**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K/A**

**Amendment No. 1**

 

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| **x** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended October 31,2008**

 
| **o** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the transition period from                       to                         **

 

**Commission file number 000-53588**

 

**HIGHWATERETHANOL, LLC**

(Name of registrant as specified in its charter)

 

| **Minnesota**                                                   | ** ** | **20**-**4798531**                   |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **24500 US Highway 14, Lamberton, MN**                          | ** ** | **56152**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

 

**(507)752-6160**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

| Large accelerated filer o                |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller Reporting Company x |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).  o Yes x No

 

Asof January 25, 2009, the aggregate market value of the membership unitsheld by non-affiliates (computed by reference to the most recent offering priceof such membership units) was $47,350,000. The Company is a limited liability company whose outstanding commonequity is subject to significant restrictions on transfer under its MemberControl Agreement.  No public market forcommon equity of Highwater Ethanol, LLC is established and it is unlikely inthe foreseeable future that a public market for its common equity will develop.

 

Asof January 25, 2009, there were 4,953 membership units outstanding.   As of September 25, 2009, there were4,953 membership units outstanding.

 

 

 

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**ExplanatoryNote Regarding Amendment No. 1**

 

This Amendment No. 1to the Annual Report on Form 10-KSB of Highwater Ethanol, LLC (the “Company”)for the fiscal year ended October 31, 2008, is being filed for the purposeof amending and restating Items 1A, 6, 7, 8A(T) and 13 to correct an errorthat occurred with the omission of an interest rate swap agreement.  The interest rate swap fixes the interestrate on a portion of the Company’s long-term debt at 7.60% for a period of fiveyears beginning in June 2009.  TheCompany did not previously record the interest rate swap, which is a liabilitydue to the decline in market interest rates. As a result of this error, an interest rate swap was unrecorded at October 31,2008.  The value of the agreement was notreflected in liabilities, members’ equity and net income (loss) accounts.  In accordance with Rule 12b-15 under theSecurities and Exchange Act of 1934, the complete text of such Items, asamended are set forth herein. In addition to the filing of this Amendment No. 1and pursuant to Rule 12b-15, the Company is including certain currentlydated certifications. The remainder of the Company’s Form 10-KSB has notbeen updated to reflect events occurring subsequent to the original reportingdate.

 

Therefore, the Company has:

 

·      Increased liabilities by approximately $591,000,resulting in a decrease of net income of approximately $591,000 or $193.42 perweighted average unit outstanding, for the year ended October 31, 2008.

·      Decreased members’ equity by approximately $591,000 asof October 31, 2008.

 

In addition, based on thecontinued assessment and evaluation of the Company’s internal control overfinancial reporting, the Company believes it has a material weakness due to theomission of the interest rate swap transaction and related effects on priorperiods.  As part of the Company’scontinued evaluation of its internal controls, the Company recently hired aChief Financial Officer in February 2009. Due to the addition of Mark Peterson as the Company’s Chief FinancialOfficer he is now the signatory and certifier effective March 5, 2009 of thefinancial statements and reports filed with the United States Securities andExchange Commission.  Prior to Mr. Petersonjoining the Company, the financial statements and reports were signed andcertified by Tim Van Der Wal who was the Company’s Treasurer (Principal Financialand Accounting Officer).

 

The information in thisAmendment has been updated to give effect to the restatement.  Thedisclosures in this Amendment supersede and replace the disclosures in the Form 10-KSB,as initially filed. However, this report speaks as of the original filing dateof the Form 10-KSB, and other than providing the restated financialstatements, restated financial notes and the restated portion of the relevantManagement, Discussion and Analysis, the Company has not updated thedisclosures contained in the Form 10-KSB to reflect any events thatoccurred subsequent to the original reporting date.  Accordingly, in conjunction with reading this Form 10-KSB/A,you should also read all other filings that we have made with the Securitiesand Exchange Commission since the date of the original filings.

 

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**Forward Looking Statements**

 

This report containsforward-looking statements that involve future events, our future performanceand our expected future operations and actions. In some cases you can identifyforward-looking statements by the use of words such as “may,” “should,” “will,”“anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,”“predict,” “hope,” “potential,” “continue,” or the negative of these terms orother similar expressions. Many of these forward-looking statements are locatedin this report under Item 1, “Description of Business;” Item 1A, “Risk Factors,”Item 2, “Description of Property;” and Item 6, “Management’s Discussion andAnalysis or Plan of Operations,” but they may appear in other sections as well.

 

These forward-lookingstatements are only our predictions and involve numerous assumptions, risks anduncertainties. Important factors that could significantly affect ourassumptions, plans, anticipated actions and future financial and other resultsinclude, among others, those matters set forth in the section of this report inItem 1A - “Risk Factors.”  You are urgedto consider all of those risk factors when evaluating any forward-lookingstatement, and we caution you not to put undue reliance on any forward-lookingstatements.

 

You should read thisreport thoroughly with the understanding that our actual results may differmaterially from those set forth in the forward-looking statements for manyreasons, including events beyond our control and assumptions that prove to beinaccurate or unfounded.  We cannot provideany assurance with respect to our future performance or results.  While it is impossible to identify all suchfactors, factors that could cause actual results to differ materially fromthose estimated by us include

 

·      Changes in our business strategy, capital improvementsor development plans;

·      Construction delays and technical difficulties inconstructing the plant;

·      Increases in the cost of construction;

·      Changes in the environmental regulations or in ourability to comply with the environmental regulations that apply to our plantsite and our anticipated operations;

·      Changes in general economic conditions or theoccurrence of certain events causing an economic impact in the agriculture, oilor automobile industries;

·      Changes in the availability and price of corn andnatural gas and the market for ethanol and distillers grains;

·      Our anticipated inelastic demand for corn, as it isthe only available feedstock for our plant;

·      Difficulties we may encounter during the constructionof our plant;

·      Changes in federal and/or state laws (including theelimination of any federal and/or state ethanol tax incentives);

·      Changes and advances inethanol production technology that may make it more difficult for us to competewith other ethanol plants utilizing such technology;

·      Competition from alternativefuel additives;

·      Our inability to securecredit that we may require in the future;

·      Lack of transport, storageand blending infrastructure preventing ethanol from reaching high demandmarkets;

·      Changes in interest ratesand lending conditions;

·      Volatile commodity andfinancial markets; and

·      Ethanol supply exceedingdemand and corresponding ethanol price reductions.

 

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The cautionary statementsreferred to in this section also should be considered in connection with anysubsequent written or oral forward-looking statements that may be issued by usor any persons acting on our behalf. We are not under any duty to update the forward-lookingstatements contained in this report. We cannot guarantee future results, levelsof activity, performance or achievements. We caution you not to put unduereliance on any forward-looking statements, which speak only as of the date ofthis report. You should read this report and the documents that we reference inthis report and have filed as exhibits completely and with the understandingthat our actual future results may be materially different from what wecurrently expect. We qualify all of our forward-looking statements by thesecautionary statements.

 

**ITEM 1A.****              ****RISKFACTORS.**

 

*You should carefully read and consider the risksand uncertainties below and the other information contained in thisreport.  The risks and uncertaintiesdescribed below are not the only ones we may face.  The following risks, together with additionalrisks and uncertainties not currently known to us or that we currently deemimmaterial could impair our financial condition and results of operation.*

 

**Risks Related to Highwater Ethanol asa Development-Stage Company**

 

***Highwater Ethanolhas no operating history, which could result in errors in******management and operations causing a reduction in thevalue of your investment.* **We have no history of operations. We maynot manage start-up effectively or properly staff operations, and any failureto manage our start-up effectively could delay the commencement of plantoperations. A delay in start-up operations is likely to further delay ourability to generate revenue and satisfy our debt obligations. We anticipate aperiod of significant growth, involving the construction and start-up ofoperations of the plant. This period of growth and the start-up of the plantare likely to be a substantial challenge to us. If we fail to manage start-upeffectively, we may not be able to operate our plant profitably or at all.

 

***We have little tono experience in the ethanol industry and our governors do******not dedicate their efforts to our project on a fulltime basis, which may**affect ourability to build and operate the ethanol plant.* **We are presently dependent upon our initial governors.Most of these individuals are experienced in business generally but have verylittle or no experience in organizing and building an ethanol plant, andgoverning and operating a public company. Our governors also have little to noexpertise in the ethanol industry. In addition, certain governors on our boardare presently engaged in business and other activities which impose substantialdemand on the time and attention of such governors. Our governors do notdedicate their efforts to our project on a full time basis which may affect ourability to build and develop our ethanol plant. Our member control agreementprovides that the initial board of governors will serve until the first annualor special meeting of the members following commencement of substantialoperations of the ethanol plant. If our project suffers delays due to financingor construction, our initial board of governors could serve for an extended periodof time. In that event, our only recourse to replace these governors would bethrough an amendment to our operating agreement which could be difficult toaccomplish.

 

***We will depend onFagen, Inc. for expertise in beginning operations in the******ethanol industry and any loss of this relationshipcould cause us delay and**addedexpense, placing us at a competitive disadvantage.* **We are dependent on our relationship with Fagen, Inc.and its employees. Any loss of this relationship with Fagen, Inc.,particularly during the construction and start-up period of the plant mayprevent us from commencing operations and result in the failure of ourbusiness. The time and expense of locating new consultants and contractorswould result in unforeseen expenses and delays which may reduce our ability togenerate revenue and operate profitability and significantly damage ourcompetitive position in the ethanol industry.

 

***Our business is notdiversified.***** **We expect our business to solely consistof ethanol and distillers grains production and sales. We do not have any otherlines of business or other sources of revenue if we are unable to complete theconstruction and operation of the plant or if we are unable to operate ourplant and generate ethanol and distillers grains. If we are unable to generaterevenues by the production and sales of ethanol and distillers grains ourbusiness may fail since we do not expect to have any other lines of business oralternative revenue sources.

 

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***We have a historyof losses and may not ever operate profitably.*****  **We have incurred and may continue to incur significantlosses until we successfully complete construction and commence operations ofthe plant. Through October 31, 2008, we generated losses and have adeficit in working capital.  There is noassurance that we will be successful in our efforts to build and operate anethanol plant. Even if we successfully begin operations at the ethanol plant,there is no assurance that we will be able to operate profitably.

 

**RisksRelated to Construction of the Ethanol Plant**

 

***We may need toincrease cost estimates for construction of the ethanol plant,******and such increase could result in devaluation of ourunits if ethanol plant**constructionrequires additional capital.* **We anticipate that Fagen, Inc. willconstruct the plant for a contract price, based on the plans and specificationsin the design-build agreement. We have based our capital needs on a design forthe plant that will cost approximately $69,950,000 with additional start-up anddevelopment costs of approximately $43,630,000 for a total project completioncost of approximately $113,580,000. The final cost of the plant may be higher.

 

***Defects in plantconstruction could result in delays in our ability to generate revenues if our******plant does not produce ethanol or its co-products asanticipated.* **Defects in materials and/or workmanshipin the plant may occur. Under the terms of the design-build agreement withFagen, Inc., Fagen, Inc. will warrant that the material and equipmentfurnished to build the plant will be new, of good quality, and free frommaterial defects in material or workmanship at the time of delivery. Though thedesign-build agreement requires Fagen, Inc. to correct all defects in materialor workmanship for a period of one year after substantial completion of theplant, material defects in material or workmanship may still occur. Suchdefects could delay the commencement of operations of the plant, or, if suchdefects are discovered after operations have commenced, could cause us to haltor discontinue the plant’s operation. Halting or discontinuing plant operationscould delay our ability to generate revenues.

 

***The plant site mayhave unknown environmental problems that could be expensive******and time consuming to correct, which may delay orhalt plant construction and**delayour ability to generate revenue.* **Our plantsite is located in Redwood County, Minnesota, near the City of Lamberton,Minnesota. We may encounter hazardous environmental conditions that may delaythe construction of the plant. We do not anticipate Fagen, Inc. will beresponsible for any hazardous environmental conditions encountered at the plantsite. Upon encountering a hazardous environmental condition, Fagen, Inc.may suspend work in the affected area. If we receive notice of a hazardousenvironmental condition, we may be required to correct the condition prior tocontinuing construction. The presence of a hazardous environmental conditionwill likely delay construction of the plant and may require significantexpenditure of our resources to correct the condition. In addition, Fagen, Inc.will be entitled to an adjustment in price and time of performance if it hasbeen adversely affected by the hazardous environmental condition. If weencounter any hazardous environmental conditions during construction thatrequire time or money to correct, such event could delay our ability togenerate revenues.

 

**Risks Relating to Our Business**

 

***Wehave a significant amount of debt, and our existing debt financing agreementscontain, and our future debt financing agreements may contain, restrictivecovenants that limit distributions and impose restrictions on the operation ofour business.***  The use of debt financing makes it moredifficult for us to operate because we must make principal and interestpayments on the indebtedness and abide by covenants contained in our debtfinancing agreements.  The level of ourdebt may have important implications on our operations, including, among otherthings: (a) limiting our ability to obtain additional debt or equityfinancing; (b) making us vulnerable to increases in prevailing interestrates; (c) placing us at a competitive disadvantage because we may besubstantially more leveraged than some of our competitors; (d) subjectingall or substantially all of our assets to liens, which means that there may beno assets left for shareholders in the event of a liquidation; and (e) limitingour ability to make business and operational decisions regarding our business,including, among other things, limiting our ability to pay dividends to ourunit holders, make capital improvements, sell or purchase assets or engage intransactions we deem to be appropriate and in our best interest.

 

***Ourinability to secure credit facilities we may require in the future maynegatively impact our liquidity.***  Due to current conditions in the creditmarkets, it has been increasingly difficult for businesses to securefinancing.  While we do not currentlyrequire more financing than we have, in the future we may need additionalfinancing.  If

 

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we require financing in the future and weare unable to secure such financing, it may have a negative impact on ourliquidity.  This could negatively impactthe value of our units.

 

***We have nooperating history and our business may not be as successful as weanticipate. ***We have not yet begun plantoperations.  Accordingly, we have nooperating history from which you can evaluate our business and prospects.  Our operating results could fluctuatesignificantly in the future as a result of a variety of factors, includingthose discussed throughout these risk factors. Many of these factors are outside our control.   As a result of these factors, our operatingresults may not be indicative of future operating results and you should notrely on them as indications of our future performance.

 

***We expect to be heavily dependent on rail as our primarymode of transporting our product to distribution terminals****. *Most ethanol producers shipethanol by rail to distribution terminals, which then send the ethanol on abarge or truck to blenders.  Increasedproduction of ethanol has created a bottleneck between producers and blenders,and the rail system’s capacity is strained to meet demand.  In addition, railroads are also facingpressure from increased corn production, and have found it difficult to meetthe demand to transport the grain to storage facilities.  If the nation’s rail system cannot keep pacewith the production of ethanol and corn, we may be forced to pay higher pricesfor rail cars in order to compete with other plants for access totransportation.  This could lead to adecrease in our profitability and you could lose some or all of your investment.

 

***The expansion of domestic ethanol production in combinationwith state bans on Methyl Tertiary Butyl Ether (MTBE) and/or state renewablefuels standards may place strains on destination terminal and blenderinfrastructure such that our ethanol cannot be marketed and shipped to theblending terminals that would otherwise provide us the best cost advantages****. *If the volume of ethanolshipments continues to increase with the nation’s increased production capacity and blenders switch from MTBE to ethanol,there may be weaknesses in infrastructure and its capacity to transport ethanolsuch that our product cannot reach its target markets.  In addition, ethanol destination terminalsmay not have adequate capacity to handle the supply of ethanol, and will haveto quickly adapt by building more tanks to hold increased inventory beforeshipping ethanol to the blenders.  Manyblending terminals may need to make infrastructure changes to blend ethanolinstead of MTBE and to blend the quantities of ethanol that are beingproduced.  Refineries may be unwilling tospend large amounts of capital to expand infrastructure, or may be disinclinedto blend ethanol absent a legislative mandate to increase blending.  If the blending terminals do not havesufficient capacity or the necessary infrastructure to make this switch, or arereluctant to make such large capital expenditures to blend ethanol, there maybe an oversupply of ethanol on the market, which could depress ethanol pricesand negatively impact our financial performance.

 

***Our financial performance will be significantly dependent oncorn prices and generally we will not be able to pass on increases in inputprices to our customers.**** *Ourresults of operations and financial condition are significantly affected by thecost and supply of corn and natural gas. Changes in the price and supply ofcorn and natural gas are subject to and determined by market forces over whichwe have no control.

 

Ethanol productionrequires substantial amounts of corn. Corn, as with most other crops, isaffected by weather, disease and other environmental conditions.  The price of corn is also influenced bygeneral economic, market and government factors.  These factors include farmer plantingdecisions, domestic and foreign government farm programs and policies, globaldemand and supply and quality.  Changesin the price of corn can significantly affect our business. Generally, highercorn prices will produce lower profit margins and, therefore, representunfavorable market conditions.  This isespecially true if market conditions do not allow us to pass along increasedcorn costs to our customers.  The priceof corn has fluctuated significantly in the past and may fluctuatesignificantly in the future.  Over thecourse of the last year, the price of corn has exceeded historicalaverages.  If a period of high cornprices were to be sustained for some time, such pricing may reduce our abilityto generate revenues because of the higher cost of operating and may makeethanol uneconomical to use in fuel markets. We cannot offer any assurance that we will be able to offset anyincrease in the price of corn by increasing the price of our products.  If we cannot offset increases in the price ofcorn, our financial performance may be materially and adversely affected.

 

***The spreadbetween ethanol and corn prices can vary significantly and we do not expect thespread to remain at the high levels recently experienced by the ethanolindustry.***  Our gross margins will depend principally onthe spread between ethanol and corn prices. The spread between the price of a gallon of ethanol and the cost of theamount of corn required to produce a gallon of ethanol will likely continue tofluctuate.  Any further reduction in

 

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the spread between ethanol and corn prices, whether a result of anincrease in corn prices or a reduction in ethanol prices, would adverselyaffect our future results of operations and financial condition.

 

***Ourrevenues will be greatly affected by the price at which we can sell our ethanoland distillers grains. ***Theseprices can be volatile as a result of a number of factors.  These factors include the overall supply and demand,the price of gasoline, level of government support, and the availability andprice of competing products. For instance, the price of ethanol tends toincrease as the price of gasoline increases, and the price of ethanol tends todecrease as the price of gasoline decreases. Any lowering of gasoline priceswill likely also lead to lower prices for ethanol, which may decrease ourethanol sales and reduce revenues, causing a reduction in the value of yourinvestment

 

***Weexpect to sell all of the ethanol we produce to RPMG in accordance with anexclusive ethanol marketing agreement.******* We have engagedRPMG as our exclusive marketing agent for all of the ethanol we produce at theplant.  We will rely heavily on itsmarketing efforts to successfully sell our product.  Because RPMG sells ethanol for itself and anumber of other producers, we expect to have limited control over its salesefforts.  Our financial performance maybe dependent upon the financial health of RPMG as a significant portion of ouraccounts receivable are expected to be attributable to RPMG and itscustomers.  If RPMG fails tocompetitively market our ethanol or breaches the ethanol marketing agreement,we could experience a material loss and we may not have any readily availablemeans to sell our ethanol.

 

***We expect to engage in hedging transactions whichinvolve risks that can harm our business.***  We will be exposed to market risk fromchanges in commodity prices.  Exposure tocommodity price risk results from our dependence on corn and natural gas in theethanol production process.  We will seekto minimize the risks from fluctuations in the prices of corn and natural gasthrough the use of hedging instruments. The effectiveness of our hedging strategies is dependent upon the costof corn and natural gas and our ability to sell sufficient products to use allof the corn and natural gas for which we have futures contracts.  There is no assurance that our hedgingactivities will successfully reduce the risk caused by price fluctuation whichmay leave us vulnerable to high corn and natural gas prices.  Alternatively, we may choose not to engage inhedging transactions.  As a result, ourfuture results of operations and financial conditions may also be adverselyaffected during periods in which corn and/or natural gas prices increase.

 

***Changes andadvances in ethanol production technology could require us to incur******costs to update our plant or could otherwise hinderour ability to**compete in theethanol industry or operate profitably.*** Advances and changes in the technology of ethanol production areexpected to occur.  Such advances andchanges may make the ethanol production technology we installed in our plantless desirable or obsolete.  Theseadvances could also allow our competitors to produce ethanol at a lower costthan us.  If we are unable to adopt orincorporate technological advances, our ethanol production methods andprocesses could be less efficient than our competitors, which could cause ourplant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or licensetechnology that is superior to ours or that makes our technology obsolete, wemay be required to incur significant costs to enhance or acquire new technologyso that our ethanol production process remains competitive.  Alternatively, we may be required to seekthird-party licenses, which could also result in significant expenditures.  Third-party licenses may not be available or,once obtained, may not continue to be available on commercially reasonableterms, if at all.  These costs couldnegatively impact our financial performance by increasing our operating costsand reducing our net income.

 

**Risks Related to Ethanol Industry**

 

***Overcapacitywithin the ethanol industry could cause an oversupply of ethanol and a declinein ethanol prices. ***Excess capacity in the ethanol industrywould have an adverse impact on our results of operations, cash flows andgeneral financial condition.  Excesscapacity may also result or intensify from increases in production capacitycoupled with insufficient demand.  If the demand for ethanol does not growat the same pace as increases in supply, we would expect the price for ethanolto decline.  If excess capacityin the ethanol industry occurs, the market price of ethanol may decline to alevel that is inadequate to generate sufficient cash flow to cover our costs.

 

***We expect to operate in acompetitive industry******and compete with larger,better financed entities which could impact our ability to operate profitably.***  There issignificant competition among ethanol producers with 

 

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numerous producer and privately owned ethanol plants planned andoperating throughout the United States. The largestethanol producers include POET, VeraSun Energy Corporation, Archer DanielsMidland, and Hawkeye Renewables, LLC, all of which are each capable ofproducing more ethanol than we expect to produce.  A number of our competitors are divisions ofsubstantially larger enterprises and have substantially greater financialresources than we do.  If the demand forethanol does not grow at the same pace as increases in supply, we expect thatlower prices for ethanol may result which may adversely affect our ability togenerate profits and our financial condition.

 

**RisksRelated to Regulation and Governmental Action**

 

***Governmentincentives for ethanol production, including federal tax incentives,******may be eliminated in the future, which could hinderour ability to operate at a**profit****.*

 

*Renewable Fuels Standard. *The ethanol industry is assisted by various federalethanol production and tax incentives, including the RFS set forth in theEnergy Independence and Security Act of 2007. The RFS helps support a market for ethanol that might disappear withoutthis incentive; as such, waiver of RFS minimum levels of renewable fuels includedin gasoline could negatively impact our results of operations.

 

In addition, the elimination or reduction of taxincentives to the ethanol industry, such as the Volume Ethanol Excise TaxCredit (VEETC) available to gasoline refiners and blenders, could also reducethe market demand for ethanol, which could reduce prices and our revenues bymaking it more costly or difficult for us to produce and sell ethanol. If thefederal tax incentives are eliminated or sharply curtailed, we believe thatdecreased demand for ethanol will result, which could negatively impact ourability to operate profitably.

 

***Changes in environmental regulations or violations of theregulations could be******expensiveand reduce our profitability.***  We are subject toextensive air, water and other environmental laws and regulations.  Inaddition, some of these laws require our plant to operate under a number ofenvironmental permits. These laws, regulations and permits can often requireexpensive pollution control equipment or operation changes to limit actual orpotential impacts to the environment.  A violation of these laws andregulations or permit conditions can result in substantial fines, damages,criminal sanctions, permit revocations and/or plant shutdowns.  In the future,we may be subject to legal actions brought by environmental advocacy groups andother parties for actual or alleged violations of environmental laws or ourpermits.  Additionally, any changes in environmental laws and regulations,both at the federal and state level, could require us to spend considerableresources in order to comply with future environmental regulations. The expenseof compliance could be significant enough to reduce our profitability andnegatively affect our financial condition.

 

Carbondioxide may be regulated in the future by the EPA as an air pollutant requiringus to obtain additional permits and install additional environmental mitigationequipment, which could adversely affect our financial performance.  In 2007, the Supreme Court decided a case inwhich it ruled that carbon dioxide is an air pollutant under the Clean Air Actfor the purposes of motor vehicle emissions. The Supreme Court directed the EPA to regulate carbon dioxide fromvehicle emissions as a pollutant under the Clean Air Act.  Similar lawsuits have been filed seeking torequire the EPA to regulate carbon dioxide emissions from stationary sourcessuch as our ethanol plant under the Clean Air Act. Our plant may produce asignificant amount of carbon dioxide that we will vent into the atmosphere;however, we intend to capture a small portion of our carbon dioxide emissionsthrough our water treatment system. While there are currently no regulations applicable to us concerningcarbon dioxide, if the EPA or the State of Minnesota were to regulate carbondioxide emissions by plants such as ours, we may have to apply for additionalpermits or we may be required to install carbon dioxide mitigation equipment ortake other as yet unknown steps to comply with these potential regulations.  Compliance with any future regulation ofcarbon dioxide, if it occurs, could be costly and may prevent us from operatingthe ethanol plant profitably which could decrease or eliminate the value of ourunits.

 

**ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION.**

 

***This report contains forward-looking statements that involvesignificant risks and uncertainties.  Thefollowing discussion, which focuses on our plan of operation through thecommencement of operations of the plant, consists almost entirely offorward-looking information and statements. Actual events or results may differ***

 

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***materially fromthose indicated or anticipated, as discussed in the section entitled “ForwardLooking Statements.”  This may occur as aresult of many factors, including those set forth in Item 1A, “Risk Factors.”  The following discussion of our financialcondition and plan of operation should also be read in conjunction with ourfinancial statements and notes to financial statements contained in thisreport.***

 

**Overview**

 

Highwater Ethanol, LLC isa development-stage Minnesota limited liability company. It was formed on May 2,2006 for the purpose of developing, constructing, owning and operating a50 million gallon per year ethanol plant near Lamberton, Minnesota.  We have not yet engaged in the production ofethanol and distillers grains. Based upon engineering specifications from Fagen, Inc.,we expect the ethanol plant, once built, will process approximately 18.5 millionbushels of corn per year into 50 million gallons of denatured fuel gradeethanol and 160,000 tons of dried distillers grains with solubles.  Plant construction is progressing onschedule.  We anticipate that our plantwill be operational in May 2009.

 

We anticipate the totalproject costs to be approximately $113,580,000 which includes construction ofour ethanol plant and start-up of operations. We are financing the construction and start-up of the ethanol plant witha combination of equity and debt.

 

Since we have not yetbecome operational as of the end of our fiscal year, we do not have comparableincome, production or sales data.

 

**Plan ofOperations for the Next 12 Months**

 

We expect to spend thenext 12 months focused on completing plant construction and commencing start-upoperations.  As a result of oursuccessful completion of the registered offering and the related debtfinancing, we expect to have sufficient cash on hand to cover all costs associatedwith construction of the project.  Weestimate that we will need approximately $113,580,000 to complete plantconstruction and begin start-up operations.

 

*ProjectCapitalization*

 

We issued 150 units to our founding members, for anaggregate of $500,000.  In addition, weissued 236 units to our seed capital members in exchange for aggregate proceedsof approximately $1,180,000.  We receivedtotal proceeds from our private placements of $1,680,000.

 

We filed a registration statement on Form SB-2with the Securities and Exchange Commission (“SEC”) which became effective on April 5,2007.  We closed the offering on April 5,2008 having raised proceeds of approximately $45,670,000 were transferred toour account at First National Bank of Omaha. We then issued 4,567 registered units to our members which supplementedthe 386 units issued in our private placement offerings to our founders and ourseed capital investors.

 

On April 24, 2008, we entered into a ConstructionLoan Agreement (the “Agreement”) with First National Bank of Omaha of Omaha, Nebraska(“FNBO”) for the purpose of funding a portion of the cost of the ethanolplant.  Under the Agreement, FNBO hasagreed to loan us up to $61,000,000, consisting of a $50,400,000 ConstructionLoan, together with a $5,000,000 Revolving Loan, and $5,600,000 to support theissuance of letters of credit by FNBO. We have issued letters of credit to Redwood Electric Cooperative, Inc.and Northern Natural Gas Company for the amount of $700,000 and $4,000,000respectively.  The details of the lettersof credit are described below in

 

*Plant Construction and Start-Up of PlantOperations.*

 

During the construction period, interest on theConstruction Loan will be payable on a monthly basis on the outstandingprincipal amount at a variable rate equal to the one month LIBOR Rate, ineffect from time to time, plus 350 basis points prior to maturity.  On the Construction Loan Termination Date,the Construction Loan will be converted into a Fixed Rate Note for the maximumamount of $25,200,000, a Variable Rate Note for the maximum amount of$20,200,000 and a Long term Revolving Note for the maximum amount of$5,000,000.

 

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We will make monthlyprincipal payments on the Fixed Rate Note ranging from approximately $145,000to $197,000 plus accrued interest on the eighth day of every month commencingone month immediately following the Construction Loan Termination Date.  A final balloon payment of approximately$15,184,000 will be due on the termination date of the Fixed Rate Note.  We will make monthly payments ranging fromapproximately $147,000 to $211,000 on the eighth day of every month commencingone month immediately following the Construction Loan Termination Datewhich shall be allocated as follows: (i) first to accrued and unpaidinterest on the Long Term Revolving Note, (ii) next to accrued and unpaidinterest on the Variable Rate Note, and (iii) next to principal on theVariable Rate Note.  In connection withthe Construction Loan Agreement, the Company entered into an interest rate swapwhich fixes the interest rate on the Fixed Rate Note at 7.6% for five yearsbeginning in June 2009.

 

In connection with theConstruction Loan Agreement, we executed a mortgage in favor of FNBO creating afirst lien on our real estate and plant and a security interest in all personalproperty located on the property.  Inaddition, we assigned in favor of FNBO, all rents and leases to our property,the design/build contract, our marketing contracts, our risk managementservices contract, and our natural gas, electricity, water service and grainprocurement agreements.

 

In addition, during theterm of the loans, we will be subject to certain financial covenants consistingof minimum working capital, minimum net worth, and maximum debt servicecoverage ratios.  After our constructionphase we will be limited to annual capital expenditures of $1,000,000 withoutprior approval of the Banks.  We willalso be prohibited from making distributions to our members of greater than 45%of our net income during any fiscal year if our debt leverage ratio (combinedtotal liabilities to net worth) is greater than or equal to 1.0:1.0.  Our failure to comply with the protectiveloan covenants or maintain the required financial ratios may cause accelerationof the outstanding principal balances on the term notes and revolving noteand/or the imposition of fees, charges or penalties.  Any acceleration of the debt financing orimposition of the significant fees, charges or penalties may restrict or limitour access to the capital resources necessary to continue plant construction oroperations.  The lease agreement is securedby substantially all business assets and is subject to various financial andnon-financial covenants that limit distributions and leverage and requireminimum debt service coverage, net worth, and working capital requirements.

 

Also on April 24,2008, we entered into certain financing and credit arrangements with U.S. BankNational Association, as trustee (the “Trustee”) and the City of Lamberton,Minnesota (the “City”) in order to secure the proceeds from the sale of thesolid waste facilities revenue bonds, Series 2008A (the “Bonds”) issued bythe City in the aggregate principal amount of $15,180,000 pursuant to a trustindenture between the City and the Trustee (“Trust Indenture”).  The City has undertaken the issuance of theBonds to finance the acquisition and installation of certain solid wastefacilities in connection with our ethanol plant to be located near Lamberton,Minnesota.  Highwater received proceedsof approximately $14,876,000, after financing costs of approximately $304,000.  The remaining proceeds are held as restrictedcash or marketable securities based on anticipated use and are split between aproject fund of approximately $11,564,000, a capitalized interest fund ofapproximately $1,818,000, and a debt service reserve fund of approximately$1,501,000.  The Bonds mature on December 1,2022 and bear interest at a rate of 8.5%.

 

We mayapply for grants from the USDA and other sources. Although we may apply underseveral programs simultaneously and may be awarded grants or other benefitsfrom more than one program, it must be noted that some combinations of programsare mutually exclusive. Under some state and federal programs, awards are notmade to applicants in cases where construction on the project has started priorto the award date. There is no guarantee that applications will result inawards of grants or loans.

 

*Plantconstruction and start-up of plant operations*

 

Construction of theproject is expected to take 16 to 18 months from the date constructioncommenced.  We anticipate completion ofplant construction in approximately May 2009.  We anticipate that our total project costwill be approximately $113,580,000.  Weexpect to have sufficient cash on hand through our equity and debt financing tocomplete construction and start-up operations. However, any significant changes to our estimated budget may result inour need for additional equity or debt financing.  Once we are operational, we expect to begingenerating cash flow.

 

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On September 28, 2006, we entered into adesign-build contract with Fagen, Inc. for the design and construction ofour ethanol plant for a total price of $69,950,000.  If Fagen, Inc. isrequired to employ union labor, excluding union labor for the grain system andenergy center, the contract price will be increased to include any increasedcosts associated with the use of union labor. We paid amobilization fee of $5,000,000 to Fagen, Inc. when we issued our notice toproceed with construction in April 2008 pursuant to the terms of thedesign-build contract.

 

We have executed a Phase Iand Phase II Engineering Services Agreement with Fagen Engineering, LLC, anentity related to our design-builder Fagen, Inc., for the performance ofcertain engineering and design work. Fagen Engineering, LLC performs theengineering services for projects constructed by Fagen, Inc. In exchangefor certain engineering and design services, we have agreed to pay FagenEngineering, LLC a lump-sum fixed fee, which will be credited against the totaldesign-build costs.

 

We also entered into a license agreement with ICM, Inc.for limited use of ICM, Inc.’s proprietary technology and information toassist us in operating, maintaining, and repairing the ethanol productionfacility.  We are not obligated to pay afee to ICM, Inc. for use of the proprietary information and technologybecause our payment to Fagen, Inc. for the construction of the plant underour design-build agreement is inclusive of these costs.   Under the license agreement, ICM, Inc.retains the exclusive right and interest in the proprietary information andtechnology and the goodwill associated with that information.  ICM, Inc. may terminate the agreementupon written notice if we improperly use or disclose the proprietaryinformation or technology at which point all proprietary property must bereturned to ICM, Inc.

 

On November 28,2007 we executed a Phase 1 Mass Grading and Drainage Agreement with R and GConstruction Co. for certain improvements to the project site which involvesmass grading and drainage activities. We agreed to pay a monthly fee of 90% ofthe value based on the amount of work completed with the remaining 10% held asretainage.  As of October 31, 2008,we incurred approximately $2,113,000 for R and G’s services under thisagreement.  In August 2008, weentered into an additional contract with R and G for rail system drainage foran amount of approximately $1,214,000. We agreed to pay a monthly fee of 90% of the value based on the amountof work completed, with the remaining 10% held as retainage.  As of October 31, 2008, we had incurredapproximately $1,190,000 in costs under these agreements and the work has beencompleted.

 

In December 2007,we entered into an agreement with Rice Lake Construction for construction of awater treatment facility, well drilling and installation of the fire loop forapproximately $15,995,000.  We agreed tomake monthly payments based on the amount of work completed, with 5% retainageheld on the last two payments.  As of October 31,2008, we had incurred approximately $6,178,000 in costs under this agreement.

 

In July 2008, we entered into an agreement withL.A. Colo., LLC for rail work in the amount of approximately $4,361,000.  We agreed to pay a monthly fee of 90% of thevalue on the amount of work completed with the remaining 10% held asretainage.  The project is scheduled tobe completed in early 2009 as we have approximately 200 feet left to beinstalled.  As of October 31, 2008,we had incurred approximately $3,700,000 in costs under this agreement.

 

Also, in July 2008, we entered into an agreementwith McCormick Construction Company for the installation of auger cast pilingsfor support of grain silos for approximately $428,000.  We paid a 10% down payment of approximately$43,000 upon execution of the documents, and made monthly progress paymentsduring the construction.  As of October 31,2008, we had incurred $424,000 in costs under this agreement and constructionhas been completed.

 

In August 2008, we entered into an agreement withLamberton Construction for the construction of an administration building forapproximately $278,000.  Pursuant to theterms of the agreement we are paying a monthly fee of 90% of the value based onthe amount of work completed, with the remaining 10% held as retainage.  As of October 31, 2008, we had incurredapproximately $50,000 in costs under this agreement.

 

Plant construction is progressing on schedule.  We commenced site work at the plant in November 2007.  We provided Fagen, Inc. with notice toproceed with construction, which was executed on April 7, 2008.  Status to date on the construction is asfollows:

 

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·                  AdministrationBuilding—Construction of the administrationbuilding is approximately 70% complete with interior cabinetry, trim andflooring remaining to be installed.  Theexterior walls need siding.  We expect tooccupy this building by the end of February 2009.

 

·                  DDG StorageBuilding—The construction of the distillers driedgrain storage building is complete.

 

·                  Process BuildingArea—All field fabricated tanks (fermenters, beer well, stilage alleytanks) have been completed.  Alldistillation vessels (columns and molecular sieves) have been set inplace.  All process tanks (evaporators,slurry, CIP and enzyme) inside the Process Building are installed.  Process piping and pumps are being hooked upto the tanks.  All stillage alley tanksare insulated and many exterior pipelines are now insulated as well.  The electrical hook up from the Motor ControlCenter (MCC) room to the equipment has been started and is progressing.

 

·                  Energy Center—Thecentrifuges, dryers, dust collectors, conveyors, screws and ductwork are all inplace.  The thermal oxidizer stack wasinstalled in December and is awaiting the arrival of the thermal oxidizerand the boiler with both expected to arrive in early February.  Electrical wiring from the MCC room to theequipment has been started in this building as well and is also progressing.

 

·                  CoolingTower/Water Treatment—Cooling tower construction hasbeen completed.  The cooling water headerlines to the process building are being connected to the tower pumps.  The Cold Lime Softening water treatmentbuilding was erected in November and concrete floor slabs are currentlybeing installed and the water treatment storage tanks are beingconstructed.  Some water treatmentequipment is beginning to arrive on site. We expect a late March or early April 2009 completiontimeline.

 

·                  Tank Farm—Alltank farm storage vessels are built, painted and rigged with floatingroofs.  The outside accessories arecurrently being attached to the tanks.

 

·                  Grain ReceivingArea—The concrete grain storage silos were poured in October.  The grain receiving building basement iscomplete with equipment, including the rail scale. The building is now readyfor the concrete floor and then wall erection. The grain legs are currently being attached to the silos.  Also underway is the electrical insulation ofswitch gear in the MCC room.

 

InfrastructureStatus:

 

·                  Natural Gas—CenterpointEnergy installed the natural gas pipeline into the Company’s site.  In addition, our natural gas contractorinstalled the natural gas lines connecting Centerpoint Energy’s main regulardistribution line to the energy center, load out flare and administrationbuilding.

 

·                  Rail Siding andSpurs—Rail siding and spurs are approximately 98% complete.  The siding is connected via mainline switchesto the DM&E Railroad system. Approximately 200 feet of the total 28,000 foot track is left to installinto the grain receiving building once that building is complete.

 

·                  ElectricalSubstation—Redwood Electric and Great River Energyhave finished the electrical sub-station construction.  Permanent electrical power distributionnetwork has been installed on the site and is now supplying electrical power toseveral areas of the site.

 

·                  Phase 1—Alldirt work associated with the phase 1 portion of construction was substantiallycomplete by mid-November.  Theinstallation of approximately 100 feet of drain culvert, grass seeding and thefinal grading of site roads is all that remains and we expect this to becompleted in the spring.

 

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·                  Phase 2—Alloff-site and on-site process water supply pipelines, the entire fire loopsystem, the on-site sanitary sewer and potable water supply lines arecomplete.  The production well pumps andpitless adapters are ready to install in the wells.  The electrical service to the well sites iscomplete.

 

We estimate that we willneed approximately $69,950,000 to construct the plant and a total ofapproximately $43,630,000 to cover all other expenditures necessary to completethe project, commence plant operations and produce revenue.

 

*Marketing and GrainProcurement Agreements*

 

We have entered into anethanol marketing agreement with Renewable Products Marketing Group, LLC (“RPMG”)pursuant to which RPMG will be our exclusive ethanol marketer.  RPMG will use its best efforts to market andobtain the best price for the ethanol we expect to produce in exchange for apercentage of the price we receive for each gallon of ethanol sold.  The initial term of the RPMG agreement is for24 months and shall be automatically extended for 12 months unless either partygives the other prior written notice. The RPMG agreement can be terminated for any uncured breach of the termsof the agreement.  In the event theagreement is not renewed, Highwater may assume certain rail car leasescurrently controlled by RPMG.

 

On October 11,2007, we entered into a Distillers Grains Marketing Agreement with CHS, Inc.  CHS, Inc. is a diversified energy,grains and foods company owned by farmers, ranchers and cooperatives.  CHS, Inc. provides products and servicesranging from grain marketing to food processing to meet the needs of itscustomers around the world.  CHS, Inc.will market our distillers grains and we receive a percentage of the sellingprice actually received by CHS, Inc. in marketing our distillers grains toits customers.  Under the agreement, CHS, Inc.will pay to us a price equal to 98% of the FOB plant price actually received byCHS, Inc. for all dried distillers grains removed by CHS, Inc. fromour plant and a price equal to 96% of the FOB plant price actually received byCHS, Inc. for all our wet distillers grains. The term of our agreementwith CHS, Inc. is for one year commencing as of the completion andstart-up of the plant.  Thereafter, theagreement will remain in effect unless otherwise terminated by either partywith 120 days notice.  Under theagreement, CHS, Inc. will be responsible for all transportationarrangements for the distribution of our distillers grains.

 

We have entered into agrain procurement agreement with Meadowland Farmers Co-op (“Meadowland”).  Meadowland has the exclusive right andresponsibility to provide us with our daily requirements of corn meetingquality specifications set forth in the grain procurement agreement.  Under the agreement, we will purchase corn atthe local market price delivered to the ethanol plant plus a fixed fee perbushel of corn purchased.  We willprovide Meadowland with an estimate of our usage at the beginning of eachfiscal quarter and Meadowland agrees to at all times maintain a minimum of 7days corn usage at our plant.  The initialterm of the agreement is 7 years from the time we request our first delivery ofcorn.

 

*OtherConsultants*

 

*Agreementfor Electric Service*

 

On June 28, 2007 weentered into an Agreement for Electric Service with Redwood ElectricCooperative, Inc. for the sale and delivery of electric power and energynecessary to operate our ethanol plant. In exchange for its services, we agreed to pay Redwood ElectricCooperative, Inc. a monthly facilities charge of approximately $12,000plus the Cooperative’s standard electrical rates. Pursuant to the agreement thecontract rate will be guaranteed for up to five years. Upon execution of theagreement, we became a member of the Cooperative and are bound by its articlesof incorporation and bylaws. This agreement will remain in effect for ten yearsfollowing the initial billing period.  Inthe event we wish to continue receiving electrical service from the Cooperativebeyond the ten year period, we will need to enter into a new agreement with theCooperative at least one year prior to the expiration of the initial ten yearperiod.  If the agreement is terminatedby either party for any reason prior to the expiration of the initial ten yearperiod, we will be required to pay for the entire amount of the facility chargefor the remainder of the initial ten year period.  Also, pursuant to this agreement, Highwaterprovided the Cooperative with a Letter of Credit in the amount of $700,000 atthe expense of Highwater for the entire period of construction and continuingfor a period of one year of commercial operation.  The Cooperative agrees to release the Letterof Credit requirement after 

 

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one full year ofcommercial operation upon a showing by Highwater that it is solvent.  In the event that Highwater is not solventafter one year of commercial operation, the Letter of Credit will remain ineffect; provided, however, the Cooperative agrees to review Highwater’sfinancial situation after each subsequent one year period has passed and ifHighwater establishes that it is solvent at any of those review dates, theletter of credit will be released.  In June 2008,there was a verbal agreement to suspend the $12,000 monthly fee untiloperations commence.

 

*EnergyManagement Agreement*

 

We have entered into anenergy management agreement with U.S. Energy Services, Inc. pursuant towhich U.S. Energy will provide us with the necessary natural gas managementservices. Some of their services may include an economic comparison ofdistribution service options, negotiation and minimization of interconnectcosts, submission of the necessary pipeline “tap” request, supplying the plantwith and/or negotiating the procurement of natural gas, development andimplementation of a price risk management plan targeted at mitigating naturalgas price volatility and maintaining profitability, providing consolidatedmonthly invoices that reflect all natural gas costs, and U.S. Energy will beresponsible for reviewing and reconciling all invoices. In exchange for theseservices, we will pay U.S. Energy a monthly retainer fee of $3,050 for aninitial contract term of 12 months.  Ifwe decide to utilize U.S. Energy’s hedging service we will have to pay anadditional $.01 per MMBTu administrative fee for physical or financial naturalgas hedging.  Additional fees may applyfor additional services and for time and travel.

 

*ConstructionConsulting Agreement*

 

On May 27, 2008 weentered into an Agreement for Consulting Services with Granite Falls Energy,LLC (“Granite Falls”) to assist us in monitoring the construction and reviewingproject plans and documents.  Some oftheir services may include reviewing project budget and timeline, reviewingcontracts, weekly on-site inspections, obtaining competitive bids and executingcontracts for services not currently under contract and providingrecommendation and analysis of change order requests.  In exchange for these services, we will payGranite Falls a Consultant fee of $10,250 per month for its consultingservices.  Additional services will bebilled to Highwater in accordance with a set fee schedule.  The agreement commenced May 1, 2008 andwill continue unless terminated by either party, by providing the other with a30 day advance written notice of termination.

 

*NaturalGas Service Agreement*

 

On July 1, 2008, we entered into a natural gasservice agreement with CenterPoint Energy Resources Corp., d.b.a. CenterPointEnergy Minnesota Gas (“CenterPoint Energy”). CenterPoint Energy has constructed a pipeline from the Northern NaturalGas Company (“Northern”) Town Border Station for Highwater (Highwater TBS”)terminating at Highwater’s selected location. Construction shall be completed by the later of April 1, 2009 orwithin 15 days of Northern’s completion of the Highwater TBS.  Additionally, Highwater agrees to purchaseall of its natural gas requirements from CenterPoint Energy’s pipeline.  This Agreement will continue until October 31,2019.  Also, pursuant to this agreement,Highwater has provided Northern with a letter of credit for $4,000,000.  Northern may draw on the letter of creditonly if (1) Highwater is in default of its obligations under thisagreement and all applicable notice and cure periods have expired or (2) Northern’scontractual obligations with Highwater extend beyond the expiration date of theLetter of Credit and either Highwater or the Issuing Bank has provided noticeto Northern that the Letter of Credit will not be extended beyond its currentlyeffective expiration period.  Pursuant tothe terms of the agreement we provided a security deposit of $500,000, whichwas returned to the Company with the release of the capacity agreement in December 2008.

 

*Permitting and RegulatoryActivities*

 

We are subject toextensive air, water and other environmental regulations.  We have obtained the required air andconstruction permits necessary to begin construction of the plant and are inthe process of obtaining any additional permits necessary to operate the plant.Fagen, Inc. and Earth Tec Consulting, Inc. are coordinating andassisting us with obtaining certain environmental permits, and advising us ongeneral environmental compliance.  Inaddition, we will retain consultants with expertise specific to the permitsbeing pursued to ensure all permits are acquired in a cost efficient and timelymanner.

 

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We havereceived our Air Emissions Permit, a Stormwater permit, a Discharge forStormwater During Construction Acitivities Permit, Groundwater Permit and anAbove Ground Storage Tank Permit. Additionally, we have received the water appropriation permits from theMinnesota Department of Natural Resources as well as Notice from the RedwoodConservation District approving an exemption to place force mains through a wetlandarea.  We have also received thenecessary permits from Minnesota Pollution Control Agency (MPCA) for treatmentof our wasteater.

 

Theremaining permits will be required shortly before or shortly after we begin tooperate the plant.  If for any reason anyof these permits are not granted, construction costs for the plant mayincrease, or the plant may not be constructed at all.  Currently, we do not anticipate problems inobtaining the required permits; however, such problems may arise in which caseour plant may not be allowed to operate.

 

**Trends and Uncertainties Impacting the EthanolIndustry and Our Future Operations**

 

Weare subject to industry-wide factors, trends and uncertainties that affect ouroperating and financial performance. These factors include, but are not limitedto, the available supply and cost of corn from which our ethanol and distillersgrains are processed; the cost of natural gas, which we use in the productionprocess; new technology developments in the industry; dependence on our ethanolmarketer and distillers grains marketer to market and distribute our products;the intensely competitive nature of the ethanol industry; and possible changesin legislation/regulations at the federal, state and/or local level. Thesefactors as well as other trends and uncertainties are described in more detailbelow.

 

Wehave no operating history and our business may not be as successful as weanticipate. As of the end of the fiscal year we had not yet completedconstruction of the plant. Accordingly, we have no operating history from whichyou can evaluate our business and prospects. Our operating results couldfluctuate significantly in the future as a result of a variety of factors. Manyof these factors are outside our control. In addition, our prospects must be considered in light of the normalrisks and uncertainties encountered by an early stage company in a rapidlygrowing industry where supply, demand and pricing may change substantially in ashort amount of time.

 

*Economic Downturn*

 

The U.S. stock markets tumbled in September and October 2008upon the collapse of multiple major financial institutions, the federalgovernment’s takeover of two major mortgage companies, Freddie Mac and FannieMae, and the President’s enactment of a $700 billion bailout plan pursuant towhich the federal government will directly invest in troubled financialinstitutions.  Financial institutions across the country have lostbillions of dollars due to the extension of credit for the purchase andrefinance of over-valued real property.  The U.S. economy is in the midstof a recession, with increasing unemployment rates and decreasing retailsales.  Other large corporate giants, such as the big three auto makers,have also been seeking government bailout money and may be facingbankruptcy.  These factors have caused significant economic stress andupheaval in the financial and credit markets in the United States, as well asabroad.  Credit markets have tightened and lending requirements havebecome more stringent.  Oil prices have dropped rapidly as demand for fuelhas decreased.  We believe that these factors have contributed to adecrease in the prices at which we may be able to sell our ethanol in thefuture which may persist throughout all or parts of fiscal year 2009.  Itis uncertain how long and to what extent these economic troubles may negativelyaffect ethanol prices in the future.

 

*Corn Prices*

 

Our cost of goods soldwill consist primarily of costs relating to the corn and natural gas suppliesnecessary to produce ethanol and distillers grains for sale.  On December 11,2008, the USDA released its Crop Production report, which estimated the 2008grain corn crop at approximately 12 billion bushels, approximately 8% below theUSDA’s estimate of the 2007 corn crop of 13.07 billion bushels.  Corn prices reached historical highs in June 2008,but have come down sharply since that time as stronger than expected cornyields materialized and the global financial crisis brought down the prices ofmost commodities generally.  We expect continued volatility in theprice of corn, which could significantly impact our cost of goods sold.  The growing number of operating ethanolplants nationwide is also expected to increase the demand for corn.  This increase will likely drive the price ofcorn upwards in our market which will impact our ability to operate profitably.

 

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There is no assurancethat a corn shortage will not develop, particularly if there is an extendeddrought or other production problems in the 2009 crop year.  We anticipate that our plant’s profitabilitywill be negatively impacted during periods of high corn prices.  Although we expect the negative impact onprofitability resulting from high corn prices to be mitigated, in part, by theincreased value of the distillers grains we intend to market (as the price ofcorn and the price of distillers grains tend to fluctuate in tandem), we stillmay be unable to operate profitably if high corn prices are sustained for asignificant period of time.

 

*NaturalGas*

 

Natural gas is also animportant input commodity to our manufacturing process. We estimate that ournatural gas usage will be approximately 10% to 15% of our annual totalproduction cost. We use natural gas to dry our distillers grain products to amoisture content at which they can be stored for long periods of time, and canbe transported greater distances. Any sustained increase in the price level ofnatural gas will increase our cost of production and will negatively impact ourfuture profit margins.

 

*Ethanol Supply and Demand*

 

Thenumber of ethanol plants being developed and constructed in the United Statescontinues to increase.  If the demand forethanol does not grow at the same pace as increases in supply, we expect theprice for ethanol to further decline. The prices of crude oil and refined gasoline decreased significantly inthe second half of 2008, which has in turn placed downward pressure on theprice of ethanol.  Declining ethanolprices will result in lower future revenues and may reduce or eliminateprofits.

 

Whilewe believe that the nationally mandated usage of renewable fuels has largelydriven demand in the past, we believe that an increase in voluntary usage willbe necessary for the industry to continue its growth trend.  In addition, a higher RFS standard may benecessary to encourage blenders to utilize ethanol. We expect that voluntaryusage by blenders will occur only if the price of ethanol makes increasedblending economical. In addition, we believe that heightened consumer awarenessand consumer demand for ethanol-blended gasoline may play an important role ingrowing overall ethanol demand and voluntary usage by blenders. If blenders donot voluntarily increase the amount of ethanol blended into gasoline andconsumer awareness does not increase, it is possible that additional ethanolsupply will continue to outpace demand and further depress ethanol prices.

 

*Ethanol Industry Competition*

 

We operate in acompetitive industry and compete with larger, better financed entities whichcould impact our ability to operate profitably. There is significantcompetition among ethanol producers with numerous producer and privately ownedethanol plants planned and operating throughout the United States. In addition,we are beginning to see consolidation in the industry.  Archer Daniels Midland Company, POET, LLC,Hawkeye Renewables, LLC, Aventine Renewable Energy Holdings, Inc., VeraSunEnergy Corp. and Cargill Incorporated control a significant portion of theethanol market, producing an aggregate of over 4.6 billion gallons of ethanolannually.  However, in November 2008VeraSun Energy Corp. announced it had filed for Chapter 11 bankruptcyprotection thereby calling into question its ability to maintain its level ofethanol production.

 

*Derivatives*

 

We are exposed to market risks from changes incorn, natural gas, and ethanol prices. We may seek to minimize these commodityprice fluctuation risks through the use of derivative instruments. Although wewill attempt to link these instruments to sales plans, market developments, andpricing activities, such instruments in and of themselves can result inadditional costs due to unexpected directional price movements. We may incursuch costs and they may be significant.

 

In April 2008, we entered into an interestrate swap agreement in order to manage our exposure to the impact of changinginterest rates.  As of October 31,2008, we had recorded a liability for a derivative instrument of approximately$591,000 related to the interest rate swap. This derivative instrument was not designated as a cash 

 

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flow hedge.  The Company hasrecognized a loss on the interest rate swap of approximately $591,000 includedin other income and expense for the year ended October 31, 2008.

 

*DistillersGrains Marketing*

 

Withthe advancement of research into the feeding rations of poultry and swine, weanticipate these markets will continue to expand and create additional demandfor distillers grains; however, no assurance can be given that these marketswill in fact expand, or if they do that we will benefit.

 

*Technology Developments*

 

The current trendin ethanol production research is to develop an efficient method of producingethanol from cellulose-based biomass, such as agricultural waste, forestresidue, municipal solid waste, and energy crops.  This trend is driven by the fact thatcellulose-based biomass is generally cheaper than corn, and producing ethanolfrom cellulose-based biomass would create opportunities to produce ethanol inareas which are unable to grow corn. Although current technology is not sufficiently efficient to becompetitive, the United States Congress is consistently increasing theavailability of incentives to promote the development of commercially viablecellulose based ethanol production technology.

 

Advances and changes in the technology used to produceethanol may make the technology we are installing in our plant less desirableor obsolete.  These advances could alsoallow our competitors to produce ethanol at a lower cost than us.  If we are unable to adopt or incorporatetechnological advances, our ethanol production methods and processes could beless efficient than our competitors, which could cause our plant to becomeuncompetitive or completely obsolete.

 

*GovernmentLegislation and Regulations*

 

Theethanol industry and our business are assisted by various federal ethanolsupports and tax incentives, including those included in the Energy Policy Actof 2005 and the Energy Independence and Security Act of 2007. Governmentincentives for ethanol production, including federal tax incentives, may be reducedor eliminated in the future, which could hinder our ability to operate at aprofit. Federal ethanol supports, such as the renewable fuels standard (“RFS”),help support a market for ethanol that might disappear without this incentive;as such, a waiver of minimum levels of renewable fuels included in gasolinecould have a material adverse effect on our results of operations. Theelimination or reduction of tax incentives to the ethanol industry, such as theVEETC available to gasoline refiners and blenders, could reduce the market forethanol, causing prices, revenues, and profitability to decrease.

 

**Liquidity and Capital Resources**

 

*EstimatedSources of Funds*

 

The following schedule sets forth estimatedsources of funds to build our ethanol plant near Lamberton, Minnesota. This schedule could change in the future depending on the level of equityand debt financing we receive and the amount of grants, if any we are able toobtain.

 
| **Sources of  Funds (1)**                  | ** ** | ** ** | ** **  | **Percent** | ** ** |
|--------------------------------------------|------------|------------|-------------|-------------|------------|
| Offering Proceeds (2)                      |       | $          | 45,710,000  |        | 40.24      | % |
| Seed Capital Proceeds (3)                  |       | $          | 1,680,000   |        | 1.48       | % |
| Senior and Subordinated Debt Financing (4) |       | $          | 51,314,000  |        | 45.18      | % |
| Bond Financing (5)                         |       | $          | 14,876,000  |        | 13.10      | % |
| **Total Sources of Funds**                 |       | $          | 113,580,000 |        | 100.00     | % |

 

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(1)                                           The amount of estimated offering proceedsand senior debt financing may be adjusted depending on the amount of grants weare able to obtain.

 

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(2)                                                    We received proceeds for approximately$45,670,000 in our registered offering and issued 4,567 registered units to ourinvestors.  We also received $40,000 ofinvestor deposits that were forfeited and are included with these offeringproceeds.

 

(3)                                                    We issued a total of 386 units to ourseed capital investors in exchange for proceeds of $1,680,000.  We issued a total of 236 units to our seedcapital investors at a price of $5,000 per unit.  In addition, we issued 150 units to ourfounders at a price of $3,333.33 per unit.

 

(4)                                                    We have a definitive loan agreement withFNBO for debt financing in the amount up to $61,000,000, consisting of up to$50,400,000 for a Construction Loan, together with up to $5,000,000 RevolvingLoan and up to $5,600,000 to support the issuance of letters of credit byFNBO.  We have issued letters of creditto Redwood Electric Cooperative, Inc. and Northern Natural Gas Company forthe amount of $700,000 and $4,000,000 respectfully.  The details of the letters of credit aredescribed above in *Plant Construction andStart-Up of Plant Operations. *TheCompany also entered into an interest rate swap agreement which fixes theinterest rate on the Fixed Rate Note at 7.6% for five years beginning in June 2009.

 

(5)                                                    We have entered into a long term leaseagreement with the City of Lamberton, Minnesota in order to finance equipmentfor the plant.  The City financed thepurchase of equipment through Solid Waste Facilities Revenue Bonds Series 2008Atotaling $15,180,000.  We receivedproceeds of approximately $14,876,000, after financing costs of approximately$304,000.  The remaining proceeds areheld as restricted cash and marketable securities based on anticipated use andare split between a project fund of approximately $11,564,000, a capitalizedinterest fund of approximately $1,818,000, and a debt service reserve fund ofapproximately $1,501,000.

 

We expect to havesufficient cash on hand through our equity and debt financing to cover allcosts associated with construction of the project, including, but not limitedto, site development, utilities, construction and equipment acquisition.

 

*EstimatedUses of Proceeds*

 

The followingtable reflects our estimate of costs and expenditures for the ethanol plant tobe built near Lamberton, Minnesota. These estimates are based on discussions with Fagen, Inc., ourdesign-builder. The following figures are intended to be estimates only, andthe actual use of funds may vary significantly from the descriptions givenbelow due to a variety of factors described elsewhere in this report.

 

Estimate of Costsas of the Date of this Report.

 
| **Use of Proceeds**                   | ** ** | **Amount** | ** **      | **Percent of Total** | ** ** |
|---------------------------------------|------------|------------|-----------------|----------------------|------------|
|                                  |       |       |            |                 |       |
| Plant construction                    |       | $          | 69,950,000      |                 | 61.59      | % |
| Land cost                             |       | 1,098,000  |            | 0.97                 | %          |
| Site development costs                |       | 13,647,300 |            | 12.02                | %          |
| Construction contingency              |       | 1,000,000  |            | 0.88                 | %          |
| Construction performance bond         |       | 350,000    |            | 0.31                 | %          |
| Construction insurance costs          |       | 160,000    |            | 0.14                 | %          |
| Administrative building               |       | 300,000    |            | 0.26                 | %          |
| Office equipment                      |       | 44,500     |            | 0.04                 | %          |
| Computers, Software, Network          |       | 193,000    |            | 0.17                 | %          |
| Railroad                              |       | 5,879,615  |            | 5.18                 | %          |
| Rolling stock                         |       | 560,000    |            | 0.49                 | %          |
| Fire Protection and water supply      |       | 6,005,835  |            | 5.29                 | %          |
| Construction Manager Fees             |       | 100,000    |            | 0.09                 | %          |
| Capitalized interest                  |       | 1,818,000  |            | 1.60                 | %          |
| **Start up costs:**                   |       |       |            |                 |       |
| Financing costs                       |       | 1,981,000  |            | 1.74                 | %          |
| Cost of Raising Capital               |       | 736,000    |            | 0.65                 | %          |
| Organization costs                    |       | 935,000    |            | 0.82                 | %          |
| Pre-production period costs           |       | 1,170,750  |            | 1.03                 | %          |
| Debt Service Reserve                  |       | 1,501,000  |            | 1.32                 | %          |
| Working capital                       |       | 2,000,000  |            | 1.76                 | %          |
| Inventory - corn                      |       | 1,375,000  |            | 1.21                 | %          |
| Inventory - chemicals and ingredients |       | 600,000    |            | 0.53                 | %          |
| Inventory - Ethanol                   |       | 1,500,000  |            | 1.32                 | %          |
| Inventory - DDGS                      |       | 500,000    |            | 0.44                 | %          |
| Spare parts - process equipment       |       | 175,000    |            | 0.15                 | %          |
| **Total**                             | ** ** | **$**      | **113,580,000** |                 | 100.00     | % |

 

18

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We expect thetotal funding required for the plant to be approximately $113,580,000, whichincludes $69,950,000 to build the plant and approximately $43,630,000 for otherproject development costs including land, site development, utilities, start-upcosts, capitalized fees and interest, inventories and working capital.  In addition, our use of proceeds budget waspreviously increased due to increases in the budgeted amounts for the CCIcontingency, site development costs, construction performance bond, railroadcosts, fire protection and water supply, and financing costs.  Our use of proceeds is measured from date ofinception and we have already incurred some of the related expenditures.

 

*FinancialResults*

 

As of October 31,2008, we had cash of approximately $1,356,000 and total assets of approximately$77,798,000, which includes approximately $62,948,000 in construction inprogress and approximately $6,842,000 in restricted marketable securities.  As of October 31, 2008, we had currentliabilities of approximately $17,556,000 consisting mainly of accrued expensesin the amount of approximately $669,000 and construction payable in the amountof approximately $16,764,000.  Inaddition, we have long term debt of approximately $15,180,000 and long-termderivative instrument of approximately $530,000.    Total members’ equity as of October 31,2008, was approximately $44,532,000. Since inception, we have generated no revenue from operations, and as ofOctober 31, 2008, have accumulated net losses of approximately $2,061,000and accumulated other comprehensive loss of approximately $60,000.

 

At October 31,2008, we had recorded a liability for a derivative instrument of approximately$591,000 related to the interest rate swap. The Company has recognized a loss onthe interest rate swap of approximately $591,000 included in other income andexpense for the year ended October 31, 2008.

 

We raised $1,680,000 inseed capital through previous private placements.  We received proceeds forapproximately 4,567 units through our registered offering for aggregateproceeds of approximately $45,670,000. We closed the offering on April 5, 2008 and released funds fromescrow on April 7, 2008.

 

**CriticalAccounting Estimates**

 

Management uses variousestimates and assumptions in preparing our financial statements in accordancewith generally accepted accounting principles.  These estimates andassumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported revenues andexpenses. Accounting estimates that are the most important to the presentationof our results of operations and financial condition, and which require thegreatest use of judgment by management, are designated as our criticalaccounting estimates. We have the following critical accounting estimates:

 

We review long-livedassets for impairment whenever events or changes in circumstances indicate thatthe related carrying amounts may not be recoverable.  Impairment testingfor assets requires various estimates and assumptions,

 

19

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including an allocationof cash flows to those assets and, if required, an estimate of the fair valueof those assets.  Our estimates are based upon assumptions believed to bereasonable, but which are inherently uncertain and unpredictable. Thesevaluations require the use of management’s assumptions, which do not reflectunanticipated events and circumstances that may occur.

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheet arrangements.

 

**Employees**

 

We currently have three part-time employees, a PlantManager and a General Manager/Chief Executive Officer.  Our Grain Merchandiser and MaintenanceTechnician are expected to start working for the Company in February andour Operations Manager is expected to start work in early March.   See “**DESCRIPTIONOF BUSINESS — Employees.**”

 

20

----

 

**ITEM7.  FINANCIAL STATEMENTS.**

 

 

REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM

 

Boardof Governors

HighwaterEthanol, LLC

Lamberton,Minnesota

 

Wehave audited the accompanying balance sheets of Highwater Ethanol, LLC (adevelopment stage company) as of October 31, 2008 and 2007, and therelated statements of operations, changes in members’ equity and comprehensiveloss, and cash flows for the years then ended and the period from inception (May 2,2006) to October 31, 2008. Highwater Ethanol, LLC’s management isresponsible for these financial statements. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Highwater Ethanol, LLC (adevelopment stage company) as of October 31, 2008 and 2007, and theresults of its operations and its cash flows for the years then ended and forthe period from inception (May 2, 2006) to October 31, 2008 inconformity with accounting principles generally accepted in the United Statesof America.

 
|                                                         | /s/ Boulay, Heutmaker, Zibell & Co., P.L.L.P |
|--------------------------------------------------------------|-------------------------------------------------------|
|                                                         |                                                  |
|                                                         | Certified Public Accountants                          |
|                                                         |                                                  |
| Minneapolis, Minnesota                                       |                                                  |
| January 29,  2009, except as to Notes 1, 5, 7, 9 and 11 |                                                  |
| which are as of September 29, 2009                      |                                                  |

 

21

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**HIGHWATER ETHANOL, LLC**

(A Development Stage Company)

** **

Balance Sheets

 
| ** **                                                                                                                                             | ** ** | **October 31,** | ** ** | **October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **ASSETS**                                                                                                                                             | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| ** **                                                                                                                                             | ** ** | **(Restated)**       | ** ** | ** **           | ** ** |
| **Current Assets**                                                                                                                                     |       |                 |       |                 |       |
| Cash                                                                                                                                                   |       | $                    | 1,355,827  |                 | $          | 98,697 |   |
| Restricted cash                                                                                                                                        |       | 2,916,825            |       | 56,254               |       |
| Restricted marketable securities                                                                                                                       |       | 5,380,199            |       | —               |       |
| Prepaids and other                                                                                                                                     |       | 540,190              |       | 35,353               |       |
| Total current assets                                                                                                                                   |       | 10,193,041           |       | 190,304              |       |
|                                                                                                                                                   |       |                 |       |                 |       |
| **Property and Equipment**                                                                                                                             |       |                 |       |                 |       |
| Land and land improvements                                                                                                                             |       | 1,250,621            |       | 1,018,252            |       |
| Construction in progress                                                                                                                               |       | 62,948,311           |       | 20,854               |       |
| Office equipment                                                                                                                                       |       | 19,137               |       | 17,283               |       |
| Accumulated depreciation                                                                                                                               |       | (5,949               | )          | (2,386               | )          |
| Total property and equipment                                                                                                                           |       | 64,212,120           |       | 1,054,003            |       |
|                                                                                                                                                   |       |                 |       |                 |       |
| **Other Assets**                                                                                                                                       |       |                 |       |                 |       |
| Restricted cash                                                                                                                                        |       | 56,565               |       | —               |       |
| Restricted marketable securities                                                                                                                       |       | 1,461,435            |       | —               |       |
| Deferred offering costs                                                                                                                                |       | —               |       | 717,363              |       |
| Debt issuance costs, net                                                                                                                               |       | 1,874,782            |       | 2,209                |       |
| Land options                                                                                                                                           |       | —               |       | 2,000                |       |
| Total other assets                                                                                                                                     |       | 3,392,782            |       | 721,572              |       |
|                                                                                                                                                   |       |                 |       |                 |       |
| **Total Assets**                                                                                                                                       |       | $                    | 77,797,943 |                 | $          | 1,965,879 |   |
|                                                                                                                                                   |       |                 |       |                 |       |
| ** **                                                                                                                                             | ** ** | **October 31,** | ** ** | **October 31,** | ** ** |
| **LIABILITIES AND EQUITY**                                                                                                                             | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| ** **                                                                                                                                             | ** ** | **(Restated)**       | ** ** | ** **           | ** ** |
| **Current Liabilities**                                                                                                                                |       |                 |       |                 |       |
| Note payable                                                                                                                                           |       | $                    | —     |                 | $          | 1,100,000 |   |
| Accounts payable                                                                                                                                       |       | 54,833               |       | 577,231              |       |
| Accounts payable - members                                                                                                                             |       | 7,014                |       | 125,589              |       |
| Construction payable                                                                                                                                   |       | 1,620,712            |       | —               |       |
| Construction payable - members                                                                                                                         |       | 15,143,048           |       | —               |       |
| Accrued expenses                                                                                                                                       |       | 669,126              |       | 13,956               |       |
| Derivative instrument                                                                                                                                  |       | 60,996               |       | —               |       |
| Total current liabilities                                                                                                                              |       | 17,555,729           |       | 1,816,776            |       |
|                                                                                                                                                   |       |                 |       |                 |       |
| **Long-Term Debt**                                                                                                                                     |       | 15,180,000           |       | —               |       |
|                                                                                                                                                   |       |                 |       |                 |       |
| **Derivative Instrument**                                                                                                                              |       | 530,078              |       | —               |       |
|                                                                                                                                                   |       |                 |       |                 |       |
| **Commitments and Contingencies**                                                                                                                      |       |                 |       |                 |       |
|                                                                                                                                                   |       |                 |       |                 |       |
| **Members’ Equity**                                                                                                                               |       |                 |       |                 |       |
| Member contributions, net of costs related to  capital contributions, 4,953 and 386 units outstanding at October 31,  2008 and 2007, respectively |       | 46,653,590           |       | 1,680,000            |       |
| Deficit accumulated during development stage                                                                                                           |       | (2,061,350           | )          | (1,530,897           | )          |
| Accumulated other comprehensive loss                                                                                                                   |       | (60,104              | )          | —               |       |
| Total members’ equity                                                                                                                             |       | 44,532,136           |       | 149,103              |       |
|                                                                                                                                                   |       |                 |       |                 |       |
| **Total Liabilities and Members’  Equity**                                                                                                        |       | $                    | 77,797,943 |                 | $          | 1,965,879 |   |

 

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

 

22

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**HIGHWATER ETHANOL, LLC**

(A Development Stage Company) 

 

Statements of Operations

 
| ** **                              | ** ** | ** **                | ** ** | ** **                | ** ** | **From Inception**           | ** ** |
|-----------------------------------------|------------|---------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Year Ended**            | ** ** | **Year Ended**            | ** ** | **(May 2, 2006)**       | ** ** |
| ** **                              | ** ** | **October 31, 2008** | ** ** | **October 31, 2007** | ** ** | **to October 31, 2008** | ** ** |
| ** **                              | ** ** | **(Restated)**            | ** ** | ** **                | ** ** | **(Restated)**               | ** ** |
|                                    |       |                      |       |                      |       |                         |       |
| **Revenues**                            |       | $                         | —     |                      | $          | —                       |       | $ | — |   |
|                                    |       |                      |       |                      |       |                         |       |
| **Operating Expenses**                  |       |                      |       |                      |       |                         |       |
| Professional fees                       |       | 710,218                   |       | 990,707                   |       | 2,042,272                    |       |
| General and administrative              |       | 300,512                   |       | 199,720                   |       | 527,193                      |       |
| Total operating expenses                |       | 1,010,730                 |       | 1,190,427                 |       | 2,569,465                    |       |
|                                    |       |                      |       |                      |       |                         |       |
| **Operating Loss**                      |       | (1,010,730                | )          | (1,190,427                | )          | (2,569,465                   | )          |
|                                    |       |                      |       |                      |       |                         |       |
| **Other Income (Expense)**              |       |                      |       |                      |       |                         |       |
| Interest income                         |       | 1,060,630                 |       | 30,507                    |       | 1,110,785                    |       |
| Other income                            |       | 10,721                    |       | 3,225                     |       | 13,946                       |       |
| Interest expense                        |       | —                    |       | (25,542                   | )          | (25,542                      | )          |
| Loss on derivative instrument           |       | (591,074                  | )          | —                    |       | (591,074                     | )          |
| Total other income, net                 |       | 480,277                   |       | 8,190                     |       | 508,115                      |       |
|                                    |       |                      |       |                      |       |                         |       |
| **Net Loss**                            |       | $                         | (530,453   | )                         | $          | (1,182,237                   | )          | $ | (2,061,350 | ) |
|                                    |       |                      |       |                      |       |                         |       |
| **Weighted Average Units  Outstanding** |       | 3,056                     |       | 386                       |       | 1,440                        |       |
|                                    |       |                      |       |                      |       |                         |       |
| **Net Loss Per Unit**                   |       | $                         | (173.58    | )                         | $          | (3,062.79                    | )          | $ | (1,431.49 | ) |

 

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

 

23

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**HIGHWATER ETHANOL, LLC**

(A Development Stage Company)

 

Statement of Changes in Members’ Equity and Comprehensive Loss

 
| ** **                                                           | ** ** | ** **        | ** ** | ** **              | ** ** | ** **            | ** ** | ** **     | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                                                           | ** ** | ** **        | ** ** | **Deficit Accumulated** | ** ** | **Accumulated Other** | ** ** | ** **     | ** ** |
| ** **                                                           | ** ** | **Member**        | ** ** | **During**              | ** ** | **Comprehensive**     | ** ** | ** **     | ** ** |
| ** **                                                           | ** ** | **Contributions** | ** ** | **Development Stage**   | ** ** | **Loss**              | ** ** | **Total**      | ** ** |
| ** **                                                           | ** ** | ** **        | ** ** | ** **              | ** ** | ** **            | ** ** | **(Restated)** | ** ** |
| **Balance - May 2, 2006,  Inception**                           |       | $                 | —     |                    | $          | —                |       | $              | —     |   | $ | — |   |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Membership units - 150 units at $3,333 per unit,  May 2006      |       | 500,000           |       | —                  |       | —                |       | 500,000        |       |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Membership units - 236 units at $5,000 per unit,  June 2006     |       | 1,180,000         |       | —                  |       | —                |       | 1,180,000      |       |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Net loss                                                             |       | —            |       | (348,660                | )          | —                |       | (348,660       | )          |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| **Balance - October 31, 2006**                                  |       | 1,680,000         |       | (348,660                | )          | —                |       | 1,331,340      |       |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Net loss                                                             |       | —            |       | (1,182,237              | )          | —                |       | (1,182,237     | )          |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| **Balance - October 31, 2007**                                  |       | 1,680,000         |       | (1,530,897              | )          | —                |       | 149,103        |       |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Membership units - 4,567 units at $10,000 per  unit, April 2008 |       | 45,670,000        |       | —                  |       | —                |       | 45,670,000     |       |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Additional paid in capital - forfeited units                         |       | 40,000            |       | —                  |       | —                |       | 40,000         |       |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Costs of raising capital                                             |       | (736,410          | )          | —                  |       | —                |       | (736,410       | )          |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Other comprehensive loss                                             |       |              |       |                    |       |                  |       |           |       |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Net loss                                                             |       | —            |       | (530,453                | )          | —                |       | (530,453       | )          |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Unrealized loss on restricted marketable  securities                 |       | —            |       | —                  |       | (60,104               | )          | (60,104        | )          |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| Total comprehensive loss                                             |       | —            |       | —                  |       | —                |       | (590,557       | )          |
|                                                                 |       |              |       |                    |       |                  |       |           |       |
| **Balance - October 31, 2008**                                  |       | $                 | 46,653,590 |                    | $          | (2,061,350            | )          | $              | (60,104    | ) | $ | 44,532,136 |   |

 

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

 

24

----

 

**HIGHWATER ETHANOL, LLC**

(A Development Stage Company)

 

Statement of Cash Flows

 
| ** **                                                                 | ** ** | ** **                | ** ** | ** **                | ** ** | **From Inception**           | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                                                 | ** ** | **Year Ended**            | ** ** | **Year Ended**            | ** ** | **(May 2, 2006)**       | ** ** |
| ** **                                                                 | ** ** | **October 31, 2008** | ** ** | **October 31, 2007** | ** ** | **to October 31, 2008** | ** ** |
| ** **                                                                 | ** ** | **(Restated)**            | ** ** | ** **                | ** ** | **(Restated)**               | ** ** |
| **Cash Flows from Operating  Activities**                                  |       |                      |       |                      |       |                         |       |
| Net loss                                                                   |       | $                         | (530,453   | )                         | $          | (1,182,237                   | )          | $ | (2,061,350 | ) |
| Adjustments to reconcile net loss to net cash from  operations             |       |                      |       |                      |       |                         |       |
| Depreciation and amortization                                              |       | 3,563                     |       | 6,179                     |       | 9,801                        |       |
| Change in fair value of derivative instrument                              |       | 591,074                   |       | —                    |       | 591,074                      |       |
| Other                                                                      |       | 1,624                     |       | —                    |       | 370                          |       |
| Change in assets and liabilities                                           |       |                      |       |                      |       |                         |       |
| Prepaids and other                                                         |       | (504,837                  | )          | (20,080                   | )          | (540,190                     | )          |
| Accounts payable, including members                                        |       | (411,737                  | )          | 283,896                   |       | 61,847                       |       |
| Accrued expenses                                                           |       | (11,485                   | )          | 13,956                    |       | 2,471                        |       |
| Net cash used in operating activities                                      |       | (862,251                  | )          | (898,286                  | )          | (1,935,977                   | )          |
|                                                                       |       |                      |       |                      |       |                         |       |
| **Cash Flows from Investing  Activities**                                  |       |                      |       |                      |       |                         |       |
| Capital expenditures                                                       |       | (232,223                  | )          | (874,415                  | )          | (1,227,758                   | )          |
| Construction in progress                                                   |       | (40,327,504               | )          | (20,854                   | )          | (40,348,358                  | )          |
| Payments for land options                                                  |       | —                    |       | (30,000                   | )          | (42,000                      | )          |
| Net cash used in investing activities                                      |       | (40,559,727               | )          | (925,269                  | )          | (41,618,116                  | )          |
|                                                                       |       |                      |       |                      |       |                         |       |
| **Cash Flows from Financing  Activities**                                  |       |                      |       |                      |       |                         |       |
| Proceeds from note payable                                                 |       | —                    |       | 1,038,939                 |       | 1,038,939                    |       |
| Payments on notes payable                                                  |       | (1,100,000                | )          | —                    |       | (1,100,000                   | )          |
| Funds received from restricted cash                                        |       | 36,721                    |       | —                    |       | 36,721                       |       |
| Increase in restricted cash from net interest  earned                      |       | (119,604                  | )          | —                    |       | (119,604                     | )          |
| Member contributions                                                       |       | 45,670,000                |       | —                    |       | 47,350,000                   |       |
| Forfeited investor deposits                                                |       | 40,000                    |       | —                    |       | 40,000                       |       |
| Payments for deferred offering costs                                       |       | (248,283                  | )          | (381,058                  | )          | (736,410                     | )          |
| Payments for debt issuance costs                                           |       | (1,599,726                | )          | —                    |       | (1,599,726                   | )          |
| Net cash provided by financing activities                                  |       | 42,679,108                |       | 657,881                   |       | 44,909,920                   |       |
|                                                                       |       |                      |       |                      |       |                         |       |
| **Net Increase (Decrease) in Cash**                                        |       | 1,257,130                 |       | (1,165,674                | )          | 1,355,827                    |       |
|                                                                       |       |                      |       |                      |       |                         |       |
| **Cash - Beginning of period**                                             |       | 98,697                    |       | 1,264,371                 |       | —                       |       |
|                                                                       |       |                      |       |                      |       |                         |       |
| **Cash - End of period**                                                   |       | $                         | 1,355,827  |                      | $          | 98,697                       |       | $ | 1,355,827 |   |
|                                                                       |       |                      |       |                      |       |                         |       |
| **Supplemental Cash Flow  Information**                                    |       |                      |       |                      |       |                         |       |
| Cash paid for interest expense                                             |       | $                         | —     |                      | $          | 25,542                       |       | $ | 25,542 |   |
| Cash paid for interest capitalized                                         |       | $                         | 66,895     |                      | $          | 8,154                        |       | $ | 76,895 |   |
| Total                                                                      |       | $                         | 66,895     |                      | $          | 33,696                       |       | $ | 102,437 |   |
|                                                                       |       |                      |       |                      |       |                         |       |
| **Supplemental Disclosure of  Noncash Financing and Investing Activities** |       |                      |       |                      |       |                         |       |
| Unrealized losses on restricted marketable  securities                     |       | $                         | 60,104     |                      | $          | —                       |       | $ | 60,104 |   |
| Restricted cash received as part of capital lease                          |       | $                         | 14,876,400 |                      | $          | —                       |       | $ | 14,876,400 |   |
| Restricted cash received as part of note payable                           |       | $                         | —     |                      | $          | 55,000                       |       | $ | 55,000 |   |
| Purchase of restricted marketable securities with restricted  cash         |       | $                         | 6,903,362  |                      | $          | —                       |       | $ | 6,903,362 |   |
| Capital expenditures included in construction  payable                     |       | $                         | 16,763,760 |                      | $          | —                       |       | $ | 16,763,760 |   |
| Capital expenditures included in accounts payable                          |       | $                         | —     |                      | $          | 119,704                      |       | $ | — |   |
| Construction in progress paid from restricted cash                         |       | $                         | 5,138,785  |                      | $          | —                       |       | $ | 5,138,785 |   |
| Accrued interest capitalized in construction in  progress                  |       | $                         | 666,655    |                      | $          | —                       |       | $ | 666,655 |   |
| Loan costs capitalized with construction in  progress                      |       | $                         | 30,753     |                      | $          | —                       |       | $ | 30,753 |   |
| Deferred offering costs included in accounts  payable                      |       | $                         | —     |                      | $          | 229,236                      |       | $ | — |   |
| Debt issuance costs financed through capital lease                         |       | $                         | 303,600    |                      | $          | —                       |       | $ | 303,600 |   |
| Debt issuance costs financed with note payable                             |       | $                         | —     |                      | $          | 6,061                        |       | $ | 6,061 |   |
| Costs of raising capital offset against equity  raised                     |       | $                         | 736,410    |                      | $          | —                       |       | $ | 736,410 |   |
| Land options exercised for land purchase                                   |       | $                         | 2,000      |                      | $          | 40,000                       |       | $ | 42,000 |   |

 

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

 

25

----

 

**HIGHWATERETHANOL, LLC**

(A DevelopmentStage Company)

 

Notes to FinancialStatements

 

October 31,2008 and 2007

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Nature ofBusiness*

 

HighwaterEthanol, LLC, (a Minnesota Limited Liability Company) was organized with theintentions of developing, owning and operating a 50 million gallon dry millcorn-processing ethanol plant near Lamberton, Minnesota. The Company was formedon May 2, 2006 to have a perpetual life. As of October 31, 2008, theCompany is in the development stage with its efforts being principally devotedto organizational activities and construction of the plant.  The Company anticipates completion of theplant in May 2009.

 

*FiscalReporting Period*

 

TheCompany has adopted a fiscal year ending October 31 for reportingfinancial operations.

 

*Accounting Estimates*

 

Managementuses estimates and assumptions in preparing these financial statements inaccordance with generally accepted accounting principles.  Those estimates and assumptions affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities, and the reported revenues and expenses.  Actual results could differ from thoseestimates.

 

*Cash*

 

TheCompany maintains its accounts primarily at one financial institution.  At times throughout the year, the cashbalances may exceed amounts insured by the Federal Deposit InsuranceCorporation.  The Company does notbelieve it is exposed to any significant credit risk on cash balances.

 

*Restricted Cash*

 

TheCompany maintains restricted cash balances as part of the capital leasefinancing agreement described in Note 9. The restricted cash balances include money market accounts and similardebt instruments which currently exceed amounts insured by the Federal DepositInsurance Corporation and the Securities Investor Protection Corporation.  The Company does not believe it is exposed toany significant credit risk on cash balances.

 

*Restricted Marketable Securities*

 

TheCompany maintains restricted marketable securities in debt securities as partof the capital lease financing agreement described in Note 9.  The restricted marketable securities consistprimarily of municipal obligations, U.S. treasury government obligations, and corporateobligations.  Restricted marketablesecurities are classified as “available-for-sale” and are carried at theirestimated fair market value based on quoted market prices at year end.

 

Realizedgains and losses, determined using the specific identification method, areincluded in earnings; unrealized holding gains and losses on available-for-salesecurities are reported as a separate component of members’ equity inaccumulated other comprehensive income or loss and excluded from earnings untilrealized.

 

*Propertyand Equipment*

 

Property and equipment isstated at cost.  Depreciation is providedover an estimated useful life by use of the straight line method.  Maintenance and repairs are expensed asincurred; major improvements and betterments are capitalized.  The present value of capital leaseobligations is classified as long-term debt and the related assets will beincluded with property and equipment. Amortization of property and equipment under capital lease will beincluded with depreciation expense.

 

26

----

 

**HIGHWATERETHANOL, LLC**

(A DevelopmentStage Company)

 

Notes to FinancialStatements

 

October 31,2008 and 2007

 

The Company incurredsubstantial consulting, permitting, and other pre-construction services relatedto building its plant facilities prior to receiving project funding.  These costs were expensed prior to obtainingproject debt and equity financing.  Oncethis funding was received, these costs as they related to project constructionhave been capitalized with construction in progress.

 

The Company capitalizesconstruction costs and construction period interest as construction in progressuntil the assets are placed in service. As of October 31, 2008, the Company had construction in progress ofapproximately $62,950,000, which includes approximately $774,000 of capitalizedinterest, including amounts accrued, and approximately $92,000 of insurancecosts.  As of October 31, 2007, theCompany had construction in progress of approximately $21,000, all consistingof capitalized interest, including amounts accrued.

 

*CarryingValue of Long-Lived Assets*

 

Long-lived assets, suchas property, plant, and equipment, and other long-lived assets subject toamortization, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  If circumstances require along-lived asset be tested for possible impairment, the Company first comparesundiscounted cash flows expected to be generated by an asset to the carryingvalue of the asset.  If the carryingvalue of the long-lived asset is not recoverable on an undiscounted cash flowbasis, impairment is recognized to the extent that the carrying value exceedsits fair value.  Fair value is determinedthrough various valuation techniques including discounted cash flow models,quoted market values and third-party independent appraisals, as considerednecessary.

 

*DeferredOffering Costs*

 

The Company defersthe costs incurred to raise equity financing until that financing occurs. Atsuch time that the issuance of new equity occurs, these costs will be nettedagainst the proceeds received.  In April 2008,the issuance of new equity occurred and approximately $736,000 of offeringcosts were netted against the proceeds received.

 

*DebtIssuance Costs*

 

Costsassociated with the issuance of debt are recorded as debt issuance costs andare amortized over the term of the related debt by use of the effectiveinterest method.

 

*Net Income (Loss) per Unit*

 

Basicnet income (loss) per unit is computed by dividing net income by the weightedaverage number of members’ units outstanding during the period.  Diluted net income per unit is computed bydividing net income by the weighted average number of members’ units andmembers’ unit equivalents outstanding during the period.  There were no member unit equivalentsoutstanding during the periods presented; accordingly, for all periodspresented, the Company’s basic and diluted net income per unit are the same.

 

*Income Taxes*

 

TheCompany is treated as a partnership for federal and state income tax purposesand generally does not incur income taxes. Instead, their income or losses are included in the income tax returnsof the members and partners. Accordingly, no provision or liability for federal or state income taxeshas been included in these financial statements.

 

In June 2006,the FASB issued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (FIN 48).  FIN48 clarifies the requirements of SFAS 109, *Accounting for IncomeTaxes,*relating to the recognition of income tax benefits.  FIN 48 provides a two-step approach torecognizing and measuring tax benefits when realization of the 

 

27

----

 

**HIGHWATERETHANOL, LLC**

(A DevelopmentStage Company)

 

Notes to FinancialStatements

 

October 31,2008 and 2007

 

benefitsis uncertain.  The first step is todetermine whether the benefit meets the more-likely-than-not condition forrecognition and the second step is to determine the amount to be recognizedbased on the cumulative probability that exceeds 50%.  Primarily due to the Company’s tax status asa partnership, the adoption of FIN 48 on November 1, 2008, had no materialimpact on the Company’s financial condition or results of operations.

 

*Fair Valueof Financial Instruments*

 

The carrying value ofcash, restricted cash, and restricted marketable securities approximates theirfair value based on quoted market prices at year end.  The Company believes the carrying value ofthe derivative instrument approximates fair value based on widely acceptedvaluation techniques including discounted cash flow analysis which includesobservable market-based inputs.  TheCompany believes the carrying amount of the long-term debt approximates thefair value due to the terms of the debt and the current interest rateenvironment.

 

*Derivative Instrument*

 

The Company accounts forderivative instruments in accordance with Statement of Financial AccountingStandards (SFAS) No. 133, “Accounting for Derivative Instruments andHedging Activities”. SFAS No. 133 requires the recognition of derivativeinstruments in the balance sheet and the measurement of these instruments atfair value.

 

In order for a derivativeto qualify as a hedge, specific criteria must be met and appropriatedocumentation maintained. Gains and losses from derivatives that do not qualifyas hedges, or are undesignated, must be recognized immediately in earnings. Ifthe derivative does qualify as a hedge, depending on the nature of the hedge,changes in the fair value of the derivative will be either offset against thechange in fair value of the hedged assets, liabilities, or firm commitmentsthrough earnings or recognized in other comprehensive income until the hedgeditem is recognized in earnings.  Changes in the fair value of undesignatedderivatives are recorded in the statement of operations along with items beinghedged.  The Statement of Cash Flowsincludes the non-cash effects of changes in the interest rate swap as a changein fair value of derivative instrument.

 

Additionally, SFAS No. 133requires a company to evaluate its contracts to determine whether the contractsare derivatives. Certain contracts that literally meet the definition of aderivative may be exempted as “normal purchases or normal sales”. Normalpurchases and normal sales are contracts that provide for the purchase or saleof something other than a financial instrument or derivative instrument thatwill be delivered in quantities expected to be used or sold over a reasonableperiod in the normal course of business. Contracts that meet the requirementsof normal are documented as normal and exempted from the accounting andreporting requirements of SFAS No. 133, and therefore, are not marked tomarket in our financial statements.

 

In order to reduce therisk caused by interest rate fluctuations, the Company entered into an interestrate swap agreement. This contract is used with the intention to limit exposureto increased interest rates.  The fairvalue of this contract is based on widely accepted valuation techniquesincluding discounted cash flow analysis which includes observable market-basedinputs. The fair value of the derivative is continually subject to change dueto changing market conditions. The Company does not formally designate thisinstrument as a hedge and, therefore, records in earnings adjustments causedfrom marking instrument to market on a monthly basis.

 

*RecentlyIssued Accounting Pronouncements*

 

In September 2006,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 157 (SFAS 157), *Fair ValueMeasurements*, SFAS 157 defines fair value, establishes a frameworkfor measuring fair value, and expands disclosures about fair valuemeasurements.

 

The statement iseffective for (1) financial assets and liabilities in financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years and (2) certain non-financial assets andliabilities in financial statements issued for fiscal years beginning after November 15,2008, and interim periods 

 

28

----

 

**HIGHWATERETHANOL, LLC**

(A DevelopmentStage Company)

 

Notes to FinancialStatements

 

October 31,2008 and 2007

 

within those fiscalyears.  The Company is evaluating theeffect, if any, that the adoption of SFAS 157 will have on its results ofoperations, financial position, and the related disclosures.

 

In February 2007,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 159, (SFAS 159), *The FairValue Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement No. 115 (Accounting for Certain Investments inDebt and Equity Securities)*. SFAS 159 provides companies with an option to report selected financialassets and liabilities at fair value and is effective for fiscal yearsbeginning after November 15, 2007 with early adoption permitted.  The Company is evaluating the effect, if any,that the adoption of SFAS 159 will have on its results of operations, financialposition, and the related disclosures.

 

In March 2008,the FASB issued SFAS No. 161, Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133. SFAS 161applies to all derivative instruments and nonderivative instruments that aredesignated and qualify as hedging instruments pursuant to paragraphs 37 and 42of SFAS 133 and related hedged items accounted for under SFAS 133. SFAS 161requires entities to provide greater transparency through additionaldisclosures about how and why an entity uses derivative instruments, howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations, and how derivative instruments and relatedhedged items affect an entity’s financial position, results of operations, andcash flows. SFAS 161 is effective as of the beginning of an entity’s firstfiscal year that begins after November 15, 2008. The Company currentlyplans to adopt SFAS 161 during its 2010 fiscal year.

 

**2.  UNCERTAINTIES**

 

TheCompany will derive substantially all of its revenues from the sale of ethanoland distillers grains once operations commence. These products are commodities and the market prices for these productsrecently display substantial volatility and are subject to a number of factorswhich are beyond the control of the Company. The Company’s most significant manufacturing inputs will be corn andnatural gas.  The price of these commoditiesis also subject to substantial volatility and uncontrollable marketfactors.  In addition, these input costsdo not necessarily fluctuate with the market prices for ethanol and distillersgrains.

 

As aresult, the Company is subject to significant risk that its operating marginscan be reduced or eliminated due to the relative movements in the market pricesof its products and major manufacturing inputs. As a result, market fluctuations in the price of or demand for thesecommodities can have a significant adverse effect on the Company’s operationsand profitability.

 

29

----

 

**HIGHWATERETHANOL, LLC**

(A DevelopmentStage Company)

 

Notes to FinancialStatements

 

October 31,2008 and 2007

 

**3.  RESTRICTED MARKETABLE SECURITIES**

 

The cost and fairvalue of the Company’s restricted marketable securities consist of thefollowing at October 31, 2008:

 
| ** **                                         | ** ** | **Amortized  Cost** | ** ** | **Gross********Unrealized********Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------------|------------|---------------------|------------|-------------------------------------------|------------|----------------|------------|
|                                               |       |                |       |                                      |       |           |       |
| Restricted marketable  securities - Current        |       |                |       |                                      |       |           |       |
| Municipal  obligations                             |       | $                   | 430,210    |                                      | $          | (3,977         | )          | $ | 426,233 |   |
| U.S.  treasury government obligations              |       | 639,791             |       | (8,283                                    | )          | 631,508        |       |
| Corporate  obligations                             |       | 4,322,620           |       | (162                                      | )          | 4,322,458      |       |
| Total  restricted marketable securities            |       | 5,392,621           |       | (12,422                                   | )          | 5,380,199      |       |
|                                               |       |                |       |                                      |       |           |       |
| Restricted  marketable securities — Long-term |       |                |       |                                      |       |           |       |
| Municipal  obligations                             |       | 1,509,117           |       | (47,682                                   | )          | 1,461,435      |       |
|                                               |       |                |       |                                      |       |           |       |
| Total  restricted marketable securities            |       | $                   | 6,901,738  |                                      | $          | (60,104        | )          | $ | 6,841,634 |   |

 

The long-termrestricted marketable securities relate to the debt service reserve fund notedin Note 9.  Other comprehensive income isincome of approximately $500 for the year ended October 31, 2008.

 

Shown below arethe contractual maturities of marketable securities with fixed maturities at October 31,2008.  Actual maturities may differ fromcontractual maturities because certain securities may contain early call orprepayment rights.

 
| Due  within 1 year        |   | $         | 5,380,199 |   |
|---------------------------|--------|-----------|-----------|--------|
| Due  in 1 to 3 years      |   | —    |      |
| Due  in 3 to 5 years      |   | 1,237,815 |      |
| Due  in more than 5 years |   | 223,620   |      |
| Total                     |   | $         | 6,841,634 |   |

 

**4.  INTERIM FINANCING**

 

TheCompany had a note payable for $800,000 from a bank to finance a landpurchase.  The note carried annualinterest at 7.50% and was repaid in April 2008.

 

In July 2007,the Company obtained an unsecured note payable for $300,000 from the generalcontractor.  The note carried interest at7.50% and was payable in full at the earlier of financial close or January 2,2008.  In January 2008, the Companyexecuted an extension agreement for the note to be payable in full at theearlier of financial close or April 15, 2008.  In April 2008, the Company paid allprincipal and interest due on this note.

 

**5.DERIVATIVE INSTRUMENT**

 

At October 31,2008, the Company recorded a liability for a derivative instrument of approximately$591,000 related to the interest rate swap described in Note 9. This derivativeinstrument was not designated as a cash flow hedge. The Company has recognizeda loss on the interest rate swap of approximately $591,000 included in otherincome and expense for the year ended October 31, 2008.

 

30

----

 

**HIGHWATERETHANOL, LLC**

(A DevelopmentStage Company)

 

Notes to FinancialStatements

 

October 31,2008 and 2007

 

**6.  MEMBERS’ EQUITY**

 

TheCompany has one class of membership units, which include certain transferrestrictions as specified in the operating agreement and pursuant to applicabletax and securities law, with each unit representing a pro rata ownership in theCompany’s capital, profits, losses and distributions. Income and losses areallocated to all members based upon their respective percentage of units held.

 

TheCompany was initially capitalized by 13 members, contributing an aggregate of$500,000 for 150 units. The Company was further capitalized by 117 additionalmembers contributing an aggregate of $1,180,000 in exchange for 236 units.

 

TheCompany filed a Form SB-2 Registration Statement with the Securities andExchange Commission (SEC) for a minimum of 4,500 and up to 6,000 membershipunits for sale at $10,000 per unit. The Registration Statement was declaredeffective on April 5, 2007. Offering proceeds were held in escrow until April 2008.  The total number of units accepted was 4,567with proceeds totaling $45,670,000.  TheCompany received approximately $40,000 of investor deposits that were forfeitedand are included with member contributions. These funds will be used to provide financing to complete the Company’sethanol facility in Lamberton, Minnesota.

 

**7. INCOME TAXES**

 

TheCompany has adopted an October 31 fiscal year end, but has a tax year endof December 31.  The differences between financial statement basisand tax basis of assets are estimated as follows:

 
| ** **                                                                   | ** ** | **October 31,** | ** ** | **October 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | **2008**             | ** ** | **2007**             | ** ** |
|                                                                         |       |                 |       |                 |       |
| Financial statement basis of total assets                                    |       | $                    | 77,797,943 |                 | $          | 1,965,879 |   |
|                                                                         |       |                 |       |                 |       |
| Organizational and start-up costs expensed for  financial reporting purposes |       | 2,542,960            |       | 1,544,339            |       |
|                                                                         |       |                 |       |                 |       |
| Income tax basis of total assets                                             |       | $                    | 80,340,903 |                 | $          | 3,510,218 |   |

 

Thedifferences between the financial statement basis and tax basis of the Company’sliabilities are estimated as follows:

 
| ** **                                     | ** ** | **October 31,** | ** ** | **October 31,** | ** ** |
|------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **2008**             | ** ** | **2007**             | ** ** |
|                                           |       |                 |       |                 |       |
| Financial statement basis of liabilities       |       | $                    | 33,265,807 |                 | $          | 1,816,776 |   |
|                                           |       |                 |       |                 |       |
| Less: unrealized loss on derivative instrument |       | (591,074             | )          | —               |       |
|                                           |       |                 |       |                 |       |
| Income tax basis of liabilities                |       | $                    | 32,674,733 |                 | $          | 1,816,776 |   |

 

31

----

 

**HIGHWATERETHANOL, LLC**

(A DevelopmentStage Company)

 

Notes to FinancialStatements

 

October 31,2008 and 2007

 

**8.  RELATED PARTYTRANSACTIONS**

 

Amember is providing legal services to the Company.  The Company has incurred approximately$123,000 for the year ended October 31, 2008 related to these services.

 

In September 2006,the Company entered into an agreement with a general contractor, a member, todesign and build the ethanol plant.  Asof October 31, 2008, the Company has incurred approximately $47,747,000for these services.

 

In December 2007,the Company entered into an agreement with a related party through commonownership for the construction of a water treatment facility, well drilling,and installation of the fire loop.  As ofOctober 31, 2008, the Company has incurred approximately $6,178,272 underthis agreement.

 

In June 2007,the Company entered into an agreement with a related party to be the exclusiveprovider of electricity for the plant. As of October 31, 2008, the monthly fee of approximately $12,000had been suspended until operations begin.

 

In August 2008,the Company entered into an agreement with a related party through commonownership for the construction of an administration building.  As of October 31, 2008, the Company hasincurred approximately $50,000.

 

**9.  DEBT FINANCING**

 

*BankFinancing*

 

In April 2008, the Company entered into a credit agreement with afinancial institution for the purpose of funding a portion of the cost of theethanol plant.  Under the creditagreement, the lender will provide a construction loan of $50,400,000, aconstruction revolving loan for $5,000,000 and will support the issuance ofletters of credit up to $5,600,000, all of which are secured by substantiallyall assets.  At October 31, 2008,the Company had issued $4,700,000 in letters of credit.  The Company will make monthly interestpayments for all amounts owed during the construction phase at the greater ofLIBOR plus 350 basis points or 4%.  Noamounts have been drawn on this financing at October 31, 2008.  Upon the completion ofconstruction, a maximum of $25,200,000 of the construction loan will convertinto a Fixed Rate Note, a maximum of $20,200,000 will convert into a Variable RateNote, and a maximum of $5,000,000 will convert into a Long-term Revolving Note,as described in the credit agreement and further below.

 

*Fixed Rate Note*

 

The Fixed Rate Note is for up to $25,200,000 with a variable interestrate that is fixed with an interest rate swap. The Company will make 59 monthly principal payments on the Fixed Rate Noteinitially for approximately $145,000 plus accrued interest commencing one monthimmediately following the construction loan termination date. Interest willaccrue on the Fixed Rate Note at the greater of the one-month LIBOR rate plus300 basis points or 4%. A final balloon payment on the Fixed Rate Note ofapproximately $15,184,000 will be due five years following the constructionloan termination date.  The Companyentered into an interest rate swap which fixes the interest rate on the Fixed RateNote at 7.6% for five years beginning in June 2009.

 

*Variable Rate Note*

 

The Variable Rate Note is for up to $20,200,000.  For the Variable Rate Note, the Company willmake 59 monthly payments initially for approximately $147,000 plus accruedinterest commencing one month immediately following the construction loantermination date for the Variable Rate Note. Interest will accrue on the VariableRate Note at the greater of the one-month LIBOR rate plus 350 basis points or4%. A final balloon payment of approximately $14,807,000 will be due five yearsfollowing the construction loan termination date.

 

*Long-term Revolving Note*

 

The Long-term Revolving Note is for up to $5,000,000 initially.  The amount available onthe Long-term Revolving Note will decline annually by the greater of $125,000or 50% of the excess cash flow, as defined by the agreement.  The Long-term Revolving Note will accrueinterest monthly at the greater of the one-month LIBOR plus 350 basis points,or 4% until maturity will be due five years following the construction loantermination date.

 

32

----

 

**HIGHWATERETHANOL, LLC**

(A DevelopmentStage Company)

 

Notes to FinancialStatements

 

October 31,2008 and 2007

 

*Line of Credit*

 

The construction revolving loan is the Company’s line of credit andaccrues interest at the greater of the one-month LIBOR plus 350 basis points or4%.  The line of credit requires monthlyinterest payments and is payable in full in April 2009.

 

The Company isrequired to make additional payments annually on debt for up to 50% of theexcess cash flow, as defined by the agreement.  As part of the bank financing agreement, thepremium above LIBOR on the loans may be reduced based on a financialratio.  The loan agreements are secured by substantially allbusiness assets and are subject to various financial and non-financialcovenants that limit distributions and debt and require minimum debt servicecoverage, net worth, and working capital requirements.

 

As of October 31,2008, the Company has letters of credit outstanding of $4,700,000 as mentionedpreviously.  The Company pays interest ata rate of 3% on amounts outstanding and the letters of credit are valid until July 2009.One of the letters of credit will automatically renew for an additional oneyear period in the amount of $4,000,000.

 

*CapitalLease*

 

In April 2008, theCompany entered into a lease agreement with the City of Lamberton, Minnesota,(the City) in order to finance equipment for the plant.  The lease has a term from April 1, 2008through April 1, 2028 or until earlier terminated. The City financed thepurchase of equipment through Solid Waste Facilities Revenue Bonds Series 2008Atotaling $15,180,000.

 

Under the equipment leaseagreement with the City, the Company will start making interest payments on November 25,2008 and monthly thereafter at an implicit interest rate of 8.5%. The monthlycapital lease interest payments correspond to 1/6 the semi-annual interestpayments due on the Bonds on the next interest payment date. Monthly capitallease payments for principal were originally scheduled to begin on November 25,2009, however, the City amended the agreement in September 2008 whichadjusted the start date for principal payments to begin on November 25,2014.  These payments will equal 1/12 theannual principal payments scheduled to become due on the corresponding bonds onthe next principal payment date.  TheCompany has guaranteed that if such assessed lease payments are not sufficientfor the required bond payments, the Company will provide such funds as areneeded to fund the shortfall. The lease agreement is secured by substantiallyall business assets and is subject to various financial and non-financialcovenants that limit distributions and leverage and require minimum debtservice coverage, net worth, and working capital requirements, and are securedby all business assets.

 

The capital leaseincludes an option to purchase the equipment at fair market value at the end ofthe lease term.  Under the capital leaseagreement, the proceeds are for project costs and the establishment of a capitalizedinterest fund and a debt service reserve fund. The Company received proceeds of approximately $14,876,000, afterfinancing costs of approximately $304,000. At close when the funds were distributed, the remaining proceeds wereheld as restricted cash based on anticipated use and were split between aproject fund of approximately $11,527,000, a capitalized interest fund ofapproximately $1,831,000, and a debt service reserve fund of approximately$1,518,000.

 

Estimatedprincipal payments on long-term debt are as follows at October 31, 2008:

 
| 2009        |   | $          | —     |   |
|-------------|--------|------------|------------|--------|
| 2010        |   | —     |       |
| 2011        |   | —     |       |
| 2012        |   | —     |       |
| 2013        |   | —     |       |
| After  2013 |   | 15,180,000 |       |
| Total       |   | $          | 15,180,000 |   |

 

33

----

 

**HIGHWATER ETHANOL, LLC**

(ADevelopment Stage Company)

 

Notesto Financial Statements

 

October31, 2008 and 2007

 

Futureminimum lease payments under the capital lease are as follows at October 31,2008:

 
| 2009                                     |   | $          | 1,956,955  |   |
|------------------------------------------|--------|------------|------------|--------|
| 2010                                     |   | 1,290,300  |       |
| 2011                                     |   | 1,290,300  |       |
| 2012                                     |   | 1,290,300  |       |
| 2013                                     |   | 1,290,300  |       |
| After  2013                              |   | 22,933,275 |       |
| Total                                    |   | 30,051,430 |       |
| Less  amount representing interest       |   | 14,871,430 |       |
| Present  value of minimum lease payments |   | 15,180,000 |       |
| Less  current maturities                 |   | —     |       |
| Long-term  debt                          |   | $          | 15,180,000 |   |

 

**10.  COMMITMENTS AND CONTINGENCIES**

 

*ConstructionContracts*

 

The total cost ofthe project, including the construction of the ethanol plant and start-upexpenses, is expected to approximate $113,580,000.  The Company signed an agreement in September 2006with a general contractor, a related party, to design and build the ethanolplant at a total contract price of approximately $66,026,000. The design-buildagreement provided for an upward adjust of the construction price over theconstruction cost index (CCI) published in January 2006 of 7660.29.  As the notice to proceed was executed in April 2008,the contract price increased, with change orders, to approximately $69,950,000.

 

Monthlyapplications are submitted for work performed in the previous period.  Final payment will be due when finalcompletion has been achieved.  As of October 31,2008, the Company has incurred approximately $47,747,000 for these services.

 

*SiteImprovement Contracts*

 

In November 2007,the Company entered into an agreement with an unrelated party for dirt workrelated to the construction of the plant for an amount of approximately$1,761,000.  As of October 31, 2008the company has approved change orders totaling approximately $395,000.  The Company shall pay a monthly fee of 90% ofthe value based on the amount of work completed, with the remaining 10% held asretainage.  As of October 31, 2008,the Company has incurred approximately $2,113,000 under this agreement.  In August 2008, the Company entered intoan additional contract with the same party for rail system drainage for anamount of approximately $1,214,000.  TheCompany shall pay a monthly fee of 90% of the value based on the amount of workcompleted, with the remaining 10% held as retainage.  As of October 31, 2008, the Company hasincurred approximately $1,190,000 under this agreement.

 

In December 2007,the Company entered into an agreement with a related party for construction ofa water treatment facility, well drilling, and installation of the fire loopfor approximately $15,995,000.  Thecompany shall make monthly payments based on the amount of work completed, with5% retainage held on the last two payments. As of October 31, 2008, the Company has incurred approximately$6,178,000 under this agreement.

 

In July 2008,the Company entered into an agreement with an unrelated party for rail work forapproximately $4,361,000.  The Companyshall pay a monthly fee of 90% of the value based on the amount of workcompleted, with the remaining 10% held as retainage.  The contractor began work on August 15,2008, and must complete the project by January 15, 2009.  The contractor shall pay the Company $750 fordamages each day that work extends 

 

34

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**HIGHWATER ETHANOL, LLC**

(ADevelopment Stage Company)

 

Notesto Financial Statements

 

October31, 2008 and 2007

 

beyond January 15,2009.  As of October 31, 2008, theCompany has incurred approximately $3,700,000 under this agreement.

 

In July 2008,the Company entered into an agreement with an unrelated party for theinstallation of piling for support of grain silos for approximately$428,000.  The contract required a 10%down payment of approximately $43,000 upon signing.  As of October 31, 2008, the Company hasincurred approximately $424,000 under this contract.

 

In August 2008,the Company entered into an agreement with a related party for the constructionof an administration building for approximately $278,000.  The Company shall pay a monthly fee of 90% ofthe value based on the amount of work completed, with the remaining 10% held asretainage.  As of October 31, 2008,the Company has incurred approximately $50,000.

 

*ConsultingContracts*

 

In June 2007,the Company entered into an agreement with a related party to be the exclusiveprovider of electricity for the plant. The agreement is to commence the earlierof the first day of the month in which the plant begins operations or June 1,2008. The agreement is to remain in effect for a period of ten years followingcommencement. The rates for these services will be a fixed charge of $12,000per month along with monthly electric usage based on rates listed in theagreement. The rates for the first five years of the agreement areguaranteed.  The estimated constructioncost of the electrical infrastructure is $1,300,000.  If the plant is not completed as planned orif the plant does not continue in operations for the entire term of thecontract, the Company is liable for incurred project costs to date minus anysalvage value.   The agreement requiredthe Company to provide a letter of credit upon request in the amount of$700,000, which was issued in July 2008, for the period of theconstruction and continuing for one year after commercial operation.  In June 2008, there was a verbalagreement to suspend the $12,000 monthly fee until operations begin.

 

In May 2008,the Company entered into an agreement with an unrelated party to provideconstruction management services.  Theagreement will remain in effect until terminated.  The fees for these services are $10,250 permonth plus expense reimbursement.  As of October 31,2008, the Company has incurred approximately $69,000 under this agreement.

 

In June 2008,the Company entered into an agreement with an unrelated party for constructionof a natural gas pipeline, which is expected to be in April 2009, and tobe the exclusive provider of natural gas for the plant. The agreement commencesupon completion of the pipeline and will remain in effect for ten years.  The rates for these services will be based onthe agreed upon minimum usage at rates listed in the agreement.  The estimated construction cost of thepipeline is $4,000,000.  The agreementrequires a cash deposit or letter of credit of $4,000,000 plus three months ofcapacity payments payable in installments determined by the unrelated partybefore construction begins.  Theagreement also required the Company to provide a security deposit of $500,000,which will be returned to the Company over the term of the agreement. TheCompany made the security deposit payment of $500,000 in June 2008, andsecured a $4,000,000 letter of credit in July 2008.

 

*Marketing Agreements*

 

In September 2006,the Company entered into a marketing agreement with an unrelated party topurchase, market, and distribute all the ethanol produced by the Company. TheCompany will pay the buyer one percent of the net sales price for certainmarketing costs. The initial term is for two years beginning in the month whenethanol production begins with a one year renewal option. The Company wouldassume certain rail car leases if the agreement is not renewed.

 

In October 2007,the Company entered into a marketing agreement with an unrelated party topurchase all of the distiller’s dried grains with solubles (DDGS), wetdistillers grains (WDG), and solubles the Company is expected to 

 

35

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**HIGHWATER ETHANOL, LLC**

(ADevelopment Stage Company)

 

Notesto Financial Statements

 

October31, 2008 and 2007

 

produce.  The buyer agrees to pay the Company 98% ofthe selling price for DDGS and 96% of the selling price for WDG and a fee of $2per ton for solubles, with a minimum fee of $1.50 per ton for sales of DDGS andWDG.  The agreement commences oncompletion and start-up of operations of the plant and continues for oneyear.  The agreement will remain ineffect thereafter unless a 120 day advance written notice of termination isprovided by either party.

 

*Grain Procurement Contract*

 

In July 2006, theCompany entered into a grain procurement agreement with an unrelated party toprovide all of the corn needed for the operation of the ethanol plant.  Under the agreement, the Company willpurchase corn at the local market price delivered to the plant plus a fixed feeper bushel of corn.  The agreement beginswhen operations commence and continues for seven years.

 

**11.  RESTATEMENT**

 

On September 8,2009, the Company’s Audit Committee, upon management’s recommendation,determined that its financial statements as of October 31, 2008 asreported on Form 10-KSB should not be relied upon due to an error thatoccurred in the recording of an interest rate swap agreement.  The Company had not recorded the interestrate swap entered into in April 2008. The effects of this error on the financial statements were as follows:

* *
| **Balance Sheet**                                 | ** ** | **October 31, 2008**              | ** ** | **October 31, 2008** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|---------------------------|------------|
| ** **                                        | ** ** | **(As previously reported)** | ** ** | **(As restated)**    | ** ** |
|                                              |       |                                   |       |                      |       |
| Derivative  instrument liability                  |       | $                                      | —     |                      | $          | 591,074 |   |
| Deficit  accumulated during the development stage |       | $                                      | (1,470,276 | )                         | $          | (2,061,350 | ) |

 
| **Statement of Operations**    | ** ** | **Year Ended********October 31, 2008** | ** ** | **Year Ended********October 31, 2008** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **(As previously reported)**                | ** ** | **(As restated)**                           | ** ** |
|                           |       |                                        |       |                                        |       |
| Loss  on derivative instrument |       | $                                           | —     |                                        | $          | (591,074 | ) |
| Net  Income (Loss)             |       | $                                           | 60,621     |                                        | $          | (530,453 | ) |
| Net  Income (Loss) Per Unit    |       | $                                           | 19.84      |                                        | $          | (173.58 | ) |

 

36

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**ITEM8.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None.

 

**Item8A(T).  CONTROLS AND PROCEDURES.**

 

***DisclosureControls and Procedures***

 

Management of Highwateris responsible for maintaining disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the reportsthat the Company files or submits under the Securities Exchange Act of 1934(the “Exchange Act”) is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.  In addition, the disclosurecontrols and procedures must ensure that such information is accumulated andcommunicated to the Company’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required financial and other required disclosures.

 

Atthe end of the period covered by this report, an evaluation of theeffectiveness of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and15(d)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”))was carried out under the supervision and with the participation of ourPrincipal Executive Officer, Brian Kletscher, and our Principal FinancialOfficer, Mark Peterson. Based on their evaluation of our disclosure controlsand procedures, they have concluded that during the period covered by thisreport, such disclosure controls and procedures were not effective to detectthe inappropriate application of US GAAP standards.

 

Prior to this mostrecent evaluation of the effectiveness of our disclosure controls andprocedures covering the period ended October 31, 2008 in which ourcontrols and procedures were deemed to be not effective, our Company haddisclosed material weaknesses.  Ourmanagement is working diligently to remediate the material weaknesses and willcontinue our efforts to remediate these material weaknesses through ongoingprocess improvements and the implementation of enhanced policies and improvingstandards.  We are in the process of strengthening internal controls includingenhancing our internal control systems and procedures to assure that theseweaknesses are corrected and remediated. No material weaknesses will be considered remediated until theremedial procedures have operated for an appropriate period, have been tested,and management has concluded that they are operating effectively.

 

***Management’sAnnual Report on Internal Control over Financial Reporting***

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over our financial reporting. Internal control over financial reporting is a process designed toprovide reasonable assurance to our management and board of directors regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with U.S. generally acceptedaccounting principles.  Our internal controlover financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect our transactions; (ii) provide reasonable assurance that transactionsare recorded as necessary for preparation of our financial statements; (iii) providereasonable assurance that receipts and expenditures of company assets are madein accordance with management authorization; and (iv) provide reasonableassurance that unauthorized acquisition, use or disposition of company assetsthat could have a material effect on our financial statements would beprevented or detected on a timely basis.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because changes in conditions mayoccur or the degree of compliance with the policies or procedures maydeteriorate.

 

Managementassessed the effectiveness of our internal control over financial reporting asof October 31, 2008.  Thisassessment is based on the criteria for effective internal control described inInternal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based

 

37

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onits assessment, management concluded that the Company’s internal control overfinancial reporting was not effective as of October 31, 2008.  This annual report does not include anattestation report of our registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject to attestation by our registeredpublic accounting firm pursuant to temporary rules of the Securities andExchange Commission that permit us to provide only management’s report in thisannual report.

 

Thisreport shall not be deemed to be filed for purposes of Section 18 of theSecurities Exchange Act of 1934, or otherwise subject to the liabilities ofthat section , and is not incorporated by reference into any filing of theCompany, whether made before or after the date hereof, regardless of anygeneral incorporation language in such filing.

 

***Changes in Internal Control overFinancial Reporting***

 

Ourmanagement, including our principal executive officer and principal financialofficer, have reviewed and evaluated any changes in our internal control overfinancial reporting that occurred as of October 31, 2008 and there hasbeen no change that has materially affected or is reasonably likely tomaterially affect our internal control over financial reporting.

 

**PART III****.**

 

**ITEM 13.****  EXHIBITS.**

 

The following exhibits are filed as part of, or areincorporated by reference into, this report:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                          | ** ** | **Method of  Filing** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 10.1             |       | Fifth Amendment to Lump Sum Design-Build Agreement between Highwater  Ethanol, LLC and Fagen, Inc.                                                                  |       | 1                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.2             |       | Lease Agreement  dated April 1, 2008 with the City of Lamberton, MN                                                                                                 |       | 2                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.3             |       | Trust Indenture  dated April 1, 2008 with the City of Lamberton, MN and U.S. Bank  National Association                                                             |       | 2                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.4             |       | Guaranty  Agreement dated April 1, 2008 with U.S. Bank National Association                                                                                         |       | 2                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.5             |       | Bill of Sale  dated April 25, 2008 from Highwater Ethanol, LLC to City of Lamberton,  MN                                                                            |       | 2                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.6             |       | Mortgage,  Security Agreement, Assignment of Leases and Rents and Fixture Financing  Statement dated April 1, 2008 with U.S. Bank National Association              |       | 2                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.7             |       | Security  Agreement dated April 1, 2008 with U.S. Bank National Association                                                                                         |       | 2                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.8             |       | Intercreditor  Agreement dated April 24, 2008 with First National Bank of Omaha and  U.S. Bank National Association.                                                |       | 2                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.9             |       | Disbursing  Agreement dated April 24, 2008 with First National Bank of Omaha,  Homestead Escrow and Exchange Company and Dakota Homestead Title Insurance  Company. |       | 2                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.10            |       | Construction  Loan Agreement dated April 24, 2008 with First National Bank of Omaha.                                                                                |       | 2                     |
|             |       |                                                                                                                                                                     |       |                  |
| 10.11            |       | Construction  Loan Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture  Financing Statement dated April 24, 2008 with First National Bank of   |       | 2                     |

 

38

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|   |   | Omaha.                                                                                                                   |   |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                     |   |   |
| 10.12  |   | Security  Agreement dated April 25, 2008 with First National Bank of Omaha.                                         |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.13  |   | $10,000,000  Construction Note dated April 24, 2008 with First National Bank of  Omaha.                             |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.14  |   | $2,000,000  Construction Note dated April 25, 2008 with First National Bank of  Omaha.                              |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.15  |   | $9,000,000  Construction Note dated April 25, 2008 with First National Bank of  Omaha.                              |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.16  |   | $13,646,000  Construction Note dated April 25, 2008 with First National Bank of  Omaha.                             |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.17  |   | $500,000  Construction Note dated April 25, 2008 with First National Bank of  Omaha.                                |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.18  |   | $1,000,000  Construction Note dated April 25, 2008 with First National Bank of  Omaha.                              |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.19  |   | $14,254,000  Construction Note dated April 25, 2008 with First National Bank of  Omaha.                             |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.20  |   | Promissory Note  and Continuing Letter of Credit Agreement dated April 24, 2008 with  First National Bank of Omaha. |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.21  |   | $1,000,000  Revolving Promissory Note dated April 24, 2008 with First National Bank  of Omaha.                      |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.22  |   | $1,354,000  Revolving Promissory Note dated April 24, 2008 with First National Bank  of Omaha.                      |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.23  |   | $2,646,000  Revolving Promissory Note dated April 24, 2008 with First National Bank  of Omaha.                      |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.24  |   | Consulting  Agreement dated May 27, 2008 with Granite Falls Energy, LLC.                                            |   | 2      |
|   |   |                                                                                                                     |   |   |
| 10.25  |   | Private Placement Agreement dated March 27, 2008 with City of  Lamberton, MN and Northland Securities, Inc.    |   | 3      |
|   |   |                                                                                                                     |   |   |
| 10.26  |   | Natural Gas Service Agreement dated June 26, 2008 with  CenterPoint Energy Resources Corp.+                         |   | 4      |
|   |   |                                                                                                                     |   |   |
| 10.27  |   | General Contract dated July 30, 2008 with L.A. Colo, LLC                                                            |   | 4      |
|   |   |                                                                                                                     |   |   |
| 10.28  |   | Grain Silo Support Construction Contract dated July 24, 2008  with McC, Inc.                                   |   | 4      |
|   |   |                                                                                                                     |   |   |
| 14.1   |   | Code of Ethics of Highwater Ethanol, LLC as adopted in  June 2008.                                                  |   | 5      |
|   |   |                                                                                                                     |   |   |
| 31.1   |   | Certificate Pursuant to 17 CFR 240.13a-14(a)                                                                             |   | *      |
|   |   |                                                                                                                     |   |   |
| 31.2   |   | Certificate Pursuant to 17 CFR 240.13a-14(a)                                                                             |   | *      |
|   |   |                                                                                                                     |   |   |
| 32.1   |   | Certificate Pursuant to 18 U.S.C. § 1350                                                                            |   | *      |
|   |   |                                                                                                                     |   |   |

 

39

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| 32.2 |   | Certificate Pursuant to 18 U.S.C. § 1350. |   | * |
|------|--------|------------------------------------------------|--------|---|

 

----

| (*)    | Filed herewith.                                                                                                                                                                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                               |
| (1)    | Incorporated by  reference to the exhibit of the same number in Form 10-QSB filed with  the Securities and Exchange Commission on March 17, 2008.                                                        |
|   |                                                                                                                                                                                                               |
| (2)    | Incorporated by  reference to the exhibit of the same number in Form 10-QSB filed with  the Securities and Exchange Commission on June 13, 2008.                                                         |
|   |                                                                                                                                                                                                               |
| (3)    | Incorporated by  reference to Exhibit 99.1 on Form 8-K filed with the Securities and  Exchange Commission on April 1, 2008.                                                                         |
|   |                                                                                                                                                                                                               |
| (4)    | Incorporated by  reference to the exhibit of the same number in Form 10-QSB filed with  the Securities and Exchange Commission on September 15, 2008.                                                    |
|   |                                                                                                                                                                                                               |
| (5)    | Incorporated by  reference to the exhibit of the same number in Form 10-KSB for the  fiscal year ended October 31, 2008 and filed with the Securities and  Exchange Commission on January 29, 2009. |
|   |                                                                                                                                                                                                               |
| (+)    | Material has been  omitted pursuant to a request for confidential treatment and such materials  have been filed separately with the Securities and Exchange Commission.                                            |

 

**SIGNATURES**

 

In accordancewith Section 13 or 15(d) of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|              |                     |   | HIGHWATER ETHANOL, LLC       |
|-------------------|--------------------------|--------|------------------------------|
|              |                     |   |                         |
|              |                     |   |                         |
| Date:   | September 28,  2009 |   | /s/ Brian Kletscher          |
|              |                     |   | Brian Kletscher              |
|              |                     |   | Principal  Executive Officer |
|              |                     |   |                         |
|              |                     |   |                         |
| Date:   | September 28,  2009 |   | /s/ Mark Peterson            |
|              |                     |   | Mark  Peterson               |
|              |                     |   | Principal  Financial Officer |

 

In accordancewith the Exchange Act, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| Date:  | September 28, 2009 |   | /s/ Brian Kletscher         |
|--------|-------------------------|--------|-----------------------------|
|   |                    |   | Brian Kletscher             |
|   |                    |   | Principal Executive Officer |
|   |                    |   |                        |
| Date:  | September 28, 2009 |   | /s/ Mark Peterson           |
|   |                    |   | Mark Peterson               |
|   |                    |   | Principal Financial Officer |
|   |                    |   |                        |
| Date:  | September 28, 2009 |   | /s/ David G. Moldan         |
|   |                    |   | David G. Moldan             |
|   |                    |   | President and Governor      |

 

40

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| Date:  | September 28, 2009 |   | /s/ John M. Schueller          |
|--------|-------------------------|--------|--------------------------------|
|   |                    |   | John M. Schueller              |
|   |                    |   | Vice President and Governor    |
|   |                    |   |                           |
| Date:  | September 28, 2009 |   | /s/Timothy J. Van Der  Wal     |
|   |                    |   | Timothy J. Van Der Wal         |
|   |                    |   | Treasurer and Governor         |
|   |                    |   |                           |
| Date:  | September 28, 2009 |   | /s/Warren Walter  Pankonin     |
|   |                    |   | Warren Walter Pankonin         |
|   |                    |   | Secretary and Governor         |
|   |                    |   |                           |
| Date:  | September 28, 2009 |   | /s/ Monica Rose  Anderson      |
|   |                    |   | Monica Rose Anderson, Governor |
|   |                    |   |                           |
| Date:  | September 28, 2009 |   | /s/ Russell J.  Derickson      |
|   |                    |   | Russell J. Derickson, Governor |
|   |                    |   |                           |
| Date:  | September 28, 2009 |   | /s/ George M. Goblish          |
|   |                    |   | George M. Goblish, Governor    |
|   |                    |   |                           |
| Date:  | September 28, 2009 |   | /s/ Ronald E. Jorgenson        |
|   |                    |   | Ronald E. Jorgenson, Governor  |
|   |                    |   |                           |
| Date:  | September 28, 2009 |   | /s/ Michael J. Landuyt         |
|   |                    |   | Michael J. Landuyt, Governor   |
|   |                    |   |                           |
| Date:  | September 28, 2009 |   | /s/ Jason R. Fink              |
|   |                    |   | Jason R. Fink, Governor        |

 

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