**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM l0-K**

 

**Annual Report Pursuant toSection 13 or15(d) of the Securities Exchange Act of 1934**

 

**For the fiscal year ended****December 31, 2005**

 

**Commission file number 0-50711**

 

### **Northern Growers, 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.) |
|                                                                        |       |                                  |
| **48416 144th Street  P.O. Box 356  Big Stone City SD 57216  605-862-7902** |
| (Address of Principal Executive Offices) (Zip Code)                         |
|                                                                        |       |                                  |
| **(605) 862-7902**                                                          |
| (Issuer’s Telephone Number, Including Area Code)                       |
|                                                                        |       |                                  |
| Securities registered under Section 12(b) of  the Exchange Act:        |
| **None**                                                                    |
| ** **                                                                  | ** ** | ** **                            |
| Securities registered under Section 12(g) of  the Exchange Act:        |
| **Class A Capital Units**                                                   |

 

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

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 orSection 15(d) of the Act.o Yes    ý  No

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90days.      ý Yes    o No

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K.   ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).o Yes     ý  No

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).o Yes     ý No

 

The aggregate market value of the registrant’s common stock held bynon-affiliates at June 30, 2005 was approximately $32,793,750. The aggregatemarket value was computed by reference to the last sales price during theregistrant’s most recently completed second fiscal quarter.

 

Indicate the number of shares outstanding of each ofthe registrant’s classes of common stock, as of the latest practicable date. Asof the date of this filing, there were 25,314,000 Class A capital units of theregistrant outstanding.

 

 **DOCUMENTSINCORPORATED BY REFERENCE**

 

Part III of Form 10-K -Portions of the Proxy Statement for 2005 Annual Meeting of Members.

 

 

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**CAUTIONARYSTATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

This Annual Report onForm 10-K and other reports issued by Northern Growers, LLC (including reportsfiled with the Securities and Exchange Commission (the “SEC” or “Commission”),contain “forward-looking statements” that deal with future results,expectations, plans and performance.  Forward-looking statements mayinclude statements which use words such as “believe,” “expect,” “anticipate,” “intend,”“plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,”“potential,” or the negatives of these words, and all similarexpressions. Forward-looking statements involve numerous assumptions,risks and uncertainties.  Actual resultsor actual business or other conditions may differ materially from thosecontemplated by any forward-looking statements.  Factors that could causeactual results to differ materially from the forward-looking statementsinclude:

 

•                                            Changes or developments in laws,regulations or taxes in the ethanol, agricultural or energy industries;

•                                            Damage to or loss of the plant due tocasualty, weather, mechanical failure or any extended or extraordinarymaintenance or inspection that may be required;

•                                            An increase in environmental regulation andscrutiny from federal and state governments;

 

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•                                            The loss of any license or permit, theinability to renew such license or permit, or the inability to obtain approvalof an amendment to such license or permit for new technology and the plant’sexpansion;

•                                            An oversupply of ethanol in the marketdue to an increase in production of ethanol from new and expanding plants, butwhich is not met with a corresponding increase in demand;

 

•                                            The ability to retain Broin Management,LLC and affiliated companies— Broin and Associates, Inc., Ethanol  Products, LLC, and Broin Enterprises, Inc.d/b/a Dakota Gold Marketing—as its plant manager, licensor and design-builder,and marketers of ethanol and distillers grains;

 

•                                            Changes in the weather or generaleconomic conditions impacting the availability and price of commodities,particularly corn and natural gas;

 

•                                            Theavailability and cost of raw materials for the production process, particularlyfor corn, natural gas, steam, and water;

 

•                                            The results ofrisk management or hedging strategies;

 

•                                            Changes in business strategy, capitalimprovements or development plans;

 

•                                            The availability of additional capital tosupport capital improvements and

development; and

 

•                                            Other factors discussed below under theitem entitled “Risk Factors.”

 

 

We are not under any dutyto update the forward-looking statements contained in this report, nor do weguarantee future results or performance or what future business conditions willbe like. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report.

 

### **PART I**

### ** **

**Item1.    Business.**

 

**Overview**

 

Northern Growers, LLC (“NorthernGrowers”) is a South Dakota limited liability company that owns and manages a77.16% interest in its subsidiary, Northern Lights Ethanol, LLC ( “NorthernLights”), with Broin Investments I, LLC owning the remaining minority interest.(Northern Growers and Northern Lights are also referred to collectively in thisreport as “we,” “our,” or “us”).

 

 

 

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Northern Growers’business primarily consists of owning and managing its interest in NorthernLights. Northern Lights, a South Dakota limited liability company, owns andoperates a plant near Big Stone City, South Dakota (the “plant”), whichproduces ethanol and distillers grains. The principal raw material in theproduction process is corn, which is supplied to the plant from local producersand elevators.  Ethanol produced at theplant is sold exclusively to a Broin-affiliated company that markets and sellsthe ethanol to an array of customers located throughout the continental UnitedStates. Distillers grains, the principal by-product of the ethanol productionprocess at the plant, are exclusively marketed and sold through anotherBroin-affiliated company to livestock producers as livestock feed.

 

Northern Growers alsocontinues to study the feasibility of entering the wind-generation business, orparticipating in some capacity. In 2005, Northern Growers’ board of managersestablished a wind generation committee for this purpose. In February 2006, theboard approved a non-interest bearing loan to Northern Wind, LLC in the amountof $52,000. Northern Wind, LLC is a recently formed South Dakota limitedliability company formed for the purpose of studying wind generation innortheastern South Dakota.  The initialboard of managers of Northern Wind consists of seven managers, six of whom alsoserve on the Northern Growers’ board of managers.

 

**Reorganization**

 

Northern Growers wasoriginally formed as a South Dakota cooperative on April 14, 2000.  The purpose of the cooperative was to own andmanage a 77.16% interest in Northern Lights and to supply corn to the plant.  As a cooperative, Northern Growers wasentitled to single-level, pass-through tax treatment on income generatedthrough members’ patronage. This allowed Northern Growers to pass income ontoits members in the form of distributions without first paying taxes at thecompany level, similar to apartnership. As the cooperative’s board of directorsbecame more aware of certain disadvantages in remaining as a cooperative, theboard of directors approved a plan to reorganize into a South Dakota limitedliability company.

 

The reorganization from acooperative to a limited liability company was approved by Northern Growers’members at a meeting held on March 27, 2003, and the reorganization becameeffective on April 1, 2003. The transaction was an exchange of interestswhereby the assets and liabilities of the cooperative were transferred forcapital units of the newly formed limited liability company, Whetstone Ethanol,LLC. The capital units were distributed to Northern Growers’ members upondissolution of the cooperative at a rate of one capital unit of the limitedliability company for each share of equity stock owned in the cooperative. Thedistribution of capital units to the members was registered under theSecurities Act of 1933. Upon completion of the reorganization, the name,Whetstone Ethanol, LLC, was changed to Northern Growers, LLC.  As a limited liability company, NorthernGrowers elected to be taxed as a partnership in order to retain its historicsingle-level income tax treatment at the member level.

 

 

 

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**ThePlant**

 

The plant is locatedimmediately adjacent to the Big Stone Plant near the city of Big Stone City inGrant County, South Dakota.  The plant was designed and built by Broin andAssociates, Inc., a Sioux Falls, South Dakota based company specializing in thedesign and construction of ethanol plants, and was designed and built with aname-plate production capacity of 40 million gallons of ethanol annually.Construction of the plant was completed in June 2002 and full productioncommenced in July 2002. Broin Management, LLC, also a Sioux Falls, South Dakotabased company that specializes in the management of ethanol plants, manages theday-to-day operations of the plant.

 

Two new developments areplanned for the plant in 2006.  InJanuary 2006, new construction was commenced at the plant in order incorporateBPXÔ, a new raw starch technology developedby Broin and Associates that eliminates an energy-intensive step in theproduction process.  Following the completionof this project, additional construction will be commenced to expand the plantfrom a 40 million gallon name-plate production capacity to a 75 million gallonname-plate production capacity. Construction for expansion of the plant is expected to begin in the fallof 2006 and to be completed in late summer of 2007. Both construction projectsare designed and will be built by Broin and Associates.

 

**Ethanol**

 

The principal productproduced at the plant is ethanol. Ethanol is ethyl alcohol, a fuel componentmade primarily from corn. Ethanol is used for three primary purposes: 1) as anoxygenated fuel additive; 2) as an octane enhancer in fuels; and 3) as anon-petroleum based gas substitute. Approximately 95% of all ethanol is usedfor blending with unleaded gasoline and other fuel products. Although not allscientists agree about the existence or extent of environmental benefitsassociated with the use of ethanol, the use of ethanol is commonly viewed as away to improve the quality of automobile emissions. When blended with gasoline,ethanol acts as an oxygenate by increasing the percentage of oxygen ingasoline.  As a result, the gasoline burns more cleanly, and releases lesscarbon monoxide and other exhaust emissions into the atmosphere.

 

An ethanol plant isessentially a fermentation plant.  The ground corn, which containsstarch, is mixed with water to form a mash.  The mash is heated andenzymes added to convert the starch into fermentable sugars.  Fermentationoccurs when yeast is added to convert the sugars into alcohol and carbondioxide.  The carbon dioxide may either be captured and sold, if nearbymarkets exist, or released into the atmosphere.  Fermentation produces amixture called “beer,” which contains about 10% alcohol and 90% water. The “beer” is then boiled in a distillation column to separate the water,resulting in ethyl alcohol that is 90 to 95% pure.  The mixture then goesthrough a dehydration process, which increases the alcohol content to 99% orgreater.  This product is then mixed with a certified denaturant to makethe product unfit for human consumption and commercially saleable.

 

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**EthanolMarketing and Distribution**

 

All of the ethanolproduced at the plant is sold to Ethanol Products, LLC, a Broin affiliate,under an ethanol marketing agreement.  Ethanol Products, in turn, marketsand sells the ethanol to major, multi-national oil companies with blending andrefinery facilities located throughout the continental United States. The pricereceived from the sale to Ethanol Products is based upon various types ofcontracts between Northern Lights and Ethanol Products and is fixed upon thetransfer of title to Ethanol Products.

 

The ethanol produced atthe plant is shipped by Ethanol Products using rail cars operated by EthanolProducts or trucks supplied by companies with which Ethanol Productscontracts.  Transfer of title and risk ofloss is made to Ethanol Products upon the loading of ethanol onto the railcarsand trucks at the plant.  The plant isserved by rail facilities and connections to the Burlington Northern Santa Ferailroad system, which facilitate the transportation of ethanol to thecustomers’ terminals.  The plant site isalso served by multiple South Dakota state highways and Interstate Highway 29,which provide transportation links in all directions.

 

The marketing agreementbetween Ethanol Products and Northern Lights is in effect until 2007 and renewsautomatically for five-year terms, unless either party provides at least ninetydays written notice of termination prior to the end of the term.  Ethanol Products charges Northern Lights amarketing and service fee based upon each gallon of ethanol sold. Shippingcosts in transporting the ethanol are borne by Northern Lights and are includedin gross revenues and cost of revenues. In the event that Northern Lights’ relationship with Ethanol Products isinterrupted for any reason, we believe that another entity to market theethanol could be located.  Any interruption, however, could temporarilydisrupt the sale of ethanol and adversely affect our business and operations.

 

**DistillersGrains**

 

A principal co-product ofthe ethanol production process is distillers grains.  Distillers grainsare a high protein, high energy feed supplement marketed primarily to thedairy, beef, sheep, swine, and poultry industries. It is a popular animalfeed supplement, with millions of tons produced in North Americaannually.  Most of the distillers grains produced in the United States aresold for use in animal feeds within the continental United States, and a smallpercentage is exported primarily to Canada, Mexico and Europe.  The vastmajority of it is fed to ruminant animals in the dairy and beef sector. New technologies, which have allowed for the production of a more consistent,quality product, are creating a market for it in the swine and poultryindustries as well.

 

Dry mill ethanolprocessing generally produces three forms of distillers grains, all of whichdiffer in moisture content and shelf life: 1) dried distillers grains withsolubles (DDGS); 2) distillers wet grains or “wet cake”; and 3) modifieddistillers grains.  Distillers wet grains are processed corn mash thatdoes not go through a drying process

 

 

 

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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 theplant.  Modified distillers grains are distillers wet grains that havebeen dried to a 50% moisture content.  Modified distillers grains have aslightly longer shelf life and are often sold to nearby livestock producers.DDGS isdistillerswet grains dried to an 8-10% moisture content. DDGS have an almost indefiniteshelf life and may be sold and shipped to any market regardless of its vicinityto the plant.

 

**DistillersGrains Marketing and Distribution**

 

All of the distillersgrains produced at the plant is sold to customers through Broin Enterprises,Inc. d/b/a Dakota Gold Marketing, a Broin affiliate, under a distillers grainsmarketing agreement. As Northern Lights’ exclusive marketing agent, Dakota Goldmarkets and sells the distillers grains produced at the plant to customersprimarily located throughout the continental United States. The price receivedfrom the sale of distillers grain is the price received from the customers withwhich Dakota Gold Marketing has negotiated and entered a sale.

 

There are threevariations of distillers grains produced at the plant and marketed by DakotaGold Marketing: 1) DDGS; 2) Dakota GoldTM; and 3) distillers wet grains. DakotaGoldTM is DDGS, plus a certification from Dakota Gold Marketing indicating thatDDGS meets certain standards and specifications. In 2005, approximately 97% ofour revenues from the sale of distillers grains was attributable to sales ofDakota GoldTM.

 

Dakota Gold Marketingmarkets Dakota GoldTM, DDGS and distillers wet grains to local, regional, andnational markets.  The plant ships the majority of Dakota GoldTM and DDGSto national markets, which are primarily located in the southwestern UnitedStates, and the rest to local, regional markets.  Shipments to nationalmarkets are primarily done by rail because of a longer shelf life, whileshipments to local or regional markets are primarily done by truck. Northern Lights also contracts with Dakota Gold Marketing for the use ofrailcars in the shipping of DDGS and Dakota GoldTM, paying Dakota Gold Marketinga flat fee per railcar in connection with each shipment. Through themarketing of Dakota Gold, we are not dependent upon one or a limited number ofcustomers.

 

 The marketingagreement between Northern Lights and Dakota Gold Marketing is in effect until2007 and renews automatically for additional five-year terms, unlessdiscontinued by either party upon at least three months prior writtennotice.  Dakota Gold Marketing charges Northern Lights a marketing feebased upon a percentage of gross monthly sales of distillers grains lessshipping costs. All shipping costs associated with transporting distillersgrains from the plant to customers are borne by Northern Lights and areincluded in our gross revenues and cost of revenues, while Dakota GoldMarketing is responsible for invoicing all loads and receiving payments fromthe customers, the payment of which is remitted to Northern Lights.

 

 

 

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**DependenceUpon a Single or Few Customers**

 

We, as discussed above,are substantially dependent upon Ethanol Products for the purchase, marketingand distribution of ethanol. Ethanol Products purchases 100% of the ethanolproduced at the plant, all of which is marketed and distributed to itscustomers.

 

**Sourcesand Availability of Raw Materials**

 

**Corn**. The major raw material required toproduce ethanol and distillers grains is corn.  To operate at a name-platecapacity of 40 million gallons of ethanol annually, the plant requires thesupply of approximately 16 million bushels of corn annually.  BeforeJanuary 1, 2006, unless a corn delivery exemption had been granted by theplant, Northern Growers’ members were required to deliver corn to the plant ona trimester basis (every four months) and receive payment for their corn basedon individually contracted prices, or an average of market prices atpredetermined elevators, plus a freight allowance.  In 2005, approximately23% of the plant’s corn requirements was supplied from Northern Growers’members, the balance of which was supplied from purchases on the open marketfrom local producers and elevators. Effective January 1, 2006, however, Northern Growers’ members are nolonger required to deliver corn to the plant as a condition of theirmembership.  Therefore, all of the plant’scorn requirements are purchased on the open market from local producers andelevators.

 

Followingthe expansion of the plant, the plant’s new name-plate capacity will requirethe supply of approximately 26.5 million bushels of corn annually.  The plant’s location in Grant County, South Dakota, isexpected to continue to provide a sufficient supply of corn to meet the newbushel requirement.  In 2005, approximately 9.6 million bushels of cornwere produced in Grant County and 53.2 million bushels of corn were produced inthe nearby South Dakota counties of Codington, Day, Deuel, Hamlin, andRoberts.  Another 39 million bushels were produced in the nearby Minnesotacounties of Big Stone and Lac Qui Parle.

 

**Steam.** The productionprocess at the plant requires a constant supply of steam.  Steam is usedfor the cooking, evaporation, and distillation processes.  While steam forthe ethanol production process is generally received from an ethanol plant’son-site boilers, the plant receives a substantial portion of its steam directlyfrom Big Stone Plant, a coal fired, electrical generating facility locatedimmediately adjacent to the plant, and co-owned by Otter Tail Corporation,Montana-Dakota Utilities and NorthWestern Corporation.  In the event that additional steam isnecessary or the supply of steam from Big Stone Plant is unexpectedlydiminished or interrupted, the plant uses two on-site boilers to produce steam.The energy source for powering the two on-site boilers and other machinery isnatural gas. However,****the use of steam from the Big Stone Plantreduces the plant’s dependence on natural gas for operations.  In 2005, for example, 40% ofthe plant’s natural gas requirements for operations were replaced directly withsteam from the Big Stone Plant, compared to 45% of the plant’s requirements in2004.

 

 

 

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#### **The steam sale agreement between Northern Lights and BigStone Plant provides steam to the plant up to a maximum of 140 million BTU’sper hour.  The agreement’s ten year term ends on June 1, 2012, butautomatically renews for two additional five-year terms unless terminated byeither party by providing 12 months advance notice. Big Stone Plant hasprovided the plant with a consistent supply of steam to meet its requirementsexcept during routine, semi-annual maintenance shutdowns.**

 

**Natural Gas**. Theproduction process at the plant requires a constant supply of naturalgas.  Natural gas is the primary energy source for drying distillersgrains, and for powering the two on-site boilers for the production of steam inthe event that additional steam is necessary or the supply of steam from theBig Stone Plant is unexpectedly diminished or interrupted. Northern Lightscontracts with NorthWestern Corporation of Sioux Falls, South Dakota, for thesupply and distribution of natural gas to the plant.  The agreement withNorthWestern is for a term of ten years ending in 2012.  Since the plant’soperations were commenced, there have been no material interruptions orshortages in the supply of natural gas to the plant.

 

**Electricity**. The production process at the plantrequires a constant supply of electricity.  Electricity is necessary forlighting purposes and powering much of the machinery and equipment at theplant.  Northern Lights contracts withOtter Tail Power Company of Otter Tail, Minnesota, to provide all the electricpower and energy requirements for the plant.  The agreement commenced atthe start of plant operations in 2002 under an initial one-year term, butautomatically renews for additional one-year terms unless terminated by 12months advance written notice from either party.  Since operations werecommenced, there have been no interruptions or shortages in the supply ofelectricity to the plant.

 

**Water**. The production process at the plantrequires a constant supply of water.  Water is necessary for the slurryand cooking processes, cooling towers and boiler operations.  NorthernLights contracts with the city of Big Stone City and the Big Stone Plant tosupply the necessary water requirements for the production process.  Theagreement with the city of Big Stone City is in effect until 2012, andautomatically renews for two, five-year terms unless terminated by either partywith 12 months advance written notice.  Since the plant’s operations werecommenced, the city of Big Stone City and Big Stone Plant have provided anample and consistent supply of water to meet the plant’s requirements.

 

**Researchand Development**

 

We do not conduct any research and development of ourown relating to the production of ethanol and distillers grains. Instead, werely on Broin and Associates to research and develop new technologies in effortto improve the production process and end products. On October 25, 2005,Northern Lights entered intoa new licensing agreement and addendum with Broin Associates. Under theagreement, in exchange for an annual licensing fee, Broin and Associateslicenses to Northern Lights the right to use certain technology and patentsowned, developed, or obtained by Broin and Associates

 

 

 

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and which relate to the ethanol and co-product production processes.The term of this agreement ends on June 30, 2015, the date the managementagreement between Northern Lights and Broin Management is scheduled toexpire.  Under the addendum, Broin andAssociates licenses to Northern Lights the right to use a newly developed rawstarch technology called BPXÔ. BPXÔ, which eliminates an energy-intensivestep in the cooking production phase, is currently in the process of beingincorporated into the production process and is expected to be fullyincorporated by September 2006.

 

**Competition**

 

We are in directcompetition with numerous other ethanol and distillers grains producers, manyof which have significantly greater resources.  We expect that additionalethanol and distillers grains producers will enter the market if the demand andgovernmental supports for ethanol continue to increase.

 

The ethanol industry hasgrown to 96 production facilities in the United States as of March 2006. Thelargest ethanol producers include Abengoa Bioenergy Corp, Archer DanielsMidland, Cargill, New Energy Corporation and VeraSun Energy Corporation, andAventine Renewable Energy, all of which are capable of producing more ethanolthan the plant.  There are numerous ethanol plants of a similar size tothe plant located in the Midwest region. In addition, at least 34 new ethanolplants and nine expanding plants, with a combined annual production capacity ofover 2.1 billion gallons annually, are set to come into production in the next18 months, which will increase the ethanol production capacity ofcompetitors.  In South Dakota, excluding the plant, there are currentlyten plants in full production and another two plants currently in theconstruction phase. The ten plants have a total annual production capacity ofapproximately 377 million gallons of ethanol and the two plants underconstruction will have a production capacity of approximately 110 milliongallons.  Despite this concentration andgrowth, we believe that we will continue to compete favorably with otherethanol and distillers grains’ producers because of the plant’s existingefficiencies, the anticipated improvements to the plant from the incorporationof BPXÔ and expansion, and the marketingarrangements with various Broin-affiliated companies.

 

The following tableidentifies most of the producers in the United States along with theirproduction capacities.

 

 
| ** **              | ** ** | **Location** | ** ** | **Feedstock** | ** ** | **Current Capacity  (mmgy)** | ** ** | **Under Construction/  Expansions  (mmgy)** | ** ** |
|-------------------------|------------|--------------|------------|---------------|------------|------------------------------|------------|---------------------------------------------|------------|
| Abengoa Bioenergy Corp. |       | York, NE     |       | Corn/milo     |       | 55                           |       |                                        |       |
|                    |       | Colwich, KS  |       |          |       | 25                           |       |                                        |       |
|                    |       | Portales, NM |       |          |       | 30                           |       |                                        |       |
|                    |       | Ravenna, NE  |       |          |       |                         |       | 88                                          |       |
| ACE Ethanol, LLC        |       | Stanley, WI  |       | Corn          |       | 39                           |       |                                        |       |

 

 

 

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| Adkins Energy, LLC*                   |   | Lena, IL            |   | Corn        |   | 40     |   |   |   |
|---------------------------------------|--------|---------------------|--------|-------------|--------|--------|--------|--------|--------|
| Advanced Bioenergy                    |   | Fairmont, NE        |   | Corn        |   |   |   | 100    |   |
| AGP*                                  |   | Hastings, NE        |   | Corn        |   | 52     |   |   |   |
| Agra Resources Coop. d.b.a.  EXOL*    |   | Albert Lea, MN      |   | Corn        |   | 40     |   | 8      |   |
| Agri-Energy, LLC*                     |   | Luverne, MN         |   | Corn        |   | 21     |   |   |   |
| Alchem Ltd. LLLP                      |   | Grafton, ND         |   | Corn        |   | 10.5   |   |   |   |
| Al-Corn Clean Fuel*                   |   | Claremont, MN       |   | Corn        |   | 35     |   |   |   |
| Amaizing Energy, LLC*                 |   | Denison, IA         |   | Corn        |   | 40     |   |   |   |
| Archer Daniels Midland                |   | Decatur, IL         |   | Corn        |   | 1,070  |   |   |   |
|                                  |   | Cedar Rapids, IA    |   | Corn        |   |   |   |   |   |
|                                  |   | Clinton, IA         |   | Corn        |   |   |   |   |   |
|                                  |   | Columbus, NE        |   | Corn        |   |   |   |   |   |
|                                  |   | Marshall, MN        |   | Corn        |   |   |   |   |   |
|                                  |   | Peoria, IL          |   | Corn        |   |   |   |   |   |
|                                  |   | Wallhalla, ND       |   | Corn/barley |   |   |   |   |   |
| ASAlliances Biofuels, LLC             |   | Albion, NE          |   | Corn        |   |   |   | 100    |   |
|                                  |   | Linden, IN          |   | Corn        |   |   |   | 100    |   |
| Aventine Renewable Energy,  LLC       |   | Pekin, IL           |   | Corn        |   | 100    |   | 57     |   |
|                                  |   | Aurora, NE          |   | Corn        |   | 50     |   |   |   |
| Badger State Ethanol, LLC*            |   | Monroe, WI          |   | Corn        |   | 48     |   |   |   |
| Big River Resources, LLC*             |   | West Burlington, IA |   | Corn        |   | 40     |   |   |   |
| Broin Enterprises, Inc.               |   | Scotland, SD        |   | Corn        |   | 9      |   |   |   |
| Bushmills Ethanol, Inc.*              |   | Atwater, MN         |   | Corn        |   |   |   | 40     |   |
| Cargill, Inc.                         |   | Blair, NE           |   | Corn        |   | 85     |   |   |   |
|                                  |   | Eddyville, IA       |   | Corn        |   | 35     |   |   |   |
| Central Indiana Ethanol,  LLC         |   | Marion, IN          |   | Corn        |   |   |   | 40     |   |
| Central MN Ethanol Coop*              |   | Little Falls, MN    |   | Corn        |   | 21.5   |   |   |   |
| Central Wisconsin Alcohol             |   | Plover, WI          |   | Seed corn   |   | 4      |   |   |   |
| Chief Ethanol                         |   | Hastings, NE        |   | Corn        |   | 62     |   |   |   |
| Chippewa Valley Ethanol  Co.*         |   | Benson, MN          |   | Corn        |   | 45     |   |   |   |
| Commonwealth Agri-Energy,  LLC*       |   | Hopkinsville, KY    |   | Corn        |   | 24     |   | 9      |   |
| Corn, LP*                             |   | Goldfield, IA       |   | Corn        |   | 50     |   |   |   |
| Cornhusker Energy  Lexington, LLC     |   | Lexington, NE       |   | Corn        |   |   |   | 40     |   |
| Corn Plus, LLP*                       |   | Winnebago, MN       |   | Corn        |   | 44     |   |   |   |
| Dakota Ethanol, LLC*                  |   | Wentworth, SD       |   | Corn        |   | 50     |   |   |   |
| DENCO, LLC*                           |   | Morris, MN          |   | Corn        |   | 21.5   |   |   |   |
| E3 Biofuels                           |   | Mead, NE            |   | Corn        |   |   |   | 24     |   |
| East Kansas Agri-Energy,  LLC*        |   | Garnett, KS         |   | Corn        |   | 35     |   |   |   |
| ESE Alcohol Inc.                      |   | Leoti, KS           |   | Seed corn   |   | 1.5    |   |   |   |
| Ethanol2000, LLP*                     |   | Bingham Lake, MN    |   | Corn        |   | 32     |   |   |   |
| Frontier Ethanol, LLC                 |   | Gowrie, IA          |   | Corn        |   |   |   | 60     |   |
| Front Range Energy, LLC               |   | Windsor, CO         |   | Corn        |   |   |   | 40     |   |
| Glacial Lakes Energy, LLC*            |   | Watertown, SD       |   | Corn        |   | 50     |   |   |   |
| Golden Cheese Company of  California* |   | Corona, CA          |   | Cheese whey |   | 5      |   |   |   |

 

 

 

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| Golden Grain Energy, LLC*            |   | Mason City, IA     |   | Corn               |   | 40     |   |   |   |
|--------------------------------------|--------|--------------------|--------|--------------------|--------|--------|--------|--------|--------|
| Golden Triangle Energy,  LLC*        |   | Craig, MO          |   | Corn               |   | 20     |   |   |   |
| Grain Processing Corp.               |   | Muscatine, IA      |   | Corn               |   | 20     |   |   |   |
| Granite Falls Energy, LLC            |   | Granite Falls, MN  |   | Corn               |   | 45     |   |   |   |
| Great Plains Ethanol, LLC*           |   | Chancellor, SD     |   | Corn               |   | 50     |   |   |   |
| Green Plains Renewable  Energy       |   | Shenandoah, IA     |   | Corn               |   |   |   | 50     |   |
| Hawkeye Renewables, LLC              |   | Iowa Falls, IA     |   | Corn               |   | 50     |   | 50     |   |
|                                 |   | Fairbank, IA       |   | Corn               |   |   |   | 100    |   |
| Heartland Corn Products*             |   | Winthrop, MN       |   | Corn               |   | 36     |   |   |   |
| Heartland Grain Fuels, LP*           |   | Aberdeen, SD       |   | Corn               |   | 9      |   |   |   |
|                                 |   | Huron, SD          |   | Corn               |   | 12     |   | 18     |   |
| Heron Lake BioEnergy, LLC            |   | Heron Lake, MN     |   | Corn               |   |   |   | 50     |   |
| Horizon Ethanol, LLC                 |   | Jewell, IA         |   | Corn               |   | 60     |   |   |   |
| Husker Ag, LLC*                      |   | Plainview, NE      |   | Corn               |   | 26.5   |   |   |   |
| Illinois River Energy, LLC           |   | Rochelle, IL       |   | Corn               |   |   |   | 50     |   |
| Iowa Ethanol, LLC*                   |   | Hanlontown, IA     |   | Corn               |   | 50     |   |   |   |
| Iroquois Bio-Energy  Company, LLC    |   | Rensselaer, IN     |   | Corn               |   |   |   | 40     |   |
| James Valley Ethanol, LLC            |   | Groton, SD         |   | Corn               |   | 50     |   |   |   |
| KAAPA Ethanol, LLC*                  |   | Minden, NE         |   | Corn               |   | 40     |   |   |   |
| Land O’ Lakes*                  |   | Melrose, MN        |   | Cheese whey        |   | 2.6    |   |   |   |
| Lincolnland Agri-Energy,  LLC*       |   | Palestine, IL      |   | Corn               |   | 48     |   |   |   |
| Lincolnway Energy, LLC*              |   | Nevada, IA         |   | Corn               |   |   |   | 50     |   |
| Liquid Resources of Ohio             |   | Medina, OH         |   | Waste Beverage     |   | 3      |   |   |   |
| Little Sioux Corn  Processors, LP*   |   | Marcus, IA         |   | Corn               |   | 52     |   |   |   |
| Merrick/Coors                        |   | Golden, CO         |   | Waste beer         |   | 1.5    |   | 1.5    |   |
| MGP Ingredients, Inc.                |   | Pekin, IL          |   | Corn/wheat starch  |   | 78     |   |   |   |
|                                 |   | Atchison, KS       |   |               |   |   |   |   |   |
| Michigan Ethanol, LLC                |   | Caro, MI           |   | Corn               |   | 50     |   |   |   |
| Mid America Agri  Products/Wheatland |   | Madrid, NE         |   | Corn               |   |   |   | 44     |   |
| Mid-Missouri Energy, Inc.*           |   | Malta Bend, MO     |   | Corn               |   | 45     |   |   |   |
| Midwest Grain Processors*            |   | Lakota, IA         |   | Corn               |   | 95     |   |   |   |
|                                 |   | Riga, MI           |   | Corn               |   |   |   | 57     |   |
| Midwest Renewable Energy,  LLC       |   | Sutherland, NE     |   | Corn               |   | 17.5   |   | 4.5    |   |
| Minnesota Energy*                    |   | Buffalo Lake, MN   |   | Corn               |   | 18     |   |   |   |
| Missouri Ethanol                     |   | Laddonia, MO       |   | Corn               |   |   |   | 45     |   |
| New Energy Corp.                     |   | South Bend, IN     |   | Corn               |   | 102    |   |   |   |
| North Country Ethanol, LLC*          |   | Rosholt, SD        |   | Corn               |   | 20     |   |   |   |
| Northeast Missouri Grain,  LLC*      |   | Macon, MO          |   | Corn               |   | 45     |   |   |   |
| Northern Lights Ethanol,  LLC*       |   | Big Stone City, SD |   | Corn               |   | 50     |   |   |   |
| Northstar Ethanol, LLC               |   | Lake Crystal, MN   |   | Corn               |   | 52     |   |   |   |
| Otter Creek Ethanol, LLC*            |   | Ashton, IA         |   | Corn               |   | 55     |   |   |   |
| Pacific Ethanol                      |   | Madera, CA         |   | Corn               |   |   |   | 35     |   |
| Panhandle Energies of  Dumas, LP     |   | Dumas, TX          |   | Corn/Grain Sorghum |   |   |   | 30     |   |

 

 

 

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| Parallel Products                            |       | Louisville, KY         |   | Beverage waste        |   | 5.4        |   |     |   |
|----------------------------------------------|------------|------------------------|--------|-----------------------|--------|------------|--------|----------|--------|
|                                         |       | R. Cucamonga, CA       |   |                  |   |       |   |     |   |
| Permeate Refining                            |       | Hopkinton, IA          |   | Sugars & starches |   | 1.5        |   |     |   |
| Phoenix Biofuels                             |       | Goshen, CA             |   | Corn                  |   | 25         |   |     |   |
| Pinal Energy, LLC                            |       | Maricopa, AZ           |   | Corn                  |   |       |   | 55       |   |
| Pine Lake Corn Processors,  LLC*             |       | Steamboat Rock, IA     |   | Corn                  |   | 20         |   |     |   |
| Platte Valley Fuel Ethanol,  LLC             |       | Central City, NE       |   | Corn                  |   | 40         |   |     |   |
| Prairie Ethanol, LLC                         |       | Loomis, SD             |   | Corn                  |   |       |   | 60       |   |
| Prairie Horizon  Agri-Energy, LLC            |       | Phillipsburg, KS       |   | Corn                  |   |       |   | 40       |   |
| Pro-Corn, LLC*                               |       | Preston, MN            |   | Corn                  |   | 42         |   |     |   |
| Quad-County Corn  Processors*                |       | Galva, IA              |   | Corn                  |   | 27         |   |     |   |
| Red Trail Energy, LLC                        |       | Richardton, ND         |   | Corn                  |   |       |   | 50       |   |
| Redfield Energy, LLC                         |       | Redfield, SD           |   | Corn                  |   |       |   | 50       |   |
| Reeve Agri-Energy                            |       | Garden City, KS        |   | Corn/milo             |   | 12         |   |     |   |
| Siouxland Energy &  Livestock Coop*      |       | Sioux Center, IA       |   | Corn                  |   | 25         |   |     |   |
| Siouxland Ethanol, LLC                       |       | Jackson, NE            |   | Corn                  |   |       |   | 50       |   |
| Sioux River Ethanol, LLC*                    |       | Hudson, SD             |   | Corn                  |   | 55         |   |     |   |
| Sterling Ethanol, LLC                        |       | Sterling, CO           |   | Corn                  |   | 42         |   |     |   |
| Tall Corn Ethanol, LLC*                      |       | Coon Rapids, IA        |   | Corn                  |   | 49         |   |     |   |
| Tate & Lyle                              |       | Loudon, TN             |   | Corn                  |   | 67         |   |     |   |
| The Andersons Albion  Ethanol LLC            |       | Albion, MI             |   | Corn                  |   |       |   | 55       |   |
| Trenton Agri Products, LLC                   |       | Trenton, NE            |   | Corn                  |   | 35         |   | 10       |   |
| United WI Grain Producers,  LLC*             |       | Friesland, WI          |   | Corn                  |   | 49         |   |     |   |
| US BioEnergy Corp.                           |       | Albert City, IA        |   | Corn                  |   |       |   | 100      |   |
|                                         |       | Lake Odessa, MI        |   | Corn                  |   |       |   | 45       |   |
| U.S. Energy Partners, LLC                    |       | Russell, KS            |   | Milo/wheat starch     |   | 48         |   |     |   |
| Utica Energy, LLC                            |       | Oshkosh, WI            |   | Corn                  |   | 48         |   |     |   |
| Val-E Ethanol, LLC                           |       | Ord, NE                |   | Corn                  |   |       |   | 45       |   |
| VeraSun Energy Corporation                   |       | Aurora, SD             |   | Corn                  |   | 230        |   | 110      |   |
|                                         |       | Ft. Dodge, IA          |   | Corn                  |   |       |   |     |   |
|                                         |       | Charles City, IA       |   | Corn                  |   |       |   |     |   |
| Voyager Ethanol, LLC*                        |       | Emmetsburg, IA         |   | Corn                  |   | 52         |   |     |   |
| Western Plains Energy, LLC*                  |       | Campus, KS             |   | Corn                  |   | 45         |   |     |   |
| Western Wisconsin Renewable  Energy, LLC*    |       |  

Boyceville, WI |   | Corn                  |   |       |   | 40       |   |
| Wind Gap Farms                               |       | Baconton, GA           |   | Brewery waste         |   | 0.4        |   |     |   |
| Wyoming Ethanol                              |       | Torrington, WY         |   | Corn                  |   | 5          |   |     |   |
| Xethanol BioFuels, LLC                       |       | Blairstown, IA         |   | Corn                  |   | 5          |   |     |   |
| ****Total Current Capacity****               | ** ** | ** **             |   |                  |   | **4441.4** |   |     |   |
| ****Total Under  Construction/Expansions**** | ** ** | ** **             |   |                  |   |       |   | **2041** |   |
| **Total Capacity**                           | ** ** | ** **             |   |                  |   | **6482.4** |   |     |   |

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* farmer-owned

RenewableFuels AssociationMarch 3, 2006

 

 

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As the demand for ethanolincreases, we may have to compete with international ethanol producers, whichmay be able to produce and sell ethanol more inexpensively.  Brazil is currently the world’s largestproducer and exporter of ethanol. In 2004, for example, Brazil produced 3.9billion gallons of ethanol and shipped approximately 112 million gallons ofethanol into the United States.  Ethanolis produced more cheaply in Brazil than in the United States because of the useof sugarcane, a less expensive raw material alternative to corn.  Because of various tariffs on the importationof ethanol into the United States, the price of ethanol produced in the UnitedStates is currently more competitive than ethanol imported from Brazil.  In the event that these tariffs are reducedor eliminated, however, the price of ethanol produced in the United States maybecome less competitive, which could adversely impact the ability to sellethanol.

 

In addition, theCaribbean Basin Initiative allows for ethanol produced in participatingCaribbean Basin countries to be imported into the United States duty free.Large ethanol producers, like Cargill, have expressed an interest in buildingethanol plants in these countries, such as El Salvador. While the CaribbeanBasin Initiative caps the amount of duty free ethanol imported into the UnitedStates at 7% of the total United States’ production from the previous year, astotal production in the United States grows, the amount of ethanol producedfrom the Caribbean area and sold in the United States will also grow, whichcould impact the ability to sell ethanol.

 

Like many ethanolproducers, we compete with producers of MTBE.  MTBE is the other oxygenateused in fuels for compliance with the Federal Clean Air Act mandates and is acompetitor of ethanol in the oxygenate market. Many major oil companies produceMTBE and, because it is petroleum-based, its use is supported by thesecompanies. These companies have significantly greater resources than we do withwhich to market MTBE, influence legislation, and influence public perception ofMTBE.  These companies also have sufficient resources to begin productionof ethanol should they choose to do so. While MTBE still remains a competitor,it has been increasingly the subject of serious environmental concerns, whichhas resulted in several states enacting laws prohibiting the use of MTBE as anoxygenate in fuels.  As more states continue to ban the use of MTBE, MTBEis expected to be become less competitive with ethanol.

 

Alternativefuels, gasoline oxygenates, and ethanol production methods are continuallyunder development by ethanol and oil companies with far greater resources thanwe have.  New products or methods of ethanol production developed bylarger, better-financed competitors could provide them with competitiveadvantages over us and harm our business.

 

**Federaland State Government Supports**

 

Various federal and statelaws, regulations, and programs have led to an increasing use of ethanol infuel, including subsidies, tax credits, policies and other forms

 

 

 

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of financial incentives.  Some of these lawsprovide economic incentives to produce and blend ethanol and others mandate theuse of ethanol.

 

Priorto the Energy Policy Act of 2005 (EPACT), which was signed into law on August8, 2005, ethanolsales were favorably affected by the Clean Air Act Amendments of 1990. Theseamendments required, among other things, the sale of reformulated gasoline incertain major urban areas to reduce pollutants, and that the reformulatedgasoline contain at least 2% oxygen by weight. Refiners met the oxygenatedrequirement by adding ethers or ethanol, any of which contained oxygens andother elements. Until recently, MTBE (methyl tertiary butyl ether) was the mostcommonly used oxygenate until the use of it declined following seriousenvironmental concerns and the banning of it in several states.

 

                EPACT repealed the Clean Air Act requirement to useoxygenates in reformulated gasoline. In place of this requirement, itestablished a 7.5 billion gallon Renewable Fuels Standard (RFS). The RFSrequires 4.0 billiongallons of ethanol or other renewable fuel be used in motor vehicles in 2006and 7.5 billion gallons of ethanol or other renewable fuel be used in motorvehicles by 2012.  In addition, EPACTexpanded who qualifies for the federal small producer tax credit.  Producers with a production capacity of up to 60million gallons annually now qualify for a credit of $0.10 per gallon ofethanol produced, not to exceed $1.5 million per year per producer.  Thecredit is effective for producers with taxable years ending after August 8,2005. Because the plant’s production capacity is currently less than 60 milliongallons annually, the credit will be passed through to Northern Lights,Northern Growers, and Northern Growers’ members for the 2005 tax year.

 

In addition, the use of ethanolas an oxygenate to comply with federal mandates has been aided by federal taxpolicy.  Prior to the enactment of the American Jobs Creation Act of 2004,which took effect on January 1, 2005, the Energy Tax Act of 1978 exemptedethanol blended gasoline from the full federal excise tax as a means ofstimulating the development of a domestic ethanol industry and mitigating theUnited States’ dependence on foreign oil. The exemption allowed ethanol to besold by blenders at prices that were competitive with other less expensiveadditives and gasoline. Equivalent to providing a per gallon “equalization”payment, the exemption allowed blenders to pay more for ethanol than thewholesale price of gasoline and still retain the same profit margins.  The equalization payment consisted of anexemption of $0.052 per gallon from the excise tax of $0.184 per gallon for a10% ethanol blend, with lower exemption amounts available for a 7.7% and 5.7%ethanol blend.

 

The American JobCreations Act replaced the federal excise tax exemption with the VolumetricEthanol Excise Tax Credit (“VEETC”).  VEETC provides an excise tax creditof $0.51 per gallon of ethanol blended into gasoline.  For example, for a 10% and 85% ethanol blend,a blender can now claim a credit of $0.051 and $0.4335 per gallon of gasoline,respectively.  Basing the credit on anyvolume of ethanol blended, as opposed to a more restrictive blend percentageunder the prior exemption, the VEETC is expected to allow refineries greaterflexibility and incentive to blend as much or as little to meet

 

 

 

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their octane or volume needs.   The VEETC is scheduled to expire on December31, 2010.

 

In addition to taxpolicy, the production of ethanol has been aided by federal and stategovernment production incentives. Congress provides an ethanol production incentive to ethanol producersthrough the United States Department of Agriculture Commodity CreditCorporation’s Bioenergy Program.  Under the program, incentive paymentsare allocated to ethanol producers based primarily on an increase in gallons ofethanol produced compared to the prior year’s production.  We received thelargest payments in 2002 and 2003, receiving substantially less every yearsince this time. We do not expect to receive an increase in revenue under theprogram in 2006 because a substantial increase in production at the plant from2005 is not expected. Further, revenue under the program is expected to beadversely affected by an increase in participation by new and expanding plantsin the United States, a decrease in federal funding under the program, and atermination of the program on September 30, 2006.

 

In South Dakota, thestate provides an incentive production payment to ethanol producers operatingin South Dakota.  The production incentive consists of a direct payment toSouth Dakota ethanol producers of up to $0.20 per gallon, which is dividedamong producers of fuel ethanol within South Dakota up to a maximum of $1million per year per plant (a maximum of $83,333 per month in 2005) and amaximum of $10 million over the life of a plant.  The program, however,caps the payments that can be distributed to all plants based in South Dakotain a program year to no more than $7 million in payments in 2006 (program yearending June 30, 2006) and $7 million in 2007. The payments are distributed toeach plant in proportion to the total number of gallons of ethanol produced andmarketed annually by all the plants in South Dakota.  As more plants commenceproduction, or existing plants increase production, each plant may receive alower proportionate share of the maximum payment under the program. Due to anincrease in claims made for payment from new and existing plants during the2005 program year, the funds were depleted in full midway through the 2005program year.  It is uncertain whetherthe funds under the program will be depleted before the end of the 2006 programyear, much of which is dependent upon any new production and participation inSouth Dakota in 2006.

 

The revocation,amendment, or non-renewal of any one or more of these laws, regulations orprograms, or a lack of funding under the programs, could adversely affect thefuture use of ethanol and operations in a material way.  Any material reductionof the use of ethanol would have an adverse effect on the plant’s profitabilityand viability.

**OtherFactors Affecting Demand and Supply**

                Inaddition to government supports that encourage production and the use ofethanol, demand for ethanol may increase as a result of increased consumptionof E85 fuel. E85 fuel is a blend of 70% to 85% ethanol and gasoline. Accordingto the Energy Information Administration, E85 consumption is projected toincrease from a national total of 11 million gallons in 2003 to47 million gallons in 2025. According to the National Ethanol VehicleCoalition, there are currently about 6.0 million flexible fuel

 

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vehicles capable of operating on E85 in the UnitedStates and over 460 retail stations supplying it. Automakers have indicatedplans to produce an estimated one million more flexible fuel vehicles per year.

 

**EnvironmentalRegulation and Costs**

 

We are subject toextensive environmental regulation at the federal and state levels.  Thefederal environmental regulations with which the plant must comply werepromulgated by the United States Environmental Protection Agency pursuant tothe Clean Air Act.  The stateenvironmental regulations with which the plant must comply, on the other hand,were promulgated by the South Dakota Department of Environment and NaturalResources. The Environmental Protection Agency and the South Dakota Departmentof Environment and Natural Resources regulate the air quality at the plant, inparticular the plant’s emissions into the air.  The Department ofEnvironment and Natural Resources also regulates water collection anddischarge. In addition to its own enforcement authority under this law, theEnvironmental Protection Agency has delegated permitting and enforcementauthority to the Department of Environment and Natural Resources.  Theplant requires the following permits from these and other agencies in order toconduct operations:

 

•*Title FiveOperating Permit from the South Dakota Department of Environment and NaturalResources*. In South Dakota, the Title Five Operating Permit servesas the air quality and operation permit for the plant. The plant must conductongoing emissions testing to verify compliance with the Title Five OperatingPermit.  The permit is due for renewal in2006.  To proceed with the necessaryimprovements for BPXTM and plant expansion, the plant filed with the Departmentof Environment and Natural Resources an application for renewal and modificationof the existing Title Five permit. To date, the Department has not yet approvedthe application for renewal or modification.

 

•*Bureau of Alcohol,Tobacco and Fuel Permit from the United States Department of Treasury.*The plant is required to have this permit because of the alcohol content ofethanol. The permit is due for renewal annually.

 

•*A Surface WaterDischarge Permit from the South Dakota Department of Environment and NaturalResources.* The Surface Water Discharge Permit regulates the terms ofany storm water discharges associated with industrial activity. The permitrequires the plant to provide ongoing compliance reports to the South DakotaDepartment of Environment and Natural Resources. This permit is due for renewalin 2008.

 

Whilethe plant is currently in compliance with all applicable environmental laws,regulations and permits, the plant must continue to comply with the permits andregulatory requirements. To accomplish this, the plant maintains an on-goingprogram to ensure compliance with such requirements. Maintaining compliance mayrequire the plant to incur expenditures for such things as new or upgradedequipment or processes,

 

 

 

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some of which could bematerial and costly. Approximately $3.0 million in capital expenditures onenvironmental control and other related equipment is expected to be made in thenext 24 months pertaining to improvements associated with BPXTM and theexpansion of the plant.

 

Finally, federal andstate government’s regulation of the environment changes constantly. It ispossible that more stringent federal or state environmental rules orregulations could be adopted, which could increase the plant’s future operatingcosts and expenses. It also is possible that federal or state environmental rulesor regulations could be adopted that could have an adverse effect on the use ofethanol. For example, changes in the environmental regulations regardingethanol’s use due to currently unknown effects on the environment could have anadverse effect on the ethanol industry. Furthermore, the plant’s operations aregoverned by the Occupational Safety and Health Administration (“OSHA”). OSHAregulations may change such that the future costs of the operation of the plantmay increase. Any of these regulatory factors may result in higher costs orother materially adverse conditions effecting operations, cash flows andfinancial performance.

 

**Managementand Employees**

 

Broin Management, LLC, aBroin affiliate, manages the day-to-day operations of the plant under amanagement agreement, which is in effect until June 30, 2015.  Under the agreement, Broin Managementreceives a fixed annual fee and an incentive bonus based on our annual netincome.  Northern Lights also pays certain expenses incurred with respectto the operation of the plant while other expenses, including, but not limitedto, the provision of a full-time technical manager and general manager, areincluded as part of Broin Management’s fees.  Mr. Blaine Gomer, the plant’sgeneral manager, is a Broin Management employee.  Mr. Gomer oversees andis responsible for operations and production at the plant on a day-to-daybasis.  The general manager is a full-time, on-site position, but Mr.Gomer is an employee of Broin Management.

 

As of March 1, 2006,Northern Lights employed 39 employees, including a commodities manager, acommodities supervisor, an operations manager, a maintenance manager, amicrobiologist, a chief mechanical operator, a controller, plant operators,maintenance technicians, grains assistants, accountants, and an administrativeassistant.  This does not include Mr. Gomer and the technical manager bothof whom are employees of Broin Management.

 

**Item 1A. Risk Factors.**

*** *****Risks Related toOperations**

**                *Our financial performance is dependent on corn pricesand market prices for ethanol and distillers dried grains, and our financialcondition and results of operation are directly affected by changes in thesemarket prices*. **Our results of operations and financialcondition is significantly affected by the cost and supply of corn and by the

 

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sellingprice for ethanol and distillers grains. Changes in the price and supply ofthese commodities are subject to and determined by market forces over which wehave no control. The availability and price of corn significantly influencesour financial performance as it is our highest production expense. We purchasethe corn in the cash market and hedge corn price risk through futures andforward contracts and options to reduce exposure to price fluctuations.

Generally, higher corn prices produce lower profitmargins.  This is especially true ifmarket conditions do not allow us to pass to our customers these increased corncosts.  In the event of higher prices, thereis no assurance that we will be able to pass through to our customers thesecosts.  If a period of high corn priceswere sustained for some time, such pricing may reduce our ability to generaterevenues and income because of the higher cost of operating the plant.

                Our revenues are exclusively dependenton the market prices for ethanol and distillers grains.  These prices can be volatile as a result of anumber of factors.  These factors includethe overall supply and demand, the price of gasoline, level of governmentsupport, and the availability and price of competing products.  For instance, the price of ethanol generallytends to increase as the price of gasoline increases, and the price of ethanolgenerally tends to decrease as the price of gasoline decreases.  Any lowering of gasoline prices will likelylead to lower prices for ethanol, which may decrease our ethanol revenues.  Similarly, the price of distillers grainsgenerally tends to fluctuate in the same direction as the price of corn andsoybean meal.  Therefore, any lowering ofcorn or soybean meal prices will likely lead to lower prices of distillersgrains.

***Hedgingtransactions involve risks that could harm our profitability.*** In an attempt to minimize the effects of the volatility of corn andnatural gas costs on operating profits, we engage in hedging activities in thecorn and natural gas futures markets. The effectiveness of such hedging activities is dependent, among otherthings, 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 assurancethat our hedging activities will reduce the risk caused by price fluctuationwhich may leave us vulnerable to high corn and natural gas prices.  In addition, we may choose not to take hedgingpositions in the future, which may adversely affect our financial condition ifcorn and natural gas prices increase.

Our hedging activities can themselves result inincreased costs because price movements in corn and natural gas are highlyvolatile and are influenced by many factors that are beyond our control.  In 2004, for example, hedging activitiesrelating to corn resulted in a material increase to our cost of revenues. Wemay incur these costs again and they may be significant.

***Our business is notdiversified because it is limited to the fuel grade ethanol industry, which maylimit our ability to adapt to changing business and market conditions.***   Our sole business isthe production and sale of fuel grade ethanol produced from corn and itsco-product, distillers grains. The plant does not have the capability of

 

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producingindustrial or food and beverage grade ethanol, which is used in such productsas cosmetics, perfume, paint thinner and vinegar. Our plant is also notequipped 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 several Broin-affiliatedcompanies and any termination of or disagreement regarding the services ofthese affiliates may materially harm our business.***   There are severalmaterial agreements in effect with four Broin affiliates with respect to theoperations of the plant.  Northern Lightshas an agreement with Broin Management to manage and operate the plant.  Also, Northern Lights has two agreements withBroin and Associates, one to license technology developed by Broin and a secondto construct certain improvements relating to the incorporation of suchtechnology and expansion of the plant. Lastly, Northern Lights has agreements with Ethanol Products for thepurchase, marketing and sale of ethanol, and with Broin Enterprises, Inc. d/b/aDakota Gold Marketing, for the marketing and sale of distillers grains.  If any of these parties were to terminate anyof these agreements, we might not be able to secure suitable and timelyreplacements for those services at a reasonable cost or at all, which wouldmaterially harm our business.

***We are dependentupon Ethanol Products, LLC to purchase and market all of the ethanol producedat the plant*****. ** Ethanol Products is the exclusive purchaser ofall of the ethanol produced at the plant which, in turn, markets and transportsthe ethanol to refineries located throughout the United States.  If Ethanol Products breaches the ethanolmarketing agreement or is not in the financial position to purchase all of theethanol produced, we may not have any readily available means to sell theethanol and our financial condition will be adversely and materiallyaffected.  If the ethanol marketing agreement with Ethanol Products wereto terminate, we would be forced to seek other arrangements to sell the ethanolproduced, but there are no assurances that these arrangements would achieveresults comparable to those achieved by Ethanol Products.

***                Interruptionsin energy supplies could delay or halt production at the plant, which willreduce our profitability.***  Ethanolproduction requires a constant and consistent supply of energy, includingelectricity, steam and natural gas.  Ifthere is any interruption in the plant’s supply of energy for whatever reason,such as supply, delivery or mechanical problems, we may be required to haltproduction.  If production is halted forany extended period of time, it will reduce our profitability.  Northern Lights has agreements with variouscompanies to provide the plant’s needed energy, but we cannot assure you thatthese companies will continue to be able to supply reliably the necessaryenergy that the plant needs.  If theplant were to suffer interruptions in its energy supply, our business would beharmed.

***We are dependentupon the Big Stone Plant for steam, and the plant may incur increased operatingcosts if the steam supply is terminated or interrupted.***    The production ofsteam is a necessary energy source in the ethanol production process. Ethanolplants generally rely upon on-site boilers to produce and supply steam in the

 

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productionprocess, which are typically powered by natural gas.  We, in contrast, rely on the adjacent BigStone Plant to supply a substantial portion of the required steam to theplant.  If the Big Stone Plant were toshut down for any considerable length of time or is unable to meet the plant’ssteam requirements, the plant must operate with steam energy supplied from twoon-site boilers. As a result, we may face increased operating costs because wewould need to purchase more costly natural gas to fuel and power these boilers.

***To produce ethanol,we need a significant supply of water*****.**   Watersupply and water quality are important requirements to produce ethanol.  The plant’s water requirements are suppliedby Big Stone City and the Big Stone Plant. We expect that Big Stone City and the Big Stone Plant will continue toprovide all of the plant’s water requirement, including following expansion ofthe plant.  If Big Stone City and the BigStone Plant are unable to meet our requirements, the plant will be forced tofind other sources and this could require us to spend additional capital whichcould harm our business.  We cannotassure you that the plant would be able to find alternate sources of water atcommercially reasonable prices, if at all.

***Debt service andrestrictive loan covenants limit our ability to make cash distributions tomembers and could have other important consequences.***    Our debt servicerequirements make us more vulnerable to economic or market downturns.  If we are unable to service our debt, we maybe forced to reduce or delay planned capital expenditures, sell assets,restructure indebtedness or seek additional equity capital.  There are no assurances that we canaccomplish any of these strategies on satisfactory terms, if at all.  In addition, our debt financing agreementscontain numerous financial, maintenance and other restrictive covenants.  These covenants and obligations limit ourability to make cash distributions to members.

**Risks Related to Industry**

**                *Increasesin the production of ethanol could result in lower prices for ethanol anddistillers grains and higher prices for corn***. There are currently 96 ethanol plants nationwide that have the capacityto produce over four billion gallons annually. There are another 34 ethanol plants and nine plant expansions underconstruction with a combined annual capacity of more than 2.1 billion gallonsannually, and more potentially in the planning stages.  To accommodate this increased supply, thereare no assurances that there will be a material or significant increase in thedemand for ethanol.  If demand does notcorrespondingly increase with this supply, the prices of ethanol may declineand decrease our profitability in the process.

***We operate in anintensely competitive industry and there is no assurance that we will be ableto compete effectively.***   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 ethanolplants, and there are numerous other entities considering the construction ofethanol plants. Nationally, the ethanol industry may

 

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becomemore competitive given the substantial construction and expansion that isoccurring in the industry. We compete with other ethanol producers such asArcher Daniels Midland, Cargill, among others, all of which are capable ofproducing significantly greater quantities of ethanol than the amount weproduce.  In light of such competition,there is no assurance that we will be able to compete effectively in theindustry.

***Competition from the advancement of technology may lessenthe demand for ethanol and negatively impact our profitability*****.**** Alternative fuels, gasolineoxygenates and ethanol production methods are continually under development. Anumber of automotive, industrial and power generation manufacturers aredeveloping more efficient engines, hybrid engines and alternative clean powersystems using fuel cells or clean burning gaseous fuels. Vehicle manufacturersare working to develop vehicles that are more fuel efficient and have reducedemissions using conventional gasoline. Vehicle manufacturers have developed andcontinue to work to improve hybrid technology, which powers vehicles by enginesthat utilize both electric and conventional gasoline fuel sources. In thefuture, the emerging fuel cell industry offers a technological option toaddress increasing worldwide energy costs, the long-term availability ofpetroleum reserves and environmental concerns. Fuel cells have emerged as apotential alternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions. If the fuel cell and hydrogen industries continue toexpand and gain broad acceptance, and hydrogen becomes readily available toconsumers for motor vehicle use, we may not be able to compete effectively.This additional competition could reduce the demand for ethanol, which wouldnegatively impact our financial condition.

 

***Corn-based ethanol may compete with cellulose-based ethanolin the future, which could make it more difficult for us to produce ethanol ona cost-effective basis****. *Most ethanol is currently produced fromcorn and other raw grains, such as milo or sorghum-especially in the Midwest.The current trend in ethanol production research is to develop an efficientmethod of producing ethanol from cellulose-based biomass, such as agriculturalwaste, forest residue, municipal solid waste, and energy crops. This trend isdriven by the fact that cellulose-based biomass is generally cheaper than corn,and producing ethanol from cellulose-based biomass would create opportunitiesto produce ethanol in areas which are unable to grow corn. Although currenttechnology is not sufficiently efficient to be competitive, new conversiontechnologies may be developed in the future. If an efficient method ofproducing ethanol from cellulose-based biomass is developed, we may not be ableto compete effectively. We also do not believe it will be cost-effective toconvert the plant into one that will use cellulose-based biomass to produce ethanol.If we are unable to produce ethanol as cost-effectively as cellulose-basedproducers, our ability to generate revenue will be negatively impacted.

 

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***Consumer resistanceto the use of ethanol based on the belief that ethanol is expensive, adds toair pollution, harms engines and takes more energy to produce than itcontributes, may affect the demand for ethanol which could affect our abilityto market our product*****.**** **Certain individuals believe that use of ethanol willhave a negative impact on retail prices. Many also believe that ethanol adds to air pollution and harms car andtruck engines.  Still other consumersbelieve that the process of producing ethanol actually uses more fossil energy,such as oil and natural gas, than the amount of ethanol that is produced.  These consumer beliefs could potentially bewide-spread. If consumers choose not to buy ethanol, it would affect the demandfor the ethanol that we produce which could lower demand for ethanol andnegatively affect our profitability.

***        ****        **Competition from ethanolimported from Caribbean basin countries may be a less expensive alternative tothe ethanol produced in the United States, which may cause us to lose marketshare*****.**** **Ethanol produced or processed in certain countries inCentral America and the Caribbean region is eligible for tariff reduction orelimination upon importation to the United States under a program known as theCaribbean Basin Initiative.  Largeethanol producers, such as Cargill, have expressed interest in buildingdehydration plants in participating Caribbean Basin countries, such as ElSalvador, which would convert ethanol into fuel-grade ethanol for shipment tothe United States.  Ethanol imported fromCaribbean Basin countries is a less expensive alternative to ethanol produceddomestically.  Thus, competition fromethanol imported from Caribbean Basin countries may affect our ability to sellethanol profitably.

***Competition fromethanol imported from Brazil may be a less expensive alternative to ethanolproduction in the United States, which may cause us to lose market share.******* Brazil is currently the world’s largestproducer and exporter of ethanol. In 2004, Brazil experienced a dramaticincrease in ethanol production and trade exporting approximately112 million gallons to the United States alone. Ethanol imported fromBrazil is produced primarily from sugarcane, which may be a less expensivealternative to ethanol produced from corn. If the tariffs presently protecting UnitedStates’ ethanol producers are reduced or eliminated, competition from ethanolimported from Brazil may be increased which would affect our ability to produceand sell ethanol profitably.

**EthanolPlant Technology Improvements and Expansion Risks**

 

***There are no assurances that the incorporation of newtechnology at the plant and plant expansion will improve operations or ourprofitability.**** * Weare in the process of making certain improvements to the plant in order toincorporate a patent-pending technology called BPXÔ.  BPXÔ is a new technology developed andlicensed by Broin Associates that eliminates an energy-intensive cooking stepin the production process.  Aftercompletion of these improvements, we plan to undertake a new constructionproject to expand the plant from a name-plate production capacity of 40 milliongallons annually to 75 million gallons annually.  However, there is no assurance that BPXÔ orthe plant’s expansion will reduce operating costs or increase operatingincome. In addition, BPXÔ and plant expansion may cost more thanbudgeted and present additional challenges and risks, such as dealing withpotential shut downs at the plant during testing phases, all of which couldnegatively impact our profitability.

 

 

 

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***Construction related to BPXTM and expansion at the plantcould cost more than anticipated.***  Broin and Associates is in the process ofmaking improvements to the plant relating to BPXTM and, following completion ofthese improvements, will commence construction on the expansion of theplant.  All of these improvements arebased on a fixed price of $38.2 million set forth in a design-buildcontract with Broin and Associates.  However, therecould be cost overruns in connection with construction due to change ordersapproved by management, delays in completion of these improvement due tovarious factors, including acts of God, destruction of the plant by fire orother hazards, and inability to obtain materials or labor or other factors.

 

***Delays and defects in construction related to BPX****TM**and plant expansion could impair the plant’s abilityto operate.******* Under the terms of the design-build  agreement with Broin and Associates, Broinwarrants that the material and equipment furnished for BPXTM and plant expansionwill be new, of good quality, and free from defects in material orworkmanship.  Although Broin  and Associates will, for a period of one yearafter substantial completion of BPXTM**** and plant expansion, correct all defects inmaterial or workmanship at no additional expense to us, any defects in materialor workmanship may interrupt or hinder the operation of the plant.  These defects may have a material adverseimpact on our financial condition.

 

**Government,Regulatory and Other Risks**

***Government regulation costs could increase costs and reduceprofitability*****.**   Theoperation of the plant is subject to ongoing compliance with applicable federaland state governmental regulations, such as those governing emission control,ethanol production, grain purchasing and other matters. If any of theseregulations were to change, it could cost us significantly more to comply withthem. Further, other regulations may arise in future years regarding theoperation of the plant, including the possibility of additional permits andlicenses. We might have difficulty obtaining any such additional permits orlicenses, and they could involve significant unanticipated costs. We aresubject to all of these regulations without regard to whether the operation ofthe plant is profitable.

***We have not received from the South Dakota Department ofEnvironment and Natural Resources a notice of renewal and approval of anamendment to the plant’s air quality permit*****. **Because of future plant expansion, theplant has submitted an application with the South Dakota Department ofEnvironment and Natural Resources to renew and amend the plant’s Title V airquality permit, which is due for renewal in July 2006. While approval of therenewal and amendment is anticipated, there is no assurance that this will beaccomplished in a timely manner or at all. Any failure to obtain a renewaland approval of the amendment could delay, prevent expansion, or even suspendoperations of the plant. Our financial condition could be adversely affected inthe event operations were suspended for an indefinite period of time.

*** ***

***The plant may be subject to further scrutiny or a proceedingfrom the United States Environmental Protection Agency and the South DakotaDepartment of Environment and Natural Resources.***** **On January 6, 2003, the Environmental

 

 

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Protection Agency issued formal information requeststo, among others, plants designed, constructed, and/or managed by Broin andAssociates and Broin Management. By virtue of the nature and timing of therequest, the plant was subject to these requests along with several otherplants managed by Broin Management. The requests required that the subjectplants provide the Environmental Protection Agency with certain data regardingemissions, presumably to determine whether the plants were in compliance withthe Clean Air Act. After this information was provided, Broin and Associates,on behalf of the applicable plants managed by Broin Management, initiated discussionswith the Environmental Protection Agency regarding the application and use oftesting methods for quantifying certain types of emissions from theseplants.  To date, no legal proceeding ispending with or threatened by the Environmental Protection Agency or theDepartment of Environment and Natural Resources.  However, there is no assurance that eitheragency will not initiate a proceeding in the future as a result of theseinformation requests. If such proceeding were initiated, fines and/orother penalties against the plant and us could result, the nature and scope ofwhich is uncertain. Such fine and penalties could be severe enough to adverselyaffect our financial condition.

 

***Federal and state laws, regulations and tax incentivesconcerning ethanol could expire or change, which could harm our business*****.**** **As described in more detail herein, ethanol sales havebeen favorably affected by a variety of federal laws and supports.  TheClean Air Act Amendments of 1990 helped spur demand for ethanol by requiringthe use of oxygenated motor fuels. The Energy Policy Act of 2005(EPACT) mandates the use of ethanol in motor vehicles through 2012.  The Volumetric Ethanol Excise Tax Creditoffers to blenders a volumetric ethanol excise tax credit of $0.51 cents pergallon of any ethanol blend.  Thefederal BioenergyProgram and South Dakota program provide incentives to ethanol producers toproduce ethanol.  Themodification or elimination of any of the federal and states laws and programs,among others, could have a material adverse impact on us.

***        *****        *If Northern Growers istreated as a corporation for federal income tax purposes, its capital unitscould decline in value.***    Northern Growers elected to betreated as a partnership for federal income tax purposes. This means that itdoes not pay income tax at the company level and that its members pay tax ontheir proportionate share of the net income. In the event there are changes inthe law or IRS interpretations, or that the trading of its capital units resultsin the classification of Northern Growers as a publicly traded partnership, wemay be treated as a corporation rather than a partnership for federal incometax purposes. In that case, we would pay tax on our income at corporate ratesand no income, gains, losses, deductions or credits would flow through to itsmembers. Currently, the maximum effective federal corporate rate is 35%. Inaddition, distributions would generally be taxed to members upon receipt ascorporate dividends. Because a tax would be imposed upon Northern Growers atthe entity level, the cash available for distribution to members would bereduced by the amount of the tax paid. Reduced distributions could reduce thevalue of a member’s capital units.

***                 Amember’s tax liabilities may exceed cash distributions.***    The amount of ourtaxable income allocated to a member could exceed any cash distributions that amember

 

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mayreceive. This may occur if the board of managers determines that the cashgenerated by the business is needed to fund activities or other obligations,rather than being available for distribution to members, or if there is aprohibition from making distributions pursuant to the Operating Agreement.  It is possible that members may not receivedistributions sufficient to pay the tax liability attributed to them, andtherefore members may be forced to pay tax liabilities out of their personalfunds.

***There aresignificant restrictions on transferring the capital units.***    To maintainpreferential partnership tax status, Northern Growers’ capital units may not betraded on an established securities market or readily tradable on a secondarymarket. To help ensure that a market does not develop, Northern Growers’Operating Agreement prohibits transfers other than through the proceduresspecified in its Capital Units Transfer System. Under this system, alltransactions must be approved by Northern Growers’ board of managers. The boardgenerally approves transfers that fall within “safe harbors” contained in thepublicly traded partnership rules under the federal tax code. Permittedtransfers include transfers by gift and death, sales to qualified familymembers, and sales through a qualified matching service. Transfers through NorthernGrowers’ qualified matching service are limited annually to no more than the10% of total capital units outstanding. If a member transfers capital units in violation of the publicly tradedpartnership rules or without the prior written consent of the board, thetransfer is considered null and void and the board has the option to redeem thecapital units at a substantial discount. These restrictions on transfer couldreduce the value of a member’s capital units.

**Item 2. Properties.**

 

The plant is locatedimmediately adjacent to the Big Stone Plant near the city of Big Stone City inGrant County, South Dakota.  The land on which the plant is located isleased from Big Stone-Grant Industrial Development and Transportation, LLC,which is owned by Otter Tail Power Company, Montana-Dakota Utilities, andNorthWestern Corporation.  The term of the lease is for 99 years. The rent is $2,520.00 per year until December 31, 2010, after which therent is increased by 5.0% from the immediately preceding five-year period. In addition, the plant site is served by multiple state highways, is nearInterstate Highway 29, and has rail facilities and connections to theBurlington-Northern-Santa Fe Railroad system to transport the ethanol anddistillers grains produced at the plant to various markets.  All ofNorthern Lights’ tangible and intangible property, including its leaseholdinterest, easement rights, improvements, equipment, personal property, andcontracts, serve as the collateral for the debt financing with US Bank NationalAssociation, of Sioux Falls, South Dakota, which is described below under “Item7—Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Indebtedness.”

 

**Item3.  Legal Proceedings.**

 

From time to time in theordinary course of business, we may be named as a defendant in legalproceedings related to various issues, including without limitation,

 

 

 

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workers’ compensation claims, tort claims, orcontractual disputes. Except as described below, we are not currently involvedin any material legal proceedings, directly or indirectly, and we are not awareof any potential claims.

 

Over the last four years,both the United States Environmental Protection Agency and the State of SouthDakota Department of Environment and Natural Resources have placed increasedscrutiny on ethanol plants for compliance with air quality laws andregulations. In 2002, a number of ethanol plants in Minnesota entered intoconsent decree settlements with the State of Minnesota and the EnvironmentalProtection Agency arising from alleged emission violations.  Civilpenalties were assessed against each ethanol plant, additional emissionsdevices were required, new testing protocols were established and air qualitypermits were modified by the settlement agreements.  The EnvironmentalProtection Agency subsequently statedthat it intended to “level the playing field,” inferring actions against otherethanol producers.

 

On January 6, 2003,the Environmental Protection Agency issued formal information requests to,among others, plants designed, constructed, and/or managed by Broin andAssociates and Broin Management. By virtue of the nature and timing of therequest, the plant was subject to these requests along with several otherplants managed by Broin Management. The requests required that the subjectplants provide the Environmental Protection Agency with certain data regardingemissions, presumably to determine whether the plants were in compliance with theClean Air Act. After this information was provided, Broin and Associates, onbehalf of the applicable plants managed by Broin Management, initiateddiscussions with the Environmental Protection Agency regarding the applicationand use of the proper testing methods for quantifying certain types ofemissions from these plants.  To date, nolegal proceeding is pending with the Environmental Protection Agency or theDepartment of Environment and Natural Resources.  However, there is no assurance that eitheragency will not initiate a proceeding in the future as a result of theinformation requests. If such proceeding were initiated, fines and/orother penalties against the plant and us could result, the nature and scope ofwhich is uncertain given the discussions between Broin and Associates and the Environmental Protection Agency on theapplication and use of the proper testing method for quantifying emissions.

 

**Item4.  Submission of Matters to a Vote of Security Holders.**

 

We did not submit anymatter to a vote of our security holders through the solicitation of proxies orotherwise during the fourth quarter of 2005.

 

### **PART II**

### ** **

**Item5.  Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchaser of Equity Securities.**

 

**               **As of March 1, 2006, Northern Growers had 668members.

 

 

 

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*TradingActivity and Restrictions*

 

There is no establishedpublic trading market for Northern Growers’ capital units.  Capital unitsmust be transferred in accordance with Northern Growers’ Operating Agreementand its Capital Units Transfer System.  The Capital Units Transfer Systemprovides for transfers to qualified family members, by gift, upon death, andthrough a qualified matching service, subject to final board of managers’approval.  Since March 8, 2004, the qualified matching service hasbeen operated through Alerus Securities Corporation, a registered broker-dealerbased in Grand Forks, North Dakota, and which operates a registered AlternativeTrading System with the Securities and Exchange Commission.   Thefollowing table contains historical information by trimester for the past twoyears regarding the trading of capital units since the qualified matchingservice commenced:

 
| **Trimester****(1)**      | ** ** | **Low Price****(2)** | ** ** | **High Price****(2)** | ** ** | **Average Price****(2)** | ** ** | **# of Capital  Units Traded****(2)** | ** ** |
|---------------------------|------------|----------------------|------------|-----------------------|------------|--------------------------|------------|---------------------------------------|------------|
| Mar  2004 – Apr 2004 |       | $                    | 0.00       |                  | $          | 0.00                     |       | $                                     | 0.00       |   | 0 |   |
| May  – Aug 2004      |       | $                    | 0.88       |                  | $          | 1.00                     |       | $                                     | 0.92       |   | 96,000 |   |
| Aug  – Dec 2004      |       | $                    | 0.94       |                  | $          | 0.96                     |       | $                                     | 0.95       |   | 360,000 |   |
| Jan  – Apr 2005      |       | $                    | 1.01       |                  | $          | 1.51                     |       | $                                     | 1.16       |   | 292,000 |   |
| May  – Aug 2005      |       | $                    | 1.25       |                  | $          | 1.50                     |       | $                                     | 1.33       |   | 148,000 |   |
| Aug  – Dec 2005      |       | $                    | 1.50       |                  | $          | 2.50                     |       | $                                     | 2.10       |   | 85,000 |   |

 

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(1) Prior to January 1, 2006, transfer of ownership ofall capital units occurred on the first day of the trimester immediatelyfollowing the trimester in which the trade occurred between buyer and seller orthe subsequent trimester, depending upon the date of the trade during thetrimester. Trimesters began on January 1, May 1 and September 1,except for the first trimester in 2004 which began on March 8, 2004.Effective January 1, 2006, transfer of ownership of all capital units occurs onthe first day of the quarter immediately following the quarter(s) in which thetrade occurs between the buyer and seller or the next following quarter,depending upon the date of the trade during the quarter. Quarters begin onJanuary 1, April 1, July 1 and October 1.

(2)  Allunit prices and number of units traded are adjusted to reflect a four-for-onecapital unit split made effective on September 1, 2005.

 

 As a limited liability company, NorthernGrowers is required to restrict the transfers of its capital units in order topreserve its preferential single-level tax status.  Its capital units maynot be traded on any national securities exchange or in any over-the-countermarket.  Northern Growers’ Capital Unit Transfer System prohibits anytransfer that would result in the loss of its partnership tax status.

 

Pursuant to NorthernGrowers’ Operating Agreement, a minimum of 5,000 capital units is required tobecome and remain a member. In addition to the transfer restrictions describedabove, under certain limited circumstances, the board of managers retains theright to redeem the capital units at $0.20 per capital unit. The board’s rightto redeem is available in the event a member breaches the Operating Agreement,upon a member’s failure to fulfill the membership requirements, and withrespect to other matters. Under the qualified matching service, the number ofcapital units traded annually cannot exceed 10% of Northern Growers’ totalissued and outstanding capital units.

 

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*Distributions*

 

Under the terms of NorthernGrowers’ Amended and Restated Operating Agreement dated January 1, 2006, theboard of managers is required to make annual (or more frequent) distributionsto its members and may not retain more than $200,000 of net cash fromoperations, unless (i) a super majority of the board of managers (75%) decidesotherwise, (ii) it would violate or cause a default under the terms of any debtfinancing or other credit facilities, or (iii) it is otherwise prohibited bylaw.  For further details of therestrictions under the credit facilities, please see “Item 7, Management’sDiscussion and Analysis of Financial Conditions and Results ofOperations—Indebtedness.”

 

In addition, prior toJanuary 1, 2006, distributions to Northern Growers’ members were required to beissued to members of record as of the last day of the trimester immediately priorto the trimester in which the distribution was declared by the Northern Growers’board of managers. After January 1, 2006, following a change to the CapitalUnits Transfer System, 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 2004, Northern Lightsmade cash distributions to Northern Growers of approximately $3.86 million and$1.14 million to the minority member of Northern Lights.  NorthernGrowers, in turn, distributed to its members approximately $3.56 million, or$0.14 per capital unit.

 

In 2005, Northern Lightsmade cash distributions to Northern Growers of approximately $12.5 million and$3.7 million to the minority member of Northern Lights.  Northern Growers,in turn, distributed to its members approximately $12.22 million, or $0.482 percapital unit.

 

Thus far in 2006,Northern Lights made cash distributions to Northern Growers of approximately$3.21 million and $950,000 to the minority member of Northern Lights. Northern Growers, in turn, distributed to its members approximately $3.21million, or $0.126 per capital unit.

 

           It is uncertain whether similar distributions will be made in 2006. The ability to issue similar distributions is substantially dependent upon our profitability, the discretion of our board of managers subject to the provisions of the Operating Agreement, and the approval from our lender.

 

 

 

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**Item 6.****          ****Selected Financial Data.**

 

The following table setsforth our selected financial data for the periods indicated. The auditedfinancial statements included in Item 8 of this report have been audited by ourindependent auditors, Eide Bailly LLP.

  
| ** **                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003(2)** | ** ** | **2002(1)** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|-------------|------------|
|                                          |       |       |       |       |       |        |       |        |       |
| **Statement of Operations Data:**             |       |       |       |       |       |        |       |        |       |
| Revenues                                      |       | $          | 89,692,708 |       | $          | 86,587,585  |       | $           | 70,857,262 |   | $ | 32,756,935 |   |
| Cost of Revenues                              |       | $          | 63,552,756 |       | $          | 71,279,883  |       | $           | 58,920,917 |   | $ | 24,674,714 |   |
| General and Administrative  Expenses          |       | $          | 3,913,177  |       | $          | 2,984,238   |       | $           | 2,739,136  |   | $ | 1,352,524 |   |
| Income from Operations                        |       | $          | 22,226,775 |       | $          | 12,323,464  |       | $           | 9,197,209  |   | $ | 6,072,565 |   |
| Interest Expense                              |       | $          | 1,420,827  |       | $          | 1,500,438   |       | $           | 1,847,108  |   | $ | 963,714 |   |
| Minority Interest in  Subsidiary Income       |       | $          | (4,848,463 | )          | $          | (2,528,026  | )          | $           | (1,770,430 | ) | $ | (1,229,452 | ) |
| Net Income                                    |       | $          | 16,157,712 |       | $          | 8,371,331   |       | $           | 5,611,068  |   | $ | 3,880,017 |   |
|                                          |       |       |       |       |       |        |       |        |       |
| Capital Units Outstanding  (3)                |       | 25,314,000 |       | 25,314,000 |       | 25,314,000  |       | 25,314,000  |       |
| Cash Distributions  declared per Capital Unit |       | $          | 0.460      |       | $          | 0.237       |       | $           | 0.190      |   | $ | 0.000 |   |
| Net Income per Capital  Unit                  |       | $          | 0.638      |       | $          | 0.331       |       | $           | 0.222      |   | $ | 0.153 |   |
|                                          |       |       |       |       |       |        |       |        |       |
| **Balance Sheet Data:**                       |       |       |       |       |       |        |       |        |       |
| Working Capital                               |       | $          | 9,011,848  |       | $          | 560,045     |       | $           | 194,176    |   | $ | 5,718,766 |   |
| Net Property, Plant &  Equipment          |       | $          | 39,097,204 |       | $          | 40,885,963  |       | $           | 41,735,733 |   | $ | 43,016,408 |   |
| Total Assets                                  |       | $          | 59,315,715 |       | $          | 54,678,507  |       | $           | 53,786,201 |   | $ | 59,031,879 |   |
| Long-Term Obligations                         |       | $          | 17,104,400 |       | $          | 16,387,498  |       | $           | 20,053,377 |   | $ | 27,858,349 |   |
| Minority Interest in  Subsidiary              |       | $          | 7,054,934  |       | $          | 5,715,325   |       | $           | 5,014,499  |   | $ | 4,899,960 |   |
| Members’ Equity                          |       | $          | 23,949,718 |       | $          | 19,446,001  |       | $           | 17,067,695 |   | $ | 16,280,448 |   |
| Book Value per Capital Unit                   |       | $          | 0.946      |       | $          | 0.768       |       | $           | 0.674      |   | $ | 0.643 |   |
|                                               |            |            |            |            |            |             |            |             |            |  |  |  |  |  |  |  |

 

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(1) The plant commenced operations on July 26, 2002.

(2) Northern Growers reorganized from a cooperative toa limited liability company on April 1, 2003.

(3) Adjusted for a four-for-one capital unit splitmade effective September 1, 2005.

 

 

**Item7.  Management’s Discussion and Analysis of Financial Condition andResults of Operation.**

 

*Youshould read the following discussion along with our financial statements andthe notes to our financial statements included elsewhere in this report. Thefollowing discussion contains forward-looking statements that are subject torisks, uncertainties and assumptions. Our actual results, performance andachievements may differ materially from those expressed in, or implied by, suchforward-looking statements. See “Cautionary Statement Regarding Forward-LookingInformation” at the beginning of this report.*

 

**Overviewand Executive Summary**

 

NorthernGrowers, LLC (“Northern Growers”) owns and manages a 77.16% interest in itssubsidiary, Northern Lights Ethanol, LLC (“Northern Lights”) (Northern Lightsand Northern Growers are also collectively referred to as “we” “us” or “our”).Broin Investments I, LLC owns the remaining minority interest in NorthernLights.

 

 

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Northern Lights owns andoperates an ethanol plant (the “plant”) near Big Stone City, South Dakota. Theplant producesfuel-grade ethanol and distillers grains from the processing of corn. Corn issupplied to the plant from purchases of corn on the local open market. Theethanol produced at the plant is sold to Ethanol Products, a Broin affiliate,which subsequently markets and sells the ethanol to gasoline blenders andrefineries located throughout the continental United States.  Distillersgrains, a co-product of the production process, are sold through Dakota GoldMarketing, another Broin affiliate, which markets and sells the product tolivestock feeders primarily located in the United States.

 

Ournet income increased by approximately $7.8 million from 2004 to 2005. Netincome increased between periods primarily due to strong ethanol prices, whichincreased our revenues, and low and steady corn prices, which decreased ourcost of revenues. Ethanol prices were strong primarily due to higher prices ofunleaded gasoline and increased demand resulting from new markets opening up inthe United States. Corn prices and costs remained low and stable due to a largecarryout and plentiful corn harvest in 2005, in contrast to 2004 when cornprices and costs were significantly higher and more volatile. The decrease incost of corn between periods was offset, though, by increased natural gascosts.

 

Ouroutlook for 2006, at least for the first six months, is favorable yet cautious.We expect ethanol prices to remain favorable because the price of unleadedgasoline is expected to remain at or above its current price levels. Ethanolprices are also expected to be impacted positively by blenders and refineriesincreasing the use of ethanol, new markets for ethanol opening up due to MTBEphase out, and increased acceptance and exposure of ethanol.  However, the expected increase in demand maybe offset by an increase in supply in 2006 and 2007. Approximately 34 plantsare expected to come into production in the next 18 months, along with nineoperating plants expanding production capacity, thus adding an additional 2.1billion gallons of annual production capacity. Accordingly, the price ofethanol may trend downward if supply exceeds demand. With respect to distillersgrains, we believe that prices will remain at or near its currently low andstable levels due to the low price of corn and soybean meal and, therefore,revenues should remain relatively consistent with 2005.

 

Interms of our cost of revenues, we expect corn prices and costs to remain lowand stable due to a large carryout from 2005. This trend could change in 2006if inclement weather makes for poor planting, growing or harvestconditions.  Lower corn costs, however,are likely to be offset in part by the continuing high prices of natural gas,although our use of steam from the Big Stone Plant should continue to offset inpart this impact. An additional offset may be the rise in shipping costs as itrelates to the sale and shipment of distillers grains due to a shippingsurcharge recently imposed by the Burlington Northern Santa Fe railroad system.

 

 Finally, two significant improvements to the plant are plannedfor 2006, one regarding new technology and the other regarding expansion.  In January 2006,

 

 

 

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construction was commenced to incorporate BPXTM.  BPXTM is a raw starch technology that allowsthe plant to skip an energy-intensive step in the cooking process.  Following this construction phase, which isexpected to be completed in the summer of 2006, we expect to commence a secondconstruction phase to expand the plant from a name-plate capacity of 40 milliongallons annually to 75 million gallons annually, this phase being slated forcompletion in the summer of 2007. Both improvements are expected to be financedwith new debt financing from US Bank National Association of Sioux Falls, SouthDakota.

 

#### **Results of Operations**

#### ** **

**Comparisonof years ended December 31, 2005 and December 31, 2004.**

 

 
| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **$**                            | ** ** | **%  of  Revenue** | ** ** | **$** | ** ** | **%  of  Revenue** | ** ** |
| Revenue:                             |       |                             |       |   |   |   |   |   |   |
| Ethanol                              |       | 72,633,304                       |       | 81 | % | 68,501,969 |   | 79 | % |
| Distillers grains                    |       | 16,305,319                       |       | 18 | % | 16,486,472 |   | 19 | % |
| Incentive                            |       | 754,085                          |       | 1 | % | 1,599,144 |   | 2 | % |
| Total                                |       | 89,692,708                       |       | 100 | % | 86,587,585 |   | 100 | % |
|                                 |       |                             |       |   |   |   |   |   |   |
| Cost of Revenues                     |       | 63,552,756                       |       | 71 | % | 71,279,883 |   | 82 | % |
|                                 |       |                             |       |   |   |   |   |   |   |
| General and Administrative  Expenses |       | 3,913,177                        |       | 4 | % | 2,984,237 |   | 3 | % |
|                                 |       |                             |       |   |   |   |   |   |   |
| Other Operating Income  (Expense)    |       | (1,220,600                       | )          | (1 | )% | (1,424,107 | ) | (2 | )% |
|                                 |       |                             |       |   |   |   |   |   |   |
| Minority Interest in  Subsidiary     |       | (4,848,463                       | )          | (5 | )% | (2,528,026 | ) | (3 | )% |
| Net Income                           |       | 16,157,712                       |       | 18 | % | 8,371,332 |   | 10 | % |

 

*Revenues*-Revenue from the sale ofethanol increased 6% from the year ended December 31, 2004 to the year endedDecember 31, 2005.  The increase was due to a 5% increase in the averageprice of ethanol per gallon and a 1% increase in sales volume.

 

Revenuefrom the sale of distillers grains decreased nominally from the year endedDecember 31, 2004 to the year ended December 31, 2005. The decrease was dueprimarily to a 3% decrease in the price of distillers grains, offset by a 2%increase in sales volume.

 

Theincentive revenue from the United States Department of Agriculture’s CommodityCredit Corporation Bioenergy Program decreased $880,000, or 95%, to $50,000 forthe year ended December 31, 2005 from $930,000 for the year ended December 31,2004.  Minimal incentive revenue was earned under this program for theyear ended December 31, 2005 because there was an insignificant increase inethanol

 

 

 

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production at the plant fromthe twelve months ended December 31, 2004. Payments under this program are based in part on a plant’s increase inproduction from the prior year’s corresponding periods. Minimal paymentsfrom this program are expected in 2006 because of increased participation byethanol producers, decreased funding, and a termination of the program onSeptember 30, 2006. Incentive revenue from the state of South Dakota decreased$38,000, or 6%, to $705,000 for the year ended December 31, 2005 from $667,000for the year ended December 31, 2004.

 

*Cost of Revenues-*Cost of revenues decreased $7.7million, or 11%, to $63.6 million for the year ended December 31, 2005 from$71.3 million for the year ended December 31, 2004. The decrease in the cost ofrevenues was primarily due to a 32% decrease in the cost of corn, offset by a10% increase in energy costs.  The decrease in the cost of corn was causedprimarily by an approximately 26% decrease in the market price of corn per bushel.The decrease in the price of corn was due to a large carryout and a plentifulcorn harvest in 2005.

 

Thedecrease in the cost of corn was also impacted in part by the use and effect ofhedging instruments relative to the market price of corn between periods. Gains and losses that result from achange in value of corn and natural gas hedging instruments are recognized incost of revenues as the changes occur. Gains are recognized as a decrease tocost of revenues, while losses are recognized as an increase to cost ofrevenues. For the year ended December 31, 2004, cost of revenues includeslosses of $3.5 million from the use of corn hedging instruments. These losseswere caused by the significant price fluctuation of corn in 2004 and its effecton the value of the hedging instruments. In late 2003, we increased the use ofcorn hedging instruments and positions to protect against the market priceforecasts for corn. The forecasts predicted higher prices for corn because oflow world carryout prior to the growing season, decreased production, anddrought. As the year progressed, however, and it became apparent that cornproduction would be much higher than expected, the original market forecastsproved incorrect and the market price of corn actually declined. When themarket price declined, the value of the corn hedging instruments fell which ledto the $3.5 million loss and a corresponding increase in cost of corn and costof revenues.

 

Incontrast, there was no material adverse effect on cost of revenues from the useof hedging instruments and the corn market for the year ended December 31,2005.  Due to the record carryout of corn into 2005 and the overall stableconditions in the commodities markets, we took fewer hedging positions toprotect against potential price volatility. As a result, there was considerablyless market risk less exposure in 2005 and potential for losses. Accordingly, for the year ended December 31, 2005, a $245,000 gain resultedfrom the use of corn hedging instruments which, in turn, led to a correspondingdecrease in the cost of revenues.

 

Thedecrease in cost of revenues between 2004 and 2005 was offset by a 10% increasein energy costs between periods. This increase was due to a 31% increase incost of natural gas per unit in 2005 and the effect of a settlement credit in2004.  Natural gas costs increasedbecause of a decrease in natural gas production nationwide caused

 

 

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primarily by an overlyactive hurricane season and increased demand for natural gas. As for thesettlement credit,  Northern Lights received a credit in 2004 fromthe adjacent Big Stone Plant, resulting in the cost of steam being lower in2004 than in 2005.  The Big Stone Plant,which supplies steam to the plant for the production process, issued toNorthern Lights a $1.4 million credit in November 2004 after it determined thata metering instrument had been miscalibrated. The miscalibration caused an erroneous report of steam being transferredto the plant, resulting in an overcharge for the use of steam. The overchargewas resolved in November 2004 when the Big Stone Plant offered Northern Lights the$1.4 million credit, which Northern Lights accepted at such time.

 

  * General and Administrative Expenses*-General andadministrative expenses increased $930,000 or 31%,**to $3.91 million for the year ended December 31, 2005 from$2.98 million for the year ended December 31, 2004.  The increase ingeneral and administrative expenses was primarily the result of increasedmanagement incentive fees and employee profit-sharing costs during the year,which are both based on an increase in our profitability.

 

*Interest Expense*-Interest expense decreased$80,000, or 5%, to $1.42 million for the year ended December 31, 2005 from $1.50million for the year ended December 31, 2004.  The decrease in interestexpense was due to a $410,000 reduction in outstanding debt from December 31,2004 to December 31, 2005, along with more favorable interest rates negotiatedduring the March 2005 refinancing.

 

*Net Income-*Net income increased $7.8million to $16.2 million for the year ended December 31, 2005 from $8.4 millionfor the year ended December 31, 2004.  This change was caused primarilyby, as discussed above, an increase in revenues and a decrease in the cost ofcorn, offset by an increase in energy costs.

 

**Comparisonof years ended December 31, 2004 and December 31, 2003.**

 

 
| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **$**                            | ** ** | **%  of  Revenue** | ** ** | **$** | ** ** | **%  of  Revenue** | ** ** |
| Revenue:                             |       |                             |       |   |   |   |   |   |   |
| Ethanol                              |       | 68,501,969                       |       | 79 | % | 51,913,676 |   | 73 | % |
| Distillers grains                    |       | 16,486,472                       |       | 19 | % | 13,643,646 |   | 19 | % |
| Incentive                            |       | 1,599,144                        |       | 2 | % | 5,299,940 |   | 7 | % |
| Total                                |       | 86,587,585                       |       | 100 | % | 70,857,262 |   | 100 | % |
|                                 |       |                             |       |   |   |   |   |   |   |
| Cost of Revenues                     |       | 71,279,883                       |       | 82 | % | 58,920,917 |   | 83 | % |
|                                 |       |                             |       |   |   |   |   |   |   |
| General and Administrative  Expenses |       | 2,984,237                        |       | 3 | % | 2,739,136 |   | 4 | % |
|                                 |       |                             |       |   |   |   |   |   |   |
| Other Operating Income  (Expense)    |       | (1,424,107                       | )          | (2 | )% | (1,815,711 | ) | (3 | )% |
|                                 |       |                             |       |   |   |   |   |   |   |
| Minority Interest in  Subsidiary     |       | (2,528,026                       | )          | (3 | )% | (1,770,430 | ) | (2 | )% |

 

 

 

34

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|       |   | **Year Ended December 31,** |   |
|------------|--------|----------------------------------|--------|
|       |   | **2004**                         |   | **2003** |   |
| Net Income |   | 8,371,332                        |   | 10 | % | 5,611,068 |   | 8 | % |
|            |        |                                  |        |  |  |  |  |  |  |

 

*Revenues*-Revenue increased $15.7 million, or 22%,to $86.6 million for the year ended December 31, 2004 from $70.9 millionfor the year ended December 31, 2003. The increase in total revenues wasprimarily due to an increase in revenue from the sale of ethanol.

 

Revenue from the sale ofethanol increased 32% from the year ended December 31, 2003 to the yearended December 30, 2004.  The increase was due primarily to a 24%increase in the average sales price per gallon of ethanol along with a 7%increase in sales volume. The price increase was primarily due to a higherprice for unleaded gasoline and a strong demand for ethanol.  Sales volumeincreased because of an increase in production volume caused by an improvementin the plant’s efficiencies.

 

Revenue from the sale ofdistillers grains increased approximately 21% from the year endedDecember 31, 2003 to the year ended December 31, 2004. The increasewas due primarily to a 17% increase in sales volume between periods. Theincrease in sales volume was also caused by an increase in production volume in2004.

 

Total incentive revenuesfrom federal and state government incentive programs decreased by 70% from theyear ended December 31, 2003 to the year ended December 31,2004. The incentive revenue from the United States Department ofAgriculture’s Commodity Credit Corporation Bioenergy Program decreased $3.2million, or 77%, to $900,000 for the year ended December 31, 2004 from$4.1 million for the year ended2003. Less incentive revenue was earned in 2004 compared to 2003 becausethere was a far smaller increase in production at the plant from 2003 to 2004than from the previous periods.

 

Incentive revenue fromthe state of South Dakota incentive program decreased $518,000, or 44%, to$667,000 from the year ended December 31, 2003 to the year endedDecember 31, 2004. The decrease was due to an earlier than anticipated depletionof funds allocated to the program in the 2004 program year (endingJune 30, 2004).

 

*Cost ofRevenues*-Cost ofrevenues increased $12.4 million, or 21%, to $71.3 million for the year endedDecember 31, 2004 from $58.9 million for the year ended December 31,2003.  Cost of revenues for the yearended December 31, 2004 includes the $1.4 million settlement credit receivedfrom the Big Stone Plant in November 2004, which, in effect, lowered the costof revenues by the same amount in 2004 and offset the increase between periods.But by excluding the settlement credit from cost of revenues in 2004, cost ofrevenues increased $13.8 million, or 23%, to $72.7 million for the year endedDecember 31, 2004. The $13.8 million increase in the cost of revenues was primarilythe result of a 34% increase in the cost of corn. The increase in the cost ofcorn was caused primarily by an approximately 11% increase in the market priceof corn per bushel from the year ended December 31, 2003 to the year endedDecember 31, 2004. The increase was also partially due to the effect theprice volatility of corn had on the use

 

 

 

35

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and value of hedging instruments in 2004. Such effectcontributed to a $3.5 million loss  and acorresponding increase in cost of corn and cost of revenues in 2004. Incontrast, the effect of the use of hedging instruments relative to the cornmarket in 2003 was positive, causing a $100,000 gain and a correspondingdecrease in cost of corn and cost of revenues.

 

*Generaland Administrative Expenses*-General and administrative expenses increased$250,000, or 9%,**to $2.98 millionfor the year ended December 31, 2004 from $2.73 million for the year ended2003.  The increase in general and administrative expenses was primarilythe result of increased management fees and employee profit-sharing costsduring the year, which are both based on an increase in our profitability.

 

*InterestExpense-*Interestexpense decreased $350,000, or 19%, to $1.5 million for the year endedDecember 31, 2004 from $1.85 million for the year ended 2003.  Thedecrease in interest expense was primarily due to a $3.7 million reduction inoutstanding debt from December 31, 2003 to December 31, 2004.

 

*NetIncome-*Net incomeincreased $2.8 million to a net income of $8.4 million for the year endedDecember 31, 2004 from a net income of $5.6 million for the year endedDecember 31, 2003.  This change was caused primarily by, as discussedabove, an increase in revenues from the sale of ethanol, offset by an increasein cost of revenues.

 

**Liquidityand Capital Resources**

 

The following table showsthe cash flows between the year ended December 31, 2005 and the year endedDecember 31, 2004:

 
| ** **                                | ** ** | **Year Ended December 31** | ** **  |
|-------------------------------------------|------------|---------------------------------|-------------|
| ** **                                | ** ** | **2005**                        | ** **  | **2004** | ** ** |
| ** **                                | ** ** | **$**                           | ** **  | **$** | ** ** |
| Net cash from operating  activities       |       | $                               | 26,116,011  |   | 11,122,960 |   |
| Net cash (used for)  investing activities |       | $                               | (1,225,498  | ) | (2,050,295 | ) |
| Net cash (used for)  financing activities |       | $                               | (16,333,813 | ) | (8,437,658 | ) |
|                                           |            |                                 |             |  |  |  |  |

 

*Cash Flow From Operating Activities-*Operatingactivities generated $26.1 million for the year ended December 31, 2005,compared to $11.1 million for the year ended December 31, 2004. The increase of$15.0 million in net cash flow provided from operating activities was primarilydue to the significant increase in net income between periods, along with adecrease in cash used for accounts receivable and inventory.

 

*Cash Flow From Investing Activities-*Net cash flowused for investing activities decreased $820,000 between periods due in part toa refund of $200,570 from the State of South Dakota Department of Revenue forsales, use and contractors’ excise taxes paid on the original construction ofthe plant, and a smaller amount spent on general capital improvementprojects.  In 2005, capital improvement projects included improvements toor for rail expansion, ethanol load-out systems, and buildings, while in 2004improvements were made primarily to the plant’s dryer and electrical systems.

 

36

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*Cash Flow From Financing Activities-*Net cash usedfor financing activities increased $7.9 million between periods, due primarilyto an additional $11.2 million in distributions paid to Northern Growers andthe minority member. The $11.2 million increase in total distributions paid wasoffset by a decrease in payments made on the long-term fixed and variable-ratenotes. The decrease in payments on the long-term notes was due in part to thetermination of the excess cash flow payment on the fixed-rate note inconnection with a debt refinancing on March 30, 2005. As a result of therefinancing, no excess cash flow payments were made during the year endedDecember 31, 2005, compared to $925,708 in payments during the year endedDecember 31, 2004. The decrease in payments on the long-term notes was alsocaused by the March 30th refinancing, as the principal paymentson the fixed rate and variable-rate, revolving notes, which would have beennormally due on March 31, 2005, were temporarily suspended until the thirdquarter of 2005.  In addition to the offset from a decrease in paymentsmade on the long-term fixed and variable-rate notes, the increase in cash usedfor financing activities was offset by an additional $1.03 million borrowedfrom US Bank on March 30, 2005 to pay for a rail expansion project.

 

We anticipate that atleast $39.6 million in capital expenditures will be made on the plant in 2006and 2007, most of which relate to the improvements for BPXTM and the plant’sexpansion. These expenditures will be financed by cash from operations andadditional debt financing from US Bank. Some of the expected details of the US Bank’s financing are discussedbelow under “Indebtedness.” We also anticipate in the next 12 months havingsufficient cash flows from operating activities and revolving debt to fundworking capital and to cover operating and administrative expenses, capitalexpenditures (other than those discussed in this report) and debt service obligations.

 

The following table showsthe cash flows between the year ended December 31, 2004 and the year endedDecember 31, 2003:

 
| ** **                                | ** ** | **Year Ended December 31** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| ** **                                | ** ** | **$**                           | ** ** | **$** | ** ** |
| Net cash from operating  activities       |       | $                               | 11,122,960 |   | 13,182,320 |   |
| Net cash (used for)  investing activities |       | $                               | (2,050,295 | ) | (1,128,154 | ) |
| Net cash (used for)  financing activities |       | $                               | (8,437,658 | ) | (13,766,313 | ) |

 

*Cash Flow From Operating Activities-*The decrease ofapproximately $2.1 million in net cash flow provided from operating activitiesbetween 2003 and 2004 was due to an increase in net income between periods,offset by a decrease in accounts receivable outstanding in 2004 and a change incorn payable.  Accounts receivable decreased in 2003 because ofsubstantial payments received from the incentive programs, compared to anincrease in 2004 when incentive programs provided less cash.  Corn payableincreased in 2003 because more agricultural producers at the end of 2003,compared to the end of 2004, elected to defer payment from us to 2004 fordelivering corn to the plant.

 

 

 

37

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*Cash Flow From Investing Activities-*The increase ofapproximately $950,000 in net cash flow used for investing activities wasattributed to an increase in capital improvement projects at the plant from2003 to 2004.  The capital improvement projects in 2004 consisted ofgeneral improvements to the plant, particularly to the plant’s dryer andelectrical systems.

 

*Cash Flow From Financing Activities-*The decrease ofapproximately $5.3 million in net cash used for financing activities betweenperiods was due principally to a payment of $5.0 million on the variable-rate,revolving note in 2003, and additional excess cash flow payments of $770,000 in2003 on the fixed-rate note.  Principal paid on the fixed-rate noterelative to required excess cash flow payments totaled approximately $1.6million in 2003 and $925,708 in 2004.

 

**Indebtedness**

 

                USBank National Association of Sioux Falls, South Dakota, is Northern Lights’lender. Prior to March 30, 2005, there were four loans outstanding with USBank:  a $15.0 million fixed-ratenote; a $11.1 million variable-rate non-revolving note; a $5.0 millionvariable-rate, revolving note; and a $1.2 million fixed-rate note.  The fixed and variable notes were obtainedunder a loan agreement dated July 11, 2001 and amendments datedJanuary 1, 2003, while the $1.2 million note was obtained separately onMay 1, 2003. OnMarch 30, 2005, Northern Lights entered into an amended loan agreement with USBank to refinance existing debt and obtain additional debt to finance a railexpansion project at the plant, which resulted in five new notes with US Bank:a $15.8 million fixed rate note; a $3.9 million variable-rate, non-revolving note;the $5 million variable-rate, revolving note; a $3.0 million variable-rate,revolving note; and the $1.2 million fixed-rate note.  Northern Lights is currently negotiating withUS Bank for a new financing package to pay for BPXTM and expansion of the plant,but the details are not yet complete.

 

The $15.8 millionfixed-rate note bears an annual interest rate at 6.38%, compared to thepreviously retired $15.0 million note which bore a fixed rate of 6.95%. The$15.8 million note requires quarterly payments of interest and amortizedprincipal of $537,500 on the basis of a ten-year term, with a balloon paymentdue at maturity on March 31, 2012, compared to a quarterly payment ofinterest and principal of $521,000 on the $15.0 million note. Principal paymentsof $853,434 were made on both notes for the year ended December 31, 2005. Theprincipal balance outstanding on the $15.8 million note was approximately $14.9million as of December 31, 2005.

 

The $1.2 millionfixed-rate note bears an interest rate at 4.7% annually, compared to a rate of5.7% prior to the refinancing on March 30, 2005. This note is subject to amaturity of April 30, 2007. Principal payments of $300,214 and $281,964were made on the note for the year ended December 31, 2005 and December31, 2004, respectively, and the principal balance outstanding was $482,995 asof December 31, 2005.

 

 

 

38

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The $3.9 millionvariable-rate, non-revolving note bears an interest rate at US Bank’s primerate (currently 7.50%), and is subject to a maturity of March 31, 2012. Thisnote requires quarterly payments of interest and amortized principal of$153,000 on the basis of a ten-year term, the first payment being made onJune 30, 2005. Principal payments of $292,500 were made on the note forthe year ended December 31, 2005.  Theprincipal balance outstanding was approximately $3.6 million as of December 31,2005.

 

The $5 millionvariable-rate, revolving note bears an interest at US Bank’s primerate and carries an unused commitment feeof 0.375%, assessed quarterly, as compared to a rate of 1.00% over US Bank’sprime rate prior to refinancing on March 30, 2005.  This note requiresquarterly interest-only payments on any amount outstanding and is subject to amaturity of March 31, 2012. The note permits us to re-borrow thedifference between the unpaid principal balance outstanding amount on the noteand $5 million. The principal balance outstanding on this note was $0.00 as ofDecember 31, 2005 and December 31, 2004.

 

The $3.0 millionvariable-rate, revolving note bears an interest rate equal to US Bank’s primerate and is subject to a maturity of March 31, 2008. This note requiresquarterly interest payments when the loan is drawn down. It also carried anunused commitment fee of 0.375%, assessed quarterly. The note is tied to theborrowing base and cannot be drawn until the existing $5 million variable rate,revolving note is fully drawn. The maximum available credit was $3,000,000 asof December 31, 2005; accordingly, the principal balance outstanding was $0.00as of December 31, 2005.

 

Afternegotiations are complete, we and US Bank expect to enter into a new financingarrangement for a loan sum up to $33.0 million. The purpose of the arrangementwill be to finance the construction of improvements relating to BPXTM and theplant’s expansion. In addition, we intend to refinance all of our existingrevolving debt. The construction note is expected to be set at a variable rateuntil maturity, after which Northern Lights will be permitted to convert it toa term note and have the ability to select from several interest rateoptions.  The existing $15.8 million and$1.2 million fixed rate notes and the $3.9 million variable rate note are expectedto remain in place under the existing terms and conditions.

 

                In additionto standard covenants and conditions, the following new covenants and/orconditions, among others, are expected with the new financing from US Bank: 1)a minimum working capital requirement of $7.5 million including the unadvancedportion of the existing term revolving debt; and 2) beginning October 2005, adistribution limitation of 50% of total net income until at least $5 million incash, which would have otherwise been paid out, for initial project equity is obtained. A distributions level of 80% of total net income will be allowed only uponcomplying with all other covenants and after successful closing of the newfinancing. At December 31, 2005, approximately $2.5 million of the initialproject equity had been earned towards the $5 million required by US Bank.

 

 

 

39

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In the event of default,US Bank will continue to have the authority to terminate the loan agreementsand declare the entire amount immediately due and owing.  Events ofdefault include failure to make payments when due or violation of one or moreof the loan agreement’s covenants. In addition, all of our tangible andintangible property, including leasehold interest, easement rights,improvements, equipment, personal property, and contracts, serve as thecollateral for the debt financing secured by US Bank.

 

Inaddition to our long-term debt, the following tables provides informationregarding our consolidated contractual obligations as of December 31,2005:

 
| **Contractual Obligations**         | ** ** | **Total** | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Four to  Five  Years** | ** ** | **After Five  Years** | ** ** |
|-------------------------------------|------------|-----------|------------|-------------------------|------------|--------------------------|------------|--------------------------|------------|-----------------------|------------|
|                                |       |      |       |                    |       |                     |       |                     |       |                  |       |
| Long-Term Debt Obligations  (1)     |       | $         | 24,679,525 |                    | $          | 3,164,078                |       | $                        | 5,731,608  |                  | $          | 5,431,938 |   | 10,351,901 |   |
| Capital Lease Obligations           |       | $         | 0          |                    | $          | 0                        |       | $                        | 0          |                  | $          | 0 |   | 0 |   |
| Operating Lease  Obligations        |       | $         | 384,715    |                    | $          | 2,520                    |       | $                        | 5,040      |                  | $          | 5,040 |   | 372,115 |   |
| Purchase Obligations                |       | $         | 5,683,790  |                    | $          | 682,940                  |       | $                        | 1,334,160  |                  | $          | 1,334,160 |   | 2,332,530 |   |
| Total Contractual Cash  Obligations |       | $         | 30,748,030 |                    | $          | 3,849,538                |       | $                        | 7,070,808  |                  | $          | 6,771,138 |   | 13,056,546 |   |
|                                     |            |           |            |                         |            |                          |            |                          |            |                       |            |  |  |  |  |  |  |  |

----

(1)Long-term debt obligations reflect payment obligations arising under theamended Loan Agreement dated March 30, 2005.

 

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

##### ** **

We donot use or have any material off-balance sheet financial arrangements.

 

**RecentAccounting Pronouncements**

 

We have reviewed therecent accounting pronouncements and have not identified any that will have amaterial impact on our financial statements

 

**CriticalAccounting Policies and Estimates**

 

Preparation of ourfinancial statements require estimates and judgments to be made that affect theamounts of assets, liabilities, revenues and expenses reported.  Suchdecisions include the selection of the appropriate accounting principles to beapplied and the assumptions on which to base accounting estimates.  Wecontinually evaluate these estimates based on historical experience and otherassumptions we believe to be reasonable under the circumstances.

 

The difficulty inapplying these policies arises from the assumptions, estimates and judgmentsthat have to be made currently about matters that are inherently uncertain,such as future economic conditions, operating results and valuations as well asmanagement intentions.  As the difficulty increases, the level ofprecision decreases, meaning that actual results can and probably will bedifferent from those currently estimated.

 

 

 

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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.

 

## ***Commitments and Contingencies. ***Contingencies, bytheir nature, relate to uncertainties that require management to exercise judgmentboth in assessing the likelihood that a liability has been incurred, as well asin estimating the amount of the potential expense.  In conformity withaccounting principles generally accepted in the United States, we accrue anexpense when it is probable that a liability has been incurred and the amountcan be reasonably estimated.

## ** **

## ***Inventory Valuation. ***We account for corninventory at estimated net realizable market value.  Corn is anagricultural commodity that is freely traded, has quoted market prices, may besold without significant further processing, and has predictable andinsignificant costs of disposal.  We derive our estimates from localmarket prices determined by grain terminals in our area.  Changes in themarket value of corn inventory is recognized as a component of cost ofrevenues.  Ethanol and distillers grains are stated at net realizablevalue.  Work-in-process and chemical inventory are stated at an averagecost method.

## ** **

###### ***Revenue Recognition. ***Revenue from theproduction of ethanol and related products is recorded when title transfers tocustomers, net of allowances for estimated returns.  Interest income isrecognized when earned.

 

Revenue from federal andstate incentive programs is recorded when we have produced or sold the ethanoland satisfied the reporting requirements under each applicable program. When it is uncertain that we will receive full allocation and payment due underthe federal incentive program, we derive an estimate of the incentive revenue**for the relevant period based on variousfactors including the most recently used payment factor applied to theprogram.  The estimate is subject to change as management becomes aware ofincreases or decreases in the amount of funding available under the federalincentive program or other factors that affect funding or allocation of fundsunder such program.

 

## ***Long-Lived Assets. ***Depreciation and amortization ofour property, plant, and equipment is provided on the straight-line method bycharges to operations at rates based upon the expected useful lives ofindividual or groups of assets.  Economic circumstances or other factorsmay cause management’s estimates of expected useful lives to differ fromactual.

## ** **

Long-lived assets,including property, plant and equipment, and investments are evaluated forimpairment 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

 

 

 

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on the best information available.  Considerablemanagement judgment is necessary to estimate discounted future cash flows andmay differ from actual cash flows.

 

*Accountingfor Derivative Instruments and Hedging Activities.  *We enter into derivative instruments tohedge our exposure to price risk related to forecasted corn and natural gaspurchases, forward corn purchase contracts and forecasted ethanol sales. We do not typically enter into derivative instruments other than for hedgingpurposes.  All derivative contracts are recognized on theDecember 31, 2005 and 2004 balance sheets at their fair market value.Currently, none of the derivative instruments are classified as cash-flow hedgesfor accounting purposes.

 

On the date thederivative instrument is entered into, we designate the derivative as either(1) a hedge of the fair value of a recognized asset or liability or of anunrecognized firm commitment (fair value hedge), (2) a hedge of a forecastedtransaction or of the variability of cash flows to be received or paid relatedto a recognized asset or liability (cash flow hedge) or (3) will notdesignate 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 Market Risk.**

 

We are exposed to theimpact of market fluctuations associated with commodity prices and interestrates as discussed below. We have no exposure to foreign currency risk as allof our business is conducted in U.S. Dollars. We use derivative financialinstruments as part of an overall strategy to manage market risk. Specifically,we use forward, futures and option contracts to hedge changes to the commodityprices of corn and natural gas. However, we do not enter into these derivativefinancial instruments for trading or speculative purposes, nor do we designatethese contracts as hedges for accounting purposes pursuant to the requirementsof SFAS 133, Accounting for Derivative Instruments and Hedging Activities.

 

*CommodityPrice Risk*

 

We produce ethanol andits co-product, distillers grains, from corn, and, as such, we are sensitive tochanges in the price of corn. The price of corn is subject to fluctuations dueto unpredictable factors such as weather, total corn planted and harvestedacreage, changes in national and global supply and demand, and governmentprograms and policies. We also use natural gas in the production process, andas such are sensitive to changes in the price of natural gas.  The priceof natural gas is influenced by such weather factors as heat or cold in thesummer and winter, in addition to the threat of hurricanes in the spring,summer and fall. Other natural gas price factors include the

 

 

 

42

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domestic onshore and offshore rig count, and theamount of natural gas in underground storage during 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, competing protein feedproducts.

 

We attempt to reduce themarket risk associated with fluctuations in the price of corn and natural gasby employing a variety of risk management strategies.  Strategies includethe use of derivative financial instruments such as futures and optionsinitiated on the Chicago Board of Trade and/or the New York MercantileExchange, as well as the daily cash management of our total corn and naturalgas ownership relative to our monthly demand for each commodity, which mayincorporate the use of forward cash contracts or basis contracts.

 

Corn is hedged withderivative instruments including futures and options contracts offered throughthe Chicago Board of Trade. Forward cash corn and basis contracts are alsoutilized to minimize future price risk.  Likewise, natural gas is hedgedwith futures and options contracts offered through the New York MercantileExchange.  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 basedprices so that gains or losses on the derivative contracts, as well as forward cash corn andbasis contracts, are offset by gains or losses on inventories during the sameaccounting period.

 

Gains and losses onfutures and options contracts used as economic hedges of natural gas, as wellas basis contracts, are recognized as a component of cost of revenues forfinancial reporting on a monthly basis using month-end settlement prices fornatural gas futures on the New York Mercantile Exchange.  The natural gasinventories hedged with these derivatives or basis contracts are valued at thespot 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.

 

A sensitivity analysishas been prepared to estimate our exposure to commodity price risk The tablepresents the fair value of corn inventory, forward purchase contracts and openfutures and option positions for corn, natural gas and distillers grains as ofDecember 31, 2005 and December 31, 2004 and the potential loss in fair valueresulting from a hypothetical 10% adverse change in corn and natural gasprices. The fair value of the positions is a summation of the fair valuescalculated by valuing each net position at quoted market prices as of the applicabledate. The results of this analysis, which may differ from actual results, areas follows:

 
| **Year Ended**         | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical Adverse  Change— Market Risk** | ** ** |
|------------------------|------------|----------------|------------|--------------------------------------------------------------|------------|
| December 31, 2005 |       | $              | 9,487,543  |                                                         | $          | 948,754 |   |
| December 31, 2004 |       | $              | 9,079,366  |                                                         | $          | 907,937 |   |

 

 

 

43

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*InterestRate Risk*

 

Our interest rate riskexposure pertains primarily to our variable rate, long-term debt. Specifically,we had approximately $3.6 million in variable rate, long-term debt as ofDecember 31, 2005.  The interest rate on the variable rate, long-termdebt is US Bank’s prime rate, which was 7.25% as of December 31, 2005. Wemanage our interest rate risk by monitoring the effects of market changes onthe interest rates and using fixed-rate debt.

 

**Item8.    Financial Statements and Supplementary Data.**

 

Reference is made to the “Indexto Financial Statements” of Northern Growers, LLC located at page F-1 ofthis report, and financial statements for the year ended December 31, 2005referenced therein, which are hereby incorporated by reference.

 

**Item9.    Changes in and Disagreements With Accountants onAccounting and Financial Disclosure.**

 

None.

 

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

 

*EvaluationOf Disclosure Controls And Procedures*

 

Our chief executiveofficer and chief financial officer, after evaluating the effectiveness of our “disclosurecontrols and procedures” (as defined in Rule 13a-15(e) and15(d)-15(e) under the Securities Exchange Act of 1934, as amended) as of theend of the period covered by this report, has concluded that our disclosurecontrols and procedures are effective in ensuring that material informationrequired to be disclosed is included in the reports that we file with theSecurities and Exchange Commission.

 

*ChangesIn Internal Controls*

 

There were no significantchanges in our internal controls or, to the knowledge of our management, inother factors that could significantly affect these controls during the fourthquarter of 2005.

 

**Item 9B.Other Information.**

 

None.

 

### ** **

### **44**

### ****

### **PART III**

** **

**Item10.  Directors and Executive Officers of the Registrant.**

 

**Compliancewith Section 16(a) of the Exchange Act**

 

Information regardinguntimely filings pursuant to Section 16 of the Securities Exchange Act of1934, as amended, is incorporated in this Form 10-K by reference fromNorthern Growers’ Information Statement for the Annual Meeting of Members to beheld in 2006, a copy of which will be filed with the Commission not later than120 days after December 31, 2005.

 

**Code ofEthics**

 

Information regarding acode of ethics is incorporated in this Form 10-K by reference to NorthernGrowers’ Information Statement for the Annual Meeting of Members to be held in2006, a copy of which will be filed with the Commission not later than 120 daysafter December 31, 2005.

 

**Directors**

 

Information regardingNorthern Growers’ board of managers is incorporated in this Form 10-K byreference from Northern Growers’ Information Statement for the Annual MeetingofMembers tobe held in 2006, a copy of which will be filed with the Commission not laterthan 120 days after December 31, 2005.

 

**Executiveofficers**

 

Information required bythis item regarding the business experience of an executive is incorporated inthis Form 10-K by reference from Northern Growers’ Information Statementfor the Annual Meeting of Members to be held in 2006, a copy of which will befiled with the Commission not later than 120 days after December 31, 2005.

 

**Item11.  Executive Compensation.**

 

The information requiredby this item is incorporated by reference in this Form 10-K from NorthernGrowers’ Information Statement for the Annual Meeting of Members to be held in2006, a copy of which will be filed with the Commission not later than 120 daysafter December 31, 2005.

 

**Item12.  Security Ownership of Certain Beneficial Owners and Management.**

 

The information requiredby this item is incorporated by reference in this Form 10-K from NorthernGrowers’ Information Statement for the Annual Meeting of Members to be held in2006, a copy of which will be filed with the Commission not later than 120 daysafter December 31, 2005.

 

 

 

45

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**Item13.  Certain Relationships and Related Transactions.**

 

The information requiredby this item is incorporated by reference in this Form 10-K from NorthernGrowers’ Information Statement for the Annual Meeting of Members to be held in2006, a copy of which will be filed with the Commission not later than 120 daysafter December 31, 2005.

 

**Item14.  Principal Accounting Fees and Services.**

 

 The informationrequired by this item is incorporated by reference in this Form 10-K fromNorthern Growers’ Information Statement for the Annual Meeting of Members to beheld in 2006, a copy of which will be filed with the Commission not later than120 days after December 31, 2005.

 

**PART IV**

 

**Item15.  Exhibits, Financial Statement Schedules.**

 

(a)The following exhibits and financialstatements are filed as part of, or are incorporated by reference into, thisreport:

 

(1) Financial Statements—Reference is made to the “Index to FinancialStatements” of Northern Growers, LLC located at page F-1 of this reportfor a list of the financial statements and schedules for the year ended December 31,2005 included herein.

 

(2) All supplemental schedules are omitted because of theabsence of conditions under which they are required or because the informationis shown in the Consolidated Financial Statements or notes thereto.

 

(3) The exhibits we have filed herewith or incorporated byreference herein are set forth on the attached Exhibit Index.  The following exhibits constitute amanagement contract:  10.23 and 10.25.

 

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

 

 

 

46

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SIGNATURES

 

Pursuant to therequirement of Section 13 or 15(d) of the Securities Exchange Act,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   |                | NORTHERN GROWERS, LLC |
|--------|---------------------|-----------------------|
|   |                |                  |   |
| Date:  | March 16, 2006 |                  | /s/  Robert Narem |   |
|   |                |                  | Robert Narem, Chief  Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act, this report has been signed belowby the following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
|   |            | NORTHERN GROWERS, LLC   |
|--------|-----------------|-------------------------|
|   |            |                    |   |
| Date:  | March 16, 2006  |                    | /s/  Robert Narem |   |
|   |            |                    | Robert Narem, Chief  Executive Officer and  Chief Financial Officer, Manager  (Principal Executive  Officer) |
|   |            |                    |   |
|   |            |                    |   |   |
| Date:  |            |                    |   |   |
|   |            |                    | Ronald Anderson,  Manager |   |
|   |            |                    |   |   |
|   |            |                    |   |   |
| Date:  | March 16, 2006  |                    | /s/  Glenn Berdan |   |
|   |            |                    | Glenn Berdan, Manager |   |
|   |            |                    |   |   |
| Date:  | March  16, 2006 |                    | /s/ Wendell Falk |   |
|   |            |                    | Wendell  Falk, Manager  |   |
|   |            |                    |   |   |
| Date:  | March 16, 2006  |                    | /s/  Dennis Flemming |   |
|   |            |                    | Dennis Flemming,  Manager |   |
|   |            |                    |   |   |
|   |            |                    |   |   |
| Date:  | March 16, 2006  |                    | /s/  Lars Herseth |   |
|   |            |                    | Lars Herseth, Manager |   |
|   |            |  

           |   |
| Date:  | March 16, 2006  |                    | /s/  Mark Lounsbery |   |
|   |            | Mark Lounsbery, Manager |   |
|   |            |                    |   |   |   |
|        |                 |                         |  |  |  |  |  |  |  |  |

  
| Date:  | March 16, 2006 |                 | /s/  Robert Metz |   |
|--------|----------------|----------------------|------------------|--------|
|   |           | Robert Metz, Manager |             |
|   |           |                 |             |
|   |           |                 |             |
| Date:  | March 16, 2006 |                 | /s/  Jeff Olson  |   |
|   |           | Jeff Olson, Manager  |             |
|   |           |                 |             |

 

 

 

47

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|   |           |                       |                  |
|--------|----------------|----------------------------|-----------------------|
| Date:  | March 16, 2006 |                       | /s/  Ron Olson        |   |
|   |           | Ronald Olson, Manager      |                  |
|   |           |                       |                  |
|   |           |                       |                  |
| Date:  | March 16, 2006 |                       | /s/  Delton Strasser  |   |
|   |           | Delton Strasser,  Manager  |                  |
|   |           |                       |                  |
|   |           |                       |                  |
| Date:  | March 16, 2006 |                       | /s/  Steve Street     |   |
|   |           | Steve Street, Manager      |                  |
|   |           |                       |                  |
|   |           |                       |                  |
|   |           |                       |                  |
| Date:  | March 16, 2006 |                       | /s/  Bill Whipple     |   |
|   |           | Bill Whipple, Manager      |                  |
|   |           |                       |                  |
|   |           |                       |                  |
| Date:  | March 16, 2006 |                       | /s/  Robert Wittnebel |   |
|   |           | Robert Wittnebel,  Manager |                  |

 

48

----

 

**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              |       | Third Amended and Restated Operating Agreement dated January 1, 2006.                                         |       |                |       | Exhibit 3(ii)(a) to the Registrant’s Form 8-K filed with the  Commission on January 5, 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             |       | Corn Price Risk  Management Agreement with Broin Management, LLC, dated November 16, 2001                     |       |                |       | Exhibit 10.4 to  the Registrant’s Form S-4 filed with the Commission on July 26, 2002.       |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.2             |       | Ethanol  Marketing and Services Agreement with Ethanol Products, LLC, dated March 5,  2002.                   |       |                |       | Exhibit 10.5 to  the Registrant’s Form S-4/A filed with the Commission on January 8, 2003.   |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.3             |       | DDGS Marketing  Agreement with Dakota Commodities (a/k/a Dakota Gold Marketing), dated April  10, 2002.       |       |                |       | Exhibit 10.6 to  the Registrant’s Form S-4 filed with the Commission on July 26, 2002.       |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.4             |       | Loan Agreement  with US Bank, dated July 11, 2001.                                                            |       |                |       | Exhibit 10.7 to  the Registrant’s Form S-4 filed with the Commission on July 26, 2002.       |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.5             |       | 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.       |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.6             |       | 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.      |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.7             |       | 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.      |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.8             |       | 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.      |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.9             |       | 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.      |
|             |       |                                                                                                          |       |                |       |                                                                                              |

 

 

 

49

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| **Exhibit  No.** | ** ** | **Description**                                                                                               | ** ** | **Filed  Herewith** | ** ** | **Incorporated by  Reference**                                                                    |
|------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------------------------------------------------------------|
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.10            |       | 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.      |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.11            |       | 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.      |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.12            |       | 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.      |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.13            |       | Mortgage in  favor of US Bank, dated December 31, 2002.                                                       |       |                |       | Exhibit 10.23 to  the Registrant’s Form S-4/A filed with the Commission on January 8, 2003.  |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.14            |       | Memorandum of  Understanding with Broin Enterprises, Inc., dated January 28, 2003.                            |       |                |       | Exhibit 10.24 to  the Registrant’s Form S-4/A filed with the Commission on March 6, 2003.    |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.15            |       | $1.2 million  Promissory Note with US Bank, dated May 1, 2003.                                                |       |                |       | Exhibit 10.18 to  the Registrant’s Form 10-QSB filed with the Commission on August 14, 2003. |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.16            |       | Trading Service  Agreement with Alerus Securities Corporation, dated February 2, 2004.                        |       |                |       | Exhibit 10.1 to  the Registrant’s Form 10-Q filed with the Commission on May 17, 2004.       |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.17            |       | Amendment to US  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.    |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.18            |       | Second Amendment  to US 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.    |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.19            |       | $15.8 Million  Promissory Note with US Bank, dated March 30, 2005.                                            |       |                |       | Exhibit 10.27 to  the Registrant’s Form 10-K filed with the Commission on March 31, 2005.    |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.20            |       | $3.9 Million  Promissory Note with US Bank, dated March 30, 2005.                                             |       |                |       | Exhibit 10.28 to  the Registrant’s Form 10-K filed with the Commission on March 31, 2005.    |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.21            |       | $3.0 Million  Promissory Note with US Bank, dated March 30, 2005.                                             |       |                |       | Exhibit 10.2 to  the Registrant’s Form 10-K filed with the Commission on March 31, 2005.     |
|             |       |                                                                                                          |       |                |       |                                                                                              |
| 10.22            |       | $5.0 Million  Promissory Note with US Bank, dated March 30, 2005.                                             |       |                |       | Exhibit 10.2 to  the Registrant’s Form 10-Q filed with the Commission on May 16, 2005.       |

 

 

 

50

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| **Exhibit  No.** | ** ** | **Description**                                                                                            | ** ** | **Filed  Herewith** | ** ** | **Incorporated by  Reference**                                                                   |
|------------------|------------|------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------|
|             |       |                                                                                                       |       |                |       |                                                                                             |
|             |       |                                                                                                       |       |                |       |                                                                                             |
| 10.23            |       | Management  Agreement with Broin Management, LLC, dated April 20, 2005.                                    |       |                |       | Exhibit 10.2 to  the Registrant’s Form 10-Q filed with the Commission on May 16, 2005.      |
|             |       |                                                                                                       |       |                |       |                                                                                             |
| 10.24            |       | Technology and  Patent Rights License Agreement with Broin and Associates, LLC, dated October  25, 2005. * |       |                |       | Exhibit 10.1 to  the Registrant’s Form 10-Q filed with the Commission on November 14, 2005. |
|             |       |                                                                                                       |       |                |       |                                                                                             |
| 10.25            |       | Amendment to the  Management Agreement with Broin Management, dated October 25, 2005.                      |       |                |       | Exhibit 10.2 to  the Registrant’s Form 10-Q filed with the Commission on November 14, 2005. |
|             |       |                                                                                                       |       |                |       |                                                                                             |
| 10.26            |       | Design Build  Agreement with Broin and Associates, Inc., dated October 25, 2005.                           |       |                |       | Exhibit 10.3 to  the Registrant’s Form 10-Q filed with the Commission on November 14, 2005  |
|             |       |                                                                                                       |       |                |       |                                                                                             |
| 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 of this exhibit were filedseparately with the SEC subject to a request for confidential treatment datedNovember 14, 2005.

 

 

 

51

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**NORTHERN GROWERS, LLC**

 

Table of Contents

 
| **REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** |                                          |
|--------------------------------------------------------------|-----------------------------------------------|
| ** **                                                   |                                          |
| **CONSOLIDATED FINANCIAL STATEMENTS**                        |                                          |
|                                                         | Balance Sheets                                |   |
|                                                         | Statements of Operations                      |   |
|                                                         | Statements of Changes in Members’ Equity |   |
|                                                         | Statements of Cash Flows                      |   |
|                                                         | Notes to Consolidated Financial Statements    |   |

 

----

 

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

## ** **

To the Audit Committee andMembers of Northern Growers, LLC

Big Stone City, South Dakota

We have audited the accompanying consolidatedbalance sheets of Northern Growers, LLC as of December 31, 2005 and 2004,and the related consolidated statements of operations, members’ equity and cashflows for each of the years in the three-year period ended December 31, 2005.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we do not express such an opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of Northern Growers, LLC as of December 31, 2005 and 2004, and theresults of its operations and its cash flows for each of the years in thethree-year period ended December 31, 2005 in conformity with accountingprinciples generally accepted in the United States of America.

 
| /s/ EIDE BAILLY LLP    |   |
|------------------------|--------|
| Minneapolis, Minnesota |
| January 27, 2006  |

** **

 

F-1

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2005, AND 2004**

 
| ** **                         | ** ** | ** **     | ** **     | ** ** | ** ** |
|------------------------------------|------------|----------------|----------------|------------|------------|
| ** **                         | ** ** | **2005**       | ** **     | **2004**   | ** ** |
|                               |       |           |           |       |       |
| **ASSETS**                         |       |           |           |       |       |
|                               |       |           |           |       |       |
| CURRENT ASSETS                     |       |           |           |       |       |
| Cash                               | ** ** | **$**          | **12,057,017** |       | $          | 3,500,317 |   |
| Accounts  receivable               |       |           |           |       |       |
| Trade related  party               | ** ** | **3,596,642**  |           | 3,675,195  |       |
| Trade                              | ** ** | **428,129**    |           | 541,646    |       |
| Other                              | ** ** | **195,012**    |           | 877,357    |       |
| Inventory                          | ** ** | **3,782,616**  |           | 4,639,561  |       |
| Prepaid expenses                   | ** ** | **74,133**     |           | 344,702    |       |
| Investment in  commodity contracts | ** ** | **84,962**     |           | 110,951    |       |
|                               |       |           |           |       |       |
| Total current  assets              | ** ** | **20,218,511** |           | 13,689,729 |       |
|                               |       |           |           |       |       |
| PROPERTY AND EQUIPMENT             |       |           |           |       |       |
| Land  improvements                 | ** ** | **3,970,615**  |           | 3,985,910  |       |
| Equipment                          | ** ** | **34,620,861** |           | 34,905,067 |       |
| Buildings                          | ** ** | **8,149,571**  |           | 8,125,978  |       |
| Construction in  progress          | ** ** | **911,863**    |           | 17,747     |       |
| ** **                         |       | **47,652,910** |           | 47,034,702 |       |
| Less accumulated  depreciation     | ** ** | **(8,555,706** | )              | (6,148,738 | )          |
|                               |       |           |           |       |       |
| Net property and  equipment        | ** ** | **39,097,204** |           | 40,885,964 |       |
|                               |       |           |           |       |       |
| OTHER ASSETS                       | ** ** | **—**     |           | 102,814    |       |
|                               |       |           |           |       |       |
| ** **                         |       | **$**          | 59,315,715     |       | $          | 54,678,507 |   |

 

See Notes to Consolidated Financial Statements

 

F-2

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2005, AND 2004**

 
| ** **                                                                  | ** ** | ** **     | ** **     | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
| ** **                                                                  | ** ** | **2005**       | ** **     | **2004**   | ** ** |
|                                                                        |       |           |           |       |       |
| **LIABILITIES AND MEMBERS' EQUITY**                                         |       |           |           |       |       |
|                                                                        |       |           |           |       |       |
| CURRENT LIABILITIES                                                         |       |           |           |       |       |
| Accounts payable  - trade                                                   | ** ** | **$**          | **1,662,410**  |       | $          | 1,200,112 |   |
| Accounts payable  - corn                                                    | ** ** | **2,363,338**  |           | 3,044,095  |       |
| Accounts payable  - related party                                           | ** ** | **520,593**    |           | 378,631    |       |
| Accounts payable  - construction - related party                            | ** ** | **—**     |           | 108,121    |       |
| Other accrued  liabilities                                                  | ** ** | **555,946**    |           | 402,891    |       |
| Accrued interest                                                            | ** ** | **3,847**      |           | 7,440      |       |
| Distribution  payable - Northern Growers                                    | ** ** | **3,212,093**  |           | 3,778,051  |       |
| Distribution  payable - minority member                                     | ** ** | **950,775**    |           | 1,142,000  |       |
| Notes payable -  due upon demand                                            | ** ** | **5,000**      |           | 5,000      |       |
| Current portion  of note payable                                            | ** ** | **1,932,661**  |           | 3,063,342  |       |
|                                                                        |       |           |           |       |       |
| Total current  liabilities                                                  | ** ** | **11,206,663** |           | 13,129,683 |       |
|                                                                        |       |           |           |       |       |
| LONG-TERM NOTE PAYABLE                                                      | ** ** | **17,104,400** |           | 16,387,498 |       |
|                                                                        |       |           |           |       |       |
| COMMITMENTS AND CONTINGENCIES                                               |       |           |           |       |       |
|                                                                        |       |           |           |       |       |
| MINORITY INTEREST                                                           | ** ** | **7,054,934**  |           | 5,715,325  |       |
|                                                                        |       |           |           |       |       |
| MEMBERS' EQUITY                                                             |       |           |           |       |       |
| Capital units,  $0.50 stated value, 25,314,000 units issued and outstanding | ** ** | **12,657,000** |           | 12,657,000 |       |
| Additional  paid-in capital                                                 | ** ** | **64,900**     |           | 64,900     |       |
| Retained  earnings                                                          | ** ** | **11,227,818** |           | 6,724,101  |       |
|                                                                        |       |           |           |       |       |
| Total members'  equity                                                      | ** ** | **23,949,718** |           | 19,446,001 |       |
|                                                                        |       |           |           |       |       |
| ** **                                                                  |       | **$**          | **59,315,715** |       | $          | 54,678,507 |   |

 

 

See Notes to Consolidated Financial Statements

 

F-3

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**YEARSENDED DECEMBER 31, 2005, 2004 AND 2003**

** **

| ** **                                                    | ** ** | ** **     | ** **     | ** **  | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|----------------|----------------|-------------|------------|------------|------------|
| ** **                                                    | ** ** | ** **     | ** **     | ** **  | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **2005**       | ** **     | **2004**    | ** ** | **2003**   | ** ** |
|                                                          |       |           |           |        |       |       |       |
| REVENUES                                                      |       |           |           |        |       |       |       |
| Sales related  party                                          | ** ** | **$**          | **72,633,304** |        | $          | 68,501,969 |       | $ | 51,913,676 |   |
| Sales                                                         | ** ** | **16,305,319** |           | 16,486,472  |       | 13,643,646 |       |
| Incentive                                                     | ** ** | **754,085**    |           | 1,599,144   |       | 5,299,940  |       |
| Total revenues                                                | ** ** | **89,692,708** |           | 86,587,585  |       | 70,857,262 |       |
|                                                          |       |           |           |        |       |       |       |
| COST OF REVENUES                                              |       |           |           |        |       |       |       |
| Cost of revenues                                              | ** ** | **63,552,756** |           | 72,729,131  |       | 58,920,917 |       |
| Settlement  credit - see Note 12                              | ** ** | **—**     |           | (1,449,248) |       | —     |       |
| Total cost of  revenues                                       | ** ** | **63,552,756** |           | 71,279,883  |       | 58,920,917 |       |
|                                                          |       |           |           |        |       |       |       |
| GROSS PROFIT                                                  | ** ** | **26,139,952** |           | 15,307,702  |       | 11,936,345 |       |
|                                                          |       |           |           |        |       |       |       |
| EXPENSES                                                      |       | .              |           |        |       |       |       |
| General and  administrative                                   | ** ** | **3,913,177**  |           | 2,984,237   |       | 2,739,136  |       |
| Total operating  expenses                                     | ** ** | **3,913,177**  |           | 2,984,237   |       | 2,739,136  |       |
|                                                          |       |           |           |        |       |       |       |
| INCOME FROM OPERATIONS                                        | ** ** | **22,226,775** |           | 12,323,465  |       | 9,197,209  |       |
|                                                          |       |           |           |        |       |       |       |
| OTHER INCOME (EXPENSES)                                       |       |           |           |        |       |       |       |
| Interest income                                               | ** ** | **75,682**     |           | 10,780      |       | 8,153      |       |
| Interest expense                                              | ** ** | **(1,420,827** | **)**          | (1,500,438  | )          | (1,847,108 | )          |
| Other                                                         | ** ** | **124,545**    |           | 65,551      |       | 23,244     |       |
| Total other  income (expenses)                                | ** ** | **(1,220,600** | **)**          | (1,424,107  | )          | (1,815,711 | )          |
|                                                          |       |           |           |        |       |       |       |
| INCOME BEFORE  MINORITY INTEREST                              | ** ** | **21,006,175** |           | 10,899,358  |       | 7,381,498  |       |
|                                                          |       |           |           |        |       |       |       |
| MINORITY  INTEREST IN SUBSIDIARY (INCOME)                     | ** ** | **(4,848,463** | **)**          | (2,528,026  | )          | (1,770,430 | )          |
|                                                          |       |           |           |        |       |       |       |
| NET INCOME                                                    | ** ** | **$**          | **16,157,712** |        | $          | 8,371,332  |       | $ | 5,611,068 |   |
|                                                          |       |           |           |        |       |       |       |
| BASIC AND  DILUTED EARNINGS PER CAPITAL UNIT                  | ** ** | **$**          | **0.638**      |        | $          | 0.331      |       | $ | 0.222 |   |
|                                                          |       |           |           |        |       |       |       |
| BASIC AND  DILUTED WEIGHTED AVERAGE CAPITAL UNITS OUTSTANDING | ** ** | **25,314,000** |           | 25,314,000  |       | 25,314,000 |       |
|                                                          |       |           |           |        |       |       |       |
| DISTRIBUTIONS  PER CAPITAL UNIT DECLARED                      | ** ** | **$**          | **0.460**      |        | $          | 0.237      |       | $ | 0.190 |   |
|                                                          |       |           |           |        |       |       |       |
| DISTRIBUTIONS  PER CAPITAL UNIT PAID                          | ** ** | **$**          | **0.483**      |        | $          | 0.141      |       | $ | 0.145 |   |

 

 

See Notes toConsolidated Financial Statements

 

F-4

----

 

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OF CHANGESIN MEMBERS’ EQUITY**

**YEARSENDED DECEMBER 31, 2005, 2004 AND 2003**

 
| ** **                     | ** ** | ** **     | ** ** | ** ** | ** **     | **Additional** | ** ** | ** **   | ** ** | ** ** | ** **     |
|--------------------------------|------------|----------------|------------|------------|----------------|----------------|------------|--------------|------------|------------|----------------|
|                           |       | **Capital**    | ** ** | ** ** | ** **     | **paid-in**    | ** ** | **Retained** | ** ** | ** ** |           |
|                           |       | **Units**      | ** ** | **Amount** | ** **     | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  |           |
|                           |       |           |       |       |           |           |       |         |       |       |           |
| BALANCE, DECEMBER 31, 2002     |       | 25,313,800     |       | $          | 12,656,900     |           | $          | 65,000       |       | $          | 3,558,548      |   | $ | 16,280,448 |   |
| Transfers and  adjustments     |       | 200            |       | 100        |           | (100           | )          | —       |       | —     |           |
| Net income                     |       | —         |       | —     |           | —         |       | 5,611,068    |       | 5,611,068  |           |
| Distributions  payable         |       | —         |       | —     |           | —         |       | (1,343,224   | )          | (1,343,224 | )              |
| Distributions  paid            |       | —         |       | —     |           | —         |       | (3,480,597   | )          | (3,480,597 | )              |
|                           |       |           |       |       |           |           |       |         |       |       |           |
| BALANCE, DECEMBER 31, 2003     |       | 25,314,000     |       | 12,657,000 |           | 64,900         |       | 4,345,795    |       | 17,067,695 |           |
| Net income                     |       | —         |       | —     |           | —         |       | 8,371,332    |       | 8,371,332  |           |
| Distributions  payable         |       | —         |       | —     |           | —         |       | (3,778,051   | )          | (3,778,051 | )              |
| Distributions  paid            |       | —         |       | —     |           | —         |       | (2,214,975   | )          | (2,214,975 | )              |
|                           |       |           |       |       |           |           |       |         |       |       |           |
| BALANCE, DECEMBER 31, 2004     |       | 25,314,000     |       | 12,657,000 |           | 64,900         |       | 6,724,101    |       | 19,446,001 |           |
| Net income                     |       | —         |       | —     |           | —         |       | 16,157,712   |       | 16,157,712 |           |
| Distributions  payable         |       | —         |       | —     |           | —         |       | (3,212,093   | )          | (3,212,093 | )              |
| Distributions  paid            |       | —         |       | —     |           | —         |       | (8,441,902   | )          | (8,441,902 | )              |
|                           |       |           |       |       |           |           |       |         |       |       |           |
| **BALANCE, DECEMBER 31, 2005** | ** ** | **25,314,000** | ** ** | **$**      | **12,657,000** | ** **     | **$**      | **64,900**   | ** ** | **$**      | **11,227,818** | ** ** | **$** | **23,949,718** | ** ** |
|                                |            |                |            |            |                |                |            |              |            |            |                |  |  |  |  |  |  |  |

 

See Notes to Consolidated Financial Statements

 

 

F-5

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**YEARSENDED DECEMBER 31, 2005, 2004 AND 2003**

** **
| ** **                                  | ** ** | ** **      | ** **     | ** ** | ** ** | ** **  | ** ** |
|---------------------------------------------|------------|-----------------|----------------|------------|------------|-------------|------------|
| ** **                                  | ** ** | ** **      | ** **     | ** ** | ** ** | ** **  | ** ** |
| ** **                                  | ** ** | **2005**        | ** **     | **2004**   | ** ** | **2003**    | ** ** |
| OPERATING  ACTIVITIES                       |       |            |           |       |       |        |       |
| Net income                                  | ** ** | **$**           | **16,157,712** |       | $          | 8,371,332   |       | $ | 5,611,068 |   |
| Changes to net  income not affecting cash   |       |            |           |       |       |        |       |
| Depreciation                                | ** ** | **2,613,727**   |           | 2,531,969  |       | 2,446,104   |       |
| Amortization of  loan fees                  | ** ** | **102,818**     |           | 102,848    |       | 102,845     |       |
| Loss on  impairment of assets               | ** ** | **355,177**     |           | —     |       | —      |       |
| Minority  interest in subsidiary's earnings | ** ** | **4,848,463**   |           | 2,528,026  |       | 1,770,430   |       |
| Decrease  (increase) in current assets      |       |            |           |       |       |        |       |
| Accounts  receivable                        |       |            |           |       |       |        |       |
| Related party                               | ** ** | **78,553**      |           | (84,243    | )          | (885,816    | )          |
| Trade                                       | ** ** | **113,517**     |           | (40,761    | )          | 114,766     |       |
| Other                                       | ** ** | **682,345**     |           | (574,811   | )          | 3,329,166   |       |
| Inventory                                   | ** ** | **856,945**     |           | (338,657   | )          | (297,461    | )          |
| Prepaid expenses                            | ** ** | **270,570**     |           | (245,115   | )          | (28,193     | )          |
| Investment in  commodity contracts          | ** ** | **25,989**      |           | 73,671     |       | (77,527     | )          |
| Increase  (decrease) in current liabilities |       |            |           |       |       |        |       |
| Accounts payable                            |       |            |           |       |       |        |       |
| Trade                                       | ** ** | **428,227**     |           | (139,393   | )          | 185,042     |       |
| Corn                                        | ** ** | **(680,757**    | )              | (1,134,955 | )          | 1,100,172   |       |
| Related party                               | ** ** | **141,962**     |           | 174,411    |       | (240,643    | )          |
| Accrued  liabilities                        | ** ** | **124,356**     |           | (98,683    | )          | 214,533     |       |
| Accrued interest                            | ** ** | **(3,593**      | )              | (2,679     | )          | (162,166    | )          |
|                                        |       |            |           |       |       |        |       |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES  | ** ** | **26,116,011**  |           | 11,122,960 |       | 13,182,320  |       |
|                                        |       |            |           |       |       |        |       |
| INVESTING  ACTIVITIES                       |       |            |           |       |       |        |       |
| Purchase of  property and equipment         | ** ** | **(1,426,068**  | )              | (2,108,018 | )          | (1,382,158  | )          |
| Tax refund on  construction                 | ** ** | **200,570**     |           | 57,723     |       | 254,004     |       |
|                                        |       |            |           |       |       |        |       |
| NET CASH (USED  FOR) INVESTING ACTIVITIES   | ** ** | **(1,225,498**  | )              | (2,050,295 | )          | (1,128,154  | )          |
|                                        |       |            |           |       |       |        |       |
| FINANCING  ACTIVITIES                       |       |            |           |       |       |        |       |
| Long-term notes  payable issued             | ** ** | **1,032,369**   |           | —     |       | 1,500,000   |       |
| Change in  short-term notes payable         | ** ** | **—**      |           | —     |       | (1,000,000  | )          |
| Principal paid  on long-term notes payable  | ** ** | **(1,446,148**  | )              | (3,737,459 | )          | (9,411,701  | )          |
| Distributions  paid - Northern Growers      | ** ** | **(12,219,954** | )              | (3,558,199 | )          | (3,650,597  | )          |
| Distributions  paid - minority member       | ** ** | **(3,700,080**  | )              | (1,142,000 | )          | (1,199,091  | )          |
| Other                                       | ** ** | **—**      |           | —     |       | (4,924      | )          |
|                                        |       |            |           |       |       |        |       |
| NET CASH (USED  FOR) FINANCING ACTIVITIES   | ** ** | **(16,333,813** | )              | (8,437,658 | )          | (13,766,313 | )          |
|                                        |       |            |           |       |       |        |       |
| NET INCREASE  (DECREASE) IN CASH            | ** ** | **8,556,700**   |           | 635,007    |       | (1,712,147  | )          |
|                                        |       |            |           |       |       |        |       |
| CASH AT  BEGINNING OF YEAR                  | ** ** | **3,500,317**   |           | 2,865,310  |       | 4,577,457   |       |
|                                        |       |            |           |       |       |        |       |
| CASH AT END OF  YEAR                        | ** ** | **$**           | **12,057,017** |       | $          | 3,500,317   |       | $ | 2,865,310 |   |

 

(continued on next page)

 

F-6

----

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS - page 2**

 
| ** **                                                               | ** ** | **2005**   | ** **     | **2004** | ** ** | **2003**  | ** ** |
|--------------------------------------------------------------------------|------------|------------|----------------|----------|------------|-----------|------------|
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                       |       |       |           |     |       |      |       |
| Cash paid for interest                                                   | ** ** | **$**      | **1,321,551**  |     | $          | 1,400,270 |       | $ | 1,762,557 |   |
|                                                                     |       |       |           |     |       |      |       |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |       |       |           |     |       |      |       |
| Accounts payable  incurred for construction costs                        | ** ** | **$**      | **62,769**     |     | $          | 108,121   |       | $ | 476,216 |   |
| Notes payable  refinanced                                                | ** ** | ** ** | **18,667,631** |     |       | —    |       |   | — |   |
| Distributions  payable                                                   | ** ** | **$**      | **4,162,868**  |     | $          | 3,778,051 |       | $ | 1,343,224 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-7

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

**NOTE 1 - NATURE OF OPERATIONS**

 

*Principal Business Activity*

 

Northern Growers, LLC orNorthern Growers (formerly Northern Growers Cooperative or the Cooperative), isa South Dakota limited liability company that was organized to pool investors,provide a portion of the corn supply for a 40 million gallon name-plate annualcapacity ethanol plant (the plant) owned by Northern Lights Ethanol, LLC(Northern Lights), and own a 77.16% interest in Northern Lights. For purposesof the financial statements and notes, the “Company” refers to both NorthernGrowers and Northern Lights on a consolidated basis. Northern Lights was formedon February 14, 2001. On June 26, 2002, the plant began grinding cornand on July 5, 2002, the plant commenced its principal operations. TheCompany sells ethanol and related products primarily in the United States.

 

On April 1, 2002,Whetstone Ethanol, LLC (Whetstone) was formed. The initial member of Whetstonewas the Cooperative. Whetstone was formed for the purpose of acquiring theassets and liabilities of the Cooperative. On April 10, 2002, the Board ofDirectors of the Cooperative approved a plan of reorganization related to anexchange whereby Whetstone would acquire the assets and liabilities of the Cooperative.On March 27, 2003, the members of the Cooperative approved the plan ofreorganization to take effect on April l, 2003. The transaction was an exchangeof interests whereby the assets and liabilities of the Cooperative weretransferred for capital units of Whetstone. For financial statements purposes,no gain or loss was recorded as a result of the 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 surrendered and retired. In connection with thereorganization, Whetstone subsequently changed its name to Northern Growers,LLC. Under the Northern Growers’ Operating Agreement, a minimum of 5,000capital units is required to become a member of Northern Growers. Such unitsare subject to certain transfer restrictions, including approval by the Boardof Managers of Northern Growers. Northern Growers also retains the right toredeem the capital units at $.20 per unit in the event a member attempts todispose of the units in a manner not in conformity with the OperatingAgreement, if a member becomes a holder of less than 5,000 units or a member becomesbankrupt. The Operating Agreement also includes provisions whereby cash flow inexcess of $200,000 will be distributed to unit holders subject to limitationsimposed by a super majority vote of the Board of Managers or restrictions imposedby loan covenants.

 

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

 

*Principles of Consolidation*

 

The consolidated financial statements includethe accounts of Northern Growers and its 77.16% owned subsidiary, NorthernLights. All significant inter-company transactions and balances have beeneliminated in consolidation*.*Forpurposes of these financial statements and notes, the use of the term “theCompany” refers to the consolidated accounts of Northern Growers and NorthernLights.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents consist of demand accounts and other accountsthat provide withdrawal privileges.

 

F-8

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

*RevenueRecognition*

 

Revenue from the production of ethanol and related products is recordedupon transfer of title to customers, net of allowances for estimated returns onrelated products. Generally, ethanol and related products are shipped FOBshipping point. Interest income is recognized as earned.

 

Revenue from federal and state incentive programs is recorded when theCompany has produced or sold the ethanol and satisfied the reportingrequirements under each applicable program. When it is uncertain that theCompany will receive full allocation and payment due under the federalincentive program, it derives an estimate of the incentive revenue for therelevant period based on various factors including the most recently usedpayment factor applied to the program. The estimate is subject to change asmanagement becomes aware of increases or decreases in the amount of fundingavailable under the incentive programs or other factors that affect funding orallocation of funds under such programs.

 

*Shipping Costs*

 

Freight charges incurred are reported as a component of cost ofrevenues.

 

*Receivables and Credit Policies*

 

Trade receivablesare uncollateralized customer obligations due under normal trade termsrequiring 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.

 

Trade receivablesare stated at the amount billed to the customer.

 

Payments of tradereceivables are allocated to the specific invoices identified on the customer’sremittance advice or, if unspecified, are applied to the earliest unpaidinvoices.

 

The carrying amount of trade receivables is reduced by a valuationallowance that reflects management’s best estimate of the amounts that will notbe collected. Management reviews all trade receivable balances that exceed 30days from the invoice date and based on an assessment of currentcreditworthiness, estimates the portion, if any, of the balance that will notbe collected. Management believes that all trade receivables are collectible;therefore, there is no valuation allowance as of December 31, 2005 and 2004.

 

*Inventory*

 

Ethanol andrelated product inventory is stated at net realizable value. Corn inventory isstated at market value, which approximates net realizable value (local marketprices less cost of disposal), based on local market prices determined by grainterminals 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.

 

Inventories at December 31, 2005 and 2004 are as follows:

 

| ** **            | ** ** | **2005**    | ** **    | **2004**      | ** ** |
|-----------------------|------------|-------------|---------------|---------------|------------|
| ** **            | ** ** | ** **  | ** **    | ** **    | ** ** |
| Finished goods        | ** ** | **$**       | **1,983,179** |          | $          | 2,112,405 |   |
| Raw materials         | ** ** | **660,045** |          | 1,500,457     |       |
| Work-in-process       | ** ** | **326,018** |          | 399,049       |       |
| Spare parts inventory | ** ** | **813,374** |          | 627,650       |       |
| ** **            | ** ** |        | $             | **3,782,616** |       | $ | 4,639,561 |   |
|                       |            |             |               |               |            |  |  |  |  |

 

 

F-9

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

 

*Investment in Grain Contracts,Derivative Instruments and Hedging Activities*

 

SFAS No. 133 requires a company to evaluate itscontracts to determine whether the contracts are derivatives. Certain contractsthat literally meet the definition of a derivative may be exempted from SFASNo. 133 as normal purchases or normal sales. Normal purchases and normal salesare contracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered in quantitiesexpected to be used or sold over a reasonable period in the normal course ofbusiness. Contracts that meet the requirements of normal are documented asnormal and exempted from the accounting and reporting requirements of SFAS No.133.

 

The Company enters into short-term cash grain, optionand futures contracts as a means of securing corn for the ethanol plant andmanaging exposure to changes in commodity prices. All derivatives aredesignated as non-hedge derivatives. Although the contracts are effectiveeconomic hedges of specified risks, they are not designated as and accountedfor as hedging instruments.

 

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

 

Unrealized gains and losses related to derivativecontracts are included as a component of cost of revenues in the accompanyingconsolidated financial statements. Inventories are recorded at net realizablevalue so that gains and losses on derivative contracts are offset by gains andlosses on inventories and reflected in earnings currently. For the statement ofcash flows, such contract transactions are classified as operating activities.

 

The Company has recorded anincrease (decrease) to cost of revenues of $(211,011), $3,719,496 and $(71,653)related to our derivative contracts for the year ended December 31, 2005, 2004and 2003, respectively.

 

*Minority Interest*

 

Amounts recordedas minority interest on the balance sheet relate to the investment by BroinInvestments I, LLC in Northern Lights, plus or minus any allocation of incomeor loss of Northern Lights, less distributions from Northern Lights.Earnings/losses and distributions of Northern Lights are allocated to itsmembers in proportion to the member’s capital accounts.

 

*Use of Estimates*

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires Management to make estimates and assumptions that affectthe reported amount of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and revenues andexpenses during the reporting period. Actual results could differ from thoseestimates.

 

*Concentrations of Credit Risk*

 

Cash balances are maintained in bank depositories and periodicallyexceed federally insured limits.

 

F-10

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

*Property and Equipment*

 

Property and equipment is stated at cost. Significant additions andbetterments are capitalized, while expenditures for maintenance, repairs andminor renewals are charged to operations when incurred. Depreciation on assetsplaced in service is computed using the straight-line method over estimateduseful lives as follows:

 

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

 

Land improvements consist of landscaping, additional fencing andimprovements to the roads for entering and exiting the plant.

 

Equipment consists of grain systems, trucks, mechanical and electricalproduction and process equipment, cooling towers, boilers and a reboiler, fieldsensors and power supplies.

 

Buildings consists of administrative offices, sheds, catwalks,platforms, and mechanical and grain buildings.

 

The Company reviews its property and equipment for impairment wheneverevents indicate that the carrying amount of the asset may not be recoverable.An impairment loss is recorded when the sum of the future cash flows is lessthan the carrying amount of the asset. An impairment loss is measured as theamount by which the carrying amount of the asset exceeds its fair value.

 

A loss on impairment of assets for $355,177 was recognized by managementduring October 2005 and is included in cost of revenues. A subset of thethermal oxidizers was deemed impaired/inoperable and no longer useful due toextreme internal heat damage, although the plant continues to meet allregulatory requirements without the operation of this subset of the thermaloxidizers. Due to the extreme degradation of the equipment, it was determinedto have no value and that any scrap value the equipment had would approximatethe costs of disposal.

 

# ***Environmental Liabilities***

 

The Company’s operations are subject to environmental laws andregulations adopted by various governmental authorities in the jurisdiction inwhich it operates. These laws require the Company to investigate and remediatethe effects of the release or disposal of materials at its locations.Accordingly, the Company has adopted policies, practices and procedures in theareas of pollution control, occupational health, and the production, handling,storage and use of hazardous materials to prevent material environmental orother damage, and to limit the financial liability which could result from suchevents. Environmental liabilities are recorded when the liability is probableand the costs can be reasonably estimated.

 

*Income Taxes*

 

The Company is not a taxpaying entity for federal and state income taxpurposes and thus no income tax expense has been recorded in the statements.Income of the Company is taxed to the members in their respective returns.

 

*Cost of Revenues*

 

The primary components of cost of revenues from the production ofethanol and related products are corn expense, energy expense (steam, naturalgas and electricity), raw materials expense (chemicals and denaturant),shipping costs on sales and depreciation on process equipment.

 

F-11

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

** **

 

All shipping costs incurred with regard to the sale of ethanol andrelated product inventory are included in the consolidated statements ofoperations as a component of gross revenues. Accordingly, those shipping costsare deducted and are all classified as a component of cost of revenues.Shipping costs in relation to sales are defined as the cost to transportproducts to the customers. Other shipping costs in the cost of revenues includeinbound freight charges on inventory.

 

*General and Administrative Expenses*

 

The primary components of general and administrative expenses aremanagement fees, insurance expense and professional fees (legal and audit).

 

*Reclassifications*

 

Certain reclassifications have been made tothe 2003 and 2004 financial statements to conform to the presentation in 2005. Thesereclassifications had no change in previously reported net income.

 

**NOTE 3 - NOTES PAYABLE**

 

*Short-Term Notes Payable*

 

Northern Growers received advances of $5,000 from various entities tohelp establish Northern Growers. The notes are due on demand and do not bearinterest. The balance of this non-interest bearing note was $5,000 at December31, 2005 and 2004.

 

On June 5, 2002, Northern Lights entered into a $1,000,000 promissorynote with US Bank National Association, Sioux Falls, South Dakota (Bank), whichmatured on May 1, 2003.

 

On December 15, 2002, Northern Lights entered into a $500,000 line ofcredit with the Bank, which matured on May 1, 2003.

 

*Long-TermNotes Payable*

 

Prior to entering into a refinancing agreement on March 30, 2005,Northern Lights had four loans outstanding with the Bank: a $15.0 millionfixed-rate note; an $11.1 million variable-rate non-revolving note; a $5.0million variable-rate, revolving note; and a $1.2 million fixed-rate note. Thefinancing arrangements for the fixed rate note required Northern Lights to makeadditional principal payments equal to 15% of its excess cash flow (as definedby the agreement), not to exceed 20% of the outstanding principal balance. In conjunctionwith the Northern Lights distributions on February 10, 2004 and November 12,2004, additional excess cash flow payments of $335,664 and $590,044,respectively, were made on the fixed-rate note.

 

F-12

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

** **

 

On March 30, 2005, Northern Lights and US Bank entered into anamended loan agreement.  The purpose of the agreement was to refinanceexisting debt and to finance a planned rail expansion project.  EffectiveMarch 30, 2005, five loans with the Bank became outstanding:  a $15.8million fixed-rate note; a $3.9 million variable-rate, non-revolving note; the$5 million variable-rate, revolving note; a $3.0 million variable-rate,revolving note; and the $1.2 million note.  As part of the refinancing,the $15 million fixed-rate note and the $11.1 million variable-rate,non-revolving note were retired and an additional $1,032,369 was borrowed forthe rail expansion project and included in the refinancing.

 

The new $15.8 million fixed-rate note bears an interest rate of6.38%.  This note requires quarterly payments of interest and amortizedprincipal on the basis of a ten-year term and is subject to maturity onMarch 31, 2012. The first payment was made on June 30, 2005.

 

The new $3.9 million variable-rate, non-revolving note bears interestat US Bank’s prime rate, or 7.25% at December 31, 2005. This note requiresquarterly payments of interest and amortized principal on the basis of aten-year term, the first payment being made on June 30, 2005.  Thenote matures on March 31, 2012.

 

The new $3.0 million variable-rate, revolving note bears interest at USBank’s prime rate and carries an unused commitment fee of 3/8% assessedquarterly in arrears.  This note, which requires the payment of interestwhen drawn, is tied to the borrowing base and cannot be used until the existing$5 million revolving note is fully drawn. The note matures on March 31, 2008.

 

The $5.0 million variable-rate, revolving note bears interest at USBank’s prime rate, and carries an unused commitment fee of 3/8% assessed quarterlyin arrears.  This note requires quarterly interest-only payments and issubject to maturity on March 31, 2012.

 

The $1.2 million fixed rate note bears interest at 4.7%, and requiresquarterly payments of principal and interest until maturity on April 30,2007.

 

Northern Lights is subject to certain restrictive covenantsestablishing minimum reporting requirements, ratios, working capital and networth requirements and is in full compliance at December 31, 2005.

 

F-13

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

** **

 

The balance of the long-termnotes payable as of December 31, 2005 and 2004 is as follows:
| ** **                                   | ** ** | ** **     | ** **     | ** ** | ** ** |
|----------------------------------------------|------------|----------------|----------------|------------|------------|
| ** **                                   | ** ** | ** **     | ** **     | ** ** | ** ** |
| ** **                                   | ** ** | **2005**       | ** **     | **2004**   | ** ** |
| ** **                                   | ** ** | ** **     | ** **     | ** ** | ** ** |
| Original variable rate, non-revolving note   | ** ** | **$**          | **—**     |       | $          | 8,711,196 |   |
| Original variable rate, revolving note       | ** ** | **—**     |           | —     |       |
| Original fixed rate note                     | ** ** | **—**     |           | 9,956,435  |       |
| Refinanced variable rate, non-revolving note | ** ** | **3,607,500**  |           | —     |       |
| Refinanced fixed rate note                   | ** ** | **14,946,566** |           | —     |       |
| Fixed rate note                              | ** ** | **482,995**    |           | 783,209    |       |
|                                         |       |           |           |       |       |
| ** **                                   |       | **19,037,061** |           | 19,450,840 |       |
| Less current  portion                        | ** ** | **(1,932,661** | )              | (3,063,342 | )          |
|                                         |       |           |           |       |       |
| ** **                                   |       | **$**          | **17,104,400** |       | $          | 16,387,498 |   |

 

At December 31, 2005 and 2004, the Company had no outstandingborrowings against the variable rate revolving notes. The balance available onthese notes as of December 31, 2005 and 2004 was $8,000,000 and $5,000,000,respectively.

 

Minimum principal payments, through the maturity of the notes, follow:

 

| **Years  Ending December 31,** | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
|                           |       |       |       |
| 2006                           |       | $          | 1,932,661  |   |
| 2007                           |       | 1,861,079  |       |
| 2008                           |       | 1,780,704  |       |
| 2009                           |       | 1,871,577  |       |
| 2010                           |       | 1,968,387  |       |
| 2011 to March 31, 2012         |       | 9,622,653  |       |
|                           |       |       |       |
|                           |       | $          | 19,037,061 |   |
|                                |            |            |            |  |  |

 

Minimum principal payments for the year ending December 31, 2006 do notinclude any related additional principal to US Bank based on excess cash flow.US Bank released Northern Lights of any further excess cash flow payments as ofDecember 31, 2004.

 

**NOTE 4 - RELATED PARTY TRANSACTIONS**

 

Northern Growers and Broin Investments I, LLC, are the members ofNorthern Lights. Northern Growers invested $12,500,000 and Broin Investments I,LLC invested $3,700,000 in Northern Lights Ethanol, LLC for their respectiveownership interests of approximately 77% and 23%. In accordance with theOperating Agreement of Northern Lights, Broin Investments I, LLC, has the rightto elect two of seven members of the Board of Managers of Northern Lights.

 

 

F-14

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

Additional agreements with related parties are included in Note 6.

 

**NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The Company believes the carrying amount of cash and cash equivalentsapproximates fair value due to the short maturity of these instruments.

 

As of December 31, 2004, the Company believed the fair value of thelong-term note payable obligations approximated the carrying amount due to thevariable interest rate feature of the debt. Subsequent to the refinancing inMarch 2005, the Company believes the carrying amount of long-term note payableobligations exceeds fair value. As the following table presents, the carryingamount of long-term note payable obligations exceeds the fair value byapproximately $840,000 at December 31, 2005.

 

| ** **              | ** ** | **December 31, 2005** | ** **     |
|-------------------------|------------|-----------------------|----------------|
| ** **              | ** ** | **Carrying Amount**   | ** **     | **Fair Value** | ** ** |
|                    |       |                  |           |   |   |
| Long-term notes payable | ** ** | **$**                 | **19,037,061** | ** ** | **$** | **18,195,089** | ** ** |
|                         |            |                       |                |  |  |  |  |

 

 

The Company believes the carrying amount of short-term notes payableapproximates their value due to the short maturity of these instruments.

 

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

 

Substantially all of the Company’s facilities are subject to federal,state and local regulations relating to the discharge of materials into theenvironment. Management believes that the current practices and procedures forthe control and disposition of such wastes comply with the applicable federal, stateand local requirements.

 

The Company has entered into contracts and agreements regarding theconstruction, operation and management of the ethanol plant. Agreements withBroin Investments I, LLC, the minority member of Northern Lights, or partiesrelated to the minority member through common ownership, are as follows:

 

Original Construction Agreement — The Company had a constructionagreement with Broin and Associates, Inc., an affiliate of the minority memberof Northern Lights. The agreement, with change orders, totals $47,615,981, allof which was complete as of December 31, 2005.

 

Expansion Construction Agreement — The Company entered into aDesign/Build Agreement with Broin and Associates on October 25, 2005. Thepurpose of this agreement is to expand the name-plate production capacity ofthe plant from 40 million gallons of ethanol annually to 75 million gallons ofethanol annually, as well as to make certain capital improvements to the plantprior to the incorporation of the raw starch technology. The estimated cost ofconstruction and improvements for both projects is $38.3 million. No liabilitywas incurred on this construction contract as of December 31, 2005 sinceconstruction did not begin until January 2006.

 

Ethanol Marketing Agreement — The Company has an agreement withEthanol Products, LLC, a joint venture of ethanol producers, for the sale,marketing, billing and receipt of payment and other administrative services forall ethanol produced by the plant. The agreement expires on July 5, 2007, andis automatically renewed for successive five-year terms unless terminated threemonths prior to expiration.

 

 

F-15

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

** **

 

Management Agreement — On April 20, 2005, the Company renewedits agreement with Broin Management, LLC for the management and operation ofthe plant. The original agreement was executed on November 2, 2000 andremained in effect until July 1, 2005. The term of the new managementagreement, as amended, continues through June 30, 2015.  In exchangefor these services, Broin Management receives an annual fee of $450,000,payable in equal monthly installments, plus an incentive bonus of 5% of netincome, payable quarterly. The annual fee is adjusted each year onMarch 1st for changes in the consumer price index. The fees and bonus paidto Broin Management include the salary and benefits of the general manager andtechnical manager and certain other services related to operation of theethanol plant.

 

Technology and PatentRights License Agreement - On October 25, 2005, the Company entered into a Technology andPatent Rights License Agreement with Broin and Associates, Inc. Under thisagreement, Broin and Associates granted the Company a non-exclusive license touse certain technology and patents owned, developed, or obtained by Broin andAssociates relating to the ethanol and related product production processes.The Company is required to pay an annual licensing fee for the right to usesuch technology and patents. The term of this agreement continues untilJune 30, 2015, the date of expiration of the Management Agreement betweenthe Company and Broin Management, LLC.

 

Risk Management Agreement - The Company has entered into anagreement with Broin Management, LLC for hedge and price risk managementservices related to the corn and natural gas requirements of the plant. Theagreement expires in April 2006 and is renewable for successive one-year termsunless terminated 30 days prior to expiration.

 

Distillers GrainsMarketing Agreement— The Company has an agreement with Dakota Gold Marketing, a related partythrough ownership by entities related to the minority member, to providemarketing and administrative services for the sale of distillers grains. Theagreement commenced on May 10, 2002. The agreement provides for an agencyrelationship in that Dakota Gold Marketing does not take title to thedistillers grains but acts as a broker on behalf of the Company. The agreement beganon March 10, 2002 and has a term of five years, renewing for five-year termsunless terminated by either party with 90 days notice prior to expiration.

 

Revenues and expenses related to agreements withrelated parties for the years ended December 31, 2005, 2004 and 2003 are asfollows:

 

 

| ** **                            | ** ** | **2005**      | ** **     | **2004** | ** ** | **2003**   | ** ** |
|---------------------------------------|------------|---------------|----------------|----------|------------|------------|------------|
|                                  |       |          |           |     |       |       |       |
| Ethanol gross revenues                | ** ** | **$**         | **72,633,304** |     | $          | 68,501,969 |       | $ | 51,913,676 |   |
| Management fees expense               | ** ** | **1,663,261** |           | 995,458  |       | 791,659    |       |
| Marketing fees expense - all products | ** ** | **619,527**   |           | 691,832  |       | 603,186    |       |
|                                       |            |               |                |          |            |            |            |  |  |  |

 

 

Agreements with unrelated parties are as follows:

 

Property Lease — The Company has a ninety-nine-yearproperty lease (an operating lease) with Big Stone-Grant Industrial Developmentand Transportation, LLC. Rent was $2,400 annually for each of the first fiveyears beginning in 2001. Beginning on May 1, 2006, and every five yearsthereafter, rent is increased 5% over the immediately preceeding five-yearperiod.

 

Steam — The Company has an agreement with theBig Stone Plant Co-Owners (the Big Stone Plant); Otter Tail Corporation,Montana-Dakota Utilities Co. and Northwestern Public Service, for steam in aspecified amount for use in its ethanol manufacturing process at a base rate,adjusted annually for changes in the cost of

 

 

F-16

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

energy. The agreement commenced on June 1, 2002 andhas a term of ten years, renewable for two five-year periods, after which theagreement is renewable from year to year. Either party may terminate theagreement by providing notice one year prior to a renewal or expiration date. Pleasesee Note 12—Cost of Revenues—Settlement Credit, for further details on thesteam agreement with the Big Stone Plant.

 

Expenses related to the property lease and steam agreements for theyears ended December 31, 2005, 2004 and 2003 were $2,361,367, $3,378,906and $2,319,403, respectively.

 

Minimum payments related to the above agreements are summarized in thefollowing table:

 
| ** **       | ** ** | ** **     | ** ** | ** **     | ** ** | **Unconditional** | ** ** | ** ** | ** ** |
|------------------|------------|----------------|------------|----------------|------------|-------------------|------------|------------|------------|
| **Years Ending** | ** ** | **Lease**      | ** ** | **Management** | ** ** | **Purchase**      | ** ** | ** ** | ** ** |
| **December 31,** | ** ** | **Agreements** | ** ** | **Agreements** | ** ** | **Agreements**    | ** ** | **Total**  | ** ** |
|             |       |           |       |           |       |              |       |       |       |
| 2006             |       | $              | 2,520      |           | $          | 465,860           |       | $          | 217,080    |   | $ | 685,460 |   |
| 2007             |       | 2,520          |       | 450,000        |       | $                 | 217,080    |       | 669,600    |   |
| 2008             |       | 2,520          |       | 450,000        |       | $                 | 217,080    |       | 669,600    |   |
| 2009             |       | 2,520          |       | 450,000        |       | $                 | 217,080    |       | 669,600    |   |
| 2010             |       | 2,520          |       | 450,000        |       | $                 | 217,080    |       | 669,600    |   |
| 2011-2100        |       | 372,115        |       | 2,025,000      |       | 307,530           |       | 2,704,645  |       |
|             |       | $              | 384,715    |           | $          | 4,290,860         |       | $          | 1,392,930  |   | $ | 6,068,505 |   |
|                  |            |                |            |                |            |                   |            |            |            |  |  |  |  |  |  |  |

 

 

Corn Delivery — On August 9, 2005, Northern Lights agreed torelease Northern Growers and, accordingly, all of its members from deliveringcorn to the plant starting on January 1, 2006.  Prior toJanuary 1, 2006, Northern Growers’ members were obligated to deliver cornto the plant unless the plant released the member from the member’s corndelivery obligation.  Effective January 1, 2006, however, NorthernGrowers’ members are no longer obligated to deliver corn to the plant. Instead,the plant will purchase all of its corn from local corn producers and the openmarket.  In addition, Northern Lights agreed to honor all member forwardcontracts for 2006 delivery if the contract was written by September 15,2005. Purchases of corn from corn delivery agreements and cash contracts fromthe Northern Growers’ members totaled approximately $22,016,000 and $33,300,000for the years ending December 31, 2005 and 2004, respectively, of which $1,810,245and $2,139,294 was recorded as a liability at December 31, 2005 and 2004,respectively.

 

Incentive Revenue - The Company receives an incentive payment from theUnited States Department of Agriculture (USDA) for the use of corn to produceethanol. In accordance with the terms of this arrangement, revenue is recordedbased on incremental production of ethanol compared to the prior year. The USDAhas set the annual maximum not to exceed $7,500,000 for each eligible producer.The incentive is calculated on the USDA fiscal year of October 1 to September30. Revenue of $26,835, $1,064,644 and $7,500,000 has been earned for the USDAprogram years ended September 30, 2005, 2004 and 2003, respectively. Incentiverevenue of $48,682, $932,477 and $4,115,170 was recorded for the years endedDecember 31, 2005, 2004 and 2003, respectively, for this program.

 

The Company also receives an incentive payment from the State of SouthDakota to produce ethanol. In accordance with the terms of this arrangement,revenue is recorded based on ethanol sold. The State of South Dakota has set amaximum of up to $1,000,000 per year for this program per qualifying producer. TheCompany has earned $583,334, $705,404 and $666,667 for the program years endedJune 30, 2006, 2005 and 2004, respectively. Incentive revenue of $705,404, $666,667and $1,184,770 was recorded for the years ended December 31, 2005, 2004 and2003, respectively, for this program.

 

 

F-17

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

Legal Proceedings — The Company is involved in various legal actionsarising in the normal course of business. Management is of the opinion thattheir outcome will not have a significant effect on the Company’s consolidatedfinancial statements.

 

Capital Unit Trading - On March 8, 2004, NorthernGrowers’ members and non-members began trading Northern Growers capital unitson an alternative trading system operated by Alerus Securities Corporation ofWest Fargo, North Dakota.

 

Environmental Contingency - In January 2003, the EnvironmentalProtection Agency (EPA) issued formal information requests to, among others,plants designed, constructed, and/or managed by Broin and Associates and BroinManagement. By virtue of the nature and timing of these requests, the Company’splant became subject to these requests. The requests required that the subjectplants provide the EPA with certain data regarding emissions, presumably todetermine whether the applicable plants were in compliance with the Clean AirAct. After this information was provided to the EPA, Broin and Associates, onbehalf of the Company and the subject plants managed by Broin Management,initiated discussions with the EPA regarding the application and use of testingmethods for quantifying certain types of emissions emanating from these plants.

 

To date, no legal proceeding is pending with or threatened by the EPA,nor has Broin and Associates resolved with the EPA the application and use ofthe proper testing method for quantifying emissions. If a proceeding wereinitiated or settlement reached with the EPA, fines and/or other penaltiesagainst the Company could result, the nature and scope of which is uncertain.While there is a reasonable possibility of fines and/or other penalties in theevent of any proceeding or settlement, until the EPA and Broin and Associatesresolve what the proper testing method will be for measuring emissions, theCompany is unable to estimate the scope and magnitude of any possible fine orother penalty. Accordingly, the Company has not accrued any amount to itsconsolidated statement of operations relating to any potential claim.

 

**NOTE 7 - DISTRIBUTIONS**

 

During March 2003, Northern Lights approved a $1,750,000 distribution,which it paid on April 11, 2003. Northern Growers received approximately$1,350,000 and the minority member received approximately $400,000. Inconjunction with this cash distribution, Northern Growers paid a distributionto its members of approximately $1,100,000.

 

During September 2003, Northern Lights approved a $3,500,000distribution, which it paid on September 22, 2003. Northern Growers receivedapproximately $2,700,000 and the minority member received approximately$800,000. In conjunction with this cash distribution, Northern Growers paid adistribution to its members of approximately $2,550,000.

 

During January 2004, Northern Lights approved a $2,000,000distribution, which it paid on February 10, 2004. Northern Growers receivedapproximately $1,543,000 and the minority member received approximately$457,000. In conjunction with this cash distribution, Northern Growers paid adistribution to its members of approximately $1,343,000.

 

During November 2004, Northern Lights approved a $3,000,000distribution, which it paid on November 12, 2004. Northern Growers receivedapproximately $2,315,000 and the minority member received approximately$685,000. In conjunction with this cash distribution, Northern Growers paid adistribution to its members of approximately $2,215,000.

 

 

F-18

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

During January 2005, Northern Lights approved a $5,000,000distribution, which it paid on February 1, 2005. Northern Growers receivedapproximately $3,858,000 and the minority member received approximately$1,142,000. In conjunction with this cash distribution, on February 7,2005, Northern Growers paid a distribution of approximately $3,778,000 to itsmembers of record as of December 31, 2004. The above distributions arerecorded as a liability as of December 31, 2004.

 

During July 2005, Northern Lights approved an $8,000,000distribution, which it paid on July 28, 2005. Northern Growers received$6,172,800 and the minority member received $1,827,200. In conjunction withthis cash distribution, on July 29, 2005, Northern Growers paid adistribution of approximately $5,972,800 to its members of record as ofApril 30, 2005.

 

During October 2005, Northern Lights approved a $3,200,000 distribution,which it paid on October 28, 2005. Northern Growers received $2,469,120and the minority member received $730,880. In conjunction with this cashdistribution, on October 31, 2005 Northern Growers paid a distribution of$2,469,064 to its members of record as of August 31, 2005.

 

During January 2006, Northern Lights approved a $4,162,763distribution, which it paid on January 24, 2006. Northern Growers receivedapproximately $3,212,000 and the minority member received approximately$951,000. In conjunction with this cash distribution, on January 30, 2006,Northern Growers paid a distribution of approximately $3,212,000 to its membersof record as of December 31, 2005. The above distributions are recorded asa liability as of December 31, 2005.

 

**NOTE 8 - CAPITAL UNITS**

 

On June 20, 2005, the Board of Managers of Northern Growers approved afour-for-one (4-for-1) capital unit split of its Class A capital units,effective for September 1, 2005. Under the terms of the Class A capital units’split, members of record as of September 1, 2005 received four capital unitsfor each one capital unit held in Northern Growers. Prior period financialstatements have been restated to reflect the capital unit split.

 

**NOTE 9 - INCOME TAXES**

 

As of December 31,2005 and 2004, the Company’s book basis of assets exceeded their tax basis byapproximately $22,900,000 and $12,100,000, respectively. There were nosignificant differences between the book basis and tax basis of liabilities asof December 31, 2005 or 2004.

 

**NOTE 10 - 401(K) PLAN**

 

On February 1, 2003, the Company set up a 401(k) plan for substantiallyall employees who work more than 1,000 hours per year. Employees can makevoluntary contributions up to federally designated limits. The Company matchesemployee voluntary contributions at a 50% level up to an effective maximum of2% of gross employee pay. Eligible employees are always fully vested in theiraccount balances resulting from employee voluntary contributions. The Company401(k) expense for the years ended December 31, 2005 and 2004 was $25,192 and$21,762, respectively.

 

 

F-19

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

**NOTE 11 - QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

Summary quarterly results are as follows:
| ** **                                    | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-----------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                    | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                          |       |        |       |        |       |        |       |        |       |
| Year Ended December 31, 2005:                 |       |        |       |        |       |        |       |        |       |
|                                          |       |        |       |        |       |        |       |        |       |
| Total revenues                                |       | $           | 22,264,409 |        | $          | 20,151,343  |       | $           | 22,174,095 |   | $ | 25,102,861 |   |
| Gross profit                                  |       | 6,286,254   |       | 3,714,285   |       | 6,321,903   |       | 9,817,510   |       |
| Operating income (loss)                       |       | 5,374,964   |       | 2,913,306   |       | 5,359,768   |       | 8,578,737   |       |
| Income (loss) before Minority Interest        |       | 5,081,681   |       | 2,611,957   |       | 5,036,734   |       | 8,275,803   |       |
| Minority interest in subsidiary (income) loss |       | (1,170,325  | )          | (614,764    | )          | (1,161,824  | )          | (1,901,550  | )          |
| Net income (loss)                             |       | 3,911,356   |       | 1,997,193   |       | 3,874,910   |       | 6,374,253   |       |
| Basic earnings (loss) per unit                |       | 0.154       |       | 0.079       |       | 0.153       |       | 0.252       |       |
|                                          |       |        |       |        |       |        |       |        |       |
| Year Ended December 31, 2004:                 |       |        |       |        |       |        |       |        |       |
|                                          |       |        |       |        |       |        |       |        |       |
| Total revenues                                |       | $           | 21,707,883 |        | $          | 20,958,695  |       | $           | 22,296,905 |   | $ | 21,624,102 |   |
| Gross profit                                  |       | 5,942,562   |       | (1,922,844  | )          | 2,327,681   |       | 8,960,303   |       |
| Operating income (loss)                       |       | 5,084,220   |       | (2,344,298  | )          | 1,669,817   |       | 7,913,726   |       |
| Income (loss) before Minority Interest        |       | 4,711,367   |       | (2,700,009  | )          | 1,307,893   |       | 7,580,106   |       |
| Minority interest in subsidiary (income) loss |       | (1,092,583  | )          | 607,565     |       | (305,533    | )          | (1,737,475  | )          |
| Net income (loss)                             |       | 3,618,784   |       | (2,092,444  | )          | 1,002,360   |       | 5,842,631   |       |
| Basic earnings (loss) per unit                |       | 0.143       |       | (0.083      | )          | 0.040       |       | 0.231       |       |
|                                          |       |        |       |        |       |        |       |        |       |
| Year Ended December 31, 2003:                 |       |        |       |        |       |        |       |        |       |
|                                          |       |        |       |        |       |        |       |        |       |
| Total revenues                                |       | $           | 19,123,755 |        | $          | 17,241,715  |       | $           | 16,110,060 |   | $ | 18,381,732 |   |
| Gross profit                                  |       | 4,427,581   |       | 1,584,621   |       | 1,822,589   |       | 4,101,554   |       |
| Operating income                              |       | 3,693,484   |       | 1,010,312   |       | 1,125,256   |       | 3,368,157   |       |
| Income before Minority Interest               |       | 3,198,000   |       | 530,879     |       | 675,948     |       | 2,976,671   |       |
| Minority interest in subsidiary (income)      |       | (761,395    | )          | (133,773    | )          | (186,367    | )          | (688,895    | )          |
| Net income                                    |       | 2,436,605   |       | 397,106     |       | 489,581     |       | 2,287,776   |       |
| Basic earnings per unit                       |       | 0.097       |       | 0.016       |       | 0.019       |       | 0.090       |       |

 

The above quarterly financial data is unaudited, but in the opinion ofmanagement, all adjustments necessary for a fair presentation of the selecteddata for these interim periods presented have been included.

 

**NOTE 12 - COST OF REVENUES — SETTLEMENT CREDIT**

 

In November 2004, the Company received a credit from Big Stone Plantfor approximately $1,450,000. Big Stone Plant is located adjacent to the plantand supplies steam to the plant for the production process. This credit wasissued after an informal dispute between the Company and Big Stone Plantregarding the reported volume of steam supplied from Big Stone Plant to theplant. In March 2003, management at the plant questioned Big Stone Plant aboutthe reported volume of steam supplied to the plant from Big Stone Plant. Managementbelieved the reported volume of steam supplied to the plant was excessive,compared to the volume of steam required for the production process. After initialtesting and analysis, Big Stone Plant concluded the reported volume of steamwas accurate. After further testing and analysis in 2004, however, Big StonePlant determined that the reported

 

 

F-20

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

DECEMBER 31, 2005 AND2004

 

volume of steam was erroneous due to an error caused by themiscalibration of a metering instrument. As a result of this error, Big Stone Plantovercharged the Company for the use of steam in 2003 and 2004. In November2004, in an effort to resolve the dispute, Big Stone Plant notified the Companythat a settlement credit would be issued, which the Company agreed to accept.At December 31, 2004, approximately $708,000 was outstanding from Big StonePlant in relation to the settlement credit, and was recorded on theconsolidated balance sheet as a component of other accounts receivable. AtDecember 31, 2005, there was no balance outstanding as the credit had beendepleted in full.

 

**NOTE 13 - SUBSEQUENT EVENTS**

 

During January 2006, the Company approved two change orders inconnection with the expansion construction agreement entered into on October25, 2005. These two change orders total approximately $1.3 million and are forimprovements to the plant’s software and for additional storage capacity.

 

Northern Lights is currently negotiating with US Bank for a newfinancing arrangement to pay for the expansion construction agreement and thetwo change orders mentioned above, but the details are not yet complete. Afternegotiations are complete, Northern Lights expect to enter into a new financingarrangement with US Bank for a loan sum up to $33.0 million. The constructionnote is expected to be set at a variable rate until maturity, after whichNorthern Lights will be permitted to convert it to a term note and have theability to select from several interest rate options. The existing $15.8million and $1.2 million fixed rate notes and the $3.9 million variable ratenote are expected to remain in place under the existing terms and conditions.

 

 In addition to standard covenants and conditions, the followingnew covenants and/or conditions, among others, are expected with any newfinancing from US Bank: 1) a minimum working capital requirement of $7.5million including the unadvanced portion of the existing term revolving debt;and 2) beginning October 2005, a distribution limitation of 50% of total netincome until at least $5 million in cash, which would have otherwise been paidout, for initial project equity is obtained.  A distributions level of 80%of total net income will be allowed only upon complying with all othercovenants and after successful closing of the new financing. At December 31,2005, approximately $2.5 million of project equity had been earned towards the$5 million total required by US Bank.

 

 

 

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