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** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**
| **x**                                                 | **Annual Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                  |                                                                                                |
| **For  the fiscal year ended December 31, 2009** |
|                                                  |                                                                                                |
| **o**                                                 | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Act of 1934**      |

** **

**Commission file number 0-50711**

 

**Northern Growers, LLC**

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address ofPrincipal Executive Offices) (Zip Code)

 

**(605)862-7902**

(Issuer’s TelephoneNumber, Including Area Code)

 

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

**None**

 

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

**Class ACapital Units**

 

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

 

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

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).   Yes o No o

 

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

 

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

 

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

 

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

 

The aggregate market valueof the registrant’s common stock held by non-affiliates at June 30, 2009was approximately $43,543,200. 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**

 

None.

 

 

 

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**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

This Annual Reporton Form 10-K and other reports issued by Northern Growers, LLC (includingreports filed with the Securities and Exchange Commission (the “SEC” or “Commission”),contain “forward-looking statements” that deal with future results,expectations, plans and performance.  Forward-looking statements mayinclude statements which use words such as “believe,” “expect,” “anticipate,” “intend,”“plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,”“potential,” or the negatives of these words, and all similar expressions.These forward-looking statements are made based on our expectations and beliefsconcerning future events affecting us and are subject to uncertainties andfactors relating to our operations and business environment, all of which aredifficult to predict and many of which are beyond our control, that could causeour actual results to differ materially from those matters expressed in orimplied by these forward-looking statements. We do not undertake anyresponsibility to release publicly any revisions to these forward-lookingstatements to take into account events or circumstances that occur after thedate of this report. Additionally, we do not undertake any responsibility toupdate you on the occurrence of any unanticipated events which may cause actualresults to differ from those expressed or implied by the forward-lookingstatements contained in this report. Important factors that could cause actual results to differ materiallyfrom our expectations are disclosed under “Risk Factors” and elsewhere in thisreport.  As stated elsewhere in thisreport such factors include, among others:

 
| · | Excess production capacity  and supply in the ethanol industry;                                                                                                                                                            |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                       |
| · | The price volatility  and uncertainty of corn, natural gas, steam, ethanol, unleaded gasoline, oil,  distillers grains and other commodities prices;                                                                       |
|   |                                                                                                                                                                                                                       |
| · | Changes in the weather  or general economic conditions impacting the availability and price of  commodities, particularly corn and natural gas;                                                                            |
|   |                                                                                                                                                                                                                       |
| · | Limitations on the  demand for ethanol resulting from the “blend wall” which limits the amount of  ethanol blended into the national gasoline pool based on current 10 percent  blend rate in standard vehicles; |
|   |                                                                                                                                                                                                                       |
| · | The results of our risk  management or hedging strategies;                                                                                                                                                                 |
|   |                                                                                                                                                                                                                       |
| · | Competition from  alternative fuels and alternative fuel additives;                                                                                                                                                        |
|   |                                                                                                                                                                                                                       |
| · | Fluctuations in U.S.  oil consumption and petroleum prices;                                                                                                                                                                |
|   |                                                                                                                                                                                                                       |
| · | Changes in plant  production capacity due to variations in steam supply provided by the  adjacent power plant;                                                                                                             |
|   |                                                                                                                                                                                                                       |
| · | Changes in the  availability of credit and interest rates;                                                                                                                                                                 |
|   |                                                                                                                                                                                                                       |
| · | The availability of  additional capital to support capital improvements and development;                                                                                                                                   |
|   |                                                                                                                                                                                                                       |
| · | The availability and  adequacy of our cash flow to meet our requirements;                                                                                                                                                  |
|   |                                                                                                                                                                                                                       |
| · | Changes in or  elimination of federal and/or state laws (including the elimination of any  federal and/or state ethanol tax incentives and supports);                                                                      |
|   |                                                                                                                                                                                                                       |
| · | 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;                                                             |

 

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| · | Changes in the  environmental regulations or in our ability to comply with the environmental  regulations that apply to our plant’s operations; and |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                     |
| · | Other factors discussed  below under the item entitled “Risk Factors.”                                                                         |

 

We are not underany duty to update the forward-looking statements contained in this report, nordo we guarantee future results or performance of what future businessconditions will be like. We caution you not to put undue reliance on anyforward-looking statements, which speak only as of the date of this report.

 

### **PART I**

###  

**Item1.  Business.**

 

**Overview**

 

Northern Growers, LLC (“NorthernGrowers”) is a South Dakota limited liability company, consisting of 960members who principally reside in South Dakota and the upper Midwest. NorthernGrowers owns and manages a 77.16% interest in its subsidiary, POET® Biorefining- Big Stone (“Big Stone”), an ethanol and distillers grains plant (the “plant”or “our plant”) located near the city of Big Stone City, South Dakota.(Northern Growers and Big Stone are referred to collectively in this report as “we,”“our,” or “us”).

 

Our revenues are derivedfrom the sale and distribution of ethanol and distillers grains to customersprimarily located in the U.S.  Corn for our plant’s production process issupplied primarily from local agricultural producers and from purchases on theopen market. After processing the corn into ethanol, ethanol is sold to POET®Ethanol Products, LLC, which subsequently markets and sells the ethanol togasoline blenders and refineries located throughout the continental U.S. All of our distillers grains are sold through our marketing agent, POET®Nutrition, Inc., which markets and sells the product to livestock feedersprimarily located in the continental U.S. The day-to-day operations of our plantare managed by POET® Plant Management, LLC, of Sioux Falls, South Dakota.

 

Our operating results arelargely driven by the prices at which we sell ethanol and distillers grains andthe costs related to their production.  Historically, the price of ethanoltends to fluctuate in the same direction as the price of unleaded gasoline andother petroleum products.  The greatesteffect on the price of ethanol is the supply and demand for ethanol in the U.S.markets. Our two largest costs of production are corn and natural gas, althoughour use of natural gas is offset by the use of steam supplied directly from theadjacent energy power plant called Big Stone Plant. The price of distillersgrains is generally influenced by supply and demand, the price of substitutelivestock feed, such as corn and soybean meal, and other animal feed proteins.

 

**General Developments of Business**

 

Northern Growers wasoriginally organized in 2000 as a South Dakota cooperative for the purpose ofowning and managing its interest in Big Stone and providing a major source ofcorn supply to the plant. Northern Growers was subsequently reorganized in 2003as a South Dakota limited liability company at which time it became subject tothe reporting requirements under the Securities Act of 1933 and SecuritiesExchange Act of 1934.  Northern Growersis taxed as a partnership for federal income tax purposes, meaning that all ofits income is subject to single-level, pass through tax treatment at the memberlevel rather than at the company level.

 

Construction ofour 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, but since thattime we have made significant capital improvements.  In March 2006, we completed a railexpansion project, which provided our plant with additional capacity to storerail cars for the shipment of products. In October 2006, we completed construction for the incorporation ofBPXTM technology into the production process. In addition to reducing energycosts, BPXTM releases additional starch content, increases the protein contentand quality of by-products and decreases plant emissions.  In May 2007, our plant expansion wascompleted, increasing its annual name-plate capacity from 40 million to 75million 

 

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gallons of ethanol.  In October 2007, we increased our grainstorage capacity by adding two grain bins. The design and construction of the BPXTM, grain storage and expansionprojects was completed by POET® Design and Construction, Inc., of SiouxFalls, South Dakota.

 

Since 2008, the ethanolindustry has experienced significant change. In 2008, the industry was markedby volatility and unprofitability. An increase in production capacity caused bynew and expanding plants drove ethanol prices lower and corn prices higher.Corn prices were significantly higher than in prior years which adverselyaffected costs of production. Similarly, ethanol prices were significantlylower than in prior years which adversely impacted revenues.  In addition, U.S. financial marketsexperienced a severe downturn in the latter part of 2008 and all of 2009.Businesses across many sectors experienced a lack of access to credit causing aseries of liquidity crises.

 

In 2009, theethanol industry began to stabilize and profitability returned to much of theindustry. The decrease in ethanol prices in 2008 caused many plants in the U.S.to slow production or shut down which consequently decreased supply nationwide.The decrease in supply contributed to an increase in ethanol prices andrevenues. At the same time, corn prices decreased due to a large carryout from2008 and a favorable harvest forecast in 2009. Energy prices, especially natural gas and steam prices, alsodecreased.  Whether the current trendcontinues into 2010 is uncertain due to the lasting effects of the financialcrisis, potential excess capacity in the ethanol industry and lack of demandgrowth, and volatility historically associated with corn and ethanol prices.

 

**PrincipalProducts**

 

The principalproducts produced at our plant are fuel grade ethanol and distillers grains.

 

***Ethanol***

 

Ethanol is ethylalcohol.  Ethanol is produced from starchor sugar-based feed products such as corn, potatoes, wheat, and sorghum, aswell as from agricultural waste products including sugar, rice straw, cheesewhey, beverage wastes and forestry and paper wastes. Historically, corn hasbeen the primary source of producing ethanol because of its relatively lowcost, wide availability and ability to produce large quantities ofcarbohydrates that convert into glucose more easily than other products. Today, approximately 90% of the ethanol produced in the U.S. is produced fromcorn.

 

Ethanol is usedfor three primary purposes: 1) as an oxygenated fuel additive; 2) as an octaneenhancer in fuels; and 3) as a non-petroleum based gas substitute.Approximately 95% of all ethanol is used for blending with unleaded gasolineand other fuel products. Ethanol has been utilized as a fuel additive since thelate 1970s when its value as a product extender for gasoline was discoveredduring the OPEC oil embargo crisis.  In the 1980s, ethanol began to seewidespread use as an octane enhancer, replacing other environmentally harmfulcomponents in gasoline such as lead and benzene.  Ethanol’s use as anoxygenate continued to increase with the passage of the Clean Air ActAmendments of 1990, which required the addition of oxygenates to gasoline inthe nation’s most polluted areas.  Because ethanol contains approximately35% oxygen, its combination with gasoline increases the percentage of oxygen ingasoline.  As a result, the gasoline burns cleaner and releases lesscarbon monoxide and other exhaust emissions into the atmosphere.

 

***Distillers Grains***

 

A principalby-product of the ethanol production process is distillers grains. Distillers grains are a high protein, high energy feed supplement marketedprimarily to the dairy, beef, sheep, swine, and poultry industries. It isa popular animal feed supplement, with millions of tons produced in NorthAmerica annually.  Most of the distillers grains produced in the U.S. aresold for use in animal feeds within the continental U.S., although a growingpercentage is exported to countries such as Canada and Mexico and countries inAsia and Europe.

 

Dry mill ethanolprocessing produces, generally, three forms of distillers grains, all of whichdiffer in moisture content and shelf life: 1) dried distillers grains withsolubles, otherwise known as DDGS; 2) distillers wet grains or “wet cake”; and3) modified distillers grains.  Distillers wet grains are processed cornmash that does not go through a drying process and contains approximately 70%moisture content.  Distillers wet grains have a short shelf life ofapproximately three days and can be sold only to livestock producers within theimmediate vicinity of a plant.  Modified distillers grains 

 

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are distillers wet grainsthat are dried to a 50% moisture content.  Modified distillers grains havea slightly longer shelf life and are often sold to nearby livestock producers.DDGS is distillers wet grains that are dried to an 8-10% moisture content. DDGShave an almost indefinite shelf life and may be sold and shipped to any marketregardless of its vicinity to a plant.

 

**Marketing and Distribution**

 

***Ethanol***

 

The ethanol produced atour plant is sold to POET® Ethanol Products, LLC, the terms of which aregoverned by an ethanol marketing agreement. After purchasing the ethanolfrom us, POET® Ethanol Products markets and sells the ethanol to major,multi-national oil companies with blending and refinery facilities locatedthroughout the continental U.S. The price that we receive from the sale toPOET® Ethanol Products is based upon various contracts between POET® EthanolProducts and its customers, and is fixed upon the transfer of title to POET®Ethanol Products.

 

The ethanolproduced at our plant is shipped by POET® Ethanol Products using rail carsoperated by POET® Ethanol Products or trucks supplied by companies with whichPOET® Ethanol Products contracts.  Transfer of title and risk of lossshifts to POET® Ethanol Products upon the loading of ethanol onto railcars andtrucks at the plant.  Our plant is served by rail facilities andconnections to the Burlington Northern Santa Fe railroad system, whichfacilitates the transportation of ethanol to customers’ terminals, and bymultiple South Dakota state highways and Interstate Highway 29, which providetransportation links in all directions.

 

The marketingagreement with POET®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.  POET® Ethanol Products charges us a marketing and service fee basedupon each gallon of ethanol sold. POET® 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 contractual relationshipwith POET®Ethanol Products is interrupted for any reason, we believe thatanother entity or entities to purchase or market the ethanol could belocated.  Any interruption, however, could temporarily disrupt the sale ofethanol and adversely affect our business and operations.

 

***Distillers Grains***

 

The distillersgrains produced at our plant are sold through POET® Nutrition, Inc., theterms of which are governed by a distillers grains marketing agreement. As ourexclusive marketing agent, POET® Nutrition markets and sells the distillersgrains to customers. By marketing through POETTM Nutrition, we are not dependentupon one or a limited number of customers. The price received from the sale ofdistillers grain is the price received from the customers with which POET® Nutritionhas negotiated and entered into a contract for sale.

 

We produce threevariations of distillers grains which are marketed through POET® Nutrition: 1)DDGS; 2) Dakota GoldTM; and 3) distillers wet grains. Dakota Gold® is DDGS whichPOET® Nutrition certifies to as meeting certain quality standards andspecifications.

 

POET® Nutritionmarkets distillers grains to local, regional, national and internationalmarkets.  We sell and ship a substantial majority of our distillers grainsto customers in the southwestern and western parts of the U.S., the remainderof which is shipped to other areas of the U.S. and to Mexico. Shipments tonational and international markets are primarily completed by the use of raildue to a longer shelf life, whereas shipments to local or regional markets areprimarily completed by truck.  We also contract with POET® Nutrition forthe use of railcars in the shipping of DDGS and Dakota Gold®, paying POET®Nutrition a flat fee per railcar in connection with each shipment.

 

The marketingagreement with POET®Nutrition is in effect until March 2012, renewingautomatically for additional five-year terms unless discontinued by eitherparty upon at least three months prior written notice.  POET® 

 

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Nutrition charges us amarketing fee based upon a percentage of gross monthly sales of distillersgrains less shipping costs. All shipping costs associated with thetransportation of distillers grains are borne by us and are included in ourgross revenues and cost of revenues, and POET® Nutrition is responsible forinvoicing all loads and receiving payments from the customers, the payment ofwhich is remitted to us.

 

**RiskManagement**

 

Due tofluctuations in the price of corn and natural gas, we use a risk managementprogram, including hedging strategies, to minimize our commodity risk. Hedging is a means of protecting the price at which corn and natural gas isbought in the future.  All of the commodity risk management servicesrelating to corn and natural gas are provided by POET® Risk Management inaccordance with a corn and natural gas price risk management agreement.  Under the agreement, we pay POET® RiskManagement an annual flat fee. The agreement is in effect until January 2012,renewing automatically for additional five-year terms unless discontinued byeither party upon written notice prior to the expiration of the term.

 

**DependenceUpon a Single or Few Customers**

 

We, as discussedabove, are substantially dependent upon POET® Ethanol Products for thepurchase, marketing and distribution of ethanol. POET® Ethanol Productspurchases 100% of the ethanol produced at our plant, all of which is marketedand distributed to its customers.

 

**Sourcesand Availability of Raw Materials**

 

***Corn***.Our major raw material for the production process is corn.  To operate ourplant at full name-plate capacity, we require the supply of approximately 27million bushels of corn annually.  We purchase a majority of our corn fromproducers in northeastern South Dakota and western Minnesota. We believethat corn producers in proximity to our plant will continue to provide asufficient supply for the foreseeable future.

 

***Steam.***Our production process requires a constant supply of steam.  Steam is usedfor the cooking, evaporation, and distillation processes.  While theproduction of steam in the ethanol production process is generally receivedfrom an ethanol plant’s on-site boilers, our plant receives a substantialportion of its steam from Big Stone Plant, a coal fired, electrical generatingfacility located immediately adjacent to our plant. Big Stone Plant isco-owned by three utilities, namely, Otter Tail Corporation, Montana-DakotaUtilities and NorthWestern Corporation. The benefit of a steam supply from BigStone Plant is that it reduces our dependence on natural gas foroperations.  In 2009, for example, 37% of our natural gas requirements foroperations were replaced directly with steam from Big Stone Plant, compared to41% of our requirements in 2008.

 

Big Stone Plantgenerally provides us with a consistent supply of steam to meet ourrequirements except during its semi-annual maintenance shutdowns. When BigStone Plant shuts down for any prolonged period of time, or if the transfer ofsteam is unexpectedly diminished or interrupted, we use two on-site boilerspowered by natural gas to generate steam. However, as discussed below under “NaturalGas,” when we are required to rely on our on-site boilers to generate steam,our natural gas supply can prevent us from generating a sufficient volume ofsteam to operate at full name-plate production capacity.

 

The purchase ofsteam is governed by a steam sale agreement between us and Big StonePlant.  The rate is set at a fixed ratebased on specified volume used, above which it is set at a market rate asdetermined by Big Stone Plant. The agreement’s ten year term ends on June 1,2012, but automatically renews for two additional five-year terms unlessterminated by either party by providing 12 months advance notice.

 

***Natural Gas****.* Ourproduction process requires a constant supply of natural gas.  Natural gasis the primary energy source for the drying of distillers grains. It isprimarily responsible for powering the two on-site boilers for the generationof steam in the event that additional steam is necessary or the supply of steamfrom Big Stone Plant is unexpectedly diminished or interrupted. We contractwith CenterPoint Energy Services, Inc., of Houston, Texas, for the supplyand distribution of natural gas to the plant.  The agreement withCenterPoint terminates in 2012.

 

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Prior to thecompletion of our expansion in May 2007, we did not experience anyinterruption or shortage of natural gas supply. But since completion we have experienced a shortage of supply attimes.  When our plant’s supply of steamfrom Big Stone Plant is interrupted for any prolonged period of time, such asduring Big Stone Plant’s general maintenance shut downs, our plant’s naturalgas capacity is insufficient to allow the plant to operate at its full 75million gallon name-plate production capacity. In such instances, our plant isrequired to scale back production, typically based in proportion to thecapacity of our natural gas supply. To avoid this problem in the future, we arecurrently exploring options to increase our natural gas supply.

 

***Electricity***. Our production process requires a constant supply ofelectricity.  Electricity is necessary to generate lighting and to powerthe machinery and equipment at the plant.  We contract with Otter TailPower Company of Otter Tail, Minnesota, to provide us with all of our electricpower requirements.  The agreement automatically renews for one year termsunless terminated by either party by providing 12 months advance writtennotice. Since operations were commenced, we have not had interruptions orshortages in the supply of electricity.

 

***Water***.The production process requires a constant supply of water.  Water isnecessary for the slurry and cooking processes, cooling towers and boileroperations.  We contract with the city of Big Stone City and Big StonePlant to supply our plant with water for the production process.  Theagreement with the city of Big Stone City is in effect until 2012, andautomatically renews for two, five-year terms unless terminated by either partywith 12 months advance written notice.  Since operations were commenced,the city of Big Stone City and Big Stone Plant have provided us with an ampleand consistent supply of water to meet operational requirements.

 

**Researchand Development**

 

We do not conductany research and development relating to the production of ethanol anddistillers grains. Instead, we rely on POET® Research, Inc., of SiouxFalls, South Dakota, to research and develop new technologies in order toimprove the production process and end products. POET® Research provides usthis technology through a license agreement, where we pay POET® Research alicensing fee on a quarterly basis.  Thisagreement terminates on June 30, 2015.

 

**Competition**

 

We are in directcompetition with numerous ethanol producers, many of whom have greaterresources than we do. Following the significant growth in the ethanol industryduring 2005 and 2006, the ethanol industry has grown at a much slower pace. Therapid growth during 2005 and 2006 is attributed to a favorable spread betweenthe price of ethanol and the cost of the raw materials to produce ethanol. Webelieve that currently there is excessive ethanol supply capacity in theindustry. This has resulted in some ethanol producers reducing production ofethanol or ceasing operations altogether. As a result of this overcapacity, theethanol industry has become increasingly competitive. Since ethanol is acommodity product, competition in the industry is predominantly based on price.We anticipate that without an increase in the amount of ethanol that can beblended into gasoline for use in conventional automobiles, ethanol demand maynot significantly increase which may result in ethanol supply capacityexceeding ethanol demand for the foreseeable future.

 

The U.S. EnvironmentalProtection Agency is currently reviewing whether to allow the increase ofethanol that can be blended for use in conventional automobiles from 10% to15%. The EPA, however, has delayed its decision on whether to allow a higherblend percentage until the middle of 2010. We believe that increasing ethanolblends to a higher blend percentage for use in conventional automobiles willincrease demand for ethanol and would likely positively impact ethanol prices.Yet, this may result in companies building new ethanol plants or expandingtheir current ethanol plants, which could lead to further overcapacity in theethanol industry.

 

Many of the currentethanol production incentives are designed to encourage the production ofrenewable fuels using raw materials other than corn. One type of ethanolproduction feedstock that is being explored is cellulose. Cellulose is the maincomponent of plant cell walls and is the most common organic compound on earth.Cellulose is found in wood chips, corn stalks, rice, straw, amongst othercommon plants. Cellulosic ethanol is ethanol produced from cellulose.Currently, cellulosic ethanol production technology is not sufficientlyadvanced to produce cellulosic ethanol on 

 

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a commercial scale;however, due to these new government incentives, we anticipate thatcommercially viable cellulosic ethanol technology will be developed in the nearfuture. Several companies and researchers have commenced pilot projects tostudy the feasibility of commercially producing cellulosic ethanol. If thistechnology can be profitably employed on a commercial scale, it couldpotentially lead to ethanol that is less expensive to produce than corn basedethanol, especially if corn prices are high. Cellulosic ethanol may alsocapture more government subsidies and assistance than corn based ethanol. Thiscould decrease demand for our product or result in competitive disadvantagesfor our ethanol production process.

 

At the end of 2008,VeraSun Energy filed for Chapter 11 bankruptcy following significantlosses. VeraSun’s ethanol plants were auctioned during the bankruptcy processand a significant number of these plants were purchased by Valero EnergyCorporation, a major gasoline refining company. The purchase by Valero Energyrepresents the first major oil company that has taken a stake in ethanolproduction infrastructure. In addition, Valero Energy controls its own supplyof ethanol that can be used to blend at its gasoline refineries. If other oilcompanies become involved in the ethanol industry, it may be increasinglydifficult for us to compete.

 

According to theRenewable Fuels Association, as of March 2, 2010, the ethanol industry hasgrown to 201 production facilities in the U.S. There are ten new plantscurrently under construction along with four plant expansions. The RenewableFuels Association currently estimates that the U.S. ethanol industry hascapacity to produce more than 13.5 billion gallons of ethanol per year.The new ethanol plants under construction along with the plant expansions underconstruction could push U.S. production of fuel ethanol in the near future tomore than 14.5 billion gallons per year. In South Dakota, excluding ourplant, there are currently 14 plants in full production, all of which have acombined production capacity of approximately 960 million gallons.  Thelargest ethanol producers in the U.S. include Archer Daniels Midland, GreenPlains Renewable Energy, Hawkeye Renewable and Valero Renewable Fuels, each ofwhich is capable of producing more ethanol than we produce at our plant.

 

Ethanol production isalso expanding internationally. Ethanol produced or processed in certaincountries in Central America and the Caribbean region is eligible for tariffreduction or elimination on importation to the United States under a programknown as the Caribbean Basin Initiative. Some ethanol producers, includingCargill, have started taking advantage of this situation by buildingdehydration plants in participating Caribbean Basin countries, which convertethanol into fuel-grade ethanol for shipment to the U.S. Ethanol imported fromCaribbean Basin countries may be a less expensive alternative to domesticallyproduced ethanol and may affect our ability to sell our ethanol profitably. Inaddition, despite the fact that there is a significant amount of ethanolproduced in the U.S., ethanol produced abroad and shipped by sea may be a morefavorable alternative to supply coastal cities that are located oninternational shipping ports.

 

Our plant also competeswith producers of other gasoline additives having similar octane and oxygenatevalues as ethanol. Alternative fuels, gasoline oxygenates and alternativeethanol production methods are also continually under development. The majoroil companies have significantly greater resources than we have to market otheradditives, to develop alternative products, and to influence legislation andpublic perception of ethanol. These companies also have sufficient resources tobegin production of ethanol should they choose to do so.

 

A number of automotive,industrial and power generation manufacturers are developing alternative cleanpower systems using fuel cells, plug-in hybrids or clean burning gaseous fuels.Like ethanol, the emerging fuel cell industry offers a technological option toaddress worldwide energy costs, the long-term availability of petroleumreserves and environmental concerns. Fuel cells have emerged as a potentialalternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions. If the fuel cell industry continues to expand andgain broad acceptance and becomes readily available to consumers for motorvehicle use, we may not be able to compete effectively. This additionalcompetition could reduce the demand for ethanol, which would negatively impactour profitability.

 

Demand for ethanol mayincrease as a result of increased consumption of E85 fuel. E85 fuel is a blendof 85% ethanol and 15% gasoline. According to U.S. Department of Energyestimates, there are currently nearly 8 million flexible fuel vehiclescapable of operating on E85 in the U.S. Further, the U.S. Department of Energyreports that there are currently more than 1,900 retail gasoline stationssupplying E85. The number of retail E85 suppliers increases 

 

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significantly each year,however, this remains a relatively small percentage of the total number of U.S.retail gasoline stations, which is approximately 170,000. In order for E85 fuelto increase demand for ethanol, it must be available for consumers to purchaseit. As public awareness of ethanol and E85 increases along with E85’s increasedavailability, we anticipate some growth in demand for ethanol associated withincreased E85 consumption.

 

***Distillers Grains Competition***

 

Ethanol plants in theMidwest produce the majority of distillers grains and primarily compete withother ethanol producers in the production and sales of distillers grains.According to the Renewable Fuels Association’s Ethanol Industry Outlook 2010,ethanol plants produced 30.5 million metric tons of distillers grains in2008/2009 and estimates 33 million metric tons in 2009/2010. The amount ofdistillers grains produced is expected to increase significantly as the numberof ethanol plants increase.

 

The primary consumers ofdistillers grains are dairy and beef cattle, according to the Renewable FuelsAssociation’s Ethanol Industry Outlook 2010. In recent years, an increasingamount of distillers grains have been used in the swine and poultry markets.Numerous feeding trials show advantages in milk production, growth, rumenhealth, and palatability over other dairy cattle feeds. With the advancement ofresearch into the feeding rations of poultry and swine, we expect these marketsto expand and create additional demand for distillers grains; however, noassurance can be given that these markets will in fact expand, or if they do,that we will benefit from it. The market for distillers grains is generallyconfined to locations where freight costs allow it to be competitively pricedagainst other feed ingredients. Distillers grains generally compete with corn,soybean meal and other feed formulations.

 

**Federaland State Government Supports**

 

Various federaland state laws, regulations, and programs have led to an increasing use ofethanol in fuel, including subsidies, tax credits, policies and other forms offinancial incentives.  Some of these laws provide economic incentives toproduce and blend ethanol and others mandate the use of ethanol.

 

***The Renewable Fuels Standard***

 

The Energy PolicyAct enacted in 2005 established the first ever Renewable Fuel Standard, or RFS,in federal law which mandated certain levels of usage of biofuels in thedomestic fuel supply beginning in 2006 and continuing through 2012.  In December 2007,the Energy Independence and Security Act of 2007 was enacted.  Thislegislation further increased the amount of mandated biofuel usage to a maximumof 36 billion gallons a year by 2022.  Pursuant to the Energy Policy Actand the Energy Independence and Security Act, the U.S. Environmental ProtectionAgency has promulgated rules requiring refineries, blenders, distributorsand importers to introduce or sell volumes of biofuels, including corn-basedethanol and biodiesel fuel, into commerce in accordance with the annual RFS. Thefollowing table describes minimum biofuel use mandated for years 2010 through2015:

 
| **Year** | ** ** | **Biofuel  usage  (in billions of  gallons)** | ** ** |
|----------|------------|-----------------------------------------------|------------|
| 2010     |       | 12.95                                         |       |
| 2011     |       | 13.95                                         |       |
| 2012     |       | 15.20                                         |       |
| 2013     |       | 16.55                                         |       |
| 2014     |       | 18.15                                         |       |
| 2015     |       | 20.50                                         |       |

 

Under the RFS as modifiedby Energy Independence and Security Act, the mandate for corn-based ethanol iscapped at 15 billion gallons in 2015 and continues at that level through2022.  The remaining amount of biofuel required by the RFS must be derivedfrom non-corn-based ethanol such as biodiesel.

 

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The EPA iscurrently reviewing a request to allow for blending of up to 15% ethanol intogasoline for normal use.  A decision is expected in mid 2010. If granted,this waiver could have a positive impact upon demand as E15 may replace E10 asthe base blend of ethanol in the nation’s fuel supply.

*** ***

***The Volumetric Ethanol ExciseTax Credit***

 

The use of ethanolas an alternative fuel source has been aided by federal tax policy, whichdirectly benefits gasoline refiners and blenders, and increases demand forethanol. In 2004, the Volumetric Ethanol Excise Tax Credit (“VEETC”) was signedinto law which amended the federal excise tax structure effective as of January 1,2005. This law amended the federal gasoline excise tax structure effective January 1,2005.  As amended, the law created a new volumetric ethanol excise taxcredit of $0.51 per gallon of ethanol blended at 10% ($0.45 per gallon as of January 1,2009).  The use of ethanol as a fuel additive is enhanced by theavailability of a credit from the federal gasoline excise tax. The credit isscheduled to expire on December 31, 2010.

 

***Small Ethanol Producer Tax Credit***

 

The Energy PolicyAct of 2005 expanded who qualifies for the small ethanol producer tax credit.Historically, small ethanol producers were allowed a 10-cents-per-gallonproduction income tax credit on up to 15 million gallons of productionannually. The size of the plant eligible for the tax credit was limited to 30million gallons. Under the Energy Policy Act, the size limitation on theproduction capacity for small ethanol producers increased from 30 million to 60million gallons. The tax credit is capped at $1.5 million per year perproducer. We are no longer eligible for this credit because of our plantproduces in excess of 60 million gallons annually.

 

***Imported Ethanol Tariffs and Quotas***

 

Currently, thereis a $0.54 per gallon tariff on imported ethanol, which is scheduled toexpire in 2011.  In addition, ethanol imports from 19 countries in CentralAmerica and the Caribbean region are exempted from this tariff under theCaribbean Basin Initiative or CBI, which provides that specified nations mayexport annually to the U.S. an aggregate of 7.0% of U.S. ethanolproduction, with additional exemptions from ethanol produced from feedstock inthe Caribbean region over the 7.0% limit.

 

***State Legislation Banning orLimiting MTBE Use***

 

As of February 2010, 25 states have banned or significantlylimited the use of MTBE due to environmental and public health concerns.Ethanol has served as a replacement for much of the discontinued volumes ofMTBE and is expected to continue to replace future volumes of MTBE that areremoved from the fuel supply.

 

***SouthDakota***

 

The state of SouthDakota provides an incentive production payment to ethanol producers operatingin South Dakota. The production incentive consists of a direct payment toSouth Dakota ethanol producers of up to $0.20 per gallon, which is dividedamong producers of fuel ethanol within South Dakota up to a maximum of $1million per year per plant and a maximum of $10 million over the life of aplant.  The program caps the payments that can be distributed to allplants based in South Dakota in a program year to no more than $7 million inpayments each year (program year ends on June 30). The payments aredistributed to each plant in proportion to the total number of gallons ofethanol produced and marketed annually by all the plants in South Dakota. If additional plants commence production, or existing plants increaseproduction, each plant receives a lower proportionate share of the maximumpayment under the program. Conversely, if existing plants terminate operations,or decrease production, each plant receives a higher proportionate share of themaximum payment under the program.

 

**EnvironmentalRegulation and Costs**

 

We are subject toextensive environmental regulation at the federal and state levels.  Thefederal environmental regulations with which our plant must comply arepromulgated by the U.S. Environmental Protection Agency pursuant to 

 

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the Clean Air Act. The state environmental regulations with which our plant must comply arepromulgated by the South Dakota Department of Environment and NaturalResources, or DENR. The EPA and the DENR regulate air quality, particularly ourplant’s emissions into the air.  The DENR also regulates water collectionand discharge. In addition to its own enforcement authority under this law, theEPA has delegated permitting and enforcement authority to the DENR.  Toconduct operations, we are required to have the following permits from theseand other agencies:

 

·*Title FiveOperating Permit from the DENR*. In South Dakota, the Title Five Operating Permit serves as the airquality and operation permit for our plant. We must conduct ongoing emissionstesting to verify compliance with the Title Five Operating permit. This permitis subject to a renewal in 2011.

 

·*Bureau of Alcohol,Tobacco, Firearms and Explosives and Fuel Permit from the U.S. Department ofTreasury.* We are required to have this permit because of the alcoholcontent of ethanol. The permit is subject to renewal annually.

 

·*General Permit for StormWater Discharge*.  This permitis required for the runoff of storm water from our plant and is subject torenewal every five years.

 

We maintain anon-going compliance program to ensure compliance with all applicable laws,regulations and permits.  Maintainingcompliance can require us to incur expenditures for such things as new orupgraded equipment or processes, some of which can be material and costly attimes. For example, as a result of U.S. Environmental Protection Agency’sissuance of a Notice of Violation (see Part I, Item 3, “Legal Proceedings”below), we plan to make improvements to our plant’s dryer and thermal oxidizer,the cost of which is expected to be approximately $1 million.

 

In addition, federaland state government’s regulation of the environment changes constantly. It ispossible that more stringent federal or state environmental rules orregulations could be adopted, which could increase our plant’s future operatingcosts and expenses. It also is possible that federal or state environmental rules orregulations could be adopted that could have an adverse effect on the use ofethanol. For example, on September 30, 2009, the U.S. EnvironmentalProtection Agency proposed a rule requiring large industrial facilitiesthat emit at least 25,000 tons of greenhouse gases a year to be subject toadditional compliance restrictions.  Ifthese regulations are adopted and our plant were to become subject to these newregulations, we may have to invest or spend considerable resources to complywith the new requirements, including possibly investing in additional pollutioncontrol equipment or making operation changes. 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.

 

**Managementand Employees**

 

POET® PlantManagement, LLC manages the day-to-day operations of our plant under amanagement agreement. Under the agreement, which is in effect until June 2015,POET® Plant Management receives a fixed annual fee, adjusted annually forinflation, and an incentive bonus based on our profitability.  We also paycertain expenses incurred with respect to the operation of the plant whileother expenses, including, but not limited to, the provision of a full-timetechnical manager and general manager, are included as part of POET® PlantManagement’s fees.  Mr. Blaine Gomer, our plant’s general manager, isan employee of POET® Plant Management, and is responsible for operations andproduction at the plant on a day-to-day basis.

 

As of the date ofthis filing, our plant employs 48 employees, including a commodities manager, acommodities supervisor, an operations manager, a maintenance manager, amicrobiologist, a chief mechanical operator, a controller, plant operators,maintenance technicians, grains assistants, accountants, and a membershipcoordinator.  This does not include Mr. Gomer and the technicalmanager, both of whom are employees of POET® Plant Management.

 

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**AvailableInformation**

 

Our Annual Reporton Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,and amendments to reports filed pursuant to the Securities Exchange Act of1934, as amended, are filed with the SEC. Such reports and other information filed by us with the SEC areavailable on the SEC website (www.sec.gov). The public may read and copy anymaterials filed by us with the SEC at the SEC’s Public Reference Room at100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtaininformation on the operation of the Public Reference Room by calling theSEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,proxy, and information statements and other information regarding issuers thatfile electronically with the SEC at www.sec.gov. The contents of these websitesare not incorporated into this filing. Our website is found at www.poet.com, then clicking on “Meet POET,” “Plants,”“Big Stone, SD,” and “Becoming an Investor.”

 

**Item 1A.Risk Factors.**

 

**RisksRelated to Our Business**

 

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

 

***The spread between ethanol and corn prices can varysignificantly.***Ourgross margins depend principally on the spread between ethanol prices and cornprices. The spread between the price of a gallon of ethanol and the cost ofcorn required to produce a gallon of ethanol will likely continue to fluctuate.A protracted reduction in the spread between ethanol and corn prices, whether aresult of an increase in corn prices or a reduction in ethanol prices, wouldadversely affect our results of operations and financial condition.

 

***Corn, as with most other crops, is affected by weather,disease and other environmental conditions.***  The price of corn is also influenced by generaleconomic, market and government factors.  These factors include weatherconditions, farmer planting decisions, domestic and foreign government farmprograms and policies, global demand and supply and quality.  If a periodof high corn prices is sustained for some time, such pricing may reduce ourability to generate profits because of the higher cost of operating and maymake ethanol uneconomical to use in fuel markets.  We cannot offer anyassurance that we will be able to offset any increase in the price of corn byincreasing the price of our products.  If we cannot offset increases inthe price of corn, our results of operations and financial condition may bematerially and adversely affected and our plant may be forced to curtailproduction.

 

***The price of distillers grains is affected by the price ofother commodity products, and decreases in the price of these commodities coulddecrease the price of distillers grains***.  Distillers grains compete with otherprotein-based animal feed products such as soybean meal. The price of distillersgrains may decrease when the price of competing feed products decrease. Theprices of competing animal feed products are based in part on the prices of thecommodities from which they are derived. Downward pressure on commodity prices,such as soybeans, will generally cause the price of competing animal feedproducts to decline, resulting in downward pressure on the price of distillersgrains. As a result, we may experience lower revenue and income.

 

***Our debt financing agreements contain, and our future debtfinancing agreements may contain, restrictive covenants that impose significantrestrictions on the operation of our business.*******The terms of ourexisting loan agreements with U.S. Bank National Association, contain, and anyfuture debt agreement we enter into may contain, financial, maintenance, cashdistribution, operational and other restrictive covenants. Any violation of thecovenants could have an adverse effect on operations. If we are unable tocomply with these covenants or service our debt, or obtain necessary waivers ofany covenant violation in the future, we may lose control of our business andbe forced to reduce or delay planned capital expenditures, sell assets,restructure our indebtedness or submit to foreclosure proceedings, all of whichcould result in a material adverse effect upon our business.

 

***Hedging transactions involve risks that could harm ourprofitability.*** In an attempt to minimize the effects of the volatility of corn and natural gason operating profits, we engage in hedging activities in the corn and naturalgas futures markets.  The effectiveness of such hedging activities isdependent, among other things, upon the cost of corn and 

 

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natural gas and ourability to sell sufficient products to utilize all of the corn and natural gassubject to the futures contracts.  There is no assurance that our hedgingactivities will reduce the risk caused by price fluctuation which may leave usvulnerable to high corn and natural gas prices.  In addition, we maychoose not to take hedging positions in the future, which may adversely affectour financial condition if corn and natural gas prices increase. Our hedgingactivities also can result in increased costs because price movements in cornand natural gas are highly volatile and are influenced by many factors that arebeyond our control.

 

***Our business is subject to seasonal fluctuations.***Our operating results are influenced by seasonal fluctuations in theprice of our primary production inputs, namely corn, and the price of ourprimary product, ethanol. In recent years, the spot price of corn tends to riseduring the spring planting season in May and June and tends todecrease during the fall harvest in October and November. The price fornatural gas, however, tends to move opposite of corn and tends to be lower inthe spring and summer and higher in the fall and winter. In addition, ourethanol prices are substantially correlated with the price of unleadedgasoline. As a result, because the price of unleaded gasoline tends to riseduring the summer, the price of ethanol generally rises in the summer.

 

***Our business is not diversified because it is limited to thefuel grade ethanol industry, which may limit our ability to adapt to changingbusiness and market conditions.***   Our sole business is the productionand sale of fuel grade ethanol produced from corn and its by-product,distillers grains. Our plant does not have the capability of producingindustrial or food and beverage grade ethanol, which is used in such productsas cosmetics, perfume, paint thinner and vinegar. Our plant is also notequipped to capture carbon dioxide, another co-product of the ethanolproduction process. The lack of diversification of our business may limit ourability to adapt to changing business and market conditions.

 

***We are heavily dependent upon POET®, LLC.*** We have several agreements in place with companies owned and controlledby POET®, LLC, of Sioux Falls, South Dakota, including those related to thepurchase or marketing of ethanol and distillers grains, management of theplant, design and construction, research and technology, and informationtechnology.  If any of the agreementswere to terminate, we might not be able to secure suitable and timelyreplacements for those services at a reasonable cost or at all, which wouldmaterially harm our business.

 

***We are dependent upon POET® Ethanol Products, LLC topurchase and market all of the ethanol produced at our plant*****. ** POET® Ethanol Products is theexclusive purchaser of all of the ethanol produced at our plant which, in turn,markets and transports the ethanol to refineries located throughout theU.S.  If POET® Ethanol Products breaches the ethanol marketing agreementor is not in the financial position to purchase all of the ethanol produced, wemay not have any readily available means to sell the ethanol and our financialcondition will be adversely and materially affected.  If the ethanolmarketing agreement with POET® Ethanol Products were to terminate, we would beforced to seek other arrangements to sell the ethanol produced, but there areno assurances that these arrangements would achieve results comparable to thoseachieved by POET® Ethanol Products.

 

***Interruptions in energy supplies could delay or haltproduction at our plant, which will reduce our profitability.***  Ethanol production requires aconstant and consistent supply of energy, including electricity, steam andnatural gas.  If there is any interruption in our plant’s supply of energyfor whatever 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 hasagreements with various companies to provide it with necessary energy, but wecannot assure that these companies will continue to be able to supply reliablysuch energy.  If our plant were to suffer interruptions in energy supply,our business would be harmed.

 

***We have limited natural gas available for operations and rely heavilyon the adjacent Big Stone Plant.*** We rely on Big Stone Plant to supply approximately50% of our energy needs for production. When steam from Big Stone Plant is not operating or the transfer ofsteam to our plant is interrupted, we rely on our natural gas supply to powertwo on-site boilers in order to generate steam for the production process.  The natural gas supply to our plant, however,is limited as the supply itself 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.

 

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**RisksRelated to the Industry**

 

***Demand for ethanol may not continue to grow unless ethanolcan be blended into gasoline in higher percentage blends for conventionalautomobiles.***Ethanolis blended with conventional gasoline for use in standard (non-flex fuel)vehicles to create a blend which is 10% ethanol and 90% conventional gasoline.Estimates indicate that approximately 135 billion gallons of gasoline aresold in the U.S. Assuming that all gasoline in the United States is blended ata rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is13.5 billion gallons. This is commonly referred to as the “blending wall,”which represents a theoretical limit where more ethanol cannot be blended intothe national gasoline pool. Many in the ethanol industry believe that theethanol industry will reach this blending wall in 2010. In order to expanddemand for ethanol, higher percentage blends of ethanol must be utilized inconventional automobiles. Such higher percentage blends of ethanol haverecently become a contentious issue. Automobile manufacturers and environmentalgroups have fought against higher percentage ethanol blends. State and federalregulations prohibit the use of higher percentage ethanol blends in conventionalautomobiles and vehicle manufacturers have stated that using higher percentageethanol blends in conventional vehicles would void the manufacturer’s warranty.Recently, the U.S. Environmental Protection Agency was expected to make aruling on using higher percentage blends of ethanol such as E15, but itdeferred making a decision until the middle of 2010. Without an increase in theallowable percentage blends of ethanol, demand for ethanol may not continue toincrease which could decrease the selling price of ethanol and could result inour inability to operate profitably.

 

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

 

***Decreasing gasoline prices may negatively impact the sellingprice of ethanol which could reduce our ability to operate profitably***. The price of ethanol generally tends tochange in relation to the price of gasoline. For most of 2009, for example, asa result of a number of factors including the current world economy, the priceof gasoline decreased. In correlation to the decrease in the price of gasoline,the price of ethanol also decreased. Decreases in the price of ethanol reduceour revenue. Our profitability depends on a favorable spread between our cornand natural gas costs and the price we receive for our ethanol. If ethanolprices fall during times when corn and/or natural gas prices are high, we maynot be able to operate our ethanol plant profitably.

 

***The global financial crisis may have impact on our businessand financial condition that we currently cannot predict.***The continued credit crisis and relatedinstability in the global and national financial system may impact our businessand our financial condition. The credit crisis, for instance, could have animpact on our senior lender under our loan agreement, causing it to takeadverse action in the event we are unable to comply with the terms under ourloan agreement.

 

***We operate in an intensely competitive industry and competewith larger, better financed entities which could impact our ability to operateprofitably.***Thereis significant competition among ethanol producers. There are numerousproducer-owned and privately-owned ethanol plants planned and operatingthroughout the Midwest and elsewhere in the U.S. We also face competition fromoutside of the U.S. The passage of the Energy Policy Act of 2005 included arenewable fuels mandate. The renewable fuels standard was increased in December 2007to 36 billion gallons by 2022. Further, some states have passed renewablefuel mandates. All of these increases in ethanol demand have encouragedcompanies to enter the ethanol industry. The largest ethanol producers includeArcher Daniels Midland, Green Plains Renewable Energy, Hawkeye Renewable, andValero Renewable Fuels, all of which are each capable of producing more ethanolthan we produce. Further, many believe that there will be consolidationoccurring in the ethanol industry in the near future which will likely lead toa few companies who control a significant portion of the ethanol production market.

 

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We may not be able tocompete with these larger entities. These larger ethanol producers may be ableto affect the ethanol market in ways that are not beneficial to us which couldaffect our financial condition.

 

***Competition from the advancement of technology may lessenthe demand for ethanol and negatively impact our profitability*****.**** Alternative fuels, gasolineoxygenates and ethanol production methods are continually under development. Anumber of automotive, industrial and power generation manufacturers aredeveloping more efficient engines, hybrid engines and alternative clean powersystems using fuel cells, or clean burning gaseous fuels or electricity.Vehicle manufacturers are working to develop vehicles that are more fuelefficient and have reduced emissions using conventional gasoline. Vehiclemanufacturers have developed and continue to work to improve hybrid technology,which powers vehicles by engines that utilize both electric and conventionalgasoline fuel sources. In the future, the emerging fuel cell industry offers atechnological option to address increasing worldwide energy costs, the long-termavailability of petroleum reserves and environmental concerns. Fuel cells haveemerged as a potential alternative to certain existing power sources because oftheir higher efficiency, reduced noise and lower emissions. Fuel cell industryparticipants are currently targeting the transportation, stationary power andportable power markets in order to decrease fuel costs, lessen dependence oncrude oil and reduce harmful emissions. If the fuel cell and hydrogenindustries continue to expand and gain broad acceptance, and hydrogen becomesreadily available to consumers for motor vehicle use, we may not be able tocompete effectively. This additional competition could reduce the demand forethanol, which would negatively impact our financial condition.

 

***Corn-based ethanol may compete with cellulose-based ethanolin the future, which could make it more difficult for us to produce ethanol ona cost-effective basis****. *Most ethanol is currently produced fromcorn and other raw grains, such as milo or sorghum-especially in the Midwest.The current trend in ethanol production research is to develop an efficientmethod of producing ethanol from cellulose-based biomass, such as agriculturalwaste, forest residue, municipal solid waste, and energy crops. This trend isdriven by the fact that cellulose-based biomass is generally cheaper than corn,and producing ethanol from cellulose-based biomass would create opportunitiesto produce ethanol in areas which are unable to grow corn. Although currenttechnology is not sufficiently efficient to be competitive, new conversiontechnologies may be developed in the future. By this year, the renewable fuels standard mandates that a specificvolume of ethanol be derived from cellulosic feedstocks.   If an efficient method of producing ethanolfrom cellulose-based biomass is developed, we may not be able to competeeffectively. If we are unable to produce ethanol as cost-effectively ascellulose-based producers, our ability to generate revenue will be negativelyimpacted.

 

***Negative media attention associated with the use of corn inthe ethanol production process may lead to decreases in demand for the ethanolwe produce, which could negatively affect our profitability.***  Media attention associated withthe use of corn as the feedstock in ethanol production has been unfavorable tothe ethanol industry.  This negative media attention has focused on theeffect ethanol production has on domestic and foreign food prices. Ethanol production has previously received favorable coverage by the newsmedia, which may have increased demand for ethanol.  The negativeperception of ethanol production may have a negative effect on demand forethanol, which could decrease the price we receive for our ethanol. Decreasesin the selling price of ethanol may have a negative effect on our financialcondition.

 

**RisksRelated to Governmental and Regulatory Action**

 

***A change in government policies favorable to ethanolmay cause demand for ethanol to decline.***Growth and demand for ethanol may bedriven primarily by federal and state government policies, such as state lawsbanning MTBE and the national renewable fuels standard. The continuation ofthese policies is uncertain, which means that demand for ethanolmay decline if these policies change or are discontinued. A decline in thedemand for ethanol is likely to cause lower ethanol prices which in turn willnegatively affect our business and financial condition.

 

***Tariffs effectively limit imported ethanol into the U.S.,and their reduction or elimination could undermine the ethanol industry in theU.S.*******Imported ethanol is generally subject toa $0.54 per gallon tariff that was designed to offset the $0.45 pergallon ethanol incentive available under the federal excise tax incentiveprogram for refineries that blend ethanol in their fuel. There is, however, aspecial exemption from this tariff for ethanol imported from 19 countries inCentral America and the Caribbean Islands, which is limited to a total of 7% ofU.S. ethanol production per year. Imports from the exempted countries mayincrease as a result of new plants in development. Since production costs forethanol in 

 

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these countries aresignificantly less than what they are in the U.S., the duty-free import ofethanol through the countries exempted from the tariff may negatively affectthe demand for domestic ethanol and the price at which we sell our ethanol. ** **We do not know theextent to which the volume of imports would increase or the effect onU.S. prices for ethanol if the tariff is not renewed beyond its currentexpiration date of January 2011. Any changes in the tariff or exemptionfrom the tariff could have a material adverse effect on our business andfinancial condition.

 

***Government incentives for ethanol production may beeliminated in the future.***The ethanol industry and our business are assisted byvarious federal ethanol tax incentives, including those contained in The EnergyIndependence and Security Act of 2007. Under this law, the renewable fuelsstandard is increased to a mandate of 36 billion gallons by 2022. While we haveno present indication that there are plans to revise the renewable fuelsstandard in the future, we have no assurance the renewable fuels standard willremain as presently drafted.  The renewable fuels standard helps support amarket for ethanol that might disappear without this incentive.  If thefederal incentives are eliminated or sharply curtailed, we believe that adecreased demand for ethanol will result, which could negatively affect ourprofitability and financial condition.

 

***Changes in environmental regulations or violations of theregulations could reduce our profitability.***We are subject to extensive air, water and otherenvironmental laws and regulations. In addition some of these laws require ourplant to operate under a number of environmental permits. These laws,regulations and permits can often require expensive pollution control equipmentor operation changes to limit actual or potential impacts to the environment. Aviolation of these laws and regulations or permit conditions can result insubstantial fines, damages, criminal sanctions, permit revocations and/or plantshutdowns. We do not assure you that we have been, are or will be at all timesin complete compliance with these laws, regulations or permits or that we havehad or have all permits required to operate our business. We do not assure youthat we will not be subject to legal actions brought by environmental advocacygroups and other parties for actual or alleged violations of environmental lawsor our permits. Additionally, any changes in environmental laws andregulations, both at the federal and state level, could require us to invest orspend considerable resources in order to comply with future environmentalregulations. The expense of compliance could be significant enough to reduceour profitability and negatively affect our financial condition.

 

***Wemay become subject to additional environmental regulation and permitting fromthe U.S. Environmental Protection Agency*****.** On September 30, 2009, the EPA proposed a rule requiringlarge industrial facilities that emit at least 25,000 tons of greenhouse gases,like carbon dioxide, a year to be subject to additional compliancerestrictions.  If these regulations areadopted and our plant were to become subject to these regulations, we may haveto invest or spend considerable resources to comply with the new requirements,including possibly investing in additional pollution control equipment ormaking operation changes. The expense of compliance could be significant enoughto reduce our profitability and negatively affect our financial condition.

 

**Item1B.  Unresolved Staff Comments.**

 

None.

 

**Item 2. Properties.**

 

Our plant islocated immediately adjacent to Big Stone Plant in the city of Big Stone City,Grant County, South Dakota.  The land on which our plant is located isleased from Big Stone-Grant Industrial Development and Transportation, LLC,which is owned by Otter Tail Power Company, Montana-Dakota Utilities, andNorthWestern Corporation.  The term of the lease is for 99 years. The rent is $2,520 per year until December 31, 2010, after which the rentis increased by 5.0%.  In addition, our plant has transportationfacilities including a rail track, rail spur and paved access roads.

 

Our plant consists of thefollowing main buildings or properties:

 

·                  An administrative building, which contains officeequipment, computer systems, and furniture and fixtures.

 

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·                  A mechanical building, which contains boilers andwater treatment equipment.

 

·                  A process building, which contains slurry andfermentation equipment, drums and a lab.

 

·                  An evaporation building, which contains evaporatorsand related equipment.

 

·                  A distillation building, which contains distillationcolumns and mole sieves.

 

·                  A ring dryer building, which contains a dryer and afluid bed.

 

All of ourtangible and intangible property, including our leasehold interest, easementrights, improvements, equipment, personal property, and contracts, serve as thecollateral for the debt financing with U.S. Bank National Association, of SiouxFalls, South Dakota, which is described below under “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Indebtedness.”

 

**Item3.  Legal Proceedings.**

 

From time to timein the ordinary course of business, we may be named as a defendant in legalproceedings related to various issues, including without limitation, workers’compensation claims, tort claims, or contractual disputes. We are not currentlyinvolved in any material legal proceedings, directly or indirectly, except forthe following.

 

On January 14, 2009,our plant received from the U.S. Environmental Protection Agency a writtenNotice of Violation (NOV). The NOV alleges that our plant violated the CleanAir Act by failing to adequately maintain a required level of air pollutants asestablished under the plant’s Title V air permit and by conducting invalidtesting for compliance under such permit. Since the issuance of the NOV, ourplant has been negotiating with the EPA a possible settlement. We believe thatany settlement into which we enter will result in a fine, but that such a finewill not be material. Meanwhile, we have taken corrective actions to addressthe principal cause of the NOV, principally approving a $1 million capitalimprovement project for our plant’s dryer and thermal oxidizer.

 

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

 

We did not submitany matter to a vote of our security holders through the solicitation of proxiesor otherwise during the fourth quarter of 2009.

 

**PART II**

 

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

 

As of March 1,2010, Northern Growers had 960 members.

 

*TradingActivity and Restrictions*

 

Northern Growers’capital units are not traded on an exchange or The NASDAQ Stock Market.  Rather, the capital units are traded on a “qualifiedmatching service” as defined by the publicly traded partnership rules ofthe federal tax code. Under the qualified matching service, bids for capitalunits from interested buyers and sellers are matched and capital units tradedon the basis of a set of rules and conditions set forth under the federaltax code and by Northern Growers, all trades being subject to board of managers’approval. Northern Growers’ qualified matching service is operated throughAlerus Securities Corporation, a registered broker-dealer based in Grand Forks,North Dakota, which operates a registered alternative trading system as definedand regulated by the SEC The following table contains historicalinformation by quarter for the past two years regarding the trading of capitalunits under the qualified matching service:

 

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| **Quarter (1)**               | ** ** | **Low  Price(1)** | ** ** | **High  Price(1)** | ** ** | **Average  Price(1)** | ** ** | **# of Capital  Units Traded  (1)** | ** ** |
|------------------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|----------------------------------------------------|------------|
| January -  March 2008    |       | $                 | 2.05       |               | $          | 2.50                  |       | $                                                  | 2.26       |   | 34,000 |   |
| April -  June 2008       |       | $                 | 1.80       |               | $          | 1.80                  |       | $                                                  | 1.80       |   | 2,000 |   |
| July -  September 2008   |       | $                 | .95        |               | $          | 1.30                  |       | $                                                  | 1.13       |   | 135,500 |   |
| October -  December 2008 |       | $                 | 1.10       |               | $          | 1.10                  |       | $                                                  | 1.10       |   | 10,000 |   |
| January -  March 2009    |       | $                 | 0.90       |               | $          | 0.90                  |       | $                                                  | 0.90       |   | 5,000 |   |
| April -  June 2009       |       | $                 | 0.85       |               | $          | 0.90                  |       | $                                                  | 0.87       |   | 78,500 |   |
| July -  September 2009   |       | $                 | -          |               | $          | -                     |       | $                                                  | -          |   | - |   |
| October -  December 2009 |       | $                 | 0.85       |               | $          | 0.85                  |       | $                                                  | 0.85       |   | 15,000 |   |

 

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(1)  Thequalified matching service does not permit firm bids per the rules establishedunder the federal tax code. As a result, the prices reflect actual sale pricesof the capital units.

 

There were noissuer purchases of equity securities during the fourth quarter ended December 31,2009.

 

As a limitedliability company being taxed as a partnership, Northern Growers is required torestrict the transfer of its capital units in order to preserve itspreferential single-level tax status. Such restrictions are set forth inNorthern Growers’ Operating Agreement and Capital Units Transfer System. Underthe Capital Units Transfer System, transfers are limited to those through aqualified matching service, transfers made to qualified family members, ortransfers by gift, block, upon death, and like transfers, all of which aresubject to final board of managers’ approval.

 

Pursuant to theOperating Agreement, a minimum of 2,500 capital units is required to become andremain a member. In addition to the transfer restrictions described above, theboard of managers retains the right to redeem the capital units at $0.20 percapital unit in the event a member breaches the Operating Agreement or upon amember’s failure to fulfill the membership requirements with respect to othermatters. Under the qualified matching service, the number of capital unitstraded annually cannot exceed 10% of Northern Growers’ total issued and outstandingcapital units.

 

*Distributions*

 

Under the terms ofNorthern Growers’ Amended and Restated Operating Agreement dated July 31,2009, the board of managers is required to make annual (or more frequent)distributions to its members and may not retain more than $200,000 of net cashfrom operations, unless (i) a super-majority of the board of managers(75%) decides otherwise, (ii) it would violate or cause a default underthe terms of any debt financing or other credit facilities, or (iii) it isotherwise prohibited by law.  For further details of the restrictionsunder our debt facilities, please see “Item 7, Management’s Discussion andAnalysis of Financial Conditions and Results of Operations—Indebtedness.”Distributions are required to be issued to members of record as of the last dayof the quarter immediately prior to the quarter in which the distribution wasapproved by the board of managers.

 

In 2008, Big Stonemade no cash distributions to Northern Growers. However, Northern Growers paid cash distributions to its members ofapproximately $1.52 million, or $0.030 per capital unit, from a previously madedistribution by Big Stone in 2007. In 2009, neither Big Stone nor NorthernGrowers made any cash distributions to its members.

 

In February 2010,Big Stone made a cash distribution of $3.47 million to Northern Growers and$1.03 million to the noncontrolling interest member. Northern Growers, in turn,made a cash distributions to its members of approximately $2.53 million, or$0.05 per capital unit.

 

Our ability toissue distributions is substantially dependent upon profitability, thediscretion of our board of managers subject to the provisions of the OperatingAgreement, the restrictions under our loan agreement and the approval from ourlender, U.S. Bank. In 2010, the issuances of any distribution to members willbe substantially dependent upon the state of the ethanol market and continuedprofitability.

 

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**Item 6.  Selected Financial Data.**

 

 

The following table sets forth our selected financialdata for the periods indicated. The audited financial statements included inItem 8 of this report have been audited by our independent auditors, EideBailly LLP.

 
| ** **                                          | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**   | ** ** |
|-----------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| **Statement of Operations Data:**                   | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenues                                            | $          | 142,038,338 |       | 171,424,927 |       | 138,243,780 |       | 122,837,119 |       | 89,692,708 |       |
| Cost of Revenues                                    | $          | 125,825,811 |       | 169,595,752 |       | 112,694,987 |       | 62,731,376  |       | 63,552,756 |       |
| General and Administrative Expenses                 | $          | 4,408,451   |       | 3,679,176   |       | 4,790,117   |       | 6,364,983   |       | 3,913,177  |       |
| Income (Loss) from Operations                       | $          | 11,804,076  |       | (1,850,001  | )          | 20,758,676  |       | 53,740,760  |       | 22,221,775 |       |
| Interest Expense                                    | $          | 2,769,848   |       | 3,535,485   |       | 2,876,464   |       | 1,261,542   |       | 1,317,957  |       |
| Noncontrolling Interest in Subsidiary (Income) Loss | $          | (2,143,145  | )          | 1,154,649   |       | (4,269,470  | )          | (12,132,284 | )          | (4,848,469 | )          |
| Net Income (Loss)                                   | $          | 6,915,513   |       | (4,152,550  | )          | 14,144,720  |       | 40,703,348  |       | 16,157,712 |       |
|                                                |       |        |       |        |       |        |       |        |       |       |       |
| Capital Units Outstanding (1)                       |       | 50,628,000  |       | 50,628,000  |       | 50,628,000  |       | 50,628,000  |       | 50,628,000 |       |
|                                                |       |        |       |        |       |        |       |        |       |       |       |
| Cash Distributions declared per Capital Unit        | $          | ---         |       | ---         |       | 0.238       |       | 0.518       |       | 0.23       |       |
| Net Income (Loss) per Capital Unit                  | $          | 0.137       |       | (0.082      | )          | 0.279       |       | 0.804       |       | 0.319      |       |
|                                                |       |        |       |        |       |        |       |        |       |       |       |
| **Balance Sheet Data:**                             | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Working Capital                                     | $          | 21,956,305  |       | 13,590,348  |       | 19,723,995  |       | 15,795,102  |       | 9,011,848  |       |
| Net Property, Plant & Equipment            | $          | 68,188,002  |       | 73,231,189  |       | 78,141,027  |       | 66,413,382  |       | 39,097,204 |       |
| Total Assets                                        | $          | 109,445,807 |       | 104,972,958 |       | 113,580,105 |       | 101,479,908 |       | 59,315,715 |       |
| Long-Term Obligations                               | $          | 35,873,728  |       | 42,618,873  |       | 46,794,965  |       | 33,578,810  |       | 17,104,400 |       |
| Noncontrolling Interest in Subsidiary               | $          | 12,454,558  |       | 10,111,948  |       | 11,631,149  |       | 10,790,823  |       | 7,054,934  |       |
| Members’ Equity                                | $          | 42,009,654  |       | 34,420,293  |       | 39,804,399  |       | 38,262,916  |       | 23,949,718 |       |
| Northern Growers, LLC Equity per Capital Unit       | $          | 0.830       |       | 0.680       |       | 0.786       |       | 0.756       |       | 0.473      |       |

----

(1) Adjustedfor a four-for-one capital unit split made effective September 1, 2005 anda two-for-one split effective July 1, 2006.

 

**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operation.**

 

*You should read the followingdiscussion along with our financial statements and the notes to our financialstatements included elsewhere in this report. The following discussion containsforward-looking statements that are subject to risks, uncertainties andassumptions. Our actual results, performance and achievements may differmaterially from those expressed in, or implied by, such forward-lookingstatements. See “Cautionary Statement Regarding Forward-Looking Information” atthe beginning of this report.*

 

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**Overview**

 

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

 

Ourrevenues are derived from the sale and distribution of ethanol and distillersgrains to customers primarily located in the U.S. Corn for the productionprocess is supplied to our plant primarily from local agricultural producersand from purchases on the open market. After processing the corn, ethanol issold to POET® 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 POET® Nutrition, Inc.,which markets and sells the product to livestock feeders primarily located inthe continental U.S.

 

Our operating and financial performance is largelydriven by the prices at which we sell ethanol and distillers grains and thecosts related to production. The price of ethanol is influenced by factors suchas prices of unleaded gasoline and the petroleum markets, supply and demand,weather, and government policies and programs. Excess ethanol supply in themarket, generally puts downward pressure on the price of ethanol. The price ofdistillers grains is influenced by the price of corn, soybean meal and otherprotein-based feed products, and supply and demand. A low price of corngenerally puts downward pressure on the price of distiller grains.

 

Our two largest costs of production are corn andnatural gas, although our plant’s use of natural gas is offset by the use ofsteam supplied from the adjacent Big Stone Plant. The cost of natural gas andcorn is generally impacted by factors such as supply and demand, weather,government policies and programs, and our risk management program used toprotect against the price volatility of these commodities.

 

**ExecutiveSummary**

 

We had a net income of $6.9 million and $4.5 millionfor the year and quarter ended December 31, 2009, respectively, comparedto a net loss of $4.2 million and $1.8 million for the year and quarter ended December 31,2008. The change between periods is primarily attributed to a decrease in cornand energy costs, offset by a decrease in ethanol revenues. For the year, ourcorn costs per bushel decreased 29% primarily due to a decrease in the marketprice of corn. The price of corn decreased between periods because of increasesin supply, a large carryout from 2008 and favorable corn harvest forecasts in2009.  Likewise, energy costs per gallondecreased 31% due principally to a decrease in natural gas costs. The decreasein corn and energy costs between periods, however, was offset by a decrease inethanol revenues. Ethanol revenues decreased between periods because of acontinuing surplus of ethanol in the market and low unleaded gasoline prices.

 

Wewill face challenges in the ethanol industry in 2010, but probably on a lesserscale than in 2008 and 2009. Ethanol prices are expected to remain low byhistorical standards due to supply and demand issues. Excess supply, a dominantfactor in pushing ethanol prices lower in 2008 and most of 2009, is likely tocontinue in 2010. With economic factors recently improving in the industry,existing plants, which either shut down or scaled back production in 2009, arelikely to return fully on online in 2010. In addition, new plants withapproximately 1.04 billion gallons in capacity are expected to come online in2010. While demand for ethanol grew in the fourth quarter of 2009, and hascontinued to grow slowly in the first quarter of 2010, it is not likely thatdemand will grow at the same pace as supply. As a result, ethanol prices andrevenues are not likely to increase materially from their 2009 levels.  But this situation could change if the U.S.Environmental Protection Agency decides to permit an increase in the amount ofethanol blended for use in conventional automobiles from 10% to as high as 15%.A favorable decision by the EPA, we believe, will increase demand for ethanoland positively impact ethanol prices and revenues. EPA’s decision, however, isnot expected until the summer of 2010. Meanwhile, we believe corn prices willremain favorable at least for the first two quarters of 2010, helping offsetlagging ethanol prices. Corn prices are expected to be favorable because ofrecord supply. On January 12, 2010, the U.S. Department of Agricultureforecast a record corn crop for 2009, estimating that U.S. farmers produced13.2 billion bushels of corn, up 8.8% from 2008.

 

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**Resultsof Operations**

 

**Comparisonof years ended December 31, 2009 and December 31, 2008**

 
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **$**                            | ** ** | **% of  Revenue** | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
| ** **                                  | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                     |       |                             |       |   |   |   |   |   |   |
| Ethanol                                     |       | 112,997,456                      |       | 80% |   | 137,146,540 |   | 80% |   |
| Distillers grains                           |       | 28,374,215                       |       | 20% |   | 33,632,791 |   | 20% |   |
| Incentive                                   |       | 666,667                          |       | 0% |   | 645,596 |   | 0% |   |
| Total                                       |       | 142,038,338                      |       | 100% |   | 171,424,927 |   | 100% |   |
|                                        |       |                             |       |   |   |   |   |   |   |
| Cost of Revenues                            |       | 125,825,811                      |       | 89% |   | 169,595,752 |   | 99% |   |
|                                        |       |                             |       |   |   |   |   |   |   |
| General &  Administrative Expenses |       | 4,408,451                        |       | 3% |   | 3,679,176 |   | 2% |   |
|                                        |       |                             |       |   |   |   |   |   |   |
| Other Operating  Income (Expense)           |       | (2,745,418)                      |       | (2%) |   | (3,457,198) |   | (2)% |   |
|                                        |       |                             |       |   |   |   |   |   |   |
| Noncontrolling  Interest                    |       | (2,143,145)                      |       | (2%) |   | 1,154,649 |   | 1% |   |
|                                        |       |                             |       |   |   |   |   |   |   |
| Net Income  (Loss)                          |       | 6,915,513                        |       | 5% |   | (4,152,550) |   | (2)% |   |

 

*Revenues* – Revenue decreased $29.4 million, or 17%, to $142.0million for the year ended December 31, 2009 from $171.4 million for theyear ended December 31, 2008. Revenues decreased due to a decrease in ethanol and distillers grains’revenue.

 

Revenue from the sale of ethanol decreased $24.1million, or 18%, to $113.0 million for the year ended December 31, 2009from $137.1 million for the year ended December 31, 2008.  The decrease is primarily due to an 18%decrease in the average sales price per gallon. Ethanol prices decreased between periods because of an oversupply ofethanol in the industry and a decrease in the price of unleaded gasoline andcorn.

 

Revenue from the sale of distillers grains decreased$5.2 million, or 16%, to $28.4 million for the year ended December 31,2009 from $33.6 million for the year ended December 31, 2008.  The decrease is primarily due to an 18%decrease in the average sales price per ton. The price of distillers grains decreased due to a decrease in demand aslivestock producers increased their use of corn for feed purposes due todeclining corn prices.

 

*Cost of Revenues* – Cost of revenues, which includes productionexpenses, decreased $43.8 million, or 26%, to $125.8 million for the year endedDecember 31, 2009 from $169.6 million for the year ended December 31,2008.  The primary reason for thedecrease is a decrease in corn and energy costs.

 

Corn costs per bushel decreased 29% between periods.  This decrease is primarily due to a 23%decrease in the market price of corn. The market price decreased due to favorable crop reports and weatherconditions, a decrease in demand from the ethanol industry and a decrease incommodity speculation.  Likewise, energycosts per gallon decreased 

 

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31%due primarily to a decrease in natural gas costs.  Natural gas costs per unit decreased 52% dueto an increase in natural gas reserves and decreases in demand nationwide.

 

*General and Administrative Expenses* – General and administrative expensesincreased $730,000, or 20%, to $4.41 million for the year ended December 31,2009 from $3.68 million for the year ended December 31, 2008.  The primary reason for the increase ismanagement incentive fees which increase if our net income (before net incomeattributable to the non-controlling interest) increase and decrease if our netincome decreases.

 

*Interest Expense* - Interest expense decreased $770,000, or 22%, to$2.77 million for the year ended December 31, 2009 from $3.54 million forthe year ended December 31, 2008. Interest expense decreased because we drew down on revolving loansduring the first months of 2008, compared to not drawing down on the revolvingloans in 2009.  Interest rates on ourvariable loans also decreased by an average of 0.45%.

 

*Net Income* – Net income increased $11.1 million, or 267%, to$6.9 million for the year ended December 31, 2009 from a net loss of $4.2million for the year ended December 31, 2008.  This change is caused primarily by a decreasein corn and energy costs, offset by a decrease in ethanol revenues.

 

**Comparisonof years ended December 31, 2008 and December 31, 2007**

 

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

 

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

 

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

 

Revenuefrom the sale of distillers grains increased $12.2 million, or 57%, to $33.6million for the year ended December 31, 2008 from $21.4 million for theyear ended December 31, 2007.  Theincrease is primarily due to a 44% increase in the sales price per ton.  The increase in price per ton is attributedto an increase in the value of distillers grains 

 

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relative to the price ofcorn as livestock producers increasingly switched to distillers grains as asource of feed due to the high price of corn.

 

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

 

Corncosts rose 41% per bushel between periods. This increase is primarily due to a 42% increase in the market price ofcorn, due to an increase in demand and decrease in supply of grains globally,an increase in commodity speculation including corn and oil, and increaseddemand for corn from the ethanol industry.

 

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

 

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

 

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

 

*Net Income —* Net income decreased $18.3 million, or129%, to a net loss of $4.2 million for the year ended December 31, 2008from a net income of $14.1 million for the year ended December 31,2007.  This change is caused primarily bya significant increase in the cost of revenues from rising corn costs, offsetby an increase in revenues from the sale of ethanol and distillers grains.

 

**Liquidity and Capital Resources**

 

Our primary sources of liquidity are cash provided byoperations and borrowings under our $8.0 million and $9.0 million revolvingcredit facilities which are discussed below under “Indebtedness.”  Net working capital is $22 million as of December 31,2009, compared to $13.6 million as of December 31, 2008.   Working capital increased between periodsprincipally due to an increase in profitability.  We believe that, for the next 12 months,working capital will remain adequate and our cash flows from operations andrevolving debt will be sufficient to meet our expected capital and liquidityrequirements.

 

The following table shows the cash flows between theyear ended December 31, 2009 and the year ended December 31, 2008:

 
| ** **                                    | ** ** | **Year Ended December 31** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | **$**                           | ** ** | **$** | ** ** |
| Net cash from operating activities            |       | 9,218,745                       |       | 10,316,093 |   |
| Net cash from (used for) investing activities |       | (9,882)                         |       | 445,293 |   |
| Net cash (used for) financing activities      |       | (5,800,320)                     |       | (7,230,934) |   |

 

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*CashFlow From Operating Activities* – Net cash flow provided by operating activitiesdecreased $1.1 million between periods due principally to a decrease in cash providedby inventory, commodities contracts and broker transactions, offset by anincrease in cash provided by net income between periods.  Total ethanol inventory increased 36% betweenperiod ends, due to a 25% increase in the ethanol inventory value pergallon.  Total corn inventory wasrelatively flat between period ends, despite a 48% increase in bushels of cornin inventory.  However, we hadsignificantly more cash tied up in commodities contracts and brokertransactions between periods due to a 23% decrease in the market value of corninventory per bushel.  This was offset bya $5.8 million gain on commodities contracts and broker transactions at December 31,2009, compared to a $3.2 million loss on commodities contracts and brokertransactions at December 31, 2008.

 

*CashFlow (Used For) From Investing Activities –*  Net cash flowused for investing activities increased $455,000 between periods due to adecrease in purchases of property and equipment and a decrease in refunds fromthe State of South Dakota for sales and excise tax paid.  Since completing construction of our plant’sexpansion in May 2007, we have purchased less in property and equipmentbecause material capital improvements on the plant have been lessnecessary.  In addition, we received morein tax refunds from the State of South Dakota in 2008 than in 2009, becauseconstruction of our plant’s expansion was completed in 2007 and due to thetiming of refund payments from the State of South Dakota.

 

*CashFlow (Used For) Financing Activities*- Net cash used forfinancing activities decreased $1.4 million between periods, because we paid toour members a distribution of $1.5 million in 2008, compared to paying nodistributions to members in 2009.

 

The followingtable shows the cash flows between the year ended December 31, 2008 andthe year ended December 31, 2007:

 

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

 

*CashFlow From Operating Activities* - Net cash flow from operating activities decreased$15.8 million between periods due principally to a decrease in cash provided bynet income between periods, offset by an increase in cash provided byinventory.  Total ethanol inventory wasrelatively flat between period ends, despite a 20% reduction in the ethanolinventory value per gallon.  However, wehad significantly less cash tied up in corn inventory between periods due to a17% decrease in the market value of corn inventory per bushel and a $2.7million loss on forward corn contracts at December 31, 2008 (compared to a$5.1 million gain on forward corn contracts at December 31, 2007).

 

*CashFlow From Investing Activities*- Net cash flow from investing activities increased$19.7 million between periods due to a decrease in 2008 in purchases ofproperty and equipment and the receipt of a sales and excise tax refund fromthe State of South Dakota.  In contrastto 2007, we purchased in 2008 significantly less in property and equipmentafter completing the construction of our plant’s expansion in May 2007.  In addition, we received in 2008 from theState of South Dakota a series of tax refunds totaling $1,016,697 for sales andexcise taxes paid in 2007 and 2006 relating to the construction of our plant’sexpansion.

 

*CashFlow From Financing Activities -* Net cash used for financing activities decreased$430,000 between periods due to a $21.5 million decrease in distributions paidto members and the minority interest member from 2007 to 2008.  The decrease is offset by a decrease inadvances on long-term debt as we no longer drew down on the $33 millionconstruction note following our plant’s expansion and an increase of $2.9million in principal paid on long-term notes payable between periods.

 

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**Indebtedness**

 

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

 

The $8 millionnote permits us to borrow, on a revolving basis, the difference between theunpaid principal balance and $8 million.  The principal purpose of thisrevolver is to cover the cost of any non-corn related items at the plant at anytime.  The principal balance outstandingis $0 as of December 31, 2009, allowing us to borrow up to $8 million asof December 31, 2009 and the date of this filing.

 

The $9 million notepermits us to borrow, on a revolving basis, the difference of the outstandingprincipal amount and the lesser of the borrowing base or $9.0 million. Theborrowing base is defined as 75% of the total of the fair market value of theoutstanding inventory, eligible accounts receivable, and hedging accounts atfair market value. The principal purpose of this revolver is to cover the costof purchasing corn during a period of tight margins.  The principalbalance outstanding is $0 as of December 31, 2009, allowing us to borrowup to $9 million as of December 31, 2009 and the date of this filing.

 

The $33 millionterm note, which had been converted from a construction note on August 31,2007, is subject to two interest rate arrangements. The notional amounts ($12.79million and $6.39 million as of December 31, 2009) are subject to aninterest rate swap agreement with U.S. Bank. (see also Item 7A below-”Quantitativeand Qualitative Disclosures About Market Risk”). Under the agreement, thenotional amounts are subject to a fixed rate of 7.98% and 7.52% respectively,which is payable monthly until maturity on August 30, 2014. The remainingportion of the note is subject to a variable rate of one-month LIBOR plus2.75%, adjusted and due monthly (2.980% at December 31, 2009). A principalpayment of $825,000 is due quarterly on the note.

 

The principalbalance outstanding on the $15.8 million fixed-rate note (6.38%) is $9.59million as of December 31, 2009. Principal payments of $1.47 million weremade for the year ended December 31, 2009.

 

The principalbalance outstanding on the $3.9 million variable rate (3.25% as of December 31,2009) non-revolving loan is $2.05 million as of December 31, 2009. Principal payments of $390,000 were made for the year ended December 31,2009.

 

The principalbalance outstanding on the $4.3 million variable rate loan (3.235% at December 31,2009) is $2.91million. Principal payments of $616,000 were made for the yearended December 31, 2009.

 

All of the loansand notes outstanding are secured by Big Stone’s tangible and intangibleproperty, including a leasehold interest, easement rights, improvements,equipment, personal property, accounts receivable, inventory and contracts. Inaddition to standard covenants and conditions in the amended and restated loanagreement, Big Stone is subject to material conditions and covenants, including1) an annual capital expenditure limitation, 2) a cash distribution limitationto members, 3) a tangible net worth minimum, 4) a minimum working capital requirement,5) a fixed charge coverage ratio, and 6) a minimum balance sheet equity. Thefollowing table represents the material covenant and condition requirementsunder Big Stone’s loan agreement and its actual results in terms of complianceas of December 31, 2009:

 

| **Material Loan Covenants (and  Measurement Period)** | ** ** | **Requirement**    | ** ** | **Actual**    | ** ** | **In  Compliance  (1)** |
|-------------------------------------------------------|------------|--------------------|------------|---------------|------------|-------------------------|
| Capital  Expenditure Limitation (Annual)              |       | $1 million         |       | $200,000      |       | Yes                     |
| Cash  Distribution Limitation (Annual)                |       | 80% of Net  Income |       | 44%           |       | Yes                     |
| Tangible  Net Worth Minimum (Quarter)                 |       | $25 million        |       | $54 million   |       | Yes                     |
| Minimum  Working Capital (Quarter)(2)                 |       | $10 million        |       | $25.5 million |       | Yes                     |
| Fixed  Charge Coverage Ratio (Quarter)                |       | 1.15:1             |       | 1.43:1        |       | Yes                     |
| Minimum  Balance Sheet Equity (Quarter)               |       | 40%                |       | 51%           |       | Yes                     |

 

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(1)  Complianceis based on the financial statements of our subsidiary, Big Stone, as opposedto on a consolidated basis.

(2)  U.S. Bank’scovenants permit the inclusion of the $8 million revolver if not drawn down.

 

We are incompliance with all conditions and covenants under our loan agreement with U.S.Bank as of December 31, 2009 and the date of this filing.

 

The following tablesummarizes our consolidated contractual obligations as of December 31,2009:

 
| ** **                          | ** ** | ** ** | ** ** | ** **     | ** ** | **One to** | ** ** | **Four to** | ** ** | ** **      |
|-------------------------------------|------------|------------|------------|----------------|------------|------------|------------|-------------|------------|-----------------|
| ** **                          | ** ** | ** ** | ** ** | **Less  than** | ** ** | **Three**  | ** ** | **Five**    | ** ** | **After  Five** |
| **Contractual Obligations**         | ** ** | **Total**  | ** ** | **One  Year**  | ** ** | **Years**  | ** ** | **Years**   | ** ** | **Years**       |
| Long-Term  Debt Obligations (1)     |       | 47,321,555 |       | 8,222,999      |       | 20,837,454 |       | 18,261,102  |       | -               |
| Operating  Lease Obligations        |       | 374,635    |       | 2,520          |       | 5,292      |       | 5,292       |       | 361,531         |
| Purchase  Obligations(2)            |       | 3,398,617  |       | 784,420        |       | 1,385,357  |       | 983,072     |       | 245,768         |
| Total  Contractual Cash Obligations |       | 51,094,807 |       | 9,009,939      |       | 22,228,103 |       | 19,249,466  |       | 607,299         |

 

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(1)          Long-term debt obligations reflect paymentobligations, including interest, arising under the amended Loan Agreement withU.S. Bank.

(2)          Purchase obligations include payment for minimum steampurchases, and services for plant management and risk management.

 

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

#####  

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

 

**RecentAccounting Pronouncements**

 

In June 2009, theFASB amended the existing accounting and disclosure guidance for theconsolidation of variable interest entities, which is effective January 1,2010.  The amended guidance requiresenhanced disclosures intended to provide users of financial statements withmore transparent information about an enterprise’s involvement in a variableinterest entity.  We are currentlyassessing the impact of adoption on its financial position and results ofoperations.

 

In October 2009, theFASB issued new guidance for revenue recognition with multiple deliverables,which is effective for revenue arrangements entered into or materially modifiedin fiscal years beginning on or after June 15, 2010, although earlyadoption is permitted.  This guidanceeliminates the residual method under the current guidance and replaces it withthe “relative selling price” method with allocating revenue in a multipledeliverable arrangement.  The sellingprice for each deliverable shall be determined using vendor specific objectiveevidence of selling price, if it exists, otherwise third-party evidence ofselling price shall be used.  If neitherexists for a deliverable, the vendor shall use its best estimate of the sellingprice for that deliverable.  Afteradoption, this guidance will also require expanded qualitative and quantitativedisclosures. We are currently assessing the impact of adoption on its financialposition and results of operations.

 

**NewlyAdopted Accounting Pronouncements**

 

*NoncontrollingInterests in Consolidated Financial Statements.*  On January 1,2009, we adopted new guidance for the accounting, reporting and disclosure ofnoncontrolling interests, which improves the relevance, comparability andtransparency of the financial information that a reporting entity provides inits consolidated financial statements by establishing accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  Theimpact of adopting this guidance on the consolidated financial statements wasthe presentation of 

 

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noncontrolling interestwithin equity in the consolidated balance sheets and in the consolidatedstatements of changes in equity.

 

*BusinessCombinations.* On January 1,2009, we adopted new guidance on business combinations which expands the scopeof acquisition accounting to all transactions under which control of a businessis obtained. This guidance requires an acquirer to recognize the assetsacquired and liabilities assumed at the acquisition date fair values withlimited exceptions. Additionally, the guidance requires that contingentconsideration be recorded at fair value on the acquisition date, that acquiredin-process research and development be capitalized and recorded as intangibleassets at the acquisition date, and also requires transaction costs and coststo restructure the acquired company be expensed. On April 1, 2009,additional guidance was issued further amending the accounting for businesscombinations to require that assets acquired and liabilities assumed in abusiness combination that arise from contingencies be recognized at fair valueif fair value can reasonably be estimated. If the acquisition date fair valueof an asset acquired or liability assumed that arises from a contingency cannotbe determined, the asset or liability would be recognized if probable andreasonably estimable; if these criteria are not met, no asset or liabilitywould be recognized.  We have not had anybusiness combinations since adopting this guidance.

 

*Disclosuresabout Derivative Instruments and Hedging Activities.* On April 1, 2009, we adopted  new guidance related to derivative disclosureand hedging activities. This guidance requires entities that utilize derivativeinstruments to provide qualitative disclosures about their objectives andstrategies for using such instruments, as well as any details ofcredit-risk-related contingent features contained within derivatives. Theguidance  also requires entities todisclose additional information about the amounts and location of derivativeslocated within the financial statements and the impact that hedges have on anentity’s operating results, financial position or cash flows. See Note 4 —Derivative Financial Instruments for additional disclosures.

 

*Codification.* In June 2009, the FASB issued the FASB Accounting StandardsCodification (“Codification”). The Codification became the single source forall authoritative GAAP recognized by the FASB and has been applied to financialstatements issued for periods ending after September 15, 2009. The onlyimpact of adopting this provision was to update and remove certain referencesin our consolidated financial statements to technical accounting literature.

 

**CriticalAccounting Policies and Estimates**

 

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

 

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

 

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

 

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

 

*InventoryValuation. *Ethanoland related product inventory is stated at net realizable value. Corn inventoryis stated at market value, which approximates net realizable value (localmarket prices less cost of disposal), based on local market prices determinedby grain terminals in the area of the plant. Other raw materials, spare partsand work-in-process inventory are stated at the lower of cost or market on anaverage cost method.

 

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

######  

###### Revenue from federal and state incentiveprograms is recorded when we have produced or sold the ethanol and satisfiedthe reporting requirements under each applicable program. When it is uncertainthat we will receive full allocation and payment due under the incentiveprograms, we derive an estimate of the incentive revenue for the relevantperiod based on various factors. The estimate is subject to change as we becomeaware of increases or decreases in the amount of funding available under theincentive programs or other factors that affect funding or allocation of fundsunder such programs.

######  

*Cost ofRevenues. *Theprimary components of cost of revenues from the production of ethanol andrelated products are corn expense, energy expense (electricity, natural gas andsteam), raw materials expense (chemicals and denaturant), shipping costs onsales, depreciation on process equipment and direct labor costs. Shipping costsincurred by us are recorded as a component of cost of revenues. Shipping costsin cost of revenues includes inbound freight charges on inventory, outboundfreight charges on related product and purchasing and receiving costs.

 

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

 

Long-lived assets,including property, plant and equipment, and investments are evaluated forimpairment on the basis of undiscounted cash flows whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  An impaired asset is written down to our estimated fair marketvalue based on the best information available.  Considerable managementjudgment is necessary to estimate discounted future cash flows and may differfrom actual cash flows.

 

*Accountingfor Derivative Instruments and Hedging Activities.  *We enter into derivative instruments tohedge our exposure to price risk related to forecasted corn and natural gaspurchases, forward corn purchase contracts and forecasted ethanol sales. We do not typically enter into derivative instruments other than for hedgingpurposes.  All derivative contracts are recognized on the December 31,2009 and 2008 balance sheets at their fair market value.

 

On the date thederivative instrument is entered into, we designate the derivative as either (1) ahedge of the fair value of a recognized asset or liability or of anunrecognized firm commitment (fair value hedge), (2) a hedge of aforecasted transaction or of the variability of cash flows to be received orpaid related to a recognized asset or liability (cash flow hedge) or (3) willnot designate the derivative as a hedge.  Changes in the fair value of aderivative that is designated as and meets all the required criteria for a fairvalue hedge, along with the gain or loss on the hedged asset or liability thatis attributable to the hedged risk, are recorded in current periodearnings.  Changes in the fair value of a derivative that is designated asand meets all the required criteria for a cash flow hedge are recorded inaccumulated other 

 

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comprehensive income andreclassified into earnings as the underlying hedged item affectsearnings.  Changes in the fair value of a derivative that is notdesignated as a hedge are recorded in current period earnings.

 

**Item 7A.Quantitative and Qualitative Disclosure About Market Risk.**

 

We are exposed tothe impact of market fluctuations associated with commodity prices and interestrates as discussed below. We have no exposure to foreign currency risk as allof our business is conducted in U.S. Dollars. We use derivative financialinstruments as part of an overall strategy to manage market risk.Specifically, we use forward, futures and option contracts to hedge changes tothe commodity prices of corn and natural gas, as well as interest rate swaps tohedge against changes in interest rates. However, we do not enter into thesederivative financial instruments for trading or speculative purposes. The interestrate swap agreement is accounted for as a cash flow hedge pursuant to therequirements of SFAS 133, as amended, Accounting for Derivative Instruments andHedging Activities.

 

*CommodityPrice Risk*

 

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

 

We attempt toreduce the market risk associated with fluctuations in the price of corn andnatural gas by employing a variety of risk management strategies. Strategiesinclude the use of derivative financial instruments such as futures and optionsinitiated on the Chicago Board of Trade and/or the New York MercantileExchange, as well as the daily cash management of our total corn and naturalgas ownership relative to our monthly demand for each commodity, whichmay incorporate the use of forward cash contracts or basis contracts.

 

Corn is hedgedwith derivative instruments including futures and options contracts offeredthrough the Chicago Board of Trade. Forward cash corn and basis contracts arealso utilized to minimize future price risk. Likewise, natural gas is hedgedwith futures and options contracts offered through the New York MercantileExchange. Basis contracts are also utilized to minimize future price risk.

 

Gains and losseson futures and options contracts used as economic hedges of corn inventory, aswell as on forward cash corn and basis contracts, are recognized as a componentof cost of revenues for financial reporting on a monthly basis using month-endsettlement prices for corn futures on the Chicago Board of Trade. Corninventories are marked to fair value using market based prices so that gains orlosses on the derivative contracts, as well as forward cash corn and basiscontracts, are offset by gains or losses on inventories during the sameaccounting period.

 

Gains and losseson futures and options contracts used as economic hedges of natural gas, aswell as basis contracts, are recognized as a component of cost of revenues forfinancial reporting on a monthly basis using month-end settlement prices fornatural gas futures on the New York Mercantile Exchange. The natural gasinventories hedged with these derivatives or basis contracts are valued at thespot price of natural gas, plus or minus the gain or loss on the futures oroptions positions relative to the month-end settlement price on the New YorkMercantile Exchange.

 

A sensitivityanalysis has been prepared to estimate our exposure to commodity price risk.The table presents the fair value of open futures and option positions for cornand natural gas as of December 31, 2009 and December 31, 2008 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:

 

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| **Year Ended**          | ** ** | **Fair  Value** | ** ** | **Effect  of  Hypothetical  Adverse  Change —  Market Risk** |
|-------------------------|------------|-----------------|------------|-------------------------------------------------------------------|
| December 31,  2009 |       | $               | 1,455,911  |                                                              | 145,591 |
| December 31,  2008 |       | $               | 5,297,175  |                                                              | 529,718 |

 

*InterestRate Risk*

 

We manage ourinterest rate risk by monitoring the effects of market changes on the interestrates and using fixed-rate debt whenever possible. We also enter into interestrate swap agreements.

 

Our interest raterisk exposure pertains primarily to our variable rate, long-term debt.Specifically, we had $11.36 million in variable rate, long-term debtoutstanding as of December 31, 2009, or approximately 28% of our totallong-term indebtedness. The interest rate on $2.05 million of the variablerate, long-term debt is U.S. Bank’s prime rate, which was 3.25% as of December 31,2009.  The interest rate on $2.91 million of the variable rate debt issubject to an interest rate of 3.235% as of December 31, 2009.  Thevariable rate on the $6.39 million portion of the term note is 2.980%(One-Month LIBOR plus 2.75%) as of December 31, 2009.

 

Inorder to achieve a fixed interest rate on a portion of our $33.0 million termnote, we are a party to 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 ($12.79 million and$6.39 million, respectively as of December 31, 2009). The remainingamount, $6.39 million, is subject to a variable rate of One-Month LIBOR plus2.75%. While our exposure is now reduced, there is no assurance that theinterest rate swap will provide us with protection in all scenarios. Forexample, under the swap agreement, when One-Month LIBOR plus 2.75% exceeds7.98% or 7.52%, we receive payments from U.S. Bank for the difference betweenthe market rate and the swap rate.  Conversely, when the One-Month LIBORplus 2.75% falls below 7.98% or 7.52%, we make payments to U.S. Bank for thedifference.  The interest rate on the variable portion of our $33.0million term note decreased 0.231% from December 31, 2008 to December 31,2009, which required us to pay more in interest to U.S. Bank on the two swaptransactions.

 

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

 

Reference is madeto the “Table of Contents” of Northern Growers, LLC located on the page priorto page F-1 of this report, and financial statements for the year ended December 31,2009 referenced therein, which are hereby incorporated by reference.

 

**Item9.  Changes in and Disagreements With Accountants on Accounting andFinancial Disclosure.**

 

None.

 

**Item9A(T).  Controls and Procedures.**

 

*Evaluationof Disclosure Controls and Procedures.*  Ourmanagement, including the participation of our Chief Executive Officer/ChiefFinancial Officer, has concluded that, based on management’s evaluation as ofthe end of the period covered by this Annual Report on Form 10-K,  the disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934) are effective to ensure that information required to bedisclosed by us in reports that we file or submit under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules andforms.  Additionally, based on management’sevaluation, our disclosure controls and procedures were effective in ensuringthat information required to be disclosed in our Exchange Act reports isaccumulated and communicated to our management, including our Chief ExecutiveOfficer/Chief Financial Officer, to allow timely decisions regarding requireddisclosures.

 

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*Management’sreport on internal control over financial reporting. *Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) ofthe Securities Exchange Act of 1934.  Ourinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Our internal control over financial reporting includes those policiesand procedures 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.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

Management has assessedour internal control over financial reporting in relation to criteria describedin *Internal Control- Integrated Framework*,issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on this assessmentusing those criteria, we concluded that, as of December 31, 2009, ourinternal control over financial reporting was effective.

 

*Changesin Internal Control over Financial Reporting.*  There was nochange in our internal control over financial reporting that occurred duringthe quarter ended December 31, 2009 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

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

 

**Item9B.  Other Information.**

 

On October 23, 2009,we announced an intent to undertake a reclassification of our Class Acapital units. The proposed transaction, which is subject to approval by ourmembers, will result in the reclassification of our Class A capital unitsoutstanding into three distinct classes. In the proposed reclassification, we expect that: (a) recordholders of between 40,000 and 69,999 of our Class A capital units willreceive newly-created Class B capital units, on the basis of one Class Bcapital unit for each Class A capital unit; (b) record holders ofless than 40,000 of our Class A capital units will receive newly-created Class Ccapital units, on the basis of one Class C capital unit for each Class Amember unit; and (c) all other Class A capital units will remainoutstanding.  Capital unit holdersreceiving Class B or Class C capital units will receive no additionalconsideration for their Class A capital units.

 

The reclassificationtransaction can only be effected by the adoption by our members of amendmentsto our Fifth Amended and Restated Operating Agreement, which amendments will beincluded in a Sixth Amended and Restated Operating Agreement. The members willvote on the adoption of the proposed amendment at a special meeting of members onApril 26, 2010, in Milbank, South Dakota. The Sixth Amended and Restated Operating Agreement will include detailsabout the rights, privileges, obligations and restrictions associated with the Class A,B and C capital units.  If our membersapprove the Sixth Amended and Restated Operating Agreement and thereclassification is implemented, we anticipate having fewer than 300 Class Amembers of record, which would enable us to terminate voluntarily theregistration of our Class A units under the Securities Exchange Act of1934.

 

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**PART III**

 

**Item 10.Directors, Executive Officers and Corporate Governance.**

 

*Directorsand Officers*

 

The following tableprovides certain information about Northern Growers’ board of managers and soleofficer.  None of our managers or officer has served as a director ofanother company which is required to file reports under the Exchange Act.

 
| **Name, Address and Board/Officer  Position, if any**                                 | ** ** | **District** | ** ** | **Age** | ** ** | **Board  Member  Since** | ** ** | **Term  Expiring** | ** ** | **Background**                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------------------|------------|--------------|------------|---------|------------|--------------------------|------------|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                  |       |         |       |    |       |                     |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **Ronald Anderson**47895 S.D. Hwy.  158   LaBolt, South Dakota 57246*Audit Committee* |       | One          |       | 66      |       | 1999                     |       | 2012               |       | Ron has been a farmer  for nearly 42 years. He served as a director of the Nassau Farmers Elevator  for 12 years and as its chairman for six years. He assisted with the  organization of the Grant County Soybean Association, serving as its  president for six years. He is an active member of American Lutheran Church  in Milbank, South Dakota. He attended Augustana College, Sioux Falls, South  Dakota for one year before returning to farming in 1964.                      |
| ** **                                                                            |       |         |       |    |       |                     |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **LeRoy Bergan**15445 442nd Avenue,   Florence, SD 57235                         |       | One          |       | 72      |       | 2007                     |       | 2010               |       | Leroy is a retired  farmer who farmed for over 30 years. He is currently an independent wellness  consultant for Nikken, Inc., of Irvine, California, and has served since  1991 on the board of directors for Codington-Clark Electric Coop, Inc.,  representing District 3. He graduated from South Dakota State University,  Brookings, South Dakota, in 1959 with a Bachelor of Science Degree in  Agriculture Education, and in 1969 with a Masters Degree in Education. |
| ** **                                                                            |       |         |       |    |       |                     |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **Wendell Falk**45384 154th St.  South Shore, South Dakota 57265                 |       | One          |       | 38      |       | 2005                     |       | 2011               |       | Wendell has been a  farmer for the past 10 years. He and his wife own and operate Wendell Falk  Farms. He graduated from South Dakota State University, Brookings, South  Dakota, in 1992 with an Associate Degree in General Agriculture.                                                                                                                                                                                                                                              |
| ** **                                                                            |       |         |       |    |       |                     |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **R. Lars Herseth**

39949 114th Street

Houghton, South Dakota  57449                |       | One          |       | 62      |       | 2003                     |       | 2012               |       | Lars has been a farmer  for 40 years. He is a former State Representative and State Senator with the  South Dakota Legislature, serving for 12 years and 8 years, respectively. He  currently serves as a director of the American Coalition of Ethanol and as a  member of the South Dakota Corn Utilization Council. He graduated from the  University of South Dakota, Vermillion, South Dakota, in 1969 with a Bachelor  of Arts Degree in Government and History.                  |
| ** **                                                                            |       |         |       |    |       |                     |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **Mark Lounsbery**                                                                    |       | One          |       | 63      |       | 1999                     |       | 2011               |       | Mark has been a farmer  for the past 35 years. He is a former director of the South Dakota Corn                                                                                                                                                                                                                                                                                                                                                                                         |

 

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| 16453 482nd Ave.  Revillo, South Dakota 57259*Nomination Committee*                             |   |   |   |   |   |   |   |   |   | Utilization Council and  is a current director of the American Corn Growers Association.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                 |   |   |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Robert Metz**46602 127th Street  Browns Valley, Minnesota 56219 *President; Audit  Committee* |   | One    |   | 52     |   | 1999   |   | 2010   |   | Robert has been a  farmer for the past 33 years. He represents South Dakota on the United  Soybean Board and serves as past chairman of the National Bio-Diesel Board.  He serves as a member of the South Dakota Corn Growers Association and is  trustee of St. Anthony’s Catholic Church. He is also a former board member of  the Browns Valley School District and the Browns Valley Community Elevator.  He is a past president of the American Soybean Association.                                                                                                                                   |
| ** **                                                                                           |   |   |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Robert Narem**14313 469th Ave.  Twin Brooks, South Dakota 57269*Chief Executive Officer*      |   | One    |   | 54     |   | 1999   |   | 2011   |   | Robert has been  employed with Soil Consultant, Inc. as an agronomist since 1982 and  serves as its president. He is a member of the South Dakota Independent Crop  Consultant Association, vice president of the South Dakota Certified Crop  Advisor Committee, and supervisor of Kilborn Township. He is a board member  of Mountain View Harvest Coop and Gerald, LLC, a commercial baking company.  He graduated from South Dakota State University, Brookings, South Dakota, in  1977, with a Bachelor of Science Degree in Park Management and in 1982 with a  Masters of Science Degree in Agronomy. |
|                                                                                                 |   |   |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Jeff Olson**2494 300th Street  Madison, Minnesota 56256                                       |   | Two    |   | 47     |   | 2004   |   | 2010   |   | Jeff has been a farmer  for the past 21 years. He currently serves as a director of the Lac Qui Parle  County Planning and Zoning Committee. He graduated from South Dakota State  University, Brookings, South Dakota, in 1985 with a Bachelor of Science  Degree in Agriculture Education.                                                                                                                                                                                                                                                                                                                      |
| ** **                                                                                           |   |   |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Ronald Olson**  44228 150th Street  Waubay, South Dakota 57273                                |   | One    |   | 46     |   | 1999   |   | 2010   |   | Ron has been a farmer  for the past 24 years. He currently serves as a director of the South Dakota  Corn Utilization Council and serves on an Action Team for the U.S. Grains  Council. He graduated from South Dakota State University, Brookings, South  Dakota, in 1986 with an Associate Degree in General Agriculture.                                                                                                                                                                                                                                                                                      |
| ** **                                                                                           |   |   |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Heath Peterson**  16948 482nd Ave.  Revillo, South Dakota 57259                               |   | One    |   | 40     |   | 2006   |   | 2012   |   | Heath has been a farmer  for 16 years. He currently serves as a member of the South Dakota Corn  Growers Association, and is a former director of the Revillo Farmers Elevator  Board. He graduated from Lake Area Vocational School in 1992.                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                 |   |   |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Delton Strasser**  13975 SD Hwy. 123  Wilmot, South Dakota 57279*Secretary/Treasure*r              |   | One    |   | 65     |   | 1999   |   | 2012   |   | Del has been a farmer  for over 39 years. He is president of the board of POET® Biorefining - Big  Stone and of Zion Community Church. He is a former director and chairman of  the South Dakota Corn Utilization Council and former director of National  Corn Growers Association. He attended Trinity College, Chicago, Illinois, for  one year.                                                                                                                                                                                                                                                          |

 

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| **Steve Street**16153 486th Avenue  Revillo, South Dakota 57259*Nomination Committee*         |   | One    |   | 59     |   | 1999   |   | 2010   |   | Steve has been a farmer  for over 31 years. He currently serves as a State Representative for District  4 in the South Dakota Legislature. He is also treasurer of Adams Township and  was formerly president of the Revillo Grain Elevator. He graduated from South  Dakota State University in Brookings, South Dakota, in 1972 with a Bachelor  of Science Degree in Agronomy.                    |
|----------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                         |   |   |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| **J. Charles Walters**  68937 240th St.  Graceville, Minnesota 56240                          |   | Two    |   | 57     |   | 2009   |   | 2012   |   | Charles has been a  farmer for 28 years. He graduated from the University of Minnesota, St. Paul,  Minnesota, in 1975 with a Bachelor of Science Degree in Agronomy.                                                                                                                                                                                                                                 |
|                                                                                               |   |   |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Bill Whipple**13453 460th Avenue  Wilmot, South Dakota 57279*Audit Committee*               |   | One    |   | 65     |   | 1999   |   | 2011   |   | Bill has been a farmer  for over 35 years with Whipple Ranch, Inc., where he is president and  manager. He has served as a director of the South Dakota Corn Growers  Association. He serves as Director of the South Dakota Corn Utilization  Council. He graduated from South Dakota State University, Brookings, South  Dakota, in 1969 with a Bachelor of Science Degree in Animal Science. |
|                                                                                               |   |   |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Robert Wittnebel**2971 121st Ave.  Nassau, Minnesota 56257*Audit and Nomination Committees* |   | Two    |   | 70     |   | 2002   |   | 2011   |   | Robert has been a  farmer for over 37 years. He is a member of the American Legion, VFW, and  Trinity Lutheran Church. He also serves as a director of Hilltop Residence  and Madison Lutheran Home. He graduated from South Dakota State University,  Brookings, South Dakota, in 1961 with a Bachelor of Science Degree in  Agricultural Education.                                                |

 

*DirectorQualifications*

 

Each person waselected because of his involvement in and support of the agriculture industryin northeastern South Dakota, including the ethanol industry. In particular,each person is or was an agriculture producer or owns a business involved inthe agriculture industry. In addition, seven persons - Ron Anderson, MarkLounsbery, Robert Metz, Robert Narem, Delton Strasser, Steve Street, and BillWhipple - were chosen because they are the original founders of NorthernGrowers. As original founders, they are viewed as having invaluable experienceand knowledge in representing the board of managers and our operations.

 

*AuditCommittee*

 

We have a separatelydesignated standing Audit Committee established in accordance with section3(a)(58)(A) of the Exchange Act, whose members include Messrs. RonAnderson, Robert Metz, Bill Whipple and Robert Wittnebel. Because our board of managers are mostly farmers, asis common for producer-based agricultural entities, we do not have an auditcommittee financial expert serving on our Audit Committee as that term isdefined under SEC rules.

 

*Code of Ethics*

 

All of the board of managers, officers and employees,are required to comply with Northern Growers’ Code of Ethics. A copy of theCode of Ethics can be obtained, without charge, by writing to the followingaddress:

 

Membership Coordinator

Northern Growers, LLC

c/o POET® Biorefining -Big Stone

 

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48416 144th Street.

Big Stone City, SouthDakota 57216

 

Amendments and modifications to, and waivers of, theCode of Ethics will be promptly disclosed, to the extent required under theExchange Act, on a current report on Form 8-K.

 

*Director Nominations*

 

There are no material changes to the procedures bywhich members may recommend nominees to our board of managers where thosechanges were implemented after our last provided disclosure in 2009. Therefore,members will be allowed to recommend candidates to the board of managers priorto the election at the 2010 Annual Meeting of Members.

 

*Section 16(A) BeneficialOwnership**Reporting Compliance*

 

Section 16(a) of the Securities Exchange Actof 1934, as amended, requires our executive officers and managers of our Board,and persons who directly or indirectly own more than ten percent of a class ofour Class A capital units, to file reports of ownership and changes inownership with the Securities and Exchange Commission (the “SEC”). Executive officers and greater than ten-percent beneficial owners are requiredby SEC regulations to furnish us with copies of all Section 16(a) formsthey file. Based solely on a review of the copies of such reports furnished tous and written representations from our executive officer and managers of theBoard, all Section 16(a) filing requirements were complied withduring the fiscal year ended December 31, 2009 except a Form 3 for Mr. CharlesWalters which was filed with the SEC on a Form 5 on February 3, 2010.

 

**Item 11.  Executive Compensation**

 

**Executive Compensation**

 

**SummaryCompensation Table**

 

The tables below summarize the total compensation paidor earned by our chief executive and financial officer, Mr. Robert Narem. Mr. Naremhas served in this position since September 11, 2003.  He does not receive a salary or bonus for hisservices as officer. He also does not receive any stock or incentive awards,health-care, retirement or other benefits, or compensation for a termination orchange in control. His compensation is strictly based on services he performson behalf of Northern Growers’ which is a fee of $250 for most servicesperformed, including reviewing financial reports, preparing and reviewing SECreports and compliance matters, communicating with our board of managers andthe plant’s general manger, and anything relating to the oversight of themanagement of POET® Biorefining - Big Stone. The amounts reported in theSummary Compensation Tables reflect actual amount paid during the year.

 

**SUMMARYCOMPENSATION TABLE**

 
| **Name and  principal  position** | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **All Other  Compensation  ($)  See Note 2** | ** ** | **Total  ($)** |
|----------------------------------------|------------|----------|------------|-----------------|------------|----------------|------------|-------------------------------------------------------------|------------|----------------|
| Robert  Narem (1)                      |       | 2009     |       | $               | NA         |           | NA         |                                                        | $          | 5,750          |   | $ | 5,750 |
|                                   |       | 2008     |       | $               | NA         |           | NA         |                                                        | $          | 5,821          |   | $ | 5,821 |

 

----

(1)           Robert Narem is the chief executiveand chief financial officer of Northern Growers.

(2)           The amount shown in this columnrepresents Northern Growers’ total aggregate payment to Mr. Narem in 2009and 2008 for services performed on behalf of Northern Growers, at $250 perservice item and for mileage reimbursement

 

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**Managers’ Compensation**

 

For their services onNorthern Growers’ board of managers, an individual receives compensation shownin the following table and explained in the accompanying notes.

 
| **Name**            | ** ** | **Fees  Earned or  Paid  in Cash  See Note 1** | ** ** | **All Other  Compensation  See Note 2** | ** ** | **Total ($)** |
|---------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------|
| Ronald  Anderson    |       | $                                                                  | 3,250      |                                                   | —     |               | $ | 3,250 |
| Leroy  Bergan       |       | $                                                                  | 1,750      |                                                   |       |               | $ | 1,750 |
| Wendell  Falk       |       | $                                                                  | 2,000      |                                                   | —     |               | $ | 2,000 |
| Lars  Herseth       |       | $                                                                  | 2,000      |                                                   | —     |               | $ | 2,000 |
| Mark  Lounsbery     |       | $                                                                  | 2,000      |                                                   | —     |               | $ | 2,000 |
| Robert  Metz        |       | $                                                                  | 3,750      |                                                   | —     |               | $ | 3,750 |
| Robert  Narem(3)    |       | $                                                                  | 5,750      |                                                   | —     |               | $ | 5,750 |
| Jeff  Olson         |       | $                                                                  | 2,000      |                                                   | —     |               | $ | 2,000 |
| Ronald  Olson       |       | $                                                                  | 1,500      |                                                   | —     |               | $ | 1,500 |
| Heath  Peterson     |       | $                                                                  | 2,000      |                                                   | —     |               | $ | 2,000 |
| Delton  Strasser    |       | $                                                                  | 4,000      |                                                   | —     |               | $ | 4,000 |
| Steve  Street       |       | $                                                                  | 3,000      |                                                   | —     |               | $ | 3,000 |
| J.  Charles Walters |       | $                                                                  | 750        |                                                   |       |               | $ | 750 |
| Bill  Whipple       |       | $                                                                  | 2,750      |                                                   | —     |               | $ | 2,750 |
| Robert  Wittnebel   |       | $                                                                  | 3,250      |                                                   | —     |               | $ | 3,250 |

----

(1)           The board of managers receives a perdiem fee for services performed on our behalf in the amount of $250 for eachregular board or committee meeting.  Theboard also receives the same membership benefits as other members receive inproportion to their ownership of capital units in the company.

 

(2)           The board of managers is reimbursedat current IRS rates for travel incurred for each board and committee meetingor function and when attending other events on behalf of the company.

 

(3)           Mr. Narem serves as Chief Executive Officerand Cheif Financial Officer of Northern Growers.

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

We have not authorizedthe issuance of any equity securities for purposes of any equity compensationplan.  The following table sets forth certain information as of February 1,2010, with respect to the capital unit ownership of: (i) each our board ofmanagers, (ii) all officers and managers of Northern Growers, 15 innumber, as a group; and any person or group (as that term is used in Section 13(d)(3) ofthe Exchange Act) who beneficially own more than 5% of Northern Growers’capital units.   Mr. Robert Narem serves in the capacity ofexecutive officers.  Except as noted below, the persons listed belowpossess sole voting and investment power over their respective capital units

** **
| **Title of  Class** | ** ** | **Name and Address of  Beneficial Owner(1)**                                      | ** ** | **Amount and  Nature of  Beneficial Owner  (in units)** | ** ** | **Equity  Percent  of Class** | ** ** | **Voting  Percent  of Class** | ** ** |
|--------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| Class A             |       | South  Dakota Corn Processors Investment Fund

P.O. Box  85102

Sioux  Falls, South Dakota 57104 |       | 3,150,000                                                                   |       | 6.2                                | %          | *                                  |       |
|                     |       |                                                                                                  |       |                                                                        |       |                               |       |                               |       |
| Class A             |       | Ronald Anderson,  Manager(2)                                                                          |       | 160,000                                                                     |       | *                                  |       | *                                  |       |
|                     |       |                                                                                                  |       |                                                                        |       |                               |       |                               |       |
| Class A             |       | Leroy Bergan, Manager                                                                                 |       | 40,000                                                                      |       | *                                  |       | *                                  |       |
|                     |       |                                                                                                  |       |                                                                        |       |                               |       |                               |       |
| Class A             |       | Wendell Falk, Manager  (3)                                                                            |       | 40,000                                                                      |       | *                                  |       | *                                  |       |

 

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| Class A |       | Lars Herseth, Manager  (4)                       |   | 170,000   |   | *      |   | *      |   |
|--------------|------------|--------------------------------------------------|--------|-----------|--------|--------|--------|--------|--------|
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Mark Lounsbery, Manager  (5)                     |   | 246,666   |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Robert Metz, Manager  (6)                        |   | 200,000   |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Robert Narem, Manager,  CEO/CFO(7)               |   | 120,000   |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Jeff Olson, Manager                              |   | 40,000    |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Ronald Olson, Manager                            |   | 140,000   |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Heath Peterson, Manager                          |   | 120,000   |   | *      |   |   |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Delton Strasser,  Manager(8)                     |   | 172,000   |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Steve Street,  Manager(9)                        |   | 320,000   |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | J. Charles Walters                               |   | 10,000    |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Bill Whipple,  Manager(10)                       |   | 440,000   |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A |       | Robert Wittnebel,  Manager                       |   | 40,000    |   | *      |   | *      |   |
|         |       |                                             |   |      |   |   |   |   |   |
| Class A | ** ** | **Managers and Executive  Officers, as a Group** |   | 2,258,666 |   | 5.1%   |   | 1.9    | %      |

----

*Percentage of capitalunits beneficially owned does not exceed 1% of the class.

 

(1)           The addresses for each of theindividual managers listed above is set forth above under Item 10. Directors,Executive Officers and Corporate Governance

 

(2)          Includes 120,000 capital units ownedof record through an IRA.

 

(3)           Includes 40,000 capital units ownedjointly with Mr. Falk’s wife.

 

(4)                                  Includes 2,500 capital units held by Mr. Hersethas custodian for the benefit of a grandchild and 2,500 capital units held by Mr. Herseth’swife as custodian for the benefit of her grandchildren.

 

(5)           Includes capital units owned jointlywith Mr. Lounsbery’s wife.

 

(6)           Includes 80,000 capital units ownedof record by Mr. Metz’s wife.

 

(7)           Includes capital units owned ofrecord by Soil Consultants, Inc. of which Mr. Narem is the owner.

 

(8)           Includes 172,000 capital units ownedjointly with Mr. Strasser’s wife.

 

(9)           Includes 80,000 capital units ownedof record by Mr. Street’s wife.

 

(10)         Represents capital units owned ofrecord through an IRA and Whipple Ranch, Inc. of which Mr. Whipple isco-owner.

 

**Item13.  Certain Relationships and RelatedTransactions, and Director Independence**

 

Northern Growers’board of managers and officer have not entered into, and do not anticipateentering into, any contractual or other transactions between themselves and us,directly or indirectly, except for transactions identical to those provided byall other members such as corn delivery transactions to Northern Growers’subsidiary, POET® Biorefinery — Big Stone. The board of managers receives a perdiem fee and other reimbursement and compensation for their services, asdescribed above.

 

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Except as setforth under the operating agreement, Northern Growers does not have any formalpolicies and procedures for the review, approval or ratification oftransactions between board of managers or officers. Under the operatingagreement, all acts of the board of managers are required to be conducted bymajority vote of disinterested persons serving on the board. A disinterestedperson is defined as a person who does not have a financial interest in anycontract or agreement, or whose family member does not have a financialinterest in the same. A person who is not disinterested is precluded fromvoting on the matter at hand unless such agreement or contract is madeavailable to all members of the company. In 2009, the terms and conditionsregarding a vote by disinterested board of managers were fully complied with underour operating agreement.

 

All of the boardof managers are independent except Mr. Robert Narem. Mr. Narem is notindependent because of his service as an executive officer of Northern Growersand not due to any other transactions or relationships. The determination ofindependence is made by reference to NASDAQ Rule 5605.

 

**Item14.  Principal Accounting Fees andServices**

 

The followingpresents fees for professional services rendered by our independent auditor,Eide Bailly LLP, for the audit of our annual financial statements for thefiscal year ended December 31, 2008 and 2009 and fees for other servicesrendered by Eide Bailly during those periods.

 

**Audit Fees. **Eide Bailly has billed us a total amountof $29,500 and $75,000 in December 31, 2009 and December 31, 2008,respectively, for professional services rendered for the audit of NorthernGrowers’ various financial statements, and the reviews of the financialstatements included in its Form 10-Q for the 2009 and 2008 fiscalyears.  Additional fees for servicesperformed on the audit of financial statements for the year ended December 31,2009 are expected to be billed to us in the next 30 days.

 

**Audit-Related Fees.** Eide Bailly did not perform anyaudit-related services as of December 31, 2009 and December 31, 2008.

 

**Tax Fees. **Eide Bailly has billed us a total amountof $ 21,548 and $16,581 for professional tax services rendered as of December 31,2009 and December 31, 2008, respectively. The tax services includedpreparation of federal tax returns and consultation regarding federal tax lawsand an IRS exam.

 

**All Other Fees. **Eide Bailly has billed us a total of $550and $545 for all other services rendered as of December 31, 2009 and December 31,2008. The services rendered in 2009 pertained to travel to the Northern Growers’Annual Meeting. The services rendered in 2008 pertained to implementation ofSFAS 157 and related disclosures.

 

We have a separate audit committee. It is the policyof the audit committee to pre-approve all audit and permissible non-auditservices performed by Eide Bailly. The audit committee approved all servicesthat Eide Bailly provided to us in the past two fiscal years.

 

The percentage of hoursexpended on Eide Bailly’s engagement to audit our financial statements for themost recent fiscal year that were attributed to work performed by persons otherthan Eide Bailly’s full time, permanent employees was 0%.

 

**PART IV**

 

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

 

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

 

(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 fora list of the financial statements and schedules for the year ended December 31,2009 included herein. The financial statements begin on page F-2 of thisReport.

 

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(2) All supplemental schedules are omittedbecause of the absence of conditions under which they are required or becausethe information is shown in the Consolidated Financial Statements or notesthereto.

 

(3) The exhibits we have filed herewith orincorporated by reference herein are set forth on the attached Exhibit Index. The following exhibits constitute a management contract:  10.14 and 10.16.

 

(b) See Item15(a)(3)

 

SIGNATURES

 

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

 

 
|                       | NORTHERN GROWERS, LLC                                                                                          |
|----------------------------|----------------------------------------------------------------------------------------------------------------|
|                       |                                                                                                           |
| Date: March 31,  2010 | /s/ Robert Narem                                                                                               |
|                       | Robert Narem, Chief  Executive   Officer/Chief Financial Officer   (Principal Executive and Financial Officer) |

 

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

 

 
|                        | NORTHERN  GROWERS, LLC                                                        |
|-----------------------------|-------------------------------------------------------------------------------|
|                        |                                                                          |
| Date:  March 31, 2010  | /s/  Robert Narem                                                             |
|                        | Robert  Narem, Chief Executive Officer   and Chief Financial Officer, Manager |
|                        |                                                                          |
| Date:  March 31, 2010  | /s/  Ron Anderson                                                             |
|                        | Ronald  Anderson, Manager                                                     |
|                        |                                                                          |
| Date:  March 31 , 2010 | /s/  Leroy Bergan                                                             |
|                        | Leroy  Bergan, Manager                                                        |
|                        |                                                                          |
| Date:  March 31, 2010  | /s/  Wendell Falk                                                             |
|                        | Wendell  Falk, Manager                                                        |
|                        |                                                                          |
| Date:  March 31, 2010  | /s/  Lars Herseth                                                             |
|                        | Lars  Herseth, Manager                                                        |
|                        |                                                                          |
| Date:  March 31, 2010  | /s/  Mark Lounsbery                                                           |
|                        | Mark  Lounsbery, Manager                                                      |
|                        |                                                                          |
| Date:  March 31, 2010  | /s/  Robert Metz                                                              |
|                        | Robert  Metz, Manager                                                         |
|                        |                                                                          |
| Date:  March 31, 2010  | /s/  Jeff Olson                                                               |
|                        | Jeff  Olson, Manager                                                          |
|                        |                                                                          |
| Date:  March 31, 2010  | /s/  Ron Olson                                                                |
|                        | Ronald  Olson, Manager                                                        |

 

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| Date:  March 31, 2010 | /s/  Heath Peterson         |
|----------------------------|-----------------------------|
|                       | Heath  Peterson, Manager    |
|                       |                        |
| Date:  March 31, 2010 | /s/  Delton Strasser        |
|                       | Delton  Strasser, Manager   |
|                       |                        |
| Date:  March 31, 2010 | /s/  Steve Street           |
|                       | Steve  Street, Manager      |
|                       |                        |
| Date:  March 31, 2010 | /s/  J. Charles Walter      |
|                       | J.  Charles Walter, Manager |
|                       |                        |
| Date:  March 31, 2010 | /s/  Bill Whipple           |
|                       | Bill  Whipple, Manager      |
|                       |                        |
| Date:  March 31, 2010 | /s/  Robert Wittnebel       |
|                       | Robert  Wittnebel, Manager  |

 

**EXHIBITINDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                     | ** ** | **Filed  Herewith** | ** ** | **Incorporated by  Reference**                                                                               |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Plan  of Organization.                                                                                              |       |                |       | Appendix  A to Registrant’s Prospectus filed with the Commission on March 17,  2003.               |
|             |       |                                                                                                                |       |                |       |                                                                                                         |
| 3.1              |       | Articles  of Organization.                                                                                          |       |                |       | Appendix  B to Registrant’s Prospectus filed with the Commission on March 17,  2003.               |
|             |       |                                                                                                                |       |                |       |                                                                                                         |
| 3.2              |       | Fifth  Amended and Restated Operating Agreement dated July 31, 2009.                                           |       |                |       | Exhibit 3.2  to the Registrant’s Form 8-K filed with the Commission on August 6,  2009.  |
|             |       |                                                                                                                |       |                |       |                                                                                                         |
| 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                                                     |       |                |       | Exhibit 10.15  to the Registrant’s Form S-4 filed with the Commission on July 26,  2002. |

 

40

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Table of Contents

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                              | ** ** | **Filed  Herewith** | ** ** | **Incorporated by  Reference**                                                                                   |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------------------------------------------------------------------------------------------------|
|             |       | Railway  Company, dated January 8, 2002.                                                                                |       |                |       |                                                                                                             |
|             |       |                                                                                                                         |       |                |       |                                                                                                             |
| 10.9             |       | Service  Request Form and Extended Service Agreement with NorthWestern Public  Service, dated March 19, 2002.      |       |                |       | Exhibit 10.17  to the Registrant’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                                         |       |                |       |                                                                                                             |
| 10.10            |       | Amendment  to U.S. Bank Loan Agreement, dated June 22, 2004.                                                            |       |                |       | Exhibit 10.1  to the Registrant’s Form 10-Q filed with the Commission on  August 16, 2004.   |
|             |       |                                                                                                                         |       |                |       |                                                                                                             |
| 10.11            |       | Second  Amendment to U.S. Bank Loan Agreement, dated March 30, 2005.                                                    |       |                |       | Exhibit 10.26  to the Registrant’s Form 10-K filed with the Commission on  March 31, 2005.   |
|             |       |                                                                                                                         |       |                |       |                                                                                                             |
| 10.12            |       | $15.8  Million Promissory Note with U.S. Bank, dated March 30, 2005.                                                    |       |                |       | Exhibit 10.27  to the Registrant’s Form 10-K filed with the Commission on  March 31, 2005.   |
|             |       |                                                                                                                         |       |                |       |                                                                                                             |
| 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.      |

 

41

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Table of Contents

 
| 10.26  |   | DDGS  Marketing and Service Agreement dated March 2002.                                     |   |   |   | Exhibit 10.6  to the Registrant’s Form S-4 filed with the Commission July 21,  2002.        |
|--------|--------|--------------------------------------------------------------------------------------------------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                             |   |   |   |                                                                                                            |
| 10.27  |   | Design  Build Agreement with POETTM Design and Construction dated April 3, 2007.        |   |   |   | Exhibit 10.4  to the Registrant’s Form 10-Q filed with the Commission on May 10,  2007.     |
|   |   |                                                                                             |   |   |   |                                                                                                            |
| 10.28  |   | Amendment  to Amended and Restated Loan Agreement with U.S. Bank dated  September 21, 2007. |   |   |   | Exhibit 10.1  to the Registrant’s Form 10-Q filed with the Commission on  November 9, 2007. |
|   |   |                                                                                             |   |   |   |                                                                                                            |
| 10.29  |   | $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. |
|   |   |                                                                                             |   |   |   |                                                                                                            |
| 10.31  |   | $9.0  million Promissory Note with U.S. Bank dated July 28, 2009.                           |   |   |   | Exhibit 10.1  to the Registrant’s Form 10-Q filed with the Commission on  August 10, 2009.  |
|   |   |                                                                                             |   |   |   |                                                                                                            |
| 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.

 

42

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Table of Contents

 

**NORTHERN GROWERS, LLC**

 

Table of Contents

 

 

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

 

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Tableof Contents

 

 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

 

To the Audit Committee of**Northern Growers, LLC**Big Stone City, South Dakota

 

We have audited the accompanying consolidated balancesheets of **Northern Growers, LLC** asof December 31, 2009 and 2008, and the related consolidated statements ofoperations and comprehensive income, changes in members’ equity andcomprehensive income, and cash flows for the years ended December 31,2009, 2008, and 2007. These consolidated financial statements are theresponsibility of the company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The company was not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting as of December 31,2009. Our audit as of December 31, 2009 included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the company’s internal control over financialreporting as of December 31, 2009. Accordingly, we express no such opinionon the effectiveness of the company’s internal control over financial reportingas of December 31, 2009. An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of **Northern Growers, LLC**as of December 31, 2009 and 2008, and the results of its operations andits cash flows for the years ended December 31, 2009, 2008, and 2007, inconformity with accounting principles generally accepted in the United Statesof America.

 

 

Minneapolis, Minnesota 

March 31, 2010

 

 

www.eidebailly.com

 

200 E. 10th St., Ste. 500 | P.O. Box5125 | Sioux Falls, SD 57117-5125 | T 605.339.1999 | F 605.339.1306 | EOE

 

F-1

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Tableof Contents

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATEDBALANCE SHEETS**

 

 
|                                                | ** ** | **December 31,** |            |   | December 31, |   |        | December 31, |   |
|-----------------------------------------------------|------------|-----------------------|-----------------|--------|-------------------|--------|-------------|-------------------|--------|
|                                                | ** ** | **2009**              |            |   | 2008              |   |        | 2009              |   |
|                                                | ** ** | ** **            |            |   |              |   |        | Pro forma         |   |
|                                                | ** ** | ** **            |            |   |              |   |        | (Unaudited)       |   |
|                                                | ** ** | ** **            |            |   |              |   |        | See Note 13       |   |
| **ASSETS**                                          | ** ** | ** **            |            |   |              |   |        |              |   |
|                                                | ** ** | ** **            |            |   |              |   |        |              |   |
| CURRENT  ASSETS                                     | ** ** | ** **            |            |   |              |   |        |              |   |
| Cash  and cash equivalents                          | ** ** | **$**                 | **16,121,530**  |   |              | $      | 12,712,987  |              |   | $ | 12,562,330 |   |
| Accounts  receivable                                |       |                  |            |   |              |   |        |              |   |
| Trade  - related party                              | ** ** | **6,883,902**         |            |   | 6,475,987         |   |        | 6,883,902         |   |
| Trade                                               | ** ** | **950,397**           |            |   | 525,851           |   |        | 950,397           |   |
| Other                                               | ** ** | **352,274**           |            |   | 316,576           |   |        | 352,274           |   |
| Inventory                                           | ** ** | **12,489,540**        |            |   | 9,710,268         |   |        | 12,489,540        |   |
| Prepaid  expenses                                   | ** ** | **84,513**            |            |   | 127,236           |   |        | 84,513            |   |
| Due  from broker                                    | ** ** | **4,182,016**         |            |   | 1,543,287         |   |        | 4,182,016         |   |
|                                                |       |                  |            |   |              |   |        |              |   |
| Total  current assets                               | ** ** | **41,064,172**        |            |   | 31,412,192        |   |        | 37,504,972        |   |
|                                                |       |                  |            |   |              |   |        |              |   |
| PROPERTY  AND EQUIPMENT                             |       |                  |            |   |              |   |        |              |   |
| Land  improvements                                  | ** ** | **7,141,267**         |            |   | 7,107,452         |   |        | 7,141,267         |   |
| Equipment                                           | ** ** | **71,032,475**        |            |   | 71,005,748        |   |        | 71,032,475        |   |
| Buildings                                           | ** ** | **15,379,448**        |            |   | 15,379,448        |   |        | 15,379,448        |   |
|                                                | ** ** | **93,553,190**        |            |   | 93,492,648        |   |        | 93,553,190        |   |
| Less  accumulated depreciation                      | ** ** | **(25,365,188**       | **)**           |   | (20,261,459       | )      |        | (25,365,188       | )      |
|                                                |       |                  |            |   |              |   |        |              |   |
| Net  property and equipment                         | ** ** | **68,188,002**        |            |   | 73,231,189        |   |        | 68,188,002        |   |
|                                                |       |                  |            |   |              |   |        |              |   |
| OTHER  ASSETS                                       |       |                  |            |   |              |   |        |              |   |
| Financing  costs, net of amortization of $177,404   |       |                  |            |   |              |   |        |              |   |
| and  $116,932 as of December 31, 2009 and 2008 | ** ** | **193,633**           |            |   | 229,577           |   |        | 193,633           |   |
| Assets  held for sale                               | ** ** | **-**                 |            |   | 100,000           |   |        | -                 |   |
|                                                |       |                  |            |   |              |   |        |              |   |
| Total  other assets                                 | ** ** | **193,633**           |            |   | 329,577           |   |        | 193,633           |   |
|                                                |       |                  |            |   |              |   |        |              |   |
|                                                |       |                  |            |   |              |   |        |              |   |
|                                                | ** ** | **$**                 | **109,445,807** |   |              | $      | 104,972,958 |              |   | $ | 105,886,607 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-2

----

Table of Contents

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED BALANCE SHEETS**

 

 
|                                         | ** ** | **December 31,** | ** **      |       | December 31, |   |        | December 31, |   |
|----------------------------------------------|------------|-----------------------|-----------------|------------|-------------------|--------|-------------|-------------------|--------|
|                                         | ** ** | **2009**              | ** **      |       | 2008              |   |        | 2009              |   |
|                                         |       |                  |            |       |              |   |        | Pro forma         |   |
|                                         |       |                  |            |       |              |   |        | (Unaudited)       |   |
|                                         |       |                  |            |       |              |   |        | See Note 13       |   |
| **LIABILITIES AND EQUITY**                   |       |                  |            |       |              |   |        |              |   |
|                                         |       |                  |            |       |              |   |        |              |   |
| CURRENT  LIABILITIES                         |       |                  |            |       |              |   |        |              |   |
| Accounts  payable - trade                    | ** ** | **$**                 | **1,853,276**   | ** ** |              | $      | 2,037,590   |              |   | $ | 1,853,276 |   |
| Accounts  payable - corn                     | ** ** | **6,873,524**         | ** **      |       | 6,667,478         |   |        | 6,873,524         |   |
| Accounts  payable - related party            | ** ** | **642,503**           | ** **      |       | 328,566           |   |        | 642,503           |   |
| Other  accrued liabilities                   | ** ** | **712,609**           | ** **      |       | 603,768           |   |        | 712,609           |   |
| Accrued  interest                            | ** ** | **7,500**             | ** **      |       | 3,750             |   |        | 7,500             |   |
| Accrued  liability for commodities contracts | ** ** | **3,132,408**         | ** **      |       | 2,390,685         |   |        | 3,132,408         |   |
| Notes  payable - due upon demand             | ** ** | **5,000**             | ** **      |       | 5,000             |   |        | 5,000             |   |
| Current  portion of notes payable            | ** ** | **5,881,047**         | ** **      |       | 5,785,007         |   |        | 5,881,047         |   |
|                                         |       |                  |            |       |              |   |        |              |   |
| Total  current liabilities                   | ** ** | **19,107,867**        | ** **      |       | 17,821,844        |   |        | 19,107,867        |   |
|                                         |       |                  |            |       |              |   |        |              |   |
| LONG-TERM  LIABILITIES                       |       |                  |            |       |              |   |        |              |   |
| Derivative  financial instruments            | ** ** | **1,623,620**         | ** **      |       | 2,496,933         |   |        | 1,623,620         |   |
| Long-term  notes payable                     | ** ** | **34,250,108**        | ** **      |       | 40,121,940        |   |        | 34,250,108        |   |
|                                         |       |                  |            |       |              |   |        |              |   |
| Total  long-term liabilities                 | ** ** | **35,873,728**        | ** **      |       | 42,618,873        |   |        | 35,873,728        |   |
|                                         |       |                  |            |       |              |   |        |              |   |
| COMMITMENTS  AND CONTINGENCIES (NOTE 7)      |       |                  |            |       |              |   |        |              |   |
|                                         |       |                  |            |       |              |   |        |              |   |
| EQUITY                                       |       |                  |            |       |              |   |        |              |   |
| Capital  units, $0.25 stated value,          |       |                  |            |       |              |   |        |              |   |
| 50,628,000  units issued and outstanding     | ** ** | **12,657,000**        | ** **      |       | 12,657,000        |   |        | 12,657,000        |   |
| Additional  paid-in capital                  | ** ** | **64,900**            | ** **      |       | 64,900            |   |        | 64,900            |   |
| Accumulated  other comprehensive (loss)      | ** ** | **(1,252,784**        | **)**           |       | (1,926,632        | )      |        | (1,252,784        | )      |
| Retained  earnings                           | ** ** | **30,540,538**        | ** **      |       | 23,625,025        |   |        | 28,009,138        |   |
|                                         |       |                  |            |       |              |   |        |              |   |
| Total  Northern Growers, LLC equity          | ** ** | **42,009,654**        | ** **      |       | 34,420,293        |   |        | 39,478,254        |   |
|                                         |       |                  |            |       |              |   |        |              |   |
| Noncontrolling  interest                     | ** ** | **12,454,558**        | ** **      |       | 10,111,948        |   |        | 11,426,758        |   |
|                                         |       |                  |            |       |              |   |        |              |   |
| Total  equity                                | ** ** | **54,464,212**        | ** **      |       | 44,532,241        |   |        | 50,905,012        |   |
|                                         |       |                  |            |       |              |   |        |              |   |
|                                         |       |                  |            |       |              |   |        |              |   |
|                                         | ** ** | **$**                 | **109,445,807** | ** ** |              | $      | 104,972,958 |              |   | $ | 105,886,607 |   |

 
| See Notes to  Consolidated Financial Statements |   |
|-------------------------------------------------|--------|

 

F-3

----

 

Table of Contents

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

**YEARSENDED DECEMBER 31, 2009, 2008 AND 2007**

 

 
|                                                | ** ** | **2009**        | ** **      |   | 2008        |   |        | 2007        |   |
|-----------------------------------------------------|------------|-----------------|-----------------|--------|-------------|--------|-------------|-------------|--------|
|                                                |       |            |            |   |        |   |        |        |   |
| REVENUES                                            |       |            |            |   |        |   |        |        |   |
| Sales  - related party                              | ** ** | **$**           | **112,997,456** |   |        | $      | 137,146,540 |        |   | $ | 116,084,868 |   |
| Sales                                               | ** ** | **28,374,215**  |            |   | 33,632,791  |   |        | 21,408,911  |   |
| Incentive                                           | ** ** | **666,667**     |            |   | 645,596     |   |        | 750,001     |   |
| Total  revenues                                     | ** ** | **142,038,338** |            |   | 171,424,927 |   |        | 138,243,780 |   |
|                                                |       |            |            |   |        |   |        |        |   |
| COST  OF REVENUES                                   | ** ** | **125,825,811** |            |   | 169,595,752 |   |        | 112,694,987 |   |
|                                                |       |            |            |   |        |   |        |        |   |
| GROSS  PROFIT                                       | ** ** | **16,212,527**  |            |   | 1,829,175   |   |        | 25,548,793  |   |
|                                                |       |            |            |   |        |   |        |        |   |
| EXPENSES                                            |       |            |            |   |        |   |        |        |   |
| General  and administrative                         | ** ** | **4,408,451**   |            |   | 3,679,176   |   |        | 4,790,117   |   |
| Total  operating expenses                           | ** ** | **4,408,451**   |            |   | 3,679,176   |   |        | 4,790,117   |   |
|                                                |       |            |            |   |        |   |        |        |   |
| INCOME  (LOSS) FROM OPERATIONS                      | ** ** | **11,804,076**  |            |   | (1,850,001  | )      |        | 20,758,676  |   |
|                                                |       |            |            |   |        |   |        |        |   |
| OTHER  INCOME (EXPENSES)                            |       |            |            |   |        |   |        |        |   |
| Interest  income                                    | ** ** | **29,344**      |            |   | 84,422      |   |        | 509,018     |   |
| Interest  expense                                   | ** ** | **(2,769,848**  | **)**           |   | (3,535,485  | )      |        | (2,876,464  | )      |
| Other                                               | ** ** | **(4,914**      | **)**           |   | (6,135      | )      |        | 22,960      |   |
| Total  other income (expenses)                      | ** ** | **(2,745,418**  | **)**           |   | (3,457,198  | )      |        | (2,344,486  | )      |
|                                                |       |            |            |   |        |   |        |        |   |
| NET  INCOME (LOSS)                                  | ** ** | **9,058,658**   |            |   | (5,307,199  | )      |        | 18,414,190  |   |
|                                                |       |            |            |   |        |   |        |        |   |
| LESS:  NET (INCOME) LOSS ATTRIBUTABLE TO THE        |       |            |            |   |        |   |        |        |   |
| NONCONTROLLING  INTEREST                            | ** ** | **(2,143,145**  | **)**           |   | 1,154,649   |   |        | (4,269,470  | )      |
|                                                |       |            |            |   |        |   |        |        |   |
| NET  INCOME (LOSS) ATTRIBUTABLE TO                  |       |            |            |   |        |   |        |        |   |
| NORTHERN  GROWERS, LLC                              | ** ** | **6,915,513**   |            |   | (4,152,550  | )      |        | 14,144,720  |   |
|                                                |       |            |            |   |        |   |        |        |   |
| OTHER  COMPREHENSIVE INCOME (LOSS)                  |       |            |            |   |        |   |        |        |   |
| Cash  flow hedge income (loss) attributable to      |       |            |            |   |        |   |        |        |   |
| Northern  Growers, LLC                              | ** ** | **673,848**     |            |   | (1,231,556  | )      |        | (550,734    | )      |
|                                                |       |            |            |   |        |   |        |        |   |
| COMPREHENSIVE  INCOME (LOSS) ATTRIBUTABLE TO        |       |            |            |   |        |   |        |        |   |
| NORTHERN  GROWERS, LLC                              | ** ** | **$**           | **7,589,361**   |   |        | $      | (5,384,106  | )           |   | $ | 13,593,986 |   |
|                                                |       |            |            |   |        |   |        |        |   |
| BASIC  AND DILUTED EARNINGS (LOSS) PER CAPITAL UNIT | ** ** | **$**           | **0.137**       |   |        | $      | (0.082      | )           |   | $ | 0.279 |   |
|                                                |       |            |            |   |        |   |        |        |   |
| BASIC  AND DILUTED WEIGHTED AVERAGE                 |       |            |            |   |        |   |        |        |   |
| CAPITAL  UNITS OUTSTANDING                          | ** ** | **50,628,000**  |            |   | 50,628,000  |   |        | 50,628,000  |   |
|                                                |       |            |            |   |        |   |        |        |   |
| DISTRIBUTIONS  PER CAPITAL UNIT DECLARED            | ** ** | **$**           | **—**      |   |        | $      | —      |        |   | $ | 0.238 |   |
|                                                |       |            |            |   |        |   |        |        |   |
| DISTRIBUTIONS  PER CAPITAL UNIT PAID                | ** ** | **$**           | **—**      |   |        | $      | 0.030       |        |   | $ | 0.342 |   |

 
| See Notes to  Consolidated Financial Statements |   |
|-------------------------------------------------|--------|

 

F-4

----

Table of Contents

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN MEMBERS’ EQUITY AND COMPREHENSIVE INCOME**

**YEARS ENDED DECEMBER 31, 2009,2008 AND 2007**

 

 
|                           |       |                |       | ** ** |   |           |       |       |   |       | Accumulated   |       |       |           |       |       | **Total**         |           |       |           |   |
|--------------------------------|------------|----------------|------------|------------|--------|----------------|------------|------------|--------|------------|---------------|------------|------------|----------------|------------|------------|-------------------|----------------|------------|----------------|--------|
|                           |       |           |       |       |   |           | ** ** | Additional |   |       | Other         |       |       |           |       |       | **Northern**      | ** **     |       | Noncontrolling |   |
|                           |       | Capital        |       |       |   |           |       | Paid-In    |   |       | Comprehensive |       | ** ** | Retained       |       |       | **Growers,  LLC** |           |       | Interest       |   |
|                           |       | Units          |       |       | Amount |           |       | Capital    |   |       | Income (Loss) |       |       | Earnings       |       | ** ** | **Equity**        | ** **     |       | Equity         |   |
|                           |       |           |       |       |   |           |       |       |   |       |          |       |       |           |       |       |              |           |       |           |   |
| BALANCE,  JANUARY 1, 2007      |       | 50,628,000     |       |       | $      | 12,657,000     |       |       | $      | 64,900     |          |       | $          | (144,342       | )          |       | $                 | 25,685,358     | ** ** | ** **     | **$**  | **38,262,916** |   |   | $ | 10,790,823 |   |
|                           |       |           |       |       |   |           |       |       |   |       |          |       |       |           |       |       |              |           |       |           |   |
| Net  income (loss)             |       | -              |       |       | -      |           |       | -          |   |       | -             |       |       | 14,144,720     | ** ** | ** ** | **14,144,720**    |           |       | 4,269,469      |   |
| Cash  flow hedge (loss)        |       | -              |       |       | -      |           |       | -          |   |       | (550,734      | )          |       | -              | ** ** | ** ** | **(550,734**      | **)**          |       | (163,023       | )      |
| Distributions  payable         |       | -              |       |       | -      |           |       | -          |   |       | -             |       |       | (1,518,840     | )          | ** ** | **(1,518,840**    | **)**          |       | -              |   |
| Distributions  paid            |       | -              |       |       | -      |           |       | -          |   |       | -             |       |       | (10,533,663    | )          | ** ** | **(10,533,663**   | **)**          |       | (3,266,120     | )      |
|                           |       |           |       |       |   |           |       |       |   |       |          |       |       |           |       |       |              |           |       |           |   |
| BALANCE,  DECEMBER 31, 2007    |       | 50,628,000     |       |       | $      | 12,657,000     |       |       | $      | 64,900     |          |       | $          | (695,076       | )          |       | $                 | 27,777,575     | ** ** | ** **     | **$**  | **39,804,399** |   |   | $ | 11,631,149 |   |
|                           |       |           |       |       |   |           |       |       |   |       |          |       |       |           |       |       |              |           |       |           |   |
| Net  income (loss)             |       | -              |       |       | -      |           |       | -          |   |       | -             |       |       | (4,152,550     | )          | ** ** | **(4,152,550**    | **)**          |       | (1,154,649     | )      |
| Cash  flow hedge (loss)        |       | -              |       |       | -      |           |       | -          |   |       | (1,231,556    | )          |       | -              | ** ** | ** ** | **(1,231,556**    | **)**          |       | (364,552       | )      |
| Distributions  payable         |       | -              |       |       | -      |           |       | -          |   |       | -             |       |       | -              | ** ** | ** ** | **-**             |           |       | -              |   |
| Distributions  paid            |       | -              |       |       | -      |           |       | -          |   |       | -             |       |       | -              | ** ** | ** ** | **-**             |           |       | -              |   |
|                           |       |           |       |       |   |           |       |       |   |       |          |       |       |           |       |       |              |           |       |           |   |
| BALANCE,  DECEMBER 31, 2008    |       | 50,628,000     |       |       | $      | 12,657,000     |       |       | $      | 64,900     |          |       | $          | (1,926,632     | )          |       | $                 | 23,625,025     | ** ** | ** **     | **$**  | **34,420,293** |   |   | $ | 10,111,948 |   |
|                           |       |           |       |       |   |           |       |       |   |       |          |       |       |           |       |       |              |           |       |           |   |
| Net  income (loss)             |       | -              |       |       | -      |           |       | -          |   |       | -             |       |       | 6,915,513      | ** ** | ** ** | **6,915,513**     |           |       | 2,143,145      |   |
| Cash  flow hedge income (loss) |       | -              |       |       | -      |           |       | -          |   |       | 673,848       |       |       | -              | ** ** | ** ** | **673,848**       |           |       | 199,465        |   |
| Distributions  payable         |       | -              |       |       | -      |           |       | -          |   |       | -             |       |       | -              | ** ** | ** ** | **-**             |           |       | -              |   |
| Distributions  paid            |       | -              |       |       | -      |           |       | -          |   |       | -             |       |       | -              | ** ** | ** ** | **-**             |           |       | -              |   |
|                           |       |           |       |       |   |           |       |       |   |       |          |       |       |           |       |       |              |           |       |           |   |
| **BALANCE, DECEMBER 31, 2009** | ** ** | **50,628,000** | ** ** | ** ** | **$**  | **12,657,000** | ** ** | ** ** | **$**  | **64,900** | ** **    | ** ** | **$**      | **(1,252,784** | **)**      | ** ** | **$**             | **30,540,538** | ** ** | ** **     | **$**  | **42,009,654** | ** ** | ** ** | **$** | **12,454,558** | ** ** |

 
| See Notes to  Consolidated Financial Statements |   |
|-------------------------------------------------|--------|

 

F-5

----

Table of Contents

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2009,2008 AND 2007**

 

 
|                                                            | ** ** | **2009**       | ** **     | ** ** | **2008**   | ** ** | ** ** | **2007**    | ** ** |
|-----------------------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|-------------|------------|
| OPERATING  ACTIVITIES                                           |       |           |           |       |       |       |       |        |       |
| Net  income (loss)                                              | ** ** | **$**          | **6,915,513**  |       |       | $          | (4,152,550 | )           |       | $ | 14,144,720 |   |
| Changes  to net income (loss) not affecting cash                |       |           |           |       |       |       |       |        |       |
| Depreciation                                                    | ** ** | **5,139,255**  |           |       | 5,136,891  |       |       | 4,459,581   |       |
| Amortization  of loan fees                                      | ** ** | **60,472**     |           |       | 65,738     |       |       | 41,493      |       |
| Noncontrolling  interest in subsidiary’s earnings (losses) | ** ** | **2,143,145**  |           |       | (1,154,649 | )          |       | 4,269,470   |       |
| Loss  on sale/disposal of assets                                | ** ** | **135,216**    |           |       | 16,975     |       |       | 625,195     |       |
| Decrease  (increase) in current assets                          |       |           |           |       |       |       |       |        |       |
| Accounts  receivable                                            |       |           |           |       |       |       |       |        |       |
| Related  party                                                  | ** ** | **(407,915**   | **)**          |       | (764,139   | )          |       | 733,539     |       |
| Trade                                                           | ** ** | **(424,546**   | **)**          |       | 350,659    |       |       | (25,945     | )          |
| Other                                                           | ** ** | **(157,100**   | **)**          |       | (767       | )          |       | 50,998      |       |
| Inventory                                                       | ** ** | **(2,779,272** | **)**          |       | 2,176,550  |       |       | (1,826,219  | )          |
| Prepaid  expenses                                               | ** ** | **42,723**     |           |       | (23,559    | )          |       | (21,686     | )          |
| Due  from broker                                                | ** ** | **(2,638,729** | **)**          |       | 3,970,752  |       |       | (4,083,906  | )          |
| Commodities  contracts                                          | ** ** | **—**     |           |       | 793,029    |       |       | 4,331,266   |       |
| Increase  (decrease) in current liabilities                     |       |           |           |       |       |       |       |        |       |
| Accounts  payable                                               |       |           |           |       |       |       |       |        |       |
| Trade                                                           | ** ** | **(184,314**   | **)**          |       | 63,451     |       |       | 719,968     |       |
| Corn                                                            | ** ** | **206,046**    |           |       | 1,386,122  |       |       | 3,299,552   |       |
| Related  party                                                  | ** ** | **313,937**    |           |       | (19,442    | )          |       | (548,670    | )          |
| Accrued  liabilities                                            | ** ** | **108,841**    |           |       | 80,347     |       |       | (25,488     | )          |
| Accrued  liability for commodities contracts                    | ** ** | **741,723**    |           |       | 2,390,685  |       |       | —      |       |
| Accrued  interest                                               | ** ** | **3,750**      |           |       | —     |       |       | 2,429       |       |
|                                                            |       |           |           |       |       |       |       |        |       |
| NET  CASH PROVIDED BY OPERATING ACTIVITIES                      | ** ** | **9,218,745**  |           |       | 10,316,093 |       |       | 26,146,297  |       |
|                                                            |       |           |           |       |       |       |       |        |       |
| INVESTING  ACTIVITIES                                           |       |           |           |       |       |       |       |        |       |
| Purchase  of property and equipment                             | ** ** | **(263,478**   | **)**          |       | (571,402   | )          |       | (18,840,552 | )          |
| Cash  received on sale of assets                                | ** ** | **5,000**      |           |       | —     |       |       | 555         |       |
| Cash  paid for capitalized construction interest                | ** ** | **—**     |           |       | —     |       |       | (653,413    | )          |
| Refund  on construction                                         | ** ** | **84,922**     |           |       | —     |       |       | —      |       |
| Tax  refund on construction                                     | ** ** | **163,674**    |           |       | 1,016,697  |       |       | 262,313     |       |
|                                                            |       |           |           |       |       |       |       |        |       |
| NET  CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES           | ** ** | **(9,882**     | **)**          |       | 445,295    |       |       | (19,231,097 | )          |
|                                                            |       |           |           |       |       |       |       |        |       |
| FINANCING  ACTIVITIES                                           |       |           |           |       |       |       |       |        |       |
| Long-term  notes payable issued                                 | ** ** | **—**     |           |       | —     |       |       | 18,340,126  |       |
| Principal  paid on long-term notes payable                      | ** ** | **(5,775,792** | **)**          |       | (5,682,270 | )          |       | (2,828,126  | )          |
| Distributions  paid - Northern Growers                          | ** ** | **—**     |           |       | (1,518,840 | )          |       | (17,321,359 | )          |
| Distributions  paid - noncontrolling interest                   | ** ** | **—**     |           |       | —     |       |       | (5,778,520  | )          |
| Cash  paid for financing costs                                  | ** ** | **(24,528**    | **)**          |       | (29,824    | )          |       | (69,988     | )          |
| ** **                                                      | ** ** | ** **     | ** **     | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| NET  CASH (USED FOR) FINANCING ACTIVITIES                       | ** ** | **(5,800,320** | **)**          |       | (7,230,934 | )          |       | (7,657,867  | )          |
|                                                            |       |           |           |       |       |       |       |        |       |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS           | ** ** | **3,408,543**  |           |       | 3,530,454  |       |       | (742,667    | )          |
|                                                            |       |           |           |       |       |       |       |        |       |
| CASH  AT BEGINNING OF PERIOD                                    | ** ** | **12,712,987** |           |       | 9,182,533  |       |       | 9,925,200   |       |
|                                                            |       |           |           |       |       |       |       |        |       |
| CASH  AT END OF PERIOD                                          | ** ** | **$**          | **16,121,530** |       |       | $          | 12,712,987 |        |       | $ | 9,182,533 |   |
|                                                            |       |           |           |       |       |       |       |        |       |
|                                                            |       |           |           |       |       |       |       |        |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW                          |       |           |           |       |       |       |       |        |       |
| INFORMATION                                                     |       |           |           |       |       |       |       |        |       |
| Cash  paid for interest                                         | ** ** | **$**          | **2,766,098**  |       |       | $          | 3,535,485  |        |       | $ | 3,612,547 |   |
|                                                            |       |           |           |       |       |       |       |        |       |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH                           |       |           |           |       |       |       |       |        |       |
| INVESTING  AND FINANCING ACTIVITIES                             |       |           |           |       |       |       |       |        |       |
| Accounts  receivable for tax refund on construction             | ** ** | **$**          | **—**     |       |       | $          | 142,632    |        |       | $ | 831,955 |   |
| Accounts  receivable for refund on construction                 | ** ** | **$**          | **21,230**     |       |       | $          | —     |        |       | $ | — |   |
| Distributions  payable                                          | ** ** | **$**          | **—**     |       |       | $          | —     |        |       | $ | 1,518,840 |   |

 
| See Notes to  Consolidated Financial Statements |   |
|-------------------------------------------------|--------|

 

F-6

----

Tableof Contents

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**NOTE 1 -    NATUREOF OPERATIONS**

 

*Principal Business Activity*

 

Northern Growers, LLC orNorthern Growers (formerly Northern Growers Cooperative or the “Cooperative”),is a South Dakota limited liability company that was organized to poolinvestors, provide a portion of the corn supply for an ethanol plant (the “plant”)owned by Northern Lights Ethanol, LLC (d/b/a POET® Biorefining – Big Stone) (“POET®Biorefining – Big Stone”), and own a 77.16% interest in POET® Biorefining – BigStone.  For purposes of the financialstatements and notes, the “Company” refers to both Northern Growers and POET®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 completedan expansion to a 75 million gallon nameplate capacity. The Company sellsethanol and related products primarily in the United States.

 

**NOTE 2 -    SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

** **

*Principles of Consolidation*

 

The consolidated financialstatements include the accounts of Northern Growers and its 77.16% ownedsubsidiary, POET® Biorefining - Big Stone. All significant inter-companytransactions and balances have been eliminated in consolidation.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsconsist of all highly liquid investments with an original maturity of threemonths or less.

 

*Revenue Recognition*

 

Revenuefrom the sale of ethanol and related products is recorded when title transfersto customers. Generally, ethanol is shipped FOB shipping point and relatedproducts are shipped FOB destination point. In accordance with the Company’sagreement for the marketing and sale of ethanol, shipping costs arranged by themarketer are deducted from the gross sales price reported to the Company by themarketer, thus no shipping costs are incurred related to sales of ethanol. Fordistiller grains, shipping costs incurred by the Company are included as acomponent of cost of revenues.  Interest income is recognized as earned.

 

Revenuefrom the state incentive program is recorded when the Company has produced orsold the ethanol and satisfied the reporting requirements under the program.When it is uncertain that the Company will receive full allocation and paymentdue under the incentive program, 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 program or other factors thataffect funding or allocation of funds.

 

*Receivables and Credit Policies*

 

Trade receivables areuncollateralized customer obligations due under normal trade terms requiringpayment within 30 days from the invoice date. Customer account balances withinvoices dated over 30 days old are considered delinquent. Interest is notcharged on any delinquent accounts.

 

Trade receivables are statedat the amount billed to the customer.

 
| (continued on  next page) |   |
|---------------------------|--------|

 

F-7

----

 

Table of Contents

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

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

 

Thecarrying amount of trade receivables is reduced by a valuation allowance thatreflects management’s best estimate of the amounts that will not be collected.Management reviews all trade receivable balances that exceed 30 days from theinvoice date and based on an assessment of current creditworthiness, estimatesthe portion, if any, of the balance that will not be collected. Managementbelieves that all trade receivables are collectible; therefore, there is novaluation allowance as of December 31, 2009 and 2008.

 

*Inventory*

 

Ethanol and related productinventory is stated at net realizable value. Corn inventory is stated at marketvalue, which approximates net realizable value (local market prices less costof disposal), based on local market prices determined by grain terminals in thearea of the plant. Other raw materials, spare parts and work-in-processinventory are stated at the lower of cost or market on an average cost method.

 

Inventoriesat December 31, 2009 and 2008 are as follows:

 
|                   | ** ** | **2009**      | ** **     |   | 2008      |   |
|------------------------|------------|---------------|----------------|--------|-----------|--------|
|                   | ** ** | ** **    | ** **     |   |      |   |
|                   | ** ** | ** **    | ** **     |   |      |   |
| Finished  goods        | ** ** | **$**         | **2,340,779**  |   |      | $      | 1,875,444 |   |
| Raw  materials         | ** ** | **8,050,117** |           |   | 5,620,800 |   |
| Work-in-process        | ** ** | **925,858**   |           |   | 1,022,085 |   |
| Spare  parts inventory | ** ** | **1,172,786** |           |   | 1,191,939 |   |
|                   |       |          |           |   |      |   |
|                   | ** ** | **$**         | **12,489,540** |   |      | $      | 9,710,268 |   |

 

*Investment in Commodities Contracts, DerivativeInstruments and Hedging Activities*

 

Derivative accounting guidance requires a company toevaluate its contracts to determine whether the contracts are derivatives.Certain contracts that literally meet the definition of a derivative may beexempted from derivative accounting as normal purchases or normal sales. Normalpurchases and normal sales are contracts that provide for the purchase or saleof something other than a financial instrument or derivative instrument thatwill be delivered in quantities expected to be used or sold over a reasonableperiod in the normal course of business. Contracts that meet the requirementsof normal are documented as normal and exempted from the derivative accountingand reporting requirements.

 

The Company enters into short-term cash, options andfutures contracts and ethanol swaps as a means of securing corn and natural gasfor the ethanol plant and managing exposure to changes in commodity prices. Allderivatives are designated as non-hedge derivatives. Although the contracts areeffective economic hedges of specified risks, they are not designated as andaccounted for as hedging instruments.

 

As part of its trading activity, the Company usesfutures and option contracts and ethanol swaps offered through regulatedcommodity exchanges to reduce risk.  TheCompany is exposed to risk of loss in the market value of inventories. To reducethat risk, the Company generally takes positions using cash and futurescontracts, ethanol swaps and options.

 

During 2007 and 2006 the Company entered intoderivative financial instruments to limit its exposure to changes

 
| (continued on  next page) |   |
|---------------------------|--------|

 

F-8

----

Tableof Contents

 

**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

in interest rates. The Company entered into two 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 are accounted for as a cash flow hedge.

 

*Interest Rate Swap Agreements*

 

During 2007 and 2006 the Company entered intointerest rate swap agreements as part of its interest rate risk managementstrategy and to effectively convert a portion of its variable rate debt tofixed rate debt.  The swap agreements,which both expire August 31, 2014, are accounted for as cash flowhedges.  Under the terms of the swapagreements, the Company’s net payment is a fixed interest rate on the notionalamount in exchange for receiving a variable rate based on one month LIBOR. Theswap transactions qualify for the shortcut method of recognition; therefore, noportion of the swap is treated as ineffective.

 

*Other Comprehensive Income (Loss)*

 

The Company’scomprehensive income (loss) consists of net income (loss) and othercomprehensive income (loss), consisting of an unrealized loss from our interestrate swap agreements designated as a cash flow hedge.

 

*NetIncome (Loss) per Unit*

 

Basic net income(loss) per unit is computed by dividing net income (loss) by theweighted average number of members’ units outstanding during the period.Diluted net income per unit is computed by dividing net income by the weightedaverage number of members’ units and members’ unit equivalents outstandingduring the period. There were no member unit equivalents outstanding during theperiods presented; accordingly, the Company’s basic and diluted net income(loss) per unit are the same.

 

*Noncontrolling Interest*

 

Amountsrecorded as noncontrolling interest on the balance sheet relate to theinvestment by Broin Investments I, LLC in POET® Biorefining – BigStone, plus or minus any allocation of income or lossof POET® Biorefining – Big Stone, plusor minus any allocation of accumulated other comprehensive income or loss, lessdistributions from POET® Biorefining – Big Stone. Earnings/losses and distributions of POET® Biorefining – BigStone are allocated to its members in proportion tothe member’s capital accounts.

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amount of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

*Concentrations of Credit Risk*

 

Cashbalances are maintained in bank depositories and periodically exceed federallyinsured limits.

 
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F-9

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Table of Contents

 

**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

*Property and Equipment*

 

Propertyand equipment is stated at cost. Significant additions and betterments arecapitalized, while expenditures for maintenance, repairs and minor renewals arecharged to operations when incurred. Depreciation on assets placed in serviceis computed using the straight-line method over estimated useful lives asfollows:

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

 

Landimprovements consist of landscaping, additional fencing and improvements to theroads for entering and exiting the plant.

 

Equipmentconsists of grain systems, trucks, mechanical and electrical production andprocess equipment, cooling towers, boilers and a reboiler, field sensors andpower supplies.

 

Buildingsconsist of administrative offices, sheds, catwalks, platforms, and mechanicaland grain buildings.

 

*Long-Lived Assets*

 

Long-lived assets, such as property, plant, andequipment, and purchased intangible assets subject to amortization, arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. If circumstancesrequire a long-lived asset be tested for possible impairment, the Company firstcompares undiscounted cash flows expected to be generated by an asset to thecarrying value of the asset. If the carrying value of the long-lived asset isnot recoverable on an undiscounted cash flow basis, an impairment is recognizedto the extent that the carrying value exceeds its fair value. Fair value isdetermined through various valuation techniques including discounted cash flowmodels, quoted market values and third-party independent appraisals, asconsidered necessary.

 

During2009, the Company recorded a loss on disposal of assets of $35,216 for acombination of several small equipment items that were deemed unusable.  Also, the “Assets held for sale”, describedbelow, were deemed to have little if no sales value and the remaining value of$100,000 is included in the cost of revenues as a loss on impairment of assets.

 

Aloss on impairment of assets of $625,195 was recognized by the Company in 2007and is 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  the subset was $100,000, which managementintended to sell on the open market, and is listed on the Consolidated BalanceSheet as “Assets held for sale.”  Inaddition, the Company recorded a loss on disposal of assets of $10,555 for acompilation of several small equipment items that were deemed unusable.

 

# ***Environmental Liabilities***

# ** **

The Company’s operations are subject toenvironmental laws and regulations adopted by various governmental authoritiesin the jurisdiction in which it operates. These laws require the Company toinvestigate and remediate the effects of the release or disposal of materialsat its locations. Accordingly, the Company has adopted policies, practices andprocedures in the areas of pollution control, occupational health, and theproduction, handling, storage and use of hazardous materials to preventmaterial environmental or other damage, and to limit the 

 
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F-10

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Table of Contents

 

**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

financial liability which could result from such events.Environmental liabilities are recorded when the liability is probable and thecosts can be reasonably estimated.

 

*Income Taxes*

 

The Company is organized as a limited liabilitycompany under state law. Accordingly, the Company’s earnings pass through tothe members and are taxed at the member level. No income tax provision has beenincluded in these financial statements. Differences between the financialstatement basis of assets and the tax basis of assets are related tocapitalization and amortization of organization and start-up costs for taxpurposes, whereas these costs are expensed for financial statement purposes. Inaddition, differences in lives and methods result in differences in thedepreciation of property and equipment for financial statement and taxpurposes. Differences also exist in the treatment of unrealized gains andlosses on investments in grain contracts, derivative instruments, and hedgingactivities. The Company is no longer subject to U.S. Federal income taxexaminations by tax authorities for fiscal years prior to 2006.

 

InJune 2006, the FASB issued new guidance for accounting for uncertainty inincome taxes. This guidance clarifies the requirements of accounting for incometaxes, relating to the recognition of income tax benefits. The provisions ofthis have subsequently been included in the FASB Accounting StandardsCodification Topic 740 provides a two-step approach to recognizing andmeasuring tax benefits when realization of the benefits is uncertain. The firststep is to determine whether the benefit meets the more-likely-than-notcondition for recognition and the second step is to determine the amount to berecognized based on the cumulative probability that exceeds 50%. The Companyhas evaluated whether it was necessary to recognize any benefit from uncertaintax positions in currently open tax periods and determined that, primarily dueto its status as a partnership, there are no material uncertainties within itsfiled tax returns. As a result, no liability related to the implementation ofthis guidance has been recorded.

 

As of December 31, 2009 the Company’s netassets exceeded their tax basis by approximately $30,000,000.

 

*Costof Revenues*

 

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, depreciation onprocess equipment and direct labor costs.

 

Shipping costs incurredby the Company are recorded as a component of cost of revenues. Shipping costsin cost of revenues includes inbound freight charges on inventory, outboundfreight charges on related product and purchasing and receiving costs.

 

*General and Administrative Expenses*

 

Theprimary components of general and administrative expenses are management fees,administrative salaries and wages, insurance expense and professional fees(legal, audit and consulting).

 

*AdvertisingCosts*

 

Advertising and promotioncosts are expensed when incurred and totaled $314,915, $129,074 and $203,386for the years ended December 31, 2009, 2008 and 2007, respectively.

 
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F-11

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Table of Contents

 

**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

*Capitalizationof Interest*

 

The Company capitalizesinterest cost on construction in progress and capitalized developmentcosts.  A certain portion of interestcosts are capitalized as part of the historical cost of developing orconstructing an asset. The Company capitalized $0, $0 and $653,413 of interestfor the years ending December 31, 2009, 2008 and 2007, respectively.

 

*Reclassifications*

 

Certainreclassifications have been made to the 2007 and 2008 financial statements toconform to the presentation in 2009. These reclassifications had no change inpreviously reported net income.

 

*RecentlyIssued Accounting Pronouncements*

 

In June 2009, theFASB amended the existing accounting and disclosure guidance for theconsolidation of variable interest entities, which is effective January 1,2010.  The amended guidance requiresenhanced disclosures intended to provide users of financial statements withmore transparent information about an enterprise’s involvement in a variableinterest entity.  The Company iscurrently assessing the impact of adoption on its financial position andresults of operations.

 

In October 2009, theFASB issued new guidance for revenue recognition with multiple deliverables,which is effective for revenue arrangements entered into or materially modifiedin fiscal years beginning on or after June 15, 2010, although earlyadoption is permitted.  This guidanceeliminates the residual method under the current guidance and replaces it withthe “relative selling price” method with allocating revenue in a multipledeliverable arrangement.  The sellingprice for each deliverable shall be determined using vendor specific objectiveevidence of selling price, if it exists, otherwise third-party evidence ofselling price shall be used.  If neitherexists for a deliverable, the vendor shall use its best estimate of the sellingprice for that deliverable.  Afteradoption, this guidance will also require expanded qualitative and quantitativedisclosures. The Company is currently assessing the impact of adoption on itsfinancial position and results of operations.

 

*NewlyAdopted Accounting Pronouncements*

 

*NoncontrollingInterests in Consolidated Financial Statements. *On January 1,2009, the Company adopted new guidance for the accounting, reporting anddisclosure of noncontrolling interests, which improves the relevance,comparability and transparency of the financial information that a reportingentity provides in its consolidated financial statements by establishingaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  The impact of adopting this guidance on theconsolidated financial statements was the presentation of noncontrollinginterest within equity in the consolidated balance sheets and in theconsolidated statements of changes in equity.

 

*Business Combinations.*On January 1, 2009, theCompany adopted new guidance on business combinations which expands the scopeof acquisition accounting to all transactions under which control of a businessis obtained. This guidance requires an acquirer to recognize the assetsacquired and liabilities assumed at the acquisition date fair values withlimited exceptions. Additionally, the guidance requires that contingentconsideration be recorded at fair value on the acquisition date, that acquiredin-process research and development be capitalized and recorded as intangibleassets at the acquisition date, and also requires transaction costs and coststo restructure the acquired company be expensed. On April 1, 2009,additional guidance was issued further amending the accounting for businesscombinations to require that assets acquired and liabilities assumed in abusiness combination that arise from contingencies be recognized at fair valueif fair value can reasonably be estimated. If the acquisition date fair valueof an asset acquired or liability assumed that arises from a contingency

 
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F-12

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Table of Contents

 

**NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

cannotbe determined, the asset or liability would be recognized if probable andreasonably estimable; if these criteria are not met, no asset or liabilitywould be recognized.  The Company has nothad any business combinations since adopting this guidance.

 

*Disclosures about Derivative Instruments and HedgingActivities.* On April 1, 2009, the Company adopted  new guidance related to derivative disclosureand hedging activities. This guidance requires entities that utilize derivativeinstruments to provide qualitative disclosures about their objectives andstrategies for using such instruments, as well as any details ofcredit-risk-related contingent features contained within derivatives. Theguidance  also requires entities to discloseadditional information about the amounts and location of derivatives locatedwithin the financial statements and the impact that hedges have on an entity’soperating results, financial position or cash flows. See Note 4 — DerivativeFinancial Instruments for additional disclosures.

 

*Codification.*  In June 2009,the FASB issued the FASB Accounting Standards Codification (“Codification”).The Codification became the single source for all authoritative GAAP recognizedby the FASB and has been applied to financial statements issued for periods endingafter September 15, 2009. The only impact of adopting this provision wasto update and remove certain references in our consolidated financialstatements to technical accounting literature.

 

**NOTE 3 -  FAIR VALUEMEASUREMENTS**

** **

OnJanuary 1, 2008, the Company adopted new guidance on fair valuemeasurements, which clarifies the definition of fair value, establishes aframework for measuring fair value, and expands the disclosures of fair valuemeasurements. In February 2008, the FASB deferred the effective date ofthe new guidance for one year for nonfinancial assets and liabilities recordedat fair value on a nonrecurring basis. The effect of adoption on January 1,2009 of the new guidance for nonfinancial assets and liabilities recorded atfair value on a nonrecurring basis did not have a material impact on theCompany’s financial position and results of operations or cash flows.

 

Thereare three levels of inputs that may be used to measure fair value:

 

Level 1 inputs includequoted market prices in an active market for identical assets or liabilities.

 

Level 2 inputs are marketdata, other than Level 1, that are observable either directly or indirectly.Level 2 inputs include quoted market prices for similar assets or liabilities,quoted market prices in an inactive market, and other observable informationthat can be corroborated by market data.

 

Level 3 inputs areunobservable and corroborated by little or no market data.

 

Except for those assetsand liabilities which are required by accounting guidance to be recorded atfair value in the consolidated balance sheets, the Company has elected not torecord any other assets or liabilities at fair value, as permitted by newguidance.  No events occurred during thetwelve months ended December 31, 2009 which would require adjustment tothe recognized balances of assets or liabilities which are recorded at fairvalue on a nonrecurring basis.

 
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F-13

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Tableof Contents

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

The following table provides information on thoseassets and liabilities measured at fair value on a recurring basis.

 
|                              |   | Carrying Amount             |       |                        |   |                         |   |    |        |    |   |
|-----------------------------------|--------|-----------------------------|------------|-----------------------------|--------|------------------------------|--------|---------|-------------|---------|--------|
|                              |   | In Consolidated             |       |                        |   |                         |   |    |        |    |   |
|                              |   | Balance Sheets              |       | Fair Value                  |   | Fair Value Measurement Using |   |
|                              |   | December 31, 2009 |       | December 31, 2009 |   | Level 1                      |   | Level 2 |        | Level 3 |   |
| Commodities  contracts            |   | $                           | (1,887,106 | )                           | $      | (1,887,106                   | )      |    | $(1,887,106 | )       |   |   |   |   |
| Corn  purchase contracts          |   | $                           | (1,245,302 | )                           | $      | (1,245,302                   | )      |    |        |    | $      | (1,245,302 | ) |   |   |
| Derivative  financial instruments |   | $                           | (1,623,620 | )                           | $      | (1,623,620                   | )      |    |        |    | $      | (1,623,620 | ) |   |   |

 

 

Commoditiescontracts principally includes corn and natural gas futures and optioncontracts and ethanol swaps.  The fairvalues for which are obtained from quoted market prices from the CBOT foridentical assets or liabilities, and are designated as Level 1 within thevaluation hierarchy.  The Company’s cornpurchase contracts consist of forward purchase commitments and are included inCommodities contracts if positive and in Accrued liability for commoditycontracts if negative.  The fair valuefor these agreements were determined using quoted market prices from the ChicagoBoard of Trade (CBOT) for similar assets, and are designated as Level 2 withinthe valuation hierarchy.  Derivativefinancial instruments consists of interest rate swaps at fair value using thecounterparty’s marked-to-market statement, which can be validated usingmodeling techniques that include market inputs such as publicly availableinterest rate yield curves, and are designated as Level 2 within the valuationhierarchy.

 

TheCompany considers the carrying amount of significant classes of financialinstruments on the balance sheets, including cash, accounts receivable,inventories, other assets, accounts payable, accrued liabilities, and variablerate long-term debt to be reasonable estimates of fair value either due totheir length of maturity or the existence of variable interest rates underlyingsuch financial instruments that approximate prevailing market rates at December 31,2009 and 2008.

 

 

Due todeclining interest rates since the inception of certain long-term notes, thecarrying amount of the fixed-rate, long-term note payable obligations were lessthan fair value at December 31, 2009 and 2008. As the following tablepresents, the carrying amount and the fair value of long-term note payableobligations at December 31, 2009 and 2008 are as follows:

 
|                                            | ** ** | **Carrying  Amount** | ** **     | **Fair  Value** | ** ** |
|-------------------------------------------------|------------|----------------------|----------------|-----------------|------------|
|                                            |       |                 |           |            |       |
| Long-term  notes payable December 31, 2009 | ** ** | **$**                | **40,131,155** | ** **      | **$**      | **40,159,996** | ** ** |
| Long-term  notes payable December 31, 2008 | ** ** | **$**                | **45,906,947** | ** **      | **$**      | **46,319,988** | ** ** |

 

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

 
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F-14

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Tableof Contents

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**NOTE 4 -  DERIVATIVE FINANCIAL INSTRUMENTS**

** **

From time to time theCompany enters into derivative transactions to hedge its exposures to interestrate and commodity price fluctuations. The Company does not enter intoderivative transactions for trading purposes.

 

As discussed in Note 2,on January 1, 2009, the Company adopted new guidance requiring holders ofderivative instruments to provide qualitative disclosures about objectives andstrategies for using derivatives, quantitative disclosures about fair valueamounts of gains and losses from derivative instruments, and disclosures aboutcredit-risk-related contingent features in derivative agreements.

 

As of December 31,2009, the Company has entered into ethanol, natural gas and corn derivativeinstruments and interest rate swap agreements. The Company is required to record derivative financial instruments aseither assets or liabilities at fair value in the statement of financialposition.  Derivatives qualify for treatment as hedges when there isa high correlation between the change in fair value of the derivativeinstrument and the related change in value of the underlying hedged item.Furthermore, the Company must designate the hedging instruments based upon theexposure being hedged as a fair value hedge, a cash flow hedge or a hedgeagainst foreign currency exposure.  The Company formally documents,designates, and assesses the effectiveness of transactions that receive hedgeaccounting initially and on an on-going basis.

 

*Commodity Contracts*

 

The Company enters intoethanol and corn commodity-based derivatives in order to protect cash flowsfrom fluctuations caused by volatility in commodity prices for periods up totwelve months in order to protect gross profit margins from potentially adverseeffects of market and price volatility on ethanol sales and corn purchasecommitments where the prices are set at a future date.  In addition, the Company hedges anticipatedsales of ethanol to minimize its exposure to the potentially adverse effect ofprice volatility.  These derivatives arenot designated as effective hedges for accounting purposes. For derivativeinstruments that are not accounted for as hedges, or for the ineffectiveportions of qualifying hedges, the change in fair value is recorded throughearnings in the period of change. Derivative fair market value gains or lossesare included in the results of operations and are included in cost of revenues.   All commodity contracts do not qualify forhedge accounting.

 

 

*Interest Rate Contracts*

 

The Company manages itsfloating rate debt using interest rate swaps. The Company will enter into fixedrate swaps to alter its exposure to the impact of changing interest rates onits consolidated results of operations and future cash outflows for interest.Fixed rate swaps are used to reduce the Company’s risk of the possibility ofincreased interest costs. Interest rate swap contracts are therefore used bythe Company to separate interest rate risk management from the debt fundingdecision.

 

At December 31,2009, the Company had $19,181,250 of notional amount outstanding in swapagreements that exchange variable interest rates (one-month LIBOR plus 2.75%)for fixed interest rates over the terms of the agreements and are designated ascash flow hedges of the interest rate risk attributable to forecasted variableinterest payments. The effective portion of the fair value gains or losses onthese swaps is included as a component of accumulated other comprehensiveincome (“AOCI”).

 

All interest rate swapsheld by the Company as of December 31, 2009 qualified as cash flow hedges.For these qualifying hedges, the effective portion of the change in fair valueis recognized through earnings when the underlying transaction being hedgedaffects earnings, allowing a derivative’s gains and losses to offset relatedresults from the hedged item on the income statement.

 
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F-15

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Table of Contents

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

The following tablesprovide details regarding the Company’s derivative financial instruments at December 31,2009:

 
| ** **                                                   | ** ** | **Asset  Derivatives** | ** ** | **Liability  Derivatives** |
|--------------------------------------------------------------|------------|------------------------|------------|----------------------------|
| **As of December 31,**                                  | ** ** | **2009**               | ** ** | **2009**                   |
| ** **                                                   | ** ** | **Balance Sheet**      | ** ** | **Fair**                   | ** ** | **Balance  Sheet** | ** ** | **Fair** |
| ** **                                                   | ** ** | **Location**           | ** ** | **Value**                  | ** ** | **Location** | ** ** | **Value** |
| ** **                                                   |       |                   |       |                       |   |   |   |   |
| **Derivatives designated as hedging instruments**            |       |                   |       |                       |   |   |   |   |
| Interest  rate swap                                          |       |                   |       | $                          | - |   | Long-term liabilities |   | $ 1,623,620 |
| ** **                                                   |       |                   |       |                       |   |   |   |   |
| **Total derivatives designated as hedging instruments**      |       |                   |       | $                          | - |   |   |   | $ 1,623,620 |
| ** **                                                   |       |                   |       |                       |   |   |   |   |
|                                                         |       |                   |       |                       |   |   |   |   |
| **Derivative not designated as hedging instruments**         |       |                   |       |                       |   |   |   |   |
| Commodities  contracts                                       |       |                   |       | $                          | - |   | Current liabilities |   | $ 3,132,408 |
| ** **                                                   |       |                   |       |                       |   |   |   |   |
| **Total  derivatives not designated as hedging instruments** |       |                   |       | $                          | - |   |   |   | $ 3,132,408 |

 
| **Derivative Cash Flow Hedging Relationship - Interest rate  swaps**               |   | Twelve Months Ended  December 31, 2009 |
|------------------------------------------------------------------------------------|--------|------------------------------------------------------------|
| ** **                                                                         |   |                                                       |
|                                                                               |   |                                                       |   |
| Amount  of gain (loss) recognized in OCI on derivative                             |   | $                                                          | 673,848 |   |
|                                                                               |   |                                                       |   |
| Amount  of gain (loss) reclassified from accumulated OCI into income on derivative |   | $                                                          | - |   |
|                                                                               |   |                                                       |   |
| Location  of gain (loss) reclassified from accumulated OCI into income             |   |                                                       |   |
|                                                                               |   |                                                       |   |
|                                                                               |   |                                                       |   |
| Amount  of gain (loss) recognized in income on derivative                          |   | $                                                          | (982,284 | ) |
|                                                                               |   |                                                       |   |
| Location  of gain (loss) recognized in income                                      |   | Interest Expense                                           |

 

 
| **Derivatives not designated as hedging intruments -  Commodities contracts** |   | Twelve Months Ended  December 31, 2009 |
|-------------------------------------------------------------------------------|--------|-------------------------------------------------------|
|                                                                          |   |                                                  |   |
|                                                                          |   |                                                  |   |
| Amount  of gain (loss) recognized in income on derivative                     |   | $                                                     | 5,773,808 |   |
|                                                                          |   |                                                  |   |
| Location  of gain (loss) recognized in income                                 |   | Cost of revenues                                      |
|                                                                               |        |                                                       |  |  |

 
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F-16

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Tableof Contents

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**NOTE 5 -  NOTES PAYABLE**

** **

NorthernGrowers received advances of $5,000 from various entities to help establish theCompany. This short-term note payable is due on demand and does not bearinterest.  The balance of this non-interest bearing note was $5,000 at December 31,2009 and December 31, 2008.

 

Northern Growers receiveda loan advance of $25,000 from First Bank & Trust, Milbank, SD, duringthe three month period ending March 31, 2008 for short-term cash needs.This short-term note payable bore interest at 5.94% and matured May 1,2008 and was paid in full.  The balanceof this note was $0 at December 31, 2009 and December 31, 2008.

 

On August 28, 2006,POET® Biorefining - Big Stone and U.S. 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 $3,000,000 and$5,000,000 revolving notes into one note.  On September 21, 2007, anamendment to the loan agreement became effective.  The purpose of the amendment was to financethe purchase and construction of additional grain storage bins and equipment($4,300,000) and obtain a $9,000,000 short-term revolving loan. Under theamended and restated loan agreement and the September 21, 2007 amendment,POET® Biorefining – Big Stone is subject to six notes:  Note #174, a $3,900,000 variable-rate,non-revolving note;  Note #158, a $15,800,000 fixed-rate note; Note #91,an $8,000,000 variable-rate, revolving long term note; Note #190, a $33,000,000construction note; Note #232, a $4,300,000 variable-rate note; and Note #216, a$9,000,000 variable-rate, revolving short-term note.

 

Note #174, the $3,900,000variable-rate, non-revolving note, bears interest at the Bank’s prime rate, or3.25% at December 31, 2009. This note requires quarterly payments ofinterest and amortized principal on the basis of a ten-year term, the firstpayment being made on June 30, 2005.  The note matures on March 31,2012.

 

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

 

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

 

Note #91, the $8,000,000variable rate, revolving note, permits POET® Biorefining - Big Stone to borrow,on a revolving basis, the difference between the unpaid principal balance and$8,000,000. The revolving note bears a variable-interest rate equal to theprime rate announced by the Bank from time to time, adjusted each time thePrime Rate changes (3.25% at December 31, 2009). Quarterly payments ofinterest on any unpaid balance are due March 31, June 30, September 30,and December 31 of each year. The total unpaid principal balance is due atmaturity, or August 31, 2014. The loan is subject to a quarterly unusedcommitment fee of 0.0375% and prepayment is without penalty.  At December 31, 2009 and 2008, therewere no outstanding borrowings against the long-term variable rate revolvingnote and the balance available on this note was $8,000,000.

 

Note #190, the constructionnote of $33,000,000, was converted to a term note on August 31, 2007.  The notional amount ($19,181,250 as of December 31,2009) is subject to the interest rate swap agreements discussed in Note 2 under“Interest Rate Swap Agreements”.  Thenote is amortized over a ten-year period and is subject to a maturity of August 31,2014. Payments of principal are due quarterly and began on November 30,2007.  Payments of interest are duemonthly, subject to a variable rate of one-month LIBOR plus 2.75%, adjustedmonthly (2.980% at December 31, 2009).

 
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F-17

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Tableof Contents

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

Note #232, the $4,300,000 note, is subject to avariable rate of LIBOR plus 3.00% (3.235% at December 31, 2009), adjustedand due monthly. A principal payment of $154,000 is due quarterly, which beganon October 31, 2007.

 

Note #216, the $9,000,000short-term note, which was issued on September 21, 2007, permits us toborrow, on a revolving basis, the difference of the outstanding principalamount and the lesser of the borrowing base or $9,000,000. The borrowing baseis defined as 75% of the total of the fair market value of the outstandinginventory, eligible accounts receivable, and hedging accounts at fair marketvalue. The principal purpose of this revolver is to cover the cost ofpurchasing corn.  The loan has beenrenewed, with revised terms, as of July 28, 2009.  It bears a variable-interest rate equal toone-month LIBOR plus 3.00%, payable monthly when there is an outstandingbalance (4.250% at December 31, 2009). The revolver is subject to a quarterly unused commitment fee of 0.500%per year, assessed quarterly in arrears (previously was 0.250%). The variableinterest rate has been revised to one-month LIBOR plus 4.00%.  The total unpaid principal balance is due atmaturity, or July 26, 2010.  Theamount available on this note was $9,000,000 at December 31, 2009 and December 31,2008.

 

POET® Biorefining -Big Stone is subject to certain restrictive covenants establishing minimumreporting requirements, ratios, working capital and net worth requirements andis in full compliance at December 31, 2009.  The bank waived compliance of the fixedcharge coverage ratio on May 14, 2009 for the March 31, 2009compliance date.  On May 14, 2009,the bank also adjusted the 2009 requirements of the fixed charge coverage ratiocovenant for the second and third quarters of 2009 and the Company was in fullcompliance with the covenants at June 30 and September 30, 2009.   The Company believes it will be incompliance with all covenants for each of the four quarters of 2010.  Collateral for the notes is multiplemortgages and security agreements, multiple UCC filings on all business assets,and assignments of certain agreements related to the construction and operationof the plant.

 

The balance of thelong-term notes payable as of December 31, 2009 and 2008 is as follows:

 

 
|                  | ** ** | **2009**       |           | 2008       |       |
|-----------------------|------------|----------------|----------------|------------|------------|
|                  |       |           |           |       |       |
|                  |       |           |           |       |       |
| Note  #174            | ** ** | **$**          | **2,047,500**  | ** ** |       | $ | 2,437,500 |   |
| Note  #158            | ** ** | **9,594,655**  | ** **     |       | 11,064,447 |   |
| Note  #190            | ** ** | **25,575,000** | ** **     |       | 28,875,000 |   |
| Note  #232            | ** ** | **2,914,000**  | ** **     |       | 3,530,000  |   |
|                  |       |           |           |       |       |   |
|                  | ** ** | **40,131,155** | ** **     |       | 45,906,947 |   |
| Less  current portion | ** ** | **(5,881,047** | **)**          |       | (5,785,007 | ) |
|                  |       |           |           |       |       |   |
|                  | ** ** | **$**          | **34,250,108** | ** ** |       | $ | 40,121,940 |   |

 
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F-18

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Table of Contents

 

**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

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

 
| Twelve Months Ending December 31,       |   | Amount     |       |
|----------------------------------------------|--------|------------|------------|
|                                         |   |       |       |
| 2010                                         |   | $          | 5,881,047  |   |
| 2011                                         |   | 5,983,965  |       |
| 2012                                         |   | 11,525,143 |       |
| 2013                                         |   | 3,916,000  |       |
| January 1, 2014 to August 31, 2014 |   | 12,825,000 |       |
|                                         |   |       |       |
|                                         |   | $          | 40,131,155 |   |

 

**NOTE 6 -  RELATED PARTY TRANSACTIONS**

** **

Northern Growers and Broin Investments I, LLC, are the members of POET® Biorefining - Big Stone. Northern Growersinvested $12,500,000 and Broin Investments I, LLC invested $3,700,000 in POET® Biorefining - Big Stone for theirrespective ownership interests of 77.16% and 22.84%. In accordance with theMember Control Agreement of POET® Biorefining - Big Stone, Broin Investments I, LLC, hasthe right to elect two of seven members of the Board of Managers of POET® Biorefining - Big Stone.

 

Additional agreements with related parties are includedin Note 7.

 

**NOTE 7 -  COMMITMENTS, CONTINGENCIES AND AGREEMENTS**

** **

Due to the name change ofBroin Companies, LLC (“Broin”) to POET®, LLC in early 2007 and a correspondingchange in the name of some Broin-related companies, the Company’s existing contractualarrangements and agreements for plant development, operations and marketing arenow with newly named entities containing POET®. All of the newly namedPOET®-related entities are the same Broin-related entities that existed priorto the Broin to POET® name change.  BroinInvestments I, LLC, the minority member of POET® Biorefining – Big Stone, hasnot changed its name, yet is still a related party to all POET®-named companieslisted here.

 

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

 

Expansion Construction Agreement – The Company entered into a Design/BuildAgreement with POET® Design and Construction, Inc. (formerly known asBroin & Associates, Inc.) on October 25, 2005. The purposeof this agreement was to expand the name-plate production capacity of the plantfrom 40 million gallons of ethanol annually to 75 million gallons of ethanolannually, as well as to make certain capital improvements to the plant for theincorporation of new raw starch technology. The final cost of construction andimprovements for both projects was $42.3 million, with all constructioncomplete at December 31, 2007.

 

Additional Corn Storage Construction Agreement – The Company entered into aDesign/Build Agreement with POET® 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/ POET® Ethanol Products) for the sale, marketing,billing and receipt of payment and other administrative 

 
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**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

services for all ethanol produced by the plant.  The new agreement is effective July 1,2007 and terminates on July 1, 2012, automatically renewing for afive-year term unless a notice of termination is provided by either party priorto the end of the term, and increases marketing fees by $0.002 per gallonsold.  The Company has sales commitmentswith POET® Ethanol Products of approximately 14.0 million gallons over the nexttwelve months, of which, virtually all gallons are contracted at a variableprice. The Company purchases all of its denaturant through POET® EthanolProducts.

 

Management Agreement – On April 20, 2005, the Company renewed itsagreement with POET® Plant Management, LLC (formerly known as Broin Management,LLC) for the management and operation of the plant. The new agreementterminates on June 30, 2015.  In exchange for management services,POET® Plant Management receives an annual fee of $450,000, payable in equalmonthly installments, plus an incentive bonus based on a percentage of netincome, payable quarterly. The annual fee is adjusted each year on March 1stfor changes in the consumer price index. The fees and bonus paid to POET® PlantManagement include the salary and benefits of the general manager and technicalmanager and certain other services related to operation of the plant.

 

Technology and Patent Rights License Agreement - On October 25, 2005, the Companyentered into a Technology and Patent Rights License Agreement with POET®Research, Inc. (formerly known as Broin and Associates, Inc.).  Under this agreement, POET® Research grantsthe Company a non-exclusive license to use certain technology and patentsowned, developed, or obtained by POET® Research relating to the ethanol andrelated product production processes. The Company is required to pay an annuallicensing fee for the right to use such technology and patents. The agreementterminates on June 30, 2015.

 

Risk Management Agreement– On April 1,2007, the Company entered into a new corn and natural gas price risk managementagreement with POET® Risk Management, LLC. 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 POET® RiskManagement an annual fee, payable in quarterly installments, subject tomodification in the case of plant expansions or increases in corn usage.

 

Distillers GrainsMarketing Agreement–****On March 8, 2002****the Company entered into an agreement with POET® Nutrition, Inc.(formerly known as Dakota Gold Marketing, Inc.), to provide marketing andadministrative services for the sale of distillers grains.  The agreement terminates March 8, 2012, butrenews for a five year term unless either party provides the other party a 90day notice of termination prior to the renewal date.  The agreement provides for an agencyrelationship as POET® Nutrition does not take title to the distillers grainsbut acts as a broker on behalf of the Company. The Company entered into forward contracts to sell approximately 18,000tons of various distiller grains at an average fixed price of approximately$160 per ton as of December 31, 2009.

 
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**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

Revenues and expenses related to agreements with related parties forthe years ended December 31, 2009, 2008 and 2007 are as follows:

 
|                                  | ** ** | **2009**       |                  | 2008       |   | 2007        |   |
|---------------------------------------|------------|----------------|-----------------------|------------|--------|-------------|--------|
|                                  |       |           |                  |       |   |        |   |
| Ethanol gross revenues                | ** ** | **$**          | ** 112,997,456** |       | $      | 137,146,540 |   | $ | 116,084,868 |   |
| Denaturant expense                    | ** ** | **2,535,515**  |                  | 4,621,203  |   | 4,352,347   |   |
| Management fees expense               | ** ** | **1,114,437**  |                  | 587,089    |   | 1,592,821   |   |
| Licensing fees expense                | ** ** | **441,080**    |                  | 532,832    |   | 428,981     |   |
| Freight expense - all products        | ** ** | **11,060,167** |                  | 11,800,137 |   | 7,223,554   |   |
| Marketing fees expense - all products | ** ** | **1,340,850**  |                  | 1,473,192  |   | 985,136     |   |
|                                       |            |                |                       |            |        |             |        |  |  |  |

 

Agreements with unrelatedparties are as follows:

 

Property Lease – The Company has a 99 yearproperty lease (an operating lease) with Big Stone-Grant Industrial Developmentand Transportation, 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 the immediately preceding five-year period.

 

Steam – The Company hasan agreement with the co-owners of the 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 set at a base rate, adjusted annuallyfor changes in the cost of energy, and any amount over the base rate is set ata market rate. The agreement commenced on June 1, 2002 and has a term often years, renewable for two five-year periods, after which the agreement isrenewable from year to year. Either party may terminate the agreement byproviding notice one year prior to a renewal or expiration date.

 

Expenses related to theproperty lease and steam agreements for the years ended December 31, 2009,2008 and 2007 were $3,604,975, $4,444,553 and $2,962,099, respectively.

 

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

 
|                  |   |                                                               |   |                                         |   | Unconditional                                |   |                                         |
|-----------------------|--------|--------------------------------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|
| Twelve Months  Ending |   | Lease                                                              |   | Management                                   |   | Purchase                                     |   |                                         |
| December 31,     |   | Agreements                                                         |   | Agreements                                   |   | Agreements                                   |   | Total                                        |
|                  |   |                                                               |   |                                         |   |                                         |   |                                         |
| 2010                  |   | $          2,520 |   | $      567,340 |   | $      217,080 |   | $      786,940 |
| 2011                  |   | 2,646                                                              |   | 567,340                                      |   | 217,080                                      |   | 787,066                                      |
| 2012                  |   | 2,646                                                              |   | 510,487                                      |   | 90,450                                       |   | 603,583                                      |
| 2013                  |   | 2,646                                                              |   | 491,536                                      |   | -                                            |   | 494,182                                      |
| 2014                  |   | 2,646                                                              |   | 491,536                                      |   | -                                            |   | 494,182                                      |
| 2015-2100             |   | 361,531                                                            |   | 245,768                                      |   | -                                            |   | 607,299                                      |
|                  |   | $      374,635                       |   | $    2,874,007           |   | $      524,610 |   | $    3,773,252           |

 

Corn Delivery – On August 9, 2005, POET® Biorefining - BigStone agreed to release Northern Growers and, accordingly, all of its membersfrom delivering corn to the plant starting on January 1, 2006.  Priorto January 1, 2006, Northern Growers’ members were obligated to delivercorn to the plant unless the plant released the member from the member’s corndelivery obligation.  Effective January 1, 2006, however, NorthernGrowers’ 

 
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**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

members are no longer obligated to deliver corn to the plant. Instead,the plant purchases all of its corn from local corn producers and the openmarket.  Purchases of corn from corn delivery agreements and cashcontracts from the Northern Growers’ members totaled approximately $43,965,000,$60,957,000 and $36,357,000 for the years ending December 31, 2009, 2008and 2007, respectively, of which $4,382,519 and $4,409,611 was recorded as aliability at December 31, 2009 and 2008, respectively.

 

Incentive Revenue - The Company receives an incentive payment from theState of South Dakota to produce ethanol. In accordance with the terms of thisarrangement, revenue is recorded based on ethanol sold. The State of SouthDakota has set a maximum of up to $1,000,000 per year for this program perqualifying producer. The Company has earned $333,334, $666,667 and $645,596 forthe program years ended June 30, 2010, 2009 and 2008, respectively.Incentive revenue of $666,667, $645,596 and $750,001 was recorded for thetwelve months ended December 31, 2009, 2008 and 2007, respectively, forthis program.

 

Capital UnitTrading - On March 8,2004, Northern Growers’ members and non-members began trading Northern Growerscapital units on an alternative trading system operated by Alerus SecuritiesCorporation of West Fargo, North Dakota.

 

EnvironmentalContingency - TheCompany’s operations are subject to environmental laws and regulations adoptedby various governmental authorities in the jurisdiction in which it operates.These laws require the Company to investigate and remediate the effects of therelease or disposal of materials at its locations. Accordingly, the Company hasadopted policies, practices and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage, and to limit thefinancial liability which could result from such events.

 

The Company conducts anongoing compliance program designed to meet these environmental laws andregulations.  The Company believes that it is in substantial compliancewith applicable environmental laws and regulations.  From time to time,however, the Company may be involved in investigations or determinationsregarding non-material matters that may arise.

 

In January 2003, theU.S. Environmental Protection Agency (U.S. EPA) issued formal informationrequests to, among others, plants designed, constructed, and/or managed by POET® Design andConstruction and POET® Plant Management. The Company’s plant was asubject of these requests. The requests required that the plants provide theEPA with certain data regarding emissions.

 

On January 14, 2009,the Company’s plant received from the U.S. EPA a written Notice of Violation(NOV).  The NOV alleges that the Company’s plant violated the Clean AirAct by failing to adequately maintain a regulated level of air pollutants underthe plant’s Title V air permit, and by conducting invalid testing forcompliance with such limit.  Since the issuance of the NOV, the plant hasbeen negotiating a possible settlement with the EPA.  The Company believes that any settlement intowhich it may enter will result in a fine, but that such fine will not bematerial.

 

TheCompany has taken corrective action relating to the NOV through planned capitalimprovements to the plant.  On January 22, 2009, a capitalimprovement project for approximately $1 million was approved. This project,which will involve the construction of improvements to the dryer and thermaloxidizer, is expected to be capitalized and financed with cash fromoperations.  A small amount of designwork has been initiated on this project as of December 31, 2009.

 
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**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**NOTE 8 -  DISTRIBUTIONS**
| POET - Big Stone   Distribution Date |   |   | POET - Big Stone  Approved Distribution |       |   | Northern Growers  Amount Received |   |      | Minority Member   Amount Received |   |   | Northern Growers   Distribution Date |   |   |  

Distributions  paid  to Northern  Growers Members |   |   | Quarter - Year  for Northern  Growers Tax Purposes and  Liability Recorded |      |
|--------------------------------------|--------|--------|-----------------------------------------|------------|--------|-----------------------------------|--------|-----------|-----------------------------------|--------|--------|--------------------------------------|--------|--------|-----------------------------------------------------------|--------|--------|----------------------------------------------------------------------------|-----------|
| 1/26/2007                            |   |   | $                                       | 11,000,000 |   |                              | $      | 8,487,600 |                              |   | $      | 2,512,400                            |   |   | 1/29/2007                                                 |   |   | $                                                                          | 6,787,696 |   |   | 4th Quarter 2006 |   |
| 4/24/2007                            |   |   | $                                       | 9,000,000  |   |                              | $      | 6,944,400 |                              |   | $      | 2,055,600                            |   |   | 4/25/2007                                                 |   |   | $                                                                          | 6,444,439 |   |   | 1st Quarter 2007 |   |
| 7/27/2007                            |   |   | $                                       | 5,300,000  |   |                              | $      | 4,089,480 |                              |   | $      | 1,210,520                            |   |   | 8/2/2007                                                  |   |   | $                                                                          | 4,089,224 |   |   | 2nd Quarter 2007 |   |
| 1/29/2008                            |   |   | $                                       | -          |   |                              | $      | -         |                              |   | $      | -                                    |   |   | 1/29/2008                                                 |   |   | $                                                                          | 1,518,840 |   |   | 4th Quarter 2007 |   |

 

**NOTE 9 -  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.

 

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

** **

On February 1, 2003,POET® Biorefining - Big Stone set up a 401(k) planfor substantially all employees who work more than 1,000 hours per year.Employees can make voluntary contributions up to federally designated limits.POET® Biorefining - Big Stone matches employeevoluntary contributions at a 50% level up to an effective maximum of 2% ofgross employee pay. Eligible employees are always fully vested in their accountbalances resulting from employee voluntary contributions. POET® Biorefining -Big Stone’s 401(k) expense for the years ended December 31, 2009,2008 and 2007 was $33,767, $34,978 and $25,283, respectively.

 
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**NORTHERNGROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

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

** **

Summary quarterly resultsare as follows:

 
|                                                 |   | First      |       | Second  |      | Third   |       | Fourth     |   |
|------------------------------------------------------|--------|------------|------------|---------|-----------|---------|------------|------------|--------|
|                                                 |   | Quarter    |       | Quarter |      | Quarter |       | Quarter    |   |
|                                                 |   |       |       |    |      |    |       |       |   |
| Year Ended  December 31, 2009:                  |   |       |       |    |      |    |       |       |   |
|                                                 |   |       |       |    |      |    |       |       |   |
| Total revenues                                       |   | $          | 30,214,259 |    |      | $       | 33,142,354 |       |   | $ | 35,859,598 |   |   | $ | 42,822,127 |   |
| Gross profit (loss)                                  |   | 1,296,886  |       |    | 1,584,249 |    |       | 5,426,711  |   |   | 7,904,681 |   |
| Operating income (loss)                              |   | 398,954    |       |    | 507,824   |    |       | 4,416,426  |   |   | 6,480,872 |   |
| Income (loss) before  Noncontrolling Interest        |   | (307,357   | )          |    | (173,878  | )       |       | 3,731,422  |   |   | 5,808,471 |   |
| Noncontrolling interest  in subsidiary (income) loss |   | 45,796     |       |    | 28,784    |    |       | (870,405   | )      |   | (1,347,320 | ) |
| Net income (loss)                                    |   | (261,561   | )          |    | (145,094  | )       |       | 2,861,017  |   |   | 4,461,151 |   |
| Basic earnings (loss)  per unit                      |   | (0.005     | )          |    | (0.003    | )       |       | 0.057      |   |   | 0.088 |   |
|                                                 |   |       |       |    |      |    |       |       |   |   |   |   |
| Year Ended  December 31, 2008:                  |   |       |       |    |      |    |       |       |   |   |   |   |
|                                                 |   |       |       |    |      |    |       |       |   |   |   |   |
| Total revenues                                       |   | $          | 43,374,017 |    |      | $       | 45,776,791 |       |   | $ | 47,777,435 |   |   | $ |  34,496,684 |   |
| Gross profit (loss)                                  |   | 3,309,166  |       |    | 3,942,954 |    |       | (4,901,122 | )      |   | (521,823 | ) |
| Operating income (loss)                              |   | 2,405,794  |       |    | 2,928,091 |    |       | (5,644,305 | )      |   | (1,539,581 | ) |
| Income (loss) before  Noncontrolling Interest        |   | 1,454,237  |       |    | 2,033,115 |    |       | (6,484,552 | )      |   | (2,309,999 | ) |
| Noncontrolling interest  in subsidiary (income) loss |   | (351,359   | )          |    | (474,053  | )       |       | 1,468,919  |   |   | 511,142 |   |
| Net income (loss)                                    |   | 1,102,878  |       |    | 1,559,062 |    |       | (5,015,633 | )      |   | (1,798,857 | ) |
| Basic earnings (loss)  per unit                      |   | 0.022      |       |    | 0.031     |    |       | (0.099     | )      |   | (0.036 | ) |
|                                                 |   |       |       |    |      |    |       |       |   |   |   |   |
| Year Ended  December 31, 2007:                  |   |       |       |    |      |    |       |       |   |   |   |   |
|                                                 |   |       |       |    |      |    |       |       |   |   |   |   |
| Total revenues                                       |   | $          | 32,193,532 |    |      | $       | 34,977,104 |       |   | $ | 40,200,101 |   |   | $ | 30,873,043 |   |
| Gross profit (loss)                                  |   | 9,091,141  |       |    | 4,349,497 |    |       | 8,802,914  |   |   | 3,305,241 |   |
| Operating income (loss)                              |   | 7,690,390  |       |    | 3,320,726 |    |       | 7,501,694  |   |   | 2,245,866 |   |
| Income (loss) before  Noncontrolling Interest        |   | 7,524,659  |       |    | 2,732,543 |    |       | 6,755,378  |   |   | 1,401,610 |   |
| Noncontrolling 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 |   |

 

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

 

**NOTE 12 - MARKET RISKS AND UNCERTAINTIES**

** **

TheCompany has certain risks and uncertainties that it experiences during volatilemarket conditions such as what the Company experienced during the twelve monthsending December 31, 2009. These volatilities can have a severe impact onoperations.  The Company’s revenues arederived from the sale and distribution of ethanol and distillers grains tocustomers primarily located in the U.S.  Corn for the production processis supplied to our plant primarily from local agricultural producers and frompurchases on the open market.  Ethanolsales, historically, average 80% of total revenues and corn costs historicallyaverage 50% to 70% of cost of revenues.

 

TheCompany’s operating and financial performance is largely driven by the pricesat which we sell ethanol and the net expense of corn. The price of ethanol isinfluenced by factors such as prices of supply and demand, 

 
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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

weather,government policies and programs, and the price of unleaded gasoline and corn.Excess ethanol supply in the market, in particular, puts downward pressure onthe price of ethanol. Our largest cost of production is corn.  The cost of corn is generally impacted byfactors such as supply and demand, weather, government policies and programs,and our risk management program used to protect against the price volatility ofthese commodities.

 

**NOTE 13 - SUBSEQUENT EVENTS**

** **

During February 2010,POET® Biorefining – Big Stone approved a $4,500,000distribution, which it paid on February 16, 2010.  Northern Growersreceived $3,472,200 and the noncontrolling interest member received$1,027,800.  In conjunction with this cash distribution, on February 19,2010, Northern Growers retained $940,800 by a super majority vote of the Boardof Managers, and paid a distribution of $2,531,400, or $0.05 per capital unit,to its members of record as of December 31, 2009.  A pro formabalance sheet has been included in the accompanying consolidated financialstatements to reflect the effects of the February 2010 distributions as ifthey had been paid on December 31, 2009.  Adjustments applied to thehistorical December 31, 2009 consolidated financial statements include areduction of cash and cash equivalents, retained earnings and noncontrollinginterest.

 
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