Exhibit 10.12


 


SECURITY
AGREEMENT


 


This Security Agreement (“Agreement”), dated as of April 24, 2008,
is between HIGHWATER ETHANOL, LLC, a Minnesota limited liability company (the “Debtor”),
and FIRST NATIONAL BANK OF OMAHA, a national banking association (in its
capacity as Collateral Agent for the Banks, the “Secured Party”), as Collateral
Agent for the Banks.


 


WHEREAS, the Debtor has entered into a Construction Loan Agreement
dated of even date with this Agreement (as amended, restated and in effect from
time to time, the “Loan Agreement”), with the Secured Party as a Lender and as
Agent, and the other Banks a party thereto, pursuant to which the Banks,
subject to the terms and conditions contained therein, are to make Loans or
otherwise to extend credit to the Debtor; and


 


WHEREAS, it is a condition precedent to the Banks’ extending the
Obligations to the Debtor under the Loan Agreement that the Debtor execute and
deliver to the Secured Party, as Collateral Agent for the Banks, a security
agreement in substantially the form hereof; and


 


WHEREAS, the Debtor wishes to grant a security interest in favor of the
Secured Party, as Collateral Agent for the Banks, as herein provided.


 


NOW, THEREFORE, in consideration of the promises contained herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:


 


1.             Definitions.  All capitalized terms used herein without
definitions shall have the respective meanings provided therefor in the Loan
Agreement.  The term “State,” as used
herein, means the State of Nebraska.  All
terms defined in the Uniform Commercial Code of the State and used herein shall
have the same definitions herein as specified therein.  However, if a term is defined in Article 9
of the Uniform Commercial Code of the State differently than in another Article of
the Uniform Commercial Code of the State, the term has the meaning specified in
Article 9.  The term “Obligations,”
as used herein, means all of the indebtedness, obligations and liabilities of
the Debtor to the Banks under the Loan Agreement and the other Loan Documents,
of every kind, nature or description, individually or collectively, whether
direct or indirect, joint or several, absolute or contingent, primary or
secondary, due or to become due, now existing or hereafter arising, whether
provided for under or in respect of the Loan Agreement or otherwise or under
any promissory notes or other instruments or agreements executed and delivered
pursuant thereto or in connection therewith or this Agreement or otherwise and
any overdrafts or other deposit account liabilities of the Debtor to the
Secured Party, and the term “Event of Default,” as used herein, means the
failure of the Debtor to pay or perform any of the Obligations as and when due
to be paid or performed under the terms of the Loan Agreement and the other
Loan Documents and shall also have the meaning given to such term in the Loan
Agreement or any other Loan Document.


 


2.             Grant of
Security Interest.  The Debtor hereby
grants to the Secured Party, as collateral agent for the Banks, to secure the
payment and performance in full of all of the 


 

















 


Obligations, a
first priority security interest in and so pledges and assigns to the Secured
Party, as collateral agent for the Banks, in all goods, property and assets of
the Debtor, including, but not limited to the following goods, property, assets
and rights of the Debtor, wherever located, whether now owned or hereafter
acquired or arising, and all proceeds and products thereof (all of the same
being hereinafter called the “Collateral”):


 


2.1.          All personal and
fixture property of every kind and nature including, without limitation, all
goods, equipment, inventory, grain, grain inventory, furniture and fixtures,
all of every kind and nature (including any accessions, additions,
improvements, attachments and accessories thereto and products and proceeds
thereof, and all operating manuals, service records, maintenance logs and
warranties applicable thereto), and including all inventory, including, but not
limited to, all corn, grain, ethanol and DDGS inventory, in which the Debtor
has an interest in mass or a joint or other interest or right of any kind.


 


2.2.          All instruments
(including promissory notes, notes receivable and supporting obligations),
documents, negotiable and non-negotiable documents of title, negotiable and
non-negotiable warehouse receipts, bills of lading, transit receipts or other
documents of title, however denominated (collectively, “Warehouse Receipts”),
and the goods underlying or relating to Warehouse Receipts, including, but not
limited to, the Debtor’s present and future rights to take possession and
delivery of goods underlying or relating to any Warehouse Receipt.


 


2.3.          All accounts, all of
the Debtor’s rights to goods represented by or securing any accounts, all
proceeds from the disposition or collection of accounts, all of the Debtor’s
rights as an unpaid vendor, including the right to reclaim goods, the right to
stop goods in transit and the right to replevy goods, and all guaranties,
letters of credit and other supports to the payment of accounts, chattel paper
(whether tangible or electronic), deposit accounts (whether maintained with the
Secured Party or other financial institutions and including, without
limitation, money market account #20157015120 maintained with the Secured
Party), certificates of deposit (whether negotiable or non-negotiable),
letter-of-credit rights (whether or not the letter of credit is evidenced by a
writing), supporting obligations, any other contract rights or rights to the
payment of money, insurance claims and proceeds, trademarks, service marks,
copyrights, patents and other intellectual property rights and all of the
Debtor’s rights therein or thereto, software, general intangibles (including
all payment intangibles), all payments and rights to payments whether or not
earned by performance including, but not limited to, accounts and payments from
the USDA Commodity Credit Corporation Bioenergy Program and other similar
programs, price support payments, subsidy payments, guaranty payments, payments
in kind, deficiency payments, letters of entitlements, storage payments,
emergency assistance, diversion payments, production flexibility contracts,
contract reserve payments, grain insurance fund claim rights, grain insurance
fund proceeds and all similar programs of any and every kind, whether federal,
state or local, and any other rights to payment under or from any preexisting,
current or future federal, state or local government program, and the products
and proceeds of all the foregoing.


 


2.4.          All farm products,
including, but not limited to, all poultry and livestock and their young,
together with all products and replacements for such poultry and livestock; all
crops, annual or perennial, and all products of such crops; and all grain,
feed, seed, fertilizer, chemicals, 


 


2

















 


medicines, and
other supplies used or produced in the Debtor’s operations or sold as
inventory, and the products and proceeds and rights to payments associated with
all or any of the foregoing.


 


2.5.          All books, records,
ledger sheets or cards, reports, invoices, purchase orders, customer lists,
mailing lists, files, correspondence, computer programs, tapes, disks and other
documents or data processing software that at any time relates to any of the
foregoing or are otherwise necessary or helpful in realizing on or collecting
on any Collateral.


 


2.6.          All investment
property, securities, securities accounts (including, but not limited to, all
accounts maintained with First National Capital Markets, Inc.) and the
securities entitlements, securities and investment property contained therein,
all hedging accounts and all commodity and securities entitlements, investment
property, commodities and other rights associated with such hedging accounts,
and all commodity accounts and all the commodities, securities and investment
property contained therein.


 


2.7.          All commercial tort
claims now existing or hereafter arising. 
The Secured Party acknowledges that the attachment of its security
interest in any additional commercial tort claim as original collateral is
subject to the Debtor’s compliance with Section 4.7 below.


 


3.             Authorization to
File Financing Statements.  The
Debtor hereby irrevocably authorizes the Secured Party at any time and from
time to time to file in any filing office in any Uniform Commercial Code
jurisdiction any initial financing statements and amendments thereto that (a) indicate
and describe the Collateral, including, but not limited to, descriptions of the
Collateral as all assets of the Debtor, or words of similar effect, and (b) provide
any other information required by part 5 of Article 9 of the Uniform
Commercial Code of the State, or such other jurisdiction, for the sufficiency
or filing office acceptance of any financing statement or amendment, including (i) whether
the Debtor is an organization, the type of organization and any organizational
identification number issued to the Debtor and, (ii) in the case of a
financing statement filed as a fixture filing or indicating Collateral as
as-extracted collateral or timber to be cut, a sufficient description of real
property to which the Collateral relates. 
The Debtor agrees to furnish any such information to the Secured Party
promptly upon the Secured Party’s request. 
In addition, the Debtor hereby authorizes the Secured Party to file all
effective financing statements pursuant to 7 U.S.C. Section 1631, and
amendments to effective statements, describing the Collateral in any offices as
the Secured Party, in its sole discretion, may determine.  If requested by the Secured Party, the Debtor
will provide the Secured Party with a list of the buyers, commission merchants
and selling agents to or through whom the Debtor may sell farm products or
grain and a list of all elevators, warehousemen or others where the Debtor
stores corn.  The Debtor authorizes the
Secured Party to notify all such buyers, commission merchants, selling agents,
elevators, warehousemen or any other person, of the Secured Party’s security
interest in the Debtor’s farm products, corn or grain unless prohibited by
law.  The Debtor also ratifies its
authorization for the Secured Party to have filed in any Uniform Commercial
Code jurisdiction any like initial financing statements or amendments thereto
if filed prior to the date hereof.


 


4.             Other Actions.  To further the attachment, perfection and
first priority of, and the ability of the Secured Party to enforce, the Secured
Party’s, as collateral agent for the Banks, 
security interest in the Collateral, and without limitation on the
Debtor’s other obligations in this 


 


3

















 


Agreement, the
Debtor agrees, in each case at the Debtor’s expense, to take the following
actions with respect to the following Collateral:


 


4.1.          Promissory
Notes, Instruments and Tangible Chattel Paper.  If the Debtor shall at any time hold or
acquire any instruments, promissory notes or tangible chattel paper, the Debtor
shall, upon request of the Secured Party, forthwith endorse, assign and deliver
the same to the Secured Party, accompanied by such instruments of transfer or
assignment duly executed in blank as the Secured Party may from time to time
specify. The Debtor will not deliver possession of, endorse or assign any
instruments, promissory notes or tangible chattel paper to any person or entity
other than the Secured Party.


 


4.2.          Deposit
Accounts.  For each deposit account
that the Debtor at any time opens or maintains, the Debtor shall, at the
Secured Party’s request and option, pursuant to an agreement in form and
substance satisfactory to the Secured Party, either (a) cause the
depositary bank to comply at any time with instructions from the Secured Party
to such depositary bank directing the disposition of funds from time to time
credited to such deposit account, without further consent of the Debtor, or (b) arrange
for the Secured Party to become the customer of the depositary bank with respect
to the deposit account, with the Debtor being permitted, only with the consent
of the Secured Party, to exercise rights to withdraw funds from such deposit
account.  The Secured Party agrees with
the Debtor that the Secured Party shall not give any such instructions or
withhold any withdrawal rights from the Debtor, unless an Event of Default has
occurred and is continuing, or would occur, if effect were given to any
withdrawal not otherwise permitted by the Loan Documents.  The provisions of this paragraph shall not
apply to (i) any deposit account for which the Debtor, the depositary bank
and the Secured Party have entered into a cash collateral agreement specially
negotiated among the Debtor, the depositary bank and the Secured Party for the
specific purpose set forth therein, (ii) a deposit account for which the
Secured Party is the depositary bank and is in automatic control, and (iii) deposit
accounts specially and exclusively used for payroll, payroll taxes and other
employee wage and benefit payments to or for the benefit of the Debtor’s
salaried employees.


 


4.3.          Investment
Property.  If the Debtor shall at any
time hold or acquire any certificated securities, the Debtor shall forthwith
endorse, assign and deliver the same to the Secured Party, accompanied by such
instruments of transfer or assignment duly executed in blank as the Secured
Party may from time to time specify.  If
any securities now or hereafter acquired by the Debtor are uncertificated and
are issued to the Debtor or its nominee directly by the issuer thereof, the
Debtor shall immediately notify the Secured Party thereof and, at the Secured
Party’s request and option, pursuant to an agreement in form and substance
satisfactory to the Secured Party, either (a) cause the issuer to agree to
comply with instructions from the Secured Party as to such securities, without
further consent of the Debtor or such nominee, or (b) arrange for the
Secured Party to become the registered owner of the securities.  If any commodity interests or securities,
whether certificated or uncertificated, or other investment property now or
hereafter acquired by the Debtor are held by the Debtor or its nominee through
a securities intermediary or commodity intermediary, the Debtor shall
immediately notify 


 


4

















 


the Secured Party thereof and, at the Secured Party’s request and
option, pursuant to an agreement in form and substance satisfactory to the
Secured Party, either (i) cause such securities intermediary or (as the
case may be) commodity intermediary to agree to comply with entitlement orders
or other instructions from the Secured Party to such securities intermediary as
to such securities or other investment property, or (as the case may be) to
apply any value distributed on account of any commodity contract as directed by
the Secured Party to such commodity intermediary, in each case without further
consent of the Debtor or such nominee, or (ii) in the case of financial
assets or other investment property held through a securities intermediary,
arrange for the Secured Party to become the entitlement holder with respect to
such investment property, with the Debtor being permitted, only with the
consent of the Secured Party, to exercise rights to withdraw or otherwise deal
with such investment property.  The
Secured Party agrees with the Debtor that the Secured Party shall not give any
such entitlement orders or instructions or directions to any such issuer,
securities intermediary or commodity intermediary, and shall not withhold its
consent to the exercise of any withdrawal or dealing rights by the Debtor,
unless an Event of Default has occurred and is continuing, or, after giving
effect to any such investment and withdrawal rights not otherwise permitted by
the Loan Documents, would occur.


 


4.4.          Collateral
in the Possession of a Bailee.  If
any Collateral is at any time in the possession of a bailee, warehouseman or
elevator, the Debtor shall promptly notify the Secured Party thereof and, at
the Secured Party’s request and option, shall promptly obtain an
acknowledgement from the bailee, warehouseman or elevator, in form and
substance satisfactory to the Secured Party, that the bailee, warehouseman or
elevator holds such Collateral for the benefit of the Secured Party as
collateral agent for the Banks, and that such bailee, warehouseman or elevator
agrees to comply, without further consent of the Debtor, with instructions from
the Secured Party as to such Collateral, including, but not limited to, the
delivery of such Collateral to the Secured Party or as the Secured Party
directs, or the payment of the sale proceeds of such Collateral to the Secured
Party, or as the Secured Party directs. 
The Secured Party agrees with the Debtor that the Secured Party shall
not give any such instructions unless an Event of Default has occurred and is
continuing or would occur after taking into account any action by the Debtor
with respect to the bailee, warehouseman or elevator.


 


4.5.          Electronic
Chattel Paper and Transferable Records. 
If the Debtor at any time holds or acquires an interest in any
electronic chattel paper or any “transferable record,” as that term is defined
in Section 201 of the federal Electronic Signatures in Global and National
Commerce Act (as hereafter amended), or in Section 16 of the Uniform
Electronic Transactions Act as in effect in any relevant jurisdiction, the
Debtor shall promptly notify the Secured Party thereof and, at the request and
option of the Secured Party, shall take such action as the Secured Party may
reasonably request to vest in the Secured Party control, under Section 9-105
of the Uniform Commercial Code, of such electronic chattel paper or control
under Section 201 of the federal Electronic Signatures in Global and
National Commerce Act or, as the case may be, Section 16 of the Uniform
Electronic Transactions Act, as so in effect in such jurisdiction, of such
transferable record.  The Secured Party
agrees with the Debtor that the Secured Party will 


 


5

















 


arrange, pursuant to procedures satisfactory to the Secured Party and
so long as such procedures will not result in the Secured Party’s loss of
control, for the Debtor to make alterations to the electronic chattel paper or
transferable record permitted under UCC Section 9-105 or, as the case may
be, Section 201 of the federal Electronic Signatures in Global and
National Commerce Act or Section 16 of the Uniform Electronic Transactions
Act for a party in control to make without loss of control, unless an Event of
Default has occurred and is continuing or would occur after taking into account
any action by the Debtor with respect to such electronic chattel paper or
transferable record.


 


4.6.          Letter-of-Credit
Rights.  If the Debtor is at any time
a beneficiary under a letter of credit, the Debtor shall promptly notify the
Secured Party thereof and, at the request and option of the Secured Party, the
Debtor shall, pursuant to an agreement in form and substance satisfactory to
the Secured Party, either (i) arrange for the issuer and any confirmer or
other nominated person of such letter of credit to consent to an assignment to
the Secured Party of the proceeds of the letter of credit, or (ii) arrange
for the Secured Party to become the transferee beneficiary of the letter of
credit, with the Secured Party agreeing, in each case, that the proceeds of the
letter to credit are to be applied to the Obligations in such order and
priority as the Secured Party.


 


4.7           Commercial
Tort Claims.  If the Debtor shall at
any time hold or acquire a commercial tort claim, the Debtor shall immediately
notify the Secured Party in a writing signed by the Debtor of the particulars
thereof and grant to the Secured Party in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Agreement, with
such writing to be in form and substance satisfactory to the Secured Party.


 


4.8           Other
Actions as to Any and All Collateral. 
The Debtor further agrees, at the request and option of the Secured
Party, to take any and all other actions the Secured Party may determine to be
necessary or useful for the attachment, perfection and first priority of, and
the ability of the Secured Party to enforce, the Secured Party’s (as collateral
agent for the Banks) security interest in any and all of the Collateral,
including, without limitation, (a) executing, delivering and, where
appropriate, filing financing statements and amendments relating thereto under
the Uniform Commercial Code, to the extent, if any, that the Debtor’s signature
thereon is required therefor, (b) causing the Secured Party’s name to be
noted as secured party on any certificate of title for a titled good if such
notation is a condition to attachment, perfection or priority of, or ability of
the Secured Party to enforce, the Secured Party’s (as collateral agent for the
Banks) security interest in such Collateral, (c) complying with any
provision of any statute, regulation or treaty of the United States as to any
Collateral if compliance with such provision is a condition to attachment,
perfection or priority of, or ability of the Secured Party to enforce, the
Secured Party’s (as collateral agent for the Banks) security interest in such
Collateral, (d) obtaining governmental and other third party waivers,
consents and approvals in form and substance satisfactory to Secured Party,
including, without limitation, any consent of any licensor, lessor or other
person obligated on Collateral, (e) obtaining waivers from mortgagees and
landlords in form and substance satisfactory to the Secured Party and (f) taking
all actions under any earlier versions of the Uniform 


 


6

















 


Commercial Code or under any other law, as reasonably determined by the
Secured Party to be applicable in any relevant Uniform Commercial Code or other
jurisdiction, including any foreign jurisdiction.


 


4.9.          Warehouse Receipts.


 


(a)           The
Debtor has delivered or will deliver to the Secured Party any and all
documents, instruments and writings in any way relating to the Warehouse
Receipts or in any way relating to the property evidenced thereby.  As long as this Agreement remains in effect,
the Debtor shall immediately deliver to the Secured Party any and all future
documents, instruments, or other writings applicable or in any way relating to
the foregoing in the Debtor’s possession. 
In the event that the Debtor is unable to deliver original Warehouse
Receipts, and such other documents, to the Secured Party at the time this
Agreement is executed, as required above, the Debtor agrees to deliver
immediately such Warehouse Receipts to the Secured Party upon issuance of the
same.


 


(b)           The Debtor further agrees that the
Secured Party shall have the right at any time, and from time to time, whether
or not one or more Events of Default exist under the Loan Agreement, to demand
that the Debtor immediately deliver to the Secured Party any and all Warehouse
Receipts held in the Debtor’s possession or control for or representing all or
any part of the Collateral that is then or may thereafter be issued in the name
of the Debtor.  The Debtor
unconditionally agrees to deliver such Warehouse Receipts to the Secured Party
on demand.


 


(c)           In addition to Warehouse Receipts,
the Secured Party may require the Debtor from time to time, one or more times,
to deliver to the Secured Party such lists, descriptions and designations of
any applicable Collateral not represented by Warehouse Receipts as the Secured
Party may require to identify the nature, extent and location of the same.


 


(d)           The Debtor represents and warrants to
the Secured Party that all of the Debtor’s grain at any time, and from time to
time, represented by Warehouse Receipts or included in any list, description or
designation referred to above, will at all times be owned by the Debtor free
and clear of all liens, encumbrances and security interests of any kind
whatsoever, excepting only the security interest of the Secured Party pursuant
hereto.


 


(e)           As long as no Event of Default
exists, the Debtor may sell or use in its operations the property released by
the Secured Party from or under Warehouse Receipts, as well as the Debtor’s
property not represented by Warehouse Receipts, in carrying on the Debtor’s
business in the ordinary course, substantially in the same manner as now
conducted; but a sale in the ordinary course of business shall not include any
transfer or sale in satisfaction, partial or complete, of a debt owed by the
Debtor.


 


4.10.        Farm Products.  After the occurrence of an Event of Default,
the Debtor shall not store, transfer or consign any farm products without the
prior written consent of the Secured Party. 
The Debtor shall not store, transfer or consign any farm products 


 


7

















 


without first obtaining a written acknowledgment from
any person to whom physical possession of any such farm products are delivered (a) of
the Secured Party’s security interest in such farm products, (b) that it
holds possession of such farm products for the Secured Party’s (as collateral
agent for the Banks) benefit, (c) that it will not issue negotiable
documents with respect to such farm products and (d) that it agrees to
follow the Secured Party’s instructions as to disposition of farm products upon
its receipt of such instructions.  The
Debtor will comply with the provisions of all federal, state or local
government programs, agreements and contracts to which the Debtor is a party.


 


4.11.        Proceeds.  The Debtor shall transfer all proceeds of all
Collateral into the Debtor’s main operating account established and maintained
by the Debtor with the Secured Party, or in such other deposit account as
required by the Secured Party.  The
Debtor shall not grant any other person or entity a security interest, lien or
other encumbrance in or on such deposit account.


 


5.             Relation to
Other Security Documents.  The
provisions of this Agreement supplement the provisions of the Loan Agreement,
Mortgage and other Loan Documents. 
Nothing contained in the Loan Agreement, Mortgage or other Loan Documents
shall derogate from any of the rights or remedies of the Secured Party (as
collateral agent for the Banks) hereunder.


 


6.             Representations
and Warranties Concerning Debtor’s Legal Status.  The Debtor represents and warrants to the
Secured Party as follows: (a) the Debtor’s exact legal name is that
indicated on the first page and on the signature page hereof, (b) the
Debtor is an organization of the type, and is organized in the jurisdiction set
forth on the first page of this Agreement, (c) the Debtor’s tax
identification number is 20-4798531 and the Debtor’s organizational
identification number is 1825789-2 or if left blank, then the Debtor has none,
and (d) each of the Debtor’s places of business and, if more than one, its
chief executive office, as well as the Debtor’s mailing address, if different,
are listed in Schedule A attached to this Agreement and incorporated herein by
reference.


 


7.             Covenants
Concerning Debtor’s Legal Status. 
The Debtor covenants with the Secured Party as follows: (a) without
the prior written consent of the Banks, which consent shall not be unreasonably
withheld, the Debtor will not change its name, its place of business or, if
more than one, chief executive office, or its mailing address or organizational
identification number if it has one, (b) if the Debtor does not have an
organizational identification number and later obtains one, the Debtor shall
forthwith notify the Secured Party of such organizational identification
number, and (c) without the prior written consent of the Banks, which
consent shall not be unreasonably withheld, the Debtor will not change its type
of organization, jurisdiction of organization or other legal structure.


 


8.             Representations
and Warranties Concerning Collateral, Etc. 
The Debtor further represents and warrants to the Secured Party as
follows: (a) the Debtor is the owner of the Collateral, free from any
right or claim or any person or any adverse lien, security interest or other
encumbrance, except for the security interest created by this Agreement and
other liens permitted by the Loan Agreement, (b) except as disclosed to
the Secured Party, none of the 


 


8

















 


account debtors or
other persons obligated on any of the Collateral is a governmental authority
covered by the Federal Assignment of Claims Act or like federal, state or local
statute or rule in respect of such Collateral, (c) the Debtor holds
no commercial tort claim except as indicated on Schedule A attached to this
Agreement, and (d) the Debtor has at all times operated its business in
material compliance with all applicable provisions of the federal Fair Labor
Standards Act, as amended, and with all applicable provisions of federal, state
and local statutes and ordinances dealing with the control, shipment, storage
or disposal of hazardous materials or substances.


 


9.             Covenants
Concerning Collateral, Etc.  The
Debtor further covenants with the Secured Party (as collateral agent for the
Banks) as follows: (a) the Collateral, to the extent not delivered to the
Secured Party pursuant to Section 4, will be kept at those locations
listed on Schedule A and the Debtor will not move any Collateral to any
location not shown in Schedule A without providing at least thirty (30) days
prior written notice to the Secured Party, which notice shall include the new
location, (b) except for the security interest herein granted and liens
permitted by the Loan Agreement, the Debtor shall be the owner of the
Collateral free from any right or claim of any other person, lien, security
interest or other encumbrance, and the Debtor shall defend the same against all
claims and demands of all persons at any time claiming the same or any
interests therein adverse to the Secured Party (as collateral agent for the Banks),
(c) the Debtor shall not pledge, mortgage or create, or suffer to exist
any right of any person in or claim by any person to the Collateral, or any
security interest, lien or encumbrance in the Collateral in favor of any
person, other than the Secured Party (as collateral agent for the Banks) except
for liens permitted by the Loan Agreement, (d) the Debtor will keep the
Collateral in good order and repair and will not use the same in violation of
law or any policy of insurance thereon, (e) the Debtor will permit the
Secured Party, or its designee, to inspect and audit the Collateral at any
reasonable time, wherever located, according to the terms of the Loan
Agreement, (f) the Debtor will pay promptly when due all taxes,
assessments, governmental charges and levies upon the Collateral according to
the terms of the Loan Agreement or incurred in connection with the use or
operation of such Collateral or incurred in connection with this Agreement, (g) the
Debtor will continue to operate, its business in compliance with all applicable
provisions of the federal Fair Labor Standards Act, as amended, and with all
applicable provisions of federal, state and local statutes and ordinances
dealing with the control, shipment, storage or disposal of hazardous materials
or substances, (h) the Debtor will apply for all subsidies, price support
payments, guaranty payments and other payments of any kind available to the
Debtor under any federal, state or local governmental program relating to the
use of corn to produce ethanol, the production of ethanol, the sale of ethanol
and any other activities of the Debtor, will file for all tax credits and
deductions available for any of the foregoing, and will take no action, or omit
to take any action, which would preclude or jeopardize in any manner the Debtor’s
ability to participate in any such payments, programs, tax credits or
deductions and (i) the Debtor will not discount, factor, sell or otherwise
dispose, or offer to sell or otherwise dispose, of any of the Collateral, including,
but not limited to, instruments, general intangibles, tangible or electronic
chattel paper, promissory notes and/or accounts, or any interest therein except
for (i) sales and leases of inventory in the ordinary course of business
and (ii) so long as no Event of Default has occurred and is continuing,
sales or other dispositions of obsolescent items of equipment consistent with
past practices; provided, however, that permitted sales under this Section are
also permitted under the Loan Agreement. 
In the event that such sales are not permitted under the Loan Agreement,
then such sales are also not permitted hereunder.  In 


 


9

















 


addition, the
Debtor will only store grain owned by the Debtor not evidenced by a Warehouse
Receipt in facilities owned by the Debtor at locations set forth on Schedule A.


 


10.           Insurance.


 


10.1.        Maintenance
of Insurance.  The Debtor will
maintain the insurance required in the Loan Agreement.  All such insurance covering the Collateral shall
be payable to the Secured Party (as collateral agent for the Banks) as loss
payee under a “standard” or “New York” loss payee clause.


 


10.2.        Insurance
Proceeds.  The proceeds of any
casualty insurance in respect of any casualty loss of any of the Collateral
shall, subject to the rights, if any, of other parties with an interest having
priority in the property covered thereby, (i) so long as no Event of
Default has occurred and is continuing, the damaged Collateral can be
economically repaired or replaced in the sole discretion of the Secured Party
and the casualty loss is $500,000 or less and the conditions precedent in the
Loan Agreement with respect to the disbursement of insurance proceeds to the
Debtor have been satisfied, be disbursed to the Debtor for direct application
by the Debtor solely to the repair or replacement of the Debtor’s property so
damaged or destroyed, and (ii) in all other circumstances, be held by the
Secured Party (as collateral agent for the Banks) as cash collateral for the Obligations.  Subject to the foregoing, the Secured Party
may, at its sole option, disburse from time to time all or any part of such
proceeds so held as cash collateral, upon such terms and conditions as the
Secured Party may reasonably prescribe, for direct application by the Debtor
solely to the repair or replacement of the Debtor’s property so damaged or
destroyed, or the Secured Party may apply all or any part of such proceeds to
the Obligations with the amount of the Loans, as described in the Loan Agreement
(if not then terminated) being reduced by the amount so applied to the
Obligations.


 


10.3.        Continuation
of Insurance.  All policies of
insurance shall provide for at least 20 days prior written cancellation notice
to the Secured Party.  In the event of
failure by the Debtor to provide and maintain insurance as herein provided, the
Secured Party may, at its option, provide such insurance and charge the amount
thereof to the Debtor, subject to the terms of the Loan Agreement.  The Debtor shall furnish the Secured Party
with certificates of insurance and policies evidencing compliance with the
foregoing insurance provision.


 


11.           Collateral
Protection Expenses; Preservation of Collateral.


 


11.1.        Expenses
Incurred by Secured Party.  In the
Secured Party’s discretion, if the Debtor fails to do so, the Secured Party (as
collateral agent for the Banks) may discharge taxes and other encumbrances at
any time levied or placed on any of the Collateral, maintain any of the
Collateral, make repairs thereto and pay any necessary filing fees or insurance
premiums.  The Debtor agrees to reimburse
the Secured Party on demand for all expenditures so made.  The Secured Party shall have no obligation to
the 


 


10

















 


Debtor to make any such expenditures, nor shall the making thereof be
construed as the waiver or cure of any Event of Default.


 


11.2.        Secured Party’s
Obligations and Duties.  Anything
herein to the contrary notwithstanding, the Debtor shall remain obligated and
liable under each contract or agreement comprised in the Collateral to be
observed or performed by the Debtor thereunder. 
Neither the Secured Party nor any other Lender shall have any obligation
or liability under any such contract or agreement by reason of or arising out
of this Agreement or the receipt by the Secured Party of any payment relating
to any of the Collateral, nor shall the Secured Party or any other Lender be
obligated in any manner to perform any of the obligations of the Debtor under
or pursuant to any such contract or agreement, to make inquiry as to the nature
or sufficiency of any payment received by the Secured Party in respect of the
Collateral or as to the sufficiency of any performance by any party under any
such contract or agreement, to present or file any claim, to take any action to
enforce any performance or to collect the payment of any amounts which may have
been assigned to the Secured Party or to which the Secured Party may be
entitled at any time or times.  The
Secured Party’s sole duty with respect to the custody, safe keeping and
physical preservation of the Collateral in its possession, under Section 9-207
of the Uniform Commercial Code of the State or otherwise, shall be to deal with
such Collateral in the same manner as the Secured Party deals with similar
property for its own account.


 


12.           Securities
and Deposits.  The Secured Party may
at any time following and during the continuance of an Event of Default, at its
option, transfer to itself or any nominee any securities constituting
Collateral, receive any income thereon and hold such income as additional
Collateral or apply it to the Obligations. 
Whether or not any Obligations are due, the Secured Party may following
and during the continuance of an Event of Default demand, sue for, collect, or
make any settlement or compromise which it deems desirable with respect to the
Collateral. Regardless of the adequacy of Collateral or any other security for
the Obligations, any deposits or other sums at any time credited by or due from
the Secured Party to the Debtor may at any time be applied to or set off
against any of the Obligations.


 


13.           Notification
to Account Debtors and Other Persons Obligated on Collateral.  If an Event of Default shall have occurred
and be continuing, the Debtor shall, at the request and option of the Secured
Party, notify account debtors and other persons obligated on any of the
Collateral of the security interest of the Secured Party in any account,
chattel paper, general intangible, instrument or other Collateral and that
payment thereof is to be made directly to the Secured Party or to any financial
institution designated by the Secured Party as the Secured Party’s agent
therefor, and the Secured Party may itself, if an Event of Default shall have
occurred and be continuing, without notice to or demand upon the Debtor, so
notify account debtors and other persons obligated on Collateral.  After the making of such a request or the
giving of any such notification, the Debtor shall hold any proceeds of
collection of accounts, chattel paper, general intangibles, instruments and
other Collateral received by the Debtor as trustee for the Secured Party (as
collateral agent for the Banks) without commingling the same with other funds
of the Debtor and shall turn the same over to the Secured Party in the
identical form received, together with any necessary endorsements or
assignments.  The Secured Party 


 


11

















 


shall apply the
proceeds of collection of accounts, chattel paper, general intangibles,
instruments and other Collateral received by the Secured Party to the
Obligations, such proceeds to be immediately credited after final payment in
cash or other immediately available funds of the items giving rise to them.


 


14.           Power of Attorney.


 


14.1.        Appointment
and Powers of Secured Party.  The
Debtor hereby irrevocably constitutes and appoints the Secured Party and any
officer or agent thereof, with full power of substitution, as its true and
lawful attorneys-in-fact with full irrevocable power and authority in the place
and stead of the Debtor or in the Secured Party’s own name, for the purpose of
carrying out the terms of this Agreement, to take any and all appropriate
action and to execute any and all documents and instruments that may be
necessary or useful to accomplish the purposes of this Agreement and, without
limiting the generality of the foregoing, hereby gives said attorneys the power
and right, on behalf of the Debtor, without notice to or assent by the Debtor,
to do the following:


 


(a)           upon
the occurrence and during the continuance of an Event of Default, generally to
sell, transfer, pledge, make any agreement with respect to or otherwise dispose
of or deal with any of the Collateral in such manner as is consistent with the
Uniform Commercial Code of the State and as fully and completely as though the
Secured Party were the absolute owner thereof for all purposes, and to do, at
the Debtor’s expense, at any time, or from time to time, all acts and things
which the Secured Party deems necessary or useful to protect, preserve or
realize upon the Collateral and the Secured Party’s security interest therein,
in order to effect the intent of this Agreement, all at least as fully and
effectively as the Debtor might do, including, without limitation, (i) the
filing and prosecuting of registration and transfer applications with the
appropriate federal, state, local or other agencies or authorities with respect
to trademarks, copyrights and patentable inventions and processes, (ii) upon
written notice to the Debtor, the exercise of voting rights with respect to
voting securities, which rights may be exercised, if the Secured Party so
elects, with a view to causing the liquidation of assets of the issuer of any
such securities, and (iii) the execution, delivery and recording, in
connection with any sale or other disposition of any Collateral, of the
endorsements, assignments or other instruments of conveyance or transfer with
respect to such Collateral; and


 


(b)           to
the extent that the Debtor’s authorization given in Section 3 is not
sufficient, to file such financing statements with respect hereto, with or
without the Debtor’s signature, or a photocopy of this Agreement in
substitution for a financing statement, as the Secured Party may deem
appropriate and to execute in the Debtor’s name such financing statements and
amendments thereto and continuation statements which may require the Debtor’s
signature.


 


12






 


 


 












 


14.2.      Ratification
by Debtor.  To the extent permitted
by law, the Debtor hereby ratifies all that said attorneys shall lawfully do or
cause to be done by virtue hereof.  This
power of attorney is a power coupled with an interest and is irrevocable.


 


14.3.      No
Duty on Secured Party.  The powers
conferred on the Secured Party hereunder are solely to protect its interests in
the Collateral and shall not impose any duty upon it to exercise any such
powers.  The Secured Party shall be
accountable only for the amounts that it actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Debtor for any act or failure
to act, except for the Secured Party’s own gross negligence or willful
misconduct.


 


15.           Rights and
Remedies.  If an Event of Default
shall have occurred and be continuing beyond any applicable grace or notice and
cure period provided for in the Loan Agreement, the Secured Party, without any
other notice to or demand upon the Debtor have in any jurisdiction in which
enforcement hereof is sought, in addition to all other rights and remedies,
whether conferred in the Loan Agreement or at law or in equity, the rights and
remedies of a secured party under the Uniform Commercial Code of the State and
any additional rights and remedies which may be provided to a secured party in
any jurisdiction in which Collateral is located, including, without limitation,
the right to take possession of the Collateral, and for that purpose the
Secured Party may, so far as the Debtor can give authority therefor, enter upon
any premises on which the Collateral may be situated and remove the same
therefrom.  The Secured Party may in its
discretion require the Debtor to assemble all or any part of the Collateral at
such location or locations within the jurisdiction(s) of the Debtor’s
principal office(s) or at such other locations as the Secured Party may
reasonably designate.  Unless the
Collateral is perishable or threatens to decline speedily in value or is of a
type customarily sold on a recognized market, the Secured Party shall give to
the Debtor at least ten (10) days prior written notice of the time and
place of any public sale of Collateral or of the time after which any private
sale or any other intended disposition is to be made.  The Debtor hereby acknowledges that ten (10) days
prior written notice of such sale or sales shall be reasonable notice.  In addition, the Debtor waives any and all
rights that it may have to a judicial hearing in advance of the enforcement of
any of the Secured Party’s rights and remedies hereunder, including, without
limitation, its right following an Event of Default to take immediate
possession of the Collateral and to exercise its rights and remedies with
respect thereto.


 


16.           Standards for
Exercising Rights and Remedies.  To
the extent that applicable law imposes duties on the Secured Party to exercise
remedies in a commercially reasonable manner, the Debtor acknowledges and
agrees that it is not commercially unreasonable for the Secured Party (a) to
fail to incur expenses reasonably deemed significant by the Secured Party to
prepare Collateral for disposition or otherwise to fail to complete raw
material or work in process into finished goods or other finished products for
disposition, (b) to fail to obtain third party consents for access to
Collateral to be disposed of, or to obtain or, if not required by other law, to
fail to obtain governmental or third party consents for the collection or disposition
of Collateral to be collected or disposed of, (c) to fail to exercise
collection remedies against account debtors or other persons obligated on
Collateral or to fail to remove liens or encumbrances on or any adverse claims
against Collateral, (d) to exercise collection remedies against account
debtors and 


 


13

















 


other persons
obligated on Collateral directly or through the use of collection agencies and
other collection specialists, (e) to advertise dispositions of Collateral
through publications or media of general circulation, whether or not the
Collateral is of a specialized nature, (f) to contact other persons,
whether or not in the same business as the Debtor, for expressions of interest
in acquiring all or any portion of the Collateral, (g) to hire one or more
professional auctioneers to assist in the disposition of Collateral, whether or
not the collateral is of a specialized nature, (h) to dispose of
Collateral by utilizing Internet sites that provide for the auction of assets
of the types included in the Collateral or that have the reasonable capability
of doing so, or that match buyers and sellers of assets, (i) to dispose of
assets in wholesale rather than retail markets, (j) to disclaim disposition
warranties, (k) to purchase insurance or credit enhancements to insure the
Secured Party against risks of loss, collection or disposition of Collateral or
to provide to the Secured Party a guaranteed return from the collection or
disposition of Collateral, or (l) to the extent deemed appropriate by the
Secured Party, to obtain the services of other brokers, investment bankers,
consultants and other professionals to assist the Secured Party in the
collection or disposition of any of the Collateral.  The Debtor acknowledges that the purpose of
this Section 16 is to provide non-exhaustive indications of what actions
or omissions by the Secured Party would fulfill the Secured Party’s duties
under the Uniform Commercial Code or other law of the State or any other
relevant jurisdiction in the Secured Party’s exercise of remedies against the
Collateral and that other actions or omissions by the Secured Party shall not
be deemed to fail to fulfill such duties solely on account of not being
indicated in this Section 16. 
Without limitation upon the foregoing, nothing contained in this Section 16
shall be construed to grant any rights to the Debtor or to impose any duties on
the Secured Party that would not have been granted or imposed by this Agreement
or by applicable law in the absence of this Section 16.


 


17.           No Waiver by
Secured Party, Etc.  The Secured
Party shall not be deemed to have waived any of its rights or remedies in
respect of the Obligations or the Collateral unless such waiver shall be in
writing and signed by the Secured Party. 
No delay or omission on the part of the Secured Party in exercising any
right or remedy shall operate as a waiver of such right or remedy or any other
right or remedy.  A waiver on any one
occasion shall not be construed as a bar to or waiver of any right or remedy on
any future occasion.  All rights and
remedies of the Secured Party with respect to the Obligations or the
Collateral, whether evidenced hereby or by any other instrument or papers,
shall be cumulative and may be exercised singularly, alternatively,
successively or concurrently at such time or at such times as the Secured Party
deems expedient.


 


18.           Suretyship
Waivers by Debtor.  The Debtor waives
demand, notice, protest, notice of acceptance of this Agreement, notice of
loans made, credit extended, Collateral received or delivered or other action
taken in reliance hereon and all other demands and notices of any
description.  With respect to both the
Obligations and the Collateral, the Debtor assents to any extension or
postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of or failure to perfect any security
interest in any Collateral, to the addition or release of any party or person
primarily or secondarily liable, to the acceptance of partial payment thereon
and the settlement, compromising or adjusting of any thereof, all in such
manner and at such time or times as the Secured Party may deem advisable.  The Secured Party shall have no duty as to
the collection or protection of the Collateral or any income therefrom, 


 


14

















 


the preservation
of rights against prior parties, or the preservation of any rights pertaining
thereto beyond the safe custody thereof as set forth in Section 11.2.  The Debtor further waives any and all other
suretyship defenses.


 


19.           Marshalling.  The Secured Party shall not be required to
marshal any present or future collateral security (including but not limited to
the Collateral) for, or other assurances of payment of, the Obligations or any
of them or to resort to such collateral security or other assurances of payment
in any particular order, and all of its rights and remedies hereunder and in
respect of such collateral security and other assurances of payment shall be
cumulative and in addition to all other rights and remedies, however existing
or arising.  To the extent that it
lawfully may, the Debtor hereby agrees that it will not invoke any law relating
to the marshalling of collateral which might cause delay in or impede the
enforcement of the Secured Party’s rights and remedies under this Agreement or
under any other instrument creating or evidencing any of the Obligations or
under which any of the Obligations is outstanding or by which any of the
Obligations is secured or payment thereof is otherwise assured, and, to the
extent that it lawfully may, the Debtor hereby irrevocably waives the benefits
of all such laws.


 


20.           Proceeds of
Dispositions; Expenses.  The Debtor
shall pay to the Secured Party on demand any and all expenses, including
reasonable attorneys’ fees and disbursements, incurred or paid by the Secured
Party in protecting, preserving or enforcing the Secured Party’s rights and
remedies under or in respect of any of the Obligations or any of the
Collateral. After deducting all of said expenses, the residue of any proceeds
of collection or sale or other disposition of the Collateral shall, to the
extent actually received in cash, be applied to the payment of the Obligations
in such order or preference as the Secured Party may determine, proper
allowance and provision being made for any Obligations not then due.  Upon the final payment and satisfaction in
full of all of the Obligations and after making any payments required by Sections
9-608(a)(1)(C) or 9-615(a)(3) of the Uniform Commercial Code of the
State, any excess shall be returned to the Debtor.  In the absence of final payment and
satisfaction in full of all of the Obligations, the Debtor shall remain liable
for any deficiency.


 


21.           Overdue Amounts.  Until paid, all amounts due and payable by
the Debtor hereunder shall be a debt secured by the Collateral and shall bear,
whether before or after judgment, interest at the rate of interest for overdue
principal set forth in the Loan Agreement.


 


22.           Governing Law;
Consent to Jurisdiction.  THIS
AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEBRASKA.  The Debtor agrees that any action
or claim arising out of, or any dispute in connection with, this Agreement, any
rights, remedies, obligations, or duties hereunder, or the performance or
enforcement hereof or thereof, may be brought in the courts of the State or any
federal court sitting therein and consents to the non-exclusive jurisdiction of
such court and to service of process in any such suit being made upon the
Debtor by mail at the address specified in the notice provision of the Loan
Agreement.  The Debtor hereby waives any
objection that it may now or hereafter have to the venue of any such suit or
any such court or that such suit is brought in an inconvenient court.


 


15

















 


23.           Waiver of Jury
Trial.  THE DEBTOR WAIVES ITS RIGHT
TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE
IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS, REMEDIES, OBLIGATIONS, OR DUTIES
HEREUNDER, OR THE PERFORMANCE OR ENFORCEMENT HEREOF OR THEREOF.  Except as prohibited by law, the Debtor
waives any right which it may have to claim or recover in any litigation
referred to in the preceding sentence any special, exemplary, punitive or
consequential damages or any damages other than, or in addition to, actual
damages. The Debtor (i) certifies that neither the Secured Party nor any
representative, agent or attorney of the Secured Party has represented,
expressly or otherwise, that the Secured Party would not, in the event of
litigation, seek to enforce the foregoing waivers or other waivers contained in
this Agreement, and (ii) acknowledges that, in entering into the Loan
Agreement and the other Loan Documents to which the Secured Party is a party,
the Secured Party is relying upon, among other things, the waivers and
certifications contained in this Section 23.


 


24.           Miscellaneous.  The headings of each section of this
Agreement are for convenience only and shall not define or limit the provisions
thereof. This Agreement and all rights and obligations hereunder shall be
binding upon the Debtor and its respective successors and assigns, and shall
inure to the benefit of the Secured Party and its successors and assigns.  If any term of this Agreement shall be held
to be invalid, illegal or unenforceable, the validity of all other terms hereof
shall in no way be affected thereby, and this Agreement shall be construed and
be enforceable as if such invalid, illegal or unenforceable term had not been
included herein. The Debtor acknowledges receipt of a copy of this Agreement.


 


[SIGNATURE PAGE
FOLLOWS]


 


16

















 


IN WITNESS
WHEREOF, intending to be legally bound, the Debtor has caused this Agreement to
be duly executed as of the date first above written.


 


	
   

  	
  HIGHWATER
  ETHANOL, LLC, a Minnesota 

  limited liability company

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Brian Kletscher

  
	
   

  	
   

  	
  Brian Kletscher,
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  Accepted:

  
	
   

  	
   

  	
   

  
	
   

  	
  FIRST NATIONAL
  BANK OF OMAHA, a 

  national banking association,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jeremy Reineke

  
	
   

  	
   

  	
  Jeremy Reineke,
  Second Vice President

  
				



 


17

















 


CERTIFICATE OF ACKNOWLEDGMENT


 


	
  STATE OF South
  Dakota

  	
  )

  
	
   

  	
  ) ss.

  
	
  COUNTY OF
  Minnehaha

  	
  )

  



 


Before me, the
undersigned, a Notary Public in and for the county aforesaid, on this 24th
day of April, 2008, personally appeared Brian Kletscher, to me known
personally, and who, being by me duly sworn, deposes and says that he is the
President of Highwater Ethanol, LLC, and that said instrument was signed on
behalf of said limited liability company by authority of its Board of
Governors, and said President acknowledged said instrument to be the free act
and deed of said limited liability company.


 


 


	
   

  	
  /s/ Vicki Blake

  
	
   

  	
  Notary Public –
  South Dakota

  
	
  My commission
  expires:

  	
   

  
	
   

  	
   

  
	
  2/10/12

  	
   

  	
   

  
			



 


18

















 


SCHEDULE A


Locations/Commercial
Tort Claims


 


	
  I.

  	
   

  	
  Debtor
  Locations:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  205 North Main
  Street

  
	
   

  	
   

  	
  Lamberton,
  Minnesota 56152

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  II.

  	
   

  	
  Commercial Tort
  Claims:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  None