**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

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| x                                                     | **Annual report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.**      |
|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                                  |                                                                                                      |
| **For the fiscal year ended  December 31, 2007** |
|                                                  |                                                                                                      |
| o                                                     | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934.** |
|                                                  |                                                                                                      |
| **Commission file number 000-50733**                  |

** **

**UNITEDWISCONSIN GRAIN PRODUCERS, LLC**

(Exact name of registrant as specified in its charter)

 
| **Wisconsin**                                                       | ** ** | **39-2032455**                            |
|---------------------------------------------------------------------|------------|-------------------------------------------|
| **(State or other jurisdiction of  incorporation or organization)** | ** ** | **(I.R.S. Employer Identification  No.)** |

 

**W1231 Tessmann Drive, Friesland,Wisconsin 53935-0247**

(Address of principal executive offices)

 

**(920) 348-5016**

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

** **

**None**

 

Securities registered pursuant to Section 12(g) of the Act:

 

**Membership Units**

** **

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.o  Yes   x  No

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  o  Yes   x  No

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.                 x  Yes                   o  No

 

Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act:

 
| Large  accelerated filer   o |   | Accelerated  filer  o |   | Non-accelerated filer  x(Do  not check if a smaller reporting company) |   | Smaller  reporting company  o |
|----------------------------------------|--------|---------------------------------|--------|----------------------------------------------------------------------------------|--------|-----------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

o  Yes                   x  No

 

The aggregate marketvalue of the membership units held by non-affiliates of the registrant at December 31,2007, was $23,970,000.  There is no established public trading market forour membership units.  The aggregate market value was computed byreference to the price at which membership units were last sold by theregistrant ($1,000.00 per unit).

 

Asof February 29, 2008, there were 28,675 membership units outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Theregistrant has incorporated by reference into Part III of this AnnualReport on Form 10-K portions of its definitive proxy statement to be filedwith the Securities and Exchange Commission within 120 days after the close ofthe fiscal year covered by this Annual Report.

 

 

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**INDEX**

 
| ** **    | ** **  | ** **                                                                                                       | **Page No.** |
|---------------|-------------|------------------------------------------------------------------------------------------------------------------|-------------------|
|          |        |                                                                                                             |              |
| PART I   |        | 5                                                                                                                |
|          |        |                                                                                                             |              |
|          | ITEM 1.     | BUSINESS                                                                                                         | 5                 |
|          | ITEM 1A.    | RISK FACTORS                                                                                                     | 19                |
|          | ITEM 2.     | PROPERTIES                                                                                                       | 25                |
|          | ITEM 3.     | LEGAL PROCEEDINGS                                                                                                | 26                |
|          | ITEM 4.     | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                             | 26                |
|          |        |                                                                                                             |              |
| PART II  |        | 26                                                                                                               |
|          |        |                                                                                                             |              |
|          | ITEM 5.     | MARKET FOR  REGISTRANT’S MEMBERSHIP UNITS, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF  MEMBERSHIP UNITS | 26                |
|          | ITEM 6.     | SELECTED FINANCIAL  DATA                                                                                         | 29                |
|          | ITEM 7.     | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION                       | 29                |
|          | ITEM 7A.    | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                      | 38                |
|          | ITEM 8.     | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                     | 40                |
|          | ITEM 9.     | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES                           | 55                |
|          | ITEM 9A(T). | CONTROLS AND  PROCEDURES                                                                                         | 55                |
|          | ITEM 9B.    | OTHER INFORMATION                                                                                                | 56                |
|          |        |                                                                                                             |              |
| PART III |        | 56                                                                                                               |
|          |        |                                                                                                             |              |
| PART IV  |        | 56                                                                                                               |
|          |        |                                                                                                             |              |
|          | ITEM  15.   | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES                                                                         | 56                |
|          |        |                                                                                                             |              |
| SIGNATURES    |        | 59                                                                                                               |

 

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** **

**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING STATEMENTS**

 

This annual reportcontains historical information, as well as forward-looking statements thatinvolve known and unknown risks and relate to future events, our futurefinancial performance, or our expected future operations and actions.  In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,”“hope,” “predict,” “target,”“potential,” or “continue” or the negative of these terms or other similarexpressions.  These forward-lookingstatements are only our predictions based upon current information and involvenumerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from theseforward-looking statements for many reasons, including the reasons described inthis report.  While it is impossible to identify all suchfactors, factors that could cause actual results to differ materially fromthose estimated by us include:

 
| · |   | Incorrect assumptions related to industry growth, overcapacity or  increased competition in the ethanol market in which we operate;                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                      |
| · |   | Fluctuations in the price and market for ethanol and distillers  grains;                                                                                                  |
|   |   |                                                                                                                                                                      |
| · |   | Availability and costs of products and raw materials, particularly  corn and natural gas;                                                                                 |
|   |   |                                                                                                                                                                      |
| · |   | Changes in planned production, variations in actual ethanol and  distillers grains production from expectations or technical difficulties in  operating the plant;        |
|   |   |                                                                                                                                                                      |
| · |   | Our ability to market and our reliance on third parties to market our  products;                                                                                          |
|   |   |                                                                                                                                                                      |
| · |   | Changes in or elimination of governmental laws, tariffs, trade or  other controls or enforcement practices such as:                                                       |
|   |   | -   federal  ethanol tax incentives;                                                                                                                       |
|   |   | -   national,  state or local energy policy;                                                                                                               |
|   |   | -   legislation  establishing a renewable fuel standard or other legislation mandating the use  of ethanol or other oxygenate                              |
|   |   |  additives;                                                                                                                                                          |
|   |   | -   state  and federal regulation restricting or banning the use of MTBE; or                                                                               |
|   |   | -   environmental  laws and regulations that apply to our plant operations and their  enforcement;                                                         |
|   |   |                                                                                                                                                                      |
| · |   | Changes in general  economic conditions or the weather, or the occurrence of certain events  causing an economic impact in the agriculture, oil or automobile industries; |
|   |   |                                                                                                                                                                      |
| · |   | Lack of transport,  storage and blending infrastructure preventing ethanol from reaching high  demand markets;                                                            |
|   |   |                                                                                                                                                                      |
| · |   | Changes in total U.S. consumption of gasoline;                                                                                                                            |
|   |   |                                                                                                                                                                      |
| · |   | Fluctuations in petroleum prices;                                                                                                                                         |
|   |   |                                                                                                                                                                      |
| · |   | Costs of construction and equipment;                                                                                                                                      |
|   |   |                                                                                                                                                                      |
| · |   | Our ability to  implement our expansion plans;                                                                                                                            |
|   |   |                                                                                                                                                                      |
| · |   | The loss of, or our inability to obtain, any license or permit;                                                                                                           |
|   |   |                                                                                                                                                                      |
| · |   | Changes in interest rates and the availability of credit to support  capital improvements, development, expansion and operations;                                         |
|   |   |                                                                                                                                                                      |
| · |   | Our liability resulting from litigation;                                                                                                                                  |
|   |   |                                                                                                                                                                      |
| · |   | Our ability to retain key employees and maintain labor relations;                                                                                                         |
|   |   |                                                                                                                                                                      |

 

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| · |   | Changes in our business strategy, capital improvements or development  plans;                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                      |
| · |   | Additional  ethanol plants built in close proximity to our ethanol facility in south  central Wisconsin;                                  |
|   |   |                                                                                                                                      |
| · |   | Financial impacts of our hedging strategies;                                                                                              |
|   |   |                                                                                                                                      |
| · |   | Our ability to generate free cash flow to invest in our business and  service our debt;                                                   |
|   |   |                                                                                                                                      |
| · |   | Changes and advances in ethanol production technology;                                                                                    |
|   |   |                                                                                                                                      |
| · |   | The ability of First Missouri Energy LLC, an ethanol production  facility in which we have invested, to obtain equity and debt financing; |
|   |   |                                                                                                                                      |
| · |   | Competition from alternative fuels and alternative fuel additives;  and                                                                   |
|   |   |                                                                                                                                      |
| · |   | Other factors described elsewhere in this report.                                                                                         |

 

The cautionarystatements referred to in this section also should be considered in connectionwith any subsequent written or oral forward-looking statements that may beissued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, eventhough our situation may change in the future. Furthermore, we cannot guaranteefuture results, events, levels of activity, performance, or achievements.  We caution you not to put undue reliance onany forward-looking statements, which speak only as of the date of thisreport.  You should read this report and the documents that we referencein this report and have filed as exhibits, completely and with theunderstanding that our actual future results may be materially different fromwhat we currently expect.  We qualify all of our forward-lookingstatements by these cautionary statements.

 

**AVAILABLE INFORMATION**

 

Information aboutus is also available at our website at**www.uwgp.com, under “CompanyInformation — Financial Information,” which includes links to reports we havefiled with the Securities and Exchange Commission. The contents of our websiteare not incorporated by reference in this Annual Report on Form 10-K.

 

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**PART I.**

 

**ITEM 1.****                                               ****BUSINESS.**

 

**Overview**

 

References to “we,” “us,” “our” and the “Company” refer to UnitedWisconsin Grain Producers, LLC.  UnitedWisconsin Grain Producers, LLC is a Wisconsin limited liability company thatmanages the business and day-to-day operations of an ethanol plant nearFriesland, Wisconsin.  The ethanol plantwas originally constructed as a 40 million gallon per year facility.  In December 2007 we substantially completed anexpansion that is expected to increase our production capacity to 60 milliongallons per year (MGY).  We aregradually phasing in the additional production capacity and expect to be fullyoperational at 60 MGY by June 30, 2008. We anticipate further increasing our production capacity to 90 milliongallons per year by approximately June 30, 2009.

 

Since May 2005 we have been engaged in the production of ethanoland distillers grains at our plant near Friesland, Wisconsin.  Our revenues are derived from the sale anddistribution of our ethanol and distillers grains throughout the continentalUnited States and overseas.  Infiscal year 2007, we processed approximately 18.4 million bushels of corn intoapproximately 53.5 million gallons of ethanol and 154,000 tons of distillersgrains.  In fiscal year 2008, we anticipate producing approximately 56.7million gallons of ethanol and 168,000 tons of distillers grains from approximately19.9 million bushels of corn.  However, there is no guarantee that we willbe able to operate at these production levels.

 

We are subjectto industry-wide factors that affect our operating income and cost ofproduction.  Our operating results are largely driven by the prices atwhich we sell our ethanol and distillers grains and the costs related to theirproduction.  Our two largest costs of production are corn and naturalgas.  The cost of corn is affected primarily by factors over which we lackany control such as crop production, carryout, exports, government policies andprograms, risk management and weather.  Over the past year, corn priceshave been significantly higher as compared to previous years, negativelyimpacting our profitability.  Natural gasprices fluctuate with the energy complex in general.  Over the last fewyears, natural gas prices have trended higher than average and it appearsprices will continue to trend higher due to the high price of alternative fuelssuch as fuel oil.  Our costs of production are affected by the cost ofcomplying with the extensive environmental laws that regulate our industry.

 

Our revenues arealso impacted by such factors as our dependence on one or a few major customerswho market and distribute our products; the intensely competitive nature of ourindustry; possible legislation at the federal, state, and/or local level; andchanges in federal ethanol tax incentives.

 

**General Development of Business since January 2007**

 

United WisconsinGrain Producers, LLC was formed as a Wisconsin limited liability company on November 2,2001.  Construction of the ethanol plant was substantiallycompleted and operations commenced in May 2005.  In December 2007, an expansion of theplant’s ethanol production capacity was substantially completed, increasing theplant’s annual name-plate production capacity to 60 million gallons peryear.  However, we are continuing to bring the new equipment online toutilize the additional production capacity and there is no assurance or guaranteethat we will be able to operate at this expanded production capacity.  We estimate that we will reach a 60 milliongallon production rate by June 30, 2008. We expect that this expansion will increase the plant’s corn usage fromapproximately 18.4 million bushels to approximately 21.5 million bushelsannually.

 

We anticipate furtherexpanding our production capacity to 90 million gallons per year by expandingour post-fermentation capacity.  Weanticipate that this expansion will be completed and operational by June 2009.  We are in the process of determining whetherthis 30 million gallon facility will be a stand-alone facility or part of asecond expansion to our existing plant. Definition and design work on this second production capacity increaseproject is presently underway.  However,there is no assurance or guarantee that construction will stay on schedule orthat we will be able to operate at the expanded production capacity by ouranticipated completion date.  

 

5

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Additional informationregarding our construction projects and plant expansion may be found at “**Item 7 — Management’s Discussionand Analysis of Financial Condition and Results of Operations — PlantOperations and Expansion**.”

 

In order to accommodateour additional production capacity, we are also in the process of expanding ourshipping and receiving area and constructing additional grain storagecapacity.  It is anticipated that theseprojects will be completed in May 2008. We are also constructing a distillers grains cooling and conveyingsystem, which we expect to complete in May 2008.  We completed construction of a newmaintenance building in September 2007.

 

Finally, on February 12,2007 our board approved a $10,000,000 investment for an approximate 28%ownership interest in First Missouri Energy LLC, a limited liability company that intends toconstruct and operate a 55 million gallon per year ethanol plant near CapeGirardeau, Missouri.  Thus far we haveinvested approximately $1,155,000 in this project.  We do not expect to invest additional amountsin this project until it receives a debt financing commitment.  Additional information regarding this investmentmay be found at “**Item 7 — Management’s Discussionand Analysis of Financial Condition and Results of Operations — PlantOperations and Expansion**.”

 

**AvailableInformation**

 

The public mayread and copy materials we file with the Securities and Exchange Commission atthe SEC’s Public Reference Room at 100 F Street NE, Washington, D.C.,20549.  Information on the operation of the Public Reference Room maybe obtained by calling the SEC at 1-800-SEC-0330.  In addition, the SECmaintains an Internet site that contains reports, proxy and informationstatements and other information regarding issuers that file electronicallywith the SEC.  Reports we file electronically with the SEC may be obtainedat *www.sec.gov*.

 

In addition,information about us is also available at our website at**www.uwgp.com, under “CompanyInformation — Financial Information,” where visitors may link to reports wehave filed with the Securities and Exchange Commission.  Through this link, visitors to our site may access, free ofcharge, the reports we have filed with the Securities and Exchange Commission.  These reports are linked through our websiteas soon as reasonablypracticableafter we electronically file such materials with the Securities and ExchangeCommission. Thecontents of our website are not incorporated by reference in this Annual Reporton Form 10-K.

 

**Financial Information**

 

Please refer to “**Item 8 — Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”** for information about our revenues, profitand loss measurements and total assets.  Our consolidated financial statementsand supplementary data are included beginning at page 41 of this Report.

 

**Principal Productsand Markets**

 

The principal products we produce at our plant arefuel grade ethanol and distillers grains.

 

***Ethanol***

 

Ethanol is ethylalcohol, a fuel component made primarily from corn and various othergrains.   According to the Renewable Fuels Association, approximately85 percent of ethanol in the United States today is produced from corn,and approximately 90 percent of ethanol is produced from a corn and otherinput mix. Corn produces large quantities of carbohydrates, which convert intoglucose more easily than most other kinds of biomass. The Renewable FuelsAssociation (“RFA”) estimated that, as of January 29, 2008, domesticethanol production capacity reached more than 7.8 billion gallons per year.

 

An ethanol plantis essentially a fermentation plant.  Ground corn and water are mixed withenzymes and yeast to produce a substance called “beer,” which contains about10% alcohol and 90% water.  The “beer” is boiled to separate the water,resulting in ethyl alcohol, which is then dehydrated to increase the alcoholcontent.  This product is then mixed with a certified denaturant to makethe product unfit for human consumption and commercially saleable.

 

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Ethanol can beused as: (i) an octane enhancer in fuels; (ii) an oxygenated fueladditive for the purpose of reducing ozone and carbon monoxide vehicleemissions; and (iii) a non-petroleum-based gasoline substitute. Approximately 95% of all ethanol is used in its primary form for blending withunleaded gasoline and other fuel products.  Used as a fuel oxygenate,ethanol provides a means to control carbon monoxide emissions in largemetropolitan areas.  The principal purchasers of ethanol are petroleumterminals in the continental United States.

 

For our fiscalyears ended December 31, 2007, 2006 and 2005, revenues from sales ofethanol were approximately 88%, 90% and 89% of total revenues, respectively.

 

***Distillers Grains***

 

A principalco-product of the ethanol production process is distillers grains, a highprotein, high-energy animal feed supplement primarily marketed to the dairy andbeef industry.  Distillers grains contain by-pass protein that is superiorto other protein supplements such as cottonseed meal and soybean meal. By-pass proteins are more digestible to the animal, thus generating greaterlactation in milk cows and greater weight gain in beef cattle.  The drymill ethanol processing used by the plant results in two forms of distillergrains: Distillers Modified Wet Grains (“DMWS”) and Distillers Dried Grainswith Solubles (“DDGS”).  DMWS is processed corn mash that has been driedto approximately 50% moisture.  DMWS have a shelf life of approximatelyten days and are often sold to nearby markets.  DDGS is processed cornmash that has been dried to 10% to 12% moisture.  DDGS has an almostindefinite shelf life and may be sold and shipped to any market regardless ofits vicinity to an ethanol plant.  At our plant, the composition of thedistillers grains we produce is approximately 25% DMWS and 75% DDGS.

 

For our fiscalyears ended December 31, 2007, 2006 and 2005, revenues from sales ofdistillers grains were approximately 12%, 10% and 11% of total revenues,respectively.

 

**Marketing and Distribution of Principal Products**

 

Our ethanol plant is located nearFriesland, Wisconsin in Columbia County, in south-central Wisconsin.  We selected the Friesland site because of itslocation to existing grain production, accessibility to road and railtransportation and its close proximity to major highways that connect to majorpopulation centers.

 

We sell andmarket the ethanol and distillers grains produced at the plant through normaland established markets, including local, regional and national markets. We have entered into an ethanol marketing agreement with Noble Americas Corp. (“Noble”).  Whether or not ethanol produced by our plantis sold in local markets will depend on decisions made by our marketer.  We have also entered into a marketingagreement with CHS Inc. for the purpose of marketing and selling a portion ofthe dried distillers grains we produce. We independently market the modified wet distillers grains and a portionof the dried distillers grains we produce to local livestock producers.  Although local ethanol and distillers grainsmarkets will be the easiest to service, they may be oversold, particularly inthe Midwest.  Oversold markets depress ethanol and distillers grainsprices.

 

***Ethanol***

 

We have amarketing agreement with Noble for the purpose of marketing and distributingall of the ethanol we produce at the plant. We entered into this agreement on December 12, 2007 for an initialterm of two years, with automatic renewals for additional periods of two yearsunless either party to the agreement provides notice of termination to theother party at least 180 days prior to the expiration of the initial term orany subsequent renewal term.  Under our agreement with Noble, Noble entersinto sales agreements with third parties for the sale of the ethanol producedby us.  We then receive the amount paid per gallon by such third parties,less transportation costs, certain other costs and fees and a fixed per-gallonmarketing fee paid to Noble.

 

We previouslyhad entered into an ethanol marketing agreement with RPMG to purchase all ofthe ethanol we produce.  That agreementexpired by its terms on April 30, 2006, and following that date wecontinued to market our ethanol through RPMG on a month-to-month basis.  On October 11, 2007, we provided noticeto RPMG that we would no longer utilize its ethanol marketing services after December 31,2007.  On January 1, 2008, Noblebegan marketing and distributing the ethanol we produce at our plant.

 

7

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***DistillersGrains***

 

We have amarketing agreement with CHS Inc. for the purpose of marketing and selling thedried distillers grains we ship by rail. We market and sell the dried distillers grains not shipped by rail, aswell as the modified wet distillers grains we produce, directly to localfarmers.  For the dried distillers grainsmarketed and sold by CHS Inc., we receive a percentage of the sales priceinvoiced by CHS Inc. less freight costs incurred by CHS Inc.  We entered into this agreement with CHS Inc.effective October 1, 2007.  The termof the agreement is indefinite, and the agreement will remain in effect untilterminated by either party by providing at least 90 days notice to the otherparty to the agreement.

 

We previouslyentered into marketing agreements with Commodity Specialists Company (“CSC”)for the purposes of marketing and selling portions of our dried distillersgrains and modified wet distillersgrains products.  In August 2007,CHS Inc. announced that it had entered into a definitive purchase agreement toacquire the distillers grains marketing business of CSC.  We were thereafter given the option ofwhether or not we wanted our marketing agreements assigned to, and assumed by,CHS, Inc.  We chose not to allow CSCto assign the agreements to CHS Inc. and instead negotiated a new marketingagreement with CHS Inc., as described in the preceding paragraph.

 

In fiscal year2007, we marketed and sold some of our distillers grains locally, primarily tonearby livestock producers, with the remainder of the distillers grainsproduced at the plant marketed and sold by CSC and CHS Inc.  As additionalethanol plants begin production, excess capacity could result in the localdistillers grains markets.  If excess capacity in the local marketsoccurs, we may be forced to dry more of our distillers grains for marketing byCHS Inc. rather than directly selling in local markets.  As a result, ournatural gas costs may increase due to increased drying, thereby decreasing ourprofits.

 

**Dependence on One or a FewMajor Customers**

 

We aresubstantially dependent upon Noble for the purchase, marketing and distributionof our ethanol. Noble purchases 100% of the ethanol produced at the plant, allof which is marketed and distributed to its customers.  Therefore, we arehighly dependent on Noble for the successful marketing of our ethanol.  Inthe event that our relationship with Noble is interrupted or terminated for anyreason, we believe that another entity to market the ethanol could belocated.  However, any interruption or termination of this relationshipcould temporarily disrupt the sale of ethanol and adversely affect our businessand operations.

 

Additionally, weare substantially dependent upon CHS Inc. for the purchase, marketing anddistribution of our dried distillers grains shipped by rail.  CHS Inc. purchases most of the drieddistillers grains produced at the plant, which are then marketed anddistributed to its customers.  In theevent that our relationship with CHS Inc. is interrupted or terminated for anyreason, we believe that we could locate another entity to market our distillersgrains.  However, any interruption or termination of this relationshipcould temporarily disrupt the sale of distillers grains and adversely affectour business and operations.

 

**Seasonal Factors inBusiness**

 

In an effort toimprove air quality in regions where carbon monoxide and ozone are a problem,the Federal Oxygen Program of the Clean Air Act requires the sale of oxygenatedmotor fuels during the winter months in certain major metropolitan areas toreduce carbon monoxide pollution.  Gasoline that is blended with ethanolhas higher oxygen content than gasoline that does not contain ethanol.  Asa result, we expect fairly light seasonality with respect to our gross profitmargins on our ethanol allowing us to, potentially, be able to sell our ethanolat a slight premium during the mandated oxygenate period.  Conversely, weexpect our average sales price for fuel grade ethanol during the summer, whenfuel grade ethanol is primarily used as an octane enhancer or a fuel supplyextender, to be a little lower.

 

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**Financial Information aboutGeographic Areas**

 

All of our operations are domiciled in the United States.  All ofthe products sold to our customers for fiscal years 2007, 2006 and 2005 wereproduced in the United States and all of our long-lived assets are domiciled inthe United States.

 

**Sources and Availability ofRaw Materials**

 

***CornFeedstock Supply***

 

The primary rawmaterial required for our ethanol plant to produce ethanol and distillersgrains is corn.  To operate at a name-plate capacity of 60 million gallonsper year, the plant requires a supply of approximately 21.5 million bushels ofcorn annually.  Since we are a licensed Wisconsin grain dealer, webuy as much grain as possible from local producers and from localelevators.  Our commodities manager isresponsible for consistent scheduling of corn deliveries and establishingforward contracts with local producers and through local grain elevators. The commodities manager coordinates corn deliveries between local producers andelevators.** **We may purchaseadditional grain from outside of our trade area as need and price dictates.  During the fiscal year ending December 31,2007, we purchased approximately $15,042,000 in corn from some of the Company’smembers who are local grain producers.

 

An increase incorn exports as well as sustained domestic usage of corn for ethanol productionhas supported current high corn prices.  Corn prices remain significantlyhigher than in recent years, despite a very large corn crop for the 2007growing season.  The USDA estimated the 2007 national corn crop at 13.1billion bushels, a record for domestic production.  However, increases inthe supply of corn may be more than offset with larger increases in corndemand.  Management believes that corn prices will remain high into thenear future.  While our surrounding area produces a significant amount ofcorn, our profitability may be negatively impacted if long-term corn pricesremain high.

 

***NaturalGas***

 

Natural gas isalso an important input to our manufacturing process.  We estimate thatour current natural gas usage is approximately 121,500 million British thermalunits (“MMBTU”) per month.  Once we are operating at our 60 million gallonper year capacity, we anticipate that our natural gas usage will increase toapproximately 140,000 million British thermal units (“MMBTU”) per month. We use natural gas to dry our distillers grains products to moisture contentsat which they can be stored for long periods and transported greater distances,so that they can be marketed to broader livestock markets, including poultryand swine markets in the continental United States and overseas.  We have a natural gas purchase agreement with Constellation New Energyof Waukesaha, Wisconsin to provide natural gas and balancing services.  We have also engaged Energy Solutions, Inc.of Madison, Wisconsin to provide natural gas management services.

 

**Federal Ethanol Supports**

 

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

 

EnergyIndependence and Security Act of 2007

 

On December 19,2007, President Bush signed into law the Energy Independence and Security Act of2007, H.R. 6, which expands the existing RFS to require the use of 9 billiongallons of renewable fuel in 2008, increasing to 36 billion gallons ofrenewable fuel by 2022.  Only a portion of the renewable fuel used tosatisfy the expanded RFS may come from conventional corn-based ethanol. The Actrequires that 600 million gallons of renewable fuel used in 2009 must come fromadvanced biofuels, such as ethanol derived from cellulose, sugar, or cropresidue and biomass-based diesel, increasing to 21 billion gallons in 2022. TheAct further includes a requirement that 500 million gallons of biodiesel andbiomass-based diesel fuel be blended into the national diesel pool in 2009,gradually increasing to 1 billion gallons by 2012.

 

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Federal OxygenProgram and Reformulated Gasoline Program

 

Historically,ethanol sales have been favorably affected by the Clean Air Act amendments of1990, particularly the Federal Oxygen Program which became effective November 1,1992. The Federal Oxygen Program requires the sale of oxygenated motor fuelsduring the winter months in certain major metropolitan areas to reduce carbonmonoxide pollution. Ethanol use has increased due to a second Clean Air Actprogram, the Reformulated Gasoline Program. This program became effective January 1,1995, and requires the sale of reformulated gasoline in nine major urban areasto reduce pollutants, including those that contribute to ground level ozone,better known as smog.

 

The two majoroxygenates added to reformulated gasoline pursuant to these programs are MethylTertiary Butyl Ether (“MTBE”) and ethanol, however MTBE has caused groundwatercontamination and has been banned from use by many states. The Energy PolicyAct of 2005 did not impose a national ban of MTBE but it also did not includeliability protection for manufacturers of MTBE. The failure to includeliability protection for manufacturers of MTBE resulted in refiners andblenders using ethanol as an oxygenate rather than MTBE to satisfy thereformulated gasoline oxygenate requirement. While this created increasedethanol demand in the short-term, we do not believe that long-term demand willbe impacted because the Act repealed the Clean Air Act’s 2% oxygenaterequirement for reformulated gasoline immediately in California and 270 daysafter enactment elsewhere.  One remaining benefit for us is that the Actdid not repeal the 2.7% oxygenate requirement for carbon monoxide nonattainmentareas which are required to use oxygenated fuels in the winter months. While weexpect ethanol to be the oxygenate of choice in these areas, there is noassurance that ethanol will in fact be used.

 

VolumetricEthanol Excise Tax Credit

 

The use ofethanol as an alternative fuel source has been aided by federal tax policy,which directly benefits gasoline refiners and blenders, and increases demandfor ethanol. On October 22, 2004, President Bush signed H.R. 4520, whichcontained the Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended thefederal excise tax structure effective as of January 1, 2005. The billcreated a new volumetric ethanol excise tax credit of 5.1 cents per gallon ofethanol blended at 10%. Based on volume, the VEETC is expected to allow muchgreater refinery flexibility in blending ethanol since it makes the tax creditavailable on all ethanol blended with all gasoline, diesel and ethyl tertiarybutyl ether (“ETBE”), including ethanol in E-85 and E-20 in Minnesota. TheVEETC is scheduled to expire on December 31, 2010.

 

Energy PolicyAct of 2005

 

The EnergyPolicy Act of 2005 expands who qualifies for the small ethanol producer taxcredit. Historically, small ethanol producers were allowed a10-cents-per-gallon production income tax credit on up to 15 million gallons ofproduction annually. The size of the plant eligible for the tax credit waslimited to 30 million gallons. Under the Energy Policy Act of 2005, the sizelimitation on the production capacity for small ethanol producers increasedfrom 30 million to 60 million gallons. The credit can be taken on the first 15million gallons of production. The tax credit is capped at $1.5 million peryear per producer. The small ethanol producer tax credit is set to expire December 31,2010.  However, upon completion of our additional expansion of the plantin June 2009, we do not anticipate qualifying for this tax credit as ouranticipated annual production of 90 million gallons per year will exceed theproduction limit.

 

The EnergyPolicy Act of 2005 created a tax credit that permits taxpayers to claim a 30%credit (up to $30,000) for the cost of installing clean-fuel vehicle refuelingequipment, such as an E85 fuel pump, to be used in a trade or business of thetaxpayer or installed at the principal residence of the taxpayer. Under theprovision, clean fuels are any fuel of at least 85% of the volume of whichconsists of ethanol, natural gas, compressed natural gas, liquefied naturalgas, liquefied petroleum gas, and hydrogen and any mixture of diesel fuel and biodieselcontaining at least 20% biodiesel. The provision is effective for equipmentplaced in service after December 31, 2005 and before December 31,2010. While it is unclear how this credit will effect the demand for ethanol inthe short term, we expect it will help raise consumer awareness of alternativesources of fuel and could positively impact future demand for ethanol.

 

10

----

 

 

**Other Factors AffectingDemand and Supply**

 

In addition togovernment supports that encourage production and the use of ethanol, demandfor ethanol may increase as a result of increased consumption of E85fuel.  E85 fuel is a blend of 70% to 85% ethanol and gasoline. According to the Energy Information Administration, E85 consumption isprojected to increase from a national total of 11 million gallons in 2003 to 47million gallons in 2025. The demand for E85 is largely driven by flexible fuelvehicle penetration of the US vehicle fleet, the retail price of E85 comparedto regular gasoline and the availability of E85 at retail stations.  Inthe United States, there are currently approximately six million flexible fuelvehicles capable of operating on E85 and automakers have indicated plans to produce an estimatedtwo million more flexible fuel vehicles per year.  In addition, Ford and General Motorshave recently begun national campaigns to promote ethanol and flexible fuelvehicles.  Because flexible fuel vehicles can operate on both ethanol andgasoline, if the price of regular gasoline falls below E85, demand for E85 willdecrease as well. In addition, gasoline stations offering E85 are relativelyscarce.  TheNational Ethanol Vehicle Coalition estimates that there are 1,411 stationsselling E85 as of December 21, 2007. The EnergyPolicy Act of 2005 established a tax credit of 30% for infrastructure andequipment to dispense E85.  This tax credit became effective in 2006 andis expected to encourage more retailers to offer E85 as an alternative toregular gasoline. The tax credit, unless renewed, will expire December 31,2010.

 

**Competition**

 

We are in direct competition with numerousother ethanol producers, many of whom have greater resources than we do. We alsoexpect that additional ethanol producers will enter the market if the demandfor ethanol continues to increase. Ethanol is a commodity product, like corn, which means our ethanol plantcompetes with other ethanol producers on the basis of price and, to a lesserextent, delivery service.  We believe wecompete favorably with other ethanol producers due to our proximity to amplegrain supplies and multiple modes of transportation.  In addition, we believe our plant’s locationoffers an advantage over other ethanol producers in that it has ready access byrail to growing ethanol markets, which may reduce our cost of sales.

 

According to theRenewable Fuels Association, the ethanol industry has grown to approximately139 production facilities in the United States with current estimates ofdomestic ethanol production at approximately 7.88 billion gallons as of January 29,2008.  There are 61 new plants currently under construction, along with 7 plantexpansions.  There arenumerous other producer and privately owned ethanol plants planned andoperating throughout the Midwest and elsewhere in the United States.  Thelargest ethanol producers include Archer Daniels Midland (ADM), AventineRenewable Energy, Inc., Hawkeye Renewables, LLC, POET (formerly Broin), USBioEnergy Corp. and VeraSun Energy Corporation, each of which is capable ofproducing more ethanol than we expect to produce.  Recently, VeraSun andUS BioEnergy Corp. announced plans to merge, which would result in theircompanies having a combined ethanol production capacity of approximately 1.6billion gallons.

 

The followingtable identifies most of the ethanol producers in the United Statesalong with their production capacities.

 
| **Company**             | ** ** | **Location**                                     | ** ** | **Feedstock** | ** ** | **Current Capacity  (mgy)** | ** ** | **Under Construction/  Expansions  (mgy)** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|---------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| Abengoa Bioenergy Corp. |       | York, NE  Colwich, KS  Portales, NM  Ravenna, NE |       | Corn/milo     |       | 55  25  30  88              |       |                                       |       |
| Aberdeen Energy*        |       | Mina, SD                                         |       | Corn          |       |                        |       | 100                                        |       |
| Absolute Energy, LLC*   |       | St. Ansgar, IA                                   |       | Corn          |       | 100                         |       |                                       |       |
| ACE Ethanol, LLC        |       | Stanley, WI                                      |       | Corn          |       | 41                          |       |                                       |       |
| Adkins Energy, LLC*     |       | Lena, IL                                         |       | Corn          |       | 40                          |       |                                       |       |

 

11

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| **Company**                                 | ** ** | **Location**                                                                                      | ** ** | **Feedstock**                                   | ** ** | **Current Capacity  (mgy)** | ** ** | **Under Construction/  Expansions  (mgy)** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| Advanced Bioenergy                          |       | Fairmont, NE                                                                                      |       | Corn                                            |       | 100                         |       |                                       |       |
| AGP*                                        |       | Hastings, NE                                                                                      |       | Corn                                            |       | 52                          |       |                                       |       |
| Agri-Energy, LLC*                           |       | Luverne, MN                                                                                       |       | Corn                                            |       | 21                          |       |                                       |       |
| Al-Corn Clean Fuel*                         |       | Claremont, MN                                                                                     |       | Corn                                            |       | 35                          |       | 15                                         |       |
| Amaizing Energy, LLC*                       |       | Denison, IA  Atlantic, IA                                                                         |       | Corn  Corn                                      |       | 48                          |       | 110                                        |       |
| Archer Daniels Midland                      |       | Decatur, IL  Cedar Rapids, IA  Clinton, IA  Columbus, NE  Marshall, MN  Peoria, IL  Wallhalla, ND |       | Corn  Corn  Corn  Corn  Corn  Corn  Corn/barley |       | 1,070                       |       | 550                                        |       |
| Arkalon Energy, LLC                         |       | Liberal, KS                                                                                       |       | Corn                                            |       | 110                         |       |                                       |       |
| Aventine Renewable Energy,  LLC             |       | Pekin, IL  Aurora, NE  Mt. Vernon, IN                                                             |       | Corn  Corn  Corn                                |       | 207                         |       | 226                                        |       |
| Badger State Ethanol, LLC*                  |       | Monroe, WI                                                                                        |       | Corn                                            |       | 48                          |       |                                       |       |
| Big River Resources, LLC*                   |       | West Burlington, IA                                                                               |       | Corn                                            |       | 52                          |       |                                       |       |
| BioFuel Energy - Pioneer  Trail Energy, LLC |       | Wood River, NE                                                                                    |       | Corn                                            |       |                        |       | 115                                        |       |
| BioFuel Energy - Buffalo  Lake Energy, LLC  |       | Fairmont, MN                                                                                      |       | Corn                                            |       |                        |       | 115                                        |       |
| Blue Flint Ethanol                          |       | Underwood, ND                                                                                     |       | Corn                                            |       | 50                          |       |                                       |       |
| Bonanza Energy, LLC                         |       | Garden City, KS                                                                                   |       | Corn/milo                                       |       | 55                          |       |                                       |       |
| Bushmills  Ethanol, Inc.*              |       | Atwater, MN                                                                                       |       | Corn                                            |       | 40                          |       |                                       |       |
| Calgren                                     |       | Pixley, CA                                                                                        |       | Corn                                            |       |                        |       | 55                                         |       |
| Cardinal Ethanol                            |       | Harrisville, IN                                                                                   |       | Corn                                            |       |                        |       | 100                                        |       |
| Cargill, Inc.                          |       | Blair, NE  Eddyville, IA                                                                          |       | Corn  Corn                                      |       | 85  35                      |       |                                       |       |
| Cascade Grain                               |       | Clatskanie, OR                                                                                    |       | Corn                                            |       |                        |       | 108                                        |       |
| Castle Rock Renewable  Fuels, LLC           |       | Necedah, WI                                                                                       |       | Corn                                            |       |                        |       | 50                                         |       |
| Celunol                                     |       | Jennings, LA                                                                                      |       | Sugar cane bagasse                              |       |                        |       | 1.5                                        |       |
| Center Ethanol Company                      |       | Sauget, IL                                                                                        |       | Corn                                            |       |                        |       | 54                                         |       |
| Central Indiana Ethanol,  LLC               |       | Marion, IN                                                                                        |       | Corn                                            |       | 40                          |       |                                       |       |
| Central MN Ethanol Coop*                    |       | Little Falls, MN                                                                                  |       | Corn                                            |       | 21.5                        |       |                                       |       |
| Chief Ethanol                               |       | Hastings, NE                                                                                      |       | Corn                                            |       | 62                          |       |                                       |       |
| Chippewa Valley Ethanol  Co.*               |       | Benson, MN                                                                                        |       | Corn                                            |       | 45                          |       |                                       |       |
| Cilion Ethanol                              |       | Keyes, CA                                                                                         |       | Corn                                            |       |                        |       | 50                                         |       |
| Commonwealth Agri-Energy,  LLC*             |       | Hopkinsville, KY                                                                                  |       | Corn                                            |       | 33                          |       |                                       |       |
| Corn, LP*                                   |       | Goldfield, IA                                                                                     |       | Corn                                            |       | 50                          |       |                                       |       |

 

12

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| **Company**                              | ** ** | **Location**                                            | ** ** | **Feedstock**          | ** ** | **Current Capacity  (mgy)** | ** ** | **Under Construction/  Expansions  (mgy)** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| Cornhusker Energy Lexington,  LLC        |       | Lexington, NE                                           |       | Corn                   |       | 40                          |       |                                       |       |
| Corn Plus, LLP*                          |       | Winnebago, MN                                           |       | Corn                   |       | 44                          |       |                                       |       |
| Coshoctan Ethanol, OH                    |       | Coshoctan, OH                                           |       | Corn                   |       | 60                          |       |                                       |       |
| Dakota Ethanol, LLC*                     |       | Wentworth, SD                                           |       | Corn                   |       | 50                          |       |                                       |       |
| DENCO, LLC                               |       | Morris, MN                                              |       | Corn                   |       | 21.5                        |       |                                       |       |
| E Energy Adams, LLC                      |       | Adams, NE                                               |       | Corn                   |       | 50                          |       |                                       |       |
| E Caruso (Goodland Energy  Center)       |       | Goodland, KS                                            |       | Corn                   |       |                        |       | 20                                         |       |
| East Kansas Agri-Energy,  LLC*           |       | Garnett, KS                                             |       | Corn                   |       | 35                          |       |                                       |       |
| Elkhorn Valley Ethanol,  LLC             |       | Norfolk, NE                                             |       | Corn                   |       | 40                          |       |                                       |       |
| ESE Alcohol Inc.                         |       | Leoti, KS                                               |       | Seed corn              |       | 1.5                         |       |                                       |       |
| Ethanol Grain Processors,  LLC           |       | Obion, TN                                               |       | Corn                   |       |                        |       | 100                                        |       |
| First United Ethanol, LLC  (FUEL)        |       | Mitchell Co., GA                                        |       | Corn                   |       |                        |       | 100                                        |       |
| Front Range Energy, LLC                  |       | Windsor, CO                                             |       | Corn                   |       | 40                          |       |                                       |       |
| Gateway Ethanol                          |       | Pratt, KS                                               |       | Corn                   |       | 55                          |       |                                       |       |
| Glacial Lakes Energy, LLC*               |       | Watertown, SD                                           |       | Corn                   |       | 100                         |       |                                       |       |
| Global Ethanol/Midwest  Grain Processors |       | Lakota, IA  Riga, MI                                    |       | Corn  Corn             |       | 95  57                      |       |                                       |       |
| Golden Cheese Company of  California*    |       | Corona, CA                                              |       | Cheese whey            |       | 5                           |       |                                       |       |
| Golden Grain Energy, LLC*                |       | Mason City, IA                                          |       | Corn                   |       | 110                         |       | 50                                         |       |
| Golden Triangle Energy,  LLC*            |       | Craig, MO                                               |       | Corn                   |       | 20                          |       |                                       |       |
| Grand River Distribution                 |       | Cambria, WI                                             |       | Corn                   |       |                        |       | 40                                         |       |
| Grain Processing Corp.                   |       | Muscatine, IA                                           |       | Corn                   |       | 20                          |       |                                       |       |
| Granite Falls Energy, LLC*               |       | Granite Falls, MN                                       |       | Corn                   |       | 52                          |       |                                       |       |
| Greater Ohio Ethanol, LLC                |       | Lima, OH                                                |       | Corn                   |       |                        |       | 54                                         |       |
| Green Plains Renewable  Energy           |       | Shenandoah, IA  Superior, IA                            |       | Corn  Corn             |       | 50                          |       | 50                                         |       |
| Hawkeye Renewables, LLC                  |       | Iowa Falls, IA  Fairbank, IA  Menlo, IA  Shell Rock, IA |       | Corn  Corn  Corn  Corn |       | 105  115                    |       | 100  110                                   |       |
| Heartland Corn Products*                 |       | Winthrop, MN                                            |       | Corn                   |       | 100                         |       |                                       |       |
| Heartland Grain Fuels, LP*               |       | Aberdeen, SD  Huron, SD                                 |       | Corn  Corn             |       | 9  12                       |       | 18                                         |       |
| Heron Lake BioEnergy, LLC                |       | Heron Lake, MN                                          |       | Corn                   |       |                        |       | 50                                         |       |
| Holt County Ethanol                      |       | O’Neill, NE                                        |       | Corn                   |       |                        |       | 100                                        |       |
| Husker Ag, LLC*                          |       | Plainview, NE                                           |       | Corn                   |       | 26.5                        |       |                                       |       |
| Idaho Ethanol Processing                 |       | Caldwell, ID                                            |       | Potato Waste           |       | 4                           |       |                                       |       |
| Illinois River Energy, LLC               |       | Rochelle, IL                                            |       | Corn                   |       | 50                          |       |                                       |       |
| Indiana Bio-Energy                       |       | Bluffton, IN                                            |       | Corn                   |       |                        |       | 101                                        |       |
| Iroquois Bio-Energy  Company, LLC        |       | Rensselaer, IN                                          |       | Corn                   |       | 40                          |       |                                       |       |

 

13

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| **Company**                            | ** ** | **Location**                                       | ** ** | **Feedstock**          | ** ** | **Current Capacity  (mgy)** | ** ** | **Under Construction/  Expansions  (mgy)** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| KAAPA Ethanol, LLC*                    |       | Minden, NE                                         |       | Corn                   |       | 40                          |       |                                       |       |
| Kansas Ethanol, LLC                    |       | Lyons, KS                                          |       | Corn                   |       |                        |       | 55                                         |       |
| KL Process Design Group                |       | Upton, WY                                          |       | Wood waste             |       | 1.5                         |       |                                       |       |
| Land O’ Lakes*                    |       | Melrose, MN                                        |       | Cheese whey            |       | 2.6                         |       |                                       |       |
| Levelland/Hockley County  Ethanol, LLC |       | Levelland, TX                                      |       | Corn                   |       |                        |       | 40                                         |       |
| Lifeline Foods, LLC                    |       | St. Joseph, MO                                     |       | Corn                   |       | 40                          |       |                                       |       |
| Lincolnland Agri-Energy,  LLC*         |       | Palestine, IL                                      |       | Corn                   |       | 48                          |       |                                       |       |
| Lincolnway Energy, LLC*                |       | Nevada, IA                                         |       | Corn                   |       | 50                          |       |                                       |       |
| Little Sioux Corn  Processors, LP*     |       | Marcus, IA                                         |       | Corn                   |       | 52                          |       |                                       |       |
| Marquis Energy, LLC                    |       | Hennepin, IL                                       |       | Corn                   |       |                        |       | 100                                        |       |
| Marysville Ethanol, LLC                |       | Marysville, MI                                     |       | Corn                   |       |                        |       | 50                                         |       |
| Merrick & Company             |       | Golden, CO                                         |       | Waste beer             |       | 3                           |       |                                       |       |
| MGP Ingredients, Inc.             |       | Pekin, IL                                          |       | Corn/wheat starch      |       | 78                          |       |                                       |       |
|                                   |       | Atchison, KS                                       |       |                   |       |                        |       |                                       |       |
| Mid America Agri  Products/Wheatland   |       | Madrid, NE                                         |       | Corn                   |       |                        |       | 44                                         |       |
| Mid America Agri  Products/Horizon     |       | Cambridge, NE                                      |       | Corn                   |       |                        |       | 44                                         |       |
| Mid-Missouri  Energy, Inc.*       |       | Malta Bend, MO                                     |       | Corn                   |       | 45                          |       |                                       |       |
| Midwest Renewable Energy,  LLC         |       | Sutherland, NE                                     |       | Corn                   |       | 25                          |       |                                       |       |
| Minnesota Energy*                      |       | Buffalo Lake, MN                                   |       | Corn                   |       | 18                          |       |                                       |       |
| NEDAK Ethanol                          |       | Atkinson, NE                                       |       | Corn                   |       |                        |       | 44                                         |       |
| New Energy Corp.                       |       | South Bend, IN                                     |       | Corn                   |       | 102                         |       |                                       |       |
| North Country Ethanol,  LLC*           |       | Rosholt, SD                                        |       | Corn                   |       | 20                          |       |                                       |       |
| Northeast Biofuels                     |       | Volney, NY                                         |       | Corn                   |       |                        |       | 114                                        |       |
| Northwest Renewable, LLC               |       | Longview, WA                                       |       | Corn                   |       |                        |       | 55                                         |       |
| Otter Tail Ag Enterprises              |       | Fergus Falls, MN                                   |       | Corn                   |       |                        |       | 57.5                                       |       |
| Pacific Ethanol                        |       | Madera, CA  Boardman, OR  Burley, ID  Stockton, CA |       | Corn  Corn  Corn  Corn |       | 40  40                      |       | 50  50                                     |       |
| Panda Ethanol                          |       | Hereford, TX                                       |       | Corn/milo              |       |                        |       | 115                                        |       |
| Parallel Products                      |       | Louisville, KY  R. Cucamonga, CA                   |       | Beverage waste         |       | 5.4                         |       |                                       |       |
| Patriot Renewable Fuels,  LLC          |       | Annawan, IL                                        |       | Corn                   |       |                        |       | 100                                        |       |
| Penford Products                       |       | Cedar Rapids, IA                                   |       | Corn                   |       |                        |       | 45                                         |       |
| Phoenix Biofuels                       |       | Goshen, CA                                         |       | Corn                   |       | 25                          |       |                                       |       |
| Pinal Energy, LLC                      |       | Maricopa, AZ                                       |       | Corn                   |       | 55                          |       |                                       |       |
| Pine Lake Corn Processors,  LLC*       |       | Steamboat Rock, IA                                 |       | Corn                   |       | 20                          |       |                                       |       |
| Plainview BioEnergy, LLC               |       | Plainview, TX                                      |       | Corn                   |       |                        |       | 100                                        |       |

 

14

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| **Company**                                  | ** ** | **Location**                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **Feedstock**                                                                                                                                                    | ** ** | **Current Capacity  (mgy)** | ** ** | **Under Construction/  Expansions  (mgy)**                                      | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------------------------------------------------|------------|
| Platinum Ethanol, LLC*                       |       | Arthur, IA                                                                                                                                                                                                                                                                                                                                                                                         |       | Corn                                                                                                                                                             |       |                        |       | 110                                                                             |       |
| Plymouth Ethanol, LLC*                       |       | Merrill, IA                                                                                                                                                                                                                                                                                                                                                                                        |       | Corn                                                                                                                                                             |       |                        |       | 50                                                                              |       |
| POET                                         |       | Sioux Falls, SD  Alexandria, IN  Ashton, IA  Big Stone, SD  Bingham Lake, MN  Caro, MI  Chancellor, SD  Coon Rapids, IA  Corning, IA  Emmetsburg, IA  Fostoria, OH  Glenville, MN  Gowrie, IA  Groton, SD  Hanlontown, IA  Hudson, SD  Jewell, IA  Laddonia, MO  Lake Crystal, MN  Leipsic, OH  Macon, MO  Marion, OH  Mitchell, SD  North Manchester, IN  Portland, IN  Preston, MN  Scotland, SD |       | Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn

Corn  Corn  Corn

Corn  Corn  Corn  Corn  Corn  Corn |       | 1,208                       |       | 327  #

#

 

 

 

 

 

 

 

 

#  # |       |
| Prairie Horizon  Agri-Energy, LLC            |       | Phillipsburg, KS                                                                                                                                                                                                                                                                                                                                                                                   |       | Corn                                                                                                                                                             |       | 40                          |       |                                                                            |       |
| Quad-County Corn  Processors*                |       | Galva, IA                                                                                                                                                                                                                                                                                                                                                                                          |       | Corn                                                                                                                                                             |       | 27                          |       |                                                                            |       |
| Range Fuels                                  |       | Soperton, GA                                                                                                                                                                                                                                                                                                                                                                                       |       | Wood waste                                                                                                                                                       |       |                        |       | 20                                                                              |       |
| Red Trail Energy, LLC                        |       | Richardton, ND                                                                                                                                                                                                                                                                                                                                                                                     |       | Corn                                                                                                                                                             |       | 50                          |       |                                                                            |       |
| Redfield Energy, LLC*                        |       | Redfield, SD                                                                                                                                                                                                                                                                                                                                                                                       |       | Corn                                                                                                                                                             |       | 50                          |       |                                                                            |       |
| Reeve Agri-Energy                            |       | Garden City, KS                                                                                                                                                                                                                                                                                                                                                                                    |       | Corn/milo                                                                                                                                                        |       | 12                          |       |                                                                            |       |
| Renew Energy                                 |       | Jefferson Junction, WI                                                                                                                                                                                                                                                                                                                                                                             |       | Corn                                                                                                                                                             |       | 130                         |       |                                                                            |       |
| Siouxland  Energy & Livestock Coop* |       | Sioux Center, IA                                                                                                                                                                                                                                                                                                                                                                                   |       | Corn                                                                                                                                                             |       | 60                          |       |                                                                            |       |
| Siouxland Ethanol, LLC                       |       | Jackson, NE                                                                                                                                                                                                                                                                                                                                                                                        |       | Corn                                                                                                                                                             |       | 50                          |       |                                                                            |       |

 

15

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| **Company**                               | ** ** | **Location**                                                                                                         | ** ** | **Feedstock**                                  | ** ** | **Current Capacity  (mgy)** | ** ** | **Under Construction/  Expansions  (mgy)** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| Southwest Iowa Renewable  Energy, LLC*    |       | Council Bluffs, IA                                                                                                   |       | Corn                                           |       |                        |       | 110                                        |       |
| Sterling Ethanol, LLC                     |       | Sterling, CO                                                                                                         |       | Corn                                           |       | 42                          |       |                                       |       |
| Tate & Lyle                      |       | Loudon, TN                                                                                                           |       | Corn                                           |       | 67                          |       | 38                                         |       |
|                                      |       | Ft. Dodge, IA                                                                                                        |       | Corn                                           |       |                        |       | 105                                        |       |
| The Andersons Albion  Ethanol LLC         |       | Albion, MI                                                                                                           |       | Corn                                           |       | 55                          |       |                                       |       |
| The Andersons Clymers  Ethanol, LLC       |       | Clymers, IN                                                                                                          |       | Corn                                           |       | 110                         |       |                                       |       |
| The Andersons Marathon  Ethanol, LLC      |       | Greenville, OH                                                                                                       |       | Corn                                           |       | 110                         |       |                                       |       |
| Tharaldson Ethanol                        |       | Casselton, ND                                                                                                        |       | Corn                                           |       |                        |       | 110                                        |       |
| Trenton Agri Products, LLC                |       | Trenton, NE                                                                                                          |       | Corn                                           |       | 40                          |       |                                       |       |
| United Ethanol                            |       | Milton, WI                                                                                                           |       | Corn                                           |       | 52                          |       |                                       |       |
| United WI Grain Producers,  LLC*          |       | Friesland, WI                                                                                                        |       | Corn                                           |       | 49                          |       |                                       |       |
| US BioEnergy Corp.                        |       | Albert City, IA  Woodbury, MI  Hankinson, ND  Central City , NE  Ord, NE  Dyersville, IA  Janesville, MN  Marion, SD |       | Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn |       | 310                         |       | 440

#  #  #  #                            |       |
| Utica Energy, LLC                         |       | Oshkosh, WI                                                                                                          |       | Corn                                           |       | 48                          |       |                                       |       |
| VeraSun Energy Corporation                |       | Aurora, SD  Ft. Dodge, IA  Albion, NE  Charles City, IA  Linden, IN  Welcome, MN  Hartely, IA  Bloomingburg, OH      |       | Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn |       | 560                         |       | 330  #  #  #                               |       |
| Western New York Energy,  LLC             |       | Shelby, NY                                                                                                           |       | Corn                                           |       | 50                          |       |                                       |       |
| Western Plains Energy,  LLC*              |       | Campus, KS                                                                                                           |       | Corn                                           |       | 45                          |       |                                       |       |
| Western Wisconsin  Renewable Energy, LLC* |       | Boyceville, WI                                                                                                       |       | Corn                                           |       | 40                          |       |                                       |       |
| White Energy                              |       | Hereford, TX  Russell, KS                                                                                            |       | Corn/Milo  Milo/wheat starch                   |       | 100  48                     |       |                                       |       |
| Wind Gap Farms                            |       | Baconton, GA                                                                                                         |       | Brewery waste                                  |       | 0.4                         |       |                                       |       |
| Renova Energy                             |       | Torrington, WY                                                                                                       |       | Corn                                           |       | 5                           |       |                                       |       |
| Xethanol BioFuels, LLC                    |       | Blairstown, IA                                                                                                       |       | Corn                                           |       | 5                           |       |                                       |       |
| Yuma Ethanol                              |       | Yuma, CO                                                                                                             |       | Corn                                           |       | 40                          |       |                                       |       |

 

 

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| **Company**                                          | ** ** | **Location** | ** ** | **Feedstock** | ** ** | **Current Capacity  (mgy)** | ** ** | **Under Construction/  Expansions  (mgy)** | ** ** |
|------------------------------------------------------|------------|--------------|------------|---------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| Total Current Capacity at  143 ethanol biorefineries |       |         |       |          |       | **8,159.9**                 |       |                                       |       |
|                                                 |       |         |       |          |       |                        |       |                                       |       |
| Total Under Construction  (57)/Expansions (7)        |       |         |       |          |       |                        |       | **5,246.0**                                |       |
| ** **                                           |       |         |       |          |       |                        |       |                                       |       |
| Total Capacity                                       |       |         |       |          |       | **13,405.9**                |       |                                       |       |

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* locally-owned

# plant under construction Source:  Renewable Fuels Association

Updated:  February 22, 2008

 

***Competitionfrom Alternative Ethanol Production Methods***

 

Alternativeethanol production methods are continually under development. New ethanolproducts or methods of ethanol production developed by larger andbetter-financed competitors could provide them competitive advantages and harmour business.

 

Most ethanol iscurrently produced from corn and other raw grains, such as milo or sorghum -especially in the Midwest.  The currenttrend in ethanol production research is to develop an efficient method ofproducing ethanol from cellulose-based biomass, such as agricultural waste,forest residue, municipal solid waste, and energy crops.  This trend is driven by the fact thatcellulose-based biomass is generally cheaper than corn, and producing ethanolfrom cellulose-based biomass would create opportunities to produce ethanol inareas which are unable to grow corn. Additionally, the enzymes used to produce cellulose-based ethanol haverecently become less expensive.   Furthermore, the Department ofEnergy and the President have recently announced support for the development ofcellulose-based ethanol, including a $160 million Department of Energy programfor pilot plants producing cellulose-based ethanol.  Several largecompanies, including Iogen Corporation, Abengoa, Royal Dutch Shell Group,Goldman Sachs Group, Dupont and Archer Daniels Midland, have all indicated thatthey are interested in research and development in this area.  Inaddition, Xethanol Corporation has stated plans to convert a six million gallonper year plant in Blairstown, Iowa to implement cellulose-based ethanoltechnologies after 2007.  POET (formerly Broin Companies) has alsoannounced plans to expand Voyager Ethanol in Emmetsburg, Iowa to includecellulose to ethanol commercial production.

 

Although currenttechnology is not sufficiently efficient to be competitive on a large-scale, areport by the U.S. Department of Energy entitled “Outlook for Biomass EthanolProduction and Demand” indicates that new conversion technologies may bedeveloped in the future. If an efficient method of collecting biomass forethanol production and producing ethanol from cellulose-based biomass isdeveloped, we may not be able to compete effectively. We do not believe it willbe cost-effective to convert the plant into a plant which will usecellulose-based biomass to produce ethanol.  As a result, it is possiblewe could be unable to produce ethanol as cost-effectively as cellulose-basedproducers.

 

***Competitionwith Ethanol Imported from Other Countries***

 

Ethanolproduction is also expanding internationally.  Brazil has long been theworld’s largest producer and exporter of ethanol; however, since 2005, U.S.ethanol production has slightly exceeded Brazilian production. Ethanol isproduced more cheaply in Brazil than in the United States because of the use ofsugarcane, a less expensive raw material alternative to corn. However, in 1980,Congress imposed a tariff on foreign produced ethanol to make it more expensivethan domestic supplies derived from corn.  This tariff was designed toprotect the benefits of the federal tax subsidies for United Statesfarmers.  In December 2006, legislation was passed in both the U.S.House of Representatives and U.S. Senate to extend the $0.54 per gallon tariffbeyond its current expiration in December 2007 through 2008. We do notknow the extent to which the volume of imports would increase or the effect onU.S. prices for ethanol if the tariff is not renewed again in the future.

 

 

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Ethanol importsfrom 24 countries in Central America and the Caribbean Islands are exemptedfrom this tariff under the Caribbean Basin Initiative. Under the terms of theCaribbean Basin Initiative, exports from member nations are capped at 7.0% ofthe total United States production from the previous per year, withcertain  exemptions for ethanol producedfrom feedstock in the Caribbean region over the 7.0% limit. However, as totalproduction in the United States grows, the amount of ethanol produced from theCaribbean region and sold in the United States will also grow, which couldimpact our ability to sell ethanol.

 

***Competitionfrom Alternative Fuels***

 

Our plant alsocompetes with producers of other gasoline additives having similar octane andoxygenate values as ethanol, such as producers of MTBE, a petrochemical derivedfrom methanol that costs less to produce than ethanol.  Although currentlythe subject of several state bans, many major oil companies can produce MTBEand because it is petroleum-based, its use is strongly supported by major oilcompanies.

 

Alternativefuels, gasoline oxygenates and alternative ethanol production methods are alsocontinually under development by ethanol and oil companies with far greaterresources. The major oil companies have significantly greater resources than wehave to develop alternative products and to influence legislation and publicperception of MTBE and ethanol.  New ethanol products or methods ofethanol production developed by larger and better-financed competitors couldprovide them competitive advantages and harm our business.

 

A number ofautomotive, industrial and power generation manufacturers are developingalternative clean power systems using fuel cells or clean-burning gaseousfuels.  Like ethanol, the emerging fuel cell industry offers atechnological option to address increasing worldwide energy costs, the long-termavailability of petroleum reserves and environmental concerns.  Fuel cellshave emerged as a potential alternative to certain existing power sourcesbecause of their higher efficiency, reduced noise and lower emissions. Fuelcell industry participants are currently targeting the transportation,stationary power and portable power markets in order to decrease fuel costs,lessen dependence on crude oil and reduce harmful emissions.  If the fuelcell and hydrogen industries continue to expand and gain broad acceptance andhydrogen becomes readily available to consumers for motor vehicle use, we maynot be able to compete effectively.  This additional competition couldreduce the demand for ethanol, which would negatively impact our profitability.

 

***DistillersGrains Competition***

 

Ethanol plantsin the Midwest produce the majority of distillers grains and primarily competewith other ethanol producers in the production and sale of distillersgrains.  The National Corn Growers Association estimates that approximately10 million metric tons of distillers grains were produced in the 2006/2007 cropyear.  With the exception of our distillers grains that were marketed byCSC and CHS Inc., we took advantage of our proximity to local livestockproducers by marketing some of our distillers grains locally in 2007. However, the total amount of distillers grains produced is expected to increasesignificantly as the number of ethanol plants increase, which will increasecompetition in the distillers grains market in our area.  In addition, ourdistillers grains compete with other livestock feed products such as soybeanmeal, corn gluten feed, dry brewers grain and mill feeds.

 

**Research and Development**

 

Duringthe last three fiscal years, we have not conducted any material research and development activitiesassociated with the development of technologies for use in producing ethanol ordistillers grains.  We previouslyexplored the possibility of using post-fermentation cornsolids an as energy source, but ultimately concluded that fractionation was notfeasible at our plant at that time.

 

**Costs and Effects ofCompliance with Environmental Laws**

 

We are subject toextensive air, water and other environmental regulations and we have beenrequired to obtain a number of environmental permits to construct and operatethe plant and to construct our expansion. We have obtained all of the necessary permits to operate the plantincluding, air pollution construction permits, a pollutant dischargeelimination system general permit, storm water discharge permits, a waterwithdrawal permit and an alcohol fuel producer’s permit.  In addition, we have completed a spillprevention control and 

 

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countermeasuresplan.  Although we have been successful in obtaining all of the permitscurrently required, any retroactive change in environmental regulations, eitherat the federal or state level, could require us to obtain additional or newpermits or spend considerable resources on complying with such regulations.

 

We are subject toongoing environmental regulations and testing. In fiscal year2007, we incurred costs and expenses of approximately $24,000 complying withenvironmental laws, including the cost of obtaining permits.  We substantially completed the constructionof Phase I of our expansion in 2007 under the construction permit granted to uson December 15, 2006.  This permit allows us to construct andinitially operate the plant up to a capacity of 60 million gallonsannually.  The permit expires in June 2008.  We must test ouremissions to receive a permanent operating permit to operate at a capacity of60 million gallons per year, which we expect to obtain in the Spring of2008.  We will also require a construction permit to construct Phase II ofour expansion, which we have not yet obtained.

 

We are subjectto oversight activities by the EPA.  There is always a risk that the EPAmay enforce certain rules and regulations differently than Wisconsin’senvironmental administrators.  Wisconsin or EPA rules are subject tochange, and any such changes could result in greater regulatory burdens onplant operations.  We could also be subject to environmental or nuisanceclaims from adjacent property owners or residents in the area arising from possiblefoul smells or other air or water discharges from the plant.  Such claimsmay result in an adverse result in court if we are deemed to engage in anuisance that substantially impairs the fair use and enjoyment of real estate.

 

The government’sregulation of the environment changes constantly.  It is possible thatmore stringent federal or state environmental rules or regulations couldbe adopted, which could increase our operating costs and expenses.  Italso is possible that federal or state environmental rules or regulationscould be adopted that could have an adverse effect on the use of ethanol. For example, changes in the environmental regulations regarding the requiredoxygen content of automobile emissions could have an adverse effect on the ethanolindustry.  These regulatory factors may result in higher costs or othermaterially adverse conditions affecting our operations, cash flows andfinancial performance.

 

**Employees**

 

As of December 31,2007, we had a total of 37 employees.  We have 27 employees in ethanolproduction operations and 10 full-time employees in general management andadministration.

 

**ITEM1A.  RISK FACTORS.**

 

*You should carefully read and consider the risks anduncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we mayface.  The following risks, together with additional risks anduncertainties not currently known to us or that we currently deem immaterialcould impair our financial condition and results of operation.*

 

**RisksRelating to Our Business**

 

***Our business is not diversified.***  Oursuccess depends largely upon our ability to profitably operate our ethanolplant. We do not have any other lines of business or other sources of revenueif we are unable to operate our ethanol plant and manufacture ethanol anddistillers grains.  If economic or political factors adversely affect themarket for ethanol, we have no other line of business to fall back on if theethanol business declines. Our business would also be significantly harmed ifour ethanol plant could not operate at full capacity for any extended period oftime.

 

***Increases in the price of corn would reduce ourprofitability.**** *Our resultsof operations and financial condition are significantly affected by the costand supply of corn. Changes in the price and supply of corn are subject to anddetermined by market forces over which we have no control.  These factors include weather conditions,farmer planting decisions, domestic and foreign government farm programs andpolicies, global demand and supply and quality.

 

 

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The price at which wepurchase corn has risen substantially in the last year and we expect the priceto continue to increase.  Increases in demand for corn from both the worldfoodstuff markets and from increased production of ethanol have pushed up theprice of corn.  We expect demand for corn from the ethanol industry tocontinue to expand.  Changes inthe price of corn can significantly affect our business. Generally, higher cornprices will produce lower profit margins and, therefore, represent unfavorablemarket conditions.  This is especially true if market conditions do notallow us to pass along increased corn costs to our customers.  We seek tominimize the risks from fluctuations in the price of corn through the use ofhedging instruments.  However, these hedging transactions also involverisks to our business.  See “**Risks Relating to OurBusiness - *We engage in hedging transactionswhich involve risks that could harm our business***.”  If a period of high corn prices were to besustained for some time, such pricing may reduce our ability to generaterevenues because of the higher cost of operating and may make ethanol uneconomicalto produce.

 

***Increases in the price of natural gas would reduce ourprofitability.***  The price andavailability of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond our control suchas weather conditions, overall economic conditions and foreign and domesticgovernmental regulations and relations.  Significant disruptions in thesupply of natural gas could impair our ability to manufacture ethanol for ourcustomers.  Furthermore, increases in natural gas prices or changes in ournatural gas costs relative to natural gas costs paid by competitors mayadversely affect our results of operations and financial condition.  We seek to minimize the risks fromfluctuations in the price of natural gas through the use of hedginginstruments.  However, these hedging transactions also involve risks toour business.  See “**Risks Relating to Our Business - *We engage in hedging transactions which involve risksthat could harm our business***.”

 

***Our revenues are greatly affected by the price at which wecan sell our ethanol or distillers grains.*** The sales prices ofethanol and distillers grains can be volatile as a result of a number offactors, such as overall supply and demand, the price of gasoline, level of governmentsupport, and the availability and price of competing products. For instance,the price of ethanol tends to increase as the price of gasoline increases, andthe price of ethanol tends to decrease as the price of gasoline decreases. Anylowering of gasoline prices will likely also lead to lower prices for ethanol,which may decrease our ethanol sales and reduce revenues.

 

Theprice of ethanol has recently been higher than its 10-year average. We do not expect these prices to besustainable as supply from new and existing ethanol plants increases to meetincreased demand. Increased production of ethanol may lead tolower prices. The increased production of ethanol could have other adverseeffects. For example, increased ethanol production could lead to increasedsupplies of co-products from the production of ethanol, such as distillersgrains. Those increased co-product supplies could outpace demand, which wouldlead to lower prices for those co-products. Also, the increased production ofethanol could result in increased demand for corn. This could result in higherprices for corn, leading to lower profits. There can be no assurance as to theprice of ethanol or distillers grains in the future. Any downward changes inthe price of ethanol and/or distillers grains may result in less revenue whichwould decrease our income and profitability.

 

***Wesell all of the ethanol we produce to Noble Americas Corp. under our ethanolmarketing agreement.**** *NobleAmericas Corp. (“Noble”) is the sole buyer of all of our ethanol, and we relyheavily on its marketing efforts to successfully sell our product.  Our financial performance is dependent uponthe financial health of Noble, as a significant portion of our accountsreceivable are attributable to Noble.  IfNoble breaches the ethanol marketing agreement or is not in the financialposition to purchase and market all of the ethanol we produce, we couldexperience a material loss and we may not have any readily available means tosell our ethanol, meaning our financial performance would be adversely andmaterially affected.  If our agreementwith Noble terminates, we may seek other arrangements to sell our ethanol,including selling our own product; however, our sales efforts may not achieveresults comparable to those achieved by Noble.

 

***Wesell a substantial portion of the distillers grains we produce to CHS Inc.under our distillers grains marketing agreement.**** *CHS Inc. is the sole buyerof all of our dried distillers grains that we ship by rail, and we rely heavilyon its marketing efforts to successfully sell our product.  Because CHS Inc. sells distillers grains fora number of other producers, we have limited control over its salesefforts.  Our financial performance isdependent upon the financial health of CHS Inc., as a significant portion ofour accounts receivable are attributable to CHS Inc.  If CHS Inc. breaches the distillers grainsmarketing agreement or is not in a financial position to purchase and marketall of the distillers grains we produce, we could experience a material lossand we may not have any readily 

 

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availablemeans to sell our distillers grains, and our financial performance will beadversely and materially affected.  Ifour agreement with CHS Inc. terminates, we may seek other arrangements to sellour distillers grains, including selling our own product, but we give noassurance that our sales efforts would achieve results comparable to thoseachieved by CHS Inc.

 

***We engage in hedging transactions which involve risks thatcould harm our business.***  We are exposed tomarket risk from changes in commodity prices.  Exposure to commodity pricerisk results from our dependence on corn and natural gas in the ethanolproduction process.  We seek to minimize the risks from fluctuations inthe prices of corn and natural gas through the use of hedginginstruments.  The effectiveness of our hedging strategies is dependentupon the cost of corn and natural gas and our ability to sell sufficient productsto use all of the corn and natural gas for which we have futurescontracts.  There is no assurance that our hedging activities willsuccessfully reduce the risk caused by price fluctuation which may leave usvulnerable to high corn and natural gas prices. Alternatively, we may choosenot to engage in hedging transactions in the future and our operations andfinancial conditions may be adversely affected during periods in which cornand/or natural gas prices increase.

 

Hedgingactivities themselves can result in costs because price movements in corn andnatural gas contracts are highly volatile and are influenced by many factorsthat are beyond our control.  There are several variables that couldaffect the extent to which our derivative instruments are impacted by pricefluctuations in the cost of corn or natural gas.  However, it is likelythat commodity cash prices will have the greatest impact on the derivativesinstruments with delivery dates nearest the current cash price.  We mayincur such costs and they may be significant.

 

***Operational difficulties at our ethanol plant couldnegatively impact our sales volumes and could cause us to incur substantiallosses.**** *Our operations are subject to labor disruptions,unscheduled downtime and other operational hazards inherent in our industry,such as equipment failures, fires, explosions, abnormal pressures, blowouts,pipeline ruptures, transportation accidents and natural disasters.  Someof these operational hazards may cause personal injury or loss of life, severedamage to or destruction of property and equipment or environmental damage, andmay result in suspension of operations and the imposition of civil or criminalpenalties.  Our insurance may not be adequate to fully cover the potentialoperational hazards described above or we may not be able to renew thisinsurance on commercially reasonable terms or at all.

 

Moreover, our plant maynot operate as planned or expected. We recently expanded our ethanol productioncapacity to 60 MGY, although we do not expect to be able to operate at fullcapacity until approximately June 30, 2008.  Additionally, we have plans to further expandour production capacity to 90 MGY.  Theoperation of our plant is and will be, however, subject to variousuncertainties relating to our ability to implement the necessary processimprovements required to achieve these increased production capacities. As aresult, our plant may not produce ethanol and distillers grains at the levelswe expect.  In the event our plant does not run at its increased expectedcapacity levels, our business, results of operations and financial conditionmay be materially adversely affected.

 

***Changes and advances in ethanol production technology couldrequire us to incur******coststo update our plant or could otherwise hinder our ability to**compete in the ethanol industry or operateprofitably.***  Advances and changes in thetechnology of ethanol production are expected to continue to occur.  Suchadvances and changes may make the ethanol production technology installed inour plant less desirable or obsolete.  These advances could also allow ourcompetitors to produce ethanol at a lower cost than we are able.  If weare unable to adopt or incorporate technological advances, our ethanolproduction methods and processes could be less efficient than our competitors,which could cause our plant to become uncompetitive or completelyobsolete.  If our competitors develop, obtain or license technology thatis superior to ours or that makes our technology obsolete, we may be requiredto incur significant costs to enhance or acquire new technology so that ourethanol production remains competitive.  Alternatively, we may be requiredto seek third-party licenses, which could also result in significantexpenditures.  We cannot guarantee or assure you that third-party licenseswill be available or, once obtained, will continue to be available oncommercially reasonable terms, if at all.  These costs could negativelyimpact our financial performance by increasing our operating costs and reducingour net income.

 

 

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**RisksRelated to Ethanol Industry**

 

***Overcapacity within the ethanol industry could cause anoversupply of ethanol and a decline in ethanol prices. ***Excess capacity in the ethanol industrywould have an adverse impact on our results of operations, cash flows andgeneral financial condition.  Excess capacity may also result or intensifyfrom increases in production capacity coupled with insufficient demand. If the demand for ethanol does not grow at the same pace as increases insupply, we would expect the price for ethanol to decline.  If excesscapacity in the ethanol industry occurs, the market price of ethanol maydecline to a level that is inadequate to generate sufficient cash flow to coverour costs.

 

***We operate in an intensely competitive industry and competewith larger, better financed entities which could impact our ability to operateprofitably.***  There is significant competition amongethanol producers.  There are numerousproducer-owned and privately-owned ethanol plants planned and operatingthroughout the Midwest and elsewhere in the United States.  We also facecompetition from outside the United States. The number of ethanol plants being developed and constructed in theUnited States continues to increase at a rapid pace. The recent passage of the Energy Independence and Security Act of2007 included a renewable fuels mandate that we expect will furtherincrease the number of domestic ethanol production facilities.  Thelargest ethanol producers include Abengoa Bioenergy Corp., ADM, Aventine RenewableEnergy, Inc., Cargill, Inc., Hawkeye Renewables, POET (formerlyBroin), US Bio Energy Corp. and VeraSun Energy Corporation, all of which areeach capable of producing more ethanol than we expect to produce. Additionally,in November of 2007, VeraSun and US Bio Energy Corp. announced that theyentered into a merger agreement which is expected to close during the firstquarter of 2008.  If the demandfor ethanol does not grow at the same pace as increases in supply, we expectthat lower prices for ethanol will result which may adversely affect ourability to generate profits and adversely affect our financial condition.

 

Our ethanol plant alsocompetes with producers of other gasoline additives made from raw materialsother than corn having similar octane and oxygenate values as ethanol, such asproducers of methyl tertiary butyl ether (MTBE). MTBE is a petrochemicalderived from methanol which generally costs less to produce than ethanol. Manymajor oil companies produce MTBE and strongly favor its use because it ispetroleum-based. Alternative fuels, gasoline oxygenates and alternative ethanolproduction methods are also continually under development. The major oil companieshave significantly greater resources than we have to market MTBE, to developalternative products, and to influence legislation and public perception ofMTBE and ethanol. These companies also have significant resources to beginproduction of ethanol should they choose to do so.

 

***Competition from the advancement of alternative fuels maylessen the demand for******ethanol.*** Alternative fuels, gasoline oxygenates and ethanol production methods arecontinually under development. A number of automotive, industrial and powergeneration manufacturers are developing alternative clean power systems usingfuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cellindustry offers a technological option to address increasing worldwide energycosts, the long-term availability of petroleum reserves and environmentalconcerns. Fuel cells have emerged as a potential alternative to certainexisting power sources because of their higher efficiency, reduced noise andlower emissions. Fuel cell industry participants are currently targeting thetransportation, stationary power and portable power markets in order todecrease fuel costs, lessen dependence on crude oil and reduce harmfulemissions. If the fuel cell and hydrogen industries continue to expand and gainbroad acceptance, and hydrogen becomes readily available to consumers for motorvehicle use, we may not be able to compete effectively. This additionalcompetition could reduce the demand for ethanol, resulting in lower ethanolprices that might adversely affect our results of operations and financialcondition.

 

***Corn-based ethanol may compete with cellulose-based ethanolin the future,******which could makeit more difficult for us to produce ethanol on a**cost-effective basis****.*  Most ethanol is currently produced fromcorn and other raw grains, such as milo or sorghum.  This is especially true in the Midwest. Thecurrent trend in ethanol production research is to develop an efficient methodof producing ethanol from cellulose-based biomass, such as agricultural waste,forest residue, municipal solid waste, and energy crops. This trend is drivenby the fact that cellulose-based biomass is generally cheaper than corn, andproducing ethanol from cellulose-based biomass would create opportunities toproduce ethanol in areas which are unable to grow corn. Significant resourcesare being allocated to promote research and development of cellulose-basedethanol.  If an efficient method ofproducing ethanol from cellulose-based biomass is developed, we may not be ableto compete effectively. We do not believe it will be cost-effective to convertour ethanol plant into a plant which will use cellulose-based biomass toproduce 

 

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ethanol.If we are unable to produce ethanol as cost-effectively as cellulose-basedproducers, our ability to generate revenue and financial condition will benegatively impacted.

 

*****Certaincountries can export ethanol to the United States duty-free, which mayundermine the ethanol production industry in the United States*********.****  Imported ethanol is generallysubject to a $0.54 per gallon tariff and a 2.5% ad valorem tax that wasdesigned to offset the $0.51 per gallon ethanol subsidy available under thefederal excise tax incentive program for refineries that blend ethanol in theirfuel. There is a special exemption from the tariff for ethanol imported from 24countries in Central America and the Caribbean islands which is limited to atotal of 7.0% of United States production per year. In December 2006, legislationwas passed by the U.S. House of Representatives and U.S. Senate to extend the$0.54 per gallon tariff through 2008. We do not know the extent to which thevolume of imports would increase if the tariff is not renewed.

 

In addition, the NorthAmerica Free Trade Agreement foreign countries, Canada and Mexico, are exemptfrom duty.  Imports from the exempted countries have increased in recentyears and are expected to increase further as a result of new plants underdevelopment. In particular, the ethanol industry has expressed concern withrespect to a new plant under development by Cargill, Inc., the fifthlargest ethanol producer in the United States, in El Salvador that would takethe water out of Brazilian ethanol and then ship the dehydrated ethanol from ElSalvador to the United States duty-free. Brazil is currently the world’s secondlargest producer and largest exporter of ethanol. In Brazil, ethanol isproduced primarily from sugarcane, which is also used to produce food-gradesugar.  Since production costs for ethanol in Brazil are estimated to besignificantly less than what they are in the United States, the import of theBrazilian ethanol duty-free through El Salvador or another country exemptedfrom the tariff may negatively impact the demand for domestic ethanol and theprice at which we sell our ethanol.

 

***Consumer resistance to the use of ethanol based on thebelief that ethanol is******expensive,adds to air pollution, harms engines and/or takes more energy to**produce that it contributes may affect the demand forethanol.***  Certain individuals believe that use ofethanol will have a negative impact on gasoline prices at the pump. Many alsobelieve that ethanol adds to air pollution and harms car and truck engines.Still other consumers believe that the process of producing ethanol actuallyuses more fossil energy, such as oil and natural gas, than the amount ofethanol that is produced. These consumer beliefs could potentially bewide-spread. If consumers choose not to buy ethanol, it would affect the demandfor the ethanol we produce which could lower demand for our product andnegatively affect our profitability and financial condition.

 

***The expansion of domestic ethanol production in combinationwith state bans on MTBE and/or state renewable fuels standards may placestrains on related infrastructure such that our ethanol cannot be marketed andshipped to blending terminals that would otherwise provide us the best costadvantages.***** **Ifthe volume of ethanol shipments continues to increase and blenders switch fromMTBE to ethanol, there may be weaknesses in infrastructure such that ourethanol cannot reach its target markets. Substantial development ofinfrastructure by persons and entities outside our control will be required forour operations, and the ethanol industry generally, to grow.  Areasrequiring expansion include, but are not limited to:

 

·                  additional rail capacity to meet the expanding volumeof ethanol shipments;

·                  additional storage facilities for ethanol;

·                  increases in truck fleets capable of transportingethanol within localized markets;

·                  expansion of and/or improvements to refining andblending facilities to handle ethanol instead of MTBE;

·                  growth in the fleet of flexible fuel vehicles capableof using E85 fuel.

 

The expansion of theabove infrastructure may not occur on a timely basis, if at all.  Our operations could be adversely affected byinfrastructure disruptions.  In addition, lack of or delay ininfrastructure expansion may result in an oversupply of ethanol on the market,which could depress ethanol prices and negatively impact our financialperformance.

 

**RisksRelated to Regulation and Governmental Action**

 

***A change in government policies favorable to ethanol maycause demand for ethanol to decline.*******Growthand demand for ethanol may be driven primarily by federal and state governmentpolicies, such as state laws 

 

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banning MTBE and thenational renewable fuels standard. The continuation of these policies isuncertain, which means that demand for ethanol may decline if these policieschange or are discontinued. A decline in the demand for ethanol is likely tocause lower ethanol prices which in turn will negatively affect our results ofoperations, financial condition and cash flows.

 

***Loss of or ineligibility for favorable tax benefits forethanol production could hinder our ability to operate at a profit and reducethe value of your investment in us.*******The ethanol industry and our business are assisted byvarious federal ethanol tax incentives. The elimination or reduction of taxincentives to the ethanol industry could reduce the market for ethanol, whichcould reduce prices and our revenues by making it more costly or difficult forus to produce and sell ethanol. If the federal tax incentives are eliminated orsharply curtailed, we believe that a decreased demand for ethanol will result,which could depress ethanol prices and negatively impact our financialperformance.

 

One important taxprovision involves the small ethanol producer tax credit.  Historically, small ethanol producers wereallowed a 10-cents per gallon production income tax credit on up to15 million gallons of production annually. Under the Energy Policy Act of 2005 the size limitation on theproduction capacity for small ethanol producers increased from 30 millionto 60 million gallons, allowing us to qualify for this credit. However,following the completion of our plant expansion to 90MGY, we will no longerqualify for this tax credit.

 

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

 

***Carbon dioxide may be regulated in the future by the EPA asan air pollutant requiring us to obtain additional permits and installadditional environmental mitigation equipment, which could adversely affect ourfinancial performance*****. **In April 2007, the United States Supreme Court decided a case in whichit ruled that carbon dioxide is an air pollutant under the Clean Air Act forthe purposes of motor vehicle emissions.  The lawsuit sought to requirethe EPA to regulate carbon dioxide in vehicle emissions.  Similar lawsuitshave been filed seeking to require the EPA to regulate carbon dioxide emissionsfrom stationary sources such as our ethanol plant under the Clean Air Act. Ourplant produces a significant amount of carbon dioxide that we currently ventinto the atmosphere.  While there are currently no regulations applicableto us concerning carbon dioxide, if the EPA or the State of Wisconsin regulatecarbon dioxide emissions by plants such as ours, we may have to apply foradditional permits or we may be required to install carbon dioxide mitigationequipment or take other as yet unknown steps to comply with these potentialregulations.  Compliance with any future regulation of carbon dioxide, ifit occurs, could be costly and may prevent us from operating the ethanol plantprofitably which could decrease or eliminate the value of our units.

 

 

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**ITEM 2.  PROPERTIES.**

 

Our ethanol plant is located onapproximately 115 acres on Wisconsin Highway 33, two miles east of WisconsinHighway 73.  The plant’s address is W1231 Tessmann Drive, Friesland, Wisconsin 53935.  The original constructionof the plant was completed in April 2005. Phase I of the expansion of the plant was substantially completed in December 2007.  The ethanol plant consists of the followingbuildings:

 

·                  A dry bulk products shipping and receiving facility with mainelevators and conveyors of 15,000 bushel per hour capacity, one truck and onecombination truck and rail handling lane, as well as grain storage for 450,000bushels and cleaning, grinding, and dust control equipment.

 

·                  An ethanol production system which is comprised of a mixingsystem, cooker, liquefaction vessels, five 750,000 gallon fermentors, a 985,000gallon beer well vessel, distillation system, and alcohol driers.  This equipment is arranged in and around theprocess and production building, which also houses the electrical and processcontrol center, control room, maintenance facilities, staff facilities, andoperations management offices.

 

·                  The ethanol storage area which consists of two 750,000 gallonstorage tanks with floating lids, two shift tanks with a combined capacity of200,000 gallons and a denaturant storage tank with a capacity of 100,000gallons.  These vessels are containedwithin a spill containment area to contain any spills of the contents of thetanks which might occur.  There are catchbasins at the rail and truck loading stations which drain into this containmentarea as well.

 

·                  An energy building houses the natural gas burning equipmentconsisting of the thermal oxidizer and waste heat steam boiler, and thedistiller grains dryers.

 

·                  The waste mash processing system consists of four centrifuges, amultistage evaporation system and various stainless steel vessels.

 

·                  The fire protection system consists of a 470,000 gallon waterstorage tank, two 500 gallon per minute on site water wells, a 2,500 gallon perminute diesel fire pump and underground fire water distribution piping networksupplying a series of hydrants, sprinklers and a deluge system.

 

·                  A cooling tower installation with four 75 HP cooling fans andthree 200 HP water pumps.

 

·                  Transportation facilities include 8,000 feet of rail and switches,4,000 of road, a 90x12 foot truck scale, and truck and rail ethanol load outstations.

 

·                  A 4,200 square foot administration and sales office building,furniture and equipment, parking lot and landscaping.

 

·                  A 7,458 square foot maintenance building including offices, aworkout room and break area.

 

On May 25,2006, we signed credit agreements with Farmers & Merchants Union Bankof Friesland, Wisconsin and refinanced our existing term debt and revolvingloan commitment.  The credit facility issecured by substantially all our assets.

 

On June 7, 2006, our board ofdirectors announced plans to conduct an engineering and feasibility study forincreasing our plant production capacity. Phase I of this expansion was substantially completed in December 2007and is expected to increase our production capacity to 60 million gallonsannually, the capacity permitted by ourconstruction permit, by approximately June 30, 2008.  Phase II of our expansion project willinvolve downstream capacity expansion (post-fermentation) and is expected to increaseour overall production capacity to 90 million gallons per year.  Weare in the process of determining whether this 30 million gallon facility willbe a stand-alone facility or part of a second expansion to our existingplant.  We anticipate that this expansionwill be completed in

 

25

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June 2009.  In connection with this expansion, our boardhas approved the purchase of centrifuges and the expansion of our distillation,dehydration, and evaporation system.

 

We previouslyexplored the possibility of a fractionation project and grains areaexpansion.  However, changes in the riskand reward situation have resulted in a new round of evaluation of thesuitability of fractionation for our facility, and we are also exploringalternative and/or supplementary technologies for processing the portion of thecorn not used in the fermentation process for the production of alcohol and/orenergy.

 

Our grainstorage capacity is being expanded from 450,000 bushels to 900,000 bushels.  Also, a new loading system, including aseparate loading bay, is also under construction in the grain receivingarea.  A new distillers grains coolingand conveying system is also under construction.

 

**ITEM 3.  LEGALPROCEEDINGS.**

 

From time to time in theordinary course of business, we may be named as a defendant in legal proceedingsrelated to various issues, including without limitation, workers’ compensationclaims, tort claims, or contractual disputes.  We are not currentlyinvolved in any material legal proceedings, directly or indirectly, and we arenot aware of any claims pending or threatenedagainst us or any of the directors that could result in the commencementof material legal proceedings.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

We did not submit anymatter to a vote of our unit holders through the solicitation of proxies orotherwise during the fourth quarter of 2007.

 

**PART II**

 

**ITEM 5.  MARKETFOR REGISTRANT’S MEMBERSHIP UNITS, RELATED MEMBER MATTERS AND ISSUER PURCHASESOF MEMBERSHIP UNITS.**

 

Thereis no public trading market for our membership units.  However, we have created a private qualified online matching service in orderto facilitate trading of our units.  Ouronline matching service has been designed to comply with federal tax laws andregulations establishing a “qualified matching service,” as well as state andfederal securities laws.  Our onlinematching service consists of an electronic bulletin board that provides listsof interested sellers and interested buyers, along with non-firm price quotations.  We do not receive any compensation forcreating or maintaining the matching service. We do not become involved in any purchase or sale negotiations arisingfrom our qualified matching service.  Inadvertising our qualified matching service, we do not characterize the Companyas being a broker or dealer or an exchange. We do not give advice regarding the merits or shortcomings of anyparticular transaction.  We do notreceive, transfer or hold funds or securities as an incident of operating theonline matching service.  We do not usethe bulletin board to offer to buy or sell securities other than in compliancewith the securities laws, including any applicable registrationrequirements.  We have no role ineffecting the transactions beyond approval, as required under our operatingagreement and the issuance of new certificates. There are detailed timelinesthat must be followed under the matching service with respect to offers andsales of membership units.  All transactions must comply with thequalified matching service terms and conditions, rules, our operatingagreement, and are subject to approval by our board of directors.  Thequalified matching service rules and terms and conditions are available onour website, *www.uwgp.com.*

 

The following tablecontains historical information by quarter for the past two years regarding theactual unit transfers that were completed by the Company’s unit-holders duringthe periods specified.  The Company believes this most accuratelyrepresents the current trading value of the Company’s units.  Theinformation was compiled by reviewing the completed unit transfers thatoccurred on our qualified online matching service during the quartersindicated.

 

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| **Quarter**                     | ** ** | **Low Price** | ** ** | **High Price** | ** ** | **Average Price** | ** ** | **# of  Units Traded** | ** ** |
|---------------------------------|------------|---------------|------------|----------------|------------|-------------------|------------|------------------------|------------|
| Oct 1 — Dec 31 2007        |       | $             | 2,300.00   |           | $          | 3,250.00          |       | $                      | 2,727.70   |   | 213 |   |
| July 1 — Sept 30 2007 |       | $             | 3,132.00   |           | $          | 3,375.00          |       | $                      | 3,152.17   |   | 150 |   |
| Apr 1 — June 30 2007  |       | $             | 3,000.00   |           | $          | 3,500.00          |       | $                      | 3,224.08   |   | 731 |   |
| Jan 1 — March 31 2007 |       | $             | 3,000.00   |           | $          | 3,400.00          |       | $                      | 3,225.00   |   | 170 |   |
| Oct 1 — Dec 31 2006        |       | $             | 3,450.00   |           | $          | 4,000.00          |       | $                      | 3,648.08   |   | 260 |   |
| July 1 — Sept 30 2006 |       | $             | 1,500.00   |           | $          | 3,900.00          |       | $                      | 3,194.74   |   | 95 |   |
| Apr 1 — June 30 2006  |       | $             | 2,200.00   |           | $          | 2,500.00          |       | $                      | 2,363.64   |   | 55 |   |
| Jan 1 — March 31 2006 |       | $             | 1,700.00   |           | $          | 1,950.00          |       | $                      | 1,800.00   |   | 30 |   |

 

As a limited liabilitycompany, we are required to restrict the transfers of our membership units inorder to preserve our partnership tax status.  Our membership units maynot be traded on any established securities market or readily trade on asecondary market (or the substantial equivalent thereof).  All transfersare subject to a determination that the transfer will not cause us to be deemeda publicly traded partnership.

 

**UnitHolders**

 

Asof February 29, 2008, we had 28,675 membership units issued andoutstanding and approximately 983 holders of record of our membershipunits.  There is no other class ofmembership units issued or outstanding.

 

**Distributions**

 

Our board of directors has complete discretion over the timing andamount of distributions to our unit holders; however, our operating agreementrequires the board of directors to endeavor to make cash distributions at suchtimes and in such amounts as will permit our unit holders to satisfy theirincome tax liability in a timely fashion. In addition,distributions are restricted by certain covenants in our term loan andrevolving credit loan.  Theseloan covenants and restrictions are described in greater detail under “MANAGEMENT’SDISCUSSION AND ANALYSIS — *Short-Term and Long-Term Debt Sources*.” There can be no assurances as to our ability to declare or paydistributions in the future or that past distributions (described below) willbe indicative of future distributions.

 

Revenues generated from plant operations are distributed by theCompany to our unit holders in proportion to the number of units held by eachunit holder.  A unit holder’sdistribution is determined by dividing the number of units owned by such unitholder by the total number of units outstanding.

 

***2008 Distributions***

 

On January 10, 2008,our Board of Directors approved a cash distribution of $250 per unit to theholders of membership units of record at the close of business on January 10,2008.  The distribution was paid in February 2008.

 

***2007 Distributions***

 

On January 9, 2007,our Board of Directors approved a cash distribution of $500 per unit to theholders of membership units of record at the close of business on January 9,2007.  The distribution was paid in February 2007.  On July 10, 2007, our Board of Directorsapproved a cash distribution of $136 per unit to the holders of membershipunits of record at the close of business on July 10, 2007.  Thedistribution was paid in August 2007.

 

***2006 Distributions***

 

On February 8,2006 our Board of Directors approved a cash distribution of $200 per unit tothe holders of membership units of record at the close of business on February 10,2006.  The distribution was paid in March 2006.  On July 10, 2006, our Board of Directorsapproved a cash distribution of $200 per unit to the holders of membershipunits of record at the close of business on June 30, 2006.  Thedistribution was paid in August 2006.

 

27

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**IssuerPurchases of Equity Securities**

 

We made the following membership unit repurchases during the fourthquarter of our fiscal year ended December 31, 2007: (1)

** **
| **Period**                                           | ** ** | **Total Number of   Units Purchased** | ** ** | **Average Price Paid   per Unit ($)** | ** ** | **Total Number of   Units Purchased as   Part of Publicly   Announced Plans   or Programs** | ** ** | **Approximate   Dollar Value of   Units that May Yet   Be Purchased   Under the Plans or  Programs ($)** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| October 1, 2007 –  October 31, 2007   |       | 10                                    |       | 3,100.00                              |       | 10                                                                                               |       | 953,250.00                                                                                                    |       |
| November 1, 2007 –  November 30, 2007 |       | 45                                    |       | 3,211.11                              |       | 45                                                                                               |       | 808,750.00                                                                                                    |       |
| December 1, 2007 –  December 31, 2007 |       | 10                                    |       | 3,200.00                              |       | 10                                                                                               |       | 776,750.00                                                                                                    |       |
| **Total**                                            | ** ** | **65**                                | ** ** | **3,192.31**                          | ** ** | **65**                                                                                           | ** ** | **776,750.00**                                                                                                | ** ** |

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(1)On June 11, 2007 the board approved expenditures of up to $1,000,000 topursue the option of buying back membership units.  Prior to the purchases listed in the tableabove, the Company had repurchased a total of 5 units for $3,150 per unit.  As of December 31, 2007, the Company hadrepurchased a total of 70 membership units for a total of $223,250.  The expiration date of this unit repurchaseprogram is June 10, 2008.

 

**PerformanceGraph**

 

The followinggraph compares the cumulative total return on the Company’s units with thecumulative total return of the NASDAQ Index and the SIC Code Index (SIC Code2869—Industrial Organic Chemicals, Not Elsewhere Classified).  The unitprice performance shown on the following graph is not intended to forecast andis not indicative of future unit price performance.  The data for thisperformance graph was compiled for us by Morningstar, Inc.

 

 

 

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** **

**ITEM6.  SELECTED FINANCIAL DATA**

 

The following table sets forth selected consolidatedfinancial data of the Company, which is derived from the audited financialstatements for the periods indicated. The information below is only a summary. This information should be read in conjunction with “Item 7—Management’s Discussion and Analysisof Financial Condition and Results of Operations” and our audited financialstatements included in this annual report. Our past performance may not be indicative of future financial conditionor results of operations for many reasons, including the risks described in “Item 1A—Risk Factors” and elsewhere inthis annual report.

 
| **Statement  of Operations Data:**        | ** ** | **2007** | ** **  | **2006** | ** ** | **2005**    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|-------------|----------|------------|-------------|------------|----------|------------|----------|------------|
| Revenues                                  |       | $        | 112,103,602 |     | $          | 111,771,603 |       | $        | 54,477,045 |     | $          | — |   | $ | — |   |
|                                      |       |     |        |     |       |        |       |     |       |     |       |
| Cost of Goods Sold                        |       | $        | 87,374,742  |     | $          | 67,482,429  |       | $        | 43,643,191 |     | $          | — |   | $ | — |   |
|                                      |       |     |        |     |       |        |       |     |       |     |       |
| Gross Profit                              |       | $        | 24,728,860  |     | $          | 44,289,174  |       | $        | 10,833,854 |     | $          | — |   | $ | — |   |
|                                      |       |     |        |     |       |        |       |     |       |     |       |
| Operating Expenses                        |       | $        | 3,518,068   |     | $          | 3,383,385   |       | $        | 2,286,229  |     | $          | 718,431 |   | $ | 565,689 |   |
|                                      |       |     |        |     |       |        |       |     |       |     |       |
| Operating Income (Expense)                |       | $        | 21,210,792  |     | $          | 40,905,789  |       | $        | 8,547,625  |     | $          | (718,431 | ) | $ | (565,689 | ) |
|                                      |       |     |        |     |       |        |       |     |       |     |       |
| Other Income (Expense)                    |       | $        | 31,440      |     | $          | (887,940    | )          | $        | 2,187,770  |     | $          | (1,731 | ) | $ | 43,565 |   |
|                                      |       |     |        |     |       |        |       |     |       |     |       |
| Net Income (Expense)                      |       | $        | 21,242,232  |     | $          | 40,017,849  |       | $        | 10,735,395 |     | $          | (720,162 | ) | $ | (522,124 | ) |
|                                      |       |     |        |     |       |        |       |     |       |     |       |
| Weighted Average Units  Outstanding       |       | 28,767   |        | 28,780   |       | 28,780      |       | 28,270   |       | 3,071    |       |
| Net Gain (Loss) Per Unit                  |       | $        | 738.42      |     | $          | 1,390.47    |       | $        | 373.02     |     | $          | (25.47 | ) | $ | (170.02 | ) |
| Cash Distributions per  Unit              |       | $        | 636.29      |     | $          | 400.00      |       | $        | —     |     | $          | — |   | $ | — |   |
|                                      |       |     |        |     |       |        |       |     |       |     |       |
| **Balance Sheet Data:**                   | ** ** | **2007** | ** **  | **2006** | ** ** | **2005**    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net Property,  Plant & Equipment |       | $        | 51,625,090  |     | $          | 47,364,224  |       | $        | 49,891,372 |     | $          | 43,076,408 |   | $ | 5,293,549 |   |
| Total Assets                              |       | $        | 86,538,195  |     | $          | 84,946,319  |       | $        | 64,915,892 |     | $          | 44,253,414 |   | $ | 25,546,721 |   |
| Long-Term Debt, less  current maturities  |       | $        | 13,097,887  |     | $          | 14,349,890  |       | $        | 22,074,722 |     | $          | 77,723 |   | $ | 2,298 |   |
| Members’ Equity                      |       | $        | 68,128,195  |     | $          | 65,413,512  |       | $        | 36,907,663 |     | $          | 26,172,268 |   | $ | 23,710,419 |   |
| Units Outstanding at End  of Year         |       | 28,710   |        | 28,780   |       | 28,780      |       | 28,780   |       | 25,605   |       |
| Book Value Per Capital  Unit              |       | $        | 2,372.98    |     | $          | 2,272.88    |       | $        | 1,282.41   |     | $          | 909.39 |   | $ | 927.18 |   |

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**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATION.**

 

Except for historicalinformation, the following discussion contains forward-looking statements thatare subject to risks and uncertainties.  We caution you not to put unduereliance on any forward-looking statements, which speak only as of the date ofthis report.  Our actual results or actions may differ materially fromthese forward-looking statements for many reasons, including the risksdescribed in “**Item 1A—Risk Factors**” and elsewhere in this annual report.  Ourdiscussion and analysis of our financial condition and results of operations

 

 

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should be read inconjunction with the financial statements and related notes and with theunderstanding that our actual future results may be materially different fromwhat we currently expect.

 

**Overview**

 

References to “we,” “us,” “our” and the “Company” refer to UnitedWisconsin Grain Producers, LLC.  UnitedWisconsin Grain Producers, LLC is a Wisconsin limited liability company thatmanages the business and day-to-day operations of a 60 million gallon per yearethanol plant near Friesland, Wisconsin. The ethanol plant was originally constructed as a 40 million gallon peryear facility, but in late 2007 the plant’s production capacity was expanded to60 million gallons per year.  We expectto operate at this expanded production capacity by approximately June 30,2008.  We anticipate further increasingour production capacity to 90 million gallons per year by approximately June 30,2009.

 

We expect to fund ouroperations during the next twelve months using cash flow from continuingoperations and our credit facilities.  Weexpect to continue ongoing research and development activities in the nexttwelve months in the form of commissioning studies on internal energygeneration in conjunction with our plant production capacity increases, inparticular the possibility of using post-fermentation corn solids or otherrenewable fuel as an energy source, thereby offsetting our natural gasusage.  This evaluation and analysis workhas postponed the completion date for the planned 60 to 90 MGY capacityincrease.  This is because the design ofthe 30 million gallon per year facility is affected by our energy technologychoice.

 

**Resultsof Operations**

 

***Comparisonof the fiscal years ended December 31, 2007 and 2006***

 

Thefollowing table shows the results of our operations and the percentage ofrevenues, cost of goods sold, operating expenses and other items to totalrevenues in our statement of operations for the fiscal years ended December 31,2007 and 2006:

 

| ** **                | ** ** | **Fiscal year Ended  December 31, 2007  (Audited)** | ** **  | **Fiscal year Ended  December 31, 2006  (Audited)** | ** ** |
|---------------------------|------------|----------------------------------------------------------|-------------|----------------------------------------------------------|------------|
| ** **                | ** ** | **Amount**                                               | ** **  | **%**                                                    | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Income Statement Data** | ** ** | ** **                                               | ** **  | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                  |       | $                                                        | 112,103,602 |                                                     | 100.0      |   | $ | 111,771,603 |   | 100.0 |   |
|                      |       |                                                     |        |                                                     |       |   |   |   |   |
| Cost of Goods Sold        |       | $                                                        | 87,374,742  |                                                     | 77.9       |   | $ | 67,482,429 |   | 60.4 |   |
|                      |       |                                                     |        |                                                     |       |   |   |   |   |
| Gross Profit              |       | $                                                        | 24,728,860  |                                                     | 22.1       |   | $ | 44,289,174 |   | 39.6 |   |
|                      |       |                                                     |        |                                                     |       |   |   |   |   |
| Operating Expenses        |       | $                                                        | 3,518,068   |                                                     | 3.1        |   | $ | 3,383,385 |   | 3.0 |   |
|                      |       |                                                     |        |                                                     |       |   |   |   |   |
| Operating Income          |       | $                                                        | 21,210,792  |                                                     | 19.0       |   | $ | 40,905,789 |   | 36.6 |   |
|                      |       |                                                     |        |                                                     |       |   |   |   |   |
| Other Income (Expense)    |       | $                                                        | 31,440      |                                                     | 0.0        |   | $ | (887,940 | ) | (0.8 | ) |
|                      |       |                                                     |        |                                                     |       |   |   |   |   |
| **Net Income**            |       | $                                                        | 21,242,232  |                                                     | 19.0       |   | $ | 40,017,849 |   | 35.8 |   |

 

*Revenues*. Revenues from operations for the fiscal year ended December 31,2007 totaled $112,103,602.  In the fiscalyear ended December 31, 2007 ethanol comprised 88% of our revenues anddistillers grain sales (DGS) comprised 12% of our revenues.  Revenues from operations for the fiscal yearended December 31, 2006 totaled $111,771,603, of which ethanol comprised90% and distillers grains comprised 10%. Revenues for the fiscal year ended December 31, 2007 wererelatively unchanged from the previous fiscal year.

 

The price of ethanol inthe fiscal year ended December 31, 2007 was down approximately 5% from theprice for the fiscal year ended December 31, 2006.   Ethanol prices have trended higher in thelast few months.  The lowest recentprices were seen in October 2007, following a downward trend after ethanolprices peaked in 

 

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July 2006.  Management currently expects short-term andmid-term ethanol prices to remain higher than historical averages due to a highdemand for ethanol which may be contributed to by a number of factors,including the use of ethanol as an oxygenate to replace MTBE, the high price ofgasoline encouraging voluntary blending of ethanol and the growing recognitionof ethanol as an alternative energy source. However, management believes the industry will need to continue to growdemand in order to increase or sustain current prices.  According to the Renewable Fuels Association,as of February 22, 2008 there were 143 ethanol plants in operationnationwide with the capacity to produce more than 8.16 billion gallons ofethanol annually, with an additional 57 new plants and seven expansions underconstruction expected to add an additional estimated 5.25 billion gallons ofannual production capacity in the next 12 to 18 months.  Unless this new supply is equally met withincreased demand, downward pressure on ethanol prices could continue to occur.  If ethanol prices decline, our earnings willalso decline, particularly if corn prices remain substantially higher thanhistoric averages.

 

Ourrevenues include a loss of $1,221,061 for the fiscal year ended December 31,2007 related to our ethanol derivative instruments.  We recognize thegains or losses that result from the changes in the value of ourethanol-related derivative instruments in revenues as the changes occur. As ethanol prices fluctuate, the value of our ethanol-related derivativeinstruments changes, affecting our financial performance.  We expect thevolatility in these derivative instruments to continue to have an effect on ourrevenues due to the timing of the changes in value of the derivativeinstruments relative to our sales.  These instruments are the primary tools of our risk management programfor ethanol revenues.

 

                The sales prices for our distillers grains for thefiscal year ended December 31, 2007 were up 26% from the fiscal year endedDecember 31, 2006.  The rising costof corn and other alternative feed sources has pushed distillers grains pricesupward in recent months.  Distillersgrains prices are expected to follow the price of corn for the foreseeablefuture unless the price of soybean meal or other protein sources changessignificantly.  Additionally, an increasedsupply of distillers grains resulting from additional ethanol production mayput downward pressure on distillers grains prices.  To date, additional distillers grains demandhas come from increased domestic usage and increased overseas demand for distillersgrains.

 

                *Cost of Goods Sold*.  Our cost of goods sold from the production ofethanol and distillers grains is primarily made up of raw grains expenses(corn) and energy expenses (natural gas and electricity).  Cost of goods sold for the fiscal year ended December 31,2007 totaled $87,374,742 as compared to $67,482,429 for the fiscal year ended December 31,2006.  The 30% increase in cost of goodssold in the fiscal year ended December 31, 2007 as compared to theprevious fiscal year is a net result of a 46% increase in the cost of corn andother ingredients and a 16% increase in electricity, partially offset by a 10%decrease in the cost of production labor and an 8% decrease in the cost ofnatural gas.  Our decreased cost ofproduction labor is primarily the result of decreased costs in connection withour high earnings reward profit-sharing program.

 

                The average corn price for 2007 was 39% higher thanthe average for 2006.  Corn prices, alongwith the price of most agricultural commodities, have been trending higher overthe past year.  Chicago Board of Tradecorn futures contracts have traded from a low of $2.70 in early spring 2006 toa high of over $5.60 in early 2008.  This$2.90 trading range is due to increased volatility surrounding the supply anddemand picture for corn.  A large portionof this volatility was due in part to the rapid expansion taking place in theethanol production industry.  Ethanolproduction facilities were experiencing larger than average profit margins,thus encouraging many new facilities to be constructed throughout thecountry.  This rapid expansion hasbrought about a substantial increase in demand for corn and thus in cornprices. The weak dollar has also promoted strong export sales of corn, addingto the strong demand picture.  Priceshave remained relatively higher for a prolonged period, encouraging producersto supply adequate product to meet this increased demand.  The USDA estimated the 2007 national corncrop at 13.1 billion bushels, allowing a projected carryout number of slightlyless than 2 billion bushels. Historically, this is a very large carryout volume, but given theprojected total future demand, corn has struggled to trade at a lower price.  Recently, ethanol margins have tightenedconsiderably, which may reduce the domestic demand for corn.  However, current high wheat prices and highsoybean prices could lure acres out of corn production in 2008, which couldincrease corn prices and further increase our cost of goods sold.

 

Ourcost of goods sold includes a gain of $255,304 for the fiscal year ended December 31,2007 related to our corn derivative instruments as compared to a $3,183,371gain for the fiscal year ended December 31, 2006.  We recognize thegains or losses that result from the changes in the value of our corn-relatedderivative instruments in 

 

31

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costof goods sold as the changes occur.  As corn prices fluctuate, the valueof our derivative instruments changes, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timingof the changes in value of the derivative instruments relative to the cost anduse of the commodity being hedged.  These instruments are the primary tools of our risk management programfor corn prices.

 

Naturalgas is also an important input to our manufacturing process.  The price and volume of our natural gas forthe fiscal year ended December 31, 2007 remained relatively unchanged ascompared to the same period in 2006.   Weestimate that our natural gas usage is approximately 121,500 million Britishthermal units (“MMBTU”) per month.  We expect our natural gas usage toincrease to 140,000 MMBTU per month once we are operating at a production rateof 60 million gallons per year.  We usenatural gas to dry a majority of our distillers grains products to moisturecontents at which they can be stored for longer periods and transported greaterdistances, so that we can market them to broader livestock markets, includingpoultry and swine markets in the continental United States and to markets in Asia.  Overthe past two to three years natural gas has been available only at pricesexceeding historical averages. These heightened prices increase our costs ofproduction.  Although natural gas prices have trended lower since theirpeak in late 2005, we expect natural gas prices to remain higher than historicprices given the higher prices of energy sources generally.  We expect ournatural gas costs to remain at or near costs experienced over the past year,which will continue to have a negative impact on our cost of goods sold.  We have secured a marketing firm and energyconsultant for our natural gas supply and will continue to work with them on anongoing basis to mitigate our exposure to volatile gas prices.   We have also secured firm pipeline capacityfor natural gas delivery of 4,000 MMBTU per day, although we may need to secureadditional pipeline capacity to operate at our expanded production rate.

 

*Gross Profit*.  Gross profit for the fiscal year ended, December 312007 was $24,728,860, a 44% decrease from the gross profit of $44,289,174 forthe fiscal year ended December 31, 2006. This decrease is due primarily to a 39% increase in the price of corn(see “Cost of Goods Sold” above).

 

Inthe year ending December 31, 2007, although the spread between the sellingprice of the ethanol and distillers grains we sold and the cost of the rawmaterials required to produce our ethanol and distillers grains was down fromthe preceding year, we still realized a favorable margin.  The spread between the price we receive forour products and the costs of our raw materials may not continue at thisfavorable rate in the future.  Therapidly increasing supply of ethanol may outpace the demand for ethanol,placing additional downward pressure on our selling price and further erodingour margins.  The increased production ofethanol from corn in the industry may contribute to the already increasingdemand for corn and exceed the supply of corn, increasing our cost of corn andreducing our profit margin.  A decreasein profit margin will adversely affect our financial performance.

 

*OperatingExpenses*.  Operating expenses of $3,518,068 for thefiscal year ended December 31, 2007, as compared to operating expenses of$3,383,385 for fiscal year ended December 31, 2006, remained relativelyunchanged, representing 3.1% and 3.0% of our revenues, respectively.

 

*                                               **OperatingIncome*.  Operatingincome for fiscalyear ended December 31, 2007 totaled $21,210,792, or19% of revenues.  Operating income for the fiscal year ended December 31,2006 totaled $49,905,789, or 37% of revenues.  The decrease in operating income for the fiscal yearended December 31, 2007 compared to the fiscal year ended December 31,2006 is primarily a result of the decrease in “Gross Profit” (discussed above).

 

*Other Income (Expense)*.  Our other income (expense) for the fiscalyear ended December 31, 2007 was income of $31,440 as compared to an expense of$887,940 for the fiscal year ended December 31, 2006.  Our other income (expense) items at December 31, 2007 consistedprimarily of interest income, interest expense, and a net loss oninvestment.  Our other income (expense)items at December 31, 2006consisted primarily of a net interest expense. The changes in other income (expense) items were due primarily to anincrease in interest income and a decrease in interest expense.

 

Wedid not receive any payments from the USDA CCC Bioenergy program in the fiscalyear ended December 31, 2007 as compared to receipt of payments totaling$393,336 for the fiscal year ended December 31, 2006.  Payments underthe Bioenergy Program were based upon increases in ethanol production relativeto the previous year.  The CCC announced that its funds would be exhaustedin the third quarter of the government’s 2006 

 

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fiscalyear and the program terminated as of June 30, 2006.  For this reason, we will not receive anyfurther income from this program.

 

***Comparisonof the fiscal years ended December 31, 2006 and 2005***

 

The followingtable shows the results of our operations and the percentage of revenues, costof goods sold, operating expenses and other items to total revenues in ourstatement of operations for the fiscal years ended December 31, 2006 and2005.  It is important to note whencomparing these two periods that the fiscal year ending December 31, 2005represents only 8 months of production since the plant only became operationalin May of 2005.

 

| ** **                | ** ** | **Year Ended  December 31, 2006** | ** **  | **Year Ended  December 31, 2005** | ** ** |
|---------------------------|------------|----------------------------------------|-------------|----------------------------------------|------------|
| ** **                | ** ** | **Amount**                             | ** **  | **%**                                  | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Income Statement Data** | ** ** | ** **                             | ** **  | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                  |       | $                                      | 111,771,603 |                                   | 100.0      |   | $ | 54,477,045 |   | 100.0 |   |
|                      |       |                                   |        |                                   |       |   |   |   |   |
| Cost of Goods Sold        |       | $                                      | 67,482,429  |                                   | 60.4       |   | $ | 43,643,191 |   | 80.1 |   |
|                      |       |                                   |        |                                   |       |   |   |   |   |
| Gross Profit              |       | $                                      | 44,289,174  |                                   | 39.6       |   | $ | 10,833,854 |   | 19.9 |   |
|                      |       |                                   |        |                                   |       |   |   |   |   |
| Operating Expenses        |       | $                                      | 3,383,385   |                                   | 3.0        |   | $ | 2,286,229 |   | 4.2 |   |
|                      |       |                                   |        |                                   |       |   |   |   |   |
| Operating Income          |       | $                                      | 40,905,789  |                                   | 36.6       |   | $ | 8,547,625 |   | 15.7 |   |
|                      |       |                                   |        |                                   |       |   |   |   |   |
| Other Income (Expense)    |       | $                                      | (887,940    | )                                      | (0.8       | ) | $ | 2,187,770 |   | 4.0 |   |
|                      |       |                                   |        |                                   |       |   |   |   |   |
| **Net  Income**           |       | $                                      | 40,017,849  |                                   | 35.8       |   | $ | 10,735,395 |   | 19.7 |   |

 

*Revenues*.  Revenues from operations for thefiscal year ended December 31, 2006 totaled $111,771,603.  In thefiscal year ended December 31, 2006 ethanol comprised 90% of our sales andDDGS comprised 10% of our sales.  Revenues from operations for the fiscalyear ended December 31, 2005 totaled $54,477,045, of which ethanolcomprised 89% of our sales and DDGS comprised 11%.  The increase inrevenues from operations for the fiscal year ended December 31, 2006compared to the fiscal year ended December 31, 2005 is substantially aresult of a 32% increase in the price per gallon of ethanol and a 57% increasein gallons produced.   The 57% increase in gallons produced is aresult of a full year in production in 2006 as compared to only eight months ofproduction in 2005 as well as a 7% increase in the average production rate in2006.  The sales price for our distillers grains remained relativelyunchanged in the fiscal year ended December 31, 2006 compared to thefiscal year ended December 31, 2005.

 

*Costof Goods Sold*. Our cost of goods sold from the production of ethanol and distillers grains isprimarily made up of raw grains expenses (corn) and energy expenses (naturalgas and electricity).  Cost of goods sold for the fiscal year ended December 31,2006 totaled $67,482,429 as compared to $43,643,191 for the fiscal year ended December 31,2005.  The 55% increase in cost of goods sold in the fiscal year ended December 31,2006 as compared to the previous year is primarily a result of a full twelvemonths of operations in 2006 as opposed to eight months in 2005.

 

Cost of goods soldincludes a gain of $3,183,371 for the fiscal year ending December 31, 2006related to our corn derivative instruments.  We recognize the gains orlosses that result from the changes in the value of our derivative instrumentsin cost of goods sold as the changes occur.  As corn prices fluctuate, thevalue of our derivative instruments are impacted, which affects our financialperformance.

 

*GrossProfit*. Gross profit for the fiscal year ended December 31, 2006 was approximately$44,289,174 as compared to approximately $10,833,854 for the fiscal year ended December 31,2005.  This is an increase of 309% for fiscal year 2006 as compared tofiscal year 2005.  This increase is due primarily to a full year ofproduction in 2006 as compared to only eight months of production in 2005,increased efficiency and production at the plant, and 

 

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the favorable spreadbetween the selling prices of our products and the costs of the raw materialsrequired to produce our products.

 

*OperatingExpenses*. Operating expenses for the fiscal year ended December 31, 2006 totaledapproximately $3,383,385, an increase of approximately 48% over our operatingexpenses of $2,286,229 for the fiscal year ended December 31, 2005.   The increase in operating expenses for the fiscal year ended December 31,2006 was primarily due to a full twelve months of operations as opposed to onlyeight months in the previous fiscal year ended December 31, 2005.

 

*OperatingIncome*. Operating income for the fiscal year ended December 31, 2006 totaledapproximately $40,905,789.  Operating income for the fiscal year ended December 31,2005 totaled approximately $8,547,625.  The increase in operating incomefor fiscal year ended December 31, 2006 compared to the fiscal year ended December 31,2005 is substantially a result of a 32% increase in the price per gallon ofethanol and a 57% increase in production.  The production increase isprimarily a result of twelve months of production in 2006 as opposed to eightmonths of production in 2005, as well a 7% increase in year over year averagerate of production.

 

*OtherIncome (Expense)*. Our other income and expense for the fiscal year ended December 31, 2006was an expense of $887,940.  Other income and expense for the fiscal yearended December 31, 2005 was income of $2,187,770.  Our other incomeand expense items consist primarily of USDA Commodity Credit Corporation (CCC)Bioenergy program payments and interest expense.  The primary reason forthe decline of other income and expense items in the fiscal year of 2006 ascompared to the fiscal year of 2005 is the reduction in CCC Bioenergy programpayments.

 

Our USDA CommodityCredit Corporation Bioenergy Program revenue was $393,336 for the fiscal yearended December 31, 2006 as compared to $2,722,912 for the year ended December 31,2005.  Payments under the Bioenergy Program are based upon increases inethanol production relative to the previous year.  Since we beganoperations in May of 2005, the increase in gallons as we began our secondyear of operations was significantly less than our first year of operations,thus reducing the number of gallons eligible for payment.  Furthermore theCCC announced that its funds would be exhausted in the third quarter of thegovernment fiscal year and the program terminated as of June 30,2006.  For this reason, we will not receive any further income from thisprogram.

 

**Changesin Financial Condition for the Fiscal year ended December 31, 2007Compared to the Fiscal Year Ended December 31, 2006.**

 

                Assets totaled $86,538,195 on December 31,2007, as compared to $84,946,319 on December 31, 2006.  Current assets totaled $33,920,040 on December 31,2007, as compared to $37,482,095 on December 31, 2006.  This change resulted from (i) areduction in cash and cash equivalents on hand, which is primarily a net resultof an increase in cash from operations, less the $18,304,080 cash used for ourmember distributions in February and August 2007 and approximately$9,000,000 used for capital expenditures and construction in process and (ii) a$1,188,531 increase in our accounts receivable balance.

 

                Current liabilities wererelatively unchanged at $5,311,894 on December 31, 2007, as compared to$5,182,917 on December 31, 2006. Long term debt, net of current maturities, totaled $13,097,887 on December 31,2007, as compared to $14,349,980 on December 31, 2006.  This 9% reduction is a direct reflection ofthe principal payments made on our long-term debt as required by our loanagreement.

 

                Members’ equity totaled$68,128,414 on December 31, 2007, as compared to $65,413,512 on December 31,2006.  This change is a net result ofearnings less the aggregate $18,304,080 membership distributions paid out in February andAugust 2007 and $223,250 paid out for the repurchase of membershipunits.  On June 11, 2007 theboard approved up to $1,000,000 to explore/pursue the option of buying backmembership units offered for sale.  As ofDecember 31, 2007, the board had approved a repurchase of a total of 70membership units for $223,250.

 

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**Changes in Financial Condition for the Fiscal YearEnded December 31, 2006 Compared to the Fiscal Year Ended December 31,2005.**

 

Assetstotaled $84,946,319 on December 31, 2006, as compared to $64,915,892 on December 31,2005.  Current assets totaled $37,482,095 on December 31, 2006, ascompared to $14,475,144 on December 31, 2005.  Current liabilitiestotaled $5,182,917 on December 31, 2006, as compared to $5,933,507 on December 31,2005.  Long term debt, net of current maturities, totaled $14,349,980 on December 31,2006, as compared to $22,074,722 on December 31, 2005.  Members’ equity totaled $65,413,512 on December 31,2006, as compared to $36,907,663 on December 31, 2005.

 

**Liquidityand Capital Resources**

 

***Comparisonof the fiscal years ended December 31, 2007 and 2006***

 

Thefollowing table shows cash flows for the fiscal years ended December 31,2007 and 2006:

 

| ** **                                 | ** ** | **Fiscal year ended December 31** | ** **  |
|--------------------------------------------|------------|----------------------------------------|-------------|
| ** **                                 | ** ** | **2007**                               | ** **  | **2006** | ** ** |
| Net cash provided by  operating activities |       | $                                      | 24,694,496  |   | $ | 43,914,660 |   |
| Net cash used in investing  activities     |       | $                                      | (10,453,642 | ) | $ | (2,242,779 | ) |
| Net cash used in financing  activities     |       | $                                      | (19,462,571 | ) | $ | (20,477,027 | ) |

 

*Cash Flow Provided by Operations.** *Our net cash flow providedfrom operating activities for the fiscal year ended December 31, 2007 was$24,694,496, as compared to $43,914,660 for the previous fiscal year.  The decrease in net cash flow provided fromoperating activities for the fiscal year ended December 31, 2007 comparedto the fiscal year ended December 31, 2006 was primarily due to a netresult of a decrease in net income.  Our capital needs are adequately metthrough cash from our operating activities and our current credit facilities.

 

*Cash Flow Used In Investing Activities.** *Our net cash flow used ininvesting activities for the fiscal year ended December 31, 2007constituted expenditures of $10,453,642, as compared to expenditures of$2,242,779 for the previous fiscal year. The increase in expenditures for the fiscal year ended December 31,2007 compared to the fiscal year ended December 31, 2006 is due primarilyto (i) capital expenditures and construction in process payments of$9,715,392, most of which is for Phase I of the plant expansion as compared tocapital expenditures and construction in process payments of $2,142,779 in thefiscal year ended December 31, 2006 and (ii) an additional $1,055,000investment (for a total of $1,155,000) in the First Missouri Energy project(discussed below).

 

Managementestimates that approximately $1,500,000 in capital expenditures will be made inthe next six months to complete the operational improvements in grainsshipping, receiving and storage area, bringing the expected total cost toapproximately $2,440,000.  Also,approximately $1,000,000 in capital expenditures will be made to complete thenew distillers grainscooling and conveying system, a $2,050,000 project approved by our board on June 11,2007.

 

Itis presently estimated that an additional $35,000,000 will be spent over thenext eighteen months for an additional 30 million gallon per year ethanolproduction facility at our plant site (See ***“Plant Expansion andConstruction in Process”*** below), all of which is expected to befinanced from a portion of cash flows from operations and additional debtfinancing.  We are in the process of determining whetherthis 30 million gallon facility will be a stand-alone facility or part of anexpansion to our existing plant.  Utilizing cash generated from operations forthe plant expansion may impact our ability to pay out future memberdistributions.  Our projections are basedupon our historical operating costs and historical revenues.  However, our past financial performance maynot accurately predict future results.  We currently estimate the 30million gallon per year expansion facility will be complete by June 2009;however, construction may not stay on schedule and we may not be able tooperate at the expanded production levels by June 2009.

 

Inaddition to capital investment to increase the capacity and efficiency of ourFriesland facility, on February 12, 2007 our board approved a $10,000,000investment for an approximate 28% ownership interest in a 

 

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jointventure to construct and operate a 55 million gallon capacity ethanol plant atCape Girardeau, Missouri.  It is presently anticipated that theproduction of ethanol at this new plant will commence in early 2010.  However, this date may be delayed dependingon whether the plant is successful at securing adequate equity and debtfinancing to complete capitalization of the project.  As of December 31,2007 we had paid out a total of $1,155,000 on this project.  Our commitment to the project was reduced to$6,285,000 in April 2007.  We expectthat our ownership share will be reduced from 28% due to our lower capitalcontribution and expected increase in the total equity requirement for theproject.  We expect to pay our remainingcapital contribution upon loan closing once First Missouri Energy is able toobtain debt financing for the project.

 

*Cash Flow Used In Financing Activities.** *We used cash to pay downour debt by $1,158,491 during the fiscal year ended December 31, 2007compared to $8,965,027 used for debt payments for the fiscal year ended December 31,2006.  The principal paid in the fiscalyear ended December 31, 2007 was pursuant to the ten-year amortizationrequired by our existing loan agreement with Farmers & Merchants UnionBank.  The principal paid during thefiscal year ended December 31, 2006 included additional principal paymentsallowed for by our loan agreement with our previous lender, AgStar FinancialServices, in an effort to reduce debt. During the fiscal year ended December 31, 2007, we made cashdistributions to our members in the aggregate amount of $18,304,080 as comparedto $11,512,000 in the fiscal year ended December 31, 2006.

 

***Comparison of the fiscal years ended December 31, 2006 and 2005***

 

The following table shows cash flows for thefiscal years ended December 31, 2006 and 2005:

 

| ** **                                 | ** ** | **Fiscal year ended December 31** | ** **  |
|--------------------------------------------|------------|----------------------------------------|-------------|
| ** **                                 | ** ** | **2006**                               | ** **  | **2005** | ** ** |
| Net cash provided by  operating activities |       | $                                      | 43,914,660  |   | $ | 11,441,730 |   |
| Net cash used in investing  activities     |       | (2,242,779                             | )           | (1,176,915 | ) |
| Net cash used in financing  activities     |       | $                                      | (20,477,027 | ) | $ | (1,487,406 | ) |

 

*Cash Flow from Operations.*  Our net cash flow provided from operating activitiesfor the fiscal year ended December 31, 2006 was $43,914,660, as comparedto $11,441,730 for the same period the previous year.  The increase in netcash flow provided from operating activities for the fiscal year ended December 31,2006 compared to fiscal year ended December 31, 2005 was primarily due toour plant being operational for the entire twelve months in 2006 as compared toonly eight months in 2005 and the increased revenues from higher ethanol prices.

 

*Cash Flow Used In Investing Activities.*  Our net cash flow used in investing activities for thefiscal year ended December 31, 2006 constituted expenditures of$2,242,779, as compared to expenditures of $1,176,915 for the same period theprevious year.  The increase in expenditures for the fiscal year ended December 31,2006 compared to the fiscal year ended December 31, 2005 is primarily dueto construction in process payments of $1,168,306 for Phase I of the plantexpansion.

 

*Cash Flow Used In Financing Activities.*** **We used cash to pay down our debt by $8,965,027 duringthe fiscal year ended December 31, 2006 compared to $4,544,543 used fordebt payments for the fiscal year ended December 31, 2005.  Duringthe fiscal year ended December 31, 2006 we made cash distributions to ourmembers in the aggregate amount of $11,512,000.  There were no cashdistributions made to our members in 2005.

 

***Short-Term and Long-Term DebtSources***

 

On May 25, 2006, we signed credit agreementswith Farmers & Merchants Union Bank of Friesland, Wisconsin andrefinanced our initial term debt and revolving loan commitment.  The credit facility is secured bysubstantially all of our assets.   Theterm loan of $16,040,376 is for five years with a ten-year amortization.  We secured a $5,000,000 revolving loan.  As of December 31, 2007, there is nooutstanding balance on the revolving loan. Payments on the term loan are paid in monthly installments, includingprincipal and interest.  The interestrate is fixed at 7.4% for both the term and revolving loan for 5 years.  Interest is due monthly on the revolving loancommitment; however, we do not currently have any outstanding balance on therevolving loan.

 

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Asof December 31, 2007 and December 31, 2006, we had outstanding debtof $14,356,139 and $15,514,630, respectively, on the term debt and did not haveany borrowings on the revolving loan.

 

Thereis an annual facility fee of $20,000 on the term loan beginning on the closingdate, May 25, 2006, and upon each anniversary until its maturity.  There is an additional $10,000 annual servicefee for the revolving credit agreement which can be terminated prior to itsmaturity, thereby discontinuing the service fee.  No prepayment fees exist on either loan.

 

Theseloans are subject to protective covenants requiring us to maintain variousfinancial ratios. We are required to maintain a minimum tangible net worth of$24,000,000 and to increase our tangible net worth annually by the lesser of $500,000or an amount equal to retained earnings. Our owners’ equity is to be at least 45% of tangible net assets and wemust maintain a working capital position of at least $4,000,000.  We must receive written approval from ourlender to exceed $1,000,000 in annual capital expenditures and we must obtainconsent prior to making membership distributions in excess of 65% of theprevious year’s net income, excluding state and federal incentivepayments.   Farmers & MerchantsUnion Bank approved our member distribution of $14,390,000 in February 2007and of $3,914,080 in August of 2007 and has also approved our additionalanticipated capital expenditures in excess of $1,000,000 for 2007.  As of December 31, 2007, we are incompliance with all of our financial debt covenants.  The loan remains secured by substantially allof our assets.

 

OnJanuary 10, 2008 our board voted to retire the balance of our existinglong-term debt with Farmers &Merchants Union Bank.  We expect to retire the debt by the end of April 2008.

 

**Plant Expansion and Constructionin Process**

 

In December 2007 wecompleted an expansion of our plant to 60 MGY, however, we are graduallybringing various components of our capacity expansion online and we expect tobe fully operational at 60 million gallons per year, the capacity permitted byour construction permit, by approximately June 30, 2008.  However, it is possible that we will not beable to operate at 60 million gallons per year by the expected date.  Phase I of our expansion entails increasingthe cook and fermentation system capacity. As of December 31, 2007 we had incurred approximately $6.7 millionin capital expenditures for the expansion, which was the budgeted amount forthe expansion.  Phase I of our expansionis substantially complete and we do not anticipate any further expendituresrelated to this expansion project.

 

Other plant improvementsare currently underway.  The grainstorage capacity is being expanded from 450,000 bushel to 900,000 bushel, a$1,319,000 project approved by our board on May 10, 2007.  A new loading system, including a separateloading bay, is also under construction in the grain receiving area, a$1,124,000 project also approved by our board on May 10, 2007.  A new distillers grains cooling and conveyingsystem is also underway, a $2,050,000 project approved by our board on June 11,2007.  Whereas these improvements willnot increase capacity and they are not part of our “capacity expansion plans,”they will contribute to operation efficiency and customer service.  All of these projects are in progress and asof December 31, 2007 we had incurred approximately $2,646,000 inconstruction-in-process costs towards their completion.

 

We have engaged anengineering firm to assist in developing a plan to add an additional 30 milliongallons of production capacity at our plant site.   The estimated cost of this work isapproximately $35,000,000, although we have not finalized the design and thescope of work at this time.  Some capitalexpenditures have been made towards the areas of this project that have beendefined.  On May 10, 2007 the boardapproved an expenditure of $1,350,000 for the centrifuges and on June 11,2007 the board approved an expenditure of $16,700,000 for the expansion of thedistillation, dehydration, and evaporation (DD&E) system.  As of December 31, 2007 we have incurredconstruction-in-process costs of approximately $1,165,000 towards this effort.

 

All of the funds expendedthus far have been from income derived from operations.  We expect to finance the added productioncapacity through a combination of earnings from operations and additional debtfinancing.  This could limit our abilityto make member distributions as they have occurred in the past.  We may not be able to finance the projects asanticipated.

 

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***Contractual Obligations and Commercial Commitments***

 

In addition to our long-term debt obligations, we havecertain other contractual cash obligations and commitments.  The followingtables provide information regarding our consolidated contractual obligationsand commitments as of December 31, 2007:

 
| ** **                          | ** ** | **Payment Due By Period** | ** ** |
|-------------------------------------|------------|---------------------------|------------|
| **Contractual  Cash Obligations**   | ** ** | **Total**                 | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Three to  Five  Years** | ** ** | **Greater Than   Five  Years** | ** ** |
|                                |       |                      |       |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations          |       | $                         | 14,356,139 |   | $ | 1,258,252 |   | $ | 2,809,649 |   | $ | 10,288,238 |   | $ | — |   |
| Operating Lease  Obligations        |       | 3,889,988                 |       | 545,805 |   | 1,037,283 |   | 938,400 |   | 1,368,500 |   |
| Purchase Obligations                |       | 33,572,757                |       | 31,071,845 |   | 1,308,812 |   | 408,720 |   | 783,380 |   |
| Total Contractual Cash  Obligations |       | $                         | 51,818,884 |   | $ | 32,875,902 |   | $ | 5,155,744 |   | $ | 11,635,358 |   | $ | 2,151,880 |   |

 

**SubsequentEvents**

 

                                                On January 10, 2008, the board ofdirectors approved a $7,175,000 member distribution to the unit holders ofrecord as of the same date.  Thedistribution of $250 per membership unit was made on February 15, 2008.

 

                                                On January 10, 2008 the board ofdirectors voted to retire the balance of our existing long-term debt withFarmers & Merchants Union Bank. We expect to retire the debt by the end of April 2008.

 

                                                On January 10, 2008, the board ofdirectors approved the addition of a cooling tower which is estimated to cost atotal of approximately $1,254,000.

 

**OffBalance Sheet Arrangements.**

 

Wecurrently do not have any off-balance sheet arrangements.

 

**Applicationof Critical Accounting Estimates**

 

                                                Management uses estimates and assumptionsin preparing our financial statements in accordance with generally acceptedaccounting principles.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.  We did not have any critical accountingestimates as of the fiscal year ended December 31, 2007.  There were no material changes in the Company’saccounting estimates during the fiscal year ended December 31, 2007.

 

**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Weare exposed to the impact of market fluctuations associated with commodityprices as discussed below.  We have no exposure to foreign currency risk,as all of our business is conducted in U.S. Dollars, or to interest rate risk,as the interest rate for our existing term debt and revolving loan commitmentis fixed at 7.4% until May 2011.  We use derivative financialinstruments as part of an overall strategy to manage market risk.  We usecash, futures and option contracts to hedge changes to the commodity prices ofcorn and gasoline. We do not enter into these derivative financial instrumentsfor trading or speculative purposes, nor do we designate these contracts ashedges for accounting purposes pursuant to the requirements of SFAS 133, *Accounting for Derivative Instruments and HedgingActivities*.

 

**CommodityPrice Risk**

 

Weare exposed to market risk from changes in commodity prices.  Exposure tocommodity price risk results from our dependence on corn and natural gas in theethanol production process, and our reliance on sales of ethanol.  We seekto minimize the risks from fluctuations in the prices of corn and ethanolthrough the use of derivative instruments.  In practice, as markets move,we actively manage our risk and adjust hedging strategies as 

 

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appropriate. Although we believe our hedge positions accomplish an economic hedge againstour future purchases, they are not designated as such for hedge accountingpurposes, which would match the gain or loss on our hedge positions to thespecific commodity purchase being hedged.  We are marking to market ourhedge positions, which means as the current market price of our hedge positionschanges, the gains and losses are immediately recognized in our cost of goodssold.

 

Theimmediate recognition of hedging gains and losses can cause net income to bevolatile from quarter to quarter due to the timing of the change in value ofthe derivative instruments relative to the cost and use of the commodity beinghedged.  At December 31, 2007 and December 31, 2006, the fairvalue of our derivative instruments for corn and gasoline is an asset in theamount of $5,189 and an asset in the amount of $150,463, respectively.  AtDecember 31, 2006, we held derivative instruments for corn, but noethanol-related derivative instruments.  There are several variables thatcould affect the extent to which our derivative instruments are impacted byprice fluctuations in the cost of corn or gasoline. However, it is likely thatcommodity cash prices will have the greatest impact on the derivativeinstruments with delivery dates nearest the current cash price.

 

Tomanage our corn price risk, our hedging strategy is designed to establish aprice ceiling and floor for our corn purchases.  We have taken a net longposition on our exchange-traded futures and options contracts, which allows usto offset increases or decreases in the market price of corn.  The upperlimit of loss on our futures contracts is the difference between the contractprice and the cash market price of corn at the time of the execution of the contract. The upper limit of loss on our exchange-traded and over-the-counter optioncontracts is limited to the amount of the premium we paid for the option.

 

Weestimate that our expected corn usage (without taking into account ouradditional expansion plans) is approximately 21.5 million bushels per year forthe production of 60 million gallons of ethanol.  We have price protectionin place for a portion of our expected corn usage through December 2009using forward contracts, CBOT futures and options and over-the-counter optioncontracts.  As we move forward, additional protection may benecessary.  As corn prices move in reaction to market trends andinformation, our income statement will be affected depending on the impact suchmarket movements have on the value of our derivative instruments.  As wemove forward, additional price protection may be required to solidify ourmargins.  Depending on market movements, crop prospects and weather, theseprice protection positions may cause immediate adverse effects, but areexpected to produce long-term positive growth for us.

 

Wehave also entered into gasoline derivative instruments to hedge the variabilityof ethanol prices.  While not perfectly correlated we have found thatethanol and gasoline prices tend to move in tandem.  Therefore, thegasoline contracts the company has entered into are intended to offset cashdecreases in the price of ethanol we receive.

 

Tomanage our natural gas price risk, we have entered into forward contracts topurchase approximately 178,900 MMBTU of natural gas through May 2008 at anaverage price of approximately $7.25 per MMBTU.  We may also purchaseadditional natural gas requirements for the 2008 calendar year as we attempt tofurther reduce our susceptibility to price increases.

 

Asensitivity analysis has been prepared to estimate our exposure to corn andgasoline price risk. The table presents the fair value of our derivativeinstruments as of December 31, 2007 and December 31, 2006 and thepotential loss in fair value resulting from a hypothetical 10% adverse changein such prices.  The fair value of the positions is a summation of thefair values calculated by valuing each net position at quoted market prices asof the applicable date. The results of this analysis, which may differ fromactual results, are as follows:

 

| ** **             | ** ** | **Fair Value** | ** ** | **Effect of  Hypothetical  Adverse Change —  Market Risk** | ** ** |
|------------------------|------------|----------------|------------|-----------------------------------------------------------------|------------|
| December 31, 2007 |       | $              | 5,189      |                                                            | $          | (519 | ) |
| December 31, 2006 |       | $              | 150,463    |                                                            | $          | (15,046 | ) |

 

 

39

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**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

United Wisconsin GrainProducers, LLC

Friesland, Wisconsin

 

We have audited theaccompanying balance sheets of United Wisconsin Grain Producers, LLC as of December 31,2007 and 2006 and the related statements of operations, changes in members’equity, and cash flows for the years ended December 31, 2007, 2006, and2005.  United Wisconsin Grain Producers,LLC’s management is responsible for these financial statements. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  The company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of United Wisconsin Grain Producers, LLC as ofDecember 31, 2007 and 2006, and the results of its operations and its cashflows for each of the years in the three-year period ended December 31,2007, 2006 and 2005, in conformity with accounting principles generallyaccepted in the United States of America.

 

 
|                   | /s/ Boulay, Heutmaker,  Zibell & Co. P.L.L.P. |
|------------------------|--------------------------------------------------------|
|                   | Certified Public  Accountants                          |
|                   |                                                   |
|                   |                                                   |
| Minneapolis, Minnesota |                                                   |
| March 17, 2008    |                                                   |

 

40

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

** **

** **

** **

Balance Sheets

 

 
| ** **                                                                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **ASSETS**                                                                                  | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|                                                                                        |       |                  |       |                  |       |
| **Current  Assets**                                                                         | ** ** | ** **            | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                   |       | $                     | 24,759,614 |                  | $          | 29,981,331 |   |
| Restricted cash                                                                             |       | 248,383               |       | 411,587               |       |
| Derivative instruments                                                                      |       | 5,189                 |       | 150,463               |       |
| Account receivable, net of allowance for doubtful accounts of $69,000  and $0, respectively |       | 5,486,721             |       | 4,298,190             |       |
| Prepaid expenses and other current assets                                                   |       | 634,869               |       | 566,011               |       |
| Inventory                                                                                   |       | 2,785,264             |       | 2,074,513             |       |
| Total current assets                                                                        |       | 33,920,040            |       | 37,482,095            |       |
| ** **                                                                                  | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Property,  Plant and Equipment**                                                          | ** ** | ** **            | ** ** | ** **            | ** ** |
| Land and land improvements                                                                  |       | 5,864,889             |       | 5,806,181             |       |
| Office equipment                                                                            |       | 567,547               |       | 447,453               |       |
| Buildings                                                                                   |       | 2,192,293             |       | 488,454               |       |
| Plant and process equipment                                                                 |       | 52,812,431            |       | 47,100,121            |       |
| Construction in process                                                                     |       | 2,906,876             |       | 1,326,435             |       |
| Total property, plant, and equipment                                                        |       | 64,344,036            |       | 55,168,644            |       |
| Less accumulated depreciation                                                               |       | 12,718,946            |       | 7,804,420             |       |
| Net property, plant and equipment                                                           |       | 51,625,090            |       | 47,364,224            |       |
|                                                                                        |       |                  |       |                  |       |
| **Other  Assets**                                                                           | ** ** | ** **            | ** ** | ** **            | ** ** |
| Investment                                                                                  |       | 993,065               |       | 100,000               |       |
| Total other assets                                                                          |       | 993,065               |       | 100,000               |       |
| ** **                                                                                  | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Total Assets**                                                                            |       | $                     | 86,538,195 |                  | $          | 84,946,319 |   |

 

Notesto Financial Statements are an integral part of this Statement.

 

41

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**UNITED WISCONSIN GRAIN PRODUCERS,LLC**

** **

** **

** **

Balance Sheets

 

 
| ** **                                                                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **LIABILITIES  AND MEMBERS’ EQUITY**                                                             | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|                                                                                                  |       |                  |       |                  |       |
| **Current  Liabilities**                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** |
| Current maturities of long-term debt                                                                  |       | $                     | 1,258,252  |                  | $          | 1,164,740 |   |
| Accounts payable                                                                                      |       | 3,258,789             |       | 2,672,641             |       |
| Accrued liabilities                                                                                   |       | 794,853               |       | 1,345,536             |       |
| Total current liabilities                                                                             |       | 5,311,894             |       | 5,182,917             |       |
|                                                                                                  |       |                  |       |                  |       |
| **Long-Term  Debt, less current maturities**                                                          |       | 13,097,887            |       | 14,349,890            |       |
| ** **                                                                                            | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Commitments  and Contingencies**                                                                    | ** ** | ** **            | ** ** | ** **            | ** ** |
| ** **                                                                                            | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Members’  Equity, 28,710 and 28,780 units authorized, issued, and outstanding,  respectively** |       | 68,128,414            |       | 65,413,512            |       |
|                                                                                                  |       |                  |       |                  |       |
| **Total Liabilities and Members’ Equity**                                                        |       | $                     | 86,538,195 |                  | $          | 84,946,319 |   |

 

Notesto Financial Statements are an integral part of this Statement.

 

42

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**UNITEDWISCONSIN GRAIN PRODUCERS, LLC**

** **

** **

Statements ofOperations

 

 
| ** **                                                  | ** ** | **Year Ended**        | ** **  | **Year Ended**        | ** ** | **Year Ended**        | ** ** |
|-------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **December 31,** | ** **  | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                  | ** ** | **2007**              | ** **  | **2006**              | ** ** | **2005**              | ** ** |
|                                                        |       |                  |        |                  |       |                  |       |
| **Revenues**                                                |       | $                     | 112,103,602 |                  | $          | 111,771,603           |       | $ | 54,477,045 |   |
|                                                        |       |                  |        |                  |       |                  |       |
| **Cost of  Goods Sold**                                     |       | 87,374,742            |        | 67,482,429            |       | 43,643,191            |       |
|                                                        |       |                  |        |                  |       |                  |       |
| **Gross  Profit**                                           |       | 24,728,860            |        | 44,289,174            |       | 10,833,854            |       |
|                                                        |       |                  |        |                  |       |                  |       |
| **Operating  Expenses**                                     |       | 3,518,068             |        | 3,383,385             |       | 2,286,229             |       |
| ** **                                                  | ** ** | ** **            | ** **  | ** **            | ** ** | ** **            | ** ** |
| **Operating  Income**                                       |       | 21,210,792            |        | 40,905,789            |       | 8,547,625             |       |
|                                                        |       |                  |        |                  |       |                  |       |
| **Other  Income (Expense)**                                 | ** ** | ** **            | ** **  | ** **            | ** ** | ** **            | ** ** |
| Grant income                                                |       | 5,000                 |        | —                |       | 187,852               |       |
| Interest income                                             |       | 1,084,679             |        | 554,263               |       | 64,283                |       |
| Government program income                                   |       | —                |        | 393,336               |       | 3,197,912             |       |
| Interest expense                                            |       | (1,068,539            | )           | (1,338,803            | )          | (1,320,055            | )          |
| Equity in net loss of investment                            |       | (161,935              | )           | —                |       | —                |       |
| Miscellaneous income (expense)                              |       | 172,235               |        | (496,736              | )          | 57,778                |       |
| Total other income (expense), net                           |       | 31,440                |        | (887,940              | )          | 2,187,770             |       |
|                                                        |       |                  |        |                  |       |                  |       |
| **Net  Income**                                             |       | $                     | 21,242,232  |                  | $          | 40,017,849            |       | $ | 10,735,395 |   |
| ** **                                                  | ** ** | ** **            | ** **  | ** **            | ** ** | ** **            | ** ** |
| **Weighted  Average Units Outstanding - Basic and Diluted** |       | 28,767                |        | 28,780                |       | 28,780                |       |
| ** **                                                  | ** ** | ** **            | ** **  | ** **            | ** ** | ** **            | ** ** |
| **Net  Income Per Unit - Basic and Diluted**                |       | $                     | 738.42      |                  | $          | 1,390.47              |       | $ | 373.02 |   |
|                                                        |       |                  |        |                  |       |                  |       |
| **Distributions  Per Unit - Basic and Diluted**             |       | $                     | 636.29      |                  | $          | 400.00                |       | $ | — |   |

 

Notesto Financial Statements are an integral part of this Statement.

 

43

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

 

Statement of Changes in Members’ Equity

 

 
| **Balance –  January 1, 2005**                                                           |       | $           | 26,172,268 |   |
|----------------------------------------------------------------------------------------------------|------------|-------------|------------|--------|
| ** **                                                                                         | ** ** | ** **  | ** ** |
| Net Income                                                                                         |       | 10,735,395  |       |
|                                                                                               |       |        |       |
| **Balance –  December 31, 2005**                                                         |       | $           | 36,907,663 |   |
| ** **                                                                                         | ** ** | ** **  | ** ** |
| Net Income                                                                                         |       | 40,017,849  |       |
|                                                                                               |       |        |       |
| Member Distributions                                                                               |       | (11,512,000 | )          |
|                                                                                               |       |        |       |
| **Balance –  December 31, 2006**                                                         |       | 65,413,512  |       |
|                                                                                               |       |        |       |
| Net Income                                                                                         |       | 21,242,232  |       |
|                                                                                               |       |        |       |
| Repurchase of 70 Membership units for an average price of $3,189,  September 2007 to November 2007 |       | (223,250    | )          |
|                                                                                               |       |        |       |
| Member Distributions                                                                               |       | (18,304,080 | )          |
|                                                                                               |       |        |       |
| **Balance –  December 31, 2007**                                                         |       | $           | 68,128,414 |   |

 

Notes toFinancial Statements are an integral part of this Statement.

 

 

44

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

 

Statements of Cash Flows

 

 
| ** **                                                                 | ** ** | **Year Ended**        | ** ** | **Year Ended**        | ** ** | **Year Ended**        | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                 | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                 | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **Cash  Flows from Operating Activities**                                  | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| Net Income                                                                 |       | $                     | 21,242,232 |                  | $          | 40,017,849            |       | $ | 10,735,395 |   |
| Adjustments to reconcile net income to net cash provided by operations:    |       |                  |       |                  |       |                  |       |
| Depreciation                                                               |       | 4,914,526             |       | 4,857,026             |       | 3,006,850             |       |
| Write-off of debt issuance costs                                           |       | —                |       | 519,406               |       | —                |       |
| Provision for losses on accounts receivable                                |       | 69,000                |       | —                |       | —                |       |
| Change in fair value of derivative instruments                             |       | 965,757               |       | (3,183,371            | )          | 259,196               |       |
| Equity in net loss of investment                                           |       | 161,935               |       | —                |       | —                |       |
| Changes in assets and liabilities:                                         |       |                  |       |                  |       |                  |       |
| Restricted cash                                                            |       | 163,204               |       | (331,307              | )          | (80,280               | )          |
| Derivative instruments                                                     |       | (820,483              | )          | 2,944,102             |       | (5,614                | )          |
| Accounts receivable                                                        |       | (1,257,531            | )          | (721,138              | )          | (3,694,136            | )          |
| Inventory                                                                  |       | (710,751              | )          | (380,582              | )          | (1,693,931            | )          |
| Prepaid expenses and other current assets                                  |       | (68,858               | )          | (227,607              | )          | (201,912              | )          |
| Accounts payable                                                           |       | 586,148               |       | (565,609              | )          | 2,960,511             |       |
| Accrued liabilities                                                        |       | (550,683              | )          | 985,891               |       | 343,503               |       |
| Net cash provided by operating activities                                  |       | 24,694,496            |       | 43,914,660            |       | 11,629,582            |       |
| ** **                                                                 | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Cash  Flows from Investing Activities**                                  | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| Capital expenditures                                                       |       | (7,594,950            | )          | (974,473              | )          | (1,175,915            | )          |
| Payments for construction in process                                       |       | (1,580,442            | )          | (1,168,306            | )          | —                |       |
| Purchase of investments                                                    |       | (1,055,000            | )          | (100,000              | )          | (1,000                | )          |
| Repurchase of membership units                                             |       | (223,250              | )          | —                |       | —                |       |
| Net cash used in investing activities                                      |       | (10,453,642           | )          | (2,242,779            | )          | (1,176,915            | )          |
| ** **                                                                 | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Cash  Flows from Financing Activities**                                  | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| Proceeds from grants for operating expenses                                |       | —                |       | —                |       | 30,785                |       |
| Proceeds from grants for capital expenditures                              |       | —                |       | —                |       | 443,905               |       |
| Proceeds from long term debt                                               |       | —                |       | —                |       | 2,453,714             |       |
| Payments on long term debt                                                 |       | (1,158,491            | )          | (8,965,027            | )          | (4,544,543            | )          |
| Payments for debt issuance costs                                           |       | —                |       | —                |       | (59,119               | )          |
| Payment of member distributions                                            |       | (18,304,080           | )          | (11,512,000           | )          | —                |       |
| Net cash used in financing activities                                      |       | (19,462,571           | )          | (20,477,027           | )          | (1,675,258            | )          |
|                                                                       |       |                  |       |                  |       |                  |       |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                  |       | (5,221,717            | )          | 21,194,854            |       | 8,777,409             |       |
| ** **                                                                 | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Cash and  Cash Equivalents— Beginning of Period**                   |       | 29,981,331            |       | 8,786,477             |       | 9,068                 |       |
| ** **                                                                 | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Cash and  Cash Equivalents— End of Period**                         |       | $                     | 24,759,614 |                  | $          | 29,981,331            |       | $ | 8,786,477 |   |
| ** **                                                                 | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Supplemental  Cash Flow Information**                                    | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| ** **                                                                 | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| Interest expensed                                                          |       | 1,068,539             |       | 1,505,913             |       | 1,315,024             |       |
| Interest capitalized                                                       |       | 63,730                |       | —                |       | —                |       |
| Total interest paid                                                        |       | $                     | 1,132,269  |                  | $          | 1,505,913             |       | $ | 1,315,024 |   |
|                                                                       |       |                  |       |                  |       |                  |       |
| **Noncash  Investing and Financing Activities**                            | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
|                                                                       |       |                  |       |                  |       |                  |       |
| Refinancing of long-term debt                                              |       | $                     | —     |                  | $          | 16,040,376            |       | $ | — |   |
| Capital expenditures and construction in process funded by long-term  debt |       | $                     | —     |                  | $          | —                |       | $ | 8,368,571 |   |
| Operating expenses funded by construction loan                             |       | $                     | —     |                  | $          | —                |       | $ | 3,000 |   |

 

Notes toFinancial Statements are an integral part of this Statement.

 

45

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Financial Statements

 

December 31, 2007 and 2006

 

**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Nature of Business*

United Wisconsin GrainProducers LLC (a Wisconsin limited liability company) is a 60 million gallonper year ethanol plant located near the town of Friesland in the township ofRandolph, Wisconsin.  During 2007, theCompany substantially completed Phase I of an expansion project which increasedthe plant production capacity from the initial nameplate production capacity of40 million gallons per year to 60 million gallons per year.  The Company sells its production of ethanoland distillers grains, a co-product of ethanol production, within the UnitedStates.

 

The Company was organizedin November of 2001 to pool investors, some of whom provide a corn supplyon a commercial basis.  The Company was adevelopmental stage entity prior to commencing operations on May 5, 2005.

 

*Accounting Estimates*

Management uses estimatesand assumptions in preparing these financial statements in accordance withgenerally accepted accounting principles.  Those estimates and assumptionsaffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities, and the reported revenues and expenses.  Actual results could differ from theseestimates.

 

*Revenue Recognition*

The Companygenerally sells ethanol and related products pursuant to marketingagreements.  Revenues from the productionof ethanol and the related products are recorded when the customer has takentitle and has assumed the risks and rewards of ownership, prices are fixed ordeterminable and collectibility is reasonably assured.  The Company’s products are generally sold FOBshipping point.

 

In accordance withthe Company’s agreements for the marketing and sale of ethanol and relatedproducts, marketing fees and commissions due to the marketers are deducted fromthe gross sales price at the time payment is remitted to the Company.  Because the Company is the primary obligor inthe sales arrangement with the customer, these marketing fees and commissionsare recorded gross in Operating Expenses in the accompanying statements ofoperations.  Shipping costs incurred bythe Company in the sale of ethanol are not specifically identifiable and as aresult, recorded based on the net selling price reported to the Company fromthe marketer.  Shipping costs incurred by the Company in the sale ofethanol related products are included in cost of goods sold.

 

The Company recordsincentives received from federal and state programs related to the productionof ethanol, as other income, when the Company has sold the ethanol andcompleted all the requirements of the applicable incentive program.  Interest income is recognized as earned.

 

*Environmental liabilities*

The Company’s operationsare subject to environmental laws and regulations adopted by variousgovernmental authorities in the jurisdiction in which it operates.  Theselaws require the Company to investigate and remediate the effects of therelease or disposal of materials at its locations.  Accordingly, theCompany 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’sliability is probable and the costs can be reasonably estimated.  No expensehas been recorded for the years ending December 31, 2007, 2006, and 2005.

 

*Cash and Cash Equivalents*

The Company considers allhighly liquid debt instruments purchased with a maturity of three months orless to be cash equivalents.  The Company maintains its accounts primarilyat one financial institution.  At times throughout the year, the Company’scash and cash equivalents balances may exceed amounts insured by the FederalDeposit Insurance Corporation.

 

46

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Financial Statements

 

December 31, 2007 and 2006

 

*RestrictedCash*

The Company is requiredto deposit cash into a restricted cash account by the Company’s broker asdiscussed below.

 

*Trade Accounts Receivable*

Trade accounts receivableare recorded at their estimated net realizable value, net of an allowance fordoubtful accounts.  The allowancefor doubtful accounts is established through provisions charged against incomeand is maintained at a level believed adequate by management to absorbestimated bad debts based on historical experience and current economicconditions. The Companyextends credit to customers for sales of ethanol and distillers grain in thenormal course of business.  Credit is extendedbased on an on-going evaluation of a customer’s financial conditions andgenerally no collateral is required. Accounts receivable are ordinarily due in 3 business days for ethanoland 10 days from the invoice date for distillers grain.  If payment is not received on a timely basisin accordance with the Company’s credit terms it is considered past due.  Invoices that remain unpaid after 30 days maybear interest at 18% and are considered delinquent if past due over 120days.  Delinquent receivables are writtenoff based on credit evaluation and specific circumstances of the customer. At December 31,2007 and 2006, the Company has established an allowance for doubtful accountsof $68,630 and $0, respectively.

 

*Inventories*

Inventory consists of rawmaterials, supplies, work in process, and finished goods.  Corn is theprimary raw material and, along with other raw materials, is stated at thelower of average cost or market.  Finished goods consist of ethanolproduced and distillers grains, and are stated at the lower of average cost ormarket.

 

*Property,Plant,  and Equipment*

Property, plant, andequipment are stated at cost.  Depreciation is computed over estimateduseful lives by use of the straight-line method.  Maintenance and repairsare expensed as incurred; major improvements and betterments are capitalized.

 

*Asset Impairment*

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, the Company testslong-lived assets or asset groups for recoverability when events or changes incircumstances indicate that their carrying amount may not be recoverable.Circumstances which could trigger a review include, but are not limited to:significant decreases in the market price of the asset; significant adversechanges in the business climate or legal factors; accumulation of costssignificantly in excess of the amount originally expected for the acquisitionor construction of the asset; current period cash flow or operating lossescombined with a history of losses or a forecast of continuing losses associatedwith the use of the assets; and current expectation that the asset will morelikely than not be sold or disposed significantly before the end of itsestimated useful life.

 

Recoverability is assumedbased on the carrying amount of the asset and its fair value which is generallydetermined based on the sum of the undiscounted cash flows expected to resultfrom the use of the eventual disposal of the asset, as well as specificappraisal in certain instances. An impairment loss is recognized when thecarrying amount is not recoverable and exceeds fair value.

 

*CapitalizedInterest*

The Company’s policy isto capitalize interest cost incurred on debt during the construction of majorprojects exceeding one year as guided by SFAS 34, Capitalization ofInterest Costs. During fiscal year 2007, approximately $64,000 of incurredinterest cost was capitalized to property and equipment.  The Company did not capitalize any interestduring fiscal year 2006 or 2005.

 

 

47

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Financial Statements

 

December 31, 2007 and 2006

 

*Derivative Instruments*

The Company accounts forderivatives in accordance with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”. SFAS No. 133 requires the recognitionof derivatives in the balance sheet and the measurement of these instruments atfair value.

 

In order for a derivativeto qualify as a hedge, specific criteria must be met and appropriatedocumentation maintained. Gains and losses from derivatives that do not qualifyas hedges, or are undesignated, must be recognized immediately in earnings. Ifthe derivative does qualify as a hedge, depending on the nature of the hedge,changes in the fair value of the derivative will be either offset against thechange in fair value of the hedged assets, liabilities, or firm commitmentsthrough earnings or recognized in other comprehensive income until the hedgeditem is recognized in earnings.  Changesin the fair value of undesignated derivatives are recorded in cost of goodssold.

 

Additionally, SFAS No. 133requires a company to evaluate its contracts to determine whether the contractsare derivatives. Certain contracts that literally meet the definition of aderivative may be exempted as “normal purchases or normal sales”. Normalpurchases and normal sales are contracts that provide for the purchase or saleof something other than a financial instrument or derivative instrument thatwill be delivered in quantities expected to be used or sold over a reasonableperiod in the normal course of business. Contracts that meet the requirementsof normal purchases or sales are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133, and therefore, arenot marked to market in our financial statements.

 

*GovernmentIncentive Payments*

For the years ended December 31,2007, 2006 2005, the Company recorded $0, $393,336 and $2,722,912, respectivelyas other income from the Commodity Credit Corporation Bioenergy Program, adepartment of the United States Department of Agriculture.  This programenabled the Company to receive payments of up to $7,500,000 per year based onincreases in production of ethanol over the previous year.  New production was eligible and wasconsidered increased production. Payments under the program were subject to pro rata reduction ifaggregate payments to all producers in any USDA fiscal year exceeded the annualfunding of the program.  As of December 31,2007, and 2006, the Company had no receivable recorded from the CCC BioenergyProgram. The program was terminated as of June 30, 2006 therefore theCompany does not anticipate recording any more revenue from this program.

 

TheCompany recorded other income of $475,000 for the year ended December 31, 2005,related to the State of Wisconsin Producer Subsidy Payment Program.  The program terminated during 2006 and,therefore, the Company does not anticipate any more revenue from this program.

 

*FairValue of Financial Instruments*

The carrying value ofcash and equivalents and restricted cash approximates their fair value.

 

The carrying value ofderivative instruments approximates fair value based on current “market” pricesin active exchange traded or over-the-counter markets.

 

It is not currentlypracticable to estimate fair value of the notes payable to the lendinginstitution.  Because these agreements contain certain unique terms,covenants, and restrictions, as discussed in Note 4, there are no readilydeterminable similar instruments on which to base an estimate of fair value.

 

*IncomeTaxes*

The Company is treated asa partnership for federal and state income tax purposes, and generally does notincur income taxes.  Instead its earnings and losses are included in theincome tax returns of its members.  Therefore, no provision or liabilityfor Federal or state income taxes has been included in these financialstatements.

 

*Net Income per Unit*

Basic net income per unitis computed by dividing net income by the weighted average number of members’units outstanding during the period. Diluted net income per unit is computed bydividing net income by the weighted average number of members’ units andmembers’ unit equivalents outstanding during the period. There were no memberunit equivalents outstanding during the periods presented; accordingly, for allperiods presented, the Company’s basic and diluted net income per unit are thesame.

 

 

48

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Financial Statements

 

December 31, 2007 and 2006

 

*Recently Issued Accounting Pronouncements*

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS157”), Fair Value Measurements.  SFAS 157 defines fair value, establishesa framework for measuring fair value, and expands disclosures about fair valuemeasurements. The statement is effective for financial assets and liabilitiesin financial statements issued for fiscal years beginning after November 15,2007. It is effective for non-financial assets and liabilities in financialstatements issued for fiscal years beginning after November 15, 2008. TheCompany is currently evaluating the effect that the adoption of SFAS 157 willhave, if any, on its results of operations, financial position and relateddisclosures, but does not expect it to have a material impact on the financialstatements.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, (“SFAS159”), The Fair Value Option for Financial Assets and Financial Liabilities,which included an amendment to FASB 115. This statement provides companies withan option to report selected financial assets and liabilities at fair value.This statement is effective for fiscal years beginning after November 15,2007 with early adoption permitted. The Company is in the process of evaluatingthe effect, if any, that the adoption of SFAS No.159 will have on its resultsof operations and financial position.

 

*Reclassifications*

The presentation ofrevenues, cost of goods sold, and operating expenses in the statements ofoperations for 2006 and 2005 have been changed to conform to the classificationused in 2007.  These reclassifications hadno effect on net income as previously reported.

 

**2.  INVENTORY**

 

Inventory consists of thefollowing at December 31:

 

| ** **      | ** ** | **2007**  | ** ** | **2006** | ** ** |
|-----------------|------------|-----------|------------|----------|------------|
| Raw materials   |       | $         | 545,467    |     | 697,081    |   |
| Supplies        |       | 496,348   |       | 371,658  |       |
| Work in process |       | 412,772   |       | 126,868  |       |
| Finished goods  |       | 1,330,677 |       | 878,906  |       |
| Total           |       | $         | 2,785,264  |     | $          | 2,074,513 |   |
|                 |            |           |            |          |            |  |  |

 

**3.  DERIVATIVE INSTRUMENTS**

 

In order to reduce therisk caused by market fluctuations, the Company hedges its anticipated cornpurchases and ethanol sales by entering into options, futures contracts, and swapagreements. These contracts are used with the intention to fix the purchaseprice of the Company’s anticipated requirements of corn used in productionactivities and fix the selling price of the ethanol produced. The fair value ofthese contracts is based on quoted prices in active exchange-traded orover-the-counter markets. The fair value of the derivatives is continuallysubject to change due to changing market conditions. The Company does notformally designate these instruments as hedges and, therefore, records inearnings adjustments caused from marking these instruments to market on amonthly basis.

 

At December 31, 2007and 2006, the Company had recorded an asset for derivative instruments relatedto corn and ethanol option and futures positions of $5,189 and $150,463,respectively.  None of the open positions, at December 31, 2007 or2006 were designated as hedges.  Realized and unrealized gains and lossesrelated to these derivative contracts related to corn purchases are included asa component of cost of goods sold.  TheCompany has recorded a combine realized and unrealized gain on corn hedging ofapproximately $255,300, $3,183,000, and $259,000 for the years ended December 31,2007, 2006, and 2005 respectively. Realized and unrealized gains and losses related to derivative contractsthat are related to ethanol sales are included as a component of revenues.  The Company recorded a combined realized andunrealized loss on ethanol hedging of approximately $1,221,000 for the yearending December 31, 2007 and no gain or loss for the years ended December 31,2006 and 2005.

 

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Financial Statements

 

December 31, 2007 and 2006

 

The Company is requiredto maintain cash balances at its broker related to derivative instrumentpositions.  At December 31, 2007 and2006, restricted cash totaled $248,383 and $411,587, respectively, and is notincluded in cash and cash equivalents on the balance sheet or the statements ofcash flows.

 

**4.  BANK FINANCING**

 

On May 25, 2006 theCompany closed on a mortgage in the amount of $21,040,376, which included arevolving credit agreement in the amount of $5,000,000, and a term creditagreement in the amount of $16,040,376 with Farmers & Merchants UnionBank to refinance the existing debt with AgStar Financial Services, PCA.  The term debt consists of a five-yearbusiness note in the amount of $16,040,376 at a fixed interest rate of 7.4% andrequires monthly payments based on a ten-year amortization beginning July 1,2006.  As of December 31, 2007 and2006, the Company had outstanding debt of $14,356,139 and $15,514,630,respectively, on the term debt and did not have any borrowings on the revolvingcredit commitment.

 

There is an annualservice fee of $10,000 for the revolving credit agreement and an annualfacility fee of $20,000 beginning on the closing date, May 25, 2006, andupon each anniversary until its maturity. If the revolving line of credit is terminated prior to its maturity, the$10,000 annual service fee will no longer be incurred.  No prepayment fees exist on either loan.

 

These loans are subjectto protective covenants requiring the Company to maintain various financialratios.  The Company has not violated anyfinancial debt covenants during the year ending December 31, 2007 or inthe year 2006 and the Company believes the likelihood of default of thefinancial debt covenants in the next quarter to be remote.  The loan is secured by substantially all theCompany’s assets.

 

**5. LONG TERM DEBT**

 

Long term debt consistsof the following:

 
| ** **                         | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Bank Financing (Note 4)            |       | $                          | 14,356,139 |                       | 15,514,630 |   |
| Less: amounts due within  one year |       | 1,258,252                  |       | 1,164,740                  |       |
| Totals                             |       | $                          | 13,097,887 |                       | 14,349,890 |   |

 

The estimated maturitiesof long term debt at December 31, 2007 are as follows:

 

| 2008  |   | $         | 1,258,252  |   |
|-------|--------|-----------|------------|--------|
| 2009  |   | 1,120,286 |       |
| 2010  |   | 1,689,363 |       |
| 2011  |   | 642,280   |       |
| 2012  |   | 9,645,958 |       |
| Total |   | $         | 14,356,139 |   |

 

**6.  LEASE OBLIGATIONS**

 

The Company signed aten-year lease agreement in August 2004 with a leasing company foreighty-five covered hopper rail cars at $460 per month per rail car.

 

The Company entered intotwo, five-year rental agreements in April and May of 2005 for twowheel loaders at approximately $1600 per month per wheel loader.

 

 

50

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Financial Statements

 

December 31, 2007 and 2006

 

The Company entered intoa five-year lease agreement in April 2005 with a bank to lease a railshuttle wagon at $3,300 per month.

 

Lease expense foroperating leases for the years ending December 31, 2007, 2006, and 2005was $545,883, $511,409, and 335,180 respectively.

 

At December 31, 2007the Company had the following minimum commitments for payment of leases:

 

| 2008       |   | $         | 545,805   |   |
|------------|--------|-----------|-----------|--------|
| 2009       |   | 545,805   |      |
| 2010       |   | 491,478   |      |
| 2011       |   | 469,200   |      |
| 2012       |   | 469,200   |      |
| Thereafter |   | 1,368,500 |      |
| Total      |   | $         | 3,889,988 |   |

 

**7.  MEMBERS’ EQUITY**

 

As specified in theCompany’s operating agreement, the Company has one class of membershipunits.  The Company is authorized toissue up to 28,000 membership units in addition to the seed capital unitsissued prior to the Company’s initial registered offering.

 

In June 2007, theCompany’s Board of Director’s approved the expenditure of up to $1,000,000 topursue the option of buying back membership units.  As of December 31, 2007, the Company hadrepurchased a total of 70 membership units for a total of $223,250 (an averageof $3,189 per unit).

 

As of December 31,2007 and 2006, the Company had 28,710 and 28,780 units outstanding,respectively.

 

**8.  RELATED PARTY TRANSACTIONS**

 

In the year ending December 31,2007, the Company had incurred approximately $76,000 in director fees andrelated expense of which all had been paid as of December 31, 2007.  In the year ending December 31, 2006,the Company had incurred approximately $91,000 in director fees and relatedexpense.  In the year ended December 31,2005, the Company had incurred approximately $72,000 in director fees andrelated expense.  In 2007, the Companypurchased approximately $15,042,000 of corn from members which representsapproximately 26% of total corn purchased in 2007. In 2006, the Companypurchased approximately $11,900,000 of corn from members which representsapproximately 31% of total corn purchased in 2006.  In 2005, the Company purchased approximately$11,300,000 from members which represents approximately 43% of corn purchasedin 2005.

 

**9. EMPLOYEE BENEFIT PLANS**

 

The Company has adopted a401(k) plan effective January 1, 2006 which provides retirementsavings options for all eligible employees. Employees meeting certain eligibility requirements can participate inthe plan.  The Company makes a matchingcontribution based on the participants’ eligible wages.  The Company made matching contributions ofapproximately $70,000 and $36,500 during the years ended December 31, 2007and 2006, respectively and made no contributions in the year ended December 31,2005 since the plan had not yet been adopted. The employer matching portion has a vesting schedule provision.

 

The Company implemented aprofit sharing employee benefit plan on July 10, 2006 for all eligibleemployees.  The plan allows for apercentage of the Company’s earnings in excess of a pre-determined amount to bedivided between eligible employees and payment to be made six months after itis earned to eligible employees still employed with 

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Financial Statements

 

December 31, 2007 and 2006

 

the Company at the timeof payment.  The Company recorded anexpense related to this plan of approximately $587,000 and $1,273,000 in theyears ended December 31, 2007 and 2006, respectively.  Approximately $232,000 and $721,000 isincluded in accrued liabilities as of December 31, 2007 and 2006,respectively.  There were no expensesincurred in the year ended December 31, 2005 since the plan had not yetbeen adopted.

 

**10. INCOME TAXES**

 

The differences betweenfinancial statement basis and tax basis of assets are as follows at December 31:

 
| ** **                                        | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|---------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                              |       |        |       |        |       |
| Financial statement basis  of total assets        |       | $           | 86,538,195 |        | $          | 84,946,919 |   |
|                                              |       |        |       |        |       |
| Organizational and start-up costs capitalized     |       | 1,836,382   |       | 1,769,494   |       |
| Syndication costs not deductible for tax purposes |       | 506,501     |       | 506,501     |       |
| Accumulated depreciation and amortization         |       | (21,873,362 | )          | (16,191,579 | )          |
| Unrealized derivative gains                       |       | (1,152,891  | )          | (205,655    | )          |
| Prepaid expenses deductible for tax purposes      |       | 66,085      |       | (334,427    | )          |
|                                              |       |        |       |        |       |
| Income tax basis of total  assets                 |       | $           | 65,920,910 |        | $          | 70,490,653 |   |
|                                              |       |        |       |        |       |
| Financial statement basis  of total liabilities   |       | $           | 18,409,791 |        | $          | 19,532,807 |   |
|                                              |       |        |       |        |       |
| Accrued expenses not deductible for tax purposes  |       | (625,528    | )          | (1,024,992  | )          |
|                                              |       |        |       |        |       |
| Income tax basis of total  liabilities            |       | $           | 17,784,263 |        | $          | 18,507,815 |   |

 

 **11. COMMITMENTS AND CONTINGENCIES**

 

*Utility Agreements*

 

In October 2003, theCompany entered into an agreement with an electric cooperative to provideelectrical service.  The agreement is ineffect for a term of three years after electric service was first provided in January of2004.  At the anniversary of thecommencement of services the agreement automatically extends so that the termagain covers a period of three years, unless either party gives written noticeof intent not to extend.  Since neitherparty to the agreement has given such notice, the agreement has extended for anadditional three years, though January 2010.

 

In April 2004, theCompany entered into a natural gas transportation service agreement, whichprovides for the transportation of natural gas from the utility city gate tothe plant at specific transportation rates for a period of ten years. Uponconclusion of the ten-year term, the agreement shall continue from year to yearthereafter.

 

In December 2004,the Company entered into a natural gas transportation service agreement, whichprovides for interstate pipeline transportation of natural gas to the utilitycity gate at specific transportation rates for a period of ten years from theeffective date, November 1, 2006. Upon conclusion of the ten-year term, the Company has the right to renewthe agreement at specified tariff rates or can enter into contract negotiationsto attempt to obtain a negotiated rate.

 

In August 2006, theCompany entered into a natural gas purchase agreement to purchases specifiedquantities of natural gas at a then prevailing market price for a period of oneyear from the effective date, November 1, 2006.  The Company also provided the required 60 daynotice to terminate the previous natural gas purchase agreement that had beenin effect since April 2004.

 

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Financial Statements

 

December 31, 2007 and 2006

 

*Ethanol marketing agreement andmajor customer*

 

In August 2004, theCompany entered into a marketing agreement with an unrelated company for theexclusive rights to market, sell and distribute the entire ethanol inventoryproduced by the Company.  The agreementcommenced in May 2005 and was effective for an initial term of 12 monthsand subsequently continued until December 31, 2007.  The Company paid approximately $367,000,$383,000, $241,000 in marketing fees for the years ended December 31,2007, 2006, and 2005 respectively, which is included in operatingexpenses.  The Company sold 100% of itsethanol product under this marketing agreement. During the years ended December 31, 2007, 2006, and 2005 salesthrough that marketer were approximately $99,565,000, $100,986,000, and$48,454,000 respectively.  At December 31,2007, and 2006 amounts due from that customer included in receivables wereapproximately $4,568,000 and $3,547,000, respectively.  The Company provided the required notice toterminate this marketing agreement effective December 31, 2007.

 

In December 2007,the Company entered into a new marketing agreement with an unrelated companyfor the exclusive rights to market, sell and distribute the entire ethanolinventory produced by the Company.  Theagreement commenced on January 1, 2008 and is effective for an initialterm of 2 years.  Through this marketingagreement the Company has control of its sales commitments and makes futurecommitments as it sees fit.  At December 31,2007, the Company had forward contracts to sell 7.8 million gallons of ethanolfor various delivery periods from January through March 2008.  The prices on these contracts range from$1.77 to $1.97 per gallon or have a basis level established by the OPIS Chicagoethanol market between -$0.09 and -$0.12.

 

*Distillers grain marketingcontract*

 

The Company has amarketing agreement with CHS Inc. for the purpose of marketing and selling thedried distillers grains that are shipped by rail.  The Company markets and sells the drieddistillers grains not shipped by rail, as well as the modified wet distillersgrains produced, directly to local farmers. For the dried distillers grains marketed and sold by CHS Inc., theCompany receives a percentage of the sales price invoiced by CHS Inc. lessfreight costs incurred by CHS Inc.  TheCompany entered into this agreement with CHS Inc. effective October 1,2007.  The term of the agreement is indefinite,and the agreement will remain in effect until terminated by either party byproviding at least 90 days notice to the other party to the agreement.

 

*Distillers Grains Contracts*

 

At December 31,2007, the Company had forward dry distillers grains contracts totaling 23,000ton for various delivery periods from January 2008 to October 2008with a price range of $90 to $157 per ton. At December 31, 2007 the Company had forward modified wetdistillers grains sales contracts totaling 38,000 ton for various deliveryperiods from January 2008 to January 2009 with a price range of $34to $48 per ton.

 

*Corn and Natural Gas Contracts*

 

At December 31,2007, the Company had forward corn purchase contracts totaling 7.4 millionbushels for various delivery periods from January 2008 to December 2009.  The prices on these contracts range from$2.55 to $5.20 per bushel or have a basis level established by the CBOT futuresbetween $0.01 and $-0.29.

 

At December 31,2006, the Company had forward corn purchase contracts totaling 10.1 millionbushels for various delivery periods from January 2007 to December 2008. The prices on these contracts range from $2.18 to $3.88 per bushel or have abasis level established by the CBOT futures between $-0.10 and $-0.42.

 

At December 31,2007, the Company had forward contracts to purchase approximately 178,900million British thermal units (MMBTU) of natural gas during the months of January throughMay 2008 at an average price of approximately $7.25 per MMBTU.

 

 

 

53

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** **

**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Financial Statements

 

December 31, 2007 and 2006

 

At December 31,2006, the Company had forward contracts to purchase approximately 284,000million British thermal units (MMBTU) of natural gas during the months of January throughMarch 2007 at an average price of approximately $7.37 per MMBTU.

 

*Plant Expansion*

 

The Company startedconstruction on Phase I of a plant expansion in December 2006 and wassubstantially complete as of December 1, 2007.  Project costs for Phase I of the plantexpansion through December 31, 2007 were approximately $6.7 million.  As of December 31, 2007 the Company hadincurred $1.2 million for a storage, shipping, and receiving expansion of thegrains area which is expected to cost $2.4 million in total.  As of December 31, 2007 the Company hasincurred costs of approximately $575,000 for a distillers grains cooling andconveying system which is expected to cost approximately $2 million intotal.  As of December 31, 2007 theCompany had incurred costs of approximately $783,000 for a dehydration,distillation, and evaporation system which is expected to cost approximately$18 million in total.

 

*Other Investments*

 

On February 12,2007, the Company’s directors approved a $10 million equity investment inanother ethanol production facility.  TheCompany has invested $1,155,000 in this project and does not plan to invest theadditional monies until the project obtains a debt financing commitment.  The Company’s share of the losses incurredthrough December 31, 2007 totaled approximately $162,000, which isincluded in other income (expense).

 

**12. SUBSEQUENT EVENTS**

 

On January 10, 2008,the Board of Directors of United Wisconsin Grain Producers LLC (the “Company”)voted to make a cash distribution of approximately $7,175,000 to its unitholders of record as of January 10, 2008. The distribution was made in February 2008.

 

On January 10, 2008the Board of Directors of the Company voted to retire the balance of theCompany’s existing long-term debt of approximately $14.3 million with Farmers &Merchants Union Bank.  The Company expects to retire the debt by the endof April 2008.

 

54

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**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

Boulay, Heutmaker, Zibell & Co.,P.L.L.P. has been our independent registered public accounting firm since theCompany’s inception and is the Company’s independent registered publicaccounting firm at the present time.  TheCompany has had no disagreements with its auditors.

 

**ITEM9A(T).  CONTROLS AND PROCEDURES.**

 

***Disclosure Controls and Procedures***

 

The Companymaintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the reports that the Company files orsubmits under the Securities Exchange Act of 1934 (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required financial disclosure.

 

As of the end ofthe period covered by this report, the Company carried out an evaluation, underthe supervision of management, including the Chief Executive Officer and theChief Financial Officer, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.Based upon such evaluation as of December 31, 2007, the Chief ExecutiveOfficer and the Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures were effective at the reasonable assurance level toensure that information required to be disclosed in this Annual Report on Form 10-Kwas recorded, processed, summarized and reported within the time periodrequired by the Securities and Exchange Commission’s rules and forms andaccumulated and communicated to management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, to allow timely decisionsregarding required disclosure.

 

***Changes in Internal Control over Financial Reporting***

 

There has been nochange in the Company’s internal control over financial reporting (as definedin Rule 13a-15(f) under the Exchange Act) that occurred in the fiscalquarter ended December 31, 2007 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

***Management’s Report on Internal Control over FinancialReporting***

 

Management ofUnited Wisconsin Grain Producers, LLC is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) underthe Exchange Act. Under the supervision and with the participation of theCompany’s management, including the Chief Executive Officer and the ChiefFinancial Officer, the Company conducted an evaluation of the effectiveness ofthe Company’s internal control over financial reporting based on the frameworkand criteria established in *InternalControl—Integrated Framework*, issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

Based on theCompany’s evaluation under the COSO framework, management concluded that theCompany maintained effective internal control over financial reporting as of December 31,2007.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the our registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this annual report.

 

55

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**ITEM 9B.  OTHERINFORMATION.**

 

On October 1, 2007,we entered into a Distiller’s Grains Marketing Agreement with CHS Inc. (“CHS”),under which we will sell to CHS the distiller’s dried grains with solubles tobe shipped by rail produced at our ethanol plant near Friesland,Wisconsin.  The term of the agreement is indefinite, and theagreement will remain in effect until terminated by either party by providingat least 90 days notice to the other party to the agreement.  Under the agreement, we receive a percentageof the sales price invoiced by CHS Inc. less freight costs incurred by CHSInc.  We will continue to market and sellour dried distillers grains not shipped by rail, as well as the modified wetdistillers grains we produce, directly to local farmers.

 

Wehad previously entered into marketing agreements with Commodity SpecialistsCompany (“CSC”) for the purposes of marketing and selling portions of our drieddistillers grains and modified wet distillers grains products.  In August 2007, CHS Inc. announced thatit had entered into a definitive purchase agreement to acquire the distillers grainsmarketing business of CSC.  We werethereafter given the option of whether or not we wanted our marketingagreements assigned to, and assumed by, CHS, Inc.  We chose not to allow CSC to assign theagreements to CHS Inc. and instead negotiated a new marketing agreement withCHS Inc., as described in the preceding paragraph.

 

**PART III**

 

Pursuant toGeneral Instruction G(3), we omit Part III, Items 10, 11, 12, 13 and 14and incorporate such items by reference to an amendment to this Annual Reporton Form 10-K or to a definitive proxy statement to be filed with theSecurities and Exchange Commission within 120 days after the close of thefiscal year covered by this Annual Report (December 31, 2007).

 

**PART IV**

 

**ITEM15.  EXHIBITS, FINANCIAL STATEMENTSCHEDULES.**

 

**Exhibits Filed as Part of this Report and Exhibits Incorporated byReference.**

 

The following exhibits and financial statements are filed as part of,or are incorporated by reference into, this report.

 

**(1)****                                  ****Financial Statements**

 

The financial statements appear beginning at page 41of this report.

 

**(2)****                                  ****Financial StatementSchedules**

 

All supplemental schedules are omitted as the requiredinformation is inapplicable or the information is presented in the financialstatements or related notes.

 

**(3)****                                  ****Exhibits**

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                               |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Articles of Organization of  registrant.  Filed as Exhibit 3.1 to the registrant’s registration  statement on Form SB-2 (Commission File 333-92188) and incorporated by  reference herein.                                            |
|                 |       |                                                                                                                                                                                                                                                      |
| 3.2                  |       | Amended  and Restated Operating Agreement of the registrant.  Filed as  Exhibit 3.2 to the registrant’s periodic report on Form 10-QSB  filed August 15, 2005 (Commission File 000-50733) and incorporated by  reference herein. |

 

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| 4.1    |   | Form of  Membership Unit Certificate.  Filed as Exhibit 4.2 to the  registrant’s registration statement on Form SB-2 (Commission File  333-92188) and incorporated by reference herein.                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.1   |   | Agreement by and between Key Railroad  Development, LLC and United Wisconsin Grain Producers, LLC dated  January 30, 2003. Filed as Exhibit 10.10 to the registrant’s  registration statement on Form SB-2/A (Commission File 333-92188) filed  May 8, 2003 and incorporated by reference herein.                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.2   |   | Accepted Proposal for Provision of Services  by Key Engineering Group, Inc. dated June 10, 2003. Filed as  Exhibit 10.14 to registrant’s periodic report on Form 10-QSB  (Commission File 333-92188) filed November 11, 2003 and incorporated by  reference herein.                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.3   |   | Change Order Request No. 1 by Key  Railroad Development, LLC dated July 21, 2003. Filed as  Exhibit 10.15 to registrant’s periodic report on Form 10-QSB  (Commission File 333-92188) filed November 11, 2003 and incorporated by  reference herein.                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.4   |   | Electric Service Agreement dated  October 3, 2003 by and between Adams-Columbia Electric Cooperative of  Friendship and United Wisconsin Grain Producers, LLC. Filed as  Exhibit 10.6 to registrant’s periodic report on Form 10-KSB  (Commission File 333-92188) filed March 30, 2004 and incorporated by  reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.5   |   | Contract for Construction Services between  Iverson and Son’s LLC and United Wisconsin Grain Producers, LLC. Filed as  Exhibit 10.7 to registrant’s periodic report on Form 10-KSB  (Commission File 333-92188) filed March 30, 2004 and incorporated by  reference herein.                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.6   |   | Design-Build Contract dated October 8,  2003 between Fagen, Inc. and United Wisconsin Grain Producers, LLC.*  Filed as Exhibit 10.8 to registrant’s periodic report on  Form 10-KSB (Commission File 333-92188) filed March 30, 2004 and  incorporated by reference herein.                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.7   |   | Contract  Change Order dated December 30, 2003 between Fagen, Inc. and United  Wisconsin Grain Producers, LLC.* Filed as Exhibit 10.9 to registrant’s  periodic report on Form 10-KSB (Commission File 333-92188) filed  March 30, 2004 and incorporated by reference herein.                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Natural Gas Sales & Service  agreement dated April 1, 2004 between WPS Energy Services, Inc. and  United Wisconsin Grain Producers LLC. Filed as Exhibit 10.2 to  registrant’s period report on Form 10-QSB (Commission File 000-50733)  filed August 16, 2004 and incorporated by reference herein.            |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.9   |   | Natural Gas Transportation Service  agreement dated April 8, 2004 between Wisconsin Power and Light Company  and United Wisconsin Grain Producers LLC. Filed as Exhibit 10.1 to  registrant’s period report on Form 10-QSB (Commission File 000-50733)  filed August 16, 2004 and incorporated by reference herein.           |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.10  |   | Facility Use Agreement dated  October 4, 2004 between Town of Randolph and United Wisconsin Grain  Producers LLC. Filed as Exhibit 10.3 to registrant’s periodic report on  Form 10-QSB (Commission File 333-92188) filed November 15, 2004 and  incorporated by reference herein.                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.11  |   | Railroad Spur Construction Agreement dated  October 15, 2004 between the Town of Randolph and Volkmann Railroad  Builders, Inc. filed as Exhibit 10.13 to registrant’s periodic  report on Form 10-KSB (Commission File 333-92188) filed March 21,  2005 and incorporated by reference herein.                           |

 

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|   |   |                                                                                                                                                                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12  |   | Employment Agreement dated  September 25, 2006 between Jeff Robertson and United Wisconsin Grain  Producers, LLC. Filed as Exhibit 10.1 to registrant’s periodic report on  Form 10-Q (Commission File 333-92188) filed May 15, 2007 and  incorporated by reference herein.                          |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 10.13  |   | Term Credit Agreement dated May 25, 2006 between  Farmers & Merchants Union Bank and United Wisconsin Grain Producers,  LLC. Filed as Exhibit 10.2 to registrant’s periodic report on  Form 10-Q (Commission File 333-92188) filed May 15, 2007 and  incorporated by reference herein.      |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 10.14  |   | Revolving Credit Agreement dated May 25, 2006 between  Farmers & Merchants Union Bank and United Wisconsin Grain Producers,  LLC. Filed as Exhibit 10.3 to registrant’s periodic report on  Form 10-Q (Commission File 333-92188) filed May 15, 2007 and  incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 10.15  |   | Business Note dated May 25, 2006 executed by United Wisconsin  Grain Producers, LLC. Filed as Exhibit 10.4 to registrant’s periodic  report on Form 10-Q (Commission File 333-92188) filed  May 15, 2007 and incorporated by reference herein.                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 10.16  |   | Distillers Grains Marketing Agreement dated  October 1, 2007 between CHS Inc. and United Wisconsin Grain Producers  LLC.* Filed herewith.                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 10.17  |   | Ethanol Purchase and Sale Agreement dated  December 12, 2007 between Noble Americas Corp. and United Wisconsin  Grain Producers LLC.* Filed herewith.                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 14.1   |   | Code of Ethics of United Wisconsin Grain  Producers, LLC adopted March 18, 2004.Filed as Exhibit 14.1 to  registrant’s periodic report on Form 10-KSB (Commission File 333-92188)  filed March 30, 2004 and incorporated by reference herein.                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 31.1   |   | Certificate pursuant to 17 CFR  240.15d-14(a). Filed herewith.                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 31.2   |   | Certificate pursuant to 17 CFR  240.15d-14(a). Filed herewith.                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 32.1   |   | Certificate pursuant to 18 U.S.C.  Section 1350. Filed herewith.                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 32.2   |   | Certificate pursuant to 18 U.S.C.  Section 1350. Filed herewith.                                                                                                                                                                                                                                                         |

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*Material has been omitted pursuant to a request for confidentialtreatment and such materials have been filed separately with the Securities andExchange Commission.

 

58

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |                 | UNITED  WISCONSIN GRAIN PRODUCERS, LLC                                |
|--------|----------------------|-----------------------------------------------------------------------|
|   |                 |                                                                  |
|   |                 |                                                                  |   |
| Date:  | March 17,  2008 |                                                                  | /s/  J.F. Robertson |   |
|   |                 | J.F.  Robertson                                                       |   |
|   |                 | Chief  Executive Officer (Principal Executive Officer)                |   |
|   |                 |                                                                  |   |
|   |                 |                                                                  |   |
|   |                 |                                                                  |   |
| Date:  | March 17,  2008 |                                                                  | /s/  Barb Bontrager |   |
|   |                 | Barb  Bontrager                                                       |   |
|   |                 | Chief  Financial Officer (Principal Financial and Accounting Officer) |   |
|        |                      |                                                                       |  |  |  |

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| Date:  | March 17,  2008 |   |   |   |   | /s/  William R. Herrmann                       |
|--------|----------------------|--------|--------|--------|--------|------------------------------------------------|
|   |                 |   |   |   |   | William  R. Herrmann, President and Director   |
|   |                 |   |   |   |   |                                           |
|   |                 |   |   |   |   |                                           |
| Date:  | March 17,  2008 |   |   |   |   | /s/  Robert J. Miller                          |
|   |                 |   |   |   |   | Robert J. Miller, Vice  President and Director |
|   |                 |   |   |   |   |                                           |
|   |                 |   |   |   |   |                                           |
| Date:  | March 17,  2008 |   |   |   |   | /s/  Robert T. Lange                           |
|   |                 |   |   |   |   | Robert T. Lange,  Secretary and Director       |
|   |                 |   |   |   |   |                                           |
|   |                 |   |   |   |   |                                           |
| Date:  | March 17,  2008 |   |   |   |   | /s/  Carl T. Benck                             |
|   |                 |   |   |   |   | Carl  T. Benck, Director                       |
|   |                 |   |   |   |   |                                           |
|   |                 |   |   |   |   |                                           |
| Date:  | March 17,  2008 |   |   |   |   | /s/  Kevin M. Roche                            |
|   |                 |   |   |   |   | Kevin  M. Roche, Director                      |
|   |                 |   |   |   |   |                                           |
|   |                 |   |   |   |   |                                           |
| Date:  | March 17,  2008 |   |   |   |   | /s/  Berwyn G. Westra                          |
|   |                 |   |   |   |   | Berwyn  G. Westra, Director                    |

 

 

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