**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM l0-K**

 

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

 

**For the fiscal year ended****December 31, 2004**

 

**Commissionfile number 333-97215**

 

### **Northern Growers, LLC**

(Exact name of registrant asspecified in its charter)

 

| **South  Dakota**                                                            | ** ** | **77-0589881**                        |
|------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)             |       | (I.R.S. Employer  Identification No.) |
|                                                                         |       |                                  |
| **48416  144th Street  P.O. Box 356  Big Stone City SD 57216  605-862-7902** |
| (Address of Principal  Executive Offices) (Zip Code)                         |
|                                                                         |       |                                  |
| **(605)  862-7902**                                                          |
| (Issuer’s Telephone  Number, Including Area Code)                       |
|                                                                         |       |                                  |
| Securities registered  under Section 12(b) of the Exchange Act:         |
| **None**                                                                     |
| ** **                                                                   | ** ** | ** **                            |
| Securities registered  under Section 12(g) of the Exchange Act:         |
| **Class A Capital Units**                                                    |

### ** **

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

ý  Yes     o  No

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10–K.   ý

 

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

 

Asof June 30, 2004, the aggregate market value of the registrant’s Class Acapital units held by non-affiliates of the registrant was $23,850,000,computed using the last sales price of $4.00 per Class A capital unit of theregistrant’s capital units on June 30, 2004, the last business day of theregistrant’s most recently completed second fiscal quarter.

 

Indicate the number of shares outstanding of each of the registrant’sclasses of common stock, as of the latest practicable date. As of thedate of this filing, there were 6,328,500 Class A capital units of theregistrant outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

PartIII of Form 10-K - Portions of the Proxy Statement for 2005 Annual Meeting ofMembers.

 

 

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### **PART I**

### ** **

**Item 1.    Business.**

 

**Overview**

 

Northern Growers, LLC (also referred to as “we,” “our,”or “us”) is a South Dakota limited liability company that owns and manages a77.16% interest in Northern Lights Ethanol, LLC (also referred to as “NorthernLights”), with Broin Investments I, LLC owning the remaining minorityinterest.  Northern Lights owns and operates an ethanol plant near BigStone City, South Dakota which produces ethanol and distiller’s grains. The plant commenced production on June 26, 2002.

 

Northern Lights’ business is the productionand sale of ethanol and distiller’s grains from the processing of corn. Corn issupplied to Northern Lights from our members who are primarily localagricultural producers and from purchases of corn on the open market. Ethanolis sold to a company that markets and sells the ethanol to an array ofcustomers located throughout the continental United States. Distiller’s grainsare exclusively marketed and sold through a company that markets and sells itto livestock producers as livestock feed.

 

Northern Lights plans to maintain acompetitive position in the marketplace by producing high quality ethanol anddistiller’s grains and operating an efficient operation at the lowest possiblecosts. To accomplish this end, Northern Lights currently plans to continueworking with Broin Management, LLC and other Broin-related entities, insearching for new production methods and technologies and improving plantoperations.

 

**Reorganization**

 

We were originally formed as a SouthDakota cooperative on April 14, 2000, which is entitled to single-level,pass-through tax treatment on income generated through the members’ patronage.This allowed us to pass our income onto our members in the form ofdistributions without first paying taxes at the company level, similar to a

 

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partnership.As we became more aware of the disadvantages in remaining a cooperative, thecooperative’s board of directors approved a plan to reorganize into a SouthDakota limited liability company, which may elect to be taxed as either apartnership or a corporation.  As a limited liability company, we electedto be taxed as a partnership which allowed us to retain our historicsingle-level income tax treatment at the member level.

 

The plan of reorganization was duly approved by ourmembers at a meeting held on March 27, 2003, and the reorganization becameeffective April 1, 2003. The transaction was an exchange of interestswhereby the assets and liabilities of the cooperative were transferred forcapital units of the newly formed limited liability company, Whetstone Ethanol,LLC. The capital units were distributed to our members upon dissolution of thecooperative at a rate of one capital unit of the limited liability company foreach share of equity stock owned in the cooperative. The distribution ofcapital units to our members was registered under the Securities Act of 1933.Upon completion of the reorganization, the name, Whetstone Ethanol, LLC, waschanged to Northern Growers, LLC.

 

**Ethanol**

 

The principal product produced at the ethanol plantis ethanol. Ethanol is ethyl alcohol, a fuel component made primarily from cornand various other type grains. Ethanol is used for three primary purposes: i)an oxygenated fuel additive; ii) an octane enhancer in fuels; and iii) anon-petroleum based gas substitute. Approximately 95% of all ethanol is used forblending with unleaded gasoline and other fuel products. Although not allscientists agree about the existence or extent of environmental benefitsassociated with the use of ethanol, the use of ethanol is commonly viewed as away to improve the quality of automobile emissions. When blended with gasoline,ethanol acts as an oxygenate by increasing the percentage of oxygen ingasoline.  As a result, the gasoline burns more cleanly, and releases lesscarbon monoxide and other exhaust emissions into the atmosphere.

 

An ethanol plant is essentially a fermentationplant.  The ground corn, which contains starch, is mixed with waterto form a mash.  The mash is heated and enzymes added to convert thestarch into fermentable sugars.  Fermentation occurs when yeast is addedto convert the sugars into alcohol and carbon dioxide.  The carbon dioxidemay either be captured and sold, if nearby markets exist, or released into theatmosphere.  Fermentation produces a mixture called “beer,” which containsabout 10% alcohol and 90% water.  The “beer” is then boiled in adistillation column to separate the water, resulting in ethyl alcohol that is90 to 95% pure.  The mixture then goes through a dehydration process,which increases the alcohol content to 99% or greater.  This product isthen mixed with a certified denaturant to make the product unfit for humanconsumption and commercially saleable.

 

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**Ethanol Marketing and Distribution**

 

Northern Lights markets the ethanol produced atthe plant through Ethanol Products, LLC, a Broin affiliate.  Ethanol Products, LLC, through a marketingagreement with Northern Lights, purchases and markets all of the ethanolproduced at the plant. Ethanol Products is responsible for determining the priceand terms at which the ethanol acquired from the plant is sold and to whom itis sold.  The price received by NorthernLights from the sale of ethanol is based upon the price that Ethanol Productsreceives from the sale of ethanol to its customers, minus a fee. EthanolProducts’ principal customers are major, multi-national oil companies withblending and refinery facilities located throughout the continental UnitedStates. Ethanol Products sells ethanol to these customers through short-termsupply contracts, after which the ethanol is shipped by Ethanol Products fromthe plant to these customers’ terminals located in the Midwest, PacificNorthwest, South, Southwest, and East. Ethanol is shipped using rail carsoperated by Ethanol Products or trucks supplied by companies with which EthanolProducts contracts. The plant is served by rail facilities and connections tothe Burlington Northern Santa Fe railroad system, which facilitate thetransportation of the ethanol to the various markets. The plant site is alsoserved by multiple South Dakota state highways and Interstate Highway 29, whichprovide transportation links in all directions.

 

The marketing agreement between EthanolProducts and Northern Lights is in effect until 2007 and is renewed automaticallyfor five-year terms, unless either party provides ninety days written notice oftermination prior to the end of the current term. In the event thatNorthern Lights’ relationship with Ethanol Products is interrupted for anyreason, we believe that another entity to market the ethanol, could belocated.  Any interruption, however,could temporarily disrupt the sale of ethanol and adversely affect NorthernLights’ business and operations.

 

**Distiller’s Grains**

 

A principal co-product of the ethanol productionprocess is distiller’s grains.  Distiller’s grains are a high protein,high energy feed supplement marketed primarily to the dairy, beef, sheep,swine, and poultry industries. It is a popular animal feed supplement,with millions of tons produced in North America annually.  Most distiller’sgrains are sold for use in animal feeds within the United States, and a smallpercentage is exported primarily to Canada, Mexico and Europe.  The vastmajority of it is fed to ruminant animals in the dairy and beef sector. New technologies, which have allowed for the production of a more consistent,quality product, have helped create a market for it in the swine and poultryindustries as well.

 

Dry mill ethanol processing generally produces threeforms of distiller’s grains, all of which differ on moisture content and shelflife: dried distiller’s grains with solubles (DDGS), distiller’s wetgrains or “wet cake,” and modified distiller’s grains.  Distiller’s wet grains are processed cornmash that does not go through a drying process and contains approximately 70%moisture content. Distiller’s wet grains have a short shelf life ofapproximately three days and can be sold only to livestock producers within theimmediate vicinity of the plant.  Modified distiller’s grains consist ofDDGS with the addition of a syrup and contains a 50% moisture content. Modified distiller’s grains have a slightly longer shelf life and are oftensold to nearby livestock producers. DDGS is

 

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distiller’swet grains dried to an 8-10% moisture content. DDGS have an almost indefiniteshelf life and may be sold and shipped to any market regardless of its vicinityto the plant.

 

**Distiller’s Grains Marketing and Distribution**

 

Northern Lights contracts with Broin Enterprises,Inc. d/b/a Dakota Gold Marketing, a Broin affiliate, to market all of thedistiller’s grains produced at the plant. There are three types of distiller’s grains produced by Northern Lightsand marketed by Dakota Gold Marketing: DDGS, Dakota GoldTM and distiller’s wetgrains. Dakota GoldTM is DDGS with an added certification from Dakota GoldMarketing indicating that the DDGS produced meets certain processing andproduction standards. Approximately 80% of Northern Lights’ sales of distiller’sgrains consist of sales of Dakota GoldTM.

 

Dakota Gold Marketing markets Dakota GoldTM, DDGS anddistiller’s wet grains to local, regional and national markets.  NorthernLights ships the majority of Dakota GoldTM and DDGS to national markets,primarily in the southwestern United States, and the rest to local and regionalmarkets.  Shipments to the national markets are primarily done byrail.  Shipments of DDGS, Dakota Gold and distiller’s wet grains to localor regional markets are primarily done by truck.  Northern Lights alsocontracts with Dakota Gold Marketing for the use of railcars in the shipping ofDDGS and Dakota GoldTM, paying Dakota Gold Marketing a flat fee per railcar inconnection with each shipment.  Although Northern Lights relies entirelyon Dakota Gold Marketing to market its distiller’s grains, Dakota GoldMarketing is not dependent upon one or a limited number of major customers.

 

 NorthernLights’ marketing contract with Dakota Gold Marketing is in effect until 2007and automatically renews for additional five-year terms, unless discontinued byeither party upon at least three months prior written notice.  NorthernLights pays Dakota Gold Marketing a marketing fee based on the gross monthlysales of distiller’s grains.  Dakota Gold Marketing is responsible forinvoicing all loads, receiving payments from customers and paying freight whennecessary.

 

**Competition**

 

Northern Lights is in direct competition withnumerous other ethanol and distiller’s grains producers, many of which havesignificantly greater resources.  We expect that additional ethanol anddistiller’s grains producers will enter the market if the demand for ethanolcontinues to increase.  Northern Lights competes with other ethanol anddistiller’s grains producers on the basis of price and, to a lesser extent,delivery service.  We believe that Northern Lights will continue tocompete favorably with other ethanol and distiller’s grains producers becauseof aggressive marketing through Broin-affiliated companies and existing plantefficiencies.

 

The ethanol industry has grown to 85 productionfacilities in the United States as of February 2005. The largest ethanolproducers include Abengoa Bioenergy Corp, Archer Daniels Midland, Cargill, NewEnergy Corporation and VeraSun Energy

 

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Corporation,and Aventine Renewable Energy, all of which are capable of producing moreethanol than Northern Lights.  In addition, there are numerous ethanolplants of a similar size to Northern Lights’ plant located in the Midwestregion. At least 16 new ethanol plants with a combined annual productioncapacity of over 700 million gallons are currently under construction andadditional plans to expand existing plants have been announced, which would increasethe ethanol production capacity of competitors.  In South Dakota,excluding Northern Lights, there are currently ten plants in full production.These ten plants, of which six are located within a 100-mile radius of Northern Lights’ plant, have a totalannual production capacity of 377 million gallons of ethanol.

 

The following table identifies most of the producersin the United States along with their production capacities.

 

**U.S.Ethanol Production Capacity**

(million gallons per year(mmgy)

 
| **COMPANY**                       | ** ** | **LOCATION**        | ** ** | **FEEDSTOCK** | ** ** | **Current  Capacity  (mmgy)** | ** ** | **Under Construction/  Expansions  (mmgy)** | ** ** |
|-----------------------------------|------------|---------------------|------------|---------------|------------|-------------------------------|------------|---------------------------------------------|------------|
| Abengoa Bioenergy Corp.           |       | York, NE            |       | Corn/milo     |       | 55                            |       |                                        |       |
|                              |       | Colwich, KS         |       |          |       | 25                            |       |                                        |       |
|                              |       | Portales, NM        |       |          |       | 15                            |       | 15                                          |       |
| ACE Ethanol, LLC                  |       | Stanley, WI         |       | Corn          |       | 30                            |       |                                        |       |
| Adkins Energy, LLC*               |       | Lena, IL            |       | Corn          |       | 40                            |       |                                        |       |
| AGP*                              |       | Hastings, NE        |       | Corn          |       | 52                            |       |                                        |       |
| Agra Resources Coop. d.b.a. EXOL* |       | Albert Lea, MN      |       | Corn          |       | 40                            |       |                                        |       |
| Agri-Energy, LLC*                 |       | Luverne, MN         |       | Corn          |       | 21                            |       |                                        |       |
| Alchem Ltd. LLLP                  |       | Grafton, ND         |       | Corn          |       | 10.5                          |       |                                        |       |
| Al-Corn Clean Fuel*               |       | Claremont, MN       |       | Corn          |       | 30                            |       |                                        |       |
| Amaizing Energy, LLC*^            |       | Denison, IA         |       | Corn          |       |                          |       | 40                                          |       |
| Archer Daniels Midland            |       | Decatur, IL         |       | Corn          |       | 1070                          |       |                                        |       |
|                              |       | Cedar Rapids, IA    |       | Corn          |       |                          |       |                                        |       |
|                              |       | Clinton, IA         |       | Corn          |       |                          |       |                                        |       |
|                              |       | Columbus, NE        |       | Corn          |       |                          |       |                                        |       |
|                              |       | Marshall, MN        |       | Corn          |       |                          |       |                                        |       |
|                              |       | Peoria, IL          |       | Corn          |       |                          |       |                                        |       |
|                              |       | Wallhalla, ND       |       | Corn/barley   |       |                          |       |                                        |       |
| Aventine Renewable Energy, Inc.   |       | Pekin, IL           |       | Corn          |       | 100                           |       |                                        |       |
|                              |       | Aurora, NE          |       | Corn          |       | 40                            |       |                                        |       |
| Badger State Ethanol, LLC*        |       | Monroe, WI          |       | Corn          |       | 48                            |       |                                        |       |
| Big River Resources, LLC*         |       | West Burlington, IA |       | Corn          |       | 40                            |       |                                        |       |
| Broin Enterprises, Inc.           |       | Scotland, SD        |       | Corn          |       | 9                             |       |                                        |       |

 

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| Bushmills Ethanol, Inc.*^            |   | Atwater, MN             |   | Corn              |   |   |   | 40     |   |
|--------------------------------------|--------|-------------------------|--------|-------------------|--------|--------|--------|--------|--------|
| Cargill, Inc.                        |   | Blair, NE               |   | Corn              |   | 85     |   |   |   |
|                                 |   | Eddyville, IA           |   | Corn              |   | 35     |   |   |   |
| Central Iowa Renewable Energy, LLC*^ |   | Goldfield, IA           |   | Corn              |   |   |   | 50     |   |
| Central MN Ethanol Coop*             |   | Little Falls, MN        |   | Corn              |   | 20.5   |   |   |   |
| Central Wisconsin Alcohol            |   | Plover, WI              |   | Seed corn         |   | 4      |   |   |   |
| Chief Ethanol                        |   | Hastings, NE            |   | Corn              |   | 62     |   |   |   |
| Chippewa Valley Ethanol Co.*         |   | Benson, MN              |   | Corn              |   | 45     |   |   |   |
| Commonwealth Agri-Energy, LLC*       |   | Hopkinsville, KY        |   | Corn              |   | 23     |   |   |   |
| Corn Plus, LLP*                      |   | Winnebago, MN           |   | Corn              |   | 44     |   |   |   |
| Dakota Ethanol, LLC*                 |   | Wentworth, SD           |   | Corn              |   | 50     |   |   |   |
| DENCO, LLC*                          |   | Morris, MN              |   | Corn              |   | 21.5   |   |   |   |
| East Kansas Agri-Energy, LLC*^       |   | Garnett, KS             |   | Corn              |   |   |   | 35     |   |
| ESE Alcohol Inc.                     |   | Leoti, KS               |   | Seed corn         |   | 1.5    |   |   |   |
| Ethanol2000, LLP*                    |   | Bingham Lake, MN        |   | Corn              |   | 30     |   |   |   |
| Glacial Lakes Energy, LLC*           |   | Watertown, SD           |   | Corn              |   | 50     |   |   |   |
| Golden Cheese Company of California* |   | Corona, CA              |   | Cheese whey       |   | 5      |   |   |   |
| Golden Grain Energy, LLC*            |   | Mason City, IA          |   | Corn              |   | 40     |   |   |   |
| Golden Triangle Energy, LLC*         |   | Craig, MO               |   | Corn              |   | 20     |   |   |   |
| Grain Processing Corp.               |   | Muscatine, IA           |   | Corn              |   | 20     |   |   |   |
| Granite Falls Energy, LLC^           |   | Granite Falls, MN       |   | Corn              |   |   |   | 45     |   |
| Great Plains Ethanol, LLC*           |   | Chancellor, SD          |   | Corn              |   | 50     |   |   |   |
| Hawkeye Renewables, LLC              |   | Iowa Falls, IA          |   | Corn              |   | 45     |   |   |   |
| Heartland Corn Products*             |   | Winthrop, MN            |   | Corn              |   | 36     |   |   |   |
| Heartland Grain Fuels, LP*           |   | Aberdeen, SD            |   | Corn              |   | 8      |   |   |   |
| Huron, SD                            |   | Corn                    |   | 14                |   |   |   |   |   |
| Husker Ag, LLC*                      |   | Plainview, NE           |   | Corn              |   | 24     |   |   |   |
| Iowa Ethanol, LLC*                   |   | Hanlontown, IA          |   | Corn              |   | 55     |   |   |   |
| Illinois River Energy, LLC^          |   | Rochelle, IL            |   | Corn              |   |   |   | 50     |   |
| James Valley Ethanol, LLC            |   | Groton, SD              |   | Corn              |   | 50     |   |   |   |
| KAAPA Ethanol, LLC*                  |   | Minden, NE              |   | Corn              |   | 40     |   |   |   |
| Land O’ Lakes*                  |   | Melrose, MN             |   | Cheese whey       |   | 2.6    |   |   |   |
| Lincolnland Agri-Energy, LLC*        |   | Palestine, IL           |   | Corn              |   | 40     |   |   |   |
| Lincolnway Energy, LLC*^             |   | Nevada, IA              |   | Corn              |   |   |   | 50     |   |
| Liquid Resources of Ohio^            |   | Medina, OH              |   | Waste Beverage    |   |   |   | 4      |   |
| Little Sioux Corn Processors, LP*    |   | Marcus, IA              |   | Corn              |   | 49     |   |   |   |
| Merrick/Coors                        |   | Golden, CO              |   | Waste beer        |   | 1.5    |   |   |   |
| Michigan Ethanol, LLC                |   | Caro, MI                |   | Corn              |   | 50     |   |   |   |
| MGP Ingredients, Inc.                |   | Pekin, IL  Atchison, KS |   | Corn/wheat starch |   | 78     |   |   |   |

 

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| Mid-Missouri Energy, Inc.*             |   | Malta Bend, MO     |   | Corn                  |   | 45     |   |   |   |
|----------------------------------------|--------|--------------------|--------|-----------------------|--------|--------|--------|--------|--------|
| Midwest Grain Processors*              |   | Lakota, IA         |   | Corn                  |   | 50     |   | 45     |   |
| Midwest Renewable Energy, LLC          |   | Sutherland, NE     |   | Corn                  |   | 15     |   |   |   |
| Miller Brewing Co.                     |   | Olympia, WA        |   | Brewery waste         |   | 0.7    |   |   |   |
| Minnesota Energy*                      |   | Buffalo Lake, MN   |   | Corn                  |   | 18     |   |   |   |
| New Energy Corp.                       |   | South Bend, IN     |   | Corn                  |   | 102    |   |   |   |
| Northeast Missouri Grain, LLC*         |   | Macon, MO          |   | Corn                  |   | 40     |   |   |   |
| Northern Lights Ethanol, LLC*          |   | Big Stone City, SD |   | Corn                  |   | 50     |   |   |   |
| Northstar Ethanol, LLC^                |   | Lake Crystal, MN   |   | Corn                  |   |   |   | 50     |   |
| Otter Creek Ethanol, LLC*              |   | Ashton, IA         |   | Corn                  |   | 55     |   |   |   |
| Panhandle Energies of Dumas, LP^       |   | Dumas, TX          |   | Corn/Grain Sorghum    |   |   |   | 30     |   |
| Parallel Products                      |   | Louisville, KY     |   | Beverage waste        |   | 5.4    |   |   |   |
|                                   |   | R. Cucamonga, CA   |   |                  |   |   |   |   |   |
| Permeate Refining                      |   | Hopkinton, IA      |   | Sugars & starches |   | 1.5    |   |   |   |
| Phoenix Biofuels^                      |   | Goshen, CA         |   | Corn                  |   |   |   | 25     |   |
| Pine Lake Corn Processors, LLC*^       |   | Steamboat Rock, IA |   | Corn                  |   |   |   | 20     |   |
| Platte Valley Fuel Ethanol, LLC        |   | Central City, NE   |   | Corn                  |   | 40     |   |   |   |
| Pro-Corn, LLC*                         |   | Preston, MN        |   | Corn                  |   | 40     |   |   |   |
| Quad-County Corn Processors*           |   | Galva, IA          |   | Corn                  |   | 23     |   |   |   |
| Reeve Agri-Energy                      |   | Garden City, KS    |   | Corn/milo             |   | 12     |   |   |   |
| Siouxland Energy & Livestock Coop* |   | Sioux Center, IA   |   | Corn                  |   | 22     |   |   |   |
| Sioux River Ethanol, LLC*              |   | Hudson, SD         |   | Corn                  |   | 55     |   |   |   |
| Tall Corn Ethanol, LLC*                |   | Coon Rapids, IA    |   | Corn                  |   | 49     |   |   |   |
| Tate & Lyle                        |   | Loudon, TN         |   | Corn                  |   | 67     |   |   |   |
| Trenton Agri Products, LLC             |   | Trenton, NE        |   | Corn                  |   | 30     |   |   |   |
| Tri-State Ethanol Co., LLC*            |   | Rosholt, SD        |   | Corn                  |   | 18     |   |   |   |
| United WI Grain Producers, LLC*^       |   | Friesland, WI      |   | Corn                  |   |   |   | 40     |   |
| U.S. Energy Partners, LLC              |   | Russell, KS        |   | Milo/wheat starch     |   | 40     |   |   |   |
| Utica Energy, LLC                      |   | Oshkosh, WI        |   | Corn                  |   | 48     |   |   |   |
| VeraSun Energy Corporation             |   | Aurora, SD         |   | Corn                  |   | 102    |   |   |   |

 

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| VeraSun Fort Dodge, LLC^                    |       | Ft. Dodge, IA  |   | Corn   |   |       |   | 110       |   |
|---------------------------------------------|------------|----------------|--------|--------|--------|------------|--------|-----------|--------|
| Voyager Ethanol, LLC*                       |       | Emmetsburg, IA |   | Corn   |   | 50         |   |      |   |
| Western Plains Energy, LLC*                 |       | Campus, KS     |   | Corn   |   | 30         |   |      |   |
| Western Wisconsin Renewable Energy, LLC*^   |       | Boyceville, WI |   | Corn   |   |       |   | 40        |   |
| Wyoming Ethanol                             |       | Torrington, WY |   | Corn   |   | 5          |   |      |   |
| ****Total Existing Capacity****             | ** ** | ** **     |   |   |   | **3738.7** |   |      |   |
| ****Total Under Construction/Expansions**** | ** ** | ** **     |   |   |   | ** ** |   | **689.0** |   |
| **Total  Capacity**                         | ** ** | ** **     |   |   |   | **4427.7** |   |      |   |

 

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* farmer-owned

^ under construction

Renewable Fuels Association

Last Updated: February 2005

 

As the demand for ethanol increases, Northern Lightsmay also have to compete with international ethanol producers, which may beable to produce and sell ethanol more inexpensively. Currently, the CarribeanBasin Initiative allows for ethanol produced in participating Carribean Basincountries to be imported into the United States duty free. Large ethanolproducers, such as Cargill, have recently expressed an interest in buildingplants in these countries. While the Carribean Basin Initiative caps the amountof duty free ethanol imported into the United States at 7% of the total UnitedStates’ production from the previous year, as total production in the UnitedStates grows, the amount of ethanol produced from the Carribean area and soldin the United States will also grow, which could impact the ability to sellethanol and the price at which it is sold.

 

Like many ethanol producers, Northern Lightscompetes with producers of MTBE.  MTBE isthe other oxygenate commonly used in fuels for compliance with the FederalClean Air Act mandates and is ethanol’s major competitor in the oxygenatemarket. Many major oil companies produce MTBE and, because it ispetroleum-based, its use is strongly supported by these companies. Thesecompanies have significantly greater resources than Northern Lights with whichto market MTBE, influence legislation, and influence public perception of MTBE. These companies also have sufficient resources to begin production of ethanolshould they choose to do so. While MTBE still remains a competitor, it has beenincreasingly the subject of serious environmental concerns, which has resultedin several states enacting laws prohibiting the use of MTBE as anoxygenate in fuels.  As more statescontinue to ban the use of MTBE, management believes that MTBE may become lesscompetitive with ethanol.

 

Alternative fuels, gasoline oxygenates, and ethanolproduction methods are continually under development by ethanol and oilcompanies with far greater resources than Northern Lights.  New productsor methods of ethanol production developed by larger, better-financedcompetitors could provide them with competitive advantages over Northern Lightsand harm its business.

 

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**Sources and Availability of Raw Materials**

 

**Corn**. The major raw material required to produceethanol and distiller’s grains is corn.  To operate at a name-plate capacityof 40 million gallons of ethanol annually, the plant requires approximately 16million bushels of corn annually.  Unless a corn delivery exemption hasbeen granted by the plant, our members are required to deliver corn to theplant on a trimester basis and receive payment for their corn based onindividually contracted prices, or an average of market prices at predeterminedelevators, plus a freight allowance.  Based on the total number of capitalunits outstanding, 6,328,500 bushels of corn are required to be deliveredannually by our members.  This represents 41% of the corn necessary forthe operation of the plant at name-plate capacity.  The balance ofNorthern Lights’ corn requirements is purchased on the open market from localproducers based upon a schedule of prices for current and future deliveryprepared by management.

 

Our members may apply on an annual basis to bereleased from the corn delivery requirement if a member historically has notproduced enough grain to meet the requirement; if a member does not produceenough grain to meet the requirement because the member’s grain is fed tolivestock; or, if a member produces and stores the majority of the member’sgrain more than 40 miles from the plant.  Northern Lights’ management hasthe sole discretion to determine whether or not to grant our members exemptionsfrom the corn delivery requirement.  As of December 31, 2004,approximately 31% of our members have been granted annual exemptions from thecorn delivery requirement. Any member’s corn exempted from delivery is replacedby corn purchased on the open market.

 

The plant’s location in Grant County, South Dakota,provides a sufficient supply of corn to meet the 16 million bushel requirementannually.  In 2003, approximately 6.7 million bushels of corn for grainwere produced in Grant County and 42.4 million bushels of corn were produced inthe nearby South Dakota counties of Codington, Day, Deuel, Hamlin, andRoberts.  Another 26.7 million bushels were produced in the nearby Minnesotacounties of Big Stone and Lac Qui Parle.

 

#### **Steam.**The production process at Northern Lights requiressteam.  Steam is used for the cooking, evaporation, and distillationprocesses.  While most ethanol plants are supplied steam from on-siteboilers that require natural gas as an energy source, Northern Lights receivesthe majority of its steam directly from the Big Stone Plant, a coal fired,electrical generating facility located immediately adjacent to the ethanolplant, co-owned by Otter Tail Corporation, Montana-Dakota Utilities andNorthWestern Public Service.  The steam sale agreement into which NorthernLights entered provides steam to the ethanol plant up to a maximum of 140million BTU’s per hour.  The agreement’s ten year term ends on June 1,2012, but automatically renews for two additional five-year terms

 

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#### **unless terminated by either party byproviding 12 months advance notice of such termination.  The Big StonePlant has provided Northern Lights with a consistent supply of steam to meetits requirements except during routine, semi-annual maintenance shutdowns atthe Big Stone Plant.**

 

**Natural Gas**. Theproduction process at Northern Lights requires natural gas.  Naturalgas is necessary to generate steam for the cooking, evaporation, anddistillation processes, as well as to facilitate the drying of distiller’sgrains. Northern Lights depends less on the use of on-site boilers to generatesteam because it receives the substantial majority of its steam requirementsfrom the adjacent Big Stone Plant.  In the event more steam is necessaryor the supply of steam from the Big Stone Plant is unexpectedly diminished orinterrupted, Northern Lights uses two on-site boilers to produce steam. Natural gas is the energy source for these boilers. Northern Lightscontracts with NorthWestern Public Service pursuant to which NorthWesterndistributes natural gas from NorthWestern’s natural gas pipeline to the ethanolplant.  The agreement with NorthWestern is for a term of ten years endingin 2012.  Since plant operations were commenced, there have been nomaterial interruptions or shortages in the supply of natural gas to the plant.

 

**Electricity**. Theproduction process at Northern Lights requires electricity.  Electricity is necessary for lighting andpowering much of the machinery and equipment at the plant. Northern Lights contracts with Otter TailPower Company to provide all the electric power and energy requirements for theethanol plant.  The agreement commenced at the start of plant operationsin 2002 under an initial one-year term. It automatically renews for additionalone-year terms unless terminated by 12 months advance written notice by eitherparty.  Since operations were commenced, there have been no interruptionsor shortages in the supply of electricity to the plant.

 

**Water**. Theproduction process at Northern Lights requires water.  Wateris necessary for the slurry and cooking processes, cooling towers and boileroperations.  Northern Lights contractswith the city of Big Stone City and Big Stone Plant to supply and meet itswater requirements for the production process.  The Big Stone Cityagreement is in effect until 2012, and automatically renews for two five-yearterms unless terminated by either party with 12 months advance writtennotice.  Since Northern Lights’ operations were commenced, the city of BigStone City and Big Stone Plant have provided an ample and consistent supply ofwater to meet its requirements.

 

**Dependence Upon a Single or Few Customers**

 

Northern Lights, as discussed above, issubstantially dependent upon Ethanol Products for the purchase, marketing anddistribution of ethanol. Ethanol Products purchases 100% of the ethanolproduced at the plant, all of which is marketed and distributed to itscustomers. Likewise, except for purchasing, Northern Lights is substantiallydependent upon Dakota Gold Marketing for the marketing and distribution ofdistiller’s grains.

 

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**Research and Development**

 

Northern Lights does not conduct any research anddevelopment activities associated with the development of new technologies foruse in producing ethanol and distiller’s grains. Instead, Northern Lightsrelies on Broin Management, LLC and Broin and Associates, Inc. to research anddevelop new technology, as these Broin entities devote significant resourcesand efforts to improving the technology associated with product development andthe production process. Broin may offer new technology to Northern Lightsthrough new license or similar agreements, all of which must be negotiated.Currently, Northern Lights and Broin operate under a license agreement enteredin 2001, relating to technology installed at the time of construction of theplant. Under this agreement, Broin licenses to Northern Lights, for a flat fee,its proprietary technology for the operation of the ethanol plant for so longas the plant exists. Broin’s technology consists of Broin’s rights, patents,copyrights, trade secrets, formulas, research data, processes, know-how, andspecifications related to Broin’s design, construction and operation of theplant. If either Northern Lights or Broin breaches the terms of the agreement,the non-breaching party may exercise any remedies available to it, includingspecific performance and requesting injunctive relief.

 

**Government Regulation**

 

Various federal and state laws, regulations,and programs have led to an increasing use of ethanol in fuel, includingsubsidies, tax credits and other forms of financial incentives.  Some ofthese laws provide economic incentives to produce ethanol and others mandatethe use of ethanol.  Congress currently provides certain federal taxincentives for oxygenated fuel producers and marketers, including those whopurchase ethanol to blend with gasoline in order to meet federally mandatedoxygenated fuel requirements.

 

Ethanol sales have been favorably affected bythe Clean Air Act Amendments of 1990, particularly the Federal Oxygen Program,which became effective November 1, 1992. The Federal Oxygen Program requires the sale of oxygenated motor fuelsduring the fall and winter months in certain major metropolitan areas to reducecarbon monoxide pollution. Ethanol use also has increased due to a second CleanAir Act program, the Reformulated Gasoline Program. This program becameeffective January 1, 1995, and requires the sale of reformulated gasolinein certain major urban areas to reduce pollutants, including those thatcontribute to ground level ozone, better known as smog.

 

Furthermore, the use of ethanol as an oxygenate to blend with fuel to comply with federal mandates has been aided by federal tax policy.  Prior to the enactment of the American Jobs Creation Act of 2004, the Energy Tax Act of 1978 exempted ethanol blended gasoline from the federal gas tax as a means of stimulating the development of a domestic ethanol industry and mitigating the United States’ dependence on foreign oil. The exemption allowed ethanol to be sold by blenders at prices that were competitive with other less expensive additives and gasoline. Equivalent to providing a per gallon “equalization” payment, the exemption allowed blenders to pay more for ethanol than the wholesale price of gasoline and still retain the same profit margins. Blenders could claim

 

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an exemption of $0.052 per gallon from the excise tax of $0.184 per gallon for a 10% ethanol blend, with lower exemption amounts available for a 7.7% and 5.7% ethanol blend.

 

The American Jobs Creation Act of 2004amended the federal excise tax structure by implementing the Volumetric EthanolExcise Tax Credit (“VEETC”).  VEETCeliminates the existing ethanol tax exemption and replaces it with a new excisetax credit of $0.051 per gallon of ethanol. Rather than basingthe credit on an ethanol blend percentage, the credit is allowed for anypercentage blend of ethanol, which effectively gives the blender greaterflexibility to blend as much or as little ethanol to meet its octane or volumeneeds. VEETC remains in effect until 2010.

 

Additionally, Congress provides an ethanolproduction incentive to ethanol producers through the United States Departmentof Agriculture Commodity Credit Corporation’s Bioenergy Program.  Underthe program, which is scheduled to expire on September 30, 2007, incentivepayments are allocated to ethanol producers based primarily on an increase ingallons of ethanol produced compared to the prior year’s production. Because a plant typically experiences the highest increase in production duringthe first year of operations compared to the prior year’s, a plant of NorthernLights’ size is usually allocated the maximum payment during the first year ofproduction. During Northern Lights’ first year of production in the 2003 programyear (October 1, 2002 through September 30, 2003), Northern Lightsreceived the maximum payment of $7.5 million. Since this time, Northern Lights’payments have been reduced to only a nominal amount. Management does not expectto receive any increase in revenue under the program in 2005 because asignificant increase in production at the plant from 2004 is not expected, andCongress has reduced funding for the program in 2005 from $150 million to $100million.

 

The state of South Dakota provides an incentiveproduction payment to ethanol producers operating in South Dakota.  Theproduction incentive consists of a direct payment to South Dakota ethanolproducers of up to $.20 per gallon, which is divided among producers of fuelethanol within South Dakota up to a maximum of $1 million per year per plant (amaximum of $83,333 per month in 2004) and a maximum of $10 million over thelife of a plant.  The program, however, caps the payments that can bedistributed to South Dakota plants in a program year to no more than $6 millionin payments in 2005 (ending June 30, 2005) and no more than $7 million inpayments in the 2006 program year. The payments are distributed to each plantin proportion to the total number of gallons ofethanol produced and marketed annually by allthe plants in South Dakota.  Thus, as more plants commence production, orexisting plants increase production, each plant may receive a lowerproportionate share of the maximum payment under the program. Due to anincrease in claims made for payment from new and existing plants during the2004 program year, funds from this program were depleted in full midway throughthe 2004 program year. It is uncertain whether the funds under the program willbe depleted before the end of the 2005 and 2006 program years, much of which isdependent upon existing plant production during these periods.

 

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We expect that the 109th Congress will reintroduce legislation in 2005 calling for a Renewable Fuels Standard.  In 2004, both the United States Senate and House of Representatives considered legislation that would determine the specific volume of ethanol to be used in gasoline on a nationwide basis. The bills debated in Congress, which failed to pass, anticipated that the ethanol volume requirement nationwide would begin at 2.3 billion gallons and grow at a rate of approximately 300 million gallons per year to a volume of 5 billion gallons by 2012. If similar legislation is introduced and signed into law in 2005, the long-term market for ethanol is expected to grow at a rate at least equal to this schedule.

 

On March 11, 2005, legislation (SB 610) wasintroduced in the United States Senate to amend the small producer taxcredit.  This bill, if enacted into law,would make available the existing federal small producer tax credit to anyethanol plant capable of producing up to 60 million gallons of ethanol on anannual basis, including Northern Lights. Currently, the small producer tax credit is only available for plantswith 30 million gallons or less of annual capacity, which precludes NorthernLights’ plant from eligibility.  Thefederal small producer tax credit allows eligible ethanol plants to deduct fromtheir federal income tax $0.10 per gallon on the first 15 million gallonsproduced annually at the plant.  Thesmall producer tax credit is scheduled to expire on December 31, 2010.

 

The revocation, amendment, or non-renewal of any oneor more of these laws, regulations or programs, or a lack of funding under theprograms, could adversely affect the future use of ethanol and operations in amaterial way.  Any material reduction of the use of ethanol would have anadverse effect on the plant’s profitability and viability.

 

**Environmental Regulation**

 

Northern Lights’ is subject to extensive environmental regulationat the federal and state levels. The federal environmental regulationswith which the plant must comply were promulgated by the United StatesEnvironmental Protection Agency pursuant to the federal Clean Air Act. Thestate environmental regulations with which the plant must comply werepromulgated by the South Dakota Department of Environment and NaturalResources. The Environmental Protection Agency and the South Dakota Departmentof Environment and Natural Resources regulate the air quality at plant, inparticular the emissions from the plant into the air. The Department ofEnvironment and Natural Resources also regulates water collection anddischarge. In addition to its own enforcement authority under this law, theEnvironmental Protection Agency has delegated permitting and enforcementauthority to the Department of Environment and Natural Resources.  The plant requires the following permits tooperate:

 

•Northern Lights has a Title Five Operating Permit from the South DakotaDepartment of Environment and Natural Resources. In South Dakota, the TitleFive Operating Permit serves as the air quality and operation permit for theethanol plant. Northern Lights must conduct ongoing emissions testing to verify

 

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compliance with the TitleFive Operating Permit. The permit is due for renewal in 2006.

 

• NorthernLights has a Bureau of Alcohol, Tobaccoand Fuel Permit from the Department of Treasury. Northern Lights is required toobtain this permit because of the alcohol content of ethanol. The permit is duefor annual renewal.

 

• NorthernLights has a Surface Water DischargePermit from the South Dakota Department of Environment and Natural Resources.The Surface Water Discharge Permit regulates the terms of any storm waterdischarges associated with industrial activity. The permit requires NorthernLights to provide ongoing compliance reports to the South Dakota Department ofEnvironment and Natural Resources. This permit is due for renewal in 2008.

 

While Northern Lights is currently in compliancewith all applicable environmental laws, regulations and permits, NorthernLights will need to continue to comply with the permits and regulatoryrequirements. To accomplish this end, Northern Lights maintains an on-goingprogram to ensure compliance with such requirements. Maintaining compliance mayrequire Northern Lights to incur expenditures for such things as new orupgraded equipment or processes, some of which could be material and costly.Because management believes the plant is currently complying with existing lawsand permits, it does not anticipate in 2005 making any significant capitalexpenditures toward new or upgraded equipment or processes as it relates toemissions. However, if the Environmental Protection Agency and Broin andAssociates cannot amicably resolve the application of the appropriate emissionstesting method, as discussed below under “Legal Proceedings,” materialexpenditures could be required.

 

**Management and Employees**

 

Broin Management, LLC, a Broin affiliate, managesthe day-to-day operations of the ethanol plant, under a management agreementwith Northern Lights. Under the management agreement, Northern Lights paysBroin Management a fixed annual fee and an incentive bonus based on annual netincome.  Northern Lights also pays certain expenses incurred with respectto the operation of the plant while other expenses, including, but not limitedto, the provision of a full-time technical manager and general manager, areincluded as part of Broin Management’s fees.  The agreement is in effectuntil July 1, 2005 and automatically renews for an additional three-yearterm unless either party provides a 90-day advance written notice oftermination. Northern Lights may only terminate Broin Management “forcause,” which is defined in the agreement as illegal or unethical conduct, orfailure or refusal to perform under the management agreement. Negotiationsbetween Northern Lights and Broin Management on a new management agreement arecurrently being conducted, although there are no assurances that one willresult before July 1, 2005.

 

Mr. Blaine Gomer, Northern Lights’ general manager,is a Broin employee.  Mr. Gomer oversees and is responsible for operationsand production at the plant on a day-to-day 

 

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basis. The general manager is a full-time, on-site position, but Mr. Gomer is anemployee of Broin Management, LLC.  For Mr. Gomer’s biographical information,see “Item 10–Directors and Executive Officers of the Registrant.”

 

As of March 1, 2005, Northern Lights employed39 employees, including a commodities manager, a commodities supervisor, anoperations manager, a maintenance manager, a microbiologist, a chief mechanicaloperator, a controller, plant operators, maintenance technicians, grainsassistants, accountants, and an administrative assistant.  This does notinclude Mr. Gomer and the technical manager who are both employees of BroinManagement.

 

**Item 2.  Properties.**

 

The plant is located immediately adjacent to the BigStone Plant near the city of Big Stone City in Grant County, SouthDakota.  The land on which the plant is located is leased from BigStone-Grant Industrial Development and Transportation, LLC, which is owned byOtter Tail Power Company, Montana-Dakota Utilities, and NorthWestern PublicService.  The term of the lease is for 99 years.  The rent is $2,400per year until December 31, 2005, at which time, starting on January 1,2006, the rent is increased by 5% from the immediately preceding five-yearperiod.  In addition, the plant site is served by multiple state highways,is near Interstate Highway 29, and has rail facilities and connections to theBurlington-Northern-Santa Fe Railroad system to facilitate transporting theethanol and distiller’s grains produced at the plant to national and regionalmarkets.  All of Northern Lights’ tangible and intangible property,including its leasehold interest, easement rights, improvements, equipment,personal property, and contracts, serve as the collateral for the debtfinancing with US Bank National Association, of Sioux Falls, South Dakota,which is described below under “Item 7–Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Indebtedness.”

 

**Item 3.  Legal Proceedings.**

 

From time to time in the ordinary course ofbusiness, Northern Lights or we may be named as a defendant in legalproceedings related to various issues, including without limitation, workers’compensation claims, tort claims, or contractual disputes. Except as describedbelow, Northern Lights or we are not currently involved in any material legalproceedings, directly or indirectly, and we are not aware of any potentialclaims.

 

In the last two years, both the United StatesEnvironmental Protection Agency and the State of South Dakota Department ofEnvironment and Natural Resources have placed increased scrutiny on ethanolplants for compliance with air quality laws and regulations. In 2002, a numberof ethanol plants in Minnesota entered into consent decree settlements with theState of Minnesota and the Environmental Protection Agency arising from allegedemission violations.  Civil penalties were assessed against each ethanolplant, additional emissions devices were required, new testing protocols wereestablished and air quality permits were modified by the settlementagreements.  The Environmental

 

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ProtectionAgency subsequently stated that it intends to “level the playing field,”inferring actions against other ethanol producers.

 

On January 6, 2003, the EnvironmentalProtection Agency issued formal information requests to many ethanol plants,including those designed, constructed, and/or managed by Broin and Associatesand Broin Management, including Northern Lights. The requests requiredthat the subject ethanol plants provide the Environmental Protection Agencywith certain emissions data, presumably to determine whether the plants were incompliance with the Clean Air Act. Since these requests, Broin and Associateshas been holding on-going discussions with the Environmental Protection Agencyregarding the application and use of testing methods for quantifying certainemissions at the plants managed by Broin. To date, no action has been taken norhas any final resolution been made regarding this matter. It is also uncertainwhether the Environmental Protection Agency will take any action with respectto its formal information requests, or what the result or effect will be onNorthern Lights of the on-going discussions between Broin and the EnvironmentalProtection Agency.  Fines and/or other penalties could result.

 

In late 2002, the South Dakota Department ofEnvironment and Natural Resources began requiring that new ethanol plants inSouth Dakota include a new method for quantifying emissions from theplants.  The new method is commonly referred to as the Midwest ScalingMethod or the “multiplier.”  When the multiplier is used, emission testresults are generally higherthan when traditional test measures are employed. In 2003, theDepartment of Environment and Natural Resources, applying the multiplier in itsemissions calculations, informed Northern Lights that it may have exceeded itsemission limits in its Title V Air Quality Operating Permit, despite themultiplier not being required in Northern Lights’ Title V Air Quality OperatingPermit.  No formal action, however, wasever taken against Northern Lights by the Department of Environment and Natural Resources.

 

On December 29, 2003, Northern Lights, fiveother ethanol plants in South Dakota, and Broin Management filed a petition fora declaratory judgment before the South Dakota Board of Minerals andEnvironment.  The petition requested thatthe Board of Minerals and Environment bar the Department of Environmentand Natural Resources from using and applying the multiplier in quantifyingemissions because its use was inappropriate and unlawful.  Northern Lightsand the other plants contended that neither South Dakota nor federalregulations require or permit the use of the multiplier. On June 16, 2004,following an administrative hearing, the Board of Minerals and Environmentruled that the multiplier was not contained in state or federal emission testmethods or regulations. The effect of this ruling, if final, is that theDepartment of Environment and Natural Resources cannot use or require the useof the multiplier in measuring emissions from Northern Lights’ plant.

 

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**Item 4.  Submission of Matters to a Vote ofSecurity Holders.**

 

We did not submit any matter to a vote of oursecurity holders through the solicitation of proxies or otherwise during thefourth quarter of 2004.

 

### **PART II**

### ** **

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

 

Thereis no public trading market for our capital units.  Capital units must betransferred in accordance with our Capital Units Transfer System.  TheCapital Units Transfer System provides for transfers by gift to family members,upon death, and through a qualified matching service, subject to our board ofmanagers’ approval.  Since March 8, 2004, the qualified matchingservice has been operated through Alerus Securities Corporation, a registeredbroker-dealer based in Grand Forks, North Dakota, which operates a registeredAlternative Trading System with the Securities and Exchange Commission. Asof March 1, 2005, we had 649 members.  The following tablecontains historical information by trimester for the past year of our capitalunits since the qualified matching service commenced:

 
| **Trimester***              | ** ** | **Low Price** | ** ** | **High Price** | ** ** | **Average Price** | ** ** | **# of Shares/Capital  Units Traded** | ** ** |
|-----------------------------|------------|---------------|------------|----------------|------------|-------------------|------------|---------------------------------------|------------|
|                        |       |          |       |           |       |              |       |                                  |       |
| March-April 2004       |       | $0.00         |       | $0.00          |       | $0.00             |       | 0                                     |       |
| May – Aug 2004         |       | $3.50         |       | $4.00          |       | $3.67             |       | 24,000                                |       |
| August – Dec 2004 |       | $3.75         |       | $3.85          |       | $3.79             |       | 90,000                                |       |

 

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* Transfer of ownership of all capital units occurson the first day of the trimester immediately following the trimester(s) inwhich the trade occurs between buyer and seller or the subsequent trimester,depending upon the day of the trade during the trimester. Trimesters begin on January 1,May 1 and September 1, except for the first trimester in 2004 which beganon March 8, 2004.

 

Under the terms of our Operating Agreement, we are required to makeannual (or more frequent) distributions to our members and may not retain morethan $200,000 of net cash from operations, unless (i) a super majority of ourboard of managers (75%) decides otherwise, (ii) it would violate or cause adefault under the terms of any debt financing or other credit facilities, or(iii) it is otherwise prohibited by law. Our ability to make distributions tomembers, however, is dependent upon the distributions made by Northern Lights.Under its loan agreement with US Bank, Northern Lights is restricted frommaking distributions to us by a covenant. The covenant limits the distributionsin any given year not to exceed 70% of net income, although distributions maybe made up to 80% of net income if working capital is equal to or exceeds $3million. For further details of this loan, please see “Item 7, Management’s Discussion andAnalysis of Financial Conditions and Results of Operations—Indebtness.”

 

In 2003, Northern Lights made cashdistributions to us of approximately $4.05 million and $1.2 million to theminority member of Northern Lights.  We, in turn, distributed to ourmembers approximately $3.65 million, or $0.57 per capital unit.

 

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In 2004, Northern Lights made cash distributions tous of approximately $3.86 million and $1.14 million to the minority member ofNorthern Lights.  We, in turn, distributed to our members approximately$3.56 million, or $0.56 per capital unit.

 

If Northern Lights continues to operate profitablyas it did in 2004 and 2003, we expect to make similar distributions in 2005.

 

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

 

The following table sets forth selected financialdata of Northern Growers, LLC and our predecessor cooperative for the periodsindicated. The audited financial statements included in Item 8 of this reporthave been audited by our independent auditors, Eide Bailly LLP.

 
| ** **                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002 (1)** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|--------------|------------|
| **Statement  of Operations Data:**            |       |     |       |     |       |         |       |
| Revenue                                       |       | $        | 86,587,585 |     | $          | 70,857,262   |       | $ | 32,756,935 |   |
| Cost of Revenues                              |       | $        | 72,729,131 |     | $          | 58,920,917   |       | $ | 24,674,714 |   |
| Gross Profit                                  |       | $        | 13,858,454 |     | $          | 11,936,345   |       | $ | 8,082,221 |   |
| General and Administrative Expense            |       | $        | 2,984,238  |     | $          | 2,739,136    |       | $ | 1,352,524 |   |
| Income from Operations                        |       | $        | 10,874,216 |     | $          | 9,197,209    |       | $ | 6,072,565 |   |
| Interest Expense                              |       | $        | 1,500,438  |     | $          | 1,847,108    |       | $ | 963,714 |   |
| Settlement Income                             |       | $        | 1,449,248  |     | $          | 0            |       | $ | 0 |   |
| Other Income                                  |       | $        | 65,551     |     | $          | 23,244       |       | $ | 618 |   |
| Minority Interest in Subsidiary Income        |       | $        | (2,528,026 | )        | $          | (1,770,430   | )          | $ | (1,229,452 | ) |
| Net Income                                    |       | $        | 8,371,332  |     | $          | 5,611,068    |       | $ | 3,880,017 |   |
| Capital Units Outstanding                     |       | $        | 6,328,500  |     | $          | 6,328,500    |       | $ | 6,328,450 |   |
| Net Income per Capital Unit                   |       | $        | 1.32       |     | $          | 0.89         |       | $ | 0.61 |   |
| Cash Distributions declared per Capital  Unit |       | $        | 0.95       |     | $          | 0.79         |       | $ | 0.00 |   |
|                                          |       |     |       |     |       |         |       |
| **Balance  Sheet Data:**                      |       |     |       |     |       |         |       |
| Working Capital                               |       | $        | 560,046    |     | $          | 194,176      |       | $ | 5,718,766 |   |
| Net Property, Plant & Equipment           |       | $        | 40,885,963 |     | $          | 41,735,733   |       | $ | 43,016,408 |   |
| Total Assets                                  |       | $        | 54,678,507 |     | $          | 53,786,201   |       | $ | 59,031,879 |   |
| Long-Term Obligations                         |       | $        | 16,387,498 |     | $          | 20,053,377   |       | $ | 27,858,349 |   |
| Minority Interest                             |       | $        | 5,715,325  |     | $          | 5,014,499    |       | $ | 4,899,960 |   |
| Members Equity                                |       | $        | 19,446,001 |     | $          | 17,067,695   |       | $ | 16,280,448 |   |
| Book Value per Capital Unit                   |       | $        | 3.07       |     | $          | 2.70         |       | $ | 2.57 |   |

 

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(1)                                  The year 2002 represents only a partial year ofoperations, as the ethanol plant commenced production in late June 2002 .The financial information in the table also includes audited financial data ofour predecessor cooperative prior to the effectiveness of the reorganizationinto a limited liability company on April 1, 2003.

 

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

 

**CAUTIONARYSTATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

You should read the following discussion along withthe audited financial statements and notes to the audited financial statementsincluded elsewhere in this report.  This report contains forward-lookingstatements, including, but not limited to, those under “Management’s Discussionand Analysis-Results of Operations,” and “Liquidity and Capital Resources,”involving future events, future business and other conditions, our futureperformance, and expected operations.  These statements are based onmanagement’s beliefs and expectations and on information currently available tomanagement.  Forward-looking statements may include statements which usewords such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,”“hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or thenegatives of these words, and all similar expressions.

 

Forward-looking statements involve numerousassumptions, risks and uncertainties.  Northern Lights’ actual results oractual business or other conditions may differ materially from thosecontemplated by any forward-looking statements.  While we believe thatthese statements are accurate, this business is dependent upon general economicconditions and various conditions specific to the industry and future trendsand these factors could cause actual results to differ materially from theforward looking statements that have been made.  In particular,

 

•                  Although management expects demand forethanol to increase, demand is largely driven by federal and state regulations,which are often subject to change.

 

•                  Any lowering of gasoline prices will likelyalso lead to lower prices for ethanol and adversely affect Northern Lights’operating results.

 

•                  Theethanol industry and Northern Lights’ business are sensitive to corn andnatural gas prices.  When corn andnatural gas prices increase Northern Lights’ operating results may suffer. When corn andnatural gas prices fluctuate significantly, Northern Lights’ cost of revenuesand its operating results may be adversely affected by the use of derivativeinstruments under its risk management program.

 

•                  The ethanol industry and Northern Lights’operating income may be adversely impacted by a decrease in or terminationof government subsidies andother forms of financial incentives; a termination of governmentenvironmental and tax policies that encourage the production and use of ethanol;or, the prevention of new government policies and programs that encourage theuse of ethanol.

 

•                  The ethanolindustry is increasingly competitive, with additional plants in operation,under construction, or in the planning stages. With additional plants

 

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coming on line, the supply of ethanol will increase, which, if thedemand does not grow accordingly or is unaided by government policies andprograms, could adversely impact the price of ethanol and Northern Lights’operating results.

 

•                  Theethanol industry and Northern Lights may be subject to additional regulation,such as environmental restrictions, or regulatory action, which could includefines, penalties, or injunctive relief as a result of any potential excessiveemissions, which could result in an increase in costs and capital expenditures.

 

•                  Northern Lights is dependent upon BroinManagement, LLC to manage the day-to-day activities of the plant, and uponBroin-related entities to purchase and market the ethanol and distiller’sgrains produced at the plant, and for risk management services.  If any of these entities ceaseproviding services to Northern Lights, the plant’s operations will be adverselyaffected. Northern Lights is currently negotiating with Broin Management on anew management agreement, but there are no assurances that one will result.

 

We are not under any duty to update theforward-looking statements contained in this report.  We cannot guaranteefuture results or performance or what future business conditions willbe like.  We caution you not to putundue reliance on any forward-looking statements, which speak only as of thedate of this report.

 

**Overview**

 

Northern Lights is engaged in the production of fuel-grade ethanol anddistillers grains.  Corn is supplied toNorthern Lights’ plant from our members who are primarily localagricultural producers, and from purchases of corn on the open market. Afterprocessing the corn, ethanol is sold to Ethanol Products, LLC, a Broinaffiliate, which subsequently markets and sells the ethanol to gasolineblenders and refineries located throughout the continental United States.  The price that Northern Lights receives fromthe sale of ethanol to Ethanol Products is based upon the price that EthanolProducts receives from the sale to its customers, minus a fee. Distiller’sgrains are sold through Dakota Gold Marketing, another Broin affiliate, whichmarkets and sells the product to local livestock feeders.

 

Northern Lights’ operating income or loss is significantly tied to theprice at which ethanol and distiller’s grains are sold. Historically, the priceof ethanol tends to fluctuate in the same direction as the price of unleadedgasoline and other petroleum products. Surplus ethanol supplies also tend toput downward price pressure on ethanol. In contrast, the price of distiller’s grains tends to fluctuate based onthe price of substitute livestock feed, such as corn and soybean meal. Surplusgrain supplies also tend to put downward price pressure on distiller’s grains.

 

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Northern Lights Ethanol’s cost of revenues,which includes production expenses, is significantly affected by the cost ofcorn, natural gas and steam. In 2004, for instance, the cost of corn wasapproximately 64% of cost of revenues, whereas the cost of natural gas andsteam was approximately 11% of cost of revenues. Comparatively, in 2003, thecost of corn was approximately 58% of cost of revenues, while the cost ofnatural gas and steam was approximately 13% of cost of revenues.   The cost of corn is affected primarily bysupply and demand factors such as crop production, world carryout, exports,risk management and weather, much of which Northern Lights has no control.Natural gas prices generally fluctuate with the energy complex. Over the lastfew years, natural gas prices have been higher than historical averages, withmanagement expecting this trend to continue due to higher prices for crude oiland other alternative fuels.

 

The2004 year started with very strong earnings, only to see earnings fall in themiddle of the year, followed by a strong earnings recovery at the end of theyear. The principal cause for these fluctuations was the price volatility ofcorn, which proved to be significantly greater than in 2003. Earnings fellduring the spring when corn prices increased to near record highs. Fears of awet spring and a decrease in corn production were the principal causes for theincrease, although Northern Lights’ risk management program mitigated some ofthe increase. As the year progressed through the summer and early fall, cornprices actually declined due to a forecasted record corn crop. Unfortunately,when prices declined during this period, risk management had an adverse impacton cost of revenues and, therefore, earnings. During the fourth quarter, however, with a return of extremely low andstable prices for corn and a continuation of higher prices for ethanol,earnings made a full recovery.

 

While 2004 was marked by significant pricevolatility of corn, it was also marked by several positives. Earnings atNorthern Lights increased by approximately $2.7 million from 2003 due to strongethanol sales and a $1.4 million credit received from the Big Stone Plant.Further, total ethanol production at the plant increased due to additionalimprovements made to the plant. Total production was 47.4 million gallons in2004, compared to 43.6 million gallons in 2003 and, for the first six months ofproduction, 20.5 million gallons in 2002.

 

Management’s outlook for 2005 is relatively positive. The first quarterbegan with relatively high ethanol prices and stable and low corn costs, whichwe expect to continue going into the second quarter and positively impactearnings during these quarters. There is less certainty, however, aboutearnings potential during the last two quarters.  As spring approaches, price volatility ofcorn may return to the markets, particularly in anticipation of a new corncrop. Unless there is a plentiful corn crop in 2005, like in 2004, the price ofcorn may increase and lead to an increase in production costs. Further, unlessdemand for ethanol continues to increase and new markets for ethanol open upthrough passage of a federal Renewable Fuels Standard bill or other means, theprice of ethanol may be adversely impacted by a potential surplus of ethanol.Approximately 700 million new gallons of ethanol are slated to enter the marketby the end of 2005, some of which may not be absorbed unless new markets in theUnited States are developed. If ethanol prices do decrease, Northern Lights’earnings may suffer.

 

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#### **Results ofOperations**

####  

Northern Lights started operations on July 5,2002 and began operating at full name-plate capacity in August, 2002. Accordingly, there is no comparable income and sales data for the year ended December 31,2002.

 

**Comparison of years ended December 31,2004 and December 31, 2003.**

 
| ** **              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **              | ** ** | **$**                            | ** ** | **%  of  Revenue** | ** ** | **$** | ** ** | **%  of  Revenue** | ** ** |
| Revenue:                |       |                             |       |   |   |   |   |   |   |
| Ethanol                 |       | $                                | 68,501,969 |   | 79% |   | $ | 51,913,676 |   | 73% |   |
| Distiller’s Grains |       | $                                | 16,486,472 |   | 19% |   | $ | 13,643,646 |   | 19% |   |
| Incentive               |       | $                                | 1,599,144  |   | 2% |   | $ | 5,299,940 |   | 7% |   |
| Total                   |       | $                                | 86,587,585 |   | 100% |   | $ | 70,857,262 |   | 100% |   |

 

*Revenues*-Revenue increased $15.7, or 22%, to $86.6 million for the yearended December 31, 2004 from $70.9 million for the year ended December 31,2003. Total revenues increasedprimarily because of an increase in ethanol revenue.

 

Revenuefrom the sale of ethanol increased 32% from the year ended December 31,2003 to the year ended December 30, 2004.  The increase was dueprimarily to a 24% increase in the average sales price per gallon of ethanolalong with a 7% increase in the volume of ethanol sold.  The price increase was mainly attributable tohigher prices of unleaded gasoline and a strong demand for ethanol.  The increase in volume sold was facilitatedby an increase in production volumes, caused principally from an improvement inplant efficiencies.

 

Revenue from the sale of distiller’s grains increased approximately 21%from the year ended December 31, 2003 to the year ended December 31,2004. The increase was due primarily to a 17% increase in the volume of distiller’sgrains sold, resulting from an increase in production at the plant.

 

Total incentive revenues from federal and stategovernment incentive programs decreased by 70% from the year ended December 31,2003 to the year ended December 31, 2004. Incentive revenue consists ofincome received from federal and state governments in connection with NorthernLights’ ethanol production. The incentive revenue from the United StatesDepartment of Agriculture’s Commodity Credit Corporation Bioenergy Programdecreased $3.2 million, or 77% to $900,000 for the year ended December 31,2004 from $4.1 million for the year ended 2003. Thedecrease was due primarily to how the payments are structured and madeunder the program. Payments are based principally on the increase in gallons ofethanol produced compared to the prior year’s production. Because 2002 wasNorthern Lights’ first year of production, the plant had the largest increasein production from the prior year. Between 2004 and 2003, the

 

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plant had a far smaller increase in production which, accordingly, ledto less incentive revenue being earned. Management anticipates receivingless under this program in 2005 compared to 2004 because the plant is notexpected to experience a significant increase in production from last year tojustify an increase in payment,and Congress has reduced funding for the program from $150 million to$100 million in 2005.

 

Incentive revenue from the state of SouthDakota incentive program decreased $518,000, or 44%, to $667,000 from the yearended December 31, 2003 to the year ended December 31, 2004. The decrease was due to an earlierthan anticipated depletion of funds allocated to the program in the 2004program year (July 1, 2003 to June 30, 2004). While funds allocatedto this program have increased in the 2005 program year and are expected toincrease in the 2006 program year, it is uncertain whether the fundsallocated to this program will be depleted before the end of these program years,much of which is dependent upon theproduction levels of all plants operating in South Dakota during these periods.

 

*Cost of Revenues*-Costof revenues increased $13.8 million, or 23%, to $72.7 million for the yearended December 31, 2004 from $58.9 million for the year ended December 31,2003. The increase inthe cost of revenues resulted primarily from a 22% increase in the overall costof corn. The increase in the cost of corn was caused by an approximately 11%increase in the market price of corn per bushel from the year ended December 31,2003 to the year ended December 31, 2004 and the risk management programin 2004.

 

In terms ofrisk management in 2004, the use of corn derivative instruments relative to theprice fluctuation of corn in 2004 was a contributing factor for the increase incost of corn. Gains and losses that result from a change in value of corn andnatural gas derivative instruments are recognized in cost of revenues as thechanges occur. For the year ended December 31, 2004, cost of revenuesincludes losses of $3.5 million from the use of corn derivative instruments, upfrom a $100,000 gain in 2003. These losses were caused by the fluctuations inthe price of corn in 2004. At the end of 2003, Northern Lights increased itsuse of corn derivative instruments and positions to protect against the marketprice forecasts for corn. Those forecasts predicted higher prices for cornbecause of low world carryout prior to the growing season, decreasedproduction, and drought. As the year progressed, however, and it becameapparent that corn production would be much higher than expected, the originalmarket forecasts proved incorrect and the market price of corn actuallydeclined. When the market price declined, the value of the corn derivative instrumentsfell which led to an increase in cost of revenues.

 

At least forthe first half of 2005, management does not anticipate the same or similarimpact on cost of revenues from the risk management program. Because of therecord corn crop in 2004 and higher than anticipated world corn carryout, themarket conditions for corn are expected to be positive, namely lower prices forcorn and less price volatility. For the second half of 2005, however, whilemanagement believes the market will remain positive, conditions could alter thestability of the market and use of 

 

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derivativeinstruments, thus increasing the potential for losses under the risk managementprogram.

 

*General and Administrative Expenses*-Generaland administrative expenses increased $250,000, or 9%,**to $2.98 million for the year ended December 31,2004 from $2.73 million for the year ended 2003.  The increase in general and administrativeexpenses was primarily the result of increased management fees and employeeprofit-sharing costs during the year, which are both based on the increasedprofitability of Northern Lights.

 

*Interest Expense-*Interestexpense decreased $350,000, or 19%, to $1.5 million for the year ended December 31,2004 from $1.85 million for the year ended 2003.  The decrease in interest expense wasprimarily due to a $3.7 million reduction in outstanding debt from December 31,2003 to December 31, 2004.

 

*Settlement Income*-In November 2004, Big StonePlant, the plant which supplies steam to the ethanol plant, issued to NorthernLights a $1.4 million credit. The credit was issued after Big Stone Plantacknowledged that a metering instrument it owned and controlled had mistakenlyreported an excess amount of steam being transferred to Northern Lights in 2003and 2004. As a result, Big Stone Plant inadvertently overcharged NorthernLights for the transfer and use of steam in the amount of $1.4 million between2003 and 2004.  Big Stone Plant’sacknowledgement of the metering problem started from an informal disputebetween management at Northern Lights and Big Stone Plant when Northern Lights,in March 2003, questioned Big Stone Plant about the reported volume ofsteam being used and transferred to Northern Lights. Big Stone Plant, afterconducting several tests and analyses in 2003, believed the volume reports wereaccurate until the fall of 2004, when it discovered that the meteringinstrument had been miscalibrated. After this discovery, Big Stone notifiedNorthern Lights in November of 2004 that it would resolve this matterthrough the issuance of a credit, which Northern Lights agreed to accept.

 

*Minority Interest in Subsidiary-*Minority interest in subsidiary increased$750,000, or 43%, to $2.52 million for the year ended December 31, 2004from $1.77 million for the year ended 2003. The increase in minority interest was the result of an increase in netincome.

 

*Net Income-*Netincome increased $2.8 million to a net income of $8.4 million for the yearended December 31, 2004 from a net income of $5.6 million for the yearended December 31, 2003.  This change was caused primarily by, asdiscussed above, an increase in ethanol revenues and the credit received fromthe Big Stone Plant.

 

**Liquidity and Capital Resources**

 

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

 

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

 

*Cash Flow From Operating Activities-*Thedecrease of approximately $2.1 million in net cash flow provided from operatingactivities between 2003 and 2004 was due to an increase in net income betweenperiods, offset by a decrease in accounts receivable outstanding in 2004 and achange in corn payable.  Accountsreceivable decreased in 2003 because of substantial payments received from theincentive programs, compared to an increase in 2004 when incentive programsprovided less cash.  Corn payableincreased in 2003 because more agricultural producers at the end of 2003,compared to the end of 2004, elected to defer payment to 2004 for deliveringcorn to the plant.

 

*Cash Flow From Investing Activities-*Theincrease of approximately $920,000 in net cash flow used for investingactivities between periods was attributed to an increase in capital improvementprojects at the plant from $1.13 million in 2003 to $2.05 million in 2004.  The capital improvement projects in 2004consisted of general improvements to property, plant and equipment, includingdryer and electrical systems.

 

Management anticipates making at least $1.1 million in capitalexpenditures on the plant in 2005. The largest capital expenditure will be fora rail expansion project at the plant, costing $1.1 million and financed by USBank. The project consists of adding an additional track line to improve thetransportation of ethanol and distiller’s grains by railcar.  Details of the US Bank financing are furtherdiscussed below under “Indebtness.”

 

*Cash Flow From FinancingActivities-*Thedecrease of approximately $5.3 million in net cash used for financingactivities between periods was due principally to a $5.0 million payment on thevariable-rate, revolving note in 2003, and $770,000 of additional excess cashflow payments in 2003 on the fixed-rate note. Principal paid on the fixed-rate note relative to required excess cashflow payments totaled $1,695,000 during 2003 and $925,708 during 2004.

 

Management anticipates in the next 12 months havingsufficient cash flows from operating activities and revolving debt to fundworking capital and to cover operating and administrative expenses, capitalexpenditures (other than the rail expansion project), and debt serviceobligations.

 

**Indebtness**

 

US Bank National Association of Sioux Falls, SouthDakota, is Northern Lights’ primary lender.  Prior to entering into arefinancing agreement on March 30, 2005, Northern Lights had four loansoutstanding with US Bank National Association: a $15 

 

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millionfixed rate note, a $11.1 million variable-rate non-revolving note, a $5 millionvariable-rate, revolving note, and a $1.2 million note.  The fixed and variable notes were obtainedunder a Loan Agreement dated July 11, 2001 and amendments dated January 1,2003.  The $1.2 million note was obtainedseparately on May 1, 2003.

 

The $15 million fixed-rate note bore 6.95% interestannually and required equal quarterly payments of approximately $521,000 with aballoon payment due on December 31, 2007.  There was a prepaymentpenalty if Northern Lights prepaid the loan prior to its maturity by any meansother than the mandated prepayments calculated based on Northern Lights’ excesscash flow under the Loan Agreement.  Under the Loan Agreement, NorthernLights was required to prepay US Bank a portion of the principal of the loan byMay 1 of each year in an amount equal to 15% of the excess cash flow butnot more than 20% of the outstanding principal balance of the loan. The LoanAgreement defined excess cash flow as the net income of Northern Lights beforedeductions for depreciation and amortization less expenditures for fixed andcapital assets not financed by debt, required principal payments includingcapitalized lease obligations, and interest expense. Excess cash flow paymentsof $425,708 were made for the year ended December 31, 2004 compared topayments of $1,695,000 for the year ended December 31, 2003.  Inaddition to the excess cash flow payments, a total of $1,293,715 in principalpayments was made on the fixed rate note during the year ended December 31,2004, compared to principal payments of $1,129,142 during the year ended December 31,2003. The outstanding principal balance on this note was $9,956,435 as of December 31,2004.

 

The $11.1 million variable-rate, non-revolving notebore interest at 1.00% over US Bank’s prime rate.  This note requiredquarterly payments of interest and amortized principal on the basis of aten-year term.  This note was due on December 31, 2007.  As of December 31,2004, Northern Lights’ variable rate was 6.25%.  Principal payments of$1,236,072 were made on thevariable-rate note during the year ended December 31, 2004, compared toprincipal payments of $1,152,732 made in the year ended December 31, 2003.The outstanding principal balance on this note was $8,711,196 as of December 31,2004.

 

The $5 million variable-rate, revolving note boreinterest at 1.00% over US Bank’s prime rate, requires quarterly interest-onlypayments, and was due on December 31, 2007.  The revolving featurepermits Northern Lights to re-borrow in multiples of $100,000 on a revolvingbasis, the difference between the unpaid principal amount on the note and $5million. Northern Lights paid an unused commitment fee of 0.5% per yearthat was assessed quarterly on any funds not borrowed under the note.  Asof December 31, 2004, the rate was 6.25%, compared to a rate of 5.0% as ofDecember 31, 2003. The unpaid principal balance was $0.00 as of December 31,2004 and as of December 31, 2003.

 

Northern Lights is required to provide US Bank withaudited annual and unaudited quarterly financial statements.  In addition,minimum debt service coverage ratios, minimum working capital, minimum tangiblenet worth, a maximum capital expenditure limitation and other standard negativeand affirmative covenants are

 

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required.The calculation of minimum working capital includes the amount US Bank isallowed to loan Northern Lights under the $5 million variable rate, revolvingnote. If an event of default occurs, as defined in the Loan Agreement, US Bankmay terminate the Loan Agreement and declare the entire amount immediately dueand owing.  Events of default under the Agreement include failure to makepayments when due or violation of one or more of the Agreement’s covenants. Allof Northern Lights’ tangible and intangible property, including its leaseholdinterest, easement rights, improvements, equipment, personal property, andcontracts, serve as the collateral for the debt financing secured by US Bank.Management believes that Northern Lights is in compliance with all covenantsand restrictions under its existing Loan Agreement and other agreements with USBank.

 

The $1.2 million loan with US Bank was obtained tofinance the acquisition and installation of two regenerative thermal oxidizers.Northern Lights paid interest on the outstanding balance at a fixed rate of5.70% and final payment is due on May 1, 2007. The note is secured by theregenerative thermal oxidizers and a lien on all payments that Northern Lightsreceives or is entitled to receive under the Bioenergy Program. Northern Lightsmade $281,964 in principal payments for the year ended December 31, 2004,compared to $434,827 in principal payments for the year ended December 31,2003.  Of the $434,827 in principal payments in 2003, $300,000 was made inconjunction with a refinancing in 2003. The principal balance outstanding on this note was $783,209 as of December 31,2004.

 

On March 30, 2005, Northern Lights and US Bankentered into an amended Loan Agreement. The purpose of the agreement was torefinance existing debt and to finance the planned rail expansion project atthe plant. Effective March 30th, there will be five loans and notes withUS Bank: a $15.8 million fixed rate note; a $3.9 million variable-rate, non-revolvingnote; a $5 million variable-rate, revolving note; a $3.0 million variable rate,revolving note; and a $1.2 million note. The $15.8 million note and $3.9million note will retire the original $15.0 million and $11.1 million note andloans. The terms and conditions of the Loan Agreement dated March 30, 2005remain the same as the original Loan Agreement, as discussed above, except foras stated below.

 

The $15.8 million fixed rate note bears an interestrate at 6.38%. This note requires quarterly payments of interest and amortizedprincipal of $537,500 on the basis of a ten-year term, the first payment beingdue on June 30, 2005. The loan is subject to maturity on March 31,2012.

 

The $3.9 million variable rate, non-revolving notebears interest at US Bank’s prime rate (currently 5.75%). This note requiresquarterly payments of interest and amortized principal on the basis of aten-year term, the first payment being due on June 30, 2005. The firstpayment of principal and interest will be $153,600. Like the fixed rate note,the loan matures on March 31, 2012.

 

The $5 million variable-rate, revolving note bearsinterest at US Bank’s prime rate and carries an unused commitment fee of0.375%, assessed quarterly.  This note

 

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requiresquarterly interest-only payments and is subject to a new maturity of March 31,2012.

 

The $1.2 million note for the thermal oxidizers nowbears interest at a fixed rate of 4.7%, with slightly lower quarterly paymentsbeing due until maturity on April 30, 2007.

 

As part of the refinancing, Northern Lights obtaineda new $3.0 million variable rate, revolving note. This note requires quarterlyinterest payments when drawn, the first potential payment starting on June 30,2005.  The maturity on this note is March 31,2008. The interest rate is equal to US Bank’s prime rate and carries an unusedcommitment fee of 0.375%, assessed quarterly. The note is tied to the borrowingbase and cannot be used until the existing $5 million variable rate, revolvingnote is fully drawn.

 

As part of the amended Loan Agreement, somecovenants are changed. The amendment increases the minimum working capitalrequirement from $2 million to $4 million (including the amount US Bank isallowed to loan Northern Lights under the $5 million variable rate, revolvingloan); eliminates the 15% excess cash flow payment; changes the fixed chargecoverage ratio; and changes the number of allowable distributions to members tomore than one each year, provided all other covenants are complied with underthe Loan Agreement.

 

In addition to Northern Lights’ long-term debt, thefollowing table provides information regarding the consolidated contractualobligations of Northern Growers as of December 31, 2004:

 
| ** **                         | ** ** | **Total** | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Four to  Five  Years** | ** ** | **After Five  Years** | ** ** |
|------------------------------------|------------|-----------|------------|-------------------------|------------|--------------------------|------------|--------------------------|------------|-----------------------|------------|
|                               |       |      |       |                    |       |                     |       |                     |       |                  |       |
| Long-Term Debt Obligations         |       | $         | 19,450,840 |                    | $          | 3,063,342                |       | $                        | 16,387,498 |                  | $          | 0 |   | $ | 0 |   |
| Capital Lease Obligations          |       | $         | 0          |                    | $          | 0                        |       | $                        | 0          |                  | $          | 0 |   | $ | 0 |   |
| Operating Lease Obligations        |       | $         | 387,115    |                    | $          | 2,400                    |       | $                        | 5,040      |                  | $          | 5,040 |   | $ | 374,635 |   |
| Purchase Obligations               |       | $         | 1,796,604  |                    | $          | 403,674                  |       | $                        | 434,160    |                  | $          | 434,160 |   | $ | 524,610 |   |
| Total Contractual Cash Obligations |       | $         | 21,634,559 |                    | $          | 3,469,416                |       | $                        | 16,826,698 |                  | $          | 439,200 |   | $ | 899,245 |   |

 

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

##### ** **

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

 

**Recent Accounting Pronouncements**

 

The Financial Accounting Standards Board (FASB) has issued Statement No. 151,Inventory Costs, an amendment of ARB No. 43, Chapter 4, “Inventory Pricing”(SFAS No. 151). The Statement amends and clarifies accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage).  The

 

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statement requires such costs be recognized as current periodcharges.  The statement also requires theallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facility. Management has determined that implementation of this pronouncement willnot have a material effect on the financial statements.

 

**Critical Accounting Policies and Estimates**

 

Preparation of our financial statements requireestimates and judgments to be made that affect the amounts of assets,liabilities, revenues and expenses reported.  Such decisions include theselection of the appropriate accounting principles to be applied and theassumptions on which to base accounting estimates.  Management continuallyevaluates these estimates based on historical experience and other assumptionswe believe to be reasonable under the circumstances.

 

The difficulty in applying these policies arisesfrom the assumptions, estimates and judgments that have to be made currentlyabout matters that are inherently uncertain, such as future economicconditions, operating results and valuations as well as managementintentions.  As the difficulty increases, the level of precisiondecreases, meaning that actual results can and probably will be different fromthose currently estimated.

 

Of the significant accounting policies described inthe notes to the financial statements, we believe that the following mayinvolve a higher degree of estimates, judgments, and complexity.

 

## ***Commitments and Contingencies. ***Contingencies, by their nature, relate touncertainties that require management to exercise judgment both in assessingthe likelihood that a liability has been incurred, as well as in estimating theamount of the potential expense.  In conformity with accounting principlesgenerally accepted in the United States, we accrue an expense when it isprobable that a liability has been incurred and the amount can be reasonablyestimated.

## ** **

## ***Inventory Valuation. ***Northern Lightsaccounts for its corn inventory at estimated net realizable market value. Corn is an agricultural commodity that is freely traded, has quoted marketprices, may be sold without significant further processing, and has predictableand insignificant costs of disposal.  Northern Lights derives itsestimates from local market prices determined by grain terminals in itsarea.  Changes in the market value of corn inventory is recognized as acomponent of cost of revenues.  Ethanol and distiller’s grains are statedat net realizable value.  Work-in-process and chemical inventory arestated at an average cost method.

## ** **

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

 

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

 

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

## ** **

Long-lived assets, including property, plant andequipment, and investments are evaluated for impairment on the basis ofundiscounted cash flows whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  An impairedasset is written down to its estimated fair market value based on the bestinformation available.  Considerable management judgment is necessary toestimate discounted future cash flows and may differ from actual cash flows.

 

*Accounting for DerivativeInstruments and Hedging Activities.  *Northern Lights enters into derivativeinstruments to hedge its exposure to price risk related to forecasted corn andnatural gas purchases, forward corn purchase contracts and forecasted ethanolsales.  It does not typically enter into derivative instruments other thanfor hedging purposes.  All derivative contracts are recognized on the December 31,2004 and 2003 balance sheets at their fair market value. Currently, none of thederivative instruments are classified as cash-flow hedges for accountingpurposes.

 

On the date the derivative instrument is enteredinto, Northern Lights will designate the derivative as either (1) a hedgeof the fair value of a recognized asset or liability or of an unrecognized firmcommitment (fair value hedge), (2) a hedge of a forecasted transaction orof the variability of cash flows to be received or paid related to a recognizedasset or liability (cash flow hedge) or (3) will not designate thederivative as a hedge.  Changes in the fair value of a derivative that isdesignated as and meets all the required criteria for a fair value hedge, alongwith the gain or loss on the hedged asset or liability that is attributable tothe hedged risk, are recorded in current period earnings.  Changes in thefair value of a derivative that is designated as and meets all the requiredcriteria for a cash flow hedge are recorded in accumulated other comprehensiveincome and reclassified into earnings as the underlying hedged item affectsearnings.  Changes in the fair value of a derivative that is not designatedas a hedge are recorded in current period earnings.

 

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**Item 7A. Quantitative and QualitativeDisclosure About Market Risk.**

 

Northern Lights is exposed to the impact of marketfluctuations associated with commodity prices and interest rates as discussedbelow. Northern Lights has no exposure to foreign currency risk as all of itsbusiness is conducted in U.S. Dollars. Northern Lights uses derivativefinancial instruments as part of an overall strategy to manage market risk. Ituses forward, futures and option contracts to hedge changes to the commodityprices of corn and natural gas. It does not enter into these derivativefinancial instruments for trading or speculative purposes, nor does itdesignate these contracts as hedges for accounting purposes pursuant to therequirements of SFAS 133, Accounting for Derivative Instruments and HedgingActivities.

 

*Commodity Price Risk*

 

Northern Lights produces ethanol and its co-product,distiller’s grains, from corn, and as such is sensitive to changes in the priceof corn. The price of corn is subject to fluctuations due to unpredictablefactors such as weather, total corn planted and harvested acreage, changes innational and global supply and demand, and government programs and policies.Northern Lights also uses natural gas in the production process, and as such issensitive to changes in the price of natural gas.  The price of naturalgas is influenced by such weather factors as heat or cold in the summer and winter,in addition to the threat of hurricanes in the spring, summer and fall. Othernatural gas price factors include the domestic onshore and offshore rig count,and the amount of natural gas in underground storage during both the injection(April 1st – November 7th) and withdrawal (November 14th – March 31st)seasons.

 

Northern Lights attempts to reduce the market riskassociated with fluctuations in the price of corn and natural gas by employinga variety of risk management strategies.  Strategies include the use ofderivative financial instruments such as futures and options initiated on theChicago Board of Trade and/or the New York Mercantile Exchange, as well as thedaily cash management of Northern Lights’ total corn and natural gas ownershiprelative to its monthly demand for each commodity, which may incorporate theuse of forward cash contracts or basis contracts.

 

Corn is hedged with derivative instruments includingfutures and options contracts offered through the Chicago Board of Trade.Forward cash corn and basis contracts are also utilized to minimize futureprice risk.  Likewise, natural gas is hedged with futures and optionscontracts offered through the New York Mercantile Exchange.  Basiscontracts are also utilized to minimize future price risk.

 

Gains and losses on futures and options contractsused as economic hedges of corn inventory, as well as on forward cash corn andbasis contracts, are recognized as a component of cost of revenues forfinancial reporting on a monthly basis using month-end settlement prices forcorn futures on the Chicago Board of Trade.  Corn inventories are markedto fair value using market based prices so that gains or losses on the

 

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derivativecontracts, as well as forward cash corn and basis contracts, are offset bygains or losses on inventories during the same accounting period.

 

Gains and losses on futures and options contractsused as economic hedges of natural gas, as well as basis contracts, arerecognized as a component of cost of revenues for financial reporting on amonthly basis using month-end settlement prices for natural gas futures on theNew York Mercantile Exchange.  The natural gas inventories hedged withthese derivatives or basis contracts are valued at the spot price of naturalgas, plus or minus the gain or loss on the futures or options positionsrelative to the month-end settlement price on the New York Mercantile Exchange.

 

A sensitivity analysis has been prepared toestimate Northern Lights’ exposure to commodity price risk. The table presentsthe fair value of corn inventory, forward purchase contracts and open futuresand option positions as of December 31, 2004 and December 31, 2003and the potential loss in fair value resulting from a hypothetical 10% adversechange in such prices. The fair value of the positions is a summation of thefair values calculated by valuing each net position at quoted market prices asof the applicable date. The results of this analysis, which may differ fromactual results, are as follows:

 
| **Year Ended**         | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical Adverse  Change— Market Risk** | ** ** |
|------------------------|------------|----------------|------------|--------------------------------------------------------------|------------|
| December 31, 2004 |       | $3,473,670     |       | $347,367                                                     |       |
| December 31, 2003 |       | $7,094,955     |       | $709,496                                                     |       |

 

*Interest RateRisk*

 

Northern Lights’ interest rate risk exposure pertainsprimarily to its variable rate, long-term debt. Specifically, Northern Lightshas $8,711,196 in variable rate, long-term debt as of December 31,2004.  The interest rate on the variable rate, long-term debt was 1.0%over US Bank’s prime rate, which was 6.25% as of December 31, 2004.Northern Lights manages its interest rate risk by monitoring the effects ofmarket changes on the interest rates and using fixed rate debt.  NorthernLights has $10,739,644 outstanding in fixed rate, long-term debt as of December 31,2004, of which $783,209 was subject to an interest rate of 5.70% and $9,956,435was subject to an interest rate of 6.95%.

 

**Item 8.    Financial Statements andSupplementary Data.**

 

Reference is made to the “Index to FinancialStatements” of Northern Growers, LLC located at page F-1 of this report,and financial statements for the year ended December 31, 2004 referencedtherein, which are hereby incorporated by reference.

 

**Item 9.    Changes in and DisagreementsWith Accountants on Accounting and Financial Disclosure.**

 

None.

 

33

----

 

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

 

*Evaluation Of Disclosure Controls And Procedures*

 

Our chief executive officer and chief financialofficer, after evaluating the effectiveness of our “disclosure controls andprocedures” (as defined in Rule 13a-14(c) under the SecuritiesExchange Act of 1934, as amended) as of the end of the period covered by thisreport, has concluded that our disclosure controls and procedures are effectivein ensuring that material information required to be disclosed is included inthe reports that we file with the Securities and Exchange Commission.

 

*Changes In Internal Controls*

 

There were no significant changes in our or NorthernLights’ internal controls or, to the knowledge of our management, in otherfactors that could significantly affect these controls subsequent to the end ofthe period covered by this report.

 

**Item 9B. Other Information.**

 

On March 30, 2005, Northern Lightsentered into an Amended Loan Agreement with US Bank National Association ofSioux Falls, South Dakota.  Details ofthe Amended Loan Agreement are further discussed above under “Item 7 –Indebtedness.”

 

### **PART III**

### ** **

**Item 10.  Directors and Executive Officers of theRegistrant.**

 

**Compliance with Section 16(a) of theExchange Act**

 

Information regarding untimely filings pursuant to Section 16of the Securities Exchange Act of 1934, as amended, is incorporated in this Form 10-Kby reference from our definitive Proxy Statement for the Annual Meeting ofMembers to be held in 2005, a copy of which will be filed with the Commissionnot later than 120 days after December 31, 2004.

 

**Code of Ethics**

 

Information regarding a code of ethics isincorporated in this Form 10-K by reference to our definitive ProxyStatement for the Annual Meeting of Members to be held in 2005, a copy of whichwill be filed with the Commission not later than 120 days after December 31,2004.

 

**Directors**

 

Information regarding our board of directors ormanagers is incorporated in this Form 10-K by reference from thedefinitive Proxy Statement for the Annual Meeting of

 

34

----

 

Membersto be held in 2005, a copy of which will be filed with the Commission not laterthan 120 days after December 31, 2004.

 

**Executive officers**

 

Information required by this item regarding thebusiness experience of our executive is incorporated in this Form 10-K byreference from the definitive Proxy Statement for the Annual Meeting of Membersto be held in 2005, a copy of which will be filed with the Commission not laterthan 120 days after December 31, 2004.

 

**Item 11. Executive Compensation.**

 

The information requiredby this item is incorporated by reference in this Form 10-K from ourdefinitive Proxy Statement for the Annual Meeting of Members, to be filed withthe Commission not later than 120 days after December 31, 2004.

 

**Item 12. Security Ownership of Certain Beneficial Owners and Management.**

 

The information requiredby this item is incorporated by reference in this Form 10-K from ourdefinitive Proxy Statement for the Annual Meeting of Members, to be filed withthe Commission not later than 120 days after December 31, 2004.

 

**Item 13. Certain Relationships and Related Transactions.**

 

The information requiredby this item is incorporated by reference in this Form 10-K from ourdefinitive Proxy Statement for the Annual Meeting of Members, to be filed withthe Commission not later than 120 days after December 31, 2004.

 

**Item 14. Principal Accounting Fees and Services.**

 

 Theinformation required by this item is incorporated by reference in this Form 10-Kfrom our definitive Proxy Statement for the Annual Meeting of Members, to befiled with the Commission not later than 120 days after December 31, 2004.

 

**PART IV**

 

**Item 15.  Exhibits, Financial StatementSchedules.**

 

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

 

(1)                                  Financial Statements – Reference is made to the “Index to FinancialStatements” of Northern Growers, LLC located at page F-1 of this reportfor a list of the financial statements and schedules for the year ended December 31,2004 included herein.

 

35

----

 

(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.

 

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

 

(c)          -

 

SIGNATURES

 

Inaccordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|   |                 | NORTHERN  GROWERS, LLC |
|--------|----------------------|------------------------|
|   |                 |                   |   |
| Date:  | March 31,  2005 |                   | /s/ Robert Narem |   |
|   |                 |                   | Robert  Narem, Chief Executive Officer |

 

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
|   |                 | NORTHERN  GROWERS, LLC |
|--------|----------------------|------------------------|
|   |                 |                   |   |
| Date:  | March 31,  2005 |                   | /s/ Robert Narem |   |
|   |                 |                   | Robert  Narem, Chief Executive Officer and  Chief Financial Officer, Manager  (Principal Executive  Officer) |
|   |                 |                   |   |
|   |                 |                   |   |   |
| Date:  | March 31,  2005 |                   | /s/ Ron Anderson |   |
|   |                 |                   | Ronald  Anderson, Manager |   |
|   |                 |                   |   |   |
|   |                 |                   |   |   |
| Date:  | March 31,  2005 |                   | /s/ Glenn Berdan |   |
|   |                 |                   | Glenn  Berdan, Manager |   |
|   |                 |                   |   |   |
|   |                 |                   |   |   |
| Date:  | March 31,  2005 |                   | /s/ Dennis Flemming |   |
|   |                 |                   | Dennis  Flemming, Manager |   |
|   |                 |                   |   |   |
|   |                 |                   |   |   |
| Date:  | March 31,  2005 |                   | /s/ Lars Herseth |   |
|   |                 |                   | Lars  Herseth, Manager |   |

 

36

----

 
| Date:  | March 31,  2005 |   | /s/ Mark Lounsbery                     |   |
|--------|----------------------|--------|----------------------------------------|--------|
|   |                 |   | Mark  Lounsbery, Manager               |   |
|   |                 |   |                                   |   |
|   |                 |   |                                   |   |
| Date:  | March 31,  2005 |   | /s/ Robert Metz                        |   |
|   |                 |   | Robert  Metz, Manager                  |   |
|   |                 |   |                                   |   |
|   |                 |   |                                   |   |
| Date:  | March 31,  2005 |   | /s/ Jeff Olson                         |   |
|   |                 |   | Jeff  Olson, Manager                   |   |
|   |                 |   |                                   |   |
|   |                 |   |                                   |   |
| Date:  | March 31,  2005 |   | /s/ Ron Olson                     |   |
|   |                 |   | Ronald  Olson, Manager                 |   |
|   |                 |   |                                   |   |
|   |                 |   |                                   |   |
| Date:  | March 31,  2005 |   | /s/ James Peterson                     |   |
|   |                 |   | James  Peterson, President, Manager    |   |
|   |                 |   |                                   |   |
|   |                 |   |                                   |   |
| Date:  | March 31,  2005 |   | /s/ Delton Strasser                    |   |
|   |                 |   | Delton  Strasser, Secretary, Manager   |   |
|   |                 |   |                                   |   |
|   |                 |   |                                   |   |
| Date:  | March 31,  2005 |   | /s/ Steve Street                       |   |
|   |                 |   | Steve  Street, Vice President, Manager |   |
|   |                 |   |                                   |   |
|   |                 |   |                                   |   |
| Date:  | March 31,  2005 |   | /s/ Gregory Toben                      |   |
|   |                 |   | Gregory  Toben, Manager                |   |
|   |                 |   |                                   |   |
|   |                 |   |                                   |   |
| Date:  | March 31,  2005 |   | /s/ Bill Whipple                       |   |
|   |                 |   | Bill  Whipple, Manager                 |   |
|   |                 |   |                                   |   |
| Date:  | March 31,  2005 |   | /s/ Robert Wittnebel                   |   |
|   |                 |   | Robert  Wittnebel, Manager             |   |

 

37

----

 

**EXHIBITINDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                    | ** ** | **Filed  Herewith** | ** ** | **Incorporated by  Reference**                                                                              |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Plan  of Organization                                                                                              |       |                |       | Appendix  A to Issuer’s Prospectus filed with the Commission on March 17, 2003.                   |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 3.1              |       | Articles  of Organization                                                                                          |       |                |       | Appendix  B to Issuer’s Prospectus filed with the Commission on March 17, 2003.                   |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 3.2              |       | Amendment  and Addendum to Operating Agreement dated July 16, 2003                                            |       |                |       | Exhibit 3.3  to the Issuer’s Form 10-KSB filed with the Commission on March 30,  2004.  |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 4.1              |       | Form of  Class A Certificate                                                                             |       |                |       | Exhibit 4.1  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.      |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.1             |       | Licensing  Agreement with Broin and Associates, Inc., dated November 2, 2000                             |       |                |       | Exhibit 10.2  to the Issuer’s Form S-4 filed with the Commission July 26, 2002.         |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.2             |       | Management  Agreement with Broin Management, LLC, dated November 2, 2000                                      |       |                |       | Exhibit 10.3  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.3             |       | Corn  Price Risk Management Agreement with Broin Management, LLC, dated November 16,  2001                    |       |                |       | Exhibit 10.4  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.4             |       | Ethanol  Marketing and Services Agreement with Ethanol Products, LLC, dated March 5,  2002                    |       |                |       | Exhibit 10.5  to the Issuer’s Form S-4/A filed with the Commission on January 8,  2003. |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.5             |       | DDGS  Marketing Agreement with Dakota Commodities (a/k/a Dakota Gold Marketing),  dated April 10, 2002        |       |                |       | Exhibit 10.6  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.6             |       | Loan  Agreement with US Bank, dated July 11, 2001                                                             |       |                |       | Exhibit 10.7  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.7             |       | Note,  Mortgage and Security Agreement, dated July 11, 2001                                                   |       |                |       | Exhibit 10.8  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.8             |       | Lease  Agreement with Big Stone – Grant Industrial Development and Transportation,  dated April 18, 2001 |       |                |       | Exhibit 10.9  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.9             |       | Steam  Sale Agreement with Otter Tail Power Company, dated April 18, 2001                                     |       |                |       | Exhibit 10.10  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.    |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.10            |       | Water  and Fuel Oil Agreement with Otter Tail Power Company, dated August 14,  2001                           |       |                |       | Exhibit 10.11  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.    |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.11            |       | Electric  Service Agreement with Otter Tail Power Company, dated September 26,  2001                          |       |                |       | Exhibit 10.12  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.    |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.12            |       | Water  and Sanitary Sewer Agreement with the City of Big Stone City, dated December 21,  2001                 |       |                |       | Exhibit 10.13  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.    |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.13            |       | Access  and Rail Agreement with Otter Tail Corporation, dated April 18, 2001                                  |       |                |       | Exhibit 10.14  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.    |
|             |       |                                                                                                               |       |                |       |                                                                                                        |
| 10.14            |       | Industry  Track Agreement with Burlington Northern and Santa Fe Railway Company, dated January 8,  2002       |       |                |       | Exhibit 10.15  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.    |

 

38

----

 
| 10.15  |   | Service  Request Form and Extended Service Agreement with NorthWestern Public  Service, dated March 19, 2002 |   |   |   | Exhibit 10.17  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.16  |   | Security  Agreement and Promissory Note with US Bank, dated June 5, 2002                                          |   |   |   | Exhibit 10.18  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.      |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.17  |   | Security  Agreement and Promissory Note with US Bank, dated December 15, 2002                                     |   |   |   | Exhibit 10.19  to the Issuer’s Form S-4/A filed with the Commission on January 8,  2003.  |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.18  |   | $15  million Fixed-Rate Note with US Bank, dated January 1, 2003                                                  |   |   |   | Exhibit 10.20  to the Issuer’s Form S-4/A filed with the Commission on January 8,  2003.  |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.19  |   | $11.1  million Variable-Rate Note with US Bank dated January 1, 2003                                              |   |   |   | Exhibit 10.21  to the Issuer’s Form S-4/A filed with the Commission on January 8,  2003.  |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.20  |   | $5  million Revolving Variable-Rate Note with US Bank, dated January 1, 2003                                      |   |   |   | Exhibit 10.22  to the Issuer’s Form S-4/A filed with the Commission on January 8,  2003.  |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.21  |   | Mortgage  in favor of US Bank, dated December 31, 2002                                                            |   |   |   | Exhibit 10.23  to the Issuer’s Form S-4/A filed with the Commission on January 8,  2003.  |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.22  |   | Memorandum  of Understanding with Broin Enterprises, Inc., dated January 28,  2003                           |   |   |   | Exhibit 10.24  to the Issuer’s Form S-4/A filed with the Commission on March 6,  2003.    |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.23  |   | $1.2  million Promissory Note with US Bank, dated May 1, 2003                                                     |   |   |   | Exhibit 10.18  to the Issuer’s Form 10-QSB filed with the Commission on August 14,  2003. |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.24  |   | Trading  Service Agreement with Alerus Securities Corporation dated February 2,  2004                             |   |   |   | Exhibit 10.1  to the Issuer’s Form 10-Q filed with the Commission on May 17,  2004.       |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.25  |   | Amendment  to US Bank Loan Agreement dated June 22, 2004                                                          |   |   |   | Exhibit 10.1  to the Issuer’s Form 10-Q filed with the Commission on August 16,  2004.    |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.26  |   | Second  Amendment to US Bank Loan Agreement dated March 30, 2005                                                  |   | X      |   |                                                                                                          |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.27  |   | $15.8  Million Promissory Note with US Bank dated March 30, 2005                                                  |   | X      |   |                                                                                                          |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.28  |   | $3.9  Million Promissory Note with US Bank dated March 30, 2005                                                   |   | X      |   |                                                                                                          |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 10.29  |   | $3.0  Million Promissory Note with US Bank dated March 30, 2005                                                   |   | X      |   |                                                                                                          |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 31     |   | Rule 13a-14/15d-14(a) Certifications                                                                         |   | X      |   |                                                                                                          |
|   |   |                                                                                                                   |   |   |   |                                                                                                          |
| 32     |   | Section 1350  Certification                                                                                       |   | X      |   |                                                                                                          |

 

39

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**NORTHERN GROWERS, LLC**

 

Table of Contents

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

 

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

The Audit Committee

**Northern Growers,****LLC**

Big Stone City, SouthDakota

 

We have audited theaccompanying consolidated balance sheets of **NorthernGrowers,****LLC**as of December 31, 2004 and 2003, and the related consolidated statementsof operations, members’ equity and cash flows for each of the three years inthe period ended December 31, 2004. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based upon our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates by management, as well as evaluatingthe overall financial statement presentation. We believe our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of **Northern Growers,****LLC** as of December 31,2004 and 2003, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2004, in conformity withaccounting principles generally accepted in the United States of America.

 

Asdiscussed in Note 1 to the financial statements, on April 1, 2003,Northern Growers Cooperative was dissolved and reorganized as **Northern Growers,****LLC**.

 

 
| /s/ Eide Bailly LLP                                                                                                     |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|
| Minneapolis, Minnesota                                                                                                  |
| January 26, 2005,  except for Note 12 and the last paragraph in Note 3, for which the date is  March 4, 2005. |

 

 

F-1

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2004 AND 2003**

 
| ** **                         | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|------------------------------------|------------|----------------|----------------|------------|------------|
|                               |       |           |           |       |       |
| **ASSETS**                         |       |           |           |       |       |
|                               |       |           |           |       |       |
| CURRENT ASSETS                     |       |           |           |       |       |
| Cash                               | ** ** | **$**          | **3,500,317**  |       | $          | 2,865,310 |   |
| Accounts  receivable               |       |           |           |       |       |
| Trade related  party               | ** ** | **3,675,195**  |           | 3,590,952  |       |
| Trade                              | ** ** | **541,646**    |           | 500,885    |       |
| Other                              | ** ** | **877,357**    |           | 302,546    |       |
| Inventory                          | ** ** | **4,639,561**  |           | 4,300,904  |       |
| Prepaid expenses                   | ** ** | **344,702**    |           | 99,587     |       |
| Investment in  commodity contracts | ** ** | **110,951**    |           | 184,622    |       |
|                               |       |           |           |       |       |
| Total current  assets              | ** ** | **13,689,729** |           | 11,844,806 |       |
|                               |       |           |           |       |       |
| PROPERTY AND  EQUIPMENT            |       |           |           |       |       |
| Land  improvements                 | ** ** | **4,003,657**  |           | 3,520,698  |       |
| Equipment                          | ** ** | **34,905,067** |           | 33,710,785 |       |
| Buildings                          | ** ** | **8,125,978**  |           | 8,124,155  |       |
| ** **                         |       | **47,034,702** |           | 45,355,638 |       |
| Less accumulated  depreciation     | ** ** | **(6,148,738** | )              | (3,619,905 | )          |
|                               |       |           |           |       |       |
| Net property and  equipment        | ** ** | **40,885,964** |           | 41,735,733 |       |
|                               |       |           |           |       |       |
| OTHER ASSETS                       |       |           |           |       |       |
| Financing costs                    | ** ** | **102,814**    |           | 205,662    |       |
|                               |       |           |           |       |       |
| Total other  assets                | ** ** | **102,814**    |           | 205,662    |       |
|                               |       |           |           |       |       |
| ** **                         |       | **$**          | **54,678,507** |       | $          | 53,786,201 |   |

 

See Notes to Consolidated Financial Statements

 

F-2

----

 
| ** **                                                                                               | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
|                                                                                                     |       |           |           |       |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                                                |       |           |           |       |       |
|                                                                                                     |       |           |           |       |       |
| CURRENT  LIABILITIES                                                                                     |       |           |           |       |       |
| Accounts payable  - trade                                                                                | ** ** | **$**          | **1,200,112**  |       | $          | 1,339,505 |   |
| Accounts payable  - corn                                                                                 | ** ** | **3,044,095**  |           | 4,179,050  |       |
| Accounts payable  - related party                                                                        | ** ** | **378,631**    |           | 204,220    |       |
| Accounts payable  - construction - related party                                                         | ** ** | **108,121**    |           | 476,216    |       |
| Other accrued  liabilities                                                                               | ** ** | **402,891**    |           | 501,574    |       |
| Accrued interest                                                                                         | ** ** | **7,440**      |           | 10,119     |       |
| Distribution  payable - Northern Growers                                                                 | ** ** | **3,778,051**  |           | 1,343,224  |       |
| Distribution  payable - minority member                                                                  | ** ** | **1,142,000**  |           | 456,800    |       |
| Notes payable -  due upon demand                                                                         | ** ** | **5,000**      |           | 5,000      |       |
| Current portion  of note payable                                                                         | ** ** | **3,063,342**  |           | 3,134,922  |       |
|                                                                                                     |       |           |           |       |       |
| Total current  liabilities                                                                               | ** ** | **13,129,683** |           | 11,650,630 |       |
|                                                                                                     |       |           |           |       |       |
| LONG-TERM NOTE  PAYABLE                                                                                  | ** ** | **16,387,498** |           | 20,053,377 |       |
|                                                                                                     |       |           |           |       |       |
| COMMITMENTS AND  CONTINGENCIES                                                                           |       |           |           |       |       |
|                                                                                                     |       |           |           |       |       |
| MINORITY  INTEREST                                                                                       | ** ** | **5,715,325**  |           | 5,014,499  |       |
|                                                                                                     |       |           |           |       |       |
| MEMBERS’ EQUITY                                                                                     |       |           |           |       |       |
| Capital units,  $2.00 stated value, 12,000,000 units authorized; 6,328,500 units issued and  outstanding | ** ** | **12,657,000** |           | 12,657,000 |       |
| Additional  paid-in capital                                                                              | ** ** | **64,900**     |           | 64,900     |       |
| Retained  earnings                                                                                       | ** ** | **6,724,101**  |           | 4,345,795  |       |
|                                                                                                     |       |           |           |       |       |
| Total members’  equity                                                                              | ** ** | **19,446,001** |           | 17,067,695 |       |
|                                                                                                     |       |           |           |       |       |
| ** **                                                                                               |       | **$**          | **54,678,507** |       | $          | 53,786,201 |   |

 

F-3

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

 
| ** **                                            | ** ** | **2004**       | ** **     | **2003**   | ** ** | **2002**   | ** ** |
|-------------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| REVENUES                                              |       |           | ** **     |       |       |       |       |
| Sales related  party                                  | ** ** | **$**          | **68,501,969** | ** ** | $          | 51,913,676 |       | $ | 20,499,279 |   |
| Sales                                                 | ** ** | **16,486,472** | ** **     | 13,643,646 |       | 5,116,829  |       |
| Incentive                                             | ** ** | **1,599,144**  | ** **     | 5,299,940  |       | 7,140,827  |       |
| Total revenues                                        | ** ** | **86,587,585** | ** **     | 70,857,262 |       | 32,756,935 |       |
|                                                  |       |           | ** **     |       |       |       |       |
| COST OF REVENUES                                      | ** ** | **72,729,131** | ** **     | 58,920,917 |       | 24,674,714 |       |
|                                                  |       |           | ** **     |       |       |       |       |
| GROSS PROFIT                                          | ** ** | **13,858,454** | ** **     | 11,936,345 |       | 8,082,221  |       |
|                                                  |       |           | ** **     |       |       |       |       |
| EXPENSES                                              |       |           | ** **     |       |       |       |       |
| Startup expenses                                      | ** ** | **—**     | ** **     | —     |       | 657,132    |       |
| General and  administrative                           | ** ** | **2,984,237**  | ** **     | 2,739,136  |       | 1,352,524  |       |
| Total operating  expenses                             | ** ** | **2,984,237**  | ** **     | 2,739,136  |       | 2,009,656  |       |
|                                                  |       |           | ** **     |       |       |       |       |
| INCOME FROM  OPERATIONS                               | ** ** | **10,874,217** | ** **     | 9,197,209  |       | 6,072,565  |       |
|                                                  |       |           | ** **     |       |       |       |       |
| OTHER INCOME  (EXPENSES)                              |       |           | ** **     |       |       |       |       |
| Interest income                                       | ** ** | **10,780**     | ** **     | 8,153      |       | —     |       |
| Interest expense                                      | ** ** | **(1,500,438** | **)**          | (1,847,108 | )          | (963,714   | )          |
| Settlement  income - see Note 11                      | ** ** | **1,449,248**  | ** **     | —     |       | —     |       |
| Other                                                 | ** ** | **65,551**     | ** **     | 23,244     |       | 618        |       |
| Total other  income (expenses)                        | ** ** | **25,141**     | ** **     | (1,815,711 | )          | (963,096   | )          |
|                                                  |       |           | ** **     |       |       |       |       |
| INCOME BEFORE  MINORITY INTEREST                      | ** ** | **10,899,358** | ** **     | 7,381,498  |       | 5,109,469  |       |
|                                                  |       |           | ** **     |       |       |       |       |
| MINORITY  INTEREST IN SUBSIDIARY INCOME               | ** ** | **(2,528,026** | **)**          | (1,770,430 | )          | (1,229,452 | )          |
|                                                  |       |           | ** **     |       |       |       |       |
| NET INCOME                                            | ** ** | **$**          | **8,371,332**  | ** ** | $          | 5,611,068  |       | $ | 3,880,017 |   |
|                                                  |       |           | ** **     |       |       |       |       |
| BASIC AND  DILUTED EARNINGS PER UNIT                  | ** ** | **$**          | **1.32**       | ** ** | $          | 0.89       |       | $ | 0.61 |   |
|                                                  |       |           | ** **     |       |       |       |       |
| BASIC AND  DILUTED WEIGHTED AVERAGE UNITS OUTSTANDING | ** ** | **6,328,500**  | ** **     | 6,328,500  |       | 6,328,450  |       |
|                                                  |       |           | ** **     |       |       |       |       |
| DISTRIBUTIONS  PER UNIT DECLARED                      | ** ** | **$**          | **0.95**       | ** ** | $          | 0.76       |       | $ | — |   |
|                                                  |       |           | ** **     |       |       |       |       |
| DISTRIBUTIONS  PER UNIT PAID                          | ** ** | **$**          | **0.56**       | ** ** | $          | 0.58       |       | $ | — |   |

 

See Notes to Consolidated Financial Statements

 

F-4

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OFCHANGES IN MEMBERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

 
| ** **                           | ** ** | **Capital  Units** | ** ** | **Amount** | ** **     | **Additional  paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Total**  | ** **    |
|--------------------------------------|------------|--------------------|------------|------------|----------------|----------------------------------|------------|------------------------|------------|------------|---------------|
|                                 |       |               |       |       |           |                             |       |                   |       |       |          |
| BALANCE,  DECEMBER 31, 2001     |       | 6,328,450          |       | $          | 12,656,900     |                             | $          | 65,000                 |       | $          | (151,469      | ) | $ | 12,570,431 |   |
| Net income                           |       | —             |       | —     |           | —                           |       | 3,880,017              |       | 3,880,017  |          |
| Distribution  payable                |       | —             |       | —     |           | —                           |       | (170,000               | )          | (170,000   | )             |
|                                 |       |               |       |       |           |                             |       |                   |       |       |          |
| BALANCE,  DECEMBER 31, 2002     |       | 6,328,450          |       | 12,656,900 |           | 65,000                           |       | 3,558,548              |       | 16,280,448 |          |
| Transfers and  adjustments           |       | 50                 |       | 100        |           | (100                             | )          | —                 |       | —     |          |
| Net income                           |       | —             |       | —     |           | —                           |       | 5,611,068              |       | 5,611,068  |          |
| Distributions  payable               |       | —             |       | —     |           | —                           |       | (1,343,224             | )          | (1,343,224 | )             |
| Distributions  paid                  |       | —             |       | —     |           | —                           |       | (3,480,597             | )          | (3,480,597 | )             |
|                                 |       |               |       |       |           |                             |       |                   |       |       |          |
| BALANCE,  DECEMBER 31, 2003     |       | 6,328,500          |       | 12,657,000 |           | 64,900                           |       | 4,345,795              |       | 17,067,695 |          |
| Transfers and  adjustments           |       | —             |       | —     |           | —                           |       | —                 |       | —     |          |
| Net income                           |       | —             |       | —     |           | —                           |       | 8,371,332              |       | 8,371,332  |          |
| Distributions  payable               |       | —             |       | —     |           | —                           |       | (3,778,051             | )          | (3,778,051 | )             |
| Distributions  paid                  |       | —             |       | —     |           | —                           |       | (2,214,975             | )          | (2,214,975 | )             |
|                                 |       |               |       |       |           |                             |       |                   |       |       |          |
| **BALANCE,  DECEMBER 31, 2004** | ** ** | **6,328,500**      | ** ** | **$**      | **12,657,000** | ** **                       | **$**      | **64,900**             | ** ** | **$**      | **6,724,101** | ** ** | **$** | **19,446,001** | ** ** |

 

See Notes to Consolidated Financial Statements

 

F-5

----

 

**NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

 
| ** **                                            | ** ** | **2004**       | ** **    | **2003**    | ** ** | **2002**    | ** ** |
|-------------------------------------------------------|------------|----------------|---------------|-------------|------------|-------------|------------|
| OPERATING  ACTIVITIES                                 |       |           | ** **    |        |       |        |       |
| Net income                                            | ** ** | **$**          | **8,371,332** | ** **  | $          | 5,611,068   |       | $ | 3,880,017 |   |
| Changes to net income  not affecting cash             | ** ** | ** **     | ** **    |        |       |        |       |
| Depreciation                                          | ** ** | **2,531,969**  | ** **    | 2,446,104   |       | 1,172,473   |       |
| Amortization of  loan fees                            | ** ** | **102,848**    | ** **    | 102,845     |       | 50,342      |       |
| Minority  interest in subsidiary’s earnings      | ** ** | **2,528,026**  | ** **    | 1,770,430   |       | 1,229,452   |       |
| Decrease  (increase) in current assets                |       |           | ** **    |        |       |        |       |
| Accounts  receivable                                  |       |           | ** **    |        |       |        |       |
| Related party                                         | ** ** | **(84,243**    | **)**         | (885,816    | )          | (2,705,136  | )          |
| Trade                                                 | ** ** | **(40,761**    | **)**         | 114,766     |       | (615,651    | )          |
| Other                                                 | ** ** | **(574,811**   | **)**         | 3,329,166   |       | (3,572,492  | )          |
| Inventory                                             | ** ** | **(338,657**   | **)**         | (297,461    | )          | (3,731,921  | )          |
| Prepaid expenses                                      | ** ** | **(245,115**   | **)**         | (28,193     | )          | (303,507    | )          |
| Investment in  grain contract                         | ** ** | **73,671**     | ** **    | (77,527     | )          | (107,095    | )          |
| Increase  (decrease) in current liabilities           |       |           | ** **    |        |       |        |       |
| Accounts payable                                      |       |           | ** **    |        |       |        |       |
| Trade                                                 | ** ** | **(139,393**   | **)**         | 185,042     |       | 1,097,542   |       |
| Corn                                                  | ** ** | **(1,134,955** | **)**         | 1,100,172   |       | 3,078,878   |       |
| Related party                                         | ** ** | **174,411**    | ** **    | (240,643    | )          | 444,863     |       |
| Accrued  liabilities                                  | ** ** | **(98,683**    | **)**         | 214,533     |       | 237,287     |       |
| Accrued interest                                      | ** ** | **(2,679**     | **)**         | (162,166    | )          | 172,285     |       |
|                                                  |       |           | ** **    |        |       |        |       |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES            | ** ** | **11,122,960** | ** **    | 13,182,320  |       | 327,337     |       |
|                                                  |       |           | ** **    |        |       |        |       |
| INVESTING ACTIVITIES                                  |       |           | ** **    |        |       |        |       |
| Purchase of  property and equipment                   | ** ** | **(2,050,295** | **)**         | (1,128,154  | )          | (22,346,709 | )          |
|                                                  |       |           | ** **    |        |       |        |       |
| NET CASH USED  FOR INVESTING ACTIVITIES               | ** ** | **(2,050,295** | **)**         | (1,128,154  | )          | (22,346,709 | )          |
|                                                  |       |           | ** **    |        |       |        |       |
| FINANCING  ACTIVITIES                                 |       |           | ** **    |        |       |        |       |
| Long-term notes  payable issued                       | ** ** | **—**     | ** **    | 1,500,000   |       | 25,518,061  |       |
| Change in  short-term notes payable                   | ** ** | **—**     | ** **    | (1,000,000  | )          | 1,000,000   |       |
| Principal paid  on long-term notes payable            | ** ** | **(3,737,459** | **)**         | (9,411,701  | )          | —      |       |
| Distributions  paid - Northern Growers                | ** ** | **(3,558,199** | **)**         | (3,650,597  | )          | —      |       |
| Distributions  paid - minority member                 | ** ** | **(1,142,000** | **)**         | (1,199,091  | )          | —      |       |
| Financing costs  paid                                 | ** ** | **—**     | ** **    | (4,924      | )          | (74,065     | )          |
|                                                  |       |           | ** **    |        |       |        |       |
| NET CASH (USED  FOR) PROVIDED BY FINANCING ACTIVITIES | ** ** | **(8,437,658** | **)**         | (13,766,313 | )          | 26,443,996  |       |
|                                                  |       |           | ** **    |        |       |        |       |
| NET (DECREASE)  INCREASE IN CASH                      | ** ** | **635,007**    | ** **    | (1,712,147  | )          | 4,424,624   |       |
|                                                  |       |           | ** **    |        |       |        |       |
| CASH AT  BEGINNING OF PERIOD                          | ** ** | **2,865,310**  | ** **    | 4,577,457   |       | 152,833     |       |
|                                                  |       |           | ** **    |        |       |        |       |
| CASH AT END OF  PERIOD                                | ** ** | **$**          | **3,500,317** | ** **  | $          | 2,865,310   |       | $ | 4,577,457 |   |

 

F-6

----

 

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

 
| ** **                                                               | ** ** | **2004** | ** **    | **2003** | ** ** | **2002**  | ** ** |
|--------------------------------------------------------------------------|------------|----------|---------------|----------|------------|-----------|------------|
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                       |       |     |          |     |       |      |       |
| Cash paid for  interest, net of capitalized interest                     | ** ** | **$**    | **1,400,270** |     | $          | 1,762,557 |       | $ | 1,215,420 |   |
| Cash paid for  income taxes (refunded)                                   | ** ** | **$**    | **—**    |     | $          | —    |       | $ | (59,220 | ) |
|                                                                     |       |     |          |     |       |      |       |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |       |     |          |     |       |      |       |
| Accounts payable  incurred for construction costs                        | ** ** | **$**    | **108,121**   |     | $          | 476,216   |       | $ | 438,941 |   |
| Distributions  payable                                                   | ** ** | **$**    | **3,778,051** |     | $          | 1,343,224 |       | $ | — |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-7

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

**NOTE 1 - NATURE OF OPERATIONS**

** **

*Principal Business Activity*

 

Northern Growers, LLC or the Company (formerly Northern GrowersCooperative or the Cooperative), is a South Dakota limited liability companylocated near Big Stone City, South Dakota. The Company was organized to poolinvestors and provide a portion of the corn supply for a 40 million gallon(annual capacity) ethanol plant owned by Northern Lights Ethanol, LLC (NorthernLights). Northern Lights was formed on February 14, 2001. On June 26,2002, the plant began grinding corn and on July 5, 2002, the ethanol plantcommenced its principal operations. Prior to July 5, 2002, the Company wasin the development stage. The Company sells ethanol and related products withinNorth America.

 

On April 1, 2002, Whetstone Ethanol, LLC (Whetstone) was formed.The initial member of Whetstone was the Cooperative. Whetstone was formed forthe purpose of acquiring the assets and liabilities of the Cooperative. On April 10,2002, the Board of Directors of the Cooperative approved a plan ofreorganization related to an exchange whereby Whetstone would acquire theassets and liabilities of the Cooperative. On March 27, 2003, the membersof the Cooperative approved the plan of reorganization. The effective date ofthe reorganization was April l, 2003. The transaction was an exchange ofinterests whereby the assets and liabilities of the Cooperative weretransferred for capital units of Whetstone. For financial statements purposes,no gain or loss was recorded as a result of the exchange transaction.

 

As a result of the exchange, the Cooperative was dissolved, withWhetstone’s capital units distributed to the members of the Cooperative at arate of one Whetstone capital unit for each share of equity common stock andall voting common stock of the Cooperative surrendered and retired. Inconnection with the reorganization, Whetstone changed its name to NorthernGrowers, LLC. A minimum of 5,000 capital units is required for ownership of theCompany. Such units are subject to certain transfer restrictions, includingapproval by the Board of Managers of the Company. The Company also retains theright to redeem the capital units at $.20 per unit in the event a memberattempts to dispose of the units in a manner not in conformity with theOperating Agreement, if a member becomes a holder of less than 5,000 units, ifa member breaches their member or corn delivery agreement or becomes a bankruptmember. The Operating Agreement of the Company also includes provisions wherebycash flow in excess of $200,000 will be distributed to unit holders subject tolimitations imposed by a super majority vote of the Board of Managers orrestrictions imposed by loan covenants.

 

**NOTE 2 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

** **

*Principles of Consolidation*

 

Theconsolidated financial statements include the accounts of the Company and its77.16% owned subsidiary, Northern Lights. All significant inter-companytransactions and balances have been eliminated in consolidation*.*For purposes of these financial statements and notes, theuse of the term “the Company” will refer to the consolidated accounts ofNorthern Growers and Northern Lights.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsconsist of demand accounts and other accounts that provide withdrawalprivileges.

 

F-8

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

** **

*Revenue Recognition*

 

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

 

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

 

*ShippingCosts*

 

Freight charges incurredare reported as a component of cost of revenues.

 

*Receivablesand Credit Policies*

 

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

 

Tradereceivables are stated at the amount billed to the customer.

 

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

 

The carrying amount oftrade receivables is reduced by a valuation allowance that reflects management’sbest estimate of the amounts that will not be collected. Management reviews alltrade receivable balances that exceed 30 days from the invoice date and basedon an assessment of current creditworthiness, estimates the portion, if any, ofthe balance that will not be collected. Management believes that all tradereceivables are collectible; therefore, there is no valuation allowance as of December 31,2004 and 2003.

 

*Inventory*

 

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

 

F-9

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

Inventories at December 31, 2004 and 2003 are as follows:

 

| ** **             | ** ** | **2004**      | ** **    | **2003**  | ** ** |
|------------------------|------------|---------------|---------------|-----------|------------|
|                   |       |          |          |      |       |
| Finished goods         | ** ** | **$**         | **2,112,405** |      | $          | 1,592,046 |   |
| Raw materials          | ** ** | **1,500,457** |          | 1,845,031 |       |
| Work-in-process        | ** ** | **399,049**   |          | 365,060   |       |
| Spare parts  inventory | ** ** | **627,650**   |          | 498,767   |       |
|                   | ** ** | ** **    |          |      |       |
| ** **             |       | **$**         | **4,639,561** |      | $          | 4,300,904 |   |

 

*Investmentin Grain Contracts, Derivative Instruments and Hedging Activities*

 

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

 

The Company enters intoshort-term cash grain, option and futures contracts as a means of securing cornfor 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 tradingactivity, the Company uses futures and option contracts offered throughregulated commodity exchanges to reduce risk and is exposed to risk of loss inthe market value of inventories. To reduce that risk, the Company generallytakes positions using cash and futures contracts and options.

 

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

 

Wehave recorded an increase (decrease) to cost of revenues of $3,715,496,$(71,653) and $459,207 related to our derivative contracts for the year ended December 31,2004, 2003 and 2002, respectively.

 

*FinancingCosts*

 

Financing costs are amortized over the term of the related debt usingthe interest method of amortization. Amortization of financing costs duringconstruction was capitalized as part of construction period interest.Accumulated amortization totaled $261,035 and $158,188 as of December 31, 2004and 2003, respectively.

 

*MinorityInterest*

 

Amounts recorded as minority interest on the balance sheet relate tothe investment by Broin Investments I, LLC in Northern Lights, plus or minusany allocation of income or loss of Northern Lights. Earnings and losses ofNorthern Lights are allocated to its members in proportion to the member’scapital accounts.

 

F-10

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

*Use of Estimates*

 

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

 

*Concentrations of Credit Risk*

 

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

 

*Property and Equipment*

 

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

 

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

 

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

 

On June 10, 2002,the Company received a grant of $1,501,199 from the proceeds of tax incrementfinancing bonds issued by Grant County, South Dakota. Under South Dakota law,proceeds from tax increment financing are not a liability of the entity, butare an obligation of the taxing district issuing the bonds. The grant wasprovided to fund infrastructure improvements related to the construction of theethanol plant and will be repaid by Grant County from the incremental increasein property taxes related to the improvements of the property. The total amountof the grant is recorded as a reduction of the value of the property andequipment.

 

# ***Environmental Liabilities***

 

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

 

*Income Taxes*

 

Northern Growers, LLC, isnot a taxpaying entity for federal and state income tax purposes and thus noincome tax expense has been recorded in the statements. Income of the Companyis taxed to the members in their respective returns.

 

F-11

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

*Reclassifications*

 

Certain reclassificationshave been made to the 2002 financial statements to conform to the presentationin 2003 and 2004. These reclassifications had no change in previously reportednet income.

 

*Recently Issued AccountingPronouncements*

 

The Financial AccountingStandards Board (FASB) has issued Statement No. 151, Inventory Costs, anamendment of ARB No. 43, Chapter 4. The Statement amends and clarifiesaccounting for abnormal amounts of idle facility expense, freight, handlingcosts and wasted material (spoilage). Management has determined thatimplementation of this pronouncement will not have an effect on the Company’sfinancial statements.

 

**NOTE 3 - NOTES PAYABLE**

** **

*Short-TermNotes Payable*

 

The Company receivedadvances of $5,000 from various entities to help establish the Company. Thenotes are due on demand and do not bear interest.

 

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

 

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

 

The balance of the short-term notes payable as of December 31, 2004and 2003 are as follows:

 

| ** **                  | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------|------------|------------|------------|----------|------------|
|                        |       |       |       |     |       |
| Non-interest  bearing notes | ** ** | **$**      | **5,000**  |     | $          | 5,000 |   |
| US Bank  promissory note    | ** ** | **—** |       | —   |       |
|                        | ** ** | ** ** |       |     |       |
| ** **                  |       | **$**      | **5,000**  |     | $          | 5,000 |   |

 

*Long-Term Notes Payable*

 

Northern Lights had a $31,100,000note with the Bank for the construction and permanent financing of the plant.During construction and through the balance of 2002, interest was due on aquarterly basis. Collateral for the note was the mortgage on the ethanol plant,with a net book value of approximately $40,885,000 as of December 31, 2004,and assignment of certain agreements related to the construction and operationof the plant.

 

On January 1, 2003,Northern Lights converted its $31.1 million construction note to threepromissory notes. The interest rate terms of the promissory notes are asfollows:

 

•                       Variablerate, non-revolving loan for $11.1 million, amortized over a 10 year period,with interest and principal due March 31, June 30, September 30and December 31. Interest is at prime plus 1% (6.25% at December 31,2004). The loan has a maturity date of December 31, 2007.

 

F-12

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

•                       Fixedrate loan for $15 million, amortized over a ten-year period, with interest andprincipal due March 31, June 30, September 30 and December 31.Interest is fixed at 6.95%. The loan has a maturity of December 31, 2007and is subject to a prepayment penalty.

 

•                       Variablerate, revolving loan for $5 million, interest only payments required on March 31,June 30, September 30 and December 31. Interest is at prime plus1% (6.25% at December 31, 2004). The loan has a maturity date of December 31,2007.

 

Except as noted above,the covenants and other terms and conditions of the original note with the Bankremain applicable to these three new notes.

 

On May 1, 2003,Northern Lights entered into a $1,200,000 promissory note with the Bank torefinance the then remaining unpaid and outstanding short-term notes payablebalances of the $500,000 line of credit and $1,000,000 promissory note. Thenote bears interest at 5.7%, is payable in quarterly installments of principaland interest of $84,406 beginning August 1, 2003, matures on May 1,2007 and is subject to a prepayment penalty. The note is collateralized by theprevious security agreement between the Bank and Northern Lights.

 

Northern Lights issubject to certain restrictive covenants establishing minimum reportingrequirements, ratios, working capital and net worth requirements. At December 31,2004, Northern Lights was in compliance with its covenants. Annually, beginningMay 1, 2003, the financing arrangements with U.S. Bank include termswhereby Northern Lights makes an additional principal payment equal to 15% ofNorthern Light’s excess cash flow (as defined by the agreement), not to exceed20% of the outstanding principal balance. The excess cash flow payment made on May 1,2003, was $1,010,000 and was applied to the principal of the fixed rate loanwith the original principal balance of $15,000,000. In conjunction withNorthern Light’s dividend distributions of September 22, 2003, February 10,2004 and November 12, 2004, additional excess cash flow payments of$685,000, $335,664 and $590,044, respectively, were made on the same fixed rateloan.

 

The balance of thelong-term notes payable as of December 31, 2004 and 2003 follows:

 

| ** **                         | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|------------------------------------|------------|----------------|----------------|------------|------------|
|                               |       |           |           |       |       |
| Variable rate,  non-revolving loan | ** ** | **$**          | **8,711,196**  |       | $          | 9,947,268 |   |
| Variable rate,  revolving loan     | ** ** | **—**     |           | —     |       |
| Fixed rate loan                    | ** ** | **9,956,435**  |           | 12,175,858 |       |
| Promissory note                    | ** ** | **783,209**    |           | 1,065,173  |       |
|                               |       |           |           |       |       |
| ** **                         |       | **19,450,840** |           | 23,188,299 |       |
| Less current  portion              | ** ** | **(3,063,342** | **)**          | (3,134,922 | )          |
|                               | ** ** | ** **     |           |       |       |
| ** **                         |       | **$**          | **16,387,498** |       | $          | 20,053,377 |   |

 

At December 31, 2004 and 2003, the Company had no outstandingborrowings against the variable rate revolving loan.

 

F-13

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2005                               |       | $          | 3,063,342  |   |
| 2006                               |       | 3,279,203  |       |
| 2007                               |       | 13,108,295 |       |
|                               |       |       |       |
|                               |       | $          | 19,450,840 |   |

 

Minimum principalpayments for the year ending December 31, 2005 do not include any related additionalprincipal to the Bank based on excess cash flow. U.S. Bank released the Companyof any further excess cash flow payments as of December 31, 2004. Minimumprincipal payments for the year ending December 31, 2007 include balloonpayments due at the maturity of the notes.

 

**NOTE 4 - RELATED PARTYTRANSACTIONS**

 

The Company and Broin Investments I, LLC, are the members of NorthernLights. The Company invested $12,500,000 and Broin Investments I, LLC invested$3,700,000 in Northern Lights Ethanol, LLC for their respective ownershipinterests of approximately 77% and 23%. In accordance with the Operating Agreementof Northern Lights, Broin Investments I, LLC, has the right to elect two ofseven members of the Board of Managers of Northern Lights.

 

Northern Lights has aconstruction contract with Broin and Associates, Inc. (see Note 6).Amounts due to Broin and Associates, Inc. related to the constructioncontract as of December 31, 2004 and 2003 were $0 and $476,216 respectively.Payments on the construction contract through December 31, 2004, 2003 and2002 were $47,615,981, $47,139,765 and $46,110,022, respectively.

 

During 2003, the Companyentered into an agreement with Dakota Gold Marketing for the use of railcars totransport DDGS. The agreement provides for a flat rate per car, per shipmentand can be terminated with 90 days notice by either party.

 

Additional agreements with related parties are included in Note 6.

 

**NOTE 5 - FAIR VALUE OF FINANCIALINSTRUMENTS**

 

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

 

The Company believes the carrying amount of long-term note payableobligations approximates fair value. For the construction and permanentfinancing, fair value approximates the carrying amount due to the variableinterest rate feature of the debt.

 

The Company believes the carrying amount of short-term notes payableapproximates their value due to the short maturity of these instruments. TheCompany believes the fair value of agreements for the purchase of utilitiesapproximates the carrying value based on the variable terms of the agreementsthat follow local market rates.

 

F-14

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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

 

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

 

The Company has entered into contracts and agreements regarding the construction,operation and management of the ethanol plant.

 

Agreements with BroinInvestments I, LLC, the minority member of Northern Lights, or parties relatedto the minority member through common ownership, are as follows:

 

ConstructionContract – The Company had a construction contract with Broinand Associates, Inc., an affiliate of the minority member of NorthernLights. The contract, with change orders, totals $47,615,981, all of which iscomplete as of December 31, 2004.

 

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

 

ManagementAgreement – The Company has an agreement with BroinManagement, LLC for the management and operation of the ethanol plant. Inexchange for these services, Broin Management receives an annual fee plus anincentive bonus of 5% of net income. The annual fee is adjusted each year forchanges in the consumer price index. The fees and bonus paid to BroinManagement include the salary and benefits of the general manager and technicalmanager and certain other services related to operation of the ethanol plant.  The agreement was executed on November 2,2000 and payments began during February 2002, approximately six monthsprior to the projected start of plant operations. The term of this agreementcontinues until July 1, 2005, three years from the date the plant beganprocessing corn and is renewable for successive three-year terms unlessterminated 90 days prior to expiration of the agreement.

 

The Company has enteredinto an agreement with Broin Management, LLC for hedge and price riskmanagement services related to corn requirements of the plant. The agreementexpires in April 2005 and is renewable for successive one-year terms unlessterminated 30 days prior to expiration.

 

DDGS Marketing Agreement–****The Company has an agreement withDakota Gold Marketing, a related party through ownership by entities related tothe minority member, to provide marketing and administrative services for thesale of DDGS. The agreement commenced on May 10, 2002. The agreementprovides for an agency relationship in that Dakota Gold Marketing does not taketitle to the DDGS but acts as a broker on behalf of Northern Lights. Theagreement has a term of five years from commencement, and is renewable for five-yearterms unless terminated by either party with 90 days notice.

 

Software Maintenance– In July 2002, the Company entered into an agreement with Broin andAssociates, Inc. for new revisions to the plant’s software. The agreementhas a term of three years, beginning June 1, 2002.

 

F-15

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

On December 16, 2002, the Company entered into an agreement withBroin and Associates, Inc. for the purchase of certain software and datamanagement services. The initial fee for purchase of the software is $40,000payable upon execution of the agreement. The fee for the maintenance service($20,000) shall be adjusted by the Consumer Price Index on an annual basis. Theagreement has a term of two years, and it automatically renews for successivetwo-year terms unless terminated 60 days prior to expiration.

 

Revenues and expenses related to agreements with related parties forthe years ended December 31, 2004 and 2003 are as follows:

 

| ** **                             | ** ** | **2004**    | ** **     | **2003** | ** ** |
|----------------------------------------|------------|-------------|----------------|----------|------------|
|                                   |       |        |           |     |       |
| Ethanol gross  revenues                | ** ** | **$**       | **68,501,969** |     | $          | 51,913,676 |   |
| Management fees  expense               | ** ** | **995,458** |           | 791,659  |       |
| Marketing fees  expense - all products | ** ** | **691,832** |           | 603,186  |       |
|                                        |            |             |                |          |            |  |  |

 

Agreements with unrelatedparties are as follows:

 

Property Lease – TheCompany entered into a ninety-nine-year property lease (an operating lease)with Big Stone-Grant Industrial Development and Transportation, LLC. Rent is $2,400for each of the first five years. The rent will be adjusted on January 1,2006 and every five years thereafter. The rent will be increased 5% over theimmediately preceding five-year period.

 

Steam – The Companyhas an agreement with the Big Stone Plant Co-Owners (the Big Stone Plant);Otter Tail Corporation, Montana-Dakota Utilities Co. and Northwestern PublicService, for steam in a specified amount for use in its ethanol manufacturingprocess at a base rate, adjusted annually for changes in the cost of energy.The agreement commenced on June 1, 2002 and has a term of ten years,renewable for two five-year periods, after which the agreement is renewablefrom year to year. Either party may terminate the agreement by providing noticeone year prior to a renewal or expiration date.

 

Minimumpayments related to the above agreements are summarized in the following table:

 

| **Years Ending  December 31,** | ** ** | **Lease  Agreements** | ** ** | **Management  Agreements** | ** ** | **Unconditional  Purchase  Agreements** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------------------|------------|-----------------------------------------|------------|-----------|------------|
|                                |       |                  |       |                       |       |                                    |       |      |       |
| 2005                                |       | $                     | 2,400      |                       | $          | 186,594                                 |       | $         | 217,080    |   | $ | 406,074 |   |
| 2006                                |       | 2,520                 |       | —                     |       | 217,080                                 |       | 219,600   |       |
| 2007                                |       | 2,520                 |       | —                     |       | 217,080                                 |       | 219,600   |       |
| 2008                                |       | 2,520                 |       | —                     |       | 217,080                                 |       | 219,600   |       |
| 2009                                |       | 2,520                 |       | —                     |       | 217,080                                 |       | 219,600   |       |
| 2010-2100                           |       | 374,635               |       | —                     |       | 524,610                                 |       | 899,245   |       |
|                                |       |                  |       |                       |       |                                    |       |      |       |
|                                |       | $                     | 387,115    |                       | $          | 186,594                                 |       | $         | 1,610,010  |   | $ | 2,183,719 |   |

 

Water and Fuel Oil– The Company has an agreement with the Big Stone Plant with a rate schedule fora specified quantity of water and fuel oil for ten years, commencing January 1,2002. The agreement is renewable for two five-year periods, after which theagreement renews for one-year periods. Either party may terminate the agreementwith notice provided one year prior to a renewal or expiration date. No minimumpurchase quantities are provided in the agreement, and the prices for theseitems are at local market prices.

 

F-16

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

The Company also has anagreement with the City of Big Stone City, South Dakota, with a rate schedule forwater and sewer services for ten years, commencing January 1, 2002. Theagreement is renewable for two 5-year periods, after which the agreement renewsfor one-year periods. Either party may terminate the agreement with noticeprovided one year prior to a renewal or expiration date. In addition to chargesbased on usage, the agreement requires a monthly fee of $1,500. No minimumpurchase quantities are provided in the agreement and the prices for theseservices are at local market prices.

 

Expenses related to theproperty lease, steam, water and fuel oil agreements for the years ended December 31,2004, 2003 and 2002 were $3,937,132, $3,392,378 and $303,802, respectively.

 

Please see Note 11 –Settlement Income, for further details on the steam agreement with the BigStone Plant.

 

Each holder of capitalunits has entered into a member agreement with the Company. For each capitalunit owned, one bushel of corn is required to be delivered annually. The pricepaid for the corn is the average corn price for the applicable four-monthperiod (trimester) based on several local grain elevators’ cash corn price, ora negotiated price set before delivery of the bushels. Based on the number ofcapital units outstanding, 6,328,500 bushels of corn is scheduled to bedelivered annually by the Company’s unit holders. This represents approximately41% of the corn required for the operation of the plant at its 40,000,000gallon name-plate capacity. Due to an amendment to the operating agreement,some unit holders are eligible to opt-out of their corn delivery requirement,subject to an annual approval of the opt-out requirements. Purchases of cornfrom corn delivery agreements and cash contracts from the Company’s unitholders totaled approximately $33,300,000 and $28,100,000 for the years ending December 31,2004 and 2003, respectively, of which $2,139,294 and $3,382,203 was recorded asa liability at December 31, 2004 and 2003, respectively.

 

The Company receives anincentive payment from the United States Department of Agriculture (USDA) forthe use of corn to produce ethanol. In accordance with the terms of thisarrangement, revenue is recorded based on incremental production of ethanolcompared to the prior year. The USDA has set the annual maximum not to exceed$7,500,000 for each eligible producer. The incentive is calculated on the USDAfiscal year of October 1 to September 30. Revenue of $1,303, $1,064,644and $7,500,000 has been earned for the USDA program years ended September 30,2005, 2004 and 2003, respectively. Incentive revenue of $932,477, $4,115,170and $6,742,263 was recorded for the years ended December 31, 2004, 2003and 2002, respectively, for this program.

 

The Company also receivesan incentive payment from the State of South Dakota to produce ethanol. Inaccordance with the terms of this arrangement, revenue is recorded based onethanol sold. The State of South Dakota has set a maximum of up to $1,000,000per year for this program per qualifying producer. The Company has earned $583,334,$666,667 and $1,000,000 for the program years ended June 30, 2005, 2004and 2003, respectively. Incentive revenue of $666,667, $1,184,770 and $398,564 wasrecorded for the years ended December 31, 2004, 2003 and 2002,respectively, for this program.

 

Legal Proceedings– The Company is involved in various legal actions arising in the normal courseof business. Management is of the opinion that their outcome will not have asignificant effect on the Company’s consolidated financial statements.

 

CapitalUnit Trading - Effective March 8, 2004, trading of theCompany’s Class A units began on Alerus Securities Corporation’s (Alerus)Alternative Trading System. Members and non-members were able to begin tradingof capital units on March 8, 2004.

 

F-17

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

**NOTE 7 - DISTRIBUTIONS**

 

During April 2003, Northern Lights distributed $1,750,000 of cash toits members. The Company received approximately $1,350,000, and the minoritymember received approximately $400,000. In conjunction with this cashdistribution, the Company declared a distribution of $1,831,020 and paid adistribution to its members of approximately $1,100,000.

 

During September 2003,Northern Lights distributed $3,500,000 of cash to its members. The Companyreceived approximately $2,700,000, and the minority member receivedapproximately $800,000. In conjunction with this cash distribution, the Companydeclared a distribution of $1,819,575 and paid a distribution to its members ofapproximately $2,550,000.

 

During January 2004,the Northern Lights Board of Managers approved a $2,000,000 distribution, whichit paid on February 10, 2004. The Company received approximately$1,543,000 and the minority member received approximately $457,000. Inconjunction with this cash distribution, the Company paid a distribution to itsmembers of approximately $1,343,000. The above distributions are recorded as aliability as of December 31, 2003.

 

During November 2004,the Northern Lights Board of Managers approved a $3,000,000 distribution, whichit paid on November 12, 2004. The Company received approximately$2,315,000 and the minority member received approximately $685,000. Inconjunction with this cash distribution, the Company paid a distribution to itsmembers of approximately $2,215,000.

 

During January 2005,the Northern Lights Board of Managers approved a $5,000,000 distribution, whichit paid on February 1, 2005. The Company received approximately $3,858,000and the minority member received approximately $1,142,000. In conjunction withthis cash distribution, the Company paid a distribution to its members ofapproximately $3,778,000. The above distributions are recorded as a liabilityas of December 31, 2004.

 

**NOTE 8 - INCOME TAXES**

** **

As of December 31,2004 and 2003 the book basis of assets exceeded their tax basis byapproximately $12,100,000 and $8,050,000, respectively. There were no significantdifferences between the book basis and tax basis of liabilities as of December 31,2004 or 2003.

 

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

** **

On February 1, 2003,the Company set up a 401(k) plan for substantially all employees who work morethan 1,000 hours per year. Employees can make voluntary contributions up tofederally designated limits. The Company matches employee voluntarycontributions at a 50% level up to an effective maximum of 2% of gross employeepay. Eligible employees are always fully vested in their account balancesresulting from employee voluntary contributions. The Company 401(k) expense forthe years ended December 31, 2004 and 2003 was $21,762 and $20,985,respectively.

 

F-18

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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

 

Summary quarterly resultsare as follows:

 
| ** **                                         | ** ** | **First  Quarter** | ** **     | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** **     |
|----------------------------------------------------|------------|--------------------|----------------|---------------------|------------|--------------------|------------|---------------------|----------------|
| **Year  Ended December 31, 2004**             | ** ** | ** **         | ** **     | ** **          | ** ** | ** **         | ** ** | ** **          | ** **     |
| **Total  revenues**                                | ** ** | **$**              | **21,707,883** | ** **          | **$**      | **20,958,695**     | ** ** | **$**               | **22,296,905** | ** ** | **$** | **21,624,102** | ** ** |
| **Gross  profit**                                  | ** ** | **5,942,562**      | ** **     | **(1,922,844**      | **)**      | **2,327,681**      | ** ** | **7,511,055**       | ** **     |
| **Operating  income (loss)**                       | ** ** | **5,084,220**      | ** **     | **(2,344,298**      | **)**      | **1,669,817**      | ** ** | **6,464,477**       | ** **     |
| **Income  (loss) before minority interest**        | ** ** | **4,711,367**      | ** **     | **(2,700,009**      | **)**      | **1,307,893**      | ** ** | **7,580,106**       | ** **     |
| **Minority  interest in subsidiary (income) loss** | ** ** | **(1,092,583**     | **)**          | **607,565**         | ** ** | **(305,533**       | **)**      | **(1,737,475**      | **)**          |
| **Net  income (loss)**                             | ** ** | **3,618,784**      | ** **     | **(2,092,444**      | **)**      | **1,002,360**      | ** ** | **5,842,631**       | ** **     |
| **Basic  earnings (loss) per unit**                | ** ** | **0.57**           | ** **     | **(0.33**           | **)**      | **0.16**           | ** ** | **0.92**            | ** **     |
|                                               |       |               |           |                |       |               |       |                |           |
| Year Ended  December 31, 2003                 |       |               |           |                |       |               |       |                |           |
| Total revenues                                     |       | $                  | 19,123,755     |                | $          | 17,241,715         |       | $                   | 16,110,060     |   | $ | 18,381,732 |   |
| Gross profit                                       |       | 4,427,581          |           | 1,584,621           |       | 1,822,589          |       | 4,101,554           |           |
| Operating income                                   |       | 3,693,484          |           | 1,010,312           |       | 1,125,256          |       | 3,368,157           |           |
| Income before  minority interest                   |       | 3,198,000          |           | 530,879             |       | 675,948            |       | 2,976,671           |           |
| Minority  interest in subsidiary (income)          |       | (761,395           | )              | (133,773            | )          | (186,367           | )          | (688,895            | )              |
| Net income                                         |       | 2,436,605          |           | 397,106             |       | 489,581            |       | 2,287,776           |           |
| Basic earnings  per unit                           |       | 0.39               |           | 0.06                |       | 0.08               |       | 0.36                |           |
|                                               |       |               |           |                |       |               |       |                |           |
| Year Ended  December 31, 2002                 |       |               |           |                |       |               |       |                |           |
| Total revenues                                     |       | $                  | —         |                | $          | —             |       | $                   | 13,708,731     |   | $ | 19,048,204 |   |
| Gross profit                                       |       | —             |           | —              |       | 3,743,136          |       | 4,339,085           |           |
| Operating income  (loss)                           |       | (114,835           | )              | (542,297            | )          | 2,990,122          |       | 3,739,575           |           |
| Income (loss)  before minority interest            |       | (114,835           | )              | (542,251            | )          | 2,510,269          |       | 3,256,286           |           |
| Minority  interest in subsidiary (income) loss     |       | 18,017             |           | 104,911             |       | (584,405           | )          | (767,975            | )              |
| Net income  (loss)                                 |       | (96,818            | )              | (417,654            | )          | 1,906,178          |       | 2,488,311           |           |
| Basic earnings  (loss) per unit                    |       | (0.02              | )              | (0.06               | )          | 0.30               |       | 0.39                |           |

 

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.

 

F-19

----

 

**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

**NOTE 11 - SETTLEMENT INCOME**

** **

In November 2004,the Company received a credit from the Big Stone Plant for approximately$1,450,000. This credit resulted from an informal, on-going dispute between theCompany and the Big Stone Plant on the amount of steam being supplied to theCompany by the adjacent Big Stone Plant. Beginning in March 2003, theCompany, believing the reported volume of steam being supplied from the BigStone Plant was excessive, raised questions to the Big Stone Plant about theaccuracy of the reported volume of steam being supplied. During November 2004,the Big Stone Plant acknowledged that an error created by a metering instrumentcaused the reported volume of steam supplied to the Company to be excessive. Asa result of this error, the Company was overcharged by the Big Stone Plant forthe use of steam between 2003 and 2004 by approximately $1,450,000. Because ofthe nature and timing of the resolution between the Company and the Big StonePlant, the Company determined that the entire $1,450,000 credit should berecorded in 2004 as Settlement Income in the Other Income (Expense) section inthe Statement of Operations.  At December31, 2004, approximately $708,000 was outstanding from the Big Stone Plant inrelation to the steam credit, and was recorded on the Company’s ConsolidatedBalance Sheet as a component of Other Accounts Receivable.

 

**NOTE 12 - SUBSEQUENT EVENTS**

** **

OnMarch 30, 2005, Northern Lights entered into an amended Loan Agreementwith the Bank. The purpose of the Agreement was to refinance existing debt andto finance the planned $1 million rail expansion project at the plant.Effective March 30, 2005 there will be five loans and notes with the Bank:a $15.8 million fixed rate note; a $3.9 million variable-rate, non-revolvingnote; a $5 million variable-rate, revolving note; a $3.0 million variable rate,revolving note and a $1.2 million note. The $ 15.8 million note and $3.9million note will retire the original $15 million and $11.1 million noteand loans. The terms and conditions of the Loan Agreement dated March 30,2005 remain the same as the original Loan Agreement, except as noted below.

 

The$15.8 million fixed rate note bears an interest rate at 6.38% percent. Thisnote requires quarterly payments of interest and amortized principal of$537,500 on the basis of a ten-year term, the first payment being due on June 30,2005. The loan is subject to maturity on March 31, 2012.

 

The$3.9 million variable rate, non-revolving note bears interest at the Bank’sprime rate. This note requires quarterly payments of interest and amortized principalon the basis of a ten-year term, the first payment being due on June 30,2005. The first payment of principal and interest will be $153,600. Like thefixed rate note, the note matures on March 31, 2012.

 

The$5 million variable-rate, revolving note bears interest at the Bank’s primerate and carries an unused commitment fee of 0.375%, assessed quarterly. Thisnote requires quarterly interest-only payments and matures on March 31,2012.

 

The$1.2 million note for the thermal oxidizers bears interest at a fixed rate of4.7%, with slightly lower quarterly payments being due until maturity in April,2007.

 

Aspart of the refinancing, Northern Lights obtained a new $3.0 million variablerate, revolving note. This note requires quarterly interest payments when drawn,the first potential payment starting on June 30, 2005 if money is drawn.The maturity of this note is March 31, 2008. The interest rate is equal tothe Bank’s prime rate and carries an unused commitment fee of 0.375%, assessedquarterly. The note is tied to the borrowing base and cannot be used until theexisting $5 million variable rate, revolving note is fully drawn.

 

F-20

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

Some of the covenants under the amended Loan Agreement are nowmodified. The amendment increases minimum working capital requirement from $2million to $4 million; eliminates the excess cash flow payment; changes thefixed charge coverage ratio; and changes the number of allowable distributionsto members to more than one each year, provided all other covenants arecomplied with under the loan.

 

F-21

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