UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

COMMISSION FILE NO. 333-97215

 

NORTHERN GROWERS, LLC

(Exact name of registrant as specified in its charter)

 

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o  No o

 

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

 

On May 1, 2004, the issuer had 6,328,500 Class A capital units outstanding.

 

Transitional Small Business Disclosure Format (Check one):   Yes o  No  ý

 

2

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NORTHERN GROWERS, LLC

 

UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003

 

3

 

NORTHERN GROWERS, LLC

 

Table of Contents

 

 

CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
Consolidated Statements of Operations (Unaudited)
Consolidated Statements of Cash Flows (Unaudited)
Notes to Unaudited Consolidated Financial Statements

 

4

 

NORTHERN GROWERS, LLC

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

		March 31, 2004			December 31, 2003*
ASSETS
CURRENT ASSETS
Cash		$	90,461		$	2,865,310
Accounts receivable
Trade related party		4,296,725			3,590,952
Trade		557,053			500,885
Other		747,467			302,546
Inventory		4,645,911			4,300,904
Prepaid expenses		252,751			99,587
Investment in commodity contracts		2,132,174			184,622
Total current assets		12,722,542			11,844,806
PROPERTY AND EQUIPMENT
Land improvements		3,516,297			3,520,698
Equipment		33,833,820			33,710,785
Buildings		8,117,710			8,124,155
		45,467,827			45,355,638
Less accumulated depreciation		(4,239,639		)	(3,619,905		)
Net property and equipment		41,228,188			41,735,733
OTHER ASSETS
Financing costs		179,949			205,662
Total other assets		179,949			205,662
		$	54,130,679		$	53,786,201

 

*Derived from audited financial statements

 

 

See Notes to Unaudited Consolidated Financial Statements

 

5

 

		March 31, 2004			December 31, 2003*
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES
Checks in excess of bank balance		$	286,618		$	—
Accounts payable - trade		1,273,051			1,339,505
Accounts payable - corn		2,619,442			4,179,050
Accounts payable - related party		423,015			204,220
Accounts payable - construction - related party		—			476,216
Other accrued liabilities		558,700			501,574
Accrued interest		9,307			10,119
Distribution payable - Northern Growers		—			1,343,224
Distributions payable - Minority member		—			456,800
Notes payable - due upon demand		5,000			5,000
Current portion of long-term notes payable		3,530,862			3,134,922
Total current liabilities		8,705,995			11,650,630
LONG-TERM NOTES PAYABLE		18,631,123			20,053,377
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST		6,107,082			5,014,499
MEMBERS’ EQUITY
Capital units, $2.00 stated value, 12,000,000 units authorized; 6,328,500 units issued and outstanding		12,657,000			12,657,000
Additional paid-in capital		64,900			64,900
Retained earnings		7,964,579			4,345,795
Total members’ equity		20,686,479			17,067,695
		$	54,130,679		$	53,786,201

 

*Derived from audited financial statements

 

 

See Notes to Unaudited Consolidated Financial Statements

 

6

 

NORTHERN GROWERS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED

MARCH 31, 2004 AND 2003

 

		Three Months Ended March 31, 2004			Three Months Ended March 31, 2003
REVENUES
Sales related party		$	16,359,465		$	12,410,430
Sales		4,388,113			3,234,907
Incentive		960,305			3,478,418
Total revenues		21,707,883			19,123,755
COST OF REVENUES		15,765,321			14,696,174
GROSS PROFIT		5,942,562			4,427,581
EXPENSES
General and administrative		858,342			734,097
Total operating expenses		858,342			734,097
INCOME FROM OPERATIONS		5,084,220			3,693,484
OTHER INCOME (EXPENSES)
Interest income		2,138			—
Interest expense		(385,205		)	(496,333		)
Other		10,214			849
Total other (expenses)		(372,853		)	(495,484		)
INCOME BEFORE MINORITY INTEREST		4,711,367			3,198,000
MINORITY INTEREST IN SUBSIDIARY INCOME		(1,092,583		)	(761,395		)
NET INCOME		$	3,618,784		$	2,436,605
BASIC AND DILUTED EARNINGS PER UNIT		$	0.57		$	0.39
BASIC AND DILUTED WEIGHTED AVERAGE UNITS OUTSTANDING		6,328,500			6,328,450
DISTRIBUTIONS PER UNIT DECLARED		$	—		$	0.29
DISTRIBUTIONS PER UNIT PAID		$	0.21		$	—

 

See Notes to Unaudited Consolidated Financial Statements

 

7

 

NORTHERN GROWERS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003

 

		2004			2003
OPERATING ACTIVITIES
Net income		$	3,618,784		$	2,436,605
Changes to net income not affecting cash
Depreciation		619,734			603,686
Amortization of loan fees		25,713			25,712
Minority interest in subsidiary’s earnings		1,092,583			761,395
Decrease (increase) in current assets
Accounts receivable		(1,206,862		)	(2,705,280		)
Inventory		(345,007		)	1,102,607
Prepaid expenses		(153,164		)	(89,687		)
Investment in commodity contracts		(1,947,552		)	(824,205		)
Increase (decrease) in current liabilities
Accounts payable		(1,407,267		)	(1,273,840		)
Accrued liabilities		57,126			176,165
Accrued interest		(812		)	(127,473		)
NET CASH PROVIDED BY OPERATING ACTIVITIES		353,276			85,685
INVESTING ACTIVITIES
Purchase of property and equipment		(588,405		)	(511,313		)
NET CASH USED FOR INVESTING ACTIVITIES		(588,405		)	(511,313		)
FINANCING ACTIVITIES
Principal paid on long-term notes payable		(1,026,314		)	(2,253,863		)
Distributions paid - Northern Growers		(1,343,224		)	—
Distributions paid - Minority member		(456,800		)	—
Financing costs paid		—			(4,066		)
Checks in excess of bank balances		286,618			—
NET CASH USED FOR FINANCING ACTIVITIES		(2,539,720		)	(2,257,929		)
NET (DECREASE) IN CASH		(2,774,849		)	(2,683,557		)
CASH AT BEGINNING OF PERIOD		2,865,310			4,577,457
CASH AT END OF PERIOD		$	90,461		$	1,893,900
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of capitalized interest		$	360,305		$	595,640
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Accounts payable incurred for construction costs		$	—		$	590,802
Distributions payable		$	—		$	2,230,691

 

See Notes to Unaudited Consolidated Financial Statements

 

8

 

NORTHERN GROWERS, LLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003

 

NOTE 1 -                     NATURE OF OPERATIONS

 

Principal Business Activity

 

Northern Growers, LLC or the Company, (formerly Northern Growers Cooperative or the Cooperative) is a South Dakota limited liability company located near Big Stone City, South Dakota. The Company was organized to pool investors and provide a portion of the corn supply for a 40 million gallon (annual capacity) ethanol plant owned by Northern Lights Ethanol, LLC (Northern Lights). Northern Lights was formed on February 14, 2001. On June 26, 2002, the plant began grinding corn and on July 5, 2002, the ethanol plant commenced its principal operations.

 

On April 1, 2002, Whetstone Ethanol, LLC (Whetstone) was formed. The initial member of Whetstone was the Cooperative. Whetstone was formed for the purpose of acquiring the assets and liabilities of the Cooperative. On April 10, 2002, the Board of Directors of the Cooperative approved a plan of reorganization related to an exchange whereby Whetstone would acquire the assets and liabilities of the Cooperative. On March 27, 2003, the members of the Cooperative approved the plan of reorganization. The effective date of the reorganization was April l, 2003. The transaction was an exchange of interests whereby the assets and liabilities of the Cooperative were transferred for capital units of Whetstone. For financial statement purposes, no gain or loss was recorded as a result of the exchange transaction.

 

As a result of the exchange, the Cooperative was dissolved, with Whetstone’s capital units distributed to the members of the Cooperative at a rate of one Whetstone capital unit for each share of equity common stock and all voting common stock of the Cooperative surrendered and retired. In connection with the reorganization, Whetstone changed its name to Northern Growers, LLC. A minimum of 5,000 capital units is required for ownership of the Company. Such units are subject to certain transfer restrictions, including approval by the Board of Managers of the Company. The Company also retains the right to redeem the capital units at $.20 per unit in the event a member attempts to dispose of the units in a manner not in conformity with the Operating Agreement, if a member becomes a holder of less than 5,000 units, if a member breaches their member agreement or becomes a bankrupt member. The Operating Agreement of the Company also includes provisions whereby cash flow in excess of $200,000 will be distributed to unit holders subject to limitations imposed by a super majority vote of the Board of Managers or restrictions imposed by loan covenants.

 

NOTE 2 -                     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America.

 

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. All such adjustments are of a normal, recurring nature. The results of operations for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for a full year.

 

These financial statements should be read in conjunction with the financial statements and notes included in the Company’s financial statements for the year ended December 31, 2003.

 

As a result of the reorganization mentioned above, the financial statements of the prior periods have been restated to reflect the comparative basis of the Company as a limited liability company versus the Cooperative.

 

(continued on next page)

 

9

 

NORTHERN GROWERS, LLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its 77.16% owned subsidiary, Northern Lights. All significant inter-company transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications

 

Certain amounts on the 2003 financial statements have been reclassified to conform to the current year classification.  Such reclassifications had no effect on previously reported net income.

 

NOTE 3 -                     INVENTORY

 

Inventory consisted of the following:

 

 

* Derived from audited financial statements.

 

NOTE 4 -                     LONG-TERM NOTES PAYABLE

 

Long-term notes payable with US Bank consisted of the following:

 

 

*Derived from audited financial statements

 

(continued on next page)

 

10

 

NORTHERN GROWERS, LLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Northern Lights is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital and net worth requirements. Annually, the financing arrangements with US Bank include terms whereby Northern Lights makes an additional principal payment equal to 15% of Northern Lights’ excess cash flow (as defined by the agreement), not to exceed 20% of the outstanding principal balance. In conjunction with Northern Lights’ dividend distributions on February 10, 2004, additional excess cash flow payments of $335,664, were made on the fixed rate loan. In addition, no more than 80% of net income of Northern Lights can be distributed to its owners.

 

Minimum principal payments for each of the next five years are as follows:

 

 

Minimum principal payments for the twelve months ending March 31, 2004, include approximately $680,000 related to the calculation of additional principal due based on excess cash flow as required by the financing arrangements.

 

The availability under the variable rate revolving loan was $5,000,000 at March 31, 2004 and December 31, 2003.

 

NOTE 5 -                     COMMITMENTS, CONTINGENCIES AND AGREEMENTS

 

The Company or Northern Lights has entered into contracts and agreements regarding the construction, operation and management of the ethanol plant. The following are items of significance that have been updated through March 31, 2004.

 

Northern Lights receives an incentive payment from the United States Department of Agriculture (USDA) for the use of corn to produce ethanol. In accordance with the terms of this arrangement, revenue is recorded based on incremental production of ethanol compared to the prior year. The USDA has set the annual maximum not to exceed $7,500,000 for each eligible producer. The incentive is calculated on the USDA fiscal year of October 1 to September 30. Revenue of $1,010,124, $7,500,000 and $3,224,280 has been earned for the USDA program years ended September 30, 2004, 2003 and 2002, respectively. Incentive revenue of $876,971 and $2,924,047 was recorded for the three months ended March 31, 2004 and 2003, respectively, for this program.

 

Northern Lights also receives an incentive payment from the State of South Dakota to produce ethanol. In accordance with the terms of this arrangement, revenue is recorded based on ethanol sold. The State of South Dakota has set a maximum of up to $1,000,000 per year for this program per qualifying producer. Revenue of $666,667 and $1,000,000 has been earned for the South Dakota program years ended June 30, 2004 and 2003, respectively. Incentive revenue of $83,333 and $554,371 was recorded for the three months ended March 31, 2004 and 2003, respectively, for this program.

 

(continued on next page)

 

11

 

NORTHERN GROWERS, LLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 -                     DISTRIBUTIONS

 

During February 2004, Northern Lights distributed $2,000,000 of cash to its members. The Company received $1,543,200, and the minority member received $456,800. In conjunction with this cash distribution, the Company paid a distribution to its members of $1,343,224. The above distributions were recorded as a liability as of December 31, 2003.

 

12

 

Item 2.  Management’s Discussion and Analysis of Results of Operations

 

You should read the following discussion along with our financial statements, the notes to our financial statements included elsewhere in this report and our audited financial statements for our most recently completed fiscal year included in our annual report on Form 10-KSB.  The following discussion contains forward-looking statements that are subject to risks, uncertainties and assumptions.  Our actual results, performance and achievements may differ materially from those expressed in, or implied by, these forward-looking statements.  See “Cautionary Statement Regarding Forward-Looking Information.”

 

Overview

 

Northern Growers, LLC is a South Dakota limited liability company that owns and manages a 77.16% interest in Northern Lights Ethanol, LLC. Broin Investments I, LLC owns the remaining minority interest. Northern Lights built and operates an ethanol plant near Big Stone City, South Dakota which produces ethanol and distiller’s dried grains with solubles, or DDGS.  The plant has the name-plate capacity to produce 40 million gallons of ethanol annually. Northern Lights began grinding corn on June 26, 2002 and the first ethanol was produced on July 5, 2002.  Northern Growers’ members are primarily local agricultural producers and they supply a significant portion of the plant’s corn requirements.

 

Northern Growers was originally formed as a South Dakota cooperative and on March 27, 2003, the members of Northern Growers approved a reorganization into a South Dakota limited liability company effective April 1, 2003.  As a result of the reorganization, each member received one Class A capital unit of a newly formed South Dakota limited liability company in exchange for each equity share owned in the cooperative.  Prior to the reorganization, the limited liability company had no operations.  Accordingly, this section discusses the consolidated financial performance, results of

 

13

 

operations and capital resources of Northern Lights and Northern Growers, as if the cooperative had been a limited liability company since inception.

 

Northern Lights’ business consists of the production of ethanol and DDGS.  In addition to federal and state government incentive programs, the primary factors that influence our operating and financial performance are the prices at which we sell ethanol and DDGS and the costs related to production. Although there are various costs related to the production process, the most significant are the price at which we purchase corn and the costs of natural gas and steam. You should review these and other factors when evaluating the financial statements and results of operations.

 

RESULTS OF OPERATIONS

 

 Comparison of the three months ended March 31, 2004 and 2003

 

The following table presents, for the periods indicated, the relative composition of selected income data:

 

		Quarter Ended March 31,
		2004					2003
		$			% of Revenue		$			% of Revenue
Revenue:
Ethanol		16,359,465					12,410,430
DDGS		4,388,113					3,234,907
Incentive		960,305					3,478,418
Total		21,707,883					19,123,755
Cost of Revenues		15,765,321			73%		14,696,174			77%
General and Administrative Expense		858,342			4%		734,097			4%
Other Operating Income (Expense)		(372,853		)	(2)%		(495,484		)	(3)%
Minority Interest in Subsidiary		(1,092,583		)	(5)%		(761,395		)	(4)%
Net Income		$	3,618,784		17%		$	2,436,605		13%

 

Revenues-Revenues increased $2.6 million or 14% to $21.7 million for the quarter ended March 31, 2004 from $19.1 million for the first quarter of 2003.  The $2.6 million increase in revenues is due to increased revenues from the sale of ethanol and DDGS, offset by a decrease in incentive revenue.  The increase in revenue from the sales of ethanol and DDGS between periods was caused by the following factors: an increase in volume of ethanol sales by 19%; an increase in volume of DDGS sales by 29%; an increase in the average sales price for ethanol by 11%; and an increase in the average sales price for DDGS by 8%. The increase in sales volume for both ethanol and DDGS was due in part to an increased production rate at the plant, which allowed more ethanol and DDGS to be produced and made available for sale. The increase in the price of

 

14

 

ethanol was caused primarily by an increase in the price of unleaded gasoline, as the price of ethanol tends to follow the price of unleaded gasoline. The increase in the price of DDGS was the result of the overall improvement in the substitute livestock-feed markets, such as soybean meal, where prices have steadily increased.

 

While revenue from the sale of ethanol and DDGS increased between the three months ended March 31, 2004 and March 31, 2003, the total incentive revenues from federal and state government incentive programs decreased by 72% from the three months ended March 31, 2003 to the three months ended March 31, 2004. The incentive revenue from the United States Department of Agriculture’s Commodity Credit Corporation Bioenergy Program decreased $2.047 million or 70% to $876,971 for the quarter ended March 31, 2004 from $2.92 million for the first quarter of 2003.  This decrease was primarily because the payments under the Bioenergy Program are based in part on a plant’s increase in production from the previous year’s corresponding quarter. Since Northern Lights did not commence production until July 2002, the difference in production between the first quarter of 2002 and 2003 reflected the largest increase in production and, thus, the $2.047 million in incentive revenue earned under the program. Between the first quarters of 2003 and 2004, however, there was a significantly less increase in production and, therefore, less incentive revenue earned under the program for the first quarter of 2004. The decrease is also based upon the uncertainty of available funds under the Bioenergy Program caused by a funding shortfall in the 2003 program year. This uncertainty resulted in Northern Lights estimating and accruing only 75% of the anticipated allocation of funds under the program during the three months ended March 31, 2004.

 

Incentive revenue from the state of South Dakota decreased $471,038 or 85% to $83,333 for the three months ended March 31, 2004 from $554,371 for the first quarter of 2003.  For the 2003 program year beginning on July 1, 2002, which includes the three months ended March 31, 2003, South Dakota’s incentive payment program was based on the actual number of gallons of ethanol sold and the total amount of payment requests received from ethanol plants located in South Dakota.  The amount received in terms of payment during this period varied on a monthly basis. Starting with the new program year beginning July 1, 2003, however, South Dakota began allocating to each plant, monthly incentive income based on 1/12^th of the total $1 million program year payment anticipated for each plant. In addition, because of an increase in the number of ethanol plants operating in South Dakota between the first quarter of 2003 and first quarter of 2004, the funding allocated to the program was depleted after the January 2004 payment. Management, however, expects that funding and payments under this program will begin again on July 1, 2004 with the start of the new 2005 program year, although it is uncertain how much the payment will be, the period of time for which payments will be made, and whether there will be adequate funding under the program to cover the requests made for payment by the ethanol plants located in South Dakota.

 

Cost of Revenues-Cost of revenues increased $1.1 million or 7% to $15.8 million for the three months ended March 31, 2004 from $14.7 million for the first quarter of 2003.  While the total costs of revenues increased by $1.1 million, due primarily from an

 

15

 

increased production rate at the plant during the first quarter of 2004, the cost of revenues as a percentage of total sales revenues decreased by 18% from the first quarter of 2003 to the first quarter of 2004.  This 18% decrease is primarily the result of a 29% reduction in energy costs per gallon of ethanol produced. The average price of natural gas decreased by 12% from the first quarter of 2003 to the first quarter of 2004. Further, the transfer and use of steam from the immediately adjacent Big Stone Power Plant decreased energy costs during the first quarter of 2004, compared to the first quarter of 2003, by partially replacing the use of higher-priced natural gas. During the first quarter of 2003, the transfer and use of steam in the production process from the Big Stone Power Plant was not yet fully operational, resulting in a greater reliance on natural gas for the production process and, therefore, higher energy costs.

 

The use of an effective corn price risk management strategy through the use of forward cash contracts, futures and options, resulted in a 1% decrease in total corn costs from the first quarter of 2003 to the first quarter of 2004, despite a 25% increase in the average cash price of corn from the first quarter of 2003 to the first quarter of 2004.  Management anticipates that the price of corn will be subject to extreme volatility in the next three to six months due to various factors. A reduction in the projected quantity of corn harvested due to inclement weather or the total amount of corn actually planted by farmers, or an increase in demand for corn nationally or globally, could result in increased corn prices, which would have an adverse effect on the cost of revenues.

 

General and Administrative Expenses-General and administrative expenses increased approximately $124,000 or 17% to $858,000 for the quarter ended March 31, 2004 from $734,000 for the first quarter of 2003.  The increase in general and administrative expenses is primarily the result of increased management fees and employee profit-sharing costs during the first quarter of 2004, which are both based on the increased profitability of Northern Lights.

 

Interest Expense-Interest expense decreased $111,000 or 22% to $385,000 for the quarter ended March 31, 2004 from $496,000 for the first quarter of 2003.  The decrease in interest expense was primarily due to a $7.7 million reduction in outstanding debt from the first quarter of 2003 to the first quarter of 2004.  Of the $7.7 million reduction, $5.0 million of that debt reduction was made on the $5 million variable-rate, revolving note.

 

Net Income-Net income increased $1.2 million or 49% to $3.6 million for the quarter ended March 31, 2004 from $2.4 million for the first quarter of 2003.  This change was caused by increases in the production rate and sales price of ethanol and DDGS, along with decreases in energy costs and interest expense, all of which is discussed above.

 

Liquidity and Capital Resources

 

The following table shows the cash flows between the quarter ended March 31, 2004 and the quarter ended March 31, 2003:

 

16

 

		Quarter ended March 31,
		2004 $		2003 $
Net cash from operating activities		353,276		85,685
Net cash (used for) investing activities		(588,405	)	(511,313	)
Net cash (used for) financing activities		(2,539,720	)	(2,257,929	)

 

Cash Flow From Operations.  The net cash flow from operating activities was approximately $353,000 for the three months ended March 31, 2004, compared to providing $85,000 for the three months ended March 31, 2003.  The increase of approximately $268,000 was primarily the result of an increase in net income of $1.2 million, offset by an increase in the value of inventory on hand, and the increase in investment in commodity contracts to protect against the volatile corn market during the first and subsequent quarters of 2004.

 

Cash Flow From Investing Activities.  The net cash flow used for investing activities was $588,000 for the three months ended March 31, 2004, compared to the use of $511,000 for the three months ended March 31, 2003.  The increase of approximately $77,000 was due to the final payment being made on plant construction and a small increase in the purchase of plant and equipment during the first quarter of 2004.

 

Management estimates that at least $500,000 in capital expenditures will be made in the next six to twelve months for general improvements to the plant, which are expected to be financed from cash flow from operations. These capital improvements relate to the dryers, electrical and storage units at the plant.

 

Cash Flow From Financing Activities.  The net cash used for financing activities was approximately $2.5 million for the three months ended March 31, 2004, compared to the use of $2.3 million for the three months ended March 31, 2003.  The first quarter of 2004 included repayment of principal on Northern Lights’ debt of $1.0 million, a $1,343,000 cash distribution to our members, a $456,000 cash distribution to the minority member of Northern Lights, and Northern Lights’ checks in excess of bank balances of $286,000.  The first quarter of 2003 included repayment of principal on Northern Lights’ debt of $2.2 million, including a $1.7 million repayment on its $5 million variable-rate, revolving note.

 

U.S. Bank National Association, Sioux Falls, South Dakota, is Northern Lights’ primary lender.  On July 11, 2001 Northern Lights entered into a Loan Agreement and Note with U.S. Bank for up to $31.1 million in debt financing to fund the balance of the construction costs and other start-up expenses for the ethanol plant. As of January 1, 2003, Northern Lights refinanced the outstanding balance on its Construction Note with U.S. Bank into a $11.1 million variable-rate, non-revolving note; a $15 million fixed-rate note; and a $5 million variable-rate, revolving note. The notes from U.S. Bank are

 

17

 

secured by Northern Lights’ leasehold interest, easement rights, improvements, personal property (including general intangibles), and contracts.

 

The $15 million fixed-rate note bears 6.95% interest annually and requires equal quarterly payments of approximately $521,000 with a balloon payment due on December 31, 2007.  There is a prepayment penalty if Northern Lights prepays the loan prior to its maturity by any means other than the mandated prepayments calculated based on Northern Lights’ excess cash flow under the Loan Agreement.  Under the Loan Agreement, Northern Lights is required to prepay U.S. Bank a portion of the principal of the loan by May 1 of each year in an amount equal to 15% of the excess cash flow but not more than 20% of the outstanding principal balance of the loan. On February 10, 2004, an excess cash flow payment of $335,664 was made on this note, in conjunction with the distribution made to Northern Growers and the minority interest member of Northern Lights.  A total of $648,407 in principal payments was made on the fixed rate note during the three months ended March 31, 2004, compared to principal payments of $265,680 made in the first quarter of 2003.

 

The $11.1 million variable-rate, non-revolving note bears interest at 1.00% over U.S. Bank’s prime rate.  This note requires quarterly payments of interest and amortized principal on the basis of a ten-year term.  This note is due on December 31, 2007.  As of March 31, 2004, Northern Lights’ variable rate was 5.00%.  Principal payments of $309,018 were made on the variable-rate note during the three months ended March 31, 2004, compared to principal payments of $288,183 made in the first quarter of 2003.

 

The $5 million variable-rate, revolving note bears interest at 1.00% over U.S. Bank’s prime rate, requires quarterly interest only payments, and is due on December 31, 2007.  The revolving feature permits Northern Lights to re-borrow in multiples of $100,000 on a revolving basis, the difference between the outstanding principal amount on the note and $5 million. Northern Lights pays an unused commitment fee of 0.5% per year that is assessed quarterly on any funds not borrowed under the note.  As of March 31, 2004, the outstanding principal balance on the note was zero, and the variable rate was 5.00%, compared to the outstanding principal balance on the note of $3,300,000 as of March 31, 2003.

 

The Loan Agreement requires that Northern Lights provide U.S. Bank with audited annual and unaudited quarterly financial statements.  In addition, it contains minimum debt service coverage ratios, minimum working capital, minimum tangible net worth, a maximum capital expenditure limitation and other standard negative and affirmative covenants. If an event of default occurs, as defined in the Loan Agreement, U.S. Bank may terminate the Loan Agreement and declare the entire amount immediately due and owing.  Events of default under the Agreement include failure to make payments when due or violation of one or more of the Agreement’s covenants. Management believes that Northern Lights is currently in compliance with all covenants and restrictions under the Loan Agreement.

 

18

 

On June 5, 2002, Northern Lights executed a promissory note for up to $1 million in favor of U.S. Bank for the acquisition and installation of a regenerative thermal oxidizer, a pollution control device designed to reduce emissions.  On December 15, 2002, Northern Lights executed an additional promissory note for up to $500,000 in favor of U.S. Bank for the acquisition and installation of a second regenerative thermal oxidizer to supplement the plant’s primary regenerative thermal oxidizer. On May 1, 2003, the two promissory notes were refinanced as a new $1.2 million note.  Northern Lights pays interest on the outstanding balance of the promissory note at a fixed rate of 5.70%.  Northern Lights will make quarterly principal and interest payments on the note of $84,406 with the final payment due on May 1, 2007, Northern Lights made $68,890 in principal payments for the three months ended March 31, 2004.  The new promissory note is secured by the regenerative thermal oxidizers and a lien on all payments that Northern Lights receives or is entitled to receive under the Commodity Credit Corporation Bioenergy Program.

 

Management anticipates that the plant will continue to operate at name-plate capacity for the next twelve months. Management also expects in the next twelve months to have sufficient cash flow from operations to cover operating and administrative costs, capital expenditures and debt service obligations.

 

The following table provides information regarding the consolidated contractual obligations of Northern Growers as of March 31, 2004:

 

		Total			Less than One Year			One to Three Years			Four to Five Years			After Five Years
Long-Term Debt Obligations		$	22,161,985		$	3,530,862		$	6,315,273		$	12,315,850		$	0
Land Lease		388,915			2,400			4,950			5,040			376,525
Management Agreements		473,360			385,355			88,005			0			0
Unconditional Purchase Obligations		1,772,820			217,080			434,160			434,160			687,420
Total Contractual Cash Obligations		$	24,797,080		4,135,697			6,842,388			12,755,050			1,063,945

 

Off-Balance Sheet Arrangements

 

We do not use or have any off-balance sheet arrangements.

 

Recent Accounting Pronouncements

 

None.

 

19

 

Critical Accounting Policies and Estimates

 

Preparation of our financial statements require estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported.  Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates.  Management continually evaluates these estimates based on historical experience and other assumptions we believe to be reasonable under the circumstances.

 

The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions.  As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.

 

Of the significant accounting policies described in the notes to the financial statements, we believe that the following may involve a higher degree of estimates, judgments, and complexity:

 

Commitments and Contingencies

 

Contingencies, by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred, as well as in estimating the amount of the potential expense.  In conformity with accounting principles generally accepted in the United States, expenses are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated.

 

Inventory Valuation

 

Northern Lights accounts for its corn inventory at estimated net realizable market value.  Corn is an agricultural commodity that is freely traded, has quoted market prices, may be sold without significant further processing and has predictable and insignificant costs of disposal.  Northern Lights derives its estimates from local market prices determined by grain terminals in its area.  Changes in the market values of corn inventory are recognized as a component of cost of revenues.  Ethanol and DDGS inventories are stated at net realizable value.  Work-in-process, supplies, parts and chemical inventory are stated at the lower of cost or market on an average cost method.

 

Revenue Recognition.

 

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

 

Revenue from federal and state incentive programs is recorded when we have produced or sold the ethanol and satisfied the reporting requirements under each

 

20

 

applicable program.  When it is uncertain that we will receive full allocation and payment due under the federal incentive program, we derive an estimate of the incentive revenue for the relevant period based on various factors including the most recently used payment factor applied to the program.  The estimate is subject to change as management becomes aware of increases or decreases in the amount of funding available under the federal incentive program or other factors that affect funding or allocation of funds under such program.

 

Long-Lived Assets

 

Depreciation and amortization of Northern Lights’ property, plant and equipment is provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets.  Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.

 

Long-lived assets, including property, plant and equipment and investments, are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  An impaired asset is written down to its estimated fair market value based on the best information available.  Considerable management judgment is necessary to estimate future cash flows and may differ from actual.

 

Accounting for Derivative Instruments and Hedging Activities

 

Northern Lights minimizes the effects of changes in the price of agricultural commodities by engaging Broin Management, LLC to use exchange-traded futures and options contracts to minimize its net positions in these inventories and contracts.  Northern Lights accounts for changes in market value on exchange-traded futures and option contracts at exchange values. Northern Lights also accounts for changes in value of forward purchase and sales contracts at local market prices determined by grain terminals in its area.  Changes in the market value of all these contracts are recognized in earnings as a component of cost of revenues.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Northern Lights is exposed to the impact of market fluctuations associated with commodity prices and interest rates as discussed below. Northern Lights has no exposure to foreign currency risk as all of its business is conducted in U.S. dollars.

 

Commodity Price Risk

 

Northern Lights produces ethanol and its co-product, distiller’s dried grains with solubles (DDGS), from corn, and as such is sensitive to changes in the price of corn. The price of corn is subject to fluctuations due to unpredictable factors such as weather, total corn planted and harvested acreage, changes in national and global supply and demand, and government programs and policies. Northern Lights also uses natural gas in the

 

21

 

ethanol and DDGS production process, and as such is sensitive to changes in the price of natural gas.  The price of natural gas is influenced by such weather factors as extreme heat or cold in the summer and winter, in addition to the threat of hurricanes in the spring, summer and fall. Other natural gas price factors include the U.S. domestic onshore and offshore rig count, and the amount of U.S. natural gas in underground storage during both the injection (April 1st – November 7th) and withdrawal (November 14th – March 31st) seasons.

 

Northern Lights attempts to reduce the market risk associated with fluctuations in the price of corn and natural gas by employing a variety of risk management strategies.  Strategies include the use of derivative financial instruments such as futures and options initiated on the Chicago Board of Trade and/or the New York Mercantile Exchange, as well as the daily cash management of Northern Lights’ total corn and natural gas ownership relative to its monthly demand for each commodity, which may incorporate the use of forward cash contracts or basis contracts.

 

Corn is hedged with derivative instruments including futures and options contracts offered through the Chicago Board of Trade. Forward cash corn and basis contracts are also utilized to minimize future price risk.  Similarly, natural gas is hedged with futures and options contracts offered through the New York Mercantile Exchange.  Basis contracts are likewise utilized to minimize future price risk.

 

Unrealized gains and losses on futures and options contracts used as economic hedges of corn inventory, as well as on forward cash corn and basis contracts, are recognized as a component of cost of revenues for financial reporting on a monthly basis using month-end settlement prices for corn futures on the Chicago Board of Trade.  Corn inventories are marked to fair value using market based prices so that gains or losses on the derivative contracts, as well as forward cash corn and basis contracts, are offset by gains or losses on inventories during the same accounting period.

 

Unrealized gains and losses on futures and options contracts used as economic hedges of natural gas, as well as basis contracts, are recognized as a component of cost of revenues for financial reporting on a monthly basis using month-end settlement prices for natural gas futures on the New York Mercantile Exchange.  The natural gas inventories hedged with these derivatives or basis contracts are valued at the spot price of natural gas, plus or minus the gain or loss on the futures or options positions relative to the month-end settlement price on the New York Mercantile Exchange.

 

Interest Rate Risk

 

Northern Lights’ interest rate risk exposure pertains primarily to its variable rate, long-term debt. Specifically, Northern Lights has $9,638,250 million outstanding in variable rate, long-term debt as of March 31, 2004.  The interest rate on the variable rate, long-term debt is 1.0% over U.S. Bank’s prime rate, which was 5.0% as of March 31, 2004. Northern Lights manages its interest rate risk by monitoring the effects of market changes on the interest rates and using fixed rate debt.  Northern Lights has $12,523,735

 

22

 

outstanding in fixed rate, long-term debt as of March 31, 2004, of which $11,527,452 is subject to an interest rate of 6.95% and $996,283 is subject to an interest rate of 5.7%.

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Northern Growers’ chief executive officer and chief financial officer, after evaluating the effectiveness of Northern Growers’ “disclosure controls and procedures” (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report, has concluded that the disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.

 

Changes in Internal Controls

 

There were no significant changes in Northern Growers’ or Northern Lights’ internal controls or, to the knowledge of our management, in other factors that could significantly affect these controls subsequent to the end of the period covered by this report.

 

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION

 

This report contains forward-looking statements involving future events, future business and other conditions, our future performance, and our expected operations.  These statements are based on management’s beliefs and expectations and on information currently available to management. Forward-looking statements may include statements which use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the negatives of these words, and all similar expressions.

 

Forward-looking statements involve numerous assumptions, risks and uncertainties.  Northern Growers’ and Northern Lights’ actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements.  While Northern Growers believes that these statements are accurate, its business is dependent upon general economic conditions and various conditions specific to its industry and future trends and these factors could cause actual results to differ materially from the forward looking statements that have been made.  In particular,

 

•        While it is expected that the emissions control equipment and technology installed will eliminate any potentially dangerous emissions from the ethanol production process and allow Northern Lights to comply with existing environmental regulations, there is no guarantee that it will.

 

23

 

•        The ethanol industry and Northern Lights’ business is sensitive to natural gas prices. When natural gas prices increase, Northern Lights’ operating results may suffer.

 

•        Any lowering of gasoline prices will likely also lead to lower prices for ethanol and adversely affect Northern Lights’ operating results.

 

•        The ethanol industry and Northern Lights’ business is sensitive to corn prices.  When corn prices increase, Northern Lights’ operating results may suffer.

 

•        The ethanol industry and Northern Lights may be subject to additional regulation, such as environmental restrictions, or regulatory action, which could include fines, penalties, or injunctive relief as a result of any potential excessive emissions, which could increase costs.

 

•        Northern Lights is dependent upon Broin Management, LLC to manage the day-to-day activities of the plant and upon Broin-related entities to market the ethanol and DDGS produced at the plant.  If any of these entities cease providing services to Northern Lights, the plant’s operations may be adversely affected.

 

Northern Growers is not under any duty to update the forward-looking statements contained in this report.  Northern Growers cannot guarantee future results or performance, or what future business conditions will be like.  Northern Growers cautions you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Northern Lights Ethanol, LLC is currently a party in a pending matter before the South Dakota Board of Minerals and Environment in Pierre, South Dakota.  On December 29, 2003, Northern Lights, five other ethanol plants in South Dakota, and Broin Management, LLC, filed a petition with the South Dakota Board of Minerals and Environment against the South Dakota Department of Environment and Natural Resources (DENR).  The petition requests that the Board of Minerals and Environment bar the DENR from using and applying a new method for quantifying emissions from ethanol plants known as the Midwest Scaling Method or “multiplier,” which is not the required testing methodology for quantifying emissions under Northern Lights’ Title V Air Quality Operating Permit. The Board of Minerals and Environment is a nine person citizen board that serves a quasi-judicial and legislative role in matters involving the South Dakota air quality laws.  The Board of Minerals and Environment has the authority to hear petitions regarding the application of DENR’s rules governing air quality matters.

 

24

 

The petition alleges that the DENR’s use of the multiplier for quantifying emissions is inappropriate and unlawful.  Northern Lights and the other petitioners contend that South Dakota and federal regulations do not require or permit the use of the multiplier.  The use of the multiplier changes the way emission quantities are reported, typically increasing the reported quantity of emissions and making it potentially more difficult to comply with the Title V Air Quality Operating Permit and the standards under the Clean Air Act.  A hearing on this matter before the Board of Minerals and Environment is scheduled for June 16, 2004 in Pierre, South Dakota, the outcome of which is uncertain at this time.

 

Item 2.  Changes in Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None.

 

Item 5.  Other Information

 

Northern Growers entered into an amended Trading Service Agreement with Alerus Securities Corporation on February 2, 2004, under which Alerus reaffirmed its agreement to operate an alternative trading system for the trading of Northern Growers’ Class A capital units. On March 8, 2004, Alerus commenced the operations of the alternative trading system for the trading of Northern Growers’ Class A capital units. To access the trading system, a person may contact Alerus directly at www.alerusagstock.com or through www.northernlightsethanol.com.

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits.  See Exhibit Index following the signature page to this report.

 

(b)                                 Reports on Form 8-K.  None.

 

25

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	NORTHERN GROWERS, LLC
Dated:  May 17, 2004
	By	/s/ Robert Narem
		Robert Narem
		Chief Executive Officer and Chief Financial Officer

 

26

 

EXHIBIT INDEX

TO

FORM 10-Q

OF

NORTHERN GROWERS, LLC

 

		Exhibit Number		Description
		2.1		Plan of Reorganization(1)
		3.1		Articles of Organization(2)
		3.2		Operating Agreement, as adopted on April 1, 2003(3)
		3.3		Amendment and Addendum to Operating Agreement dated July 16, 2003 (4)
		3.4		Articles of Amendment to Articles of Organization(3)
		4.1		Form of Class A Unit Certificate(5)
		10.1		Amended Trading Service Agreement and Operational Manual with Alerus Securities Corporation dated February 2, 2004
		31		Rule 13a-14(a)/15d-14(a) Certification
		32		Section 1350 Certification

 

(1) Incorporated by reference from Appendix A to the information statement/prospectus filed as a part of the issuer’s Registration Statement on Form S-4 (File No. 333-97215).

(2) Incorporated by reference from Appendix B to the information statement/prospectus filed as a part of the issuer’s Registration Statement on Form S-4 (File No. 333-97215).

(3) Incorporated by reference from Appendix B to the issuer’s information statement/prospectus filed as part of the issuer’s Registration Statement on S-4 (File No. 333-97215).

(4) Incorporated by reference from the same numbered exhibit to the issuer’s Form 10-KSB filed on March 30, 2004 (File No. 333-97215).

(5) Incorporated by reference from the same numbered exhibit to the issuer’s information statement/prospectus filed as part of the issuer’s Registration Statement on Form S-4 (File No. 333-97215).

 

27