SecProbe.io

CORRESP
1
filename1.htm

NORTHERN
GROWERS, LLC

48416 144th Street

Big Stone City, South Dakota
57216

April 28,
2005

Rufus
Decker, Accounting Branch Chief

Meagan
Caldwell, Staff Accountant

United
States Securities and Exchange Commission

Division
of Corporate Finance

Washington,
D.C. 20549-0510

RE:       Northern Growers, LLC (File No. 0-50711)
Form 10-K for the fiscal
year ended December 31, 2004

Dear
Mr. Decker and Ms. Caldwell:

This
letter responds to your review letter dated April 7, 2005. Thank you for
allowing us an extra five business day to respond to your letter, as the extra
time was definitely needed in light of our personnel situation which you
discussed with our attorney, Christopher Lent. Please find enclosed your review
comments, which we have generally outlined as A-F, and our comments and/or
revised disclosure.

A.           Cover

2.               Based
upon our records, you filed a Form 8-A12G on April 28, 2004 and
were assigned a 1934 Act number of 0-50711. Your Form 10-K for
the year ended December 31, 2004 does not include the correct file number.
Please revise.

Our Comment: We have revised our 1934 Act file number to 0-50711.
We apologize for this error.

B. Item 3. Legal Proceedings. page 16

3.               Your
disclosure includes information relating to an inquiry by the Environmental
Protection Agency relating to certain emissions data. Please expand your
disclosure to include whether any amounts have been accrued relating to this
inquiry, if so, state the line item in which this was recorded in your
statements of operations and the period in which it was recorded. Please also
include your conclusion and the related assumptions used to determine your
conclusion based on the guidance in paragraphs 3 and 8-10 of SFAS 5
relating to this matter.

Our Revised Disclosure (Changes are underlined):

From time to time in the ordinary course of business, Northern Lights
or we may be  named as a
defendant in legal proceedings related to various issues, including without
limitation, workers’ compensation claims, tort claims, or contractual disputes.
Except as

described
below, Northern Lights or we are not currently involved in any material legal
proceedings, directly or indirectly, and we are not aware of any potential
claims.

In the last two years, both
the United States Environmental Protection Agency and the State of South Dakota
Department of Environment and Natural Resources have placed increased scrutiny
on ethanol plants for compliance with air quality laws and regulations. In
2002, a number of ethanol plants in Minnesota entered into consent decree
settlements with the State of Minnesota and the Environmental Protection Agency
arising from alleged emission violations. Civil penalties were assessed against
each ethanol plant, additional emissions devices were required, new testing
protocols were established and air quality permits were modified by the settlement
agreements. The Environmental Protection Agency subsequently stated that it
intends to “level the playing field,” inferring actions against other ethanol
producers.

On January 6, 2003, the
Environmental Protection Agency issued formal information  requests to many ethanol plants, including
those designed, constructed, and/or managed by Broin and Associates and Broin
Management, including Northern Lights. The requests required that the subject
ethanol plants provide the Environmental Protection Agency with certain
emissions data, presumably to determine whether the plants were in compliance
with the Clean Air Act. Since these
requests, Broin and Associates has been holding on-going discussions with the Environmental
Protection Agency regarding the application and use of testing methods for quantifying
certain emissions at the plants managed by Broin. To date, no action has been
taken nor has any final resolution been made regarding this matter. It is also
uncertain whether the Environmental Protection Agency will take any action with
respect to its formal information requests, or what the result or effect will
be on Northern Lights of the on-going discussions between Broin and the
Environmental Protection Agency. While there is a reasonable possibility of
fines and/or other penalties, management is unable to estimate the type or
amount of such fine or penalty, if any. Further, until Broin and
Associates and the Environmental Protection Agency resolve what the mandated
testing method will be for measuring emissions, management is unable to
estimate the scope and magnitude of any possible fine or other penalty. Accordingly,
Northern Growers has not accrued any amount to its consolidated statement of operations
relating to any potential action or claim from the Environmental Protection
Agency.

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

2

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

Our Comment:

Our conclusion not to accrue
any amounts relating to the inquiry by the Environmental Protection Agency
(EPA) was based on the following, as it relates to SFAS 5 (paragraphs 3 and 8-10).
It is less than “probable” but more than “remote” that the EPA will impose a
fine as it relates to its current inquiry; that is, there is only a “reasonable
possibility” of a fine from the EPA. It is less than likely that a fine will be
imposed because, based on current discussions between Broin and Associates, Inc.
and the EPA, the focus of the discussions is amicably and informally resolving
the proper emissions testing method for the future, as opposed to imposing
sanctions. Nevertheless, it is more than remote that a fine could be imposed,
as the EPA has yet to indicate to Broin and Associates that it will not impose
a fine upon resolving the emissions testing method.

Second, while there remains
a reasonable possibility of a fine from the EPA, we are unable to estimate a
possible loss or range of loss. Unless we know of the existence and the
severity of an emissions violation, we cannot provide any reasonable estimate
of a loss or range of such loss. Sanctions imposed by the EPA are usually based
on the severity of the violation. But the existence and severity of the
violation by Northern Lights (and other plants built by Broin and Associates
and managed by Broin Management) cannot be determined until Broin and
Associates and the EPA resolve what the proper emissions testing method will be
for the plants managed by Broin Management, including Northern Lights. In addition,
because the EPA’s focus is on virtually all plants built by Broin and
Associates and managed by Broin Management, it is difficult to estimate how a
potential fine would be allocated among the plants, including Northern Lights.

C.             Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operation

Results of Operations. page 23

4.               Please
expand your disclosure to include a discussion comparing the results of
operations for the years ended December 31, 2003 and December 31,
2002. Refer to the instructions for Item 303(a) of Regulation S-[K].

3

Our Revised Disclosure

Results of Operations

Comparison of years ended December 31,
2003 and December 31, 2002.

Northern Lights commenced
operations on July 5, 2002 and began operating at full name-plate capacity
in August, 2002. Accordingly, the following discussion will compare the year
ended 2003 and the year ended 2002 based on percentages relative to other line
items in the financial statements.

Revenues-Total revenues per month of operations increased 8% to $5.9 million
for the year ended December 31, 2003 from $5.5 million for the year ended December 31,
2002. The increase in revenues was primarily due to an increase in ethanol
revenue per month, offset by a decrease in incentive revenue per month.

Revenue
from the sale of ethanol per month of operations increased 27% from the year
ended December 31, 2002 to the year ended December 31, 2003. The
increase was due primarily to a 12% increase in the average sales price per
gallon of ethanol along with a 13% increase in the volume of ethanol sold per
month of operations. The price increase was caused by higher prices of unleaded
gasoline and a strong demand for ethanol. The increase in volume sold was
facilitated by an increase in production volume, resulting from an improvement
in plant efficiencies following the start-up of operations.

Revenue
from the sale of distiller’s grains per month of operations increased
approximately 33% from the year ended December 31, 2002 to the year ended December 31,
2003. The increase was due primarily to an 18% increase in the volume of
distiller’s grains sold, resulting from an increase in production at the plant,
and a 12% increase in the average sales price per ton sold.

Total incentive revenues
from federal and state government incentive programs per month of operations
decreased by 63% from the year ended December 31, 2002 to the year ended December 31,
2003. Incentive revenue consists of income received from federal and state
governments in connection with Northern Lights’ ethanol production.

The incentive revenue from
the United States Department of Agriculture’s Commodity Credit Corporation
Bioenergy Program decreased $781,000 per month of operations, or 69%, to
$343,000 per month of operations for the year ended December 31, 2003 from
$1.1 million per month of operations for the year ended 2002. The
decrease was due primarily to how the
payments are structured and made under the program. Payments are based
principally on the increase in gallons of ethanol produced compared to the
prior year’s production. Because 2002 was Northern Lights’ first year of
production, the plant had the largest increase in production from the prior
year, or 2001.

Incentive revenue from the
state of South Dakota incentive program increased $32,000 per month of
operations, or 49%, to $99,000 per month of operations for the year ended December 31,
2003 from $66,000 per month of operations from the year ended December 31,
2002. The increase was due to a change the State of South Dakota made in
the method of allocating and making payment under the program. During the 2003
program year (July 2002 to June 2003), the incentive funds were
earned on the

4

basis of
production and pro-rated among all ethanol plants operating in South Dakota.
Starting in July 2003, however, the funds were paid to ethanol plants
based on a standard and predetermined amount per month.

Cost of
Revenues-Northern Lights’ cost of revenues, which includes production
expense, for the year ended December 31, 2003, decreased to approximately
90% of sales revenues, compared to approximately 96% of sales revenues for the
six months of operations during the year ended December 31, 2002. The
decrease in the cost of revenues as a percentage of sales revenues was the
result of a 14% and 8% increase in the net sales price of ethanol and distiller’s
grains, respectively, and a 6% increase in the rate of production. These
results, however, were partially offset by a 28% increase in total energy costs
from 2002 to 2003. The increase in energy costs was primarily due to a 55%
increase in the price of natural gas from 2002 to 2003.

General and Administrative Expenses-General and administrative expenses per
month of operations increased 32% per month of operation from 2002 to 2003. The
increase in general and administrative expenses was primarily due to an
increase in management fees, which are based in part on the increased profits
of Northern Lights in 2003.

Interest Expense-Interest expense on outstanding debt with our primary lender, US Bank,
was capitalized as part of construction costs until the start of operations in July 2002.
Accordingly, interest expense per operational month for 2002 to 2003 decreased
only 4% due to the decreasing principal balance on notes payable.

Minority Interest in Subsidiary-Minority interest in subsidiary increased
$541,000, or 44%, to $1.77 million for the year ended December 31, 2003 from
$1.23 million for the year ended 2002. The increase in minority interest was
the result of an increase in net income in 2003.

Net Income-Despite a $1.7 million aggregate increase in net income from 2002 to
2003 as a result of increased production for the 2003 year, an increase in per
unit sales prices of ethanol and distiller’s grains in 2003, and a decrease in
cost of revenues as a percentage of sales revenues in 2003, net income as a
percentage of total revenues decreased from 12% to 8% from 2002 to 2003. This
decrease was caused primarily by the decrease in incentive revenue from 2002 to
2003.

Liquidity and Capital Resources

Cash Flow
From Operations. The
net cash flow provided by operating activities was approximately $13.2 million
for the year ended December 31, 2003. The cash flow from operations
consisted of net income of $5.6 million, net non-cash expenses of $4.3 million,
and $3.3 million net change in assets and liability balances. The $3.3 million
change in asset and liability balances was primarily due to a reduction of
accounts receivable, resulting from the collection of a large Bioenergy Program
payment in August 2003. It was also caused by an increase in accounts
payable, due largely to several producers electing to defer payment for the
delivery of corn to the plant from 2002 to 2003.

5

The net cash flow provided
by operating activities was approximately $327,000 for the year ended December 31,
2002. The cash flow from operations consisted of net income of $3.9 million,
net non-cash expenses of $2.5 million, and $6.0 million net change in assets
and liability balances. Because 2002 was the start-up of operations, all asset
and liability accounts were minimal at the end of 2001.

Cash Flow
From Investing Activities. The net cash used for investing activities was approximately $1.1
million for the year ended December 31, 2003. The purchase of plant and
equipment associated with final plant construction accounted for approximately
$800,000 of the total $1.1 million increase in investing activities. Of the
$800,000 in costs, Northern Lights spent $580,000 for the installation of a
second regenerative thermal oxidizer, a pollution control device designed to
reduce e