LAKE AREA CORN PROCESSORS LLC - Annual Report: 2006 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

LAKE AREA CORN PROCESSORS, LLC

(Exact name of small business issuer as specified in its charter)

 

46269 SD Highway 34

P.O. Box 100

Wentworth, South Dakota 57075

(Address of principal executive offices)

(605) 483-2676

(Issuer’s telephone number)

Securities registered pursuant to Section 12(b) of the Exchange Act:  None

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer   o

Accelerated Filer   o

Non-Accelerated Filer   x

 

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

o  Yes     x  No

The aggregate market value of the registrant’s membership units held by non-affiliates of the registrant was $14,810,000 computed by reference to the most recent public offering price on Form S-4.

As of the date of this filing, there are 29,620,000 membership units of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

INDEX

PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES

 

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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions.  In some cases, you can identify forward-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 similar expressions.  These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report.  While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

·                  Overcapacity within the ethanol industry causing supply to exceed demand;

·                  Actual ethanol and distillers grains production varying from expectations;

·                  Availability and costs of products and raw materials, particularly corn and natural gas;

·                  Changes in the price and market for ethanol and distillers grains;

·                  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:

·                  national, state or local energy policy;

·                  federal ethanol tax incentives;

·                  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 the weather or general economic conditions impacting the availability and price of corn and natural gas;

·                  Total U.S. consumption of gasoline;

·                  Fluctuations in petroleum prices;

·                  Changes in plant production capacity or technical difficulties in operating the plant;

·                  Costs of construction and equipment;

·                  Changes in our business strategy, capital improvements or development plans;

·                  Results of our hedging strategies;

·                  Changes in interest rates or the availability of credit;

·                  Our ability to generate free cash flow to invest in our business and service our debt;

·                  Our liability resulting from litigation;

·                  Our ability to retain key employees and maintain labor relations;

·                  Changes and advances in ethanol production technology;

·                  Competition from alternative fuels and alternative fuel additives; and

·                  Other factors described elsewhere in this report.

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The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf.  We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements by these cautionary statements.

PART I.

ITEM 1.                                                     BUSINESS.

Overview

Lake Area Corn Processors, LLC (the “Company”) is a South Dakota limited liability company that currently owns and manages its wholly-owned subsidiary Dakota Ethanol, LLC.  Prior to June 2006, the Broin family owned a minority interest of approximately 12% of Dakota Ethanol, LLC.  On June 30, 2006, we entered into an assignment agreement with the Broin family to purchase its minority interest in Dakota Ethanol, LLC.  Following execution of the assignment agreement, we own 100% of Dakota Ethanol, LLC and operate it as a wholly-owned subsidiary.  Dakota Ethanol, LLC owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 40 million gallons of ethanol per year.  Lake Area Corn Processors, LLC is referred to in this report as “LACP,” the “company,” “we,” or “us.”  Dakota Ethanol, LLC is referred to in this report as “Dakota Ethanol” or the “ethanol plant.”

Since September 4, 2001, Dakota Ethanol has been engaged in the production of ethanol and distillers grains.  Fuel grade ethanol is Dakota Ethanol’s primary product accounting for the majority of its revenue.  Dakota Ethanol also sells distillers grains, a principal co-product of the ethanol production process.   In 2006, Dakota Ethanol processed approximately 17 million bushels of corn into approximately 48 million gallons of ethanol.  Dakota Ethanol also processed approximately 107,000 tons of distillers grains in 2006.  In 2007, we anticipate that Dakota Ethanol’s ethanol and distillers grains production will be substantially the same as in fiscal year 2006.  There is, however, no assurance that Dakota Ethanol will be able to operate at these production levels.

On April 26, 2006, we announced to our members that we were engaging in preliminary discussions concerning a potential change in corporate structure, merger, public offering or business combination with one or more companies.  These discussions continue and no plans have been finalized.  No agreement, arrangement or understanding concerning the potential transaction has been made.

General Development of Business

LACP was formed as a South Dakota cooperative on May 25, 1999.  On August 20, 2002, our members approved a plan to reorganize into a South Dakota limited liability company.  The reorganization became effective on August 31, 2002, and the assets and liabilities of the cooperative were transferred to the newly formed limited liability company.  Following the reorganization, our legal name was changed to Lake Area Corn Processors, LLC.

Our ownership of Dakota Ethanol represents substantially all of our assets and our only source of revenue.  Since we operate Dakota Ethanol as a wholly-owned subsidiary, we receive all revenues generated by Dakota Ethanol pursuant to its operating agreement.  We distribute the revenues received from Dakota Ethanol to our unit holders in proportion to the number of units held by each member.

Dakota Ethanol underwent a significant change in its mode of operations on June 6, 2005, when it elected not to renew its management agreement and other marketing agreements with Broin Management, LLC and other various Broin-related entities.  Between June 6, 2005 and December 31, 2005, Dakota Ethanol and the Broin-related entities negotiated termination of the contracts and Dakota Ethanol entered into agreements with new risk management and marketing service providers.  In addition, on December 16, 2005, Dakota Ethanol entered into an

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employment agreement with Scott Mundt to serve in the position of Transition Coordinator.  Mr. Mundt’s employment began on October 17, 2005, the effective date of his employment agreement.  Effective January 1, 2006, Mr. Mundt’s position changed to General Manager.  Mr. Mundt’s duties include day-to-day management of the operations of Dakota Ethanol.

Available Information

The public may read and copy materials we file with the Securities and Exchange Commission at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C., 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.  Reports we file electronically with the SEC may be obtained at http://www.sec.gov.  In addition, information about us is also available at our website at http://www.dakotaethanol.com/lacp.html, which includes links to reports we have filed with the Securities and Exchange Commission.  The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.

Financial Information

Please refer to “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information about our revenues, profit and loss measurements and total assets and “Item 8 - Financial Statements and Supplementary Data” for our consolidated financial statements.

Principal Products and Their Markets

The principal products produced at the Dakota Ethanol plant are fuel grade ethanol and distillers grains.

Ethanol

  Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains.  According to the Renewable Fuels Association, approximately 85 percent of the ethanol produced in the United States today is produced from corn, and approximately 90 percent of ethanol is produced from a corn and other input mix. Corn produces large quantities of carbohydrates, which convert into glucose more easily than most other kinds of biomass. As of February 12, 2007, the Renewable Fuels Association estimates domestic ethanol production capacity at approximately 5.5 billion gallons.

An ethanol plant is essentially a fermentation plant.  Ground corn and water are mixed with enzymes and yeast to produce a substance called “beer,” which contains about 10% alcohol and 90% water.  The “beer” is boiled to separate the water, resulting in ethyl alcohol, which is then dehydrated to increase the alcohol content.  This product is then mixed with a certified denaturant such as gasoline to make the product unfit for human consumption and commercially saleable.

Ethanol can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute.  Approximately 95% of all ethanol is used in its primary form for blending with unleaded gasoline and other fuel products.  Used as a fuel oxygenate, ethanol provides a means to control carbon monoxide emissions in large metropolitan areas where oxygenated fuels are required during certain times of the year.  The principal purchasers of ethanol are generally wholesale gasoline marketers or blenders.  The principal markets for our ethanol are petroleum terminals in the continental United States.

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Dakota Ethanol began producing ethanol in September 2001.  For our fiscal year ended December 31, 2006, revenues from sales of ethanol were approximately 91% of our total revenues.  The following table shows the percentage of our total revenues that were from sales of ethanol for each of the last three fiscal years:

Fiscal Year		Percentage of Revenues from Sales of Ethanol
Ended December 31, 2006		91	%
Ended December 31, 2005		86	%
Ended December 31, 2004		85	%

 

Distillers Grains

A principal co-product of the ethanol production process is distillers grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry.  Distillers grains contain by-pass protein that is superior to other protein supplements such as cottonseed meal and soybean meal.  By-pass proteins are more digestible to the animal, thus generating greater lactation in milk cows and greater weight gain in beef cattle.  Dry mill ethanol processing creates four forms of distiller grains: Distillers Wet Grains (“DWS”), Distillers Modified Wet Grains (“DMWS”), Condensed Distillers Solubles (“CDS”) and Distillers Dried Grains with Solubles (“DDGS”).  DWS is processed corn mash that contains approximately 70% moisture.  DWS has a shelf life of approximately seven days and can be sold only to consumers within the immediate vicinity of an ethanol plant.  DMWS is DWS that has been dried to approximately 50% moisture.  DMWS have a slightly longer shelf life of approximately ten days and are often sold to nearby markets.  CDS contains approximately 75% moisture and is marketed locally.  It has a shelf life of approximately thirty days.  DDGS is DWS that has been dried to 10% to 12% moisture.  DDGS has an almost indefinite shelf life and may be sold and shipped to any market regardless of its vicinity to an ethanol plant.  At our plant, the composition of the distillers grains we produce is approximately 3% DWS, 4% DMWS, 3% CDS and 90% DDGS.

For our fiscal year ended December 31, 2006, revenues from sales of distillers grains were approximately 8% of our total revenues.  The following table shows the percentage of our total revenues that were from sales of distillers grains for each of  the last three fiscal years:

Fiscal Year		Percentage of Revenues from Sales of Distillers Grains
Ended December 31, 2006		8	%
Ended December 31, 2005		13	%
Ended December 31, 2004		14	%

 

Distribution of Principal Products

The ethanol plant is located near Wentworth, South Dakota in Lake County, in eastern South Dakota.  We selected the Wentworth site because of its location to existing grain production, accessibility to road and rail transportation and its proximity to major population centers.  It is served by the Burlington Northern Santa Fe railroad system.  It is in close proximity to multiple state highways and is near Interstate Highways 29 and 90.

Ethanol Distribution

From the date Dakota Ethanol began operations through the fiscal year ended December 31, 2005, Dakota Ethanol marketed the ethanol produced at the plant through an exclusive marketing agreement with Ethanol Products, LLC (“Ethanol Products”), a Broin affiliate.  On June 6, 2005, Dakota Ethanol elected not to renew its agreement with Ethanol Products and agreed that termination would become effective as of January 1, 2006.

On November 30, 2005, Dakota Ethanol entered into an Ethanol Fuel Marketing Agreement with Renewable Products Marketing Group (“RPMG”) of Belle Plaine, Minnesota, for the purposes of marketing and distributing our ethanol. Under this agreement, we had the option of using a pooled or non-pooled marketing arrangement.  We have elected to use a pooled marketing arrangement, which means that the ethanol we produce is pooled with other ethanol producers and marketed by RPMG.  We pay RPMG a pooling fee for ethanol delivered to

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the pool, and RPMG pays us a netback price per gallon that is based upon the difference between the pooled average delivered ethanol selling price and the pooled average distribution expense.  These averages are calculated based upon each pool participant’s selling price and expense averaged in direct proportion to the volume of ethanol supplied by each participant to the pool.  Beginning December 31, 2006, Dakota Ethanol became eligible to purchase an ownership interest in RMPG through certain forms of capital contributions.  We have not yet exercised our right to become a member of RPMG.  The term of our ethanol marketing agreement with RMPG expires on March 31, 2007; the agreement renews automatically for additional one-year terms unless prior written notice of non-renewal is provided by either party.  We intend to renew the RPMG agreement pursuant to the automatic renewal provision.

Distillers Grains Distribution

From the date Dakota Ethanol began operations through the fiscal year ended December 31, 2005, Dakota Ethanol marketed its distillers grains through a contract with Broin Enterprises, Inc. d/b/a Dakota Gold Marketing, a Broin affiliate, to market all of the distillers grains produced at the plant.  Five types of distillers grains were produced by Dakota Ethanol and marketed by Dakota Gold Marketing: DDGS, Dakota Gold™, DWS, CDS and DMWS.  Dakota Gold™ is DDGS with an added certification from Dakota Gold Marketing that the DDGS meets certain processing and production standards.  On June 6, 2005, Dakota Ethanol elected not to renew its agreement with Dakota Gold Marketing and agreed to a termination date of December 1, 2005.

On November 28, 2005, Dakota Ethanol entered into a Distillers Grain Marketing Agreement with Commodity Specialists Company (CSC) of Minneapolis, Minnesota for the purpose of marketing the distillers dried grains we produce.  Under the terms of the agreement, CSC markets our distillers dried grains, and we receive a percentage of the selling price actually received by CSC in marketing our distillers grains to its customers. The term of the agreement began on December 1, 2005 and renews automatically for an additional term of one year unless prior written notice of non-renewal is provided by either party.  In December 2006, this agreement with CSC was renewed pursuant to the automatic renewal provision for an additional one year term.

Beginning on December 1, 2005, Dakota Ethanol began marketing DWS, CDS and DMWS to our local market without the use of an external marketer.  Shipments of these products are made to local markets by truck.  This has allowed us to sell less distillers grains in the form of DDGS which has decreased our natural gas usage and increased our revenues from the sale of distillers grains.

Seasonal Factors in Business

In an effort to improve 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 oxygenated motor fuels during the winter months in certain major metropolitan areas.  Gasoline that is blended with ethanol has a higher oxygen content than gasoline that does not contain ethanol.  As a result, we expect fairly light seasonality with respect to our gross profit margins on our ethanol allowing us to, potentially, be able to sell our ethanol at a slight premium during the mandated oxygenate period.  Conversely, we expect our average sales price for fuel-grade ethanol to be a little lower during the summer, when fuel-grade ethanol is primarily used as an octane enhancer or a fuel supply extender.

Sources and Availability of Raw Materials

Corn Feedstock Supply

The major raw material required for our ethanol plant to produce ethanol and distillers grain is corn.  To operate at a name-plate capacity of 40 million gallons, the plant requires a supply of approximately 14 million bushels of corn annually.  The plant currently operates in excess of its nameplate capacity, producing approximately 48 million gallons of ethanol annually from approximately 17 million bushels of corn.  The area surrounding the plant near Wentworth in Lake County, South Dakota currently provides an ample supply of corn to meet and exceed our raw material requirements for the name-plate production capacity of the plant and our current higher than name-plate production capacity.  In 2004 and 2005, the United States produced record corn crops of approximately 11.8 billion bushels and approximately 11.11 billion bushels respectively.  The 2006 corn crop was smaller, producing approximately 10.74 billion bushels, however this was still the third largest American corn crop recorded.  The

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slightly smaller corn crop and increased demand from both the animal feed and ethanol industries has lead to increased corn prices during 2006.  We expect that these increased corn prices will continue into 2007.

For the fiscal year ended December 31, 2005, Dakota Ethanol operated under an agreement with Broin Management, LLC for price risk management related to the corn requirements of the plant.  However, Dakota Ethanol terminated the agreement effective January 1, 2006.

On November 28, 2005, Dakota Ethanol entered into a Risk Management Contract with FCStone, LLC (“FCStone”) of West Des Moines, Iowa.  Under the contract, FCStone provides all risk management services and programs relating to Dakota Ethanol’s production and sale of ethanol and distillers grains.  In exchange for these services, Dakota Ethanol pays FCStone a fee of $3,333.33 per month, which is based on a rate of $0.001 per gallon of ethanol produced from an annual production capacity of 40 million gallons.  In addition, Dakota Ethanol will pay any commission, fee, service charge or mark-up arising from any option, futures or other risk management or cash commodity transaction executed or brokered through FCStone, not to exceed $12.50 per round turn for exchange-traded futures and options contracts and equal to $10.00 per round turn for over-the-counter transactions.  The initial term of the contract began on December 1, 2005 and went until October 31, 2006.  Following the initial term, the contract renews automatically for additional one-year terms unless prior written notice of non-renewal is provided by either party.  This agreement was renewed for an additional one-year term pursuant to the automatic renewal provision of the contract.

Natural Gas

Natural gas is also an important input to our manufacturing process.  Dakota Ethanol uses natural gas to dry its distillers grains products to moisture contents at which they can be stored for long periods of time.  This allows the distillers grains we produce to be transported greater distances which allows them to serve broader livestock markets, including poultry and swine markets in the continental United States.  Dakota Ethanol contracts with NorthWestern Energy for its natural gas.  Under our agreement, the price for our natural gas is based on market rates.  The agreement is in effect until 2011 and automatically renews for successive one-year terms unless the agreement is terminated.  Since operations were commenced in 2001, there have been no interruptions in the supply of natural gas from NorthWestern Energy, and all of Dakota Ethanol’s natural gas requirements have been met.

Electricity

Electricity is necessary for lighting and powering much of the machinery and equipment used in the production process.  Dakota Ethanol contracts with Sioux Valley Energy, Inc. to provide all of the electric power and energy requirements for the ethanol plant.   The agreement is in effect until 2011 and automatically renews for five-year terms, unless at least 18 months notice is given by either party to terminate the agreement prior to the expiration of the current term.  Dakota Ethanol has had no interruption or shortages in the supply of electricity to the plant since operations were commenced in 2001.

Water

Water is a necessary part of the ethanol production process.  It is used in the fermentation process and to produce steam for the cooking, evaporation, and distillation processes.  Dakota Ethanol contracts with Big Sioux Community Water System, Inc. to supply and meet its water requirements for the ethanol and distillers grains production process.  Dakota Ethanol’s agreement with Big Sioux is for automatically renewing five-year terms.  Since Dakota Ethanol’s operations were commenced in September 2001, Dakota Ethanol has had no interruption in the supply of water as all its requirements have been met.  This agreement was renewed for a term of six months starting on January 1, 2007 at a rate of $0.55 per thousand gallons of usage.  The Big Sioux Community Water System will not guarantee any of the parameters of the original agreement due to the Ethanol Plant’s water usage levels.  The agreement also allows Dakota Ethanol to use water from the Skunk River Aquifer to meet the plant’s water needs.  In all other respects, the terms of the original contract are the same.

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Federal Ethanol Supports

The ethanol industry is heavily dependent on several economic incentives to produce ethanol, including federal ethanol supports.  The most recent ethanol supports are contained in the Energy Policy Act of 2005.  Most notably, the Act creates a 7.5 billion gallon Renewable Fuels Standard (“RFS”).  The RFS requires refiners to use 4 billion gallons of renewable fuels in 2006, increasing to 7.5 billion gallons by 2012.  According to the Renewable Fuels Association, the 4 billion gallon requirement for 2006 was met sometime between October and November of 2006.  The production capacity of the ethanol industry is expected to be significantly greater than the RFS into the foreseeable future, thereby muting the ethanol demand increasing effects of the RFS.  On September 7, 2006, the EPA issued a proposed final rule that would fully implement the RFS.  The proposed rule requires oil refiners to use 4 billion gallons of renewable fuels in 2006.  This quota increases incrementally until 2012 when oil refiners will be required to use 7.5 billion gallons of renewable fuels per year.  The proposed rule also creates a credit trading system where oil refiners that blend more renewable fuels than they are required can sell credits to refiners who blend less renewable fuel than they are required under the RFS.  This allows the industry as a whole to meet the RFS in the most cost effective manner possible.

Historically, ethanol sales have also been favorably affected by the Clean Air Act amendments of 1990, particularly the Federal Oxygen Program which became effective November 1, 1992.  The Federal Oxygen Program requires the sale of oxygenated motor fuels during the winter months in certain major metropolitan areas to reduce carbon monoxide pollution.  Ethanol use has increased due to a second Clean Air Act program, the Reformulated Gasoline Program.  This program became effective January 1, 1995, and requires the sale of reformulated gasoline in nine major urban areas to reduce pollutants, including those that contribute to ground level ozone, better known as smog.  The two major oxygenates added to reformulated gasoline pursuant to these programs are MTBE and ethanol, however MTBE has caused groundwater contamination and has been banned from use by many states.  Although the Energy Policy Act of 2005 did not impose a national ban of MTBE, its failure to include liability protection for manufacturers of MTBE is expected to result in refiners and blenders using ethanol as an oxygenate rather than MTBE to satisfy the reformulated gasoline oxygenate requirement.  While this may create increased demand for ethanol in the short-term, we do not expect this to have a long term impact on the demand for ethanol as the Energy Policy Act repeals the Clean Air Act’s 2% oxygenate requirement for reformulated gasoline.  However, the Act did not repeal the 2.7% oxygenate requirement for carbon monoxide non-attainment areas which are required to use oxygenated fuels in the winter months.  While we expect ethanol to be the oxygenate of choice in these areas, there is no assurance that ethanol will in fact be used.

The Energy Policy Act of 2005 expands who qualifies for the small ethanol producer tax credit.  Historically, small ethanol producers were allowed a 10-cents-per-gallon production income tax credit on up to 15 million gallons of production annually.  The size of the plant eligible for the tax credit was limited to 30 million gallons.  Under the Energy Policy Act of 2005 the size limitation on the production capacity for small ethanol producers increased from 30 million to 60 million gallons.  As a result, we were eligible for the small producer tax credit and received the $1,500,000 maximum credit under the program which caps the credit at the first 15 million gallons of production.  The credit is effective for taxable years ending after the date of enactment.

In addition, the Energy Policy Act of 2005 creates a new tax credit that permits taxpayers to claim a 30% credit (up to $30,000) for the cost of installing clean-fuel vehicle refueling equipment, such as an E85 fuel pump, to be used in a trade or business of the taxpayer or installed at the principal residence of the taxpayer. Under the provision, clean fuels are any fuel where at least 85% of the volume consists of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, and hydrogen and any mixture of diesel fuel and biodiesel containing at least 20% biodiesel.  The provision is effective for equipment placed in service after December 31, 2005 and before January 1, 2010. While it is unclear how this credit will affect the demand for ethanol in the short term, we expect it will help raise consumer awareness of alternative sources of fuel and could positively impact future demand for ethanol.

The use of ethanol as an alternative fuel source has been aided by federal tax policy.  On October 22, 2004, President Bush signed H.R. 4520, which contained the Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excise tax structure effective as of January 1, 2005.  Prior to VEETC, ethanol-blended fuel was taxed at a lower rate than regular gasoline (13.2 cents on a 10% blend).  Under VEETC, the ethanol excise tax exemption has been eliminated, thereby allowing the full federal excise tax of 18.4 cents per gallon of gasoline to be

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collected on all gasoline and allocated to the highway trust fund.  This is expected to add approximately $1.4 billion to the highway trust fund revenue annually.  In place of the exemption, the bill creates a new volumetric ethanol excise tax credit of 5.1 cents per gallon of ethanol blended at 10%.  Refiners and gasoline blenders apply for this credit on the same tax form as before only it is a credit from general revenue, not the highway trust fund.  Based on volume, the VEETC is expected to allow much greater refinery flexibility in blending ethanol since it makes the tax credit available on all ethanol blended with all gasoline, diesel and ethyl tertiary butyl ether (“ETBE”), including ethanol in E-85 and the E-20 in Minnesota.  The VEETC is scheduled to expire on December 31, 2010.

The ethanol industry and our business depend upon continuation of the federal ethanol supports discussed above.  These incentives have supported a market for ethanol that might disappear without the incentives.  Alternatively, the incentives may be continued at lower levels than at which they currently exist.  The elimination or reduction of such federal ethanol supports would make it more costly for us to sell our ethanol and would likely reduce our net income.

Our Competition

We will be in direct competition with numerous other ethanol producers, many of whom have greater resources than we do. We also expect that additional ethanol producers will enter the market if the demand for ethanol continues to increase.  Ethanol is a commodity product, like corn, which means our ethanol plant competes with other ethanol producers on the basis of price, and to a lesser extent delivery service.  We believe we compete favorably with other ethanol producers due to our proximity to ample grain supplies and multiple modes of transportation.

As of February 12, 2007, the Renewable Fuels Association estimates that there are 113 ethanol production facilities in the United States. There are also numerous other producer and privately owned ethanol plants planned and under construction throughout the Midwest and elsewhere in the United States.  The largest ethanol producers include Abengoa Bioenergy Corp., Archer Daniels Midland, Aventine Renewable Energy, Inc., Cargill, Inc., Hawkeye Renewables, LLC., New Energy Corp., Tate & Lyle, US Bioenergy Corp. and VeraSun Energy Corporation, all of which are capable of producing more ethanol than we produce.  Archer Daniels Midland is currently the largest ethanol producer in the U.S. and controls a significant portion of the ethanol market.

According to the Renewable Fuels Association, excluding our plant, South Dakota currently has 12 ethanol plants with a state production capacity of approximately 640 million gallons per year.  In addition, expansions of existing plants and at least 4 new plants currently under construction are expected to add an additional approximately 700 million gallons of annual capacity.  All of the ethanol plants in South Dakota are located in the eastern portion of the state.

The following table identifies most of the ethanol producers in the United States along with their production capacities:

U.S. FUEL ETHANOL PRODUCTION CAPACITY
million gallons per year (mmgy)

Company		Location		Feedstock		Current Capacity (mgy)		Under Construction/ Expansions (mgy)
Abengoa Bioenergy Corp.		York, NE		Corn/milo		55
		Colwich, KS				25
		Portales, NM				30
		Ravenna, NE						88
Aberdeen Energy*		Mina, SD		Corn				100
Absolute Energy, LLC*		St. Ansgar, IA		Corn				100

 

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ACE Ethanol, LLC		Stanley, WI		Corn		41
Adkins Energy, LLC*		Lena, IL		Corn		40
Advanced Bioenergy		Fairmont, NE		Corn				100
AGP*		Hastings, NE		Corn		52
Agra Resources Coop. d.b.a. EXOL*		Albert Lea, MN		Corn		40		8
Agri-Energy, LLC*		Luverne, MN		Corn		21
Alchem Ltd. LLLP		Grafton, ND		Corn		10.5
Al-Corn Clean Fuel*		Claremont, MN		Corn		35		15
Amaizing Energy, LLC*		Denison, IA		Corn		40
Archer Daniels Midland		Decatur, IL		Corn		1,070		275
		Cedar Rapids, IA		Corn
		Clinton, IA		Corn
		Columbus, NE		Corn
		Marshall, MN		Corn
		Peoria, IL		Corn
		Wallhalla, ND		Corn/barley
Arkalon Energy, LLC		Liberal, KS		Corn				110
ASAlliances Biofuels, LLC		Albion, NE		Corn				100
		Linden, IN		Corn				100
		Bloomingburg, OH		Corn				100
Aventine Renewable Energy, LLC		Pekin, IL		Corn		207
		Aurora, NE		Corn
Badger State Ethanol, LLC*		Monroe, WI		Corn		48
Big River Resources, LLC*		West Burlington, IA		Corn		52		50^
Big River Resources Grinnell, LLC (joint venture with US Bio) ^		Grinnell, IA		Corn
Blue Flint Ethanol		Underwood, ND		Corn		50
Bonanza Energy, LLC		Garden City, KS		Corn/milo				55
Broin Enterprises, Inc.*		Scotland, SD		Corn		11
Bushmills Ethanol, Inc.*		Atwater, MN		Corn		40
Cardinal Ethanol		Harrisville, IN		Corn				100
Cargill, Inc.		Blair, NE		Corn		85
		Eddyville, IA		Corn		35
Cascade Grain		Clatskanie, OR		Corn				108
CassCo Amaizing Energy, LLC		Atlantic, IA		Corn				110
Castle Rock Renewable Fuels, LLC		Necedah, WI		Corn				50
Center Ethanol Company		Sauget, IL		Corn				54
Central Indiana Ethanol, LLC		Marion, IN		Corn				40
Central Illinois Energy, LLC		Canton, IL		Corn				37
Central MN Ethanol Coop*		Little Falls, MN		Corn		21.5
Central Wisconsin Alcohol		Plover, WI		Seed corn		4
Chief Ethanol		Hastings, NE		Corn		62
Chippewa Valley Ethanol Co.*		Benson, MN		Corn		45
Commonwealth Agri-Energy, LLC*		Hopkinsville, KY		Corn		33
Corn, LP*		Goldfield, IA		Corn		50

 

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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
Dexter Ethanol, LLC		Dexter, IA		Corn				100
E Energy Adams, LLC		Adams, NE		Corn				50
E3 Biofuels		Mead, NE		Corn				24
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
Ethanol2000, LLP*		Bingham Lake, MN		Corn		32
Ethanol Grain Processors, LLC		Obion, TN		Corn				100
First United Ethanol, LLC (FUEL)		Mitchell Co., GA		Corn				100
Frontier Ethanol, LLC		Gowrie, IA		Corn		60
Front Range Energy, LLC		Windsor, CO		Corn		40
Gateway Ethanol		Pratt, KS		Corn				55
Glacial Lakes Energy, LLC*		Watertown, SD		Corn		50		50
Global Ethanol/Midwest Grain Processors		Lakota, IA		Corn		95
		Riga, MI		Corn				57
Golden Cheese Company of California*		Corona, CA		Cheese whey		5
Golden Grain Energy, LLC*		Mason City, IA		Corn		60		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
Great Plains Ethanol, LLC*		Chancellor, SD		Corn		50
Greater Ohio Ethanol, LLC		Lima, OH		Corn				54
Green Plains Renewable Energy		Shenandoah, IA		Corn				50
		Superior, IA		Corn				50
Hawkeye Renewables, LLC		Iowa Falls, IA		Corn		105
		Fairbank, IA		Corn		115
		Menlo, IA		Corn				100
Heartland Corn Products*		Winthrop, MN		Corn		35
Heartland Grain Fuels, LP*		Aberdeen, SD		Corn		9
		Huron, SD		Corn		12		18
Heron Lake BioEnergy, LLC		Heron Lake, MN		Corn				50
Holt County Ethanol		O’Neill, NE		Corn				100
Horizon Ethanol, LLC		Jewell, IA		Corn		60
Husker Ag, LLC*		Plainview, NE		Corn		26.5
Illinois River Energy, LLC		Rochelle, IL		Corn		50
Indiana Bio-Energy		Bluffton, IN		Corn				101
Iowa Ethanol, LLC*		Hanlontown, IA		Corn		50
Iroquois Bio-Energy Company, LLC		Rensselaer, IN		Corn		40

 

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James Valley Ethanol, LLC		Groton, SD		Corn		50
KAAPA Ethanol, LLC*		Minden, NE		Corn		40
Kansas Ethanol, LLC		Lyons, KS		Corn				55
Land O’ Lakes*		Melrose, MN		Cheese whey		2.6
Levelland/Hockley County Ethanol, LLC		Levelland, TX		Corn				40
Lincolnland Agri-Energy, LLC*		Palestine, IL		Corn		48
Lincolnway Energy, LLC*		Nevada, IA		Corn		50
Liquid Resources of Ohio		Medina, OH		Waste Beverage		3
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
Michigan Ethanol, LLC		Caro, MI		Corn		50
Mid America Agri Products/Wheatland		Madrid, NE		Corn				44
Mid-Missouri Energy, Inc.*		Malta Bend, MO		Corn		45
Midwest Renewable Energy, LLC		Sutherland, NE		Corn		25
Millennium Ethanol		Marion, SD		Corn				100
Minnesota Energy*		Buffalo Lake, MN		Corn		18
Missouri Ethanol		Laddonia, MO		Corn		45
Missouri Valley Renewable Energy, LLC*		Meckling, SD		Corn				60
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
Northeast Missouri Grain, LLC*		Macon, MO		Corn		45
Northern Lights Ethanol, LLC*		Big Stone City, SD		Corn		50
Northstar Ethanol, LLC		Lake Crystal, MN		Corn		52
Northwest Renewable, LLC		Longview, WA		Corn				55
Otter Creek Ethanol, LLC*		Ashton, IA		Corn		55
Otter Tail Ag Enterprises		Fergus Falls, MN		Corn				57.5
Pacific Ethanol		Madera, CA		Corn		35
		Boardman, OR		Corn				35
		Burley, ID		Corn				50
Panda Energy		Hereford, TX		Corn/milo				100
Panhandle Energies of Dumas, LP		Dumas, TX		Corn/Grain Sorghum				30
Parallel Products		Louisville, KY		Beverage waste		5.4
		R. Cucamonga, CA
Patriot Renewable Fuels, LLC		Annawan, IL		Corn				100
Penford Products		Ceder Rapids, IA		Corn				45
Permeate Refining		Hopkinton, IA		Sugars & starches		1.5
Phoenix Biofuels		Goshen, CA		Corn		25

 

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Pinal Energy, LLC		Maricopa, AZ		Corn				55
Pine Lake Corn Processors, LLC*		Steamboat Rock, IA		Corn		20
Pinnacle Ethanol, LLC		Corning, IA		Corn				60
Plainview BioEnergy, LLC		Plainview, TX		Corn				100
Platinum Ethanol, LLC*		Arthur, IA		Corn				110
Plymouth Ethanol, LLC*		Merrill, IA		Corn				50
Prairie Ethanol, LLC		Loomis, SD		Corn		60
Prairie Horizon Agri-Energy, LLC		Phillipsburg, KS		Corn		40
Premier Ethanol		Portland, IN		Corn				60
Pro-Corn, LLC*		Preston, MN		Corn		42
Quad-County Corn Processors*		Galva, IA		Corn		27
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		25		40
Siouxland Ethanol, LLC		Jackson, NE		Corn				50
Sioux River Ethanol, LLC*		Hudson, SD		Corn		50
Southwest Iowa Renewable Energy, LLC *		Council Bluffs, IA		Corn				110
Sterling Ethanol, LLC		Sterling, CO		Corn		42
Summit Ethanol		Leipsic, OH		Corn				60
Tall Corn Ethanol, LLC*		Coon Rapids, IA		Corn		49
Tama Ethanol, LLC		Tama, IA		Corn				100
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
Trenton Agri Products, LLC		Trenton, NE		Corn		40
United Ethanol		Milton, WI		Corn				52
United WI Grain Producers, LLC*		Friesland, WI		Corn		49
US BioEnergy Corp.		Albert City, IA		Corn		250		400^
		Woodbury, MI		Corn
		Hankinson, ND		Corn
		Central City , NE		Corn
		Ord, NE		Corn
		Dyersville, IA		Corn
		Janesville, MN		Corn
U.S. Energy Partners, LLC (White Energy)		Russell, KS		Milo/wheat starch		48
Utica Energy, LLC		Oshkosh, WI		Corn		48
VeraSun Energy Corporation		Aurora, SD		Corn		230		330
		Ft. Dodge, IA		Corn
		Charles City, IA		Corn

 

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		Welcome, MN		Corn
		Hartely, IA		Corn
Voyager Ethanol, LLC*		Emmetsburg, IA		Corn		52
Western New York Energy, LLC		Shelby, NY		Corn				50
Western Plains Energy, LLC*		Campus, KS		Corn		45
Western Wisconsin Renewable Energy, LLC*		Boyceville, WI		Corn		40
White Energy		Hereford, TX		Corn/Milo				100
Wind Gap Farms		Baconton, GA		Brewery waste		0.4
Renova Energy		Torrington, WY		Corn		5
Xethanol BioFuels, LLC		Blairstown, IA		Corn		5		35
Yuma Ethanol		Yuma, CO		Corn				40
Total Current Capacity at 114 ethanol biorefineries						5,633.4
Total Under Construction (80)/Expansions (7)								6,394.9
Total Capacity						12,028.3

 

* locally-owned
Updated: March 13, 2007

Competition with Ethanol Imported from Other Countries

Ethanol production is also expanding internationally.  Brazil has historically been a significant producer of ethanol for both its domestic and export markets.  According to the Renewable Fuels Association, in 2006, Brazil exported more than 400 million gallons of ethanol to the United States.  Further, ethanol produced or processed in certain countries in Central American and the Caribbean region is eligible for tariff reduction or elimination upon importation to the United States under a program known as the Caribbean Basin Initiative.  Large ethanol producers, such as Cargill, have expressed interest in building dehydration plants in participating Caribbean Basin countries, such as El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to the United States.  Ethanol imported from Caribbean Basin countries may be a less expensive alternative to domestically produced ethanol and may affect our ability to sell our ethanol profitably.

Recently, President Bush has entered into discussions with South American countries regarding increasing ethanol production in South America.  While there was no discussion regarding reducing or eliminating tariffs that protect ethanol produced in the United States from foreign competition, recent high ethanol prices in the United States have encouraged ethanol importation from South and Central American countries despite the tariffs.  Any reduction of tariffs could result in increased importation of ethanol from South and Central American countries which could create additional competition in the United States ethanol market and adversely affect the prices we receive for our ethanol.

Competition from Alternative Fuels

Our ethanol plant also competes with producers of other gasoline additives having similar octane and oxygenate values as ethanol, such as producers of MTBE, a petrochemical derived from methanol that costs less to produce than ethanol.  Although currently the subject of several state bans, many major oil companies can produce MTBE, and because it is petroleum-based, its use is strongly supported by major oil companies. 

Alternative fuels, gasoline oxygenates and alternative ethanol production methods are continually under development by ethanol and oil companies with far greater resources than we possess. The major oil companies have significantly greater resources than we have to develop alternative products and to influence legislation and public perception of MTBE and ethanol.  New ethanol products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages and harm our business.

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Distillers Grains Competition

Our plant primarily competes with other ethanol producers in the production and sales of distillers grains.  According to the University of Minnesota’s DDGS—General Information website (last updated January 30, 2007) approximately 3,200,000 to 3,500,000 tons of distillers grains are produced annually in North America, approximately 98% of which are produced by ethanol plants. The remaining 1 to 2% of DDGS is produced by the alcoholic beverage industry.  The amount of distillers grains produced is expected to increase significantly as the number of ethanol plants increase.  This could negatively impact the price at which we sell our distillers grains unless demand expands in relation to the expanding supply.  Our distillers grains compete with other livestock feed products such as soybean meal, corn gluten feed, dry brewers grain and mill feeds.

General Ethanol Demand and Supply

Ethanol has important applications, primarily as a high-quality octane enhancer and an oxygenate capable of reducing air pollution and improving automobile performance.  Ethanol contains 35% oxygen by weight.  As a result, gasoline, when blended with ethanol, burns cleaner, and releases less carbon monoxide and other exhaust emissions into the atmosphere.

According to the Renewable Fuels Association, demand for fuel ethanol in the United States continued to increase in 2006.  The implementation of the Renewable Fuels Standard contained in the Energy Policy Act of 2005 probably had little effect on increasing demand for ethanol because the ethanol industry easily surpassed the 4 billion gallon requirement for 2006.  The ethanol industry produced approximately 4.9 billion gallons of ethanol in 2006.  Projected production capacity for 2007 will exceed the RFS for 2007, requiring the ethanol industry to generate demand in excess of the RFS for 2007.  If the supply of ethanol increases at a more rapid rate than demand, the price at which we can sell our ethanol may decrease.  However, the passage of the Volumetric Ethanol Excise Tax Credit (“VEETC”), is expected to provide the flexibility necessary to expand ethanol blending into higher blends of ethanol such as E85, E diesel and fuel cell markets.  This might spur additional demand for ethanol that could help offset additional supply from increased ethanol production capacity that is set to come online in 2007.

Demand for ethanol may increase as a result of increased consumption of E85 fuel. E85 fuel is a blend of 85% ethanol and 15% gasoline. According to the Energy Information Administration, E85 consumption is projected to increase from a national total of 11 million gallons in 2003 to 47 million gallons in 2025. E85 is used as an aviation fuel and as a hydrogen source for fuel cells. According to the National Ethanol Vehicle Coalition, there are currently about 4.5 million flexible fuel vehicles capable of operating on E85 in the U.S. and approximately 1,200 retail stations supplying E85. Automakers have indicated plans to produce an estimated 2 million more flexible fuel vehicles per year.

The supply of domestically produced ethanol is at an all-time high. The Renewable Fuels Association reports that ethanol production in 2006 reached a record 4.9 billion gallons, an increase of more than 25% since 2005.  The following table shows U.S. ethanol production capacity by state as of February 2007:

Ethanol Production Capacity Ranked by State
(Largest to Smallest Production Capacity as of February 2007)

 

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Sources:  Renewable Fuels Association, Washington, DC.  Nebraska Energy Office, Lincoln, NE.

In addition to domestic increases in the supply of ethanol, as discussed above we face competition from international sources of ethanol, including ethanol produced in Caribbean Basin countries that may be eligible for tariff reductions or elimination pursuant to the Caribbean Basin Initiative.

Research and Development

We do not conduct any research and development activities associated with the development of new technologies for use in producing ethanol and distillers grains.

Dependence on One or a Few Major Customers

As discussed above, we have entered into marketing agreements for services related to marketing and distributing our principal products, ethanol and distillers grains.  Pursuant to our agreements with RPMG and CSC, we rely on others for the sale and distribution of almost all of our products, except for those distillers grains that we market locally.  Therefore, we expect to continue to be highly dependent on RPMG and CSC for the successful marketing of our products.  Any loss of RPMG or CSC as our marketing agent for our ethanol and distillers grains or any lack of performance under the agreement or inability to secure competitive prices could have a significant negative impact on our revenues.

Costs and Effects of Compliance with Environmental Laws

We are subject to extensive air, water and other environmental regulations, and we have been required to obtain a number of environmental permits to construct and operate the plant.  We have obtained all of the necessary permits to operate the plant including, air pollution construction permits, a pollutant discharge elimination system general permit, storm water discharge permits, a water withdrawal permit, and an alcohol fuel producer’s permit.  In addition, we have completed a spill prevention control and countermeasures plan.  Although we have been

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successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional permits or spend considerable resources on complying with such regulations.

In addition, we may be required to purchase and install equipment for controlling and improving emissions.  In fiscal year 2006, our costs of environmental compliance were approximately $81,000 compared to approximately $41,000 for the same period of 2005.  In 2006 we applied for renewal of our air permit which was not rejected by the State of South Dakota.

We are subject to oversight activities by the EPA.  There is always a risk that the EPA may enforce certain rules and regulations differently than South Dakota’s environmental administrators.  South Dakota or EPA rules are subject to change, and any such changes could result in greater regulatory burdens on plant operations.  We could also be subject to environmental or nuisance claims from adjacent property owners or residents in the area arising from possible foul smells or other air or water discharges from the plant.  Such claims may result in an adverse result in court if we are deemed to engage in a nuisance that substantially impairs the fair use and enjoyment of real estate.

The government’s regulation of the environment changes constantly.  It is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol.  For example, changes in the environmental regulations regarding the required oxygen content of automobile emissions could have an adverse effect on the ethanol industry.  Furthermore, plant operations are governed by the Occupational Safety and Health Administration (“OSHA”).  OSHA regulations may change such that the costs of the operation of the plant may increase.  Any of these regulatory factors may result in higher costs or other materially adverse conditions effecting our operations, cash flows and financial performance.

Employees

As of December 31, 2006, we had a total of 39 full-time employees, including 33 full-time employees in ethanol production operations and 6 full-time employees in general management and administration.  We do not expect to hire a significant number of employees in the next 12 months.

ITEM 1A.               RISK FACTORS.

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

Risks Relating to Our Business

Our financial performance is significantly dependent on corn and natural gas prices.  Our results of operations and financial condition are significantly affected by the cost and supply of corn and natural gas.  Generally, we cannot pass on increases in input prices to our customers.  Changes in the price and supply of corn and natural gas are subject to and determined by market forces over which we have no control.

Corn, as with most other crops, is affected by weather, disease and other environmental conditions.  The price of corn is also influenced by general economic, market and government factors.  These factors include weather conditions, farmer planting decisions, domestic and foreign government farm programs and policies, global demand supply and quality.  Changes in the price of corn can significantly affect our business. Generally, higher corn prices will produce lower profit margins and, therefore, represent unfavorable market conditions.  If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to generate revenues because of the higher cost of operating and may make ethanol uneconomical to use in fuel markets.  If our region becomes saturated by ethanol plants, corn use for ethanol could consume a significant portion of the total corn production in our region, which would likely increase local corn prices.  We cannot offer any assurance that we will be able to offset an increase in the price of corn by increasing the price of our products.  If we cannot offset increases in the

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price of corn, our financial performance may be materially and adversely affected should we experience sustained higher corn prices.

Natural gas has recently been available only at prices greatly exceeding historical averages.  These prices have increased our costs of production in the past.  The prices for and availability of natural gas are subject to volatile market conditions, including supply shortages and infrastructure incapacities.  Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol and distillers grains for our customers.  Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition.

We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments.  However, these hedging transactions also involve risks to our business.  See “Risks Relating to Our Business - We engage in hedging transactions.”

The spread between ethanol and corn prices can vary significantly.  Corn costs significantly impact our cost of goods sold.  Our gross margins are principally dependent upon the spread between ethanol and corn prices.  Recently, the spread between ethanol and corn prices has been at historically high levels, due in large part to high oil prices and low corn prices.  However, this spread fluctuated significantly in 2006 and may fluctuate significantly in the future.  Any reduction in the spread between ethanol and corn prices, whether as a result of an increase in corn prices or a reduction in ethanol prices, would adversely affect our results of operations and financial condition.

Our revenues will be greatly affected by the price at which we can sell our ethanol and distillers grains. The prices of ethanol and distillers grains can be volatile as a result of a number of factors. These factors include overall supply and demand, the price of gasoline, level of government support, and the availability and price of competing products. For instance, the price of ethanol tends to increase as the price of gasoline increases, and the price of ethanol tends to decrease as the price of gasoline decreases. Any lowering of gasoline prices will likely also lead to lower prices for ethanol, which may decrease our ethanol sales and reduce revenues.

The price of ethanol has recently been much higher than its 10-year average. We do not expect these prices to be sustainable as supply from new and existing ethanol plants increases to meet increased demand. Increased production of ethanol may lead to lower prices. The increased production of ethanol could have other adverse effects. For example, the increased production of ethanol could lead to increased supplies of co-products such as distillers grains. Those increased supplies could outpace demand, which would lead to lower prices for those co-products. Also, the increased production of ethanol could result in significantly increased demand for corn. This could result in higher prices for corn and corn production creating lower profits. There can be no assurance as to the price of ethanol or distillers grains in the future. Any downward changes in the price of ethanol and/or distillers grains may result in less income which would decrease our revenues and profitability.

Our business is not diversified.  Our success depends largely upon our ability to profitably operate our ethanol plant. We do not have any other lines of business or other sources of revenue if we are unable to operate our ethanol plant and manufacture ethanol and distillers grains.  If economic or political factors adversely affect the market for ethanol, the company has no other line of business to fall back on. Our business would also be significantly harmed if our ethanol plant could not operate at full capacity for any extended period of time.

Advances in ethanol production technology could require us to incur costs to update our plant or could otherwise hinder our ability to compete or operate profitably.  Advances and changes in the technology of ethanol production are expected to occur.  Such advances and changes may make the ethanol production technology installed in our plant less desirable or obsolete.  These advances could also allow our competitors to produce ethanol at a lower cost than us.  If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive.  Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures.  We cannot guarantee or assure you that third-party licenses will be available or, once obtained, will continue to be available on commercially reasonable terms, if at all.  These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.

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We sell all of the ethanol we produce to RPMG under our ethanol marketing agreement.  RPMG is the sole buyer of all of our ethanol, and we rely heavily on its marketing efforts to successfully sell our product.  Because RPMG sells ethanol for a number of other producers, we have limited control over its sales efforts.  Our financial performance is dependent upon the financial health of RPMG as a significant portion of our accounts receivable are attributable to RPMG.  If RPMG breaches the ethanol marketing agreement or is not in the financial position to purchase and market all of the ethanol we produce, we may not have any readily available means to sell our ethanol and our financial performance will be adversely and materially affected.  If our agreement with RPMG terminates, we may seek other arrangements to sell our ethanol, including selling our own product, but we give no assurance that our sales efforts would achieve results comparable to those achieved by RPMG.

We sell a substantial portion of the distillers grains we produce to CSC under our distillers grains marketing agreement.  CSC is the sole buyer of all of our distillers grains that we do not sell locally, and we rely heavily on its marketing efforts to successfully sell our product.  We currently only market locally a small percentage of the distillers grains we produce.  Because CSC sells distillers grains for a number of other producers, we have limited control over its sales efforts.  Our financial performance is dependent upon the financial health of CSC, as a significant portion of our accounts receivable are attributable to CSC.  If CSC breaches the distillers grains marketing agreement or is not in the financial position to purchase and market all of the distillers grains we produce which are not marketed locally by us, we may not have any readily available means to sell our distillers grains, and our financial performance will be adversely and materially affected.  If our agreement with CSC terminates, we may seek other arrangements to sell our distillers grains, including selling our own product, but we give no assurance that our sales efforts would achieve results comparable to those achieved by CSC.

We engage in hedging transactions that may be costly and ineffective.  We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process.  We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments.  The effectiveness of our hedging strategies is dependent upon the cost of corn and natural gas and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts.  There is no assurance that our hedging activities will successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn and natural prices. Alternatively, we may choose not to engage in hedging transactions in the future.  As a result, our results of operations and financial conditions may also be adversely affected during periods in which corn and/or natural gas prices increase.

Hedging activities themselves can result in costs because price movements in corn and natural gas contracts are highly volatile and are influenced by many factors that are beyond our control.  There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas.  However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.  We may incur such costs and they may be significant.

We are exploring a potential change in corporate structure, merger, public offering or business combination with one or more businesses which if we agreed to could be unsuccessful and could decrease the value of your units.  We have been engaged in preliminary discussions regarding a potential change in corporate structure, merger, public offering or business combination with one or more businesses.  While we have not entered into any kind of agreement or made any definitive plans regarding this issue we might in the future.  If we were to engage in this type of transaction, it might be unsuccessful.  This could lead to a reduction in the value of your units and could adversely affect our profitability.

Risks Related to Ethanol Industry

New plants or decreases in the demand for ethanol may result in excess production capacity.  The supply of domestically produced ethanol is at an all-time high. The Renewable Fuels Association reports that ethanol production in 2006 reached a record 4.9 billion gallons, an increase of approximately 25% since 2005.  The ethanol industry has grown to over 113 production facilities in the United States. Excluding our facility, South Dakota currently has at least 12 current ethanol plants and at least 4 more in various stages of development.  Excess capacity in the ethanol industry would have an adverse impact on our results of operations, cash flows and general financial

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condition.  Excess capacity may also result or intensify from increases in production capacity coupled with insufficient demand.  If the demand for ethanol does not grow at the same pace as increases in supply, we would expect the price for ethanol to decline.  If excess capacity in the ethanol industry occurs, the market price of ethanol may decline to a level that is inadequate to generate sufficient cash flow to cover our costs.

We operate in a competitive industry and compete with larger, better financed entities.  There is significant competition among ethanol producers with numerous producer and privately owned ethanol plants planned and operating throughout the Midwest and elsewhere in the United States.  The number of ethanol plants being developed and constructed in the United States continues to increase at a rapid pace. The recent passage of the Energy Policy Act of 2005 included a renewable fuels mandate that we expect will further increase the number of domestic ethanol production facilities.  The largest ethanol producers include Abengoa Bioenergy Corp., Archer Daniels Midland, ASAlliances Biofuels, LLC, Aventine Renewable Energy, Inc., Cargill, Inc., Hawkeye Renewables, LLC, New Energy Corp., Tate & Lyle, US Bioenergy Corp., and VeraSun Energy Corporation, all of which are each capable of producing more ethanol than we expect to produce.  Archer Daniels Midland is currently the largest ethanol producer in the U.S. and controls a significant portion of the ethanol market. If the demand for ethanol does not grow at the same pace as increases in supply, we expect that lower prices for ethanol will result which may adversely affect our ability to generate profits and harm our financial condition.

We compete with other gasoline additives.  Our ethanol plant also competes with producers of other gasoline additives made from raw materials other than corn having similar octane and oxygenate values as ethanol, such as producers of methyl tertiary butyl ether (MTBE). MTBE is a petrochemical derived from methanol which generally costs less to produce than ethanol. Many major oil companies produce MTBE and strongly favor its use because it is petroleum-based. Alternative fuels, gasoline oxygenates and alternative ethanol production methods are also continually under development. The major oil companies have significantly greater resources than we have to market MTBE, to develop alternative products, and to influence legislation and public perception of MTBE and ethanol. These companies also have significant resources to begin production of ethanol should they choose to do so.

Competition from the advancement of alternative fuels may lessen the demand for ethanol.  Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry offers a technological option to address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If the fuel cell and hydrogen industries continue to expand and gain broad acceptance, and hydrogen becomes readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.

Corn-based ethanol may compete with cellulose-based ethanol in the future.  Especially in the Midwest, most ethanol is currently produced from corn and other raw grains, such as milo or sorghum. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas which are unable to grow corn. Although current technology is not sufficiently efficient to be competitive, a recent report by the U.S. Department of Energy entitled “Outlook for Biomass Ethanol Production and Demand” indicates that new conversion technologies may be developed in the future. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. We do not believe it will be cost-effective to convert our ethanol plant into a plant which will use cellulose-based biomass to produce ethanol. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue and financial condition will be negatively impacted.

Ethanol imported from Caribbean basin countries may be a less expensive alternative to our ethanol.  Ethanol produced or processed in certain countries in Central America and the Caribbean region is eligible for tariff reduction or elimination upon importation to the United States under a program known as the Caribbean Basin

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Initiative. Large ethanol producers, such as Cargill, have expressed interest in building dehydration plants in participating Caribbean Basin countries, such as El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to the United States. Ethanol imported from Caribbean Basin countries may be a less expensive alternative to domestically produced ethanol. Competition from ethanol imported from Caribbean Basin countries may affect our ability to sell our ethanol profitably, adversely affect our results of operations and financial condition.

Ethanol imported from Brazil may be a less expensive alternative to our ethanol.  Brazil is currently the world’s largest exporter of ethanol.  Until recently, Brazil was also the world’s largest producer of ethanol.  In Brazil, ethanol is produced primarily from sugarcane, which is also used to produce food-grade sugar. In 2006, according to the Renewable Fuels Association, Brazil produced approximately 4.5 billion gallons of ethanol and exported a total of more than 400 million gallons of ethanol to the United States alone.  Ethanol imported from Brazil may be a less expensive alternative to domestically produced ethanol, which is primarily made from corn. Tariffs presently protecting U.S. ethanol producers may be reduced or eliminated. Competition from ethanol imported from Brazil may affect our ability to sell our ethanol profitably and adversely affect our financial condition.

Consumer beliefs may affect the demand for ethanol.  We believe that certain consumers perceive the use of ethanol to have a negative impact on gasoline prices at the pump. Some consumers also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil fuel energy, such as oil and natural gas, than the energy in the ethanol that is produced. These consumer beliefs could potentially be widespread. If consumers choose not to buy ethanol, it will affect the demand for the ethanol we produce which could lower the selling price of ethanol and negatively affect our profitability and financial condition.

Risks Related to Regulation and Governmental Action

A change in government policies favorable to ethanol may cause demand for ethanol to decline.  Growth and demand for ethanol may be driven primarily by federal and state government policies, such as state laws banning Methyl Tertiary Butyl Ether (MTBE) and the national tax incentives and the renewable fuels standard. The continuation of these policies is uncertain, which means that demand for ethanol may decline if these policies change or are discontinued. A decline in the demand for ethanol is likely to cause lower ethanol prices which in turn will negatively affect our results of operations, financial condition and cash flows.

Government incentives for ethanol production may be eliminated in the future.  The ethanol industry and our business are assisted by various federal ethanol tax incentives, including those included in the Energy Policy Act of 2005. The provision of the Energy Policy Act of 2005 likely to have the greatest impact on the ethanol industry is the creation of a 7.5 billion gallon Renewable Fuels Standard (RFS). The RFS will begin at 4 billion gallons in 2006, increasing to 7.5 billion gallons by 2012. The RFS helps support a market for ethanol that might disappear without this incentive. The elimination or reduction of tax incentives to the ethanol industry could also reduce the market for ethanol, which could reduce prices and our revenues by making it more costly or difficult for us to produce and sell ethanol. If the federal tax incentives are eliminated or sharply curtailed, we believe that a decreased demand for ethanol will result, which could negatively affect our profitability and financial condition.

Another important provision involves increasing the production capacity limit of plants that are eligible for the small ethanol producer tax credit. Small ethanol producers are allowed a 10-cents-per-gallon production income tax credit on up to 15 million gallons of production annually. The size of the plant eligible for the tax credit was historically limited to 30 million gallons. Under the Energy Policy Act of 2005 the size limitation on the production capacity for small ethanol producers increases from 30 million to 60 million gallons. This tax credit may foster additional growth in ethanol plants of a larger size and increase competition in this particular plant size category.

Changes in environmental regulations or violations of the regulations could reduce our profitability.  We are subject to extensive air, water and other environmental laws and regulations.  In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operation changes to limit actual or potential impacts to the environment.  A violation of these laws and regulations 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

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be at all times in complete compliance with these laws, regulations or permits or that we have had or have all permits required to operate our business.  We do not assure you that we will not be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits.  Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.

ITEM 2.                                                     PROPERTIES.

We own Dakota Ethanol as a wholly-owned subsidiary.  The ethanol plant is located on Dakota Ethanol’s 77 acre rural site near Wentworth, South Dakota. The plant grinds approximately 17 million bushels of corn per year to produce approximately 48 million gallons of ethanol.  The original construction of the plant was completed in 2001 and consists of the following buildings:

·                  A processing building, which contains processing equipment, laboratories, control room and offices;

·                  A grain receiving and shipping building;

·                  A mechanical building, which contains maintenance offices, storage and a welding shop; and

·                  An administrative building, along with furniture and fixtures, office equipment and computer and telephone systems.

The plant includes a fermenter walkway, gas dryer, evaporator and storage facilities for ethanol and distiller grains.  The site also contains improvements such as rail tracks and a rail spur, landscaping, drainage systems and access roads.

All of Dakota Ethanol’s tangible and intangible property, real and personal, serves as the collateral for debt financing with First National Bank of Omaha described below under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Indebtedness.”

ITEM 3.                                                     LEGAL PROCEEDINGS.

From time to time in the ordinary course of business, Dakota Ethanol or we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes.  We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the managers that could result in the commencement of legal proceedings.

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

We did not submit any matter to a vote of our unit holders through the solicitation of proxies or otherwise during the fourth quarter of 2006.

PART II

ITEM 5.                  MARKET FOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS AND ISSUER PURCHASES OF MEMBERSHIP UNITS.

Recent Sales of Unregistered Securities

None.

Market Information

There is no public trading market for our units.  Our units may only be transferred in accordance with our Capital Units Transfer System, which provides for transfers by gift to family members, upon death, and through a qualified matching service, subject to approval by our board of managers.  Our qualified matching service is

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operated through Variable Investment Advisors, Inc., a registered broker-dealer based in Sioux Falls, South Dakota.  Variable Investment Advisor’s Alternative Trading System may be accessed at www.agstocktrade.com. The matching service consists of an electronic bulletin board that provides information to prospective sellers and buyers of our units.  We do not receive any compensation relating to the matching service.  We have no role in effecting the transactions beyond approval, as required under our operating agreement and the issuance of new certificates.  So long as we remain a Section 12 registrant and a publicly reporting company, information about the company will be publicly available through the SEC’s filing system.  However, if at any time we cease to be a Section 12 registrant or publicly reporting company, we will continue to make information about the company publicly available on our website.

Unit Holders

As of February 1, 2007, the company had 29,620,000 membership units issued and outstanding and a total of approximately 1,003 membership unit holders.  There is no other class of membership unit issued or outstanding.

Distributions

Under the terms of our Amended and Restated Operating Agreement, we are required to make distributions to our members and may not retain more than $200,000 of net cash from operations, unless (1) a 75% supermajority of our board decides otherwise; (2) it would violate or cause a default under the terms of any debt financing or other credit facilities; or (3) it is otherwise prohibited by law.  Our ability to make distributions to our members is dependent upon the distributions made to us by Dakota Ethanol.  All revenues generated from plant operations are distributed by Dakota Ethanol to us in since Dakota Ethanol is our wholly-owned subsidiary.  Prior to the Broin family’s assignment of its minority interest in Dakota Ethanol, we would receive approximately 88% of the revenue generated by Dakota Ethanol.  We distribute the revenues received from Dakota Ethanol to our unit holders in proportion to the number of units held by each unit holder.  A unit holder’s distribution percentage is determined by dividing the number of units owned by such unit holder by the total number of units outstanding.  Our expectations with respect to our ability to make future distributions are discussed in greater detail in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Distributions to our unit holders are also subject to certain loan covenants and restrictions that require us to make additional loan payments based on excess cash flow.  These loan covenants and restrictions are described in greater detail under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Indebtedness.”

2006 Distributions

In fiscal year 2006, Dakota Ethanol made total cash distributions to LACP of approximately $13,300,000 and approximately $800,000 to the minority members.  As a result, our board of managers approved cash distributions to our members totaling $13,329,000.  The following chart lists the cash distributions made to our members in 2006:

Date of Board Approval		Total Distribution		Distribution Per Unit		Distributed to Members of Record as of:
February 15, 2006		$         2,962,000		$         0.10		January 1, 2006
April 11, 2006		$         2,962,000		$         0.10		January 1, 2006
August 25, 2006		$         2,962,000		$         0.10		May 1, 2006
November 17, 2006		$         4,443,000		$         0.15		September 1, 2006
Totals		$    13,329,000		$       0.45

 

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2005 Distributions

In fiscal year 2005, Dakota Ethanol made total cash distributions to LACP of approximately $11.8 million and approximately $1.6 million to the minority members.  As a result, our board of managers approved cash distributions to our members totaling $11,551,800.  The following chart lists the cash distributions made to our members in 2005:

Date of Board Approval		Total Distribution		Distribution Per Unit		Distributed to Members of Record as of:
December 20, 2004		$    2,073,400.00		$         0.07		January 1, 2005
February 18, 2005		$    2,962,000.00		$         0.10		January 1, 2005
April 15, 2005		$    1,777,200.00		$         0.06		January 1, 2005
August 26, 2005		$    1,777,200.00		$         0.06		May 1, 2005
December 16, 2005		$    2,962,000.00		$         0.10		September 1, 2005
Totals		$ 11,551,800.00		$       0.39

 

2004 Distributions

In 2004, Dakota Ethanol made cash distributions to LACP of approximately $4,100,000 million and approximately $600,000 to the minority members.  As a result, LACP distributed approximately $4,100,000 million, or $0.14 per capital unit, to our members in 2004.

Performance Graph

The following graph compares the cumulative total return on the Company’s units with the cumulative total return of the NASDAQ Index and the SIC Code Index (SIC Code 2869—Industrial Organic Chemicals, Not Elsewhere Classifed).  The unit price performance shown on the following graph is not intended to forecast and is not indicative of future unit price performance.  The data for this performance graph was compiled for us by Ipreo, LLC.

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ITEM 6.                  SELECTED FINANCIAL DATA.

The following table sets forth selected consolidated financial data of the Company, which is derived from the audited financial statements for the periods indicated.

Statement of Operations Data:		2006		2005		2004
Revenues		$  103,889,412		$   80,020,970		$   84,432,486
Cost of Revenues		$    50,792,418		$   63,201,108		$   71,736,360
Gross Profit		$    53,096,994		$   16,819,862		$   12,696,126
General and Administrative Expense		$    (3,938,845	)	$    (3,610,590	)	$    (3,058,024	)
Income From Operations		$    49,158,149		$   13,209,272		$     9,638,102
Interest Expense		$    (1,008,300	)	$    (1,089,364	)	$    (1,300,647	)
Other Income		$         121,719		$        238,705		$        223,548
Minority Interest in Subsidiary Income		$    (2,235,776	)	$    (1,494,029	)	$    (1,037,458	)
Net Income		$    46,035,792		$   10,864,584		$     7,523,545
Capital Units Outstanding		29,620,000		29,620,000		29,620,000
Net Income Per Capital Unit		$               1.55		$              0.37		$              0.25
Cash Distributions per Capital Unit		$               0.45		$              0.32		$              0.21

 

Balance Sheet Data:		2006		2005		2004
Working Capital		$   17,220,709		$      1,940,335		$       (145,791	)
Net Property, Plant & Equipment		$   35,695,754		$    33,468,374		$   34,862,856
Total Assets		$   71,223,028		$    42,946,122		$   46,065,440
Long-Term Obligations		$     6,921,695		$      8,601,196		$     9,882,779
Minority Interest		$                   0		$      3,234,649		$     3,055,597
Member’s Equity		$   56,720,382		$    24,013,590		$   22,627,406
Book Value Per Capital Unit		$              1.91		$               0.81		$              0.76

 

* See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of our financial results.

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

Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in “Item 1A - Risk Factors” and elsewhere in this annual report.  Our discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes and with the understanding that our actual future results may be materially different from what we currently expect.

Overview

We currently own Dakota Ethanol, LLC as a wholly-owned subsidiary.  In June 2006, we entered into an assignment agreement with members of the Broin family who owned a minority interest in Dakota Ethanol of

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approximately 12%.  We purchased the approximately 12% minority interest in Dakota Ethanol for approximately $19,400,000 which included the estimated net earnings of Dakota Ethanol through the date of the purchase.

Dakota Ethanol owns and operates an ethanol plant with a nameplate capacity of 40 million gallons per year.  The plant currently operates in excess of its nameplate capacity, producing approximately 48 million gallons of ethanol per year.  Our revenues are derived from the sale and distribution of Dakota Ethanol’s ethanol and distillers grains throughout the continental United States.  Corn is supplied to us primarily from our members who are local agricultural producers and from purchases of corn on the open market. After processing the corn, the ethanol is sold to our ethanol marketer, which subsequently markets and sells the ethanol to gasoline blenders and refineries located throughout the continental United States.  Beginning January 1, 2006, our ethanol has been  marketed by RMPG pursuant to our ethanol marketing agreement.  Previously our ethanol was marketed by a subsidiary of the Broin Company called Ethanol Products, LLC.  We have elected to use a pooled marketing arrangement with RPMG which means that the ethanol we produce is pooled with other ethanol producers and marketed by RPMG.  We pay RPMG a pooling fee for ethanol delivered to the pool, and RPMG pays us a netback price per gallon that is based upon the difference between the pooled average delivered ethanol selling price and the pooled average distribution expense.  These averages are calculated based upon each pool participant’s selling price and expense averaged in direct proportion to the volume of ethanol supplied by each participant to the pool.  Except for the distillers grains we sell directly to local farmers, our distillers grains are sold through a marketer that markets and sells our distillers grains to livestock feeders.  From the commencement of our operations through December 1, 2005, Dakota Gold Marketing, a Broin affiliate, marketed our distillers grains.  Subsequent to December 1, 2005, our distillers grains have been marketed by Commodity Specialist Company (CSC).  For our distillers grains, we receive a percentage of the selling price actually received by CSC in marketing the distillers grains to its customers.

Our operating income or loss is significantly tied to the price at which ethanol and distillers grains are sold.  Historically, the price of ethanol tends to fluctuate based on the price of unleaded gasoline and other petroleum products.  Surplus ethanol supplies also tend to put downward price pressure on ethanol.  In contrast, the price of distillers grains generally tends to fluctuate based on the price of substitute livestock feed, such as corn and soybean meal.  Surplus grain supplies tend to put downward price pressure on distillers grains.

Our cost of revenues, which includes production expenses, is significantly affected by the cost of corn and natural gas.  In 2006, for instance, the cost of corn was approximately 54% of total cost of revenues, whereas the cost of natural gas was approximately 27% of total cost of revenues.  Comparatively, in 2005, the cost of corn was approximately 50% of total cost of revenues, whereas the cost of natural gas was approximately 23% of total cost of revenues.  The cost of corn is affected primarily by supply and demand factors such as crop production, carryout, exports, risk management and weather, much of which we have no control over.  Natural gas prices fluctuate with the energy complex in general.  Over the last few years, natural gas prices have trended higher than average.  We anticipate that natural gas prices will be stable if not slightly lower in fiscal year 2007 as compared to fiscal year 2006.

We are subject to industry-wide factors that affect our revenues and profits.  These factors include, but are not limited to, the available supply and cost of corn from which our ethanol and distillers grains are made; the cost of natural gas, which we use in the production of ethanol and distillers grains; dependence on one or a few major customers who market and distribute our products; the intensely competitive nature of our industry; possible legislation at the federal, state, and/or local level; changes in federal ethanol tax incentives; and the cost of complying with the extensive environmental laws that regulate our industry.

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