** **

**UNITEDSTATES********SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

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

 

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

 

**Commission file****number 333-56368**

 

**GreatPlains Ethanol, LLC**(Name of smallbusiness issuer in its charter)

 
| **South Dakota**                                                | ** ** | **46-0459188**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**27716 462nd AvenueChancellor, South Dakota57015**(Address of PrincipalExecutive Offices) (Zip Code)

 

**(605) 647-0040**(Issuer’s TelephoneNumber, 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**

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act of 1934 during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

 
| ý  Yes |   | o  No |
|------------------|--------|------------|

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B is not contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10 – KSB.  ý

 

 

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Stateissuer’s revenues for its most recent fiscal year: $88,920,352.

 

Statethe aggregate market value of the registrant’s Class A and Class Ccapital units held by non-affiliates of the registrant was approximately$27,581,529, computed using the last sales price of $7,500 per Class Aunit and $8,001 per Class C unit, of the registrants capital units, as of June 30,2004, the last day of the registrant’s most recently completed second fiscalquarter.  

 

Asof March 1, 2005, there were 1,513 Class A, 200 Class B and2,029 Class C capital units of the registrant outstanding.

 

TransitionalSmall Business Disclosure Format:                 o  Yes                   ý  No

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Part III of Form 10-KSB - Portions of theProxy Statement for 2005 Annual Meeting of Members.

 

**PART I**

 

**Item 1.****  Description of Business.**

 

**Overview**

 

Great Plains Ethanol, LLC(also referred to as “we,” “our,” or “us”) is a South Dakota limited liabilitycompany that owns and operates an ethanol plant near Chancellor, SouthDakota. Our plant commenced production of ethanol and distillers grains onMarch 20, 2003 and began operating at name-plate capacity in April, 2003.

 

Our businessis the production and sale of ethanol and distillers grains from the processingof corn. Corn is supplied to us by our Class A members who areprimarily local agricultural producers and from purchases of corn on the openmarket. Ethanol is sold exclusively to a company that markets and sells theethanol to an array of customers located throughout the continental UnitedStates. Distillers grains are exclusively marketed andsold through a company to livestock producers located locally, nationally, andinternationally, as a high-energy livestock feed supplement. 

 

We plan tomaintain a competitive position in the marketplace by producing high qualityethanol and distillers grains and operating anefficient facility at the lowest possible costs. To accomplish this end, wewill continue to work with Broin Management, LLC andother Broin-related entities, in searching for newproduction methods and technologies and improving plant operations.

 

**Ethanol**

** **

The principal productproduced at the ethanol plant is ethanol. Ethanol is ethyl alcohol, a fuelcomponent made primarily from corn and various other types of grains. Ethanolis used for three primary purposes: 1) an oxygenated fuel additive; ii) anoctane enhancer in fuels; and iii) a non-petroleum based gas substitute. In itsprimary form, ethanol is mostly used for blending with unleaded gasoline andother fuel products. Although not all scientists agree about the existence orextent of environmental benefits associated with the use of ethanol, the use ofethanol is commonly viewed as a way to improve the quality of automobileemissions. When blended with gasoline, ethanol acts as anoxygenate by increasing the percentage of oxygen in gasoline.  As aresult, the gasoline burns more cleanly, and releases less carbon monoxide andother exhaust emissions into the atmosphere. 

 

An ethanol plant isessentially a fermentation plant.  The ground corn, which containsstarch, is mixed with water to form a mash.  The mash is heated andenzymes added to convert the starch into

 

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fermentable sugars.  Fermentation occurs when yeastis added to convert the sugars into alcohol and carbon dioxide.  Thecarbon dioxide may be captured and sold, if nearby markets exist, or releasedinto the atmosphere.  Fermentation produces a mixture called “beer,” whichcontains about 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.

 

**Ethanol Marketing and Distribution**

** **

We market theethanol produced at the plant through Ethanol Products, LLC, aBroin affiliate. Ethanol Products, LLC, under a marketing agreement with us, purchasesand markets all of the ethanol produced at the plant. Ethanol Products isresponsible for determining the price and terms at which the ethanol acquiredfrom the plant is sold and to whom it is sold. The price we receive from the sale of ethanol is based upon the pricethat Ethanol Products receives from the sale of ethanol to its customers, minusa fee.  Ethanol Products’principal customers are major, multi-national oil companies with blending andrefinery facilities located throughout the continental United States. EthanolProducts sells ethanol to these customers through short-term supply contracts,after which the ethanol is shipped by Ethanol Products to these customers’terminals located in the Midwest, Pacific Northwest, South, Southwest, andEast. The ethanol is shipped using rail cars operated by Ethanol Products ortrucks supplied by companies with which Ethanol Products contracts. The plantis served by rail facilities and connections to the Burlington Northern SantaFe railroad system, which facilitate the transportation of approximately90% of the ethanol produced at the plant. It is also served by multiple South Dakota state highways andInterstate Highways 29 and 90, which provide transportation links in alldirections.

 

The marketingagreement between Ethanol Products and us is in effect until October 2013and automatically renews for three-year terms unless terminated by either partywith three months advance notice prior to the end of the term. Inthe event that our 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 our businessand operations.

 

**Distillers Grains**

** **

A principal co-product ofthe ethanol production process is distillersgrains.  Distillers 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 distillers grains are sold for use in animal feeds withinthe United States, and a small percentage is exported primarily to Canada,Europe and Mexico.  The vast majority of it is fed to ruminant animals inthe dairy and beef sector.  New technologies, which have allowed for theproduction of a more consistent, quality product, have helped create a marketfor distillers grains in the swine and poultryindustries as well. 

 

Dry mill ethanol processinggenerally produces three forms of distillers grains,all of which differ on moisture content and shelf life: distillers driedgrains with solubles or DDGS; distillers wet grainsor “wet cake”; and modified distillers grains. Distillers wet grains are processed corn mashthat does not go through a drying process and contains approximately 70%moisture content. Distillers wet grains have ashort shelf life of approximately three days and can be sold to livestockproducers within the immediate vicinity of the plant.  Modified distillersgrains are distillers wet grains that have been driedto approximately 45% moisture content.  Modified distillers grains have aslightly longer shelf life

 

3

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and are often sold to nearby livestockproducers. DDGS is distillers wet grains dried to an 8% to 10% moisturecontent. DDGS have an almost indefinite shelf life and may be sold and shippedto any market regardless of its vicinity to the plant. 

 

**Distillers Grains Marketing andDistribution**

 

We contract with Broin Enterprises, Inc. d/b/a Dakota Gold Marketing, aBroin affiliate, to market exclusively all of thedistillers grains produced at the plant. There are four types ofdistillers grains produced by us and marketed by Dakota Gold Marketing: DakotaGoldTM, DDGS, modified distillers wet grains anddistillers wet grains. Dakota GoldTM is DDGS with an added certification fromDakota Gold Marketing indicating that the DDGS meets certain processing andproduction standards. The sale of Dakota GoldTM makes up the majority of oursales of distillers grains. The production and sale of distillers modified wetgrains and distillers wet grains varies depending uponthe general operations of the plant and actual market conditions for eachproduct.

 

Dakota Gold Marketingmarkets Dakota GoldTM, DDGS, modified distillers wet grains and distillers wet grains to local, regional and nationalmarkets. We ship distillers grains to nationalmarkets, primarily in the west and southwest United States, as well as to localand regional markets.  Shipments of Dakota GoldTM and DDGS are primarilydone by rail, whereas shipments of modified distillers wet grains and distillers wet grains are done by truck. We contractwith Dakota Gold Marketing for the use of railcars in the transporting ofDakota GoldTM and DDGS, paying Dakota Gold Marketing a flat fee per railcar inconnection with each shipment.  Although we rely on Dakota Gold Marketingto market 100% of our distillers grains, Dakota GoldMarketing is not dependent upon one or a limited number of major customers.

 

Ourmarketing contract with Dakota Gold Marketing is in effect until October 2013.It automatically renews for three-yearperiods, unless discontinued by either party upon at least three months writtennotice prior to the end of the then current term. We pay Dakota GoldMarketing a marketing fee based on gross monthly sales of distillersgrains.  Dakota Gold Marketing isresponsible for invoicing all loads, receiving payments from customers andpaying freight when necessary.  Allaccounts receivable losses arising from the sales of distillers grains are oursole responsibility.

 

**Dependence upon aSingle or Few Customers**

** **

We, asdiscussed above, are substantially dependent upon Ethanol Products for thepurchase, marketing and distribution of ethanol. Ethanol Products purchases100% of the ethanol produced at the plant, all of which is marketed anddistributed to its customers. Similarly, except for the purchasing aspect, weare dependent upon Dakota Gold Marketing for the marketing and distribution of100% of our distillers grains.

 

**Competition**

 

We are in direct competitionwith numerous other ethanol and distillers grains producers, many of which havesignificantly greater resources than we have available.  We stronglyexpect that additional ethanol and distillers grains producers will enter themarket if the demand for ethanol continues to increase. We compete with otherethanol and distillers grains producers on the basis of price and, to a lesserextent, delivery service.  We believe that we will continue to competefavorably with other ethanol and distillers grains producers because ofadvanced technology and research in the areas of production process and productdevelopment, all of which is provided by Broin andAssociates and its

 

4

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affiliates. 

 

The ethanol industry hasgrown to over 85 production facilities in the United States.  It is estimated that these facilities couldproduce over 3.7 billion gallons of ethanol per year.  The largest ethanol producers include Abengoa  Bioenergy Corp., ArcherDaniels Midland, Cargill, New Energy Corp., MGP Ingredients, Inc., VeraSun Energy Corporation and AventineRenewable Energy, Inc., all of which are capable of producing more ethanolthan we expect to produce.  In addition, there are numerous ethanol plantsof a similar size to our plant located in the Midwest region. At least 16 newethanol plants with a combined annual production capacity of over 700 milliongallons are currently under construction and additional plans to expandexisting plants have been announced, which would increase the ethanolproduction capacity of competitors.  In South Dakota, excluding ourplant, there are currently ten plants in full production with a total annualproduction capacity of approximately 377 million gallons of ethanol. 

 

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

 

**U.S.Ethanol Production Capacity**(million gallons peryear (mmgy)

 
| ** **                           | ** ** | ** **          | ** ** | ** **    | ** ** | ** **   | ** ** | **Under**         | ** ** |
|--------------------------------------|------------|---------------------|------------|---------------|------------|--------------|------------|-------------------|------------|
| ** **                           | ** ** | ** **          | ** ** | ** **    | ** ** | **Current**  | ** ** | **Construction/** | ** ** |
| ** **                           | ** ** | ** **          | ** ** | ** **    | ** ** | **Capacity** | ** ** | **Expansions**    | ** ** |
| **COMPANY**                          | ** ** | **LOCATION**        | ** ** | **FEEDSTOCK** | ** ** | **(mmgy)**   | ** ** | **(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           |       |              |       |

 

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| Broin Enterprises, Inc.          |   | Scotland, SD      |   | Corn               |   | 9      |   |   |   |
|---------------------------------------|--------|-------------------|--------|--------------------|--------|--------|--------|--------|--------|
| Bushmills Ethanol, Inc.*^        |   | Atwater, MN       |   | Corn               |   |   |   | 40     |   |
| Cargill, Inc.                    |   | Blair, NE         |   | Corn               |   | 85     |   |   |   |
|                                  |   | Eddyville, IA     |   | Corn               |   | 35     |   |   |   |
| Central 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         |   | Corn/wheat  starch |   | 78     |   |   |   |
|                                  |   | Atchison, KS      |   |               |   |   |   |   |   |

 

6

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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    |   |   |   |
| VeraSun Fort Dodge, LLC^                    |   | Ft. Dodge, IA      |   | Corn                        |   |   |   | 110    |   |
| Voyager Ethanol, LLC*                       |   | Emmetsburg, IA     |   | Corn                        |   | 50     |   |   |   |

 

7

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| 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 ethanolincreases, we may also have to compete with international ethanol producers,which may be able to produce and sell ethanol at a lower price than us.Currently, the Carribean Basin Initiative allows forethanol 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 BasinInitiative caps the amount of duty free ethanol imported into the United Statesat 7% of the total United States’ production from the previous year, as totalproduction in the United States grows, the amount of ethanol produced from the Carribean area and sold in the United States will alsogrow, which could impact our ability to sell ethanol and the price at which itis sold. 

 

Like many ethanol producers,we compete with producers of MTBE.  MTBE is another oxygenate commonlyused in fuels for compliance with the Federal Clean Air Act mandates and isethanol’s major competitor in the oxygenate market. Many major oil companiesproduce MTBE and, because it is petroleum-based, its use is strongly supportedby these companies. These companies have significantly greater resourcesthan we do with which to market MTBE, influence legislation, and influencepublic perception of MTBE. These companies also have sufficient resourcesto begin production of ethanol should they choose to do so. While MTBE stillremains a competitor, it has been the subject of increasingly seriousenvironmental concerns, which has resulted in several states enacting lawsprohibiting the use of MTBE as an oxygenate in fuels. As more states continue to banthe use of MTBE, MTBE may become less competitive with ethanol.

 

Alternative fuels, gasolineoxygenates, and ethanol production methods are continually under development byethanol and oil companies with far greater resources than we.  Newproducts or methods of ethanol production developed by larger, better financedcompetitors could provide them with competitive advantages over us and harm ourbusiness.

 

**Sources and Availability of RawMaterials**

 

**Corn**. The major raw material required forthe production of ethanol and distillers grains is corn.  To operate at name-plate capacity of 40million gallons, our plant requires approximately 14 million bushels of cornannually.  Unless a corn deliveryexemption has been granted, our Class A members are required to delivercorn to the plant on a trimester basis and receive payment for their corn basedon an average of market prices at predetermined elevators plus a freightallowance.  Our Class A memberscurrently supply approximately 20%of the corn to our plant under a corn delivery obligation, the balance of whichis purchased from other local corn producers on the open market based upon a schedule ofprices for current and future delivery prepared by management.

 

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Since May 15,2004, our Class A members may apply on an annual basis to be released fromthe corn delivery requirement if the member historically has not producedenough grain to meet the requirement; if the member does not produce enoughgrain to meet the requirement because the member’s grain is fed to livestock;or if the member produces and stores the majority of the member’s grain morethan 40 miles from our plant site.  As ofDecember 31, 2004, approximately 20% of our Class A members have been granted annual exemptions from the corn deliveryrequirement. Any member’s corn exempted from delivery is replaced bycorn purchased on the open market.  

 

Theplant’s location in Turner County, South Dakota, provides an ample supply ofcorn to meet and exceed name-plate production capacity of the plant. In 2003,over 20.9 million bushels of corn for grain were produced in Turner County andover 78.4 million bushels of corn for grain were produced in the nearbycounties of Lincoln, Hutchinson, McCook, Hanson, Minnehaha, Yankton, andUnion.  For 2004, we expect that thenumber of bushels of corn produced in these counties will exceed the 2003production totals due to a record corn crop. 

 

#### **Natural Gas**

#### ** **

The production of ethanol at our plantrequires a significant amount of natural gas. Natural gas isnecessary to generate steam for the cooking, evaporation, and distillationprocesses, as well as for the drying of distillersgrains. We contract with NorthWestern PublicService pursuant to which NorthWestern supplies anddistributes natural gas from NorthWestern Natural GasCompany’s pipeline to the ethanol plant. Our agreement with NorthWestern is in effectuntil 2018. The agreement requires that we use a minimum amount of natural gason an annual basis to cover NorthWestern’s priorcosts of constructing a pipeline to our plant. In the event that we do not use a minimum amount of natural gas, NorthWestern is entitled to draw on an irrevocable standbyletter of credit that we provided in May 2003.  Since operations were commenced, however, wehave used the minimum amount of natural gas required by NorthWesternand we have not experienced any interruption in the supply of natural gas asall our requirements have been met.  

 

**Hedging**

 

We contract with Broin Management, LLC todevelop and implement hedging strategies to manage the risk associated with theprice fluctuation of corn and natural gas. Strategies include the use of derivativeinstruments such as futures and options contracts initiated on the ChicagoBoard of Trade and/or the New York Mercantile Exchange, as well as the dailycash management of our total corn and natural gas ownership relative to ourmonthly demand for each commodity, which may incorporate the use of forward cashcontracts or basis contracts. Corn is hedged with derivative instrumentsincluding futures and options contracts offered through the Chicago Board ofTrade. Forward cash corn and basis contracts are also utilized to minimizefuture price risk.  Similarly, natural gas is hedged with futures andoptions contracts offered through the New York Mercantile Exchange. None of thederivative instruments used are for trading orspeculative purposes, nor do we designate such contracts as hedges foraccounting purposes pursuant to the requirements of SFAS 133, Accounting forDerivative Instruments and Hedging Activities.  

 

Gains and losses on futuresand options contracts used as economic hedges of corn inventory, as well as onforward cash corn and basis contracts, are recognized as a component of cost ofrevenues for financial reporting on a monthly basis using month-end settlementprices for corn futures on the Chicago Board of Trade. Corn inventoriesare marked to fair value using market based prices so that gains or

 

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losses on the derivative contracts, as well asforward cash corn and basis contracts, are offset by gains or losses oninventories during the same accounting period. Furthermore, gains and losses onfutures and options contracts used as economic hedges of natural gas, as wellas basis contracts, are recognized as a component of cost of revenues forfinancial reporting on a monthly basis using month-end settlement prices fornatural gas futures on the New York Mercantile Exchange. The natural gasinventories hedged with these derivatives or basis contracts are valued at thespot price of natural gas, plus or minus the gain or loss on the futures oroptions positions relative to the month-end settlement price on the New YorkMercantile Exchange. 

 

**Electricity**

 

We contract with Southeastern ElectricCooperative to provide all of the electric power and energy requirements forthe ethanol plant.  The agreement is ineffect indefinitely unless we breach the agreement, at which time Southeasternmay terminate the agreement.  Sinceoperations were commenced, we have not experienced any shortages in the supplyof electricity as all our requirements have been met.

 

**Water**

 

The production of ethanol requires a significantamount of water.  Water supply and waterquality are important requirements to produce ethanol.  All of our water requirements are currentlysupplied through three existing wells located near our plant site.  In 2004, we added a fourth ground well toprovide assurances of an adequate supply of water in the event of futuredrought or plant expansion.  Sinceoperations were commenced, we have not experienced any interruption orshortages in the supply of water as all our requirements have been met.

 

**Research andDevelopment**

** **

We do not conduct anyresearch and development activities associated with the development of newtechnologies for use in producing ethanol and distillers grains. Instead, werely on Broin Management, LLC and Broinand Associates, Inc. to research and develop new technologies for our use,as these Broin entities devote resources and effortsto improving the technology associated with ethanol and distillers grains andthe production process.  A licenseagreement between Broin and us, dated November 2001,grants us use of Broin’s technology, which is theoriginal technology installed at the time the plant was constructed.  Broin’s proprietarytechnology includes all of its processes, systems, diagrams, informationbalances, blueprints, configurations, manuals, videotapes, proprietary rights,patents, trademarks, copyrights, trade secrets, formulas, research data,know-how, process control systems, software configurations and specifications,and other technology.  We are currentlynegotiating with Broin with respect to a new licenseagreement, but there are no assurances that a new agreement will result. 

 

**Government Regulation**

 

Various federal and statelaws, regulations, and programs have led to an increasing use of ethanol infuel, including subsidies, tax credits and other forms of financialincentives.  Some of these laws provide economic incentives to produceethanol and others mandate the use of ethanol.  Congress currentlyprovides certain federal tax incentives for oxygenated fuel producers andmarketers, including those who purchase ethanol to blend with gasoline in orderto meet federally mandated oxygenated fuel requirements.

 

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Ethanol sales have beenfavorably influenced by the Clean Air Act Amendments of 1990, particularly theFederal Oxygen Program, which became effective November 1, 1992.  The Federal Oxygen Program requires the saleof oxygenated motor fuels during the fall and winter months in certain majormetropolitan areas to reduce carbon monoxide pollution. Ethanol use also hasincreased due to a second Clean Air Act program, the Reformulated GasolineProgram.  This program became effective January 1,1995, and requires the sale of reformulated gasoline in certain major urbanareas to reduce pollutants, including those that contribute to groundlevel ozone, better known as smog. 

 

In addition, the use ofethanol as an oxygenate to blend with fuel to complywith federal mandates has been aided by federal tax policy.  Prior to the enactment of the American JobsCreation Act of 2004,  the Energy Tax Actof 1978 exempted ethanol blended gasoline from the federal gas tax as a meansof stimulating the development of a domestic ethanol industry and mitigatingthe United States’ dependence on foreign oil. The exemption allowed ethanol tobe sold by blenders at prices that were competitive with other less expensiveadditives and gasoline. Equivalent to providing a per gallon “equalization”payment, the exemption allowed blenders to pay more for ethanol than thewholesale price of gasoline and still retain the same profit margins. Blenderscould claim an exemption of $0.052 per gallon from the excise tax of $0.184 pergallon for a 10% ethanol blend, with lower exemption amounts available for a7.7% and 5.7% ethanol blend.

 

The AmericanJobs Creation Act of 2004 amended the federal excise tax structure byimplementing the Volumetric Ethanol Excise Tax Credit (“VEETC”).  VEETC eliminates the existing ethanol taxexemption and replaces it with a new excise tax credit of $0.051 pergallon of ethanol. Rather than basing the credit on an ethanol blendpercentage, the credit is allowed for any percentage blend of ethanol, whicheffectively gives the blender greater flexibility to blend as much or as littleethanol to meet its octane or volume needs. VEETC remains in effect until 2010.

 

Additionally, Congressprovides an ethanol production incentive to ethanol producers through theUnited States Department of Agriculture Commodity Credit Corporation’s Bioenergy Program.  Under the program, which isscheduled to expire on September 30, 2007, incentive payments areallocated to ethanol producers based primarily on an increase in gallons ofethanol produced compared to the prior year’s production.  Because a planttypically experiences the highest increase in production during the first yearof operations compared to the prior year’s, a plant of our size is usuallyallocated the maximum payment allowable during the first year of production,subject to funding restrictions of the BioenergyProgram.  While we received significantpayments in 2004 and 2003, we expect to receive only a nominal amount,comparatively, under this program in 2005 because a significant increase inproduction at the plant is not expected, and Congress has reduced funding forthe program in 2005 from $150 million to $100 million. 

 

The State of South Dakotaprovides an incentive production payment to ethanol producers operating inSouth Dakota.  The production incentive consists of a direct payment toSouth Dakota ethanol producers of up to $.20 per gallon, which is divided amongproducers of fuel ethanol within South Dakota up to a maximum of $1 million peryear per plant (a maximum of $83,333 per month in 2004) and a maximum of $10million over the life of a plant.  The program caps the payments that canbe distributed to South Dakota plants in a program year to no more than $6million in payments in 2005 (ending June 30, 2005) and no more than $7million in payments in the 2006 program year. The payments are distributed toeach plant in proportion to the total number of gallons ofethanol produced and marketed annually by allthe plants located in South Dakota.  Thus, as more plants commenceproduction, or existing plants increase production, each plant may receive alower proportionate share of

 

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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. We expect that funds under the program will be depletedbefore the end of the 2005 year and, in all likelihood, before the end of the2006 program year as well.

 

We expect that the 109thCongress will reintroduce legislation in 2005 calling for a Renewable FuelsStandard.  In 2004, Congress consideredlegislation that would determine the specific volume of ethanol to be used ingasoline on a nationwide basis. The bills debated in Congress, which failed topass, anticipated that the volume requirement would begin at 2.3 billiongallons and grow at a rate of approximately 300 million gallons per year to avolume of 5 billion gallons by 2012. If similar legislation is reintroduced andsigned into law in 2005, the long-term market for ethanol is expected to growat a rate at least equal to this schedule.

 

On March 11, 2005,legislation (SB 610) was introduced in the United States Senate to amend thesmall producer tax credit.  This bill, ifenacted into law, would make available the existing small producer tax creditto any ethanol plant capable of producing up to 60 million gallons of ethanolon an annual basis, including our plant. Currently, the small producer tax credit is only available for plantswith 30 million gallons or less of annual capacity, which precludes our plantfrom eligibility.  The federal smallproducer tax credit allows eligible ethanol plants to deduct from their federalincome tax $0.10 per gallon on the first 15 million gallons produced annuallyat the plant. The small producer tax credit is scheduled to expire on December 31,2010.

 

Therevocation, amendment, or non-renewal of any one or more of these laws,regulations or programs, or a lack of funding under the programs, couldadversely affect the future use of ethanol and operations in a materialway.  Any material reduction of the use of ethanol would have an adverseeffect on the plant’s profitability and viability.

 

**Environmental Regulation**

 

Weare subject to extensive environmental regulation at the federal and statelevels. The federal environmental regulations with which we must complywere promulgated by the United States Environmental Protection Agency pursuantto the federal Clean Air Act. The state environmental regulations with which wemust comply were promulgated by the South Dakota Department of Environment andNatural Resources. The Environmental Protection Agency and the Department ofEnvironment and Natural Resources regulate the air quality at the plant, inparticular the emissions into the air. The Department of Environment andNatural Resources also regulates water collection and discharge. In addition toits own enforcement authority under this law, the Environmental ProtectionAgency has delegated permitting and enforcement authority to the Department ofEnvironment and Natural Resources.  Tooperate our plant, we have the following permits:

 

• We have aTitle Five Operating Permit from the Department of Environment and NaturalResources. In South Dakota, the Title Five Operating Permit serves as the airquality and operation permit for the ethanol plant. We must conduct ongoingemissions testing to verify compliance with the Title Five Operating Permit. OnDecember 3, 2004, we filed an amendment to the permit in order to installat the plant a back-up generator and possibly incorporate new technology. Thepermit is due for renewal on May 24, 2007.

 

• We have a Bureau of Alcohol, Tobacco and Fuel Permit from the Department of Treasury.We are required to obtain this permit because of the alcohol content ofethanol. The permit must be

 

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renewed annually. 

 

• We have a Surface Water Discharge Permit from the Department of Environment andNatural Resources. The Surface Water Discharge Permit regulates the terms ofany storm water discharges associated with industrial activity. The permitrequires us to provide ongoing compliance reports to the Department ofEnvironment and Natural Resources. This permit is due for renewal in 2008.

 

• We have aStorm Water Discharge Permit from the Departmentof Environment and Natural Resources. The Storm Water Discharge Permitregulates the terms of any surface water from rain or other precipitation. Thewater is collected and stored in a storm water pond adjacent to the plant. Thepermit is due for renewal in 2008.

 

While we are currently incompliance with applicable environmental laws, regulations and permits, we willneed to continue to comply with all permits and regulatory requirements. Toaccomplish this end, we maintain an on-going program to ensure compliance with such requirements.Maintaining compliance may require us to incur expenditures for such things asnew or upgraded equipment or processes, some of which could be material andcostly. In addition, if the Environmental Protection Agency and Broin and Associates cannot amicably resolve theapplication of the appropriate emissions testing method, as discussed belowunder “Item 3—Legal Proceedings,” or we cannot maintain compliance withapplicable laws and permits without new or upgraded equipment, materialexpenditures may be required. 

 

##### ***Management and Employees***

##### *** ***

BroinManagement, LLC, a Broin affiliate, manages theday-to-day operations of the ethanol plant. We pay Broin Management a fixed annual fee andan incentive bonus based on annual net income. We also pay certain expenses incurred with respect to operation of theplant while other expenses, including but not limited to, the provisions of afull time plant manager and technical manager are included as part of Broin Management’s fees. Broin Management employs Mr. Rick Serie as our plant’s general manager.  Mr. Serieoversees and is responsible for the operation and production on a day-to-daybasis.  Mr. Seriealso serves as our designated Chief Executive Officer and Chief FinancialOfficer.  For Mr. Serie’s biographical information see “Item 9—Directors,Executive Officers, Promoters and Control Persons; in Compliance with Section 16(a) ofthe Exchange Act.”

 

Asof March 1, 2005 we employed 40 employees, all but two being fulltime.  Our employees include anoperations manager, a maintenance manager, a commodities manager, amicrobiologist, a controller, a membership coordinator, a chief mechanicaloperator, plant operators, plant maintenance personnel, accounting assistantsand an administrative assistant.  Thislist does not include Mr. Serie and thetechnical manager, both of whom are employed by BroinManagement.

 

**Item 2.****  Descriptionof Property.**

 

Our ethanol plant is located on 119 acresof land we own near the town of Chancellor in Turner County, South Dakota.  This site is served by multiple statehighways and is near Interstate Highways 29 and 90 and has rail facilities andconnections to the Burlington-Northern Santa Fe railroad system to facilitatetransporting the ethanol and distillers grains produced at our plant to certainmarkets.  All of our tangible andintangible property, real and personal, serves as collateral for our debtfinancing with AgCountry Farm Credit Services whichis described below under “Item 6—Management’s Discussion

 

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and Analysisor Plan of Operations—Indebtedness.”

 

**Item 3.****  LegalProceedings.**

 

From time to time in the ordinary course of business, we may be namedas a defendant in legal proceedings related to various issues, includingwithout limitation, workers’ compensation claims, tort claims, or contractualdisputes. Except as described below, we are not currently involved in anymaterial legal proceedings, directly or indirectly, and we are not aware of anypotential claims. 

 

In the last two years, theUnited States Environmental Protection Agency has placed increased scrutiny onethanol plants for compliance with air quality laws and regulations.  In 2002, a number of ethanol plants inMinnesota entered into consent decree settlements with the State of Minnesotaand the Environmental Protection Agency arising from alleged emissionviolations.  Civil penalties were assessed against each ethanol plant,additional emissions devices were required, new testing protocols wereestablished and air quality permits were modified by the settlementagreements.  The Environmental Protection Agency subsequently stated thatit intended to “level the playing field,” inferring actions against otherethanol plants.  

 

On January 6, 2003, theEnvironmental Protection Agency issued formal information requests to manyethanol plants, including those designed, constructed, and/or managed by Broin and Associates and BroinManagement. The requests required that the subject ethanol plants providethe Environmental Protection Agency with certain emissions data, presumably todetermine whether the plants complied with the Clean Air Act. To date, noformal action has been subsequently taken by the Environmental ProtectionAgency. Since these requests were made, however, Broinand Associates has been holding on-going, informal discussions with theEnvironmental Protection Agency regarding the application of certain testingmethods for quantifying types of emissions at all plants managed by Broin. To date, no agreement or resolution has been reachedwith the Environmental Protection Agency, and it remains uncertain what theresult will be or the effect these discussions will have on us. Fines and/orother penalties could result. 

 

**Item 4.****  Submissionof Matters to a Vote of Security Holders.**

 

We did not submit any matter to a vote ofour security holders through the solicitation of proxies or otherwise duringthe fourth quarter of 2004.

 

**PART II**

 

**Item 5.****  Market for Registrant’sMember Units and Related Member Matters**

 

There is no public trading market as suchfor our capital units.  Capital units mayonly be transferred in accordance with our Capital Units Transfer System.  Our Capital Units Transfer System is designedto preserve the single-level tax status as a limited liability company.  Internal Revenue regulations imposesignificant trading restrictions on our capital units if we want to maintainthis status.

 

The Capital Units Transfer System providesfor transfers by gift to family members, upon death, and through a qualifiedmatching service, subject to our board of managers’ final approval.  Between January 1, 2003 and December 31,2004, our qualified matching service was operated by Variable InvestmentAdvisors, Inc., a registered broker-dealer operating a registeredAlternative Trading System with the S.E.C. Since January 1, 2005, ourqualified matching service has been operated by Alerus

 

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Securities Corporation, a registeredbroker-dealer operating a registered Alternative Trading System with theS.E.C.  As of March 1, 2005, therewere 498 Class A members, 1 Class B member, and 152 Class Cmembers, representing a total of 530 members.

 

The following table contains historicalinformation by trimester for sales of our Class A capital units throughour qualified matching service since trading began on January 1, 2003.

 

 

| **Trimester**        | ** ** | **Low Price** | ** ** | **High Price** | ** ** | **Average Price** | ** ** | **# of Capital  Units Traded** | ** ** |
|----------------------|------------|---------------|------------|----------------|------------|-------------------|------------|--------------------------------|------------|
| Jan.-April 2003 |       | $             | 10,000     |           | $          | 10,000            |       | $                              | 10,000     |   | 2 |   |
| May-Aug. 2003   |       | $             | 8,500      |           | $          | 8,500             |       | $                              | 8,500      |   | 6 |   |
| Sept.-Dec. 2003 |       | $             | 7,000      |           | $          | 7,250             |       | $                              | 7,125      |   | 4 |   |
| Jan-April 2004  |       | $             | 7,500      |           | $          | 8,011             |       | $                              | 7,751      |   | 18 |   |
| May-Aug. 2004   |       | $             | 7,500      |           | $          | 7,500             |       | $                              | 7,500      |   | 10 |   |
| Sept.-Dec. 2004 |       | $             | 7,530      |           | $          | 8,000             |       | $                              | 7,807      |   | 16 |   |

 

Under the terms of our Fourth Amended andRestated Operating Agreement, dated February 17, 2005, we are required tomake a distribution to our members of at least 20% of the net cash fromoperations, as long as net cash from operations is in excess of $500,000 forthat year, or our board of managers determines otherwise.  However, we are prohibited from making anydistributions that would violate or cause us to default under any of the termsof our credit facilities or debt instrument. Under our loan agreement with AgCountry Farm Credit Services, we are prohibited frommaking distributions to members in any rolling 12 month period that exceed 75% of our net income (notincluding Bioenergy Program payments).

 

In 2004, we distributed to our members approximately $8.7 million intotal cash distributions, or $2,336 per capital unit. 

 

On February 10, 2005, we distributedto our members approximately $2.2 million in cash, or $600 per capital unit. 

 

**Item 6.****  Management’sDiscussion and Analysis or Plan of Operation.**

 

**CAUTIONARYSTATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

You should read the following discussionalong with the audited financial statements and notes to the audited financialstatements included elsewhere in this report. This report contains forward-looking statements, including, but notlimited to, those under “Results and Plan of Operation” and “Liquidity andCapital Resources,” involving future events, future business and otherconditions, our future performance, and our expected operations.  Forward-looking statements may includestatements which use words such as “believe,” “expect,” “anticipate,” “intend,”“plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,”“potential,” or the negatives of these words, and all similar expressions.

 

Forward-looking statements involvenumerous assumptions, risks and uncertainties, which include, but are notlimited to, legislative acts, regulatory acts, changes in the prices of cornand other commodities, including gasoline, and general economicconditions.  The actual results,performance and achievements or actual business or other conditions may differmaterially from those contemplated, expressed in, or implied by, anyforward-looking statements and we are not under any duty to update the

 

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forward-lookingstatements contained in this report.  Wecannot guarantee future results or performance, or what future businessconditions will be like.  We caution younot to put undue reliance on any forward-looking statements. In particular:

 

•                  We may besubject to additional regulation, such as environmental restrictions, orregulatory action, which could include fines, penalties, or injunctive reliefas a result of any potential excessive emissions, which could increase ourcosts.

 

•                  While weanticipate that the emissions control equipment and processes in our plant willeliminate any potentially dangerous emissions from the ethanol productionprocess, and allow us to comply with environmental regulations, we cannotguarantee that it will.

 

•                  Theethanol industry and our operatingincomemay be adversely impacted by a decrease in or termination of government subsidies and other forms of financialincentives; a termination of government environmental and tax policies andprograms that encourage the production and use of ethanol; or, theprevention of new government policies and programs that encourage the use ofethanol.  

 

•                  The ethanolindustry is increasingly competitive, with additional plants in operation,under construction and in the planning stages. With additional plants coming online in the near future, the supply of ethanol will increase which, if thedemand does not grow accordingly or is unaided by government policies andprograms like a federal Renewable Fuels Standard, could adversely impact theprice of ethanol and our operating results.

 

•                  Althoughmanagement expects the demand for ethanol to increase, demand is largely drivenby federal and state programs and regulations, which are subject to change.

 

•                  Anylowering of gasoline prices will likely lead to lower prices for ethanol andadversely affect our operating results.

 

•                  Theethanol industry and our business are sensitive to corn and natural gasprices.  When corn and natural gas pricesincrease our operating results may suffer. Whencorn and natural gas prices fluctuate significantly, our cost of revenues andoperating results may be adversely affected by the use of derivativeinstruments under our risk management program. 

 

•                  While we are currently negotiating with Broin and Associates, Inc. for a new licenseagreement, there are no assurances that a new agreement will result or that anynew technology will improve our operations.

 

•                  We areentirely dependent upon Broin Management, LLC tomanage the day-to-day activities of the plant and upon Broin-relatedentities to market the ethanol and distillers grains produced at the plant, aswell as for risk management services.  Ifany of these entities ceased providing services to us, the plant’s operationsmay be adversely affected.

 

We are not under any duty to update theforward-looking statements contained in this report.  We cannot guarantee future results orperformance, or what future business conditions will be like.  We caution you not to put undue reliance onany forward-looking statements, which speak only as the date of this report.

 

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**Overview**

 

Weare engaged in the production of fuel-grade ethanol and distillers grains.  Weobtain corn for processing from the local corn market, our members and localcorn producers. Afterprocessing corn, ethanol is sold to Ethanol Products, LLC, a Broin affiliate, which subsequently markets and sells theethanol to gasoline blenders and refineries located throughout the continentalUnited States.  The price that we receivefrom the sale of ethanol to Ethanol Products is based upon the price thatEthanol Products receives from the sale to its customers, minus a fee. Distillers grains are sold through Dakota Gold Marketing,another Broin affiliate, which markets and sells theproduct to livestock feeders.

 

Our operatingincome or loss is significantly tied to the price at which ethanol anddistillers grains are sold. Historically, the price of ethanol generally tendsto fluctuate in the same direction as the price of unleaded gasoline and otherpetroleum products.  Surplus ethanol suppliesalso tend to put downward price pressure on ethanol.  In contrast, the price of distillers grainstends to fluctuate based on the price of substitute livestock feed, such ascorn and soybean meal. Surplus grain supplies also tend to put downward pricepressure on distillers grains.  

 

Our cost ofrevenues, which includes production expenses, is significantly affected by thecost of corn and natural gas. In 2004, for instance, the cost of corn wasapproximately 63% of cost of revenues, whereas the cost of natural gas wasapproximately 15% of cost of revenues. In contrast, the cost of corn in 2003was approximately 58% of cost of revenues, while the cost of natural gas wasapproximately 17% of cost of revenues. The cost of corn is affected primarily by supply and demand factors suchas crop production, world carryout, exports, risk management and weather.  Natural gas prices generally fluctuate withthe energy complex. Over the last few years, natural gas prices have beenhigher than historical averages, which we expect to continue due to higherprices for crude oil and other alternative petroleum-based fuels. 

 

The 2004 year started with very strongearnings, only to see earnings fall in the middle of the year, followed by astrong recovery in the fourth quarter. The principal cause for thesefluctuations was the price volatility of corn, which proved to be significantlygreater than in 2003. Earnings fell during the spring when corn pricessignificantly increased.  Fears of a wetspring and a decrease in corn production were the principal causes for theincrease, although the risk management program mitigated some of the impact. Asthe year progressed through the summer and early fall,corn prices actually declined due to a record corn crop. Unfortunately, whenprices declined during this period, risk management had an adverse impact oncost of revenues and, therefore, earnings. During the fourth quarter, however,with a return of extremely low and stable prices for corn and a continuation ofhigher prices for ethanol, earnings made a full recovery

 

While 2004 wasmarked by significant price volatility of corn, it was also marked by severalpositives. Earnings reached a record high of $13.7 million, most of which wasattributable to strong ethanol sales.  As2004 came to a close, we saw record United States’ corn production drive cornprices down, creating a positive effect on our earnings for the year.  We also gained efficiencies in operations dueto the end of our startup phase.  InNovember, Broin and Associates, Inc. and itsaffiliated companies, announced the creation of new technology that could havea positive effect on plant efficiencies in a number of critical areas.  In December, we entered into preliminarydiscussions with Broin and Associates to possiblyincorporate this new technology into the production process, which, ifincorporated, is anticipated to improve overall plant performance.

 

Our outlookfor 2005 is relatively positive. The first quarter began with relatively highethanol

 

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pricesand low, stable corn costs, which we expect to continue going into the secondquarter and positively impact earnings during these two quarters. We are lesscertain, however, about earnings 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 in Congress of a Renewable Fuels Standards bill or throughother means, the price of ethanol may be adversely impacted by a potentialsurplus of ethanol. Approximately 700 million new gallons of ethanol are slatedto enter the market by the end of 2005, some of which may not be absorbedunless new markets in the United States are developed. If ethanol prices dodecrease, our earnings may suffer. 

 

**Results and Plan ofOperation**

** **

*Comparison of Year Ended December 31, 2004to December 31, 2003*

* *
| ** **                          | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **$**                                   | ** ** | **%  of  Revenue**                      | ** ** | **$** | ** ** | **%  of  Revenue** | ** ** |
| Revenue:                            |       |                                    |       |                                    |       |   |   |   |   |
| Ethanol                             |       | 69,464,216                              |       | 78.1                                    |       | 35,683,989 |   | 68.2 |   |
| Distillers  Grains                  |       | 13,896,019                              |       | 15.6                                    |       | 8,904,112 |   | 17.0 |   |
| Incentive                           |       | 5,560,117                               |       | 6.3                                     |       | 7,663,419 |   | 14.6 |   |
| Grant                               |       | 0                                       |       |                                    |       | 103,115 |   | 0.2 |   |
| Total                               |       | 88,920,352                              |       | 100.0                                   |       | 52,354,635 |   | 100.0 |   |
|                                |       |                                    |       |                                    |       |   |   |   |   |
| Cost of  Revenue                    |       | 71,588,411                              |       | 80.5                                    |       | 42,833,701 |   | 81.8 |   |
|                                |       |                                    |       |                                    |       |   |   |   |   |
| General and  Administrative Expense |       | 2,759,696                               |       | 3.1                                     |       | 2,194,496 |   | 4.2 |   |
|                                |       |                                    |       |                                    |       |   |   |   |   |
| Other  Operating Income (Expense)   |       | (833,630                                | )          | (0.9)                                   |       | (1,153,192 | ) | (2.2) |   |
|                                |       |                                    |       |                                    |       |   |   |   |   |
| Net (Loss)  Income                  |       | 13,738,615                              |       | 15.5                                    |       | 6,173,246 |   | 11.8 |   |

* *

*Revenues*- Our revenue increased $36,565,717, or 69.8%,to $88,920,352 for the year ended December 31, 2004, from $52,354,635 for the year ended December 31,2003. The increase was primarily due to the year ended December 31,2003 having only nine months of operations, as the plant did not commenceoperations until March 20, 2003. Accordingly, the plant produced and sold additional volume of ethanoland distillers grains in 2004 compared to 2003. Revenues were also impacted byan increase in the price of ethanol and distillers grains.

 

Revenue from the sale of ethanol increased approximately $33.8 million, or94.7%, to $69.4 million for the year ended December 31, 2004, from $35.6 million for the year ended December 31, 2003.  In addition to the increase in production andsale volume in 2004, revenue from the sale of ethanol increased because ofhigher ethanol prices. Ethanol prices, on a per gallon basis, increasedapproximately 28.5% from 2003 to 2004. Ethanol prices increased primarily due to higher prices for unleadedgasoline during this same period.  Itremains uncertain, however, whether the price levels will remain the same orincrease further from the current levels. If the anticipated increase inethanol production in the industry is not matched with new markets and demandin 2005, the expected increase in ethanol production from new plants coming online could adversely impact the price of ethanol,

 

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resulting in lowerethanol revenues.

 

Revenue from the sale of distillers grains increased approximately $5.0 million, or 56.1%, to $13.9 million for theyear ended December 31, 2004,from $8.9 million for the year ended December 31, 2003. In additionto the increase in production and sale volume in 2004, as compared to theshortened year of production in 2003, revenue from the sale of distillers grains increased because of higher prices in thedistillers grains’ markets. Higher prices were caused primarily by higherprices in the corn and soybean meal market. Dakota GoldTM, our premium DDGS product,realized a per ton price increase of approximately 13.9% in 2004 as compared to2003.  The use of research performed by Broin-related companies, along with our ability to providea consistent product quality, opened up new markets for Dakota Gold ä andregular DDGS which previously did not exist. We believe that these efforts will continue to have a positive impact onour distiller grains’ market share and revenues.  However, if the competitive feed proteinmarkets for distillers grains decrease in value,prices will be negatively impacted, resulting in decreased revenues.

 

Revenuefrom governmental incentive program decreased $2.1 million, or 27.5%, to $5.5million for the year ended December 31, 2004, from $7.6 million for theyear ended December 31, 2003. Incentive revenue consists of income earned from federal and stategovernments in connection with our ethanol production.  For the year ended December 31, 2004, werecorded incentive revenue from the United States Department of Agriculture’sCommodity Credit Corporation Bioenergy Program ofapproximately $4.9 million, compared to $7.1 million for the year ended December 31,2003. The decrease was due primarily to how the payments are structuredand made under the program. Payments are based principally on the increase ingallons of ethanol produced compared to the prior year’s production. Since 2003was our first year of production, we had the largest increase in productionfrom the prior year. Between 2004 and 2003, we had a far smaller increase inproduction which, accordingly, led to less incentive revenue being earned.  We expect to receive only a nominal amount under this program in 2005because a significant increase in production at the plant is not expected, andCongress has reduced funding for the program in 2005 from $150 million to $100million.

 

Inaddition, we recorded incentive revenue from the State of South Dakota of$666,667 for the year ended December 31, 2004, compared to $583,333 forthe year ended December 31, 2003. While funds allocated to this programhave increased in the 2005 program year and are expected to increase in the2006 program year, weanticipate the funds allocated to this program will be depleted before the endof these program years, much of which is dependent upon the production levelsof all plants in South Dakota during these periods. 

 

*Cost ofRevenues*-Ourcost of revenues, which includes production expense, increased $28,754,710, or67.1%, to $71,588,411 for the year ended December 31, 2004, from$42,833,701 for the year ended December 31, 2003.

 

The increase in the cost of revenues resulted from an increase inproduction volume, as discussed above, increased plant output attained afterthe startup phase, and an increase in the per bushel cost of corn.  Since ethanol production began on March 20,2003, there was only about nine months of production. Thus, with 2004 being afull year of production, we experienced a significant increase in our cost ofrevenues compared to 2003.  We also realizedgreater plant output in 2004 since we were past the startup phase ofoperations. These two factors resulted in an increase of 5.5 million bushels,or 48.3%, of corn being used for ethanol production.  In addition to the increased corn usage, wealso had an approximate 22.1% increase in the cost of corn per bushel groundfrom the year ended December 31, 2003 to the year ended December 31,2004, due to market price increases and the risk management

 

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strategy used to minimize our marketexposure to extreme corn price increases.

 

In terms ofrisk management in 2004, the use of corn derivative instruments relative to theextreme price fluctuation of corn in 2004 increased the cost of corn.  Gains and losses that result from a change invalue of corn and natural gas derivative instruments are recognized in costs ofrevenues as the changes occur.  For theyear ended December 31, 2004, our cost of revenues includes losses of $3.6million from the use of corn derivative instruments, up from $350,000 in2003.  These losses were caused byfluctuations in the price of corn in 2004. At the end of 2003, we increased our use of corn derivative instrumentsto protect against the market price forecasts for corn.  These forecasts predicted higher prices forcorn because of low world carryout prior to the growing season, decreasedproduction, and drought.  As the yearprogressed and it became apparent that corn production would be much higherthan expected, the original market forecasts proved incorrect and the marketprice of corn actually declined.  Whenthe market price declined, the value of the corn derivative instruments fellwhich led to the increase in our cost of revenues. 

 

At least forthe first half of 2005, we do not anticipate the same or similar impact on costof revenues from the risk management program. Because of the record corn crop in 2004 and higher than anticipatedworld corn carryout, the market conditions for corn are expected to bepositive, possibly resulting in lower prices for corn and less pricevolatility.  In the second half of 2005,however, while we believe the market will remain positive, certain conditionscould alter the stability of the market and our use of derivative instruments,thus increasing the potential for losses under the risk management program. 

 

While natural gas prices remainedrelatively constant between the year ended 2004 and 2003, the prices,historically, have fluctuated dramatically. Even though natural gas inventories are at or near an historical highlevel, natural gas is currently at prices exceeding historical averages.  These prices exceed historical averagesprimarily because of increased demand, inclement weather conditions and theoverall strength in the energy complex. Strong pricing in petroleum commodities, such as unleaded gas andheating oil, are contributing to the high price natural gas market.  We expect natural gas prices to remain highin the future, all of which will affect our production expenses and cost ofrevenues.  Moreover, any significantfluctuation of natural gas prices, as with corn prices, could affect the valueof our natural gas derivative instruments and, therefore, cost of revenues.

 

*General andAdministrative Expenses*-General and administrative expensesincreased $565,200, or 25.8%, to $2,759,696 for the year ended December 31,2004, from $2,194,496 for the year ended December 31, 2003.  The increase was attributed to the plantbeing under a full year of production for 2004 compared to nine months in 2003.

 

*Interest Expense*-Interest expense decreased only $1,462, or 0.1%, to $1,176,009 for the yearended December 31, 2004, from $1,177,471 for the year ended December 31,2003. Interest expense remained relatively constant as higher interest rateswere offset by declining principal balances on our debt.

 

*Net Income*-Netincome increased $7,565,369, or 122.6%, for the year ended December 31,2004, from $6,173,246 for the year ended December 31, 2003.  The increase in net income was attributed toincreased production volume and pricing levels, as discussed above, andefficiencies in operations resulting from process optimization following thestartup phase in 2003.

 

Weexpect in the next 12 months to have sufficient cash flows from operating activitiesand

 

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revolvingdebt to fund working capital and to cover operating and administrative costs,capital expenditures (other than Project BPX, discussed below), and debtservice obligations.

* *

*Plant Operations*

 

Oursole business is the operation of an ethanol plant. Our focus during the comingyear will continue to be on the efficient maintenance and operation of theplant, and the maximum production of ethanol and distillers grains on aneconomical basis.  We expect to operatethe ethanol plant at or above nameplate capacity of 40 million gallonsannually.  To maintain this level ofproduction, we will continue to focus on increasing plant and employeeefficiency to optimize a cost efficient operation.  While certain aspects of our operating costsare dependent on factors beyond our control, we will attempt to decreasevolatility and market risk for corn and natural gas prices through riskmanagement strategies.

 

Wenow employ 38 full-time and 2 part-time employees to operate the ethanolfacility.  At the current plant size, wedo not anticipate hiring a significant number of employees in the next 12months.  If a major plant expansionproject were to be undertaken, additional employees may need to be hired forthe efficient operation of the plant.

 

We anticipate spending approximately$275,000 within the next three months for a backup generator for the operationof the ethanol plant in the event of an electrical outage.  This backup generator is designed to run onlyessential processes in the plant, therefore greatly reducing our risk of fireand product integrity issues should an electrical outage occur.  In addition to the backup generator, wecurrently estimate spending approximately $400,000 to make various generalimprovements to processes and equipment.

 

The followingis our estimate of costs for the next 12 months for the plant as it currentlyoperates:

 
| Corn Costs                          |   | $ | 36,210,000 |   |
|-------------------------------------|--------|---|------------|--------|
| Natural Gas Costs                   |   | $ | 10,608,000 |   |
| Other Production Costs              |   | $ | 12,581,000 |   |
| Total Cost of Revenues              |   | $ | 59,399,000 |   |
| General and Administrative Expenses |   | $ | 3,081,000  |   |
| Other Income and Expense            |   | $ | 780,000    |   |
| Total Operating Costs               |   | $ | 63,260,000 |   |

 

If newtechnology is incorporated into our existing facility, as discussed below, ourtotal operating costs will, in all likelihood, vary from these estimates,probably by a significant amount.  Inaddition to the new technology, a variety of market factors can affect bothoperating costs and revenues.  These factors include:

 

•                  Changes in theavailability and price of corn;

•                  Changes in theenvironmental regulations that apply to our plant operations;

•                  Increasedcompetition in the ethanol and oil industries;

•                  Changes ininterest rates or the availability of credit;

•                  Changes in ourbusiness strategy, capital improvements or development plans;

•                  Changes in plantproduction capacity or technical difficulties in operating the plant;

•                  Changes ingeneral economic conditions or the occurrence of certain events causing aneconomic impact in the agriculture, oil or automobile industries;

 

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•                  Changes in theavailability and price of natural gas and the market for distillers grains; and

•                  Changes infederal and/or state laws (including the elimination of any federal and/orstate ethanol production and tax incentives).

 

Due to thenumber of factors, either internal or external that can have a material effecton our operating costs and revenues, our actual operating costs could varysignificantly from the estimates presented above.

 

*New Technology*

 

We arecurrently in preliminary discussions with Broin and Associates, Inc.regarding the possible incorporation of new technology into the productionprocess, all of which was developed by Broin and is referred to as BroinProject X, or BPX.  BPX is a new patent-pendingtechnology for ethanol production that eliminates a costly energy consumingcooking step in the fermentation process. In addition to reducing energy costs, it releases additional starchcontent for conversion to ethanol, increases byproduct flow characteristics,potentially increases plant production, and potentially decreases plantemissions.  As we have just begun thediscovery process, the potential economic impact that this new technology willhave on our operations cannot be reasonably estimated at this time.  If this new technology is actuallyincorporated into our plant, we do not anticipate a significant increase inethanol production over the next twelve months, the potential impact being madeafter this period.  

 

While we areuncertain about the specific economic impact, we expect that BPX will reducecosts in the production process and improve our operating results.  It is expected to reduce the necessary amountof energy in the cooking process.  Theethanol production process requires that corn, after it is ground into meal, becooked through a combination of heat and enzymes, upon which the starch isconverted into fermentable sugars.  BPXreduces the necessary amount of heat in this cooking stage, thus reducing thenecessary amount of energy during this stage.

 

*Environmental Permitting*

 

We are subjectto extensive environmental regulation at the federal and state levels. Weare required to have a Title Five Operating Permit from the South Department ofEnvironment and Natural Resources. The Title Five Operating Permit serves asthe air quality and operation permit for the ethanol plant. On December 3,2004, we filed an amendment to this permit in order to install a back-upgenerator and incorporate the new BPX technology.  We anticipate receiving approval of thisamendment within the next three to six months. If the amendment is not approved, it may be difficult to incorporate thenew technology.

 

**Liquidity and CapitalResources**

 

*Cash Flow from OperatingActivities*  The net cash provided byoperating activities was $15,211,601 for the year ended December 31,2004.  Net cash provided by operatingactivities consists of net income of $13,738,615 and net non-cash expenses of$2,241,485, offset by increased working capital requirements of $768,499.  The change in working capital requirements in2004 was primarily due to an increase in inventory values and hedge positionvalues, offset by an increase in accounts payables.  An increase in ethanol prices and corn valuesresulted in higher carrying values for our inventories.  The increase in our hedge position value wasa result of the risk management strategy in place at the end of 2004.  The increase in accounts payables wasattributable to increased corn values,

 

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along with seasonal trends for paymentsmade to producers for corn delivered to the plant.

 

*Cash Flow from InvestingActivities***.**  The net cash used for investing activitieswas $1,534,189 for the year ended December 31, 2004.  The primary use of cash was to purchasereplacement equipment for our DDGS dryer system as a result of the fire inMarch, 2004.  We also purchasedadditional equipment for $390,000 to assist with optimizing plant efficiencies.

 

We anticipate spending approximately $275,000within the next three to six months for a backup generator for the operation ofthe ethanol plant in the event of an electrical outage.  This backup generator is designed to run onlyessential processes in the plant, thus greatly reducing our risk of fire andproduct integrity issues should an electrical outage occur.  We also anticipate spending approximately$400,000 on various upgrades to processes and equipment.

 

If BPX technology is incorporated into ourplant, we currently anticipate spending approximately $5 million over thecourse of 2005 on various plant upgrades and new equipment.  We anticipate funding this project byrefinancing our current debt obligations with AgCountry Farm Credit Services.

 

*Cash Flow from FinancingActivities***. **The netcash used for financing activities was $18,385,926 for the year ended December 31,2004, consisting of advances from short-term financing obligations of$9,700,000, offset by $19,336,403 of principal payments made on short-termfinancing and long-term debt, $8,742,023 in distributions paid to members, and$7,500 in financing costs paid for, as discussed below, a new revolving line ofcredit.

 

**Indebtedness**

** **

AgCountry Farm CreditServices is our primary lender.  As of December 31,2004, we have three notes with AgCountry Farm Country Services pursuant to aCredit Agreement dated June 19, 2002 and amendment dated September 1,2004: a $26.5 million variable-rate note, a $6.0 million variable-rate,revolving credit note, and a $3.0 million variable-rate, revolving line ofcredit note.  

 

The $26.5 millionvariable-rate note bears interest equal to LIBOR plus 2.64 % per annum.  This note requires quarterly payments ofinterest and principal on the basis of a ten-year term.  In addition, we are required to prepayAgCountry each quarter 25% of the free cash flow for such quarter, not toexceed $1.5 million in each fiscal year. The Credit Agreement defines free cash flow as net income beforedeductions for interestexpense,income taxes, depreciation and amortization, excluding any Bioenergy Programpayments received, less expenditures for interest expense, taxes paid duringthe relevant period, required interest and principal payments, and fixed andcapital assets not financed by debt. There is no prepayment penalty if we prepay any amount outstanding underthis note, provided the payment exceeds $100,000. The note is payable in fullat maturity on October 1, 2013.  Asof December 31, 2004, the variable rate was 4.7313% and the principalbalance outstanding was $22,310,474.  Thetotal free cash flow payments for the year ended December 31, 2004 were$1,500,000.

 

The $6.0 millionvariable-rate, revolving-credit note bears interest equal to LIBOR plus 3.14 %per annum, subject to a 0.50% annual commitment fee assessed quarterly on anyfunds not borrowed.  The revolvingfeature permits us to borrow in multiples of $100,000 on a revolving basis, thedifference between the principal balance outstanding and $6 million.  This note requires monthly payments ofinterest based on the average daily balance of the revolving loan during therelated monthly period.  In

 

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addition, we must pay at least 10% of the principalamount converted to a revolving loan by October 1 of each year until October 1,2013, when principal and interest is due in full.  The annual pay downwill permanently reduce the amount we may borrow under the revolvingloan.  As of December 31, 2004, the variable rate was 5.2313% andthere was no principal balance outstanding.

 

The primary purpose of the$3.0 million variable rate, revolving line of credit note is to fund workingcapital.  The line of credit bearsinterest equal to LIBOR plus 3.50% per month, and requires quarterly paymentsof interest based on the unpaid balance. There is a 0.40% annual commitment fee assessed quarterly on any fundsnot borrowed.  The revolving featurepermits borrowing until maturity on September 1, 2005, the differencebetween the unpaid principal balance and the maximum amount allowable under theline.  Repayment is without penalty, atwhich time we can once again borrow the maximum amount allowable.  The maximum amount available is $3 million.  As of December 31, 2004, the variablerate was 5.5913% and there was no principal balance outstanding.

 

Allthree notes contain minimum debt service coverage ratios, minimum workingcapital, minimum tangible net worth, capital spending limitations, and otherstandard negative and affirmative covenants which, if not complied with, couldlead to a default under the loan agreements. In terms of capital spending, we are prohibited from making any capitalexpenditures that exceed $500,000 per year without prior written consent fromAgCountry. We are also prohibited from making distributions to our members in any rolling 12 month period that exceed 75%of our net income (not including Bioenergy Program payments). All ofour tangible and intangible property, real and personal, serves as collateralfor our debt financing with AgCountry Farm Credit Services.

 

Under a Natural GasDistribution Delivery Agreement with NorthWestern Energy Corporation, dated September 2,2003, NorthWestern requires that we use a minimum amount of natural gasannually to cover NorthWestern’s $1.6 million cost in constructing the pipelineto our plant.  To protect against a minimum amount of natural gas notbeing used, NorthWestern required that we provide security in the form of anirrevocable standby letter of credit.  A letter of credit was obtainedfrom Home Federal Bank of Sioux Falls, South Dakota and provided toNorthWestern.  To satisfy the letter of credit requirement, we enteredinto a line of credit agreement with Home Federal Bank for up to $1.6million.  Under the terms of the line ofcredit, in the event that there is a draw down on the letter of credit, anequal amount is drawn on the line of credit at which time it will be recognizedas a liability of ours.  The line ofcredit is evidenced by a promissory note with a variable interest rate equal tothe prime rate as published by the Wall Street Journal plus 2.0%.  Inaddition, nine individuals, including some of our board of managers, signedpersonal guarantees to satisfy the line of credit requirements.  Inconsideration of suchguarantees,we agreed to pay each individual guarantor an annual fee of 2% of the amount ofhis guarantee until the expiration of the letter of credit.  For the yearended December 31, 2004, we paid these guarantors a sum of $25,000.

 

On February 28, 2005, werenewed the letter of credit with NorthWestern, the line of credit with HomeFederal and the agreements with all but three of the guarantors.  Each of these agreements was renewed underthe same terms as the original agreements except for a new maturity date andreduced amount.  The new maturity or expiration date for all theagreements is March 1, 2006 and the new amount subject to each agreementis $1.125 million.  Northwestern has notdrawn on the letter of credit and, therefore, there is no balance outstandingon the line of credit with Home Federal Bank as of December 31, 2004.

 

In addition to our debtobligations, we have certain other contractual cash obligations andcommitments. The following tables provide information regarding our contractualobligations and other

 

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commercial commitments as of December 31, 2004:

 
|                                   |       |      |           | **Payment  Due by Period** |   |
|----------------------------------------|------------|-----------|----------------|----------------------------|--------|
|                                   |       | **Total** |           | **Less  than  One  Year**  |   | **One to  Three  Years** |   | **Four to  Five  Years** |   | **After  Five  Years** |   |
| Long-Term Debt                         | ** ** | **$**     | **22,310,474** | ** **                 | **$**  | **2,478,571** | ** ** | **$** | **5,029,315** | ** ** | **$** | **5,558,101** | ** ** | **$** | **9,244,487** | ** ** |
| Electricity  Purchase Agreements       |       | 1,171,000 |           | 338,000                    |   | 709,000 |   | 124,000 |   | 0 |   |
| Natural  Gas Purchase Agreements       |       | 2,879,500 |           | 352,600                    |   | 705,200 |   | 705,200 |   | 1,116,500 |   |
| Related-Party  Agreements              |       | 5,577,706 |           | 622,616                    |   | 1,142,806 |   | 1,203,419 |   | 2,608,865 |   |
| **Total Contractual Cash Obligations** |       | $         | 31,938,680     |                       | $      | 3,791,787 |   | $ | 7,586,321 |   | $ | 7,590,720 |   | $ | 12,969,852 |   |

 
|                             |   |      |      | **Amount  of Commitment Expiration Per  Period** |      |
|----------------------------------|--------|-----------|-----------|--------------------------------------------------|-----------|
|                             |   | **Total** |      | **Less  than  One  Year**                        |      | **One to  Three  Years** |   | **Four to  Five  Years** |   | **After  Five  Years** |   |
| Standby  Letter of Credit (1)    |   | $         | 1,125,000 |                                             | 1,125,000 |   | — |   | — |   | — |   |
| **Total Commercial Commitments** |   | $         | 1,125,000 |                                             |      | 1,125,000 |   | — |   | — |   | — |   |
|                                  |        |           |           |                                                  |           |  |  |  |  |  |  |  |  |

 

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(1)          On February 28, 2005, Great Plains renewed a standby letter of creditagreement with its natural gas distributor. The standby letter of credit is a form of security provided to ournatural gas distributor in the event we do not use a minimum amount of naturalgas. The distributor may draw on the letter of credit if Great Plains does notcomply with certain payment, purchase and delivery obligations under a natural gas distributionagreement.  If the natural gasdistributor draws on the letter of credit, an equal amount must be drawn on theline of credit with Home Federal Bank, which then becomes a liability to GreatPlains.  The maturity date on the line ofcredit is March 1, 2006. As of December 31, 2004, there was noprincipal balance outstanding on the line of credit. 

 

**Off-Balance SheetArrangements**

 

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

 

**Recent AccountingPronouncements**

 

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 statement requires suchcosts be recognized as current period charges. The statement also requires the allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacility.  We have determined thatimplementation of this pronouncement will not have a material effect on thefinancial statements.

 

**Application of CriticalAccounting Policies and Estimates**

 

Preparation of our financial statementsnecessarily requires estimates and judgments to be made that affect the amountsof assets, liabilities, revenues and expenses reported.  Such decisions include the selection of theappropriate accounting principles to be applied and the assumptions on which tobase accounting estimates.  Ourmanagement continually evaluates these estimates based on assumptions itbelieves to be reasonable under the circumstances.

 

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The difficulty in applying these policiesarises from the assumptions, estimates and judgments that have to be madecurrently about matters that are inherently uncertain, such as future economicconditions, operating results and valuations, as well as management’sintentions.  As the difficulty increases,the level of precision decreases, meaning that actual results can, and probablywill be, different from those currently estimated.

 

 *Long-Lived Assets*

 

Depreciation and amortization of ourproperty, plant and equipment will be provided on the straight-line method bycharges to operations at rates based upon the expected useful lives ofindividual or groups of assets that are placed in service.  Economic circumstances or other factors maycause management’s estimates of expected useful lives to differ from the actualuseful lives.  Differences betweenestimated lives and actual lives may be significant, but management does notexpect events that occur during the normal operation of our plant related toestimated useful lives to have a significant effect on results of operations.

 

Long-lived assets, including property,plant and equipment and investments are evaluated for impairment on the basisof undiscounted cash flows whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  An impaired asset is written down to itsestimated fair market value based on the best information available.  Considerable management judgment is necessaryto estimate future cash flows and may differ from actual cash flows.  Management does not expect an materialimpairment of assets based on their assessment of the risks and rewards relatedto the ownership of these assets and the expected cash flows generated from theoperation of the plant.

 

*InventoryValuation*

 

We account for our corn inventory atestimated net realizable market value. Corn is an agricultural commodity that is freely traded, has quotedmarket prices, may be sold without significant further processing and haspredictable and insignificant costs of disposal.  We derive our estimates from local marketprices determined by grain terminals in its area.  Change in the market value of corn inventoryis recognized as a component of cost of revenues.  Ethanol and distillers grains’ inventoriesare stated at net realizable value. Work-in-process, supplies, parts and chemical inventory are stated atthe lower of cost or market on the first-in, first-out method.

 

###### *Revenue Recognition*

###### * *

Revenue from the production of ethanol andrelated products is recorded when title transfers to customers, net ofallowances for estimated returns. Generally, ethanol and related products are shipped FOB shipping point.  Interest income is recognized when earned.

 

Revenue from federal and state incentiveprograms is recorded when we have produced or sold the ethanol and satisfiedthe reporting requirements under each applicable program.  When it is uncertain whether we will receivefull allocation and payment due under the federal incentive program, we derivean estimate of the incentive revenue**forthe**relevant period based onvarious factors including the most recently used payment factor applied to theprogram.  The estimate is subject tochange as management becomes aware of increases or decreases in the amount offunding available under the federal incentive program or other factors thataffect funding or allocation of funds under such program.

 

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*Commitments andContingencies*

 

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.  Inconformity with accounting principles generally accepted in the United States,we accrue an expense when it is probable that a liability has been incurred andthe amount can be reasonably estimated.

 

*Derivative Instrumentsand Hedging Activities*

 

We enter intoderivative contracts to hedge our exposure to price risk related to forecastedcorn and natural gas purchases, forward corn purchase contracts and certaindistiller grain sales.  We do not typically enter into derivativeinstruments other than for hedging purposes.  All derivative contracts arerecognized on the December 31, 2004 and 2003 balance sheets at their fairmarket value.

 

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

 

**Item 7.  Financial Statements.**

 

Great Plains Ethanol, LLC’s financialstatements, described as follows, are appended to the signature page ofthis report beginning at page F-1.

 

•                  Report ofIndependent Registered Public Accounting Firm, dated January 18, 2005.

 

•                  BalanceSheet as of December 31, 2004.

 

•                  Statementsof Operations for the years ended December 31, 2004, and 2003.

 

•                  Statementsof Changes in Members’ Equity for the years ended December 31, 2004 and2003.

 

•                  Statementsof Cash Flows for the years ended December 31, 2004 and 2003.

 

•                  Notes toFinancial Statements.

 

**Item8.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

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**Item 8A.  Controls and Procedures.**

 

*Evaluation of Disclosure Controls and Procedures*

* *

Our Chief Executive Officer and ChiefFinancial Officer, after evaluating the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-14(c) under theSecurities Exchange Act of 1934, as amended, as of the end of the periodcovered by this report, has concluded that our disclosure controls andprocedures are effective in ensuring that material information required to bedisclosed is included in the reports that we file with the Securities &Exchange Commission.

 

*Changes in Internal Controls*

* *

There were no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the end of the period covered by this report.

 

**PART III**

 

**Item 9.  Directors, Executive Officers, Promoters andControl Persons; Compliance with Section 16(A) of the Exchange Act.**

 

All of information required by this itemis incorporated in this Form 10-KSB by reference from 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.

 

**Item10.  Executive Compensation.**

 

Information required by this item isincorporated in this Form 10-KSB by reference from 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.

 

**Item11.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

Information required by this item isincorporated in this Form 10-KSB by reference from 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.

 

**Item12.  Certain Relationships and RelatedTransactions.**

 

Information required by this item isincorporated in this Form 10-KSB by reference from 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.

 

**Item13.  Exhibits.**

 

The following exhibits are filed as partof, or are incorporated by reference into, this report:

 

(a)           Exhibits. See Exhibit Index

 

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(b)           None.

 

**Item14.  Principal Accountant Fees andServices.**

 

Information required by this item isincorporated in this Form 10-KSB by reference from 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.

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 

 
|   |                |                                | GREAT PLAINS ETHANOL, LLC      |
|--------|---------------------|-------------------------------------|--------------------------------|
|   |                |                                |                           |
| Date:  | March 31, 2005 |                                | /s/ Rick Serie                 |   |
|   |                |                                | Rick A. Serie, Chief Executive |
|   |                | Officer and Chief Financial Officer |

 

In accordancewith the Exchange Act, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| Date:  | March 31, 2005 |                                                 | /s/ Rick Serie         |   |
|--------|---------------------|------------------------------------------------------|------------------------|--------|
|   |                |                                                 | Rick A. Serie          |
|   |                | Chief Executive Officer and Chief  Financial Officer |
|   |                |                                                 |
| Date:  | March 31, 2005 | /s/ Jeff Broin                                       |                   |
|   |                |                                                 | Jeff Broin, Manager    |   |
|   |                |                                                 |                   |   |
| Date:  | March 31, 2005 | /s/ Dennis Hardy                                     |                   |
|   |                |                                                 | Dennis Hardy, Manager  |   |
|   |                |                                                 |                   |   |
| Date:  | March 31, 2005 | /s/ Darrin Ihnen                                     |                   |
|   |                |                                                 | Darrin Ihnen, Manager  |   |
|   |                |                                                 |                   |   |
| Date:  | March 31, 2005 | /s/ Dennis Schrag                                    |                   |
|   |                |                                                 | Dennis Schrag, Manager |   |
|   |                |                                                 |                   |   |
| Date:  | March 31, 2005 | /s/ Steve Sinning                                    |                   |
|   |                |                                                 | Steve Sinning, Manager |   |
|   |                |                                                 |                   |   |
| Date:  | March 31, 2005 | /s/ Fred Thurman                                     |                   |
|   |                |                                                 | Fred Thurman, Manager  |   |
|   |                |                                                 |                   |   |
| Date:  | March 31, 2005 | /s/ Dan Viet                                         |                   |
|   |                |                                                 | Dan  Viet, Manager     |   |

 

29

----

 
| Date:  | March 31, 2005 | /s/ Larry Ward |                 |
|--------|---------------------|----------------|----------------------|
|   |                |           | Larry  Ward, Manager |
|        |                     |                |                      |  |

 

30

----

 

**EXHIBIT INDEX**

 
| **Exhibit #** | ** ** | **Description**                                                                                      | ** ** | **Filed  Herewith** | ** ** | **Incorporated by Reference**                                                                                                           |
|--------------------|------------|------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                |       | Articles of Organization                                                                             |       |                |       | Appendix A to Issuer’s Prospectus filed  with the Commission pursuant to Rule 424(b)(3) on June 11,  2001.          |
| 3.2                |       | First Amended and Restated Operating  Agreement                                                      |       |                |       | Appendix A to Issuer Prospectus filed  with the Commission pursuant to Rule 424(b)(3) on June 11,  2001.                 |
| 3.3                |       | Amended and Addendum to Operating  Agreement                                                         |       |                |       | Exhibit 3.2 to the Issuer’s Form 10-KSB  filed with the Commission on March 3, 2003.                                |
| 3.4                |       | Amended and Restated Operating Agreement  adopted July 22, 2003                                 |       |                |       | Exhibit 3.1 to the Issuer’s Form 10-QSB  filed with the Commission on November 14, 2003.                            |
| 3.5                |       | Amended and Restated Operating Agreement  dated February 17, 2005.                              |       | X                   |       |                                                                                                                                    |
| 4.1                |       | Form of Class A Certificate                                                                |       |                |       | Exhibit 4.1 to the Issuer’s Form SB-2  filed with the Commission on February 28, 2001 (File No. 333-56368)     |
| 4.2                |       | Form of Class B Certificate                                                                |       |                |       | Exhibit 4.2 to the Issuer’s Form SB-2  filed with the Commission February 28, 2001.                                 |
|               |       |                                                                                                 |       |                |       |                                                                                                                                    |
| 4.3                |       | Form of Class C Certificate                                                                |       |                |       | Exhibit 4.3 to the Issuer’s Form SB-2  filed with the Commission February 28, 2001.                                 |
| 10.1               |       | Ethanol Marketing and Services Agreement  with Ethanol Products, LLC, dated December 18, 2000   |       |                |       | Exhibit 10.4 to the Issuer’s Form SB-2  filed with the Commission on February 28, 2001.                             |
| 10.2               |       | Licensing Agreement with Broin and  Associates, Inc. dated November 20, 2001               |       |                |       | Exhibit 10.10 to the Issuer’s Form 10-KSB  filed with the Commission on April 1, 2002.                              |
| 10.3               |       | Process Guarantee by Broin and  Associates, Inc., dated November 20, 2001                  |       |                |       | Exhibit 10.11 to the Issuer’s Form 10-KSB/A  filed with the Commission on April 1, 2002.                            |
| 10.4               |       | Water Purchase Agreement with Lincoln  County Rural Water System, Inc., dated May 24, 2002 |       |                |       | Exhibit 10.3 to the Issuer’s Form 10-QSB  filed with the Commission on August 14, 2002.                             |
| 10.5               |       | Credit Agreement with Ag Country Farm  Services Credit, FLCA, dated June 19, 2002               |       |                |       | Exhibit 10.1 to the Issuer’s Form 8-K  filed with the Commission on June 20, 2002.                                  |
| 10.6               |       | Promissory Note with Ag Country Farm  Service Credit, PLA, dated June 20, 2002                  |       |                |       | Exhibit 10.2 to the Issuer’s Form 8-K  filed with the Commission on June 20, 2002.                                  |
| 10.7               |       | Natural Gas Distribution Agreement,  dated September 2, 2002                                    |       |                |       | Exhibit 10.2 to the Issuer’s Form 10-QSB  filed with the Commission on November 14, 2002.                           |
| 10.8               |       | Natural Gas Supply Agreement                                                                         |       |                |       | Exhibit 10.3 to the Issuer’s Form 10-QSB  filed with the Commission on November 14, 2002                            |
|               |       |                                                                                                 |       |                |       |                                                                                                                                    |
| 10.12              |       | Natural Gas Interstate Pipeline  Transportation Agreement, dated September 2, 2002              |       |                |       | Exhibit 10.4 to the Issuer’s From  10-QSB filed with the Commission on November 14, 2002  (File No. 333-56368) |

 

31

----

 
| **Exhibit #** | ** ** | **Description**                                                                                                 | ** ** | **Filed  Herewith** | ** ** | **Incorporated by Reference**                                                                                |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------------------|
| 10.9               |       | Electric Service Agreement, dated September 25,  2002                                                      |       |                |       | Exhibit 10.1 to the Issuer’s Form 10-QSB  filed with the Commission on November 14, 2002 |
| 10.10              |       | Corn Price Risk Management Agreement  with Broin Management, LLC, dated November 27, 2002                  |       |                |       | Exhibit 10.20 to the Issuer’s Form 10-KSB  filed with the Commission on March 4, 2003.   |
| 10.11              |       | DDGS Marketing Contract with Broin Enterprises, Inc.  d/b/a Dakota Commodities, dated January 7, 2003 |       |                |       | Exhibit 10.21 to the Issuer’s Form 10-KSB  filed with the Commission on March 4, 2003.   |
| 10.12              |       | Irrevocable Standby Letter of Credit                                                                            |       |                |       | Exhibit 10.1 to the Issuer’s Form 10-QSB  filed with the Commission May 15, 2003.        |
| 10.13              |       | Loan Agreement with Broin and Associates, Inc.,  dated June 16, 2003                                  |       |                |       | Exhibit 10.1 to the Issuer’s From  10-QSB filed with the Commission on August 14, 2003.       |
| 10.14              |       | Amended and Restated Irrevocable Standby  Letter of Credit, dated May 28, 2003                             |       |                |       | Exhibit 10.2 to the Issuer’s From  10-QSB filed with the Commission on August 14, 2003.       |
| 10.19              |       | Loan Agreement with Home Federal Bank,  dated February 28, 2003                                            |       |                |       | Exhibit 10.3 to the Issuer’s Form 10-QSB  filed with the Commission on August 14, 2003.  |
| 10.20              |       | Promissory Note with Home Federal Bank,  dated February 28, 2003                                           |       |                |       | Exhibit 10.4 to the Issuer’s Form 10-QSB  filed with the Commission on August 14, 2003.  |
| 10.21              |       | Amended and Restated Letter of Credit,  dated February 25, 2004                                            |       |                |       | Exhibit 10.1 to the Issuer’s Form 10-QSB  filed with the Commission on May 17, 2004.     |
|               |       |                                                                                                            |       |                |       |                                                                                                         |
|               |       |                                                                                                            |       |                |       |                                                                                                         |
| 10.22              |       | Promissory Note Modification Agreement,  dated February 25, 2004                                           |       |                |       | Exhibit 10.2 to the Issuer’s Form 10-QSB  filed with the Commission on May 17, 2004.     |
| 10.23              |       | Agreement to Compensate Guarantors,  dated February 25, 2004.                                              |       |                |       | Exhibit 10.3 to the Issuer’s Form 10-QSB  filed with the Commission on May 17, 2004.     |
| 10.24              |       | Amended and Restated Letter of Credit,  dated February 28, 2005                                                 |       | X                   |       |                                                                                                         |
| 10.25              |       | Promissory Note Modification Agreement  dated February 28, 2005                                                 |       | X                   |       |                                                                                                         |
| 10.26              |       | Agreement to Compensate Guarantors,  dated February 28, 2005                                               |       | X                   |       |                                                                                                         |
| 31                 |       | Rule 13a-14(a)/15d-14(a) Certifications                                                               |       | X                   |       |                                                                                                         |
| 32                 |       | Section 1350 Certification                                                                                 |       | X                   |       |                                                                                                         |

 

32

----

**GREATPLAINS ETHANOL, LLC**

 

Table of Contents

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

 

----

 

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

 

The Audit Committee

**GreatPlains Ethanol, LLC**

Chancellor, South Dakota

 

We have audited theaccompanying balance sheet of **Great Plains Ethanol, LLC**as of December 31, 2004 and the related statements of operations, members’equity and cash flows for each of the two years in the period ended December31, 2004. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these 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 financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates by management, as well as evaluating the overall financial statementpresentation. We believe our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of **Great Plains Ethanol, LLC**as of December 31, 2004 and the results of its operations and its cash flowsfor each of the two years in the period ended December 31, 2004, in conformitywith accounting principles generally accepted in the United States of America.

 

 
| /s/ Eide Bailly LLP                                                       |   |
|---------------------------------------------------------------------------|--------|
| Minneapolis, Minnesota                                                    |
| January 18, 2005,  except for Note 13 for which the date is March 2, 2005 |

 

 

F-1

----

 

**GREAT PLAINS ETHANOL, LLC**

**BALANCESHEET**

**DECEMBER 31, 2004**

 
| **ASSETS**                                                   |   |       |       |
|--------------------------------------------------------------|--------|------------|------------|
|                                                         |   |       |       |
| CURRENT ASSETS                                               |   |       |       |
| Cash and cash  equivalents                                   |   | $          | 771,478    |   |
| Receivables                                                  |   |       |       |
| Ethanol -  related party                                     |   | 3,409,859  |       |
| Distiller's  grain                                           |   | 487,533    |       |
| Incentives                                                   |   | 317,117    |       |
| Excise and sales  tax refund                                 |   | 185,725    |       |
| Other                                                        |   | 2,226      |       |
| Inventory                                                    |   |       |       |
| Raw materials                                                |   | 1,369,527  |       |
| Finished goods                                               |   | 2,221,080  |       |
| Work-in-process                                              |   | 381,277    |       |
| Parts inventory                                              |   | 531,363    |       |
| Investment in  commodities contracts                         |   | 1,538,118  |       |
| Prepaid expenses                                             |   | 265,756    |       |
| Total current  assets                                        |   | 11,481,059 |       |
|                                                         |   |       |       |
| PROPERTY AND  EQUIPMENT                                      |   |       |       |
| Land                                                         |   | 270,210    |       |
| Land  improvements                                           |   | 3,556,518  |       |
| Buildings                                                    |   | 8,889,160  |       |
| Equipment                                                    |   | 35,977,210 |       |
|                                                         |   | 48,693,098 |       |
| Less accumulated  depreciation                               |   | (4,427,854 | )          |
| Net property and  equipment                                  |   | 44,265,244 |       |
|                                                         |   |       |       |
| OTHER ASSETS                                                 |   |       |       |
| Financing costs,  net of accumulated amortization of $75,159 |   | 299,801    |       |
| Other                                                        |   | 1,000      |       |
|                                                         |   | 300,801    |       |
|                                                         |   |       |       |
|                                                         |   | $          | 56,047,104 |   |

 

See Notes to Financial Statements

 

F-2

----

 

 
| **LIABILITIES  AND MEMBERS' EQUITY**                           |   |       |       |
|----------------------------------------------------------------|--------|------------|------------|
|                                                           |   |       |       |
| CURRENT  LIABILITIES                                           |   |       |       |
|                                                           |   |       |       |
| Accounts payable  - trade                                      |   | $          | 3,937,022  |   |
| Accounts payable  - construction costs                         |   | 152,143    |       |
| Accounts payable  to related party                             |   | 334,929    |       |
| Accounts payable  to related party - construction costs        |   | 6,821      |       |
| Accrued  distribution                                          |   | 2,245,200  |       |
| Other accrued  liabilities                                     |   | 237,587    |       |
| Current portion  of long-term debt                             |   | 2,478,571  |       |
|                                                           |   |       |       |
| Total current  liabilities                                     |   | 9,392,273  |       |
|                                                           |   |       |       |
| LONG-TERM DEBT                                                 |   | 19,831,903 |       |
|                                                           |   |       |       |
| COMMITMENTS AND  CONTINGENCIES                                 |   |       |       |
|                                                           |   |       |       |
| MEMBERS' EQUITY                                                |   |       |       |
|                                                           |   |       |       |
| Total units  authorized - 4,700                                |   |       |       |
| Class A Units,  $5,000 par, 1,513 units issued and outstanding |   | 7,565,000  |       |
| Class B Units,  $5,000 par, 200 units issued and outstanding   |   | 1,000,000  |       |
| Class C Units,  $5,000 par, 2,029 units issued and outstanding |   | 10,145,000 |       |
| Class D Units,  $100 par, 0 units issued and outstanding       |   | —     |       |
| Additional  paid-in capital                                    |   | 7,000      |       |
| Retained  earnings                                             |   | 8,105,928  |       |
|                                                           |   |       |       |
| Total members'  equity                                         |   | 26,822,928 |       |
|                                                           |   |       |       |
|                                                           |   | $          | 56,047,104 |   |

 

F-3

----

 

**GREAT PLAINS ETHANOL, LLC**

**STATEMENTS OF OPERATIONS**

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

 
| ** **                                  | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|---------------------------------------------|------------|----------------|----------------|------------|------------|
| REVENUES                                    |       |           |           |       |       |
| Sales                                       | ** ** | **$**          | **83,360,235** |       | $          | 44,588,101 |   |
| Incentive  revenue                          | ** ** | **5,560,117**  |           | 7,663,419  |       |
| Grant revenue                               | ** ** | **—**     |           | 103,115    |       |
| Total revenues                              | ** ** | **88,920,352** |           | 52,354,635 |       |
|                                        |       |           |           |       |       |
| COST OF REVENUES                            | ** ** | **71,588,411** |           | 42,833,701 |       |
|                                        |       |           |           |       |       |
| GROSS PROFIT                                | ** ** | **17,331,941** |           | 9,520,934  |       |
|                                        |       |           |           |       |       |
| OPERATING  EXPENSES                         |       |           |           |       |       |
| Startup costs                               | ** ** | **—**     |           | 403,801    |       |
| General and  administrative                 | ** ** | **2,759,696**  |           | 1,790,695  |       |
| Total operating  expenses                   | ** ** | **2,759,696**  |           | 2,194,496  |       |
|                                        |       |           |           |       |       |
| INCOME FROM  OPERATIONS                     | ** ** | **14,572,245** |           | 7,326,438  |       |
|                                        |       |           |           |       |       |
| OTHER INCOME AND  (EXPENSES)                |       |           |           |       |       |
| Interest income                             | ** ** | **11,420**     |           | 13,107     |       |
| Interest expense                            | ** ** | **(1,176,009** | )              | (1,177,471 | )          |
| Other                                       | ** ** | **330,959**    |           | 11,172     |       |
| Total other  income and (expenses)          | ** ** | **(833,630**   | )              | (1,153,192 | )          |
|                                        |       |           |           |       |       |
| NET INCOME                                  | ** ** | **$**          | **13,738,615** |       | $          | 6,173,246 |   |
|                                        |       |           |           |       |       |
| BASIC AND  DILUTED INCOME PER CAPITAL UNIT  | ** ** | **$**          | **3,671**      |       | $          | 1,650 |   |
|                                        |       |           |           |       |       |
| WEIGHTED AVERAGE  CAPITAL UNITS OUTSTANDING |       |           |           |       |       |
|                                        |       |           |           |       |       |
| BASIC AND  DILUTED                          | ** ** | **3,742**      |           | 3,742      |       |
|                                             |            |                |                |            |            |  |  |  |

 

See Notes to Financial Statements

 

F-4

----

 

**GREAT PLAINS ETHANOL, LLC**

**STATEMENTSOF CHANGES IN MEMBERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 
| ** **                                    | ** ** | **Capital Units** | ** ** | **Additional** | ** **    | ** **  | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|-------------------|------------|----------------|---------------|-------------|------------|-------------|------------|
| ** **                                    | ** ** | **Class A**       | ** ** | **Class B**    | ** **    | **Class C** | ** ** | **Class D** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **Units**         | ** ** | **Amount**     | ** **    | **Units**   | ** ** | **Amount**  | ** ** | **Units** | ** ** | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Amount** | ** ** |
| Balance, December  31, 2002                   |       | 1,513             |       | $              | 7,565,000     |        | 200        |        | $          | 1,000,000 |   | 2,029 |   | $ | 10,145,000 |   | — |   | $ | — |   | $ | 7,000 |   | $ | (818,710 | ) | $ | 17,898,290 |   |
|                                          |       |              |       |           |          |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                    |       | —            |       | —         |          | —      |       | —      |       | — |   | — |   | — |   | — |   | — |   | 6,173,246 |   | 6,173,246 |   |
|                                          |       |              |       |           |          |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Distributions to  members, $1,000 per unit    |       | —            |       | —         |          | —      |       | —      |       | — |   | — |   | — |   | — |   | — |   | (3,742,000 | ) | (3,742,000 | ) |
|                                          |       |              |       |           |          |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December  31, 2003                   |       | 1,513             |       | 7,565,000      |          | 200         |       | 1,000,000   |       | 2,029 |   | 10,145,000 |   | — |   | — |   | 7,000 |   | 1,612,536 |   | 20,329,536 |   |
|                                          |       |              |       |           |          |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                    |       | —            |       | —         |          | —      |       | —      |       | — |   | — |   | — |   | — |   | — |   | 13,738,615 |   | 13,738,615 |   |
|                                          |       |              |       |           |          |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Distributions to  members, $1,936.19 per unit |       | —            |       | —         |          | —      |       | —      |       | — |   | — |   | — |   | — |   | — |   | (7,245,223 | ) | (7,245,223 | ) |
|                                          |       |              |       |           |          |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance,  December 31, 2004**               | ** ** | **1,513**         | ** ** | **$**          | **7,565,000** | ** **  | **200**    | ** **  | **$**      | **1,000,000** | ** ** | **2,029** | ** ** | **$** | **10,145,000** | ** ** | **—** | ** ** | **$** | **—** | ** ** | **$** | **7,000** | ** ** | **$** | **8,105,928** | ** ** | **$** | **26,822,928** | ** ** |
|                                               |            |                   |            |                |               |             |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See Notes to FinancialStatements

 

 

F-5

----

 

**GREAT PLAINS ETHANOL, LLC**

**STATEMENTS OF CASH FLOWS**

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

 
| ** **                                                | ** ** | **2004**        | ** **     | **2003**    | ** ** |
|-----------------------------------------------------------|------------|-----------------|----------------|-------------|------------|
| OPERATING  ACTIVITIES                                     |       |            |           |        |       |
| Net income                                                | ** ** | **$**           | **13,738,615** |        | $          | 6,173,246 |   |
| Changes to net  income not affecting cash                 |       |            |           |        |       |
| Depreciation                                              | ** ** | **2,525,266**   |           | 1,946,955   |       |
| Amortization                                              | ** ** | **40,871**      |           | 29,502      |       |
| Gain on  equipment disposals                              | ** ** | **(324,652**    | )              | —      |       |
| (Increase)  decrease in current assets                    |       |            |           |        |       |
| Receivables                                               | ** ** | **1,254,479**   |           | (5,421,979  | )          |
| Inventory                                                 | ** ** | **(1,683,656**  | )              | (2,819,591  | )          |
| Investments in  commodities contracts                     | ** ** | **(644,219**    | )              | (893,899    | )          |
| Prepaid expenses                                          | ** ** | **(208,637**    | )              | (18,491     | )          |
| Increase  (decrease) in current liabilities               |       |            |           |        |       |
| Accounts payable  - trade                                 | ** ** | **294,461**     |           | 3,637,346   |       |
| Accounts payable  to related party                        | ** ** | **106,956**     |           | 216,973     |       |
| Accrued interest                                          | ** ** | **—**      |           | (76,030     | )          |
| Accrued  liabilities                                      | ** ** | **112,117**     |           | 124,575     |       |
|                                                      |       |            |           |        |       |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                | ** ** | **15,211,601**  |           | 2,898,607   |       |
|                                                      |       |            |           |        |       |
| INVESTING  ACTIVITIES                                     |       |            |           |        |       |
| Insurance  proceeds on property damaged by fire           | ** ** | **993,588**     |           | —      |       |
| Purchase of  property and equipment                       | ** ** | **(2,626,519**  | )              | (12,908,826 | )          |
| Excise and sales  taxes refunded on construction contract | ** ** | **98,742**      |           | 468,266     |       |
|                                                      |       |            |           |        |       |
| NET CASH USED  FOR INVESTING ACTIVITIES                   | ** ** | **(1,534,189**  | )              | (12,440,560 | )          |
|                                                      |       |            |           |        |       |
| FINANCING  ACTIVITIES                                     |       |            |           |        |       |
| Advances on  notes payable                                | ** ** | **9,700,000**   |           | 17,440,626  |       |
| Advances on  notes payable - related party                | ** ** | **—**      |           | 1,000,000   |       |
| Principal  payments on notes payable                      | ** ** | **(19,336,403** | )              | (2,548,850  | )          |
| Principal  payments on notes payable - related party      | ** ** | **—**      |           | (1,000,000  | )          |
| Distributions  paid to members, $2,336.19 per unit        | ** ** | **(8,742,023**  | )              | —      |       |
| Financing costs  paid                                     | ** ** | **(7,500**      | )              | (21,432     | )          |
|                                                      |       |            |           |        |       |
| NET CASH (USED  FOR) PROVIDED BY FINANCING ACTIVITIES     | ** ** | **(18,385,926** | )              | 14,870,344  |       |
|                                                      |       |            |           |        |       |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS     | ** ** | **(4,708,514**  | )              | 5,328,391   |       |
|                                                      |       |            |           |        |       |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD         | ** ** | **5,479,992**   |           | 151,601     |       |
|                                                      |       |            |           |        |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD               | ** ** | **$**           | **771,478**    |        | $          | 5,479,992 |   |

 

See Notes to Financial Statements

 

F-6

----

 

**STATEMENTS OF CASH FLOWS - Page 2**

 
| ** **                                                               | ** ** | **2004** | ** **    | **2003** | ** ** |
|--------------------------------------------------------------------------|------------|----------|---------------|----------|------------|
|                                                                     |       |     |          |     |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                        |       |     |          |     |       |
| Cash paid for  interest, net of interest capitalized                     | ** ** | **$**    | **1,176,009** |     | $          | 1,253,501 |   |
|                                                                     |       |     |          |     |       |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |       |     |          |     |       |
| Accounts payable  incurred for construction costs                        | ** ** | **$**    | **158,964**   |     | $          | 641,455 |   |
|                                                                     |       |     |          |     |       |
| Financing costs  amortized and reclassified to capitalized interest      | ** ** | **$**    | **—**    |     | $          | 4,786 |   |
|                                                                     |       |     |          |     |       |
| Property and  equipment purchases                                        |       |     |          | $        | 14,065,697 |   |
| Tax increment  finance district proceeds and other support               | ** ** | **$**    | **—**    |     | $          | (1,156,871 | ) |
|                                                                     |       |     |          |     |       |
| Property and  equipment purchases, net                                   | ** ** | **$**    | **—**    |     | $          | 12,908,826 |   |

 

See Notes to FinancialStatements

 

F-7

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TO FINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

**NOTE 1 -****                     NATURE OFOPERATIONS**

** **

*Principal Business Activity*

 

Great Plains Ethanol, LLC, a South Dakota limited liability companywith its principal place of business in Turner County, South Dakota, was organizedto obtain equity ownership and debt financing to construct, own and operate a40 million gallon ethanol plant. Great Plains Ethanol, LLC (the Company) beganactivities on December 20, 2000. On March 20, 2003, the ethanol plantcommenced its principal operations. Prior to March 20, 2003, theCompany was in the development stage with its efforts being principally devotedto construction of the ethanol plant. The Company sells ethanol and relatedproducts to customers located in North America.

 

**NOTE 2 -****                     SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Basisof Accounting*

 

The Company uses theaccrual basis of accounting in accordance with accounting principles generallyaccepted in the United States of America. This method recognizes revenues asearned and expenses as incurred.

 

*RevenueRecognition*

 

Revenue from the production of ethanol and related products is recordedwhen title transfers to customers, net of allowances for estimated returns.Generally, ethanol and related products are shipped FOB shipping point.Interest income is recognized as earned.

 

The Company receivespayments for incentives to produce ethanol from the State of South Dakota andfrom the United States Department of Agriculture. In accordance with the termsof these arrangements, revenue is recorded based on production or sale ofethanol.

 

Management reviewsforward sales contracts of ethanol and related products and compares thecurrent cost of production with the contract prices. For contracts with a salesvalue that is less than the current cost of production, a loss is recorded as acomponent of cost of sales. For contracts with a sales value that exceeds thecurrent cost of production, the applicable revenue is recognized upon delivery(fulfillment of the contract).

 

*ShippingCosts*

 

Shipping costs incurred by the Company are recorded as a component ofcost of revenues. In accordance with the Company’s agreement for marketing andsale of ethanol and by-product, shipping costs arranged by the marketer arededucted from the gross sales price. Revenue is recorded based on the netselling price reported to the Company by the marketer.

 

*InventoryValuation*

 

Corn inventory is statedat market value, which approximates net realizable value, based on local marketprices determined by grain terminals located in the area of the Company.Ethanol and related products are stated at net realizable value.Work-in-process, supplies, parts and chemical inventory are stated at the lowerof cost or market on the first-in, first-out method.

 

F-8

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

In addition, futures and option contracts are marked to market throughcost of revenues.

 

*Cash and Cash Equivalents*

 

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

 

### ***Receivablesand Credit Policies***

### ** **

Trade receivables are uncollateralized customer obligations due undernormal trade terms requiring payment within fifteen days from the invoice date.Unpaid trade receivables with invoice dates over thirty days old bear interestat 1.5% per month.

 

Trade receivables arestated at the amount billed to the customer.

 

Payments of trade receivables are allocated to the specific invoicesidentified on the customer’s remittance advice or, if unspecified, are appliedto the earliest unpaid invoices.

 

The carrying amount oftrade receivables is reduced by a valuation allowance that reflectsmanagement’s best estimate of the amounts that will not be collected.Management reviews all trade receivable balances that exceed sixty days fromthe invoice date and based on an assessment of current creditworthiness,estimates the portion, if any, of the balance that will not be collected.

 

*Investment in CommoditiesContracts, Derivative Instruments and Hedging Activities*

 

SFAS No. 133 requires a company to evaluate its contracts to determinewhether the contracts are derivatives. Certain contracts that literally meetthe definition of a derivative may be exempted from SFAS No. 133 as normalpurchases or normal sales. Normal purchases and normal sales are contracts thatprovide for the purchase or sale of something other than a financial instrumentor derivative instrument that will be delivered in quantities expected to beused or sold over a reasonable period in the normal course of business.Contracts that meet the requirements of normal are documented as normal andexempted from the accounting and reporting requirements of SFAS No. 133.

 

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

 

As part of its trading activity, the Company uses futures and optionscontracts offered through regulated commodity exchanges to reduce risk and isexposed to risk of loss in the market value of inventories. To reduce thatrisk, the Company generally takes positions using cash and futures contractsand options.

 

Unrealized gains and losses related to derivative contracts areincluded as a component of cost of revenues in the accompanying financialstatements. Inventories are recorded at net realizable value so that gains andlosses on derivative contracts are offset by gains and losses on inventoriesand reflected in current earnings. For the statement of cash flows, suchcontract transactions are classified as operating activities.

 

We have recorded an increase to cost of revenues of $3,941,781 and$419,101 related to our derivative contracts for the years ended December 31,2004 and 2003, respectively.

 

F-9

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

# ***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 location. Accordingly,the Company has adopted policies, practices and procedures in the areas ofpollution control, occupational health and the production, handling, storageand use of hazardous materials to prevent material environmental or otherdamage, and to limit the financial liability, which could result from suchevents. Environmental liabilities are recorded when the Company’s liability isprobable and the costs can be reasonably estimated.

 

*Start-Up Costs*

 

Start-up costs are expensed as incurred. Start-up costs consist ofamounts incurred during the development stage related to the operation andmanagement of the Company, which do not qualify as a capitalized cost.

 

*FinancingCosts*

 

Financing costs are amortized over the term of the related debt usingthe interest method of amortization. Amortization of financing costs duringconstruction is capitalized as part of construction period interest.

 

*Use of Estimates*

 

The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States of America 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*

 

The Company’s cashbalances are maintained in bank depositories and periodically exceed federallyinsured limits.

 

*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 computed usingthe straight-line method over estimated useful lives as follows:

 

| Site improvements |   | 40 years          |
|-------------------|--------|-------------------|
| Buildings         |   | 40 years          |
| Equipment         |   | 3 – 20 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. The amount of the loss is determined bycomparing the fair market values of the asset to the carrying amount of theasset.

 

F-10

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

*Earnings per Capital Unit*

 

For purposes ofcalculating basic earnings per capital unit, capital units issued by theCompany are considered outstanding on the effective date of issue. Dilutedearnings per unit are calculated by including dilutive potential capital unitsin the denominator and adjusting net earnings (loss) as applicable. As ofDecember 31, 2004 and 2003, diluted earnings per unit are equal to basicearnings per unit.

 

*Income Taxes*

 

The Company is organizedas a limited liability company under state law. Accordingly, the Company’searnings pass through to the members and are taxed at the member level. Noincome tax provision has been included in these financial statements.Differences between financial statement basis of assets and tax basis of assetsis related to capitalization and amortization of organization and start-upcosts for tax purposes, whereas these costs are expensed for financialstatement purposes. In addition, differences in lives andmethods used in the depreciation of property and equipment result indifferences between the financial statement and tax basis of property andequipment.

 

*Recently Issued AccountingPronouncements*

 

The Financial AccountingStandards Board (FASB) has issued Statement No. 151, Inventory Costs, anamendment of ARB No. 43, Chapter 4, “Inventory Pricing” (SFAS No. 151). TheStatement amends and clarifies accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material (spoilage). The statementrequires such costs be recognized as current period charges. The statement alsorequires the allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facility.

 

Management has determinedthat implementation of this pronouncement will not have a material effect onthe Company’s financial statements.

 

**NOTE 3 -       TAX INCREMENT FINANCING**

 

During the year ended December 31, 2003, the Company received$1,106,871 from the proceeds of tax increment financing bonds issued by TurnerCounty, South Dakota. Under South Dakota law, proceeds from tax incrementfinancing are not a liability of the entity (Great Plains Ethanol, LLC), butare an obligation of the taxing district issuing the bonds. The grant wasprovided to fund infrastructure improvements to real property owned by theCompany and will be repaid by Turner County from the incremental increase inproperty taxes related to the improvement of the Company’s real property. Theproceeds of the financing have been recorded as a reduction of the cost basisof the applicable property and equipment.

 

F-11

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

**NOTE 4 -       LONG-TERM DEBT**

 

On June 19, 2002, the Company entered into a credit agreement withAgCountry Farm Credit Services, FLCA outlining the terms of its construction,term and revolving financing arrangements. The construction loan was limited to65% of construction costs of the ethanol plant or $32,500,000. Interest duringconstruction was payable monthly at a variable rate of LIBOR plus 3.14%. OnOctober 1, 2003, the loan converted to a $26,500,000 term loan payable in 40equal quarterly installments of principal and interest at a variable rate ofLIBOR plus 2.64%. The Company converted $6,000,000 of the construction loan toa revolving loan with monthly payments of interest at LIBOR plus 3.14%, plus a..50% unused commitment fee billed on a quarterly basis beginning with thecalendar quarter ending January 1, 2004. On October 1 of each year, the Companymust reduce the original amount outstanding by 10% of the amount converted tothe revolving loan. The maximum revolving loan amount is reduced each year bythis amount. The term and revolving loans have a final maturity date of October1, 2013. In addition, the Company shall pay, on a quarterly basis, 25% of itsfree cash flow, not to exceed $1,500,000 in each fiscal year. The constructionand term loans are secured by a first and prior lien on the Company’s real andpersonal property and the collateral assignment of the Company’s materialcontracts. The Company is subject to certain restrictive covenants. Thecovenants require minimum ratios, restrict distributions to no more than 75% ofnet income and limit total capital expenditures without the consent of thelender.

 

The balance of the notes payable as of December 31, 2004 is as follows:

 

| Notes payable to AgCountry Farm Credit Services | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| Term note                                       |       | $          | 22,310,474 |   |
| Revolving term  note                            |       | —     |       |
|                                            |       | 22,310,474 |       |
|                                            |       |       |       |
| Less current  portion                           |       | 2,478,571  |       |
|                                            |       |       |       |
|                                            |       | $          | 19,831,903 |   |

 

The Company had $5,400,000 available to borrow on the revolving termnote as of December 31, 2004.

 

Minimum principal payments for the next five years are estimated asfollows:

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2005                          |       | $          | 2,478,571  |   |
| 2006                          |       | 2,451,821  |       |
| 2007                          |       | 2,577,494  |       |
| 2008                          |       | 2,709,608  |       |
| 2009                          |       | 2,848,493  |       |
|                               |            |            |            |  |

 

Minimum principalpayments for the twelve months ending December 31, 2005 include $141,052related to the calculation of an additional principal payment based on freecash flow.

 

F-12

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

**NOTE 5 -       LINE OF CREDIT**

 

On September 1, 2004 the Company obtained an additional $3,000,000revolving line of credit from AgCountry Farm Credit Services, FLCA. The line ofcredit is limited to 75% of inventory, hedge accounts and accounts receivablesless than 90 days old, calculated on a quarterly basis. The line of creditcarries an interest rate equal to LIBOR plus 3.50%, adjusted on a monthlybasis, plus a .40% unused commitment fee. Interest and unused commitment feesare payable quarterly beginning on October 1, 2004. The revolving line ofcredit has a final maturity date of September 1, 2005. As of December 31, 2004there were no borrowings on the revolving line of credit. The Company had$3,000,000 available to borrow on the revolving line of credit as of December31, 2004.

 

**NOTE 6 -       GRANT AGREEMENT**

 

The Company was awarded a United States Department of AgricultureValue-Added Agricultural Product Market Development Grant (the Grant) forapproximately $401,000. The Grant was used to pay for certain organizational,offering and start-up costs related to the formation and capitalization of theCompany. Prior to 2003, the Company had received $337,123 under the Grantagreement. For the year ended December 31, 2003, the Company received $83,848,for a total grant amount of $401,704.

 

During the year ended December 31, 2003, the Company received a $50,000grant from Southeast Enterprise Facilitation Project. The grant was used to payfor certain land costs and has been recorded as a reduction in the cost of theland.

 

**NOTE 7 -       MEMBERS’ EQUITY**

 

As specified in theCompany’s Operating Agreement, the Company has four classes of membership capitalunits authorized: Class A, B, C and D.

 

During 2001, the Companycompleted its initial public offering of Class A and Class C Capital Units. TheCompany received subscriptions for 1,529 Class ACapital Units and 1,973 Class C Capital Units, which would result in proceedsof $17,510,000 to the Company if all subscriptions were paid in full. As partof the public offering, 10% of the offering price for each subscription wasrequired to be deposited to an escrow account. The Company received payment inthe form of promissory notes for the balance of the subscription price fromeach subscriber. The funds in the escrow account were not available to theCompany until the Company secured a commitment letter for debt financing tocover certain construction costs for the ethanol plant. On November 7, 2001,the Company secured a commitment letter for debt financing and broke escrow andtook possession of the $1,751,000 held in the escrow account related to the1,529 Class A Units and 1,973 Class C Units subscribedin the offering. In addition, the Company took possession of $120,000 held inescrow related to the Class B and Class C Units subscribed for in privatesales.

 

The Company offered tosell, and an entity related to the Managing Member agreed to purchase, 200Class B Capital Units at a price of $5,000 per capital unit, for a total of$1,000,000 in a private transaction. The entity related to the Managing Memberhas paid the Company $1,000,000 in cash in connection with the sale of the 200Class B Capital Units as of December 31, 2002. Transfer of Class B CapitalUnits is prohibited unless the units are first offered for sale to the Companyat the fair market value of the units.

 

F-13

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

The Company also offered to sell, and the ManagingMember agreed to purchase, 40 Class C Capital Units at a price of $5,000 percapital unit, for a total of $200,000, in a private transaction in exchange forservices related to preparation of a business plan and feasibilityof the plant. In connection with this agreement, the Company paid the ManagingMember $200,000 for the business plan and feasibility study during the yearended December 31, 2001. The Managing Member paid the Company $200,000 in cashfor the 40 Class C Capital Units as of December 31, 2002.

 

An entity related to theManaging Member also subscribed for 400 Class C Capital Units, for a total of$2,000,000, as part of the public offering. The entity has paid the Company$2,000,000 in connection with the sale of the 400 Class C Capital Units as ofDecember 31, 2002.

 

For Class A, B and C Capital Units, 10% of the offering price was dueupon subscription, with the remaining amount paid in the form of a promissorynote due subject to call of the Board of Managers. Under the terms of itsinitial public offering, the Board of Managers was required to call amounts dueon promissory notes for Class A and Class C Capital Units subscribed beforecalling amounts due on promissory notes from Class B Capital Units subscribed.At December 31, 2001, the Board of Managers called the remaining amounts due onpromissory notes for Class A and Class C Capital Units, with 40% due on January15, 2002, and the remaining 50% due on April 1, 2002.

 

The Company offered ClassC Capital units with a minimum purchase of ten (10) units per purchaser andClass A Capital Units to producers of agriculturalproducts, with a minimum purchase of two (2) Class A Capital Units perpurchaser. For each Class A Capital Unit purchased,the member is obligated to deliver 2,500 bushels of corn to the Company on anannual basis. For all Class A Members, this equates to3,782,500 bushels of corn delivered annually. Corn is purchased from the Class A Members at a price based on the average market price fromsurrounding local markets. For the years ended December 31, 2004 and 2003,respectively, the Company purchased 20% and 21% of its total bushels requiredfor production under the obligation related to Class ACapital units.

 

Upon default on certainobligations of members related to Class A, B and C Capital Units, the Companyhad the right to redeem the member’s interest at 10% of the price at which theCapital Units were originally offered for sale by the Company. If a memberdefaulted on the payment of the purchase price pursuant to the promissory notereferenced above, the Company had the option to redeem the member’s interestand retain all amounts paid by the member as liquidated damages. During theyear ended December 31, 2002, forfeitures and other adjustments resulted in areduction of subscribed units of 16 Class A units, cancellation of $73,000 ofsubscriptions receivables and forfeitures of $7,000.

 

Voting rights are onevote per member for Class A Capital Units and one voteper unit for Class B, Class C and Class D Capital Units.

 

Income and losses areallocated to members based on their respective percentage of membershipinterest. Distributions to members shall be no less than 20% of net cash fromoperations, as defined in the Operating Agreement, if net cash from operationsis in excess of $500,000 on an annual basis; provided that any suchdistribution does not constitute or cause a default under any of the Company’sloan documents or credit facilities.

 

Transfer or dispositionof Capital Units is subject to certain restrictions, including approval by theBoard of Managers.

 

F-14

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

**NOTE 8 -       INCOME TAXES**

 

The differences betweenfinancial statement basis and tax basis of assets as of December 31, 2004 areas follows:

 

| Financial statement basis of assets               | ** ** | $           | 56,047,104 | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------|
| Plus  organization and start-up costs capitalized |       | 898,017     |       |
| Depreciation                                      |       | (16,568,870 | )          |
|                                              |       |        |       |
| Tax basis of  assets                              |       | $           | 40,376,251 |       |

 

There were no material differences between the financial statementbasis and tax basis of the Company’s liabilities.

 

**NOTE 9 -       FAIR VALUE OFFINANCIAL INSTRUMENTS**

 

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

 

The carrying amount oflong-term obligations approximates fair value based on estimated interest ratesfor comparable debt.

 

The Company believes thefair value of agreements for the purchase of utilities approximates thecarrying value based on the variable terms of the agreements that follow localmarket rates.

 

**NOTE 10 -     COMMITMENTS,CONTINGENCIES AND AGREEMENTS**

 

The Board of Managershas entered into various agreements regarding the formation, operation andmanagement of the Company. Significant agreements are as follows:

 

Contract for FutureServices – The Company entered into various agreements with Broin ManagementLLC (the Managing Member) and certain of the Managing Member’s affiliates.

 

Agreements with theManaging Member and certain of its affiliates include:

 

Management Services –Pursuant to the terms set forth in the Company’s Operating Agreement, theManaging Member provides day-to-day management of the ethanol plant. TheCompany pays a management fee of $250,000 annually (the base fee), plus 4% ofthe net income of the Company as defined in the Company’s Operating Agreement.The base fee is adjusted annually for inflation, and commences no sooner thannine months prior to the operation of the ethanol plant. This agreementcontinues unless terminated by a vote of Managers as provided in the OperatingAgreement. For the years ended December 31, 2004 and 2003, fees relating to themanagement services and bonus arrangement were $939,271 and $592,363,respectively.

 

F-15

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

Marketing Agreements –The Company entered into agreements with companies affiliated with the ManagingMember to market all of its ethanol and DDGS. Fees of $.0065 per gallon arepayable for administration services and ethanol marketing. Fees of 3% of grosssales, with a minimum annual fee of $200,000, are payable for marketing DDGS.The ethanol agreement continues for the length of the original primary debtfinancing for the plant construction, while the DDGS agreement has a term of 7years or the length of the original primary debt for plant construction,whichever is longer. Both agreements are renewable for 3-year periods after theinitial term of the agreements. For the years ended December 31, 2004 and 2003,fees relating to the marketing agreements were $668,663 and $436,620,respectively.

 

Corn Price Risk Management Agreement – The Company hasentered into an agreement with Broin Management, LLC for the hedge and pricerisk management related to corn and natural gas requirements of the plant. Thefee for this service is $50,000 annually. The agreement has a term of 1 yearand commences upon the start of operations. The agreement is renewable forsuccessive 1-year terms unless terminated 30 days prior to expiration. For theyears ended December 31, 2004 and 2003, fees relating to this agreement were$52,000 and $47,667, respectively.

 

Minimum payments related to these agreements are asfollows:

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| 2005                          |       |       | $          | 622,616 |   |
| 2006                          |       |       | 564,121    |   |
| 2007                          |       |       | 578,685    |   |
| 2008                          |       |       | 593,833    |   |
| 2009                          |       |       | 609,586    |   |
| 2010-2013                     |       |       | 2,608,865  |   |
|                          |       |       |       |   |
|                          |       |       | $          | 5,577,706 |   |

 

F-16

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

The Company has enteredinto agreements for the purchase of water, natural gas and electricity.

 

NaturalGas – The agreements provide the Company with natural gas at a fixed price fora 15-year term, beginning with the date the plant begins operations. During theinitial 10 years of the agreement, the Company has a minimum obligation fordelivery of natural gas at a rate that covers the cost of construction of thepipeline. The Company is required to hold an irrevocable letter of credit orsimilar instrument to guarantee payment of the obligation. The letter of creditwill be reduced each year by an amount equal to amortization of a $1,600,000loan at 8.5%. Minimum payments, regardless of whether the plant takes deliveryof the natural gas, are as follows:

 
| **Years Ending December 31,**      | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
| 2005                               |       |       | $          | 352,600 |   |
| 2006                               |       |       | 352,600    |   |
| 2007                               |       |       | 352,600    |   |
| 2008                               |       |       | 352,600    |   |
| 2009                               |       |       | 352,600    |   |
| 2010-2013                          |       |       | 1,116,500  |   |
| Total                              |       | 2,879,500  |       |
| Less amount  representing interest |       | 539,000    |       |
| Total at present  value            |       | $          | 2,340,500  |   |

 

Electricity – Theagreements provide the Company with electric service for a term of 5 years. Theagreement sets rates for energy usage based on an agreed upon rate structureand requires a minimum purchase of electricity each month during the initialterm of the agreement. Minimum annual payments during the initial term of theelectricity agreement are as follows:

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| 2005                          |       |       | $          | 338,000 |   |
| 2006                          |       |       | 349,000    |   |
| 2007                          |       |       | 360,000    |   |
| 2008                          |       |       | 124,000    |   |
| 2009                          |       |       | —     |   |
|                          |       |       | $          | 1,171,000 |   |

 

Lineof Credit – During the year ended December 31, 2004, the Company renewed a$1,600,000 line of credit agreement with Home Federal Bank at a reduced amountof $1,250,000. The line of credit agreement is required by Home Federal Bank inconnection with a letter of credit agreement entered into between Home FederalBank and the supplier of natural gas to the Company’s plant. The letter ofcredit is security for the Company’s natural gas distribution agreement as itrelates to construction of the gas pipeline to the plant. Under the line ofcredit, the Company entered into a promissory note with Home Federal Bank toborrow up to $1,250,000. In the event of any amount drawn on the letter ofcredit by the supplier of natural gas, an equal amount will be drawn on theline of credit by Home Federal, which will be recorded as a liability of theCompany. The interest rate on the promissory note is the prime rate aspublished by the Wall Street Journal plus 2%. The maturity date on the line ofcredit is March 1, 2005. The line of credit is secured by a lien on theCompany’s real and personal property. As of December 31, 2004, there was nooutstanding balance on the line of credit.

 

F-17

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TOFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND2003**

 

To obtain the letter ofcredit, Home Federal Bank required personal guarantees totaling $1,250,000 fromcertain members or related parties of the Company. The Company has agreed topay each party an annual guarantee fee of 2% of the amount guaranteed. TheCompany paid $32,000 and $25,000 for the guarantee fee for the years endedDecember 31, 2004 and 2003, respectively.

 

The Company receivesincentives related to the production of ethanol as follows:

 

Incentives – Great PlainsEthanol receives an incentive payment from the United States Department ofAgriculture (USDA) for the use of corn to produce ethanol. In accordance withthe terms of this arrangement, revenue is recorded based on incrementalproduction of ethanol compared to the prior year. The USDA has set the annualmaximum not to exceed $7,500,000 for each eligible producer. The incentive iscalculated on the USDA fiscal year of October 1 to September 30. Revenue of $5,833,272and $5,371,895 has been earned for the USDA program years ended September 30,2004 and 2003, respectively. Incentive revenue of $4,893,450 and $7,080,085 wasrecorded for the years ended December 31, 2004 and 2003, respectively.

 

Great Plains Ethanol also receives an incentivepayment from the State of South Dakota to produce ethanol. In accordance withthe terms of this arrangement, revenue is recorded based on ethanol sold. TheState of South Dakota has set a maximum of up to $1,000,000 per year for thisprogram per qualifying producer. Incentive revenue of $666,667 and $583,334 wasrecorded for the years ended December 31, 2004 and 2003, respectively.

 

**NOTE 11 -     RELATED PARTIES**

 

Certain owners of ClassA, Class B and Class C Capital Units are parties to agreements with theCompany. Related party agreements with the Managing Member and its affiliatesare described in Note 7 and Note 10.

 

**NOTE 12 -     RETIREMENT PLAN**

 

On April 1, 2004, theCompany set up a 401(k) profit sharing plan for substantially all employees whowork more than 1,000 hours per year. Employees can make voluntary contributionsup to federally designated limits. The Company does not match any voluntarycontributions made. Eligible employees are always fully vested in their accountbalances resulting from employee voluntary contributions. The Company 401(k)expense for the year ended December 31, 2004 was $325.

 

**NOTE 13 -     SUBSEQUENT EVENTS**

 

On March 1, 2005 theCompany renewed the line of credit with Home Federal Bank referenced in Note 10.The new maturity date on the line of credit is March 1, 2006, and the amount ofthe line of credit is $1,125,000.

 

F-18

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