. We mustconduct ongoing emissions testing to verify compliance with the Title FiveOperating permit. This permit, which we recently filed for an amendment andreceived approval from the DENR, is due for renewal in September 8, 2011.

 

·*Bureau of Alcohol, Tobacco, Firearms and Explosivesand Fuel Permit from the U.S. Department of Treasury.* We arerequired to have this permit because of the alcohol content of ethanol. Thepermit is due for renewal annually.

 

·*General Permit for Storm Water Discharge*.  This permit is required for the runoff ofstorm water from our plant and is due for renewal every five years.

 

We maintain an on-going compliance program to ensure compliance withall applicable laws, regulations and permits. Maintaining compliance can require us to incur expenditures for suchthings as new or upgraded equipment or processes, some of which can be materialand costly at times. For example, as a

 

 

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resultof U.S. Environmental Protection Agency’s issuance of a Notice of Violation(NOV) (see Part I, Item 3, “Legal Proceedings” below), we will be makeimprovements in 2009 to our dryer and thermal oxidizer. The cost of theseimprovements is expected to be $1 million.

 

In addition, federal and state government’s regulation of theenvironment changes constantly. It is possible that more stringent federal orstate environmental rules or regulations could be adopted, which couldincrease our plant’s future operating costs and expenses. It also is possiblethat federal or state environmental rules or regulations could be adoptedthat could have an adverse effect on the use of ethanol. For example, changesin the environmental regulations regarding ethanol’s use due to currentlyunknown effects on the environment could have an adverse effect on the ethanolindustry. Furthermore, our plant’s operations are governed by the OccupationalSafety and Health Administration (“OSHA”). OSHA regulations may change suchthat the future costs of the operation of our plant may increase. Any of theseregulatory factors may result in higher costs or other materially adverseconditions effecting our operations, cash flows and financial performance.

 

**Management and Employees**

 

POETTM Plant Management, LLC manages the day-to-day operations of ourplant under a management agreement. Under the agreement, which is in effectuntil June 2015, POETTM Plant Management receives a fixed annual fee,adjusted annually for inflation, and an incentive bonus based on ourprofitability.  We also pay certain expenses incurred with respect to theoperation of the plant while other expenses, including, but not limited to, theprovision of a full-time technical manager and general manager, are included aspart of POETTM Plant Management’s fees.  Mr. Blaine Gomer, our plant’sgeneral manager, is an employee of POETTM Plant Management, and is responsiblefor operations and production at the plant on a day-to-day basis.

 

As of the date of this filing, our plant employs 48 employees,including a commodities manager, a commodities supervisor, an operationsmanager, a maintenance manager, a microbiologist, a chief mechanical operator,a controller, plant operators, maintenance technicians, grains assistants,accountants, and a membership coordinator.  This does not include Mr. Gomerand the technical manager, both of whom are employees of POETTM PlantManagement.

 

**Available Information**

 

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K, and amendments to reports filed pursuant tothe Securities Exchange Act of 1934, as amended, are filed with the SEC.  Such reports and other information filed byus with the SEC are available on the SEC website (www.sec.gov). The public mayread and copy any materials filed by us with the SEC at the SEC’s PublicReference Room at 100 F Street, NE, Room 1580, Washington, DC 20549.The public may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site thatcontains reports, proxy, and information statements and other informationregarding issuers that file electronically with the SEC at www.sec.gov. Thecontents of these websites are not incorporated into this filing.

 

Our website is found at www.poet.com, then clicking on “Meet POET,” “Plants,”“Big Stone, SD,” and finally “Becoming an Investor.” Except for our AnnualReport on Form 10-K, our Quarterly Reports on Form 10-Q and CurrentReports on Form 8-K are not directly available on our website as weinstruct readers to obtain the reports through a link to www.sec.gov. However,we provide paper copies of the reports to any person who requests it, free ofcharge.

 

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**Item 1A. Risk Factors.**

 

**Risks Related to Our Business**

 

***Our financial performance isdependent on market prices for ethanol, distillers grains and corn, and ourfinancial condition and results of operation are directly affected by changesin these market prices*****.**Our results ofoperations and financial condition are significantly affected by the cost andsupply of corn and by the selling price for ethanol and distillers grains.Changes in the price and supply of these commodities are subject to anddetermined by market forces over which we have no or little control, includingoverall supply and demand, government programs and policies, weather,availability and price of competing products, and other factors.

 

***Our business is highly sensitive tocorn prices, and we generally cannot pass on increases in corn prices to ourcustomers.***Cornis the principal raw material that we use to produce ethanol and distillersgrains. Because ethanol competes with fuels that are not corn-based, wegenerally are unable to pass along increased corn costs to our customers, and,accordingly, rising corn prices tend to produce lower profit margins. At certainlevels, corn prices would make ethanol uneconomical to use in fuel markets. Theprice of corn is influenced by weather conditions (especially droughts) andother factors affecting crop yields, farmer planting decisions and generaleconomic, market and regulatory factors, including government policies andsubsidies with respect to agriculture and international trade, and global andlocal supply and demand. The price of corn has fluctuated significantly in thepast and may fluctuate significantly in the future. In addition, increasingdomestic ethanol capacity could boost demand for corn and result in increasedcorn prices. We may also have difficulty from time to time in purchasing cornon economical terms due to supply shortages. Any supply shortage could requireus to suspend operations until corn became available at economical terms.Suspension of operations could have a material adverse effect on our business,results of operations and financial condition.

 

***Decreasing gasoline prices maynegatively impact the selling price of ethanol.***  Theprice of ethanol generally tends to change in relation to the price ofgasoline. Recently, as a result of a number of factors including a slowing ofthe national economy, the price of gasoline has decreased.  In correlationto the decrease in the price of gasoline, the price of ethanol has alsodecreased. Decreases in the price of ethanol reduce our revenue.  Ifethanol prices fall during times when corn and/or natural gas prices are high,and ethanol prices remain low, we may not be able to operate profitably.

 

***The spread between ethanol and cornprices can vary significantly.***Corn costs significantlyimpact our cost of goods sold. Our gross margins are principally dependent uponthe spread between ethanol and corn prices. However, this spread has decreasedas corn prices have generally increased since the beginning of 2007 and ethanolprices have decreased since the middle of 2008. Any further reduction in thespread between ethanol and corn prices, whether as a result of higher cornprices or lower ethanol prices, would adversely affect our results ofoperations and financial condition.

 

***The price of distillers grains isaffected by the price of other commodity products, and decreases in the priceof these commodities could decrease the price of distillers grains***. Distillers grains compete with other protein-based animal feed productssuch as soybean meal. The price of distillers grains may decrease when theprice of competing feed products decrease. The prices of competing animal feedproducts are based in part on the prices of the commodities from which they arederived. Downward pressure on commodity prices, such as soybeans, willgenerally cause the price of competing animal feed products to decline,resulting in downward pressure on the price of distillers grains. As a result,we may experience lower revenue and income.

 

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***Hedging transactions involve risksthat could harm our profitability.***  In an attempt tominimize the effects of the volatility of corn and natural gas on operatingprofits, we engage in hedging activities in the corn and natural gas futuresmarkets.  The effectiveness of such hedging activities is dependent, amongother things, upon the cost of corn and natural gas and our ability to sellsufficient products to utilize all of the corn and natural gas subject to thefutures contracts.  There is no assurance that our hedging activities willreduce the risk caused by price fluctuation which may leave us vulnerable tohigh corn and natural gas prices.  In addition, we may choose not to takehedging positions in the future, which may adversely affect our financialcondition if corn and natural gas prices increase. Our hedging activities alsocan result in increased costs because price movements in corn and natural gasare highly volatile and are influenced by many factors that are beyond ourcontrol.

 

***Our business is subject to seasonalfluctuations.***Ouroperating results are influenced by seasonal fluctuations in the price of ourprimary production inputs, namely corn, and the price of our primary product,ethanol. In recent years, the spot price of corn tends to rise during thespring planting season in May and June and tends to decrease duringthe fall harvest in October and November. The price for natural gas,however, tends to move opposite of corn and tends to be lower in the spring andsummer and higher in the fall and winter. In addition, our ethanol prices aresubstantially correlated with the price of unleaded gasoline. As a result,because the price of unleaded gasoline tends to rise during the summer, theprice of ethanol generally rises in the summer.

 

***Our business is not diversifiedbecause it is limited to the fuel grade ethanol industry, which may limit ourability to adapt to changing business and market conditions.***   Oursole business is the production and sale of fuel grade ethanol produced from cornand its by-product, distillers grains. Our plant does not have the capabilityof producing industrial or food and beverage grade ethanol, which is used insuch products as cosmetics, perfume, paint thinner and vinegar. Our plant isalso not equipped to capture carbon dioxide, another co-product of the ethanolproduction process. The lack of diversification of our business may limit ourability to adapt to changing business and market conditions.

 

***We are heavily dependent upon POETTM,LLC.***  We haveseveral agreements in place with companies owned and controlled by POETTM, LLC,of Sioux Falls, South Dakota, including those related to the purchase ormarketing of ethanol and distillers grains, management of the plant, design andconstruction, research and technology, and information technology.  If any of the agreements were to terminate,we might not be able to secure suitable and timely replacements for those servicesat a reasonable cost or at all, which would materially harm our business.

 

***We are dependent upon POETTM EthanolProducts, LLC to purchase and market all of the ethanol produced at our plant*****. ** POETTM Ethanol Products is the exclusivepurchaser of all of the ethanol produced at our plant which, in turn, marketsand transports the ethanol to refineries located throughout the U.S.  IfPOETTM Ethanol Products breaches the ethanol marketing agreement or is not inthe financial position to purchase all of the ethanol produced, we may not haveany readily available means to sell the ethanol and our financial conditionwill be adversely and materially affected.  If the ethanol marketingagreement with POETTM Ethanol Products were to terminate, we would be forced toseek other arrangements to sell the ethanol produced, but there are no assurancesthat these arrangements would achieve results comparable to those achieved byPOETTM Ethanol Products.

 

***Interruptions in energy suppliescould delay or halt production at our plant, which will reduce ourprofitability.***  Ethanol production requires a constant andconsistent supply of energy, including electricity, steam and naturalgas.  If there is any interruption in our plant’s supply of energy forwhatever reason, such as supply, delivery or mechanical problems, we may berequired to halt production.  If production is halted for 

 

 

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anyextended period of time, it will reduce our profitability.  Our plant hasagreements with various companies to provide it with necessary energy, but wecannot assure that these companies will continue to be able to supply reliablysuch energy.  If our plant were to suffer interruptions in energy supply,our business would be harmed.

 

***We have limited natural gas available foroperations and rely heavily on the adjacent Big Stone Plant.*** We rely on BigStone Plant to supply approximately 50% of our energy needs forproduction.  When steam from Big StonePlant is not operating or the transfer of steam to our plant is interrupted, werely on our natural gas supply to power on-site boilers in order to generatesteam for the production process.  Thenatural gas supply, however, is limited as it alone cannot power our plant tooperate at its full 75 million annual name-plate production capacity.Therefore, if Big Stone Plant shuts down for any prolonged period of time, ourplant must reduce production based generally on the amount of natural gas thatis supplied to the plant. Reducing production could have a material adverse effect on ourrevenues and profitability.

 

**Risks Related to the Industry**

 

***Overcapacity in the industry mayresult in further decreases in the price of ethanol and distillers grains.***Excess capacityin the ethanol industry has had, and will continue to have, an adverse impacton our results of operations, cash flows and general financial condition.Excess capacity has resulted from increases in production capacity coupled withinsufficient demand. As a result, the price of ethanol and our profit marginshas declined. If excess capacity in the ethanol industry continues, the marketprice of ethanol may decline to a level that is inadequate to generatesufficient cash flow to cover our costs. In addition, because ethanolproduction produces distillers grains as a by-product, increased ethanolproduction could lead to excess supply of distillers grains. An increase in thesupply of distillers grains, without corresponding increases in demand, couldlead to lower prices or an inability to sell our distillers grains. Any declinein the price of distillers grain or the distillers grain market generally couldhave a material adverse effect on our business.

 

***Ethanol prices may be impacted bywholesale gasoline prices through the economics of discretionary blending.Lower wholesale gasoline prices tend to discourage discretionary blending whichcould lead to an imbalance in the capacity utilization of ethanol leading tolower ethanol prices.*** Through the first six months of 2008,wholesale ethanol prices were lower than wholesale gasoline prices whichprovided an economic incentive for companies to blend ethanol into gasoline andincreased overall demand for ethanol. Since July 2008, the price ofethanol has steadily increased in relation to wholesale gasoline as oil priceshave decreased as a result of the global economic crisis which, in turn, hasdecreased world demand for oil and gasoline. As of early November 2008,the price of ethanol was higher than the price of wholesale gasoline, in someareas, by an amount per gallon greater than the $0.45 tax credit available toblenders for blending ethanol. This reduces the economic incentive for thediscretionary blending of ethanol, which may decrease overall demand. If theprice of gasoline and petroleum continues to decline, we believe that the priceof ethanol may be adversely affected, which could have an adverse effect on ourprofitability.

 

***The global financial crisis may haveimpact on our business and financial condition that we currently cannotpredict.***The continued credit crisis and related instabilityin the global and national financial system may impact our business and ourfinancial condition. Our ability to access the capital markets may be severelyrestricted at a time when we would like, or need, to access such markets, whichcould have an impact on our flexibility to react to changing economic andbusiness conditions. The credit crisis could have an impact on our seniorlender under our debt facilities or on our customers, causing them to fail tomeet their obligations to us or causing them to take adverse action in theevent we are unable to comply with the terms under our loan agreement.

 

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***We operate in an intenselycompetitive industry and there is no assurance that we will be able to competeeffectively.***  The ethanol business is highlycompetitive, and other companies presently in the market, or that are about toenter the market, could adversely affect prices for the products we sell.Commodity groups in the Midwest have encouraged the construction of ethanol plants,and there are other entities considering the construction of ethanol plants.Nationally, the ethanol industry is becoming much more competitive given thesubstantial construction and expansion occurring in the industry. We alsocompete with other ethanol producers that are capable of producing greaterquantities of ethanol than the amount we produce.  In light of suchcompetition, there is no assurance that we will be able to compete effectivelyin the industry.

 

***Competition from the advancement oftechnology may lessen the demand for ethanol and negatively impact ourprofitability*****.**** Alternativefuels, gasoline oxygenates and ethanol production methods are continually underdevelopment. A number of automotive, industrial and power generation manufacturersare developing more efficient engines, hybrid engines and alternative cleanpower systems using fuel cells, or clean burning gaseous fuels or electricity.Vehicle manufacturers are working to develop vehicles that are more fuelefficient and have reduced emissions using conventional gasoline. Vehiclemanufacturers have developed and continue to work to improve hybrid technology,which powers vehicles by engines that utilize both electric and conventionalgasoline fuel sources. In the future, the emerging fuel cell industry offers atechnological option to address increasing worldwide energy costs, thelong-term availability of petroleum reserves and environmental concerns. Fuelcells have emerged as a potential alternative to certain existing power sourcesbecause of their higher efficiency, reduced noise and lower emissions. Fuelcell industry participants are currently targeting the transportation,stationary power and portable power markets in order to decrease fuel costs,lessen dependence on crude oil and reduce harmful emissions. If the fuel celland hydrogen industries continue to expand and gain broad acceptance, andhydrogen becomes readily available to consumers for motor vehicle use, we maynot be able to compete effectively. This additional competition could reducethe demand for ethanol, which would negatively impact our financial condition.

 

***Corn-based ethanol may compete withcellulose-based ethanol in the future, which could make it more difficult forus to produce ethanol on a cost-effective basis****. *Most ethanol iscurrently produced from corn and other raw grains, such as milo orsorghum-especially in the Midwest. The current trend in ethanol productionresearch is to develop an efficient method of producing ethanol fromcellulose-based biomass, such as agricultural waste, forest residue, municipalsolid waste, and energy crops. This trend is driven by the fact thatcellulose-based biomass is generally cheaper than corn, and producing ethanolfrom cellulose-based biomass would create opportunities to produce ethanol inareas which are unable to grow corn. Although current technology is notsufficiently efficient to be competitive, new conversion technologies may bedeveloped in the future.  By 2010, therenewable fuels standard mandates that a specific volume of ethanol be derivedfrom cellulosic feedstocks.   If anefficient method of producing ethanol from cellulose-based biomass isdeveloped, we may not be able to compete effectively. If we are unable toproduce ethanol as cost-effectively as cellulose-based producers, our abilityto generate revenue will be negatively impacted.

 

***Negative media attention associatedwith the use of corn in the ethanol production process may lead to decreases indemand for the ethanol we produce, which could negatively affect ourprofitability.***  Recent media attention associated with theuse of corn as the feedstock in ethanol production has been unfavorable to theethanol industry.  This negative media attention has focused on the effectethanol production has on domestic and foreign food prices.  Ethanolproduction has previously received favorable coverage by the news media, whichmay have increased demand for ethanol.  The negative perception of ethanolproduction may have a negative effect on demand for ethanol, which coulddecrease the price we receive for our ethanol. Decreases in the selling priceof ethanol may have a negative effect on our financial condition.

 

 

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**Risks Related to Governmental and Regulatory Action**

 

***A change in government policiesfavorable to ethanol may cause demand for ethanol to decline.***Growth anddemand for ethanol may be driven primarily by federal and state governmentpolicies, such as state laws banning MTBE and the national renewable fuelsstandard. The continuation of these policies is uncertain, which means thatdemand for ethanol may decline if these policies change or arediscontinued. A decline in the demand for ethanol is likely to cause lowerethanol prices which in turn will negatively affect our business and financialcondition.

 

***Tariffs effectively limit imported ethanol into theU.S., and their reduction or elimination could undermine the ethanol industryin the U.S.*******Imported ethanol isgenerally subject to a $0.54 per gallon tariff that was designed to offsetthe $0.45 per gallon ethanol incentive available under the federal excisetax incentive program for refineries that blend ethanol in their fuel. Thereis, however, a special exemption from this tariff for ethanol imported from 24countries in Central America and the Caribbean Islands, which is limited to atotal of 7% of U.S. ethanol production per year. Imports from the exemptedcountries may increase as a result of new plants in development. Sinceproduction costs for ethanol in these countries are significantly less thanwhat they are in the U.S., the duty-free import of ethanol through thecountries exempted from the tariff may negatively affect the demand fordomestic ethanol and the price at which we sell our ethanol. ** **We do not know theextent to which the volume of imports would increase or the effect onU.S. prices for ethanol if the tariff is not renewed beyond its currentexpiration date of January 2011. Any changes in the tariff or exemptionfrom the tariff could have a material adverse effect on our business andfinancial condition.

 

***Government incentives for ethanolproduction may be eliminated in the future.***The ethanolindustry and our business are assisted by various federal ethanol taxincentives, including those contained in The Energy Independence and SecurityAct of 2007. Under this law, the renewable fuels standard is increased to amandate of 36 billion gallons by 2022. However, after the recent election, anew Congressional delegation and presidential administration will likely affectthe nation’s energy policy.  While we have no present indication thatthere are plans to revise the renewable fuels standard in the future, we haveno assurance the renewable fuels standard will remain as presently drafted. The renewable fuels standard helps support a market for ethanol that mightdisappear without this incentive.  If the federal incentives areeliminated or sharply curtailed, we believe that a decreased demand for ethanolwill result, which could negatively affect our profitability and financialcondition.

 

***Changes in environmental regulationsor violations of the regulations could reduce our profitability.***We are subjectto extensive air, water and other environmental laws and regulations. In additionsome of these laws require our plant to operate under a number of environmentalpermits. These laws, regulations and permits can often require expensivepollution control equipment or operation changes to limit actual or potentialimpacts to the environment. A violation of these laws and regulations or permitconditions can result in substantial fines, damages, criminal sanctions, permitrevocations and/or plant shutdowns. We do not assure you that we have been, areor will be at all times in complete compliance with these laws, regulations orpermits or that we have had or have all permits required to operate ourbusiness. We do not assure you that we will not be subject to legal actionsbrought by environmental advocacy groups and other parties for actual oralleged violations of environmental laws or our permits. Additionally, anychanges in environmental laws and regulations, both at the federal and statelevel, could require us to invest or spend considerable resources in order tocomply with future environmental regulations. The expense of compliance couldbe significant enough to reduce our profitability and negatively affect ourfinancial condition.

 

**Item 1B.  UnresolvedStaff Comments.**

 

None.

 

 

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**Item 2.  Properties.**

 

Our plant is located immediately adjacent to Big Stone Plant in thecity of Big Stone City, Grant County, South Dakota.  The land on which ourplant is located is leased from Big Stone-Grant Industrial Development andTransportation, LLC, which is owned by Otter Tail Power Company, Montana-DakotaUtilities, and NorthWestern Corporation.  The term of the lease is for 99years.  The rent is $2,520 per year until December 31, 2010, afterwhich the rent is increased by 5.0%.  In addition, our plant hastransportation facilities including a rail track, rail spur and paved accessroads.

 

Ourplant consists of the following main buildings or properties:

 

·                  Anadministrative building, which contains office equipment, computer systems, andfurniture and fixtures.

 

·                  A mechanicalbuilding, which contains boilers and water treatment equipment.

 

·                  A processbuilding, which contains slurry and fermentation equipment, drums and a lab.

 

·                  An evaporationbuilding, which contains evaporators and related equipment.

 

·                  A distillationbuilding, which contains distillation columns and mole sieves.

 

·                  A ring dryerbuilding, which contains a dryer and a fluid bed.

 

All of our tangible and intangible property, including our leaseholdinterest, easement rights, improvements, equipment, personal property, andcontracts, serve as the collateral for the debt financing with U.S. BankNational Association, of Sioux Falls, South Dakota, which is described belowunder “Item 7—Management’s Discussion and Analysis of Financial Condition andResults of Operations—Indebtedness.”

 

**Item 3.  Legal Proceedings.**

 

From time to time in the ordinary course of business, we may be namedas a defendant in legal proceedings related to various issues, includingwithout limitation, workers’ compensation claims, tort claims, or contractualdisputes. We are not currently involved in any material legal proceedings,directly or indirectly, except for the following.

 

In2003, the U.S. Environmental Protection Agency (EPA) issued formal informationrequests to, among others, plants designed, constructed, and/or managed byPOETTM Design and Construction and POETTM Plant Management. Our plant was subjectto these requests. These requests required that the subject plants provide theEPA with certain data regarding emissions. On January 14, 2009, our plantreceived from the EPA a written Notice of Violation (NOV).  The NOV alleges that our plant violated theClean Air Act by failing to adequately maintain a required level of airpollutants as established under the plant’s Title V air permit, and byconducting invalid testing for compliance with such permit. Following thereceipt of the NOV, the plant had a meeting with the U.S. EPA to discuss theNOV. A penalty assessment is currently under consideration by theEPA.  While it is likely that we will be assessed a penalty and/or finerelated to these occurrences, none has been assessed as of the date of thisreport.  Any penalty and/or fine, moreover, is not expected to bematerial, though there can be no assurance of this result. Meanwhile, we arecurrently taking 

 

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correctiveactions to address the cause of the NOV, specifically the approval of $1million capital improvement project on our plant’s dryer and thermal oxidizer.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

 

We did not submit any matter to a vote of our security holders throughthe solicitation of proxies or otherwise during the fourth quarter of 2008.

 

**PART II**

 

**Item 5.  Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchaser of Equity Securities.**

 

As of February 1, 2009, Northern Growers had 968 members.

 

*Trading Activity and Restrictions*

 

Northern Growers’ capital units are not traded on an establishedtrading market such as a stock exchange or The NASDAQ Stock Market.  Rather, the capital units are traded on a “qualifiedmatching service” as defined by the publicly traded partnership rules ofthe federal tax code. Under the qualified matching service, interested buyersand sellers of capital units are matched on the basis of a set of rules andconditions set forth under the federal tax code, all trades being subject toboard of managers’ approval. Northern Growers’ qualified matching service isoperated through Alerus Securities Corporation, a registered broker-dealerbased in Grand Forks, North Dakota, which operates an SEC registeredAlternative Trading System.  The following table contains historicalinformation by quarter for the past two years regarding the trading of capitalunits under the qualified matching service:

 

| **Quarter (1)**              | ** ** | **Low   Price(1)** | ** ** | **High   Price(1)** | ** ** | **Average   Price(1)** | ** ** | **# of Capital  Units Traded  (1)** | ** ** |
|-----------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|----------------------------------------------------|------------|
| January - March 2007    |       | $                       | 2.30       |                     | $          | 2.69                        |       | $                                                  | 2.36       |   | 398,000 |   |
| April - June 2007       |       | $                       | 2.35       |                     | $          | 3.25                        |       | $                                                  | 2.76       |   | 604,500 |   |
| July - September 2007   |       | $                       | 3.01       |                     | $          | 3.25                        |       | $                                                  | 3.20       |   | 77,000 |   |
| October - December 2007 |       | $                       | 2.40       |                     | $          | 2.95                        |       | $                                                  | 2.48       |   | 52,500 |   |
| January - March 2008    |       | $                       | 2.05       |                     | $          | 2.50                        |       | $                                                  | 2.26       |   | 34,000 |   |
| April - June 2008       |       | $                       | 1.80       |                     | $          | 1.80                        |       | $                                                  | 1.80       |   | 2,000 |   |
| July - September 2008   |       | $                       | .95        |                     | $          | 1.30                        |       | $                                                  | 1.13       |   | 135,500 |   |
| October - December 2008 |       | $                       | 1.10       |                     | $          | 1.10                        |       | $                                                  | 1.10       |   | 10,000 |   |

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(1)  Allunit prices and number of units traded are adjusted to reflect a four-for-onecapital unit split made effective on September 1, 2005 and a two-for-onesplit made effective on July 1, 2006. In addition, our qualified matchingservice does not permit firm bids per the rules established by the federaltax code; therefore, the prices reflect actual sales.

 

There were no issuer purchases of equity securities during the fourthquarter ended December 31, 2008.

 

As a limited liability company being taxed as a partnership, NorthernGrowers is required to restrict the transfer of its capital units in order topreserve its preferential single-level tax status. Such restrictions areset forth in Northern Growers’ Operating Agreement and Capital Units TransferSystem. Under the Capital Units Transfer System, transfers are limited to thosethrough our qualified matching service, transfers made to qualified familymembers, or transfers by gift, block, upon death, and like transfers, all ofwhich are subject to final board of managers’ approval.

 

 

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Pursuant to the Operating Agreement, a minimum of 2,500 capital unitsis required to become and remain a member. In addition to the transferrestrictions described above, the board of managers retains the right to redeemthe capital units at $0.20 per capital unit in the event a member breaches theOperating Agreement or upon a member’s failure to fulfill the membershiprequirements with respect to other matters. Under the qualified matchingservice, the number of capital units traded annually cannot exceed 10% ofNorthern Growers’ total issued and outstanding capital units.

 

*Distributions*

 

Under the terms of Northern Growers’ Amended and Restated OperatingAgreement dated January 1, 2006, the board of managers is required to makeannual (or more frequent) distributions to its members and may not retain morethan $200,000 of net cash from operations, unless (i) a super-majority ofthe board of managers (75%) decides otherwise, (ii) it would violate orcause a default under the terms of any debt financing or other creditfacilities, or (iii) it is otherwise prohibited by law.  For furtherdetails of the restrictions under our debt facilities, please see “Item 7,Management’s Discussion and Analysis of Financial Conditions and Results ofOperations—Indebtedness.” Distributions are required to be issued to members ofrecord as of the last day of the quarter immediately prior to the quarter inwhich the distribution was approved by the board of managers.

 

In 2007, Big Stone paid cash distributions to Northern Growers ofapproximately $19.52 million and $5.78 million to its minority member. Northern Growers, in turn, paid to its members approximately $17.32 million, or$0.342 per capital unit.

 

In 2008, Big Stone made no cash distributions to Northern Growers.  However, Northern Growers paid cashdistributions to its members of approximately $1.52 million, or $0.030 percapital unit, from a previously made distribution by Big Stone in 2007.

 

The ability to issue distributions is substantially dependent upon ourprofitability, the discretion of our board of managers subject to theprovisions of the Operating Agreement, and the approval from our lender, U.S.Bank. Unless current economic conditions improve, which we do not expectthrough at least the first half of 2009, we do not anticipate makingdistributions to members in 2009.

 

**Item 6.  Selected Financial Data.**

 

The following table sets forth our selected financial data for theperiods indicated. The audited financial statements included in Item 8 of thisreport have been audited by our independent auditors, Eide Bailly LLP.

 
| ** **                                    | ** ** | **2008**   | ** **  | **2007**   | ** **  | **2006**   | ** **  | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|------------|
| **Statement of Operations Data:**             | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $          | 171,424,927 |       | 138,243,780 |       | 122,837,119 |       | 89,692,708 |       | 86,587,585 |   |
| Cost of Revenues                              |       | $          | 169,595,752 |       | 112,694,987 |       | 62,731,376  |       | 63,552,756 |       | 71,279,883 |   |
| General and Administrative Expenses           |       | $          | 3,679,176   |       | 4,790,117   |       | 6,364,983   |       | 3,913,177  |       | 2,984,237  |   |
| Income (Loss) from Operations                 |       | $          | (1,850,001  | )          | 20,758,676  |       | 53,740,760  |       | 22,226,775 |       | 12,323,465 |   |
| Interest Expense                              |       | $          | 3,535,485   |       | 2,876,464   |       | 1,261,542   |       | 1,317,957  |       | 1,397,591  |   |
| Minority Interest in Subsidiary (Income) Loss |       | $          | 1,154,649   |       | (4,269,470  | )          | (12,132,284 | )          | (4,848,463 | )          | (2,528,026 | ) |
| Net Income (Loss)                             |       | $          | (4,152,550  | )          | 14,144,720  |       | 40,703,348  |       | 16,157,712 |       | 8,371,332  |   |
|                                          |       |       |        |       |        |       |        |       |       |       |       |
| Capital Units Outstanding (1)                 |       | 50,628,000 |        | 50,628,000 |        | 50,628,000 |        | 50,628,000 |       | 50,628,000 |       |
|                                          |       |       |        |       |        |       |        |       |       |       |       |
| Cash Distributions declared per Capital Unit  |       | —     |        | 0.238      |        | 0.518      |        | 0.230      |       | 0.119      |       |
| Net Income (Loss) per Capital Unit            |       | (0.082     | )           | 0.279      |        | 0.804      |        | 0.319      |       | 0.165      |       |
|                                          |       |       |        |       |        |       |        |       |       |       |       |
| **Balance Sheet Data:**                       | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Working Capital                               |       | $          | 13,590,348  |       | 19,723,995  |       | 15,982,171  |       | 9,011,848  |       | 560,046    |   |
| Net Property, Plant & Equipment      |       | $          | 73,231,189  |       | 78,141,027  |       | 66,413,382  |       | 39,097,204 |       | 40,885,964 |   |
| Total Assets                                  |       | $          | 103,429,671 |       | 113,580,105 |       | 101,479,908 |       | 59,315,715 |       | 54,678,507 |   |
| Long-Term Obligations                         |       | $          | 42,618,873  |       | 46,794,965  |       | 33,578,810  |       | 17,104,400 |       | 16,387,498 |   |
| Minority Interest in Subsidiary               |       | $          | 10,111,948  |       | 11,631,149  |       | 10,790,823  |       | 7,054,934  |       | 5,715,325  |   |
| Members’ Equity                          |       | $          | 34,420,293  |       | 39,804,399  |       | 38,262,916  |       | 23,949,718 |       | 19,446,001 |   |
| Book Value per Capital Unit                   |       | $          | 0.680       |       | 0.786       |       | 0.756       |       | 0.473      |       | 0.384      |   |

----

(1) Adjusted for afour-for-one capital unit split made effective September 1, 2005 and atwo-for-one split effective July 1, 2006.

 

20

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**Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operation.**

 

*You should read the following discussion along withour financial statements and the notes to our financial statements includedelsewhere in this report. The following discussion contains forward-lookingstatements that are subject to risks, uncertainties and assumptions. Our actualresults, performance and achievements may differ materially from thoseexpressed in, or implied by, such forward-looking statements. See “CautionaryStatement Regarding Forward-Looking Information” at the beginning of thisreport.*

 

**Overview**

 

NorthernGrowers, LLC (“Northern Growers”) owns and manages a 77.16% interest in itssubsidiary, POETTM Biorefining - Big Stone (POETTM Biorefining - Big Stone andNorthern Growers are also collectively referred to in this report as “we” “us”or “our”), an ethanol and distillers grains plant (the “plant” or “Big Stone”)located near the city of Big Stone City, South Dakota.

 

Ourrevenues are derived from the sale and distribution of ethanol and distillersgrains to customers primarily located in the U.S. Corn for the productionprocess is supplied to our plant primarily from local agricultural producersand from purchases on the open market. After processing the corn, ethanol issold to POETTM Ethanol Products, LLC, which subsequently markets and sells theethanol to gasoline blenders and refineries located throughout the continentalU.S.  All of our distillers grains are sold through POETTM Nutrition, Inc.,which markets and sells the product to livestock feeders primarily located inthe continental U.S.

 

Our operating and financial performance is largely driven by the pricesat which we sell ethanol and distillers grains and the costs related toproduction. The price of ethanol is influenced by factors such as prices ofunleaded gasoline and the petroleum markets, weather, government policies andprograms, and supply and demand. Excess ethanol supply in the market, ascurrently taking place in the market, puts downward pressure on the price ofethanol. The price of distillers grains is influenced by the price of corn,soybean meal and other protein-based feed products, and supply and demand. A lowprice of corn generally puts downward pressure on the price of distillergrains.

 

Our two largest costs of production are corn and natural gas, althoughour plant’s use of natural gas is offset by the use of steam supplied from theadjacent Big Stone Plant. The cost of natural gas and corn is generallyimpacted by factors such as supply and demand, weather, government policies andprograms, and our risk management program used to protect against the pricevolatility of these commodities.

 

 

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**Executive Summary**

 

Our earnings changed significantly from 2007 to 2008. In 2007, we had anet income of $14.1 million compared to a net loss of $4.15 million in 2008.This change is primarily attributed to an increase in corn costs. Our corncosts per bushel increased 41% from 2007 to 2008 primarily due to an increasein the market price of corn. The price of corn increased between periods,particularly during the first half of 2008, due to increased demand from theethanol industry and global markets, an increase in commodity speculationduring the first half of 2008, low corn carryout from 2007, and an increase incrude oil prices during the first half of 2008 as corn prices moved inconjunction with changes in crude oil prices. While sales volume of ethanolincreased by 16% because of the plant expansion and we realized a 2% increasein the price of ethanol, both were offset by the 41% increase in corn costs.

 

The increase in corn costs and stagnant ethanol prices were offset byan increase in revenue from the sale of distillers grains. Revenue from thesale of distillers grains increased 57% between periods, due principally toincreases in production and price. The price of distillers grains rose becauseof increases in demand from livestock producers who increased their use ofdistillers grains for feed purposes due to the high price of corn and otherprotein based feed products, particularly during the first half of 2008.

 

We expect challenges in 2009, which may lead to further earningserosion.  A significant challenge will bedealing with the low price of ethanol. Since the fall of 2008, ethanol priceshave commenced a downward trend. In addition, the price of ethanol is expectedto remain low due to excess supply in the market which, at 10.4 billion gallonsas of February 2009, is at an all-time high in the U.S.  If the supply trend continues, it is likelyto surpass anticipated demand in 2009 and therefore act as a hindrance onethanol prices and our earnings.  Whilecorn prices have decreased and become more stable since the fourth quarter of2008, prices could increase and become more volatile in 2009. As a result, wewill need to operate conservatively and preserve cash. 

 

Despite the challenges ahead, we are cautiously optimistic about 2009.Because a number of ethanol refineries have recently shut down or idledproduction due to unfavorable market conditions, the decrease in supply couldpositively impact ethanol prices and our margins. Moreover, USDA is reportedlyin discussions with the Environmental Protection Agency about raising theamount of ethanol allowed to be blended into the U.S. gasoline supply.  In addition, corn prices could remain low andstable compared to 2008 due to steady and lower crude oil prices and increasesin corn supply.  The USDA released itsproduction report in January 2009 indicating that the 2008 U.S. corn cropand 2008-2009 corn carryout were larger than anticipated.

 

**Results of Operations**

 

**Comparison of years ended December 31, 2008 and December 31,2007**

 
| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **$**                            | ** ** | **% of Revenue** | ** ** | **$** | ** ** | **% of Revenue** | ** ** |
| ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                          |       |                             |       |   |   |   |   |   |   |
| Ethanol                          |       | 137,146,540                      |       | 80 | % | 116,084,868 |   | 84 | % |
| Distillers grains                |       | 33,632,791                       |       | 20 | % | 21,408,911 |   | 15 | % |
| Incentive                        |       | 645,596                          |       | 0 | % | 750,001 |   | 1 | % |
| Total                            |       | 171,424,927                      |       | 100 | % | 138,243,780 |   | 100 | % |
|                             |       |                             |       |   |   |   |   |   |   |
| Cost of Revenues                 |       | 169,595,752                      |       | 99 | % | 112,694,987 |   | 82 | % |
|                             |       |                             |       |   |   |   |   |   |   |
| G&A Expenses                 |       | 3,679,176                        |       | 2 | % | 4,790,117 |   | 3 | % |
|                             |       |                             |       |   |   |   |   |   |   |
| Other Operating Income (Expense) |       | (3,457,198                       | )          | (2 | )% | (2,344,486 | ) | (2 | )% |
|                             |       |                             |       |   |   |   |   |   |   |
| Minority Interest                |       | 1,154,649                        |       | 1 | % | (4,269,470 | ) | (3 | )% |
|                             |       |                             |       |   |   |   |   |   |   |
| Net Income (Loss)                |       | (4,152,550                       | )          | (2 | )% | 14,144,720 |   | 10 | % |

 

22

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*Revenues —* Revenue increased $33.2million, or 24%, to $171.4 million for the year ended December 31, 2008from $138.2 million for the year ended December 31, 2007.  Revenues increased due to an increase in  sales of ethanol and distillers grains.

 

Revenuefrom the sale of ethanol increased $21.0 million, or 18%, to $137.1 million forthe year ended December 31, 2008 from $116.1 million for the year ended December 31,2007.  The increase is primarily due toan increase in sales volume, due principally to a 17% increase in productionvolume and a 2% increase in price between periods. Since the end of the thirdquarter 2008, however, the price of ethanol has decreased by approximately 30%because of an oversupply in the industry.

 

Revenuefrom the sale of distillers grains increased $12.2 million, or 57%, to $33.6million for the year ended December 31, 2008 from $21.4 million for theyear ended December 31, 2007.  Theincrease is primarily due to a 44% increase in the sales price per ton.  The increase in price per ton is attributedto an increase in the value of distillers grains relative to the price of cornas livestock producers increasingly switched to distillers grains as a sourceof feed due to the high price of corn.

 

*Cost of Revenues —* Cost of revenues, whichincludes production expenses, increased $56.9 million, or 50%, to $169.6million for the year ended December 31, 2008 from $112.7 million for theyear ended December 31, 2007.  Anincrease in corn costs between periods is the largest contributing factor,followed by an increase in energy production costs.

 

Corncosts, which are primarily attributed to the market price of corn and losses,if any, from our risk management strategies, rose 41% per bushel, betweenperiods.  This increase is primarily dueto a 42% increase in the market price of corn, due to an increase in demand anddecrease in supply of grains globally, an increase in commodity speculationincluding corn and oil, and increased demand for corn from the ethanolindustry.

 

Ourrisk management strategies and program, consisting of the use of derivativesand market-to-arrive or forward contracts and the effects changes in the marketprice of corn had on the value of these instruments,  contributed $1.7 million, or 2%, to theincrease in corn costs.  During the yearended December 31, 2008, we experienced a $6.0 million gain on derivativescontracts, only to be offset by a $7.8 million loss on our forwardcontracts.  Gains from the use of riskmanagement instruments are recognized as a decrease in corn costs and lossesfrom the use of risk management instruments are recognized as an increase incorn costs.  As market prices reachedtheir peak at the end of June 2008, we maintained specific hedgingpositions to protect against market fluctuations.  When market prices fell during the thirdquarter of 2008, the value of these hedging positions increased and resulted ina gain at December 31, 2008**.**  This gain was offset by the loss on ourforward contracts for corn at December 31, 2008 and a correspondingincrease to our cost of revenues.  The 

 

23

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valueof our forward contracts fell during this period because, after purchasing cornon a forward contract basis earlier in the year at higher prices, the CBOTprice of corn decreased by $1.00 per bushel during fourth quarter 2008.

 

Energycosts per gallon of ethanol rose 20% between quarters primarily due to anincrease in natural gas costs.  Naturalgas costs per unit increased 32% between periods due to a rise in crude oilprices.  Our steam costs per unit fromthe adjacent Big Stone Plant also increased by 25% due to a new pricingarrangement that took effect on January 1, 2008.

 

*General and Administrative Expenses*— General andadministrative expenses decreased $1.1 million, or 23%, to $3.7 million for theyear ended December 31, 2008 from $4.8 million for the year ended December 31,2007.  The decrease is primarily due to adecrease in management incentive fees and costs, which resulted from a decreasein net income on which these fees and costs are based.

 

*Interest Expense —*Interestexpense increased $660,000 to $3.54 million for the year ended December 31,2008 from $2.88 million for the year ended December 31, 2007.  Despite a decrease in interest rates from2007 to 2008, interest expense increased because, in contrast to capitalizingour interest payment in 2007 during construction of our plant’s expansion, weexpensed all interest payments in 2008.

 

*Net Income —* Net income decreased $18.3million, or 129%, to a net loss of $4.2 million for the year ended December 31,2008 from a net income of $14.1 million for the year ended December 31,2007.  This change is caused primarily bya significant increase in the cost of revenues from rising corn costs, offsetby an increase in revenues from the sale of ethanol and distillers grains.

 
| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **$**                            | ** ** | **% of Revenue** | ** ** | **$** | ** ** | **% of Revenue** | ** ** |
| Revenue                          |       |                             |       |   |   |   |   |   |   |
| Ethanol                          |       | 116,084,868                      |       | 84 | % | 105,702,927 |   | 86 | % |
| Distillers grains                |       | 21,408,911                       |       | 15 | % | 16,349,308 |   | 13 | % |
| Incentive                        |       | 750,001                          |       | 1 | % | 784,884 |   | 1 | % |
| Total                            |       | 138,243,780                      |       | 100 | % | 122,837,119 |   | 100 | % |
|                             |       |                             |       |   |   |   |   |   |   |
| Cost of Revenues                 |       | 112,694,987                      |       | 82 | % | 62,731,376 |   | 51 | % |
|                             |       |                             |       |   |   |   |   |   |   |
| G&A Expenses                 |       | 4,790,117                        |       | 3 | % | 6,364,983 |   | 5 | % |
|                             |       |                             |       |   |   |   |   |   |   |
| Other Operating Income (Expense) |       | (2,344,486                       | )          | (2 | )% | (905,128) |   | (1 | )% |
|                             |       |                             |       |   |   |   |   |   |   |
| Minority Interest                |       | (4,269,470                       | )          | (3 | )% | (12,132,284 | ) | (10 | )% |
|                             |       |                             |       |   |   |   |   |   |   |
| Net Income                       |       | 14,144,720                       |       | 10 | % | 40,703,348 |   | 33 | % |

 

*Revenues*— Revenue increased $15.4 million, or 12.5%,to $138.2 million for the year ended December 31, 2007 from $122.8 millionfor the year ended December 31, 2006. Revenues increased due to an increase in sales of ethanol and distillersgrains.

 

24

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Revenuefrom the sale of ethanol increased $10.4 million, or 10%, to $116.1 million forthe year ended December 31, 2007 from $105.7 million for the year ended December 31,2006.  The increase is primarily due to a23% increase in sales volume between periods, offset by an 11% decrease in theaverage sales price per gallon.  Sales volume increased because of anincrease in production volume following our plant’s expansion, only to beoffset by the decrease in ethanol prices between periods due to excess supplyof ethanol in the market.

 

Revenuefrom the sale of distillers grains increased $5.1 million, or 31%, to $21.4million for the year ended December 31, 2007 from $16.3 million for theyear ended December 31, 2006.  Theincrease is due to increases in sales volume and sales price per ton. Like ethanol, sales increased due to an increase in plant production betweenperiods. Unlike ethanol, however, the price of distillers grains increasedapproximately 18% in conjunction with a rise in prices of corn and soybeanmeal.

 

*Cost of Revenues -* Cost of revenues, whichincludes production expenses, increased $50.0 million, or 80%, to $112.7million for the year ended December 31, 2007 from $62.7 million for theyear ended December 31, 2006.  Theincrease is primarily due to an increase in corn costs and production expenses.

 

Corncosts increased 119%, or $37.6 million, between periods. The increase isprimarily the result of an approximately 65% increase in the market price ofcorn between periods, which increased our costs by $32.8 million.  The market price was adversely affected bylower corn carryout from 2006 and from strong demand from the growing ethanolindustry.  Also included in the increasein corn costs is a $1.9 million net loss under our corn price risk managementprogram. For the year ended December 31, 2007, we experienced a $1.6million loss from the use of corn hedging instruments, which was caused by asignificant increase in the market price of corn in the fourth quarter of 2007and the impact that such price increase had on the value of our hedginginstruments at December 31, 2007. The remaining portion of the $1.9million loss ($300,000) is attributed to losses on our forward contracts forcorn at December 31, 2007, which was attributed to the difference in pricebetween forward-contract and market price at the end of the year.   The bushels for which we contracted for on aforward contract basis earlier in 2007 exceeded the market price at December 31,2007.

 

Inaddition, cost of revenues rose because the 22% increase in production volumefollowing expansion increased overall production expenses. Expenses, includingfor chemicals, depreciation, electricity, and maintenance, all roseaccordingly.

 

*General and Administrative Expenses*- General and administrativeexpenses decreased $1.56 million, or 25%,**to$4.80 million for the year ended December 31, 2007 from $6.36 million forthe year ended December 31, 2006.  The decrease is primarily due to adecrease in management incentive fees and costs, which resulted from a decreasein net income on which these fees and costs are based.

 

*Interest Expense*- Interest expense increased$1.6 million, or 128%, to $2.9 million for the twelve months December 31,2007 from $1.3 million for the twelve months December 31, 2006. Theincrease is primarily due to an increase of $18.3 million of long-term debtused to finance various construction projects in 2007 including our plant’sexpansion.

 

*Net Income -* Net income decreased $26.6million to $14.1 million for the year ended December 31, 2007 from $40.7million for the year ended December 31, 2006.  This change is causedprimarily by an increase in corn costs, offset partially by an increase inrevenues from the sale of ethanol and distillers grains.

 

25

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**Liquidity and Capital Resources**

 

Our primary sources of liquidity are cash provided by operations andborrowings under our $17.0 million revolving credit facilities which arediscussed below under “Indebtedness.” Net working capital is $13.6 million asof December 31, 2008 compared to $19.7 million as of December 31,2007.  The decrease in working capital isdue to additional costs associated with corn purchases for plant operations.Despite challenging market conditions, we believe that our cash flows fromoperations and revolving debt will be sufficient to meet our expected capitaland liquidity requirements for the next 12 months. But because we anticipateless cash flow from operations, we plan to rely more on our revolving debt tofund operations which, as of the date of this filing, $17.0 million wasavailable for borrowing.  Any capitalimprovement projects in 2009 are expected to be financed with cash fromoperations**.** Until we see significant improvementin the ethanol market, we do not anticipate paying distributions to ourmembers.

 

The following table shows the cash flows between the year ended December 31,2008 and the year ended December 31, 2007:

 

| ** **                                    | ** ** | **Year Ended December 31** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **2008**                   | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | **$**                      | ** ** | **$** | ** ** |
| Net cash from operating activities            |       | 10,316,093                 |       | 26,146,297 |   |
| Net cash from (used for) investing activities |       | 445,295                    |       | (19,231,097 | ) |
| Net cash (used for) financing activities      |       | (7,230,934                 | )          | (7,657,867 | ) |

 

*Cash Flow From Operating Activities* - Net cashflow from operating activities decreased $15.8 million between periods dueprincipally to a decrease in cash provided by net income between periods,offset by an increase in cash provided by inventory.  Total ethanol inventory was relatively flatbetween period ends, despite a 20% reduction in the ethanol inventory value pergallon.  However, we had significantlyless cash tied up in corn inventory between periods due to a 17% decrease inthe market value of corn inventory per bushel and a $2.7 million loss onforward corn contracts at December 31, 2008 (compared to a $5.1 milliongain on forward corn contracts at December 31, 2007).

 

*Cash Flow From Investing Activities*- Net cash flowfrom investing activities increased $19.7 million between periods due to adecrease in 2008 in purchases of property and equipment and the receipt of asales and excise tax refund from the State of South Dakota.  In contrast to 2007, we purchasedsignificantly significantly less property and equipment in 2008 aftercompleting the construction of our plant’s expansion in May 2007.  In addition, we received from the State ofSouth Dakota in 2008 a series of tax refunds totaling $1,016,697 for sales andexcise taxes paid in 2006 and 2007 on the construction of the plant’sexpansion.

 

*Cash Flow From Financing Activities -* Net cash usedfor financing activities decreased $430,000 between periods due to a $21.5million decrease in distributions paid to members and the minority interestmember from 2007 to 2008.  The decreaseis offset by a decrease in advances on long-term debt as we no longer drew downon the $33 million construction note following our plant’s expansion and anincrease of $2.9 million in principal paid on long-term notes payable betweenperiods.

 

The following table shows the cash flows between the year ended December 31,2007 and the year ended December 31, 2006:

 

| ** **                               | ** ** | **Year Ended December 31** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **$**                                     | ** ** | **$** | ** ** |
| Net cash from operating activities       |       | 26,146,297                                |       | 39,638,229 |   |
| Net cash (used for) investing activities |       | (19,231,097                               | )          | (29,101,256 | ) |
| Net cash (used for) financing activities |       | (7,657,867                                | )          | (12,668,790 | ) |

 

26

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*Cash Flow From Operating Activities* - Net cashflow from operating activities decreased $13.5 million between periods, due principallyto a decrease in cash provided by net income between periods, offset by anincrease in cash provided by inventory. Ethanol inventory decreased 62% from2006 to 2007 due to a decrease in the number of gallons in inventory and adecrease in the net realizable value of ethanol.

 

*Cash Flow From Investing Activities*- Net cash flowused for investing activities decreased $9.9 million between periods, dueprimarily to a decrease in payments for property and equipment on the plant’sexpansion and BPXTM project.  The total cost of the plant’s expansion andBPXTM project was $42.3 million, of which $33 million was financed with debt andthe remainder with cash from operations. We also completed construction on theexpansion and BPXTM projects in May 2007 and October 2006, havingspent $14.0 million and $28.3 in cash for these projects in 2007 and 2006,respectively.

 

*Cash Flow From Financing Activities -* Net cash usedfor financing activities decreased by $5.0 million between periods, dueprimarily to a $6.4 million decrease in distributions paid to Northern Growers’members and the minority member of POETTM Biorefining — Big Stone.  This decrease is partially offset by a$900,000 increase in principal payments on long-term debt because we beganmaking principal payments in the fourth quarter of 2007 for the financing ofour three main capital improvement projects — plant expansion, BPXTM and grainstorage.

 

**Indebtedness**

 

We have six notes and loans outstanding under our loan agreement withour lender, U.S. Bank: 1) a $33.0 million term note; 2) a $15.8 millionfixed-rate note; 3) a $3.9 million variable-rate, non-revolving note; 4) an $8million variable rate, revolving note; 5) a $9 million variable rate, revolvingnote; and 6) a $4.3 million variable rate note.

 

The $8 million note permits us to borrow, on a revolving basis, thedifference between the unpaid principal balance and $8 million.  The principal purpose of this revolver is tocover the cost of any non-corn related items at the plant at any time. We had$8 million available for use as of December 31, 2008.

 

The $9 million note permits us to borrow, on a revolving basis, thedifference of the outstanding principal amount and the lesser of the borrowingbase or $9.0 million. The borrowing base is defined as 75% of the total of thefair market value of the outstanding inventory, eligible accounts receivable,and hedging accounts at fair market value. The principal purpose of thisrevolver is to cover the cost of purchasing corn during a period of tightmargins.  We had $9 million available foruse as of December 31, 2008.

 

The $33 million term note, which was converted from a construction noteon August 31, 2007, is subject to two interest rate arrangements. Thenotional amounts ($14.4 million and $7.2 million as of December 31, 2008)are subject to an interest rate swap agreement with U.S. Bank. (see also Item7A below-”Quantitative and Qualitative Disclosures About Market Risk”). Underthe agreement, the notional amounts are subject to a fixed rate of 7.98% and7.52% respectively, which is payable monthly until maturity on August 30,2014. The remaining portion of the note is subject to a variable rate ofone-month LIBOR plus 2.75%, adjusted and due monthly (3.211% at December 31,2008). A principal payment of $825,000 is due quarterly on the note, whichcommenced on November 30, 2007.

 

The principal balance outstanding on the $15.8 million fixed-rate note(6.38%) is $11.1 million as of December 31, 2008. Principal payments of$1.38 million were made for the year ended December 31, 2008.

 

27

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The principal balance outstanding on the $3.9 million variable rate(3.25%) non-revolving loan is $2.44 million as of December 31, 2008.  Principal payments of $390,000 were made forthe year ended December 31, 2008.

 

The $4.3 million note, whichwas funded to us in full on October 5, 2007 to finance additional grainstorage and handling equipment, is subject to a variable rate of LIBOR plus3.00% (4.431% at December 31, 2008), adjusted and payable monthly.Principal payments of $616,000 were made for the year ended December 31,2008.

 

All of the loans and notes outstanding are secured by Big’s Stone’stangible and intangible property, including a leasehold interest, easementrights, improvements, equipment, personal property, accounts receivable,inventory and contracts. In addition to standard covenants and conditions inthe amended and restated loan agreement, Big Stone is subject to materialconditions and covenants, including 1) an annual capital expenditurelimitation, 2) a cash distribution limitation to members, 3) a tangible networth minimum, 4) a minimum working capital requirement, 5) a fixed chargecoverage ratio, and 6) a minimum balance sheet equity. The following table represents the materialcovenant and condition requirements under Big’s Stone’s loan agreement and its actual results interms of compliance as of December 31, 2008:

 

| **Material Loan Covenants**             | ** ** | **Requirement**   | ** ** | **Actual**        | ** ** | **In Compliance (1)** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|-----------------------|
| Capital Expenditure Limitation (Annual) |       | $1 million        |       | $571,402          |       | Yes                   |
| Cash Distribution Limitation            |       | 80% of Net Income |       | NA                |       | Yes                   |
| Tangible Net Worth Minimum              |       | $25 million       |       | $44 million       |       | Yes                   |
| Minimum Working Capital                 |       | $10 million       |       | $21.3 million (2) |       | Yes                   |
| Fixed Charge Coverage Ratio             |       | 1.15:1            |       | 0.30              |       | No                    |
| Minimum Balance Sheet Equity            |       | 40%               |       | 42%               |       | Yes                   |

----

(1)          Compliance is not based on the financialstatements on a consolidated basis; rather, compliance is based on thefinancial statements solely of our subsidiary, Big Stone’s.

(2)          U.S. Bank’s covenants allows theinclusion of the $8 million revolver if not drawn down.

 

Except for compliance with our fixed-charge coverage ratio covenant,which was waived recently by U.S. Bank, we are in compliance with allconditions and covenants under our loan agreement with U.S. Bank as of December 31,2008 and the date of this filing. However, If we are unable to comply with any material covenantin the future, or are unable to obtain waivers in the future, U.S. Bank has theright to declare us in default under our loan agreement. In the event ofdefault, U.S. Bank has the right to, among other things, accelerate the paymentof all outstanding principal or foreclose on the loan. If U.S. Bank were todeclare us in default and accelerate payment, we would not have the necessarycash to repay the outstanding principal ($45.9 million as of December 31,2008) and would need to seek additional sources of financing to repay the loan.In effort to avoid future violations of the fixed-coverage ratio, U.S. Bankagreed on February 19, 2009, to adjust the fixed-charge coverage ratiocovenant, making it less difficult for us to comply with in the future. Thefixed-charge coverage ratio will now be based on year-to-date information andstill tested quarterly. Prior to the change, it was based on rolling, fourquarter information.

 

The following table summarizes our consolidated contractual obligationsas of December 31, 2008:

 

28

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| ** **                         | ** ** | ** ** | ** ** | ** **    | ** ** | **One to** | ** ** | **Four to** | ** ** | ** **     | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|------------|------------|-------------|------------|----------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Less than** | ** ** | **Three**  | ** ** | **Five**    | ** ** | **After Five** | ** ** |
| **Contractual Obligations**        | ** ** | **Total**  | ** ** | **One Year**  | ** ** | **Years**  | ** ** | **Years**   | ** ** | **Years**      | ** ** |
| Long-Term Debt Obligations (1)     |       | 55,968,414 |       | 8,527,927     |       | 16,275,342 |       | 17,804,417  |       | 13,360,728     |       |
| Operating Lease Obligations        |       | 377,155    |       | 2,520         |       | 5,166      |       | 5,292       |       | 364,177        |       |
| Purchase Obligations(2)            |       | 4,179,845  |       | 783,929       |       | 1,567,858  |       | 1,091,491   |       | 736,567        |       |
| Total Contractual Cash Obligations |       | $          | 60,525,414 |          | $          | 9,314,376  |       | $           | 17,848,366 |           | $          | 18,901,200 |   | $ | 14,461,472 |   |
|                                    |            |            |            |               |            |            |            |             |            |                |            |  |  |  |  |  |

----

(1)          Long-term debt obligations reflectpayment obligations, including interest, arising under the amended LoanAgreement with U.S. Bank.

(2)          Purchase obligations include payment forminimum steam purchases, and services for plant management and risk management.

 

##### **Off-Balance Sheet Arrangements**

#####  

We do not use or have any off-balance sheet financial arrangements.

 

**Recent Accounting Pronouncements**

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 141R *Business Combinations*(“SFAS 141R”).  The objective of SFAS 141R is to improve the informationprovided in financial reports about a business combination and its effects.SFAS 141R retains the requirements of SFAS 141 that the acquisition methodof accounting be used for all business combinations (whether full, partial orstep acquisition) and for an acquirer to be identified for each businesscombination. SFAS 141R defines the acquirer as the entity that obtains controlof one or more businesses in the business combination and establishes theacquisition date as the date that the acquirer achieves control. In applyingthe acquisition method, the acquirer must determine the fair value of theacquired business as of the acquisition date and recognize the fair value ofthe acquired assets and liabilities assumed. SFAS 141R also statesacquisition costs will generally be expensed as incurred and restructuringcosts will be expensed in periods after the acquisition date. SFAS 141R iseffective for business combination transactions we enter into for which theacquisition date is on or after January 1, 2009. Earlier application isprohibited. We are currently evaluating the requirements of SFAS 141R and willapply the statement to any business combinations occurring on or after January 1,2009.

 

In December 2007, the FASB issued SFAS 160, “*NoncontrollingInterests in Consolidated Financial Statements*” (“SFAS 160”). SFAS160 amends Accounting Research Bulletin No. 51 to establish accounting andreporting standards for the non-controlling interest in a subsidiary and forthe deconsolidation of a subsidiary. It clarifies that a non-controllinginterest in a subsidiary is an ownership interest in the consolidated entitythat should be reported as equity in the consolidated financial statements.SFAS 160 is effective for our fiscal year beginning January 1, 2009. Weare evaluating the effect, if any, that the adoption of SFAS 160 will have onour results of operations, financial position and the related disclosures.

 

InMarch 2008, the FASB issued SFAS 161, “*Disclosures aboutDerivative Instruments and Hedging Activities an amendment of FASB Statement No. 133*,”which amends and expands the disclosure requirements of SFAS 133 torequire qualitative disclosure about objectives and strategies for usingderivatives, quantitative disclosures about fair value amounts of gains andlosses on derivative instruments, and disclosures about credit-risk-relatedcontingent features in derivative agreements. This statement will be effectivefor our financial statements issued for the first quarter of 2009. Because SFAS161 requires enhanced disclosures but does not modify the accounting treatmentof derivative instruments and hedging activities, we believe the adoption ofthis standard will have no impact on our financial position, results ofoperations or cash flows.

 

29

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The FASB has issued FASB Staff Position (FSP) FAS 133-1 and FIN 45-4,Disclosures about Credit Derivatives and Certain Guarantees: An Amendment ofFASB Statement No. 133 and FASB Interpretation No. 45; andClarification of the Effective Date of FASB Statement No. 161.  ThisFSP amends FASB Statement No. 133, Accounting for Derivative Instrumentsand Hedging Activities, to require disclosures by sellers of creditderivatives, including credit derivatives embedded in a hybridinstrument.  This FSP also amends FASB Interpretation No. 45, Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others, to require an additional disclosure aboutthe current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the Board’s intent about the effective date of FASBStatement No. 161, Disclosures about Derivative Instruments and HedgingActivities.  We are evaluating the effect, if any, that the adoption ofthese pronouncements will have on our results of operations, financial positionand the related disclosures.

 

 InApril 2008, the FASB issued FASB Staff Position SFAS 142-3, “*Determination of the Useful Life of Intangible Assets*” (“FSP142-3”). FSP 142-3 amends the factors that should be considered in developing therenewal or extension assumptions used to determine the useful life of arecognized intangible asset under SFAS 142, “*Goodwill andOther Intangible Assets*”. FSP 142-3 also requires expandeddisclosure regarding the determination of intangible asset useful lives. FSP142-3 is effective for our year beginning January 1, 2009. We arecurrently evaluating the impact, if any, that FSP 142-3 will have on ourconsolidated financial statements.

 

**Critical Accounting Policies and Estimates**

 

Preparation of our financial statements require estimates and judgmentsto be made that affect the amounts of assets, liabilities, revenues andexpenses reported.  Such decisions include the selection of theappropriate accounting principles to be applied and the assumptions on which tobase accounting estimates.  We continually evaluate these estimates basedon historical experience and other assumptions we believe to be reasonableunder the circumstances.

 

The difficulty in applying these policies arises from the assumptions,estimates and judgments that have to be made currently about matters that areinherently uncertain, such as future economic conditions, operating results andvaluations as well as management intentions.  As the difficulty increases,the level of precision decreases, meaning that actual results can and probablywill be different from those currently estimated.

 

Of the significantaccounting policies described in the notes to the financial statements, webelieve that the following may involve a higher degree of estimates, judgments,and complexity.

 

*Commitmentsand Contingencies. *Contingencies, by their nature, relate to uncertainties that requiremanagement to exercise judgment both in assessing the likelihood that aliability has been incurred, as well as in estimating the amount of thepotential expense.  In conformity with accounting principles generallyaccepted in the U.S., we accrue an expense when it is probable that a liabilityhas been incurred and the amount can be reasonably estimated.

 

*Inventory Valuation. *Ethanol and relatedproduct inventory is stated at net realizable value. Corn inventory is statedat market value, which approximates net realizable value (local marketprices less cost of disposal), based on local market pricesdetermined by grain terminals in the area of the plant. Other raw materials, spare parts andwork-in-process inventory are stated at the lower of cost or market on anaverage cost method.

 

30

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###### *Revenue Recognition. *Revenue from the sale of ethanol and related products is recorded whentitle transfers to customers. Generally, ethanol is shipped FOB shipping pointand related products are shipped FOB destination point. In accordance with ouragreement for the marketing and sale of ethanol, shipping costs arranged by themarketer are deducted from the gross sales price reported to us by themarketer; thus no shipping costs are incurred related to sales of ethanol. Fordistiller grains, shipping costs incurred by us are included as a component ofcost of revenues. Interest income is recognized as earned.

 

###### Revenue from federaland state incentive programs is recorded when we have produced or sold theethanol and satisfied the reporting requirements under each applicable program.When it is uncertain that we will receive full allocation and payment due underthe incentive programs, we derive an estimate of the incentive revenue for therelevant period based on various factors. The estimate is subject to change aswe become aware of increases or decreases in the amount of funding availableunder the incentive programs or other factors that affect funding or allocationof funds under such programs.

 

*Cost ofRevenues. *The primary components of cost of revenuesfrom the production of ethanol and related products are corn expense, energyexpense (steam, natural gas and electricity), raw materials expense (chemicalsand denaturant), shipping costs on sales, depreciation on process equipment anddirect labor costs. Shipping costs incurred by us are recorded as a componentof cost of revenues. Shipping costs in cost of revenues includes inboundfreight charges on inventory, outbound freight charges on related product andpurchasing and receiving costs.

 

*Long-Lived Assets. *Depreciation andamortization of our property, plant, and equipment is provided on thestraight-line method by charges to operations at rates based upon the expecteduseful lives of individual or groups of assets.  Economic circumstances orother factors may cause management’s estimates of expected useful lives todiffer from actual.

 

Long-livedassets, including property, plant and equipment, and investments are evaluatedfor impairment on the basis of undiscounted cash flows whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  An impaired asset is written down to our estimated fairmarket value based on the best information available.  Considerablemanagement judgment is necessary to estimate discounted future cash flows andmay differ from actual cash flows.

 

*Accounting for Derivative Instruments and HedgingActivities.  *Weenter into derivative instruments to hedge our exposure to price risk relatedto forecasted corn and natural gas purchases, forward corn purchase contractsand forecasted ethanol sales.  We do not typically enter into derivativeinstruments other than for hedging purposes.  All derivative contracts arerecognized on the December 31, 2008 and 2007 balance sheets at their fairmarket value.

 

Onthe date the derivative instrument is entered into, we designate the derivativeas either (1) a hedge of the fair value of a recognized asset or liabilityor of an unrecognized firm commitment (fair value hedge), (2) a hedge of aforecasted transaction or of the variability of cash flows to be received orpaid related to a recognized asset or liability (cash flow hedge) or (3) willnot designate the derivative as a hedge.  Changes in the fair value of aderivative that is designated as and meets all the required criteria for a fairvalue hedge, along with the gain or loss on the hedged asset or liability thatis attributable to the hedged risk, are recorded in current periodearnings.  Changes in the fair value of a derivative that is designated asand meets all the required criteria for a cash flow hedge are recorded inaccumulated other comprehensive income and reclassified into earnings as theunderlying hedged item affects earnings.  Changes in the fair value of aderivative that is not designated as a hedge are recorded in current periodearnings.

 

**Item 7A. Quantitative and Qualitative Disclosure About MarketRisk.**

 

Weare exposed to the impact of market fluctuations associated with commodityprices and interest rates as discussed below. We have no exposure to foreigncurrency risk as all of our business is conducted in U.S. Dollars. We usederivative financial instruments as part of an overall strategy to managemarket risk. Specifically, we use forward, futures and option contracts tohedge changes to the commodity prices of corn and natural gas, as well asinterest rate swaps to hedge against changes in interest rates. However, we donot enter into these derivative financial instruments for trading orspeculative purposes. The interest rate swap agreement is accounted for as acash flow hedge pursuant to the requirements of SFAS 133, as amended,Accounting for Derivative Instruments and Hedging Activities.

 

*Commodity Price Risk*

 

Weproduce ethanol and its by-product, distillers grains, from corn, and, as such,we are sensitive to changes in the price of corn. The price of corn is subjectto fluctuations due to unpredictable factors such as

 

31

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weather, total corn plantedand harvested acreage, changes in national and global supply and demand, andgovernment programs and policies. We also use natural gas in the productionprocess, and as such are sensitive to changes in the price of natural gas. Theprice of natural gas is influenced by such weather factors as heat or cold inthe summer and winter, in addition to the threat of hurricanes in the spring,summer and fall. Other natural gas price factors include the domestic onshoreand offshore rig count, and the amount of natural gas in underground storageduring both the injection (April 1st - November 7th) and withdrawal (November 14th- March 31st) seasons. The price of distillers grains is principallyinfluenced by the price of corn and soybean meal, and competing protein feed products.

 

Weattempt to reduce the market risk associated with fluctuations in the price ofcorn and natural gas by employing a variety of risk management strategies.Strategies include the use of derivative financial instruments such as futuresand options initiated on the Chicago Board of Trade and/or the New YorkMercantile Exchange, as well as the daily cash management of our total corn andnatural gas ownership relative to our monthly demand for each commodity, whichmay incorporate the use of forward cash contracts or basis contracts.

 

Cornis hedged with derivative instruments including futures and options contractsoffered through the Chicago Board of Trade. Forward cash corn and basiscontracts are also utilized to minimize future price risk. Likewise, naturalgas is hedged with futures and options contracts offered through the New YorkMercantile Exchange. Basis contracts are also utilized to minimize future pricerisk.

 

Gainsand losses on futures and options contracts used as economic hedges of corninventory, as well as on forward cash corn and basis contracts, are recognizedas a component of cost of revenues for financial reporting on a monthly basisusing month-end settlement prices for corn futures on the Chicago Board ofTrade. Corn inventories are marked to fair value using market based prices sothat gains or losses on the derivative contracts, as well as forward cash cornand basis contracts, are offset by gains or losses on inventories during thesame accounting period.

 

Gainsand losses on futures and options contracts used as economic hedges of naturalgas, as well as basis contracts, are recognized as a component of cost ofrevenues for financial reporting on a monthly basis using month-end settlementprices for natural gas futures on the New York Mercantile Exchange. The naturalgas inventories hedged with these derivatives or basis contracts are valued atthe spot price of natural gas, plus or minus the gain or loss on the futures oroptions positions relative to the month-end settlement price on the New YorkMercantile Exchange.

 

Asensitivity analysis has been prepared to estimate our exposure to commodityprice risk. The table presents the fair value of open futures and optionpositions for corn and natural gas as of December 31, 2008 and December 31,2007 and the potential loss in fair value resulting from a hypothetical 10%adverse change in corn and natural gas prices. The fair value of the positionsis a summation of the fair values calculated by valuing each net position atquoted market prices as of the applicable date. The results of this analysis,which may differ from actual results, are as follows:

 

| **Year Ended**         | ** ** | **FairValue** | ** ** | **Effect of  Hypothetical  Adverse  Change —  Market Risk** | ** ** |
|------------------------|------------|---------------|------------|------------------------------------------------------------------|------------|
| December 31, 2008 |       | $             | 5,297,175  |                                                             | 529,718    |   |
| December 31, 2007 |       | $             | 11,181,459 |                                                             | 1,118,146  |   |

 

32

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*Interest Rate Risk*

 

We manage our interestrate risk by monitoring the effects of market changes on the interest rates andusing fixed-rate debt whenever possible. We also enter into interest rate swapagreements.

 

Our interest rate riskexposure pertains primarily to our variable rate, long-term debt. Specifically,we had $13.19 million in variable rate, long-term debt outstanding as of December 31,2008, or approximately 29% of our total long-term indebtedness. The interestrate on $2.44 million of the variable rate, long-term debt is U.S. Bank’s primerate, which was 3.25% as of December 31, 2008.  The interest rate on$3.53 million of the variable rate debt is subject to an interest rate of4.431% as of December 31, 2008.  The variable rate on the $7.22million portion of the term note is 3.211% (One-Month LIBOR plus 2.75%) as of December 31,2008.

 

  In order toachieve a fixed interest rate on a portion of our $33.0 million term note, weare a party to an interest rate swap agreement with U.S. Bank.  The swapagreement covers a seven-year term financing period through August 30,2014. This****agreement assists us inprotecting against exposure to increases in interest rates and fixes theinterest rate at 7.98% and 7.52% on the notional amounts ($14.44 million and$7.22 million, respectively as of December 31, 2008). The remainingamount, $7.22 million, is subject to a variable rate of One-Month LIBOR plus2.75%. While our exposure is now reduced, there is no assurance that theinterest rate swap will provide us with protection in all scenarios.  Forexample, under the swap agreement, when One-Month LIBOR plus 2.75% exceeds7.98% or 7.52%, we receive payments from U.S. Bank for the difference betweenthe market rate and the swap rate.  Conversely, when the One-Month LIBORplus 2.75% falls below 7.98% or 7.52%, we make payments to U.S. Bank for thedifference.  The interest rate on the variable portion of our $33.0million term note decreased 4.36% from December 31, 2007 to December 31,2008, which required us to pay more in interest to U.S. Bank on the two swaptransactions.

 

**Item 8.  Financial Statements and Supplementary Data.**

 

Referenceis made to the “Table of Contents” of Northern Growers, LLC located on the page priorto page F-1 of this report, and financial statements for the year ended December 31,2008 referenced therein, which are hereby incorporated by reference.

 

**Item 9.  Changes in and Disagreements With Accountantson Accounting and Financial Disclosure.**

 

None.

 

**Item 9A.  Controls and Procedures.**

 

*Evaluationof Disclosure Controls and Procedures.*  Our management, including the participationof our Chief Executive Officer/Chief Financial Officer, has concluded that,based on management’s evaluation as of the end of the period covered by thisAnnual Report on Form 10-K,  thedisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934) are effective to ensurethat information required to be disclosed by us in reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. Additionally, based on management’s evaluation, our disclosure controlsand procedures were effective in ensuring that information required to bedisclosed in our Exchange Act reports is accumulated and communicated to ourmanagement, including our Chief Executive Officer/Chief Financial Officer, toallow timely decisions regarding required disclosures.

 

*Management’sreport on internal control over financial reporting. *Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) of the SecuritiesExchange Act of 1934.  Our internalcontrol over financial reporting is a process designed to

 

33

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provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles.  Our internalcontrol over financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of assets; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with U.S. generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with authorizations of our management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisitions, use, or disposition of our assets that could have a materialeffect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Management hasassessed our internal control over financial reporting in relation to criteriadescribed in *Internal Control- Integrated Framework*,issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on this assessmentusing those criteria, we concluded that, as of December 31, 2008, ourinternal control over financial reporting was effective.

 

Eide BaillyLLP, an independent registered public accounting firm, has audited our internalcontrol over financial reporting as of December 31, 2008, as stated intheir report which is included in F-1 of this Annual Report on Form 10-K.

 

*Changes inInternal Control over Financial Reporting.*  There was no change in our internal controlover financial reporting that occurred during the quarter ended December 31,2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 
|   | /s/ Robert Narem                       |
|--------|----------------------------------------|
|   | Robert Narem, Chief  Executive Officer |
|   | and Chief Financial  Officer, Manager  |
|   | (Principal Executive  Officer)         |

 

**Item 9B.  Other Information.**

 

None.

 

**PART III**

 

Pursuant to General Instructions G(3), we omit Part III,Items 10, 11, 12, 13 and 14, and incorporate such items by reference to anamendment to this Annual Report on Form 10-K or to an InformationStatement to be filed with the Commission within 120 days after the close ofthe fiscal year covered by this report (December 31, 2008).

 

**PART IV**

 

**Item 15.  Exhibits, Financial Statement Schedules.**

 

(a) Thefollowing exhibits and financial statements are filed as part of, or areincorporated by reference into, this report:

 

34

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(1) FinancialStatements—Reference is made to the “Table of Contents” of Northern Growers,LLC located on the page prior to page F-1 of this report for a listof the financial statements and schedules for the year ended December 31,2008 included herein. The financial statements begin on page F-2 of thisReport.

 

(2) All supplementalschedules are omitted because of the absence of conditions under which they arerequired or because the information is shown in the Consolidated FinancialStatements or notes thereto.

 

(3) The exhibits wehave filed herewith or incorporated by reference herein are set forth on theattached Exhibit Index.  The following exhibits constitute amanagement contract:  10.14 and 10.16.

 

(b) See Item 15(a)(3)

 

SIGNATURES

 

Pursuantto the requirement of Section 13 or 15(d) of the Securities ExchangeAct, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|   |                | NORTHERN  GROWERS, LLC                                                                                       |
|--------|---------------------|--------------------------------------------------------------------------------------------------------------|
|   |                |                                                                                                         |
| Date:  | March 2,  2009 | /s/ Robert  Narem                                                                                            |
|   |                | Robert  Narem, Chief Executive  Officer/Chief Financial Officer  (Principal Executive and Financial Officer) |

 

Pursuant to the requirementsof the Securities Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 

 
|   |                | NORTHERN  GROWERS, LLC                                                       |
|--------|---------------------|------------------------------------------------------------------------------|
|   |                |                                                                         |
| Date:  | March 2,  2009 | /s/ Robert  Narem                                                            |
|   |                | Robert  Narem, Chief Executive Officer  and Chief Financial Officer, Manager |
|   |                |                                                                         |
| Date:  | March 2,  2009 | /s/ Ronald  Anderson                                                         |
|   |                | Ronald  Anderson, Manager                                                    |
|   |                |                                                                         |
| Date:  | March 2,  2009 |                                                                         |
|   |                | Leroy  Bergan, Manager                                                       |
|   |                |                                                                         |
| Date:  | March 2,  2009 | /s/ Wendell  Falk                                                            |
|   |                | Wendell  Falk, Manager                                                       |
|   |                |                                                                         |
| Date:  | March 2,  2009 | /s/ Lars  Herseth                                                            |
|   |                | Lars  Herseth, Manager                                                       |
|   |                |                                                                         |
| Date:  | March 2,  2009 | /s/ Mark  Lounsbery                                                          |
|   |                | Mark  Lounsbery, Manager                                                     |

 

35

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| Date:  | March 2,  2009 | /s/ Robert  Metz           |
|--------|---------------------|----------------------------|
|   |                | Robert Metz,  Manager      |
|   |                |                       |
| Date:  | March 2,  2009 | /s/ Jeff  Olson            |
|   |                | Jeff Olson,  Manager       |
|   |                |                       |
| Date:  | March 2,  2009 | /s/ Ronald  Olson          |
|   |                | Ronald  Olson, Manager     |
|   |                |                       |
| Date:  | March 2,  2009 | /s/ Heath  Peterson        |
|   |                | Heath  Peterson, Manager   |
|   |                |                       |
| Date:  | March 2,  2009 | /s/ Delton  Strasser       |
|   |                | Delton  Strasser, Manager  |
|   |                |                       |
| Date:  | March 2,  2009 |                       |
|   |                | Steve  Street, Manager     |
|   |                |                       |
| Date:  | March 2,  2009 | /s/ Bill  Whipple          |
|   |                | Bill  Whipple, Manager     |
|   |                |                       |
| Date:  | March 2,  2009 | /s/ Robert  Wittnebel      |
|   |                | Robert  Wittnebel, Manager |

 

36

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**EXHIBITINDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                         | ** ** | **Filed  Herewith** | ** ** | **Incorporated by  Reference**                                                                                 |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Plan of Organization.                                                                                                   |       |                |       | Appendix A to  Registrant’s Prospectus filed with the Commission on March 17, 2003.                  |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 3.1              |       | Articles of  Organization.                                                                                              |       |                |       | Appendix B to Registrant’s  Prospectus filed with the Commission on March 17, 2003.                  |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 3.2              |       | Fourth Amended and  Restated Operating Agreement dated July 1, 2006.                                               |       |                |       | Exhibit 3.2 to the  Registrant’s Form 10-Q filed with the Commission on August 14,  2006.  |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 4.1              |       | Form of  Class A Certificate.                                                                                 |       |                |       | Exhibit 4.1 to the  Registrant’s Form S-4 filed with the Commission on July 26, 2002.      |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.1             |       | Loan Agreement with  U.S. Bank dated July 11, 2001.                                                                |       |                |       | Exhibit 10.7 to  the Registrant’s Form S-4 filed with the Commission on July 26,  2002.    |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.2             |       | Lease Agreement with  Big Stone — Grant Industrial Development and Transportation, dated  April 18, 2001.     |       |                |       | Exhibit 10.9 to  the Registrant’s Form S-4 filed with the Commission on July 26,  2002.    |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.3             |       | Steam Sale Agreement  with Otter Tail Power Company, dated April 18, 2001.                                         |       |                |       | Exhibit 10.10 to  the Registrant’s Form S-4 filed with the Commission on July 26,  2002.   |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.4             |       | Water and Fuel Oil  Agreement with Otter Tail Power Company, dated August 14, 2001.                                |       |                |       | Exhibit 10.11 to  the Registrant’s Form S-4 filed with the Commission on July 26,  2002.   |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.5             |       | Electric Service  Agreement with Otter Tail Power Company, dated September 26, 2001.                               |       |                |       | Exhibit 10.12 to  the Registrant’s Form S-4 filed with the Commission on July 26,  2002.   |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.6             |       | Water and Sanitary  Sewer Agreement with the City of Big Stone City, dated December 21,  2001.                     |       |                |       | Exhibit 10.13 to  the Registrant’s Form S-4 filed with the Commission on July 26,  2002.   |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.7             |       | Access and Rail  Agreement with Otter Tail Corporation, dated April 18, 2001.                                      |       |                |       | Exhibit 10.14 to  the Registrant’s Form S-4 filed with the Commission on July 26,  2002.   |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.8             |       | Industry Track  Agreement with Burlington Northern and Santa Fe Railway Company, dated  January 8, 2002.           |       |                |       | Exhibit 10.15 to  the Registrant’s Form S-4 filed with the Commission on July 26,  2002.   |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.9             |       | Service Request  Form and Extended Service Agreement with NorthWestern Public Service,  dated March 19, 2002. |       |                |       | Exhibit 10.17 to  the Registrant’s Form S-4 filed with the Commission on July 26,  2002.   |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.10            |       | Amendment to U.S. Bank  Loan Agreement, dated June 22, 2004.                                                       |       |                |       | Exhibit 10.1 to  the Registrant’s Form 10-Q filed with the Commission on August 16,  2004. |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.11            |       | Second Amendment to  U.S. Bank Loan Agreement, dated March 30, 2005.                                               |       |                |       | Exhibit 10.26 to  the Registrant’s Form 10-K filed with the Commission on March 31,  2005. |
|             |       |                                                                                                                    |       |                |       |                                                                                                           |
| 10.12            |       | $15.8 Million  Promissory Note with U.S. Bank, dated March 30, 2005.                                               |       |                |       | Exhibit 10.27 to  the Registrant’s Form 10-K filed with the Commission on March 31,  2005. |

 

37

----

 
| 10.13  |   | $3.9 Million Promissory  Note with U.S. Bank, dated March 30, 2005.                                                     |   |   |   | Exhibit 10.28 to  the Registrant’s Form 10-K filed with the Commission on March 31,  2005.   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.14  |   | Management Agreement  with POETTM Plant Management, LLC, dated April 20, 2005.                                      |   |   |   | Exhibit 10.2 to  the Registrant’s Form 10-Q filed with the Commission on May 16,  2005.      |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.15  |   | Technology and Patent  Rights License Agreement with POETTM Design and Construction, LLC, dated  October 25, 2005.* |   |   |   | Exhibit 10.1 to  the Registrant’s Form 10-Q filed with the Commission on  November 14, 2005. |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.16  |   | Amendment to the  Management Agreement with POETTM Plant Management, dated October 25,  2005.                       |   |   |   | Exhibit 10.2 to  the Registrant’s Form 10-Q filed with the Commission on  November 14, 2005. |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.17  |   | Design Build Agreement  with POETTM Design and Construction, Inc., dated October 25, 2005.                     |   |   |   | Exhibit 10.3 to  the Registrant’s Form 10-Q filed with the Commission on  November 14, 2005. |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.18  |   | Amended and Restated  Loan Agreement with U.S. Bank dated August 28, 2006.                                              |   |   |   | Exhibit 10.1 to  the Registrant’s Form 10-Q filed with the Commission on  November 14, 2006. |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.19  |   | Expansion Construction  Note Agreement dated August 28, 2006.                                                           |   |   |   | Exhibit 10.2 to  the Registrant’s Form 10-Q filed with the Commission on  November 14, 2006. |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.20  |   | $8.0 Million Variable  Rate, Revolving Note dated August 28, 2006.                                                      |   |   |   | Exhibit 10.3 to  the Registrant’s Form 10-Q filed with the Commission on  November 14, 2006. |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.21  |   | Construction Mortgage  and Addendum dated August 28, 2006.                                                              |   |   |   | Exhibit 10.4 to  the Registrant’s Form 10-Q filed with the Commission on  November 14, 2006. |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.22  |   | Security Agreement  dated August 28, 2006.                                                                              |   |   |   | Exhibit 10.5 to  the Registrant’s Form 10-Q filed with the Commission on  November 14, 2006. |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.23  |   | Corn and Natural Gas  Price Risk Management Agreement dated April 1, 2007.                                              |   |   |   | Exhibit 10.2 to  the Registrant’s Form 10-Q filed with the Commission on May 10,  2007.      |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.24  |   | Amendment No. 1 to  Water Fuel Agreement dated March 21, 2007.                                                     |   |   |   | Exhibit 10.1 to  the Registrant’s Form 10-Q filed with the Commission on May 10,  2007.      |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.25  |   | Ethanol Marketing and  Services Agreement dated April 24, 2007.                                                         |   |   |   | Exhibit 10.3 to  the Registrant’s Form 10-Q filed with the Commission on May 10,  2007.      |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.26  |   | DDGS Marketing and  Service Agreement dated March 2002.                                                                 |   |   |   | Exhibit 10.6 to  the Registrant’s Form S-4 filed with the Commission July 21, 2002.          |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.27  |   | Design Build Agreement  with POETTM Design and Construction dated April 3, 2007.                                    |   |   |   | Exhibit 10.4 to  the Registrant’s Form 10-Q filed with the Commission on May 10,  2007.      |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.28  |   | Amendment to Amended  and Restated Loan Agreement with U.S. Bank dated September 21, 2007.                              |   |   |   | Exhibit 10.1 to  the Registrant’s Form 10-Q filed with the Commission on November 9,  2007.  |
|   |   |                                                                                                                         |   |   |   |                                                                                                             |
| 10.29  |   | $9.0 Million Promissory  Note with U.S. Bank dated July 28, 2008.                                                       |   |   |   | Exhibit 10.1 to  the Registrant’s Form 10-Q filed with the Commission on August 12,  2008.   |

 

38

----

 
|   |   |                                                                        |   |   |   |                                                                                                            |
|--------|--------|-----------------------------------------------------------------------------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------|
| 10.30  |   | $4.3 Million Promissory  Note with U.S. bank dated September 21, 2007. |   |   |   | Exhibit 10.3 to  the Registrant’s Form 10-Q filed with the Commission on November 9,  2007. |
|   |   |                                                                        |   |   |   |                                                                                                            |
| 10.31  |   | Mortgage in Favor of  U.S. Bank dated September 21, 2007.              |   |   |   | Exhibit 10.4 to  the Registrant’s Form 10-Q filed with the Commission on November 9,  2007. |
|   |   |                                                                        |   |   |   |                                                                                                            |
| 21.1   |   | Subsidiaries of the  Registrant                                             |   | X      |   |                                                                                                            |
|   |   |                                                                        |   |   |   |                                                                                                            |
| 31     |   | Rule 13a-14(a)/15d-14(a) Certifications                           |   | X      |   |                                                                                                            |
|   |   |                                                                        |   |   |   |                                                                                                            |
| 32     |   | Section 1350  Certification                                            |   | X      |   |                                                                                                            |

 

----

*The redacted portions ofthis exhibit were filed separately with the SEC subject to a request forconfidential treatment dated November 14, 2005.

 

 

39

----

 

**NORTHERN GROWERS, LLC**

 

Table of Contents

 
|                                                         | **Page**                                                                |
|--------------------------------------------------------------|-------------------------------------------------------------------------|
|                                                         |                                                                    |
| **REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** | F-1                                                                     |
|                                                         |                                                                    |
| **CONSOLIDATED FINANCIAL STATEMENTS**                        |                                                                    |
|                                                         | Balance Sheets                                                          | F-2 |
|                                                         | Statements of Operations and Comprehensive Income                       | F-4 |
|                                                         | Statements of Changes in Members’ Equity and Comprehensive  Income | F-5 |
|                                                         | Statements  of Cash Flows                                               | F-6 |
|                                                         | Notes  to Consolidated Financial Statements                             | F-7 |

 

----

 

 

 

## **REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

## ** **

The Audit Committee andMembers**Northern Growers, LLC**

Big Stone City, South Dakota

 

We have audited theaccompanying consolidated balance sheets of **NorthernGrowers, LLC** as of December 31,2008 and 2007, and the related consolidated statements of operations andcomprehensive income, members’ equity and comprehensive income, and cash flowsfor each of the years in the three-year period ended December 31, 2008. We also have audited **NorthernGrowers, LLC**’s internal control over financial reporting as of December 31, 2008, based oncriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). **NorthernGrowers, LLC**’s management is responsible for these financialstatements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Report on InternalControl Over Financial Reporting. Our responsibility is to express an opinionon these financial statements and an opinion on the company’s internal controlover financial reporting based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement and whether effective internal control over financialreporting was maintained in all material respects. Our audits of the financialstatements included examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. Our audit of internal controlover financial reporting included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of **Northern Growers, LLC**as of December 31, 2008 and2007, and the results of its operations and its cash flows for each of theyears in the three-year period ended December 31,2008 in conformity with accounting principles generally accepted in theUnited States of America. Also in our opinion, **NorthernGrowers, LLC** maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2008, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).

 

 

SiouxFalls, South Dakota

February 26,2009

 

PEOPLE.PRINCIPLES. POSSIBILITIES.

----

www.eidebailly.com

200E. 10th Street, Suite 500 ·PO Box 5125 · Sioux Falls, South Dakota57117-5125 · Phone 605.339.1999 · Fax 605.339.1306 ·EOE

 

F-1

----

 

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                           | ** ** | **December 31,** | ** **      | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2008**              | ** **      | **2007**              | ** ** |
| **ASSETS**                                                                                           |       |                  |            |                  |       |
|                                                                                                 |       |                  |            |                  |       |
| CURRENT ASSETS                                                                                       |       |                  |            |                  |       |
| Cash and cash  equivalents                                                                           | ** ** | **$**                 | **12,712,987**  |                  | $          | 9,182,533 |   |
| Accounts  receivable                                                                                 |       |                  |            |                  |       |
| Trade related  party                                                                                 | ** ** | **6,475,987**         |            | 5,711,848             |       |
| Trade                                                                                                | ** ** | **525,851**           |            | 876,510               |       |
| Other                                                                                                | ** ** | **316,576**           |            | 1,005,132             |       |
| Inventory                                                                                            | ** ** | **9,710,268**         |            | 11,886,818            |       |
| Prepaid expenses                                                                                     | ** ** | **127,236**           |            | 103,678               |       |
| Margin deposits  and commodities contracts                                                           | ** ** | **—**            |            | 6,307,068             |       |
|                                                                                                 |       |                  |            |                  |       |
| Total current  assets                                                                                | ** ** | **29,868,905**        |            | 35,073,587            |       |
|                                                                                                 |       |                  |            |                  |       |
| PROPERTY AND  EQUIPMENT                                                                              |       |                  |            |                  |       |
| Land  improvements                                                                                   | ** ** | **7,107,452**         |            | 7,090,574             |       |
| Equipment                                                                                            | ** ** | **71,005,748**        |            | 71,186,213            |       |
| Buildings                                                                                            | ** ** | **15,379,448**        |            | 15,379,448            |       |
|                                                                                                 | ** ** | **93,492,648**        |            | 93,656,235            |       |
| Less accumulated  depreciation                                                                       | ** ** | **(20,261,459**       | **)**           | (15,515,208           | )          |
|                                                                                                 |       |                  |            |                  |       |
| Net property and  equipment                                                                          | ** ** | **73,231,189**        |            | 78,141,027            |       |
|                                                                                                 |       |                  |            |                  |       |
| OTHER ASSETS                                                                                         |       |                  |            |                  |       |
| Financing costs,  net of amortization of $116,932 and $51,194 as of December 31, 2008 and  2007 | ** ** | **229,577**           |            | 265,491               |       |
| Assets held for  sale                                                                                | ** ** | **100,000**           |            | 100,000               |       |
|                                                                                                 |       |                  |            |                  |       |
| Total other  assets                                                                                  | ** ** | **329,577**           |            | 365,491               |       |
|                                                                                                 |       |                  |            |                  |       |
|                                                                                                 | ** ** | **$**                 | **103,429,671** |                  | $          | 113,580,105 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-2

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                  | ** ** | **December 31,** | ** **      | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|-----------------|-----------------------|------------|
| ** **                                                                  | ** ** | **2008**              | ** **      | **2007**              | ** ** |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                   |       |                  |            |                  |       |
|                                                                        |       |                  |            |                  |       |
| CURRENT  LIABILITIES                                                        |       |                  |            |                  |       |
| Accounts payable  - trade                                                   | ** ** | **$**                 | **2,037,590**   |                  | $          | 1,974,139 |   |
| Accounts payable  - corn                                                    | ** ** | **6,667,478**         |            | 5,281,356             |       |
| Accounts payable  - related party                                           | ** ** | **328,566**           |            | 348,008               |       |
| Other accrued  liabilities                                                  | ** ** | **603,768**           |            | 523,421               |       |
| Accrued interest                                                            | ** ** | **3,750**             |            | 3,750                 |       |
| Accrued  liability for commodity contracts, net of margin deposits          | ** ** | **847,398**           |            | —                |       |
| Distribution  payable - Northern Growers                                    | ** ** | **—**            |            | 1,518,840             |       |
| Distribution  payable - minority member                                     | ** ** | **—**            |            | —                |       |
| Notes payable -  due upon demand                                            | ** ** | **5,000**             |            | 5,000                 |       |
| Current portion  of notes payable                                           | ** ** | **5,785,007**         |            | 5,695,078             |       |
|                                                                        |       |                  |            |                  |       |
| Total current  liabilities                                                  | ** ** | **16,278,557**        |            | 15,349,592            |       |
|                                                                        |       |                  |            |                  |       |
| LONG-TERM  LIABILITIES                                                      |       |                  |            |                  |       |
| Derivative  financial instruments                                           | ** ** | **2,496,933**         |            | 900,826               |       |
| Long-term notes  payable                                                    | ** ** | **40,121,940**        |            | 45,894,139            |       |
|                                                                        |       |                  |            |                  |       |
| Total long-term  liabilities                                                | ** ** | **42,618,873**        |            | 46,794,965            |       |
|                                                                        |       |                  |            |                  |       |
| COMMITMENTS AND  CONTINGENCIES (NOTE 6)                                     |       |                  |            |                  |       |
|                                                                        |       |                  |            |                  |       |
| MINORITY  INTEREST                                                          | ** ** | **10,111,948**        |            | 11,631,149            |       |
|                                                                        |       |                  |            |                  |       |
| MEMBERS’ EQUITY                                                        |       |                  |            |                  |       |
| Capital units,  $0.25 stated value, 50,628,000 units issued and outstanding | ** ** | **12,657,000**        |            | 12,657,000            |       |
| Additional  paid-in capital                                                 | ** ** | **64,900**            |            | 64,900                |       |
| Accumulated  other comprehensive (loss)                                     | ** ** | **(1,926,632**        | **)**           | (695,076              | )          |
| Retained  earnings                                                          | ** ** | **23,625,025**        |            | 27,777,575            |       |
|                                                                        |       |                  |            |                  |       |
| Total members’  equity                                                 | ** ** | **34,420,293**        |            | 39,804,399            |       |
|                                                                        |       |                  |            |                  |       |
|                                                                        | ** ** | **$**                 | **103,429,671** |                  | $          | 113,580,105 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-3

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

**YEARS ENDED DECEMBER 31, 2008,2007 AND 2006**

 
| ** **                                                    | ** ** | **2008**        | ** **      | **2007**    | ** ** | **2006**    | ** ** |
|---------------------------------------------------------------|------------|-----------------|-----------------|-------------|------------|-------------|------------|
| REVENUES                                                      |       |            |            |        |       |        |       |
| Sales related  party                                          | ** ** | **$**           | **137,146,540** |        | $          | 116,084,868 |       | $ | 105,702,927 |   |
| Sales                                                         | ** ** | **33,632,791**  |            | 21,408,911  |       | 16,349,308  |       |
| Incentive                                                     | ** ** | **645,596**     |            | 750,001     |       | 784,884     |       |
| Total revenues                                                | ** ** | **171,424,927** |            | 138,243,780 |       | 122,837,119 |       |
|                                                          |       |            |            |        |       |        |       |
| COST OF REVENUES                                              | ** ** | **169,595,752** |            | 112,694,987 |       | 62,731,376  |       |
|                                                          |       |            |            |        |       |        |       |
| GROSS PROFIT                                                  | ** ** | **1,829,175**   |            | 25,548,793  |       | 60,105,743  |       |
|                                                          |       |            |            |        |       |        |       |
| EXPENSES                                                      |       |            |            |        |       |        |       |
| General and  administrative                                   | ** ** | **3,679,176**   |            | 4,790,117   |       | 6,364,983   |       |
| Total operating  expenses                                     | ** ** | **3,679,176**   |            | 4,790,117   |       | 6,364,983   |       |
|                                                          |       |            |            |        |       |        |       |
| INCOME (LOSS)  FROM OPERATIONS                                | ** ** | **(1,850,001**  | **)**           | 20,758,676  |       | 53,740,760  |       |
|                                                          |       |            |            |        |       |        |       |
| OTHER INCOME  (EXPENSES)                                      |       |            |            |        |       |        |       |
| Interest income                                               | ** ** | **84,422**      |            | 509,018     |       | 334,512     |       |
| Interest expense                                              | ** ** | **(3,535,485**  | **)**           | (2,876,464  | )          | (1,261,542  | )          |
| Other                                                         | ** ** | **(6,135**      | **)**           | 22,960      |       | 21,902      |       |
| Total other  income (expenses)                                | ** ** | **(3,457,198**  | **)**           | (2,344,486  | )          | (905,128    | )          |
|                                                          |       |            |            |        |       |        |       |
| INCOME (LOSS)  BEFORE MINORITY INTEREST                       | ** ** | **(5,307,199**  | **)**           | 18,414,190  |       | 52,835,632  |       |
|                                                          |       |            |            |        |       |        |       |
| MINORITY  INTEREST IN SUBSIDIARY (INCOME) LOSS                | ** ** | **1,154,649**   |            | (4,269,470  | )          | (12,132,284 | )          |
|                                                          |       |            |            |        |       |        |       |
| NET INCOME  (LOSS)                                            | ** ** | **(4,152,550**  | **)**           | 14,144,720  |       | 40,703,348  |       |
|                                                          |       |            |            |        |       |        |       |
| OTHER  COMPREHENSIVE INCOME (LOSS)                            |       |            |            |        |       |        |       |
| Cash flow hedge  income (loss)                                | ** ** | **(1,231,556**  | **)**           | (550,734    | )          | (144,342    | )          |
| Total other  comprehensive income (loss)                      | ** ** | **(1,231,556**  | **)**           | (550,734    | )          | (144,342    | )          |
|                                                          |       |            |            |        |       |        |       |
| COMPREHENSIVE  INCOME (LOSS)                                  | ** ** | **$**           | **(5,384,106**  | **)**       | $          | 13,593,986  |       | $ | 40,559,006 |   |
|                                                          |       |            |            |        |       |        |       |
| BASIC AND  DILUTED EARNINGS (LOSS) PER CAPITAL UNIT           | ** ** | **$**           | **(0.082**      | **)**       | $          | 0.279       |       | $ | 0.804 |   |
|                                                          |       |            |            |        |       |        |       |
| BASIC AND  DILUTED WEIGHTED AVERAGE CAPITAL UNITS OUTSTANDING | ** ** | **50,628,000**  |            | 50,628,000  |       | 50,628,000  |       |
|                                                          |       |            |            |        |       |        |       |
| DISTRIBUTIONS  PER CAPITAL UNIT DECLARED                      | ** ** | **$**           | **—**      |        | $          | 0.238       |       | $ | 0.518 |   |
|                                                          |       |            |            |        |       |        |       |
| DISTRIBUTIONS  PER CAPITAL UNIT PAID                          | ** ** | **$**           | **0.030**       |        | $          | 0.342       |       | $ | 0.448 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-4

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN MEMBERS’ EQUITYAND COMPREHENSIVE INCOME**

**YEARS ENDED DECEMBER 31, 2008,2007 AND 2006**

 
| ** **                      | ** ** | ** **     | ** ** | ** ** | ** **     | ** **     | ** ** | **Accumulated**    | ** ** | ** **   | ** **     | ** **  | ** ** | ** **         | ** ** |
|---------------------------------|------------|----------------|------------|------------|----------------|----------------|------------|--------------------|------------|--------------|----------------|-------------|------------|--------------------|------------|
| ** **                      | ** ** | ** **     | ** ** | ** ** | ** **     | **Additional** | ** ** | **Other**          | ** ** | ** **   | ** **     | ** **  | ** ** | **Annual**         | ** ** |
| ** **                      | ** ** | **Capital**    | ** ** | ** ** | ** **     | **Paid-In**    | ** ** | **Comprehensive**  | ** ** | **Retained** | ** **     | ** **  | ** ** | **Comprehensive**  | ** ** |
| ** **                      | ** ** | **Units**      | ** ** | **Amount** | ** **     | **Capital**    | ** ** | **Income  (Loss)** | ** ** | **Earnings** | ** **     | **Total**   | ** ** | **Income  (Loss)** | ** ** |
| BALANCE, JANUARY  1, 2006       |       | 50,628,000     |       | $          | 12,657,000     |           | $          | 64,900             |       | $            | —         |        | $          | 11,227,818         |       | $ | 23,949,718 |   | $ | 16,157,712 |   |
|                            |       |           |       |       |           |           |       |               |       |         |           |        |       |               |       |
| Net income                      |       | —         |       | —     |           | —         |       | —             |       | 40,703,348   |           | 40,703,348  |       | 40,703,348         |       |
| Cash flow hedge  (loss)         |       | —         |       | —     |           | —         |       | (144,342           | )          | —       |           | (144,342    | )          | (144,342           | )          |
| Distributions  payable          |       | —         |       | —     |           | —         |       | —             |       | (6,787,696   | )              | (6,787,696  | )          | —             |       |
| Distributions  paid             |       | —         |       | —     |           | —         |       | —             |       | (19,458,112  | )              | (19,458,112 | )          | —             |       |
|                            |       |           |       |       |           |           |       |               |       |         |           |        |       |               |       |
| BALANCE, DECEMBER  31, 2006     |       | 50,628,000     |       | $          | 12,657,000     |           | $          | 64,900             |       | $            | (144,342       | )           | $          | 25,685,358         |       | $ | 38,262,916 |   | $ | 40,559,006 |   |
|                            |       |           |       |       |           |           |       |               |       |         |           |        |       |               |       |
| Net income                      |       | —         |       | —     |           | —         |       | —             |       | 14,144,720   |           | 14,144,720  |       | 14,144,720         |       |
| Cash flow hedge  (loss)         |       | —         |       | —     |           | —         |       | (550,734           | )          | —       |           | (550,734    | )          | (550,734           | )          |
| Distributions  payable          |       | —         |       | —     |           | —         |       | —             |       | (1,518,840   | )              | (1,518,840  | )          | —             |       |
| Distributions  paid             |       | —         |       | —     |           | —         |       | —             |       | (10,533,663  | )              | (10,533,663 | )          | —             |       |
|                            |       |           |       |       |           |           |       |               |       |         |           |        |       |               |       |
| BALANCE, DECEMBER  31, 2007     |       | 50,628,000     |       | $          | 12,657,000     |           | $          | 64,900             |       | $            | (695,076       | )           | $          | 27,777,575         |       | $ | 39,804,399 |   | $ | 13,593,986 |   |
|                            |       |           |       |       |           |           |       |               |       |         |           |        |       |               |       |
| Net income (loss)               |       | —         |       | —     |           | —         |       | —             |       | (4,152,550   | )              | (4,152,550  | )          | (4,152,550         | )          |
| Cash flow hedge  (loss)         |       | —         |       | —     |           | —         |       | (1,231,556         | )          | —       |           | (1,231,556  | )          | (1,231,556         | )          |
| Distributions  payable          |       | —         |       | —     |           | —         |       | —             |       | —       |           | —      |       | —             |       |
| Distributions  paid             |       | —         |       | —     |           | —         |       | —             |       | —       |           | —      |       | —             |       |
|                            |       |           |       |       |           |           |       |               |       |         |           |        |       |               |       |
| **BALANCE,  DECEMBER 31, 2008** | ** ** | **50,628,000** | ** ** | **$**      | **12,657,000** | ** **     | **$**      | **64,900**         | ** ** | **$**        | **(1,926,632** | **)**       | **$**      | **23,625,025**     | ** ** | **$** | **34,420,293** | ** ** | **$** | **(5,384,106** | **)** |

 

See Notes toConsolidated Financial Statements

 

F-5

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2008,2007 AND 2006**

 

 
| ** **                                                               | ** ** | **2008**       | ** **     | **2007**    | ** ** | **2006**    | ** ** |
|--------------------------------------------------------------------------|------------|----------------|----------------|-------------|------------|-------------|------------|
| OPERATING  ACTIVITIES                                                    |       |           |           |        |       |        |       |
| Net income  (loss)                                                       | ** ** | **$**          | **(4,152,550** | **)**       | $          | 14,144,720  |       | $ | 40,703,348 |   |
| Changes to net  income (loss) not affecting cash                         |       |           |           |        |       |        |       |
| Depreciation                                                             | ** ** | **5,136,891**  |           | 4,459,581   |       | 2,758,668   |       |
| Amortization of  loan fees                                               | ** ** | **65,738**     |           | 41,493      |       | 9,701       |       |
| Loss on disposal  or impairment of assets                                | ** ** | **16,975**     |           | 625,195     |       | 450,362     |       |
| Minority  interest in subsidiary’s earnings                         | ** ** | **(1,154,649** | **)**          | 4,269,470   |       | 12,132,284  |       |
| Decrease  (increase) in current assets                                   |       |           |           |        |       |        |       |
| Accounts  receivable                                                     |       |           |           |        |       |        |       |
| Related party                                                            | ** ** | **(764,139**   | **)**          | 733,539     |       | (2,848,745  | )          |
| Trade                                                                    | ** ** | **350,659**    |           | (25,945     | )          | (422,436    | )          |
| Other                                                                    | ** ** | **(767**       | **)**          | 50,998      |       | (29,163     | )          |
| Inventory                                                                | ** ** | **2,176,550**  |           | (1,826,219  | )          | (6,029,354  | )          |
| Prepaid expenses                                                         | ** ** | **(23,559**    | **)**          | (21,686     | )          | (7,859      | )          |
| Margin deposits  and commodities contracts                               | ** ** | **6,307,068**  |           | 247,360     |       | (6,554,428  | )          |
| Increase  (decrease) in current liabilities                              |       |           |           |        |       |        |       |
| Accounts payable                                                         |       |           |           |        |       |        |       |
| Trade                                                                    | ** ** | **63,451**     |           | 719,968     |       | (408,239    | )          |
| Corn                                                                     | ** ** | **1,386,122**  |           | 3,299,552   |       | (381,534    | )          |
| Related party                                                            | ** ** | **(19,442**    | **)**          | (548,670    | )          | 376,085     |       |
| Accrued  liabilities                                                     | ** ** | **80,347**     |           | (25,488     | )          | 55,732      |       |
| Accrued  liability for commodity contracts, net of margin deposits       | ** ** | **847,398**    |           | —      |       | (163,667    | )          |
| Accrued interest                                                         | ** ** | **—**     |           | 2,429       |       | (2,526      | )          |
|                                                                     |       |           |           |        |       |        |       |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                               | ** ** | **10,316,093** |           | 26,146,297  |       | 39,638,229  |       |
|                                                                     |       |           |           |        |       |        |       |
| INVESTING  ACTIVITIES                                                    |       |           |           |        |       |        |       |
| Purchase of  property and equipment                                      | ** ** | **(571,402**   | **)**          | (18,840,552 | )          | (28,844,044 | )          |
| Cash received on  sale of assets                                         | ** ** | **—**     |           | 555         |       | 31,100      |       |
| Cash paid for  capitalized construction interest                         | ** ** | **—**     |           | (653,413    | )          | (288,312    | )          |
| Tax refund on  construction                                              | ** ** | **1,016,697**  |           | 262,313     |       | —      |       |
|                                                                     |       |           |           |        |       |        |       |
| NET CASH  PROVIDED BY (USED FOR) INVESTING ACTIVITIES                    | ** ** | **445,295**    |           | (19,231,097 | )          | (29,101,256 | )          |
|                                                                     |       |           |           |        |       |        |       |
| FINANCING  ACTIVITIES                                                    |       |           |           |        |       |        |       |
| Long-term notes  payable issued                                          | ** ** | **—**     |           | 18,340,126  |       | 18,959,874  |       |
| Principal paid  on long-term notes payable                               | ** ** | **(5,682,270** | **)**          | (2,828,126  | )          | (1,919,718  | )          |
| Distributions  paid - Northern Growers                                   | ** ** | **(1,518,840** | **)**          | (17,321,359 | )          | (22,670,206 | )          |
| Distributions  paid - minority member                                    | ** ** | **—**     |           | (5,778,520  | )          | (6,792,043  | )          |
| Cash paid for  financing costs                                           | ** ** | **(29,824**    | **)**          | (69,988     | )          | (246,697    | )          |
|                                                                     |       |           |           |        |       |        |       |
| NET CASH (USED  FOR) FINANCING ACTIVITIES                                | ** ** | **(7,230,934** | **)**          | (7,657,867  | )          | (12,668,790 | )          |
|                                                                     |       |           |           |        |       |        |       |
| NET INCREASE  (DECREASE) IN CASH                                         | ** ** | **3,530,454**  |           | (742,667    | )          | (2,131,817  | )          |
|                                                                     |       |           |           |        |       |        |       |
| CASH AT  BEGINNING OF YEAR                                               | ** ** | **9,182,533**  |           | 9,925,200   |       | 12,057,017  |       |
|                                                                     |       |           |           |        |       |        |       |
| CASH AT END OF  YEAR                                                     | ** ** | **$**          | **12,712,987** |        | $          | 9,182,533   |       | $ | 9,925,200 |   |
|                                                                     |       |           |           |        |       |        |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                       |       |           |           |        |       |        |       |
| Cash paid for  interest                                                  | ** ** | **$**          | **3,535,485**  |        | $          | 3,612,547   |       | $ | 1,552,337 |   |
|                                                                     |       |           |           |        |       |        |       |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |       |           |           |        |       |        |       |
| Accounts payable  incurred for construction costs                        | ** ** | **$**          | **—**     |        | $          | —      |       | $ | 2,173,905 |   |
| Accounts  receivable for tax refund on construction                      | ** ** | **$**          | **142,632**    |        | $          | 831,955     |       | $ | 687,184 |   |
| Distributions  payable                                                   | ** ** | **$**          | **—**     |        | $          | 1,518,840   |       | $ | 9,300,096 |   |

 

See Notes toConsolidated Financial Statements

 

F-6

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1 -**                     NATURE OF OPERATIONS

** **

*Principal Business Activity*

 

Northern Growers,LLC or Northern Growers (formerly Northern Growers Cooperative or the “Cooperative”),is a South Dakota limited liability company that was organized to poolinvestors, provide a portion of the corn supply for an ethanol plant (the “plant”)owned by Northern Lights Ethanol, LLC (d/b/a POETTM Biorefining - Big Stone) (“POETTMBiorefining - Big Stone”), and own a 77.16% interest in POETTM Biorefining - BigStone.  For purposes of the financialstatements and notes, the “Company” refers to both Northern Growers and POETTMBiorefining - Big Stone on a consolidated basis.  On June 26, 2002, the Company begangrinding corn and on July 5, 2002, the Company commenced its principaloperations at a 40 million gallon nameplate capacity.  On May 14, 2007, the Company completedan expansion to a 75 million gallon nameplate capacity. The Company sellsethanol and related products primarily in the United States.

 

On April 1,2002, Whetstone Ethanol, LLC “Whetstone” was formed. The initial member ofWhetstone was the Cooperative. Whetstone was formed for the purpose ofacquiring the assets and liabilities of the Cooperative. On April 10,2002, the Board of Directors of the Cooperative approved a plan ofreorganization related to an exchange whereby Whetstone would acquire theassets and liabilities of the Cooperative. On March 27, 2003, the membersof the Cooperative approved the plan of reorganization to take effect on April l,2003. The transaction was an exchange of interests whereby the assets andliabilities of the Cooperative were transferred for capital units of Whetstone.For financial statements purposes, no gain or loss was recorded as a result ofthe exchange transaction.

 

As a result of theexchange, the Cooperative was dissolved, with Whetstone’s capital unitsdistributed to the members of the Cooperative at a rate of one Whetstonecapital unit for each share of equity common stock and all voting common stockof the Cooperative was surrendered and retired. In connection with thereorganization, Whetstone subsequently changed its name to Northern Growers,LLC. Under the amended and restated Operating Agreement of Northern Growers, aminimum of 2,500 capital units is required to become a member.  Such units are subject to certain transferrestrictions, including approval by the Board of Managers of Northern Growers.Northern Growers also retains the right to redeem the capital units at $.20 perunit in the event a member attempts to dispose of the units in a manner not inconformity with the Operating Agreement, if a member becomes a holder of lessthan 2,500 units or if a member becomes bankrupt. The Operating Agreement alsoincludes provisions whereby cash flow in excess of $200,000 will be distributedto unit holders subject to limitations imposed by a super majority vote of theBoard of Managers or restrictions imposed by loan covenants.

 

**NOTE 2 -**                     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

** **

*Principles of Consolidation*

 

Theconsolidated financial statements include the accounts of Northern Growers andits 77.16% owned subsidiary, POETTM Biorefining - Big Stone. All significantinter-company transactions and balances have been eliminated in consolidation.

 

*Cash and Cash Equivalents*

 

Cashand cash equivalents consist of all highly liquid investments with an originalmaturity of three months or less.

 

(continued on next page)

 

F-7

----

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Revenue Recognition*

 

Revenue from the sale ofethanol and related products is recorded when title transfers to customers.Generally, ethanol is shipped FOB shipping point and related products areshipped FOB destination point. In accordance with the Company’s agreement forthe marketing and sale of ethanol, shipping costs arranged by the marketer arededucted from the gross sales price reported to the Company by the marketer,thus no shipping costs are incurred related to sales of ethanol. For distillergrains, shipping costs incurred by the Company are included as a component ofcost of revenues.  Interest income is recognized as earned.

 

Revenue from federal andstate incentive programs is recorded when the Company has produced or sold theethanol and satisfied the reporting requirements under each applicable program.When it is uncertain that the Company will receive full allocation and paymentdue under the incentive programs, it derives an estimate of the incentiverevenue for the relevant period based on various factors. The estimate issubject to change as management becomes aware of increases or decreases in theamount of funding available under the incentive programs or other factors thataffect funding or allocation of funds under such programs.

 

*Receivablesand Credit Policies*

 

Tradereceivables are uncollateralized customer obligations due under normal tradeterms requiring payment within 30 days from the invoice date. Customer accountbalances with invoices dated over 30 days old are considered delinquent.Interest is not charged on any delinquent accounts.

 

Tradereceivables are stated at the amount billed to the customer.

 

Paymentsof trade receivables are allocated to the specific invoices identified on thecustomer’s remittance advice or, if unspecified, are applied to the earliestunpaid invoices.

 

The carrying amount oftrade receivables is reduced by a valuation allowance that reflects management’sbest estimate of the amounts that will not be collected. Management reviews alltrade receivable balances that exceed 30 days from the invoice date and basedon an assessment of current creditworthiness, estimates the portion, if any, ofthe balance that will not be collected. Management believes that all tradereceivables are collectible; therefore, there is no valuation allowance as of December 31,2008 and 2007.

 

*Inventory*

 

Ethanol and related product inventory is stated at net realizablevalue. Corn inventory is stated at market value, which approximates netrealizable value (local market prices less cost of disposal), based on localmarket prices determined by grain terminals in the area of the plant. Other rawmaterials, spare parts and work-in-process inventory are stated at the lower ofcost or market on an average cost method.

 

(continued on next page)

 

F-8

----

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

Inventories at December 31, 2008 and 2007are as follows:

 

| ** **             | ** ** | **2008**      | ** **    | **2007**  | ** ** |
|------------------------|------------|---------------|---------------|-----------|------------|
| Finished goods         | ** ** | **$**         | **1,875,444** |      | $          | 1,473,720 |   |
| Raw materials          | ** ** | **5,620,800** |          | 7,893,195 |       |
| Work-in-process        | ** ** | **1,022,085** |          | 1,352,000 |       |
| Spare parts  inventory | ** ** | **1,191,939** |          | 1,167,903 |       |
|                   |       |          |          |      |       |
|                   | ** ** | **$**         | **9,710,268** |      | $          | 11,886,818 |   |

 

*Investmentin Commodities Contracts, Derivative Instruments and Hedging Activities*

 

SFAS No. 133requires a company to evaluate its contracts to determine whether the contractsare derivatives. Certain contracts that literally meet the definition of aderivative may be exempted from SFAS No. 133 as normal purchases or normalsales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business. Contracts that meetthe requirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

 

The Company enters intoshort-term cash, options and futures contracts and ethanol swaps as a means ofsecuring corn and natural gas for the ethanol plant and managing exposure tochanges in commodity prices. All derivatives are designated as non-hedgederivatives. Although the contracts are effective economic hedges of specifiedrisks, they are not designated as and accounted for as hedging instruments.

 

As part of its tradingactivity, the Company uses futures and option contracts and ethanol swapsoffered through regulated commodity exchanges to reduce risk.  The Company is exposed to risk of loss in themarket value of inventories. To reduce that risk, the Company generally takespositions using cash and futures contracts, ethanol swaps and options.

 

Unrealized gains andlosses related to derivative contracts are included as a component of cost ofrevenues in the accompanying consolidated financial statements. Inventories arerecorded at net realizable value so that gains and losses on derivativecontracts are offset by gains and losses on inventories and other commoditycontracts and reflected in current earnings. For the statement of cash flows,such contract transactions are classified as operating activities.  This derivative activity resulted in lossesof $3,201,483 and $1,938,509 for the periods ended December 31, 2008 and December 31,2007, respectively, and is included in cost of revenues in the statement ofoperations.  These derivative contracts can be found on the balance sheet under “Accruedliability for commodity contracts, net of margin deposits” for December 31,2008 and under “Margin deposits and commodities contracts” for December 31,2007.

 

During 2007 and 2006 the Company entered into derivative financialinstruments to limit its exposure to changes in interest rates. The Companyentered into two interest rate swap agreements as part of its interest raterisk management strategy and to effectively convert a portion of its variablerate debt to fixed rate debt. The swap agreements are accounted for as a cashflow hedge under SFAS No. 133, as amended.

 

(continued on next page)

 

F-9

----

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

*InterestRate Swap Agreements*

 

During2007 and 2006 the Company entered into interest rate swap agreements as part ofits interest rate risk management strategy and to effectively convert a portionof its variable rate debt to fixed rate debt.  The swap agreements, which both expire August 31,2014, are accounted for as cash flow hedges under SFAS No. 133, asamended.  Under the terms of the swapagreements, the Company’s net payment is a fixed interest rate on the notionalamount in exchange for receiving a variable rate based on one month LIBOR. Theswap transactions qualify for the shortcut method of recognition under SFAS No. 133;therefore, no portion of the swap is treated as ineffective. The notionalamount of the two interest rate swap agreements was $21,656,250 and $24,131,250as of December 31, 2008 and 2007, respectively.  A derivative liability to record the fairvalue of the swap of $2,496,933 and $900,826 has been recorded for December 31,2008 and December 31, 2007, respectively, with a corresponding entry of$1,231,556 and $550,734 to accumulated other comprehensive loss to the members’equity section of the consolidated balance sheet and a decrease of $364,551 and$163,023 to minority interest for the years ended December 31, 2008 and2007, respectively.

 

*OtherComprehensive Income (Loss)*

 

TheCompany has adopted Statement of Financial Accounting Standards No. 130,Reporting Comprehensive Income (“SFAS 130”) that establishes standards forreporting comprehensive income. The Statement defines comprehensive income asthe changes in equity of an enterprise except those resulting from stockholdertransactions. As of December 31, 2008 and 2007, accumulated othercomprehensive loss consists of an unrealized loss from our interest rate swapagreements designated as a cash flow hedge.

 

*NetIncome (Loss) per Unit*

 

Basicnet income (loss) per unit is computed by dividing net income(loss) by the weighted average number of members’ units outstanding duringthe period. Diluted net income per unit is computed by dividing net income bythe weighted average number of members’ units and members’ unit equivalentsoutstanding during the period. There were no member unit equivalentsoutstanding during the periods presented; accordingly, the Company’s basic anddiluted net income (loss) per unit are the same.

 

*MinorityInterest*

 

Amounts recorded as minority interest on the balance sheet relate tothe investment by Broin Investments I, LLC in POETTM Biorefining - Big Stone,plus or minus any allocation of income or loss of POETTM Biorefining - BigStone, plus or minus any allocation of accumulated other comprehensive incomeor loss, less distributions from POETTM Biorefining - Big Stone. Earnings/lossesand distributions of POETTM Biorefining - Big Stone are allocated to its membersin proportion to the member’s capital accounts.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and revenues and expenses during the reporting period. Actualresults could differ from those estimates.

 

*Concentrations of Credit Risk*

 

Cash balances aremaintained in bank depositories and periodically exceed federally insuredlimits.

 

(continued on next page)

 

F-10

----

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Property and Equipment*

 

Property and equipment isstated at cost. Significant additions and betterments are capitalized, whileexpenditures for maintenance, repairs and minor renewals are charged tooperations when incurred. Depreciation on assets placed in service is computedusing the straight-line method over estimated useful lives as follows:

 
| Land improvements | 8-40 years  |
|-------------------|-------------|
| Equipment         | 3-20 years  |
| Buildings         | 10-40 years |

 

Land improvements consistof landscaping, additional fencing and improvements to the roads for enteringand exiting the plant.

 

Equipment consists ofgrain systems, trucks, mechanical and electrical production and processequipment, cooling towers, boilers and a reboiler, field sensors and powersupplies.

 

Buildings consist of administrativeoffices, sheds, catwalks, platforms, and mechanical and grain buildings.

 

*Long-LivedAssets*

 

In accordance with FinancialAccounting Standard Board (FASB) Statement of Financial Accounting Standards No. 144(SFAS 144), *Accounting for the Impairment orDisposal of Long-Lived Assets,*long-lived assets, such as property,plant, and equipment, and purchased intangible assets subject to amortization,are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Ifcircumstances require a long-lived asset be tested for possible impairment, theCompany first compares undiscounted cash flows expected to be generated by anasset to the carrying value of the asset. If the carrying value of thelong-lived asset is not recoverable on an undiscounted cash flow basis, animpairment is recognized to the extent that the carrying value exceeds its fairvalue. Fair value is determined through various valuation techniques includingdiscounted cash flow models, quoted market values and third-party independentappraisals, as considered necessary.

 

A loss on impairment ofassets of $625,195 was recognized by the Company in 2007 and is included incost of revenues.  A subset of the plant’sthermal oxidizers, built during the original construction of the plant, wasdeemed impaired for $614,640 when environmental testing indicated that theequipment recently installed to replace the subset was sufficient to meetenvironmental compliance rules.  Theestimated fair market value of  thesubset is $100,000, which management intends to sell on the open market, and islisted on the Consolidated Balance Sheet as “Assets held for sale.”  In addition, the Company recorded a loss ondisposal of assets of $10,555 for a compilation of several small equipmentitems that were deemed unusable.

 

A loss on impairment ofassets of $450,362 was recognized by the Company in 2006 and is included incost of revenues.  Upon the completion and incorporation of BPXTM technology into the plant’s production processin October 2006, there were multiple tanks, motors and other equipmentdeemed to be unusable.  Two tanks were sold. The Company determined thatthe balance of the unusable assets was without value as the scrap value of suchassets approximated the costs of disposal.

 

# ***Environmental Liabilities***

# ** **

The Company’s operationsare subject to environmental laws and regulations adopted by variousgovernmental authorities in the jurisdiction in which it operates. These lawsrequire the Company to investigate and remediate 

 

(continued on next page)

 

F-11

----

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

the effects of therelease or disposal of materials at its locations. Accordingly, the Company hasadopted policies, practices and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage, and to limit thefinancial liability which could result from such events. Environmentalliabilities are recorded when the liability is probable and the costs can bereasonably estimated.

 

*Income Taxes*

 

The Company is not ataxpaying entity for federal and state income tax purposes due to its treatmentas a partnership.  Accordingly, noprovision or liability for federal or state income taxes has been included inthese financial statements.  Income ofthe Company is taxed to the members in their respective returns.  The Company is no longer subject to U.S.Federal income tax examinations by tax authorities for fiscal years prior to2005.

 

In June 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (FIN 48). FIN 48clarifies the requirements of SFAS 109, *Accounting for IncomeTaxes*, relating to the recognition of income tax benefits. FIN 48provides a two-step approach to recognizing and measuring tax benefits whenrealization of the benefits is uncertain. The first step is to determinewhether the benefit meets the more-likely-than-not condition for recognitionand the second step is to determine the amount to be recognized based on thecumulative probability that exceeds 50%. Primarily due to the Company’s tax status as a partnership, the adoptionof FIN 48 on January 1, 2007, had no material impact on the Company’sfinancial condition or results of operations.

 

As of December 31,2008 the Company’s net assets exceeded their tax basis by approximately$35,700,000.

 

*Cost of Revenues*

 

Theprimary components of cost of revenues from the production of ethanol andrelated products are corn expense, energy expense (steam, natural gas andelectricity), raw materials expense (chemicals and denaturant), shipping costson sales, depreciation on process equipment and direct labor costs.

 

Shippingcosts incurred by the Company are recorded as a component of cost of revenues.Shipping costs in cost of revenues includes inbound freight charges oninventory, outbound freight charges on related product and purchasing andreceiving costs.

 

*General and AdministrativeExpenses*

 

The primary components ofgeneral and administrative expenses are management fees, administrativesalaries and wages, insurance expense and professional fees (legal, audit andconsulting).

 

*AdvertisingCosts*

 

Advertisingand promotion costs are expensed when incurred and totaled $129,074, $203,386and $113,467 for the years ended December 31, 2008, 2007 and 2006,respectively.

 

*Capitalizationof Interest*

 

TheCompany capitalizes interest cost on construction in progress and capitalizeddevelopment costs in accordance with the requirements of Statement of FinancialAccounting Standards (SFAS) No. 34, Capitalization of Interest Cost. Thisstandard requires that a certain portion of interest cost be capitalized aspart of the historical 

 

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F-12

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**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

costof developing or constructing an asset. The Company capitalized $0, $653,413and $288,312 of interest for the years ending December 31, 2008, 2007 and2006, respectively.

 

*Reclassifications*

 

Certainreclassifications have been made to the 2006 and 2007 financial statements toconform to the presentation in 2008. These reclassifications had no change inpreviously reported net income.

 

*RecentlyIssued Accounting Pronouncements*

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 141R *Business Combinations*(“SFAS 141R”).  The objective of SFAS 141R is to improve the informationprovided in financial reports about a business combination and its effects.SFAS 141R retains the requirements of SFAS 141 that the acquisition methodof accounting be used for all business combinations (whether full, partial orstep acquisition) and for an acquirer to be identified for each businesscombination. SFAS 141R defines the acquirer as the entity that obtains controlof one or more businesses in the business combination and establishes theacquisition date as the date that the acquirer achieves control. In applyingthe acquisition method, the acquirer must determine the fair value of theacquired business as of the acquisition date and recognize the fair value ofthe acquired assets and liabilities assumed. SFAS 141R also statesacquisition costs will generally be expensed as incurred and restructuringcosts will be expensed in periods after the acquisition date. SFAS 141R iseffective for business combination transactions the Company enters into forwhich the acquisition date is on or after January 1, 2009. Earlierapplication is prohibited. The Company is currently evaluating the requirementsof SFAS 141R and will apply the statement to any business combinationsoccurring on or after January 1, 2009.

 

InDecember 2007, the FASB issued SFAS 160, “*NoncontrollingInterests in Consolidated Financial Statements*” (“SFAS 160”). SFAS160 amends Accounting Research Bulletin No. 51 to establish accounting andreporting standards for the non-controlling interest in a subsidiary and forthe deconsolidation of a subsidiary. It clarifies that a non-controllinginterest in a subsidiary is an ownership interest in the consolidated entitythat should be reported as equity in the consolidated financial statements.SFAS 160 is effective for the Company’s fiscal year beginning January 1,2009. The Company is evaluating the effect, if any, that the adoption of SFAS160 will have on its results of operations, financial position and the relateddisclosures.

 

InMarch 2008, the FASB issued SFAS 161, “*Disclosures aboutDerivative Instruments and Hedging Activities an amendment of FASB Statement No. 133*,”which amends and expands the disclosure requirements of SFAS 133 torequire qualitative disclosure about objectives and strategies for usingderivatives, quantitative disclosures about fair value amounts of gains andlosses on derivative instruments, and disclosures about credit-risk-relatedcontingent features in derivative agreements. This statement will be effectivefor the Company’s financial statements issued for the first quarter of 2009.Because SFAS 161 requires enhanced disclosures but does not modify theaccounting treatment of derivative instruments and hedging activities, theCompany believes the adoption of this standard will have no impact on itsfinancial position, results of operations or cash flows.

 

TheFASB has issued FASB Staff Position (FSP) FAS 133-1 and FIN 45-4, *“Disclosures about Credit Derivatives and Certain Guarantees”*:An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45;and Clarification of the Effective Date of FASB Statement No. 161. This FSP amends FASB Statement No. 133, Accounting for DerivativeInstruments and Hedging Activities, to require disclosures by sellers of creditderivatives, including credit derivatives embedded in a hybridinstrument.  This FSP also amends FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others, to require an additionaldisclosure about the current status of the payment/performance risk of aguarantee.  Further, this FSP clarifies the Board’s intent about theeffective date of FASB Statement No. 161, Disclosures about DerivativeInstruments and Hedging Activities.  The Company is 

 

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F-13

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**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

evaluatingthe effect, if any, that the adoption of these pronouncements will have on itsresults of operations, financial position and the related disclosures.

 

InApril 2008, the FASB issued FASB Staff Position SFAS 142-3, “*Determination of the Useful Life of Intangible Assets*” (“FSP142-3”). FSP 142-3 amends the factors that should be considered in developingthe renewal or extension assumptions used to determine the useful life of arecognized intangible asset under SFAS 142, “*Goodwill andOther Intangible Assets*”. FSP 142-3 also requires expandeddisclosure regarding the determination of intangible asset useful lives. FSP142-3 is effective for the Company’s year beginning January 1, 2009. TheCompany is currently evaluating the impact, if any, that FSP 142-3 will have onits consolidated financial statements.

 

**NOTE 3 -**                     FAIR VALUE MEASUREMENTS

** **

EffectiveJanuary 1, 2008, the Company adopted Statement of Financial AccountingStandard No. 157, “Fair Value Measurements” (SFAS 157), as it applies tothe financial instruments, and Statement of Financial Accounting Standard No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 157defines fair value, outlines a framework for measuring fair value, and detailsthe required disclosures about fair value measurements. SFAS 159 permitscompanies to irrevocably choose to measure certain financial instruments andother items at fair value. SFAS 159 also establishes presentation anddisclosure requirements designed to facilitate comparison between entities thatchoose different measurement attributes for similar types of assets andliabilities.

 

TheSFAS 157 requirements for certain nonfinancial assets and liabilities have beendeferred until the first quarter of 2009 in accordance with FASB Staff Position157-2.  Non-recurring nonfinancial assetsand nonfinancial liabilities for which the Company has not applied theprovisions of SFAS 157 include assets held for sale, corn inventory, ethanolinventory and distillers grains inventory. The adoption of SFAS 157 for financial assets and liabilities did nothave a material impact on our financial position, results of operation or cashflows.

 

UnderSFAS 157, fair value is defined as the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date in the principal or most advantageousmarket. SFAS 157 establishes a hierarchy in determining the fair value of anasset or liability. The fair value hierarchy has three levels of inputs, bothobservable and unobservable. SFAS 157 requires the utilization of the lowestpossible level of input to determine fair value. Level 1 inputs include quotedmarket prices in an active market for identical assets or liabilities. Level 2 inputsare market data, other than Level 1, that are observable either directly orindirectly. Level 2 inputs include quoted market prices for similar assets orliabilities, quoted market prices in an inactive market, and other observableinformation that can be corroborated by market data. Level 3 inputs areunobservable and corroborated by little or no market data.

 

Exceptfor those assets and liabilities which are required by authoritative accountingguidance to be recorded at fair value in the consolidated balance sheets, theCompany has elected not to record any other assets or liabilities at fairvalue, as permitted by SFAS 159. No events occurred during 2008 which wouldrequire adjustment to the recognized balances of assets or liabilities whichare recorded at fair value on a nonrecurring basis.

 

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F-14

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

The following tableprovides information on those assets and liabilities measured at fair value ona recurring basis.

 
| ** **                                 | ** ** | **Carrying Amount**        | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **  | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                 | ** ** | **In Consolidated**        | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **  | ** ** |
| ** **                                 | ** ** | **Balance Sheets**         | ** ** | **Fair Value**             | ** ** | **Fair Value Measurement Using** | ** ** |
| ** **                                 | ** ** | **December 31, 2008** | ** ** | **December 31, 2008** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Margin deposits  and commodities contracts |       | $                          | 1,819,968  |                       | $          | 1,819,968                        |       | $           | 1,819,968  |        |       |   |   |   |
| Corn purchase  contracts                   |       | $                          | (2,667,366 | )                          | $          | (2,667,366                       | )          |        |       | $           | (2,667,366 | ) |   |   |
| Derivative  financial instruments          |       | $                          | (2,496,933 | )                          | $          | (2,496,933                       | )          |        |       | $           | (2,496,933 | ) |   |   |
|                                            |            |                            |            |                            |            |                                  |            |             |            |             |            |  |  |  |  |

 

Margindeposits and commodities contracts principally includes corn and natural gasfutures and option contracts and ethanol swaps. The fair values for which are obtained from quoted market prices fromthe CBOT for identical assets or liabilities, and are designated as Level 1within the valuation hierarchy.  TheCompany’s corn purchase contracts consist of forward purchase commitments andare included in Margin deposits and commodities contracts if positive and inAccrued liability for commodity contracts if negative.  The fair value for these agreements weredetermined using quoted market prices from the Chicago Board of Trade (CBOT)for similar assets, and are designated as Level 2 within the valuationhierarchy.  Derivative financialinstruments consists of interest rate swaps at fair value using thecounterparty’s marked-to-market statement, which can be validated usingmodeling techniques that include market inputs such as publicly availableinterest rate yield curves, and are designated as Level 2 within the valuationhierarchy.

 

TheCompany considers the carrying amount of significant classes of financialinstruments on the balance sheets, including cash, accounts receivable,inventories, other assets, accounts payable, accrued liabilities, and variablerate long-term debt to be reasonable estimates of fair value either due totheir length of maturity or the existence of variable interest rates underlyingsuch financial instruments that approximate prevailing market rates at December 31,2008 and 2007.  The Company’s other significant classes of financialinstruments on the balance sheets for which the carrying amounts and estimatedfair values differ at December 31, 2008 and 2007 are detailed below.

 

Dueto declining interest rates since the inception of certain long-term notes, thecarrying amount of the fixed-rate, long-term note payable obligations were lessthan fair value at December 31, 2008 and 2007. As the following tablepresents, the carrying amount and the fair value of long-term note payableobligations at December 31, 2008 and 2007 are as follows:

 

| ** **                                      | ** ** | **Carrying Amount** | ** **     | **Fair Value** | ** ** |
|-------------------------------------------------|------------|---------------------|----------------|----------------|------------|
|                                            |       |                |           |           |       |
| Long-term notes  payable December 31, 2008 | ** ** | **$**               | **45,906,947** | ** **     | **$**      | **46,319,988** | ** ** |
| Long-term notes  payable December 31, 2007 | ** ** | **$**               | **51,589,217** | ** **     | **$**      | **51,652,937** | ** ** |

 

TheCompany believes the carrying amount of short-term notes payable approximatestheir value due to the short maturity of these instruments.

 

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F-15

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 4 -       NOTES PAYABLE**

** **

Northern Growers receivedadvances of $5,000 from various entities to help establish the Company. Thisshort-term note payable is due on demand and does not bear interest.  Thebalance of this non-interest bearing note was $5,000 at December 31, 2008and December 31, 2007.

 

Northern Growers receiveda loan advance of $25,000 from First Bank & Trust, Milbank, SD, duringthe three month period ending March 31, 2008 for short-term cash needs.This short-term note payable bore interest at 5.94% and matured May 1,2008 and was paid in full.  The balanceof this note was $0 at December 31, 2008 and December 31, 2007.

 

On August 28, 2006, POETTMBiorefining - Big Stone and U.S. Bank National Association, Sioux Falls, SouthDakota (Bank) entered into an amended and restated loan agreement for thepurpose of financing the plant’s expansion and restructuring the $3,000,000 and$5,000,000 revolving notes into one note.  On September 21, 2007, anamendment to the loan agreement became effective.  The purpose of the amendment was to financethe purchase and construction of additional grain storage bins and equipment($4,300,000) and obtain a $9,000,000 short-term revolving loan. Under theamended and restated loan agreement and the September 21, 2007 amendment,POETTM Biorefining - Big Stone is subject to six notes:  Note #174, a $3,900,000 variable-rate,non-revolving note;  Note #158, a $15,800,000 fixed-rate note; Note #91,an $8,000,000 variable-rate, revolving long term note; Note #190, a $33,000,000construction note; Note #232, a $4,300,000 variable-rate note; and Note #216, a$9,000,000 variable-rate, revolving short-term note.

 

Note #174, the $3,900,000variable-rate, non-revolving note, bears interest at the Bank’s prime rate, or3.25% at December 31, 2008. This note requires quarterly payments ofinterest and amortized principal on the basis of a ten-year term, the firstpayment being made on June 30, 2005.  The note matures on March 31,2012.

 

Note #158, the$15,800,000 million fixed-rate note, bears an interest rate of 6.38%. This note requires quarterly payments of interest and amortized principal onthe basis of a ten-year term and is subject to maturity on March 31, 2012.The first payment was made on June 30, 2005.

 

Note #117, the $1,200,000fixed rate note, was retired on April 30, 2007.

 

Note #91, the $8,000,000variable rate, revolving note, permits POETTM Biorefining - Big Stone to borrow,on a revolving basis, the difference between the unpaid principal balance and$8,000,000. The revolving note bears a variable-interest rate equal to theprime rate announced by the Bank from time to time, adjusted each time thePrime Rate changes (3.25% at December 31, 2008). Quarterly payments ofinterest on any unpaid balance are due March 31, June 30, September 30,and December 31 of each year. The total unpaid principal balance is due atmaturity, or August 31, 2014. The loan is subject to a quarterly unusedcommitment fee of 0.0375% and prepayment is without penalty.  The amount available on this note was$8,000,000 at December 31, 2008 and December 31, 2007.

 

Note #190, theconstruction note of $33,000,000, was converted to a term note on August 31,2007.  The notional amount ($21,656,250as of December 31, 2008) is subject to the interest rate swap agreementsdiscussed in Note 2 under “Interest Rate Swap Agreements”.  The note is amortized over a ten-year periodand is subject to a maturity of August 31, 2014. Payments of principal aredue quarterly and began on November 30, 2007.  Payments of interest are due monthly, subjectto a variable rate of one-month LIBOR plus 2.75%, adjusted monthly (3.211% at December 31,2008).

 

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F-16

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

Note #232, the $4,300,000 note, is subject to avariable rate of LIBOR plus 3.00% (4.431% at December 31, 2008), adjustedand due monthly. A principal payment of $154,000 is due quarterly, which beganon October 31, 2007.

 

Note #216, the $9,000,000short-term note, which was issued on September 21, 2007, permits us toborrow, on a revolving basis, the difference of the outstanding principalamount and the lesser of the borrowing base or $9,000,000. The borrowing baseis defined as 75% of the total of the fair market value of the outstandinginventory, eligible accounts receivable, and hedging accounts at fair marketvalue. The principal purpose of this revolver is to cover the cost ofpurchasing corn.  It bears avariable-interest rate equal to one-month LIBOR plus 3.00%, payable monthlywhen there is an outstanding balance (4.437% at December 31, 2008).  The loan is subject to a quarterly unusedcommitment fee of 0.250% per year, assessed quarterly in arrears. The totalunpaid principal balance is due at maturity, or July 28, 2009.  The amount available on this note was$9,000,000 at December 31, 2008 and December 31, 2007.

 

POETTM Biorefining - BigStone is subject to certain restrictive covenants establishing minimumreporting requirements, ratios, working capital and net worth requirements andis in compliance at December 31, 2008 with the exception of the fixedcharge coverage ratio.  The bank subsequently waived compliance of thefixed charge coverage ratio on February 11, 2009 for the December 31,2008 compliance date.  On February 19,2009, the bank adjusted the 2009 requirements of the fixed charge coverageratio covenant such that the Company believes it will be in compliance withthis and all covenants for each of the four quarters of 2009.  Collateral for the notes is multiplemortgages and security agreements, multiple UCC filings on all business assets,and assignments of certain agreements related to the construction and operationof the plant.

 

The balance of thelong-term notes payable as of December 31, 2008 and 2007 is as follows:

 

| ** **            | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|-----------------------|------------|----------------|----------------|------------|------------|
|                  |       |           |           |       |       |
| Note #174             | ** ** | **$**          | **2,437,500**  |       | $          | 2,827,500 |   |
| Note #158             | ** ** | **11,064,447** |           | 12,440,717 |       |
| Note #117             | ** ** | **—**     |           | —     |       |
| Note #190             | ** ** | **28,875,000** |           | 32,175,000 |       |
| Note #232             | ** ** | **3,530,000**  |           | 4,146,000  |       |
|                  |       |           |           |       |       |
|                  | ** ** | **45,906,947** |           | 51,589,217 |       |
| Less current  portion | ** ** | **(5,785,007** | **)**          | (5,695,078 | )          |
|                  |       |           |           |       |       |
|                  | ** ** | **$**          | **40,121,940** |       | $          | 45,894,139 |   |

 

AtDecember 31, 2008 and 2007, there were no outstanding borrowings againstthe long-term variable rate revolving note and the balance available on thisnote was $8,000,000.

 

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F-17

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

Minimum principalpayments, through the maturity of the notes, are estimated as follows:

 

| **Year Ending December 31,**             | ** ** | **Amount** | ** ** |
|-----------------------------------------------|------------|------------|------------|
|                                          |       |       |       |
| 2009                                          |       | $          | 5,785,007  |   |
| 2010                                          |       | 5,881,649  |       |
| 2011                                          |       | 5,984,606  |       |
| 2012                                          |       | 11,514,685 |       |
| 2013                                          |       | 3,916,000  |       |
| January 1, 2014 to  August 31, 2014 |       | 12,825,000 |       |
|                                          |       |       |       |
|                                          |       | $          | 45,906,947 |   |

 

**NOTE 5 -       RELATED PARTY TRANSACTIONS**

** **

Northern Growers and Broin Investments I, LLC,are the members of POETTM Biorefining - Big Stone. Northern Growers invested $12,500,000 and BroinInvestments I, LLC invested $3,700,000 in POETTM Biorefining - Big Stone for their respective ownership interests of77.16% and 22.84%. In accordance with the Member Control Agreement of POETTMBiorefining - Big Stone, Broin InvestmentsI, LLC, has the right to elect two of seven members of the Board of Managers ofPOETTM Biorefining - Big Stone.

 

Additional agreements with related parties areincluded in Note 6.

 

**NOTE 6 -       COMMITMENTS, CONTINGENCIES AND AGREEMENTS**

** **

Due to the name change ofBroin Companies, LLC (“Broin”) to POETTM, LLC in early 2007 and a correspondingchange in the name of some Broin-related companies, the Company’s existingcontractual arrangements and agreements for plant development, operations andmarketing are now with newly named entities containing POETTM. All of the newlynamed POETTM-related entities are the same Broin-related entities that existedprior to the Broin to POETTM name change. Broin Investments I, LLC, the minority member of POETTM Biorefining - BigStone, has not changed its name, yet is still a related party to allPOETTM-named companies listed here.

 

The Company has enteredinto contracts and agreements regarding the construction, operation andmanagement of the ethanol plant. Agreements with the minority member, orparties related to the minority member through common ownership, are asfollows:

 

Expansion Construction Agreement —The Company entered into a Design/Build Agreement with POETTM Design andConstruction, Inc. (formerly known as Broin & Associates, Inc.)on October 25, 2005. The purpose of this agreement was to expand thename-plate production capacity of the plant from 40 million gallons of ethanolannually to 75 million gallons of ethanol annually, as well as to make certaincapital improvements to the plant for the incorporation of new raw starchtechnology. The final cost of construction and improvements for both projectswas $42.3 million, with all construction complete at December 31, 2007.

 

Additional Corn Storage Construction Agreement— The Company entered into a Design/Build Agreement with POETTM Design andConstruction, Inc. on April 3, 2007. The purpose of this agreement was to expand the corn storage capacity atthe plant.  The final cost ofconstruction and improvements for this project was $4.2 million, with allconstruction complete and final payments made at December 31, 2007.

 

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F-18

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

Ethanol Marketing Agreement — TheCompany renewed its agreement with Ethanol Products, LLC (d/b/a/ POETTM EthanolProducts) for the sale, marketing, billing and receipt of payment and otheradministrative services for all ethanol produced by the plant.  The new agreement is effective July 1,2007 and terminates on July 1, 2012, automatically renewing for afive-year term unless a notice of termination is provided by either party priorto the end of the term, and increases marketing fees by $0.002 per gallonsold.  The Company has sales commitmentswith POETTM Ethanol Products of approximately 15.5 million gallons over the nexttwelve months, of which 14 million gallons are contracted at a variable priceand 1.5 million gallons are contracted at a fixed sales price with a weightedaverage of $1.90 per gallon. The Company purchases all of its denaturantthrough POETTM Ethanol Products.

 

Management Agreement — On April 20,2005, the Company renewed its agreement with POETTM Plant Management, LLC(formerly known as Broin Management, LLC) for the management and operation ofthe plant. The new agreement terminates on June 30, 2015.  Inexchange for management services, POETTM Plant Management receives an annual feeof $450,000, payable in equal monthly installments, plus an incentive bonusbased on a percentage of net income, payable quarterly. The annual fee isadjusted each year on March 1st for changes in the consumer price index.The fees and bonus paid to POETTM Plant Management include the salary andbenefits of the general manager and technical manager and certain otherservices related to operation of the plant.

 

Technology and Patent Rights License Agreement- On October 25, 2005, the Company entered into a Technology and PatentRights License Agreement with POETTM Research Inc. (formerly known as Broin andAssociates, Inc.).  Under thisagreement, POETTM Research grants the Company a non-exclusive license to usecertain technology and patents owned, developed, or obtained by POETTM Researchrelating to the ethanol and related product production processes. The Companyis required to pay an annual licensing fee for the right to use such technologyand patents. The agreement terminates on June 30, 2015.

 

Risk ManagementAgreement — On April 1, 2007, the Company entered into anew corn and natural gas price risk management agreement with POETTM RiskManagement.  The new risk managementagreement became effective on July 1, 2007 and terminates on July 1,2012, automatically renewing for a five-year term unless a notice oftermination is provided by either party prior to the end of the term.  In exchange for providing certain riskmanagement services relating to corn and natural gas prices, including hedgingand pooling services, the Company pays POETTM Risk Management an annual fee,payable in quarterly installments, subject to modification in the case of plantexpansions or increases in corn usage.

 

Distillers GrainsMarketing Agreement —****On March 8,2002****the Company entered into an agreementwith POETTM Nutrition, Inc. (formerly known as Dakota Gold Marketing, Inc.),to provide marketing and administrative services for the sale of distillersgrains.  The agreement terminates March 8,2012, but renews for a five year term unless either party provides the otherparty a 90 day notice of termination prior to the renewal date.  The agreement provides for an agencyrelationship as POETTM Nutrition does not take title to the distillers grainsbut acts as a broker on behalf of the Company. The Company has entered into forward contracts to sell approximately15,000 tons of various distiller grains at an average fixed price of approximately$190 per ton as of December 31, 2008.

 

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F-19

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

Revenues and expensesrelated to agreements with related parties for the years ended December 31,2008, 2007 and 2006 are as follows:

 

| ** **                             | ** ** | **2008**      | ** **      | **2007**  | ** ** | **2006**    | ** ** |
|----------------------------------------|------------|---------------|-----------------|-----------|------------|-------------|------------|
|                                   |       |          |            |      |       |        |       |
| Ethanol gross  revenues                | ** ** | **$**         | **137,146,540** |      | $          | 116,084,868 |       | $ | 105,702,927 |   |
| Denaturant  expense                    | ** ** | **4,621,203** |            | 4,352,347 |       | 4,105,335   |       |
| Management fees  expense               | ** ** | **587,089**   |            | 1,592,821 |       | 3,440,001   |       |
| Licensing fees  expense                | ** ** | **532,832**   |            | 428,981   |       | 82,739      |       |
| Marketing fees  expense - all products | ** ** | **1,362,382** |            | 952,888   |       | 659,874     |       |
|                                        |            |               |                 |           |            |             |            |  |  |  |

 

Agreements with unrelatedparties are as follows:

 

Property Lease — The Company has a 99 year property lease(an operating lease) with Big Stone-Grant Industrial Development andTransportation, LLC. In 2001, rent was $2,400 annually through May 1,2006, after which it increased by 5% through 2011. Beginning on May 1,2006, and every five years thereafter, rent is increased 5% over theimmediately preceding five-year period.

 

Steam — The Company has an agreement with theco-owners of the Big Stone Plant (“Big Stone Plant”), Otter Tail Corporation,Montana-Dakota Utilities Co. and Northwestern Public Service, for the use ofsteam in the ethanol production process. The rate for a minimum amount is setat a base rate, adjusted annually for changes in the cost of energy, and anyamount over the base rate is set at a market rate. The agreement commenced on June 1,2002 and has a term of ten years, renewable for two five-year periods, afterwhich the agreement is renewable from year to year. Either party may terminatethe agreement by providing notice one year prior to a renewal or expirationdate.

 

Expenses related to theproperty lease and steam agreements for the years ended December 31, 2008,2007 and 2006 were $4,444,553, $2,962,099 and $3,052,753, respectively.

 

Minimum payments related to the above agreementsare summarized in the following table:

 

| ** **            | ** ** | ** **     | ** ** | ** **     | ** ** | **Unconditional** | ** ** | ** ** | ** ** |
|-----------------------|------------|----------------|------------|----------------|------------|-------------------|------------|------------|------------|
| **Years Ending**      | ** ** | **Lease**      | ** ** | **Management** | ** ** | **Purchase**      | ** ** | ** ** | ** ** |
| **December 31,** | ** ** | **Agreements** | ** ** | **Agreements** | ** ** | **Agreements**    | ** ** | **Total**  | ** ** |
| 2009                  |       | $              | 2,520      |           | $          | 566,849           |       | $          | 217,080    |   | $ | 786,449 |   |
| 2010                  |       | 2,520          |       | 566,849        |       | 217,080           |       | 786,449    |       |
| 2011                  |       | 2,646          |       | 566,849        |       | 217,080           |       | 786,575    |       |
| 2012                  |       | 2,646          |       | 509,996        |       | 90,450            |       | 603,092    |       |
| 2013                  |       | 2,646          |       | 491,045        |       | —            |       | 493,691    |       |
| 2014-2100             |       | 364,177        |       | 736,567        |       | —            |       | 1,100,744  |       |
|                  |       | $              | 377,155    |           | $          | 3,438,155         |       | $          | 741,690    |   | $ | 4,557,000 |   |

 

Corn Delivery— On August 9, 2005, POETTM Biorefining - Big Stone agreed to releaseNorthern Growers and, accordingly, all of its members from delivering corn tothe plant starting on January 1, 2006.  Prior to January 1,2006, Northern Growers’ members were obligated to deliver corn to the plantunless the plant released the member from the member’s corn deliveryobligation.  Effective January 1, 2006, however, Northern Growers’members are no longer obligated to deliver corn to the plant. Instead, theplant purchases all of its corn from local corn producers and the openmarket.  In addition, POETTM Biorefining - Big Stone agreed to honor allmember 

 

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

forward contractsfor 2006 delivery if the contract was written by September 15, 2005.  Purchases of corn from corn deliveryagreements and cash contracts from the Northern Growers’ members totaledapproximately $60,957,000, $36,357,000 and $26,346,000 for the years ending December 31,2008, 2007 and 2006, respectively, of which $4,409,611 and $3,898,937 wasrecorded as a liability at December 31, 2008 and 2007, respectively.

 

Incentive Revenue- The Company previously received incentive payments from the United StatesDepartment of Agriculture (USDA) for the use of corn to produce ethanol. Theprogram ended June 30, 2006.  TheUSDA had set the annual maximum not to exceed $7,500,000 for each eligibleproducer. The incentive was calculated on the USDA fiscal year of October 1to September 30. Revenue of $31,385 and $26,835 was earned for the USDAprogram years ended September 30, 2006 and 2005, respectively. Incentiverevenue of $0, $0 and $8,551 was recorded for the twelve months ended December 31,2008, 2007 and 2006, respectively, for this program due to the variability ofprogram rules for payout ratios.

 

The Company also receivesan incentive payment from the State of South Dakota to produce ethanol. Inaccordance with the terms of this arrangement, revenue is recorded based onethanol sold. The State of South Dakota has set a maximum of up to $1,000,000per year for this program per qualifying producer. The Company has earned$500,000, $645,596 and $750,000 for the program years ended June 30, 2009,2008 and 2007, respectively. Incentive revenue of $645,596, $750,001 and$776,333 was recorded for the twelve months ended December 31, 2008, 2007and 2006, respectively, for this program.

 

Capital Unit Trading - On March 8, 2004, Northern Growers’members and non-members began trading Northern Growers capital units on analternative trading system operated by Alerus Securities Corporation of WestFargo, North Dakota.

 

Environmental Contingency- The Company’s operations are subjectto environmental laws and regulations adopted by various governmentalauthorities in the jurisdiction in which it operates. These laws require theCompany to investigate and remediate the effects of the release or disposal ofmaterials at its locations. Accordingly, the Company has adopted policies,practices and procedures in the areas of pollution control, occupationalhealth, and the production, handling, storage and use of hazardous materials toprevent material environmental or other damage, and to limit the financialliability which could result from such events.

 

TheCompany conducts an ongoing compliance program designed to meet theseenvironmental laws and regulations.  The Company believes that it is insubstantial compliance with applicable environmental laws andregulations.  From time to time, however, the Company may be involved ininvestigations or determinations regarding non-material matters that may arise.

 

InJanuary 2003, the U.S. Environmental Protection Agency (U.S. EPA) issuedformal information requests to, among others, plants designed, constructed,and/or managed by POETTM Design and Construction and POETTM Plant Management. TheCompany’s plant was a subject of these requests. The requests required thatthe  plants provide the EPA with certaindata regarding emissions.

 

OnJanuary 14, 2009, the Company’s plant received from the U.S. EPA a writtenNotice of Violation (NOV).  The NOV alleges that the Company’s plantviolated the Clean Air Act by failing to adequately maintain a regulated levelof air pollutants under the plant’s Title V air permit, and by conducting invalidtesting for compliance with such limit.  Following the receipt of the NOV,the plant had a meeting with the U.S. EPA to discuss the NOV.

 

Apenalty assessment is currently under consideration by the EPA.  While itis likely that the Company will be assessed penalties and/or fines related tothese occurrences, none have been assessed as of the date of this report. Any potential penalties and/or fines, are not expected to be material to theCompany.

 

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**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

Correctiveactions have been taken related to these occurrences.  Capitalexpenditures are required to minimize environmental risk.  As discussed inNote 12 — Subsequent Event, on January 22, 2009, a capital improvementproject for approximately $1 million has been approved. This project, whichwill involve the construction of improvements to the dryer and thermaloxidizer, is expected to be capitalized and financed with cash from operations.

 

**NOTE 7 -       DISTRIBUTIONS**

 
| **POET - Big Stone Distribution  Date** | ** ** | **POET - Big Stone Approved Distribution** | ** ** | **Northern Growers Amount Received** | ** ** | **Minority Member Amount Received** | ** ** | **Northern Growers Distribution Date** | ** ** | **Distributions paid to Northern Growers Members** | ** ** | **Quarter - Year for Northern Growers Tax Purposes and Liability  Recorded** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
|                                    |       |                                       |       |                                 |       |                                |       |                                   |       |                                               |       |                                                                         |       |
| 1/24/2006                               |       | $                                          | 4,162,763  |                                 | $          | 3,211,988                           |       | $                                      | 950,775    |                                               | 1/30/2006  |                                                                         | $          | 3,212,093 |   | 4th Quarter  2005 |   |
| 5/1/2006                                |       | $                                          | 3,675,448  |                                 | $          | 2,835,976                           |       | $                                      | 839,472    |                                               | 5/8/2006   |                                                                         | $          | 2,760,998 |   | 1st Quarter 2006 |   |
| 8/2/2006                                |       | $                                          | 10,899,284 |                                 | $          | 8,409,888                           |       | $                                      | 2,489,396  |                                               | 8/7/2006   |                                                                         | $          | 8,359,696 |   | 2nd Quarter 2006 |   |
| 10/30/2006                              |       | $                                          | 11,000,000 |                                 | $          | 8,487,600                           |       | $                                      | 2,512,400  |                                               | 11/6/2006  |                                                                         | $          | 8,337,419 |   | 3rd Quarter 2006 |   |
| 1/26/2007                               |       | $                                          | 11,000,000 |                                 | $          | 8,487,600                           |       | $                                      | 2,512,400  |                                               | 1/29/2007  |                                                                         | $          | 6,787,696 |   | 4th Quarter 2006 |   |
| 4/24/2007                               |       | $                                          | 9,000,000  |                                 | $          | 6,944,400                           |       | $                                      | 2,055,600  |                                               | 4/25/2007  |                                                                         | $          | 6,444,439 |   | 1st Quarter 2007 |   |
| 7/27/2007                               |       | $                                          | 5,300,000  |                                 | $          | 4,089,480                           |       | $                                      | 1,210,520  |                                               | 8/2/2007   |                                                                         | $          | 4,089,224 |   | 2nd Quarter 2007 |   |
| 1/29/2008                               |       | $                                          | —     |                                 | $          | —                              |       | $                                      | —     |                                               | 1/29/2008  |                                                                         | $          | 1,518,840 |   | 4th Quarter 2007 |   |

 

**NOTE 8 -       CAPITAL UNITS**

** **

On June 20, 2005,Northern Growers approved a four-for-one (4-for-1) capital unit split of its Class Acapital units, effective for September 1, 2005. Under the terms of the Class Acapital units’ split, members of record as of September 1, 2005 receivedfour capital units for each one capital unit held in Northern Growers.

 

On June 2, 2006,Northern Growers approved a two-for-one (2-for-1) capital unit split of its Class Acapital units, effective for July 1, 2006.  Under the terms of the Class Acapital units’ split, members of record as of July 1, 2006 received twocapital units for each one capital unit held in Northern Growers.

 

Prior period financialstatements have been restated to reflect the capital unit splits stated above.

 

**NOTE 9 -       401(K) PLAN**

** **

On February 1, 2003,the Company set up a 401(k) plan for substantially all employees who workmore than 1,000 hours per year. Employees can make voluntary contributions upto federally designated limits. The Company matches employee voluntarycontributions at a 50% level up to an effective maximum of 2% of grossemployeepay. Eligible employees are always fully vested in their account balancesresulting from employee voluntary contributions. The Company 401(k) expensefor the years ended December 31, 2008, 2007 and 2006 was $34,978, $25,283and $33,646, respectively.

** **

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**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

** **

**NOTE 10 -     QUARTERLY FINANCIAL DATA (UNAUDITED)**

** **

Summary quarterly resultsare as follows:

 
| ** **                                     | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                     | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                           |       |        |       |        |       |        |       |        |       |
| Year Ended  December 31, 2008:            |       |        |       |        |       |        |       |        |       |
|                                           |       |        |       |        |       |        |       |        |       |
| Total revenues                                 |       | $           | 43,374,017 |        | $          | 45,776,791  |       | $           | 47,777,435 |   | $ | 34,496,684 |   |
| Gross profit  (loss)                           |       | 3,309,166   |       | 3,942,954   |       | (4,901,122  | )          | (521,823    | )          |
| Operating income  (loss)                       |       | 2,405,794   |       | 2,928,091   |       | (5,644,305  | )          | (1,539,581  | )          |
| Income (loss)  before Minority Interest        |       | 1,454,237   |       | 2,033,115   |       | (6,484,552  | )          | (2,309,999  | )          |
| Minority  interest in subsidiary (income) loss |       | (351,359    | )          | (474,053    | )          | 1,468,919   |       | 511,142     |       |
| Net income  (loss)                             |       | 1,102,878   |       | 1,559,062   |       | (5,015,633  | )          | (1,798,857  | )          |
| Basic earnings  (loss) per unit                |       | 0.022       |       | 0.031       |       | (0.099      | )          | (0.036      | )          |
|                                           |       |        |       |        |       |        |       |        |       |
| Year Ended  December 31, 2007:            |       |        |       |        |       |        |       |        |       |
|                                           |       |        |       |        |       |        |       |        |       |
| Total revenues                                 |       | $           | 32,193,532 |        | $          | 34,977,104  |       | $           | 40,200,101 |   | $ | 30,873,043 |   |
| Gross profit  (loss)                           |       | 9,091,141   |       | 4,349,497   |       | 8,802,914   |       | 3,305,241   |       |
| Operating income  (loss)                       |       | 7,690,390   |       | 3,320,726   |       | 7,501,694   |       | 2,245,866   |       |
| Income (loss)  before Minority Interest        |       | 7,524,659   |       | 2,732,543   |       | 6,755,378   |       | 1,401,610   |       |
| Minority  interest in subsidiary (income) loss |       | (1,745,148  | )          | (633,687    | )          | (1,549,455  | )          | (341,180    | )          |
| Net income  (loss)                             |       | 5,779,511   |       | 2,098,856   |       | 5,205,923   |       | 1,060,430   |       |
| Basic earnings  (loss) per unit                |       | 0.114       |       | 0.041       |       | 0.103       |       | 0.021       |       |
|                                           |       |        |       |        |       |        |       |        |       |
| Year Ended  December 31, 2006:            |       |        |       |        |       |        |       |        |       |
|                                           |       |        |       |        |       |        |       |        |       |
| Total revenues                                 |       | $           | 25,944,116 |        | $          | 31,839,903  |       | $           | 34,896,320 |   | $ | 30,156,780 |   |
| Gross profit  (loss)                           |       | 8,663,189   |       | 15,741,041  |       | 20,163,657  |       | 15,537,856  |       |
| Operating income  (loss)                       |       | 7,548,135   |       | 14,182,345  |       | 18,347,680  |       | 13,662,600  |       |
| Income (loss)  before Minority Interest        |       | 7,306,106   |       | 13,951,973  |       | 18,097,633  |       | 13,479,920  |       |
| Minority  interest in subsidiary (income) loss |       | (1,678,944  | )          | (3,196,560  | )          | (4,137,618  | )          | (3,119,162  | )          |
| Net income  (loss)                             |       | 5,627,162   |       | 10,755,413  |       | 13,960,015  |       | 10,360,758  |       |
| Basic earnings  (loss) per unit                |       | 0.111       |       | 0.212       |       | 0.276       |       | 0.205       |       |

 

The above quarterlyfinancial data is unaudited, but in the opinion of management, all adjustmentsnecessary for a fair presentation of the selected data for these interimperiods presented have been included. Basic earnings or loss per unit are presented on the 50,628,000 unitscurrently issued and outstanding.

 

**NOTE 11 -       UNCERTAINTIES**

 

TheCompany has certain risks and uncertainties that it experiences during volatilemarket conditions such as what the Company experienced during the six monthsending December 31, 2008. These volatilities can have a severe impact onoperations.  The Company’s revenues are derivedfrom the sale and distribution of ethanol and distillers grains to customersprimarily located in the U.S.  Corn for the production process is suppliedto our plant primarily from local agricultural producers and from purchases onthe open market.  Ethanol sales,historically, average 80% of total revenues and corn costs historically average50 to 60% of cost of revenues.

 

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F-23

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**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

TheCompany’s operating and financial performance is largely driven by the pricesat which we sell ethanol and the net expense of corn. The price of ethanol isinfluenced by factors such as prices of supply and demand, weather, governmentpolicies and programs, and unleaded gasoline and the petroleum markets. Excessethanol supply in the market, in particular, puts downward pressure on theprice of ethanol. Our largest cost of production is corn.  The cost of corn is generally impacted byfactors such as supply and demand, weather, government policies and programs,and our risk management program used to protect against the price volatility ofthese commodities.

 

Ournet income decreased by approximately $2.9 million from a net income of $1.1million for the three months ended December 31, 2007 to a net loss of $1.8million for the three months ended December 31, 2008.  For the twelve month periods, our net incomedecreased by approximately $18.3 million, from a net profit of $14.1 million in2007 compared to a net loss of $4.2 million in 2008. The decrease betweenperiods was the result of rising corn costs which were not offset by rises inethanol prices. Corn costs were primarily affected by a 26% and 42% increase inthe market price of corn between the three and twelve month periods,respectively. Prices increased due to increases in demand for grain from globalmarkets, increased speculation in the commodity markets including oil and corn,low corn carryout from 2007, and inclement spring weather. Corn costs alsorose between quarters due to a change in value of our market-to-arrivecontracts, which were adversely affected by the change in market price. Weexperienced a 3% decrease and a 2% rise in ethanol prices between the three andtwelve months ended, respectively; however, the twelve month increase was notenough to offset the increase in corn costs. Ethanol prices remained relativelyflat despite the increase in the price of corn and oil.

 

Weanticipate that our results of operations into 2009 will continue to beaffected by high corn prices, a surplus of ethanol, low ethanol prices, and possiblevolatility in the commodity markets. While the market price of corn has sincedropped to $4.07 per bushel on December 31, 2008 as quoted on the CBOT forMarch 2009 futures from a peak of $8.05 per bushel on June 26, 2008as quoted on the CBOT for March 2009 futures, it still remains relativelyvolatile. The volatility is due to various factors, including uncertainty withrespect to the corn carryout in 2008, volatility in the demand for grain fromglobal and national markets, speculation in the commodity markets, volatilityin the demand for corn from the ethanol industry and the severe downturn of theglobal financial markets. Concurrently, the price of ethanol ($1.57 per gallonas of February 25, 2009 on the CBOT for March 2009 futures) isexpected to lag due to excess supply in the market and sluggish demand growth.Consequently, we expect 2009 margins to be tight or exist not at all, though noton the scale as the third quarter of 2008. Further plant shutdowns in theindustry may result. According to the Renewable Fuels Association, 24 of 180ethanol plants in the United States have shut down over the last three months.  Other sources estimate that 15% to 25% of thecountry’s ethanol capacity has been idled. There is reason for cautious optimism, however. The ethanol supplysituation, though uncertain as to exact timing, is anticipated to correctitself through the postponement and cancellation of new construction due tocurrent market conditions. Moreover, U.S. Agriculture Secretary Tom Vilsack hasbeen quoted recently saying that the Agriculture Department is in discussionswith the Environmental Protection Agency about raising the amount of ethanolallowed to be blended into the U.S. gasoline supply. Our liquidity positionalso remains positive.

 

 

**NOTE 12 -    SUBSEQUENT EVENT**

 

Construction Project-On January 22, 2009, POET Biorefining - Big Stone’s board of managersapproved a capital improvement project for approximately $1 million. Theproject, which will involve the construction of improvements to the dryer andthermal oxidizer, is expected to be financed from cash from operations.

 

 

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