10-K

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TABLE OF CONTENTS
FINANCIAL STATEMENTS
EXHIBITS AND FINANCIAL STATEMENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2012.
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                    to                    .

Commission File Number 000-51825

Heron Lake BioEnergy, LLC
(Exact name of registrant as specified in its charter)

Minnesota
(State or other jurisdiction of
incorporation or organization) 41-2002393
(IRS Employer
Identification No.)

91246 390th Avenue, Heron Lake, MN 56137-1375
(Address of principal executive offices)

Registrant's telephone number, including area code: (507) 793-0077

Securities registered pursuant to Section 12(b) of the Act:	Securities registered pursuant to Section 12(g) of the Act:
Class A Units	None

        Name of Exchange on Which Registered: None

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

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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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.    ý

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer ý Smaller Reporting Company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Act) Yes o    No ý

        As of April 30, 2012, the aggregate market value of the Company's Class A Units held by non-affiliates is not able to be calculated. The Company is a limited liability company whose outstanding common equity, consisting of its Class A Units, is subject to significant restrictions on transfer under its Member Control Agreement. No public market for common equity of Heron Lake BioEnergy, LLC is established and it is unlikely in the foreseeable future that a public market for its common equity will develop.

        As of February 11, 2013, the Company had outstanding 38,622,107 Class A Units.

DOCUMENTS INCORPORATED BY REFERENCE:

        None.

PART I
Item 1.	Business	3
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	30
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosures	31
PART II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
Item 6.	Selected Financial Data	33
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	49
Item 8.	Financial Statements and Supplementary Data	51
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	52
Item 9A.	Controls and Procedures	52
Item 9B.	Other Information	53
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	54
Item 11.	Executive Compensation	59
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	63
Item 13.	Certain Relationships and Related Transactions, and Director Independence	65
Item 14.	Principal Accountant Fees and Services	67
PART IV
Item 15.	Exhibits and Financial Statement Schedules	68
SIGNATURES		69

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PART I

        When we use the terms "Heron Lake BioEnergy," "we," "us," "our," the "Company", "HLBE" or similar words in this Annual Report on Form 10-K, unless the context otherwise requires, we are referring to Heron Lake BioEnergy, LLC and its subsidiaries, Lakefield Farmers Elevator, LLC, with grain facilities at Lakefield and Wilder, Minnesota, and HLBE Pipeline Company, LLC. Additionally, when we refer to "units" in this Annual Report on Form 10-K, unless the context otherwise requires, we are referring to the Class A units of Heron Lake BioEnergy, LLC.

CAUTION 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 on 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 under Part I, Item 1A. "Risk Factors" of this Form 10-K.

        We undertake no duty to update these forward-looking statements, even though our situation may change in the future. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.

ITEM 1.    BUSINESS

Overview

        We were organized as a Minnesota limited liability company on April 12, 2001 under the name "Generation II, LLC." In June 2004, we changed our name to Heron Lake BioEnergy, LLC.

        We operated a dry mill, coal fired ethanol plant in Heron Lake, Minnesota. After completing a conversion in November 2011, we are now a natural gas fired ethanol plant. Our subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas, LLC, the pipeline company formed to construct, own, and operate a natural gas pipeline that provides natural gas to the Company's ethanol production facility through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota. Our subsidiary, Lakefield Farmers Elevator, LLC, has grain facilities at Lakefield and Wilder, Minnesota. At nameplate, our ethanol plant has the capacity to process approximately 18.0 million bushels of corn each year, producing approximately 50 million gallons per year of fuel-grade ethanol and approximately 160,000 tons of distillers' grains with soluble ("DGS"). On September 21, 2007, we began operations at ethanol plant. Fiscal year 2007 was the first fiscal year that includes any revenue generated from our operations. In fiscal years 2012 and 2011 which ended October 31, 2012 and 2011, we sold approximately 58.2 and 53.4 million gallons of ethanol, respectively.

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        The following table sets forth a summary of significant milestones in our company's history until we began operations at our plant.

Date	Milestone
February 2002	We obtained an option on land that is now part of the 216 acre site of our ethanol plant.
October 2003	We entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors.
Early 2004	We selected Fagen, Inc. to be the design-build firm to build our ethanol plant near Heron Lake, Minnesota, using process technology provided by ICM, Inc.
September 2005	We entered into a Standard Form of Agreement between Owner and Designer—Lump Sum with Fagen, Inc.
December 2005	We purchased certain assets relating to elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota with a combined storage capacity of approximately 2.8 million bushels.
May 2006	We entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County.
August 2006	We entered into an electric service agreement with Interstate Power and Light Company (a wholly-owned subsidiary of Alliant Energy Corporation).
December 2006	We entered into a contract with Federated Rural Electric Association for the construction of the distribution system and electrical substation for the plant.
June 2007	We entered into a master coal supply agreement with Northern Coal Transportation Company (NCTC) to provide Powder River Basin (PRB) coal for the plant.
June 2007	We entered into a coal transloading agreement with Southern Minnesota Beet Sugar Cooperative (SMBSC).
September 2007	We began operations at our dry mill, coal fired ethanol plant.

Production

        Since the beginning of operations at our ethanol plant, our primary business is the production and sale of ethanol and co-products, including dried distillers' grains. We currently do not have or anticipate we will have any other lines of business or other significant sources of revenue other than the sale of ethanol and ethanol co-products.

Our Ethanol Plant

        Our ethanol plant was designed and built by Fagen Inc. under a September 2005 design-build agreement who used certain proprietary property and information of ICM, Inc. in the design and construction of our ethanol plant.

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        Our ethanol plant uses a dry milling process to produce fuel-grade ethanol and distillers' grains. The dry milling process involves grinding the entire corn kernel into flour and the starch is converted to ethanol through fermentation that also produces carbon dioxide and distillers' grains.

        The ethanol plant consists principally of a natural gas combustion area; storage and processing areas for corn; a fermentation area comprised mainly of fermentation tanks; a distillation finished product storage area; and a drying unit for processing the dried distillers' grains. Additionally, the ethanol plant contains receiving facilities that have the ability to receive corn by rail and truck, store it for use in the plant and prepare the corn to be used in the plant. We have storage tanks on site to store the ethanol we produce. The plant also contains a storage building and silos to hold distillers' grains until it is shipped to market.

        The Union Pacific Railroad is the railroad adjacent to our ethanol plant. The ethanol plant has the facilities necessary to receive corn by truck and rail, coal by truck, and to load ethanol and distillers grains onto trucks and rail cars.

        Our ethanol plant requires significant and uninterrupted amounts of electricity, natural gas and water. We have entered into agreements for our supply of electricity, natural gas and water.

        We are required to comply with various requirements of state and federal law regulating the operations at our plant, including regulations relating to air emissions. On July 2, 2010, we entered into a mutual release and settlement agreement with Fagen, Inc. and ICM, Inc. relating to the arbitration commenced by us in September 2009 in which we asserted claims against Fagen based on the design-build agreement for our ethanol plant and the plant's air emissions. Please review the section entitled "Compliance with Environmental Laws and Other Regulatory Matters" for a description of how compliance with regulatory requirements, including requirements relating to air emissions, has impacted our business.

Our Principal Products

        The principal products that we produce are fuel grade ethanol and distillers' grains. Raw carbon dioxide is also a product of the ethanol production process, but we do not capture or market any carbon dioxide gas.

Ethanol

        Ethanol is a type of alcohol produced in the U.S. principally from corn. Ethanol is primarily used in the U.S. gasoline fuel market as:

•

an octane enhancer in fuels;

•

an oxygenated fuel additive that can reduce ozone and carbon monoxide vehicle emissions;

•

a gasoline substitute generally known as E85, a fuel blend composed of 85% ethanol; and

•

as a renewable fuel to displace consumption of imported oil.

        Ethanol used as an octane enhancer or fuel additive is blended with unleaded gasoline and other fuel products. The principal purchasers of ethanol are generally wholesale gasoline distributors or blenders.

Distillers' Grains

        The principal co-product of the ethanol production process is distillers' grains, a high protein and high-energy animal feed ingredient.

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        Dry mill ethanol processing creates three primary forms of distillers' grains: wet distillers' grains, modified wet distillers' grains, and dried distillers' grains with solubles. Wet distillers' grains are processed corn mash that contains a substantial amount of moisture. It has a shelf life of approximately three days and is primarily sold to feeders of beef animals within the immediate vicinity of the ethanol plant. Modified wet distillers' grains are similar to wet distillers' grains except that it has been partially dried and contains less moisture. Modified wet distillers' grains has a shelf life of a maximum of fourteen days, contains less water to transport, is more easily adaptable to some feeding systems, and is sold to both local and regional markets, primarily for both beef and dairy animals. Dried distillers' grains with solubles are corn mash that has been dried to approximately 10% moisture. It has an almost indefinite shelf life and may be sold and shipped to any market and to almost all types of livestock. Most of the distillers' grains that we sell are in the form of dried distillers' grains.

Procurement and Marketing Agreements

Corn Procurement

        The primary raw material used in the production of ethanol at our plant is corn. We need to procure approximately 18 million bushels of corn per year for our dry mill ethanol process. We generally do not have long-term, fixed price contracts for the purchase of corn and our members are not obligated to deliver corn to us. Typically, we purchase our corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.

        We generally purchase corn through cash fixed-price contracts and may utilize hedging positions in the corn futures market for a portion of our corn requirements to manage the risk of excessive corn price fluctuations. Our fixed-price forward contracts specify the amount of corn, the price and the time period over which the corn is to be delivered. These forward contracts are at fixed prices or prices based on the Chicago Board of Trade (CBOT) prices. Our corn requirements can be forward contracted on either a fixed-price basis or futures only contracts. The parameters of these contracts are based on the local supply and demand situation and the seasonality of the price. We also purchase a portion of our corn on a spot basis.

        The price and availability of corn is subject to significant fluctuation depending upon a number of factors that affect commodity prices generally. These include, among others, crop conditions, crop production, weather, government programs, and export demands.

Natural Gas Procurement

        The primary source of energy in our manufacturing process is natural gas. We have a facilities agreement with Northern Border Pipeline Company which allows us access to an existing interstate natural gas pipeline located approximately 16 miles north from our plant. We entered into a transportation agreement with Agrinatural Gas, LLC ("Agrinatural Gas"). Agrinatural Gas, owned by our subsidiary, HLBE Pipeline Company, LLC, and Rural Energy Solutions, was formed to own and operate the pipeline. Our Company owns 73% of the pipeline and its associated delivery of natural gas to the plant.

        We also have a base agreement for the sale and purchase of natural gas with Constellation NewEnergy—Gas Division, LLC ("Constellation"). We buy all of our natural gas from Constellation and this agreement runs for a three year period from November 1, 2011 to October 31, 2014.

Ethanol and Distillers' Grains Marketing

        Effective September 1, 2011, the Company entered into certain marketing, corn supply and corn storage agreements with Gavilon, LLC ("Gavilon") to market the Company's ethanol and distillers' grains products and to supply the Company's ethanol production facility with corn. Gavilon is now the

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exclusive corn supplier and ethanol and distillers' grains marketer for the Company's production facility beginning September 1, 2011 and for an initial term of two years. The Company believes that working with Gavilon to manage the Company's marketing and procurement needs will provide a comprehensive solution to help the Company achieve its risk management objectives in a competitive market and will enable the Company to reduce its working capital requirements and more effectively manage its processing margins in both spot and forward markets.

        The Company pays Gavilon a supply fee consisting of a per bushel fee based on corn processed at the facility and a cost of funds component determined on the amount of corn financed by Gavilon for supply to the Company's ethanol production facility based on the length of time between when Gavilon pays for the corn stored in or en route to or from the Company's elevator facilities or production facility, and when the Company is invoiced for that corn at the time it is processed at the Company's production facility. The supply fee was negotiated based on prevailing market-rate conditions for comparable corn supply services. Both Gavilon and the Company have the ability to originate the corn requirements for the production facility. On the effective date of the corn supply Agreement, Gavilon purchased all corn inventory currently owned by the Company and located at its production facility or elevator facilities, at current market prices, to facilitate the transition to Gavilon supplying 100% of the Company's corn requirements at the production facility and the repayment of the Company's line of credit with AgStar Financial Services, PCA ("AgStar").

        Under the ethanol and distillers' grains marketing agreement, Gavilon will purchase, market and resell 100% of the ethanol and distillers grains products produced at the Company's ethanol production facility and the Company will pay Gavilon a marketing fee based on a percentage of the applicable sale price of the ethanol and distillers grains products. The marketing fees were negotiated based on prevailing market-rate conditions for comparable ethanol and distillers grains marketing services. On the effective date of the marketing agreement, Gavilon purchased all ethanol and distillers grains inventory currently owned by the Company and located at the Company's production facilities, at current market prices.

        The Company entered into a master netting agreement under which payments by the Company to Gavilon for corn under the corn supply agreement will be netted against payments by Gavilon to the Company for ethanol and distillers' grains products produced and sold to Gavilon under the marketing agreement. Under the terms of the master netting agreement, the Company is giving Gavilon a first priority security interest in, and a right of set off against, the Company's non-fixed assets including any rights it has to corn under the corn supply agreement, ethanol and distillers' grains under the marketing agreement, the work-in-process at the Company's ethanol production facility, and the other transactions under the Gavilon agreements. The master netting agreement is integral to the transition to the Gavilon agreements, and the termination and payoff of the Company's seasonal revolving line of credit with AgStar.

        As part of the transition to the Gavilon agreements, the Company entered into a termination agreement with CHS Inc. and C&N to terminate the marketing agreements the Company had with each, with termination dates of August 31, 2011 for each. The Company assumed certain rail car leases with the termination of the ethanol marketing agreement and paid a termination fee of $325,000 over the remaining term of the original contract, which ended on September 30, 2012.

        Due to the anticipated sale of the plant assets, the Company plans to terminate its relationship with Gavilon. An agreed upon settlement due to the Company's early termination is expected to be approximately $635,000.

Pricing of Corn and Ethanol

        The sale of ethanol represented approximately 76% of our revenue for the year ended October 31, 2012. The cost of corn represented approximately 82% of our cost of sales for the year ended

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October 31, 2012. We expect that ethanol sales will represent our primary revenue source and corn will represent our primary component of cost of goods sold. Therefore, changes in the price at which we can sell the ethanol we produce and the price at which we buy corn for our ethanol plant present significant operational risks inherent in our business.

        Generally, the price at which ethanol can be sold does not track with the price at which corn can be bought. Historically, ethanol prices have tended to correlate with wholesale gasoline prices, with demand for and the price of ethanol increasing as supplies of petroleum decreased or appeared to be threatened, crude oil prices increased and wholesale gasoline prices increased. However, the prices of both ethanol and corn do not always follow historical trends. Trends in ethanol prices and corn prices are subject to a number of factors and are difficult to predict.

Demand for Ethanol

        In recent years, the demand for ethanol has increased, particularly in the upper Midwest, in part because of two major programs established by the Clean Air Act Amendments of 1990: the Oxygenated Gasoline Program and the Reformulated Gasoline Program. Under these programs, an additive (oxygenate) is required to be blended with gasoline used in areas with excessive carbon monoxide or ozone pollution to help mitigate these conditions. Because of the potential health and environmental issues associated with methyl tertiary butyl ether (MTBE) and the actions of the EPA, ethanol is now used as the primary oxygenate in those areas requiring an oxygenate additive pursuant to state or federal law. A clean air additive is a substance that, when added to gasoline, reduces tailpipe emissions, resulting in improved air quality characteristics. Ethanol contains 35% oxygen, approximately twice that of MTBE, a historically used oxygenate. The additional oxygen found in ethanol results in more complete combustion of the fuel in the engine cylinder, which reduces tailpipe emissions by as much as 30%, including a 12% reduction in volatile organic compound emissions when blended at a 10% level. Pure ethanol, which is non-toxic, water soluble and biodegradable, replaces some of the harmful gasoline components, including benzene. The Unites States consumes approximately 135-140 billion gallons of gasoline a year. More than 95% of those gallons were blended with ethanol, predominantly at the E10 (ten percent ethanol) level. In 2011, the United States produced and consumed 13.9 billion gallons of ethanol representing 10.1% of the 136.6 billion gallons of finished motor gasoline consumed.

        In addition to demand for ethanol as an oxygenate, ethanol demand has increased because of the adoption of programs setting national renewable fuels standards (RFS). The first RFS program (RFS1) was introduced through the Energy Policy Act of 2005. RFS1 required 7.5 billion gallons of renewable fuel to be blended into gasoline by 2012. With the passage of the Energy Independence and Security Act of 2007, Congress made several important revisions to the RFS that required the EPA to promulgate new regulations to implement these changes. In February 2010, the EPA established the revised annual renewable fuel standard (RFS2) and to make the necessary program modifications as set forth in the Energy Independence and Security Act of 2007. Further, for the first time, the EPA set volume standards for specific categories of renewable fuels including cellulosic, biomass-based diesel, and total advanced renewable fuels. In order to qualify for these new volume categories, fuels must demonstrate that they meet certain minimum greenhouse gas reduction standards, based on a lifecycle assessment, in comparison to the petroleum fuels they displace. Our ethanol does not qualify for the new volume categories of renewable fuels and therefore, the total renewable fuel requirement for each year will be most relevant to the demand for, and required use of, ethanol such as ours. Under RFS2, the total renewable fuel requirement will increase from 12.95 billion gallons in 2010 to 36 billion gallons by 2022. Of the 16.55 billion gallons of total renewable fuel required for 2013, 1.0 billion gallons must be from cellulosic biofuels and 2.75 billion gallons must be from advanced biofuels, with the remaining 12.8 billion gallons consisting of other renewable fuels. Of the 36 billion gallons of total renewable fuel required for 2022, 16 billion gallons must be from cellulosic biofuels and 21 billion gallons must be from advanced biofuels, with the remaining gallons consisting of other renewable fuels.

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Current ethanol production capacity exceeds the 2013 RFS requirement which can be satisfied by corn based ethanol. We believe the RFS program creates greater market for renewable fuels, such as ethanol, as a substitute for petroleum-based fuels.

        The Volumetric Ethanol Excise Tax Credit ("VEETC"), often commonly referred to as the "blender's credit", was created by the American Jobs Creation Act of 2004. This credit allowed gasoline distributors who blend ethanol with gasoline to receive a federal excise tax credit of $0.45 per gallon of pure ethanol used, or $0.045 per gallon for E10 and $0.3825 per gallon for E85. To ensure the blender's credit spurred growth in domestic production, federal policy also insulated the domestic ethanol industry from foreign competition by levying a $0.54 per gallon tariff on all imported ethanol. The VEETC and tariff expired on December 31, 2011.

Markets for Ethanol

        There are local, regional, national and international markets for ethanol. Typically, a regional market is one that is outside of the local market, yet within the neighboring states. Some regional markets include large cities that are subject to anti-smog measures in either carbon monoxide or ozone non-attainment areas, or that have implemented oxygenated gasoline programs, such as Chicago, St. Louis, Denver and Minneapolis. We consider our primary regional market to be large cities within a 450-mile radius of our ethanol plant. In the national ethanol market, the highest demand by volume is primarily in the southern United States and the east and west coast regions.

        The markets in which our ethanol is sold will depend primarily upon the efforts of Gavilon, which buys and markets our ethanol. However, we believe that local markets will be limited and must typically be evaluated on a case-by-case basis. Although local markets will be the easiest to service, they may be oversold because of the number of ethanol producers near our plant, which may depress the price of ethanol in those markets.

        We transport our ethanol primarily by rail. In addition to rail, we service certain regional markets by truck from time to time. We believe that regional pricing tends to follow national pricing less the freight difference.

        We believe that the E10 "blend wall" is one of the most critical governmental policies currently facing the ethanol industry. The "blend wall" issue arises because of several conflicting requirements. First, the renewable fuels standards dictate a continuing increase in the amount of ethanol blended into the national gasoline supply. Second, the EPA mandates a limit of 10% ethanol inclusion in non-flex fuel vehicles, and the E85 vehicle marketplace is struggling to grow due to lacking infrastructure. Total gasoline usage by the U.S. is expected to decrease over the next 5 years as fuel mileage standards are changed. RFS2 dictates an increasing amount of blending of total renewable fuels: 16.55 billion gallons in 2013 increasing to 36 billion gallons by 2022. To reach the standard as dictated by RFS2 in 2013, assuming 136 billion gallons of total gasoline usage nationally, each gallon of gasoline sold would have to be blended with greater than 10% ethanol. The EPA limit of 10% ethanol inclusion in non-flex fuel vehicles and the RFS increasing blend rate are at odds, which is sometimes referred to as the "blend wall." In order to drive growth in ethanol usage, Growth Energy, an ethanol industry trade association, requested a waiver from the EPA to increase the allowable amount of ethanol blended into gasoline from the current 10% level to a 15% level. On October 13, 2010, EPA granted a first partial waiver for E15 for use in model year 2007 and newer light-duty motor vehicles (i.e., cars, light-duty trucks and medium-duty passenger vehicles). On January 21, 2011, EPA granted the second partial waiver for E15 for use in model year 2001-2006 light-duty motor vehicles. On June 15, 2012, EPA took additional action allowing E15 to be used more broadly in vehicles with model years 2001 and later. Although regulatory issues remain in many states, E15 is now available in limited locations in a number of states. This issue is a major risk to the ethanol industry and management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the labeling requirements the EPA may impose. The EPA is considering instituting labeling requirements associated with E15 which may unfairly discourage consumers from purchasing E15. As a result, the approval of E15 may not significantly increase demand for ethanol.

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Markets for Distillers' Grains

        We sell distillers' grains as animal feed for beef and dairy cattle, poultry and hogs. However, the modified wet distillers' grains typically have a shelf life of a maximum of fourteen days. This provides for a much smaller market and makes the timing of its sale critical. Further, because of its moisture content, the modified wet distillers' grains are heavier and more difficult to handle. The customer must be close enough to justify the additional handling and shipping costs. As a result, modified wet distillers' grains are principally sold only to local feedlots and livestock operations.

        Various factors affect the price of distillers' grain, including, among others, the price of corn, soybean meal and other alternative feed products, the performance or value of distillers' grains in a particular feed market, and the supply and demand within the market. Like other commodities, the price of distillers' grains can fluctuate significantly.

Competition

Producers of Ethanol

        We sell our ethanol in a highly competitive market. We are in direct competition with numerous other ethanol producers, both regionally and nationally, many of which have more experience and greater resources than we have. Some of these producers are, among other things, capable of producing a significantly greater amount of ethanol or have multiple ethanol plants that may help them achieve certain benefits that we could not achieve with one ethanol plant. Further, new products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages over us and harm our business. A majority of the ethanol plants in the U.S. and the greatest number of gallons of ethanol production are located in the corn-producing states, such as Iowa, Nebraska, Illinois, Minnesota, Indiana, South Dakota, Wisconsin, Ohio, Kansas, and North Dakota.

        According to the Renewable Fuels Association (RFA), as of January 2012, approximately 207 biorefineries have nameplate capacity of 14.9 billion gallons of ethanol per year.

        Below is the U.S. ethanol production by state in millions of gallons for the ten states with the most total ethanol production as of January 2012:

State	Nameplate		Operating		Under Construction/ Expansion		Total
Iowa		3,625.0		3,625.0		115		3,740.0
Nebraska		2,108.0		1,973.0		0		2,108.0
Illinois		1,486.0		1,486.0		0		1,486.0
Minnesota		1,147.1		1,129.1		0		1,147.1
Indiana		1,147.0		1,147.0		0		1,147.0
South Dakota		1,009.0		1,009.0		0		1,009.0
Wisconsin		504.0		504.0		0		504.0
Ohio		538.0		478.0		0		538.0
Kansas		491.5		411.5		25		516.5
North Dakota		393.0		383.0		0		393.0
Total		12,448.6		12,145.6		140		12,588.6

Source: Renewable Fuels Association, January 2012

        Because Minnesota is one of the top producers of ethanol in the U.S., we face increased competition because of the location of our ethanol plant in Minnesota. Therefore, we compete with other Minnesota ethanol producers both for markets in Minnesota and markets in other states.

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        In addition to intense competition with local, regional and national producers of ethanol, we expect increased competition from imported ethanol and foreign producers of ethanol. Ethanol imported to the U.S. was subject to a 2.5 percent ad valorem tax and an additional 54 cents a gallon surcharge, both of which expired on December 31, 2011. As a result, we will face increased competition from imported ethanol and foreign producers of ethanol.

Producers of Other Fuel Additives and Alternative Fuels

        In addition to competing with ethanol producers, we also compete with producers of other gasoline oxygenates. Many gasoline oxygenates are produced by other companies, including oil companies, that have far greater resources than we have. Historically, as a gasoline oxygenate, ethanol primarily competed with two gasoline oxygenates, both of which are ether-based: MTBE (methyl tertiary butyl ether) and ETBE (ethyl tertiary butyl ether). Many states have enacted legislation prohibiting the sale of gasoline containing certain levels of MTBE or are phasing out the use of MTBE because of health and environmental concerns. As a result, national use of MTBE has decreased significantly in recent years. Use of ethanol now exceeds that of MTBE and ETBE as a gasoline oxygenate.

        While ethanol has displaced these two gasoline oxygenates, the development of ethers intended for use as oxygenates is continuing and we will compete with producers of any future ethers used as oxygenates.

        A number of automotive, industrial and power generation manufacturers are developing alternative fuels and power systems, both for vehicles and other applications. Fuel cells have emerged as a potential alternative power system 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.

        Additionally, there are more than a dozen alternative and advanced fuels currently in development, production or use, including the following alternative fuels that, like ethanol, have been or are currently commercially available for vehicles:

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biodiesel

•

electricity

•

hydrogen

•

methanol

•

natural gas

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propane

        Several emerging fuels are currently under development. Many of these fuels are also considered alternative fuels and may have other benefits such as reduced emissions or decreasing dependence upon oil. Examples of emerging fuels include:

•

Biobutanol: Like ethanol, biobutanol is an alcohol that can be produced through the processing of domestically grown crops, such as corn and sugar beets, and other biomass, such as fast-growing grasses and agricultural waste products.

•

Biogas: Biogas is produced from the anaerobic digestion of organic matter such as animal manure, sewage, and municipal solid waste. After it is processed to required standards of purity, biogas becomes a renewable substitute for natural gas and can be used to fuel natural gas vehicles.

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•

Fischer-Tropsch Diesel: Diesel made by converting gaseous hydrocarbons, such as natural gas and gasified coal or biomass, into liquid fuel, including transportation fuel

•

Hydrogenation-Derived Renewable Diesel (HDRD): The product of fats or vegetable oils—alone or blended with petroleum—that has been refined in an oil refinery

•

P-Series: A blend of natural gas liquids (pentanes plus), ethanol, and the biomass-derived co-solvent methyltetrahydrofuran (MeTHF) formulated to be used in flexible fuel vehicles

•

Ultra-Low Sulfur Diesel: This is diesel fuel with 15 parts per million or lower sulfur content. This ultra-low sulfur content enables the use of advanced emission control technologies on vehicles using ULSD fuels produced from non-petroleum and renewable sources that are considered alternative fuels.

        Additionally, there are developed and developing technologies for converting natural gas, coal and biomass to liquid fuel, including transportation fuels such as gasoline, diesel, and methanol.

        We expect that competition will increase between ethanol producers, such as HLBE, and producers of these or other newly developed alternative fuels or power systems, especially to the extent they are used in similar applications such as vehicles.

Producers of Distillers' Grains

        The amount of distillers' grains produced annually in North America is expected to increase significantly as the number of ethanol plants increase. We compete with other producers of distillers' grains products both locally and nationally, with more intense competition for sales of distillers' grains among ethanol producers in close proximity to our ethanol plant. There are seven ethanol plants within an approximate 50 mile radius of our plant with a combined ethanol capacity of 436 million gallons that will produce approximately 1.5 million tons of distillers' grains. These competitors may be more likely to sell to the same markets that we target for our distillers' grains.

        Additionally, distillers' grains compete with other feed formulations, including corn gluten feed, dry brewers' grain and mill feeds. The primary value of these products as animal feed is their protein content. Dry brewers' grain and distillers' grains have about the same protein content, and corn gluten feed and mill feeds have slightly lower protein contents. Distillers' grains contain nutrients, fat content, and fiber that we believe will differentiate our distillers' grains products from other feed formulations. However, producers of other forms of animal feed may also have greater experience and resources than we do and their products may have greater acceptance among producers of beef and dairy cattle, poultry and hogs.

Competition for Corn

        We will compete with ethanol producers in close proximity for the supplies of corn we will require to operate our plant. Ethanol production consumes a significant portion of Minnesota's corn crop, approximately 29% in 2009, 34% in 2010, and 36% in 2011. The existence and development of other ethanol plants, particularly those in close proximity to our plant, will increase the demand for corn that may result in higher costs for supplies of corn. We estimate that the seven ethanol plants within an approximate 50 mile radius of our plant will use approximately 160 million bushels of corn and that we will compete with these other ethanol plants for corn for our ethanol plant.

        We compete with other users of corn, including ethanol producers regionally and nationally, producers of food and food ingredients for human consumption (such as high fructose corn syrup, starches, and sweeteners), producers of animal feed and industrial users. According to estimates by the Minnesota Department of Agriculture for 2011, 36% of Minnesota corn production was used in ethanol

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production, 42% was exported, 17% was used for feed, 2% was put to a residual use, and 3% was used in other processing.

Competition for Personnel

        We will also compete with ethanol producers in close proximity for the personnel we will require to operate our plant. The existence and development of other ethanol plants will increase competition for qualified managers, engineers, operators and other personnel. We also compete for personnel with businesses other than ethanol producers and with businesses located outside the community of Heron Lake, Minnesota.

Hedging

        We may hedge anticipated corn purchases and ethanol and distillers' grain sales through a variety of mechanisms.

        We procure corn through spot cash, fixed-price forward, basis only, futures only, and delayed pricing contracts. Additionally, we may use hedging positions in the corn futures and options market to manage the risk of excessive corn price fluctuations for a portion of our corn requirements.

        For our spot purchases, we post daily corn bids so that corn producers can sell to us on a spot basis. Our fixed-price forward contracts specify the amount of corn, the price and the time period over which the corn is to be delivered. These forward contracts are at fixed prices indexed to Chicago Board of Trade, or CBOT, prices. Our corn requirements can be contracted in advance under fixed-price forward contracts or options. The parameters of these contracts are based on the local supply and demand situation and the seasonality of the price. For delayed pricing contracts, producers will deliver corn to our elevators, but the pricing for that corn and the related payment will occur at a later date.

        To hedge a portion of our exposure to corn price risk, we may buy and sell futures and options positions on the CBOT. In addition, our facilities have significant corn storage capacity. We generally maintain inventories of corn at our ethanol plant, but can draw from our elevators at Lakefield and Wilder to protect against supply disruption. At the ethanol plant, we have the ability to store approximately 10 days of corn supply and our elevators have capacity for approximately an additional 50 days of supply.

        Gavilon is the exclusive marketer for all of the ethanol produced at our facility. Gavilon is obligated to use reasonable efforts to obtain the best price for our ethanol. To mitigate ethanol price risk and to obtain the best margins on ethanol that is marketed and sold by our marketer, we may utilize ethanol swaps, over-the-counter ("OTC") ethanol swaps, or OTC ethanol options that are typically settled in cash, rather than gallons of the ethanol we produce.

        Our marketing and risk management committee assists the board and our risk management personnel to, among other things, establish appropriate policies and strategies for hedging and enterprise risk.

Compliance with Environmental Laws and Other Regulatory Matters

        Our business subjects us to various federal, state and local environmental laws and regulations, including those relating to discharges into the air, water and ground; the generation, storage, handling, use, transportation and disposal of hazardous materials; and the health and safety of our employees.

        These laws and regulations require us to obtain and comply with numerous permits to construct and operate our ethanol plant, including water, air and other environmental permits. The costs associated with obtaining these permits and meeting the conditions of these permits have increased our costs of construction and production.

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        In particular, we have incurred additional costs relating to an air-emission permit from the Minnesota Pollution Control Agency ("MPCA"). We applied for a synthetic minor air-emissions source permit in July 2004 that was granted by the MPCA in May 2005. In June 2005, a coalition of two environmental groups and one energy group challenged the granting of this air emissions permit by an appeal to the Minnesota Court of Appeals. In July 2006, the Minnesota Court of Appeals affirmed the MPCA's issuance of the permit. In conjunction with the permit and the permit dispute and to prevent further appeals by the coalition, we entered into a compliance agreement with the MPCA on January 23, 2007.

        Under the compliance agreement, we agreed to submit an amendment to our air permit to qualify our facility as a "major emissions source." The compliance agreement also allowed us to continue with the construction of our facility. Under the compliance agreement, we agreed to operate our facility such that each type of emission generated by our ethanol plant was within an established amount and we agreed to comply in all other respects with the air emissions permit previously issued by the MPCA. Accordingly, we submitted an amendment to our existing air-emissions permit in December 2008, and, following air pollution control device testing, we submitted a second amendment to our air permit in September 2009, seeking amendments to permit conditions and adjustments to other components of plant operations and production.

        On December 16, 2010, the MPCA issued a permit to us that supersedes our previously issued air permit and the compliance agreement. The new permit establishes the applicable limits for each type of emission generated by our ethanol plant. The permit also requires us to take additional actions relating to our plant and our operations within certain time frames.

        We have also incurred additional expense to resolve a notice of violation issued by the MPCA in March 2008 that alleged violations certain rules, statutes, and permit conditions, including emission violations and reporting violations. On December 16, 2010, we entered into a stipulation agreement with the MPCA relating to this March 2008 notice of violation. Under the stipulation agreement, we agreed to pay a civil penalty of $66,000, of which $54,000 was paid within thirty days and up to $12,000 may be satisfied through our delivery of the building capture efficiency study referred to above.

        We have incurred costs associated with obtaining the air permits and costs associated with the compliance agreement of approximately $452,000 in fiscal year 2009, $315,000 in fiscal year 2010, $163,000 in fiscal year 2011, and $32,000 in fiscal year 2012.

        Compliance with environmental laws and permit conditions in the future could require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment, as well as significant management time and expense. A violation of these laws, regulations or permit conditions can result in substantial fines, natural resource damage, criminal sanctions, permit revocations and/or plant shutdown, any of which could have a material adverse effect on our operations. Although violations and environmental incompliance still remain after the conversion from coal to natural gas combustion, the exposure to the company has been greatly reduced.

        We have also experienced significant additional expense in fiscal year 2009 and part of fiscal year 2010 associated with equipment failures and/or warranty and other claims against Fagen, Inc. that were the subject of an arbitration action we brought against Fagen, Inc. relating to the design-build agreement and air emissions at our plant. While we settled this arbitration action against Fagen, Inc. on July 2, 2010, we incurred costs and expenses associated with our claims of approximately $743,000 in fiscal year 2010 and approximately $2,700,000 in fiscal year 2009.

Employees

        As of October 31, 2012, we had 34 full-time employees, of which 27 were in operations and 7 were in executive, general management and administration. We also have 3 part-time employees of which 2

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were in operations and 1 in executive, general management and administration. We do not maintain an internal sales organization, but instead rely upon third-parties to market and sell the ethanol and distillers' grains that we produce.

Corporate Information

        Our principal executive offices are located at 91246 390th Avenue, Heron Lake, Minnesota 56137 and our telephone number is 507-793-0077. We maintain an Internet website at www.heronlakebioenergy.com. We make available free of charge on or through our Internet website, www.heronlakebioenergy.com, all of our reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We will provide electronic or paper copies of these documents free of charge upon request.

        Additionally, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

ITEM 1A.    RISK FACTORS

        If any of the following risks actually occur, our results of operations, cash flows and the value of our units could be negatively impacted.

Risks Related to Our Financial Condition, Sale Transactions and Plan of Dissolution

We are in default of our master loan agreement with AgStar and there is substantial doubt about our ability to continue as a going concern.

        At October 31, 2012, we were in default of covenants of our master loan agreement with AgStar Financial Services, PCA ("AgStar") requiring us to maintain at least $5.0 million minimum working capital; at least $39.5 million of tangible net worth; and a fixed charge ratio of 1.20 to 1.00 or greater. We also failed to make monthly principal payments to AgStar on December 1, 2012, January 1, 2013, and February 1, 2013 and will not make the required monthly principal payment on March 1, 2013.

        All of our assets and real property are subject to security interests and mortgages in favor of AgStar as security for the obligations of the master loan agreement. Our failure to maintain the required amount of working capital and payment defaults constitute an event of default under the master loan agreement, entitling AgStar to accelerate and declare due all amounts outstanding under the master loan agreement.

        As a result of these defaults, we have classified $37.5 million of long-term debt as a current liability. As a result, current liabilities as of October 31, 2012 totaled approximately $45 million. This compares to cash and cash equivalents (other than restricted cash) at October 31, 2012 of approximately $653,000, current assets of approximately $7.5 million and total assets of approximately $66.6 million. In the absence of an amendment to the master loan agreement or refinancing of the master loan agreement, we do not have adequate capital to repay all of the amounts that would become due upon acceleration.

        The defaults under our master loan agreement with AgStar and inadequate cash flow from our business raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary as a result of this uncertainty.

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If we default on our forbearance agreement with AgStar by failing to close on the sale of our ethanol plant assets by March 31, 2013, AgStar may seize our assets or we may be forced to seek bankruptcy protection.

        As a result of our poor financial performance during the fiscal year, we violated certain financial covenants under our master loan agreement with AgStar and we also failed to make monthly principal payments to AgStar on December 1, 2012, January 1, 2013, and February 1, 2013 and will not make the required monthly principal payment on March 1, 2013.

        At October 31, 2012, our total indebtedness to AgStar was approximately $40.8 million. At January 1, 2013, our total indebtedness to AgStar was approximately $40.6 million. All of our assets and real property are subject to security interests and mortgages in favor of AgStar as security for the obligations of the master loan agreement.

        On account of the covenant and payment defaults, AgStar has the right to declare the all of our indebtedness to AgStar fully and immediately due and payable without defense or right of setoff. AgStar is also entitled to collect late charges and to recover its costs and expenses.

        On February 12, 2013, we entered into a second amended and restated forbearance agreement with AgStar. Under the forbearance agreement, AgStar agreed to forbear from exercising its legal and contractual rights and remedies provided in the loan documents and by applicable law, including, but not limited to, the right to foreclose the real estate mortgages and security agreements and to obtain the appointment of a receiver pursuant to applicable law, until March 31, 2013 in order to permit us to close on the transactions contemplated by the asset purchase agreement with Heron Lake Guardian, LLC for the sale of our ethanol plant assets and the asset purchase agreement with FCA Co-op for the sale of the grain storage and handling facilities of our subsidiary, Lakefield Farmers Elevator, LLC. On February 1, 2013, we completed the sale of substantially all the assets of Lakefield Farmers Elevator, LLC to FCA Co-op pursuant to the terms of the asset purchase agreement dated January 3, 2013.

        Under the forbearance agreement, it is an event of default, among other things, if we fail to close (i) on the sale of our grain storage and handling facilities as contemplated by asset purchase agreement dated January 3, 2013 with FCA Co-op on or before February 28, 2013 or (ii) on the sale of our ethanol plant assets to Guardian Energy Heron Lake, LLC on or before March 31, 2013.

        The closing of each of the asset purchase agreements with FCA-Co-op and Guardian Energy Heron Lake, LLC is subject to the satisfaction or wavier of various conditions. One condition to the closing of sale transaction with Guardian Energy Heron Lake, LLC is the approval of our members and we will call a Special Meeting of Members for this purpose. We cannot guarantee that we will be able to satisfy the closing conditions set forth in the respective asset purchase agreements or that we will be able to satisfy these conditions in time for a closing by the dates AgStar requires under the forbearance agreement.

        Accordingly, if the sale of our grain storage and handling facilities and the sale of our ethanol plant assets are not closed by the respective dates stated above for any reason, AgStar may accelerate all of our indebtedness and may seize the assets that secure our indebtedness, causing us to lose control of our business. We may also be forced to sell our assets, restructure our indebtedness, submit to foreclosure proceedings, cease operations or seek bankruptcy or reorganization protection.

We have relied upon on our master loan agreement to fund our past operations and past losses because we have not generated a sufficient level of net income or obtained sufficient working capital to fund our ongoing operations.

        We had a net loss of approximately $32.7 million for our fiscal year ended October 31, 2012 and net income of $570,000 for our fiscal year ended October 31, 2011. Our operating results have fluctuated significantly in past years. We had net income of approximately $1.7 million in our fiscal year

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ended October 31, 2010 (which included approximately $2.6 million of settlement income) and a net loss of approximately $11.3 million for the fiscal year ended October 31, 2009. Our limited net income or our net losses have primarily been driven by our low or negative margins. For example, our cost of goods sold (including lower of cost or market adjustments) as a percentage of revenues was 98.7% and 95.8% for the fiscal years ended October 31, 2012 and October 31, 2011, respectively. Whether we achieve a sufficient level of net income to fund our operations depends on a number of factors, including:

•

our revenue in any given period, which depends both on the volume of our products produced and the price we receive for these products;

•

our expense levels, particularly our operating expenses relating to corn; and

•

the efficiency of our plant, particularly managing costs and expenses associated with repairs and air emissions compliance and remediation plans and avoiding plant shut downs and slow downs.

        We have historically financed our operations primarily through borrowing under our master loan agreement with AgStar, and, to a lesser extent, cash from operating activities. As of October 31, 2012, we had cash and cash equivalents (other than restricted cash) of approximately $653,000. As of October 31, 2012, our indebtedness under the master loan agreement with AgStar was approximately $40.8 million.

        The amount currently available under our master loan agreement is insufficient to fund our ongoing operations. To fund our ongoing cash needs and to service our indebtedness if we do not close on the sale transactions with FCA Co-op and Guardian Energy Heron Lake, LLC, we must increase the income and cash generated from our operations. We cannot assure you that we will improve our liquidity to the extent required to enable us to service or reduce our indebtedness or to fund our other capital needs, if at all.

Certain provisions of our master loan agreement with AgStar present special risks to our business.

        As of October 31, 2012, our debt with AgStar consists of approximately $18.3 million in fixed rate obligations and $22.5 million in variable rate obligations. The variable rate on a portion of our debt may make us vulnerable to increases in prevailing interest rates. If the interest rate on our variable rate debt were to increase, our aggregate annualized interest and principal payments would also increase and could increase significantly.

        The principal and interest payments on our $36.6 million term loan with AgStar are calculated using an amortization period of ten years even though the note will mature on September 1, 2016, five years from the date of its issuance. As a result, at maturity of the term loan, there would be approximately $29.0 million in principal remaining under the term loan. In order to finance this large payment of principal that would be due at maturity, we may attempt to extend the term of the loan under the master loan agreement, refinance the indebtedness under the master loan agreement, in full or in part, or obtain a new loan to repay the term loan. We cannot assure you that we will be successful in obtaining an extension of or refinancing our indebtedness. We also cannot assure you that we will be able to obtain a new loan in an amount that is sufficient for our needs, in a timely manner or on terms and conditions acceptable to us or our members.

        If we are unable to service our debt, AgStar may accelerate all of our indebtedness and may seize the assets that secure our indebtedness, causing us to lose control of our business. We may also be forced to sell our assets, restructure our indebtedness, submit to foreclosure proceedings, cease operations or seek bankruptcy or reorganization protection.

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Despite our intention to sell our assets, dissolve and liquidate, there can be no assurance that our efforts to do so will be successful.

        On January 22, 2013, the Company's Board of Governors approved a plan of liquidation and dissolution (the "Plan of Dissolution"). The Plan of Dissolution is subject to approval by our members at a special meeting of members to be held on March 6, 2013. If our members approve the Plan of Dissolution and the asset purchase agreement Guardian Energy Heron Lake, LLC dated January 22, 2013, immediately upon consummation of the asset sale, the Plan of Dissolution will take effect, and the winding up and termination of the Company will commence. The Company intends to complete the sale of its assets, wind up and terminate the Company pursuant to our Member Control Agreement and the Minnesota Limited Liability Company Act, but there can be no assurance that its efforts to do so will be successful.

THE FOLLOWING RISKS WILL APPLY TO US AND OUR BUSINESS IF WE DO NOT DISSOLVE AND LIQUIDATE PURSUANT TO THE PLAN OF DISSOLUTION APPROVED BY OUR BOARD OF GOVERNORS ON JANUARY 22, 2013.

Risks Relating to Our Operations

Because we are primarily dependent upon one product, our business is not diversified, and we may not be able to adapt to changing market conditions or endure any decline in the ethanol industry.

        Our success depends on our ability to efficiently produce and sell ethanol, and, to a lesser extent, distillers' grains. We do not have any other lines of business or other significant sources of revenue to rely upon if we are unable to produce and sell ethanol and distillers' grains, or if the market for those products decline. Our lack of diversification means that we may not be able to adapt to changing market conditions, changes in regulation, increased competition or any significant decline in the ethanol industry.

Our profitability depends upon purchasing corn at lower prices and selling ethanol at higher prices and because the difference between ethanol and corn prices can vary significantly, our financial results may also fluctuate significantly.

        The substantial majority of our revenues are derived from the sale of ethanol. Our gross profit relating to the sale of ethanol is principally dependent on the difference between the price we receive for the ethanol we produce and the price we pay for the corn we used to produce our ethanol.

        The price we receive for our ethanol is dependent upon a number of factors. Increasing domestic ethanol capacity may boost demand for corn, resulting in increased corn prices and corresponding decrease in the selling price of ethanol as production increases. Further, the price of corn is influenced by weather conditions (including droughts or over abundant rainfall) and other factors affecting crop yields, farmers' planting decisions and general economic, market and regulatory factors, including government policies and subsidies with respect to agriculture and international trade, and global and local supply and demand. Declines in the corn harvest, caused by farmers' planting decisions or otherwise, could cause corn prices to increase and negatively impact our gross margins.

        We have experienced low or negative margins in the past, reflecting a higher expenses for the corn we purchase and lower revenues from ethanol we produce. For example, our cost of goods sold (including lower of cost or market adjustments) as a percentage of revenues was 98.7% and 95.8% for the fiscal years ended October 31, 2012 and October 31, 2011, respectively. Reduction in ethanol prices without corresponding decreases in corn costs or increases in corn prices without corresponding increases in ethanol prices has adversely affected our financial performance in the past and may adversely affect our financial performance in the future.

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If the supply of ethanol exceeds the demand for ethanol, the price we receive for our ethanol and distillers' grains may decrease.

        According to the RFA, domestic ethanol production capacity has increased steadily each year from 1999 to 2012. However, demand for ethanol may not increase as quickly as expected or to a level that exceeds supply, or at all.

        Excess ethanol production capacity may result from decreases in the demand for ethanol or increased domestic production or imported supply. There are many factors affecting demand for ethanol, including regulatory developments and reduced gasoline consumption as a result of increased prices for gasoline or crude oil. Higher gasoline prices could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage, or higher prices could spur technological advances, such as the commercialization of engines utilizing hydrogen fuel-cells, which could supplant gasoline-powered engines. There are a number of governmental initiatives designed to reduce gasoline consumption, including tax credits for hybrid vehicles and consumer education programs.

        If ethanol prices decline for any reason, including excess production capacity in the ethanol industry or decreased demand for ethanol, our business, results of operations and financial condition may be materially and adversely affected.

        In addition, because ethanol production produces distillers' grains as a co-product, increased ethanol production will also lead to increased production of distillers' grains. An increase in the supply of distillers' grains, without corresponding increases in demand, could lead to lower prices or an inability to sell our distillers' grains production. A decline in the price of distillers' grains or the distillers' grains market generally could have a material adverse effect on our business, results of operations and financial condition.

The price of distillers' grains is affected by the price of other commodity products, such as soybeans, and decreases in the price of these commodities could decrease the price of distillers' grains.

        Distillers' grains compete with other protein-based animal feed products. The price of distillers' grains may decrease when the price of competing feed products decrease. The prices of competing animal feed products are based in part on the prices of the commodities from which they are derived. Downward pressure on commodity prices, such as soybeans, will generally cause the price of competing animal feed products to decline, resulting in downward pressure on the price of distillers' grains. The price of distillers' grains is not tied to production costs. However, decreases in the price of distillers' grains would result in less revenue from the sale of distillers' grains and could result in lower profit margins.

We face intense competition that may result in reductions in the price we receive for our ethanol, increases in the prices we pay for our corn, or lower gross profits.

        Competition in the ethanol industry is intense. We face formidable competition in every aspect of our business from both larger and smaller producers of ethanol and distillers' grains. Some larger producers of ethanol, such as Archer Daniels Midland Company, Cargill, Inc., Valero Energy Corporation, have substantially greater financial, operational, procurement, marketing, distribution and technical resources than we have. Additionally, smaller competitors, such as farmer-owned cooperatives and independent companies owned by farmers and investors, have business advantages, such as the ability to more favorably procure corn by operating smaller plants that may not affect the local price of corn as much as a larger-scale plant like ours or requiring their farmer-owners to sell them corn as a requirement of ownership.

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        Because Minnesota is one of the top producers of ethanol in the U.S., we face increased competition because of the location of our ethanol plant in Minnesota. Therefore, we compete with other Minnesota ethanol producers both for markets in Minnesota and markets in other states.

        We also face increasing competition from international ethanol suppliers. Most international ethanol producers have cost structures that can be substantially lower than ours and therefore can sell their ethanol for substantially less than we can. While ethanol imported to the U.S. was subject to an ad valorem tax and a per gallon surcharge that helped mitigate the effects of international competition for U.S. ethanol producers, the tax and per gallon surcharge expired on December 31, 2011. Because the tax and surcharge on imported ethanol was not extended beyond December 31, 2011, we will face increased competition from imported ethanol and foreign producers of ethanol. In addition, ethanol imports from certain countries are exempted from these tariffs under the Caribbean Basin Initiative to spur economic development in Central America and the Caribbean. Imports of ethanol from Central American and Caribbean countries represents a significant portion of the gallons imported into the U.S. each year and a source of intense competition for us due to the lower production costs these ethanol producers enjoy.

        Competing ethanol producers may introduce competitive pricing pressures that may adversely affect our sales levels and margins or our ability to procure corn at favorable prices. As a result, we cannot assure you that we will be able to compete successfully with existing or new competitors.

We engage in hedging transactions which involve risks that can harm our business.

        In an attempt to offset some of the effects of pricing and margin volatility, we may hedge anticipated corn purchases and ethanol and distillers' grain sales through a variety of mechanisms. Because of our hedging strategies, we are exposed to a variety of market risks, including the effects of changes in commodities prices of ethanol and corn.

        Hedging arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices paid or received by us. Hedging activities can themselves result in losses when a position is purchased in a declining market or a position is sold in a rising market. Our losses or gains from hedging activities may vary widely.

        There can be no assurance that our hedging strategies will be effective and we may experience hedging losses in the future. We also vary the amount of hedging or other price mitigation strategies we undertake, and we may choose not to engage in hedging transactions at all. As a result, whether or not we engage in hedging transactions, our business, results of operations and financial condition may be materially adversely affected by increases in the price of corn or decreases in the price of ethanol.

Operational difficulties at our plant could negatively impact our sales volumes and could cause us to incur substantial losses.

        We have experienced operational difficulties at our plant that have resulted in scheduled and unscheduled downtime or reductions in the number of gallons of ethanol we produce. Some of the difficulties we have experienced relate to production problems, repairs required to our plant equipment and equipment maintenance, the installation of new equipment and related testing, and our efforts to improve and test our air emissions. Although operational difficulties will still remain after the conversion from coal to natural gas combustion, the amount of incidents should be reduced. Our revenues are driven in large part by the number of gallons of ethanol we produce and the number of tons of distillers' grains we produce. If our ethanol plant does not efficiently produce our products in high volumes, our business, results of operations, and financial condition may be materially adversely affected.

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        Our operations are also subject to operational hazards inherent in our industry and to manufacturing in general, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. The occurrence of any of these operational hazards may materially adversely affect our business, results of operations and financial condition. Further, our insurance may not be adequate to fully cover the potential operational hazards described above or we may not be able to renew this insurance on commercially reasonable terms or at all.

Our operations and financial performance could be adversely affected by infrastructure disruptions and lack of adequate transportation and storage infrastructure in certain areas.

        We ship our ethanol to our customers primarily by the railroad adjacent to our site. We also have the potential to receive inbound corn via the railroad, although we currently receive corn by truck from our facilities in Lakefield, Minnesota and Wilder, Minnesota, each of which is less than 15 miles away from our plant. Our customers require appropriate transportation and storage capacity to take delivery of the products we produce. We also receive our natural gas through a pipeline that is approximately 16 miles in length. Without the appropriate flow of natural gas through the pipeline our plant may not be able to run at desired production levels or at all. Therefore, our business is dependent on the continuing availability of rail, highway and related infrastructure. Any disruptions in this infrastructure network, whether caused by labor difficulties, earthquakes, storms, other natural disasters, human error or malfeasance or other reasons, could have a material adverse effect on our business. We rely upon third-parties to maintain the rail lines from our plant to the national rail network, and any failure on their part to maintain the lines could impede our delivery of products, impose additional costs on us and could have a material adverse effect on our business, results of operations and financial condition.

        In addition, lack of this infrastructure prevents the use of ethanol in certain areas where there might otherwise be demand and results in excess ethanol supply in areas with more established ethanol infrastructure, depressing ethanol prices in those areas. In order for the ethanol industry to grow and expand into additional markets and for our ethanol to be sold in these new markets, there must be substantial development of infrastructure including:

•

additional rail capacity;

•

additional storage facilities for ethanol;

•

increases in truck fleets capable of transporting ethanol within localized markets;

•

expansion of refining and blending facilities to handle ethanol; and

•

growth in service stations equipped to handle ethanol fuels.

        The substantial investments that will be required for these infrastructure changes and expansions may not be made on a timely basis, if at all, and decisions regarding these infrastructure improvements are outside of our control. Significant delay or failure to improve the infrastructure that facilitates the distribution could curtail more widespread ethanol demand or reduce prices for our products in certain areas, which would have a material adverse effect on our business, results of operations or financial condition.

Competition for qualified personnel in the ethanol industry is intense and we may not be able to hire and retain qualified personnel to operate our ethanol plant.

        Our success depends in part on our ability to attract and retain competent personnel. For our ethanol plant, we must hire qualified managers, operations personnel, accounting staff and others,

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which can be challenging in a rural community. Competition for employees in the ethanol industry is intense, and we may not be able to attract and retain qualified personnel. If we are unable to hire productive and competent personnel and retain our existing personnel, our business may be adversely affected and we may not be able to efficiently operate our ethanol business and comply with our other obligations.

Technology in our industry evolves rapidly, potentially causing our plant to become obsolete, and we must continue to enhance the technology of our plant or our business may suffer.

        We expect that technological advances in the processes and procedures for processing ethanol will continue to occur. It is possible that those advances could make the processes and procedures that we utilize at our ethanol plant less efficient or obsolete. These advances could also allow our competitors to produce ethanol at a lower cost than we are able. If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than those of our competitors, which could cause our ethanol plant to become uncompetitive.

        Ethanol production methods are constantly advancing. 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 and municipal solid waste. 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 that are unable to grow corn. Another trend in ethanol production research is to produce ethanol through a chemical or thermal process, rather than a fermentation process, thereby significantly increasing the ethanol yield per pound of feedstock. Although current technology does not allow these production methods to be financially competitive, new technologies may develop that would allow these methods to become viable means of ethanol production in the future. If we are unable to adopt or incorporate these advances into our operations, our cost of producing ethanol could be significantly higher than those of our competitors, which could make our ethanol plant obsolete. Modifying our plant to use the new inputs and technologies would likely require material investment.

If ethanol fails to compete successfully with other existing or newly-developed oxygenates or renewable fuels, our business will suffer.

        Alternative fuels, additives and oxygenates are continually under development. Alternative fuels and fuel additives that can replace ethanol are currently under development, which may decrease the demand for ethanol. Technological advances in engine and exhaust system design and performance could reduce the use of oxygenates, which would lower the demand for ethanol, and our business, results of operations and financial condition may be materially adversely affected.

Our sales will decline, and our business will be materially harmed if our third party marketers do not effectively market or sell the ethanol and distillers grains we produce or if there is a significant reduction or delay in orders from our marketers.

        We have entered into an agreement with a third party to market our supply of ethanol and distillers' grains. Our marketer is an independent business that we do not control. We cannot be certain that our marketer will market or sell our ethanol and distillers' grains effectively. Our agreements with this marketer do not contain requirements that a certain percentage of sales are of our products, nor do the agreements restrict the marketer's ability to choose alternative sources for ethanol or distillers' grains.

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        Our success in achieving revenue from the sale of ethanol and distillers' grains will depend upon the continued viability and financial stability of our marketer. Our marketer may choose to devote its efforts to other ethanol producers or reduce or fail to devote the necessary resources to provide effective sales and marketing support of our products. We believe that our financial success will continue to depend in large part upon the success of our marketer in operating its businesses. If our marketer does not effectively market and sell our ethanol and distillers' grains, our revenues may decrease and our business will be harmed.

Risks Related to Government Programs and Regulation

We have experienced significant costs in obtaining and complying with permits and environmental laws, particularly our air emissions permit, and may continue to experience significant costs in the future.

        The costs associated with obtaining and complying with permits and complying with environmental laws have increased our costs of construction, production and continued operation. In particular, we have incurred significant expense relating to our air-emission permit in four categories: (1) obtaining our air emissions permit from the Minnesota Pollution Control Agency ("MPCA"); (2) compliance with our air emissions permit and the terms of our compliance agreement with the MPCA; (3) our dispute under the design-build agreement with Fagen, Inc. relating to equipment failures, warranty claims and other claims regarding air emissions at our plant that was the subject of an arbitration action that was settled on July 2, 2010; and (4) a March 2008 notice of violation from the MPCA that was resolved in December 2010 though a stipulation agreement.

        While our air emissions permit issue was resolved with the December 16, 2010 issuance of a new air permit by the MPCA, our arbitration action against Fagen, Inc. has been settled, and we have addressed the notice of violation through a stipulation agreement, we anticipate future expense associated with compliance with our air permit and related environmental laws. The permit requires us to take additional actions relating to our plant and our operations within certain time frames.

        Continued compliance with our air emissions permit issue will involve management time and expense and may involve ongoing operational expense or further modifications to the design or equipment in our plant. Although violations and environmental incompliance still remain after the conversion from coal to natural gas combustion, the exposure to the company has been greatly reduced.

        There can be no assurance that we will be able to comply with any of the conditions of any of our permits, or with environmental laws applicable to us. A violation of environmental laws, regulations or permit conditions can result in substantial fines, natural resource damage, criminal sanctions, permit revocations or plant shutdown, any of which could have a material adverse effect on our operations.

Our failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

        We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground. Certain aspects of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities including the Minnesota Pollution Control Agency. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party claims for property damage and personal injury as a result of violations of or liabilities under environmental laws or non-compliance with environmental permits. We could also incur substantial costs and experience increased operating expenses as a result of operational changes to comply with environmental laws, regulations and permits. As discussed above, we have incurred substantial costs relating to our air emissions permit and expect additional costs relating to this permit in the future.

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        Further, environmental laws and regulations are subject to substantial change. We cannot predict what material impact, if any, these changes in laws or regulations might have on our business. Future changes in regulations or enforcement policies could impose more stringent requirements on us, compliance with which could require additional capital expenditures, increase our operating costs or otherwise adversely affect our business. These changes may also relax requirements that could prove beneficial to our competitors and thus adversely affect our business. In addition, regulations of the Environmental Protection Agency and the Minnesota Pollution Control Agency depend heavily on administrative interpretations. We cannot assure you that future interpretations made by regulatory authorities, with possible retroactive effect, will not adversely affect our business, financial condition and results of operations.

        Failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

Because federal and state regulation heavily influence the supply of and demand for ethanol, changes in government regulation that adversely affect demand or supply will have a material adverse effect on our business.

        Various federal and state laws, regulations and programs impact the supply of and demand for ethanol. Some government regulation, for example those that provide economic incentives to ethanol producers, stimulate supply of ethanol by encouraging production and the increased capacity of ethanol plants. Others, such as a federal excise tax incentive program that provides gasoline distributors who blended ethanol with gasoline to receive a federal excise tax rate reduction for each blended gallon they sell, stimulate demand for ethanol by making it price competitive with other oxygenates. Further, tariffs generally apply to the import of ethanol from certain other countries, where the cost of production can be significantly less than in the U.S. These tariffs are designed to increase the cost of imported ethanol to a level more comparable to the cost of domestic ethanol by offsetting the benefit of the federal excise tax program. Tariffs have the effect of maintaining demand for domestic ethanol.

        Additionally, the Environmental Protection Agency has established a revised annual renewable fuel standard (RFS2) that sets minimum national volume standards for use of renewable fuels. The RFS2 also sets volume standards for specific categories of renewable fuels: cellulosic, biomass-based diesel and total advanced renewable fuels. While our ethanol does not qualify one of the new volume categories of renewable fuels, we believe that the overall renewable fuels requirement of RFS2 creates an incentive for the use of ethanol. Other federal and state programs that require or provide incentives for the use of ethanol create demand for ethanol. Government regulation and government programs that create demand for ethanol may also indirectly create supply for ethanol as additional producers expand or new companies enter the ethanol industry to capitalize on demand. In the case of the RFS2, while it creates a demand for ethanol, the existence of specific categories of renewable fuels also creates a demand for these types of renewable fuels and will likely provide an incentive for companies to further develop these products to capitalize on that demand. In these circumstances, the RFS2 may also reduce demand for ethanol in favor of the renewable fuels for which specific categories exist.

        Federal and state laws, regulations and programs are constantly changing. We cannot predict what material impact, if any, these changes might have on our business. Future changes in regulations and programs could impose more stringent operational requirements or could reduce or eliminate the benefits we receive, directly and indirectly, under current regulations and programs. Future changes in regulations and programs may increase or add benefits to ethanol producers other than us or eliminate or reduce tariffs or other barriers to entry into the U.S. ethanol market, any of which could prove beneficial to our competitors, both domestic and international. Future changes in regulation may also hurt our business by providing economic incentives to producers of other renewable fuels or oxygenates or encouraging use of fuels or oxygenates that compete with ethanol. In addition, both national and state regulation is influenced by public opinion and changes in public opinion. For example, certain

24

states oppose the use of ethanol because, as net importers of ethanol from other states, the use of ethanol could increase gasoline prices in that state and because that state does not receive significant economic benefits from the ethanol industry, which are primarily experienced by corn and ethanol producing states. Further, some argue that the use of ethanol will have a negative impact on gasoline prices to consumers, result in rising food prices, add to air pollution, harm car and truck engines, and actually use more fossil energy, such as oil and natural gas, than the amount of ethanol that is produced. We cannot predict the impact that opinions of consumers, legislators, industry participants, or competitors may have on the regulations and programs currently benefiting ethanol producers.

The EPA imposed E10 "blend wall" if not overcome will have an adverse effect on demand for ethanol.

        We believe that the E10 "blend wall" is one of the most critical governmental policies currently facing the ethanol industry. The "blend wall" issue arises because of several conflicting requirements. First, the renewable fuels standards dictate a continuing increase in the amount of ethanol blended into the national gasoline supply. Second, the Environmental Protection Agency (EPA) mandates a limit of 10% ethanol inclusion in non-flex fuel vehicles, and the E85 vehicle marketplace is struggling to grow due to lacking infrastructure. The EPA policy of 10% and the RFS increasing blend rate are at odds, which is sometimes referred to as the "blend wall." While the issue is being considered by the EPA, there have been no regulatory changes that would reconcile the conflicting requirements. In 2011, the United States Environmental Protection Agency allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. Management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the labeling requirements the EPA may impose. The EPA is considering instituting labeling requirements associated with E15 which may unfairly discourage consumers from purchasing E15. As a result, the approval of E15 may not significantly increase demand for ethanol.

Risks Related to the Units

Project Viking owns a large percentage of our units, which may allow it to control or heavily influence matters requiring member approval, and Project Viking has been granted additional board rights under our member control agreement.

        As of October 31, 2012, Project Viking, L.L.C. beneficially owned 41.4% of our outstanding units. Project Viking is owned by Roland J. (Ron) Fagen and Diane Fagen, the principal shareholders of Fagen, Inc., the design-build firm for our ethanol plant. Project Viking, together with our executive officers and governors, together control approximately 44.8% of our outstanding units as of October 31, 2012. As a result, these unit holders, acting individually or together, could significantly influence our management and affairs and all matters requiring member approval, including the election of governors and approval of significant corporate transactions, such as the sale of our grain storage and handling facilities as contemplated by asset purchase agreement with FCA Co-op and the sale of our ethanol plant assets to Guardian Energy Heron Lake, LLC.

        Additionally, our member control agreement gives members who hold significant amounts of equity in us the right to designate governors to serve on our board of governors. For every 9% of our units held, the member has the right to appoint one person to our board. Project Viking, L.L.C. has the right to appoint four persons to our board pursuant to this provision and has appointed four persons as of October 31, 2012. Although the designated governors do not represent a majority of our board, their presence on the board may allow Project Viking, L.L.C. to have greater influence over the decisions of our board and our business than other members.

        Further, the interests of Project Viking, L.L.C. may not coincide with our interests or the interests of our other members. For example, Fagen, Inc. has invested and may continue to invest in a number

25

of other ethanol producers, some of whom may compete with us. As a result of these and other potential conflicting interests, these existing members may make decisions with respect to us with which we or our members may disagree.

There is no public market for our units and no public market is expected to develop.

        There is no established public trading market for our units, and we do not expect one to develop in the foreseeable future. To maintain our partnership tax status, we do not intend to list the units on any stock exchange or automatic quotation system such as OTC Bulletin Board. As a result, units held by our members may not be easily resold and members may be required to hold their units indefinitely. Even if members are able to resell our units, the price may be less than the members' investment in the units or may otherwise be unattractive to the member.

There are significant restrictions on the transfer of our units.

        To protect our status as a partnership for tax purposes and to assure that no public trading market in our units develops, our units are subject to significant restrictions on transfer and transfers are subject to approval by our board of governors. All transfers of units must comply with the transfer provisions of our member control agreement and the unit transfer policy adopted by our board of governors. Our board of governors will not approve transfers which could cause us to lose our tax status or violate federal or state securities laws. On November 5, 2008, our board of governors adopted a revised unit transfer policy. While the revised policy permits transfers of our units under certain circumstances, including certain transfers of units for value, there continue to be significant restrictions on transfer of our units. Among other things, the revised unit transfer policy places limits on the number of units that may be transferred during any fiscal year and requires the transferor and transferee to complete a unit transfer agreement and application form and submit these to us along with the required documents and an application fee.

        On July 2, 2010, in conjunction with our recapitalization efforts and in light of the transactions and agreements the Company entered into with Project Viking, L.L.C., the board of governors determined to suspend approvals of any transfers of units, provided that related-party transfers without consideration would still be considered. This suspension was approved by the board pursuant to its authority under our member control agreement. On July 9, 2010, we notified our members of the suspension of approvals by a letter. We also removed all postings on the unit bulletin board.

        On November 30, 2011, in light of the recapitalization transactions we entered into during fiscal year 2011 and the conversion of our ethanol plant to natural gas thermal source, the board approved the lifting of its suspension of approvals of transfers of units, with consideration of such transfers to commence at its next regularly scheduled board meeting.

        As a result of the provisions of our member control agreement, members may not be able to transfer their units and may be required to assume the risks of the investment for an indefinite period of time.

        A transferee may be admitted as a member only upon approval by the board of governors and upon satisfaction of certain other requirements, including the transferee meeting the minimum unit ownership requirements to become a member (which for our present units requires holding a minimum of 2,500 units). Any transferee that is not admitted as a member will be deemed an unadmitted assignee. An unadmitted assignee will be a non-member unit holder and will have the same financial rights as other unit holders, such as the right to receive distributions that we declare or that are available upon our dissolution or liquidation. As a non-member unit holder, an unadmitted assignee will not have the voting or other governance rights of members and will not be entitled to any information or accountings regarding our business or to inspect our books and records.

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        If the members approve the dissolution of the Company, no transfers of Units will be permitted.

There is no assurance that we will be able to make distributions to our unit holders, which means that holders could receive little or no return on their investment.

        Distributions of our net cash flow may be made at the sole discretion of our board of governors, subject to the provisions of the Minnesota Limited Liability Company Act, our member control agreement and restrictions imposed by AgStar under our master loan agreement. Our master loan agreements with AgStar currently materially limit our ability to make distributions to our members and are likely to limit materially the future payment of distributions. If our financial performance and loan covenants permit, we expect to make future cash distributions at times and in amounts that will permit our members to make income tax payments. If our financial performance and loan covenants further permit, we intend to make distributions in excess of those amounts. However, our board may elect to retain cash for operating purposes, debt retirement, plant improvements or expansion. We may also never be in a position to pay distributions because of our financial performance or the terms of our master loan agreement. Consequently, members may receive little or no return on their investment in the units.

We may authorize and issue units of new classes which could be superior to or adversely affect holders of our outstanding units.

        Our board of governors, upon the approval of a majority in interest of our members, has the power to authorize and issue units of classes which have voting powers, designations, preferences, limitations and special rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights, different from or superior to those of our present units. New units may be issued at a price and on terms determined by our board of governors. The terms of the units and the terms of issuance of the units could have an adverse impact on your voting rights and could dilute your financial interest in us.

Our use of a staggered board of governors and allocation of governor appointment rights may reduce the ability of members to affect the composition of the board.

        We are managed by a board of governors, currently consisting of five elected governors and four appointed governors. The seats on the board that are not subject to a right of appointment will be elected by the members without appointment rights. An appointed governor serves indefinitely at the pleasure of the member appointing him or her (so long as such member and its affiliates continue to hold a sufficient number of units to maintain the applicable appointment right) until a successor is appointed, or until the earlier death, resignation or removal of the appointed governor.

        Under our member control agreement, non-appointed governors are divided into three classes, with the term of one class expiring each year. As the term of each class expires, the successors to the governors in that class will be elected for a term of three years. As a result, members elect only approximately one-third of the non-appointed governors each year.

        The effect of these provisions may make it more difficult for a third party to acquire, or may discourage a third party from acquiring, control of us and may discourage attempts to change our management, even if an acquisition or these changes would be beneficial to our members.

Our units represent both financial and governance rights, and loss of status as a member would result in the loss of the holder's voting and other rights and would allow us to redeem such holder's units.

        Holders of units are entitled to certain financial rights, such as the right to any distributions, and to governance rights, such as the right to vote as a member. If a unit holder does not continue to qualify as a member or such holder's member status is terminated, the holder would lose certain rights,

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such as voting rights, and we could redeem such holder's units. The minimum number of units presently required for membership is 2,500 units. In addition, holders of units may be terminated as a member if the holder dies or ceases to exist, violates our member control agreement or takes actions contrary to our interests, and for other reasons. Although our member control agreement does not define what actions might be contrary to our interests, and our board of governors has not adopted a policy on the subject, such actions might include providing confidential information about us to a competitor, taking a board or management position with a competitor or taking action which results in significant financial harm to us in the marketplace. If a holder of units is terminated as a member, our board of governors will have no obligation to redeem such holder's units.

Voting rights of members are not necessarily equal and are subject to certain limitations.

        Members of our company are holders of units who have been admitted as members upon their investment in our units and who are admitted as members by our board of governors. The minimum number of units required to retain membership is 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our board of governors to become members. Members who are holders of our present units are entitled to one vote for each unit held. The provisions of our member control agreement relating to voting rights applicable to any class of units will apply equally to all units of that class.

        However, our member control agreement gives members who hold significant amounts of equity in us the right to designate governors to serve on our board of governors. For every 9% of our units held, the member has the right to appoint one person to our board. Project Viking, L.L.C. has the right to appoint four persons to our board pursuant to this provision and has currently appointed four persons. If units of any other class are issued in the future, holders of units of that other class will have the voting rights that are established for that class by our board of governors with the approval of our members. Consequently, the voting rights of members may not be necessarily proportional to the number of units held.

        Further, cumulative voting for governors is not allowed, which makes it substantially less likely that a minority of members could elect a member to the board of governors. Members do not have dissenter's rights. This means that they will not have the right to dissent and seek payment for their units in the event we merge, consolidate, exchange or otherwise dispose of all or substantially all of our property. Holders of units who are not members have no voting rights. These provisions may limit the ability of members to change the governance and policies of our company.

All members will be bound by actions taken by members holding a majority of our units, and because of the restrictions on transfer and lack of dissenters' rights, members could be forced to hold a substantially changed investment.

        We cannot engage in certain transactions, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, without the approval of our members. However, if holders of a majority of our units approve a transaction, then all members will also be bound to that transaction regardless of whether that member agrees with or voted in favor of the transaction. Under our member control agreement, members will not have any dissenters' rights to seek appraisal or payment of the fair value of their units. Consequently, because there is no public market for the units, members may be forced to hold a substantially changed investment.

Risks Related to Tax Issues in a Limited Liability Company

EACH UNIT HOLDER SHOULD CONSULT THE INVESTOR'S OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL AND STATE TAX CONSEQUENCES OF AN INVESTMENT IN

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HERON LAKE BIOENERGY, LLC AND ITS IMPACT ON THE INVESTOR'S TAX REPORTING OBLIGATIONS AND LIABILITY.

If we are not taxed as a partnership, we will pay taxes on all of our net income and you will be taxed on any earnings we distribute, and this will reduce the amount of cash available for distributions to holders of our units.

        We consider Heron Lake BioEnergy, LLC to be a partnership for federal income tax purposes. This means that we will not pay any federal income tax, and our members will pay tax on their share of our net income. If we are unable to maintain our partnership tax treatment or qualify for partnership taxation for whatever reason, then we may be taxed as a corporation. We cannot assure you that we will be able to maintain our partnership tax classification. For example, there might be changes in the law or our company that would cause us to be reclassified as a corporation. As a corporation, we would be taxed on our taxable income at rates of up to 35% for federal income tax purposes. Further, distributions would be treated as ordinary dividend income to our unit holders to the extent of our earnings and profits. These distributions would not be deductible by us, thus resulting in double taxation of our earnings and profits. This would also reduce the amount of cash we may have available for distributions.

Your tax liability from your allocated share of our taxable income may exceed any cash distributions you receive, which means that you may have to satisfy this tax liability with your personal funds.

        As a partnership for federal income tax purposes, all of our profits and losses "pass-through" to our unit holders. You must pay tax on your allocated share of our taxable income every year. You may incur tax liabilities from allocations of taxable income for a particular year or in the aggregate that exceed any cash distributions you receive in that year or in the aggregate. This may occur because of various factors, including but not limited to, accounting methodology, the specific tax rates you face, and payment obligations and other debt covenants that restrict our ability to pay cash distributions. If this occurs, you may have to pay income tax on your allocated share of our taxable income with your own personal funds.

You may not be able to fully deduct your share of our losses or your interest expense.

        It is likely that your interest in us will be treated as a "passive activity" for federal income tax purposes. In the case of unit holders who are individuals or personal services corporations, this means that a unit holder's share of any loss incurred by us will be deductible only against the holder's income or gains from other passive activities, e.g., S corporations and partnerships that conduct a business in which the holder is not a material participant. Some closely held C corporations have more favorable passive loss limitations. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. Upon disposition of a taxpayer's entire interest in a passive activity to an unrelated person in a taxable transaction, suspended losses with respect to that activity may then be deducted.

        Interest paid on any borrowings incurred to purchase units may not be deductible in whole or in part because the interest must be aggregated with other items of income and loss that the unit holder has independently experienced from passive activities and subjected to limitations on passive activity losses.

        Deductibility of capital losses that we incur and pass through to you or that you incur upon disposition of units may be limited. Capital losses are deductible only to the extent of capital gains plus, in the case of non-corporate taxpayers, the excess may be used to offset up to $3,000 of ordinary income. If a non-corporate taxpayer cannot fully utilize a capital loss because of this limitation, the

29

unused loss may be carried forward and used in future years subject to the same limitations in the future years.

You may be subject to federal alternative minimum tax

        Individual taxpayers are subject to an "alternative minimum tax" if that tax exceeds the individual's regular income tax. For alternative minimum tax purposes, an individual's adjusted gross income is increased by items of tax preference. We may generate such preference items. Accordingly, preference items from our operations together with other preference items you may have may cause or increase an alternative minimum tax to a unit holder. You are encouraged and expected to consult with your individual tax advisor to analyze and determine the effect on your individual tax situation of the alternative minimum taxable income you may be allocated, particularly in the early years of our operations.

Preparation of your tax returns may be complicated and expensive.

        The tax treatment of limited liability companies and the rules regarding partnership allocations are complex. We will file a partnership income tax return and will furnish each unit holder with a Schedule K-1 that sets forth our determination of that unit holder's allocable share of income, gains, losses and deductions. In addition to United States federal income taxes, unit holders will likely be subject to other taxes, such as state and local taxes, that are imposed by various jurisdictions. It is the responsibility of each unit holder to file all applicable federal, state and local tax returns and pay all applicable taxes. You may wish to engage a tax professional to assist you in preparing your tax returns and this could be costly to you.

Any audit of our tax returns resulting in adjustments could result in additional tax liability to you.

        The IRS may audit our tax returns and may disagree with the positions that we take on our returns or any Schedule K-1. If any of the information on our partnership tax return or a Schedule K-1 is successfully challenged by the IRS, the character and amount of items of income, gains, losses, deductions or credits in a manner allocable to some or all our unit holders may change in a manner that adversely affects those unit holders. This could result in adjustments on unit holders' tax returns and in additional tax liabilities, penalties and interest to you. An audit of our tax returns could lead to separate audits of your personal tax returns, especially if adjustments are required.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        We own approximately 216 acres of land located near Heron Lake, Minnesota on which we have constructed our ethanol plant, which also includes corn, coal, ethanol, and distillers' grains storage and handling facilities. Located on these 216 acres is an approximately 7,320 square foot building that serves as our headquarters. Our address is 91246 390th Avenue, Heron Lake, Minnesota 56137-3175. Pursuant to an asset purchase agreement dated January 22, 2013, we have agreed to sell substantially all of our assets to Guardian Energy Heron Lake, LLC ("Guardian"), other than the elevator and grain storage facilities sold to FCA Co-op as described below. Under the terms of the asset purchase agreement with Guardian, the purchase price for the acquired assets is $55 million, payable in cash, plus the value of certain net working capital items at closing, less the amount we owe as of the closing date under certain debt obligations to be assumed by Guardian. We expect the value of our net working capital to be approximately $1.5 million at closing and the aggregate amount of liabilities to be assumed by Guardian to be $4.4 million at closing, which will reduce the purchase price. We expect to

30

close the transaction with Guardian on or before March 31, 2013, or as soon as practicable following satisfaction or waiver of all closing conditions specified in the asset purchase agreement.

        Through our wholly owned subsidiary, Lakefield Farmers Elevator, LLC, we also owned elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota. The elevator and grain storage facilities at each location have grain handling equipment and both upright and flat storage capacity. The storage capacity of the Lakefield, Minnesota facility is approximately 1.9 million bushels and the storage capacity of the Wilder, Minnesota facility is approximately 900,000 bushels. Pursuant to an asset purchase agreement dated January 3, 2013, Lakefield Farmers Elevator, LLC agreed to sell substantially all of its assets consisting of the elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota to FCA Co-op for $3.75 million plus the purchase price for corn and fuel inventory. The sale to FCA Co-op closed on February 1, 2013.

        All of our real property is subject to mortgages in favor of AgStar as security for loan obligations.

ITEM 3.    LEGAL PROCEEDINGS

        None.

ITEM 4.    MINE SAFETY DISCLOSURES

        None.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

        There is no established public trading market for the units and we do not expect one to develop in the foreseeable future. To maintain our partnership tax status, we do not intend to list the units on any stock exchange or over-the-counter securities market such as the OTC Bulletin Board.

        Effective July 2, 2010, our board of governors determined to suspend approvals of any transfers of units, provided that related-party transfers without consideration would still be considered. This suspension was approved by the board pursuant to its authority under our member control agreement. On July 9, 2010, we notified our members of the suspension of approvals by a letter. We also removed all postings on the unit bulletin board.

        On November 30, 2011, in light of the recapitalization transactions we entered into during fiscal year 2011 and the conversion of our ethanol plant to natural gas thermal source, the board approved the lifting of its suspension of approvals of transfers of units, with consideration of such transfers to commence at its next regularly scheduled board meeting.

        If the members approve the dissolution of the Company, no transfers of Units will be permitted.

Holders of Record

        As of February 11, 2013, there were 38,622,107 Class A units outstanding and held of record by 1,161 persons. There are no other classes of units outstanding. As of October 31, 2012 and February 11, 2013, there were no outstanding options or warrants to purchase, or securities convertible into, our units.

Distributions

        To date, we have not made any distributions to our members. Our master loan agreement with AgStar Financial Services, PCA currently materially limits our ability to make distributions, other than tax distributions, to our members and is likely to limit materially the future payment of distributions. If our financial performance and loan covenants permit, we expect to make future cash distributions at times and in amounts that will permit our members to make income tax payments. If our financial performance and loan covenants further permit, we intend to make distributions in excess of those amounts. Cash distributions are not assured, however, and we may never be in a position to make distributions. Under Minnesota law, we cannot make a distribution to a member if, after the distribution, we would not be able to pay our debts as they become due or our liabilities, excluding liabilities to our members on account of their capital contributions, would exceed our assets.

        For a further description of the limitations on our ability to make distributions to our members, please see "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 9 of the notes to our audited consolidated financial statements.

Securities Authorized for Issuance under Equity Compensation Plans

        There are no "compensation plans" (including individual compensation arrangements) under which any of our equity securities are authorized for issuance.

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ITEM 6.    SELECTED FINANCIAL DATA

Selected Consolidated Financial Data

        The following table presents selected consolidated financial and operating data as of the dates and for the periods indicated. The selected financial data for the balance sheets as of October 31, 2012 and 2011 and the statements of operations data for the years ended October 31, 2012, 2011, and 2010 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected financial data for the balance sheet as of October 31, 2010, 2009 and 2008 and the statements of operations data for the years ended October 31, 2009 and 2008 were derived from audit financial statements filed previously.

        This selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" within Item 7 and the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following consolidated financial data.

	Fiscal Year Ended
	October 31, 2012			October 31, 2011			October 31, 2010			October 31, 2009			October 31, 2008
Statement of Operations Data:
Revenues	$	168,659,935		$	164,120,375		$	110,624,758		$	88,304,596		$	131,070,642
Cost of goods sold		166,529,283			157,163,624			103,690,208			90,857,247			114,411,541
Gross profit (loss)		2,130,652			6,956,751			6,934,550			(2,552,651	)		16,659,101
Operating expenses		(3,171,331	)		(3,613,465	)		(3,857,492	)		(4,515,476	)		(3,351,252	)
Impairment charge		(27,844,579	)		—			—			—			—
Settlement income (expense)		(900,000	)		—			2,600,000			—			—
Operating income (loss)		(29,785,258	)		3,343,286			5,677,058			(7,068,127	)		13,307,849
Other expense		(2,567,385	)		(2,800,269	)		(3,993,537	)		(4,261,307	)		(4,689,810	)
Net income (loss) before noncontrolling interest		(32,352,643	)		543,017			1,683,521			(11,329,434	)		8,618,039
Noncontrolling income (loss)		353,019			(27,838	)		—			—			—
Net income (loss)	$	(32,705,662	)	$	570,855		$	1,683,521		$	(11,329,434	)	$	8,618,039
Weighted average units outstanding		38,510,066			33,391,636			28,141,942			27,104,625			27,104,625
Net income (loss) per unit—Basic and diluted	$	(0.85	)	$	0.02		$	0.06		$	(0.42	)	$	0.32

	As of
	October 31, 2012		October 31, 2011		October 31, 2010		October 31, 2009		October 31, 2008
Balance Sheet Data:
Assets:
Current assets	$	7,538,782	$	14,237,942	$	18,254,313	$	12,926,672	$	27,223,185
Property and equipment		58,099,286		88,592,945		89,803,647		98,560,605		103,882,039
Other assets		942,951		1,303,037		1,482,617		1,602,000		2,295,586
Total assets	$	66,581,019	$	104,133,924	$	109,540,577	$	113,089,277	$	133,400,810
Current liabilities	$	45,000,237	$	7,807,727	$	60,034,589	$	69,059,727	$	23,552,096
Long-term debt		4,031,335		46,844,912		4,068,716		4,775,804		59,265,534
Members' equity		17,549,447		49,481,285		45,437,272		39,253,746		50,583,180
Total liabilities and members' equity	$	66,581,019	$	104,133,924	$	109,540,577	$	113,089,277	$	133,400,810

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of selected factors, including those set forth under "Risk Factors" in Part I, Item 1A of this Form 10-K. All forward-looking statements included herein are based on information available to us as of the date hereof, and we undertake no obligation to update any such forward-looking statements.

        We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the fiscal year ended October 31, 2012.

Overview

        Heron Lake BioEnergy, LLC is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota. The plant has a stated capacity to produce 50 million gallons of denatured fuel grade ethanol and 160,000 tons of dried distillers' grains (DDGS) per year. Production of ethanol and distillers' grains at the plant began in September 2007. We began recording revenue from plant production in October 2007, the last month of our fiscal year. Our revenues are derived from the sale and distribution of our ethanol throughout the continental United States and in the sale and distribution of our distillers' grains (DGS) locally, and throughout the continental United States. Our subsidiary, Lakefield Farmers Elevator, LLC, has grain facilities at Lakefield and Wilder, Minnesota. Our subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas, LLC, the pipeline company formed to construct, own, and operate a natural gas pipeline that provides natural gas to the Company's ethanol production facility through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota.

        Our operating results are largely driven by the prices at which we sell ethanol and distillers grains and the costs related to their production, particularly the cost of corn. Historically, the price of ethanol tended to fluctuate in the same direction as the price of unleaded gasoline and other petroleum products. However, during fiscal 2008 and continuing into fiscal 2012, it appears ethanol prices tended to move up and down proportionately, with changes in corn prices. The price of ethanol can also be influenced by factors such as general economic conditions, concerns over blending capacities, and government policies and programs. The price of distillers grains is generally influenced by supply and demand, the price of substitute livestock feed, such as corn and soybean meal, and other animal feed proteins. Our largest component of and cost of production is corn. The cost of corn is affected primarily by factors over which we lack any control such as crop production, carryout, exports, government policies and programs, and weather. The growth of the ethanol industry has increased the demand for corn. We believe that continuing increase in global demand will result in corn prices above historic averages. As an example of our potential sensitivity to price changes, if the price of ethanol rises or falls $.10 per gallon, our revenues may increase or decrease accordingly by approximately $5.0 million, assuming no other changes in our business. Additionally, if the price of corn rises or falls $0.25 per bushel, our cost of goods sold may increase or decrease by $5.0 million, again assuming no other changes in our business. During our fiscal 2012, the market price of ethanol and corn were extremely volatile. The price of corn hit a high of $8.32 per bushel in August and a low of $5.51 per bushel in June, while the price of ethanol fluctuated from a high of $2.87 per gallon in November and a low of $1.86 per gallon in June.

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Pending Asset Sales, Forbearance Agreement and Plan of Dissolution

        Pursuant to an asset purchase agreement dated January 22, 2013, we have agreed to sell substantially all of our assets to Guardian Energy Heron Lake, LLC ("Guardian"), other than the elevator and grain storage facilities to be sold to FCA Co-op as described below. Under the terms of the asset purchase agreement with Guardian, the purchase price for the acquired assets is $55 million, payable in cash, plus the value of certain net working capital items at closing, less the amount we owe as of the closing date under certain debt obligations to be assumed by Guardian. We expect the value of our net working capital to be approximately $1.5 million at closing and the aggregate amount of liabilities to be assumed by Guardian to be $4.4 million at closing, which will reduce the purchase price. We expect to close the transaction with Guardian on or before March 31, 2013, or as soon as practicable following satisfaction or waiver of all closing conditions specified in the asset purchase agreement. One condition to the closing of the sale transaction with Guardian is the approval of our members and we will call a Special Meeting of Members for this purpose.

        Through our wholly owned subsidiary, Lakefield Farmers Elevator, LLC, we also owned elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota. Pursuant to an asset purchase agreement dated January 3, 2013, Lakefield Farmers Elevator, LLC agreed to sell substantially all of its assets consisting of the elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota to FCA Co-op for $3.75 million plus the purchase price for corn and fuel inventory. On February 1, 2013 the sale to FCA Co-op was closed.

        On February 12, 2013, we entered into a second amended and restated forbearance agreement with AgStar Financial Services, PCA ("AgStar"). Under the forbearance agreement, AgStar agreed to forbear from exercising its legal and contractual rights and remedies provided in the loan documents and by applicable law, including, but not limited to, the right to foreclose the real estate mortgages and security agreements and to obtain the appointment of a receiver pursuant to applicable law, until March 31, 2013 in order to permit us to close on the transactions contemplated by the asset purchase agreement with Guardian and the asset purchase agreement with FCA Co-op. On February 1, 2013, we completed the sale of substantially all the assets of Lakefield Farmers Elevator, LLC to FCA Co-op pursuant to the terms of the asset purchase agreement.

        Under the forbearance agreement, it is an event of default, among other things, if we fail to close (i) on the sale of our grain storage and handling facilities as contemplated by asset purchase agreement dated January 3, 2013 with FCA Co-op on or before February 28, 2013 or (ii) on the sale of our ethanol plant assets to Guardian Energy Heron Lake, LLC on or before March 31, 2013.

        The closing of each of the asset purchase agreements with FCA-Co-op and Guardian Energy Heron Lake, LLC is subject to the satisfaction or waiver of various conditions. We cannot guarantee that we will be able to satisfy the closing conditions set forth in the respective asset purchase agreements or that we will be able to satisfy these conditions in time for a closing by the dates AgStar requires under the forbearance agreement.

        Accordingly, if the sale of our ethanol plant assets is not closed by the respective date stated above for any reason, AgStar may accelerate all of our indebtedness and may seize the assets that secure our indebtedness, causing us to lose control of our business. We may also be forced to sell our assets, restructure our indebtedness, submit to foreclosure proceedings, cease operations or seek bankruptcy or reorganization protection.

        Further, our Board of Governors has determined that Heron Lake BioEnergy, LLC should be dissolved and liquidated completely after the consummation of the transaction with Guardian. In this respect, the Board of Governors approved a Plan of Liquidation and Dissolution (the "Plan of Dissolution") on January 22, 2013. The Plan of Dissolution is conditioned on the consummation of the

35

transaction with Guardian and obtaining approval of the Plan of Dissolution by our members at the Special Meeting of Members to approve the transaction with Guardian.

Trends and Uncertainties Impacting Our Operations

        Our current results of operation are affected by factors such as (a) volatile and uncertain pricing of ethanol and corn; (b) availability of corn that is, in turn, affected by trends such as corn acreage, weather conditions, and yields on existing and new acreage diverted from other crops; and (c) the supply and demand for ethanol, which is affected by acceptance of ethanol as a substitute for fuel, public perception of the ethanol industry, government incentives and regulation, and competition from new and existing construction, among other things.

        These same factors will affect our future results of operations if we do not dissolve and liquidate pursuant to the Plan of Dissolution. Other factors that may affect our future results of operation include those factors discussed in "Item 1. Business" and "Item 1A. Risk Factors."

Critical Accounting Estimates

        We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions, which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of impairment of our long-lived assets to be a critical accounting estimate. As a result of our review of long-lived assets for impairment at October 31, 2012, we recorded an impairment charge of approximately $27.8 million.

        We enter forward contracts for corn purchases to supply the plant. These contracts represent firm purchase commitments which along with inventory on hand must be evaluated for potential market value losses. We have estimated a loss on these firm purchase commitments to corn contracts in place and for corn on hand during 2011 where the price of corn exceeded the market price and upon being used in the manufacturing process and eventual sale of products we anticipate losses. Our estimates include various assumptions including the future prices of ethanol, distillers' grains and corn. For the years ended 2012, 2011 and 2010 we recognized a lower of cost or market losses of approximately $0, $1,592,000 and $904,000, respectively.

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Fiscal Year Ended October 31, 2012 Compared to Fiscal Year Ended October 31, 2011

        The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statements of operations for the fiscal year ended October 31, 2012 and 2011:

	2012						2011
Income Statement Data	Amount			%			Amount			%
Revenues	$	168,659,935			100.0		$	164,120,375			100.0
Cost of Goods Sold		166,529,283			98.7			157,163,624			95.8
Gross Profit		2,130,652			1.3			6,956,751			4.2
Operating Expenses		3,171,331			1.9			3,613,465			2.2
Impairment Charge		27,844,579			16.5			—			0.0
Settlement Expense		900,000			0.5			—			0.0
Operating Income (Loss)		(29,785,258	)		(17.7	)		3,343,286			2.0
Other Expense		(2,567,385	)		(1.5	)		(2,800,269	)		(1.7	)
Net Income (Loss) before noncontrolling interest		(32,352,643	)		(19.2	)		543,017			0.4
Noncontrolling Income (Loss)		353,019			(0.2	)		(27,838	)		0.0
Net Income (Loss)	$	(32,705,662	)		(19.4	)	$	570,855			0.3

Revenues

        Ethanol revenues during the fiscal year ended October 31, 2012 were approximately $128.6 million, comprising 76% of our revenues, as compared to approximately $130.6 million during the fiscal year ended October 31, 2011, representing 80% of our revenues.

        For the year ended October 31, 2012, we sold approximately 58.2 million gallons of ethanol at an average price of $2.21 per gallon. For the year ended October 31, 2011, we sold approximately 53.4 million gallons of ethanol at an average price of $2.45 per gallon. The price of ethanol during our fiscal year was affected by the demand for ethanol as a motor fuel which is affected by, among other factors, regulatory developments, gasoline consumption, and the price of crude oil. The price was also affected by federal RFS blending mandates.

        We may hedge anticipated ethanol sales through a variety of mechanisms. Our marketers, whether C&N or Gavilon, are obligated to use reasonable efforts to obtain the best price for our ethanol. To mitigate ethanol price risk and to obtain the best margins on ethanol that is marketed and sold by a marketer, we may utilize ethanol swaps, over-the-counter ("OTC") ethanol swaps, or OTC ethanol options that are typically settled in cash, rather than gallons of the ethanol we produce. Losses or gains on ethanol derivative instruments recorded in a particular period are reflected in revenue for that period. For the years ended October, 31, 2012 and 2011, we recorded losses of approximately $0 and $24,000, respectively, related to ethanol derivative instruments. There are timing differences in the recognition of losses or gains on derivatives as compared to the corresponding sale of ethanol.

        We expect to see fluctuations in ethanol prices over the next fiscal year. While the demand for ethanol is expected to continue since gasoline blenders will need increasing amounts of ethanol to meet the Renewable Fuels Standard's blending requirements, the supply is also expected to increase as additional production facilities are completed or increase production. In addition, low prices for petroleum and gasoline will exert downward pressure on ethanol prices. If ethanol prices decline, our earnings will also decline, particularly if corn prices remain substantially higher than historic averages, as they were in our fiscal year 2012. Future prices for fuel ethanol will be affected by a variety of factors beyond our control including, the demand for ethanol as a motor fuel, federal incentives for

37

ethanol production, the amount and timing of additional domestic ethanol production and ethanol imports and petroleum and gasoline prices.

        Total sales of DGS during fiscal years 2012 and 2011 equaled approximately $33.2 million and $24.8 million, respectively, comprising 20% and 15% of our revenues for fiscal years 2012 and 2011, respectively. In fiscal years 2012 and 2011, we sold approximately 146,000 tons and 136,000 tons, respectively, of dried distillers' grain. The average price we received for distillers' grain was approximately $215 per ton in fiscal year 2012 and approximately $176 per ton in fiscal year 2011.

        Prices for distillers' grains are affected by a number of factors beyond our control such as the supply of and demand for distillers' grains as an animal feed and prices for competing feeds. We believe that current market prices for distillers' grains are approaching levels that can be sustained long-term as long as the prices of competing animal feeds remain steady or increase, livestock feeders continue to create demand for alternative feed sources such as distillers' grains and the supply of distillers' grains remains relatively stable. On the other hand, if competing commodity price values retreat and distillers' supplies increase due to growth in the ethanol industry, distillers' grains prices may decline.

Cost of Goods Sold

        Our costs of sales include, among other things, the cost of corn used in ethanol and DGS production (which is the largest component of costs of sales), natural gas, processing ingredients, electricity, and wages, salaries and benefits of production personnel. We use approximately 1.5 million bushels of corn per month at the plant. We contract with local farmers and elevators for our corn supply. We are able to store corn that we purchase in our elevators in Lakefield and Wilder, Minnesota, as well as in on-site storage at the plant.

        Our costs of sales (including lower of cost or market adjustments) as a percentage of revenues were 98.7% and 95.8% for the fiscal years ended October 31, 2012 and October 31, 2011, respectively. The per bushel cost of corn purchased increased approximately 10.0% in the fiscal year ended October 31, 2012 as compared to the fiscal year ended October 31, 2011. Cost of goods sold includes lower of cost or market adjustments of approximately $1.6 million for the fiscal year ended October 31, 2011. There were no such losses for the fiscal year ended October 31, 2012. We had gains and losses related to corn derivative instruments of approximately $1.1 million and $0.4 million for the fiscal year ended October 31, 2012 and 2011, respectively, which changed cost of sales. In summary, lower of cost or market adjustments decreased approximately $1.6 million for the fiscal year ended October 31, 2012 as compared to the fiscal year ended October 31, 2011. The 10.0% increase in the per bushel cost of corn outweighed the 10.0% decrease in the per gallon sales price of ethanol which caused the increase in the cost of goods sold as a percent of revenues for the fiscal year ended October 31, 2012. Our gross margin for the fiscal year ended October 31, 2012 decreased to 1.3% from 4.2% for the fiscal year ended October 31, 2011.

        The cost of corn fluctuates based on supply and demand, which, in turn, is affected by a number of factors that are beyond our control. We expect our gross margin to fluctuate in the future based on the relative prices of corn and fuel ethanol. We use futures and options contracts to minimize our exposure to movements in corn prices, but there is no assurance that these hedging strategies will be effective. Through October 31, 2012, none of our derivative contracts were designated as hedges and, as a result, changes to the market value of these contracts were recognized as an increase or decrease to our costs of goods sold. As a result, gains or losses on derivative instruments do not necessarily coincide with the related corn purchases. This may cause fluctuations in cost of goods sold. While we do not use hedge accounting to match gains or losses on derivative instruments, we believe the derivative instruments provide an economic hedge.

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Operating Expenses

        Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs and generally do not vary with the level of production at the plant. These expenses were $3.1 million for the fiscal year ended October 31, 2012, down 12.0% from $3.6 million for the fiscal year ended October 31, 2011. These expenses generally do not vary with the level of production at the plant and were relatively constant from period to period. The decline in operating expenses was primarily due to a reduction in professional fees. The Company recorded an impairment charge of approximately $27.8 million as of October 31, 2012. The impairment charge was recorded after analysis by the Company whereby the fair value of long-lived assets was less than the carrying value. There was no similar impairment in 2011. The Company also recorded settlement expense of $900,000 related to a dispute with its former coal supplier.

Operating Income

        Our loss from operations for fiscal year 2012 was $29.8 million compared to operating income of $3.3 million for fiscal year 2011. The operating loss for fiscal year 2012 includes the impairment charge of $27.8 million.

Other Income and (Expense)

        Other expense consisted primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense for fiscal year 2012, which was down as compared to fiscal year 2011, is dependent on the balances outstanding and interest rate fluctuations. As of October 31, 2012, debt balances were down 9% as compared to balances at October 31, 2011, which was the main factor in the loan interest expense. Balances on our revolving term note were $4.2 million at October 31, 2012 as compared to $6.9 million at October 31, 2011. In May 2008, we locked in an interest rate of 6.58% on $45.0 million of the note for three years ending April 30, 2011. As of May 1, 2011 the outstanding balance on the term note was subject to a variable rate based on LIBOR plus 3.25%.

Fiscal Year Ended October 31, 2011 Compared to Fiscal Year Ended October 31, 2010

        The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statements of operations for the fiscal year ended October 31, 2011 and 2010:

	2011						2010
Income Statement Data	Amount			%			Amount			%
Revenues	$	164,120,375			100.0		$	110,624,758			100.0
Cost of Goods Sold		157,163,624			95.8			103,690,208			93.7
Gross Profit		6,956,751			4.2			6,934,550			6.3
Operating Expenses		3,613,465			2.2			3,857,492			3.5
Settlement Income		—			0.0			2,600,000			2.4
Operating Income (Loss)		3,343,286			2.0			5,677,058			5.1
Other Expense		(2,800,269	)		(1.7	)		(3,993,537	)		(3.6	)
Net Income before noncontrolling interest		543,017			0.4			1,683,521			1.5
Noncontrolling Loss		(27,838	)		0.0			—			0.0
Net Income	$	570,855			0.3		$	1,683,521			1.5

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Revenues

        Ethanol revenues during the period ended October 31, 2011 were approximately $130.6 million, comprising 80% of our revenues compared to $90.9 million during the period ended October 31, 2010, representing 82% of our revenues.

        For the year ended October 31, 2011, we sold approximately 53.4 million gallons of ethanol at an average price of $2.45 per gallon. For the year ended October 31, 2010, we sold approximately 53.4 million gallons of ethanol at an average price of $1.70 per gallon. The price of ethanol during our fiscal year was affected by the demand for ethanol as a motor fuel which is affected by, among other factors, regulatory developments, gasoline consumption, and the price of crude oil. The price was also affected by federal RFS blending mandates.

        We may hedge anticipated ethanol sales through a variety of mechanisms. Our marketers, whether C&N or Gavilon, are obligated to use reasonable efforts to obtain the best price for our ethanol. To mitigate ethanol price risk and to obtain the best margins on ethanol that is marketed and sold by a marketer, we may utilize ethanol swaps, over-the-counter ("OTC") ethanol swaps, or OTC ethanol options that are typically settled in cash, rather than gallons of the ethanol we produce. Losses or gains on ethanol derivative instruments recorded in a particular period are reflected in revenue for that period. For the years ended October, 31, 2011 and 2010, we recorded losses of approximately $20,000 and $200,000, respectively, related to ethanol derivative instruments. There are timing differences in the recognition of losses or gains on derivatives as compared to the corresponding sale of ethanol.

        We expect to see fluctuations in ethanol prices over the next fiscal year. While the demand for ethanol is expected to continue since gasoline blenders will need increasing amounts of ethanol to meet the Renewable Fuels Standard's blending requirements, the supply is also expected to increase as additional production facilities are completed or increase production. In addition, low prices for petroleum and gasoline will exert downward pressure on ethanol prices. If ethanol prices decline, our earnings will also decline, particularly if corn prices remain substantially higher than historic averages, as they were in our fiscal year 2011. Future prices for fuel ethanol will be affected by a variety of factors beyond our control including, the demand for ethanol as a motor fuel, federal incentives for ethanol production, the amount and timing of additional domestic ethanol production and ethanol imports and petroleum and gasoline prices.

        Total sales of DGS during fiscal years 2011 and 2010 equaled approximately $24.8 million and $13.0 million, respectively, comprising 15% and 12% of our revenues for fiscal years 2011 and 2010, respectively. In fiscal years 2011 and 2010, we sold approximately 136,000 tons and 119,000 tons, respectively, of dried distillers' grain. The average price we received for distillers' grain was approximately $176 per ton in fiscal year 2011 and approximately $99 per ton in fiscal year 2010.

        Prices for distillers' grains are affected by a number of factors beyond our control such as the supply of and demand for distillers' grains as an animal feed and prices for competing feeds. We believe that current market prices for distillers' grains are approaching levels that can be sustained long-term as long as the prices of competing animal feeds remain steady or increase, livestock feeders continue to create demand for alternative feed sources such as distillers' grains and the supply of distillers' grains remains relatively stable. On the other hand, if competing commodity price values retreat and distillers' supplies increase due to growth in the ethanol industry, distillers' grains prices may decline.

Cost of Goods Sold

        Our costs of sales include, among other things, the cost of corn used in ethanol and DGS production (which is the largest component of costs of sales), coal, processing ingredients, electricity, and wages, salaries and benefits of production personnel. We use approximately 1.5 million bushels of

40

corn per month at the plant. We contract with local farmers and elevators for our corn supply. We are able to store corn that we purchase in our elevators in Lakefield and Wilder, Minnesota, as well as in on-site storage at the plant.

        Our costs of sales (including lower of cost or market adjustments) as a percentage of revenues were 95.8% and 93.9% for the twelve months ended October 31, 2011 and, 2010, respectively. The per bushel cost of corn purchased increased approximately 78% in the twelve months ended October 31, 2011 as compared to the fiscal year ended October 31, 2010. Cost of goods sold includes lower of cost or market adjustments of approximately $1.6 million for the fiscal year ended October 31, 2011, which related to forward purchase contracts and inventory where the fixed price was more than the estimated realizable value. The lower of cost or market adjustment for the twelve months ended October 31, 2010 was approximately $0.9 million. We had losses related to corn derivative instruments of approximately $0.4 and $1.0 million for the twelve months ended October 31, 2011 and 2010, respectively, which increased cost of sales. In summary, lower of cost or market adjustments increased approximately $0.7 million for the fiscal year ended October 31, 2011 as compared to the fiscal year ended October 31, 2010. During the same periods, losses on derivatives decreased approximately $0.6 million. The 78% increase in the per bushel cost of corn outweighed the 44% increase in the per gallon sales price of ethanol which caused the increase in the cost of goods sold as a percent of revenues for the twelve months ended October 31, 2011. Our gross margin for the twelve months ended October 31, 2011 decreased to 4.2% from 6.1% for the twelve months ended October 31, 2010. Our gross margin decreased in fiscal year 2011 as compared to fiscal year 2010 due in part to the additional plant downtime for the conversion to natural gas.

        The cost of corn fluctuates based on supply and demand, which, in turn, is affected by a number of factors that are beyond our control. We expect our gross margin to fluctuate in the future based on the relative prices of corn and fuel ethanol. We use futures and options contracts to minimize our exposure to movements in corn prices, but there is no assurance that these hedging strategies will be effective. Through October 31, 2011, none of our derivative contracts were designated as hedges and, as a result, changes to the market value of these contracts were recognized as an increase or decrease to our costs of goods sold. As a result, gains or losses on derivative instruments do not necessarily coincide with the related corn purchases. This may cause fluctuations in cost of goods sold. While we do not use hedge accounting to match gains or losses on derivative instruments, we believe the derivative instruments provide an economic hedge.

Operating Expenses

        Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs and generally do not vary with the level of production at the plant. These expenses were $3.6 million for the twelve months ended October 31, 2011 down 6.3% from $3.9 million for the twelve months ended October 31, 2010. These expenses generally do not vary with the level of production at the plant and were relatively constant from period to period. Increased revenue for the fiscal year ended October 31, 2011 positively affected operating expenses as a percentage of revenue as total revenues increased approximately 48%.

Settlement Income

        From the settlement on July 2, 2010 of our arbitration proceeding involving Fagen, Inc., we recorded $2.6 million of settlement income from cash and noncash proceeds during the third quarter of fiscal year 2010. There was no settlement income in fiscal year 2011.

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Operating Income

        Our income from operations for fiscal year 2011 totaled $3.3 million compared to fiscal year 2010 operating income of approximately $5.7 million. We experienced a decrease in operating income in fiscal year 2011 compared to 2010 due primarily to the impact of $2.6 million in settlement income.

Other Income and (Expense)

        Other expense consisted primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense for fiscal year 2011, which was down as compared to the twelve months ended October 31, 2010, is dependent on the balances outstanding, interest rate fluctuations and default interest accruals. As of October 31, 2011, debt balances were down 12% as compared to balances at October 31, 2010. Balances on our line of credit decreased from $3,500,000 at October 31, 2010 to no outstanding balance at October 31, 2011. In May 2008, we locked in an interest rate of 6.58% on $45.0 million of the note for three years ending April 30, 2011. As of May 1, 2011 the outstanding balance on the term note was subject to a variable rate based on LIBOR plus 3.25%. We also accrued 2% in default interest on all of our indebtedness to AgStar beginning February 1, 2010 through July 2, 2010, which added additional expense for the twelve months ended October 31, 2010.

Liquidity and Capital Resources

        As of October 31, 2012, we had cash and equivalents (other than restricted cash) of approximately $653,000, current assets of approximately $7.5 million and total assets of approximately $66.6 million.

        Our principal sources of liquidity consist of available borrowings under our master loan agreement with AgStar, cash provided by operations, and cash and cash equivalents on hand. Under the master loan agreement with AgStar, we have two forms of debt: a term note and a revolving term note. The total indebtedness to AgStar at October 31, 2012 was $40.8 million, consisting of $36.6 million under the term note and $4.2 million under the revolving term note. Our revolving term note allowed borrowing up to $7.5 million subject to letters of credit outstanding. Among other provisions, our master loan agreement contains covenants requiring us to maintain various financial ratios and tangible net worth. It also limits our annual capital expenditures and membership distributions. All of our assets and real property are subject to security interests and mortgages in favor of AgStar as security for the obligations of the master loan agreement. Please see "Credit Arrangements—Credit Arrangement with AgStar" for a description of our indebtedness and agreements relating to our indebtedness with AgStar. We have also raised $3.5 million in equity in fiscal 2011 and another $0.7 million in November 2011; the proceeds of these offerings were used for operating working capital purposes.

        Historically, our cash and cash generated from operations have been insufficient to fund our capital needs and operating expenses, primarily due to the volatility in the ethanol and corn markets reducing or eliminating profit margins. Accordingly, we have relied on available borrowing under our agreement with AgStar for capital necessary to fund our business.

        As of October 31, 2012, we were in default of covenants of our master loan agreement with AgStar requiring us to maintain at least $5.0 million minimum working capital; at least $39.5 million of tangible net worth; and a fixed charge ratio of 1.20 to 1.00 or greater. We also failed to make monthly principal payments to AgStar on December 1, 2012, January 1, 2013, and February 1, 2013 and will not make the required monthly principal payment on March 1, 2013. As a result of these actual and anticipated events of default, our lower than desired working capital, and the continued volatility in commodity prices, there is substantial doubt about our ability to continue as a going concern.

        On February 12, 2013, we entered into a second amended and restated forbearance agreement with AgStar. Under the forbearance agreement, AgStar agreed to forbear from exercising its legal and

42

contractual rights and remedies provided in the loan documents and by applicable law, including, but not limited to, the right to foreclose the real estate mortgages and security agreements and to obtain the appointment of a receiver pursuant to applicable law, until March 31, 2013 in order to permit us to close on the transactions contemplated by the asset purchase agreement with Heron Lake Guardian, LLC ("Guardian") for the sale of our ethanol plant assets and the asset purchase agreement with FCA Co-op for the sale of the grain storage and handling facilities of our subsidiary, Lakefield Farmers Elevator, LLC.

        Under the forbearance agreement, it is an event of default, among other things, if we fail to close (i) on the sale of our grain storage and handling facilities as contemplated by asset purchase agreement dated January 3, 2013 with FCA Co-op on or before February 28, 2013 or (ii) on the sale of our ethanol plant assets to Guardian on or before March 31, 2013. On February 1, 2013, we completed the sale of substantially all the assets of Lakefield Farmers Elevator, LLC to FCA Co-op pursuant to the terms of the asset purchase agreement.

        Accordingly, if the sale of our ethanol plant assets is not closed by the respective date stated above for any reason, AgStar may accelerate all of our indebtedness and may seize the assets that secure our indebtedness, causing us to lose control of our business. We may also be forced to sell our assets, restructure our indebtedness, submit to foreclosure proceedings, cease operations or seek bankruptcy or reorganization protection.

        The asset sale to Guardian is the result of a review of strategic alternatives for our company by the Board in light of financial exigencies facing us. Management has not developed any plan to improve our liquidity and capital resource position apart from the sale of assets to FCA Co-op and Guardian, followed by the complete dissolution and liquidation of Heron Lake BioEnergy, LLC after the consummation of the transaction with Guardian. In this respect, the Board of Governors approved the Plan of Dissolution on January 22, 2013. The Plan of Dissolution is conditioned on the consummation of the transaction with Guardian and obtaining approval of the Plan of Dissolution by our members at the Special Meeting of Members to approve the transaction with Guardian.

        If we complete the asset sale to Guardian and our members approve the Plan of Dissolution, the Plan of Dissolution will become effective. Thereafter, we will cease to do business and will not engage in any business activities except for the purpose of liquidating our remaining assets, paying any debts and obligations, distributing the remaining assets to members, and doing other acts required to liquidate and wind up our business and affairs.

Year Ended October 31, 2012 Compared to Year Ended October 31, 2011

        Our principal uses of cash are to pay operating expenses of the plant and to make debt service payments. During the fiscal year ended October 31, 2012, we used cash to make principal payments of approximately $6.9 million against our debt.

        The following table summarizes our sources and uses of cash and equivalents from our condensed consolidated statements of cash flows for the periods presented (in thousands):

	Year Ended October 31
	2012			2011			2010
Net cash provided by (used in) operating activities	$	398		$	14,258		$	(202	)
Net cash used in investing activities		(1,561	)		(4,493	)		(519	)
Net cash used in financing activities		(5,324	)		(4,148	)		(940	)
Net increase (decrease) in cash and equivalents	$	(6,487	)	$	5,617		$	(1,661	)

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        During the twelve months ended October 31, 2012, we received $398,000 in cash for operating activities. This consists primarily of generating a net loss of $32.7 million plus non-cash expenses and charges including depreciation and amortization expense, and impairment charges of $33.5 million and net cash uses for changes in other current assets and liabilities.

        During the twelve months ended October 31, 2012, we used approximately $1.6 million for investing activities primarily to pay for capital expenditures which included costs for the corn oil separation system.

        During the twelve months ended October 31, 2012, we used approximately $5.3 million from financing activities consisting primarily of payments on our long term debt of approximately $6.9 million. Offsetting cash sources from financing activities included member contributions and modest borrowing.

Year Ended October 31, 2011 Compared to Year Ended October 31, 2010

        Our principal uses of cash are to pay operating expenses of the plant and to make debt service payments. During the twelve months ended October 31, 2011, we used cash to make principal payments of approximately $4.2 million against the term note and to pay down $3.5 million on our line of credit.

        The following table summarizes our sources and uses of cash and equivalents from our condensed consolidated statements of cash flows for the periods presented (in thousands):

	Year Ended October 31
	2011			2010			2009
Net cash provided by (used in) operating activities	$	14,258		$	(202	)	$	(8,334	)
Net cash used in investing activities		(4,493	)		(519	)		(232	)
Net cash provided by (used in) financing activities		(4,148	)		(940	)		395
Net increase (decrease) in cash and equivalents	$	5,617		$	(1,661	)	$	(8,171	)

        During the twelve months ended October 31, 2011, we received $14.3 million in cash for operating activities. This consists primarily of generating net income of $0.5 million plus non-cash expenses including depreciation and amortization of $5.5 million and reductions in inventory and accounts receivable.

        During the twelve months ended October 31, 2011, we used approximately $4.5 million for investing activities primarily to pay for capital expenditures which included costs for the conversion to natural gas.

        During the twelve months ended October 31, 2011, we used approximately $4.1 million from financing activities consisting primarily of payments on our term note of approximately $4.2 million and $3.5 million on the line of credit. We also raised $3.5 million from member contributions.

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Contractual Obligations

        The following table provides information regarding the consolidated contractual obligations of the Company as of October 31, 2012:

	Total		Less than One Year		One to Three Years		Four to Five Years		Greater Than Five Years
Long-term debt obligations(1)	$	48,552,760	$	43,940,563	$	2,289,784	$	907,730	$	1,414,683
Operating lease obligations		5,583,738		1,589,842		2,259,856		1,664,740		69,300
Purchase obligations(2)		264,000		132,000		132,000		—		—
Total contractual obligations	$	54,400,498	$	45,662,405	$	4,681,640	$	2,572,470	$	1,483,983

(1)

Long-term debt obligations include estimated interest and interest on unused debt.

(2)

Purchase obligations primarily include forward contracts for natural gas.

Off Balance-Sheet Arrangements

        We have no off balance-sheet arrangements.

Credit Arrangements

Credit Arrangements with AgStar

        We have entered into an amended and restated master loan agreement with AgStar Financial Services, PCA ("AgStar") under which we have two forms of debt as of September 1, 2011: a five-year term loan initially amounting of $40,000,000 and a five-year term revolving loan commitment in the amount of $8,008,689, which, according to the loan agreement was reduced to $7,508,689 as of September 1, 2012.

        AgStar has been granted a security interest in substantially all of the assets of Heron Lake BioEnergy and its subsidiary, Lakefield Farmers Elevator, LLC. We also assigned to AgStar our interest in our agreements for the sale of ethanol and distillers grains, and for the purchases of natural gas, corn and electricity, as well as our design-build agreement with Fagen, Inc. AgStar also received a mortgage relating to our real property and that of Lakefield Farmers Elevator. The security interest and mortgage relating to the property of Lakefield Farmers Elevator was released in connection with the sale of assets on February 1, 2013 by Lakefield Farmers Elevator.

        During the term of the loans, we are subject to certain financial loan covenants consisting of minimum working capital, minimum debt coverage, and minimum tangible net worth. We are only allowed to make annual capital expenditures up to $500,000 annually without prior approval. The loan agreements also impose restrictions on our ability to make cash distributions to our members.

        Upon an occurrence of an event of default or an event that will lead to our default, AgStar may upon notice terminate its commitment to loan funds and declare the entire unpaid principal balance of the loans, plus accrued interest, immediately due and payable. An event of default includes, but is not limited to, our failure to make payments when due, insolvency, any material adverse change in our financial condition or our breach of any of the covenants, representations or warranties we have given in connection with the transaction.

        Please see the discussion above in "Liquidity and Capital Resources" regarding our failure to comply with covenants of the master loan agreement and payment defaults and the impact of these defaults on our liquidity and capital resources. Please also see "Forbearance Agreement" below for a description of our amended and restated forbearance agreement with AgStar, as amended on February 12, 2013.

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Term Note

        The Fifth Amended and Restated Master Loan Agreement and related loan documents with AgStar replaced and superseded the Company's existing loan agreements, related loan documents and the amended forbearance agreements effective September 1, 2011. Under the Fifth Amended and Restated Master Loan Agreement the Company has a five-year term loan in the amount of $40,000,000, comprised of two tranches of $20,000,000 each, with the first tranche bearing interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, and the second tranche bearing interest at 5.75%. The Company must make equal monthly payments of principal and interest on the term loan based on a ten-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016.

Revolving Term Note

        Under the Fifth Amended and Restated Master Loan Agreement the Company also obtained a five-year term revolving loan commitment in the amount of $8,008,689, under which AgStar agreed to make periodic advances to the Company up to this original amount until September 1, 2016. Amounts borrowed by the Company under the term revolving loan and repaid or prepaid may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, payable monthly. The Company also pays an unused commitment fee on the unused portion of the term revolving loan commitment at the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the term revolving loan. Under the terms of the new agreement, the term revolving loan commitment is scheduled to decline by $500,000 annually, beginning on September 1, 2012 and each anniversary date thereafter. The maturity date of the term revolving loan is September 1, 2016.

        Amounts available under the revolving term note are reduced by outstanding standby letters of credit. The Company does have a $600,000 outstanding standby letter of credit at October 31, 2011 and 2012.

Line of Credit

        In September 2011, the Company negotiated a new debt agreement with AgStar that superseded past agreements, including the forbearance agreements. This new debt agreement extends the maturity date of the loans, increases the potential available balance on the revolving portion of the long-term debt, and allows the Company to reclassify the debt to long-term. As part of this new agreement, the Company repaid in full the line of credit with AgStar in September 2011. The repayment of the line of credit was done as part of the change in ethanol and distillers marketers to Gavilon, LLC ("Gavilon") in September 2011. Gavilon will also assume responsibility for certain risk management activities for the Company and will carry certain raw material and finished goods inventory rather than the Company. With the transition to Gavilon, the Company sold certain inventory to Gavilon in order to pay in full the $3.5 million outstanding on line of credit in September 2011.

Forbearance Agreement

        On February 12, 2013, we entered into a second amended and restated forbearance agreement with AgStar that provides for a forbearance period until March 31, 2013 relating to certain covenant defaults and required monthly principal installment payments. We previously entered into a forbearance agreement with AgStar dated December 21, 2012, which was amended and restated on January 22, 2013. Below is a description of the January 22, 2013 amended and restated forbearance agreement, as amended on February 12, 2013.

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        Under the forbearance agreement, AgStar agreed to forbear from exercising its legal and contractual rights and remedies provided in the loan documents and by applicable law, including, but not limited to, the right to foreclose the real estate mortgages and security agreements and to obtain the appointment of a receiver pursuant to applicable law, until March 31, 2013 (the "Forbearance Period") in order to permit the Company to close on the transactions contemplated by the asset purchase agreement dated January 22, 2013 between us and Guardian (the "Ethanol Plant APA") and the asset purchase agreement between us and FCA Co-op (the "Elevator APA"). The Elevator APA transactions closed on February 1, 2013. In exchange for this forbearance, we agreed to use our best commercial efforts to close on the sale of substantially all of its assets pursuant to the terms of the Ethanol Plant APA and the Elevator APA and use the proceeds received upon the closing of the transactions contemplated under the Elevator APA and the Ethanol Plant APA, in the following order:

            i.  first, to pay the costs associated with the closing of such transactions;

           ii.  second, to pay the costs, fees and expenses incurred by, or due to AgStar under or related to the forbearance agreement;

          iii.  third, to pay all late charges and other costs, fees and expenses due under the master loan agreement, term note and revolving term note and other loan documents; and

          iv.  finally to repay the outstanding principal balance and accrued interest under the term note and revolving term note, in such order and manner as AgStar shall determine in its sole and absolute discretion.

        The parties also agreed in the forbearance agreement that interest shall continue to accrue on the unpaid principal balance of the notes at the rates provided in the loan documents (including, as applicable, interest at the default rate specified in the loan documents) and, prior to closing on the transactions contemplated by the Ethanol Plant APA and the Elevator APA, the Company shall pay to AgStar all regularly scheduled periodic payments of interest required under the MLA and Notes on each Monthly Payment Date. Additionally, advances under the revolving term note may only be advanced to the Company for the purpose of funding normal operating expenses pending the closing of the transactions contemplated by the Ethanol Plant APA and Elevator APA, including the payment of interest to AgStar in accordance with the forbearance agreement. Such advances may not exceed $1,750,000. Any request for advances on the Revolving Note is subject to the terms and conditions set forth in the MLA and no advances will be made by AgStar after March 31, 2013.

        Upon the occurrence of any one or more of the following Events of Default under the forbearance agreement, the entire unpaid balance of the loans, including all unpaid principal, accrued interest, default charges and costs and expenses incurred by AgStar in connection with the loans, shall be immediately due and payable by us and AgStar may, in its sole discretion, and without further demand or notice to us, protect and enforce all of its legal, contractual and equitable rights and remedies under the loan documents and the forbearance agreement. For purposes of the forbearance agreement, Event of Default means:

•

any Event of Default under the loan documents first occurring after January 22, 2013 (excluding Events of Default relating to the matters expressly set forth in the forbearance agreement);

•

our failure to pay, when due, any amounts required to be paid under the forbearance agreement, including any amounts owed on the expiration of the Forbearance Period, provided that failure to make the required monthly installment of principal required by the Notes on February 1 and March 1, 2013 shall not constitute a payment default;

•

our failure to observe or perform any covenant, condition, or agreement to be observed or performed under the forbearance agreement for a period of five (5) Business Days after written notice, specifying such default and requesting that it be remedied, provided however that no

47

Event of Default shall be deemed to exist if, within said five (5) day period, we have commenced appropriate action to remedy such failure and shall diligently and continuously pursue such action until such cure is completed, unless such cure is or cannot be completed within thirty (30) days after written notice shall have been given;

•

our failure to close on the transaction contemplated by the Elevator APA on or before February 28, 2013 (the closing of the Elevator APA transactions occurred on February 1, 2013);

•

our failure to close on the transaction contemplated by the Ethanol Plant APA on or before March 31, 2013;

•

our filing of a petition in bankruptcy or for reorganization or for an arrangement pursuant to any present or future state or federal bankruptcy law or under any similar federal or state law, or having an order for relief pursuant to 11 U.S.C. § 303 entered in any such proceeding brought by any other creditor, or making a general assignment for the benefit of our creditors;

•

the commencement of foreclosure or other proceeding to obtain possession of our real property and/or the collateral, whether by judicial proceeding, self-help, repossession, garnishment, execution or any other method, by any creditor of the company; and

•

our failure to deliver to AgStar on each Friday during the term of the forbearance agreement: (i) weekly financial and operating reports, including without limitation its statements of cash flows and income statements, (ii) a weekly budget forecast for the operation of the Project, and (iii) such other reports relating to the financial condition or operation of the our ethanol plant, in each case in a form and substance acceptable to AgStar in its sole discretion.

        We may not make any distributions prior to the closing of the transactions contemplated by the Ethanol Plant APA and the Elevator APA. In connection with the forbearance agreement, we paid a forbearance fee of $10,000, plus all other costs and expenses incurred by AgStar in connection with the preparation, negotiation and execution of the forbearance agreement, including, without limitation, reasonable attorneys' fees.

Other Credit Arrangements

        In addition to our primary credit arrangement with AgStar, we have other material credit arrangements and debt obligations.

        In October 2003, we entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, we and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities. In May 2006, we entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, we pay monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to us if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement. As of October 31, 2012 and 2011, there was a total of $2.9 million and $3.2 million in outstanding water revenue bonds, respectively. We classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

        In November 2007, we entered into a shared savings contract with Interstate Power and Light Company ("IPL"), our electrical service provider. Under the agreement, IPL is required to pay $1,850,000 to fund project costs for the purchase and installation of electrical equipment. In exchange,

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we are required to share a portion of the energy savings with IPL that may be derived from the decreased energy consumption from the new equipment. We are required to pay IPL approximately $30,000 for the first thirteen billing cycles, $140,000 at the end of the thirteenth billing cycle, and thereafter, approximately $30,000 for the remainder of the billing cycles. These amounts represent IPL's portion of the shared savings. We also granted IPL a security interest in the electrical equipment to be installed on our site. The shared savings contract expires December 31, 2012.

        In connection with the shared savings contract, IPL deposited $1,710,000 of the $1,850,000 in an escrow account on our behalf and we received the remaining $140,000 as cash proceeds. The escrow account expires at the same time as the shared savings contract or a termination by IPL of the escrow arrangement, at which time any remaining funds will be distributed to IPL. We earn interest at a rate of 4.2% on the funds escrowed and we pay a rate of interest of 1.5% on the funds deposited into escrow. Each month, a distribution from the escrow account is made to IPL to pay its portion of the shared savings under the shared savings contract.

        To fund the purchase of the distribution system and substation for the plant, we entered into a loan agreement with Federated Rural Electric Association pursuant to which we borrowed $600,000 by a secured promissory note. Under the note we are required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual fee of 1% beginning on October 10, 2009. In exchange for this loan, Federated Rural Electric Association was granted a security interest in the distribution system and substation for the plant. The balances of this loan at October 31, 2012 and 2011 were $368,750 and $443,750, respectively.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of FASB ASC 815, Derivatives and Hedging.

Interest Rate Risk

        We may be exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding a variable term note and a revolving term note. The specifics of these notes are discussed in greater detail in "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations."

Commodity Price Risk

        We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and finished products ethanol and distillers grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

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        As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

        A sensitivity analysis has been prepared to estimate our exposure to ethanol and corn price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and average ethanol price as of October 31, 2012, net of the forward and future contracts used to hedge our market risk for corn usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from October 31, 2012. As of October 31, 2012, none of our corn usage or our ethanol sales over the next 12 months was subject to fixed price or index contracts where a price has been established with an exchange. Other procurement and sales options including basis or index contracts without a price established on the exchange, for both corn and ethanol, are not included in this analysis. The results of this analysis, which may differ from actual results, are as follows:

	Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)		Unit of Measure	Hypothetical Adverse Change in Price as of 10/31/2012			Approximate Adverse Change to Income
Ethanol		58.2 million	Gallons		10	%	$	12 million
Corn		20.1 million	Bushels		10	%	$	14 million

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The following financial statements are included in this Annual Report on Form 10-K beginning at the "F" page noted:

	Page Reference
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of October 31, 2012 and 2011		F-2
Consolidated Statements of Operations for the fiscal years ended October 31, 2012, 2011 and 2010		F-4
Consolidated Statements of Changes in Members' Equity for the fiscal years ended October 31, 2012, 2011 and 2010		F-5
Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2012, 2011 and 2010		F-6
Notes to Consolidated Financial Statements		F-8

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

        We maintain a system of "disclosure controls and procedures," as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended.

        Our Chief Executive Officer, Robert J. Ferguson, and our Chief Financial Officer, Michael L. Mattison, have evaluated our disclosure controls and procedures as of October 31, 2012. Based upon their review, they have concluded that our disclosure controls and procedures were not effective as of October 31, 2012 due to a material weakness in internal control over financial reporting relating to the errors in pricing ethanol and distillers grains revenue and the effects of this revenue recognition error upon the financial statements and reports. This material weakness resulted in a restatement of the unaudited condensed consolidated financial statements for the quarter ended July 31, 2012.

        Our management plans to remediate this material weakness through ongoing process improvements and the implementation of enhanced policies and procedures related to pricing of contracts. We are in the process of strengthening internal controls including enhancing our internal control systems and procedures to assure that this weakness is corrected and remediated. No material weakness is considered remediated until the remedial procedures have operated for an appropriate period, have been tested, and management has concluded that they are operating effectively.

(b) Management's Report on Internal Control over Financial Reporting

The Board of Directors and Members of Heron Lake BioEnergy, LLC:

        Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that:

          (i)  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

         (ii)  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

        (iii)  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Under the supervision of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on

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the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

        A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

        In conducting the aforementioned evaluation, management concluded that the Company's internal control over financial reporting was not effective as of October 31, 2012 due to a material weakness in internal control over financial reporting relating to revenue recognition as described in paragraph (a) to this Item 9A.

(c) Changes in Internal Controls Over Financial Reporting

        There have been no changes in internal control over financial reporting that occurred during the fourth fiscal quarter ended October 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting, except as noted above.

ITEM 9B.    OTHER INFORMATION

        None.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information Regarding Our Governors

        Under our Member Control Agreement, the number of Governors serving the Company is set at nine (9) Governors, including both appointed and elected Governors. Governors that are elected by Members are currently divided into three classes, with the terms of the Governors staggered such that one-third of the Governors (or as nearly as possible) are elected annually by the Members at each Annual Meeting. As the term of each class expires, the successors to the Governors in that class are elected for a three-year term and until their successors are duly elected and qualified, or until their earlier death, resignation or removal.

        Under our current Member Control Agreement, any Member who, together with such Member's affiliates, holds 9% or more of the Units outstanding is entitled to appoint one Governor to the Board for every 9% of Units held, up to the right to appoint a maximum of four Governors by any Member who, together with such Member's affiliates, holds 36% or more of the Units outstanding but less than a majority of the Units outstanding. No Member who, together with such Member's affiliates, holds 45% or more of the Units outstanding but less than a majority of the Units outstanding is entitled to appoint a majority of the Governors to the Board, notwithstanding the fact that such Member together with such Member's affiliates owns 45% or more but less than a majority of the Units outstanding. Any Member who, together with such Member's affiliates, holds a majority of the Units outstanding is entitled to appoint a majority of the Governors (five Governors) to the Board of Governors. Project Viking, LLC owns approximately 41% of our Units that are issued and outstanding and has the right to appoint four (4) Governors to the Company's Board of Governors under the Member Control Agreement. Accordingly, Project Viking has appointed the following Governors: Nick Bowdish, Steven H. Core, and Kenton Johnson. An appointed Governor serves indefinitely at the pleasure of the Member appointing him or her (so long as such Member and its affiliates continue to hold a sufficient number of Units to maintain the applicable appointment right) until a successor is appointed, or until the earlier death, resignation or removal of the appointed Governor. On January 23, 2012, David M. Reinhart, a Project Viking appointee, resigned from the Company's Board of Governors. Project Viking has not yet named a successor appointee to our Board of Governors.

        Except for the appointment right described above, we know of no arrangements or understandings between a Governor and any other person pursuant to which he has been selected as a Governor. There is no family relationship between any of our Governors or our executive officers.

        Set forth below is biographical and other information with respect to each of our Governors serving continuing terms. This information was reviewed and updated by the Governors in January 2013.

Name	Age		Position	Term Expires/Appointed
David J. Woestehoff		43	Governor, Board President	Term expires 2015
Doug Schmitz		50	Governor, Board Vice President	Term expires 2015
Robert J. Ferguson		64	Governor, Chief Executive Officer	Term expires 2014
Michael S. Kunerth		45	Governor, Board Treasurer	Term expires 2013
Milton J. McKeown		67	Governor	Term expires 2013
Nick Bowdish		29	Governor	Appointed
Steven H. Core		63	Governor	Appointed
Kenton Johnson		24	Governor, Board Secretary	Appointed

        David J. Woestehoff.    Mr. Woestehoff operates grain farming operations in Belle Plaine, Minnesota and Arlington, South Dakota. Mr. Woestehoff is also the founder and 50% owner of Brewery Hill

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Grain Company, which operates independent grain elevators in Cleveland and Le Sueur, Minnesota. In 2009, Mr. Woestehoff became president and majority shareholder of Minnesota Valley Grain Company, LLC, which operates commercial grain elevators in LeCenter and Montgomery, Minnesota. Mr. Woestehoff also serves on various committees at First Lutheran Church in Le Sueur, Minnesota. Mr. Woestehoff graduated from the University of Wisconsin in 1990 with a B.S. degree in Agricultural Business and minors in Economics and Animal Science. Mr. Woestehoff was an original member of our founding Board of Governors and currently serves as our Board President.

        Doug Schmitz.    Mr. Schmitz attended Willmar Community College in Willmar, Minnesota, and majored in Ag Business. Doug is a third generation farmer who has been farming with his brother since 1988. In addition to agriculture, Mr. Schmitz owns and operates Schmitz Grain, Inc., which was purchased from his father in 1991. Schmitz Grain has three locations in southwestern Minnesota and provides services to area farmers in grain merchandising, custom drying, feed sales, seed sales and fertilizer and chemical application. He also currently serves on the board of two privately-held companies: Agri-Tech Systems, Inc. located in Las Vegas, Nevada, and United Ag Resources of Slayton, Minnesota. Mr. Schmitz currently serves as our Board Vice President.

        Robert J. Ferguson.    Since 1972, Mr. Ferguson has farmed near Heron Lake, Minnesota. Mr. Ferguson was formerly a Jackson County Commissioner and served on the Jackson County Planning and Zoning board and the Prairieland Economic Development board. In addition, Mr. Ferguson is President of Heron Lake Development Corporation. He is a member of the Jackson County Corn and Soybean Associations, and the Heron Lake / Okabena Community Club. Mr. Ferguson attended Worthington Community College to pursue his associate of arts degree in business administration but just after graduation was drafted by the U.S. Army to serve in the Vietnam War. Mr. Ferguson was an original member of our founding Board of Governors, served as Board President from 2003 to 2011, and currently serves as our Chief Executive Officer.

        Michael S. Kunerth.    Mr. Kunerth has operated a corn and soybean farm in Brewster, Minnesota since 1990. Since 1992, Mr. Kunerth has also operated a retail seed service business. From 1994 to 2008, Mr. Kunerth also served as the Clerk of Graham Lakes Township. He holds a B.S. Degree in Business Management from St. John's University, Collegeville, Minnesota. Mr. Kunerth was an original member of our founding Board of Governors and currently serves as our Board Treasurer.

        Milton J. McKeown.    From 1991 to his retirement in October 2006, Mr. McKeown managed the Heron Lake Insurance Agency. While he is currently retired, Mr. McKeown is active in community affairs. In addition to serving on our Board of Governors, Mr. McKeown is currently a board member of the Southwest Minnesota Workforce Council. Mr. McKeown graduated from Dakota State University with a B.S. degree in Industrial Arts. Mr. McKeown was an original member of our founding Board of Governors.

        Nick Bowdish.    Mr. Bowdish grew up in the grain industry with several years of experience at a privately owned grain elevator in Brodhead, Wisconsin. Since 2008, he has served as the General Manager of Platinum Ethanol, LLC where he is the sole manager of Platinum's commodity margin and its risk management strategy. He tends to the general business practices of the facility while overseeing 50 employees that work in production, accounting, material handling, environmental, health and safety, maintenance and laboratory analysis roles. From June 2007 to November 2008, Mr. Bowdish was a member of the project development team at Fagen, Inc., a prominent builder of ethanol plants worldwide. Nick worked with both operating and development stage projects in the ethanol, power, wind, and industrial process industries. Mr. Bowdish currently serves as a Director on the Board of Badger State Ethanol, LLC located in Monroe, Wisconsin, since August 2010, and the Board of Pannonia Ethanol, LLC located in Dunafoldvar, Hungary, since 2010. Mr. Bowdish previously served on the Board of Platinum Ethanol, LLC in Arthur, IA, from October 2008 to December 2008, before he was appointed its General Manager. Nick also served on the Board of Directors at Western

55

Wisconsin Energy, LLC located in Boyceville, Wisconsin from June 2007 through March 2011. Mr. Bowdish holds a Bachelor's degree in Agricultural Business Management from The University of Wisconsin—Madison. Mr. Bowdish was appointed to our Board of Governors by Project Viking, LLC effective May 24, 2011.

        Steven H. Core.    Mr. Core has over 40 years of agricultural business management experience. Since January 2002, he has worked in sales and marketing for Fagen, Inc., of Granite Falls, Minnesota, on new ethanol plant construction and expansions. Between 1994 and 2002, he served as General Manager of Corn Plus, a Winnebago, MN ethanol producer. During his tenure at Corn Plus, he supervised a staff of 34 employees at the plant which produced 44 million gallons of ethanol annually. Steve is a member of the Minnesota Corn Growers Association and serves as a Director on six ethanol boards, with plants ranging in size from 52 million gallon to 125 million gallon yearly production. Mr. Core received his Associate of Applied Sciences degree in Agricultural Business from Eastern Iowa Community College. Mr. Core was appointed to our Board of Governors by Project Viking, LLC effective May 24, 2011.

        Kenton Johnson.    Mr. Johnson currently raises corn and soybeans with his father south of Granite Falls, MN. In May of 2007, Mr. Johnson started managing his own farming operation. In August of 2009, Mr. Johnson became Chief Executive Officer and shareholder of Prairie View Farms, Inc. Prairie View Farms has been a family owned and operated farming business since 1991. In May of 2011, Mr. Johnson graduated with a Bachelor of Science degree in Agriculture Business Management from Southwest Minnesota State University in Marshall, MN. Mr. Johnson was appointed to our Board of Governors by Project Viking, LLC effective August 30, 2011 and currently serves as our Board Secretary.

Biographies of Executive Officers

        Set forth below is biographical and other information regarding Michael L. Mattison, our Chief Financial Officer. Information about Robert J. Ferguson, our Chief Executive Officer, may be found under the heading "Information Regarding Our Governors."

        Michael L. Mattison, age 60, was appointed as Chief Financial Officer of the Company effective November 26, 2012. Prior to joining the Company, Mr. Mattison served as controller for AgFirst Farmers Cooperative in Brookings, South Dakota from June 2012 to November 2012. From April 2006 to December 2011, Mr. Mattison served as Chief Financial Officer for Western Wisconsin Energy, LLC. Western Wisconsin Energy, LLC owned and operated a 55 million gallon per year ethanol plant near Boyceville, Wisconsin which began production in September 2006. As Chief Financial Officer, Mr. Mattison was responsible for start-up and ongoing management of all financial and administrative infrastructures for Western Wisconsin Energy.

Committees of the Board of Governors and Committee Independence

        We currently have four separate standing committees: the Audit Committee, the Compensation Committee, the Nomination and Governance Committee and the Marketing and Risk Management Committee. One of our committees, the Finance and Planning Committee, was dissolved June 24, 2009. The Audit Committee assumed all responsibilities of the Finance and Planning Committee.

        In December 2007, our Board of Governors adopted written charters for the Audit Committee, the Compensation Committee, and the Nomination and Governance Committee. In December 2011, the Board of Governors, based on the recommendation of the Nomination and Governance Committee, reviewed and made certain amendments to each of these charters and our Governance Guidelines, primarily to clarify the "independence" standard applied to the Board and each committee. Copies of the amended charter of each of these committees are available on our website at www.heronlakebioenergy.com by following the link to "Board of Governors."

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        The composition and function of the committees of the Board are set forth below.

        Compensation Committee.    Currently, the Compensation Committee consists of two Governors: David J. Woestehoff and Michael S. Kunerth. The Compensation Committee oversees our compensation and employee benefit plans and practices, including any executive compensation plans, Governor compensation plans and incentive compensation and equity-based plans. The charter of the Compensation Committee requires that this committee consist of at least two members of the Board of Governors. A majority of members of the Compensation Committee must satisfy the independence requirements of: (1) the NASDAQ Listing Rules, as adopted in the Company's Governance Guidelines; (2) Section 16b-3 of the Exchange Act, if Section 16 is applicable to the Company; and (3) Section 162(m) of the Internal Revenue Code of 1986, all as amended from time to time. A majority of the members of our Compensation Committee meet these requirements. During fiscal year 2012, the Compensation Committee met one time.

        Nomination and Governance Committee.    Currently, the Nomination and Governance Committee consists of four Governors: Milton J. McKeown (Chair), Doug Schmitz, Michael S. Kunerth, and Kenton Johnson. The Nomination and Governance Committee's responsibilities include: (1) identifying and nominating individuals qualified to serve as Governors and on committees of the Board; (2) advising the Governors with respect to the Board's composition, procedures and committees; (3) developing and recommending to the Board a set of corporate governance principles; and (4) overseeing the evaluation of the Board and the Board committees. The charter of the Nomination and Governance Committee requires that this committee consist of at least two members of the Board of Governors. A majority of members of the Nomination and Governance Committee must satisfy the independence requirements of the NASDAQ Listing Rules, as adopted in the Company's Governance Guidelines. The membership of our Nomination and Governance Committee meets the requirements of its charter. During fiscal year 2012, the Nomination and Governance Committee met two times.

        Audit Committee.    Currently, the Audit Committee consists of three Governors and one Board appointed consultant: Michael S. Kunerth (Chair), Milton J. McKeown, Steven H. Core, and Jeremy Wilhelm (third party financial consultant appointed to the Audit Committee by the Board). The Audit Committee assists the Board in fulfilling its oversight responsibility for: (1) the integrity of our financial statements and financial reporting process and our systems of internal accounting and financial controls; (2) the performance of our internal audit function; (3) the annual independent integrated audit of our consolidated financial statements and internal control over financial reporting; and (4) our compliance with legal and regulatory requirements, including our disclosure controls and procedures. The duties and responsibilities of the Audit Committee include the engagement of our independent registered public accounting firm and the evaluation of our accounting firm's qualifications, independence and performance. The charter of the Audit Committee requires that the Audit Committee be comprised of three or more Governors, a majority of whom must be "independent" under the NASDAQ Listing Rules, as adopted in the Company's Governance Guidelines. A majority of the members must also be non-executive Governors, free from any relationship that would interfere with the exercise of independent judgment and "independent" as defined by the applicable rules and regulations of the Securities and Exchange Commission. Moreover, all members of the committee must have a basic understanding of finance and accounting and be able to read and understand fundamental financial statements, and at least one member of the committee must have accounting or related financial management expertise. The Board of Governors determined that the membership of the Audit Committee meets the requirements of its charter. During fiscal year 2012, the Audit Committee met five times.

        In February 2013, the Board of Governors reviewed the qualifications of each member of the Audit Committee for the purpose of determining whether any Governor serving on the Audit Committee would qualify as an "audit committee financial expert" as that term is defined under the

57

rules of the Securities and Exchange Commission. Based upon that review, the Board of Governors determined that no Governor qualifies as an audit committee financial expert, but that the Audit Committee as a whole has sufficient experience and education to perform its duties.

        Marketing and Risk Management Committee.    Currently, the Marketing and Risk Management Committee consists of four Governors: Doug Schmitz (Chair), Robert J. Ferguson, David J. Woestehoff, and Nick Bowdish. The Marketing and Risk Management committee assists the Board and our management to, among other things, enhance our profitability and manage commodity price risk, by establishing appropriate policies and strategies for grain procurement, marketing of ethanol and distillers grains, and managing enterprise risk. During fiscal year 2012, the Marketing and Risk Management Committee met 24 times.

Governor Nominations

        The Nomination and Governance Committee will consider candidates for Board membership suggested by members of that committee, other Governors, as well as management and Members.

        Criteria for Nomination to the Board.    The Nomination and Governance Committee is responsible for identifying, evaluating and approving qualified candidates for nomination as Governors. The committee has not adopted minimum qualifications that nominees must meet in order for the committee to recommend them to the Board of Governors, as the committee believes that each nominee should be evaluated based on his or her merits as an individual, taking into account our needs and the needs of the Board of Governors. The Nomination and Governance Committee evaluates each prospective nominee against the standards and qualifications set out in our Governance Guidelines, including:

•

Background, including demonstrated high personal and professional ethics and integrity; and the ability to exercise good business judgment and enhance the Board's ability to manage and direct the affairs and business of the Company;

•

Commitment, including the willingness to devote adequate time to the work of the Board and its committees, and the ability to represent the interests of all Members and not a particular interest group;

•

Board skills needs, in the context of the existing makeup of the Board, and the candidate' s qualification as independent and qualification to serve on Board committees;

•

Diversity, in terms of knowledge, experience, skills, expertise, and other demographics which contribute to the Board's diversity; and

•

Business experience, which should reflect a broad experience at the policy-making level in business, government and/or education.

        The Nomination and Governance Committee also considers such other relevant factors, as it deems appropriate. The committee will consider persons recommended by the Members in the same manner as other nominees.

        Process for Identifying and Evaluating Nominees.    The process for identifying and evaluating nominees to the Board of Governors is initiated by identifying a slate of candidates who meet the criteria for selection as a nominee and have the specific qualities or skills being sought based on input from members of the Board and, if the Nomination and Governance Committee deems appropriate, a third-party search firm. The Nomination and Governance Committee evaluates these candidates by reviewing the candidates' biographical information and qualifications and checking the candidates' references. We have not engaged a third-party search firm to assist us in identifying potential Governor candidates, but the Nomination and Governance Committee may choose to do so in the future.

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        Member Proposals for Nominees.    The Nomination and Governance Committee will consider written proposals from Members for nominees for Governor. Any such nominations should be submitted to the Nomination and Governance Committee in care of the Board Secretary of Heron Lake BioEnergy and should include the following information: (a) all information relating to such nominee that is required to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Governor if elected); (b) the name and record address of the Member and of the beneficial owner, if any, on whose behalf the nomination will be made; and (c) the number of Units owned by the Member and beneficially owned by the beneficial owner, if any, on whose behalf the nomination will be made. As to each person the Member proposes to nominate, the written notice must also state: (a) the name, age, business address and residence address of the person; (b) the principal occupation or employment of the person; and (c) the number of Units beneficially owned by the person. To be considered as nominees for the 2013 Annual Meeting, the written notice must be submitted in the time frames established by the Nomination and Governance Committee and communicated to Members prior to the meeting.

Communications with Governors

        Members may communicate with the Board as a group, the chair of any committee of the Board of Governors or any individual Governor by sending an e-mail to info@heronlakebioenergy.com or by directing the communication in care of the Board Secretary, at the address set forth on the front page of this Annual Report on Form 10-K.

        All communications will be processed by the Board Secretary. Communications are distributed to the Board, or to any individual Governors as appropriate, depending on the facts and circumstances outlined in the communication. You will receive a written acknowledgement from the Board Secretary upon receipt of your communication.

Section 16(a) Beneficial Ownership Reporting Compliance

        Section 16(a) of the Securities Exchange Act requires our Governors, officers and persons who own more than 10% of our Units to file reports of ownership and changes in ownership in our Units with the Securities and Exchange Commission, and to furnish us with copies of the reports. Based on our review of such reports, we believe that our Governors, officers and owners of 10% or more of our Units timely filed all required Section 16(a) reports during our fiscal year ended October 31, 2012.

Code of Ethics

        Our Board has adopted a code of ethics that applies to our officers and Governors, including our Chief Executive Officer and Chief Financial Officer, and a code of business conduct and ethics that applies to our officers, Governors and employees. Copies of these codes of ethics are available to Members without charge by writing to us at 91246 390th Avenue, Heron Lake, MN 56137.

        We intend to satisfy the disclosure requirements of the Securities and Exchange Commission regarding certain amendments to, or waivers from, provisions of our code of ethics that apply to our principal executive officer, principal financial officer, principal accounting officer or controller by posting such information on our website at www.heronlakebioenergy.com.

ITEM 11.    EXECUTIVE COMPENSATION

Employment Arrangements with Named Executive Officers

        Robert J. Ferguson has served as the President of our Board of Governors since our inception and until October 26, 2011 when the Board of Governors appointed David J. Woestehoff as the new

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President of the Board. Mr. Ferguson acted as our Chief Executive Officer through his position as Board President until September 1, 2007, the date on which we hired Mr. Ferguson as an employee to serve as our Chief Executive Officer and entered into an employment agreement with him. Mr. Ferguson served under that employment agreement until September 1, 2008, after which he served at the pleasure of the Board. Mr. Ferguson is currently paid an annual base salary of $124,800 on a bi-weekly basis and is eligible to participate in any bonus to employees at the discretion of the Board of Governors. On January 28, 2012, Mr. Ferguson announced his intent to retire from his position as the Company's Chief Executive Officer, effective March 23, 2012, subject to any transition services the Board of Governors may request Mr. Ferguson to perform after the effective date. Due to the financial constraints that the Company was experiencing, the Board asked Mr. Ferguson to remain the Company's Chief Executive Officer.

        Lucas Schneider, our Chief Financial Officer during fiscal year 2012 until his resignation effective November 30, 2012, was paid an annual base salary of $85,000. The Company did not enter into an employment agreement with Mr. Schneider.

        Our agreement with Mr. Ferguson did not provide for severance or any other compensation following termination of the employment or services.

Compensation Discussion and Analysis

        The following discussion and analysis describes our compensation objectives and policies as applied to the following executive officers who are referred to as the Named Executive Officers:

•

Robert J. Ferguson, who served as our Chief Executive Officer during fiscal year 2012

•

Lucas Schneider, who served as our Chief Financial Officer until his resignation effective November 30, 2012

        This section is intended to provide a framework within which to understand the actual compensation awarded to, earned or held by each Named Executive Officer during fiscal year 2012, as reported in the compensation tables and accompanying narrative sections appearing below.

Executive Summary

        In fiscal year 2012 we continued the process of transforming Heron Lake BioEnergy into a higher-performing business, focusing on initiatives that substantially improve the performance of our ethanol plant and reduce the costs of production and the costs of regulatory compliance, including the conversion of our ethanol plant from coal to natural gas combustion. With these changes in our business, the Compensation Committee evaluated our compensation programs for fiscal year 2012 to ensure they supported our business initiatives and provided incentives to high performance. Highlighted below are some of the key compensation-related decisions and policies considered by the Compensation Committee relating to fiscal year 2011 compensation to the Named Executive Officers:

•

Salary Increases.  The Compensation Committee did not approve any increases in base salary for Mr. Ferguson or Mr. Schneider during fiscal year 2012.

•

Performance-Based Incentives.  Messrs. Ferguson and Schneider were eligible to participate in any cash bonus to which our other employees were eligible in the discretion of the Board. The Board did not award any discretionary bonus in fiscal year 2012 to Mr. Ferguson, Mr. Schneider or other employees of Heron Lake BioEnergy.

•

Compensation Policies.  The Compensation Committee determined not to use any equity or cash performance-based compensation for fiscal year 2012 compensation.

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Our Compensation Philosophy

        The Compensation Committee's philosophy is to provide a competitive level of compensation that is consistent with the Company's budget, financial performance, and local labor market conditions. In determining compensation for the Chief Executive Officer and Chief Financial Officer, the Compensation Committee sometimes solicits input from our human resources personnel, primarily relating to benefit programs and local labor market conditions. The Chief Executive Officer and Chief Financial Officer are not present during deliberations or determination by the Compensation Committee or the Board of their compensation. Based upon this philosophy, the Compensation Committee has determined that the compensation of the Chief Executive Officer and the Chief Financial Officer should consist of base salary and benefits to which our other employees are eligible.

Fiscal Year 2012 Compensation Elements and Determinations

        The Compensation Committee followed the guiding principles outlined above in the development and administration of compensation programs for Mr. Ferguson and Mr. Schneider.

        During fiscal year 2012, the components of our executive compensation programs consisted of base salary and a discretionary cash bonus. Messrs. Ferguson and Schneider were also eligible to participate in the same benefit programs as were available to our other employees.

2012 Base Salaries

        The Compensation Committee set Mr. Ferguson's annual base salary at $124,800 per year for fiscal year 2012, which it believed was appropriate based upon Mr. Ferguson's responsibilities, the feedback from Mr. Ferguson's review, and information provided by our human resources personnel.

        Mr. Schneider was appointed as our Chief Financial Officer effective December 1, 2010. The Compensation Committee set Mr. Schneider's base salary at $72,500 per year, subject to an adjustment on April 1, 2011 and annual adjustments thereafter. On April 1, 2011, the Company increased Mr. Schneider's base salary to $85,000, which it believed was appropriate based on Mr. Schneider's responsibilities and information provided by our human resources personnel.

2012 Cash Bonus Plan

        Messrs. Ferguson and Schneider were eligible, in the discretion of the Board, to participate in any cash bonus to which our other employees were eligible. The Board did not award any discretionary cash bonuses in fiscal year 2012 to Mr. Ferguson, Mr. Schneider or any other employees of Heron Lake BioEnergy.

2012 Incentive Plans and Equity Awards

        After weighing the complexities in designing and administering equity compensation programs and cash performance-based compensation programs and the limited benefits these other programs would offer as tools to compensate the Chief Executive Officer, the Compensation Committee determined not to use any equity or cash performance-based compensation for fiscal year 2012 compensation.

Consideration of Risk in Compensation

        We believe the compensation policies and practices for our Named Executive Officers do not encourage excessive or inappropriate risk taking and are not reasonably likely to have a material adverse effect on the Company. Our compensation program primarily consists of fixed base salaries for Named Executive Officers, which provide stable income regardless of Company performance or Unit price.

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Report of the Compensation Committee

        The following report of the Compensation Committee shall not be deemed to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the 1934 Securities Exchange Act, as amended, except to the extent that we specifically incorporate it by reference in such filing.

        The Compensation Committee has reviewed and discussed the section of this Annual Report on Form 10-K entitled Compensation Discussion and Analysis (the "CD&A") for the year ended October 31, 2012 with management. In reliance on this review and discussion, the Compensation Committee recommended to the Board of Governors that the CD&A be included in this Annual Report on Form 10-K for filing with the Securities and Exchange Commission.

By the Compensation Committee of the Board of Governors

David J. Woestehoff and Michael S. Kunerth

Summary Compensation Table

        The following table shows information concerning compensation earned for services in all capacities during fiscal years 2011 and 2012 for (i) Robert J. Ferguson, who served as our Chief Executive Officer in fiscal years 2011 and 2012; and (ii) Lucas Schneider, who served as our Senior Accountant during fiscal year 2011 and served as our Chief Financial Officer from November 24, 2010 until his resignation effective November 30, 2012 (together referred to as our "Named Executive Officers"). There were no other executive officers of our company in fiscal years 2011 or 2012.

Name and Principal Position	Fiscal Year		Salary ($)		All Other Compensation ($)		Total ($)
Robert J. Ferguson(1)		2012	$	124,800		—	$	124,800
Chief Executive Officer		2011	$	124,800		—	$	124,800
Lucas Schneider(2)		2012	$	85,000		—	$	85,000
Chief Financial Officer		2011	$	80,192		—	$	80,192

(1)

Salary for Mr. Ferguson represents amounts other than Board meeting fees and additional fees for service as the Board President paid to Mr. Ferguson. For an explanation of compensation paid to Mr. Ferguson in fiscal year 2012 for his services as our Governor and an officer of the Board, please see the section entitled "Governor Compensation."

(2)

Mr. Schneider was appointed as our Chief Financial Officer on November 24, 2010. Salary for Mr. Schneider represents amounts paid for his service as our Senior Accountant in fiscal year 2011 and service as our Chief Financial Officer in fiscal years 2011 and 2012.

Governor Compensation

        For fiscal year 2012 service, each Governor received $1,500 per full quarter of Board service. Additionally, each Governor received $250 for each Board meeting attended (whether in person or telephonically). Each committee member also received $250 for each committee meeting attended in person and $200 for each special meeting attended in person. Mr. Ferguson, our Chief Executive Officer during fiscal year 2012, received the same retainer and per meeting fees as the other non-employee Governors. Members of our Board of Governors are also reimbursed for reasonable expenses included in carrying out their duties as Governors, including mileage reimbursement for travel to meetings.

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        Also for fiscal year 2012, Governors received an additional quarterly retainer for holding Board officer positions, as follows: Board President, $2,500 per quarter; Board Vice President, $2,250 per quarter; Board Treasurer, $2,000 per quarter; Board Secretary, $1,750 per quarter. Each officer of the Board received an additional $250 for each meeting of the Board attended either in person or telephonically. For fiscal year 2012, David J. Woestehoff served as the President of the Board; Doug Schmitz served as the Vice President of the Board; Michael S. Kunerth served as the Treasurer of the Board; and Kenton Johnson served as Secretary of the Board.

        The following table shows for fiscal year 2012 the total compensation paid by us to each of our Governors:

Name	Fees Earned or Paid in Cash ($)(1)
David J. Woestehoff	$	16,250
Doug Schmitz	$	12,350
Michael S. Kunerth	$	11,250
Kenton Johnson	$	10,100
Robert J. Ferguson	$	9,350
Milton J. McKeown	$	9,050
Fagen, Inc.(2)	$	19,700

(1)

Represents cash retainers and meeting fees for fiscal year 2012 as described above and total compensation to each Governor.

(2)

Represents amounts paid by us to Fagen, Inc., an affiliate of Project Viking, in respect of the services of Steven H. Core and Nick Bowdish. Each of Messrs. Core and Bowdish were separately compensated by Fagen, Inc. for their service on our Board.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The following table sets forth certain information as of February 11, 2013 with respect to our Units beneficially owned by (i) each Governor, (ii) each person known to us to beneficially own more than 5% percent of our Units, (iii) each executive officer named in the Summary Compensation Table (the "Named Executive Officers"), and (iv) all current executive officers and Governors as a group. The beneficial ownership percentages are based on 38,622,107 Units issued and outstanding as of February 11, 2013, which includes 36,488 Class A Units held by non-members.

        Unless otherwise indicated and subject to community property laws where applicable, each Unit holder named in the table below has sole voting and investment power with respect to the Units shown

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opposite such Unit holder's name. Each holder may be reached at our offices in Heron Lake, Minnesota.

	Units Beneficially Owned
Name	Number		Percent
Holders of More Than 5% of Units
Project Viking, LLC(1)		16,005,949		41.4	%
Governors and Officers
David J. Woestehoff(2)(4)		569,846		1.5	%
Doug Schmitz(2)(5)		369,675		*
Robert J. Ferguson(2)(3)(6)		147,250		*
Michael S. Kunerth(2)(7)		126,000		*
Milton J. McKeown(2)(8)		87,000		*
Nick Bowdish(2)(9)		—		*
Steven H. Core(2)(9)		—		*
Kenton Johnson(2)(9)		—		*
Michael L. Mattison(3)		—		*
Lucas Schneider(3)		—		*
Brett L. Frevert(3)		—		*
All current executive officers and governors as a group (9 persons)		1,299,771		3.4	%

*

Indicates ownership of less than 1%.

(1)

Based on an Amendment No. 3 to Schedule 13D filed on May 25, 2011 by Project Viking, LLC, Roland J. (Ron) Fagen and Diane K. Fagen. Mr. Fagen and Mrs. Fagen each hold 50% of the voting membership interests of Project Viking, LLC. All executive offices and directorships of Project Viking, LLC are held by either Mr. Fagen or Mrs. Fagen. Mr. Fagen and Mrs. Fagen are the only persons controlling Project Viking, LLC.

(2)

Serves as a governor.

(3)

Named executive officer. Mr. Mattison was appointed as Chief Financial Officer effective November 26, 2012. Mr. Schneider resigned as Chief Financial Officer effective November 30, 2012. Mr. Frevert's services as our Interim Chief Financial Officer, under an agreement with CFO Systems, ended November 24, 2010.

(4)

All Units are owned jointly by Mr. Woestehoff and his spouse.

(5)

Includes 25,000 Units owned by Doug Schmitz, 38,092 Units owned by Mr. Schmitz and his spouse, 44,432 Units owned by Mr. Schmitz's spouse, and 262,151 Units owned by Schmitz Grain Inc., which is controlled by Doug Schmitz.

(6)

Includes 126,250 Units owned jointly by Mr. Ferguson and his spouse and 21,000 Units owned by a son who resides with Mr. Ferguson.

(7)

Includes 63,000 Units owned by the Michael Kunerth Trust under agreement dated July 18, 2006, and 63,000 Units owned by the Dawn Kunerth Trust under agreement dated July 18, 2006. Mr. Kunerth and his spouse are trustees of each of these trusts.

(8)

All Units are owned jointly by Mr. McKeown and his spouse.

(9)

Appointed as a governor by Project Viking, LLC.

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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Transactions in Fiscal Year 2012

        Since the beginning of fiscal year 2010, we have not entered into any transaction and there are no currently proposed transactions, in which we were or are to be a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest, except as described in "Item 11—Executive Compensation" or as described below.

        Corn Transactions.    In the ordinary course of business, we regularly enter into transactions to buy grain. From time to time, we may buy grain from related persons on the same basis as we buy grain from un-related parties. During fiscal year 2012, we purchased approximately $800,000 in grain from Robert J. Ferguson and approximately $17.7 million in grain from Schmitz Grain, Inc. Robert J. Ferguson is a Governor and our Chief Executive Officer. Schmitz Grain, Inc. is controlled by Doug Schmitz, a Governor.

Process for Review, Approval or Ratification of Transactions with Related Persons

        The charter of our Audit Committee provides that the Audit Committee is responsible for reviewing and approving the terms and conditions of all of transactions we enter into in which an officer, Governor or any Member holding greater than 5% or any affiliate of these persons has a direct or indirect material interest. Our Code of Business Conduct and Ethics, which is applicable to all of our employees and Governors, also prohibits our employees, including our executive officers, and our Governors from engaging in conflict of interest transactions. Requests for waivers by our executive officers and Governors from the provisions of, or requests for consents by our executive officers and Governors under, our Code of Business Conduct and Ethics must be made to the Audit Committee.

        In addition, in December 2007, we adopted a formal related person transaction approval policy, which sets forth our policies and procedures for the review, approval or ratification of any transaction required to be reported in our filings with the Securities and Exchange Commission. Our policy applies to any financial transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships in which our company is a participant and in which a related person has a direct or indirect interest. Through the policy, the Audit Committee has also identified and pre-approved certain transactions with related persons, including:

•

employment and compensation of our executive officers or Governor compensation, if required to be reported in under the disclosure requirements of the Securities and Exchange Commission,

•

payment of ordinary expenses and business reimbursements;

•

transactions with another company in which the related party's only relationship is as a non-executive officer, employee, governor/director or beneficial owner of less than 10% of the other company's voting equity and in which the dollar amount does not exceed the greater of $100,000 or 2% of the other company's total revenues;

•

any transaction with another company controlled by a related party or with a related party for the purchase by us of corn where (A) the amount of corn sold in the transaction does not exceed 200,000 bushels; (B) the contract for delivery of the corn specifies a delivery date of not more than sixty (60) days from the date of the contract; (C) the price per bushel is fixed at the time of the contract; and (D) where the amount paid per bushel or other material terms of the transaction are based on consideration or criteria generally applicable to other sellers of corn of a like quality and quantity, given the conditions of the grain markets at the time of sale;

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•

charitable contributions in which the dollar amount does not exceed $100,000 or 2% of the charitable organization's receipts if the related party's only relationship is as a non-executive officer, employee or a governor/director;

•

payments made under our Articles of Organization, Member Control Agreement, insurance policies or other agreements relating to indemnification;

•

transactions in which our Members receive proportional benefits; and

•

transactions that involve competitive bid, banking transactions and transactions where the terms of which are regulated by law or governmental authority.

        The Audit Committee must approve any related person transaction subject to this policy before commencement of the related party transaction. If pre-approval is not feasible, the Audit Committee may ratify, amend or terminate the related person transaction. The Audit Committee will analyze the following factors, in addition to any other factors the Committee deems appropriate, in determining whether to approve a related party transaction:

•

whether the terms are fair to us;

•

whether the terms of the related party transaction are no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances;

•

whether the related party transaction is material to us;

•

the role the related party has played in arranging the transaction;

•

the structure of the related party transaction;

•

the interests of all related parties in the transaction;

•

the extent of the related party's interest in the transaction; and

•

whether the transaction would require a waiver of our Code of Business Conduct and Ethics.

        The Audit Committee may, in its sole discretion, approve or deny any related person transaction. Approval of a related person transaction may be conditioned upon our company and the related person taking such precautionary actions, as the Audit Committees deems appropriate.

Board Independence

        The Board of Governors undertook a review of Governor independence in February 2013 as to all of the Governors then serving. As part of that process, the Board reviewed all transactions and relationships between the Governor (or any member of his immediate family) and Heron Lake BioEnergy, LLC, its executive officers and its auditors, and other matters bearing on the independence of Governors. In particular, the Board reviewed corn transactions by Governors or their affiliates in relationship to the Governor's ability to exercise independent judgment.

        Although our Units are not listed on any stock exchange, the Board of Governors is required to select and apply the independence standards of a stock exchange. For the purposes of disclosing the independence of our Governors and committee members in this Annual Report on Form 10-K, the Board of Governors selected the NASDAQ Listing Rules. This is also the definition used for "independence" in our Governance Guidelines and Committee Charters. However, we specifically excluded the additional independence requirements under the NASDAQ Listing Rules for Audit Committee members from the Company's Governance Guidelines and Audit Committee Charter.

        As a result of its review, the Board of Governors affirmatively determined that David J. Woestehoff, Michael S. Kunerth, Milton J. McKeown, Nick Bowdish, Steven H. Core, and Kenton Johnson are independent according to the "independence" definition of the NASDAQ Listing Rules.

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        Robert J. Ferguson is not "independent" under the NASDAQ Listing Rules because he served as our Chief Executive Officer in fiscal year 2012, and sold a significant amount of grain to us in our fiscal year 2012. Mr. Schmitz is also not independent because he sold a significant amount of grain to us in fiscal year 2012, individually or through affiliated entities. The charters of the Audit Committee, Compensation Committee, and Nomination and Governance Committee also established separate criteria for eligibility to serve as a member of those committees, which are discussed below.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Accountant Fees and Services

        Boulay, Heutmaker, Zibell & Co. P.L.L.P., independent certified public accountants, served as our independent registered public accounting firm for the fiscal year ended October 31, 2012. The following is an explanation of the fees billed to us by Boulay, Heutmaker, Zibell & Co. P.L.L.P. for professional services rendered for the fiscal years ended October 31, 2012 and October 31, 2011, which totaled $176,790 and $161,174, respectively.

        Audit Fees.    The aggregate fees billed to us for professional services related to the audit of our annual financial statements, review of financial statements included in our reports with the Securities and Exchange Commission, or other services normally provided by Boulay, Heutmaker, Zibell & Co. P.L.L.P. in connection with statutory and regulatory filings or engagements for the fiscal years ended October 31, 2012 and October 31, 2011 totaled $132,239 and $138,677, respectively.

        Audit-Related Fees.    The aggregate fees billed to us for professional services for assurance and related services by Boulay, Heutmaker, Zibell & Co. P.L.L.P. that were reasonably related to the performance of the audit or review of our financial statements and were not reported above under "Audit Fees" for the fiscal year ended October 31, 2012 and October 31, 2011 were $13,127 and $7,860, respectively, which includes fees related to equity transaction, debt settlement, and other contract matters.

        Tax Fees.    The aggregate fees billed to us by Boulay, Heutmaker, Zibell & Co. P.L.L.P. for professional services related to tax compliance, tax advice, and tax planning related to the potential sale of plant assets for the fiscal year ended October 31, 2012 and October 31, 2011 totaled $31,424 and $14,637, respectively.

        All Other Fees.    For the fiscal year ended October 31, 2012 and October 31, 2011, there were no fees billed to us by Boulay, Heutmaker, Zibell & Co. P.L.L.P. for professional services or products not previously disclosed.

Audit Committee Pre-Approval Policies

        We have adopted pre-approval policies and procedures for the Audit Committee that require the Audit Committee to pre-approve all audit and all permitted non-audit engagements and services (including the fees and terms thereof) by the independent auditors, except that the Audit Committee may delegate the authority to pre-approve any engagement or service less than $10,000 to one of its members, but requires that the member report such pre-approval at the next full Audit Committee meeting. The Audit Committee may not delegate its pre-approval authority for any services rendered by our independent auditors relating to internal controls. These pre-approval policies and procedures prohibit delegation of the Audit Committee's responsibilities to our management. Under the policies and procedures, the Audit Committee may pre-approve specifically described categories of services which are expected to be conducted over the subsequent twelve months on its own volition, or upon application by management or the independent auditor.

        All of the services described above for fiscal year 2012 were pre-approved by the Audit Committee or a member of the committee before Boulay, Heutmaker, Zibell & Co. P.L.L.P. was engaged to render the services.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a)

Financial Statements

	Page Reference
Audited Financial Statements
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of October 31, 2012 and 2011		F-2
Consolidated Statements of Operations for the fiscal years ended October 31, 2012, 2011, and 2010		F-4
Consolidated Statements of Changes in Members' Equity for the fiscal years ended October 31, 2012, 2011 and 2010		F-5
Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2012, 2011 and 2010		F-6
Notes to Consolidated Financial Statements		F-8

(b)

Exhibits

        See "Exhibit Index" on the page following the Signature Page.

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SIGNATURES

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

Dated: February 13, 2013

HERON LAKE BIOENERGY, LLC
By:	/s/ ROBERT J. FERGUSON Robert J. Ferguson, Chief Executive Officer (principal executive officer)

        Each person whose signature appears below hereby constitutes and appoints Robert J. Ferguson and Michael L. Mattison, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments to this Form 10-K and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant by the following persons in the capacities indicated on February 13, 2013.

/s/ ROBERT J. FERGUSON Robert J. Ferguson	Chief Executive Officer and President (principal executive officer), Governor
/s/ MICHAEL L. MATTISON Michael L. Mattison	Chief Financial Officer (principal financial and accounting officer)
/s/ DAVID J. WOESTEHOFF David J. Woestehoff	Governor
/s/ DOUG SCHMITZ Doug Schmitz	Governor
/s/ MICHAEL S. KUNERTH Michael S. Kunerth	Governor

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/s/ KENTON JOHNSON Kenton Johnson	Governor
/s/ NICK BOWDISH Nick Bowdish	Governor
/s/ STEVEN H. CORE Steven H. Core	Governor
/s/ MILTON J. MCKEOWN Milton J. McKeown	Governor

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HERON LAKE BIOENERGY, LLC

INDEX TO EXHIBITS TO FORM 10-K FOR FISCAL YEAR ENDED OCTOBER 31, 2012

Exhibit Number		Exhibit Title	Incorporated by Reference To:
	2.1	Asset Purchase Agreement dated January 3, 2013, by Heron Lake BioEnergy, LLC, as the sole member and owner of all of the outstanding membership interests of Lakefield Farmers Elevator, LLC, the Seller, and FCA Co-op, the Buyer	Attached hereto.
	2.2	Asset Purchase Agreement dated January 22, 2013, by and between Heron Lake BioEnergy, LLC and Guardian Energy Heron Lake, LLC	Attached hereto.
	2.3	Plan of Liquidation and Dissolution of Heron Lake BioEnergy, LLC, as approved by the Board of Governors on January 22, 2013	Attached hereto.
	3.1	First Amended and Restated Articles of Organization of Heron Lake BioEnergy, LLC, as amended effective August 30, 2011	Exhibit 3.1 to Current Report on Form 8-K dated September 2, 2011.
	3.2	Member Control Agreement of Heron Lake BioEnergy, LLC, as amended through August 30, 2011	Exhibit 3.2 to Current Report on Form 8-K dated September 2, 2011.
	4.1	Form of Class A Unit Certificate	Exhibit 4.1 of the Company's Registration Statement on Form 10 (File No. 000-51825) filed on August 22, 2008 (the "2008 Registration Statement").
	4.2	Unit Transfer Policy adopted November 5, 2008	Exhibit 4.1 of the Company's Current Report on Form 8-K dated November 5, 2008.
	10.1	Fourth Amended and Restated Loan Agreement dated October 1, 2007 by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.1 of the Company's 2008 Registration Statement.
	10.2	Third Supplement dated October 1, 2007 to Fourth Amended and Restated Loan Agreement by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.2 of the Company's 2008 Registration Statement.
	10.3	Fourth Supplement dated October 1, 2007 to Fourth Amended and Restated Loan Agreement by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.3 of the Company's 2008 Registration Statement.

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Exhibit Number		Exhibit Title	Incorporated by Reference To:
	10.4	Term Note dated October 1, 2007 in principal amount of $59,583,000 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Exhibit 10.4 of the Company's 2008 Registration Statement.
	10.5	Term Revolving Note dated October 1, 2007 in principal amount of $5,000,000 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Exhibit 10.5 of the Company's 2008 Registration Statement.
	10.6	Personal Guaranty dated October 1, 2007 by Roland Fagen, guarantor, in favor of AgStar Financial Services, PCA	Exhibit 10.6 of the Company's 2008 Registration Statement.
	10.7	Fourth Amended and Restated Guaranty dated October 1, 2007 by Lakefield Farmers Elevator, LLC in favor of AgStar Financial Services, PCA	Exhibit 10.7 of the Company's 2008 Registration Statement.
	10.8	Fifth Supplement dated November 19, 2007 to Fourth Amended and Restated Loan Agreement by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.8 of the Company's 2008 Registration Statement.
	10.9	Revolving Line of Credit Note dated November 19, 2007 in principal amount of $7,500,000 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Exhibit 10.9 of the Company's 2008 Registration Statement.
	10.10	Industrial Water Supply Development and Distribution Agreement dated October 27, 2003 among Heron Lake BioEnergy, LLC (f/k/a Generation II Ethanol, LLC), City of Heron Lake, Jackson County, and Minnesota Soybean Processors	Exhibit 10.10 of the Company's 2008 Registration Statement.
	10.11	Industrial Water Supply Treatment Agreement dated May 23, 2006 among Heron Lake BioEnergy, LLC, City of Heron Lake and County of Jackson	Exhibit 10.11 of the Company's 2008 Registration Statement.
	10.12	Standard Form of Agreement between Owner and Designer—Lump Sum dated September 28, 2005 by and between Fagen, Inc. and Heron Lake BioEnergy, LLC†	Exhibit 10.12 of Amendment No. 4 to the Company's 2008 Registration Statement.
	10.13	Distiller's Grain Marketing Agreement dated October 5, 2005 by and between Heron Lake BioEnergy, LLC and Commodity Specialist Company as assigned to CHS Inc. as of August 17, 2007	Exhibit 10.13 of the Company's 2008 Registration Statement.

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Exhibit Number		Exhibit Title	Incorporated by Reference To:
	10.14	Ethanol Fuel Marketing Agreement dated August 7, 2006 by and between RPGM, Inc. and Heron Lake BioEnergy, LLC	Exhibit 10.14 of the Company's 2008 Registration Statement.
	10.15	Letter Agreement re: Environmental Compliance Support dated March 12, 2007 by and between Fagen Engineering, LLC Heron Lake BioEnergy, LLC	Exhibit 10. 15 of the Company's 2008 Registration Statement.
	10.16	Coal Loading, Transport, and Delivery Agreement effective as of April 1, 2007 by and between Tersteeg Transport Inc. and Heron Lake BioEnergy, LLC	Exhibit 10.16 of the Company's 2008 Registration Statement.
	10.17	Coal Transloading Agreement dated June 1, 2007 by and between Southern Minnesota Beet Sugar Cooperative and Heron Lake BioEnergy, LLC†	Exhibit 10.17 of the Company's 2008 Registration Statement.
	10.18	Master Coal Purchase and Sale Agreement dated June 1, 2007 by and between Northern Coal Transport Company and Heron Lake BioEnergy, LLC, including confirmation letter dated July 13, 2007†	Exhibit 10.18 of the Company's 2008 Registration Statement.
	10.19	Loan Agreement dated December 28, 2007 by and between Federated Rural Electric Association and Heron Lake BioEnergy, LLC	Exhibit 10.19 of the Company's 2008 Registration Statement.
	10.20	Secured Promissory Note issued December 28, 2007 by Heron Lake BioEnergy, LLC as borrower to Federated Rural Electric Association as lender in principal amount of $600,000	Exhibit 10.20 of the Company's 2008 Registration Statement.
	10.21	Security Agreement dated December 28, 2007 by Heron Lake BioEnergy, LLC in favor of Federated Rural Electric Association	Exhibit 10.21 of the Company's 2008 Registration Statement.
	10.22	Electric Service Agreement dated October 17, 2007 by and between Interstate Power and Light Company and Heron Lake BioEnergy, LLC	Exhibit 10.22 of the Company's 2008 Registration Statement.
	10.23	Shared Savings Contract dated November 16, 2007 by and between Interstate Power and Light Company and Heron Lake BioEnergy, LLC	Exhibit 10.23 of the Company's 2008 Registration Statement.
	10.24	Escrow Agreement dated November 16, 2007 by and between Heron Lake BioEnergy, LLC, Farmers State Bank of Hartland for the benefit of Interstate Power and Light Company	Exhibit 10.24 of the Company's 2008 Registration Statement.

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Exhibit Number		Exhibit Title	Incorporated by Reference To:
	10.25	Employment Agreement dated February 1, 2008 by and between Heron Lake BioEnergy, LLC and Robert J. Ferguson*	Exhibit 10.25 of the Company's 2008 Registration Statement.
	10.26	Compliance Agreement effective January 23, 2007 by and between Heron Lake BioEnergy, LLC and the Minnesota Pollution Control Agency	Exhibit 10.28 to Amendment No. 1 to the Company's 2008 Registration Statement.
	10.27	Letter Agreement dated November 25, 2008 by and between Heron Lake BioEnergy, LLC, CFO Systems, LLC and Brett L. Frevert relating to the services of Brett L. Frevert*	Exhibit 10.1 to Current Report on Form 8-K dated November 26, 2008.
	10.28	Ethanol Purchase and Marketing Agreement dated September 2, 2009 by and between Heron Lake BioEnergy, LLC and C&N Ethanol Marketing Corporation	Exhibit 10.1 to Current Report on Form 8-K dated September 2, 2009.
	10.29	Amendment No. 4 to Fifth Supplement dated December 8, 2009 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.32 to Annual Report on Form 10-K for the year ended October 31, 2009.
	10.30	Amendment No. 5 to Fifth Supplement to the Master Loan Agreement dated March 25, 2010 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.1 to Current Report on Form 8-K dated March 25, 2010
	10.31	Amendment No. 6 to Fifth Supplement to the Master Loan Agreement dated May 27, 2010 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.2 to Current Report on Form 8-K dated March 25, 2010
	10.32	Amended and Restated Fifth Supplement dated as of July 2, 2010 to the Master Loan Agreement by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.1 to Current Report on Form 8-K dated July 2, 2010
	10.33	Second Amended and Restated Revolving Line of Credit Note dated July 2, 2010 in the maximum principal amount of $6,750,000 by Heron Lake BioEnergy, LLC as borrower to AgStar Financial Services, PCA as lender	Exhibit 10.2 to Current Report on Form 8-K dated July 2, 2010
	10.34	Forbearance Agreement dated July 2, 2010 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.3 to Current Report on Form 8-K dated July 2, 2010

74

Exhibit Number		Exhibit Title	Incorporated by Reference To:
	10.35	Mutual Release and Settlement Agreement dated July 2, 2010 among Heron Lake BioEnergy, LLC, Fagen, Inc. and ICM, Inc.†	Exhibit 10.1 to Current Report on Form 8-K dated July 2, 2010
	10.36	Subscription Agreement dated July 2, 2010 by Heron Lake BioEnergy, LLC and Project Viking, L.L.C.	Exhibit 10.1 to Current Report on Form 8-K dated July 2, 2010
	10.37	First Amendment to Fifth Supplement to the Master Loan Agreement dated as of December 30, 2010 by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.1 to Current Report on Form 8-K dated December 30, 2010
	10.38	Third Amended and Restated Revolving Line of Credit Note dated December 30, 2010 in the maximum principal amount of $6,750,000 by Heron Lake BioEnergy, LLC as borrower to AgStar Financial Services, PCA as lender	Exhibit 10.2 to Current Report on Form 8-K dated December 30, 2010
	10.39	First Amendment to Forbearance Agreement dated December 30, 2010 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.3 to Current Report on Form 8-K dated December 30, 2010
	10.40	Fifth Amended and Restated Master Loan Agreement dated to be effective as of September 1, 2011 between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC†	Exhibit 10.40 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.41	Amended and Restated Term Note dated September 1, 2011 in principal amount of $40,000,000 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Exhibit 10.41 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.42	Amended and Restated Term Revolving Note dated September 1, 2011 in principal amount of $8,008,689 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Exhibit 10.42 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.43	Fourth Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated September 1, 2011 between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.43 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.44	Fifth Amended and Restated Guaranty dated September 1, 2011 by Lakefield Farmers Elevator, LLC in favor of AgStar Financial Services, PCA	Exhibit 10.44 to Annual Report on Form 10-K for the year ended October 31, 2011.

75

Exhibit Number		Exhibit Title	Incorporated by Reference To:
	10.45	Amended and Restated Guaranty dated September 1, 2011 by HLBE Pipeline Company, LLC in favor of AgStar Financial Services, PCA	Exhibit 10.45 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.46	Collateral Assignment dated September 1, 2011 between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.46 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.47	Collateral Assignment dated September 1, 2011 between Lakefield Farmers Elevator, LLC and AgStar Financial Services, PCA	Exhibit 10.47 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.48	Corn Supply Agreement dated effective as of September 1, 2011 between Heron Lake BioEnergy, LLC and Gavilon, LLC†	Exhibit 10.48 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.49	Ethanol and Distiller's Grains Marketing Agreement dated effective as of September 1, 2011 between Heron Lake BioEnergy, LLC and Gavilon, LLC†	Exhibit 10.49 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.50	Master Netting, Setoff, Credit and Security Agreement dated effective as of September 1, 2011 between Heron Lake BioEnergy, LLC and Gavilon, LLC†	Exhibit 10.50 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.51	Corn Storage Agreement dated effective as of September 1, 2011 between Lakefield Farmers Elevator, LLC, Heron Lake BioEnergy, LLC and Gavilon, LLC	Exhibit 10.51 to Annual Report on Form 10-K for the year ended October 31, 2011.
	10.52	Amended and Restated Forbearance Agreement dated January 22, 2013 between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Attached hereto.
	10.53	Second Amended and Restated Forbearance Agreement dated February 12, 2013 between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.1 to Current Report on Form 8-K dated February 12, 2013
	21.1	Subsidiaries of the Registrant	Exhibit 21.1 to Annual Report on Form 10-K for the year ended October 31, 2011.
	31.1	Certification of Chief Executive Officer (principal executive officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.	Attached hereto.
	31.2	Certifications of Chief Financial Officer (principal financial officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.	Attached hereto.

76

Exhibit Number		Exhibit Title	Incorporated by Reference To:
	32	Certification pursuant to 18 U.S.C. § 1350.	Attached hereto.
	101.1	The following materials from Heron Lake BioEnergy, LLC's Annual Report on Form 10-K for the fiscal year ended October 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

*

Indicates compensatory agreement.

†

Certain portions of this exhibit have been redacted and filed on a confidential basis with the Commission pursuant to a request for confidential treatment under Rule 24b-2 of under the Exchange Act. Spaces corresponding to the deleted portions are represented by brackets with asterisks [* * *].

77

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Governors
Heron Lake BioEnergy, LLC and Subsidiaries
Heron Lake, Minnesota

        We have audited the accompanying consolidated balance sheets of Heron Lake BioEnergy, LLC and Subsidiaries (the "Company") as of October 31, 2012 and 2011, and the related consolidated statements of operations, changes in members' equity, and cash flows for each of the fiscal years in the three-year period ended October 31, 2012. Heron Lake BioEnergy, LLC and Subsidiaries' management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heron Lake BioEnergy, LLC and Subsidiaries as of October 31, 2012 and 2011, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended October 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

        The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred losses due to difficult market conditions and the impairment of long-lived assets. The Company is out of compliance with its master loan agreement and is operating under a forbearance agreement whereby the Company agreed to sell substantially all of its assets. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.

Minneapolis, Minnesota
February 13, 2013

F-1

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

	October 31, 2012			October 31, 2011
ASSETS
Current Assets
Cash and equivalents	$	653,361		$	7,140,573
Restricted cash		65,259			367,012
Restricted certificates of deposit		650,000			650,000
Accounts receivable		1,784,761			1,378,220
Inventory		3,588,572			3,764,616
Prepaid expenses		796,829			937,521
Total current assets		7,538,782			14,237,942
Property and Equipment
Land and improvements		9,252,379			12,265,434
Plant buildings and equipment		76,155,846			94,509,719
Vehicles and other equipment		645,481			635,054
Office buildings and equipment		622,711			615,298
Construction in progress		645,486			4,132,965
		87,321,903			112,158,470
Less accumulated depreciation		(29,222,617	)		(23,565,525	)
		58,099,286			88,592,945
Other Assets
Restricted cash		—			59,574
Other intangible assets, net		256,513			415,276
Debt service deposits and other assets		686,438			828,187
Total other assets		942,951			1,303,037
Total Assets	$	66,581,019		$	104,133,924

Notes to Consolidated Financial Statements are an integral part of this Statement.

F-2

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

	October 31, 2012		October 31, 2011
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities
Line of credit	$	480,000	$	—
Current maturities of long-term debt		42,051,402		4,572,613
Accounts payable:
Trade accounts payable		2,085,882		2,704,707
Trade accounts payable—related party		—		109,101
Accrued expenses		382,953		421,306
Total current liabilities		45,000,237		7,807,727
Long-Term Debt, net of current maturities		4,031,335		46,844,912
Commitments and Contingencies
Members' Equity
Controlling interest in equity:
38,622,107 and 30,208,074 Class A units issued and outstanding at October 31, 2012 and 2011, respectively		17,344,433		49,508,123
Noncontrolling interest		205,014		(26,838	)
Total members' equity		17,549,447		49,481,285
Total Liabilities and Members' Equity	$	66,581,019	$	104,133,924

Notes to Consolidated Financial Statements are an integral part of this Statement.

F-3

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Operations

	Year Ended October 31, 2012			Year Ended October 31, 2011			Year Ended October 31, 2010
Revenues	$	168,659,935		$	164,120,375		$	110,624,758
Cost of Goods Sold
Cost of goods sold		166,529,283			155,571,814			102,786,513
Lower of cost or market adjustment		—			1,591,810			903,695
Total Cost of Goods Sold		166,529,283			157,163,624			103,690,208
Gross Profit		2,130,652			6,956,751			6,934,550
Operating Expenses		(3,171,331	)		(3,613,465	)		(3,857,492	)
Impairment Charge		(27,844,579	)		—			—
Settlement Income (Expense)		(900,000	)		—			2,600,000
Operating Income (Loss)		(29,785,258	)		3,343,286			5,677,058
Other Income (Expense)
Interest income		10,773			37,078			43,179
Interest expense		(2,625,322	)		(2,900,470	)		(4,048,634	)
Other income		47,164			63,123			11,918
Total other expense, net		(2,567,385	)		(2,800,269	)		(3,993,537	)
Net Income (Loss)		(32,352,643	)		543,017			1,683,521
Net Income (Loss) Attributable to Noncontrolling Interest		353,019			(27,838	)		—
Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC	$	(32,705,662	)	$	570,855		$	1,683,521
Weighted Average Units Outstanding—Basic and Diluted		38,510,066			33,391,636			28,141,942
Net Income (Loss) Per Unit—Basic and Diluted	$	(0.85	)	$	0.02		$	0.06

Notes to Consolidated Financial Statements are an integral part of this Statement.

F-4

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Changes in Members' Equity

Balance—October 31, 2009	$	39,253,746
Capital issuance—3,103,449 Class A units, $1.45 per unit, July 2010		4,500,001
Net income		1,683,521
Balance—October 31, 2010		45,437,268
Capital issuance—7,000,000 Class A units, $0.50 per unit, May 2011		3,500,000
Capital issuance for noncontrolling interest		1,000
Net loss attributable to noncontrolling interest		(27,838	)
Net income attributable to Heron Lake BioEnergy, LLC		570,855
Balance—October 31, 2011		49,481,285
Capital issuance—1,414,033 Class A units, $.50 per unit, November 2011		707,017
Costs of raising capital		(165,045	)
Net income attributable to noncontrolling interest		353,019
Net loss attributable to Heron Lake BioEnergy, LLC		(32,705,662	)
Balance—October 31, 2012	$	17,549,447

Notes to Consolidated Financial Statements are an integral part of this Statement.

F-5

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Year Ended October 31, 2012			Year Ended October 31, 2011			Year Ended October 31, 2010
Cash Flow From Operating Activities
Net income (loss)	$	(32,352,643	)	$	543,017		$	1,683,521
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		5,693,459			5,490,240			5,578,053
Impairment charge		27,844,579			—			—
Lower of cost or market adjustment		—			1,591,810			903,695
Unrealized losses on derivative instruments		—			—			193,590
Non-cash settlement income		—			—			(500,000	)
Change in operating assets and liabilities:
Restricted cash		103,697			205,212			(231,580	)
Accounts receivable		(406,541	)		3,639,009			(577,528	)
Inventory		176,044			6,857,746			(5,981,727	)
Derivative instruments		—			(107,271	)		(92,202	)
Prepaid expenses and other		117,396			(936,192	)		(59,135	)
Accounts payable		(727,926	)		621,970			621,970
Accrued expenses		(50,357	)		(993,412	)		314,735
Lower of cost or market accrued expense		—			1,577,856	)		(2,055,662	)
Net cash provided by (used in) operating activities		397,708			14,258,277			(202,270	)
Cash Flows from Investing Activities
Payments for restricted certificates of deposit		—			(250,000	)		(400,000	)
Capital expenditures		(1,560,616	)		(4,243,171	)		(119,047	)
Net cash used in investing activities		(1,560,616	)		(4,493,171	)		(519,047	)
Cash Flows from Financing Activities
Checks written in excess of bank balance		—			(913,492	)		913,492
Proceeds from (payments on) line of credit, net		480,000			(3,500,000	)		(1,500,000	)
Payments on long-term debt		(6,922,038	)		(5,100,700	)		(4,992,343	)
Proceeds from note payable		262,250			737,750			—
Release of restricted cash		257,630			336,408			322,808
Issuance of member units		707,017			3,500,000			4,500,001
Costs of raising capital		—			(90,005	)		(75,040	)
Noncontrolling interest investment		—			1,000			—
Distributions to noncontrolling interest		(109,163	)		—			—
Net cash used in financing activities		(5,324,304	)		(4,147,851	)		(939,439	)
Net Increase (Decrease) in cash and equivalents		(6,487,212	)		5,617,255			(1,660,756	)
Cash and Equivalents—Beginning of period		7,140,573			1,523,318			3,184,074
Cash and Equivalents—End of period	$	653,361		$	7,140,573		$	1,523,318

Notes to Consolidated Financial Statements are an integral part of this Statement.

F-6

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Year Ended October 31, 2012		Year Ended October 31, 2011		Year Ended October 31, 2010
Supplemental Disclosure of Cash Flow Information
Interest expense paid	$	2,642,087	$	3,377,199	$	3,660,433
Supplemental Disclosure of Non-Cash Activities
Cost of raising capital offset against member contributions	$	165,045	$	—	$	—
Capital expenditure financed with note payable		1,325,000
Distribution to non-controlling interest in accrued expenses		12,004		—		—
Release of retainage payable as part of legal settlement		—		—		3,834,319
Fair value of equipment received as part of settlement income		—		—		500,000

Notes to Consolidated Financial Statements are an integral part of this Statement.

F-7

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2012 and 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

        The Company owns and operates a 50 million gallon ethanol plant near Heron Lake, Minnesota with ethanol distribution throughout the continental United States. In addition, the Company produces and sells distillers grains with solubles and corn oil as co-products of ethanol production. The Company was formed on April 12, 2001 to have an indefinite life. The Company converted the plant from being coal fired to natural gas fired in November 2011.

        After October 31, 2012, the Company began seeking buyers to purchase the assets. On January 22, 2013, the Company entered into an asset purchase agreement under which the Company agreed to sell substantially all of the assets of the Company's ethanol and related distillers and non-food grade corn oil businesses located in Heron Lake (the "Asset Sale") to Guardian Energy Heron Lake, LLC. See Note 16 for further details.

Principles of Consolidation

        The financial statements include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiaries, Lakefield Farmers Elevator, LLC and HLBE Pipeline Company, LLC, collectively, "the Company." HLBE Pipeline Company, LLC owns 73% of Agrinatural Gas, LLC (Agrinatural); the remaining 27% is included in the consolidated financial statements as a noncontrolling interest. All significant intercompany balances and transactions are eliminated in consolidation.

Fiscal Reporting Period

        The Company's fiscal year end for reporting financial operations is October 31.

Accounting Estimates

        Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for significant matters including, among others, the carrying value and useful lives of property and equipment, analysis of impairment of long-lived assets, contingencies and valuation of forward purchase contract commitments and inventory. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Noncontrolling Interest

        Amounts recorded as noncontrolling interest relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Agrinatural will provide natural gas to the plant with a specified price per MMBTU for an initial term of 10 years, with two renewal options for five year periods.

F-8

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition

        Revenue from sales is recorded when title transfers to the customer, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed and determinable. The title transfers when the product is loaded into the railcar or truck, the customer takes ownership and assumes risk of loss.

        In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

Cash and Equivalents

        The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash and equivalents.

        The Company maintains its accounts at five financial institutions. At times throughout the year, the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. The Company does not believe it is exposed to any significant credit risk on cash and equivalents.

Restricted Cash

        The Company is periodically required to maintain cash balances at its broker related to derivative instrument positions and as part of a loan agreement.

Restricted Certificates of Deposit

        The Company maintains restricted certificates of deposit as part of its grain dealer's license.

Accounts Receivable

        Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral.

        Accounts receivable are recorded at estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Accounts considered uncollectible are written off. The Company's estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At October 31, 2012 and 2011, the Company was of the belief that such accounts would be collectable and thus an allowance was not considered necessary.

F-9

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventory

        Inventory consists of raw materials, work in process, finished goods, supplies, and other grain inventory. Raw materials are stated at the lower of cost or market on a first-in, first-out (FIFO) basis. Work in process and finished goods, which consists of ethanol, distillers grains and corn oil produced, if any, is stated at the lower of average cost or market. Other grain inventory, which consists of agricultural commodities, is valued at market value (net realizable value). Other grain inventory is readily convertible to cash because of its commodity characteristics, widely available markets and international pricing mechanisms. Other grain inventory is also freely traded, has quoted market prices, may be sold without significant further processing, and has predictable and insignificant disposal costs.

Derivative Instruments

        From time to time, the Company enters into derivative transactions to protect gross margins from potentially adverse effects of market and price volatility in future periods. In order to reduce the risks caused by market fluctuations, the Company hedges a portion of its anticipated corn and natural gas purchases, and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn and natural gas in the Company's ethanol production activities and the related sales price of ethanol produced. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions.

        The Company generally does not designate these derivative instruments as hedges for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value caused from marking these instruments to market, recognized in current period earnings or losses on a monthly basis. While the Company does not designate the derivative instruments that it enters into as hedging instruments because of the administrative costs associated with the related accounting, the Company believes that the derivative instruments represent an economic hedge.

        In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings.

        The Company evaluates its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as "normal purchases or normal sales." Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Certain corn, ethanol and distillers grains contracts that meet the requirement of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements, and therefore, are not marked to market in our financial statements.

F-10

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Intangibles

        Other intangibles are stated at cost and include road improvements located near the plant in which the Company has a beneficial interest in but does not own the road. The Company amortizes the assets over the economic useful life of 15 years.

Property and Equipment

        Property and equipment are recorded at cost. Depreciation is provided over an estimated useful life by use of the straight-line deprecation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress is comprised of costs related to the construction of the ethanol plant facilities. Interest is capitalized during the construction period. Depreciable useful lives are as follows:

Land improvements	15 Years
Plant building and equipment	7 - 40 Years
Vehicles and equipment	5 - 7 Years
Office buildings and equipment	3 - 40 Years

Long-Lived Assets

        The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the assets; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through various valuation techniques including discounted cash flow models, comparable activities in the market place, and third-party independent appraisals, as considered necessary.

        The Company's ethanol production facilities have a nameplate capacity of 50 million gallons per year. The carrying value of these facilities at October 31, 2011 was approximately $88,600,000. As of October 31, 2012, the Company recorded an impairment charge of approximately $27,845,000 against long-lived assets. In accordance with the Company's policy for evaluating impairment of long-lived assets described above, management has evaluated the recoverability of the facilities based on projected future cash flows from operations over the facilities' estimated useful lives. Management has determined that the projected future undiscounted cash flows from operations of these facilities do not exceed their carrying value at October 31, 2012. The Company performed an impairment analysis estimating the discounted cash flows to determine the impairment to record. In determining the projected future discounted cash flows, the Company made significant assumptions concerning the

F-11

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity.

Deferred Offering Costs

        The Company defers the costs incurred to raise equity financing until that financing occurs. At such time that the issuance of new equity occurs, these costs will be netted against the proceeds received.

Fair Value of Financial Instruments

        The Company follows guidance for accounting for fair value measurements of financial assets and liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring and nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

        The three levels of the fair value hierarchy are as follows:

•

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

•

Level 2 includes:



1.

Quoted prices in active markets for similar assets or liabilities.



2.

Quoted prices in markets that are observable for the asset or liability either directly or indirectly, for substantially the full term of the asset or liability.



3.

Inputs that derived primarily from or corroborated by observable market date by correlation or other means.

•

Level 3 inputs are unobservable inputs for the asset or liability.

        The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

        Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. Except for the impairment charge noted above, no events occurred during the fiscal 2012, 2011, or 2010 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

        The carrying value of cash and equivalents, restricted cash, restricted certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The fair value of debt has been estimated using discounted cash flow analysis based upon the Company's current incremental borrowing rates for similar types of financing arrangements. The fair value of outstanding debt will fluctuate with changes in applicable interest rates.

F-12

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company's debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules. The Company believes the carrying amount of the debt and line of credit approximates the fair value.

        Loans with AgStar consist of term loans of approximately $40,839,000 with interest at market rates that are believed to approximate fair value. Due to the current defaults under the senior debt loan agreement which have triggered an additional 2.0% default interest, the forbearance agreement that anticipates the sale of assets and repayments of term loans, and the underlying collateral of the loans, the Company believes the fair value continues to approximate the carrying value.

Income Taxes

        The Company is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements. Differences between financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the alternative depreciation system (ADS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences. The Company's tax year end is December 31. Primarily due to the partnership tax status, the Company does not have any significant tax uncertainties that would require disclosure. The Company recognizes and measures tax benefits when realization of the benefits is uncertain under a two-step approach. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Primarily due to the Company's tax status as a partnership, the adoption of this guidance had no material impact on the Company's financial condition or results of operations.

        The Company files income tax returns in the U.S. federal and Minnesota state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2009.

Net Income (Loss) per Unit

        Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members' units outstanding during the period. Diluted net income or loss per unit is computed by dividing net income (loss) by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, for all periods presented, the calculations of the Company's basic and diluted net income (loss) per unit are the same.

F-13

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Environmental Liabilities

        The Company's operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices, and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.

2. GOING CONCERN

        The financial statements have been prepared on a going-concern basis, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. The Company has previously disclosed losses related to operations related to difficult market conditions and operating performance. The Company has instances of unwaived debt covenant violations at October 31, 2012, has not made required principal payments beginning in December 2012, and is operating under a forbearance agreement with AgStar. These conditions contributed to the long-term debt with AgStar being classified as current at October 31, 2012. These factors and the continued volatility in commodity prices raise substantial doubt about the Company's ability to continue as a going concern.

        The Company has continued to make changes to plant operations, including converting from a coal-fired ethanol plant to a natural gas plant in October 2011. This conversion was completed in fiscal 2012. The Company also raised additional funds in an effort to improve working capital.

        While the Company believes these changes have improved the operating performance of the plant, and lead to lower operating costs, market conditions have resulted in losses. These losses and the repayment of debt have caused working capital to decline and contributed to the debt covenant violations at October 31, 2012 as well as missed principal payments after year end. The Company was unable to raise additional funds to increase working capital. The forbearance agreement the Company entered into with AgStar requires the Company to seek a buyer for its assets to repay the outstanding debt. In January 2013, the Company entered into two asset sale agreements as described in Note 16.

3. UNCERTAINTIES

        The Company has certain risks and uncertainties that it experienced during volatile market conditions. These volatilities can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 75% - 85% of total revenues and corn costs average 65% - 75% of cost of goods sold.

        The Company's operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the

F-14

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

3. UNCERTAINTIES (Continued)

price of ethanol. The largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company's operations, profitability and the availability and adequacy of cash flow to meet the Company's working capital requirements.

4. FAIR VALUE MEASUREMENTS

        The following table provides information on those assets measured at fair value on a nonrecurring basis.

			Fair Value Measurement Using
	Fair Value as of October 31, 2012								Impairment Charge
			Level 1		Level 2		Level 3
Property and Equipment	$	58,099,286	$	—	$	—	$	58,099,286	$	27,722,183
Other Intangible Assets, net	$	256,513	$	—	$	—	$	256,513	$	122,396

        The Company's assessment of fair value of long-lived assets is based on various valuation techniques including discounted cash flow models, comparable activity in the market place, and third-party independent appraisals, as considered necessary. The impairment charge of approximately $27,845,000 against long-lived assets included significant assumptions concerning the future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity.

5. CONCENTRATIONS

        The Company sells all of the ethanol and distiller grains produced to one customer under marketing agreements at October 31, 2012 and 2011. At October 31, 2012 and 2011, this customer comprised nearly all of accounts receivable. Prior to the change in marketers in 2011, the Company sold all of its ethanol and distillers grain to two customers.

6. INVENTORY

        Inventory consists of the following at October 31:

	2012		2011
Raw materials	$	521,865	$	593,761
Work in process		1,149,214		978,967
Supplies		922,384		840,756
Other grains		995,109		1,351,132
Totals	$	3,588,572	$	3,764,616

        The Company recorded losses of approximately $15,000 and $97,000 for fiscal 2011 and 2010 respectively, related to inventory, in addition to losses recorded on forward purchase contracts as noted in Note 14, where the market value was less than the cost basis, attributable primarily to decreases in

F-15

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

6. INVENTORY (Continued)

market prices of corn and ethanol. There were no significant losses in fiscal 2012. The loss was recorded with the lower of cost or market adjustment in the statement of operations. In addition, the Company stored grain inventory for farmers. The value of these inventories owned by others is approximately $790,000 and $105,000 based on market prices at October 31, 2012 and 2011, respectively, and is not included in the amounts above.

7. DERIVATIVE INSTRUMENTS

        As of October 31, 2012 and 2011 the Company has no corn, ethanol, or natural gas derivative instruments. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item and when the Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge or a cash flow hedge. The Company does not enter into derivative transactions for trading purposes.

        The Company enters into corn, ethanol, and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices for periods up to 24 months. These derivatives are put in place to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales and corn purchase commitments where the prices are set at a future date. Although these derivative instruments serve the Company's purpose as an economic hedge, they are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change.

        The following tables provide details regarding the gains and (losses) from the Company's derivative instruments in Consolidated Statements of Operations, none of which are designated as hedging instruments:

		Twelve Months Ended October 31,
	Statement of Operations location
		2012			2011			2010
Corn contracts	Cost of goods sold	$	1,088,000		$	(432,000	)	$	(1,007,000	)
Natural gas contracts	Cost of goods sold		(446,000	)		—			—
Ethanol contracts	Revenues		—			(24,000	)		(171,000	)
Totals		$	642,000		$	(456,000	)	$	(1,178,000	)

8. LINES OF CREDIT

        In September 2011, the Company negotiated a new debt agreement with AgStar Financial Services, PCA (AgStar) as described in Note 9 that superseded past agreements. As part of those agreements, the Company repaid the line of credit and the line was closed in September 2011.

        Agrinatural obtained a line of credit with lending institution in September 2012 which provides up to $600,000 until March 31, 2013. Interest is charged at 5.43%. The line of credit, along with a note payable in Note 9, is secured by substantially all business assets of Agrinatural. The line of credit has a balance of $480,000 at October 31, 2012.

F-16

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

9. LONG-TERM DEBT

        Long-term debt consists of the following:

	October 31 2012		October 31 2011
Term note payable to lending institution, see terms below.	$	36,627,901	$	39,747,497
Revolving term note payable to lending institution, see terms below.		4,211,163		6,864,561
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company made deposits for one years' worth of debt service payments that are held on deposit to be applied with the final payments of the assessment.		2,456,372		2,653,090
Assessment payable as part of water treatment agreement, due in semi-annual installments of $25,692 with interest at 0.50%, enforceable by statutory lien, with the final payment due in 2016.		202,998		253,118
Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.		235,781		264,309
Note payable for equipment, with monthly payments of $2,371 including effective interest of 6.355%, repaid in April 2012, secured by equipment.		—		13,860
Note payable to electrical provider, with monthly payments of $29,775 including implicit interest of 1.50%, due in December 2012, secured by equipment and restricted cash.		88,578		439,590
Note payable to electrical company with monthly payments of $6,250 with a 1% maintenance fee due each October, due September 2017. The electrical company is a member of the Company.		368,750		443,750
Note payable to a lending institution for the construction of the pipeline assets initially due in December 2011, converted in February 2012 to a term loan with a three year repayment period. Interest is at 5.29% and the note, along with the line of credit in Note 8, is secured by substantially all assets of Agrinatural.		818,884		737,750
Equipment payable on corn oil separation equipment from a vendor. The Company pays approximately $40,000 per month conditioned upon revenue generated from the corn oil equipment. The monthly payment includes implicit interest of 5.57% until maturity in May 2015 and the note is secured by the equipment.		1,072,310		—
Totals		46,082,737		51,417,525
Less amounts due within one year		42,051,402		4,572,613
Net long-term debt	$	4,031,335	$	46,844,912

        At October 31, 2012, the Company was out of compliance with certain covenants in the AgStar loan agreements including the minimum working capital amount, minimum tangible net worth amount,

F-17

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

9. LONG-TERM DEBT (Continued)

and the fixed charge coverage ratio. Subsequent to October 31, 2012, the Company did not make required principal payments on AgStar loans. On December 21, 2012, the Company and AgStar entered into a forbearance agreement whereby the Company agreed to sell substantially all plant assets and execute an asset sale agreement for substantially all assets by January 10, 2013. AgStar also began charging a default interest premium on the AgStar loans of an additional 2.0%. Advances on the revolving term note were frozen until the Company entered into an asset sale agreement for substantially all plant assets.

        The Company did not execute an asset agreement until January 22, 2013 as described in Note 16. Following this, the Company and AgStar entered into amendments to the forbearance agreement which extended the time for the Company to close on the sale of substantially all plant assets to March 31, 2013. The forbearance agreements limited the advances on the AgStar loans to $1,750,000.

Term Note Payable

        In September 2011, AgStar replaced and superseded the Company's existing loan agreements, related loan documents and the amended forbearance agreements. The Company has a five-year term loan initially amounting to $40,000,000, comprised of two tranches of $20,000,000 each, with the first tranche bearing interest at a variable rate equal to the greater of LIBOR plus 3.50% or 5.0%, and the second tranche bearing interest at 5.75%. The Company must make equal monthly payments of principal and interest on the term loan based on a ten-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016. In addition, the Company is required to make additional payments annually on debt for up to 25% of the excess cash flow, as defined by the agreement, up to $2 million per year. As part of the agreement, the premium above LIBOR on the loans may be reduced based on a financial ratio. The loan agreements are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements.

        Prior to the changes in 2011, the Company was charged interest on the term note payable at LIBOR plus 3.25%. The Company had locked in an interest rate of 6.58% on $45 million of the note for three years ending in April 2011.

Revolving Term Note

        The Company also obtained a five-year term revolving loan commitment in the amount of $8,008,689, under which AgStar agreed to make periodic advances to the Company up to this original amount until September 1, 2016. Amounts borrowed by the Company under the term revolving loan and repaid or prepaid may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, payable monthly. The Company also pays an unused commitment fee on the unused portion of the term revolving loan commitment at the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the term revolving loan. Under the terms of the new agreement, the term revolving loan commitment is scheduled to decline by $500,000 annually, beginning on September 1, 2012 and each anniversary date thereafter. The maturity

F-18

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

9. LONG-TERM DEBT (Continued)

date of the term revolving loan is September 1, 2016. The Company does have a $600,000 outstanding standby letter of credit at October 31, 2011 and 2012.

        Prior to the changes in September 2011, the revolving term note had an interest rate of LIBOR plus 3.25%. The Company had accrued default interest of 2.0% from February 2010 to July 2010 because of covenant defaults. AgStar agreed in 2011 to waive 50% of the default interest during 2011.

        Estimated maturities of long-term debt at October 31, 2012 are as follows:

2013	$	42,051,402
2014		1,182,659
2015		731,501
2016		417,888
2017		380,064
After 2017		1,319,223
Total long-term debt	$	46,082,737

10. MEMBERS' EQUITY

        Company is authorized to issue 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have been designated as Class B units. Members of the Company are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our board of governors to become members. Members are entitled to one vote for each unit held. Subject to the Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

        In July 2010, the Company sold to Project Viking, a related party, 3,103,449 of its Class A units at a price per unit of $1.45 for total gross proceeds to the Company of approximately $4.5 million as described in Note 13.

        In May 2011, Project Viking invested $3.5 million in the Company for 7,000,000 Class B units at a purchase price of $0.50 per unit. These units sold to Project Viking were immediately converted to Class A units.

        On August 30, 2011, the Company commenced a subscription rights offering to holders of its Class A units who are residents of the State of Minnesota for an aggregate of 16,500,000 Class A units at a purchase price of $0.50 per unit. No eligible Class A unit holder could purchase more than 77.73% of the Units currently held by such unit holder as of August 30, 2011. In addition, purchasers of units were required to deposit $.125 per unit into an escrow account that was to be held to guarantee a portion of the debt of Agrinatural. Amounts collected related to this guarantee were subsequently returned. The offering period expired on October 15, 2011. The Company closed on the offering in November 2011 having sold 1,414,033 Class A units for approximately $707,000.

F-19

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

11. LEASES

        The Company leases equipment, primarily rail cars, under operating leases through 2017. Rent expense for fiscal 2012, 2011, and 2010 was approximately $2.2 million, $1.8 million, and $1.9 million, respectively.

        At October 31, 2012, the Company had the following minimum future lease payments, which at inception had non-cancelable terms of more than one year:

2013	$	1,563,000
2014		1,231,000
2015		842,000
2016		833,000
2017		693,000
Total lease commitments	$	5,162,000

12. INCOME TAXES

        The differences between consolidated financial statement basis and tax basis of assets and liabilities are estimated as follows at October 31:

	2012			2011
Consolidated financial statement basis of assets	$	66,581,019		$	104,133,924
Plus: Organization and start-up costs capitalized		1,564,147			1,952,135
Less: Accumulated tax depreciation and amortization greater than financial statement basis		(32,928,411	)		(25,804,453	)
Plus: Impairment charge		27,844,579			—
Income tax basis of assets	$	63,061,334		$	80,281,606

        There were no significant differences between the consolidated financial statement basis of liabilities and the income tax basis of liabilities at October 31, 2012 and 2011.

13. RELATED PARTY TRANSACTIONS

        As discussed in Note 10, Project Viking invested $3.5 million in the Company in May 2011 for 7,000,000 Class B units at a purchase price of $0.50 per unit, which were converted to Class A units.

        In July 2010, the Company issued to Project Viking 3,103,449 Class A units at a price per unit of $1.45 for total gross proceeds to the Company of approximately $4.5 million. All proceeds from the sale of the units to Project Viking were used to reduce the principal balance of the Company's revolving line of credit note with AgStar.

        The Company purchased approximately $57,451,000 and $43,233,000 of corn from members in fiscal years 2011 and 2010, respectively.

F-20

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

14. COMMITMENTS AND CONTINGENCIES

Water Agreements

        In October 2003, the Company entered into an industrial water supply development and distribution agreement with the City of Heron Lake for 15 years. The Company has the exclusive rights to the first 600 gallons per minute of capacity that is available from the well, and provides for the Company, combined with Minnesota Soybean Processors, to approve any other supply contracts that the City may enter into. In consideration, the Company will pay one half of the City's water well bond payments of $735,000, plus a 5% administrative fee, totaling approximately $594,000, and operating costs, relative to the Company's water usage, plus a 10% profit. These costs will be paid as water usage fees. The Company recorded an assessment of approximately $367,000 with long-term debt as described in Note 9. The Company pays operating and administrative expenses of approximately $12,000 per year.

        In May 2006, the Company entered into a water treatment agreement with the City of Heron Lake and Jackson County for 30 years. The Company will pay for operating and maintenance costs of the plant in exchange for receiving treated water. In addition, the Company agreed to an assessment for a portion of the capital costs of the water treatment plant. The Company recorded assessments with long-term debt of $500,000 and $3,550,000 in fiscal 2007 and 2006, respectively, as described in Note 9. The Company paid operating and maintenance expenses of approximately $349,000, $287,000, and $327,000 in fiscal 2012, 2011, and 2010, respectively.

Marketing Agreements

        The Company entered into a termination agreement with its previous marketers to terminate the marketing agreements the Company had with each, with termination dates of August 31, 2011. The Company assumed certain rail car leases with the termination of the ethanol marketing agreement and paid a termination fee of $325,000 over the remaining term of the original contract, which ended September 30, 2012.

        Effective September 1, 2011, the Company entered into certain marketing, corn supply and corn storage agreements with Gavilon, LLC ("Gavilon") to market the Company's ethanol and distillers' grains products and to supply the Company's ethanol production facility with corn. Gavilon is now the exclusive corn supplier and ethanol and distillers' grains marketer for the Company's production facility beginning September 1, 2011 and for an initial term of two years. The Company believes that working with Gavilon to manage the Company's marketing and procurement needs will provide a comprehensive solution to help the Company achieve its risk management objectives in a competitive market and will enable the Company to reduce its working capital requirements and more effectively manage its processing margins in both spot and forward markets.

        The Company pays Gavilon a supply fee consisting of a per bushel fee based on corn processed at the facility and a cost of funds component determined on the amount of corn financed by Gavilon for supply to the Company's ethanol production facility based on the length of time between when Gavilon pays for the corn stored in or en route to or from the Company's elevator facilities or production facility, and when the Company is invoiced for that corn at the time it is processed at the Company's production facility. The supply fee was negotiated based on prevailing market-rate conditions for comparable corn supply services. Both Gavilon and the Company have the ability to originate the corn requirements for the production facility. On the effective date of the corn supply Agreement, Gavilon

F-21

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

14. COMMITMENTS AND CONTINGENCIES (Continued)

purchased all corn inventory currently owned by the Company and located at its production facility or elevator facilities, at current market prices, to facilitate the transition to Gavilon supplying 100% of the Company's corn requirements at the production facility and the repayment of the Company's line of credit with AgStar.

        Under the ethanol and distillers' grains marketing agreement, Gavilon will purchase, market and resell 100% of the ethanol and distillers grains products produced at the Company's ethanol production facility and the Company will pay Gavilon a marketing fee based on a percentage of the applicable sale price of the ethanol and distillers grains products. The marketing fees were negotiated based on prevailing market-rate conditions for comparable ethanol and distillers grains marketing services. On the effective date of the marketing agreement, Gavilon purchased all ethanol and distillers grains inventory currently owned by the Company and located at the Company's production facilities, at current market prices.

        The Company entered into a master netting agreement under which payments by the Company to Gavilon for corn under the corn supply agreement will be netted against payments by Gavilon to the Company for ethanol and distillers' grains products produced and sold to Gavilon under the marketing agreement. Under the terms of the master netting agreement, the Company is giving Gavilon a first priority security interest in, and a right of set off against, the Company's non-fixed assets including any rights it has to corn under the corn supply agreement, ethanol and distillers' grains under the marketing agreement, the work-in-process at the Company's ethanol production facility, and the other transactions under the Gavilon agreements. The master netting agreement is integral to the transition to the Gavilon agreements, and the termination and payoff of the Company's seasonal revolving line of credit with AgStar.

        Due to the anticipated sale of the plant assets, the Company plans to terminate its relationship with Gavilon. An agreed upon settlement due to the Company's early termination of the agreements is expected to approximate $635,000.

Forward Contracts

        The Company has natural gas agreements with a minimum commitment of approximately 1.6 million MMBTU per year until October 31, 2014.

Legal Proceedings

Permit Matters

        The Company completed the conversion to natural gas from coal in November 2011. The Company also completed an amendment to the existing air emissions permit allowing the conversion from coal to natural gas. The Company is now seeking the final amendments to its air emissions permit related to the natural gas conversion pending regulatory approvals in form acceptable to the Company, and may incur additional costs in connection with the permit amendment, as well as improvements to its plant as part of the natural gas conversion and to ensure compliance with its permit and planned amendments.

F-22

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

14. COMMITMENTS AND CONTINGENCIES (Continued)

        On December 16, 2010, the Company entered into a stipulation agreement with the Minnesota Pollution Control Agency ("MPCA") to resolve a notice of violation issued by the MPCA in March 2008 that alleged violations of certain rules, statutes, and permit conditions, including emission violations and reporting violations. Under the stipulation agreement, the Company agreed to pay a civil penalty and complete other corrective actions. On April 12, 2012, the Company received a letter from the MPCA acknowledging that the Company had completed all the corrective action requirements described in the stipulation agreement and the stipulation agreement was therefore terminated effective as of the date of the letter.

Coal Contract Termination Dispute and Settlement

        Following conversion by the Company from coal to natural gas as its primary fuel, the Company and Cloud Peak Energy Logistics LLC, formerly known as Northern Coal Transportation Company ("Cloud Peak"), the Company and Cloud Peak entered into a Confidential Settlement Agreement and Mutual Release ("Settlement Agreement") to resolve all claims related to the coal contract dispute on April 30, 2012. Under the terms of the Settlement Agreement, the Company made a one-time cash payment to Cloud Peak in the amount of $900,000 (the "Settlement Payment").

        In general, the parties agreed that the terms and conditions of the Settlement Agreement are confidential, subject to public reporting company obligations and applicable accounting rules and principles. Accordingly, no party (including board members, officers or other representatives of the parties with knowledge of the terms of the Settlement Agreement) is permitted to discuss or otherwise disclose such confidential information, except as required by law or pursuant to such public reporting company obligations and applicable accounting rules and principles.

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

        Summary quarterly results are as follows:

	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
Fiscal year ended October 31, 2012
Revenues	$	38,861,794		$	41,186,236		$	41,908,904	$	46,703,001
Gross profit (loss)		264,570			1,102,346			1,921,833		(1,158,097	)
Operating income (loss)		(586,037	)		(660,787	)		1,206,927		(31,545,361	)
Net income (loss)		(1,312,813	)		(1,356,345	)		470,598		(32,705,662	)
Basic and diluted earnings (loss) per unit		(0.04	)		(0.04	)		0.01		(0.84	)

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
Fiscal year ended October 31, 2011
Revenues	$	39,199,181	$	38,022,811	$	43,013,930		$	43,884,453
Gross profit (loss)		3,226,245		1,840,466		688,880			1,201,160
Operating income (loss)		2,530,477		1,071,699		(182,475	)		(76,415	)
Net income (loss)		1,676,923		438,674		(724,890	)		(819,852	)
Basic and diluted earnings (loss) per unit		0.06		0.01		(0.02	)		(0.02	)

F-23

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

October 31, 2012 and 2011

15. QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)

	First Quarter		Second Quarter			Third Quarter			Fourth Quarter
Fiscal year ended October 31, 2010
Revenues	$	29,413,131	$	25,698,413		$	23,621,607		$	31,891,607
Gross profit (loss)		4,551,412		699,690			(822,069	)		2,505,517
Operating income (loss)		3,539,838		(342,423	)		934,978			1,544,666
Net income (loss)		2,618,162		(1,492,613	)		(173,026	)		730,998
Basic and diluted earnings (loss) per unit		0.10		(0.06	)		(0.01	)		0.03

        The above quarterly financial date is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these periods presented have been included.

16. SALE OF PLANT ASSETS

        The Company entered into an asset purchase agreement on January 22, 2013 with Guardian Energy Heron Lake, LLC for the sale of the ethanol plant assets. The sale is scheduled to close on or before March 1, 2013. The purchase price is the sum of $55,000,000 plus closing net working capital, less the amount owed on the closing date under assumed debt. Under the agreement, $4,000,000 of the sales price is held in escrow. As part of the planned spring 2013 shutdown of the plant, an inspection will occur. Above normal wear and tear costs of required repairs to the Company's boiler system, if any, will be deducted from $2,000,000 of the escrow amount. The remaining $2,000,000 will be held in escrow pending any further claims until December 15, 2013. Under the forbearance agreements in Note 9, AgStar has agreed to delay exercising its legal and contractual rights and remedies provided in the loan documents, including, but not limited to, the right to foreclose the real estate mortgages and security agreements and to obtain the appointment of a receiver until March 31, 2013 in order for the Company to permit the close on the transactions contemplated by the asset purchase agreements. The sale of the ethanol plant assets is subject to approval by the members.

        The Company entered into an asset purchase agreement on January 3, 2013 with FCA Co-op for the sale of the Company's grain storage and handling facilities. The sale closed on February 1, 2013 for approximately $3,750,000.

        The Company anticipates distributing the net proceeds from the sale of assets, after repayment of loans and other obligations, during 2013 pending approval by the members.

F-24

EX-2.1

EXHIBIT 2.1

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement (“Agreement”) made this 3rd day of January, 2013, by Heron Lake BioEnergy, LLC, hereinafter Company, the sole member of Lakefield Farmers Elevator, LLC, hereinafter Seller, whose address is 111 Main Street, Lakefield, Minnesota, and FCA CO-OP, a Minnesota Cooperative, hereinafter referred to as Buyer, whose address is 105 Jackson Street, PO Box 228, Jackson, MN 56143.

WHEREAS, Seller has conducted and operated a grain elevator, a petroleum retail outlet and related business services in the cities of Lakefield and Wilder Minnesota; and,

WHEREAS, Company owns all of the outstanding membership interests of Seller and desires to sell the assets of the Seller; and,

WHEREAS, Buyer desires to purchase the assets of the Seller identified hereinafter.

NOW THEREFORE, in consideration of the terms and conditions contained herein and other good and valuable consideration, it is agreed by and between the parties as follows:

1.Assets.On and subject to the terms and conditions set forth in this Agreement and the consummation of the transactions contemplated by the Agreement, on the closing date (hereinafter specified in Section 2 below and hereinafter referred to herein as the “Closing Date”), Seller hereby agrees to sell and transfer to Buyer and Buyer does hereby purchase and acquire all the assets of Seller as existed on November 27, 2012, other than the excluded assets, which acquired assets includes all real estate identified on the attach “EXHIBIT B”, customer lists, the machinery, equipment, bunkers, rolling stock, tools, shop parts, furniture, fixtures, and other fixed assets, and computers, identified on the attach “EXHIBIT A”, the “consumable” shop inventory used to operate the business and not held for resale, such as engine oil for rolling stock and machinery and equipment, propane at Wilder and Lakefield sites, oil to control dust, etc,, the grain bin identified on the attach “EXHIBIT D”, the grain inventory purchased pursuant to the Grain Transfer Agreement provisions of Section 19, and the consumable fuel inventory used to operate the card-troll retail fuel business purchased pursuant to the Fuel Inventory Agreement provisions of Section 19, free and clear of all liens and encumbrances except as otherwise specifically identified herein. Buyer is not purchasing any of Seller’s cash, cash equivalents, license deposits, contracts (other than the grain contracts identified in Section 19), inventory (other than grain inventory or fuel inventory or the consumable shop inventory used to operate the business and not held for resale, purchased at Closing hereunder), obligations, name, accounts receivable, or any other excluded assets identified on the attach “EXHIBIT C” or any other interest in the Company or Seller, and is not herewith entering into any legal relationship or acquiring any interest in the Company or Seller other than the purchase of the specified assets. All of the Company’s, Seller’s and Gavilon, LLC inventory will be removed on or before closing, or purchased pursuant to the Grain Transfer Agreement provisions of Section 19, unless prior arrangements are made with Buyer.

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2.Purchase Price; Closing.The purchase price shall be Three Million Seven Hundred Fifty Thousand Dollars ($3,750,000.00), plus the purchase price for the grain inventory or fuel inventory purchased pursuant to the provisions of Section 19. Buyer shall deposit Three Hundred Seventy Five Thousand Dollars ($375,000) as earnest money with First American Title Insurance Company, 801 Nicollet Mall, Minneapolis, MN 55402 Attn: Kristi Broderick, within one (1) business day of execution of this Agreement (the “Earnest Money”), which amount shall be refunded to Buyer upon any termination of this Agreement by Buyer hereunder, paid over to Seller upon any termination of this Agreement by Seller as a result of Buyer’s failure to cure its breach of this Agreement or the failure of a condition to closing the transactions contemplated hereby as a result of Buyer’s actions or inactions (other than the financing contingency described in Section 15 hereof), or credited to the purchase price at the closing of this transaction (the “Closing”) by mail or in person at a location to be mutually agreed upon by the parties hereto on January 30th , 2013 (the “Closing Date”), unless the parties mutually agree to extend the Closing Date or the Closing Date is extended pursuant to the terms hereof.  On the Closing Date: a) Seller shall cease operations of the Lakefield and Wilder locations; allow Buyer to undertake a final inspection of the assets sold; confirm the existence and operating condition of all equipment sold (identified on the Schedule of Fixed Assets on the attach “EXHIBIT A” or in “REPLACEMENT EXHIBIT A” to be attached to the Bill of Sale, as provided at the end of this Section 2; and, to undertake the measure of all inventory (fuel and grain) to be transferred pursuant to this agreement; b) Seller shall deliver to Buyer the duly-executed documents, instruments and considerations specified in this Agreement or as reasonably required to transfer the acquired assets to Buyer or otherwise effect the consummation of the transactions described herein, including but not limited to General Warranty Bills of Sale for the fixed assets and other personal property acquired hereby substantially in the form of the General Warranty Bill of Sale attached hereto and incorporated herein by reference as “EXHIBIT D” for the transfer of the Grain Bin; and c) Buyer shall deliver to Seller the purchase price for the acquired assets less the earnest money deposit by wire transfer or immediately available funds to a bank account specified by Seller, the assumption agreements related to DP corn grain contracts specified in Section 19 and the Grain Bin transfer and the Koedam Bill of Sale, and such other duly-executed documents, instruments and considerations reasonably required to transfer the acquired assets to Buyer or otherwise effect the consummation of the transactions described herein.  If there any changes in the items listed on the attached “EXHIBIT A” between the date of this Agreement and the Closing Date, then Seller and Buyer shall prepare (based on its inspection on the Closing Date) an Updated Schedule of Fixed Assets listing the fixed assets sold as of the Closing Date and shall be attached to this Agreement as “REPLACEMENT EXHIBIT A”.  The $850,000 portion of the purchase price allocated for the fixed assets sold as of the Closing Date shall be adjusted plus or minus the fair market value (as agreed to by Seller and Buyer) of any fixed assets listed on or missing from “REPLACEMENT EXHIBIT A” which represents additions or deletions from EXHIBIT A.

3.Corporate ownership transfer. Seller shall execute and tender to Buyer all necessary corporate documents to transfer all assets of the Seller identified herein. Buyer shall execute and tender to Seller all necessary corporate documents to purchase all assets of the Seller identified herein or assume the grain contracts identified in Section 19. Seller and Buyer each

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agree to execute any and all other documents that may later be required or reasonably requested to complete the transfer of ownership of the acquired assets, the assumption of the grain contracts specified in Section 19, or to allow the Buyer to transfer any necessary license, permit or acquired contract.

4.Covenant Not to Compete.Seller agrees it shall not compete with the Buyer in the grain purchasing business in cities of Lakefield, Jackson, Round Lake, Trimont, Sherburn or Wilder Minnesota for a period of five (5) years from the close of this sale. This provision shall survive the Closing, and Seller agrees to execute any reasonable documentation confirming this non-compete agreement at Closing.  Company agrees it shall not compete with the Buyer in the grain purchasing business in cities of Lakefield, Jackson, Round Lake, Trimont, Sherburn or Wilder Minnesota for a period of five (5) years from the close of the sale of its elevator facility. This provision shall survive the Closing, and Company agrees to execute any reasonable documentation confirming this non-compete agreement at Closing.

5.Seller debts; Buyer’s assumptions.At Closing, Seller shall pay all account payables of the Seller due and owing as of January 30th, 2013 and any and all debt owed by Seller as of January 30th, 2013 as necessary for Seller to deliver marketable title at Closing to any assets purchased herein. Seller shall indemnify and hold the Buyer harmless against all such accounts payable and other liabilities not expressly assumed by Buyer hereunder.  Unless specifically provided in this agreement, Buyer is not acquiring, directly or indirectly, any of Seller’s or the Company’s liabilities or obligations and no such assumption shall accrue to Buyer by operation of law or otherwise.  Buyer shall indemnify and hold Seller and the Company harmless against all liabilities or obligations assumed by Buyer under Section 19 with respect to DP grain contracts, the Grain Bin and any other contracts expressly assumed by Buyer hereunder.

6.Employees.Parties acknowledge that this is a purchase agreement for the assets of Seller and that there is no guarantee to acquire or obligation to employ employees of the Company or Seller.

7.Representations of Seller.  Seller represents and warrants to the Buyer as follows:

a)the assets to be transferred to the Buyer pursuant to this Agreement, whether tangible or intangible, shall be at the time of transfer free of any and all liens, security interests, claims and encumbrances;

b)Seller is not in breach or in default of any contract, lease or arrangement affecting the operation of the assets being acquired hereunder and Seller shall duly perform any such contract, leases and arrangements until Closing;

c)there are no actions or proceedings pending or threatened against Seller or the Company affecting the operation of the assets being acquired hereunder;

d)Seller is not insolvent and the Company is not insolvent and neither will be rendered insolvent by this sale;

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e)all equipment, tools, furniture, fixtures, machinery and computers of Seller are in good operating condition and repair, normal wear and tear excepted;

f)Seller and the Company have complied with all applicable federal, state and local laws in any way related to the conduct and operation of Seller;

g)no special consents are required to carry out the transaction contemplated in this Agreement, other than the consent of mortgagee that encumbers the real estate described on Exhibit “B”;

8.Real estate transfer.The following conditions shall apply to the transfer of the real estate (Property) pursuant to this Agreement:

a.Real estate taxes:  Seller shall pay the real estate taxes payable in 2012 and all prior years.  Real estate taxes due and payable in 2013 shall be prorated to the day of closing. Buyer shall pay the real estate taxes due and payable in 2014 and all subsequent years. In the event that the property is encumbered by assessments, Seller shall pay the portion of the assessments due and payable with Seller’s portion of the real estate taxes to be paid in the year 2013; and Buyer agrees to pay all assessments or any part of any assessment that becomes due and payable thereafter.

b.Possession:  Seller shall deliver possession of the Property to Buyer at Closing on the Closing Date.

c.Conveyance of title:  Subject to Buyer’s performance, Seller shall deliver to Buyer at Closing a Limited Warranty Deed in fully executed, recordable form, conveying marketable title in and to the real estate identified on “Exhibit B”, free and clear from any liens or encumbrances not objected to under subsection (d) hereof, subject to the following exceptions:

Building and zoning laws, ordinances, State and Federal regulations; restrictions relating to the use or improvement of the Property without effective forfeiture provisions; reservation of any minerals or mineral rights to the State of Minnesota, if previously so reserved; covenants, conditions, restrictions, declarations and easements of record, and the use of the weigh scale and egress and ingress set forth in the form of the Koedam Bill of Sale on the Grain Bin which is included in the attach “EXHIBIT D”.

d.Owners Policy of Title Insurance and objections to title:  Within a reasonable time after the date of this agreement, Seller shall provide an updated Owners Policy of Title Insurance commitment for the real estate which shall be certified to date at Sellers’ expense to include proper searches covering bankruptcies, State and Federal liens, and judgments.  Seller shall also provide to Buyer a drawing from the surveyor of the boundaries of the real estate Buyer is purchasing at Lakefield and Wilder hereunder, provided no further survey is required and the surveyor may use his existing data to provide a current drawing of the real estate being sold and purchased hereunder.  Buyer shall be allowed ten (10) days after receipt of the title commitment and surveyor drawings to consider any exceptions to coverage in the title insurance commitment and to make any commercially reasonable objections to title, which shall be in writing or shall be deemed waived.  If any such objections to title are made, the Seller shall be allowed 120 days to remove the exceptions. Pending correction of title, the payments hereunder

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shall be postponed; but upon correction of title, and within 10 days after written notice to Buyer, the parties shall perform this Agreement according to its terms.

e.Risk of loss:  If for any reason — including, but not limited to, fire, vandalism, flood, earthquake, or act of God — there is any loss or damage to the real estate or

personal property being purchased hereunder (“Property”) prior to closing, the risk of loss shall be on the Seller.  If the Property or assets are destroyed or substantially damaged before the closing, Buyer, at Buyer’s option, may declare this agreement to be null and void, and in such event Seller and Buyer shall sign an instrument canceling and terminating this agreement.

f.General warranties:  Seller warrants [a] that there is a right of access to the real estate from a public right-of-way; [b] that prior to closing payment in full has been made for all labor, materials, machinery, fixtures, or tools furnished within 120 days immediately preceding the date of closing in connection with construction, alteration, or repair of any structure on or improvement to the real estate; [c] that Seller has not received notice from any person or governmental authority as to any violation of any law, ordinance, regulation, or restrictive covenant and that any such notice received by Seller will be provided to Buyer immediately.  Seller certifies that there are no known water wells or septic systems located on the real estate and these warranties shall satisfy all reporting requirements.  Buyer represents and warrants that at the time of Closing, it shall have all permits, licenses, bonds and all required governmental authority to conduct the business of the elevator that may be required by law.  Seller and Buyer each represent and warrant to the other party that, as of the date of this Agreement and as of the Closing Date, each has and will have the power and authority to enter into and perform its obligations under this Agreement, this Agreement has been duly and validly authorized by all required corporate action, and upon execution this Agreement shall constitute the valid and binding obligation of each party that shall be enforceable against each party in accordance with the terms hereof.  These warranties shall survive closing.

9.Hazardous substances:

Seller has not engaged in the business of generating, transporting, storing, treating or disposing of hazardous substances or hazardous waste (as those terms are defined in The Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq. or in the so-called “Minnesota Superfund Bill”, Minnesota Statutes Chapter 115B (1984)) on the real estate identified on the attach “EXHIBIT B”, (Real Property); the Real Property has not been used for the storing or disposal of waste or for storing or disposal of hazardous substances during or, to the best of Seller’s knowledge, prior to the period that Seller has been an owner of the Real Property; to Seller’s actual knowledge, neither the real property nor any of its various components contains, is composed of, or emits any hazardous, toxic, or contaminated chemicals, substances, materials or pollutants.  Seller hereby agrees to indemnify Buyer against any and all liability which is the result of a release or threatened release of hazardous substances deposited, stored, disposed of, placed on or which otherwise came to be located on the real property, or which is the result of the existence or emission of any hazardous, toxic or contaminated chemicals, substances, materials or pollutants in, on or from the real property during or prior to the period of Seller’s ownership or possession of the real property.

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To the best of Seller’s knowledge, Seller warrants that there are no underground storage tanks, with the exception of the underground tanks used for the retail petroluem outlet, located on the Real Property and that no asbestos is present in the buildings.

Seller shall deliver to Buyer, at Seller’s cost and within 15 days after the date hereof, a Phase I Environmental Site Assessment (the “Phase I”) of the Real Property covered hereby, written under American Standard of Testing and Measurement (ASTM) Standard Practice for Environmental Site Assessments by American Engineering Testing, Inc., to identify to the extent reasonable, pursuant to the methodology prescribed by such ASTM standards, recognized environmental conditions in connection with the Real Property.  The Phase I will be certified to Seller and Company.  In the event that Buyer determines on a commercially reasonable basis that the results of the Phase I are unacceptable, Buyer must notify Seller in writing of such determination and the basis therefor within seven (7) days of its receipt of the Phase I.  Seller shall have ten (10) days following receipt of such notice (the “Election Period”) in which to address any recognized environmental conditions on the Real Property or to otherwise enter into a written undertaking acceptable to Buyer and Seller to remedy the basis for Buyer’s objections within 120 days following receipt of such notice, in which case the Closing may be postponed by Buyer pending the remedy of Buyer’s objections.  If Seller fails to undertake such actions within the Election Period,  Buyer shall have the right to terminate this Agreement by written notice thereof to Seller given within seven (7) days after the expiration of the Election Period, in which event this Agreement shall be null and void and neither party shall have any further rights, obligations, or liability hereunder.  In addition, at Buyer’s expense, Buyer, its agents and designees, are hereby granted the right at any time or times after the date hereof to inspect, analyze, and test the Real Property and their various components including without limitation the Land and Improvements, and all appliances, heating, air conditioning, wiring and plumbing therein and all structural and nonstructural elements thereof, to determine that the improvements and tangible personal property is in good working order and repair, ordinary wear and tear excepted, provided said inspection must take place within fifteen (15) days after the date hereof.  In the event that Buyer determines on a commercially reasonable basis that the Improvements and tangible personal property located on the Real Property are not in good working order and repair (ordinary wear and tear excepted) based on the results of its general site inspection, Buyer shall have the right to terminate this Agreement by written notice thereof to Seller given within seven (7) days after the date of Buyer’s inspection, in which event this Agreement shall be null and void and neither party shall have any further rights, obligations, or liability hereunder.

10.Execution of documents.Each of the parties shall execute and deliver any and all documents necessary to effect the terms of the contract herein.

11.Attorney fees and costs.Any party who breaches this contract shall be liable to the other party for applicable attorney fees and costs incurred as a result of the breach, in addition to compensatory damages.

12.Entire agreement:  Except as provided herein, this contract contains the entire agreement between the parties, and no party has relied upon any verbal or written representations, agreements, or understandings not set forth herein.

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13.Venue.  Any action brought upon or pursuant to this agreement shall be venued in District Court in and for Jackson County, Minnesota and this contract shall be governed by and construed in accordance with the laws of the State of Minnesota.

14.Notices.  Any notice, demand, or other communication made pursuant to this contract shall be sufficiently given or delivered if it is dispatched by registered or certified mail, postage prepaid, return receipt requested, or delivered personally to the parties addresses set forth above.

15.Financing.This contract is subject to Buyer confirming a reasonable financing agreement with its lender, within ten days (10) of the date this contract is executed by Seller as evidenced below. In the event Buyer is unable to procure such financing, Buyer shall provide written notice to Seller terminating this contract on or before that date which is ten (10) days of the date this contract is executed by Seller, as evidenced below. This financing contingency shall expire with no further effect if written notice of termination is not delivered within said ten (10) days.

16.Agreement on asset valuation.Buyer and Seller agree to execute the necessary IRS forms to acknowledge the assets are valued for the purpose of this sale as follows:

1.	Land	$	50,000.
2.	Buildings	$	2,800,000.
3.	Equipment	$	850,000.
4.	Covenant not to compete	$	50,000.

17.Conditions Precedent to Closing.Seller’s performance of its obligations hereunder are expressly conditioned upon the satisfaction of the following:

a.Termination of that certain Corn Storage Agreement between Seller and Gavilon, LLC.

b.Delivery to Buyer of a copy of the fully-executed Koedam Bill of Sale included in the attach “EXHIBIT D”.

If the above conditions precedent are not satisfied, or waived by Buyer on or before the Closing on the Closing Date, then Buyer may terminate this Agreement upon 5 days’ written notice.

18.Confidentiality.Buyer and Seller agree that the terms and conditions of this agreement are and shall remain confidential, provided however that each acknowledges that the Company is a public reporting company and governed by the SEC rules and regulations governing public reporting companies and  to the extent the Company is required to disclose publicly in one or more public filings made with the SEC all or some of the terms of this Agreement the confidentiality covenant shall not apply to such public disclosures and such public disclosures shall not be a violation of this confidentiality provision.  The parties may disclose the

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terms of this Agreement to their auditors, lenders, legal counsel, directors, management team or other persons or entities who are required to have the details of this Agreement in order to perform their services, but only on the condition that such persons and entities shall agree to keep this information confidential and nonpublic, provided however that the parties agree that their respective financial statements may make such disclosures of this Agreement and the terms hereof to the extent necessary or required under applicable accounting rules and principles. Notwithstanding this confidentiality provision, both parties shall be free to respond to legal process or regulatory inquiry and shall respond with a request that the terms of this contract be treated as confidential to the extent reasonably possible. Buyers , as part of their due diligence, may contact vendors and third parties necessary to operate the assets sold herein to arrange for services to be extended to Buyer and to confirm operating arrangements of the assets, but Buyer agrees not to disclose terms of this agreement other than those terms necessary.

19.Grain Transfer Agreement; Fuel Inventory Transfer Agreement.  On the Closing Date, Buyer will assume DP contracted corn that is physically on site, not to exceed 462,000 bushels (“DP Corn” or “DP Open Grain Contracts”), as specified on the attach “EXHIBIT E.” Buyer and Seller agree to settle the purchase and sale on the DP Corn and assumption the next business day following a measure-up that will be conducted on-site on the Closing Date, and settle the DP corn and assumption the next business day.  The purchase and sale of all other physical inventory corn on-site at either Lakefield or Wilder is under discussion between Buyer and Seller, but is not part of this Agreement.  Seller agrees that, but for the DP Corn subject to the DP Corn Contracts assumed by Buyer, the elevator facilities will be empty of corn and soybeans on the Closing Date, subject to any additional corn or soybeans purchased by Buyer from Seller pursuant to additional agreement, provided that, to allow for the orderly sale of such additional bushels that are on-site (above the 462,000 bushels maximum of DP Corn), Seller may extend the Closing Date from January 30th  to no later than end of February 2013 in order to empty the grain bins by Closing on or before the Closing Date. Any purchase of grain inventory by Buyer shall be based upon the “Daily Position Report” (DPR) of Seller or Gavilon LLC as of the Closing Date and confirmed by a federal measure up.  The measure up will be undertaken by a mutually agreed upon third party by Seller and Buyer on or before Closing.  A long measure will not affect the DPR/ sale bushels but a short measure will reduce the DPR/sale bushels.  Seller shall use reasonable efforts to empty grain bins completely and not leave multiply grain bins with grain in the “bottoms.” Buyer agrees to purchase the fuel inventory held for sale at retail at Lakefield cardtrol at its fair market value (wholesale cost to Seller) on the Closing Date (as adjusted for any outstanding purchase or sale contracts for such fuel inventory), as agreed to by Buyer and Seller. On the Closing Date, Buyer and Seller will measure the fuel inventory held for sale at retail at Lakefield cardtrol. Buyer and Seller agree to settle the purchase and sale of the fuel inventory the next business day following the measure.

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 [signature page to Asset Purchase Agreement dated January 3, 2013]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date indicated.

BUYER:	FCA CO-OP	Date:	January 3, 2013
/s/ MARK EGGIMANN		/s/ JERRY SVOBODA
Mark Eggimann, President		Jerry Svoboda, General Manager
SELLER:	Lakefield Farmers Elevator, LLC		Date:	January 3, 2013
/s/ ROBERT J. FERGUSON
Robert J. Ferguson, President and Chief Manager

And the undersigned Company joins in the execution of this Agreement, not as a party to the transactions between Buyer and Seller, but solely for the express purposes set forth in this Agreement.

COMPANY:	Heron Lake BioEnergy, LLC	Date:	January 3, 2013
/s/ ROBERT J. FERGUSON
Robert J. Ferguson, Chief Executive Officer

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EXHIBITS

[The following exhibits are omitted from the copy of this agreement as filed with the Securities and Exchange Commission, but will be furnished supplementally by Heron Lake BioEnergy, LLC to the Commission upon request:

Exhibit A	Schedule of Fixed Assets / Other Personal Property
Exhibit B	Legal Description of Real Property
Exhibit C	Other Excluded Assets
Exhibit D	Form of General Warranty Bill of Sale
Exhibit E	Schedule of DP Corn / Open-Grain Contracts]

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EX-2.2

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Exhibit 2.2

ASSET PURCHASE AGREEMENT

        THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made as of January 22, 2013, by and between Heron Lake BioEnergy, LLC, a Minnesota limited liability company ("Seller") and Guardian Energy Heron Lake, LLC, a Delaware limited liability company ("Buyer").

BACKGROUND

        This Agreement contemplates a transaction in which Seller would sell to Buyer, and Buyer would purchase from Seller, substantially all of the assets of Seller (and assume certain liabilities) pursuant to the terms and conditions as set forth herein (the "Transaction").

        NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

ARTICLE 1
DEFINITIONS

        For purposes of this Agreement, the following terms have the meanings set forth below:

        "Acquired Assets" means all right, title and interest in and to all of the assets of Seller related to the ownership and operation of the Facility or otherwise used in connection with or held for the benefit of the operation of the Business, including, without limitation, all: (a) Real Property; (b) Tangible Personal Property; (c) Intellectual Property, IP Licenses, and all rights thereunder, including all rights to sue for past, present and future infringements, misappropriations, dilutions and other violations thereof, and all other remedies against infringements, misappropriations, dilutions, and other violations thereof and rights to protection of interests therein under the laws of all jurisdictions; (d) Acquired Contracts; (e) prepaid expenses, claims, prepayments, refunds, causes of action, rights of recovery, rights of set-off and rights of recoupment; (f) franchises, approvals, permits, licenses, Orders, registrations, certificates, variances and similar rights obtained from Government Entities; (g) Records; (h) goodwill; (i) to the extent transferable, all renewable identification numbers, carbon intensity credits, emission reduction credits, permits and rights with respect to ethanol included in Inventory; (j) all of the Seller's equity interests in HLBE Pipeline Company, LLC; (k) those assets specifically set forth on Schedule 1.1; (l) spare parts inventory; (m) restricted cash or debt service deposits related to Assumed Debt; (n) Inventory, and (o) to the extent transferable, all warranties, indemnities and guarantees with respect to any of the foregoing; provided, however, that the Acquired Assets do not include the Excluded Assets.

        "Acquired Contracts" means the agreements, contracts, leases, licenses and other arrangements set forth on Schedule 1.2, and all rights, privileges and claims thereunder.

        "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with such Person. A Person is deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise.

        "Agreement" has the meaning set forth in the opening paragraph.

        "Allocation Statement" has the meaning set forth in Section 2.8.

        "Alternative Transaction" has the meaning set forth in Section 6.3.

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        "Assumed Debt" means the amounts of certain of Seller's Debt as set forth on Schedule 1.3, which amounts shall be updated as of the Closing Date to identify the balance of Seller's Debt being assumed.

        "Assumed Liabilities" means: (a) the Seller's obligations arising after the Closing Date under the Acquired Contracts; (b) all liabilities and obligations for (i) Taxes relating to the Business, the Acquired Assets or the Assumed Liabilities for any taxable period (or a Straddle Period) ending after the Closing Date and (ii) Taxes allocated to Buyer or for which Buyer is liable in accordance with Article 10; (c) all liabilities and obligations arising out of or relating to Buyer's ownership or operation of the Business and the Acquired Assets on or after the Closing Date; (d) all accrued vacation and paid-time off as of the Closing for Hired Employees; and (e) the Seller's other liabilities set forth on Schedule 1.4.

        "Base Purchase Price" has the meaning set forth in Section 2.3(a)(i).

        "Bill of Sale" means the Bill of Sale, Assignment and Assumption Agreement to be entered into at the Closing by Buyer and Seller, in substantially the form attached as Exhibit A.

        "Board" means the Board of Directors of the Seller.

        "Breakup Fee" has the meaning set forth in Section 6.3.

        "Business" means the business of owning and operating the Facility, and producing, storing, transporting, marketing and selling fuel-grade ethanol and other related products in connection with the operations of the Acquired Assets and the Assumed Liabilities, whether such operations are conducted by Seller or any of its Affiliates before Closing, or Buyer after Closing.

        "Business Day" means a day other than a Saturday, a Sunday or another day on which commercial banking institutions in Minneapolis, Minnesota are authorized or required by Legal Requirements to be closed.

        "Buyer" has the meaning set forth in the opening paragraph.

        "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time.

        "Closing" has the meaning set forth in Section 2.7.

        "Closing Date" has the meaning set forth in Section 2.7.

        "Closing Net Working Capital" means Seller's and Buyer's agreement upon Net Working Capital on and as of the Closing Date after such parties have inventoried and priced all required assets in accordance with the procedures set forth on Exhibit C.

        "Closing Working Capital Statement" has the meaning set forth in Section 2.4.

        "COBRA" means the requirements of Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the Code and of any similar state law, each as amended from time to time.

        "Code" means the Internal Revenue Code of 1986, as amended from time to time.

        "Confidential Information" means any information concerning the Business and affairs of Seller that is not already generally available to the public.

        "Confidentiality Agreement" means that certain Confidentiality Agreement dated October 31, 2012, between Seller and Buyer.

        "Damages" means all damages, dues, penalties, fines, costs, amounts paid in settlement, Liabilities, obligations, Taxes, Liens, losses, expenses and fees, including court costs and attorneys' fees and expenses arising from or related to any actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands or Orders.

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        "Debt" means: (a) indebtedness for borrowed money; (b) indebtedness secured by any Lien on property owned by Seller or on any Acquired Asset; (c) indebtedness evidenced by notes, bonds, mortgages, financing statements, debentures, outstanding checks, bankers' acceptances or similar instruments; (d) capital leases, including, without limitation, all amounts representing the capitalization of rentals in accordance with GAAP; (e) "earnouts" and similar payment obligations; (f) obligations under letters of credit; (g) advances under factoring agreements; (h) other obligations and Liabilities that accrue interest or similar charges (other than trade payables incurred in the ordinary course of the Business consistent with past practice); (i) guarantees with respect to liabilities of a type described in any of clauses (a) through (h) above; and (j) interest, penalties, premiums, yield maintenance amounts, fees and expenses related to any of the foregoing.

        "Deed" means a recordable general warranty deed conveying the Real Property to Buyer, together with a Certificate of Real Estate Value, all in substantially the form attached as Exhibit D.

        "Disclosure Schedule" means the disclosure schedules attached to this Agreement that sets forth the exceptions to the representations and warranties contained in Article 3 and Article 4 and certain other information called for by this Agreement.

        "Employee Benefit Plan" means: (a) any "employee benefit plan" (as defined in Section 3(3) of ERISA); (b) all specified fringe benefit plans as defined in Section 6039(D) of the Code; (c) all cafeteria plans as defined in Section 125 of the Code; and (d) any other employee benefit plan, program or arrangement of any kind, including, without limitation, bonus plans, employment, consulting, change-in-control, commissions or other compensation agreements, incentive, equity or equity-based compensation, or deferred compensation arrangements, security purchase, severance pay, sick leave, vacation pay, paid time off, salary continuation, disability, hospitalization, medical insurance, life insurance, and scholarship programs.

        "Environmental Laws" means any Legal Requirement, and any Order or binding agreement with any Government Entity: (a) relating to pollution or Hazardous Substances (or the cleanup thereof) or the protection of natural resources, endangered or threatened species, human health or safety, or the environment (including ambient air, soil, surface water or groundwater, or subsurface strata); or (b) concerning the presence of, exposure to, or the management, manufacture, use, containment, storage, recycling, reclamation, reuse, treatment, generation, discharge, transportation, processing, production, disposal or remediation of any Hazardous Substances. The term "Environmental Law" includes, without limitation, the following (including their implementing regulations and any state analogs): CERCLA; the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. §§ 6901 et seq.; the Federal Water Pollution Control Act of 1972, as amended by the Clean Water Act of 1977, 33 U.S.C. §§ 1251 et seq.; the Toxic Substances Control Act of 1976, as amended, 15 U.S.C. §§ 2601 et seq.; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. §§ 11001 et seq.; the Clean Air Act of 1966, as amended by the Clean Air Act Amendments of 1990, 42 U.S.C. §§ 7401 et seq.; and the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. §§ 651 et seq.; and all similar laws and regulations under the laws of the State of Minnesota.

        "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time.

        "ERISA Affiliate" means each entity that is treated as a single employer with Seller for purposes of Section 414 of the Code or Section 4001(a)(14) or 4001(b) of ERISA.

        "Escrow Account" has the meaning set forth in Section 2.6.

        "Escrow Agent" means Wells Fargo Bank, N.A., or any other successor as determined under the Escrow Agreement.

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        "Escrow Agreement" means the escrow agreement by and among Seller, Buyer and Escrow Agent, in substantially the form attached as Exhibit B.

        "Escrow Amount" has the meaning set forth in Section 2.3.

        "Escrow Fund" shall mean the Escrow Amount held by the Escrow Agent in accordance with this Agreement and the Escrow Agreement together with all interest on or other taxable income, if any, earned from the investment of the Escrow Amount.

        "Escrow Termination Date" shall mean December 15, 2013.

        "Estimated Net Working Capital" means Seller's and Buyer's agreement of the estimated Net Working Capital on and as of the Closing Date, which estimate is to be determined pursuant to Section 2.3(c).

        "Estimated Net Working Capital Payment" means any amount equal to ninety percent (90%) of the Estimated Net Working Capital.

        "Exchange Act" means the Securities Exchange Act of 1934, as amended.

        "Excluded Assets" means: (a) cash, cash equivalents, restricted cash; (b) accounts, notes and other receivables; (c) the charter and other documents relating to the organization, maintenance and existence of Seller as a limited liability company; (d) any of the rights of Seller under any Transaction Document; (e) any of the rights of Seller under any Excluded Contract; (f) the other excluded assets set forth on Schedule 1.5; (g) Seller's equity interest in Lakefield Farmers Elevator, LLC, or any of the assets or business owned by Lakefield Farmers Elevator, LLC; (h) notes receivable owed by, or advances or loans made to, any officer or employee of Seller; and (i) any restricted cash or debt service deposits related to Assumed Debt that are not assumable or related to any Acquired Contracts that are not assigned to Buyer at Closing.

        "Excluded Contract" means any contract, agreement or understanding that is not an Acquired Contract, including, without limitation, those contracts, agreements and understandings set forth on Schedule 1.6.

        "Excluded Liabilities" means any Liabilities of Seller or any of its Affiliates, or the Business, other than the Assumed Liabilities or Assumed Debt, including, without limitation: (a) any Liability resulting from, arising out of, relating to, in the nature of or caused by any breach of contract, breach of warranty, tort, infringement, workers' compensation claim, customer warranty claim, violation of Legal Requirement or environmental matter, including without limitation those arising under Environmental Laws; (b) any Liability for Taxes; (c) any Liability for income, transfer, sales, use and other Taxes arising in connection with the consummation of the Transaction in accordance with Article 10 (including any Taxes arising as a result of the transfer of the Acquired Assets); (d) any Liability for the unpaid Taxes of any Person as a transferee or successor, by contract or otherwise; (e) any Liability to indemnify any Person by reason of the fact that the Person was a partner, manager, trustee, director, officer, employee or agent of Seller or any of its Affiliates or was serving at the request of any such Person as a partner, manager, trustee, director, officer, employee or agent of another Person; (f) any Liability for costs and expenses incurred in connection with this Agreement and the Transaction; (g) any Liability under this Agreement or any other Transaction Document; (h) any Liability resulting from, arising out of, relating to, in the nature of, or caused by any Excluded Asset; (i) any Liability resulting from, arising out of, relating to, in the nature of or caused by any Excluded Contract; (j) any Debt not listed on Schedule 1.3; (k) any Liability for compensation, salary, wages, commissions, or any other Liability under or connected with any Employee Benefit Plan; (l) any notes payable or other similar Liabilities to any officer or employee of Seller; (m) any Unclaimed Property; (n) any Liability related to the ownership, operation or use of Lakefield Farmers Elevator, LLC; (o) any Liability

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incurred under any Environmental Law, and (p) any Liability related to any claim or action by a member of Seller regarding this Agreement, any other Transaction Document, or the Transaction.

        "Facility" means Seller's ethanol producing facility located at 91246 390th Avenue, Heron Lake, MN 56137.

        "Financial Statements" has the meaning set forth in Section 3.6.

        "Fundamental Representations" has the meaning set forth in Section 8.1.

        "GAAP" means United States generally accepted accounting principles, as established by the Financial Accounting Standards Board, as in effect from time to time.

        "Gavilon Documents" means an amendment of the Seller's Ethanol and Distiller's Grains Marketing Agreement with Gavilon, LLC for distiller's grains marketing, on terms acceptable to Buyer and Seller, and an agreement between Gavilon, LLC, Seller, and Buyer for the purchase of (i) grain on site at the Facility as of the Closing Date, (ii) finished good ethanol and distiller's grains inventory on site at the Facility as of the Closing Date, and (iii) to arrive grain contracts for the Facility, pursuant to the agreement principles set forth on Schedule 5.1(l).

        "Government Entity" means any: (a) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature; (d) multi-national organization or body; or (e) Person exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or similar power of any nature.

        "Hazardous Substance" means any chemical, material or substance in any form, whether solid, liquid, gaseous, semisolid or any combination thereof, whether waste material, raw material, chemical, finished product, byproduct or any other material or article, that is listed or regulated under applicable Environmental Laws as a "hazardous" or "toxic" substance or waste, or as a "contaminant," or is otherwise listed or regulated under applicable Environmental Laws because it poses a hazard to human health or the environment; including, without limitation, hazardous substances as defined in CERCLA, petroleum products, byproducts or derivatives thereof, asbestos, urea formaldehyde foam insulation and lead-containing paints or coatings, mold and any other substance, natural or artificial, which may pose a threat to human health.

        "Hired Employee" has the meaning set forth in Section 7.5(a).

        "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended from time to time.

        "Indemnified Party" means a party who is seeking indemnification under Article 8.

        "Indemnifying Party" means a party from whom indemnification is being sought under Article 8.

        "Independent Accountant" has the meaning set forth in Section 2.5.

        "Insurance Policies" has the meaning set forth in Section 3.17.

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        "Intellectual Property" means all domestic and foreign intellectual property rights, including all of the following: (a) inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto and all patents, patent applications and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions and reexaminations thereof; (b) trademarks, service marks, trade dress, logos, slogans, trade names, corporate names, telephone and facsimile numbers and brand names, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith and all applications, registrations and renewals in connection therewith; (c) copyrightable works, copyrights, industrial designs, and all applications, registrations and renewals in connection therewith; (d) mask works and applications, registrations and renewals in connection therewith; (e) trade secrets and information related to research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals; (f) computer software (including data and related documentation); (g) other proprietary information and rights; (h) registered internet domain names, websites, website addresses and universal resource locators (URLs); and (i) copies and tangible embodiments (in whatever form or medium) of any of the foregoing.

        "Inventory" means all of the inventory of the Business, excluding spare parts inventory, whether or not reflected on the books and records of Seller and whether finished products, raw materials, ingredients, or supplies, that is located at the Facility, including: (a) all Work in Process; (b) all corn oil; and (c) all yeast, enzymes, chemicals and denaturant; provided, however, that any grain on site at the Facility will not constitute "Inventory" to the extent that title to such grain has not passed to Seller under the Corn Supply Agreement between Seller and Gavilon, LLC dated September 1, 2011, and any finished products on site will not constitute "Inventory" to the extent (x) delivery of such finished products have been loaded onto a truck or railcar and a bill of lading has been issued with respect to such finished products or (y) delivery of such finished products has otherwise been completed to Gavilon, LLC under the Ethanol and Distiller's Grains Marketing Agreement between Seller and Gavilon, LLC dated September 1, 2011.

        "IP Licenses" means all licenses and sublicenses of Intellectual Property granted by or to Seller, other than licenses of Intellectual Property included in the Excluded Assets.

        "Latest Balance Sheet" means Seller's most recent unaudited balance sheet included in the Financial Statements.

        "Legal Requirement" means any law, statute, legislation, constitution, principle of common law, resolution, ordinance, code, Order, treaty, rule, regulation, ruling, determination, charge, direction or other restriction of an arbitrator or Government Entity.

        "Liability" means any liability or obligation of any kind or nature (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated and whether due or to become due), including any liability for Taxes.

        "Lien" means any mortgage, pledge, lien, encumbrance, charge, assessment, deed of trust, lease, adverse claim, fixture filing, levy, restriction on transfer, any conditional sale or title retention agreement or other security interest.

        "Material Adverse Effect" means any fact, event, series of events, change, effect or circumstance that, individually or in the aggregate with other facts, events, series of events, changes, effects or circumstances, has had or is reasonably likely to have a material adverse effect either on (a) the ability of Seller to consummate the Transactions or perform their respective obligations under this Agreement or any other Transaction Document, or (b) the Business, results of operations, assets, Liabilities or

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financial condition of Seller; provided, however, that, solely with respect to this clause (b), in no event shall any of the facts, events, series of events, changes, effects or circumstances resulting from or relating to the following, either alone or in combination, constitute a Material Adverse Effect, or be taken into account in determining whether there has been a Material Adverse Effect: (i) the execution of this Agreement or the public announcement of the Transaction, (ii) any change in GAAP after the date hereof; (iii) changes in national or international political or social conditions, including the engagement by the United States in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack or any earthquakes, hurricanes or other natural disasters; (iv) any change in the financial, banking, credit, securities, or commodities markets, the economy in general or prevailing interest rates of the United States or any other jurisdiction, where Seller has operations or significant revenues; (v) any changes in any Legal Requirements or the interpretation thereof after the date hereof; (vi) the effect of any change that generally affects the industry in which the Company operates; or (vii) the effect of any breach of the Company's loan or forbearance agreements with AgStar Financial Services, ACA; except to the extent that, in the case of clauses (v) or (vi), such change that has had, or is reasonably likely to have, a material disproportionate effect on the Business or the Seller, taken as a whole, relative to other Persons in its industry.

        "Member Approval" has the meaning set forth in Section 6.6.

        "Member Meeting" has the meaning set forth in Section 6.6.

        "Net Working Capital" means: (a) the sum of the current assets included in the Acquired Assets, net of any allowances or reserves; less (b) the sum of the current liabilities included in the Assumed Liabilities; all as determined in accordance with GAAP and consistent with the calculation set forth on Exhibit C.

        "Nonfundamental Claim" has the meaning set forth in Section 8.4(a).

        "Objection Notice" has the meaning set forth in Section 2.5.

        "Order" means any order, injunction, judgment, decree, ruling, writ, assessment or arbitration award of a Government Entity.

        "Outside Date" means March 31, 2013.

        "Permits" has the meaning set forth in Section 3.22.

        "Permitted Liens" means: (i) Liens for current Taxes, assessments, fees and other charges by any Tax Authority that are not due and payable as of the Closing Date; (ii) statutory Liens of landlords, Liens of carriers, warehouse persons, mechanics and material persons and other Liens imposed by Legal Requirements incurred in the ordinary course of business for sums (x) not yet due and payable or (y) being contested in good faith, if a reserve or other provision, if any, as shall be required by GAAP shall have been made therefor on the Financial Statements; and (iii) easements, rights-of-way, restrictions and other similar charges or other Liens on or affecting any Real Property and set forth on Schedule 1.7, in each case which do not materially interfere with the ordinary conduct of business of Seller or the Business or the value of any additional land which may be part of the Real Property.

        "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or entity, any other business entity, an estate, a labor union or a Government Entity.

        "Post-Closing Adjustment Amount" has the meaning set forth in Section 2.4(b).

        "Proxy Statement" means the information statement that is submitted to Seller's unitholders and filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act describing the Transactions.

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        "Purchase Price" has the meaning set forth in Section 2.3(a).

        "Real Property" means all real property (including all land, buildings, structures, improvements and fixtures erected thereon and all easements, appurtenances, hereditaments, rights, permits and privileges related thereto, together with all systems, equipment and items of personal property attached thereto) as used in the operation of the Business and including, without limitation, the Facility, but specifically excluding all real property owned by Lakefield Farmers Elevator, LLC at its Lakefield, Minnesota and Wilder, Minnesota elevator locations.

        "Records" means, the following written materials, data and records (in whatever form or medium) to the extent in existence and the possession or control of Seller relating to the Business and which are not Excluded Assets, or acceptable copies thereof: (i) business records, including customer lists and records and transportation and logistics records; (ii) equipment logs; (iii) service, warranty and claim records; (iv) records relating to the Inventory; (v) maintenance records and other documents relating to the Real Property, Intellectual Property, and the Tangible Personal Property; (vi) material safety data sheets; (vii) information demonstrating compliance with applicable laws, such as: (A) service records; (B) emissions data, or parametric data used to demonstrate compliance with emissions limits; (C) inspections results; (D) process information such as scrubber flow, pressure drop and thermal oxidizer temperature logs; (E) training records; and (F) process safety information, including any drawings, studies and calculations, reflecting the original/as-built design of the Facility as well as up-to-date process safety information consistent with current operating conditions and equipment; (viii) operating procedures, guides and manuals; (ix) training manuals (x) compliance calendars; (xi) logins/passwords for government on-line registries, including Federal Communications Commission registration numbers and passwords; (xii) plans required by applicable regulation such as Storm Water Pollution Prevention Plan and Spill Prevention Control & Countermeasure; (xiii) to the extent transferable in accordance with Legal Requirements, employment, occupational, exposure and medical records of any employees of Seller who perform services for the Business (other than employment records related to any such employee who is not offered employment by Buyer pursuant to Section 7.5(a) or who does not accept an offer of employment with Buyer); (xiv) copies of financial records related to the transfer of the Acquired Assets or reasonable access thereto, provided that Seller shall retain all original financial records of Seller unless necessary or proper to effect the transfer of the Acquired Assets; (xv) product formulations, specifications and recipes; (xvi) environmental reports, investigations and notices; (xvii) surveys and title insurance policies, title insurance commitments, title opinions and abstracts, if any; (xviii) leases, easements, permits, declarations and related documents affecting the Real Property, if any; (xix) geotechnical reports, plans and specifications for the Facility and engineering reports; (xx) all other documents used in the Business, including those related to products, marketing, advertising and promotional materials; and (xxi) those related to any of the Acquired Assets or Assumed Liabilities or Assumed Debt.

        "Reporting Party" has the meaning set forth in Section 3.11.

        "Representatives" means, with respect to any Person, such Person and its Affiliates and their respective managers, officers, directors, employees, investment bankers, financial advisors, attorneys, accountant or any other representative, agent, consultant or advisor.

        "Resolution Period" has the meaning set forth in Section 2.5.

        "Review Period" has the meaning set forth in Section 2.5.

        "Scheduled Contracts" has the meaning set forth in Section 3.18(a).

        "SEC" means the United States Securities and Exchange Commission.

        "Seller" has the meaning set forth in the opening paragraph.

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        "Seller's Knowledge" means the actual knowledge, after due inquiry and reasonable investigation, of each of David Woestehoff, governor and board president; Doug Schmitz, governor and board vice president; Michael Kunerth, governor and board treasurer; Kenton Johnson, governor and board secretary; Robert Ferguson, governor and general manager; Milton McKeown, governor; Steve Core, governor; Nick Bowdish, governor; Brodie McKeown, plant manager; Brent Pavelko, environmental health and safety; Tyronne Bialas, director of commodities; and Mike Mattison, interim chief financial officer.

        "Straddle Period" has the meaning set forth in Section 10.1.

        "Subsidiary" means, with respect to any Person, any corporation, partnership, limited liability company or other Person of which an aggregate of more than 50% of the outstanding voting stock, partnership interests, membership interests or other ownership interests are at any time directly or indirectly owned by such Person, by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries.

        "Superior Proposal" has the meaning set forth in Section 6.3.

        "Tangible Personal Property" means all fixed assets and other tangible personal property (including all machinery, equipment, Inventory, furniture, furnishings, fixtures, automobiles, trucks, trailers, other vehicles, tools, parts and spare parts) together with any transferable express or implied warranty of any Person covering any item or component part thereof, rights of return, or rebate rights relating to the foregoing, including but not limited to the items set forth on Schedule 1.8.

        "Tax" or "Taxes" means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Section 59A of the Code), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property (including special assessments), personal property, sales, use, registration, value added, alternative or add-on minimum, estimated or other tax of any kind, including any interest, penalty or addition thereto, whether disputed or not and including any obligations to indemnify or otherwise assume or succeed to the Tax liability of any other Person. The term "Tax" or "Taxes" shall not include state deed tax imposed by the State of Minnesota which, under Minnesota law, is to be paid by the Seller on the consideration given in exchange for the Deed.

        "Tax Proceeding" has the meaning set forth in Section 10.4.

        "Tax Return" means any return, declaration, report, claim for refund or information return or statement relating to Taxes (including any schedule or attachment thereto) and any amendment thereof.

        "Tax Authority" means the United States Internal Revenue Service and any other Government Entity responsible for the administration of any Tax.

        "Third Party" has the meaning set forth in Section 6.3.

        "Third Party Claim" has the meaning set forth in Section 8.5(a).

        "Transaction" means the sale of the Acquired Assets, the assignment of the Acquired Contracts, the assumption of the Assumed Liabilities, the payment of the Purchase Price, and all other matters related to the herein described transaction.

        "Transaction Documents" means this Agreement, the Deed, the Escrow Agreement, the Bill of Sale, and all other assignment and assumption and consent and other documents necessary or proper to effect the consummation of the Transaction.

        "Treasury Regulations" means the rules and regulations promulgated under the Code.

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        "Unclaimed Property" means all abandoned or unclaimed property reportable under any state or local unclaimed property, escheat or similar Legal Requirement where the dormancy period elapsed prior to the Closing Date.

        "Work in Process" means all unfinished ethanol (or ethanol by-products) still involved in the production process and located in fermentation devices, distillation devices, tanks, piping or elsewhere within the Facility, as well as all grains and grain products involved in the production process (i.e., not yet ready for sale as dry, modified or wet distillers grains, corn oil or otherwise) and located anywhere within the Facility.

ARTICLE 2
PURCHASE AND SALE OF ACQUIRED ASSETS

        2.1.    Purchase and Sale of Acquired Assets.    Subject to the terms and conditions of this Agreement, Buyer will purchase the Acquired Assets from Seller, and Seller will sell, transfer, assign and deliver the Acquired Assets to Buyer, free and clear of all Liens and Debt at the Closing, other than Assumed Debt and Permitted Liens.

        2.2.    Assumption of Assumed Liabilities and Assumed Debt.    Subject to the terms and conditions of this Agreement, Buyer will assume from Seller and become responsible for all Assumed Liabilities and Assumed Debt at the Closing. Buyer will not assume from Seller or have any responsibility with respect to the Excluded Liabilities or any other Liability of Seller not included within the definition Assumed Liabilities or Assumed Debt.

        2.3.    Purchase Price.

        (a)    Purchase Price Determination.    The aggregate consideration for the Acquired Assets (as adjusted in accordance with the terms of this Agreement, the "Purchase Price") will be the sum of the following (without duplication):

          (i)  $55,000,000.00 (the "Base Purchase Price"); plus

         (ii)  Closing Net Working Capital; less

        (iii)  the amount owed as of the Closing Date under Assumed Debt.

        (b)    Payment of Purchase Price.    At the Closing and subject to the conditions set forth in this Agreement, Buyer will deliver to Seller, by wire transfer or delivery of other immediately available funds to an account designated by Seller, an amount equal to the sum of the amount set forth in Section 2.3(a)(i) and the Estimated Net Working Capital Payment less the net amount set forth in Section 2.3(a)(iii) and less an escrow deposit of $4,000,000 (the "Escrow Amount"). The Escrow Amount shall be deposited by Buyer by wire transfer of immediately available funds into the Escrow Account in accordance with Section 2.6. Prior to or at the time of Closing, Seller shall satisfy in full or terminate: (i) all of the Debt (other than trade accounts payable, Assumed Liabilities and Assumed Debt) of Seller as of the Closing Date; (ii) all fees and expenses owing by Seller in connection with the Transaction, to the extent that any encumber or may encumber the Acquired Assets, and (iii) all Liens (other than Permitted Liens) against the Business or any of the Acquired Assets. All such satisfactions or terminations will be made pursuant to payoff letters, invoices or termination agreements delivered by Seller to Buyer in form and substance reasonably satisfactory to Buyer.

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        (c)    Pre-Closing Deliveries.    Seller shall determine and deliver to Buyer at least three (3) Business Days but no more than five (5) Business Days prior to the Closing Date, a statement setting forth the calculation of the Estimated Net Working Capital and the Estimated Net Working Capital Payment, which statement and amount shall be calculated in accordance with Exhibit C, along with all supporting data and calculations related thereto, provided that such amount shall be subject to adjustment based on a physical count and measurement of the Inventory on hand as described below. Buyer and Seller shall cooperate in good faith to conduct a physical count and measurement of the Inventory on hand, as of 6:00 p.m. (Central Time) on the day before the Closing Date in accordance with the procedures set forth in Exhibit C.

        2.4.    Post-Closing Adjustment.

        (a)   Within thirty (30) days after the Closing Date, Buyer shall prepare and deliver to Seller a statement setting forth its calculation of the Closing Net Working Capital and the Post-Closing Adjustment Amount, which statement and amount shall be calculated in accordance with Exhibit C (the "Closing Working Capital Statement"), along with all supporting data, measurements, valuations and calculations related thereto.

        (b)   The "Post Closing Adjustment Amount" shall mean the amount equal to the Closing Net Working Capital minus the Estimated Net Working Capital Payment. If the Post-Closing Adjustment Amount is a positive number, Buyer shall pay to Seller an amount equal to the Post-Closing Adjustment Amount together with interest thereon from the Closing Date at a per annum rate equal to the 1 Year London InterBank Offered Rate as of the Closing Date within five (5) Business Days after acceptance or determination of the Post-Closing Adjustment Amount in accordance with Section 2.5, by wire transfer of immediately available funds to an account designated by Seller. If the Post-Closing Adjustment Amount is a negative number, Seller shall pay to Buyer an amount equal to the absolute value of the Post-Closing Adjustment amount together with interest thereon from the Closing Date at a per annum rate equal to the 1 Year London InterBank Offered Rate as of the Closing Date within five (5) Business Days after acceptance or determination of the Post-Closing Adjustment Amount in accordance with Section 2.5, by wire transfer of immediately available funds to an account designated by Buyer.

        2.5.    Examination and Review of Post-Closing Adjustment Amount.

        (a)   After receipt of the Closing Working Capital Statement, Seller shall have thirty (30) days to review the Closing Working Capital Statement (the "Review Period").

        (b)   On or prior to the last day of the Review Period, Seller may object to the Closing Working Capital Statement by delivering to Buyer a written statement setting forth Seller's objections in reasonable detail, indicating each disputed item or amount and the basis for Seller's disagreement therewith (the "Objection Notice"). If Seller fails to deliver the Objection Notice before the expiration of the Review Period, the Closing Working Capital Statement and the Post-Closing Adjustment Amount reflected therein shall be deemed to have been accepted by Seller. If Seller delivers the Objection Notice before the expiration of the Review Period, Buyer and Seller shall negotiate in good faith to resolve such objections within thirty (30) days after the delivery of the Statement of Objections (the "Resolution Period") and, if the same are so resolved within the Resolution Period, the Post-Closing Adjustment Amount and the Closing Working Capital Statement with such changes as may have been previously agreed in writing by Buyer and Seller, shall be final and binding upon the parties hereto.

        (c)   If Seller and Buyer fail to reach an agreement with respect to all of the matters set forth in the Objection Notice before expiration of the Resolution Period, then any amount remaining in dispute ("Disputed Amounts") shall be submitted for resolution to the office of a mutually acceptable certified public accounting firm (the "Independent Accountant") who shall, acting as

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experts and not arbitrators, resolve the Disputed Amounts only and make any necessary adjustments to the Post-Closing Adjustment Amount and the Closing Working Capital Statement. The parties agree that all adjustments shall be made without regard to materiality. The Independent Accountant shall only decide the specific items under dispute by Buyer and Seller and their decisions for each Disputed Amount must be within the range of values assigned to each such item in the Closing Working Capital Statement and the Objection Notice, respectively. The Independent Accountant shall make a determination as soon as practicable within thirty (30) days of its engagement, and its resolution of the Disputed Amounts and its adjustments to the Closing Working Capital Statement and/or the Post-Closing Adjustment Amount shall be conclusive and binding upon the parties hereto.

        (d)   The Independent Accountant will determine the allocation of the cost of its review and report based on the inverse of the percentage its determination (before such allocation) bears to the total amount of the total items in dispute as originally submitted to the Independent Accountant. For example, should the items in dispute total in amount to $1,000 and the Independent Accountant awards $600 in favor of Seller's position, 60% of the costs of its review would be borne by Buyer and 40% of the costs would be borne by Seller.

        (e)   Buyer and Seller shall, and shall cause their respective Affiliates and Representatives to, cooperate and assist in the preparation of the Closing Working Capital Statement and in the conduct of the review referred to in this Section 2.5, including making available, to the extent necessary, books, Records, work papers and personnel.

        2.6.    Escrow Account.    The Escrow Amount shall be held in an escrow account (the "Escrow Account") and distributed in accordance with the terms of the Escrow Agreement.

        (a)   For Tax reporting purposes, the Seller shall be deemed to be the owner of any cash in the Escrow Fund, and all interest on or other taxable income, if any, earned from the investment of such cash pursuant to the Escrow Agreement shall be treated for Tax purposes as earned by Seller until distributed in accordance with this Agreement and the Escrow Agreement.

        (b)   Immediately following inspections and if required, completion of repairs to the Facility's boiler system pursuant to the procedures outlined in this Section 2.6(b), $2,000,000, less the costs of any and all repairs to the Facility's boiler system identified in such inspections and determined in accordance with this Section 2.6(b), but expressly excluding the costs for any and all repairs associated with ordinary wear and tear of the Facility's boiler system, shall be released from the Escrow Account and paid to Seller.

          (i)  During Spring 2013 shutdown but no later than May 31, 2013, Buyer and Seller shall cause a dual inspection of the Facility's boiler system to be completed by two (2) independent and qualified and reputable boiler inspection and repair companies, one selected by Buyer and one selected by Seller, upon inspection and inspection report schedules mutually acceptable to Buyer and Seller, provided that such inspections shall be conducted jointly at the same time by both boiler companies unless Buyer and Seller otherwise agree (the "Original Boiler Inspection Reports"). Each party shall be responsible for the costs and expenses of its own respective inspection and Boiler Inspection Report. Buyer shall immediately provide Seller with a copy of Buyer's Boiler Inspection Report.

         (ii)  Buyer agrees that the costs of any and all recommended repairs to the Facility's boiler system in the Boiler Inspection Reports associated with ordinary wear and tear shall be excluded under and not covered by disbursement from $2,000,000 Escrow Amount.

        (iii)  After receipt by Seller of the Buyer's Boiler Inspection Report, Seller shall have ten (10) days to review the Buyer's Boiler Inspection Report and to mutually agree with Buyer upon the cost and extent of the repairs to the Facility's boiler system to be covered by this

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Section 2.6(b). If the parties cannot agree on the cost and extent of the repairs covered by this Section 2.6(b) within such 10-day period, then Seller shall have an additional thirty (30) days to review the Buyer's Boiler Inspection Report (the "Boiler Inspection Review Period"). On or prior to the last day of the Boiler Inspection Review Period, Seller may object to the Buyer's Boiler Inspection Report and the recommended repairs allowed for reimbursement hereunder by delivering to Buyer a written statement setting forth Seller's objections in reasonable detail, indicating each disputed item or amount and the basis for disagreement therewith (the "Boiler Inspection Objection Notice"). If Seller fails to deliver a Boiler Inspection Objection Notice before the expiration of the Boiler Inspection Review Period, the Boiler Inspection Report of Buyer and the recommended repairs allowed for reimbursement hereunder reflected therein shall be deemed to have been accepted by Seller. If Seller delivers the Boiler Inspection Objection Notice before the expiration of the Boiler Inspection Review Period, Buyer and Seller shall negotiate in good faith to resolve such objections within thirty (30) days after the delivery of the Boiler Inspection Objection Notice (the "Resolution Period") and, if the same are so resolved within the Resolution Period, the Buyer's Boiler Inspection Report and the recommended repairs allowed for reimbursement hereunder reflected therein with the agreed upon resolutions agreed in writing by Buyer and Seller, shall be final and binding upon the parties hereto.

        (iv)  If Seller and Buyer fail to reach an agreement with respect to all of the matters set forth in the Boiler Inspection Objection Notice before expiration of the Resolution Period, then any amount remaining in dispute ("Disputed Amounts") shall be submitted for resolution to the office of a mutually acceptable certified boiler engineering firm (the "Independent Boiler Engineer") who shall, acting as experts and not arbitrators, resolve the Disputed Amounts only and make any necessary adjustments to the costs of any and all recommended repairs to the Facility's boiler system in the Boiler Inspection Report allowed for reimbursement hereunder. The parties agree that all adjustments shall be made without regard to materiality. The Independent Boiler Engineer shall only decide the specific items under dispute by Buyer and Seller and their decisions for each Disputed Amount must be within the range of values assigned to each such item in the Boiler Inspection Reports and the Boiler Inspection Objection Notice, respectively. The Independent Boiler Engineer shall make a determination as soon as practicable within thirty (30) days of its engagement, and its resolution of the Disputed Amounts and its adjustments to the Boiler Inspection Reports and the costs of any and all recommended repairs to the Facility's boiler system in the Boiler Inspection Reports allowed for reimbursement hereunder shall be conclusive and binding upon the parties hereto.

         (v)  Buyer and Seller shall, and shall cause their respective Affiliates and Representatives to, cooperate and assist in the preparation of the Boiler Inspection Reports in the conduct of the review referred to in this Section 2.6(b), including making available, to the extent necessary, books, Records, work papers and personnel.

        (c)   Upon the Escrow Termination Date, the remaining balance of the Escrow Fund (net of all amounts necessary to satisfy any pending claims that were made in accordance with the terms of the Escrow Agreement) shall promptly be paid from the Escrow Fund to the Seller; provided, however, that the Escrow Fund shall not terminate with respect to any amount which is necessary to satisfy any unsatisfied claims specified in any authorized officer's certificate delivered to the Escrow Agent and the Seller promptly following discovery of the unsatisfied claim on or, to the extent possible, a reasonable time prior to the Escrow Termination Date with respect to facts and circumstances existing on or prior to the Escrow Termination Date. As soon as all such claims have been resolved, the Escrow Agent shall deliver the remaining portion of the Escrow Fund not required to satisfy such claims to Seller.

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        2.7.    The Closing.    The effective time and date for closing the Transaction (the "Closing") shall be at 10:00 a.m. (Central time) on the third (3^rd) Business Day following the date on which all of the conditions set forth in Article 5 have been satisfied (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of those conditions at the Closing) or such other date and/or time as may be agreed upon by the parties (the "Closing Date"). The Closing shall take place by electronic or facsimile exchange of documents.

        2.8.    Allocation of Purchase Price.    The Purchase Price (taking into account any adjustments thereto), plus the amount of the Assumed Liabilities and Assumed Debt included in the amount realized on the sale of the Acquired Assets for United States federal income tax purposes, shall be allocated among the Acquired Assets in accordance with Section 1060 of the Code (or any comparable provision of state, local or foreign Legal Requirements) and commercially reasonable valuation and allocation methods currently applicable to the fuel-grade ethanol industry. Buyer will retain, at its cost, Natwick Associates Appraisal Services as a third party appraiser to value the individual assets comprising the Acquired Assets that are Class V assets, Class I through IV assets shall be valued at their respective GAAP net book value, and any remaining Purchase Price will be allocated to Class VI and VII accordingly, and Buyer shall prepare a statement setting forth the foregoing allocations (the "Allocation Statement") based on the final valuation report issued by such third-party appraiser and the foregoing allocation methods. Buyer shall deliver the Allocation Statement to Seller within ten (10) days of completion of same, which shall be binding on Seller, unless Seller delivers Buyer a written statement setting forth Seller's objections and the basis therefor within ten (10) days of delivery of the Allocation Statement. If Seller delivers an objection statement within such period, Buyer and Seller shall negotiate in good faith to resolve such objections within thirty (30) days. Buyer, Seller and their respective Affiliates shall report the purchase and sale of the Acquired Assets on all relevant Tax Returns, including IRS Form 8594 and any amendments thereto, consistent with the Allocation Statement. Neither Buyer nor Seller shall take any position (whether in audits, Tax Returns or otherwise) that is inconsistent with such allocation unless required to do so by Legal Requirements or pursuant to a "determination" within the meaning of Section 1313(a) of the Code (or any comparable provision of state, local or foreign Legal Requirements).

        2.9.    Utilities; Service Providers.    Prior to the Closing Date, Seller and Buyer shall jointly contact and notify all utilities and other service providers to the Business, including, without limitation, all gas, electric, water, waste, phone, internet and other utilities and providers, of the change in ownership of the Business and the Acquired Assets effective as of 12:01 a.m. as of the Closing Date and that all charges, fees and other amounts to be paid to said utilities and/or service providers for services prior to such date will be Seller's and for services on and after such date and time shall be the sole cost and responsibility of Buyer.

        2.10.    Withholding.    Buyer shall be entitled to deduct and withhold, or cause to be deducted and withheld, any and all amounts from the Purchase Price equal to any withholding Tax owed to any Government Entity as a result of the transactions contemplated by the Agreement to the extent required under applicable Legal Requirements. Any amounts so withheld shall be treated as having been paid to Seller.

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ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF SELLER

        Except as otherwise set forth on the Disclosure Schedule (but subject to the provisions of Section 11.9 applicable thereto), Seller represents and warrants to Buyer as of the date hereof and at Closing, the following:

        3.1.    Organization, Power and Authorization.    Seller is a limited liability company, duly organized, validly existing and in good standing under the laws of the State of Minnesota. Seller is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required, which jurisdictions are set forth on Schedule 3.1 of the Disclosure Schedule, except where the failure to be so qualified or in good standing would not, individually or in the aggregate, have a Material Adverse Effect. Seller has the organizational power to carry on the business in which it is engaged (including the Business) and to own and use the properties owned and used by it. Seller has the requisite power and authority necessary to enter into, deliver and perform its obligations pursuant to each of the Transaction Documents to which it is a party. The execution, delivery and performance by Seller of each Transaction Document to which it is a party has been duly and validly authorized by all necessary limited liability company action. The board of directors of Seller approved and adopted this Agreement in accordance with the Minnesota Limited Liability Company Act, approved the other Transaction Documents to be entered into by Seller as contemplated hereby, resolved to recommend the approval and adoption of this Agreement by the members of Seller and directed that this Agreement be submitted to the members for approval and adoption.

        3.2.    Binding Effect and Noncontravention.

        (a)   This Agreement has been duly executed and delivered by Seller and constitutes, and each other Transaction Document to which Seller is a party when executed and delivered will constitute, a valid and binding obligation of Seller, enforceable against Seller, in accordance with its terms except as such enforceability may be limited by: (i) applicable insolvency, bankruptcy, reorganization, moratorium or other similar laws affecting creditors' rights generally; and (ii) applicable equitable principles (whether considered in a proceeding at law or in equity).

        (b)   The execution, delivery and performance by Seller of the Transaction Documents to which it is a party does not: (i) violate any provision of its charter, operating agreement or equivalent organizational documents; (ii) violate any Legal Requirement to which Seller is subject; (iii) except as set forth on Schedule 3.2(b)(iii) of the Disclosure Schedule, materially conflict with, result in a material breach of, constitute a material default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel or require any notice under, or result in the loss or impairment of any rights under any agreement, contract, lease, license, instrument or other arrangement to which Seller is a party or by which Seller is bound or to which Seller's assets are subject; (iv) result in the creation of any Lien on any of the Acquired Assets; or (v) except as set forth on Schedule 3.2(b)(v) of the Disclosure Schedule, require any authorization, consent, approval or notice by or to any Government Entity or other Person.

        3.3.    Brokers.    None of Seller or any of its Affiliates has retained any broker in connection with the Transaction. Buyer will not have any obligation to pay any broker's, finder's, investment banker's, financial advisor's or similar fee in connection with this Agreement or the Transaction by reason of any action taken by or on behalf of Seller or any of its Affiliates, other than the fee paid in connection with the fairness opinion to be included in the Proxy Statement.

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        3.4.    Capitalization.Schedule 3.4 sets forth the number of issued and outstanding membership units of Seller as of the date hereof, all of which are validly issued, fully paid and nonassessable. Except as set forth in Schedule 3.4, no membership units or other voting securities of Seller or options or rights to purchase membership units of Seller are issued, reserved for issuance or outstanding. All issued and outstanding membership units have been issued in compliance with all applicable securities Legal Requirements and preemptive rights (whether as part of Legal Requirements or agreement). Except as set forth in Schedule 3.4 or Seller's articles of organization or member control agreement, Seller is not a party to, and there does not currently exist, any member control agreement, operating voting trust agreement or any other similar agreement relating to the voting, distribution, ownership or transfer rights of any units of ownership of Seller. True and complete copies of Seller's articles of organization and member control agreement have been delivered to Buyer. Seller has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the members of Seller on any matter. Except for this Agreement and as otherwise set forth in Schedule 3.4, there are no options, warrants, calls, rights, puts or agreements to which Seller is a party or by which it is bound obligating Seller to issue, deliver, sell or redeem, or cause to be issued, delivered, sold or redeemed, any additional limited liability company interests or other voting or equity securities, or any securities convertible into or exercisable for such securities, of Seller or obligating Seller to grant, extend or enter into any such option, warrant, call, right, put or agreement.

        3.5.    Subsidiaries.    Except as set forth on Schedule 3.5, Seller does not currently have, and has not had in the past, any Subsidiary nor any investment, equity or ownership interest (whether controlling or not) of any kind in any other Person. Seller is not engaged in any joint venture or partnership with any other Person.

        3.6.    Financial Statements.    Seller has delivered the following financial statements (collectively, the "Financial Statements") to Buyer: (a) Seller's audited balance sheet and related statements of income, owner's equity and cash flows as of and for the fiscal year ended October 31, 2011, together with all related notes and schedules thereto, and the report of Seller's independent registered accounting firm thereon; and (b) Seller's unaudited balance sheet and related statements of income and cash flows as of and for the twelve-months ended October 31, 2012. The Financial Statements were prepared in accordance with the books of account and other financial records of Seller, and have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and present fairly in all material respects the financial condition of Seller as of such dates and the results of its operations and its cash flows for the periods specified; provided, however, that the Financial Statements described in Section 3.6(b) are subject to normal and recurring year-end adjustments and lack footnotes and other presentation items, the effect of which are not, individually or in the aggregate, material, except as described in item 6 of Schedule 3.8.

        3.7.    Absence of Undisclosed Liabilities.    There are no Liabilities of or related to the Business or the Acquired Assets other than: (i) Liabilities reflected or reserved against in the Financial Statements, (ii) Liabilities that have arisen after the Latest Balance Sheet in the ordinary course of the Business; (iii) Liabilities for the performance or payment of executory obligations under any of the Acquired Contracts; provided that such Liabilities do not arise from any breach or default under such Acquired Contracts; (iv) Liabilities incurred in connection with this Agreement and the transactions contemplated hereby; and (v) the Excluded Liabilities.

        3.8.    Subsequent Events.

        (a)   Since October 31, 2011, except as set forth on Schedule 3.8: (i) there has been no event or occurrence which has had or could reasonably be expected to have a Material Adverse Effect; and (ii) Seller and, as applicable, its Affiliates have conducted the Business in the ordinary course consistent with past practice.

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        (b)   Since October 31, 2011, except as set forth on Schedule 3.8 of the Disclosure Schedule, neither Seller nor any of its Affiliates has, with respect to the Business, taken or failed to take any action through the date hereof that if taken or failed to be taken following the date hereof would have required the consent of, or notice to, Buyer under Sections 6.1(b), 6.1(c), 6.1(e), 6.1(f) , 6.1(g) or 6.1(h) of this Agreement, or, other than with respect to matters reflected in the Financial Statements, under Section 6.1(k) of this Agreement.

        (c)   Since October 31, 2011, except as set forth on Schedule 3.8 of the Disclosure Schedule, neither Seller nor any of its Affiliates has, with respect to the Business, taken or failed to take any action through the date hereof that if taken or failed to be taken following the date hereof would have required the consent of, or notice to, Buyer under Sections 6.1(a), 6.1(d) or 6.1(i) of this Agreement.

        3.9.    Title to Assets.    Seller has good and marketable fee simple title to, or a valid, insurable leasehold interest in, the Facility and the Real Property and good and marketable title to the other assets used in the conduct of the Business, reflected on the Latest Balance Sheet, or acquired since the date thereof, including all of the Acquired Assets, free and clear of all Liens (other than Permitted Liens) and Debt, except for (a) Assumed Debt, (b) Liens and Debt to be satisfied in full, released and terminated prior to the Closing as contemplated by Section 2.3, (c) Inventory disposed of in the ordinary course of business consistent with past practice since the date of the Latest Balance Sheet, and (d) the Excluded Assets. Without limiting the generality of the foregoing, Seller has, and will transfer to Buyer at Closing, and immediately following the Closing Buyer will have, good and marketable title to all of the Acquired Assets, free and clear of all Debt and Liens (other than Permitted Liens and any Assumed Liabilities or Assumed Debt related to the Acquired Assets), subject, as applicable, to the receipt of the authorizations, consents and approvals set forth on Schedule 3.2(b)(v) and 5.1(f) of the Disclosure Schedule.

        3.10.    Compliance With Laws.    Seller and, with respect to the Business, its Affiliates, have complied in all material respects with all applicable Legal Requirements and Environmental Laws and, except as set forth on Schedule 3.10 of the Disclosure Schedule, no action, suit, proceeding, hearing, charge, complaint, claim, demand or notice has been filed or commenced against Seller or, with respect to the Business, any of Seller's Affiliates, alleging any failure to so comply. Without limiting the generality of the foregoing, none of Seller or, with respect to the Business, any of Seller's Affiliates, has failed to comply with any Legal Requirement or Environmental Law to the extent that such failure could reasonably be expected to result in or give rise to: (i) any criminal liability in respect of Seller, any of Seller's Affiliates or the Business, or (ii) any restrictions, penalties, limitations, or other Liens being imposed on the Acquired Assets or the operation of the Business.

        3.11.    Tax Matters.    With respect to Seller or any Affiliate of Seller that reports or includes the activities of the Seller, the Business or the Acquired Assets on any Tax Return (Seller and each such Affiliate (solely with respect to such Affiliate's reporting or inclusion of the activities of the Seller, the Business or the Acquired Assets on such Affiliate's Tax Return), referred to herein as, a "Reporting Party"):

        (a)   All Tax Returns required to be filed by or on behalf of each Reporting Party have been duly and timely filed with the appropriate Tax Authority in all jurisdictions in which such Tax Returns are required to be filed, and all such Tax Returns are complete and accurate and were prepared in compliance with all Legal Requirements. All Taxes due and owing by each Reporting Party (whether or not shown on any Tax Return) have been paid. Each Reporting Party has complied in all material respects with all applicable Legal Requirements relating to the collection, withholding and payment of Taxes and has paid over to the proper Government Entity all amounts required to be so paid over, including Taxes required to be withheld and paid in connection with amounts paid or owing to, by way of example, (i) employees, agents, independent contractors,

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creditors, members, partners, vendors, customers or other third parties, and (ii) nonresidents of the United States.

        (b)   All deficiencies asserted or assessed as a result of any examinations by any Tax Authority of the Tax Returns relating to the Acquired Assets or the Business have been fully paid. No audits or administrative or judicial Tax proceedings are pending or, to Seller's Knowledge, being conducted with respect to or threatened against any Reporting Party. No Reporting Party has received from any Government Entity any: (i) notice indicating an intent to open an audit or other review; (ii) request for additional information related to Tax matters; or (iii) notice of deficiency or proposed adjustment for any Tax. No Reporting Party has waived or extended any statute of limitations in respect of Taxes or agreed to the extension of time with respect to a Tax assessment or deficiency. No Reporting Party has received notice of any claim by any Government Entity in a jurisdiction where such Reporting Party does not file Tax Returns that such Reporting Party is or may be subject to taxation by that jurisdiction. No Reporting Party has entered into a closing agreement pursuant to Section 7121 of the Code or corresponding provision of state, local or foreign Tax law within the previous four years.

        (c)   No Reporting Party is a party to or bound by any tax allocation or sharing agreement. Seller has not been a member of an affiliated group filing a consolidated federal income Tax Return.

        (d)   The unpaid Taxes of any Reporting Party: (i) did not, as of the Latest Balance Sheet, exceed the reserve for Tax Liability set forth on the face of the Latest Balance Sheet; and (ii) do not exceed that reserve as adjusted to reflect operations thereafter in accordance with past practice. Since the Latest Balance Sheet, no Reporting Party has incurred any Liability for Taxes outside the ordinary course of business.

        (e)   Schedule 3.11(e) of the Disclosure Schedule lists all types of Taxes paid and all types of Tax Returns filed by or on behalf of each Reporting Party in connection with the Acquired Assets or the Business with respect to taxable periods arising on or after December 31, 2008, and the Tax Authorities that had jurisdiction over such Taxes or Tax Returns. Each Reporting Party has made available complete copies of material Tax Returns relating to the Acquired Assets or the Business filed for taxable periods arising on or after December 31, 2008.

        (f)    Other than Permitted Liens, there are no Liens for Taxes upon the Acquired Assets. None of the Acquired Assets is tax-exempt use property within the meaning of Section 168(h) of the Code. None of the Real Property is subject to "Green Acres" taxes or other deferred taxes which will become due on transfer of the Real Property.

        (g)   No power of attorney with respect to any Tax matter is currently in force with respect to the Acquired Assets or the Business that would, in any manner, bind, obligate or restrict Buyer. No Reporting Party has executed or entered into any agreement with, or obtained any consents or clearances from, any Tax Authority, or has been subject to any ruling guidance specific to such Reporting Entity that would be binding on Buyer for any taxable period (or portion thereof) ending after the Closing Date.

        (h)   The Transaction, as consummated on the Closing Date, will not terminate any Tax incentive, holiday or abatement with respect to the Acquired Assets or the Business or result in a material reduction of any Tax benefit under such incentive, holiday or abatement, subject, as applicable, to the receipt of the authorizations, consents and approvals set forth on Schedule 3.2(b)(v) and 5.1(f) of the Disclosure Schedule.

        (i)    Seller has been, is and will be, through the Closing Date, treated as a partnership within the meaning of Treasury Regulations Section 301.7701-2(c)(1).

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        3.12.    Environmental Matters.

        (a)   Except as set forth on Schedule 3.12(a) of the Disclosure Schedule: (i) Seller and, with respect to the Business, each of its Affiliates, has complied in all material respects with all applicable Environmental Laws, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed or commenced, or, to Seller's Knowledge, threatened, against Seller or any of Seller's Affiliates alleging any failure to so comply; (ii) Seller and, with respect to the Business, each of its Affiliates, has obtained and is in compliance in all material respects with all permits, licenses and other authorizations required pursuant to Environmental Laws for the occupation of the Real Property and the operation of the Business; and all such Permits are set forth on Schedule 3.12(a) of the Disclosure Schedule; (iii) neither Seller nor, with respect to the Business, any of its Affiliates, has received any notice of any actual or alleged material violations or Liabilities, including any investigatory, remedial or corrective obligations, arising under Environmental Laws, and (iv) neither Seller nor, with respect to the Business, any of its Affiliates, has assumed or otherwise become subject to any material Liability, including any investigatory, remedial or corrective obligations, of any other Person arising under Environmental Laws.

        (b)   Schedule 3.12(b) of the Disclosure Schedule lists each environmental site assessment and audit report, asbestos survey, geotechnical analysis, remedial action plan, environmental impact statement, environmental assessment worksheet, and other similar studies or analyses related to the Acquired Assets that were generated since January 1, 2009 related to the Acquired Assets that are in the possession or control of Seller or, with respect to the Business, any of its Affiliates, a copy of which has been made available to Buyer. All findings in the notifications of violation, letters of warning, consent decrees and air inspection reports listed on Schedule 3.12(a) of the Disclosure Schedule, other than those listed in items 1-3, have been resolved.

        (c)   Except as set forth on Schedule 3.12(c) of the Disclosure Schedule, none of the following exists at any property or facility owned or operated by Seller or, with respect to the Business, any of its Affiliates: (i) underground or above-ground storage tanks, pits, sumps or impondments; (ii) asbestos-containing material in any form or condition; (iii) materials or equipment containing polychlorinated biphenyls; or (iv) landfills, surface impondments or disposal areas. To Seller's Knowledge, there are no underground or above-ground storage tanks, pits, sumps or impondments located under any property or facility formerly owned or operated by Seller or, with respect to the Business, any of its Affiliates, or otherwise in connection with the Business.

        (d)   Neither Seller nor, with respect to the Business, any of its Affiliates, has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, manufactured, distributed or released any substance, including without limitation any Hazardous Substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) so as to give rise to any current or future material Liabilities, including any material Liability for fines, penalties, response costs, corrective action costs, personal injury, property damage, natural resources Damages or attorneys' fees, pursuant to any Environmental Law.

        (e)   To Seller's Knowledge, neither this Agreement nor the consummation of the Transaction will result in any obligations for site investigation or cleanup, or notification to or consent of any Government Entity or other Person, pursuant to any of the "transaction-triggered" or "responsible property transfer" Environmental Laws.

        (f)    To Seller's Knowledge, no facts, events or conditions relating to the past or present facilities, properties or operations of Seller, or, with respect to the Business, any of its Affiliates, will prevent, hinder or limit continued compliance with Environmental Laws, give rise to any material investigatory, remedial or corrective obligations pursuant to Environmental Laws or give

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rise to any other material Liabilities pursuant to Environmental Laws, including without limitation any Liabilities relating to on-site or off-site releases or threatened releases of Hazardous Substances, personal injury, property damage or natural resources damage.

        3.13.    Intellectual Property.

        (a)   Except as set forth on Schedule 3.13(a) of the Disclosure Schedule, Seller and, with respect to the Business, each of its Affiliates, owns or has a valid right to use all Intellectual Property that is used in the conduct of the Business. Each item of Intellectual Property owned or used by Seller or any of its Affiliates in the conduct of the Business immediately prior to the Closing will be owned or available for use by Buyer on the same terms and conditions immediately after the Closing, subject, as applicable, to the receipt of the authorizations, consents and approvals set forth on Schedule 3.2(b)(v) and 5.1(f) of the Disclosure Schedule. To Seller's Knowledge, Seller and its Affiliates have taken all action necessary to maintain and protect each item of Intellectual Property that it owns or uses.

        (b)   To Seller's Knowledge, neither Seller nor, with respect to the Business, any of its Affiliates, has interfered with, infringed upon, misappropriated or otherwise come into conflict with or violated any Intellectual Property rights of any Person. To Seller's Knowledge, neither Seller nor, with respect to the Business, any of its Affiliates, has received any charge, complaint, claim, demand or notice alleging any of the foregoing. To Seller's Knowledge, no Person has interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of Seller or, with respect to the Business, any of its Affiliates. Neither Seller nor, with respect to the Business, to Seller's Knowledge, any of its Affiliates, has made or given any charge, complaint, claim, demand or notice alleging any of the foregoing.

        (c)   Schedule 3.13(c) of the Disclosure Schedule sets forth all of the following that are owned or used by Seller or any of its Affiliates in the conduct of the Business: (i) patents, patent applications, and notices of inventions or other records of new inventions; (ii) registered and unregistered trademarks; (iii) registered copyrights and applications to register copyrights; (iv) all Intellectual Property owned by any other Person that is material to the Business; (v) domain names and trade names; and (vi) any other Intellectual Property that is material to the Business.

        (d)   With respect to each item of Intellectual Property owned by Seller or, with respect to the Business, any of its Affiliates, and required to be identified on the Disclosure Schedule (and, to Seller's Knowledge, with respect to each other item of Intellectual Property required to be identified on the Disclosure Schedule): (i) no action, suit, proceeding, hearing, charge, complaint, claim or demand is pending or, is threatened that challenges the legality, validity, enforceability, use or ownership of the item, and to Seller's Knowledge, there is no basis for the foregoing; and (ii) no loss or expiration of the item is pending, threatened or reasonably foreseeable, except for patents expiring at the end of their statutory terms (and not as a result of any act or omission by Seller or any other Person).

        (e)   Except with respect to: licenses of commercial off-the-shelf software available on reasonable terms for a license fee of no more than $50,000 and those licenses set forth on Schedule 3.13(c) of the Disclosure Schedule, to the Seller's Knowledge, neither Seller nor, with respect to the Business, any of its Affiliates, is required, obligated or under any Liability whatsoever to make any payments by way of royalties, fees or otherwise (except for maintenance and renewal fees to be paid to the United States Patent and Trademark Office and other Government Entities) to any owner, licensor of or other claimant to any Intellectual Property, or any other Person, with respect to the use thereof or in connection with the conduct of the Business and none shall become payable as a result of the Closing.

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        (f)    To Seller's Knowledge, neither Seller nor, with respect to the Business, any of its Affiliates, has granted any license, sublicense, agreement or other permission to any other Person with respect to any Intellectual Property included in the Acquired Assets.

        (g)   To Seller's Knowledge, Seller and, with respect to the Business, each of Seller's Affiliates has taken all necessary and desirable actions to maintain and protect all of the Intellectual Property related to or used in the Business and will continue to maintain and protect all of such Intellectual Property prior to Closing so as not to adversely affect the validity or enforceability thereof. To the Seller's Knowledge, the owners of any of the Intellectual Property licensed to Seller or, with respect to the Business, any of Seller's Affiliates, have taken all necessary and desirable actions to maintain and protect the Intellectual Property covered by such license.

        3.14.    Real Estate.

        (a)   Schedule 3.14(a) of the Disclosure Schedule sets forth the legal description of each parcel of Real Property, including insurable appurtenant easements thereto.

        (b)   Seller has good, valid and marketable title in fee simple to each parcel of Real Property, free and clear of Liens and Debt, except for Permitted Liens and those matters specifically identified on Schedule 3.14(b) of the Disclosure Schedule, if any.

        (c)   To Seller's Knowledge, all buildings, structures, fixtures, building systems and equipment, and all components thereof (including the roof, foundation, walls, and other structural elements thereof, heating, ventilation, air conditioning, mechanical, electrical, plumbing and other building systems, environmental control, remediation and abatement systems, sewer, storm and waste water systems, irrigation and other water distribution systems, parking facilities, fire protection security and surveillance systems and telecommunications, computer, wiring and cable installations), included in the Real Property are in good condition and repair (ordinary wear and tear excepted) and sufficient for the operation of the Business. The Real Property has full and free access to and from public highways, streets or roads and there is no pending or, to Seller's Knowledge, threatened proceeding that would impair or result in the termination of such access. The zoning classification of each improvement on the Real Property is such that it may be used as currently used by Seller and the Business. To Seller's Knowledge, no improvements at any Real Property encroach upon any adjoining land, and no improvements from adjoining land encroach upon any Real Property. The Real Property constitutes one or more complete tax parcels. No part of the Real Property is included in any tax parcel owned by someone other than Seller, and no part of any real property owned by anyone other than Seller is included in the tax parcel(s) constituting the Real Property. The Real Property is legally conveyable without subdivision or re-platting.

        (d)   To Seller's Knowledge, except for the Permits set forth on Schedule 3.12(a) of the Disclosure Schedule or the matters identified on Schedule 3.10 of the Disclosure Schedule, there are no contractual or legal restrictions that preclude or restrict the ability to use the Real Property for the purposes for which it is currently being used and, except for Permitted Liens and those matters specifically identified on Schedule 3.14(d) of the Disclosure Schedule, Seller is in peaceful and undisturbed possession of each parcel of Real Property that is described on Schedule 3.14(a) of the Disclosure Schedule. Except as set forth on Schedule 3.14(d) of the Disclosure Schedule, neither Seller nor, with respect to the Business, any of its Affiliates, has leased or subleased any parcel or any portion of any parcel of Real Property to any other Person and, to Seller's Knowledge, no other Person has any rights to the use, occupancy or enjoyment thereof. To Seller's Knowledge, there is no adverse party in possession of any Real Property or any portion thereof.

        (e)   There are no pending or, to Seller's Knowledge, contemplated or threatened condemnation proceedings against all or any portion of the Real Property. To Seller's Knowledge, there are no: (i) public improvements which have been commenced or completed and for which an

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assessment may be levied against the Real Property; or (ii) any planned improvements which may result in any new assessment against the Real Property. To Seller's Knowledge, none of the Real Property, buildings, structures, fixtures, building systems and equipment, or the use thereof, contravenes or violates any Legal Requirements.

        3.15.    Litigation.Schedule 3.15 of the Disclosure Schedule: (a) describes all outstanding Orders, or charges related to Seller, the Acquired Assets or the Business; and (b) describes all actions, suits, proceedings, hearings, arbitrations and other legal or administrative proceedings to which Seller or, with respect to the Acquired Assets or the Business, any Affiliate of Seller, is a party or, to Seller's Knowledge, threatened to be made a party. None of the matters listed or required to be listed on Schedule 3.15 of the Disclosure Schedule, if determined adversely, could reasonably be expected to result in or give rise to: (i) any Liabilities in excess of $50,000.00, either individually or in the aggregate; (ii) any criminal liability in respect of Seller, any of Seller's Affiliates or the Business, or (iii) any restrictions, penalties, limitations, or other Liens being imposed on the Acquired Assets or the operation of the Business.

        3.16.    Employee Benefits.

        (a)   Schedule 3.16(a) of the Disclosure Schedule lists each material Employee Benefit Plan that Seller or any ERISA Affiliate maintains, to which Seller or any ERISA Affiliate contributes or has any obligation to contribute, or with respect to which Seller or any ERISA Affiliate has any Liability.

          (i)  Except as would not have a Material Adverse Effect, each such Employee Benefit Plan (and each related trust, insurance contract or fund) has been maintained, funded and administered in accordance with the terms of such Employee Benefit Plan, the material terms of any applicable collective bargaining agreement and all Legal Requirements.

         (ii)  Each such Employee Benefit Plan which is intended to meet the requirements of a "qualified plan" under Section 401(a) of the Code has received a determination from the Internal Revenue Service that such Employee Benefit Plan is so qualified, and, to Seller's Knowledge, nothing has occurred since the date of such determination that could adversely affect the qualified status of any such Employee Benefit Plan.

        (iii)  Seller has delivered or made available to Buyer correct and complete copies of the plan documents (including all amendments) and, in the case of unwritten Employee Benefit Plans, written descriptions thereof, summary plan descriptions, any other communications provided to participants regarding each such Employee Benefit Plan, the most recent determination letter received from the Internal Revenue Service, and the most recent annual report (IRS Form 5500, with all applicable attachments).

        (b)   Neither Seller nor any ERISA Affiliate maintains, contributes to, has any obligation to contribute to or has any Liability (or has done or had any of the foregoing since January 1, 2007) under or with respect to any "defined benefit plan" (as defined in Section (3)(35) of ERISA) or any "multiemployer plan" (as defined in Section (3)(37) or 4001(a)(3) of ERISA). Neither Seller nor any ERISA Affiliate has since January 1, 2007 maintained or contributed to a plan subject to Section 412 of the Code, including a multiemployer plan within the meaning of Section 3(37) or 4001(a)(3) of ERISA.

        (c)   Neither Seller nor any ERISA Affiliate maintains, contributes to or has any obligation to contribute to, or has any Liability with respect to, any employee welfare benefit plan providing medical, health or life insurance or other welfare-type benefits for current or future retired or terminated directors, officers or employees of Seller (or any spouse or other dependent thereof) other than in accordance with and as required by COBRA.

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        (d)   Except as set forth on Schedule 3.16(d) of the Disclosure Schedule, the consummation of the Transaction will not: (i) entitle any current or former employee, officer or director of Seller or any ERISA Affiliate to severance pay, unemployment compensation or any other payment; or (ii) accelerate the time of payment or vesting or increase the amount of compensation otherwise due any such individual.

        (e)   Neither Seller nor any ERISA Affiliate nor any "party in interest" or "disqualified person" with respect to the Employee Benefit Plan has engaged in a non-exempt "prohibited transaction" within the meaning of Section 4975 of the Code or Section 406 of ERISA.

        3.17.    Insurance.Schedule 3.17 of the Disclosure Schedule lists each insurance policy, bond or other form of insurance maintained by or for the benefit of Seller (the "Insurance Policies"). With respect to each Insurance Policy: (a) to Seller's Knowledge, such policy is legal, valid, binding, enforceable and in full force and effect; (b) to Seller's Knowledge, such policy will continue to be legal, valid, binding, enforceable and in full force and effect on the same terms following the consummation of the Transaction; (c) neither Seller nor, to Seller's Knowledge, any other party to such policy is in breach or default (including with respect to the payment of premiums or the giving of notices), and to Seller's Knowledge, no event has occurred which, with notice or the lapse of time, would constitute such a breach or default, or permit termination, modification or acceleration, under such policy; (d) to Seller's Knowledge, no party to such policy has repudiated any provision thereof; and (e) Seller has provided to Buyer a true, correct and complete copy of such policy. To Seller's Knowledge, Seller, the Facility, the Acquired Assets and the Business have been covered during the past six years by insurance in scope and amount customary and reasonable for the Business during such period.

        3.18.    Contracts.

        (a)   Schedule 3.18(a) of the Disclosure Schedule contains a list of each of the following contracts, agreements or other arrangements to which Seller is a party or by which any of its assets or properties, including, without limitation, the Acquired Assets, the Facility and the Business, are bound (the "Scheduled Contracts"):

          (i)  agreement (or series of agreements with the same counterparty or its Affiliates) that involves the delivery of goods, materials or services by Seller that may result in consideration paid to Seller in excess of $50,000.00, either individually or in the aggregate;

         (ii)  agreement (or series of agreements with the same counterparty or its Affiliates) that involves the delivery of goods, materials or services to Seller that may result in consideration paid by Seller in excess of $50,000.00, either individually or in the aggregate;

        (iii)  collective bargaining agreement or other similar contract with any labor union;

        (iv)  agreement for the employment of any Person on a full-time, part-time, consulting or other basis;

         (v)  agreement, guaranty or indenture relating to borrowed money or other Debt of Seller or any material Lien on any asset of Seller or any Affiliate of Seller to the extent related to the Business;

        (vi)  agreement that restricts the ability of Seller or the Business to engage in any line of business or compete with any Person;

       (vii)  joint venture or partnership agreement involving a sharing of profits, losses, costs or liabilities by Seller or the Business with any other Person;

      (viii)  lease or agreement under which Seller is (A) lessee of or holds or operates any tangible personal property owned by any other Person, or (B) lessor of or permits any other Person to hold or operate any tangible personal property owned or leased by Seller;

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        (ix)  lease, sublease, license, easement or other agreement under which Seller is (A) lessee of or holds or operates any real property, including the Real Property, or (B) lessor of or permits any other Person to hold or operate any real property owned or leased by Seller;

         (x)  agreement (including any license, sublicense or other permission) under which (A) Seller has granted to any Person any rights in any Intellectual Property owned or leased by Seller, and (B) any Person has granted to Seller any rights in any Intellectual Property;

        (xi)  power of attorney granted by or to Seller;

       (xii)  agreement with, or loan to or from, any director, officer, employee, agent or other Affiliate of Seller;

      (xiii)  agreement not entered into in the ordinary course of business;

      (xiv)  other agreement (or series of agreements with the same counterparty or its Affiliates) that (A) involves the payment or potential payment, pursuant to the terms of any such contract or agreement, to or by Seller of more than $50,000.00, either individually or in the aggregate, and (B) cannot be terminated within 30 days after giving notice of termination without resulting in any cost or penalty to Seller or, following the Closing, Buyer; and

       (xv)  other agreement that is material to Seller or the Business.

        (b)   There are no contracts, agreements or other arrangements to which Seller is a party or by which any of its assets or properties, including, without limitation, the Acquired Assets, the Facility and the Business, are bound which would constitute a Scheduled Contract, except as set forth on Schedule 3.18(a) of the Disclosure Schedule. Seller has provided to Buyer a true, correct and complete copy of each written Scheduled Contract and an accurate written description of the material terms of each oral Scheduled Contract. Each Scheduled Contract has been entered into on an arm's-length basis and, is a valid and binding obligation of Seller or Seller's Affiliate party thereto and, to Seller's Knowledge, each of the other parties thereto, enforceable against them in accordance with its express terms except as such enforceability may be limited by: (i) applicable insolvency, bankruptcy, reorganization, moratorium or other similar laws affecting creditors' rights generally; and (ii) applicable equitable principles (whether considered in a proceeding at law or in equity). To Seller's Knowledge, no course of conduct of any party to any Scheduled Contract, with respect to the performance of its obligations or exercise of its rights thereunder, is inconsistent with the express terms and conditions of said Scheduled Contract. To Seller's Knowledge, no Person is in material violation or breach of or material default under any Scheduled Contract. Except as set forth on Schedule 3.2(b)(iii), Schedule 3.2(b)(v) or Schedule 5.1(f) of the Disclosure Schedule, the Transaction does not require the consent of any party to any Scheduled Contract, will not result in a material violation or breach of or material default under any Scheduled Contract and will not otherwise cause any Scheduled Contract to cease to be legal, binding, enforceable and in full force and effect on the same terms following the Closing. There are presently no renegotiations of, or attempts to renegotiate any material provision (including fees or other payment amounts) under any Scheduled Contract and no Person has made any written demand to Seller or any of its Representatives for such renegotiation.

        3.19.    Employees.

        (a)   Neither Seller nor any of its Affiliates is a party to or bound by any collective bargaining or similar agreement with any labor organization relating to any employees of the Business, or work rules or practices agreed to with any labor organization and to Seller's Knowledge, no union or labor organization claims to represent any of the employees of the Business. There is no collective bargaining agreement or similar agreement with any labor organization under current negotiation, nor, to Seller's Knowledge, are there any union organizing activities among the

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employees of the Business or any demand for recognition of any labor organization. There is currently no strike, slowdown, sitdown, work stoppage, interruption of work, picketing, handbilling, corporate campaign activity or other concerted labor dispute pending or to Seller's Knowledge, threatened at the Facility. No claims, charges, administrative proceedings, or formal complaints for unfair labor practices or violations of labor and/or employment laws brought by any employee or the Business are pending or, to Seller's Knowledge, have been threatened, against Seller or the Business, and there are no grievances or arbitration proceedings against Seller or the Business pending under any collective bargaining agreement or other labor agreement.

        (b)   Seller and its Affiliates are in compliance, in all material respects, with all applicable Legal Requirements respecting labor, employment, fair employment practices, employee privacy, the collection and payment of all Taxes and other withholdings, terms and conditions of employment, workers' compensation, occupational safety, plant closings and wages and hours with respect to the employees of the Business. To Seller's Knowledge, neither Seller nor any of its Affiliates is liable for the payment of any claims, Damages, fines, penalties, or other amounts, however designated, for failure to comply with any labor or employment Legal Requirements. Neither Seller nor any of its Affiliates is a party to any judgment, settlement agreement, consent decree, or other agreement with any Government Entity requiring continuing compliance or reporting obligations entered into to resolve any labor or employment matter of the Business. In the last two years, neither Seller nor any of its Affiliates has received any notice of the intent of any Government Entity responsible for the enforcement of labor or employment laws to conduct an investigation of the Business and no such investigation is in progress. The qualifications for employment of each of the employees of the Business under applicable immigration laws have been reviewed by Seller and a properly completed Form I-9 is on file with Seller for each employee. Seller has materially complied with the U.S. Immigration and Nationality Act, as amended from time to time, and the rules and regulations promulgated thereunder. To Seller's Knowledge, every Person who currently provides service to the Business or any other Person at the request of Seller has been properly classified by the Business as an employee or independent contractor in compliance with all Legal Requirements.

        (c)   Neither Seller nor any of its Affiliates is delinquent in payments which are due and payable under any applicable law to any employees of the Business for any wages, salaries, commissions, bonuses, vacation, sick leave, other paid time off, severance pay or other compensation for any services performed by them to the date hereof.

        3.20.    Affiliate Transactions.    To Seller's Knowledge, except as disclosed on Schedule 3.20 of the Disclosure Schedule, none of Seller's officers, directors, employees or Affiliates: (a) has any interest in any property (whether real, personal or mixed and whether tangible or intangible) used in or pertaining to the Business; (b) owns, of record or as a beneficial owner, an equity interest or any other financial or profit interest in any Person that: (i) has business dealings or a material financial interest in any transaction with Seller; or (ii) engages in competition with Seller; (c) is a party to any contract or agreement with Seller; or (d) has any cause of action or other claim against, or owes or has advanced any amount to, Seller.

        3.21.    Inventory and Parts.    The Inventory consists of a quality and quantity that are usable and salable at normal profit margins and within customary time periods in the ordinary course of business and contain no amount of slow-moving, obsolete or damaged items or materials in excess of reserves reflected in the Latest Balance Sheet for such purposes. Except as set forth on Schedule 3.21, the Inventory and the spare parts inventory has not been consigned to others, nor is any of the Inventory or the spare parts inventory consigned to Company. Except as set forth on Schedule 3.21, no Inventory or spare parts inventory of Company is located at a location other than the Facility or with a common carrier in transit to or from a vendor or customer, and no Inventory or spare parts inventory of another Person is located at the Facility. All purchased parts are merchantable and fit for the purpose for which

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they were procured in all material respects, and none of which is slow-moving, obsolete, damaged, or defective in any material respect.

        3.22.    Permits and Licenses.Schedule 3.22 of the Disclosure Schedule contains a true and complete list of all material licenses, permits, certificates of authority, authorizations, approvals, registrations and similar consents granted or issued by any Government Entity to Seller or with respect to the Acquired Assets or the Business (the "Permits"). To Seller's Knowledge, Seller possesses all Permits necessary for the current operation of the Business and the Acquired Assets and is in compliance (other than instances of non-compliance that are individually, and in the aggregate, immaterial) with all Permits. All Permits are in full force and effect and there are no proceedings pending or, to Seller's Knowledge, threatened that seek the revocation, cancellation, suspension or adverse modification thereof. Seller is not in default or violation of, and no event has occurred which, with notice or the lapse of time or both, would constitute a default or violation in any respect of any term, condition or provision of, any Permit that would allow the Permit to be terminated. To Seller's Knowledge, except as specifically indicated on Schedule 3.22 of the Disclosure Schedule, no Permit will be impaired or in any way affected by the consummation of the Transaction or any Transaction Document.

        3.23.    Tangible Assets.    Except as set forth on Schedule 3.23 of the Disclosure Schedule, each tangible asset included in the Acquired Assets is, in all material respects, in good operating condition and repair (ordinary wear and tear excepted) and is suitable for the purposes for which it is used. The Acquired Assets comprise all of the assets that are necessary for Buyer to conduct the Business as it has been conducted by Seller and (except for the Excluded Assets) constitute all of the assets used to conduct the Business.

        3.24.    Product Warranty.    All products manufactured, sold, leased or delivered by Seller (or any Person for which Seller may be responsible) have been in material conformity with all applicable contractual commitments, express and implied warranties and Legal Requirements, and Seller has no material Liability for replacement thereof or other Damages in connection therewith.

        3.25.    Product Liability.    Seller has no material Liability arising out of any injury to individuals or property as a result of the ownership, possession or use of any product manufactured, sold or delivered by Seller (or any Person for which Seller may be responsible).

        3.26.    Customers and Suppliers.Schedule 3.26 of the Disclosure Schedule contains a list of the five (5) largest customers and the one-hundred (100) largest suppliers of Seller each of for the fiscal years ended October 31, 2010 and 2011 and for the twelve (12) month period ended October 31, 2012, and includes the net sales or purchases by Seller attributable to each such customer or supplier for each such period. No customer or supplier listed on Schedule 3.26 of the Disclosure Schedule, nor any other material customer or supplier of the Business, has given written notice that it will or, to Seller's Knowledge, otherwise intends to, cease doing business with the Business or decrease the amount of business it does with the Business in any material respect, including following the Closing.

        3.27.    Vehicles.Schedule 3.27 of the Disclosure Schedule contains a true, complete and correct list of all vehicles and equipment owned by Seller where the ownership of such vehicle or equipment is evidenced by a certificate of title.

        3.28.    Disclosure.    No representation or warranty contained in this Article 3 or the Schedules to this Article 3, omits to state a material fact necessary in order to make the statements contained herein, in light of the circumstances in which they were made, not misleading. To Seller's Knowledge, no fact exists that has not been disclosed to Buyer that has had or would be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect.

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ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF BUYER

        Buyer represents and warrants to Seller as of the date hereof and at Closing the following:

        4.1.    Organization, Power and Authorization.    Buyer is a limited liability company, duly organized, validly existing and in good standing under the laws of the State of Delaware. Buyer has the requisite power to carry on the business in which it is engaged and to own and use the properties owned and used by it. Buyer has the requisite power and authority necessary to enter into, deliver and perform its obligations pursuant to each of the Transaction Documents to which it is a party. Buyer's execution, delivery and performance of each Transaction Document to which it is a party has been duly authorized by all necessary limited liability company action.

        4.2.    Binding Effect and Noncontravention.

        (a)   This Agreement has been duly executed and delivered by Buyer and constitutes, and each other Transaction Document to which Buyer is a party when executed and delivered will constitute, a valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms except as such enforceability may be limited by: (i) applicable insolvency, bankruptcy, reorganization, moratorium or other similar laws affecting creditors' rights generally; and (ii) applicable equitable principles (whether considered in a proceeding at law or in equity).

        (b)   The execution, delivery and performance by Buyer of the Transaction Documents to which it is a party do not: (i) violate any Legal Requirement to which Buyer is subject or its charter or bylaws; (ii) materially conflict with, result in a material breach of, constitute a material default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which Buyer is a party or by which Buyer is bound or to which Buyer's assets are subject; or (iii) require any authorization, consent, approval or notice by or to any Person (except for those which have been obtained or provided).

        4.3.    No Litigation.    No litigation is pending or, to the knowledge of Buyer, threatened against or affecting Buyer that questions the legality, validity or enforceability of this Agreement, the other Transaction Documents or the consummation of the transactions contemplated by this Agreement.

        4.4.    Funding.    Buyer will have on the Closing Date, sufficient cash on hand from equity contributions of Buyer's members, Buyer's immediately available internal funds or available under an established committed credit facility or unutilized lines of credit with financial institutions to pay the Purchase Price and consummate the Transaction.

        4.5.    Brokers.    Buyer has not retained any broker in connection with the Transaction. Seller will not have any obligation to pay any broker's, finder's, investment banker's, financial advisor's or similar fee in connection with this Agreement or the Transaction by reason of any action taken by or on behalf of Buyer.

        4.6.    Financial Ability.    Buyer has on the date hereof legally binding commitments for equity contributions from its members of $24,000,000. Buyer will have on the Closing Date, sufficient cash on hand from equity contributions of Buyer's members, Buyer's immediately available internal funds or available under an established committed credit facility or unutilized lines of credit with financial institutions to pay the Purchase Price.

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        4.7.    Condition of Business.    The Buyer has made all inspections and investigations of the Business and the Acquired Assets deemed necessary or desirable by the Buyer. The Buyer acknowledges and agrees that it is purchasing the Acquired Assets based on the results of its inspections and investigations, and not on any representation or warranty of the Seller, or any of its Affiliates, not expressly set forth in this Agreement or the other Transaction Documents. Any claims the Buyer may have for breach of representation or warranty shall be based solely on the respective representations and warranties of the Seller expressly set forth in this Agreement or the other Transaction Documents. ALL WARRANTIES OF MERCHANT-ABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE, AND ALL OTHER WARRANTIES ARISING UNDER THE UNIFORM COMMERCIAL CODE, ARE HEREBY WAIVED BY THE BUYER. The Buyer further acknowledges that, other than the respective representations and warranties of the Seller and Buyer set forth in this Agreement or the other Transaction Documents, neither Seller, nor any of its Affiliates, nor any other Person has made any representation or warranty, express or implied, as to the accuracy or completeness of any information regarding the Seller, the Business or the Acquired Assets, including in any confidential memoranda distributed by or on behalf of the Seller relating to the Business, or in any other publication, document or information provided to the Buyer or its Representatives or otherwise in connection with the Business or the sale of the Acquired Assets.

ARTICLE 5
CONDITIONS TO THE CLOSING

        5.1.    Conditions to Buyer's Obligation.    Buyer's obligation to effect the Transaction is subject to the satisfaction as of the Closing of the following conditions precedent (unless waived by Buyer):

        (a)    Representations and Warranties.    Each of the representations and warranties of Seller contained in Article 3 shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date.

        (b)    Covenants.    Seller shall have performed and observed in all material respects each covenant or other obligation required to be performed or observed by it pursuant to this Agreement through the Closing.

        (c)    Proceedings.    No action, suit or proceeding shall be pending before any Government Entity that would reasonably likely result in an Order that would: (i) prevent or prohibit the consummation of the Transaction; or (ii) cause any of the Transaction to be rescinded following consummation.

        (d)   [Reserved]

        (e)    Governmental Licenses, Permits and Approvals.    Buyer shall have obtained the Government Entity licenses, permits and approvals listed on Schedule 5.1(e).

        (f)    Third-Party Consents.    Seller shall have obtained the third-party consents listed on Schedule 5.1(f).

        (g)    Facility Operations.    The Facility shall be operating in the ordinary course of business on the Closing Date and shall have been operating in the ordinary course of business for each of the five days immediately preceding the Closing Date.

        (h)    No Material Adverse Effect.    There shall not have occurred any Material Adverse Effect.

        (i)    Member Approval.    The Member Approval shall have been obtained.

        (j)    Fairness Opinion.    Seller shall have been issued a fairness opinion and such fairness opinion shall be included in the Proxy Statement as an exhibit.

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        (k)    Seller's Closing Documents.    The following documents (duly executed as appropriate) shall have been delivered to Buyer, any of which may be waived by Buyer:

          (i)  the Bill of Sale, duly executed by Seller;

         (ii)  the Deed, duly executed by Seller;

        (iii)  the Escrow Agreement duly executed by Seller and Escrow Agent;

        (iv)  a non-foreign affidavit dated as of the Closing Date in form and substance required under the Treasury Regulations issued pursuant to Section 1445 of the Code stating that Seller is not a "foreign person" as defined therein;

         (v)  customary payoff letters or evidence of termination of the Debt and Liens listed on Schedule 2.3(b)(i) and, if applicable, customary payoff letters or evidence of termination of any other Debt or Liens required to be satisfied or terminated by Seller prior to or at the time of Closing pursuant to Section 2.3(b) of this Agreement; and

        (vi)  a certificate dated as of the Closing Date from a duly authorized signatory of Seller certifying: (A) that resolutions in the form attached to the certificate have been duly adopted by its Board authorizing the execution of this Agreement and the other Transaction Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby and (B) the satisfaction of the conditions under Sections 5.1(a) and 5.1(b).

        (l)    Gavilon Documents.    The Gavilon Documents shall have been entered into by and between Gavilon, LLC, Seller and Buyer.

        (m)    Alcohol Fuel Permit.    The Alcohol Fuel Permit from the Alcohol and Tobacco Tax and Trade Bureau must have been approved and received by Buyer, allowing it to operate the Facility.

        (n)    Financing.    This Agreement is subject to Buyer obtaining reasonably acceptable financing from AgStar Financial Services in an aggregate amount of at least $50 million.

        5.2.    Conditions to Seller's Obligation.    Seller's obligation to effect the Transaction is subject to the satisfaction as of the Closing of the following conditions precedent (unless waived by Seller):

        (a)    Representations and Warranties.    Each of the representations and warranties of Buyer contained in Article 4 shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date.

        (b)    Covenants.    Buyer shall have performed and observed in all material respects each covenant or other obligation required to be performed or observed by Buyer pursuant to this Agreement through the Closing.

        (c)    Proceedings.    No action, suit or proceeding shall be pending before any Government Entity which would reasonably and likely result in an Order that would: (i) prevent or prohibit the consummation of the Transaction; or (ii) cause any of the Transaction to be rescinded following consummation.

        (d)   [Reserved]

        (e)    Member Approval.    The Member Approval shall have been obtained.

        (f)    Buyer's Closing Documents.    The following documents (duly executed as appropriate) must have been delivered to Seller:

          (i)  the Bill of Sale, duly executed by Buyer;

         (ii)  the Escrow Agreement duly executed by Buyer; and

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        (iii)  a certificate dated as of the Closing Date from Buyer certifying: (A) that resolutions in the form attached to the certificate have been duly adopted by Buyer's board authorizing the execution of this Agreement and the other Transaction Documents to which Buyer is a party and the consummation of the transactions contemplated hereby and thereby and (B) the satisfaction of the conditions under Sections 5.2(a) and 5.2(b).

        (g)    Gavilon Documents.    The Gavilon Documents duly executed by Gavilon, LLC, Seller, and Buyer.

ARTICLE 6
COVENANTS OF SELLER PENDING CLOSING

        6.1.    Limitation on Conduct Prior to Closing Date.    Between the date hereof and the Closing Date, except as contemplated by this Agreement and subject to Legal Requirements, Seller agrees to conduct the Business in the ordinary course in substantially the manner heretofore conducted, and Seller shall not, without the prior written consent of Buyer:

        (a)   grant any general or uniform increase in the rate of pay to employees or employee benefits other than in the ordinary course of business;

        (b)   make any commitments with respect to capital expenditures in excess of $50,000.00 with respect to any item or project or in the aggregate with respect to any related items or projects, except for capital expenditures described in the Disclosure Schedule, ordinary repairs, renewals and replacements and any expenditures contemplated by Section 6.2(a) (other than commitments that will have been paid in full prior to the Closing);

        (c)   compromise or otherwise settle or adjust any assertion or claim of a deficiency in Taxes (or interest thereon or penalties in connection therewith), extend the statute of limitations with any Tax Authority or file any pleading in court in any Tax litigation or any appeal from an asserted deficiency, or file or amend any Tax Return, or make any Tax election that is inconsistent with Seller's current tax election practices, change or make any Tax elections or its Tax or accounting policies and procedures or any method or period of accounting unless required by GAAP, the Code, or any other statutory or financial accounting principles or a Government Entity;

        (d)   adopt or enter into any new employment agreement with any employee or other employee benefit plan or arrangement or amend or modify any employment agreement or employee benefit plan or arrangement of any such type except to comply with Legal Requirements;

        (e)   sell, assign, transfer, mortgage, lease, license, abandon, permit to lapse, encumber or otherwise dispose of any assets or release or waive any claim, except for sales of finished goods Inventory in the ordinary course of business and consistent with past practices;

        (f)    settle any material claim, action or proceeding involving any material Liability for monetary Damages or enter into any settlement agreement containing material obligations;

        (g)   incur any Debt except for in the ordinary course of business or short-term borrowings made at prevailing market rates and on terms consistent with prior practice (it being agreed that if any such Debt is incurred it shall be repaid in full on or prior to Closing as contemplated by Section 2.3); provided that all Debt incurred or agreements made with AgStar Financial Services, ACA under or pursuant to the loan agreement dated September 1, 2011 or the forbearance agreement dated December 21, 2012, each as amended, shall be considered in the ordinary course of business for purposes of this Section 6.1;

        (h)   enter into any new material line of business;

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        (i)    amend or modify any Scheduled Contract or enter into any agreement or contract that would be required to be a Scheduled Contract, provided, that Seller may renew an existing Scheduled Contract in the ordinary course of business on substantially equivalent terms;

        (j)    take any action that would or could reasonably be expected to: (i) adversely affect the ability of Buyer or Seller to obtain any necessary approval of any Government Entity or other Person required for the Transaction; (ii) adversely affect Seller's ability to perform its covenants and agreements under this Agreement; or (iii) result in any of the conditions to the performance of Buyer's or Seller's obligations hereunder not being satisfied;

        (k)   engage in any material transaction or incur or sustain any material obligation not in the ordinary course of business consistent with past practice; or

        (l)    agree or make any commitment to take any actions prohibited by this Section 6.1.

        6.2.    Affirmative Conduct Prior to Closing.    Between the date hereof and the Closing, Seller shall:

        (a)   continue making all budgeted capital expenditures, including the capital expenditures described in Schedule 6.2(a) and ordinary repairs, maintenance, renewals and replacements in the ordinary course of business consistent with past practice and industry standards;

        (b)   use commercially reasonable efforts consistent with this Agreement to maintain and preserve intact the present business organization and to maintain and preserve the relationships and goodwill with customers, employees, suppliers, Government Entities and others having business or regulatory relationships with Seller or the Business;

        (c)   keep in full force and effect all of its Permits;

        (d)   use commercially reasonable efforts to maintain insurance coverage at least equal to that now in effect on all properties which it owns or leases and on the Business;

        (e)   solely with respect to the Acquired Contracts, perform contractual obligations in all material respects and not default on any such obligations in any material respect or otherwise take or omit to take any action, the result of which would be a termination of such Acquired Contract or permit the counterparty to such contract to exercise any termination rights in respect thereof;

        (f)    duly observe and conform in all material respects to all Legal Requirements;

        (g)   maintain the assets and properties of the Business in good condition and repair, normal wear and tear excepted;

        (h)   file all Tax Returns required to be filed with any Tax Authority in accordance with Legal Requirements, and to timely pay all Taxes due and payable whether or not shown in the respective Tax Returns that are so filed; and

        (i)    promptly notify Buyer regarding receipt from any Tax Authority of any notification of (i) the commencement of an audit, any request to extend the statute of limitations, any statutory notice of deficiency, any revenue agent's report, any notice of proposed assessment, or any other similar notification of potential adjustments to the Tax liabilities or attributes of Seller, (ii) any actual or threatened collection enforcement activity by any Tax Authority with respect to Tax liabilities of any Reporting Party, or (iii) any termination or threatened termination of benefits under any Tax incentive or similar program with any Government Entity.

        6.3.    Exclusivity.    From and after the date hereof, Seller will not, directly or indirectly: initiate, solicit or knowingly encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal that constitutes, or would reasonably be expected to lead to, any Alternative Transaction (as defined below); negotiate or have any discussions with any Person in furtherance of such inquiries in respect of an Alternative

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Transaction; agree to or endorse any Alternative Transaction; approve, recommend, execute or enter into, any letter of intent, agreement in principle, merger agreement, asset purchase or share exchange or issuance agreement, option agreement, or other similar agreement related to any Alternative Transaction; or, agree to do any of the foregoing, or authorize any of its Representatives to take any such action, and will direct its Representatives not to take any such action, and Seller will notify Buyer of all of the relevant details relating to all inquiries and proposals that it may receive relating to any of such matters. For purposes of this Agreement, "Alternative Transaction" means any of the following involving Seller, the Acquired Assets, the Business or the Facility, on the one hand, and any Person (other than Buyer or any of its Affiliates, such Person, a "Third Party"), on the other hand: any merger, consolidation, share exchange or other business combination; a sale, lease, license, exchange, mortgage, pledge, transfer or other disposition of any assets of Seller (other than the Excluded Assets), the Acquired Assets, the Business or the Facility other than in the ordinary course of business; a sale of member units of Seller (or securities convertible or exchangeable into or otherwise evidencing, or any agreement or instrument evidencing, the right to acquire member units). Notwithstanding the foregoing, in the event that Seller receives an a proposal from a Third Party for an Alternative Transaction that, in the business judgment of the Board of Directors of Seller, is a superior offer for the members (a "Superior Proposal"), Seller may negotiate with such Third Party to the extent consistent with the fiduciary duties of the Board of Directors of Seller. If Seller enters into a letter of intent with such Third Party making the Superior Proposal, Seller will immediately notify Buyer of such letter of intent and Buyer shall have the option to match, in writing, the competing offer. If Buyer declines to match the competing offer in writing, Seller may terminate this Agreement to pursue a transaction with the competing Third Party upon promptly paying Buyer a "breakup fee" in the amount of Two Million Dollars ($2,000,000) (the "Breakup Fee").

        6.4.    Filings.    Seller agrees that through the Closing, Seller's reports, proxy statements, registrations, statements and other filings required to be filed with any applicable Government Entity will comply in all material respects with all Legal Requirements and none will contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Seller shall afford Buyer a reasonable opportunity to review and comment on such documents to the extent specifically related to the Transaction, the Acquired Asset or the Business prior to the filing.

        6.5.    Proxy Statement.    As promptly as reasonably practicable, but no later than five (5) Business Days after the date hereof, Seller shall prepare and file the Proxy Statement with the SEC in accordance with Regulation 14A of the Exchange Act. Seller shall provide Buyer with the opportunity to review and suggest comments on the Proxy Statement prior to its filing with the SEC. Seller shall consider Buyer's comments in good faith, but Buyer's consent (and the incorporation of Buyer's comments) shall not be required for any SEC filing. Seller shall distribute the Proxy Statement to its unitholders in accordance with Regulation 14A of the Exchange Act.

        6.6.    Member Meeting.    Seller shall, within fifteen (15) Business Days following the date of this Agreement, duly call and give notice of, and thereafter convene and hold, within thirty (30) days of the giving of such notice, a meeting of the members (the "Member Meeting") at which the required members of Company shall vote to approve or reject this Agreement, the Transaction Documents and the Transaction contemplated hereby (the "Member Approval"), provided that said fifteen (15) Business Days period shall be extended on a day-for-day basis for each day SEC review delays the filing of the definitive Proxy Statement beyond 11 days after the filing of the preliminary Proxy Statement. Following the execution of this Agreement and prior to the Member Meeting, Seller shall deliver to the required members a Proxy Statement describing this Agreement and the Transaction represented hereby and such other information as Seller determines in its discretion.

        6.7.    Access.    Seller will: (i) afford, upon reasonable notice, to Buyer and its Representatives reasonable access during normal Business hours to the Business, the Facility, the Acquired Assets and

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Seller's offices, properties, customers, suppliers, employees, operations, properties, books, files and other Records; (ii) furnish to Buyer and its Representatives such additional financial and operating data and other information and Records regarding the Business (or copies thereof) as Buyer may from time to time reasonably request; and (iii) will reasonably cooperate with Buyer to enable Buyer and its Representatives to make an examination of the financial statements, Business, the Acquired Assets, Assumed Debt and Assumed Liabilities, and other assets and Liabilities of Seller and its Affiliates related to the Business, including, without limitation, as necessary or desirable to observe any turnarounds or similar material maintenance operations at the Facility. Without limiting the foregoing, Seller hereby agrees to provide to Buyer on or immediately prior to the Closing Date, or the extent not reasonably practicable, promptly following the Closing Date, information relating to: (i) compensation that Seller has paid or will pay in the current year through the Closing Date to each of Hired Employees; and (ii) all Taxes paid or remitted (or to be paid or remitted) to the Tax Authority by Seller and each of its employees, as applicable, under the Federal Unemployment Tax Act and the Federal Insurance Contributions Act that are attributable to the compensation referenced in clause (i). Seller and Buyer further agree that they will utilize, or cause their respective Affiliates to utilize, the standard procedure set forth in IRS Revenue Procedure 2004-53 with respect to wage reporting relating to the foregoing.

        6.8.    Environmental Matters.    Prior to the Closing, Seller will: (a) (i) prepare and complete accurately those notices and reports identified on Schedule 6.8 to the extent such notices and reports relate to periods during which Seller or, with respect to the Business, any of Seller's Affiliates, owned or operated any of the Acquired Assets or the Business; (ii) use commercially reasonable efforts to provide copies of all such notices and reports to Buyer as soon as practical; (iii) sign and, if required by Legal Requirements, certify all such notices and reports, in each case after a reasonable inquiry with regard to the information contained in such notices and reports; (iv) file all such notices and reports with the appropriate Government Entity or third party no later than the date on which such reports or notices are required to be filed; provided that, to the extent that any such notice or report is not required to be filed with a Government Entity or third party until after the Closing Date, Seller may prepare and complete the same after the Closing Date but prior to the earlier of the date such notice or report is required to be filed and the date that is three (3) months following the Closing Date, and (b) remove from the Facility any Hazardous Substance or other waste (including solid waste, universal waste and used oil) generated prior to the Closing Date which, if not removed, would be required to be removed under applicable Legal Requirements.

        6.9.    Notifications.    Until the Closing Date, each party hereto shall promptly notify the other parties in writing of (a) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any respect on or prior to the Closing Date, and (b) any material failure of the party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. Seller may, from time to time prior to or at the Closing by notice given in accordance with this Agreement, supplement or amend the Disclosure Schedule (other than Schedule 1.2 (Acquired Contracts) or Schedule 1.5 (Excluded Assets)), any supplement or amendment to which shall require the prior written approval of Buyer, which may be granted or denied in Buyer's sole discretion) to correct any matter that would otherwise constitute a breach of any representation or warranty contained herein; provided, however, that such supplements and amendments and any other updates to the Disclosure Schedule shall be disregarded for purposes of, and shall not affect, (x) any rights of Buyer hereunder, including Buyer's rights to indemnification or to terminate this Agreement set forth under Articles VIII or IX, or (y) any of Buyer's conditions to consummate the Transaction set forth in Section 5.1; or (z) any of the Assumed Liabilities or Assumed Debt.

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        6.10.    Interim Financial Information.    No later than thirty (30) days following the end of each monthly accounting period subsequent to October 31, 2012 and prior to the Closing, Seller shall deliver to Buyer periodic financial statements and reports in the form that it customarily prepares for its internal purposes concerning the Seller and the Business, all of which financial statements and reports (i) will have been prepared in accordance with the books of account and other financial records of Seller; and (ii) to the extent such information consists of financial statements, be deemed included in the definition of the term "Financial Statements" solely for the purposes of the representations and warranties contained in Section 3.6 and any indemnification provisions related thereto.

        6.11.    Instruments of Conveyance.    Seller shall execute and deliver the Transaction Documents, and shall use commercially reasonable efforts to obtain from third parties, such other usual and customary documents as are reasonably necessary or desirable to (a) vest in Buyer all the right, title and interest of Seller, in, to or under any or all of the Acquired Assets, including, with respect to vehicles, certificate of title, and (b) allow Buyer to obtain owner's title insurance with extended coverage from a reputable licensed title insurer(s) of Buyer's choice (with such endorsements as Buyer shall request), including, without limitation, evidence of corporate authority, corporate authorizing resolutions, and customary owner's affidavits and certifications, mechanics' lien indemnities and gap indemnities as Buyer and the title insurer may request.

ARTICLE 7
COVENANTS

        7.1.    Further Assurances.    Buyer and Seller will take such further actions (including the execution and delivery of such further instruments and documents) as the other parties may reasonably request to carry out the purposes of this Agreement.

        7.2.    Litigation Support; Access.    From and after the Closing, in the event that and for so long as Buyer is actively prosecuting, asserting, contesting or defending any third party action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand in connection with any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction arising on or prior to the Closing Date involving Seller or the Business, Seller will reasonably cooperate with Buyer and provide Buyer with reasonable access to their personnel and documents as are necessary in connection with such prosecution, assertion, contest or defense, and, except as otherwise provided under Article 8, all at the sole cost and expense of Buyer. From and after the Closing, in the event that and for so long as Seller is actively prosecuting, asserting, contesting or defending any third party action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand in connection with any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction arising on or prior to the Closing Date involving Seller or the Business, Buyer will reasonably cooperate with Seller and provide Seller with reasonable access to their personnel for purposes of interviews, depositions, and trial appearances and documents as are necessary in connection with such prosecution, assertion, contest or defense, and, except as otherwise provided under Article 8, all at the sole cost and expense of Seller.

        7.3.    Confidentiality.    Seller will, and will cause its Affiliates to, treat and hold as confidential all of the Confidential Information, and shall refrain from using any of the Confidential Information except in connection with this Agreement. In the event that Seller is requested or required pursuant to written or oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand or similar process to disclose any Confidential Information, such Person will notify Buyer promptly in writing of the request or requirement so that Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section 7.3. If, in the absence of a protective order or the receipt of a waiver hereunder, Seller is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, such Person may disclose the Confidential Information to the tribunal, provided, however, that the

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disclosing Person will use its best efforts to obtain an order or other assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed as Buyer requests.

        7.4.    Transition.    Seller will not take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier or other business associate of or Government Entity with jurisdiction over Seller from maintaining the same business and regulatory relationships and good will with Buyer and the Business after the Closing as it maintained with Seller and the Business prior to the Closing. Seller will refer all customer, supplier, regulatory and similar inquiries relating to the Business to Buyer from and after the Closing.

        7.5.    Employment Matters.

        (a)    Hired Employees.    Effective as of the Closing, Seller will terminate and Buyer will make offers of employment to all of Seller's employees as Buyer identifies in a list to Seller prior to the Closing and on such terms and conditions as Buyer determines, in its sole discretion, including that each such offer is subject to Buyer's customary pre-employment/post-offer procedures and qualifications. Nothing in this Agreement will constitute an agreement by Buyer to assume or be bound by any previous or existing employment agreement or arrangement between Seller and any of its employees, or a guaranty that any Person that accepts employment with Buyer will be entitled to remain in the employment of Buyer for a specified period of time. Buyer will have no Liability with respect to any employee who does not become employed by Buyer. Seller will bear all Liability with respect to the federal Workers Adjustment and Retraining Notification Act and similar state laws to the extent applicable to the Transaction. Each of Seller's employees who becomes employed by Buyer shall be a "Hired Employee".

        (b)    COBRA.    Seller will be responsible for providing all notices and continuation coverage required under COBRA to all employees of Seller who are or become "M&A Qualified Beneficiaries" (as such term is defined in Treasury Regulations §54.4980B-9) as a result of the consummation of the Transaction. Specifically, Seller agrees that all obligations to provide such continuation coverage to M&A Qualified Beneficiaries are being allocated to Seller. If Seller and its Affiliates cease to maintain a group health care plan, then, notwithstanding any other provision of this Agreement to the contrary, Seller will be responsible for providing continuation coverage required by COBRA to all employees of Seller and dependents of such employees who are or become M&A Qualified Beneficiaries.

        (c)    Post-Closing Benefits.    Effective as of the Closing, each Hired Employee shall cease participation in the Employee Benefit Plans, and Buyer shall provide, or cause to be provided, to each Hired Employee a level of employee benefits that is no less favorable in the aggregate than the employee benefits provided to similarly situated existing employees of Buyer; provided, however, that nothing herein shall preclude Buyer or its ERISA Affiliates from altering, amending or terminating any of its employee benefit plans, or the participation of any of their employees in such plans, at any time.

        (d)    Prior Service Credit.    Each Hired Employee shall be given credit for his or her years of service with Seller and its ERISA Affiliates prior to the Closing for purposes of determining eligibility, vesting and the accrual of vacation and paid time off (but not other forms of benefit accrual) under each of Buyer's employee benefit plans, programs and policies covering such Hired Employees.

        (e)    Preexisting Conditions and Deductibles.    With respect to each welfare or fringe benefit plan maintained by Buyer or its ERISA Affiliates in which Hired Employees become eligible to participate on or after the Closing, to the extent permitted under the terms of such plans: (i) Buyer shall waive, or cause to be waived, all limitations as to preexisting conditions, exclusions

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and waiting periods with respect to participation and coverage requirements applicable to the Hired Employees (and their covered dependents), other than any such limitations that are in effect with respect to any Hired Employee (or his or her covered dependents) and that have not been satisfied under the corresponding Employee Benefit Plan maintained by Seller or its ERISA Affiliates immediately prior to the Closing; and (ii) Buyer shall provide each Hired Employee with credit for any deductibles and maximum out-of-pocket requirements paid by such Hired Employee for the then current plan year under the corresponding Employee Benefit Plan maintained by Seller or its ERISA Affiliates immediately prior to the Closing.

        (f)    No Third Party Beneficiaries.    The provisions of this Section 7.5 are solely for the benefit of the parties hereto, and no provision of this Section 7.5, express or implied, is intended or shall be construed to create any third party beneficiary or other rights in any current or former employees of the Seller (including any dependent or beneficiary thereof) in respect of the terms and conditions of employment with, or any benefits that may be provided by, Buyer or any of its ERISA Affiliates. Nothing herein shall be construed as an amendment to any Employee Benefit Plan for any purpose.

        7.6.    Domain Name Assignment.    Within five Business Days after the Closing Date, Seller will assist Buyer with the transfer to Buyer of all internet domain names that are Acquired Assets. Seller will cease using such internet domain names after the Closing.

        7.7.    Warranty Claims.    Seller acknowledges and agrees that any Liabilities in respect of customer warranty claims, including, but not limited to, costs of replacement, for products manufactured, produced, sold or provided by Seller prior to the Closing are not Assumed Liabilities. Notwithstanding the foregoing, to maintain customer satisfaction, Buyer will be entitled to process and service such warranty claims, including, without limitation, repairing, reworking and replacing any products in connection with a warranty claim, in a reasonable manner and substantially consistent with Seller's past practices, and Seller will promptly reimburse Buyer for the costs and expenses incurred in connection therewith.

        7.8.    Excluded Liabilities.    Seller will timely pay and fulfill its obligations under all Excluded Liabilities (except to the extent Seller contests such Excluded Liabilities in good faith by appropriate proceedings).

        7.9.    Assignment of Acquired Contracts.

        (a)   Prior to the Closing, Seller and Buyer shall: (i) use commercially reasonable efforts to cause, and to obtain consent to assignment for, each of the Acquired Contracts listed on Schedule 7.9(a)(i) to be assigned to Buyer or its designated Affiliate, and (ii) cause, and obtain consent to assignment for, each of the Acquired Contracts listed on Schedule 5.1(f) to be assigned to Buyer or its designated Affiliate. Upon any party's request, the other parties shall cooperate to obtain novations of any of the Acquired Contracts in lieu of assignment thereof; provided that Seller shall not be required to (x) make out of pocket payments other than commercially reasonable expenses in connection with the foregoing or (y) to compromise or waive any material right Seller may have with respect to such Acquired Contract.

        (b)   To the extent not obtained prior to Closing, (i) Seller shall use its commercially reasonable efforts to obtain consent to assignment for each of the Acquired Contracts following the Closing; (ii) Seller shall provide to Buyer the benefits of such Acquired Contract (including the right to enforce for the benefit of Buyer any and all rights of Seller or any Affiliate of any Seller against a third party thereunder) for the remaining term of such Acquired Contract and (iii) subject to the foregoing limitations, Buyer and Seller will cooperate with each other in any lawful and contractually permitted arrangements designed to provide to Buyer such benefits and obligations of the Acquired Contract for its term remaining as of the Closing Date, exclusive of

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any renewals or extensions; provided, however, that any actions taken pursuant to this Section 7.9(b) shall not involve any out-of-pocket payments by (x) Buyer or any of its Affiliates other than commercially reasonable expenses and otherwise as specifically and expressly provided by the terms of any contract related to an Acquired Contract entered into prior to the Closing Date, or (y) Seller or any of its Affiliates other than commercially reasonable expenses and otherwise as specifically and expressly provided by the terms of any contract related to an Acquired Asset. In connection with any such arrangements, Buyer and Seller will each abide by the terms and conditions set forth in the applicable Acquired Contract and, subject to the arrangement contemplated by this Section 7.9(b), will reimburse each other for payments made to or received from counterparties on behalf of each other pursuant to the terms of the applicable Acquired Contracts, will reasonably act to provide that the other party is put in the same economic position with respect to the Acquired Contract as if the relevant consent or other action had been obtained at the Closing. Once a consent or other action for the sale, assignment, assumption, transfer, conveyance, and delivery of an Acquired Contract is obtained or taken, Seller will promptly assign, transfer, convey, and deliver, or cause to be assigned, transferred, conveyed, and delivered, such Acquired Contract to Buyer, and subject to Sections 2.2 and 7.8, Buyer will assume all executory Liabilities arising or to be performed after the Closing under such Acquired Contracts as in existence on the date of such assignment, transfer, conveyance or delivery pursuant to such instruments as Buyer and Seller deem reasonably necessary to effect such transfer and assumption (which Buyer and Seller will jointly prepare, execute, and deliver in good faith at the time of such transfer, all at no additional cost to Buyer).

        7.10.    Excluded Assets.    Seller will remove all Excluded Assets from the Real Property as promptly as practicable following the Closing, but no later than thirty days following the Escrow Termination Date.

        7.11.    Consents; Regulatory Filings.

        (a)   Each party hereto shall use commercially reasonable efforts to obtain all licenses, permits, approvals, consents, qualifications and orders of Government Entities and other third parties that may be or become necessary for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement and the other Transaction Documents (including, without limitation, the permits, approvals and consents set forth on Schedule 5.1(e) or Schedule 5.1(f)), and will cooperate fully with each other in promptly seeking to obtain all such permits, authorizations, consents, orders and approvals.

        (b)   Within ten (10) Business Days after the date hereof, each party hereto shall make or cause to be made all filings required of each of them or any of their respective subsidiaries or Affiliates under the HSR Act with respect to the Transaction, including, if required, an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the Transaction. Each such filing shall request early termination of the waiting periods imposed by the HSR Act. All filing fees to be paid by Buyer or Seller in connection with filing Notification and Report Forms pursuant to the HSR Act shall equally by Buyer and Seller. To the extent any other antitrust or similar notification or consent is required from any other Government Entity, such filings and costs shall be undertaken and borne equally by Buyer and Seller.

        (c)   Seller and Buyer shall cooperate in good faith with each other in connection with any filings with any Government Entity (including, to the extent permitted by applicable law, providing copies of all such documents to the non-filing parties prior to filing and consider all reasonable additions, deletions or changes suggested in connection therewith) and in connection with resolving any investigation or other inquiry of any of the United States Federal Trade Commission, the Antitrust Division of the United States Department of Justice or other Government Entity under the HSR Act with respect to any such filing or any such transaction. Each such party shall use its

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best efforts to furnish to each other all information required for any application or other filing to be made pursuant to any applicable law in connection with the Transaction. In addition, except as prohibited by Legal Requirements, each party hereto shall (i) promptly notify the other parties hereto of any communication to that party from any Government Entity relating to the approval or disapproval of the Transaction; and (ii) not participate in any meetings or substantive discussions with any Government Entity with respect thereto without consulting with and offering the other party a meaningful opportunity to participate in such meetings or discussions.

        (d)   The parties hereto agree to use commercially reasonable efforts to satisfy, prior to the Outside Date, any requirement, request or condition sought or imposed by the United States Federal Trade Commission, the Antitrust Division of the United States Department of Justice or any other Government Entity acting under the HSR Act, in each case, relating in any way to the Transaction, where the failure to satisfy any such requirement, request or condition would delay, prevent or make illegal such timely consummation of the Transaction, including (i) taking commercially reasonable actions to comply with any request, directions, determinations, requirements or conditions of the United States Federal Trade Commission, the Antitrust Division of the United States Department of Justice or other Government Entity and (ii) taking commercially reasonable actions to remove or cause to be removed any direction, determination, requirement, injunction, order, condition or limitation, that prevents or would prevent, or that makes illegal, the timely consummation of the Transaction. Notwithstanding anything to the contrary in this Agreement, neither Buyer, Seller nor any of their respective Affiliates shall be required, in connection with the matters covered by this Section 7.11, (v) to pay any amounts (other than the payment of filing fees and expenses and fees of its counsel), (w) to commence or defend litigation, (x) to hold separate (including by trust or otherwise) or divest any of their respective Affiliates' businesses, product lines or assets, or any of the Acquired Assets, (y) to take any action or agree to any limitation on the operation or conduct of the Business or any other business or assets of Buyer, Seller or any of their respective Affiliates or (z) to waive any of the conditions to this Agreement set forth in Section 5.1.

        (e)   As promptly as reasonably practicable, but no later than five (5) Business Days after the date hereof, Buyer shall make or cause to be made all filings required to obtain an Alcohol Fuel Permit from the Alcohol and Tobacco Tax and Trade Bureau for the operation of the Facility.

ARTICLE 8
SURVIVAL AND INDEMNIFICATION

        8.1.    Survival of Covenants, Representations and Warranties.    (a) All covenants, representations and warranties of Seller shall survive Closing and shall continue and be limited as follows: (i) the representations and warranties set forth in Section 3.1 (Organization, Power and Authorization), Section 3.2 (Binding Effect and Noncontravention), Section 3.3 (Brokers), Section 3.9 (Title to Assets), and Section 3.14 (Real Property) (collectively, the "Fundamental Representations") shall survive indefinitely; (ii) the representations and warranties set forth in Section 3.11 (Tax Matters) and Section 3.16 (Employee Benefits) shall survive for a period of time equal to the statute of limitations applicable to such matter plus an additional sixty (60) days; (iii) the representations and warranties set forth in Section 3.12 (Environmental) shall survive the Closing for a period of three (3) years; (iv) all other representations and warranties and the covenants to be performed or complied with prior to Closing shall survive Closing for a period of eighteen (18) months; and (v) all other covenants shall survive Closing indefinitely or for such lesser period of time as may be specified therein; (b) all covenants, representations and warranties of Buyer shall survive Closing indefinitely or for such lesser period of time as may be specified therein; and (c) notwithstanding anything herein contained to the contrary, there shall be no time limitations on breaches of covenants, representations or warranties where the basis of the claim is fraud.

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        8.2.    Indemnification Obligations of Seller.    From and after the Closing, Seller shall indemnify and hold harmless Buyer and its Affiliates, without duplication, from and against any Damages that Buyer or any of its Affiliates incur as a result of, arising out of or related to: (a) the breach of any of the representations and warranties made by Seller in this Agreement or any other Transaction Document; (b) the breach of any covenant made by Seller in this Agreement or any other Transaction Document; (c) any Liability of Seller that is not an Assumed Liability or Assumed Debt, including the Excluded Liabilities, and (d) items 1-3 on Schedule 3.12(a) of the Disclosure Schedule.

        8.3.    Indemnification Obligations of Buyer.    From and after the Closing, Buyer shall indemnify and hold harmless Seller and its Affiliates, without duplication, from and against any Damages that Seller or any of its Affiliates incur as a result of, arising out of or related to: (a) the breach of any of the representations and warranties made by Buyer in this Agreement or any other Transaction Document; (b) the breach of any covenant made by Buyer in this Agreement or any other Transaction Document; (c) the Assumed Liabilities; or (d) the Assumed Debt.

        8.4.    Limitations on Indemnification; Etc.

        (a)   With respect to any claims for indemnification under Section 8.2(a), the parties agree as follows: (i) subject to the applicable restrictions in Section 8.1, Seller shall fully indemnify Buyer and its Affiliates for any Damages as a result of the breach of any of the Fundamental Representations or the representation and warranties in Section 3.11 (Tax Matters) and (ii) for all indemnification claims made by Buyer and its Affiliates against Seller other than as a result of the breach of any of the Fundamental Representations or the representation and warranties in Section 3.11 (Tax Matters) (the "Nonfundamental Claims"), Seller will have no liability for indemnification until the aggregate of all Damages related to the Nonfundamental Claims exceeds $200,000.00, and then for all amounts claimed thereafter.

        (b)   For the avoidance of doubt, none of the limitations contained in Section 8.4(a) shall apply to or in any manner limit or restrict (i) any claim for Damages as a result of fraud by Seller, or (ii) any claims for indemnification under Sections 8.2(b), 8.2(c) or 8.2(d) of this Agreement.

        (c)   For the purposes of this Article 8, including the determination of any breach of any representation or warranty or the amount of Damages to which Buyer may be entitled to indemnification as a result thereof, any inaccuracy in or breach of any representation or warranty shall be determined without regard to any materiality, Material Adverse Effect or other similar qualification or exception contained in or otherwise applicable to such representation or warranty.

        8.5.    Third Party Claims.

        (a)    Notice.    If any third party notifies any Indemnified Party of any matter that may give rise to a claim by such Indemnified Party for indemnification pursuant to Section 8.2 or Section 8.3 (a "Third Party Claim"), such Indemnified Party will give the Indemnifying Party from whom indemnification is sought written notice of such Indemnified Party's claim for indemnification within a reasonable period after the Indemnified Party receives written notice of such Third Party Claim, provided, however, that the failure of any Indemnified Party to give timely notice will not affect any rights to indemnification hereunder except to the extent that the Indemnifying Party demonstrates actual damage caused by such failure.

        (b)    Control of Defense.    An Indemnifying Party, at its option, may defend the Indemnified Party against any Third Party Claim so long as: (i) the Indemnifying Party notifies the Indemnified Party in writing within thirty (30) days after the Indemnified Party has given notice of the Third Party Claim that the Indemnifying Party will indemnify the Indemnified Party for the Damages the Indemnified Party may suffer as a result of such Third Party Claim; (ii) the Third Party Claim does not involve Environmental Laws; (iii) the Third Party Claim involves only money Damages and does not seek an injunction or other equitable relief; (iv) the Indemnifying Party is not a party to

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the Third Party Claim such that the Indemnified Party determines in good faith that joint representation would be inappropriate; and (v) the Indemnifying Party diligently defends the Third Party Claim. If the Indemnifying Party defends against the Third Party Claim, the Indemnified Party may participate in the defense and employ counsel of its choice for such purpose; provided, that such employment will be at the Indemnified Party's own expense.

        (c)    Settlement.    So long as the Indemnifying Party has assumed and is conducting the defense of the Third Party Claim in accordance with Section 8.5(b): (i) the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (which will not be unreasonably withheld); and (ii) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (which will not be unreasonably withheld). Unless and until the Indemnifying Party assumes and conducts the defense of the Third Party Claim in accordance with Section 8.5(b), the Indemnified Party may defend against, and consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without prejudicing its rights against the Indemnifying Party under this Article 8.

        8.6.    Characterization of Indemnity Payments.    Unless otherwise required by any Legal Requirements, the parties agree that any indemnification payments made pursuant to this Agreement will be treated for all Tax purposes as an adjustment to the Purchase Price, and no party shall take any position inconsistent with such characterization.

        8.7.    Use of Escrow Account.    Any and all indemnification amounts to be paid by Seller shall be first satisfied by amounts available in the Escrow Fund and paid pursuant to the terms of the Escrow Agreement.

        8.8.    Other Indemnification Matters.    Any claim for indemnification under this Article 8 must be asserted by providing written notice to the Indemnifying Party specifying the factual basis of the claim in reasonable detail (including all reasonably related backup information evidencing such claim) to the extent then known by the Person asserting the claim. The right to indemnification, payment of Damages or other remedy pursuant to this Article 8 will not be affected by the Indemnified Party's investigation with respect to, or any knowledge acquired (or capable of having been acquired) about, the accuracy or inaccuracy of or compliance with, any representation, warranty, agreement, covenant or obligation under this Agreement or any other Transaction Documents. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant, agreement or obligation, will not affect the right to indemnification, payment of Damages, or other remedy based on such representation, warranty, covenant, agreement or obligation.

        8.9.    Mitigation.    Each of the parties shall take commercially reasonable steps to mitigate their respective Damages upon and after becoming aware of any event or condition that would reasonably be expected to give rise to any Damages that are indemnifiable hereunder.

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ARTICLE 9
TERMINATION

        9.1.    Termination.    This Agreement may be terminated at any time prior to the Closing, upon the occurrence of any of the following:

        (a)   by mutual agreement of Seller and Buyer, in writing;

        (b)   by Seller, if:

          (i)  Buyer has breached any representation, warranty, agreement or obligation contained in this Agreement, which breach would give rise to the failure of a condition set forth in Section 5.2, and which breach cannot be cured on or prior to the Outside Date; or

         (ii)  the Transaction has not been consummated on or before the Outside Date; provided, however, Seller will not be entitled to terminate this Agreement pursuant to this Section 9.1(b)(ii) if Seller' breach of any provision of this Agreement has been the cause of, or resulted in, the failure of the Closing to be consummated by the Outside Date; or

        (iii)  there is any Legal Requirement restraining, enjoining or otherwise prohibiting the Transactions that shall have become final and nonappealable.

        (c)   or by Buyer, if:

          (i)  Seller has breached any representation, warranty, agreement or obligation contained in this Agreement, which breach would give rise to the failure of a condition set forth in Section 5.1, and which breach cannot be cured on or prior to the Outside Date;

         (ii)  the Transaction has not been consummated on or before the Outside Date; provided, however, that Buyer will not be entitled to terminate this Agreement pursuant to this Section 9.1(c)(ii) if Buyer's breach of any provision of this Agreement has been the cause of, or resulted in, the failure of the Closing to be consummated by the Outside Date;

        (iii)  the Members do not approve this Agreement and the Transaction contemplated hereby; or

        (iv)  there is any Legal Requirement restraining, enjoining or otherwise prohibiting the Transactions that shall have become final and nonappealable.

        9.2.    Effect of Termination.    In the event of termination of this Agreement as provided in Section 9.1, this Agreement shall forthwith be terminated and there shall be no liability on the part of any party hereto except under the terms of the Confidentiality Agreement, and under Section 7.3 (Confidentiality), Article 8 (Survival and Indemnification), Article 9 (Termination) and Article 11 (Miscellaneous). Notwithstanding the foregoing, any party hereto shall be entitled to seek an injunction or injunctions to prevent a breach of, or specific performance to enforce specifically the provisions of, any covenant of any other party contained in this Agreement. Nothing in this Section 9.2 shall relieve Buyer or Seller of any liability for willful breach of its covenants, agreements or other obligations contained in this Agreement prior to the date of valid termination.

ARTICLE 10
TAX MATTERS

        10.1.    Covenant Regarding Tax Matters.    Seller shall be solely responsible for the timely preparation and filing of all Tax Returns relating, and shall pay without any cost to the Buyer, any and all Taxes for which the Seller is or may be liable with respect to taxable periods of the Seller ending on or before the Closing Date (regardless of whether the filing of any Tax Return with respect thereto or payment of any amount in respect thereof is filed, paid or due before, on or after the Closing Date).

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Any such Tax Return described in the preceding sentence filed after the Closing Date that reflects the activities of the Seller shall be prepared in a manner consistent with the past practice of the Seller. The Buyer shall prepare, or cause to be prepared, and file, or cause to be filed, all other Tax Returns.

        10.2.    Prorations.

        (a)   All real property Taxes, personal property Taxes, withholding Taxes, unemployment Taxes or ad valorem obligations and similar recurring Taxes and fees on the Business or sales Taxes collected for taxable periods beginning before, and ending after, the Closing Date (a "Straddle Period"), shall be prorated between the Buyer and the Seller as of the Closing Date. With respect to Taxes described in this Section 10.2, the Seller shall timely file all Tax Returns due on or before the Closing Date with respect to such Taxes and the Buyer shall prepare and timely file all Tax Returns due after the Closing Date with respect to such Taxes. If one party remits to the appropriate Taxing Authority payment for Taxes that are subject to proration under this Section 10.2 and if such payment includes the other party's share of such Taxes, then, upon remittance of a statement certifying the amount of Tax shown on such Tax Return allocable to the other party pursuant to Section 10.2(b), such other party shall promptly reimburse the remitting party for its share of such Taxes.

        (b)   In the case of Taxes that are payable with respect to any Straddle Period, the portion of any such Tax that is allocable to the portion of such Straddle Period ending on the Closing Date will be:

          (i)  in the case of Taxes that are either (A) based upon or related to income, wages or receipts or (B) imposed in connection with any sale or other transfer or assignment of property (real or personal, tangible or intangible) (other than conveyances made pursuant to the transactions contemplated by this Agreement), deemed equal to the amount that would be payable if the taxable period ended on the Closing Date; and

         (ii)  in the case of Taxes imposed on a periodic basis with respect to the Acquired Assets or otherwise measured by the level of any item, deemed to be the amount of such Taxes for the entire period (or, in the case of such Taxes determined on an arrears basis, the amount of such Taxes for the immediately preceding period), multiplied by a fraction, the numerator of which is the number of calendar days in the period ending on or before the Closing Date and the denominator of which is the number of calendar days in the entire Straddle Period. Any credit or refund resulting from an overpayment of Taxes for any Straddle Period will be prorated based upon the method employed in this Section 10.2(b) taking into account the type of the Tax to which the refund relates. In the case of any Tax based upon or measured by capital (including net worth or long-term debt) or intangibles, any amount thereof required to be allocated under this Section 10.2(b) will be computed by reference to the level of such items on the Closing Date or the measurement date, whichever results in the lesser amount. All determinations necessary to effect the foregoing allocations will be made in a manner consistent with prior practice of Seller.

        10.3.    Cooperation on Tax Matters.    The Buyer and Seller shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing and preparation of Tax Returns pursuant to this Article 10 and any proceeding related thereto. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information that are reasonably relevant to any such proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder.

        10.4.    Tax Contests.    The procedures set forth in this Section 10.4 rather than Section 8.6 shall govern the contest or resolution of any claim, audit, investigation or proceeding relating to Taxes (a "Tax Proceeding"). If an Indemnified Party receives notice of a Tax Proceeding, which, if successful,

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might result in an indemnity payment pursuant to Article 8, the party receiving such notice shall promptly notify the Indemnifying Party of such Tax Proceeding; provided, however, that the failure by an Indemnified Party to provide prompt notification shall not relieve the Indemnifying Party of its indemnification obligations hereunder, except to the extent that the Indemnifying Party is materially prejudiced thereby in defending such Tax Proceeding. Seller shall control all Tax Proceedings related to Taxes that are Excluded Liabilities (other than Taxes relating to a Straddle Period) and shall have the right to make all decisions in connection with such Tax Proceedings, including, without limitation, the decision to pursue or forego any and all administrative appeals, proceedings, hearings and conferences with any Tax Authority, or to pay the Tax claimed, sue for a refund or contest the disputed Tax in any legally permissible manner; provided, however, that Seller shall not take any position with respect to any of the foregoing that would reasonably be expected to have an adverse effect on Buyer without consultation with and prior written consent of Buyer. In lieu of such consent, Buyer shall have the right to participate in such Tax Proceedings with counsel of its choosing and at its expense. Buyer shall control Tax Proceedings relating to the Taxes covered by Section 10.2 and the Tax Returns related thereto; provided, however, that Seller, upon timely notification to Buyer, may elect to participate in such Tax Proceedings with counsel of its choosing and at its expense. In the event that Seller does not elect to participate in such Tax Proceedings, Buyer shall keep Seller apprised of all major developments with respect to such Tax Proceedings and shall not settle the claims or assessments that are the subject of such Tax Proceedings without the prior written consent of Seller, which consent shall not be unreasonably withheld or delayed.

        10.5.    Certain Taxes.    All state deed tax incurred in connection with this Agreement or the Transaction shall be paid by Seller when due, and all transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement or the Transaction shall be paid one-half by the Buyer and one-half by the Seller, when due, and the parties shall cooperate in the filing of all necessary Tax Returns and other documentation with respect to all such state deed tax, transfer, documentary, sales, use, stamp, registration and other such Taxes and fees, and, if required by Legal Requirements, the parties shall, and shall cause their Affiliates to, join in the execution of any such Tax Returns and other documentation.

        10.6.    Refunds.    Any refund or credit, including any interest actually received with respect thereto, (a) relating to Taxes that are Excluded Liabilities will be the property of Seller, and if received by Buyer, will be paid over to Seller within a reasonable time, and (b) relating to Taxes paid after the Closing Date will be the property of Buyer, and if received by Seller will be paid over to Buyer within a reasonable time. In the case of any refunds or credits attributable to Taxes prorated pursuant to Section 10.2 of this Agreement, such refunds or credits shall be allocated between Seller and Buyer in proportion to the amount of Tax paid by each party to which such refunds or credits relate.

ARTICLE 11
MISCELLANEOUS

        11.1.    Public Announcements.    Except as may otherwise be mutually agreed to by Seller and Buyer: (i) the terms of this Agreement shall not be disclosed or otherwise made available to the public, (ii) no party shall make, or cause or permit to be made by any of such party's Affiliates, any press release, public announcement or announcement to any third party or otherwise communicate with any news media or any third party in respect of this Agreement or the transactions contemplated by this Agreement, and (iii) copies of this Agreement shall not be publicly filed or otherwise made available to the public, except, in each case, where such disclosure, availability or filing is required by (x) applicable Legal Requirements or (y) GAAP in preparation of financial statements, and then only to the extent required by such Legal Requirements or GAAP. Nothing herein shall prevent any party from responding to direct inquiry regarding the Transaction received from any Government Entity. Further,

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each party will be permitted, after written notice and consultation with the other party, to correct any false or misleading information which may become public concerning the Transactions.

        11.2.    Transaction Expenses.    Buyer, on the one hand, and Seller, on the other hand, will each bear their own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the Transaction. Buyer and Seller shall each pay one-half the filing fees and costs required under the HSR Act.

        11.3.    Amendments.    No amendment, modification or waiver of this Agreement will be effective unless made in writing and signed by the party to be bound thereby. No other course of dealing between or among any of the parties or any delay in exercising any rights pursuant to this Agreement will operate as a waiver of any rights of any party.

        11.4.    Successors and Assigns.    All covenants and agreements set forth in this Agreement will bind and inure to the benefit of the respective successors and permitted assigns of the parties. No party may assign this Agreement nor any of its rights, interests or obligations hereunder without the prior written consent of the other parties, provided, however, that Buyer may assign any or all of its rights, interests and obligations hereunder: (i) to one or more of its Affiliates; (ii) for collateral security purposes to any lender providing financing to Buyer or any of its Affiliates and any such lender may exercise all of the rights and remedies of Buyer hereunder; and (iii) to any subsequent purchaser of Buyer, or any material portion of its assets (whether such sale is structured as a sale of equity, a sale of assets, a merger or otherwise).

        11.5.    Governing Law.    This Agreement will be governed by and construed in accordance with the laws of the State of Minnesota, without giving effect to any choice of law or conflict provision or rule (whether of such State or any other jurisdiction) that would cause the laws of any other jurisdiction to be applied.

        11.6.    Jurisdiction.

        (a)   Each party irrevocably submits to the jurisdiction of: (a) the state courts located in the State of Minnesota and (b) the United States District Court for the District of Minnesota, for the purposes of any action or proceeding arising out of this Agreement or the Transaction. Each party further agrees that service of any process, summons, notice or document by U.S. registered mail to such party's respective address set forth in Section 11.8 shall be effective service of process for any action or proceeding in the State of Minnesota with respect to any matters to which it has submitted to jurisdiction in this Section 11.6. Each party irrevocably and unconditionally waives any objection to the laying of venue of any proceeding arising out of this Agreement or the Transaction in (i) a state court located in the State of Minnesota, or (ii) a United States District Court located in the State of Minnesota, and hereby and thereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum.

        (b)   EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (II) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF

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SUCH WAIVERS, (III) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (IV) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.6(b).

        11.7.    Service of Process.    Each party irrevocably consents to the service of process outside the territorial jurisdiction of the courts referred to in Section 11.6 in any such proceeding by mailing copies thereof by registered United States mail, postage prepaid, return receipt requested, to its address as specified in or pursuant to Section 11.8. However, the foregoing shall not limit the right of a party to effect service of process on the other party by any other legally available method.

        11.8.    Notices.    All demands, notices, communications and reports provided for in this Agreement will be in writing and will be sent by facsimile with confirmation to the number specified below, personally delivered, sent by reputable overnight courier service (delivery charges prepaid), or sent by registered or certified mail (postage prepaid) to the address specified below, or at such address as the recipient party has specified by prior written notice to the sending party pursuant to the provisions of this Section 11.8.

        If to Seller:

Heron Lake BioEnergy, LLC
91246 390th Avenue
Heron Lake, MN 56137
Attn: Chief Executive Officer
Facsimile No.: 507-793-0078

        with a copy to:

Lindquist & Vennum PLLP
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Attention: Michael Weaver
Facsimile No.: 612-371-3285

        If to Buyer:

Guardian Energy Heron Lake, LLC
4745 380th Avenue
Janesville, MN 56048
Attention: Don Gales
Facsimile No.: (507) 234-5011

        with a copy to:

Leonard, Street and Deinard, P.A.
150 South Fifth Street Suite 2300
Minneapolis, MN 55402
Attention: Jill R. Radloff
Facsimile No.: (612) 335-1657

Any such demand, notice, communication or report will be deemed to have been given pursuant to this Agreement when delivered personally, when confirmed if by facsimile, on the second Business Day after deposit with a reputable overnight courier service, or on the fifth Business Day after being sent by registered or certified mail, as the case may be.

        11.9.    Schedules and Exhibits.    The exhibits and schedules to this Agreement constitute a part of this Agreement and are incorporated into this Agreement for all purposes as if fully set forth herein.

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The Disclosure Schedule includes references to the particular section of the Agreement that relates to each disclosure. Any disclosure which may be applicable to another section of this Agreement will be deemed to be made with respect to such other section only if reasonably apparent from the face of such disclosure, regardless of whether or not a specific cross reference is made thereto; provided, however, that no disclosure will be deemed adequate to disclose an exception to a representation or warranty unless the disclosure identifies the exception with reasonable particularity and describes the relevant facts in reasonable detail.

        11.10.    Counterparts; Electronic Transmission of Signatures.    This Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed to be an original and all of which counterparts, taken together, will constitute but one and the same instrument. Delivery of an executed counterpart of this Agreement by facsimile or e-mail of a PDF file will be equally as effective as delivery of an original executed counterpart of this Agreement.

        11.11.    No Third Party Beneficiaries.    Except as otherwise expressly provided in this Agreement, no Person which is not a party will have any right or obligation pursuant to this Agreement.

        11.12.    Headings.    The headings used in this Agreement are for the purpose of reference only and will not affect the meaning or interpretation of any provision of this Agreement.

        11.13.    Entire Agreement.    This Agreement (including the exhibits and schedules referred to herein) along with the Confidentiality Agreement and the other Transaction Documents constitute the entire agreement of the parties relating to the subject matter hereof, and all other prior understandings, whether written or oral are superseded by this Agreement, and all other prior understandings, and all related agreements and understandings are terminated.

        11.14.    Severability.    In case any one or more of the provisions contained in this Agreement are held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision of this Agreement.

        11.15.    Construction.    The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the parties and no presumption or burden of proof will arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

        11.16.    Exclusive Remedy.

        (a)   Buyer and Seller acknowledge and agree that, if the Closing occurs, the indemnification provisions of Article 8 and the provisions of the Escrow Agreement shall be the sole and exclusive remedies of the parties hereto for any obligations or liabilities under this Agreement or any other Transaction Document or for any claim (whether in contract or tort, in law or in equity or otherwise), liability or any other obligation arising under, based on, in respect of, in connection with, or by reason of, this Agreement or the Transaction, including its negotiation and/or execution; provided, however, that nothing contained in this Agreement or any other Transaction Document shall relieve or limit the liability of any party from any liability or Damages arising out of or resulting from such party's fraud or willful misconduct in connection with the Transactions, or a breach by Seller of the warranties of title to the Real Property contained in the Deed; and provided further, that to the extent Seller has any Directors' and Officers' insurance policy that would provide coverage to Buyer or its Affiliates for any Liability related to any claim or action by a member of Seller regarding this Agreement, any other Transaction Document, or the Transaction, then nothing herein shall prevent Buyer or its Affiliates from making a claim against such coverage.

        (b)   Notwithstanding anything herein to the contrary, if any of the provisions of this Agreement or any of the other Transaction Documents are not performed in accordance with their terms or are otherwise breached, the parties shall be entitled to specific performance of the terms thereof in addition to any other remedy at law or in equity.

* * * * *

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        IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

BUYER:			SELLER:
GUARDIAN ENERGY HERON LAKE, LLC			HERON LAKE BIOENERGY, LLC
By:	/s/ DONALD GALES		By:	/s/ ROBERT J. FERGUSON
	Name:	Don Gales		Name:	Robert J. Ferguson
	Title:	Chief Executive Officer		Title:	Chief Executive Officer

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EXHIBITS AND SCHEDULES

[The following exhibits and schedules are omitted from the copy of this agreement as filed with the Securities and Exchange Commission, but will be furnished supplementally by Heron Lake BioEnergy, LLC to the Commission upon request:

Exhibit A	Bill of Sale
Exhibit B	Escrow Agreement
Exhibit C	Net Working Capital
Exhibit D	Warranty Deed and Certificate of Real Estate Value

Schedules

1.1	Other Acquired Assets
1.2	Acquired Contracts
1.3	Assumed Debt
1.4	Assumed Liabilities
1.5	Excluded Assets
1.6	Excluded Contracts
1.7	Permitted Liens
1.8	Tangible Personal Property
2.3(b)(i)	Debts and Liens
3.1	Authorizations (Seller)
3.2(b)(iii)	Noncontravention (Seller)
3.2(b)(v)	Third Party Consents (Seller)
3.4	Capitalization (Seller)
3.5	Subsidiaries (Seller)
3.8	Subsequent Events (Seller)
3.10	Compliance with Laws (Seller)
3.11(e)	Types of Taxes Paid (Seller)
3.12(a)	Environmental Matters
3.12(b)	Environmental Reports
3.12(c)	Environmental Hazards
3.13(a)	Intellectual Property—Not Owned
3.13(c)	Intellectual Property—Business
3.14(a)	Real Property
3.14(b)	Real Property—Other Exceptions
3.14(d)	Real Property—Other Encumbrances
3.15	Litigation
3.16(a)	Employee Benefit Plans
3.16(d)	Employee Payables
3.17	Insurance
3.18(a)	Contracts
3.20	Affiliate Transactions
3.21	Inventory
3.22	Permits and Licenses (Seller)
3.23	"AS-IS" Tangible Assets
3.26	Customers and Suppliers
3.27	Vehicles
5.1(e)	Permits and Licenses (Buyer)
5.1(f)	Required Third-Party Consents (Seller)
5.1(l)	Schedule of Principles for Gavilon Documents Pricing
6.2(a)	Capital Expenditures
6.8	Notices and Reports
7.9(a)(i)	Assignment of Acquired Contract]

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QuickLinks

Exhibit 2.2

ASSET PURCHASE AGREEMENT
BACKGROUND
ARTICLE 1 DEFINITIONS
ARTICLE 2 PURCHASE AND SALE OF ACQUIRED ASSETS
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER
ARTICLE 5 CONDITIONS TO THE CLOSING
ARTICLE 6 COVENANTS OF SELLER PENDING CLOSING
ARTICLE 7 COVENANTS
ARTICLE 8 SURVIVAL AND INDEMNIFICATION
ARTICLE 9 TERMINATION
ARTICLE 10 TAX MATTERS
ARTICLE 11 MISCELLANEOUS
EXHIBITS AND SCHEDULES

EX-2.3

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Exhibit 2.3

PLAN OF LIQUIDATION AND DISSOLUTION
OF
HERON LAKE BIOENERGY, LLC

        This Plan of Liquidation and Dissolution (this or the "Plan"), is intended to accomplish the dissolution, winding up and termination of Heron Lake BioEnergy, LLC., a Minnesota limited liability company (the "Company"), in accordance with the applicable provisions of the Minnesota Limited Liability Company Act, Chapter 322B, of Minnesota Statutes (the "Act").

        1.     Approval of Dissolution pursuant to the Plan. The dissolution of the Company pursuant to the Plan shall be adopted by the Company and effective when all of the following conditions have been satisfied:

        (a)   Approval of the Dissolution of the Company pursuant to the Plan by the Company's Members. The Company's members shall have approved the dissolution of the Company pursuant to this Plan by the affirmative vote of members holding a majority of the voting power of the outstanding units of the Company entitled to vote thereon at a special meeting of the members of the Company called for such purpose by the Board. The date of such member approval is referred to in this Plan as the "Approval Date."

        (b)   Consummation of the Asset Sale. The Plan shall be effective upon the consummation of the asset sale pursuant to asset purchase agreement we entered into with Guardian Energy Heron Lake, LLC on January 22, 2013 (the "Asset Purchase Agreement"), pursuant to which we agreed, subject to the approval of our members, to, among other things, sell substantially all of the operating assets of the Company and its subsidiaries to Guardian, excluding the Company's cash, the Company's equity interest in its wholly-owned subsidiary Lakefield Farmers Elevator, LLC or any of the elevator assets in Lakefield and Wilder, Minnesota owned by Lakefield Farmers Elevator, LLC, and other excluded assets (the "Asset Sale").

        (c)   Asset Sale Contingency. The dissolution of the Company is contingent upon the Asset Sale. If members do not approve the Asset Sale, the Company will not count the votes at the member meeting relating to the dissolution, the dissolution of the Company will not be approved and this Plan will not be effective or implemented. Likewise, if the Asset Sale proposal is approved by members, but the Asset Sale does not close for any reason, the dissolution of the Company and this Plan will not become effective or be implemented.

        2.     Dissolution and Liquidation Period. Once the dissolution and the Plan become effective (the "Effective Date"), the steps set forth below shall be completed at such times as the Board of Governors of the Company (the "Board"), in its absolute discretion, deems necessary, appropriate or advisable:

        (a)   the Company shall file a Notice of Dissolution of the Company (the "Notice of Dissolution") pursuant to the Act specifying the date on which the dissolution was approved;

        (b)   the Company shall cease to carry on its business, except to the extent necessary for the winding up of the business of the Company;

        (c)   the members of the Company shall retain the right to revoke the dissolution in accordance with Section 322B.823 of the Act;

        (d)   the Company shall give notice to creditors and claimants under Section 322B.816 of the Act or proceed under Section 322B.82 of the Act;

        (e)   the Company shall collect or make provision for the collection of all known debts due or owing to the Company;

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        (f)    except as provided in Sections 322B.816, 322B.82, and 322B.863, the Company shall pay or make provision for the payment of all known debts, obligations, and liabilities of the Company according to their priorities under Section 322B.873;

        (g)   the Company may sell, lease, transfer, or otherwise dispose of all or substantially all of the property and assets of the Company remaining after the Asset Sale; and

        (h)   the Company shall take all other actions required or permitted under Section 322B.80 of the Act to wind up and terminate the Company.

Without limiting the generality of the foregoing, the Board may instruct the officers of the Company to delay the taking of any of the foregoing steps until the Company has performed such actions as the Board or such officers determine to be necessary, appropriate or advisable for the Company to maximize the value of the Company's assets upon liquidation; provided, that such steps may not be delayed longer than is permitted by applicable law.

        3.     Authority of Officers and Governors.

        (a)   After the Effective Date, the Board and the officers of the Company shall continue in their positions for the purpose of winding up the business of the Company and terminating the Company as contemplated by the Act and the Member Control Agreement of the Company. The Board may appoint officers, hire employees and retain independent contractors and advisors in connection with the winding up process, and is authorized to pay to the Company's officers, governors and employees, or any of them, in accordance with their regular compensation, in money.

        (b)   Approval of the dissolution pursuant to the Plan shall constitute the grant of full and complete authority by the Company's members to the Board and the officers of the Company, without further member action, to do and perform any and all acts and to make, execute and deliver any and all agreements, conveyances, assignments, transfers, certificates and other documents of any kind and character that the Board or such officers deem necessary, appropriate or advisable (i) to dissolve, wind up and terminate the Company in accordance with the laws of the State of Minnesota and cause its withdrawal from all jurisdictions in which it is authorized to do business, (ii) to proceed with the Asset Sale, (iii) to satisfy or provide for the satisfaction of the Company's obligations in accordance with the Act, (iv) to prepare and give such notices and make such filings under federal and state securities laws as may be required to reflect this Plan, and (v) to distribute any properties and assets of the Company and all remaining funds to the members of the Company in accordance with the Act and the Member Control Agreement.

        4.     Conversion of Assets Into Cash and/or Other Distributable Form.

        (a)   Subject to consummation of the Asset Sale, the officers, employees and agents of the Company shall, as promptly as feasible, proceed to (i) collect all sums due or owing to the Company, (ii) sell and convert into cash and/or other distributable form all the remaining assets and properties of the Company, if any, and (iii) out of the assets and properties of the Company, pay, satisfy and discharge or make adequate provision for the payment, satisfaction and discharge of all debts and liabilities of the Company pursuant to Section 2 above, including all expenses of the sales of assets and of the dissolution and liquidation provided for by the Plan.

        5.     Professional Fees and Expenses.

        (a)   The Board is expressly authorized to make provision for the payment of legal, accounting and other professional fees and expenses of the Company incurred in connection with the dissolution, winding up and termination of the Company.

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        (b)   In addition, in connection with and for the purpose of implementing and assuring completion of this Plan, the Company may, in the sole and absolute discretion of the Board, pay any brokerage, agency and other fees and expenses of persons rendering services, including accountants and tax advisors, to the Company in connection with the collection, sale, exchange or other disposition of the Company's property and assets and the implementation of this Plan.

        6.     Indemnification. The Company shall continue to indemnify and advance expenses to its officers, directors, employees and agents in accordance with its Member Control Agreement and any contractual arrangements for actions taken in connection with this Plan and the winding up of the business of the Company and termination of the Company. The Board, in its sole and absolute discretion, is authorized to obtain and maintain directors' and officers' liability insurance and any other insurance as may be necessary, appropriate or advisable to cover the Company's obligations.

        7.     Liquidating Distributions.

        (a)   If the Asset Sale is consummated, liquidating distributions, if any, shall be made from time to time after the filing of the Notice of Dissolution to the members of record, at the close of business on the Effective Date, in accordance with the Act and the Member Control Agreement; provided that in the opinion of the Board adequate provision has been made for the payment, satisfaction and discharge of all known, unascertained or contingent debts, obligations and liabilities of the Company (including costs and expenses incurred and anticipated to be incurred in connection with the sale and distribution of assets and liquidation of the Company). Liquidating distributions shall be made in cash or, following liquidating distributions of cash, in kind, as determined necessary or advisable by the Board. Such distributions may occur in a single distribution or in a series of distributions, in such amounts and at such time or times as the Board in its absolute discretion, and in accordance with the Act may determine; provided, however, that the Board shall use its best commercially reasonable efforts to cause the Company to complete the distribution of all its properties and assets to its members as provided in this Section 7 as soon as practicable following the filing of its Notice of Dissolution and in any event on or before December 31, 2013 (the "Final Distribution Date").

        (b)   If and to the extent deemed necessary, appropriate or desirable by the Board in its absolute discretion, the Company may establish and set aside a reasonable amount of cash and/or property to satisfy claims against the Company and its subsidiaries and other obligations of the Company and its subsidiaries (a "Contingency Reserve"), including (i) tax obligations, (ii) all expenses of the sale of the Company's property and assets, (iii) the salary, fees and expenses of members of the Board, management and employees, (iv) expenses for the collection and defense of the Company's property and assets, (v) the expenses described in Section 5 above and (vi) all other expenses related to the dissolution and liquidation of the Company and the winding-up of its affairs. Any unexpended amounts remaining in a Contingency Reserve shall be distributed to the Company's stockholders no later than the Final Distribution Date.

        (c)   As provided below, distributions made pursuant to the Plan shall be treated as made in complete liquidation of the Company within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder. The approval of the dissolution pursuant to the Plan by the members shall constitute full and complete authority for the making by the Board of all distributions contemplated in this Section 7(c).

        8.     Liquidating Trusts. The Board may, but is not required to, establish a Liquidating Trust (the "Liquidating Trust") and distribute assets of the Company to the Liquidating Trust. The Liquidating Trust may be established by agreement with one or more trustees selected by the Board. If the Liquidating Trust is established by agreement with one or more trustees, the trust agreement establishing and governing the Liquidating Trust shall be in form and substance determined by the Board. The trustees shall in general be authorized to take charge of the Company's property, and to

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sell and convert into cash or other distributable form any and all corporate non-cash or non-distributable assets and collect the debts and property due and belonging to the Company, with power to prosecute and defend, in the name of the Company, or otherwise, all such suits as may be necessary or proper for the foregoing purposes, and to appoint an agent under it and to do all other acts which might be done by the Company that may be necessary, appropriate or advisable for the final settlement of the unfinished business of the Company.

        9.     Revocation of Dissolution. If for any reason the Board determines that such action would be in the best interests of the Company, it may submit a revocation of dissolution vote to the members; provided, however, that the Board shall not abandon the Plan following the filing of the Notice of Dissolution without first obtaining the approval of members holding a majority of the voting power of the outstanding units entitled to vote at a special meeting or annual meeting of the members of the Company called for such purpose by the Board. The dissolution and the winding up proceedings commenced under the Plan may be revoked before the filing of articles of termination by the affirmative vote of members holding a majority of the Company's outstanding Units entitled to vote, at a members' meeting held for the purpose of considering the revocation of the dissolution. Written notice of the meeting stating that the purpose of the meeting is to consider the advisability of revoking the dissolution must be provided to each member entitled to vote in accordance with our Member Control Agreement and the Minnesota Limited Liability Company Act. If revocation of the dissolution is approved, the revocation will be effective upon filing a notice of revocation with the Minnesota Secretary of State. Upon the revocation of dissolution, the Plan shall be void.

        10.   Cancellation of Unit Certificates.

        (a)   After known liabilities of the Company have been paid to the full extent possible and the remaining assets of the Company, if any, have been distributed to the unit holders, the unit holders shall surrender any and all certificates representing the units of the Company and shall have no further rights against the Company, whether arising out of each unit holder's status as a unit holder or as a creditor of the Company.

        (b)   On or after the close of business on the Effective Date, subject to applicable law, (i) each holder of class A units of the Company shall cease to have any rights in respect thereof other than to receive distributions (if any) in accordance with this Plan, and (ii) the Company's unit transfer books shall be closed and the Company's units and unit certificates evidencing the Company's units will be treated as no longer being outstanding.

        11.   Liquidation under Internal Revenue Code. It is intended that this Plan shall be a plan of complete liquidation of the Company in accordance with the terms of subchapter K of the Code. The Plan shall be deemed to authorize the taking of such action as, in the opinion of counsel to the Company, may be necessary to conform with the provisions of those Sections and the regulations promulgated thereunder.

        12.   Filing of Tax Forms. The officers of the Company are authorized and directed to execute and file such forms and reports with the Internal Revenue Service as may be necessary or appropriate in connection with this Plan and the carrying out thereof.

        13.   Defined Term. In this Plan "including" shall mean "including, without limitation."

**As approved by the
Board of Governors on
January 22, 2013.

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QuickLinks

Exhibit 2.3

PLAN OF LIQUIDATION AND DISSOLUTION OF HERON LAKE BIOENERGY, LLC

EX-10.52

EXHIBIT 10.52

AMENDED AND RESTATED FORBEARANCE AGREEMENT

THIS AMENDED AND RESTATED FORBEARANCE AGREEMENT (the “Agreement”) is made as of this 22nd day of January, 2013 (“Effective Date”), between HERON LAKE BIOENERGY,  LLC, a Minnesota limited liability company (“HLBE”) and AGSTAR FINANCIAL SERVICES, PCA, an United States instrumentality (“AgStar”).

RECITALS

A.HLBE is indebted to AgStar under an Amended and Restated Term Note dated September 1, 2011, in the principal amount of $40,000,000.00 (“Note 1”), and an Amended and Restated Term Revolving Note dated September 1, 2011, in the principal amount of $8,008,689.00 (“Note 2,” and together with Note 1, the “Notes”).  The loans extended to HLBE and evidenced by the Notes are referred to herein collectively as the “Loans.”

B.HLBE’s obligations to AgStar are further evidenced by the Fifth Amended and Restated Master Loan Agreement dated to be effective as of September 1, 2011, (the “MLA”).

C.The Loans were made by AgStar to HLBE for the purpose of constructing and operating an ethanol production facility in or near Heron Lake, Minnesota (the “Project”).

D.As collateral for the Notes, HLBE has granted to AgStar (among other things):

(i)a Mortgage, Security Agreement and Assignment of Rents and Leases dated September 29, 2005 and recorded in the Office of the County Recorder of Jackson County on September 30, 2005, as Instrument No. 244879; as amended and restated by that certain Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated November 20, 2006 and recorded in the Office of the County Recorder of Jackson County on December 6, 2006 as Instrument No. 248498; and further amended by that certain Second Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated December 27, 2006 and recorded in the Office of the County Recorder of Jackson County on December 27, 2006 as Instrument No. 248658; and further amended by that certain Third Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated May 18, 2007 and recorded in the Office of the County Recorder of Jackson County on June 4, 2007 as Instrument No. A 250019; and further amended by that certain Fourth Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated September 1, 2011, recorded in the Office of the County Recorder of Jackson County on September 8, 2011 as Document No. A262710; and further amended by that certain Fifth Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated September 20, 2011, recorded in the Office of the County Recorder of Jackson County on September         , 2011 as Document No.                               , (collectively, the “Mortgage”) under

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which AgStar has a lien in certain real property in Jackson County, Minnesota, as further described in the Mortgage (the “Real Property”);

(ii)security interests in all of the assets of HLBE, including without limitation, inventory, chattel paper, accounts, equipment, general intangibles, deposit accounts, and commodity accounts, (collectively, the “Collateral”) pursuant to the provisions of a Security Agreement dated September 29, 2005 (the “Security Agreement”);

(iii)collateral assignments of all material contracts related to the Project, including, without limitation, construction agreements, ethanol and distillers grains marketing agreements, grain procurement contracts and coal supply and transport agreement (collectively, the “Assignments”); and

(iv)unconditional continuing guarantees from Lakefield Farmers Elevator, LLC and HLBE Pipeline Company, LLC (as amended and restated from time to time, the “Guarantees”).

E.The MLA, Notes, Mortgage, Security Agreement, Assignments, Guarantees and all other documents evidencing the obligations of HLBE under the Loans are referred to in this Agreement as the “Loan Documents.”  All capitalized terms not otherwise defined in this Agreement shall have the meaning attributed to such terms in the Loan Documents.

F.HLBE has failed to make the required monthly installment of principal required by the Notes on December 1, 2012 and January 1, 2013.  HLBE will not make the required monthly installment of principal required by the Notes on February 1, 2013.  HLBE has also failed to maintain the financial covenants of Section 5.01(d), (e) and (g) of the MLA.  On account of such defaults, AgStar has the right to declare the Notes fully and immediately due and payable without defense or right of setoff.

G.HLBE has entered into an Asset Purchase Agreement dated as of January 3, 2013, by which Lakefield Farmers Elevator, LLC, the wholly-owned subsidiary of HLBE, has proposed to sell substantially all of the real property and personal property used in connection with the operation of its grain storage and handling facilities to FCA Co-op (the “Elevator APA”).

H.HLBE has entered into an Asset Purchase Agreement of even date by which it has proposed to sell substantially all of the real property and personal property used in connection with the operation of its ethanol production facility to Guardian Energy Heron Lake, LLC, or an affiliated entity (the “Ethanol Plant APA”).

I.HLBE and AgStar previously entered into a Forbearance Agreement dated December 21, 2012 (the “Forbearance Agreement”) which required entry into an Asset Purchase Agreement with Guardian for the sale and purchase of the ethanol plant by January 10, 2013, and closing of the transaction by January 31, 2013.

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J.As of December 1, 2012, the outstanding principal balance of the indebtedness evidenced by the Notes was as follows: Note 1 $36,360,313.29 ($18,147,173.06 variable interest rate portion, and $18,213,140.23 fixed interest rate portion), and Note 2 $4,211,163.01.

K.Interest continues to accrue on the Notes at the Default Rate of interest set forth in the MLA and the Notes.  In addition, on account of the failure of HLBE to comply with the terms of the MLA and the Notes, AgStar is entitled to collect from HLBE the late charges set forth in the MLA and the Notes, and to recover from HLBE its costs and expenses, including reasonable attorney fees incurred in connection with the negotiation and execution of this Agreement and the compliance by HLBE with its terms.

L.HLBE has requested AgStar extend the Forbearance Agreement and forbear from exercising its legal and contractual rights and remedies provided in the Loan Documents and by applicable law from the date of this Agreement until February 28, 2013 (the “Forbearance Period”) in order to permit HLBE to close on the transactions contemplated by the Ethanol Plant APA and the Elevator APA.  AgStar has agreed to do so subject to the terms and conditions set forth in this Agreement and in lieu of AgStar exercising its rights under the Loan Documents, including, but not limited to, the right to foreclose the real estate mortgages and security agreements and to obtain the appointment of a receiver pursuant to applicable law.

AGREEMENT

NOW, THEREFORE, in consideration of the facts set forth in these Recitals, which the parties agree are true and correct, and in consideration of the mutual covenants and agreements set forth in this Agreement, the parties hereto agree as follows:

1.Acknowledgment of Default.  HLBE acknowledges due execution and delivery of the Loan Documents and agrees and acknowledges that the same are valid and enforceable by AgStar against HLBE in accordance with their terms.  HLBE acknowledges that it is in default under the MLA, Notes and other Loan Documents and that, as a result of such defaults, AgStar is entitled to declare that the indebtedness evidenced by the Loan Documents due and owing without any claims, defenses, counterclaims, offsets, and/or cross-complaints, or demands of any kind or nature whatsoever.

2.Acknowledgment of Debt.  HLBE acknowledges that the principal balances owed AgStar and evidenced by the Notes as of December 1, 2012, are as set forth in the Recitals set forth above.  In addition to the outstanding principal balances, interest will continue to accrue on such indebtedness and AgStar has incurred, and will continue to incur, costs and legal expenses as a result of HLBE’s defaults under the Loan Documents which amounts are, in accordance with the terms of the Loan Documents, due and payable by HLBE.

3.[Reserved].

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4.Sale of Assets.  HLBE agrees to use its best commercial efforts to close on the sale of it substantially all of its assets pursuant to the terms of the Ethanol Plant APA and the Elevator APA.  HLBE further agrees that it shall use the proceeds received by it upon the closing of the transactions contemplated under the Elevator APA and the Ethanol Plant APA, to pay the costs associated with the closing of such transactions; second, to pay the costs, fees and expenses or incurred by, or due to AgStar under or related to this Agreement; third, to pay all late charges and other costs, fees and expenses due under the MLA, Notes and other Loan Documents; and finally to repay the outstanding principal balance and accrued interest under the Notes, in such order and manner as AgStar shall determine in its sole and absolute discretion.

5.Interest Rates and Payments Pending Closing.  The parties agree that the Loans shall accrue interest and be repaid in accordance with the following terms:

a.Interest.  Interest shall continue to accrue on the unpaid principal balance of the Notes at the rates provided in the Loan Documents (including, as applicable, interest at the Default Rate specified in the Loan Documents).

b.Payments.  Prior to closing on the transactions contemplated by the Ethanol Plant APA and the Elevator APA, HLBE shall pay to AgStar all regularly scheduled periodic payments of interest required under the MLA and Notes on each Monthly Payment Date.

6.Advances on Term Revolving Loan.  Notwithstanding any provisions contained in the MLA, advances pursuant to Note 2 shall only be advanced to HLBE for the purpose of funding normal operating expenses pending the closing of the transactions contemplated by the Ethanol Plant APA and Elevator APA, including the payment of interest to AgStar in accordance with paragraph 5.  Such advances will be available and shall not exceed (i) $500,000.00 previously advanced upon AgStar’s receipt of the Elevator APA on January 3, 2013;  and (ii) $1,750,000.00 upon AgStar’s receipt of the Ethanol Plant APA. Any request for advances on Note 2 shall further be subject to the terms and conditions set forth in the MLA.  No advances will be made by AgStar on Note 2 after February 28, 2013.

7.Conditions Precedent.  As conditions precedent to AgStar’s agreements under this Agreement, the following agreements, documents, and other items shall have been executed and/or delivered to AgStar, and the following events shall have occurred:

a.Execution and Delivery of Agreement.  HLBE shall have executed and delivered to AgStar this Agreement and any other documents and agreements ancillary or incident hereto.

b.Other Documentation.  HLBE shall have obtained and delivered to AgStar any and all further documentation reasonably requested by AgStar.

4

c.Fees.  HLBE shall have paid to AgStar a waiver and forbearance fee in the amount of $10,000.00, and all other costs and expenses incurred by AgStar in connection with the preparation, negotiation and execution of this Agreement, including, without limitation, reasonable attorneys’ fees.

8.Distributions Pending Closing.  Notwithstanding any provisions contained in the Loan Documents to the contrary, HLBE shall not make, or cause to be made, any Distributions prior to the closing of the transactions contemplated by the Ethanol Plant APA and the Elevator APA.

9.Representations and Warranties of HLBE.  HLBE represents and warrants to AgStar that the statements contained in this Section 9 are correct and complete as of the date of this Agreement.

a.Organization and Good Standing.   HLBE is a limited liability company duly organized and validly existing and in good standing under the laws of the State of Minnesota and qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary.  HLBE has the power and authority to own and operate its assets and to carry on its business and to execute, deliver, and perform its obligations under this Agreement.

b.Authorization of Transactions.  HLBE has full power and authority, corporate or otherwise, to enter into and perform its obligations under this Agreement.  This Agreement and the ancillary agreements attached to this Agreement as Exhibits constitute valid and legally binding obligations of the parties hereto and thereto, as applicable, enforceable in accordance with their respective terms and conditions.

c.Noncontravention.  Neither the execution and the delivery of this Agreement or the ancillary documents attached to this Agreement as Exhibits to which HLBE is a party, nor the consummation of the contemplated transactions will (a) violate any law, order or regulation to which HLBE is subject; (b) violate any provision of the governing documents of HLBE; or (c) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which HLBE is a party or is bound or to which any of such HLBE’s assets are subject.

d.Broker Fees.  HLBE has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which AgStar could become liable or obligated.

e.Legal Compliance; Litigation.  HLBE has complied with all applicable laws, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed, commenced or alleged against it.  There are no pending or threatened claims, actions, suits, proceedings, hearings or investigations affecting HLBE or its assets.  HLBE is not operating under or

5

subject to, or in default with respect to, any order, writ, injunction or decree of any court or governmental agency.

f.Enforceability.  This Agreement is, and each of the ancillary documents attached to this Agreement as an exhibit are, or when delivered will be, legal, valid and binding obligations of HLBE set forth in such ancillary documents enforceable against such HLBE in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditor’s rights generally and by general principles of equity.

g.Environmental.

(i)to HLBE’s knowledge, the current business operations of HLBE comply with, and are not subject to any claim or order concerning environmental, health or safety matters (“Environmental Laws”), and HLBE has received no notice, either written or to any HLBE’s knowledge otherwise, alleging that the activities of the business are in violation of any Environmental Laws.

(ii)to HLBE’s knowledge, there has been no release of any hazardous substances that requires reporting under applicable Environmental Laws at, on or under any of the Real Property, and none of such properties has been used by any person as a landfill or storage, treatment or disposal site for any type of hazardous substance or non-hazardous solid wastes as defined under the Resource Conservation and Recovery Act of 1976, as amended.

(iii)HLBE has obtained all permits needed for the ownership of its assets and operation of the business of HLBE as currently operated under applicable Environmental Laws; HLBE is in compliance with all material conditions of such permits; the permits have not expired, and HLBE has timely applied to renew all such Permits.  There is no proceeding pending or, to HLBE’s knowledge, threatened that would reasonably be expected to result in the termination, revocation, suspension or restriction of, or the loss of any benefit to which such HLBE would obtain from, any permit needed for the ownership of its assets and operation of the business as currently operated under applicable Environmental Laws or the imposition of any fine, penalty or other sanctions for the violation of any applicable law relating to such Permit.

h.Consents.  No consent approval, authorization or order of any court, governmental agency or body, or third party is required for HLBE to consummate the transactions contemplated by this Agreement.

i.Other Information.  The information concerning HLBE set forth in this Agreement and the schedules and exhibits attached to this Agreement and any

6

statement or certificate of HLBE furnished or to be furnished to AgStar pursuant to this Agreement, does not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated herein or therein or necessary to make the statements and facts contained herein or therein, in light of the circumstances in which they are made, not false or misleading.

10.Acknowledgement of Guarantors.  By signing the Acknowledgement and Agreement of Guarantors attached hereto, each Guarantor, as guarantor of all present and future obligations of HLBE to AgStar, consents and agrees to the terms of this Agreement and acknowledges that all indebtedness arising under the Loan Documents shall continue to constitute obligations guaranteed under each of the Guarantees.  Such confirmation shall not be deemed to limit the terms of any of the Guarantees in any manner.

11.Events of Default.  For purposes of this Agreement, “Event of Default” means (a) any Event of Default under the Loan Documents first occurring after the Effective Date, or at any prior date but regarding which AgStar did not have actual knowledge (excluding Events of Default relating to the matters expressly set forth in this Agreement), or (b) the occurrence of any one or more of the following:

a.Payment Defaults.  HLBE shall fail to pay, when due, any amounts required to be paid hereunder, including any amounts owed on the expiration of the Forbearance Period, provided that failure to make the required monthly installment of principal required by the Notes on February 1, 2013 shall not constitute a payment default hereunder.

b.Nonmonetary Defaults.  HLBE shall fail to observe or perform any covenant, condition, or agreement to be observed or performed by them under this Agreement for a period of five (5) Business Days after written notice, specifying such default and requesting that it be remedied, provided however that no Event of Default shall be deemed to exist if, within said five (5) day period, HLBE has commenced appropriate action to remedy such failure and shall diligently and continuously pursue such action until such cure is completed, unless such cure is or cannot be completed within thirty (30) days after written notice shall have been given.

c.Failure to Close Elevator APA.  HLBE shall fail to close on the transaction contemplated by the Elevator APA pursuant to the terms of the Elevator APA on or before February 28, 2013.

d.Failure to Close Ethanol Plant APA.  HLBE shall fail to close on the transaction contemplated by the Ethanol Plant APA pursuant to the terms of the Ethanol Plant APA on or before March 1, 2013.

e.Bankruptcy.  HLBE shall file a petition in bankruptcy or for reorganization or for an arrangement pursuant to any present or future state or federal bankruptcy law or under any similar federal or state law, or shall have an order for relief pursuant

7

to 11 U.S.C. § 303 entered in any such proceeding brought by any other creditor, or shall make a general assignment for the benefit of their creditors.

f.Creditor Proceedings.  The commencement of foreclosure or other proceeding to obtain possession of the Real Property and/or the Collateral, whether by judicial proceeding, self-help, repossession, garnishment, execution or any other method, by any creditor of HLBE.

g.Weekly Financial Reporting.  HLBE shall fail to deliver to AgStar by 3:00 p.m. (Minneapolis, MN Time) on each Friday during the term of this Agreement: (i) weekly financial and operating reports, including without limitation its statements of cash flows and income statements; (ii) a weekly budget forecast for the operation of the Project; and (iii) such other reports relating to the financial condition or operation of the Project, in each case in a form and substance acceptable to AgStar in its sole discretion.

h.Amendments to APAs. HLBE shall amend, extend, modify or otherwise alter the terms of the Elevator APA or Ethanol Plant APA without the prior written consent of AgStar in its sole discretion.

12.Remedies.  Upon the occurrence of an Event of Default:

a.the entire unpaid balance of the Loans, including all unpaid principal, accrued interest, default charges and costs and expenses incurred by AgStar in connection with the Loans, including attorney fees shall be immediately due and payable by HLBE;

b.AgStar may, in its sole discretion, and without further demand or notice to HLBE, protect and enforce all of its legal, contractual and equitable rights and remedies under the Loan Documents and this Agreement;

c.AgStar may apply all amounts that HLBE has on deposit with AgStar, including, without limitation, all escrowed funds, to the payment of the outstanding principal balance, accrued interest, default charges, and the costs and expenses of collection, including attorneys’ fees, in such order as AgStar may deem appropriate; and

d.[reserved]

e.Each and every power or remedy herein specifically given shall be in addition to every other power or remedy, existing or implied, given now or hereafter existing at law or in equity, and each and every power and remedy herein specifically given or otherwise so existing may be exercised from time to time and as often and in such order as may be deemed expedient by AgStar, and the exercise or the beginning of the exercise of one power or remedy shall not be deemed a waiver of the right to exercise at the same time or thereafter any other power or remedy. No

8

delay or omission of AgStar in the exercise of any right or power accruing hereunder shall impair any such right or power or be construed to be a waiver of any default or acquiescence therein.

13.Waiver and Release.  To the extent any claims or defenses may exist, HLBE, on behalf of themselves and their respective successors and assigns, hereby forever and irrevocably release AgStar and its officers, representatives, agents, attorneys, employees, predecessors, successors, and assigns, from any and all such claims and defenses, whether known or unknown arising out of any acts or omissions occurring prior to the date of this Agreement (including without limitation, those relating to late fees currently outstanding or previously paid), provided that HLBE does not waive any rights afforded it hereunder.

14.Effect of Agreement.  Except as expressly provided in this Agreement, the Loan Documents remain in full force and effect in accordance with their respective terms, and this Agreement shall not be construed to: (i) impair the validity, perfection or priority of any security interest or lien securing the Loans; (ii) waive or impair any rights, powers or remedies of AgStar under the Loan Documents; or (iii) constitute an agreement by AgStar or require it to waive any further defaults by HLBE, grant any forbearance, or otherwise forego the exercise of any rights or remedies under the Loan Documents or applicable law.

15.[Reserved].

16.Further Assurances.  If at any time after the date of this Agreement any further action is necessary or desirable to carry out the purposes of this Agreement and its contemplated transactions, each of the Parties will take such further action (including the execution and delivery of further instruments and documents) as any other Party reasonably may request, all at the sole cost and expense of the requesting Party.

17.Reinstatement.  If notwithstanding the provisions of this Agreement, any transfers made by HLBE pursuant to this Agreement are rescinded, or must otherwise be restored or returned by AgStar, by order of court, to or for the benefit of any HLBE or its legal representative or estate, whether upon any insolvency, bankruptcy, dissolution, liquidation or reorganization of HLBE, or otherwise, then (a) HLBE shall return, to AgStar, any and all transfers made to HLBE, or on HLBE’s behalf, by AgStar hereunder and (b) HLBE’s obligations under the terms of the Loan Documents shall be reinstated, and shall be effective, just as though the releases granted by AgStar in this Agreement had not been made.  As part of such reinstatement (i) the then outstanding indebtedness, including all default interest that would have accrued thereunder and any additional amounts due under the Loan Documents, shall be due and payable in full and (ii) the assets so returned shall remain subject to the Loan Documents including, but not limited to, the perfection and priority of the Loan Documents as of the Closing Date.

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19.Miscellaneous.

a.Recitals Incorporated.  The Recitals set forth at the beginning of this Agreement are deemed incorporated herein, and the parties hereto represent they are true, accurate and correct.

b.Acknowledgement of Distressed Loan Notice.  HLBE acknowledges receipt of notice of its rights under AgStar’s distressed loan program and 12 U.S.C. § 2202a(b) and to request restructuring of their loans under such program.  HLBE acknowledges and agrees that it has not requested restructuring of their respective loans and has elected to enter into this Agreement in lieu of any such restructuring.

c.[reserved]

d.Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

e.Severability.  If any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, such provision shall be severable from the remainder of such agreement and the validity, legality and enforceability of the remaining provisions shall not be adversely affected or impaired thereby and shall remain in full force and effect.

f.Counterparts.  This Agreement may be executed in any number of counterparts, each of which shall be deemed to be one and the same instrument.  The exchange of copies of this Agreement and of signature pages by facsimile transmission shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes.  Signatures of the parties transmitted by facsimile shall be deemed to be their original signatures for all purposes.

g.Entire Agreement.  This Agreement, together with the Exhibits set forth the entire agreement between the parties pertaining to the transactions contemplated by this Agreement.  This Agreement may be amended or modified only by a written instrument signed by the party against which enforcement is sought.

[Remainder of page intentionally blank.  Signature page immediately follows.]

10

IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly executed and delivered as of the date and year first above written.

Dated: January 22, 2013	HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company
	By:	/s/ ROBERT J. FERGUSON
		Its:  CEO
Dated: January 22, 2013	AGSTAR FINANCIAL SERVICES, PCA, a United States instrumentality,
	By:	/s/ MARK SCHMIDT
		Mark Schmidt
		Its:  Vice President

[Signature page to Forbearance Agreement, dated January 22, 2013]

11

ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS

Each of the undersigned hereby (i) acknowledges receipt of the foregoing Forbearance Agreement and acknowledges and agrees that this Acknowledgement is executed by the undersigned in order to induce AgStar to enter into the Debt Settlement Agreement; (ii) consents and agrees to the terms of the Forbearance Agreement and the execution thereof; (iii) reaffirms the undersigned’s obligations to AgStar pursuant to the terms of the Guarantees (as defined in the Forbearance Agreement), (iv) acknowledges that AgStar may amend, restate, extend, renew or otherwise modify the Loan Documents (as defined in the Forbearance Agreement) and any indebtedness or agreement of HLBE, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under the Guarantees for all of HLBE’s present and future indebtedness to AgStar; and (v) acknowledges to and agrees with AgStar that no events, conditions or circumstances have arisen or exist as of the date hereof which would give the undersigned the right to assert a defense, counterclaim and/or setoff to any claim by AgStar for the payment and performance of the obligations of each of such parties under the Guarantees, or to the extent that any such defense, counterclaim and/or setoff exist as of the date hereof, the same are hereby absolutely and forever waived and released.

GUARANTORS:

Dated: January 22, 2013	LAKEFIELD FARMERS ELEVATOR, LLC, a Minnesota limited liability company
	By:	/s/ ROBERT J. FERGUSON
		Its:  President and Chief Manager
Dated: January 22, 2013	HLBE PIPELINE COMPANY, LLC, a Minnesota limited liability company
	By:	/s/ ROBERT J. FERGUSON
		Its:  President and Chief Manager

12

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Robert J. Ferguson, certify that:

1.I have reviewed this Form 10-K of Heron Lake BioEnergy, LLC.

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 13, 2013
	/s/ Robert J. Ferguson
	Robert J. Ferguson
	Chief Executive Officer
	(principal executive officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Michael L. Mattison, certify that:

1.I have reviewed this Form 10-K of Heron Lake BioEnergy, LLC.

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 13, 2013
	/s/ Michael L. Mattison
	Michael L. Mattison
	Chief Financial Officer
	(principal financial officer and principal accounting officer)

EX-32.2

EXHIBIT 32.1

CERTIFICATION

The undersigned certifies pursuant to 18 U.S.C. §1350, that:

(1)	The accompanying Annual Report on Form 10-K for the period ended October 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 13, 2013
	/s/ Robert J. Ferguson
	Robert J. Ferguson
	Chief Executive Officer
	( Principal executive officer )
	/s/ Michael L. Mattison
	Michael L. Mattison
	Chief Financial Officer
	(Principal financial officer and principal accounting officer )

XML

CONCENTRATIONS (Details)	12 Months Ended
	Oct. 31, 2012 customer	Oct. 31, 2011 customer
CONCENTRATIONS
Number of customers to whom all of the ethanol and dry distiller grains sold	1	1
Number Of Major Customers Prior To Change In Marketers	2	2

XML

COMMITMENTS AND CONTINGENCIES (Details) (USD $)	12 Months Ended	1 Months Ended			12 Months Ended					13 Months Ended	0 Months Ended
	Oct. 31, 2012 Natural gas agreements MMBTU	Oct. 31, 2003 Water supply development and distribution agreement gal	Oct. 31, 2003 Water supply development and distribution agreement Assessments payable	May 31, 2006 Water treatment agreement	Oct. 31, 2012 Water treatment agreement	Oct. 31, 2011 Water treatment agreement	Oct. 31, 2010 Water treatment agreement	Oct. 31, 2007 Water treatment agreement Assessments payable	Oct. 31, 2006 Water treatment agreement Assessments payable	Sep. 30, 2012 Ethanol marketing agreement	Sep. 02, 2011 Marketing, corn supply and corn storage agreements	Oct. 31, 2012 Marketing, corn supply and corn storage agreements
COMMITMENTS AND CONTINGENCIES
Term of agreement		15 years		30 years
Initial volume per minute of capacity that is available from the well for which the entity has exclusive rights (in gallons)		600
City's water well bond payments		$ 735,000
Administrative fee to be paid as water usage fees (as a percent)		5.00%
Administrative fee to be paid as water usage fees		594,000
Percentage of profit to be paid as water usage fees		10.00%
Long-term debt			367,000					500,000	3,550,000
Operating and administrative/maintenance expenses paid		12,000			349,000	287,000	327,000
Termination fee										325,000
Initial term of agreement											2 years
Percentage of corn requirements to be supplied by Gavilon											100.00%
Percentage of ethanol and distillers grains products produced by the entity to be purchased, marketed and resold by Gavilon											100.00%
Settlement payment made												$ 635,000
Minimum annual purchase commitment (in MMBTUs)	1,600,000

XML

INCOME TAXES (Details) (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011
INCOME TAXES
Consolidated financial statement basis of assets	$ 66,581,019	$ 104,133,924
Plus: Organization and start-up costs capitalized	1,564,147	1,952,135
Less: Accumulated tax depreciation and amortization greater than financial statement basis	(32,928,411)	(25,804,453)
Plus: Impairment charge	27,844,579
Income tax basis of assets	$ 63,061,334	$ 80,281,606

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)	12 Months Ended
	Oct. 31, 2012 option item gal
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operating capacity of Ethanol plant owned and operated	50,000,000
Summary of significant accounting policies
Initial term of providing natural gas to the plant	10 years
Number of renewal options	2
Term of renewed contract	5 years
Cash and Equivalents
Number of financial institutions	5
Other Intangibles
Economic useful life of other intangibles	15 years
HLBE Pipeline Company, LLC
Summary of significant accounting policies
Percentage of Agrinatural Gas, LLC owned by HLBE Pipeline Company, LLC	73.00%
Agrinatural
Summary of significant accounting policies
Remaining percentage in Agrinatural Gas, LLC included as noncontrolling interest (as a percent)	27.00%

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

12 Months Ended

Oct. 31, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of depreciable useful lives of property and equipment

Land improvements	15 Years
Plant building and equipment	7 - 40 Years
Vehicles and equipment	5 - 7 Years
Office buildings and equipment	3 - 40 Years

XML

QUARTERLY FINANCIAL DATA (UNAUDITED) (Details) (USD $)	3 Months Ended												12 Months Ended
	Oct. 31, 2012	Jul. 31, 2012	Apr. 30, 2012	Jan. 31, 2012	Oct. 31, 2011	Jul. 31, 2011	Apr. 30, 2011	Jan. 31, 2011	Oct. 31, 2010	Jul. 31, 2010	Apr. 30, 2010	Jan. 31, 2010	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2010
QUARTERLY FINANCIAL DATA (UNAUDITED)
Revenues	$ 46,703,001	$ 41,908,904	$ 41,186,236	$ 38,861,794	$ 43,884,453	$ 43,013,930	$ 38,022,811	$ 39,199,181	$ 31,891,607	$ 23,621,607	$ 25,698,413	$ 29,413,131	$ 168,659,935	$ 164,120,375	$ 110,624,758
Gross profit (loss)	(1,158,097)	1,921,833	1,102,346	264,570	1,201,160	688,880	1,840,466	3,226,245	2,505,517	(822,069)	699,690	4,551,412	2,130,652	6,956,751	6,934,550
Operating income (loss)	(31,545,361)	1,206,927	(660,787)	(586,037)	(76,415)	(182,475)	1,071,699	2,530,477	1,544,666	934,978	(342,423)	3,539,838	(29,785,258)	3,343,286	5,677,058
Net income (loss)	$ (32,705,662)	$ 470,598	$ (1,356,345)	$ (1,312,813)	$ (819,852)	$ (724,890)	$ 438,674	$ 1,676,923	$ 730,998	$ (173,026)	$ (1,492,613)	$ 2,618,162	$ (32,352,643)	$ 543,017	$ 1,683,521
Basic and diluted earnings (loss) per unit (in dollars per share)	$ (0.84)	$ 0.01	$ (0.04)	$ (0.04)	$ (0.02)	$ (0.02)	$ 0.01	$ 0.06	$ 0.03	$ (0.01)	$ (0.06)	$ 0.10	$ (0.85)	$ 0.02	$ 0.06

XML

LINE OF CREDITS (Details) (USD $)	Oct. 31, 2012	Sep. 30, 2012
LINE OF CREDIT
Outstanding borrowings on the line of credit	$ 480,000
Line of credit | Agrinatural
LINE OF CREDIT
Maximum borrowing capacity of line of credit		600,000
Interest charged (as a percent)	5.43%
Outstanding borrowings on the line of credit	$ 480,000

XML

UNCERTAINTIES (Details)	12 Months Ended
	Oct. 31, 2012
Total revenues | Ethanol | Minimum
UNCERTAINTIES
Average percentage of total sales or cost of goods sold	75.00%
Total revenues | Ethanol | Maximum
UNCERTAINTIES
Average percentage of total sales or cost of goods sold	85.00%
Cost of goods sold | Corn | Minimum
UNCERTAINTIES
Average percentage of total sales or cost of goods sold	65.00%
Cost of goods sold | Corn | Maximum
UNCERTAINTIES
Average percentage of total sales or cost of goods sold	75.00%

XML

RELATED PARTY TRANSACTIONS (Details) (USD $)	12 Months Ended				1 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2010	Oct. 31, 2012 Class B units	May 31, 2011 Project Viking	Jul. 31, 2010 Project Viking Class A units	Jun. 30, 2010 Project Viking Class A units	May 31, 2011 Project Viking Class B units
RELATED PARTY TRANSACTIONS
Class A units Authorized (in shares)				7,000,000				7,000,000
Number of units sold (in shares)	38,622,107	30,208,074				3,103,449
Purchase price Class A units (in dollars per unit)						$ 1.45	$ 1.45	$ 0.50
Gross proceeds	$ 707,017	$ 3,500,000	$ 4,500,001		$ 3,500,000	$ 4,500,000
Amount of corn purchased from members		$ 57,451,000	$ 43,233,000

XML

GOING CONCERN

12 Months Ended

Oct. 31, 2012

GOING CONCERN

GOING CONCERN

2. GOING CONCERN

        The financial statements have been prepared on a going-concern basis, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. The Company has previously disclosed losses related to operations related to difficult market conditions and operating performance. The Company has instances of unwaived debt covenant violations at October 31, 2012, has not made required principal payments beginning in December 2012, and is operating under a forbearance agreement with AgStar. These conditions contributed to the long-term debt with AgStar being classified as current at October 31, 2012. These factors and the continued volatility in commodity prices raise substantial doubt about the Company's ability to continue as a going concern.

        The Company has continued to make changes to plant operations, including converting from a coal-fired ethanol plant to a natural gas plant in October 2011. This conversion was completed in fiscal 2012. The Company also raised additional funds in an effort to improve working capital.

        While the Company believes these changes have improved the operating performance of the plant, and lead to lower operating costs, market conditions have resulted in losses. These losses and the repayment of debt have caused working capital to decline and contributed to the debt covenant violations at October 31, 2012 as well as missed principal payments after year end. The Company was unable to raise additional funds to increase working capital. The forbearance agreement the Company entered into with AgStar requires the Company to seek a buyer for its assets to repay the outstanding debt. In January 2013, the Company entered into two asset sale agreements as described in Note 16.

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LONG-TERM DEBT (Details) (USD $)			12 Months Ended			12 Months Ended		12 Months Ended		12 Months Ended		6 Months Ended	12 Months Ended					12 Months Ended		12 Months Ended		12 Months Ended		12 Months Ended		12 Months Ended		12 Months Ended		12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2012 AgStar	Oct. 31, 2012 Term note payable to lending institution tranche	Oct. 31, 2011 Term note payable to lending institution	Oct. 31, 2012 Term note payable to lending institution Maximum	Oct. 31, 2012 Term note payable to lending institution First tranche of term loan	Oct. 31, 2012 Term note payable to lending institution First tranche of term loan Minimum	Oct. 31, 2012 Term note payable to lending institution Second tranche of term loan	Oct. 31, 2012 Term note with locked interest at 6.58%	Apr. 30, 2011 Term note with locked interest at 6.58%	Jul. 31, 2010 Revolving term note payable to lending institution	Oct. 31, 2012 Revolving term note payable to lending institution	Oct. 31, 2011 Revolving term note payable to lending institution	Oct. 31, 2012 Revolving term note payable to lending institution Minimum	Oct. 31, 2012 Assessments payable as part of water treatment agreement, with interest at 6.55%, due in 2021	Oct. 31, 2011 Assessments payable as part of water treatment agreement, with interest at 6.55%, due in 2021	Oct. 31, 2012 Assessments payable as part of water treatment agreement, with interest at 0.50%, due in 2016	Oct. 31, 2011 Assessments payable as part of water treatment agreement, with interest at 0.50%, due in 2016	Oct. 31, 2012 Assessments payable as part of water supply agreement, with interest at 8.73%, due in 2019	Oct. 31, 2011 Assessments payable as part of water supply agreement, with interest at 8.73%, due in 2019	Oct. 31, 2012 Note payable to electrical provider, due in December 2012	Oct. 31, 2011 Note payable to electrical provider, due in December 2012	Oct. 31, 2012 Note payable to electrical company, due September 2017	Oct. 31, 2011 Note payable to electrical company, due September 2017	Oct. 31, 2012 Note payable for equipment	Oct. 31, 2011 Note payable for equipment	Oct. 31, 2012 Construction note payable	Oct. 31, 2011 Construction note payable	Oct. 31, 2012 Equipment note, second
Debt financing
Total long-term debt	$ 46,082,737	$ 51,417,525		$ 36,627,901	$ 39,747,497								$ 4,211,163	$ 6,864,561		$ 2,456,372	$ 2,653,090	$ 202,998	$ 253,118	$ 235,781	$ 264,309	$ 88,578	$ 439,590	$ 368,750	$ 443,750		$ 13,860	$ 818,884	$ 737,750	$ 1,072,310
Less amounts due on demand or within one year	42,051,402	4,572,613
Net long term debt	4,031,335	46,844,912
Limitation on advance of loan by forbearance agreement			1,750,000
Interest rate (as a percent)			2.00%						5.75%		6.58%					6.55%		0.50%		8.73%								5.29%		5.57%
Effective interest rate (as a percent)																										6.355%
Implicit interest rate (as a percent)																						1.50%
Maintenance fee (as a percent)																								1.00%
Period of worth of debt																1 year
Monthly payment																				3,942		29,775		6,250		2,371				40,000
Semi-annual payment																189,393		25,692
Term of debt instrument				5 years									5 years															3 years
Initial amount of debt				40,000,000			20,000,000		20,000,000				8,008,689
Number of tranches of debt				2
Interest rate								LIBOR							LIBOR
Spread over interest rate (as a percent)								3.50%							3.50%
Variable interest rate (as a percent)								5.00%							5.00%
Amortization period for equal monthly payments of principal and interest on debt				10 years
Percentage of the excess cash flow for which additional annual payments required						25.00%
Additional payments to be made per year						2,000,000
Unused commitment fee per annum on the unused portion of debt (as a percent)													35.00%
Annual reduction in maximum borrowing capacity										45,000,000			500,000
Outstanding amount of standby letter of credit													600,000	600,000
Accrued default interest rate (as a percent)												2.00%	2.00%
Percentage of default interest rate waived														50.00%
Estimated maturities of long-term debt
2013	42,051,402
2014	1,182,659
2015	731,501
2016	417,888
2017	380,064
After 2017	$ 1,319,223

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LONG-TERM DEBT (Tables)

12 Months Ended

Oct. 31, 2012

LONG-TERM DEBT

Schedule of Long-term debt

	October 31 2012		October 31 2011
Term note payable to lending institution, see terms below.	$	36,627,901	$	39,747,497
Revolving term note payable to lending institution, see terms below.		4,211,163		6,864,561
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company made deposits for one years' worth of debt service payments that are held on deposit to be applied with the final payments of the assessment.		2,456,372		2,653,090
Assessment payable as part of water treatment agreement, due in semi-annual installments of $25,692 with interest at 0.50%, enforceable by statutory lien, with the final payment due in 2016.		202,998		253,118
Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.		235,781		264,309
Note payable for equipment, with monthly payments of $2,371 including effective interest of 6.355%, repaid in April 2012, secured by equipment.		—		13,860
Note payable to electrical provider, with monthly payments of $29,775 including implicit interest of 1.50%, due in December 2012, secured by equipment and restricted cash.		88,578		439,590
Note payable to electrical company with monthly payments of $6,250 with a 1% maintenance fee due each October, due September 2017. The electrical company is a member of the Company.		368,750		443,750
Note payable to a lending institution for the construction of the pipeline assets initially due in December 2011, converted in February 2012 to a term loan with a three year repayment period. Interest is at 5.29% and the note, along with the line of credit in Note 8, is secured by substantially all assets of Agrinatural.		818,884		737,750
Equipment payable on corn oil separation equipment from a vendor. The Company pays approximately $40,000 per month conditioned upon revenue generated from the corn oil equipment. The monthly payment includes implicit interest of 5.57% until maturity in May 2015 and the note is secured by the equipment.		1,072,310		—
Totals		46,082,737		51,417,525
Less amounts due within one year		42,051,402		4,572,613
Net long-term debt	$	4,031,335	$	46,844,912

Schedule of estimated maturities of long-term debt

2013	$	42,051,402
2014		1,182,659
2015		731,501
2016		417,888
2017		380,064
After 2017		1,319,223
Total long-term debt	$	46,082,737

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DERIVATIVE INSTRUMENTS (Tables)

12 Months Ended

Oct. 31, 2012

DERIVATIVE INSTRUMENTS

Schedule of gains (losses) from derivative instruments included in the Condensed Consolidated Statements of Operations

		Twelve Months Ended October 31,
	Statement of Operations location
		2012			2011			2010
Corn contracts	Cost of goods sold	$	1,088,000		$	(432,000	)	$	(1,007,000	)
Natural gas contracts	Cost of goods sold		(446,000	)		—			—
Ethanol contracts	Revenues		—			(24,000	)		(171,000	)
Totals		$	642,000		$	(456,000	)	$	(1,178,000	)

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MEMBERS' EQUITY (Details) (USD $)	12 Months Ended			1 Months Ended		0 Months Ended	1 Months Ended		1 Months Ended
	Oct. 31, 2012 item	Oct. 31, 2011	Oct. 31, 2010	May 31, 2011 Project Viking	Oct. 31, 2012 Class A units	Aug. 30, 2011 Class A units Agrinatural	Nov. 30, 2011 Class A units Agrinatural	Aug. 31, 2011 Class A units Agrinatural	Jul. 31, 2010 Class A units Project Viking	Jun. 30, 2010 Class A units Project Viking	Oct. 31, 2012 Class B units	May 31, 2011 Class B units Project Viking
Subscription rights offering
Units authorized (in shares)	80,000,000				65,000,000						15,000,000
Class A units Authorized (in shares)						16,500,000					7,000,000	7,000,000
Minimum number of units held by members of the company (in shares)	2,500
Number of votes per unit	1
Number of units sold (in shares)	38,622,107	30,208,074					1,414,033		3,103,449
Purchase price Class A units (in dollars per unit)						$ 0.50			$ 1.45	$ 1.45		$ 0.50
Maximum percentage of the units currently held that may be purchased by Class A unit holder								77.73%
Deposit into an escrow account required (in dollars per unit)						$ 0.125
Gross proceeds	$ 707,017	$ 3,500,000	$ 4,500,001	$ 3,500,000			$ 707,000		$ 4,500,000

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LEASES (Tables)

12 Months Ended

Oct. 31, 2012

LEASES

Schedule of minimum future lease payments

2013	$	1,563,000
2014		1,231,000
2015		842,000
2016		833,000
2017		693,000
Total lease commitments	$	5,162,000

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INCOME TAXES (Tables)

12 Months Ended

Oct. 31, 2012

INCOME TAXES

Schedule of differences between consolidated financial statement basis and tax basis of assets and liabilities

	2012			2011
Consolidated financial statement basis of assets	$	66,581,019		$	104,133,924
Plus: Organization and start-up costs capitalized		1,564,147			1,952,135
Less: Accumulated tax depreciation and amortization greater than financial statement basis		(32,928,411	)		(25,804,453	)
Plus: Impairment charge		27,844,579			—
Income tax basis of assets	$	63,061,334		$	80,281,606

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Oct. 31, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

        The Company owns and operates a 50 million gallon ethanol plant near Heron Lake, Minnesota with ethanol distribution throughout the continental United States. In addition, the Company produces and sells distillers grains with solubles and corn oil as co-products of ethanol production. The Company was formed on April 12, 2001 to have an indefinite life. The Company converted the plant from being coal fired to natural gas fired in November 2011.

        After October 31, 2012, the Company began seeking buyers to purchase the assets. On January 22, 2013, the Company entered into an asset purchase agreement under which the Company agreed to sell substantially all of the assets of the Company's ethanol and related distillers and non-food grade corn oil businesses located in Heron Lake (the "Asset Sale") to Guardian Energy Heron Lake, LLC. See Note 16 for further details.

Principles of Consolidation

        The financial statements include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiaries, Lakefield Farmers Elevator, LLC and HLBE Pipeline Company, LLC, collectively, "the Company." HLBE Pipeline Company, LLC owns 73% of Agrinatural Gas, LLC (Agrinatural); the remaining 27% is included in the consolidated financial statements as a noncontrolling interest. All significant intercompany balances and transactions are eliminated in consolidation.

Fiscal Reporting Period

        The Company's fiscal year end for reporting financial operations is October 31.

Accounting Estimates

        Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for significant matters including, among others, the carrying value and useful lives of property and equipment, analysis of impairment of long-lived assets, contingencies and valuation of forward purchase contract commitments and inventory. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Noncontrolling Interest

        Amounts recorded as noncontrolling interest relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Agrinatural will provide natural gas to the plant with a specified price per MMBTU for an initial term of 10 years, with two renewal options for five year periods.

Revenue Recognition

        Revenue from sales is recorded when title transfers to the customer, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed and determinable. The title transfers when the product is loaded into the railcar or truck, the customer takes ownership and assumes risk of loss.

        In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

Cash and Equivalents

        The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash and equivalents.

        The Company maintains its accounts at five financial institutions. At times throughout the year, the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. The Company does not believe it is exposed to any significant credit risk on cash and equivalents.

Restricted Cash

        The Company is periodically required to maintain cash balances at its broker related to derivative instrument positions and as part of a loan agreement.

Restricted Certificates of Deposit

        The Company maintains restricted certificates of deposit as part of its grain dealer's license.

Accounts Receivable

        Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral.

        Accounts receivable are recorded at estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Accounts considered uncollectible are written off. The Company's estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At October 31, 2012 and 2011, the Company was of the belief that such accounts would be collectable and thus an allowance was not considered necessary.

Inventory

        Inventory consists of raw materials, work in process, finished goods, supplies, and other grain inventory. Raw materials are stated at the lower of cost or market on a first-in, first-out (FIFO) basis. Work in process and finished goods, which consists of ethanol, distillers grains and corn oil produced, if any, is stated at the lower of average cost or market. Other grain inventory, which consists of agricultural commodities, is valued at market value (net realizable value). Other grain inventory is readily convertible to cash because of its commodity characteristics, widely available markets and international pricing mechanisms. Other grain inventory is also freely traded, has quoted market prices, may be sold without significant further processing, and has predictable and insignificant disposal costs.

Derivative Instruments

        From time to time, the Company enters into derivative transactions to protect gross margins from potentially adverse effects of market and price volatility in future periods. In order to reduce the risks caused by market fluctuations, the Company hedges a portion of its anticipated corn and natural gas purchases, and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn and natural gas in the Company's ethanol production activities and the related sales price of ethanol produced. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions.

        The Company generally does not designate these derivative instruments as hedges for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value caused from marking these instruments to market, recognized in current period earnings or losses on a monthly basis. While the Company does not designate the derivative instruments that it enters into as hedging instruments because of the administrative costs associated with the related accounting, the Company believes that the derivative instruments represent an economic hedge.

        In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings.

        The Company evaluates its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as "normal purchases or normal sales." Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Certain corn, ethanol and distillers grains contracts that meet the requirement of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements, and therefore, are not marked to market in our financial statements.

Other Intangibles

        Other intangibles are stated at cost and include road improvements located near the plant in which the Company has a beneficial interest in but does not own the road. The Company amortizes the assets over the economic useful life of 15 years.

Property and Equipment

        Property and equipment are recorded at cost. Depreciation is provided over an estimated useful life by use of the straight-line deprecation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress is comprised of costs related to the construction of the ethanol plant facilities. Interest is capitalized during the construction period. Depreciable useful lives are as follows:

Land improvements	15 Years
Plant building and equipment	7 - 40 Years
Vehicles and equipment	5 - 7 Years
Office buildings and equipment	3 - 40 Years

Long-Lived Assets

        The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the assets; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through various valuation techniques including discounted cash flow models, comparable activities in the market place, and third-party independent appraisals, as considered necessary.

        The Company's ethanol production facilities have a nameplate capacity of 50 million gallons per year. The carrying value of these facilities at October 31, 2011 was approximately $88,600,000. As of October 31, 2012, the Company recorded an impairment charge of approximately $27,845,000 against long-lived assets. In accordance with the Company's policy for evaluating impairment of long-lived assets described above, management has evaluated the recoverability of the facilities based on projected future cash flows from operations over the facilities' estimated useful lives. Management has determined that the projected future undiscounted cash flows from operations of these facilities do not exceed their carrying value at October 31, 2012. The Company performed an impairment analysis estimating the discounted cash flows to determine the impairment to record. In determining the projected future discounted cash flows, the Company made significant assumptions concerning the future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity.

Deferred Offering Costs

        The Company defers the costs incurred to raise equity financing until that financing occurs. At such time that the issuance of new equity occurs, these costs will be netted against the proceeds received.

Fair Value of Financial Instruments

        The Company follows guidance for accounting for fair value measurements of financial assets and liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring and nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

        The three levels of the fair value hierarchy are as follows:

• •

  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

  •

  Level 2 includes:
  
  

  1.

  Quoted prices in active markets for similar assets or liabilities.
  
  

  2.

  Quoted prices in markets that are observable for the asset or liability either directly or indirectly, for substantially the full term of the asset or liability.
  
  

  3.

  Inputs that derived primarily from or corroborated by observable market date by correlation or other means.

  •

  Level 3 inputs are unobservable inputs for the asset or liability.

        The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

        Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. Except for the impairment charge noted above, no events occurred during the fiscal 2012, 2011, or 2010 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

        The carrying value of cash and equivalents, restricted cash, restricted certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The fair value of debt has been estimated using discounted cash flow analysis based upon the Company's current incremental borrowing rates for similar types of financing arrangements. The fair value of outstanding debt will fluctuate with changes in applicable interest rates.

        Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company's debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules. The Company believes the carrying amount of the debt and line of credit approximates the fair value.

        Loans with AgStar consist of term loans of approximately $40,839,000 with interest at market rates that are believed to approximate fair value. Due to the current defaults under the senior debt loan agreement which have triggered an additional 2.0% default interest, the forbearance agreement that anticipates the sale of assets and repayments of term loans, and the underlying collateral of the loans, the Company believes the fair value continues to approximate the carrying value.

Income Taxes

        The Company is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements. Differences between financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the alternative depreciation system (ADS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences. The Company's tax year end is December 31. Primarily due to the partnership tax status, the Company does not have any significant tax uncertainties that would require disclosure. The Company recognizes and measures tax benefits when realization of the benefits is uncertain under a two-step approach. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Primarily due to the Company's tax status as a partnership, the adoption of this guidance had no material impact on the Company's financial condition or results of operations.

        The Company files income tax returns in the U.S. federal and Minnesota state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2009.

Net Income (Loss) per Unit

        Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members' units outstanding during the period. Diluted net income or loss per unit is computed by dividing net income (loss) by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, for all periods presented, the calculations of the Company's basic and diluted net income (loss) per unit are the same.

Environmental Liabilities

        The Company's operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices, and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.

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QUARTERLY FINANCIAL DATA (UNAUDITED) (Tables)

12 Months Ended

Oct. 31, 2012

QUARTERLY FINANCIAL DATA (UNAUDITED)

Summary of quarterly results

	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
Fiscal year ended October 31, 2012
Revenues	$	38,861,794		$	41,186,236		$	41,908,904	$	46,703,001
Gross profit (loss)		264,570			1,102,346			1,921,833		(1,158,097	)
Operating income (loss)		(586,037	)		(660,787	)		1,206,927		(31,545,361	)
Net income (loss)		(1,312,813	)		(1,356,345	)		470,598		(32,705,662	)
Basic and diluted earnings (loss) per unit		(0.04	)		(0.04	)		0.01		(0.84	)

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
Fiscal year ended October 31, 2011
Revenues	$	39,199,181	$	38,022,811	$	43,013,930		$	43,884,453
Gross profit (loss)		3,226,245		1,840,466		688,880			1,201,160
Operating income (loss)		2,530,477		1,071,699		(182,475	)		(76,415	)
Net income (loss)		1,676,923		438,674		(724,890	)		(819,852	)
Basic and diluted earnings (loss) per unit		0.06		0.01		(0.02	)		(0.02	)

	First Quarter		Second Quarter			Third Quarter			Fourth Quarter
Fiscal year ended October 31, 2010
Revenues	$	29,413,131	$	25,698,413		$	23,621,607		$	31,891,607
Gross profit (loss)		4,551,412		699,690			(822,069	)		2,505,517
Operating income (loss)		3,539,838		(342,423	)		934,978			1,544,666
Net income (loss)		2,618,162		(1,492,613	)		(173,026	)		730,998
Basic and diluted earnings (loss) per unit		0.10		(0.06	)		(0.01	)		0.03

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INVENTORY (Details) (USD $)	12 Months Ended
	Oct. 31, 2011	Oct. 31, 2010	Oct. 31, 2012
INVENTORY
Raw materials	$ 593,761		$ 521,865
Work in process	978,967		1,149,214
Supplies	840,756		922,384
Other grains	1,351,132		995,109
Total	3,764,616		3,588,572
Losses related to inventory	15,000	97,000
Value of inventories owned by others	$ 105,000		$ 790,000

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Consolidated Balance Sheets (USD $)	Oct. 31, 2012	Oct. 31, 2011
Current Assets
Cash and equivalents	$ 653,361	$ 7,140,573
Restricted cash	65,259	367,012
Restricted certificates of deposit	650,000	650,000
Accounts receivable	1,784,761	1,378,220
Inventory	3,588,572	3,764,616
Prepaid expenses	796,829	937,521
Total current assets	7,538,782	14,237,942
Property and Equipment
Land and improvements	9,252,379	12,265,434
Plant buildings and equipment	76,155,846	94,509,719
Vehicles and other equipment	645,481	635,054
Office buildings and equipment	622,711	615,298
Construction in progress	645,486	4,132,965
Property, plant and equipment, gross	87,321,903	112,158,470
Less accumulated depreciation	(29,222,617)	(23,565,525)
Property, plant and equipment, net	58,099,286	88,592,945
Other Assets
Restricted cash		59,574
Other intangible assets, net	256,513	415,276
Debt service deposits and other assets	686,438	828,187
Total other assets	942,951	1,303,037
Total Assets	66,581,019	104,133,924
Current Liabilities
Line of credit	480,000
Current maturities of long-term debt	42,051,402	4,572,613
Accounts payable:
Trade accounts payable	2,085,882	2,704,707
Trade accounts payable - related party		109,101
Accrued expenses	382,953	421,306
Total current liabilities	45,000,237	7,807,727
Long-Term Debt, net of current maturities	4,031,335	46,844,912
Commitments and Contingencies
Members' Equity
Controlling interest in equity: 38,622,107 and 30,208,074 Class A units issued and outstanding at October 31, 2012 and 2011, respectively	17,344,433	49,508,123
Noncontrolling interest	205,014	(26,838)
Total members' equity	17,549,447	49,481,285
Total Liabilities and Members' Equity	$ 66,581,019	$ 104,133,924

XML

LEASES (Details) (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2010
LEASES
Rent expense	$ 2,200,000	$ 1,800,000	$ 1,900,000
Minimum non-cancelable lease term at inception (in years)	1 year
Minimum future lease payments
2013	1,563,000
2014	1,231,000
2015	842,000
2016	833,000
2017	693,000
Total lease commitments	$ 5,162,000

XML

Consolidated Statements of Changes in Members' Equity (Parenthetical) (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2010
Consolidated Statements of Changes in Members' Equity
Class A units (in units)	1,414,033	7,000,000	3,103,449
Class A units (in dollars per unit)	$ 0.50	$ 0.50	$ 1.45

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 3) (USD $)	6 Months Ended	12 Months Ended
	Jul. 31, 2010	Oct. 31, 2012
Fair Value of Financial Instruments
Long-term debt		40,839,000
Revolving term note payable to lending institution
Fair Value of Financial Instruments
Accrued default interest rate (as a percent)	2.00%	2.00%

XML

QUARTERLY FINANCIAL DATA (UNAUDITED)

12 Months Ended

Oct. 31, 2012

QUARTERLY FINANCIAL DATA (UNAUDITED)

QUARTERLY FINANCIAL DATA (UNAUDITED)

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

        Summary quarterly results are as follows:

	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
Fiscal year ended October 31, 2012
Revenues	$	38,861,794		$	41,186,236		$	41,908,904	$	46,703,001
Gross profit (loss)		264,570			1,102,346			1,921,833		(1,158,097	)
Operating income (loss)		(586,037	)		(660,787	)		1,206,927		(31,545,361	)
Net income (loss)		(1,312,813	)		(1,356,345	)		470,598		(32,705,662	)
Basic and diluted earnings (loss) per unit		(0.04	)		(0.04	)		0.01		(0.84	)

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
Fiscal year ended October 31, 2011
Revenues	$	39,199,181	$	38,022,811	$	43,013,930		$	43,884,453
Gross profit (loss)		3,226,245		1,840,466		688,880			1,201,160
Operating income (loss)		2,530,477		1,071,699		(182,475	)		(76,415	)
Net income (loss)		1,676,923		438,674		(724,890	)		(819,852	)
Basic and diluted earnings (loss) per unit		0.06		0.01		(0.02	)		(0.02	)

	First Quarter		Second Quarter			Third Quarter			Fourth Quarter
Fiscal year ended October 31, 2010
Revenues	$	29,413,131	$	25,698,413		$	23,621,607		$	31,891,607
Gross profit (loss)		4,551,412		699,690			(822,069	)		2,505,517
Operating income (loss)		3,539,838		(342,423	)		934,978			1,544,666
Net income (loss)		2,618,162		(1,492,613	)		(173,026	)		730,998
Basic and diluted earnings (loss) per unit		0.10		(0.06	)		(0.01	)		0.03

        The above quarterly financial date is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these periods presented have been included.

XML

GOING CONCERN (Details) (Subsequent event)	1 Months Ended
	Jan. 31, 2013 item
Subsequent event
GOING CONCERN
Number of asset sale agreements	2

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Oct. 31, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Principles of Consolidation

        The financial statements include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiaries, Lakefield Farmers Elevator, LLC and HLBE Pipeline Company, LLC, collectively, "the Company." HLBE Pipeline Company, LLC owns 73% of Agrinatural Gas, LLC (Agrinatural); the remaining 27% is included in the consolidated financial statements as a noncontrolling interest. All significant intercompany balances and transactions are eliminated in consolidation.

Fiscal Reporting Period

Fiscal Reporting Period

        The Company's fiscal year end for reporting financial operations is October 31.

Accounting Estimates

Accounting Estimates

        Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for significant matters including, among others, the carrying value and useful lives of property and equipment, analysis of impairment of long-lived assets, contingencies and valuation of forward purchase contract commitments and inventory. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Revenue Recognition

Revenue Recognition

        Revenue from sales is recorded when title transfers to the customer, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed and determinable. The title transfers when the product is loaded into the railcar or truck, the customer takes ownership and assumes risk of loss.

        In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

Cash and Equivalents

Cash and Equivalents

        The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash and equivalents.

        The Company maintains its accounts at five financial institutions. At times throughout the year, the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. The Company does not believe it is exposed to any significant credit risk on cash and equivalents.

Restricted Cash

Restricted Cash

        The Company is periodically required to maintain cash balances at its broker related to derivative instrument positions and as part of a loan agreement.

Restricted Certificates of Deposit

Restricted Certificates of Deposit

        The Company maintains restricted certificates of deposit as part of its grain dealer's license.

Accounts Receivable

Accounts Receivable

        Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral.

        Accounts receivable are recorded at estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Accounts considered uncollectible are written off. The Company's estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At October 31, 2012 and 2011, the Company was of the belief that such accounts would be collectable and thus an allowance was not considered necessary.

Inventory

Inventory

        Inventory consists of raw materials, work in process, finished goods, supplies, and other grain inventory. Raw materials are stated at the lower of cost or market on a first-in, first-out (FIFO) basis. Work in process and finished goods, which consists of ethanol, distillers grains and corn oil produced, if any, is stated at the lower of average cost or market. Other grain inventory, which consists of agricultural commodities, is valued at market value (net realizable value). Other grain inventory is readily convertible to cash because of its commodity characteristics, widely available markets and international pricing mechanisms. Other grain inventory is also freely traded, has quoted market prices, may be sold without significant further processing, and has predictable and insignificant disposal costs.

Derivative Instruments

Derivative Instruments

        From time to time, the Company enters into derivative transactions to protect gross margins from potentially adverse effects of market and price volatility in future periods. In order to reduce the risks caused by market fluctuations, the Company hedges a portion of its anticipated corn and natural gas purchases, and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn and natural gas in the Company's ethanol production activities and the related sales price of ethanol produced. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions.

        The Company generally does not designate these derivative instruments as hedges for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value caused from marking these instruments to market, recognized in current period earnings or losses on a monthly basis. While the Company does not designate the derivative instruments that it enters into as hedging instruments because of the administrative costs associated with the related accounting, the Company believes that the derivative instruments represent an economic hedge.

        In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings.

        The Company evaluates its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as "normal purchases or normal sales." Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Certain corn, ethanol and distillers grains contracts that meet the requirement of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements, and therefore, are not marked to market in our financial statements.

Other Intangibles

Other Intangibles

        Other intangibles are stated at cost and include road improvements located near the plant in which the Company has a beneficial interest in but does not own the road. The Company amortizes the assets over the economic useful life of 15 years.

Property and Equipment

Property and Equipment

        Property and equipment are recorded at cost. Depreciation is provided over an estimated useful life by use of the straight-line deprecation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress is comprised of costs related to the construction of the ethanol plant facilities. Interest is capitalized during the construction period. Depreciable useful lives are as follows:

Land improvements	15 Years
Plant building and equipment	7 - 40 Years
Vehicles and equipment	5 - 7 Years
Office buildings and equipment	3 - 40 Years

Long-Lived Assets

Long-Lived Assets

        The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the assets; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through various valuation techniques including discounted cash flow models, comparable activities in the market place, and third-party independent appraisals, as considered necessary.

        The Company's ethanol production facilities have a nameplate capacity of 50 million gallons per year. The carrying value of these facilities at October 31, 2011 was approximately $88,600,000. As of October 31, 2012, the Company recorded an impairment charge of approximately $27,845,000 against long-lived assets. In accordance with the Company's policy for evaluating impairment of long-lived assets described above, management has evaluated the recoverability of the facilities based on projected future cash flows from operations over the facilities' estimated useful lives. Management has determined that the projected future undiscounted cash flows from operations of these facilities do not exceed their carrying value at October 31, 2012. The Company performed an impairment analysis estimating the discounted cash flows to determine the impairment to record. In determining the projected future discounted cash flows, the Company made significant assumptions concerning the future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity.

Deferred Offering Costs

Deferred Offering Costs

        The Company defers the costs incurred to raise equity financing until that financing occurs. At such time that the issuance of new equity occurs, these costs will be netted against the proceeds received.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

        The Company follows guidance for accounting for fair value measurements of financial assets and liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring and nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

        The three levels of the fair value hierarchy are as follows:

• •

  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

  •

  Level 2 includes:
  
  

  1.

  Quoted prices in active markets for similar assets or liabilities.
  
  

  2.

  Quoted prices in markets that are observable for the asset or liability either directly or indirectly, for substantially the full term of the asset or liability.
  
  

  3.

  Inputs that derived primarily from or corroborated by observable market date by correlation or other means.

  •

  Level 3 inputs are unobservable inputs for the asset or liability.

        The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

        Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. Except for the impairment charge noted above, no events occurred during the fiscal 2012, 2011, or 2010 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

        The carrying value of cash and equivalents, restricted cash, restricted certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The fair value of debt has been estimated using discounted cash flow analysis based upon the Company's current incremental borrowing rates for similar types of financing arrangements. The fair value of outstanding debt will fluctuate with changes in applicable interest rates.

        Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company's debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules. The Company believes the carrying amount of the debt and line of credit approximates the fair value.

        Loans with AgStar consist of term loans of approximately $40,839,000 with interest at market rates that are believed to approximate fair value. Due to the current defaults under the senior debt loan agreement which have triggered an additional 2.0% default interest, the forbearance agreement that anticipates the sale of assets and repayments of term loans, and the underlying collateral of the loans, the Company believes the fair value continues to approximate the carrying value.

Income Taxes

Income Taxes

        The Company is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements. Differences between financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the alternative depreciation system (ADS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences. The Company's tax year end is December 31. Primarily due to the partnership tax status, the Company does not have any significant tax uncertainties that would require disclosure. The Company recognizes and measures tax benefits when realization of the benefits is uncertain under a two-step approach. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Primarily due to the Company's tax status as a partnership, the adoption of this guidance had no material impact on the Company's financial condition or results of operations.

        The Company files income tax returns in the U.S. federal and Minnesota state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2009.

Net Income (Loss) per Unit

Net Income (Loss) per Unit

        Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members' units outstanding during the period. Diluted net income or loss per unit is computed by dividing net income (loss) by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, for all periods presented, the calculations of the Company's basic and diluted net income (loss) per unit are the same.

Environmental Liabilities

Environmental Liabilities

        The Company's operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices, and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.

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Consolidated Statements of Cash Flows (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2010
Cash Flow From Operating Activities
Net income (loss)	$ (32,352,643)	$ 543,017	$ 1,683,521
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	5,693,459	5,490,240	5,578,053
Impairment charge	27,844,579
Lower of cost or market adjustment		1,591,810	903,695
Unrealized losses on derivative instruments			193,590
Non-cash settlement income			(500,000)
Change in operating assets and liabilities:
Restricted cash	103,697	205,212	(231,580)
Accounts receivable	(406,541)	3,639,009	(577,528)
Inventory	176,044	6,857,746	(5,981,727)
Derivative instruments		(107,271)	(92,202)
Prepaid expenses and other	117,396	(936,192)	(59,135)
Accounts payable	(727,926)	621,970	621,970
Accrued expenses	(50,357)	(993,412)	314,735
Lower of cost or market accrued expense		(1,577,856)	(2,055,662)
Net cash provided by (used in) operating activities	397,708	14,258,277	(202,270)
Cash Flows from Investing Activities
Payments for restricted certificates of deposit		(250,000)	(400,000)
Capital expenditures	(1,560,616)	(4,243,171)	(119,047)
Net cash used in investing activities	(1,560,616)	(4,493,171)	(519,047)
Cash Flows from Financing Activities
Checks written in excess of bank balance		(913,492)	913,492
Proceeds from (payments on) line of credit, net	480,000	(3,500,000)	(1,500,000)
Payments on long-term debt	(6,922,038)	(5,100,700)	(4,992,343)
Proceeds from note payable	262,250	737,750
Release of restricted cash	257,630	336,408	322,808
Issuance of member units	707,017	3,500,000	4,500,001
Costs of raising capital		(90,005)	(75,040)
Noncontrolling interest investment		1,000
Distributions to noncontrolling interest	(109,163)
Net cash used in financing activities	(5,324,304)	(4,147,851)	(939,439)
Net Increase (Decrease) in cash and equivalents	(6,487,212)	5,617,255	(1,660,756)
Cash and Equivalents - Beginning of period	7,140,573	1,523,318	3,184,074
Cash and Equivalents - End of period	653,361	7,140,573	1,523,318
Supplemental Disclosure of Cash Flow Information
Interest expense paid	2,642,087	3,377,199	3,660,433
Supplemental Disclosure of Non-Cash Activities
Cost of raising capital offset against member contributions	165,045
Capital expenditure financed with note payable	1,325,000
Distribution to non-controlling interest in accrued expenses	12,004
Release of retainage payable as part of legal settlement			3,834,319
Fair value of equipment received as part of settlement income			$ 500,000

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Consolidated Balance Sheets (Parenthetical)	Oct. 31, 2012	Oct. 31, 2011
Consolidated Balance Sheets
Members' Equity, Class A units issued	38,622,107	30,208,074
Members' Equity, Class A units outstanding	38,622,107	30,208,074

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MEMBERS' EQUITY

12 Months Ended

Oct. 31, 2012

MEMBERS' EQUITY

MEMBERS' EQUITY

10. MEMBERS' EQUITY

        Company is authorized to issue 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have been designated as Class B units. Members of the Company are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our board of governors to become members. Members are entitled to one vote for each unit held. Subject to the Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

        In July 2010, the Company sold to Project Viking, a related party, 3,103,449 of its Class A units at a price per unit of $1.45 for total gross proceeds to the Company of approximately $4.5 million as described in Note 13.

        In May 2011, Project Viking invested $3.5 million in the Company for 7,000,000 Class B units at a purchase price of $0.50 per unit. These units sold to Project Viking were immediately converted to Class A units.

        On August 30, 2011, the Company commenced a subscription rights offering to holders of its Class A units who are residents of the State of Minnesota for an aggregate of 16,500,000 Class A units at a purchase price of $0.50 per unit. No eligible Class A unit holder could purchase more than 77.73% of the Units currently held by such unit holder as of August 30, 2011. In addition, purchasers of units were required to deposit $.125 per unit into an escrow account that was to be held to guarantee a portion of the debt of Agrinatural. Amounts collected related to this guarantee were subsequently returned. The offering period expired on October 15, 2011. The Company closed on the offering in November 2011 having sold 1,414,033 Class A units for approximately $707,000.

XML

Document and Entity Information (USD $)	12 Months Ended
	Oct. 31, 2012	Feb. 11, 2013
Entity Registrant Name	Heron Lake BioEnergy, LLC
Entity Central Index Key	0001286964
Document Type	10-K
Document Period End Date	Oct. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--10-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Public Float	$ 0
Entity Common Stock, Shares Outstanding		38,622,107
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	FY

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LEASES

12 Months Ended

Oct. 31, 2012

LEASES

LEASES

11. LEASES

        The Company leases equipment, primarily rail cars, under operating leases through 2017. Rent expense for fiscal 2012, 2011, and 2010 was approximately $2.2 million, $1.8 million, and $1.9 million, respectively.

        At October 31, 2012, the Company had the following minimum future lease payments, which at inception had non-cancelable terms of more than one year:

2013	$	1,563,000
2014		1,231,000
2015		842,000
2016		833,000
2017		693,000
Total lease commitments	$	5,162,000

XML

Consolidated Statements of Operations (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2010
Consolidated Statements of Operations
Revenues	$ 168,659,935	$ 164,120,375	$ 110,624,758
Cost of Goods Sold
Cost of goods sold	166,529,283	155,571,814	102,786,513
Lower of cost or market adjustment		1,591,810	903,695
Total Cost of Goods Sold	166,529,283	157,163,624	103,690,208
Gross Profit	2,130,652	6,956,751	6,934,550
Operating Expenses	(3,171,331)	(3,613,465)	(3,857,492)
Impairment Charge	(27,844,579)
Settlement Income (Expense)	(900,000)		2,600,000
Operating Income (Loss)	(29,785,258)	3,343,286	5,677,058
Other Income (Expense)
Interest income	10,773	37,078	43,179
Interest expense	(2,625,322)	(2,900,470)	(4,048,634)
Other income	47,164	63,123	11,918
Total other expense, net	(2,567,385)	(2,800,269)	(3,993,537)
Net Income (Loss)	(32,352,643)	543,017	1,683,521
Net Income (Loss) Attributable to Noncontrolling Interest	353,019	(27,838)
Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC	$ (32,705,662)	$ 570,855	$ 1,683,521
Weighted Average Units Outstanding - Basic and Diluted (in shares)	38,510,066	33,391,636	28,141,942
Net Income (Loss) Per Unit - Basic and Diluted (in dollars per share)	$ (0.85)	$ 0.02	$ 0.06

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CONCENTRATIONS

12 Months Ended

Oct. 31, 2012

CONCENTRATIONS

CONCENTRATIONS

5. CONCENTRATIONS

        The Company sells all of the ethanol and distiller grains produced to one customer under marketing agreements at October 31, 2012 and 2011. At October 31, 2012 and 2011, this customer comprised nearly all of accounts receivable. Prior to the change in marketers in 2011, the Company sold all of its ethanol and distillers grain to two customers.

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FAIR VALUE MEASUREMENTS

12 Months Ended

Oct. 31, 2012

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

4. FAIR VALUE MEASUREMENTS

        The following table provides information on those assets measured at fair value on a nonrecurring basis.

			Fair Value Measurement Using
	Fair Value as of October 31, 2012								Impairment Charge
			Level 1		Level 2		Level 3
Property and Equipment	$	58,099,286	$	—	$	—	$	58,099,286	$	27,722,183
Other Intangible Assets, net	$	256,513	$	—	$	—	$	256,513	$	122,396

        The Company's assessment of fair value of long-lived assets is based on various valuation techniques including discounted cash flow models, comparable activity in the market place, and third-party independent appraisals, as considered necessary. The impairment charge of approximately $27,845,000 against long-lived assets included significant assumptions concerning the future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity.

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SALE OF PLANT ASSETS

12 Months Ended

Oct. 31, 2012

SALE OF PLANT ASSETS

SALE OF PLANT ASSETS

16. SALE OF PLANT ASSETS

        The Company entered into an asset purchase agreement on January 22, 2013 with Guardian Energy Heron Lake, LLC for the sale of the ethanol plant assets. The sale is scheduled to close on or before March 1, 2013. The purchase price is the sum of $55,000,000 plus closing net working capital, less the amount owed on the closing date under assumed debt. Under the agreement, $4,000,000 of the sales price is held in escrow. As part of the planned spring 2013 shutdown of the plant, an inspection will occur. Above normal wear and tear costs of required repairs to the Company's boiler system, if any, will be deducted from $2,000,000 of the escrow amount. The remaining $2,000,000 will be held in escrow pending any further claims until December 15, 2013. Under the forbearance agreements in Note 9, AgStar has agreed to delay exercising its legal and contractual rights and remedies provided in the loan documents, including, but not limited to, the right to foreclose the real estate mortgages and security agreements and to obtain the appointment of a receiver until March 31, 2013 in order for the Company to permit the close on the transactions contemplated by the asset purchase agreements. The sale of the ethanol plant assets is subject to approval by the members.

        The Company entered into an asset purchase agreement on January 3, 2013 with FCA Co-op for the sale of the Company's grain storage and handling facilities. The sale closed on February 1, 2013 for approximately $3,750,000.

        The Company anticipates distributing the net proceeds from the sale of assets, after repayment of loans and other obligations, during 2013 pending approval by the members.

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INCOME TAXES

12 Months Ended

Oct. 31, 2012

INCOME TAXES

INCOME TAXES

12. INCOME TAXES

        The differences between consolidated financial statement basis and tax basis of assets and liabilities are estimated as follows at October 31:

	2012			2011
Consolidated financial statement basis of assets	$	66,581,019		$	104,133,924
Plus: Organization and start-up costs capitalized		1,564,147			1,952,135
Less: Accumulated tax depreciation and amortization greater than financial statement basis		(32,928,411	)		(25,804,453	)
Plus: Impairment charge		27,844,579			—
Income tax basis of assets	$	63,061,334		$	80,281,606

        There were no significant differences between the consolidated financial statement basis of liabilities and the income tax basis of liabilities at October 31, 2012 and 2011.

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LINES OF CREDIT

12 Months Ended

Oct. 31, 2012

LINES OF CREDIT

LINES OF CREDIT

8. LINES OF CREDIT

        In September 2011, the Company negotiated a new debt agreement with AgStar Financial Services, PCA (AgStar) as described in Note 9 that superseded past agreements. As part of those agreements, the Company repaid the line of credit and the line was closed in September 2011.

        Agrinatural obtained a line of credit with lending institution in September 2012 which provides up to $600,000 until March 31, 2013. Interest is charged at 5.43%. The line of credit, along with a note payable in Note 9, is secured by substantially all business assets of Agrinatural. The line of credit has a balance of $480,000 at October 31, 2012.

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INVENTORY

12 Months Ended

Oct. 31, 2012

INVENTORY

INVENTORY

6. INVENTORY

        Inventory consists of the following at October 31:

	2012		2011
Raw materials	$	521,865	$	593,761
Work in process		1,149,214		978,967
Supplies		922,384		840,756
Other grains		995,109		1,351,132
Totals	$	3,588,572	$	3,764,616

        The Company recorded losses of approximately $15,000 and $97,000 for fiscal 2011 and 2010 respectively, related to inventory, in addition to losses recorded on forward purchase contracts as noted in Note 14, where the market value was less than the cost basis, attributable primarily to decreases in market prices of corn and ethanol. There were no significant losses in fiscal 2012. The loss was recorded with the lower of cost or market adjustment in the statement of operations. In addition, the Company stored grain inventory for farmers. The value of these inventories owned by others is approximately $790,000 and $105,000 based on market prices at October 31, 2012 and 2011, respectively, and is not included in the amounts above.

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DERIVATIVE INSTRUMENTS

12 Months Ended

Oct. 31, 2012

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

7. DERIVATIVE INSTRUMENTS

        As of October 31, 2012 and 2011 the Company has no corn, ethanol, or natural gas derivative instruments. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item and when the Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge or a cash flow hedge. The Company does not enter into derivative transactions for trading purposes.

        The Company enters into corn, ethanol, and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices for periods up to 24 months. These derivatives are put in place to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales and corn purchase commitments where the prices are set at a future date. Although these derivative instruments serve the Company's purpose as an economic hedge, they are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change.

        The following tables provide details regarding the gains and (losses) from the Company's derivative instruments in Consolidated Statements of Operations, none of which are designated as hedging instruments:

		Twelve Months Ended October 31,
	Statement of Operations location
		2012			2011			2010
Corn contracts	Cost of goods sold	$	1,088,000		$	(432,000	)	$	(1,007,000	)
Natural gas contracts	Cost of goods sold		(446,000	)		—			—
Ethanol contracts	Revenues		—			(24,000	)		(171,000	)
Totals		$	642,000		$	(456,000	)	$	(1,178,000	)

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LONG-TERM DEBT

12 Months Ended

Oct. 31, 2012

LONG-TERM DEBT

LONG-TERM DEBT

9. LONG-TERM DEBT

        Long-term debt consists of the following:

	October 31 2012		October 31 2011
Term note payable to lending institution, see terms below.	$	36,627,901	$	39,747,497
Revolving term note payable to lending institution, see terms below.		4,211,163		6,864,561
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company made deposits for one years' worth of debt service payments that are held on deposit to be applied with the final payments of the assessment.		2,456,372		2,653,090
Assessment payable as part of water treatment agreement, due in semi-annual installments of $25,692 with interest at 0.50%, enforceable by statutory lien, with the final payment due in 2016.		202,998		253,118
Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.		235,781		264,309
Note payable for equipment, with monthly payments of $2,371 including effective interest of 6.355%, repaid in April 2012, secured by equipment.		—		13,860
Note payable to electrical provider, with monthly payments of $29,775 including implicit interest of 1.50%, due in December 2012, secured by equipment and restricted cash.		88,578		439,590
Note payable to electrical company with monthly payments of $6,250 with a 1% maintenance fee due each October, due September 2017. The electrical company is a member of the Company.		368,750		443,750
Note payable to a lending institution for the construction of the pipeline assets initially due in December 2011, converted in February 2012 to a term loan with a three year repayment period. Interest is at 5.29% and the note, along with the line of credit in Note 8, is secured by substantially all assets of Agrinatural.		818,884		737,750
Equipment payable on corn oil separation equipment from a vendor. The Company pays approximately $40,000 per month conditioned upon revenue generated from the corn oil equipment. The monthly payment includes implicit interest of 5.57% until maturity in May 2015 and the note is secured by the equipment.		1,072,310		—
Totals		46,082,737		51,417,525
Less amounts due within one year		42,051,402		4,572,613
Net long-term debt	$	4,031,335	$	46,844,912

        At October 31, 2012, the Company was out of compliance with certain covenants in the AgStar loan agreements including the minimum working capital amount, minimum tangible net worth amount, and the fixed charge coverage ratio. Subsequent to October 31, 2012, the Company did not make required principal payments on AgStar loans. On December 21, 2012, the Company and AgStar entered into a forbearance agreement whereby the Company agreed to sell substantially all plant assets and execute an asset sale agreement for substantially all assets by January 10, 2013. AgStar also began charging a default interest premium on the AgStar loans of an additional 2.0%. Advances on the revolving term note were frozen until the Company entered into an asset sale agreement for substantially all plant assets.

        The Company did not execute an asset agreement until January 22, 2013 as described in Note 16. Following this, the Company and AgStar entered into amendments to the forbearance agreement which extended the time for the Company to close on the sale of substantially all plant assets to March 31, 2013. The forbearance agreements limited the advances on the AgStar loans to $1,750,000.

Term Note Payable

        In September 2011, AgStar replaced and superseded the Company's existing loan agreements, related loan documents and the amended forbearance agreements. The Company has a five-year term loan initially amounting to $40,000,000, comprised of two tranches of $20,000,000 each, with the first tranche bearing interest at a variable rate equal to the greater of LIBOR plus 3.50% or 5.0%, and the second tranche bearing interest at 5.75%. The Company must make equal monthly payments of principal and interest on the term loan based on a ten-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016. In addition, the Company is required to make additional payments annually on debt for up to 25% of the excess cash flow, as defined by the agreement, up to $2 million per year. As part of the agreement, the premium above LIBOR on the loans may be reduced based on a financial ratio. The loan agreements are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements.

        Prior to the changes in 2011, the Company was charged interest on the term note payable at LIBOR plus 3.25%. The Company had locked in an interest rate of 6.58% on $45 million of the note for three years ending in April 2011.

Revolving Term Note

        The Company also obtained a five-year term revolving loan commitment in the amount of $8,008,689, under which AgStar agreed to make periodic advances to the Company up to this original amount until September 1, 2016. Amounts borrowed by the Company under the term revolving loan and repaid or prepaid may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, payable monthly. The Company also pays an unused commitment fee on the unused portion of the term revolving loan commitment at the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the term revolving loan. Under the terms of the new agreement, the term revolving loan commitment is scheduled to decline by $500,000 annually, beginning on September 1, 2012 and each anniversary date thereafter. The maturity date of the term revolving loan is September 1, 2016. The Company does have a $600,000 outstanding standby letter of credit at October 31, 2011 and 2012.

        Prior to the changes in September 2011, the revolving term note had an interest rate of LIBOR plus 3.25%. The Company had accrued default interest of 2.0% from February 2010 to July 2010 because of covenant defaults. AgStar agreed in 2011 to waive 50% of the default interest during 2011.

        Estimated maturities of long-term debt at October 31, 2012 are as follows:

2013	$	42,051,402
2014		1,182,659
2015		731,501
2016		417,888
2017		380,064
After 2017		1,319,223
Total long-term debt	$	46,082,737

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011
Long-Lived Assets
Property, plant and equipment, net	$ 58,099,286	$ 88,592,945
Impairment charge against long-lived assets	$ 27,844,579
Land improvements
Property and equipment
Depreciable useful life	15 years
Plant building and equipment | Minimum
Property and equipment
Depreciable useful life	7 years
Plant building and equipment | Maximum
Property and equipment
Depreciable useful life	40 years
Vehicles and equipment | Minimum
Property and equipment
Depreciable useful life	5 years
Vehicles and equipment | Maximum
Property and equipment
Depreciable useful life	7 years
Office buildings and equipment | Minimum
Property and equipment
Depreciable useful life	3 years
Office buildings and equipment | Maximum
Property and equipment
Depreciable useful life	40 years

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SALE OF PLANT ASSETS (Details) (Subsequent event, USD $)	0 Months Ended
	Jan. 22, 2013 Ethanol plant assets Guardian Energy Heron Lake, LLC	Feb. 01, 2013 Grain storage and handling facilities FCA Co-op
Sale of plant assets
Fixed purchase price of plant assets	$ 55,000,000
Sales price held in escrow	4,000,000
Amount to be deducted from escrow for expenses above normal wear and tear cost	2,000,000
Remaining balance in escrow	2,000,000
Price on which sale was closed		$ 3,750,000

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Oct. 31, 2012

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

14. COMMITMENTS AND CONTINGENCIES

Water Agreements

        In October 2003, the Company entered into an industrial water supply development and distribution agreement with the City of Heron Lake for 15 years. The Company has the exclusive rights to the first 600 gallons per minute of capacity that is available from the well, and provides for the Company, combined with Minnesota Soybean Processors, to approve any other supply contracts that the City may enter into. In consideration, the Company will pay one half of the City's water well bond payments of $735,000, plus a 5% administrative fee, totaling approximately $594,000, and operating costs, relative to the Company's water usage, plus a 10% profit. These costs will be paid as water usage fees. The Company recorded an assessment of approximately $367,000 with long-term debt as described in Note 9. The Company pays operating and administrative expenses of approximately $12,000 per year.

        In May 2006, the Company entered into a water treatment agreement with the City of Heron Lake and Jackson County for 30 years. The Company will pay for operating and maintenance costs of the plant in exchange for receiving treated water. In addition, the Company agreed to an assessment for a portion of the capital costs of the water treatment plant. The Company recorded assessments with long-term debt of $500,000 and $3,550,000 in fiscal 2007 and 2006, respectively, as described in Note 9. The Company paid operating and maintenance expenses of approximately $349,000, $287,000, and $327,000 in fiscal 2012, 2011, and 2010, respectively.

Marketing Agreements

        The Company entered into a termination agreement with its previous marketers to terminate the marketing agreements the Company had with each, with termination dates of August 31, 2011. The Company assumed certain rail car leases with the termination of the ethanol marketing agreement and paid a termination fee of $325,000 over the remaining term of the original contract, which ended September 30, 2012.

        Effective September 1, 2011, the Company entered into certain marketing, corn supply and corn storage agreements with Gavilon, LLC ("Gavilon") to market the Company's ethanol and distillers' grains products and to supply the Company's ethanol production facility with corn. Gavilon is now the exclusive corn supplier and ethanol and distillers' grains marketer for the Company's production facility beginning September 1, 2011 and for an initial term of two years. The Company believes that working with Gavilon to manage the Company's marketing and procurement needs will provide a comprehensive solution to help the Company achieve its risk management objectives in a competitive market and will enable the Company to reduce its working capital requirements and more effectively manage its processing margins in both spot and forward markets.

        The Company pays Gavilon a supply fee consisting of a per bushel fee based on corn processed at the facility and a cost of funds component determined on the amount of corn financed by Gavilon for supply to the Company's ethanol production facility based on the length of time between when Gavilon pays for the corn stored in or en route to or from the Company's elevator facilities or production facility, and when the Company is invoiced for that corn at the time it is processed at the Company's production facility. The supply fee was negotiated based on prevailing market-rate conditions for comparable corn supply services. Both Gavilon and the Company have the ability to originate the corn requirements for the production facility. On the effective date of the corn supply Agreement, Gavilon purchased all corn inventory currently owned by the Company and located at its production facility or elevator facilities, at current market prices, to facilitate the transition to Gavilon supplying 100% of the Company's corn requirements at the production facility and the repayment of the Company's line of credit with AgStar.

        Under the ethanol and distillers' grains marketing agreement, Gavilon will purchase, market and resell 100% of the ethanol and distillers grains products produced at the Company's ethanol production facility and the Company will pay Gavilon a marketing fee based on a percentage of the applicable sale price of the ethanol and distillers grains products. The marketing fees were negotiated based on prevailing market-rate conditions for comparable ethanol and distillers grains marketing services. On the effective date of the marketing agreement, Gavilon purchased all ethanol and distillers grains inventory currently owned by the Company and located at the Company's production facilities, at current market prices.

        The Company entered into a master netting agreement under which payments by the Company to Gavilon for corn under the corn supply agreement will be netted against payments by Gavilon to the Company for ethanol and distillers' grains products produced and sold to Gavilon under the marketing agreement. Under the terms of the master netting agreement, the Company is giving Gavilon a first priority security interest in, and a right of set off against, the Company's non-fixed assets including any rights it has to corn under the corn supply agreement, ethanol and distillers' grains under the marketing agreement, the work-in-process at the Company's ethanol production facility, and the other transactions under the Gavilon agreements. The master netting agreement is integral to the transition to the Gavilon agreements, and the termination and payoff of the Company's seasonal revolving line of credit with AgStar.

        Due to the anticipated sale of the plant assets, the Company plans to terminate its relationship with Gavilon. An agreed upon settlement due to the Company's early termination of the agreements is expected to approximate $635,000.

Forward Contracts

        The Company has natural gas agreements with a minimum commitment of approximately 1.6 million MMBTU per year until October 31, 2014.

Legal Proceedings

Permit Matters

        The Company completed the conversion to natural gas from coal in November 2011. The Company also completed an amendment to the existing air emissions permit allowing the conversion from coal to natural gas. The Company is now seeking the final amendments to its air emissions permit related to the natural gas conversion pending regulatory approvals in form acceptable to the Company, and may incur additional costs in connection with the permit amendment, as well as improvements to its plant as part of the natural gas conversion and to ensure compliance with its permit and planned amendments.

        On December 16, 2010, the Company entered into a stipulation agreement with the Minnesota Pollution Control Agency ("MPCA") to resolve a notice of violation issued by the MPCA in March 2008 that alleged violations of certain rules, statutes, and permit conditions, including emission violations and reporting violations. Under the stipulation agreement, the Company agreed to pay a civil penalty and complete other corrective actions. On April 12, 2012, the Company received a letter from the MPCA acknowledging that the Company had completed all the corrective action requirements described in the stipulation agreement and the stipulation agreement was therefore terminated effective as of the date of the letter.

Coal Contract Termination Dispute and Settlement

        Following conversion by the Company from coal to natural gas as its primary fuel, the Company and Cloud Peak Energy Logistics LLC, formerly known as Northern Coal Transportation Company ("Cloud Peak"), the Company and Cloud Peak entered into a Confidential Settlement Agreement and Mutual Release ("Settlement Agreement") to resolve all claims related to the coal contract dispute on April 30, 2012. Under the terms of the Settlement Agreement, the Company made a one-time cash payment to Cloud Peak in the amount of $900,000 (the "Settlement Payment").

        In general, the parties agreed that the terms and conditions of the Settlement Agreement are confidential, subject to public reporting company obligations and applicable accounting rules and principles. Accordingly, no party (including board members, officers or other representatives of the parties with knowledge of the terms of the Settlement Agreement) is permitted to discuss or otherwise disclose such confidential information, except as required by law or pursuant to such public reporting company obligations and applicable accounting rules and principles.

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FAIR VALUE MEASUREMENTS (Tables)

12 Months Ended

Oct. 31, 2012

FAIR VALUE MEASUREMENTS

Schedule of fair value of assets measured on a non-recurring basis

			Fair Value Measurement Using
	Fair Value as of October 31, 2012								Impairment Charge
			Level 1		Level 2		Level 3
Property and Equipment	$	58,099,286	$	—	$	—	$	58,099,286	$	27,722,183
Other Intangible Assets, net	$	256,513	$	—	$	—	$	256,513	$	122,396

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COMMITMENTS AND CONTINGENCIES (Details 2) (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2010
COMMITMENTS AND CONTINGENCIES
Settlement payment	$ 900,000	$ (2,600,000)

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DERIVATIVE INSTRUMENTS (Details) (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2010
Derivative Instruments
Gains and (losses) from derivative instruments	$ 642,000	$ (456,000)	$ (1,178,000)
Derivatives not designated as hedging instruments | Commodity prices
Derivative Instruments
Maximum term of corn, ethanol and natural gas derivatives entered to protect cash flows (in months)	24 months
Derivatives not designated as hedging instruments | Corn contracts
Derivative Instruments
Gains and (losses) from derivative instruments	1,088,000	(432,000)	(1,007,000)
Derivatives not designated as hedging instruments | Natural gas contracts
Derivative Instruments
Gains and (losses) from derivative instruments	(446,000)
Derivatives not designated as hedging instruments | Ethanol contracts
Derivative Instruments
Gains and (losses) from derivative instruments		$ (24,000)	$ (171,000)

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Consolidated Statements of Changes in Members' Equity (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2010
Increase (Decrease) in Stockholders' Equity
Balance	$ 49,481,285	$ 45,437,268	$ 39,253,746
Capital Issuance - 1,414,033 Class A units, $0.50 per unit, November 2011 and 7,000,000 Class A units, $0.50 per unit, May 2011 and 3,103,449 Class A units, $1.45 per unit, July 2010	707,017	3,500,000	4,500,001
Costs of raising capital	(165,045)
Capital issuance for noncontrolling interest		1,000
Net income (loss) attributable to noncontrolling interest	353,019	(27,838)
Net income (loss)	(32,705,662)	570,855	1,683,521
Balance	$ 17,549,447	$ 49,481,285	$ 45,437,268

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UNCERTAINTIES

12 Months Ended

Oct. 31, 2012

UNCERTAINTIES

UNCERTAINTIES

3. UNCERTAINTIES

        The Company has certain risks and uncertainties that it experienced during volatile market conditions. These volatilities can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 75% - 85% of total revenues and corn costs average 65% - 75% of cost of goods sold.

        The Company's operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company's operations, profitability and the availability and adequacy of cash flow to meet the Company's working capital requirements.

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INVENTORY (Tables)

12 Months Ended

Oct. 31, 2012

INVENTORY

Schedule of inventory

	2012		2011
Raw materials	$	521,865	$	593,761
Work in process		1,149,214		978,967
Supplies		922,384		840,756
Other grains		995,109		1,351,132
Totals	$	3,588,572	$	3,764,616

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FAIR VALUE MEASUREMENTS (Details) (USD $)	12 Months Ended
	Oct. 31, 2012	Oct. 31, 2011
Fair value measurements
Other intangible assets, net	$ 256,513	$ 415,276
Impairment Charge	27,844,579
Property and Equipment
Fair value measurements
Impairment Charge	27,722,183
Other Intangible Assets, net
Fair value measurements
Impairment Charge	122,396
Nonrecurring basis | Fair Value | Property and Equipment
Fair value measurements
Property and Equipment	58,099,286
Nonrecurring basis | Fair Value | Other Intangible Assets, net
Fair value measurements
Other intangible assets, net	256,513
Nonrecurring basis | Level 3 | Property and Equipment
Fair value measurements
Property and Equipment	58,099,286
Nonrecurring basis | Level 3 | Other Intangible Assets, net
Fair value measurements
Other intangible assets, net	$ 256,513

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RELATED PARTY TRANSACTIONS

12 Months Ended

Oct. 31, 2012

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

13. RELATED PARTY TRANSACTIONS

        As discussed in Note 10, Project Viking invested $3.5 million in the Company in May 2011 for 7,000,000 Class B units at a purchase price of $0.50 per unit, which were converted to Class A units.

        In July 2010, the Company issued to Project Viking 3,103,449 Class A units at a price per unit of $1.45 for total gross proceeds to the Company of approximately $4.5 million. All proceeds from the sale of the units to Project Viking were used to reduce the principal balance of the Company's revolving line of credit note with AgStar.

        The Company purchased approximately $57,451,000 and $43,233,000 of corn from members in fiscal years 2011 and 2010, respectively.