**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

** **

**(MarkOne)**

 

**x**                              AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

** **

**Forthe fiscal year ended December 31, 2007**

 

**o**                                 TransitionReport Pursuant to Section 13 or 15(d) of the Securities Act of 1934

** **

**Commission file number 0-50711**

 

**NorthernGrowers, LLC**

(Exact name of registrant as specified in itscharter)

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

 

**48416 144th StreetP.O. Box 356Big Stone City SD 57216605-862-7902**

(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 ExchangeAct:

**None**

 

Securities registered under Section 12(g) of the ExchangeAct:

**Class A Capital Units**

 

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

 

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

 

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

 

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

 

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

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

 

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

 

The aggregate marketvalue of the registrant’s common stock held by non-affiliates at June 30,2007 was approximately $157,131,000. The aggregate market value was computed byreference to the last sales price during the registrant’s most recentlycompleted second fiscal quarter.

 

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

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Part III of Form 10-K- Portions of the Information Statement for the 2008 Annual Meeting of Members.

 

** **

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**CAUTIONARYSTATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

This Annual Report on Form 10-K and other reports issued byNorthern Growers, LLC (including reports filed with the Securities and ExchangeCommission (the “SEC” or “Commission”), contain “forward-looking statements”that deal with future results, expectations, plans and performance. Forward-looking statements may include statements which use words such as “believe,”“expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,”“should,” “could,” “may,” “future,” “potential,” or the negatives of thesewords, and all similar expressions. These forward-looking statements are madebased on our expectations and beliefs concerning future events affecting us andare subject to uncertainties and factors relating to our operations andbusiness environment, all of which are difficult to predict and many of whichare beyond our control, that could cause our actual results to differmaterially from those matters expressed in or implied by these forward-lookingstatements. We do not undertake any responsibility to release publicly anyrevisions to these forward-looking statements to take into account events orcircumstances that occur after the date of this report. Additionally, we do notundertake any responsibility to update you on the occurrence of anyunanticipated events which may cause actual results to differ from thoseexpressed or implied by the forward-looking statements contained in thisreport.  Important factors that couldcause actual results to differ materially from our expectations are disclosedunder “Risk Factors” and elsewhere in this report.  As stated elsewhere in this report suchfactors include, among others:
|   |   |                                                                                                                                            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Excess  growth, production capacity and supply in the ethanol industry;                                                                         |
|   |   |                                                                                                                                            |
| · |   | The  price volatility and uncertainty of raw materials used in the production  process, particularly corn, natural gas and steam;               |
|   |   |                                                                                                                                            |
| · |   | Changes  in the weather or general economic conditions impacting the availability and  price of commodities, particularly corn and natural gas; |
|   |   |                                                                                                                                            |
| · |   | The  results of our risk management or hedging strategies;                                                                                      |
|   |   |                                                                                                                                            |
| · |   | Competition  from alternative fuels and alternative fuel additives;                                                                             |
|   |   |                                                                                                                                            |
| · |   | Fluctuations  in U.S. oil consumption and petroleum prices;                                                                                     |
|   |   |                                                                                                                                            |
| · |   | Changes  in plant production capacity due to variations in steam supply provided by  the adjacent power plant;                                  |
|   |   |                                                                                                                                            |
| · |   | The  availability of additional capital to support capital improvements and  development;                                                       |
|   |   |                                                                                                                                            |
| · |   | The  availability and adequacy of our cash flow to meet our requirements;                                                                       |
|   |   |                                                                                                                                            |
| · |   | Changes  or developments in laws, regulations or taxes in the ethanol, agricultural or  energy industries;                                      |

 

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| · |   | Damage  to or loss of our plant due to casualty, weather, mechanical failure or any  extended or extraordinary maintenance or inspection that may be required; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| · |   | An  increase in environmental regulation and scrutiny from federal and state  governments; and                                                                 |
|   |   |                                                                                                                                                           |
| · |   | Other  factors discussed below under the item entitled “Risk Factors.”                                                                               |

 

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

 

### **PART I**

###  

**Item 1.  Business.**

 

**Overview**

 

NorthernGrowers, LLC (“Northern Growers”) is a South Dakota limited liability company,consisting of 950 members who principally reside in South Dakota and the upperMidwest. Northern Growers owns and manages a 77.16% interest in its subsidiary,POETTM Biorefining - Big Stone (“Big Stone”), an ethanol and distillers grainsplant (the “plant” or “our plant”) located near the city of Big Stone City,South Dakota. (Northern Growers and Big Stone are referred to collectively inthis report as “we,” “our,” or “us”). Our plant is built with an annualname-plate capacity of 75 million gallons of ethanol.

 

Ourrevenues are derived from the sale and distribution of ethanol and distillersgrains to customers primarily located in the U.S.  Corn for our plant’sproduction process is supplied primarily from local agricultural producers andfrom purchases on the open market. After processing the corn, ethanol is soldto POETTM Ethanol Products, LLC (f/k/a Ethanol Products, LLC), whichsubsequently markets and sells the ethanol to gasoline blenders and refinerieslocated throughout the continental U.S.  All of our distillers grains aresold through our marketing agent, POETTM Nutrition, Inc. (f/k/a Dakota GoldMarketing), which markets and sells the product to livestock feeders primarilylocated in the continental U.S. The day-to-day operations of our plant aremanaged by POETTM Plant Management, LLC, of Sioux Falls, South Dakota.

 

 Our operating results are largely driven bythe prices at which we sell ethanol and distillers grains and the costs relatedto their production.  Historically, the price of ethanol tends tofluctuate in the same direction as the price of unleaded gasoline and otherpetroleum products, although in 2005 the prices of ethanol and gasoline began adivergence, with ethanol selling for less than gasoline at the wholesalelevel.  The greatest effect on the priceof ethanol is the supply and demand for ethanol in the U.S. markets. Our twolargest costs of production are corn and natural gas, although our use ofnatural gas is offset by the use of steam supplied directly from the adjacentenergy power plant called Big Stone Plant. The price of distillers grains isgenerally influenced by supply and demand, the price of substitute livestockfeed, such as corn and soybean meal, and other animal feed proteins. Surplus grain supplies tend to put downward price pressure on distillersgrains.

 

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**GeneralDevelopments of Business**

 

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

 

Construction of our plant was completed and operations commenced in July 2002.  Our plant was originally built with an annualname-plate production capacity of 40 million gallons of ethanol. Since thattime, we have made significant capital improvements.  In March 2006, we completed a railexpansion project, which provides our plant with additional capacity to storerail cars for the shipment of products. In October 2006, we completed construction for the incorporation ofBPXTM technology into the production process. In addition to reducing energycosts,  BPXTM releases additionalstarch content, increases the protein content and quality of by-products anddecreases plant emissions.  In May 2007,we completed the construction on our plant expansion, increasing its annualname-plate capacity to 75 million gallons of ethanol  In October 2007, we increased our grainstorage capacity by adding two grain bins with a storage capacity of 569,000bushels of corn.  The design andconstruction of the BPXTM, grain storage and expansion projects, was completedby POETTM Design and Construction, Inc. (f/k/a Broin and Associates, Inc.),of Sioux Falls, South Dakota.

 

**Principal Products**

 

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

 

***Ethanol***

 

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

 

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

 

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For fiscal years ended December 31, 2007, 2006 and 2005, ourrevenues from sales of ethanol were approximately 84.0%, 86.1% and 81.0% oftotal revenues, respectively.

 

***Distillers Grains***

 

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

 

Dry mill ethanol processing produces, generally, three forms ofdistillers grains, all of which differ in moisture content and shelflife: 1) dried distillers grains with solubles (DDGS); 2) distillers wetgrains or “wet cake”; and 3) modified distillers grains.  Distillers wetgrains are processed corn mash that does not go through a drying process andcontains approximately 70% moisture content.  Distillers wet grains have ashort shelf life of approximately three days and can be sold only to livestockproducers within the immediate vicinity of the plant.  Modified distillersgrains are distillers wet grains that are dried to a 50% moisture content. Modified distillers grains have a slightly longer shelf life and are often soldto nearby livestock producers. DDGS is distillers wet grains that are dried toan 8-10% moisture content. DDGS have an almost indefinite shelf life and may besold and shipped to any market regardless of its vicinity to the plant.

 

Forfiscal years ended December 31, 2007, 2006 and 2005, our revenues fromsales of distillers grains were approximately 15.5%, 13.3%, and 18.2% of totalrevenues, respectively.

 

**Marketingand Distribution**

 

***Ethanol***

 

Theethanol produced at our plant is sold to POETTM Ethanol Products, LLC (f/k/aEthanol Products, LLC), the terms of which are governed by an ethanol marketingagreement. After purchasing the ethanol from us, POETTM Ethanol Productsmarkets and sells the ethanol to major, multi-national oil companies withblending and refinery facilities located throughout the continental U.S. Theprice that we receive from the sale to POETTM Ethanol Products is based uponvarious contracts between POETTM Ethanol Products and its customers, and isfixed upon the transfer of title to POETTM Ethanol Products.

 

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

 

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

 

***Distillers Grains***

 

The distillers grains produced at our plant are sold through POETTMNutrition, Inc. (f/k/a Dakota Gold Marketing), the terms of which aregoverned by a distillers grains marketing agreement. As our exclusive marketingagent, POETTM Nutrition markets and sells the distillers grains to customers.The price received from the sale of distillers grain is the price received fromthe customers with which POETTM Nutrition has negotiated and entered into a contractfor sale.

 

We produce at our plant three variations of distillers grains which aremarketed through POETTM Nutrition: 1) DDGS; 2) Dakota GoldTM; and 3) distillerswet grains. Dakota GoldTM is DDGS which is certified by POETTM Nutritionindicating that DDGS meet certain standards and specifications.

 

POETTM Nutrition markets distillers grains to local, regional, nationaland international markets.  We sell and ship a substantial majority of ourdistillers grains to customers in the southwestern and western parts of theU.S., the remainder of which is shipped to other areas of the U.S. and toMexico.  Shipments to national andinternational markets are primarily completed by the use of rail due to alonger shelf life, whereas shipments to local or regional markets are primarilycompleted by truck.  We also contract with POETTM Nutrition for the use ofrailcars in the shipping of DDGS and Dakota GoldTM, paying POETTM Nutrition aflat fee per railcar in connection with each shipment. By marketing throughPOETTM Nutrition, we are not dependent upon one or a limited number ofcustomers.

 

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

 

**Risk Management**

 

Due to fluctuations in the price of corn and natural gas, we use riskmanagement or hedging strategies to minimize our commodity risk.  Hedgingis a means of protecting the price at which corn and natural gas is bought inthe future.  All of the commodity risk management services relating tocorn and natural gas are provided by POETTM Plant Management in accordance witha corn and natural gas price risk management agreement.  Under the agreement, we pay POETTM PlantManagement an annual flat fee. The agreement is in effect until January 2012,renewing automatically for additional five-year terms unless discontinued byeither party upon written notice prior to the expiration of the term.

 

 

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**Dependence Upon a Single or Few Customers**

 

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

 

**Financial Information about Geographic Areas**

 

Allof our operations are domiciled in the U.S.  All of the products sold toour customers for fiscal years 2007, 2006 and 2005 were produced in the U.S.,and all of our long-lived assets are domiciled in the U.S. In addition, 98% ofour total revenues were derived from sales to customers in the U.S., whereas 2%were derived from sales to customers in Mexico.

 

**Sources and Availability of Raw Materials**

 

***Corn***. Our major raw material forthe production process is corn.  To operate our plant at full name-platecapacity, we require the supply of approximately 27 million bushels of cornannually.  All of our corn requirements are purchased on the open marketfrom local producers and storage elevators. In 2008, we expect a sufficient supply of corn to be available to meetour plant’s bushel requirement.

 

***Steam.*** Our production processrequires a constant supply of steam.  Steam is used for the cooking,evaporation, and distillation processes.  While the production of steam inthe ethanol production process is generally received from an ethanol plant’son-site boilers, our plant receives a substantial portion of its steam from BigStone Plant, a coal fired, electrical generating facility located immediatelyadjacent to our plant. Big Stone Plant is co-owned by three utilities,namely, Otter Tail Corporation, Montana-Dakota Utilities and NorthWesternCorporation. The benefit of steam from Big Stone Plant is that it reduces ourdependence on natural gas for operations.  In 2007, for example, 39% ofour natural gas requirements for operations were replaced directly with steamfrom Big Stone Plant, compared to 48% of our requirements in 2006.

 

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

 

The purchase of steam is governed by a steam sale agreement between usand Big Stone Plant.  The agreement’s tenyear term ends on June 1, 2012, but automatically renews for twoadditional five-year terms unless terminated by either party by providing 12months advance notice.

 

***Natural Gas****.* Our productionprocess requires a constant supply of natural gas.  Natural gas is theprimary energy source for the drying of distillers grains. It is primarilyresponsible for powering the two on-site boilers for the generation of steam inthe event that additional steam is necessary or the supply of steam from BigStone Plant is unexpectedly diminished or interrupted. We contract withCenterPoint Energy Services, Inc., of Houston, Texas, for the supply anddistribution of natural gas to the plant.  In April 2007, Centerpointpurchased from our previous supplier, NorthWestern Public Service, our naturalgas supply agreement. The agreement with CenterPoint is for a term of ten yearsending in 2012.

 

 

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Prior to the completion of our expansion in May 2007, we did notexperience any interruption or shortage of natural gas supply.  However, since completion of expansion, wehave experienced shortages.  When ourplant’s supply of steam from Big Stone Plant is interrupted for any prolongedperiod of time, such as during Big Stone Plant’s general maintenance shutdowns, our plant’s natural gas capacity is insufficient to allow our plant tooperate at its full 75 million gallon name-plate production capacity.Consequently, our plant is required to scale back production during thisperiod. In the fourth quarter of 2007, for example, we were required to scaleback production by approximately 30% for six weeks because Big Stone Plant wasshut down for maintenance.  We arecurrently exploring options to increase our natural gas supply in order toallow us to operate at full name-plate production when Big Stone Plant is shutdown.

 

***Electricity***. Ourproduction process requires a constant supply of electricity.  Electricityis necessary to generate lighting and to power the machinery and equipment atthe plant.  We contract  with OtterTail Power Company of Otter Tail, Minnesota, to provide us with all of ourelectric power requirements.  The agreement automatically renews for oneyear terms unless terminated by either party by providing 12 months advancewritten notice. Since operations were commenced, we have not had  interruptions or shortages in the supply ofelectricity.

 

***Water***. The production processrequires a constant supply of water.  Water is necessary for the slurryand cooking processes, cooling towers and boiler operations.  We contractwith the city of Big Stone City and Big Stone Plant to supply our plant with waterfor the production process.  The agreement with the city of Big Stone Cityis in effect until 2012, and automatically renews for two, five-year termsunless terminated by either party with 12 months advance written notice. Since operations were commenced, the city of Big Stone City and Big Stone Planthave provided us with an ample and consistent supply of water to meetoperational requirements.

 

**Research and Development**

 

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

 

**Competition**

 

***Domestic***

 

We are in direct competition with numerous other ethanol and distillersgrains producers, many of which have significantly greaterresources. Additional ethanol and distillers grains producers alsocontinue to enter the market.  As of February 2008,the ethanol industry has grown to 141 production facilities in the U.S.,compared to 113 production facilities as of February 2007. The largestethanol producers include Archer Daniels Midland, Aventine Renewable Energy,Cargill, and VeraSun Energy Corporation, all of which are capable of producingmore ethanol than we do.  There are numerous 

 

 

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ethanolplants of a similar size to our plant located in the Midwest region. Inaddition, at least 59 new ethanol plants and seven expanding plants, with acombined annual production capacity of over 5.4 billion gallons annually, areset to come into production in the next 18 months, which will increase theethanol production capacity of competitors.  In South Dakota, excludingour plant, there are currently 13 plants in full production and one underconstruction, all of which have a combined production capacity of approximately759 million gallons.  We believe that, despite this concentration andgrowth, we will continue to compete favorably with other ethanol and distillersgrains’ producers because of our plant’s existing efficiencies, the use of newtechnology from POETTM Research, and the marketing arrangements with thecompanies owned by POETTM, LLC.

 

The following table identifies most of the producers in the U.S. alongwith their production capacities.

 
| ** **                                 | ** ** | ** **          | ** ** | ** **    | ** ** | ** **   | ** ** | **Under**         | ** ** |
|--------------------------------------------|------------|---------------------|------------|---------------|------------|--------------|------------|-------------------|------------|
| ** **                                 | ** ** | ** **          | ** ** | ** **    | ** ** | **Current**  | ** ** | **Construction/** | ** ** |
| ** **                                 | ** ** | ** **          | ** ** | ** **    | ** ** | **Capacity** | ** ** | **Expansions**    | ** ** |
| **Company**                                | ** ** | **Location**        | ** ** | **Feedstock** | ** ** | **(mgy)**    | ** ** | **(mgy)**         | ** ** |
| Abengoa Bioenergy Corp.                    |       | York, NE            |       | Corn/milo     |       | 55           |       |              |       |
|                                       |       | Colwich, KS         |       |          |       | 25           |       |              |       |
|                                       |       | Portales, NM        |       |          |       | 30           |       |              |       |
|                                       |       | Ravenna, NE         |       |          |       | 88           |       |              |       |
| Aberdeen Energy*                           |       | Mina, SD            |       | Corn          |       |         |       | 100               |       |
| Absolute Energy, LLC*                      |       | St. Ansgar, IA      |       | Corn          |       |         |       | 100               |       |
| ACE Ethanol, LLC                           |       | Stanley, WI         |       | Corn          |       | 41           |       |              |       |
| Adkins Energy, LLC*                        |       | Lena, IL            |       | Corn          |       | 40           |       |              |       |
| Advanced Bioenergy                         |       | Fairmont, NE        |       | Corn          |       | 100          |       |              |       |
| AGP*                                       |       | Hastings, NE        |       | Corn          |       | 52           |       |              |       |
| Agri-Energy, LLC*                          |       | Luverne, MN         |       | Corn          |       | 21           |       |              |       |
| Al-Corn Clean Fuel*                        |       | Claremont, MN       |       | Corn          |       | 35           |       | 15                |       |
| Amaizing Energy, LLC*                      |       | Denison, IA         |       | Corn          |       | 48           |       |              |       |
|                                       |       | Atlantic, IA        |       | Corn          |       |         |       | 110               |       |
| Archer Daniels Midland                     |       | Decatur, IL         |       | Corn          |       | 1,070        |       | 550               |       |
|                                       |       | Cedar Rapids, IA    |       | Corn          |       |         |       |              |       |
|                                       |       | Clinton, IA         |       | Corn          |       |         |       |              |       |
|                                       |       | Columbus, NE        |       | Corn          |       |         |       |              |       |
|                                       |       | Marshall, MN        |       | Corn          |       |         |       |              |       |
|                                       |       | Peoria, IL          |       | Corn          |       |         |       |              |       |
|                                       |       | Wallhalla, ND       |       | Corn/barley   |       |         |       |              |       |
| Arkalon Energy, LLC                        |       | Liberal, KS         |       | Corn          |       | 110          |       |              |       |
| Aventine Renewable Energy, LLC             |       | Pekin, IL           |       | Corn          |       | 207          |       | 226               |       |
|                                       |       | Aurora, NE          |       | Corn          |       |         |       |              |       |
|                                       |       | Mt. Vernon, IN      |       | Corn          |       |         |       |              |       |
| Badger State Ethanol, LLC*                 |       | Monroe, WI          |       | Corn          |       | 48           |       |              |       |
| Big River Resources, LLC*                  |       | West Burlington, IA |       | Corn          |       | 52           |       |              |       |
| BioFuel Energy - Pioneer Trail Energy, LLC |       | Wood River, NE      |       | Corn          |       |         |       | 115               |       |
| BioFuel Energy - Buffalo Lake Energy, LLC  |       | Fairmont, MN        |       | Corn          |       |         |       | 115               |       |

 

 

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| Blue Flint Ethanol                      |   | Underwood, ND     |   | Corn               |   | 50     |   |   |   |
|-----------------------------------------|--------|-------------------|--------|--------------------|--------|--------|--------|--------|--------|
| Bonanza Energy, LLC                     |   | Garden City, KS   |   | Corn/milo          |   | 55     |   |   |   |
| Bushmills Ethanol, Inc.*           |   | Atwater, MN       |   | Corn               |   | 40     |   |   |   |
| Calgren                                 |   | Pixley, CA        |   | Corn               |   |   |   | 55     |   |
| Cardinal Ethanol                        |   | Harrisville, IN   |   | Corn               |   |   |   | 100    |   |
| Cargill, Inc.                      |   | Blair, NE         |   | Corn               |   | 85     |   |   |   |
|                                    |   | Eddyville, IA     |   | Corn               |   | 35     |   |   |   |
| Cascade Grain                           |   | Clatskanie, OR    |   | Corn               |   |   |   | 108    |   |
| Castle Rock Renewable Fuels, LLC        |   | Necedah, WI       |   | Corn               |   |   |   | 50     |   |
| Celunol                                 |   | Jennings, LA      |   | Sugar cane bagasse |   |   |   | 1.5    |   |
| Center Ethanol Company                  |   | Sauget, IL        |   | Corn               |   |   |   | 54     |   |
| Central Indiana Ethanol, LLC            |   | Marion, IN        |   | Corn               |   | 40     |   |   |   |
| Central MN Ethanol Coop*                |   | Little Falls, MN  |   | Corn               |   | 21.5   |   |   |   |
| Chief Ethanol                           |   | Hastings, NE      |   | Corn               |   | 62     |   |   |   |
| Chippewa Valley Ethanol Co.*            |   | Benson, MN        |   | Corn               |   | 45     |   |   |   |
| Cilion Ethanol                          |   | Keyes, CA         |   | Corn               |   |   |   | 50     |   |
| Commonwealth Agri-Energy, LLC*          |   | Hopkinsville, KY  |   | Corn               |   | 33     |   |   |   |
| Corn, LP*                               |   | Goldfield, IA     |   | Corn               |   | 50     |   |   |   |
| Cornhusker Energy Lexington, LLC        |   | Lexington, NE     |   | Corn               |   | 40     |   |   |   |
| Corn Plus, LLP*                         |   | Winnebago, MN     |   | Corn               |   | 44     |   |   |   |
| Coshoctan Ethanol, OH                   |   | Coshoctan, OH     |   | Corn               |   |   |   | 60     |   |
| Dakota Ethanol, LLC*                    |   | Wentworth, SD     |   | Corn               |   | 50     |   |   |   |
| DENCO, LLC                              |   | Morris, MN        |   | Corn               |   | 21.5   |   |   |   |
| E Energy Adams, LLC                     |   | Adams, NE         |   | Corn               |   | 50     |   |   |   |
| E Caruso (Goodland Energy Center)       |   | Goodland, KS      |   | Corn               |   |   |   | 20     |   |
| East Kansas Agri-Energy, LLC*           |   | Garnett, KS       |   | Corn               |   | 35     |   |   |   |
| Elkhorn Valley Ethanol, LLC             |   | Norfolk, NE       |   | Corn               |   | 40     |   |   |   |
| ESE Alcohol Inc.                        |   | Leoti, KS         |   | Seed corn          |   | 1.5    |   |   |   |
| Ethanol Grain Processors, LLC           |   | Obion, TN         |   | Corn               |   |   |   | 100    |   |
| First United Ethanol, LLC (FUEL)        |   | Mitchell Co., GA  |   | Corn               |   |   |   | 100    |   |
| Front Range Energy, LLC                 |   | Windsor, CO       |   | Corn               |   | 40     |   |   |   |
| Gateway Ethanol                         |   | Pratt, KS         |   | Corn               |   | 55     |   |   |   |
| Glacial Lakes Energy, LLC*              |   | Watertown, SD     |   | Corn               |   | 100    |   |   |   |
| Global Ethanol/Midwest Grain Processors |   | Lakota, IA        |   | Corn               |   | 95     |   |   |   |
|                                    |   | Riga, MI          |   | Corn               |   | 57     |   |   |   |
| Golden Cheese Company of California*    |   | Corona, CA        |   | Cheese whey        |   | 5      |   |   |   |
| Golden Grain Energy, LLC*               |   | Mason City, IA    |   | Corn               |   | 110    |   | 50     |   |
| Golden Triangle Energy, LLC*            |   | Craig, MO         |   | Corn               |   | 20     |   |   |   |
| Grand River Distribution                |   | Cambria, WI       |   | Corn               |   |   |   | 40     |   |
| Grain Processing Corp.                  |   | Muscatine, IA     |   | Corn               |   | 20     |   |   |   |
| Granite Falls Energy, LLC*              |   | Granite Falls, MN |   | Corn               |   | 52     |   |   |   |
| Greater Ohio Ethanol, LLC               |   | Lima, OH          |   | Corn               |   |   |   | 54     |   |
| Green Plains Renewable Energy           |   | Shenandoah, IA    |   | Corn               |   | 50     |   |   |   |
|                                    |   | Superior, IA      |   | Corn               |   |   |   | 50     |   |
| Hawkeye Renewables, LLC                 |   | Iowa Falls, IA    |   | Corn               |   | 105    |   |   |   |

 

 

10

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|                                  |   | Fairbank, IA     |   | Corn              |   | 115    |   |   |   |
|---------------------------------------|--------|------------------|--------|-------------------|--------|--------|--------|--------|--------|
|                                  |   | Menlo, IA        |   | Corn              |   |   |   | 100    |   |
|                                  |   | Shell Rock, IA   |   | Corn              |   |   |   | 110    |   |
| Heartland Corn Products*              |   | Winthrop, MN     |   | Corn              |   | 100    |   |   |   |
| Heartland Grain Fuels, LP*            |   | Aberdeen, SD     |   | Corn              |   | 9      |   |   |   |
|                                  |   | Huron, SD        |   | Corn              |   | 12     |   | 18     |   |
| Heron Lake BioEnergy, LLC             |   | Heron Lake, MN   |   | Corn              |   |   |   | 50     |   |
| Holt County Ethanol                   |   | O’Neill, NE |   | Corn              |   |   |   | 100    |   |
| Husker Ag, LLC*                       |   | Plainview, NE    |   | Corn              |   | 26.5   |   |   |   |
| Idaho Ethanol Processing              |   | Caldwell, ID     |   | Potato Waste      |   | 4      |   |   |   |
| Illinois River Energy, LLC            |   | Rochelle, IL     |   | Corn              |   | 50     |   |   |   |
| Indiana Bio-Energy                    |   | Bluffton, IN     |   | Corn              |   |   |   | 101    |   |
| Iroquois Bio-Energy Company, LLC      |   | Rensselaer, IN   |   | Corn              |   | 40     |   |   |   |
| KAAPA Ethanol, LLC*                   |   | Minden, NE       |   | Corn              |   | 40     |   |   |   |
| Kansas Ethanol, LLC                   |   | Lyons, KS        |   | Corn              |   |   |   | 55     |   |
| KL Process Design Group               |   | Upton, WY        |   | Wood waste        |   | 1.5    |   |   |   |
| Land O’ Lakes*                   |   | Melrose, MN      |   | Cheese whey       |   | 2.6    |   |   |   |
| Levelland/Hockley County Ethanol, LLC |   | Levelland, TX    |   | Corn              |   |   |   | 40     |   |
| Lifeline Foods, LLC                   |   | St. Joseph, MO   |   | Corn              |   | 40     |   |   |   |
| Lincolnland Agri-Energy, LLC*         |   | Palestine, IL    |   | Corn              |   | 48     |   |   |   |
| Lincolnway Energy, LLC*               |   | Nevada, IA       |   | Corn              |   | 50     |   |   |   |
| Little Sioux Corn Processors, LP*     |   | Marcus, IA       |   | Corn              |   | 52     |   |   |   |
| Marquis Energy, LLC                   |   | Hennepin, IL     |   | Corn              |   |   |   | 100    |   |
| Marysville Ethanol, LLC               |   | Marysville, MI   |   | Corn              |   |   |   | 50     |   |
| Merrick & Company            |   | Golden, CO       |   | Waste beer        |   | 3      |   |   |   |
| MGP Ingredients, Inc.            |   | Pekin, IL        |   | Corn/wheat starch |   | 78     |   |   |   |
|                                  |   | Atchison, KS     |   |              |   |   |   |   |   |
| Mid America Agri Products/Wheatland   |   | Madrid, NE       |   | Corn              |   |   |   | 44     |   |
| Mid America Agri Products/Horizon     |   | Cambridge, NE    |   | Corn              |   |   |   | 44     |   |
| Mid-Missouri Energy, Inc.*       |   | Malta Bend, MO   |   | Corn              |   | 45     |   |   |   |
| Midwest Renewable Energy, LLC         |   | Sutherland, NE   |   | Corn              |   | 25     |   |   |   |
| Minnesota Energy*                     |   | Buffalo Lake, MN |   | Corn              |   | 18     |   |   |   |
| NEDAK Ethanol                         |   | Atkinson, NE     |   | Corn              |   |   |   | 44     |   |
| New Energy Corp.                      |   | South Bend, IN   |   | Corn              |   | 102    |   |   |   |
| North Country Ethanol, LLC*           |   | Rosholt, SD      |   | Corn              |   | 20     |   |   |   |
| Northeast Biofuels                    |   | Volney, NY       |   | Corn              |   |   |   | 114    |   |
| Northwest Renewable, LLC              |   | Longview, WA     |   | Corn              |   |   |   | 55     |   |
| Otter Tail Ag Enterprises             |   | Fergus Falls, MN |   | Corn              |   |   |   | 57.5   |   |
| Pacific Ethanol                       |   | Madera, CA       |   | Corn              |   | 40     |   |   |   |
|                                  |   | Boardman, OR     |   | Corn              |   | 40     |   |   |   |
|                                  |   | Burley, ID       |   | Corn              |   |   |   | 50     |   |
|                                  |   | Stockton, CA     |   | Corn              |   |   |   | 50     |   |
| Panda Ethanol                         |   | Hereford, TX     |   | Corn/milo         |   |   |   | 115    |   |
| Parallel Products                     |   | Louisville, KY   |   | Beverage waste    |   | 5.4    |   |   |   |
|                                  |   | R. Cucamonga, CA |   |              |   |   |   |   |   |
| Patriot Renewable Fuels, LLC          |   | Annawan, IL      |   | Corn              |   |   |   | 100    |   |

 

 

11

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| Penford Products                            |   | Cedar Rapids, IA       |   | Corn       |   |   |   | 45     |   |
|---------------------------------------------|--------|------------------------|--------|------------|--------|--------|--------|--------|--------|
| Phoenix Biofuels                            |   | Goshen, CA             |   | Corn       |   | 25     |   |   |   |
| Pinal Energy, LLC                           |   | Maricopa, AZ           |   | Corn       |   | 55     |   |   |   |
| Pine Lake Corn Processors, LLC*             |   | Steamboat Rock, IA     |   | Corn       |   | 20     |   |   |   |
| Plainview BioEnergy, LLC                    |   | Plainview, TX          |   | Corn       |   |   |   | 100    |   |
| Platinum Ethanol, LLC*                      |   | Arthur, IA             |   | Corn       |   |   |   | 110    |   |
| Plymouth Ethanol, LLC*                      |   | Merrill, IA            |   | Corn       |   |   |   | 50     |   |
| POETTM                                  |   | Sioux Falls, SD        |   |       |   | 1,208  |   | 327    |   |
|                                        |   | Alexandria, IN         |   | Corn       |   |   |   | #      |   |
|                                        |   | Ashton, IA             |   | Corn       |   |   |   |   |   |
|                                        |   | Big Stone, SD          |   | Corn       |   |   |   |   |   |
|                                        |   | Bingham Lake, MN       |   | Corn       |   |   |   |   |   |
|                                        |   | Caro, MI               |   | Corn       |   |   |   |   |   |
|                                        |   | Chancellor, SD         |   | Corn       |   |   |   |   |   |
|                                        |   | Coon Rapids, IA        |   | Corn       |   |   |   |   |   |
|                                        |   | Corning, IA            |   | Corn       |   |   |   |   |   |
|                                        |   | Emmetsburg, IA         |   | Corn       |   |   |   |   |   |
|                                        |   | Fostoria, OH           |   | Corn       |   |   |   | #      |   |
|                                        |   | Glenville, MN          |   | Corn       |   |   |   |   |   |
|                                        |   | Gowrie, IA             |   | Corn       |   |   |   |   |   |
|                                        |   | Groton, SD             |   | Corn       |   |   |   |   |   |
|                                        |   | Hanlontown, IA         |   | Corn       |   |   |   |   |   |
|                                        |   | Hudson, SD             |   | Corn       |   |   |   |   |   |
|                                        |   | Jewell, IA             |   | Corn       |   |   |   |   |   |
|                                        |   | Laddonia, MO           |   | Corn       |   |   |   |   |   |
|                                        |   | Lake Crystal, MN       |   | Corn       |   |   |   |   |   |
|                                        |   | Leipsic, OH            |   | Corn       |   |   |   |   |   |
|                                        |   | Macon, MO              |   | Corn       |   |   |   |   |   |
|                                        |   | Marion, OH             |   | Corn       |   |   |   | #      |   |
|                                        |   | Mitchell, SD           |   | Corn       |   |   |   |   |   |
|                                        |   | North Manchester, IN   |   | Corn       |   |   |   | #      |   |
|                                        |   | Portland, IN           |   | Corn       |   |   |   |   |   |
|                                        |   | Preston, MN            |   | Corn       |   |   |   |   |   |
|                                        |   | Scotland, SD           |   | Corn       |   |   |   |   |   |
| Prairie Horizon Agri-Energy, LLC            |   | Phillipsburg, KS       |   | Corn       |   | 40     |   |   |   |
| Quad-County Corn Processors*                |   | Galva, IA              |   | Corn       |   | 27     |   |   |   |
| Range Fuels                                 |   | Soperton, GA           |   | Wood waste |   |   |   | 20     |   |
| Red Trail Energy, LLC                       |   | Richardton, ND         |   | Corn       |   | 50     |   |   |   |
| Redfield Energy, LLC*                       |   | Redfield, SD           |   | Corn       |   | 50     |   |   |   |
| Reeve Agri-Energy                           |   | Garden City, KS        |   | Corn/milo  |   | 12     |   |   |   |
| Renew Energy                                |   | Jefferson Junction, WI |   | Corn       |   | 130    |   |   |   |
| Siouxland Energy & Livestock Coop* |   | Sioux Center, IA       |   | Corn       |   | 60     |   |   |   |
| Siouxland Ethanol, LLC                      |   | Jackson, NE            |   | Corn       |   | 50     |   |   |   |
| Southwest Iowa Renewable Energy, LLC*       |   | Council Bluffs, IA     |   | Corn       |   |   |   | 110    |   |

 

 

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| Sterling Ethanol, LLC                                    |       | Sterling, CO      |   | Corn              |   | 42           |   |        |   |
|----------------------------------------------------------|------------|-------------------|--------|-------------------|--------|--------------|--------|-------------|--------|
| Tate & Lyle                                     |       | Loudon, TN        |   | Corn              |   | 67           |   | 38          |   |
|                                                     |       | Ft. Dodge, IA     |   | Corn              |   |         |   | 105         |   |
| The Andersons Albion Ethanol LLC                         |       | Albion, MI        |   | Corn              |   | 55           |   |        |   |
| The Andersons Clymers Ethanol, LLC                       |       | Clymers, IN       |   | Corn              |   | 110          |   |        |   |
| The Andersons Marathon Ethanol, LLC                      |       | Greenville, OH    |   | Corn              |   | 110          |   |        |   |
| Tharaldson Ethanol                                       |       | Casselton, ND     |   | Corn              |   |         |   | 110         |   |
| Trenton Agri Products, LLC                               |       | Trenton, NE       |   | Corn              |   | 40           |   |        |   |
| United Ethanol                                           |       | Milton, WI        |   | Corn              |   | 52           |   |        |   |
| United WI Grain Producers, LLC*                          |       | Friesland, WI     |   | Corn              |   | 49           |   |        |   |
| US BioEnergy Corp.                                       |       | Albert City, IA   |   | Corn              |   | 310          |   | 440         |   |
|                                                     |       | Woodbury, MI      |   | Corn              |   |         |   |        |   |
|                                                     |       | Hankinson, ND     |   | Corn              |   |         |   | #           |   |
|                                                     |       | Central City , NE |   | Corn              |   |         |   | #           |   |
|                                                     |       | Ord, NE           |   | Corn              |   |         |   |        |   |
|                                                     |       | Dyersville, IA    |   | Corn              |   |         |   | #           |   |
|                                                     |       | Janesville, MN    |   | Corn              |   |         |   | #           |   |
|                                                     |       | Marion, SD        |   | Corn              |   |         |   |        |   |
| Utica Energy, LLC                                        |       | Oshkosh, WI       |   | Corn              |   | 48           |   |        |   |
| VeraSun Energy Corporation                               |       | Aurora, SD        |   | Corn              |   | 560          |   | 330         |   |
|                                                     |       | Ft. Dodge, IA     |   | Corn              |   |         |   |        |   |
|                                                     |       | Albion, NE        |   | Corn              |   |         |   |        |   |
|                                                     |       | Charles City, IA  |   | Corn              |   |         |   |        |   |
|                                                     |       | Linden, IN        |   | Corn              |   |         |   |        |   |
|                                                     |       | Welcome, MN       |   | Corn              |   |         |   | #           |   |
|                                                     |       | Hartely, IA       |   | Corn              |   |         |   | #           |   |
|                                                     |       | Bloomingburg, OH  |   | Corn              |   |         |   | #           |   |
| Western New York Energy, LLC                             |       | Shelby, NY        |   | Corn              |   | 50           |   |        |   |
| Western Plains Energy, LLC*                              |       | Campus, KS        |   | Corn              |   | 45           |   |        |   |
| Western Wisconsin Renewable Energy, LLC*                 |       | Boyceville, WI    |   | Corn              |   | 40           |   |        |   |
| White Energy                                             |       | Hereford, TX      |   | Corn/Milo         |   | 100          |   |        |   |
|                                                     |       | Russell, KS       |   | Milo/wheat starch |   | 48           |   |        |   |
| Wind Gap Farms                                           |       | Baconton, GA      |   | Brewery waste     |   | 0.4          |   |        |   |
| Renova Energy                                            |       | Torrington, WY    |   | Corn              |   | 5            |   |        |   |
| Xethanol BioFuels, LLC                                   |       | Blairstown, IA    |   | Corn              |   | 5            |   |        |   |
| Yuma Ethanol                                             |       | Yuma, CO          |   | Corn              |   | 40           |   |        |   |
| **Total Current Capacity at 141 ethanol  biorefineries** | ** ** | ** **        |   |              |   | **7,999.9**  |   |        |   |
| **Total Under Construction (59)/Expansions (7)**         | ** ** | ** **        |   |              |   |         |   | **5,406.0** |   |
| **Total Capacity**                                       | ** ** | ** **        |   |              |   | **13,405.9** |   |        |   |

 

----

*locally-owned

#plant under construction Updated:  February 12, 2008

 

 

13

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***International***

 

Ethanol production is expanding internationally.  Brazil has longbeen the world’s largest producer and exporter of ethanol, although since 2005ethanol production in the U.S. has exceeded Brazilian production. Ethanol isproduced more cheaply in Brazil than in the U.S. because of the use ofsugarcane, a less expensive raw material alternative to corn. However,because of various tariffs on the importation of ethanol into the U.S., theprice of ethanol produced in the U.S. is currently more competitive thanethanol imported from Brazil.  In the event that these tariffs are reducedor eliminated, which are scheduled to expire in December 2008, the priceof ethanol produced in the U.S. may become less competitive, which couldadversely impact our ability to sell ethanol.

 

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

 

***Alternative Production Methods and Fuels***

 

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

 

Further,a number of automotive, industrial and power generation manufacturers aredeveloping alternative clean power systems using fuel cells or clean burninggaseous fuels.  Like ethanol, the emerging fuel cell industry offers atechnological option to address increasing worldwide energy costs, thelong-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing powersources because of their higher efficiency, reduced noise and lower emissions.Fuel cell industry participants are currently targeting the transportation,stationary power and portable power markets in order to decrease fuel costs,lessen dependence on crude oil and reduce harmful emissions.  If the fuelcell and hydrogen industries continue to expand and gain broad acceptance andhydrogen becomes readily available to consumers for motor vehicle use, we maynot be able to compete effectively.  Thisadditional competition could reduce the demand for ethanol, which wouldnegatively impact our profitability.

 

***Distillers Grains***

 

We also face direct competition with numerous ethanol producers thatproduce distillers grains as a by-product of the production process.Sales of distillers grainsare highly dependent on product quality, availability, and price of competingfeed ingredients such as corn and soybean meal. As domestic ethanol productionincreases, the amount of distillers grains entering the market is expected toincrease and may reach the point of market saturation. If it reaches thispoint, we may need to sell an increasing supply of DDGS and Dakota GoldTM tointernational markets.

 

 

14

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** **

**Federal and State Government Supports**

 

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

 

***The Renewable Fuels Standard***

 

The most recent ethanol supports are contained in the EnergyIndependence and Security Act of 2007 (HR 6) which was signed into law on December 19,2007. The bill increases the renewable fuels standard, or RFS, which sets theannual requirements for the amount of renewable fuels produced and used inmotor vehicles. The first RFS was established under the Energy Policy Act of2005, which required that 4 billion gallons of ethanol and biodiesel be used in2006 and 7.5 billion gallons be used by 2012.Under HR 6, however, the RFS is increasedfurther, requiring 9 billion gallons of renewable fuels in 2008 andprogressively increasing to 36 billion gallons by 2022. Beginning in 2010, aspecific volume of the annual mandate is met by ethanol derived from cellulosicfeedstocks, as opposed to corn. The specified volume of cellulosic ethanol userequired increases incrementally, culminating in the use of 16 billion gallonsof cellulosic ethanol annually in 2022. While the precise impact of HR 6 cannotyet be determined, we anticipate that it will maintain or enhance production ofethanol in the U.S.

 

***The Clean Air Act and Oxygenated Gasoline Program***

 

Ethanol sales have been favorably affected by the Clean Air Actamendments of 1990, particularly the Oxygenated Gasoline Program, which becameeffective November 1, 1992. The Oxygenated Gasoline Program requires thesale of oxygenated motor fuels during the winter months in certain majormetropolitan areas to reduce carbon monoxide pollution. Ethanol use has alsoincreased as the result of a second Clean Air Act program, the ReformulatedGasoline Program. This program became effective January 1, 1995 andrequires the sale of reformulated gasoline in numerous areas to reducepollutants, specifically those that contribute to ground level ozone, betterknown as smog. Reformulated gasoline that meets the performance criteria set bythe Clean Air Act can be reformulated in a number of ways, including theaddition of oxygenates to the gasoline. The two major oxygenates added toreformulated gasoline pursuant to these programs are MTBE and ethanol. MTBE hasbeen linked to groundwater contamination and has been banned from use inapproximately 25 states.

 

***TheVolumetric Ethanol Excise Tax Credit***

 

The use of ethanol as an alternative fuel source has been aided byfederal tax policy. In 2004, the Volumetric Ethanol Excise Tax Credit (“VEETC”)was created. This law amended the federal gasoline excise tax structureeffective January 1, 2005. As amended, the law creates a new volumetricethanol excise tax credit of $0.51 per gallon of ethanol blended at 10%. Thecredit provided by VEETC replaced an exemption which allowed ethanol blendedfuel to be taxed at a lower rate than regular gasoline. The use of ethanol as afuel additive is enhanced by the availability of a credit from the federalgasoline excise tax. The VEETC is scheduled to expire on December 31, 2010

 

15

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***Small Ethanol Producer Tax Credit***

 

The Energy Policy Act of 2005 expanded who qualifies for the smallethanol producer tax credit. Historically, small ethanol producers were alloweda 10-cents-per-gallon production income tax credit on up to 15 million gallonsof production annually. The size of the plant eligible for the tax credit waslimited to 30 million gallons. Under the Energy Policy Act, the size limitationon the production capacity for small ethanol producers increased from 30million to 60 million gallons. The tax credit is capped at $1.5 million peryear per producer. Because of our plant’s expansion in May 2007, we are nolonger eligible for this credit.

 

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

 

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

 

***Imported Ethanol Tariffs and Quotas***

 

Currently, there is a $0.54 per gallon tariff on imported ethanol,which is scheduled to expire in 2008.  In addition, ethanol imports from24 countries in Central America and the Caribbean region are exempted from thistariff under the Caribbean Basin Initiative or CBI, which provides thatspecified nations may export annually to the U.S. an aggregate of 7.0% ofU.S. ethanol production, with additional exemptions from ethanol producedfrom feedstock in the Caribbean region over the 7.0% limit.

 

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

 

As of August 2007, 25 states, includingCalifornia and New York, have banned or significantly limited the use ofMTBE due to environmental and public health concerns. Ethanol has served as areplacement for much of the discontinued volumes of MTBE and is expected tocontinue to replace future volumes of MTBE that are removed from the fuelsupply.

 

***South Dakota***

 

In South Dakota, the state provides an incentive production payment toethanol producers operating in South Dakota. The production incentiveconsists of a direct payment to South Dakota ethanol producers of up to $0.20per gallon, which is divided among producers of fuel ethanol within SouthDakota up to a maximum of $1 million per year per plant (a maximum of $83,333per month in 2007) and a maximum of $10 million over the life of a plant. The program caps the payments that can be distributed to all plants based inSouth Dakota in a program year to no more than $7 million in payments in 2007(program year ends on June 30), and every year thereafter. The paymentsare distributed to each plant in proportion to the total number of gallons ofethanol produced and marketed annually by all the plants in South Dakota. As more plants commence production, or existing plants increase production,each plant receives a lower proportionate share of the maximum payment underthe program.

 

16

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**Environmental Regulation and Costs**

 

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

 

·*Title Five Operating Permit from the DENR*.In South Dakota, the Title Five Operating Permit serves as the air quality andoperation permit for our plant. We must conduct ongoing emissions testing toverify compliance with the Title Five Operating permit.  This permit is due for renewal in September 2011.

 

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

 

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

 

While we are currently in compliance with all applicable environmentallaws, regulations and  permits, we mustcontinue to comply with the permits and regulatory requirements. To ensurethis, we maintain an on-going compliance program.  Maintaining compliance can also require us toincur expenditures for such things as new or upgraded equipment or processes,some of which can be material and costly at times.

 

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

 

**Management and Employees**

 

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

 

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

 

**Available Information**

 

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

 

Our website is at www.poetenergy.com, then clicking on “Meet POET,” “Plants,”“Big Stone, SD,” and finally “Becoming an Investor.” Our reports, including ourAnnual Report on Form 10-K, Quarterly Reports on Form 10-Q andCurrent Reports on Form 8-K, are not directly available on our website aswe instruct readers to obtain the reports through a link to www.sec.gov.However, we provide paper copies of the reports to any person who requests it,free of charge. Beginning in early May 2008, we will make available on ourwebsite our most recent Annual Report on Form 10-K.

 

**Item 1A. Risk Factors.**

 

**Risks Related to Our Business**

 

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

 

***Our business is highly sensitive tocorn prices, and we generally cannot pass on increases in corn prices to ourcustomers.***Cornis the principal raw material we use to produce ethanol and distillers grains.Because ethanol competes with fuels that are not corn-based, we generally areunable to pass along increased corn costs to our customers, and, accordingly,rising corn prices tend to produce lower profit margins. At certain levels,corn prices would make ethanol uneconomical to use in fuel markets. The priceof corn is influenced by weather conditions (especially droughts) and otherfactors affecting crop yields, farmer planting decisions and general economic,market and regulatory factors, including government policies and subsidies withrespect to agriculture and international trade, and global and local supply anddemand. The price of corn has fluctuated significantly in the past and mayfluctuate significantly in the future. In addition, increasing domestic ethanolcapacity could boost demand for corn and result in increased corn prices. Wemay also have difficulty from time to time in purchasing corn on economicalterms due to supply shortages. Any supply shortage could require us to suspendoperations until corn became available at economical terms. Suspension ofoperations could have a material adverse effect on our business, results ofoperations and financial condition.

 

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***The price of distillers grains isaffected by the price of other commodity products,  and decreases in the price of thesecommodities could decrease the price of distillers grains***.  Distillersgrains compete with other protein-based animal feed products such as soybeanmeal. The price of distillers grains may decrease when the price of competingfeed products decrease. The prices of competing animal feed products are basedin part on the prices of the commodities from which they are derived. Downwardpressure on commodity prices, such as soybeans, will generally cause the priceof competing animal feed products to decline, resulting in downward pressure onthe price of distillers grains. As a result, we may experience lower revenueand income.

 

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

 

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

 

***Our business is not diversifiedbecause it is limited to the fuel grade ethanol industry, which may limit ourability to adapt to changing business and market conditions.***   Oursole business is the production and sale of fuel grade ethanol produced fromcorn and its by-product, distillers grains. Our plant does not have thecapability of producing industrial or food and beverage grade ethanol, which isused in such products as cosmetics, perfume, paint thinner and vinegar. Ourplant is also not equipped to capture carbon dioxide, another co-product of theethanol production process. The lack of diversification of our business maylimit our ability to adapt to changing business and market conditions.

 

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

 

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

 

***Interruptions in energy suppliescould delay or halt production at our plant, which will reduce ourprofitability.***  Ethanol production requires a constant andconsistent supply of energy, including electricity, steam and naturalgas.  If there is any interruption in our plant’s supply of energy forwhatever reason, such as supply, delivery or mechanical problems, we may berequired to halt production.  If production is halted for any extendedperiod of time, it will reduce our profitability.  Our  plant has agreements with various companiesto provide it with necessary energy, but we cannot assure that these companieswill continue to be able to supply reliably such energy.  If our plantwere to suffer interruptions in energy supply, our business would be harmed.

 

***We have limited natural gas available foroperations and rely heavily on the adjacent Big Stone Plant.*** We rely on BigStone Plant to supply approximately 50% of our energy needs for production.  When Big Stone Plant steam is not operatingor the transfer of steam to our plant is interrupted, we rely on our naturalgas supply to power our boilers in order to generate steam for the productionprocess.  The natural gas supply,however, is limited as it alone cannot power our plant to operate at its full75 million annual name-plate production capacity. Therefore, if Big Stone Plantshuts down for any prolonged period of time, our plant must reduce productionbased on the amount of natural gas that is supplied to the plant. Reducingproduction could have a material adverse effect on our revenues andprofitability.

 

**Risks Related to the Industry**

 

***Overcapacity in the industry mayresult in a decrease in the price of ethanol and distillers grains.***Excess capacityin the ethanol industry would have an adverse impact on our results ofoperations, cash flows and general financial condition. Excess capacitymay also result or intensify from increases in production capacity coupledwith insufficient demand. If the demand for ethanol does not grow at the samepace as increases in supply, we would expect the price for ethanol to decline.If excess capacity in the ethanol industry occurs, the market price of ethanolmay decline to a level that is inadequate to generate sufficient cash flowto cover our costs. In addition, because ethanol production produces distillersgrains as a by-product, increased ethanol production could lead to increasedsupplies of distillers grains. An increase in the supply of distillers grains,without corresponding increases in demand, could lead to lower prices or aninability to sell our distillers grains. Any decline in the price of distillersgrain or the distillers grain market generally could have a material adverseeffect on our business.

 

***We operate in an intenselycompetitive industry and there is no assurance that we will be able to competeeffectively.***  The ethanol business is highlycompetitive, and other companies presently in the market, or that are about toenter the market, could adversely affect prices for the products we sell.Commodity groups in the Midwest have encouraged the construction of ethanolplants, and there are 

 

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numerousother entities considering the construction of ethanol plants. Nationally, theethanol industry is becoming much more competitive given the substantialconstruction and expansion occurring in the industry. We also compete withother ethanol producers such as Archer Daniels Midland, Cargill, among others,all of which are capable of producing significantly greater quantities ofethanol than the amount we produce.  In light of such competition, thereis no assurance that we will be able to compete effectively in the industry.

 

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

 

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

 

***Consumer resistance to the use ofethanol based on the belief that ethanol is expensive, adds to air pollution,harms engines and takes more energy to produce than it contributes, may affectthe demand for ethanol which could affect our ability to market our product*****.  **Certain individuals believe that use of ethanol willhave a negative impact on retail prices.  Many also believe that ethanoladds to air pollution and harms car and truck engines.  Still otherconsumers believe that the process of producing ethanol actually uses morefossil energy, such as oil and natural gas, than the amount of ethanol that isproduced.  These consumer beliefs could potentially be wide-spread. Ifconsumers choose not to buy ethanol, it would affect the demand for the ethanolthat we produce which could lower demand for ethanol and negatively affect ourprofitability.

 

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**Risks Related to Governmental and Regulatory Action**

 

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

 

***Tariffs effectively limit imported ethanol into theU.S., and their reduction or elimination could undermine the ethanol industryin the U.S.*******Imported ethanol isgenerally subject to a $0.54 per gallon tariff that was designed to offsetthe $0.51 per gallon ethanol incentive available under the federal excisetax incentive program for refineries that blend ethanol in their fuel. Thereis, however, a special exemption from this tariff for ethanol imported from 24countries in Central America and the Caribbean Islands, which is limited to atotal of 7% of U.S. ethanol production per year. Imports from the exemptedcountries may increase as a result of new plants in development. Sinceproduction costs for ethanol in these countries are significantly less thanwhat they are in the U.S., the duty-free import of ethanol through thecountries exempted from the tariff may negatively affect the demand fordomestic ethanol and the price at which we sell our ethanol. ** **We do not know theextent to which the volume of imports would increase or the effect onU.S. prices for ethanol if the tariff is not renewed beyond its currentexpiration date in December 2008. Any changes in the tariff or exemptionfrom the tariff could have a material adverse effect on our business andfinancial condition.

 

***Government incentives for ethanolproduction may be eliminated in the future.***The ethanolindustry and our business are assisted by various federal ethanol taxincentives, including those contained in The Energy Independence and SecurityAct of 2007. Under this law, the renewable fuels standard is increased to amandate of 36 billion gallons by 2022. The renewable fuels standard helps supporta market for ethanol that might disappear without this incentive. Theelimination or reduction of this law could reduce the market for ethanol, whichcould reduce prices and our revenues by making it more costly or difficult forus to produce and sell ethanol. If this and other federal tax incentives areeliminated or sharply curtailed, we believe that a decreased demand for ethanolwill result, which could negatively affect our profitability and financialcondition.

 

***Changes in environmental regulationsor violations of the regulations could reduce our profitability.***We are subjectto extensive air, water and other environmental laws and regulations. Inaddition some of these laws require our plant to operate under a number ofenvironmental permits. These laws, regulations and permits can often requireexpensive pollution control equipment or operation changes to limit actual orpotential impacts to the environment. A violation of these laws and regulationsor permit conditions can result in substantial fines, damages, criminalsanctions, permit revocations and/or plant shutdowns. We do not assure you thatwe have been, are or will be at all times in complete compliance with theselaws, regulations or permits or that we have had or have all permits requiredto operate our business. We do not assure you that we will not be subject tolegal actions brought by environmental advocacy groups and other parties foractual or alleged violations of environmental laws or our permits.Additionally, any changes in environmental laws and regulations, both at thefederal and state level, could require us to invest or spend considerableresources in order to comply with future environmental regulations. The expenseof compliance could be significant enough to reduce our profitability andnegatively affect our financial condition.

 

 

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**Item 1B.  UnresolvedStaff Comments.**

 

None.

 

**Item 2.  Properties.**

 

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

 

Ourplant consists of the following main buildings or properties:

 

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

 

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

 

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

 

·                  An evaporationbuilding, which contains evaporators and related equipment.

 

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

 

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

 

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

 

**Item 3.  Legal Proceedings.**

 

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

 

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

 

We did not submit any matter to a vote of our security holders throughthe solicitation of proxies or otherwise during the fourth quarter of 2007.

 

 

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**PART II**

 

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

 

As of March 5, 2008, Northern Growers had 963 members.

 

*Trading Activity and Restrictions*

 

Northern Growers’ capital units are not traded on an establishedtrading market such as a stock exchange or The NASDAQ Stock Market; rather, thecapital units are traded on a “qualified matching service” as defined by thepublicly traded partnership rules of the federal tax code. Under the qualifiedmatching service, interested buyers and sellers of capital units are matched onthe basis of a set of rules and conditions set forth by the federal taxcode, and all trades are subject to board of managers’ approval. NorthernGrowers’ qualified matching service is operated through Alerus SecuritiesCorporation, a registered broker-dealer operating an SEC registered AlternativeTrading System.  The following table contains historical information byquarter for the past two years regarding the trading of capital units under thequalified matching service:

 

| **Quarter (1)**              | ** ** | **Low   Price(1)** | ** ** | **High   Price(1)** | ** ** | **Average   Price(1)** | ** ** | **# of Capital  Units Traded  (1)** | ** ** |
|-----------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|----------------------------------------------------|------------|
| Jan — Mar 2006               |       | $                       | 1.37       |                     | $          | 1.91                        |       | $                                                  | 1.64       |   | 320,000 |   |
| April — Jun 2006        |       | $                       | 1.80       |                     | $          | 2.62                        |       | $                                                  | 2.31       |   | 750,000 |   |
| July — Sept 2006        |       | $                       | 3.15       |                     | $          | 4.35                        |       | $                                                  | 3.40       |   | 731,000 |   |
| Oct — Dec 2006               |       | $                       | 2.85       |                     | $          | 4.30                        |       | $                                                  | 3.52       |   | 245,000 |   |
| Jan —- Mar 2007              |       | $                       | 2.30       |                     | $          | 2.69                        |       | $                                                  | 2.36       |   | 398,000 |   |
| April —- June 2007 |       | $                       | 2.35       |                     | $          | 3.25                        |       | $                                                  | 2.76       |   | 604,500 |   |
| July —-Sept 2007        |       | $                       | 3.01       |                     | $          | 3.25                        |       | $                                                  | 3.20       |   | 77,000 |   |
| Oct —- Dec 2007              |       | $                       | 2.40       |                     | $          | 2.95                        |       | $                                                  | 2.48       |   | 52,500 |   |

 

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

 

There were no issuer purchases of equity securities during the fourthquarter ended December 31, 2007.

 

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

 

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

 

 

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*Distributions*

 

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

 

In 2006, Big Stone made cash distributions to Northern Growers ofapproximately $22.95 million and $6.79 million to its minority member. Northern Growers, in turn, distributed to its members approximately $22.67million, or $0.448 per capital unit.

 

In 2007, Big Stone made cash distributions to Northern Growers ofapproximately $19.52 million and $5.78 million to its minority member. Northern Growers, in turn, distributed to its members approximately $17.32million, or $0.342 per capital unit. Thus far in 2008, Northern Growersdistributed to its members approximately $1.5 million, or $0.03 per capitalunit.

 

The ability to issue similar distributions is substantially dependentupon our profitability, the discretion of our board of managers subject to theprovisions of the Operating Agreement, and the approval from our lender, U.S.Bank. Unless current economic conditions improve, which we do not expect in thenear term, we do not anticipate making similar distributions to members in 2008as in 2007.

 

**Item 6.  Selected Financial Data.**

 

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

 
| ** **                                   | ** ** | **2007**   | ** **  | **2006**   | ** ** | **2005**    | ** ** | **2004**   | ** ** | **2003(1)** | ** ** |
|----------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|------------|------------|-------------|------------|
| **Statement of Operations Data:**            | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** |
| Revenues                                     |       | $          | 138,243,780 |       | $          | 122,837,119 |       | 89,692,708 |       | 86,587,585  |       | 70,857,262 |   |
| Cost of Revenues                             |       | $          | 112,694,987 |       | $          | 62,731,376  |       | 63,552,756 |       | 71,279,883  |       | 58,920,917 |   |
| General and Administrative Expenses          |       | $          | 4,790,117   |       | $          | 6,364,983   |       | 3,913,177  |       | 2,984,237   |       | 2,739,136 |   |
| Income from Operations                       |       | $          | 20,758,676  |       | $          | 53,740,760  |       | 22,226,775 |       | 12,323,465  |       | 9,197,209 |   |
| Interest Expense                             |       | $          | 2,876,464   |       | $          | 1,261,542   |       | 1,317,957  |       | 1,397,591   |       | 1,744,262 |   |
| Minority Interest in Subsidiary Income       |       | $          | (4,269,470  | )          | $          | (12,132,284 | )          | (4,848,463 | )          | (2,528,026  | )          | (1,770,430 | ) |
| Net Income                                   |       | $          | 14,144,720  |       | $          | 40,703,348  |       | 16,157,712 |       | 8,371,332   |       | 5,611,068 |   |
|                                         |       |       |        |       |       |        |       |       |       |        |       |
| Capital Units Outstanding (2)                |       | 50,628,000 |        | 50,628,000 |       | 50,628,000  |       | 50,628,000 |       | 50,628,000  |       |
|                                         |       |       |        |       |       |        |       |       |       |        |       |
| Cash Distributions declared per Capital Unit |       | 0.238      |        | 0.518      |       | 0.230       |       | 0.119      |       | 0.095       |       |
| Net Income per Capital Unit                  |       | 0.279      |        | 0.804      |       | 0.319       |       | 0.165      |       | 0.111       |       |

 

 

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| **Balance Sheet Data:**                  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|------------|------------|------------|------------|
| Working Capital                          |       | $          | 19,723,995  |       | $          | 15,982,171  |       | 9,011,848  |       | 560,046    |       | 194,176 |   |
| Net Property, Plant & Equipment |       | $          | 78,141,027  |       | $          | 66,413,382  |       | 39,097,204 |       | 40,885,964 |       | 41,735,733 |   |
| Total Assets                             |       | $          | 113,580,105 |       | $          | 101,479,908 |       | 59,315,715 |       | 54,678,507 |       | 53,786,201 |   |
| Long-Term Obligations                    |       | $          | 46,794,965  |       | $          | 33,578,810  |       | 17,104,400 |       | 16,387,498 |       | 20,053,377 |   |
| Minority Interest in Subsidiary          |       | $          | 11,631,149  |       | $          | 10,790,823  |       | 7,054,934  |       | 5,715,325  |       | 5,014,499 |   |
| Members’ Equity                     |       | $          | 39,804,399  |       | $          | 38,262,916  |       | 23,949,718 |       | 19,446,001 |       | 17,067,695 |   |
| Book Value per  Capital Unit             |       | $          | 0.786       |       | $          | 0.756       |       | 0.473      |       | 0.384      |       | 0.337 |   |

 

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(1) Northern Growersreorganized from a cooperative to a limited liability company on April 1,2003.

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

 

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

 

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

 

**Overview**

 

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

 

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

 

Our operating and financial performance is largely driven by the pricesat which we sell ethanol and distillers grains and the costs related toproduction. Since 2004, federal and state government incentive programs are animmaterial source of revenue and income. The price of ethanol is influenced byfactors such as prices of unleaded gasoline and the petroleum markets, weather,government policies and programs, and supply and demand. Excess ethanol supplyin the market, in particular, puts downward pressure on the price of ethanol.The price of distillers grains is influenced by the price of corn, soybean mealand other protein-based feed products, and supply and demand. Excess grain supplyin the market, in particular, puts downward pressure on the price of distillergrains.

 

 Our two largest costs ofproduction are corn and natural gas, although our plant’s use of natural gas isoffset by the use of steam supplied from the adjacent Big Stone Plant. The costof natural gas and corn is generally impacted by factors such as supply anddemand, weather, government policies and programs, and our risk managementprogram used to protect against the price volatility of these commodities.

 

 

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**Executive Summary**

 

We generated higher than expected profits in 2007 but significantlylower profits compared to 2006. Our net income decreased from $40.7 million in2006 to $14.1 million in 2007. The major factors driving this result are anincrease in corn costs, an increase in production costs associated with ourplant’s expansion, and a decrease in ethanol prices. Our corn costs increased85% from 2006 to 2007 primarily due to an increase in the market price of corn,which is driven by increased demand from the ethanol industry and lower cornsupply projections. The price of ethanol decreased 11% between periods becauseof excess supply in the industry. Production costs increased after productionvolume increased 22% following the expansion of our plant to a 75 milliongallon facility in May 2007. Partially offsetting this, however, are increases in our revenue fromthe sale of ethanol and distillers grains. Revenue from the sale of ethanolrose because of an increase in sales volume following a 22% increase inproduction.  Revenue from the sale ofdistillers grains increased 31% between periods, due principally to increasesin production and price. The price of distillers grains rose because ofincreases in demand from livestock producers who increased their use ofdistillers grains for feed purposes due to the high price of corn and otherprotein based feed products.

 

We are expecting significant challenges in 2008, which may lead tofurther profit erosion.  Our firstchallenge is dealing with the high price of corn. While the 2007 corn crop inthe U.S. set a record of 13.1 billion bushels harvested, up 24% from 2006, weexpect prices to linger at or above their current level ($5 per bushel as of January 2008)through at least the summer. A factor contributing to this expectation is thelower than projected carryout from 2007. On January 11, 2008, the USDArevised its December carryout projection from 1.797 billion bushels to1.438 billion bushels, because of increased feed use for livestock and otherresidual uses. Another factor, and an additional challenge we face, is theincrease in demand for corn from the ethanol industry. In the U.S., another 5.6billion gallons of ethanol are expected to enter the market in the next 18months, all from new or expanding plants. Unless new markets for ethanol openup to absorb these gallons, we anticipate that prices will remain depressed orpossibly commence a downward trend. The newly enacted renewable fuels standard,or RFS, which mandates the use in the U.S. of 9.0 billion gallons of renewablefuels in 2008 and 15 billion gallons by 2015, though it is expected to createnew markets to absorb this excess supply, the timing of its impact in 2008 andbeyond is uncertain.

 

While challenges lie ahead, we are encouraged by factors that couldpartially counter the effects of these challenges. Distillers grains’ revenuesare expected to remain strong, as the high prices of corn and soybean mealshould make the use of distillers grains more attractive to livestockproducers. We also believe that natural gas costs should remain stable throughat least June because of high inventories nationwide. Further, our plantshould be more efficient as a result of new economies of scale followingexpansion. Nevertheless, we believe it will be difficult to overcome completelythe challenges that lie ahead. Sterner fiscal measures are likely to benecessary, including preserving more cash from operations, which will mean adecrease in distributions to members compared to 2007.

 

 

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**Resultsof Operations**

** **

**Comparisonof years ended December 31, 2007 and December 31, 2006.**

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

 

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

 

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

 

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

 

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

 

Corncosts per bushel increased 85% between periods. The increase is primarily theresult of an approximately 65% increase in the market price of corn betweenperiods.  The market price continued tobe adversely impacted by lower corn carryout from 2006 and from a very strongdemand from the ever-growing ethanol industry. With a lower than projected carryout for 2007 and increased demand fromthe ethanol industry and world markets, we believe that the current trend ofhigh corn prices is likely to remain through 2008.

 

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Also included in theincrease in corn costs is a $1.9 million net loss under our corn price riskmanagement program. Gains and losses that result from a change in value of cornand natural gas hedging and forward contract instruments are recognized in costof revenues as the changes occur. Gains are recognized as a decrease to cost ofrevenues, and losses are recognized as an increase to cost of revenues. For theyear ended December 31, 2007, cost of revenues includes losses of $1.6million from the use of corn hedging instruments. This loss is caused by asignificant increase in the market price of corn in the fourth quarter of 2007and the impact that the price decrease had on the value of our hedginginstruments at December 31, 2007. The remaining part of the $1.9 millionloss is attributed to losses on our forward contracts for corn at December 31,2007.

 

Inaddition, cost of revenues rose because the 22% increase in production volumefollowing expansion increased overall production expenses. Expenses, includingchemicals, depreciation, electricity, and maintenance, all rose directly due toexpansion.

 

*General and Administrative Expenses*- General andadministrative expenses decreased $1.56 million, or 25%,**to $4.80 million for the year ended December 31,2007 from $6.36 million for the year ended December 31, 2006.  Thedecrease is primarily due to a decrease in management incentive fees and costs,which are attributed to a decrease in net income.

 

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

 

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

 

**Comparison of years ended December 31, 2006 and December 31,2005.**

 
| ** **                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                   | ** ** | ** **                       | ** ** | **%** | ** ** | ** ** | ** ** | **%** | ** ** |
| ** **                   | ** ** | ** **                       | ** ** | **of** | ** ** | ** ** | ** ** | **of** | ** ** |
| ** **                   | ** ** | **$**                            | ** ** | **Revenue** | ** ** | **$** | ** ** | **Revenue** | ** ** |
| Revenue                      |       |                             |       |   |   |   |   |   |   |
| Ethanol                      |       | 105,702,927                      |       | 86 | % | 72,633,304 |   | 81 | % |
| Distillers  grains           |       | 16,349,308                       |       | 13 | % | 16,305,319 |   | 18 | % |
| Incentive                    |       | 784,884                          |       | 1 | % | 754,085 |   | 1 | % |
| Total                        |       | 122,837,119                      |       | 100 | % | 89,692,708 |   | 100 | % |
|                         |       |                             |       |   |   |   |   |   |   |
| Cost of Revenues             |       | 62,731,376                       |       | 51 | % | 63,552,756 |   | 71 | % |
|                         |       |                             |       |   |   |   |   |   |   |
| G&A Expenses             |       | 6,364,983                        |       | 5 | % | 3,913,177 |   | 4 | % |
|                         |       |                             |       |   |   |   |   |   |   |
| Other Operating Income (Exp) |       | (905,128                         | )          | (1 | %) | (1,220,600 | ) | (1 | %) |
|                         |       |                             |       |   |   |   |   |   |   |
| Minority Interest            |       | (12,132,284                      | )          | (10 | %) | (4,848,463 | ) | (5 | %) |
|                         |       |                             |       |   |   |   |   |   |   |
| Net Income (Loss)            |       | 40,703,348                       |       | 33 | % | 16,157,712 |   | 18 | % |

 

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*Revenues* -Revenue from the sale ofethanol increased 46% from the year ended December 31, 2005 to the yearended December 31, 2006.  The increase is due to a 41% increase inthe average price of ethanol per gallon and a 4% increase in sales volume.Ethanol prices rose significantly between periods as a result of increaseddemand from refineries and increases in the price of unleaded gasoline in 2006.Refineries increased their demand for ethanol as many accelerated the phase outof MTBE in the refinery process, switching to ethanol in its place.

 

Revenuefrom the sale of distillers grains increased just slightly from the year ended December 31,2005 to the year ended December 31, 2006, the increase being driven by anincrease in sales volume following a slight increase in production volume.

 

Theincentive revenue from the U.S. Department of Agriculture’s Commodity CreditCorporation Bioenergy Program, which terminated on June 30, 2006,decreased $40,000 to $9,000 for the year ended December 31, 2006 from$49,000 for the year ended December 31, 2005. Incentive revenue from theState of South Dakota, in contrast, increased $70,000, or 10%, to $776,000 forthe year ended December 31, 2006 from $705,000 for the year ended December 31,2005.

 

*Cost of Revenues -*Cost of revenues decreased $800,000, or 1%,to $62.7 million for the year ended December 31, 2006 from $63.5 millionfor the year ended December 31, 2005.  Cost of revenues decreased slightlybetween periods because of a decrease in energy costs. Corn costs remainedrelatively constant between periods because a net gain under our corn riskmanagement program offset a rise in the market price of corn.

 

Ourenergy costs decreased 6% from 2005 to 2006. This decrease is due to anincreased use of steam from Big Stone Plant and lower natural gas costs. Our volume usage of steam, the cost of which is less than natural gas,increased 19% from 2005 to 2006 because Big Stone Plant had fewer generalmaintenance shut-downs in 2006 compared to 2005. During the same period,natural gas costs decreased 4% from 2005 due primarily to an 11% decrease inthe cost per unit. This decrease is due to stable natural gas prices in 2006,compared to 2005 when an active hurricane season caused the reverse effect.

 

Corn prices rose 13% between periods because of low corn carryout for2006 and increased demand for corn from the ethanol industry. A $2.9 millionnet gain under our corn risk management program in 2006, however, offset the13% increase. For the year ended December 31, 2006, cost of revenuesincludes losses of $2.7 million from the use of corn hedging instruments. Thisloss is caused by a significant increase in the market price of corn in thefourth quarter of 2006 and its effect on the value of the hedging instrumentsat December 31, 2006. Offsetting this loss is a $5.6 million gain on ourforward contracting for corn.  In August 2006,the prices at the Chicago Board of Trade (CBOT) rose due to a reduction inbushels of corn to be harvested nationwide. But since we had locked in lowerprices for corn under our forward contracts, the value of forward contractsrose and resulted in a $5.6 million gain at December 31, 2006.

 

*General and Administrative Expenses*-General and administrativeexpenses increased $2.45 million, or 63%,**to$6.36 million for the year ended December 31, 2006 from $3.91 million forthe year ended December 31, 2005.  The increase is primarily due toincreased management incentive fees and costs during the year, which are basedon an increase in our profitability.

 

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*Interest Expense*-Interest expense decreased $60,000, or 4%, to$1.26 million for the year ended December 31, 2006 from $1.32 million forthe year ended December 31, 2005.  The decrease in interest expenseis due to a $1.9 million reduction in non-construction related debt outstandingfrom December 31, 2005 to December 31, 2006 as we reduced our debtthrough principal payments.

 

*Net Income -*Net income increased $24.5 million to $40.7million for the year ended December 31, 2006 from $16.2 million for theyear ended December 31, 2005.  This change is caused primarily by, asdiscussed above, an increase in ethanol revenue at a time of relativelyconstant cost of revenues.

 

**Liquidity and Capital Resources**

 

Our primary sources of liquidity are cash provided by operations andborrowings under our $17.0 million revolving credit facilities which arediscussed below under “Indebtedness.” Net working capital is $19.72 million asof December 31, 2007 compared to $15.98 million as of December 31,2006.  The increase in working capital isdue to a $2.17 million reduction in construction related-party payable ($0 at December 31,2007 as all construction projects are complete), as well as a $5.27 millionreduction in distributions payable to Northern Growers’ members and a $2.51million reduction in distributions payable to the minority member.

 

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

 

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

 

*Cash Flow From Operating Activities* - Net cashflow from operating activities decreased $13.5 million between periods, dueprincipally to a decrease in cash provided by net income between periods,offset by an increase in cash provided by inventory. Ethanol inventorydecreased 62% from 2006 to 2007 due to a decrease in the number of gallons ininventory and a decrease in the net realizable value.

 

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

 

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

 

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We believe that cash flows from operations and our revolving debt willbe sufficient to meet our expected capital and liquidity requirements for theforeseeable future. We anticipate that our capital improvement projects in 2008will be miscellaneous in nature and financed with cash from operations.However, because we anticipate less cash flow from operations due to currentmarket forces, we plan to rely more on our revolving debt to fund operations.Further, until we see tangible improvement in the market, we do not anticipatepaying distributions to our members.

 

The following table shows the cash flows between the year ended December 31,2006 and the year ended December 31, 2005:

 

| ** **                               | ** ** | **Year Ended December 31** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **$ **                               | ** ** | **$ ** | ** ** |
| Net cash from operating activities       |       | 39,638,229                                |       | 26,166,011 |   |
| Net cash (used for) investing activities |       | (29,101,256                               | )          | (1,225,498 | ) |
| Net cash (used for) financing activities |       | (12,668,790                               | )          | (16,333,813 | ) |

 

*Cash Flow From Operating Activities -* The increaseof $13.5 million in net cash flow provided from operating activities isprimarily due to a significant increase in net income between periods, offsetby an increase in cash used for accounts receivable and inventory.

 

*Cash Flow From Investing Activities -*Net cash flow used forinvesting activities increased $27.9 million between periods due to capitalimprovement projects. In 2006, we made significant cash expenditures to pay forthe plant’s expansion and incorporation of BPXTM technology into the productionprocess.

 

*Cash Flow From Financing Activities -* Net cash usedfor financing activities decreased $3.7 million between periods, due primarilyto the $18.9 million advanced by U.S. Bank under a construction note used topay for the expansion and BPXTM projects.  This advance is offset by a$13.5 million increase in distributions paid to members in 2006.

 

**Indebtedness**

 

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

 

The $8 million note permits us to borrow, on a revolving basis, thedifference between the unpaid principal balance and $8 million.  The principal purpose of this revolver is tocover the cost of non-corn related items at the plant at any time. We had $8million available for use as of December 31, 2007.

 

The $9 million note permits us to borrow, on a revolving basis, thedifference of the outstanding principal amount and the lesser of the borrowingbase or $9.0 million. The borrowing base is defined as 75% of the total of thefair market value of the outstanding inventory, eligible accounts receivable,and hedging accounts at fair market value. The principal purpose of thisrevolver is to cover the cost of purchasing corn during a time of tightenedmargins.  We had $9 million available foruse as of December 31, 2007.

 

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The $33 million term note, which was converted from a construction noteon August 31, 2007, is subject to two interest rate arrangements. Thenotional amounts ($16.1 million and $8.0 million as of December 31, 2007)are subject to an interest rate swap agreement with U.S. Bank. (see also Item7A below-”Quantitative and Qualitative Disclosures About Market Risk”). Underthe agreement, the notional amounts are subject to a fixed rate of 7.98% and7.52% respectively, which is payable monthly until maturity on August 30,2014. The remaining portion of the note is subject to a variable rate ofone-month LIBOR plus 2.75%, adjusted and due monthly (7.571% at December 31,2007). A principal payment of $825,000 is due quarterly on the note, whichcommenced on November 30, 2007.

 

The principal balance outstanding on the $15.8 million fixed-rate note(6.38%) is $12.44 million as of December 31, 2007. Principal payments of$1,293,225 were made for the year ended December 31, 2007.

 

The principal balance outstanding on the $3.9 million variable rate(7.25%) non-revolving loan is $2.83 million as of December 31, 2007.  Principal payments of $390,000 were made forthe year ended December 31, 2007.

 

The $4.3 million note, whichwas funded to us in full on October 5, 2007 to finance additional grainstorage and handling equipment, is subject to a variable rate of LIBOR plus3.00% (8.225% at December 31, 2007), adjusted and payable monthly.Principal payments of $154,000 were made for the year ended December 31,2007.

 

All of loans and notes outstanding are secured by our tangible andintangible property, including a leasehold interest, easement rights,improvements, equipment, personal property, accounts receivable, inventory andcontracts. In addition to standard covenants and conditions in the amended andrestated loan agreement, we are subject to the following material conditionsand covenants:  1) a capital expenditurelimitation not exceeding $1 million in any calendar year; 2) a cashdistribution limitation to members not exceeding 80% of net income annually; 3)a minimum working capital of $10 million; and 4) a fixed charge coverage ratioof 1.15:1 as of the last day of any fiscal quarter for the four consecutivefiscal quarters ending on that date.  Wewere in compliance with all conditions and covenants under our loan agreementwith U.S. Bank as of December 31, 2007 and the date of this filing.

 

The following table summarizes our consolidated contractual obligationsas of December 31, 2007:

 
| ** **                         | ** ** | ** ** | ** ** | ** **         | ** ** | **One to** | ** ** | **Four to** | ** ** | ** **          | ** ** |
|------------------------------------|------------|------------|------------|--------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Less than** | ** ** | **Three**       | ** ** | **Five**         | ** ** | **After Five** | ** ** |
| **Contractual Obligations**   | ** ** | **Total**  | ** ** | **One Year**  | ** ** | **Years**       | ** ** | **Years**        | ** ** | **Years**           | ** ** |
| ** **                         | ** ** | ** ** | ** ** | ** **         | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
| Long-Term Debt Obligations (1)     |       | 66,901,295 |       | 9,328,538          |       | 17,644,474      |       | 21,414,953       |       | 18,513,330          |       |
| Operating Lease Obligations        |       | 379,675    |       | 2,520              |       | 5,040           |       | 5,292            |       | 366,823             |       |
| Purchase Obligations(2)            |       | 4,818,725  |       | 764,589            |       | 1,529,178       |       | 1,345,695        |       | 1,179,263           |       |
| Total Contractual Cash Obligations |       | 72,099,695 |       | 10,095,647         |       | 19,178,692      |       | 22,765,940       |       | 20,059,416          |       |

 

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(1)          Long-term debt obligations reflect paymentobligations, including interest, arising under the amended Loan Agreement datedSeptember 21, 2007.

(2)          Purchase obligations include payment for minimum steamand services for management and risk management.

 

33

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##### ** **

##### **Off-BalanceSheet Arrangements**

#####  

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

 

**Recent Accounting Pronouncements**

 

InSeptember 2006, the FASB issued SFAS 157,*Fair Value Measurements*. SFAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements. The statement is effective for (1) financial assets andliabilities in financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years and (2) certainnon-financial assets and liabilities in financial statements issued for fiscalyears beginning after November 15, 2008, and interim periods within thosefiscal years. We are evaluating the effect, if any, that the adoption of SFAS157 will have on our results of operations, financial position, and the relateddisclosures.

 

InFebruary 2007, the FASB issued SFAS 159, *TheFair Value Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement No. *115 (*Accounting for Certain Investments in Debt and Equity Securities*).SFAS 159 provides companies with an option to report selected financial assetsand liabilities at fair value and is effective for fiscal years beginning afterNovember 15, 2007 with early adoption permitted. We are evaluating theeffect, if any, that the adoption of SFAS 159 will have on our results ofoperations, financial position, and the related disclosures.

 

InDecember 2007, the FASB issued SFAS 160, *NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51(Consolidated Financial Statements)*. SFAS 160 establishes accountingand reporting standards for a noncontrolling interest in a subsidiary and forthe deconsolidation of a subsidiary. In addition, SFAS 160 requires certainconsolidation procedures for consistency with the requirements of SFAS 141, *Business Combinations*. SFAS 160 iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008 with earlier adoption prohibited.We are evaluating the effect, if any, that the adoption of SFAS 160 will haveon our results of operations, financial position, and the related disclosures.

 

InDecember 2007, the FASB issued SFAS 141(R), *Business Combinations*.  SFAS 141(R) expands thedefinition of transactions and events that qualify as business combinations;requires that the acquired assets and liabilities, including contingencies, berecorded at the fair value determined on the acquisition date and changesthereafter reflected in revenue, not goodwill; changes the recognition timingfor restructuring costs; and requires acquisition costs to be expensed asincurred. Adoption of SFAS 141(R) is required for combinations after December 15,2008. Early adoption and retroactive application of SFAS 141(R) to fiscalyears preceding the effective date are not permitted. We are evaluating theeffect, if any, that the adoption of SFAS 141(R) will have on our resultsof operations, financial position, and the related disclosures.

 

**Critical Accounting Policies andEstimates**

 

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

 

34

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

 

Of the significant accounting policies described in the notes to thefinancial statements, we believe that the following may involve a higher degreeof estimates, judgments, and complexity

 

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

##  

## *Inventory Valuation. *We account for corn inventory at estimated net realizable marketvalue.  Corn is an agricultural commodity that is freely traded, hasquoted market prices, may be sold without significant further processing, andhas predictable and insignificant costs of disposal.  We derive ourestimates from local market prices determined by grain terminals in our area. Changes in the market value of corn inventory is recognized as a component ofcost of revenues.  Ethanol and distillers grains are stated at netrealizable value.  Work-in-process and chemical inventory are stated at anaverage cost method.

##  

###### *Revenue Recognition. *Revenue from the production of ethanol and related products is recordedwhen title transfers to customers, net of allowances for estimatedreturns.  Interest income is recognized when earned.

######  

Revenue from state incentive programs is recorded when we have producedor sold the ethanol and satisfied the reporting requirements under the program.

 

*Long-Lived Assets. *Depreciation and amortization of our property, plant, and equipment isprovided on the straight-line method by charges to operations at rates basedupon the expected useful lives of individual or groups of assets. Economic circumstances or other factors may cause management’s estimates ofexpected useful lives to differ from actual.

 

Long-lived assets, including property, plant and equipment, andinvestments are evaluated for impairment on the basis of undiscounted cashflows whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable.  An impaired asset is writtendown to our estimated fair market value based on the best informationavailable.  Considerable management judgment is necessary to estimatediscounted future cash flows and may differ from actual cash flows.

 

*Accounting for Derivative Instruments and HedgingActivities.  *We enter into derivative instruments to hedgeour 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 the December 31,2007 and 2006 balance sheets at their fair market value.

 

35

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On the date the derivative instrument is entered into, we designate thederivative as either (1) a hedge of the fair value of a recognized assetor liability or of an unrecognized firm commitment (fair value hedge), (2) ahedge of a forecasted transaction or of the variability of cash flows to bereceived or paid related to a recognized asset or liability (cash flow hedge)or (3) will not designate the derivative as a hedge.  Changes in thefair value of a derivative that is designated as and meets all the requiredcriteria for a fair value hedge, along with the gain or loss on the hedgedasset or liability that is attributable to the hedged risk, are recorded incurrent period earnings.  Changes in the fair value of a derivative thatis designated as and meets all the required criteria for a cash flow hedge arerecorded in accumulated other comprehensive income and reclassified intoearnings as the underlying hedged item affects earnings.  Changes in thefair value of a derivative that is not designated as a hedge are recorded incurrent period earnings.

 

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

 

We are exposed to the impact of market fluctuations associated withcommodity prices and interest rates as discussed below. We have no exposure toforeign currency risk as all of our business is conducted in U.S. Dollars. Weuse derivative financial instruments as part of an overall strategy tomanage market risk. Specifically, we use forward, futures and option contractsto hedge changes to the commodity prices of corn and natural gas, as well as interestrate swaps to hedge against changes in interest rates. However, we do not enterinto these derivative financial instruments for trading or speculativepurposes. The interest rate swap agreement is accounted for as a cash flowhedge pursuant to the requirements of SFAS 133, as amended, Accounting forDerivative Instruments and Hedging Activities.

 

*Commodity Price Risk*

 

We produce ethanol and its by-product, distillers grains, from corn,and, as such, we are sensitive to changes in the price of corn. The price ofcorn is subject to fluctuations due to unpredictable factors such as weather,total corn planted and harvested acreage, changes in national and global supplyand demand, and government programs and policies. We also use natural gas inthe production process, and as such are sensitive to changes in the price ofnatural gas. The price of natural gas is influenced by such weather factors asheat or cold in the summer and winter, in addition to the threat of hurricanesin the spring, summer and fall. Other natural gas price factors include thedomestic onshore and offshore rig count, and the amount of natural gas inunderground storage during both the injection (April 1st - November 7th)and withdrawal (November 14th - March 31st) seasons. The price of distillersgrains is principally influenced by the price of corn and soybean meal, andcompeting protein feed products.

 

We attempt to reduce the market risk associated with fluctuations inthe price of corn and natural gas by employing a variety of risk managementstrategies. Strategies include the use of derivative financial instruments suchas futures and options initiated on the Chicago Board of Trade and/or the NewYork Mercantile Exchange, as well as the daily cash management of our totalcorn and natural gas ownership relative to our monthly demand for eachcommodity, which may incorporate the use of forward cash contracts orbasis contracts.

 

Corn is hedged with derivative instruments including futures andoptions contracts offered through the Chicago Board of Trade. Forward cash cornand basis contracts are also utilized to minimize future price risk. Likewise,natural gas is hedged with futures and options contracts offered through theNew York Mercantile Exchange. Basis contracts are also utilized to minimizefuture price risk.

 

36

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Gains and losses on futures and options contracts used as economichedges of corn inventory, as well as on forward cash corn and basis contracts,are recognized as a component of cost of revenues for financial reporting on amonthly basis using month-end settlement prices for corn futures on the ChicagoBoard of Trade. Corn inventories are marked to fair value using market basedprices so that gains or losses on the derivative contracts, as well as forwardcash corn and basis contracts, are offset by gains or losses on inventoriesduring the same accounting period.

 

Gains and losses on futures and options contracts used as economichedges of natural gas, as well as basis contracts, are recognized as acomponent of cost of revenues for financial reporting on a monthly basis usingmonth-end settlement prices for natural gas futures on the New York MercantileExchange. The natural gas inventories hedged with these derivatives or basiscontracts are valued at the spot price of natural gas, plus or minus the gainor loss on the futures or options positions relative to the month-endsettlement price on the New York Mercantile Exchange.

 

A sensitivity analysis hasbeen prepared to estimate our exposure to commodity price risk. The tablepresents the fair value of open futures and option positions for corn andnatural gas as of December 31, 2007 and December 31, 2006 and thepotential loss in fair value resulting from a hypothetical 10% adverse changein corn and natural gas prices. The fair value of the positions is a summationof the fair values calculated by valuing each net position at quoted marketprices as of the applicable date. The results of this analysis, whichmay differ from actual results, are as follows:

 

| **Year Ended**    | ** ** | **Fair Value** | ** ** | **Effect of  Hypothetical   Adverse  Change — Market Risk** | ** ** |
|------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------------|------------|
| December 31, 2007 |       | $                   | 11,181,459 |                                                                                      | $          | 1,118,146 |   |
| December 31, 2006 |       | $                   | 19,767,196 |                                                                                      | $          | 1,976,720 |   |

 

*Interest Rate Risk*

 

We manage our interest rate risk by monitoring the effects of marketchanges on the interest rates and using fixed-rate debt whenever possible andusing the interest rate swap agreement on the term note.  Our interest rate risk exposure pertains primarilyto our variable rate, long-term debt. Specifically, we had $10.87 million invariable rate, long-term debt outstanding as of December 31, 2007, orapproximately 21% of our total indebtedness. The interest rate on $2.83 millionof the $3.9 million variable rate, long-term debt is U.S. Bank’s prime rate,which is 7.25% as of December 31, 2007.  The variable rate on the$8.04 million portion of the expansion note is 7.571% (One-Month LIBOR plus2.75%) as of December 31, 2007.

 

In order to achieve a fixed interest rate on a portion of our $33.0term note, we entered into an interest rate swap agreement with U.S. Bank. The swap agreement covers a seven-year term financing period through August 30,2014. This****agreement assists us inprotecting against exposure to increases in interest rates and fixes theinterest rate at 7.98% and 7.52% on the notional amounts ($16.1 million and$8.04 million, respectively as of December 31, 2007). The remainingamount, $8.04 million, is subject to a variable rate of One-Month LIBOR plus2.75%. While our exposure is reduced under the swap agreement, there is noassurance that the interest rate swap will provide us with protection in allscenarios.  For example, under the swap agreement, when One-Month LIBORplus 2.75% exceeds 7.98% or 7.52%, we receive payments from U.S. Bank for thedifference between the market rate and the swap rate. Conversely, when theOne-Month LIBOR plus 2.75% falls below 7.98% or 7.52%, we make payments to U.S.Bank for the difference.

 

37

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

 

Reference is made to the “Table of Contents” of Northern Growers, LLClocated on the page prior to page F-1 of this report, and financialstatements for the year ended December 31, 2007 referenced therein, whichare hereby incorporated by reference.

 

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

 

None.

 

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

 

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

 

*Management’s report on internal control over financial reporting. *Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) of the SecuritiesExchange Act of 1934.  Our internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Ourinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of assets; (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with U.S. generally accepted accounting principles,and that our receipts and expenditures are being made only in accordance withauthorizations of our management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisitions, use, or disposition of our assets that could have a materialeffect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Managementhas assessed our internal control over financial reporting in relation tocriteria described in *Internal Control-Integrated Framework*, issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this assessment using those criteria, we concluded that, as of December 31,2007, our internal control over financial reporting was effective.

 

38

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Ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of December 31, 2007 has been audited by EideBailly LLP, an independent registered public accounting firm, as stated intheir report which appears on page F-1 of this Annual Report on Form 10-K.

 

*Changes in Internal Control over Financial Reporting.*  There was no change in our internal controlover financial reporting that occurred during the quarter ended December 31,2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

 

**Item 9B.  Other Information.**

 

None.

 

**PART III**

 

Pursuant to General Instructions G(3), weomit Part III, Items 10, 11, 12, 13 and 14, and incorporate such items byreference to an amendment to this Annual Report on Form 10-K or to anInformation Statement to be filed with the Commission within 120 days after theclose of the fiscal year covered by this report (December 31, 2007).

 

**PART IV**

 

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

 

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

 

(1) FinancialStatements—Reference is made to the “Table of Contents” of NorthernGrowers, LLC located on the page prior to page F-1 of this report for alist of the financial statements and schedules for the year ended December 31,2007 included herein. The financial statements begin on page F-2 of thisReport.

 

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

 

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

 

(b) SeeItem 15(a)(3)

 

39

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SIGNATURES

 

Pursuant to the requirement of Section 13 or 15(d) of theSecurities Exchange Act, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   |               |   | NORTHERN GROWERS, LLC                                                                                         |
|--------|--------------------|--------|---------------------------------------------------------------------------------------------------------------|
|   |               |   |                                                                                                          |
| Date:  | March 5, 2008 |   | /s/ Robert Narem                                                                                              |
|   |               |   | Robert Narem, Chief Executive   Officer/Chief Financial Officer   (Principal Executive and Financial Officer) |

 

Pursuant to the requirements of the Securities Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
|   |               |   | NORTHERN GROWERS, LLC                                                        |
|--------|--------------------|--------|------------------------------------------------------------------------------|
|   |               |   |                                                                         |
| Date:  | March 5, 2008 |   | /s/ Robert Narem                                                             |
|   |               |   | Robert Narem, Chief Executive Officer   and Chief Financial Officer, Manager |
|   |               |   |                                                                         |
|   |               |   |                                                                         |
| Date:  | March 5, 2008 |   | /s/ Robert Narem                                                             |
|   |               |   | Ronald Anderson, Manager                                                     |
|   |               |   |                                                                         |
|   |               |   |                                                                         |
| Date:  | March 5, 2008 |   | /s/ Leroy Bergan                                                             |
|   |               |   | Leroy Bergan, Manager                                                        |
|   |               |   |                                                                         |
| Date:  | March 5, 2008 |   | /s/ Wendall Falk                                                             |
|   |               |   | Wendell Falk, Manager                                                        |
|   |               |   |                                                                         |
| Date:  | March 5, 2008 |   | /s/ Lars Herseth                                                             |
|   |               |   | Lars Herseth, Manager                                                        |
|   |               |   |                                                                         |
| Date:  | March 5, 2008 |   | /s/ Mark Lounsbery                                                           |
|   |               |   | Mark Lounsbery, Manager                                                      |
|   |               |   |                                                                         |
| Date:  | March 5, 2008 |   | /s/ Robert Metz                                                              |
|   |               |   | Robert Metz, Manager                                                         |

 

40

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|   |               |   |                      |
|--------|--------------------|--------|---------------------------|
| Date:  | March 5, 2008 |   | /s/ Jeff Olson            |
|   |               |   | Jeff Olson, Manager       |
|   |               |   |                      |
| Date:  | March 5, 2008 |   | /s/ Ronald Olson          |
|   |               |   | Ronald Olson, Manager     |
|   |               |   |                      |
| Date:  | March 5, 2008 |   | /s/ Heath Peterson        |
|   |               |   | Heath Peterson, Manager   |
|   |               |   |                      |
| Date:  | March 5, 2008 |   | /s/ Delton Strasser       |
|   |               |   | Delton Strasser, Manager  |
|   |               |   |                      |
| Date:  | March 5, 2008 |   | /s/ Steve Street          |
|   |               |   | Steve Street, Manager     |
|   |               |   |                      |
| Date:  | March 5, 2008 |   | /s/ Bill Whipple          |
|   |               |   | Bill Whipple, Manager     |
|   |               |   |                      |
| Date:  | March 5, 2008 |   | /s/ Robert Wittnebel      |
|   |               |   | Robert Wittnebel, Manager |

 

41

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**EXHIBIT INDEX**

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

 

42

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| 10.12  |   | $15.8 Million Promissory Note with U.S. Bank, dated  March 30, 2005.                                                   |   |   |   | Exhibit 10.27 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2005.   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.13  |   | $3.9 Million Promissory Note with U.S. Bank, dated  March 30, 2005.                                                    |   |   |   | Exhibit 10.28 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2005.   |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.14  |   | Management Agreement with POETTM Plant Management,  LLC, dated April 20, 2005.                                     |   |   |   | Exhibit 10.2 to the Registrant’s Form 10-Q  filed with the Commission on May 16, 2005.      |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.15  |   | Technology and Patent Rights License Agreement with  POETTM Design and Construction, LLC, dated October 25, 2005.* |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q  filed with the Commission on November 14, 2005. |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.16  |   | Amendment to the Management Agreement with POETTM  Plant Management, dated October 25, 2005.                       |   |   |   | Exhibit 10.2 to the Registrant’s Form 10-Q  filed with the Commission on November 14, 2005. |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.17  |   | Design Build Agreement with POETTM Design and  Construction, Inc., dated October 25, 2005.                    |   |   |   | Exhibit 10.3 to the Registrant’s Form 10-Q  filed with the Commission on November 14, 2005. |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.18  |   | Amended and Restated Loan Agreement with U.S. Bank  dated August 28, 2006.                                             |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q  filed with the Commission on November 14, 2006. |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.19  |   | Expansion Construction Note Agreement dated  August 28, 2006.                                                          |   |   |   | Exhibit 10.2 to the Registrant’s Form 10-Q  filed with the Commission on November 14, 2006. |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.20  |   | $8.0 Million Variable Rate, Revolving Note dated  August 28, 2006.                                                     |   |   |   | Exhibit 10.3 to the Registrant’s Form 10-Q  filed with the Commission on November 14, 2006. |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.21  |   | Construction Mortgage and Addendum dated  August 28, 2006.                                                             |   |   |   | Exhibit 10.4 to the Registrant’s Form 10-Q  filed with the Commission on November 14, 2006. |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.22  |   | Security Agreement dated August 28, 2006.                                                                              |   |   |   | Exhibit 10.5 to the Registrant’s Form 10-Q  filed with the Commission on November 14, 2006. |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.23  |   | Corn and Natural Gas Price Risk Management Agreement  dated April 1, 2007.                                             |   |   |   | Exhibit 10.2 to the Registrant’s Form 10-Q  filed with the Commission on May 10, 2007.      |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.24  |   | Amendment No. 1 to Water Fuel Agreement dated  March 21, 2007.                                                    |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q  filed with the Commission on May 10, 2007.      |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.25  |   | Ethanol Marketing and Services Agreement dated  April 24, 2007.                                                        |   |   |   | Exhibit 10.3 to the Registrant’s Form 10-Q  filed with the Commission on May 10, 2007.      |
|   |   |                                                                                                                        |   |   |   |                                                                                                            |
| 10.26  |   | Design Build Agreement with POETTM Design and  Construction dated April 3, 2007.                                   |   |   |   | Exhibit 10.4 to the Registrant’s Form 10-Q  filed with the Commission on May 10, 2007.      |

 

43

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| 10.27  |   | Amendment to Amended and Restated Loan Agreement  with U.S. Bank dated September 21, 2007. |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q  filed with the Commission on November 9, 2007 |
|--------|--------|-------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                            |   |   |   |                                                                                                          |
| 10.28  |   | $9.0 Million Promissory Note with U.S. Bank dated  September 21, 2007.                     |   |   |   | Exhibit 10.2 to the Registrant’s Form 10-Q  filed with the Commission on November 9, 2007 |
|   |   |                                                                                            |   |   |   |                                                                                                          |
| 10.29  |   | $4.3 Million Promissory Note with U.S. bank dated  September 21, 2007.                     |   |   |   | Exhibit 10.3 to the Registrant’s Form 10-Q  filed with the Commission on November 9, 2007 |
|   |   |                                                                                            |   |   |   |                                                                                                          |
| 10.30  |   | Mortgage in Favor of U.S. Bank dated  September 21, 2007.                                  |   |   |   | Exhibit 10.4 to the Registrant’s Form 10-Q  filed with the Commission on November 9, 2007 |
|   |   |                                                                                            |   |   |   |                                                                                                          |
| 21.1   |   | Subsidiaries of the Registrant.                                                                 |   | X      |   |                                                                                                          |
|   |   |                                                                                            |   |   |   |                                                                                                          |
| 31     |   | Rule 13a-14(a)/15d-14(a) Certifications                                               |   | X      |   |                                                                                                          |
|   |   |                                                                                            |   |   |   |                                                                                                          |
| 32     |   | Section 1350 Certification                                                                 |   | X      |   |                                                                                                          |

----

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

 

44

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**NORTHERN GROWERS, LLC**

 

Table of Contents

 
| ** **                                                              | ** ** | **Page** |
|-------------------------------------------------------------------------|------------|----------|
|                                                                    |       |     |
| **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**             |       | F-1      |
|                                                                    |       |     |
| **CONSOLIDATED FINANCIAL STATEMENTS**                                   |       |     |
| Balance  Sheets                                                         |       | F-2      |
| Statements of  Operations                                               |       | F-4      |
| Statements of Changes in Members’ Equity and Comprehensive  Income |       | F-5      |
| Statements of  Cash Flows                                               |       | F-6      |
| Notes to  Consolidated Financial Statements                             |       | F-8      |

 

 

----

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

TheAudit Committee and Members

**NorthernGrowers, LLC**

BigStone City, South Dakota

 

Wehave audited the accompanying consolidated balance sheets of **Northern Growers, LLC** as of December 31, 2007 and 2006,and the related consolidated statements of operations, members’ equity andcomprehensive loss, and cash flows for each of the years in the three-yearperiod ended December 31, 2007. We also have audited **NorthernGrowers, LLC’s** internal control over financial reporting as of December 31,2007, based on criteria established in *InternalControl-Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). **NorthernGrowers, LLC’s** management is responsible for these financialstatements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying management’s report oninternal control over financial reporting. Our responsibility is to express anopinion on these financial statements and an opinion on the company’s internalcontrol over financial reporting based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audits of the financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk. Our audits also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audits provide areasonable basis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of **NorthernGrowers, LLC** as of December 31, 2007 and 2006, and the resultsof its operations and its cash flows for each of the years in the three-yearperiod ended December 31, 2007 in conformity with accounting principlesgenerally accepted in the United States of America. Also in our opinion, **Northern Growers, LLC** maintained, in all material respects,effective internal control over financial reporting as of December 31,2007, based on criteria established in the *InternalControl—Integrated Framework* issued by the Committee of theSponsoring Organizations of the Treadway Commission (COSO).

 

 

SiouxFalls, South Dakota

February 22,2008

 

PEOPLE. PRINCIPLES.POSSIBILITIES.

 

www.eidebailly.com

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

 

 

F-1

----

** **

**NORTHERN GROWERS, LLC**

**CONSOLIDATEDBALANCE SHEETS**

** **
| ** **                                                                                         | ** ** | **December 31,** | ** **      | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **2007**              | ** **      | **2006**              | ** ** |
| ** **                                                                                         | ** ** | ** **            | ** **      | ** **            | ** ** |
| **ASSETS**                                                                                         |       |                  |            |                  |       |
|                                                                                               |       |                  |            |                  |       |
| CURRENT ASSETS                                                                                     |       |                  |            |                  |       |
| Cash                                                                                               | ** ** | **$**                 | **9,182,533**   |                  | $          | 9,925,200 |   |
| Accounts  receivable                                                                               |       |                  |            |                  |       |
| Trade related  party                                                                               | ** ** | **5,711,848**         |            | 6,445,387             |       |
| Trade                                                                                              | ** ** | **876,510**           |            | 850,565               |       |
| Other                                                                                              | ** ** | **1,005,132**         |            | 911,359               |       |
| Inventory                                                                                          | ** ** | **16,977,162**        |            | 15,493,876            |       |
| Prepaid expenses                                                                                   | ** ** | **103,678**           |            | 81,992                |       |
| Investment in  commodities contracts                                                               | ** ** | **1,216,724**         |            | 1,121,151             |       |
|                                                                                               |       |                  |            |                  |       |
| Total current  assets                                                                              | ** ** | **35,073,587**        |            | 34,829,530            |       |
|                                                                                               |       |                  |            |                  |       |
| PROPERTY AND EQUIPMENT                                                                             |       |                  |            |                  |       |
| Land improvements                                                                                  | ** ** | **7,090,574**         |            | 5,105,996             |       |
| Equipment                                                                                          | ** ** | **71,186,213**        |            | 45,061,239            |       |
| Buildings                                                                                          | ** ** | **15,379,448**        |            | 9,349,073             |       |
| Construction in  progress                                                                          | ** ** | **—**            |            | 18,017,902            |       |
|                                                                                               | ** ** | **93,656,235**        |            | 77,534,210            |       |
| Less accumulated  depreciation                                                                     | ** ** | **(15,515,208**       | **)**           | (11,120,828           | )          |
|                                                                                               |       |                  |            |                  |       |
| Net property and  equipment                                                                        | ** ** | **78,141,027**        |            | 66,413,382            |       |
|                                                                                               |       |                  |            |                  |       |
| OTHER ASSETS                                                                                       |       |                  |            |                  |       |
| Financing costs,  net of amortization of $51,194 and $9,701 as of December 31, 2007 and  2006 | ** ** | **265,491**           |            | 236,996               |       |
| Assets held for  sale                                                                              | ** ** | **100,000**           |            | —                |       |
|                                                                                               |       |                  |            |                  |       |
| Total other  assets                                                                                | ** ** | **365,491**           |            | 236,996               |       |
|                                                                                               |       |                  |            |                  |       |
|                                                                                               |       |                  |            |                  |       |
|                                                                                               | ** ** | **$**                 | **113,580,105** |                  | $          | 101,479,908 |   |

 

 

See Notes to ConsolidatedFinancial Statements

 

 

F-2

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                  | ** ** | **December 31,** | ** **      | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|-----------------|-----------------------|------------|
| ** **                                                                  | ** ** | **2007**              | ** **      | **2006**              | ** ** |
| ** **                                                                  | ** ** | ** **            | ** **      | ** **            | ** ** |
| **LIABILITIES AND MEMBERS’ EQUITY**                                    |       |                  |            |                  |       |
|                                                                        |       |                  |            |                  |       |
| CURRENT LIABILITIES                                                         |       |                  |            |                  |       |
| Accounts payable  - trade                                                   | ** ** | **$**                 | **1,974,139**   |                  | $          | 1,254,171 |   |
| Accounts payable  - corn                                                    | ** ** | **5,281,356**         |            | 1,981,804             |       |
| Accounts payable  - related party                                           | ** ** | **348,008**           |            | 896,678               |       |
| Accounts payable  - construction - related party                            | ** ** | **—**            |            | 2,173,905             |       |
| Other accrued  liabilities                                                  | ** ** | **523,421**           |            | 548,909               |       |
| Accrued interest                                                            | ** ** | **3,750**             |            | 1,321                 |       |
| Distribution  payable - Northern Growers                                    | ** ** | **1,518,840**         |            | 6,787,696             |       |
| Distribution  payable - minority member                                     | ** ** | **—**            |            | 2,512,400             |       |
| Notes payable -  due upon demand                                            | ** ** | **5,000**             |            | 5,000                 |       |
| Current portion  of notes payable                                           | ** ** | **5,695,078**         |            | 2,685,475             |       |
|                                                                        |       |                  |            |                  |       |
| Total current  liabilities                                                  | ** ** | **15,349,592**        |            | 18,847,359            |       |
|                                                                        |       |                  |            |                  |       |
| LONG-TERM LIABILITIES                                                       |       |                  |            |                  |       |
| Derivative  financial instruments                                           | ** ** | **900,826**           |            | 187,069               |       |
| Long-term notes  payable                                                    | ** ** | **45,894,139**        |            | 33,391,741            |       |
|                                                                        |       |                  |            |                  |       |
| Total long-term  liabilities                                                | ** ** | **46,794,965**        |            | 33,578,810            |       |
|                                                                        |       |                  |            |                  |       |
| COMMITMENTS AND CONTINGENCIES (NOTE 6)                                      |       |                  |            |                  |       |
|                                                                        |       |                  |            |                  |       |
| MINORITY INTEREST                                                           | ** ** | **11,631,149**        |            | 10,790,823            |       |
|                                                                        |       |                  |            |                  |       |
| MEMBERS’ EQUITY                                                        |       |                  |            |                  |       |
| Capital units,  $0.25 stated value, 50,628,000 units issued and outstanding | ** ** | **12,657,000**        |            | 12,657,000            |       |
| Additional  paid-in capital                                                 | ** ** | **64,900**            |            | 64,900                |       |
| Accumulated  other comprehensive (loss)                                     | ** ** | **(695,076**          | **)**           | (144,342              | )          |
| Retained  earnings                                                          | ** ** | **27,777,575**        |            | 25,685,358            |       |
|                                                                        |       |                  |            |                  |       |
| Total members’  equity                                                 | ** ** | **39,804,399**        |            | 38,262,916            |       |
|                                                                        |       |                  |            |                  |       |
|                                                                        | ** ** | **$**                 | **113,580,105** |                  | $          | 101,479,908 |   |

 

 

See Notes to ConsolidatedFinancial Statements

 

 

F-3

----

**Northern Growers, LLC**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

** **

 
| ** **                                                    | ** ** | **2007**        | ** **      | **2006**    | ** ** | **2005**    | ** ** |
|---------------------------------------------------------------|------------|-----------------|-----------------|-------------|------------|-------------|------------|
| REVENUES                                                      |       |            |            |        |       |        |       |
| Sales related  party                                          |       | **$**           | **116,084,868** |        | $          | 105,702,927 |       | $ | 72,633,304 |   |
| Sales                                                         |       | **21,408,911**  |            | 16,349,308  |       | 16,305,319  |       |
| Incentive                                                     |       | **750,001**     |            | 784,884     |       | 754,085     |       |
| Total revenues                                                |       | **138,243,780** |            | 122,837,119 |       | 89,692,708  |       |
|                                                          |       |            |            |        |       |        |       |
| COST OF REVENUES                                              | ** ** | **112,694,987** |            | 62,731,376  |       | 63,552,756  |       |
|                                                          |       |            |            |        |       |        |       |
| GROSS PROFIT                                                  | ** ** | **25,548,793**  |            | 60,105,743  |       | 26,139,952  |       |
|                                                          |       |            |            |        |       |        |       |
| EXPENSES                                                      |       |            |            |        |       |        |       |
| General and administrative                                    |       | **4,790,117**   |            | 6,364,983   |       | 3,913,177   |       |
| Total operating  expenses                                     |       | **4,790,117**   |            | 6,364,983   |       | 3,913,177   |       |
|                                                          |       |            |            |        |       |        |       |
| INCOME FROM  OPERATIONS                                       | ** ** | **20,758,676**  |            | 53,740,760  |       | 22,226,775  |       |
|                                                          |       |            |            |        |       |        |       |
| OTHER INCOME  (EXPENSES)                                      |       |            |            |        |       |        |       |
| Interest income                                               |       | **509,018**     |            | 334,512     |       | 75,682      |       |
| Interest expense                                              |       | **(2,876,464**  | **)**           | (1,261,542  | )          | (1,317,957  | )          |
| Other                                                         |       | **22,960**      |            | 21,902      |       | 21,675      |       |
| Total other  income (expenses)                                |       | **(2,344,486**  | **)**           | (905,128    | )          | (1,220,600  | )          |
|                                                          |       |            |            |        |       |        |       |
| INCOME BEFORE  MINORITY INTEREST                              | ** ** | **18,414,190**  |            | 52,835,632  |       | 21,006,175  |       |
|                                                          |       |            |            |        |       |        |       |
| MINORITY  INTEREST IN SUBSIDIARY (INCOME)                     | ** ** | **(4,269,470**  | **)**           | (12,132,284 | )          | (4,848,463  | )          |
|                                                          |       |            |            |        |       |        |       |
| NET INCOME                                                    | ** ** | **$**           | **14,144,720**  |        | $          | 40,703,348  |       | $ | 16,157,712 |   |
|                                                          |       |            |            |        |       |        |       |
| BASIC AND  DILUTED EARNINGS PER CAPITAL UNIT                  | ** ** | **$**           | **0.279**       |        | $          | 0.804       |       | $ | 0.319 |   |
|                                                          |       |            |            |        |       |        |       |
| BASIC AND  DILUTED WEIGHTED AVERAGE CAPITAL UNITS OUTSTANDING |       | **50,628,000**  |            | 50,628,000  |       | 50,628,000  |       |
|                                                          |       |            |            |        |       |        |       |
| DISTRIBUTIONS  PER CAPITAL UNIT DECLARED                      | ** ** | **$**           | **0.238**       |        | $          | 0.518       |       | $ | 0.230 |   |
|                                                          |       |            |            |        |       |        |       |
| DISTRIBUTIONS  PER CAPITAL UNIT PAID                          | ** ** | **$**           | **0.342**       |        | $          | 0.448       |       | $ | 0.241 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-4

----

**Northern Growers, LLC**

**CONSOLIDATED STATEMENTS OFCHANGES IN MEMBERS’ EQUITY AND COMPREHENSIVE INCOME**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

 
| ** **                            | ** **     | ** ** | ** ** | ** **     | ** **     | ** ** | **Accumulated**    | ** ** | ** **   | ** **   | ** **  | ** ** | ** **         | ** ** |
|---------------------------------------|----------------|------------|------------|----------------|----------------|------------|--------------------|------------|--------------|--------------|-------------|------------|--------------------|------------|
| ** **                            | ** **     | ** ** | ** ** | ** **     | **Additional** | ** ** | **Other**          | ** ** | ** **   | ** **   | ** **  | ** ** | **Annual**         | ** ** |
| ** **                            | **Capital**    | ** ** | ** ** | ** **     | **Paid-In**    | ** ** | **Comprehensive**  | ** ** | **Retained** | ** **   | ** **  | ** ** | **Comprehensive**  | ** ** |
| ** **                            | **Units**      | ** ** | **Amount** | ** **     | **Capital**    | ** ** | **Income  (Loss)** | ** ** | **Earnings** | ** **   | **Total**   | ** ** | **Income  (Loss)** | ** ** |
| BALANCE, JANUARY  1, 2005        | 50,628,000     |       | $          | 12,657,000     |           | $          | 64,900             |       | $            | —       |        | $          | 6,724,101          |       | $ | 19,446,001 |   |   |   |
|                                  |           |       |       |           |           |       |               |       |         |         |        |       |               |       |
| Net income                            | —         |       | —     |           | —         |       | —             |       | 16,157,712   |         | 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           | 50,628,000     |       | $          | 12,657,000     |           | $          | 64,900             |       | $            | —       |        | $          | 11,227,818         |       | $ | 23,949,718 |   | $ | 16,157,712 |   |
|                                  |           |       |       |           |           |       |               |       |         |         |        |       |               |       |
| Net income                            | —         |       | —     |           | —         |       | —             |       | 40,703,348   |         | 40,703,348  |       | 40,703,348         |       |
| Cash flow hedge  (loss)               | —         |       | —     |           | —         |       | (144,342           | )          | —       |         | (144,342    | )          | (144,342           | )          |
| Distributions  payable                | —         |       | —     |           | —         |       | —             |       | (6,787,696   | )            | (6,787,696  | )          | —             |       |
| Distributions  paid                   | —         |       | —     |           | —         |       | —             |       | (19,458,112  | )            | (19,458,112 | )          | —             |       |
|                                  |           |       |       |           |           |       |               |       |         |         |        |       |               |       |
| BALANCE,  DECEMBER 31, 2006 | 50,628,000     |       | $          | 12,657,000     |           | $          | 64,900             |       | $            | (144,342     | )           | $          | 25,685,358         |       | $ | 38,262,916 |   | $ | 40,559,006 |   |
|                                  |           |       |       |           |           |       |               |       |         |         |        |       |               |       |
| Net income                            | —         |       | —     |           | —         |       | —             |       | 14,144,720   |         | 14,144,720  |       | 14,144,720         |       |
| Cash flow hedge  (loss)               | —         |       | —     |           | —         |       | (550,734           | )          | —       |         | (550,734    | )          | (550,734           | )          |
| Distributions  payable                | —         |       | —     |           | —         |       | —             |       | (1,518,840   | )            | (1,518,840  | )          | —             |       |
| Distributions  paid                   | —         |       | —     |           | —         |       | —             |       | (10,533,663  | )            | (10,533,663 | )          | —             |       |
|                                  |           |       |       |           |           |       |               |       |         |         |        |       |               |       |
| **BALANCE,  DECEMBER 31, 2007**  | **50,628,000** | ** ** | **$**      | **12,657,000** | ** **     | **$**      | **64,900**         | ** ** | **$**        | **(695,076** | **)**       | **$**      | **27,777,575**     | ** ** | **$** | **39,804,399** | ** ** | **$** | **13,593,986** | ** ** |

 

See Notes toConsolidated Financial Statements

 

F-5

----

 

# **NORTHERNGROWERS, LLC**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARSENDED DECEMBER 31, 2007, 2006 AND 2005**

 
| ** **                                       | ** ** | **2007**        | ** **     | **2006**    | ** ** | **2005**    | ** ** |
|--------------------------------------------------|------------|-----------------|----------------|-------------|------------|-------------|------------|
| OPERATING ACTIVITIES                             |       |            |           |        |       |        |       |
| Net income                                       | ** ** | **$**           | **14,144,720** |        | $          | 40,703,348  |       | $ | 16,157,712 |   |
| Changes to net  income not affecting cash        |       |            |           |        |       |        |       |
| Depreciation                                     | ** ** | **4,459,581**   |           | 2,758,668   |       | 2,613,727   |       |
| Amortization of  loan fees                       | ** ** | **41,493**      |           | 9,701       |       | 102,818     |       |
| Loss on  impairment of assets                    | ** ** | **625,195**     |           | 450,362     |       | 355,177     |       |
| Minority  interest in subsidiary’s earnings | ** ** | **4,269,470**   |           | 12,132,284  |       | 4,848,463   |       |
| Decrease (increase)  in current assets           |       |            |           |        |       |        |       |
| Accounts  receivable                             |       |            |           |        |       |        |       |
| Related party                                    | ** ** | **733,539**     |           | (2,848,745  | )          | 78,553      |       |
| Trade                                            | ** ** | **(25,945**     | **)**          | (422,436    | )          | 113,517     |       |
| Other                                            | ** ** | **50,998**      |           | (29,163     | )          | 682,345     |       |
| Inventory                                        | ** ** | **(1,483,286**  | **)**          | (11,711,260 | )          | 856,945     |       |
| Prepaid expenses                                 | ** ** | **(21,686**     | **)**          | (7,859      | )          | 270,570     |       |
| Investment in  commodity contracts               | ** ** | **(95,573**     | **)**          | (1,036,189  | )          | 25,989      |       |
| Increase  (decrease) in current liabilities      |       |            |           |        |       |        |       |
| Accounts payable                                 |       |            |           |        |       |        |       |
| Trade                                            | ** ** | **719,968**     |           | (408,239    | )          | 428,227     |       |
| Corn                                             | ** ** | **3,299,552**   |           | (381,534    | )          | (680,757    | )          |
| Related party                                    | ** ** | **(548,670**    | **)**          | 376,085     |       | 141,962     |       |
| Accrued  liabilities                             | ** ** | **(25,488**     | **)**          | 55,732      |       | 124,356     |       |
| Accrued interest                                 | ** ** | **2,429**       |           | (2,526      | )          | (3,593      | )          |
|                                             |       |            |           |        |       |        |       |
| NET CASH PROVIDED BY OPERATING ACTIVITIES        | ** ** | **26,146,297**  |           | 39,638,229  |       | 26,116,011  |       |
|                                             |       |            |           |        |       |        |       |
| INVESTING ACTIVITIES                             |       |            |           |        |       |        |       |
| Purchase of  property and equipment              | ** ** | **(18,840,552** | **)**          | (28,844,044 | )          | (1,426,068  | )          |
| Cash received on  sale of assets                 | ** ** | **555**         |           | 31,100      |       | —      |       |
| Cash paid for  capitalized construction interest | ** ** | **(653,413**    | **)**          | (288,312    | )          | —      |       |
| Tax refund on  construction                      | ** ** | **262,313**     |           | —      |       | 200,570     |       |
|                                             |       |            |           |        |       |        |       |
| NET CASH (USED FOR) INVESTING ACTIVITIES         | ** ** | **(19,231,097** | **)**          | (29,101,256 | )          | (1,225,498  | )          |
|                                             |       |            |           |        |       |        |       |
| FINANCING ACTIVITIES                             |       |            |           |        |       |        |       |
| Long-term notes  payable issued                  | ** ** | **18,340,126**  |           | 18,959,874  |       | 1,032,369   |       |
| Principal paid  on long-term notes payable       | ** ** | **(2,828,126**  | **)**          | (1,919,718  | )          | (1,446,148  | )          |
| Distributions  paid - Northern Growers           | ** ** | **(17,321,359** | **)**          | (22,670,206 | )          | (12,219,954 | )          |
| Distributions  paid - minority member            | ** ** | **(5,778,520**  | **)**          | (6,792,043  | )          | (3,700,080  | )          |
| Cash paid for  financing costs                   | ** ** | **(69,988**     | **)**          | (246,697    | )          | —      |       |
|                                             |       |            |           |        |       |        |       |
| NET CASH (USED FOR) FINANCING ACTIVITIES         | ** ** | **(7,657,867**  | **)**          | (12,668,790 | )          | (16,333,813 | )          |
|                                             |       |            |           |        |       |        |       |
| NET INCREASE (DECREASE) IN CASH                  | ** ** | **(742,667**    | **)**          | (2,131,817  | )          | 8,556,700   |       |
|                                             |       |            |           |        |       |        |       |
| CASH AT BEGINNING OF YEAR                        | ** ** | **9,925,200**   |           | 12,057,017  |       | 3,500,317   |       |
|                                             |       |            |           |        |       |        |       |
| CASH AT END OF YEAR                              | ** ** | **$**           | **9,182,533**  |        | $          | 9,925,200   |       | $ | 12,057,017 |   |

 

See Notes toConsolidated Financial Statements

(continued on next page)

 

F-6

----

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS — page 2**

** **
| ** **                                                               | ** ** | **2007**   | ** **    | **2006** | ** ** | **2005**  | ** ** |
|--------------------------------------------------------------------------|------------|------------|---------------|----------|------------|-----------|------------|
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                        |       |       |          |     |       |      |       |
| Cash paid for  interest                                                  | ** ** | **$**      | **3,612,547** |     | $          | 1,552,337 |       | $ | 1,321,551 |   |
|                                                                     |       |       |          |     |       |      |       |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |       |       |          |     |       |      |       |
| Accounts payable  incurred for construction costs                        | ** ** | **$**      | **—**    |     | $          | 2,173,905 |       | $ | 62,769 |   |
| Accounts  receivable for tax refund on construction                      | ** ** | **$**      | **831,955**   |     | $          | 687,184   |       | $ | — |   |
| Notes payable  refinanced                                                | ** ** | **$**      | **—**    |     | $          | —    |       | $ | 18,667,631 |   |
| Distributions  payable                                                   | ** ** | **$**      | **1,518,840** |     | $          | 9,300,096 |       | $ | 4,162,868 |   |
|                                                                     | ** ** | ** ** | ** **    |     |       |      |       |   |   |   |

 

See Notes toConsolidated Financial Statements

 

F-7

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** **

**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1 -       NATURE OF OPERATIONS**

** **

*PrincipalBusiness Activity*

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

 

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

 

As a result of theexchange, the Cooperative was dissolved, with Whetstone’s capital unitsdistributed to the members of the Cooperative at a rate of one Whetstonecapital unit for each share of equity common stock and all voting common stockof the Cooperative was surrendered and retired. In connection with thereorganization, Whetstone subsequently changed its name to Northern Growers,LLC. Under the amended Northern Growers’ Operating Agreement, a minimum of2,500 capital units is required to become a member.  Such units are subject to certain transferrestrictions, including approval by the Board of Managers of Northern Growers.Northern Growers also retains the right to redeem the capital units at $.20 perunit in the event a member attempts to dispose of the units in a manner not inconformity with the Operating Agreement, if a member becomes a holder of lessthan 2,500 units or if a member becomes bankrupt. The Operating Agreement alsoincludes provisions whereby cash flow in excess of $200,000 will be distributedto unit holders subject to limitations imposed by a super majority vote of theBoard of Managers or restrictions imposed by loan covenants.

 

**NOTE2 -       SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

*Principlesof Consolidation*

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

 

*Cash andCash Equivalents*

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

 

(continued on next page)

 

F-8

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** **

**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*RevenueRecognition*

Revenue from theproduction of ethanol and related product is recorded upon transfer of title tocustomers, net of allowances for estimated returns on related products.Generally, ethanol is shipped FOB shipping point and related product is shippedFOB destination. Interest income is recognized as earned.

 

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

 

*Receivablesand Credit Policies*

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

 

Tradereceivables are stated at the amount billed to the customer.

 

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

 

The carrying amount oftrade receivables is reduced by a valuation allowance that reflects management’sbest estimate of the amounts that will not be collected. Management reviews alltrade receivable balances that exceed 30 days from the invoice date and basedon an assessment of current creditworthiness, estimates the portion, if any, ofthe balance that will not be collected. Management believes that all tradereceivables are collectible; therefore, there is no valuation allowance as of December 31,2007 and 2006.

 

*Inventory*

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

 

Inventories at December 31, 2007 and 2006are as follows:

 

| ** **            | ** ** | **2007**       | ** **     | **2006**   | ** ** |
|-----------------------|------------|----------------|----------------|------------|------------|
|                  |       |           |           |       |       |
| Finished goods        | ** ** | **$**          | **1,473,720**  |       | $          | 3,256,330 |   |
| Raw materials         | ** ** | **12,983,539** |           | 10,461,893 |       |
| Work-in-process       | ** ** | **1,352,000**  |           | 807,185    |       |
| Spare parts inventory | ** ** | **1,167,903**  |           | 968,468    |       |
|                  |       |           |           |       |       |
|                  | ** ** | **$**          | **16,977,162** |       | $          | 15,493,876 |   |

 

(continued on next page)

 

F-9

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**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Investmentin Commodities Contracts, Derivative Instruments and Hedging Activities*

SFAS No. 133requires a company to evaluate its contracts to determine whether the contractsare derivatives. Certain contracts that literally meet the definition of a derivativemay be exempted from SFAS No. 133 as normal purchases or normal sales.Normal purchases and normal sales are contracts that provide for the purchaseor sale of something other than a financial instrument or derivative instrumentthat will be delivered in quantities expected to be used or sold over areasonable period in the normal course of business. Contracts that meet therequirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

 

The Company enters intoshort-term cash, options and futures contracts as a means of securing corn andnatural gas for the ethanol plant and managing exposure to changes in commodityprices. All derivatives are designated as non-hedge derivatives. Although thecontracts are effective economic hedges of specified risks, they are notdesignated as and accounted for as hedging instruments.

 

As part of its tradingactivity, the Company uses futures and option contracts offered throughregulated commodity exchanges to reduce risk and is exposed to risk of loss inthe market value of inventories. To reduce that risk, the Company generallytakes positions using cash and futures contracts and options.

 

Unrealized gains andlosses related to derivative contracts are included as a component of cost ofrevenues in the accompanying consolidated financial statements. Inventories arerecorded at net realizable value so that gains and losses on derivativecontracts are offset by gains and losses on inventories and reflected incurrent earnings. For the statement of cash flows, such contract transactionsare classified as operating activities.

 

TheCompany has recorded an increase (decrease) to cost of revenues of $1,595,577,$3,181,810 and ($211,011) related to our derivative contracts for the yearended December 31, 2007, 2006 and 2005, respectively.  These derivative contracts can be found onthe Balance Sheet under “Investment in commodities contracts”.

 

During 2007 and 2006 the Company entered into derivative financial instrumentsto limit its exposure to changes in interest rates.  The Company entered into two interest rateswap agreements as part of its interest rate risk management strategy and toeffectively convert a portion of its variable rate debt to fixed rate debt.  The swap agreements are accounted for as acash flow hedge under SFAS No. 133, as amended.

 

*InterestRate Swap Agreements*

During2007 and 2006 the Company entered into interest rate swap agreements as part ofits interest rate risk management strategy and to effectively convert a portionof its variable rate debt to fixed rate debt. The swap agreements, which both expire August 31, 2014, areaccounted for as cash flow hedges under SFAS No. 133, as amended.  Under the terms of the swap agreements, theCompany’s net payment is a fixed interest rate on the notional amount inexchange for receiving a variable rate based on one month LIBOR. The swaptransactions qualify for the shortcut method of recognition under SFAS No. 133;therefore, no portion of the swap is treated as ineffective. The notionalamount of the two interest rate swap agreements was $24,131,250 and $16,252,000as of December 31, 2007 and 2006, respectively.  A derivative liability to record the fairvalue of the swap of $900,826 and $187,069 has been recorded, with acorresponding entry of $550,734 and $144,342 to accumulated other comprehensiveloss to the members’ equity section of the balance sheet and a decrease of$163,023 and $42,727 to minority interest for the years ended December 31,2007 and 2006, respectively.

 

(continued on next page)

 

F-10

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**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*OtherComprehensive Income (Loss)*

TheCompany has adopted Statement of Financial Accounting Standards No. 130,Reporting Comprehensive Income (“SFAS 130”) that establishes standards forreporting comprehensive income. The Statement defines comprehensive income asthe changes in equity of an enterprise except those resulting from stockholdertransactions. As of December 31, 2007 and 2006, accumulated othercomprehensive loss consists of an unrealized loss from our interest rate swapagreements designated as a cash flow hedge.

 

*MinorityInterest*

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

 

*Use of Estimates*

 

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

 

*Concentrationsof Credit Risk*

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

 

*Propertyand Equipment*

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

 

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

 

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

 

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

 

Buildings consists ofadministrative offices, sheds, catwalks, platforms, and mechanical and grainbuildings.

 

*Long-LivedAssets*

In accordance with FinancialAccounting Standard Board (FASB) Statement of Financial Accounting Standards No. 144(SFAS 144), *Accounting for the Impairment orDisposal of Long-Lived Assets,*long-lived assets, such as property,plant, and equipment, and purchased intangible assets subject to amortization,are reviewed for

 

(continued on next page)

 

F-11

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**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

impairment whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable. If circumstances require a long-lived asset be tested forpossible impairment, the Company first compares undiscounted cash flowsexpected to be generated by an asset to the carrying value of the asset. If thecarrying value of the long-lived asset is not recoverable on an undiscountedcash flow basis, an impairment is recognized to the extent that the carryingvalue exceeds its fair value. Fair value is determined through variousvaluation techniques including discounted cash flow models, quoted marketvalues and third-party independent appraisals, as considered necessary.

 

A loss on impairment ofassets of $625,195 was recognized by the Company’s management during 2007 andis included in cost of revenues.  Asubset of the plant’s thermal oxidizers, built during the original constructionof the plant, was deemed impaired for $614,640 when environmental testingindicated that the equipment recently installed to replace the subset wassufficient to meet environmental compliance rules.  The estimated fair market value of this assetis $100,000, for which management intends to sell on the open market, and islisted on the Consolidated Balance Sheet as “Assets held for sale.”  In addition, the Company recorded a  loss on impairment of assets of $10,555 for acompilation of several small equipment items that were deemed unusable.

 

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

 

A loss on impairment ofassets for $355,177 was recognized by the Company’s management during 2005 andis included in cost of revenues.  Asubset of the thermal oxidizers was deemed impaired and no longer useful due toextreme internal heat damage. Due to the extreme degradation of the subset,management determined that this asset was without value  as the scrap value of such asset approximatedthe 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.

 

*IncomeTaxes*

The Company is not ataxpaying entity for federal and state income tax purposes due to its treatmentas a partnership.  Accordingly, noprovision or liability for federal or state income taxes has been included inthese financial statements.  Income ofthe Company is taxed to the members in their respective returns.

 

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

 

(continuedon next page)

 

F-12

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**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Cost ofRevenues*

The primary components ofcost of revenues from the production of ethanol and related products are cornexpense, energy expense (steam, natural gas and electricity), raw materialsexpense (chemicals and denaturant), shipping costs on sales and depreciation onprocess equipment.

 

All shipping costsincurred with regard to the sale of ethanol and related product inventory areincluded in the consolidated statements of operations as a component of grossrevenues. Accordingly, those shipping costs are deducted and are all classifiedas a component of cost of revenues. Shipping costs in relation to sales aredefined as the cost to transport products to customers. Other shipping costs inthe cost of revenues include inbound freight charges on inventory.

 

*Generaland Administrative Expenses*

The primary components ofgeneral and administrative expenses are management fees, insurance expense andprofessional fees (legal, audit and consulting).

 

*Reclassifications*

Certainreclassifications have been made to the 2006 and 2005 financial statements toconform to the presentation in 2007. These reclassifications had no change inpreviously reported net income.

 

*Recently Issued Accounting Pronouncements*

InSeptember 2006, the FASB issued SFAS 157,*Fair Value Measurements*. SFAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements. The statement is effective for (1) financial assets andliabilities in financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years and (2) certainnon-financial assets and liabilities in financial statements issued for fiscalyears beginning after November 15, 2008, and interim periods within thosefiscal years. The Company is evaluating the effect, if any, that the adoptionof SFAS 157 will have on its results of operations, financial position, and therelated disclosures.

 

InFebruary 2007, the FASB issued SFAS 159, *The FairValue Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement No. *115 (*Accountingfor Certain Investments in Debt and Equity Securities*). SFAS 159provides companies with an option to report selected financial assets andliabilities at fair value and is effective for fiscal years beginning after November 15,2007 with early adoption permitted. The Company is evaluating the effect, ifany, that the adoption of SFAS 159 will have on its results of operations,financial position, and the related disclosures.

 

InDecember 2007, the FASB issued SFAS 160, *NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51(Consolidated Financial Statements)*. SFAS 160 establishes accountingand reporting standards for a noncontrolling interest in a subsidiary and forthe deconsolidation of a subsidiary. In addition, SFAS 160 requires certainconsolidation procedures for consistency with the requirements of SFAS 141, *Business Combinations*. SFAS 160 is effective for fiscalyears, and interim periods within those fiscal years, beginning on or after December 15,2008 with earlier adoption prohibited. The Company is evaluating the effect, ifany, that the adoption of SFAS 160 will have on its results of operations,financial position, and the related disclosures.

 

(continued on next page)

 

F-13

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** **

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

 

In December 2007,the FASB issued SFAS 141(R), *BusinessCombinations*.  SFAS 141(R) expandsthe definition of transactions and events that qualify as businesscombinations; requires that the acquired assets and liabilities, includingcontingencies, be recorded at the fair value determined on the acquisition dateand changes thereafter reflected in revenue, not goodwill; changes therecognition timing for restructuring costs; and requires acquisition costs tobe expensed as incurred. Adoption of SFAS 141(R) is required forcombinations after December 15, 2008. Early adoption and retroactiveapplication of SFAS 141(R) to fiscal years preceding the effective dateare not permitted. The Company is evaluating the effect, if any, that theadoption of SFAS 141(R) will have on its results of operations, financialposition, and the related disclosures.

 

**NOTE 3 -**                     NOTES PAYABLE

** **

Northern Growers receivedadvances of $5,000 from various entities to help establish the Company. Thisshort-term note payable is due on demand and does not bear interest.  The balance of this non-interest bearing notewas $5,000 at December 31, 2007 and 2006.

 

On August 28, 2006,POETTM Biorefining - Big Stone and US Bank National Association, Sioux Falls,South Dakota (Bank) entered into an amended and restated loan agreement for thepurpose of financing the plant’s expansion and restructuring the $3.0 millionand $5.0 million revolving notes into one note.  On September 21,2007, an amendment to the loan agreement became effective.  The purpose of the amendment was to finance$4,300,000 for additional grain storage and to finance a $9,000,000 short-termrevolving note. Under the amended and restated loan agreement and the September 21,2007 amendment, POETTM Biorefining — Big Stone is subject to six notes:  Note #174, a $3.9 million variable-rate,non-revolving note;  Note #158, a $15.8 million fixed-rate note; Note #91,an $8 million variable-rate, revolving long term note; Note #190, a $33 millionconstruction note; Note #232, a $4.3 million variable-rate note; and Note #216,a $9 million variable-rate, revolving short-term note.

 

Note #174, the $3.9million variable-rate, non-revolving note, bears interest at the Bank’s primerate, or 7.25% at December 31, 2007. This note requires quarterly paymentsof interest and amortized principal on the basis of a ten-year term, the firstpayment being made on June 30, 2005.  The note matures on March 31,2012.

 

Note #158, the $15.8million fixed-rate note, bears an interest rate of 6.38%.  This noterequires quarterly payments of interest and amortized principal on the basis ofa ten-year term and is subject to maturity on March 31, 2012. The firstpayment was made on June 30, 2005.

 

Note #117, the $1.2million fixed rate note, was retired on April 30, 2007.

 

The amended and restatedloan agreement restructured the $3.0 million and $5.0 million notes into an $8million revolving note (Note #91). The new revolving note permits POETTMBiorefining - Big Stone to borrow, on a revolving basis, the difference betweenthe unpaid principal balance and $8 million. The revolving note bears avariable-interest rate equal to the prime rate announced by the Bank from timeto time, adjusted each time the Prime Rate changes. Quarterly payments ofinterest on any unpaid balance are due March 31, June 30, September 30,and December 31 of each year. The total unpaid principal balance is due atmaturity, or August 31, 2014. The loan is subject to a quarterly unusedcommitment fee of .0375% and prepayment is without penalty.

 

Note #190, theconstruction note of $33,000,000, was converted to a term note on August 31,2007.  The notional amount ($24,131,250as of December 31, 2007) is subject to the interest rate swap agreementsdiscussed in Note 2 under “Interest Rate Swap Agreements”.  The loan will be amortized over a ten-yearperiod which began August 31, 2007 and is subject to a maturity of August 31,2014. Payments of principal are due quarterly and began November 30,2007.  Payments of interest are duemonthly, subject to a variable rate of one-month LIBOR plus 2.75%, adjustedmonthly (7.571% at December 31, 2007).

 

(continued on next page)

 

F-14

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** **

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

 

Note #232, the $4.3 million note, which was issued tofinance additional grain storage and handling equipment, is subject to avariable rate of LIBOR plus 3.00% (8.225% at December 31, 2007), adjustedand due monthly. A principal payment of $154,000 is due quarterly, which beganon October 31, 2007.

 

Note #216, the $9 millionshort-term note, which was issued on September 21, 2007, permits us toborrow, on a revolving basis, the difference of the outstanding principalamount and the lesser of the borrowing base or $9.0 million. The borrowing baseis defined as 75% of the total of the fair market value of the outstandinginventory, eligible accounts receivable, and hedging accounts at fair marketvalue. The principal purpose of this revolver is to cover the cost ofpurchasing corn.  It bears avariable-interest rate equal to one-month LIBOR plus 3.00%, payable monthlywhen there is an outstanding balance (8.225% at December 31, 2007).  The loan is subject to a quarterly unusedcommitment fee of .0250%. The total unpaid principal balance is due atmaturity, or July 30, 2008.  $9million was available at December 31, 2007.

 

POETTM Biorefining - BigStone is subject to certain restrictive covenants establishing minimumreporting requirements, ratios, working capital and net worth requirements andis in full compliance at December 31, 2007.  Under the Septemer 21, 2007 amendment to theloan agreement, the working capital requirement increased from $7.5 million to$10 million on October 1, 2007. Collateral for the notes is multiple mortgages and security agreements,multiple UCC filings on all business assets, and assignments of certainagreements related to the construction and operation of the plant.

 

The balance of thelong-term notes payable as of December 31, 2007 and 2006 is as follows:

 
| ** **           | ** ** | **2007**       | ** **     | **2006**   | ** ** |
|----------------------|------------|----------------|----------------|------------|------------|
|                 |       |           |           |       |       |
| Note #174            | ** ** | **$**          | **2,827,500**  |       | $          | 3,217,500 |   |
| Note #158            | ** ** | **12,440,717** |           | 13,733,942 |       |
| Note #117            | ** ** | **—**     |           | 165,901    |       |
| Note #190            | ** ** | **32,175,000** |           | 18,959,873 |       |
| Note #232            | ** ** | **4,146,000**  |           | —     |       |
|                 |       |           |           |       |       |
|                 | ** ** | **51,589,217** |           | 36,077,216 |       |
| Less current portion | ** ** | **(5,695,078** | **)**          | (2,685,475 | )          |
|                 |       |           |           |       |       |
|                 | ** ** | **$**          | **45,894,139** |       | $          | 33,391,741 |   |

 

At December 31, 2007and 2006, there were no outstanding borrowings against the variable raterevolving notes and the balance available on these notes was $8,000,000.

 

(continued on next page)

 

F-15

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** **

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

 

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

 

| **Year Ending December 31,** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2008                              |       | $          | 5,695,078  |   |
| 2009                              |       | 5,785,844  |       |
| 2010                              |       | 5,882,541  |       |
| 2011                              |       | 5,985,556  |       |
| 2012                              |       | 11,499,198 |       |
| 2013 to August 31, 2014      |       | 16,741,000 |       |
|                              |       |       |       |
|                              |       | $          | 51,589,217 |   |

 

**NOTE 4 -**                     RELATED PARTY TRANSACTIONS

** **

Northern Growers and Broin Investments I, LLC, are the members of POETTMBiorefining - Big Stone. Northern Growers invested $12,500,000 and BroinInvestments I, LLC invested $3,700,000 in POETTM Biorefining - Big Stone fortheir respective ownership interests of 77.16% and 22.84%. In accordance withthe Operating Agreement of POETTM Biorefining - Big Stone, Broin Investments I,LLC, has the right to elect two of seven members of the Board of Managers ofPOETTM Biorefining - Big Stone.

 

Additional agreements with related parties areincluded in Note 6.

 

**NOTE 5 -**                     FAIR VALUE OFFINANCIAL INSTRUMENTS

** **

The Company considers the carrying amount of significant classes offinancial instruments on the balance sheets, including cash, accountsreceivable, inventories, other assets, accounts payable, accrued liabilities,and variable rate long-term debt to be reasonable estimates of fair valueeither due to their length of maturity or the existence of variable interestrates underlying such financial instruments that approximate prevailing marketrates at December 31, 2007.  The Company’s other significant classesof financial instruments on the balance sheets for which the carrying amountsand estimated fair values differ at December 31, 2007 are detailed below.

 

As of December 31, 2006, the carrying amount of the fixed-rate,long-term note payable obligations exceeded fair value. Due to declininginterest rates during 2007, the carrying amount of the fixed-rate, long-termnote payable obligations were less than fair value at December 31, 2007.As the following table presents, the carrying amount and the fair value oflong-term note payable obligations at December 31, 2007 and 2006 are asfollows:

 

| ** **                                     | ** ** | **Carrying Amount** | ** **     | **Fair Value** | ** ** |
|------------------------------------------------|------------|---------------------|----------------|----------------|------------|
|                                           |       |                |           |           |       |
| Long-term notes payable December 31, 2007 | ** ** | **$**               | **51,589,217** | ** **     | **$**      | **51,652,937** | ** ** |
| Long-term notes payable December 31, 2006 | ** ** | **$**               | **36,077,216** | ** **     | **$**      | **35,728,911** | ** ** |

 

The Company believes thecarrying amount of short-term notes payable approximates their value due to theshort maturity of these instruments.

 

(continued on next page)

 

F-16

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** **

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

 

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

** **

Substantially all of the Company’s endeavors 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,state and local requirements.

 

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

 

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

 

Expansion Construction Agreement — The Company entered into aDesign/Build Agreement with POETTM Design and Construction, Inc. (formerly knownas Broin & Associates, Inc.) on October 25, 2005. Thepurpose of this agreement was 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 plantfor the incorporation of new raw starch technology. The final cost ofconstruction and improvements for both projects was $42.3 million, with allconstruction complete at December 31, 2007.  The liability incurred on this constructioncontract was $0 and $2,173,905 at December 31, 2007 and 2006,respectively.

 

Additional Corn Storage Construction Agreement — The Company entered into aDesign/Build Agreement with POETTM Design and Construction, Inc. on April 3,2007.  The purpose of this agreement wasto expand the corn storage capacity at the plant.  The final cost of construction andimprovements for this project was $4.2 million, with all construction completeand final payments made at December 31, 2007.

 

Ethanol Marketing Agreement — The Company renewed its agreement withEthanol Products, LLC (d/b/a/ POETTM Ethanol Products) for the sale, marketing,billing and receipt of payment and other administrative services for allethanol produced by the plant.  The newagreement is effective July 1, 2007 and terminates on July 1, 2012,automatically renewing for a five-year term unless a notice of termination isprovided by either party prior to the end of the term, and increases marketingfees by $0.002 per gallon sold.  TheCompany has sales commitments with POETTM Ethanol Products of approximately 28million gallons over the next twelve months, of which 14 million gallons arecontracted at a variable price and 14 million gallons are contracted at a fixedsales price ranging from $1.58 to $1.98 per gallon. The Company purchases allof its denaturant through POETTM Ethanol Products.

 

Management Agreement — On April 20, 2005, the Company renewed itsagreement with POETTM Plant Management, LLC (formerly known as Broin Management,LLC) for the management and operation of the plant. The original agreement wasexecuted on November 2, 2000 and remained in effect until July 1,2005. The term of the new management agreement, as amended, continues through June 30,2015.  In exchange for these services, POETTM Plant Management receives anannual fee of $450,000, payable in equal monthly installments, plus anincentive bonus based on a percentage of net income, payable quarterly. Theannual fee is adjusted each year on March 1st for changes in the consumerprice index. The fees and bonus paid to POETTM Plant Management include the salaryand benefits of the general manager and technical manager and certain otherservices related to operation of the plant.

 

(continued on nextpage)

 

F-17

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** **

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

 

Technology and Patent Rights License Agreement - On October 25, 2005, the Companyentered into a Technology and Patent Rights License Agreement with POETTM Designand Construction, Inc. (formerly known as Broin and Associates, Inc.).  Under this agreement, POETTM Design andConstruction granted the Company a non-exclusive license to use certaintechnology and patents owned, developed, or obtained by POETTM Design andConstruction 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 until June 30,2015.

 

Risk ManagementAgreement - On April 1,2007, the Company entered into a new corn and natural gas price risk managementagreement with POETTM Plant Management. The new risk management agreement became effective on July 1, 2007and terminates on July 1, 2012, automatically renewing for a five-yearterm unless a notice of termination is provided by either party prior to theend of the term.  In exchange forproviding certain risk management services relating to corn and natural gasprices, including hedging and pooling services, the Company pays POETTM PlantManagement an annual fee, payable in quarterly installments, subject tomodification in the case of plant expansions or increases in corn usage.

 

Distillers GrainsMarketing Agreement—****The Company has an agreement withPOETTM Nutrition, Inc. (formerly known as Dakota Gold Marketing, Inc.),to provide marketing and administrative services for the sale of distillersgrains. The agreement commenced March 8, 2002, with a current expirationdate of March 8, 2012, renewing for five-year terms unless terminated byeither party with 90 days notice prior to expiration.  The agreement provides for an agencyrelationship in that POETTM Nutrition does not take title to the distillersgrains but acts as a broker on behalf of the Company.  The Company has entered into forwardcontracts to sell approximately 61,000 tons of various distiller grains at anaverage fixed price of approximately $146 per ton as of December 31, 2007.

 

Revenues and expensesrelated to agreements with related parties for the years ended December 31,2007, 2006 and 2005 are as follows:

 

| ** **                            | ** ** | **2007**      | ** **      | **2006**  | ** ** | **2005**    | ** ** |
|---------------------------------------|------------|---------------|-----------------|-----------|------------|-------------|------------|
|                                  |       |          |            |      |       |        |       |
| Ethanol gross revenues                | ** ** | **$**         | **116,084,868** |      | $          | 105,702,927 |       | $ | 72,633,304 |   |
| Denaturant expense                    | ** ** | **4,352,347** |            | 4,105,335 |       | 2,806,553   |       |
| Management fees expense               | ** ** | **1,592,821** |            | 3,440,001 |       | 1,663,261   |       |
| Licensing fees expense                | ** ** | **428,981**   |            | 82,739    |       | —      |       |
| Marketing fees expense - all products | ** ** | **952,888**   |            | 659,874   |       | 619,527     |       |
|                                       |            |               |                 |           |            |             |            |  |  |  |

 

Agreements with unrelatedparties are as follows:

 

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

 

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

 

 

(continued on next page)

 

F-18

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** **

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

 

Expenses related to theproperty lease and steam agreements for the years ended December 31, 2007,2006 and 2005 were $2,962,099, $3,052,753 and $2,361,367, respectively.

 

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

 
| ** **                         | ** ** | ** **     | ** ** | ** **     | ** ** | **Unconditional** | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------|------------|----------------|------------|-------------------|------------|------------|------------|
| ** **                         | ** ** | **Lease**      | ** ** | **Management** | ** ** | **Purchase**      | ** ** | ** ** | ** ** |
| **Years Ending December 31,** | ** ** | **Agreements** | ** ** | **Agreements** | ** ** | **Agreements**    | ** ** | **Total**  | ** ** |
|                               |       |           |       |           |       |              |       |       |       |
| 2008                               |       | $              | 2,520      |           | $          | 547,509           |       | $          | 217,080    |   | $ | 767,109 |   |
| 2009                               |       | 2,520          |       | 547,509        |       | 217,080           |       | 767,109    |       |
| 2010                               |       | 2,520          |       | 547,509        |       | 217,080           |       | 767,109    |       |
| 2011                               |       | 2,646          |       | 547,509        |       | 217,080           |       | 767,235    |       |
| 2012                               |       | 2,646          |       | 490,656        |       | 90,450            |       | 583,752    |       |
| 2013-2100                          |       | 366,823        |       | 1,179,263      |       | —            |       | 1,546,086  |       |
|                               |       |           |       |           |       |              |       |       |       |
|                               |       | $              | 379,675    |           | $          | 3,859,955         |       | $          | 958,770    |   | $ | 5,198,400 |   |

 

Corn Delivery — On August 9, 2005, POETTMBiorefining - Big Stone agreed to release Northern Growers and, accordingly,all of its members from delivering corn to the plant starting on January 1,2006.  Prior to January 1, 2006, Northern Growers’ members wereobligated to deliver corn to the plant unless the plant released the memberfrom the member’s corn delivery obligation.  Effective January 1,2006, however, Northern Growers’ members are no longer obligated to delivercorn to the plant. Instead, the plant purchases all of its corn from local cornproducers and the open market.  In addition, POETTM Biorefining - Big Stoneagreed to honor all member forward contracts for 2006 delivery if the contractwas written by September 15, 2005. Purchases of corn from corn delivery agreements and cash contracts fromthe Northern Growers’ members totaled approximately $36,357,000, $26,346,000and $22,016,000 for the years ending December 31, 2007, 2006 and 2005,respectively, of which $3,898,937 and $1,505,428 was recorded as a liability atDecember 31, 2007 and 2006, respectively.

 

Incentive Revenue — The Company previously receivedincentive payments from the United States Department of Agriculture (USDA) forthe use of corn to produce ethanol. The program ended June 30, 2006.  The USDA had set the annual maximum not toexceed $7,500,000 for each eligible producer. The incentive was calculated onthe USDA fiscal year of October 1 to September 30. Revenue of $31,385and $26,835 was earned for the USDA program years ended September 30, 2006and 2005, respectively. Incentive revenue of $0, $8,551, and $48,681 wasrecorded for the twelve months ended December 31, 2007, 2006 and 2005,respectively, for this program due to the variability of program rules forpayout ratios.

 

The Company also receivesan incentive payment from the State of South Dakota to produce ethanol. Inaccordance with the terms of this arrangement, revenue is recorded based onethanol sold. The State of South Dakota has set a maximum of up to $1,000,000per year for this program per qualifying producer. The Company has earned$416,667, $750,000 and $776,333 for the program years ended June 30, 2008,2007 and 2006, respectively. Incentive revenue of $750,001, $776,333 and$705,404 was recorded for the twelve months ended December 31, 2007, 2006and 2005, respectively, for this program.

 

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

 

(continued on next page)

 

F-19

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** **

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

 

EnvironmentalContingency — In January 2003,the Environmental Protection Agency (EPA) issued formal information requeststo, among others, plants designed, constructed, and/or managed by POETTM Designand Construction and POETTM Plant Management. By virtue of the nature and timingof these requests, the Company’s plant became subject to these requests. Therequests required that the subject plants provide the EPA with certain dataregarding emissions, presumably to determine whether the applicable plants werein compliance with the Clean Air Act. After this information was provided tothe EPA, POETTM Design and Construction, on behalf of the Company and thesubject plants managed by POETTM Plant Management, initiated discussions withthe EPA regarding the application and use of testing methods for quantifyingcertain types of emissions emanating from these plants.

 

To date, no legalproceeding is pending with or threatened by the EPA nor has POETTM Design andConstruction resolved with the EPA the application and use of the propertesting method for quantifying emissions. If a proceeding were initiated orsettlement 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 a proceeding is initiated or settlement reached, until the EPA and POETTM Designand Construction resolve the outstanding issues, the Company is unable toestimate the scope and magnitude of any possible fine or other penalty.Accordingly, the Company has not accrued any amount to its consolidatedstatement of operations relating to any potential claim.

 

**NOTE 7 -**                     DISTRIBUTIONS

** **

During January 2005,POETTM Biorefining - Big Stone approved a $5,000,000 distribution, which it paidon February 1, 2005. Northern Growers received $3,858,000 and the minoritymember received $1,142,000. In conjunction with this cash distribution, on February 7,2005, Northern Growers paid a distribution of $3,778,051 to its members ofrecord as of December 31, 2004.

 

During July 2005,POETTM Biorefining - Big Stone approved an $8,000,000 distribution, which itpaid on July 28, 2005. Northern Growers received $6,172,800 and theminority member received $1,827,200. In conjunction with this cashdistribution, on July 29, 2005, Northern Growers paid a distribution of$5,972,839 to its members of record as of April 30, 2005.

 

During October 2005,POETTM Biorefining - Big Stone approved a $3,200,000 distribution, which it paidon October 28, 2005. Northern Growers received $2,469,120 and the minoritymember received $730,880. In conjunction with this cash distribution, on October 31,2005 Northern Growers paid a distribution of $2,469,064 to its members ofrecord as of August 31, 2005.

 

During January 2006,POETTM Biorefining - Big Stone approved a $4,162,763 distribution, which it paidon January 24, 2006. Northern Growers received $3,211,988 and the minoritymember received $950,775. In conjunction with this cash distribution, on January 30,2006, Northern Growers paid a distribution of $3,212,093 to its members ofrecord as of December 31, 2005.

 

During April 2006,POETTM Biorefining - Big Stone approved a $3,675,448 distribution, which it paidon May 1, 2006. Northern Growers received $2,835,976 and the minoritymember received $839,472. In conjunction with this cash distribution, on May 8,2006, Northern Growers paid a distribution of $2,760,998 to its members ofrecord as of March 31, 2006.

 

During July 2006,POETTM Biorefining - Big Stone approved a $10,899,284 distribution, which itpaid on August 2, 2006.  Northern Growers received $8,409,888 and theminority member received $2,489,396.  In conjunction with this cashdistribution, on August 7, 2006, Northern Growers paid a distribution of$8,359,696 to its members of record as of June 30, 2006.

 

(continued on next page)

 

F-20

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** **

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

 

During October 2006,POETTM Biorefining - Big Stone approved an $11,000,000 distribution, which itpaid on October 30, 2006.  Northern Growers received $8,487,600 andthe minority member received $2,512,400.  In conjunction with this cashdistribution, on November 6, 2006, Northern Growers paid a distribution of$8,337,419 to its members of record as of September 30, 2006.

 

During January 2007,POETTM Biorefining - Big Stone approved an $11,000,000 distribution, which itpaid on January 26, 2007.  Northern Growers received $8,487,600 andthe minority member received $2,512,400.  In conjunction with this cashdistribution, on January 29, 2007, Northern Growers retained $1,699,904 bya super majority vote of the Board of Managers, and paid a distribution of$6,787,696 to its members of record as of December 31, 2006.  Theabove distributions are recorded as a liability as of December 31, 2006.

 

During April 2007,POETTM Biorefining - Big Stone approved a $9,000,000 distribution, which it paidon April 24, 2007.  Northern Growers received $6,944,400 and theminority member received $2,055,600.  In conjunction with this cashdistribution, on April 25, 2007, Northern Growers retained $499,961 by asuper majority vote of the Board of Managers, and paid a distribution of$6,444,439 to its members of record as of March 31, 2007.

 

During July 2007,POETTM Biorefining - Big Stone approved a $5,300,000 distribution, which it paidon July 27, 2007.  Northern Growers received $4,089,480 and theminority member received $1,210,520.  In conjunction with this cashdistribution, on August 2, 2007, Northern Growers paid a distribution of$4,089,224 to its members of record as of June 30, 2007.

 

During January 2008,Northern Growers approved a distribution which it paid from cash reserves.  On January 29, 2008, Northern Growerspaid a distribution of $1,518,840 to its members of record as of December 31,2007.  The above distribution is recordedas a liability as of December 31, 2007.

 

**NOTE 8 -**                     CAPITAL UNITS

** **

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

 

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

 

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

 

**NOTE 9 -**                     INCOME TAXES

** **

As of December 31,2007 and 2006, the Company’s book basis of assets exceeded their tax basis byapproximately $32,800,000 and $30,100,000, respectively.  As of December 31, 2007 and 2006, theCompany’s book basis of liabilities exceeded their tax basis by $900,826 and$187,069, respectively, due to the treatment of the derivative financialinstruments.

 

(continuedon next page)

 

F-21

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** **

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

 

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

** **

On February 1, 2003,the Company set up a 401(k) plan for substantially all employees who workmore than 1,000 hours per year. Employees can make voluntary contributions upto federally designated limits. The Company matches employee voluntarycontributions at a 50% level up to an effective maximum of 2% of gross employeepay. Eligible employees are always fully vested in their account balancesresulting from employee voluntary contributions. The Company 401(k) expensefor the years ended December 31, 2007, 2006 and 2005 was $25,283, $33,646and $25,192, respectively.

 

**NOTE 11 -**              QUARTERLY FINANCIALDATA (UNAUDITED)

** **

Summary quarterly resultsare as follows:

 
| ** **                                    | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-----------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                    | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                          |       |        |       |        |       |        |       |        |       |
| Year Ended December 31, 2007:            |       |        |       |        |       |        |       |        |       |
|                                          |       |        |       |        |       |        |       |        |       |
| Total revenues                                |       | $           | 32,193,532 |        | $          | 34,977,104  |       | $           | 40,200,101 |   | $ | 30,873,043 |   |
| Gross profit                                  |       | 9,091,141   |       | 4,349,497   |       | 8,802,914   |       | 3,305,241   |       |
| Operating income (loss)                       |       | 7,690,390   |       | 3,320,726   |       | 7,501,694   |       | 2,245,866   |       |
| Income (loss) before Minority Interest        |       | 7,524,659   |       | 2,732,543   |       | 6,755,378   |       | 1,401,610   |       |
| Minority interest in subsidiary (income) loss |       | (1,745,148  | )          | (633,687    | )          | (1,549,455  | )          | (341,180    | )          |
| Net income (loss)                             |       | 5,779,511   |       | 2,098,856   |       | 5,205,923   |       | 1,060,430   |       |
| Basic earnings (loss) per unit                |       | 0.114       |       | 0.041       |       | 0.103       |       | 0.021       |       |
|                                          |       |        |       |        |       |        |       |        |       |
| Year Ended December 31, 2006:            |       |        |       |        |       |        |       |        |       |
|                                          |       |        |       |        |       |        |       |        |       |
| Total revenues                                |       | $           | 25,944,116 |        | $          | 31,839,903  |       | $           | 34,896,320 |   | $ | 30,156,780 |   |
| Gross profit                                  |       | 8,663,189   |       | 15,741,041  |       | 20,163,657  |       | 15,537,856  |       |
| Operating income (loss)                       |       | 7,548,135   |       | 14,182,345  |       | 18,347,680  |       | 13,662,600  |       |
| Income (loss) before Minority Interest        |       | 7,306,106   |       | 13,951,973  |       | 18,097,633  |       | 13,479,920  |       |
| Minority interest in subsidiary (income) loss |       | (1,678,944  | )          | (3,196,560  | )          | (4,137,618  | )          | (3,119,162  | )          |
| Net income (loss)                             |       | 5,627,162   |       | 10,755,413  |       | 13,960,015  |       | 10,360,758  |       |
| Basic earnings (loss) per unit                |       | 0.111       |       | 0.212       |       | 0.276       |       | 0.205       |       |
|                                          |       |        |       |        |       |        |       |        |       |
| 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                |       | 0.077       |       | 0.039       |       | 0.077       |       | 0.126       |       |

 

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

 

F-22

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