UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

For the quarterly period ended ~~July~~January 31, ~~2010~~2011

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

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

HIGHWATER ETHANOL, 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)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company x
~~(Do not check if a smaller reporting company)~~

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of ~~September 14, 2010~~March 1, 2011 there were 4,953 membership units outstanding.

Table of Contents

INDEX

		Page

PART I - FINANCIAL INFORMATION		3
	Item 1. Financial Statements	3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1615
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	2928
	Item 4. Controls and Procedures	2928

PART II –— OTHER INFORMATION		2928
	Item 1. Legal Proceedings	2928
	Item 1A. Risk Factors	2928
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3029
	Item 3. Defaults Upon Senior Securities	3029
	Item 4. (Removed and Reserved)	3229
	Item 5. Other Information	3229
	Item 6. Exhibits	3229

SIGNATURES		3230

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HIGHWATER ETHANOL, LLC

Condensed Balance Sheets

							January 31,			October 31,
							2011			2010
	July 31,			October 31,			(Unaudited)
ASSETS	2010			2009
	(Unaudited)
Current Assets
Cash and equivalents	$	3,842,486		$	2,620,833		$	5,633,158		$	3,856,173
Restricted cash	101,517			56,681			185,460			67,857
Restricted marketable securities	106,455			83,451			79,405			109,555
Accounts receivable	3,273,125			3,366,588			5,549,942			4,764,588
Inventories	2,983,216			2,356,670			4,030,540			4,437,672
Prepaids and other	572,819			472,738			576,316			704,943
Total current assets	10,879,618			8,956,961			16,054,821			13,940,788

Property and Equipment
Land and land improvements	6,786,724			6,712,347			6,786,724			6,786,724
Buildings	37,965,861			37,883,053			37,965,861			37,965,861
Office equipment	343,133			316,536			343,133			343,133
Equipment	59,529,582			59,376,554			59,990,473			59,540,376
Vehicles	41,994			43,494			41,994			41,994
Construction in progress	350,794			—			14,644			355,968
	105,018,088			104,331,984			105,142,829			105,034,056
Less accumulated depreciation	(5,929,301		)	(1,279,300		)	(9,029,279		)	(7,475,338		)
Net property and equipment	99,088,787			103,052,684			96,113,550			97,558,718

Other Assets
Restricted marketable securities	1,518,000			1,518,000			1,518,000			1,518,000
Debt issuance costs, net	1,514,556			1,760,767			1,361,680			1,433,751
Total other assets	3,032,556			3,278,767			2,879,680			2,951,751

Total Assets	$	113,000,961		$	115,288,412		$	115,048,051		$	114,451,257

					January 31,		October 31,
					2011		2010
	July 31,		October 31,		(Unaudited)
LIABILITIES AND EQUITY	2010		2009
	(Unaudited)
Current Liabilities
Accounts payable	$	1,394,594	$	1,077,548	$	1,274,050	$	1,604,251
Construction payable	—		534,985
Construction payable - members	1,256,335		1,815,536		93,886		365,968
Accrued expenses	540,376		482,686		706,343		640,826
Derivative instrument	2,534,522		564,664
Derivative instruments					762,744		840,467
Line of credit	—		1,000,000		1,500,000		—
Current maturities of long-term debt	64,126,823		2,343,508		6,372,024		6,801,375
Total current liabilities	69,852,650		7,818,927		10,709,047		10,252,887

Long-Term Debt	—		62,712,332		55,970,003		56,439,317

Derivative Instrument	—		1,563,985		1,382,826		1,787,375

Commitments and Contingencies

Members’ Equity
Members’ equity, 4,953 units outstanding	43,148,311		43,193,168		46,986,175		45,971,678
Total members’ equity	43,148,311		43,193,168		46,986,175		45,971,678

Total Liabilities and Members’ Equity	$	113,000,961	$	115,288,412	$	115,048,051	$	114,451,257

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

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HIGHWATER ETHANOL, LLC

Condensed Statements of Operations

	Nine Months Ended			Nine Months Ended			Three Months Ended			Three Months Ended
	July 31, 2010			July 31, 2009			January 31, 2011			January 31, 2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Revenues	$	74,647,203		$	—		$	36,269,498		$	27,734,962

Cost of Goods Sold	69,073,711			—			34,185,426			23,507,912

Gross Profit	5,573,492			—			2,084,072			4,227,050

Operating Expenses	1,707,708			1,449,752			437,292			571,250

Operating Profit (Loss)	3,865,784			(1,449,752		)
Operating Profit							1,646,780			3,655,800

Other Income (Expense)
Interest income	76,931			186,769			37,188			35,339
Other income (expense)	6,401			(17,800		)
Other income							—			5,669
Interest expense	(3,611,103		)	—			(1,165,081		)	(1,230,136		)
Loss on derivative instrument	(405,874		)	(1,477,435		)
Gain on derivative instrument							525,760			17,317
Total other expense, net	(3,933,645		)	(1,308,466		)	(602,133		)	(1,171,811		)

Net Loss	$	(67,861	)	$	(2,758,218	)
Net Income							$	1,044,647		$	2,483,989

Weighted Average Units Outstanding	4,953			4,953			4,953			4,953

Net Loss Per Unit	$	(13.70	)	$	(556.88	)
Net Income Per Unit							$	210.91		$	501.51

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

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HIGHWATER ETHANOL, LLC

Condensed Statements of ~~Operations~~Cash Flows

Three Months Ended

Three Months Ended

July 31, 2010

July 31, 2009

(Unaudited)

(Unaudited)

Revenues

$
23,691,592

$
—

Cost of Goods Sold

22,441,106

—

Gross Profit

1,250,486

—

Operating Expenses

287,681

812,817

Operating Profit (Loss)

962,805

(812,817
)

Other Income (Expense)

Interest income

38,427

44,056

Other income (expense)

732

(4,989
)
Interest expense

(1,186,829
)
—

Gain (loss) on derivative instrument

(455,755
)
204,276

Total other expense, net

(1,603,425
)
243,343

Net Loss

$
(640,620
)
$
(569,474
)

Weighted Average Units Outstanding

4,953

4,953

Net Loss Per Unit

$
(129.34
)
$
(114.98
)

	Three months ended			Three months ended
	January 31, 2011			January 31, 2010
	(Unaudited)			(Unaudited)
Cash Flows from Operating Activities
Net income	$	1,044,647		$	2,483,989
Adjustments to reconcile net income to net cash provided by operations
Depreciation and amortization	1,626,012			1,625,047
Interest payments made from restricted cash	11,220			—
Change in fair value of derivative instruments	(230,653		)	255,381
Increase in restricted cash from net interest earned	(33,638		)	(33,637		)
Change in assets and liabilities
Restricted cash	(95,185		)	—
Accounts receivable, including members	(785,354		)	1,454,531
Inventories	407,132			(1,652,575		)
Derivative instrument	(251,619		)	(272,698		)
Prepaids and other	128,627			(260,092		)
Accounts payable, including members	(330,201		)	111,663
Accrued expenses	65,517			139,383
Net cash provided by operating activities	1,556,505			3,850,992

Cash Flows from Investing Activities
Capital expenditures	(380,855		)	(596,483		)
Net cash used in investing activities	(380,855		)	(596,483		)

Cash Flows from Financing Activities
Proceeds from (payments on) line of credit	1,500,000			(1,000,000		)
Payments on long-term debt	(898,665		)	—
Net cash provided by (used in) financing activities	601,335			(1,000,000		)

Net Increase in Cash and equivalents	1,776,985			2,254,509

Cash and equivalents - Beginning of period	3,856,173			2,620,833

Cash and equivalents - End of period	$	5,633,158		$	4,875,342

Supplemental Cash Flow Information
Cash paid for interest	$	1,063,341		$	1,114,510

Supplemental Disclosure of Noncash Financing and Investing Activities
Unrealized gain (loss) on restricted marketable securities	$	(30,150	)	$	4,084
Capital expenditures included in accounts payable	$	93,886		$	1,815,536

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

~~Table of Contents~~

~~HIGHWATER ETHANOL, LLC~~

~~Condensed Statements of Cash Flows~~

Nine Months Ended

Nine Months Ended

July 31, 2010

July 31, 2009

(Unaudited)

(Unaudited)

Cash Flows from Operating Activities

Net loss

$
(67,861
)
$
(2,758,218
)
Adjustments to reconcile net loss to net cash provided by (used in) operations

Depreciation and amortization

4,896,212

7,740

Interest payments made from restricted cash

22,439

—

Change in fair value of derivative instrument

(386,133
)
1,477,435

Other

—

18,621

Change in assets and liabilities

Accounts receivable, including members

93,463

—

Inventories

(626,546
)
(1,274,309
)
Prepaids and other

(100,081
)
458,933

Accounts payable, including members

317,046

73,816

Accrued expenses

57,690

85,595

Derivative instrument

792,006

—

Net cash provided by (used in) operating activities

4,998,235

(1,910,387
)

Cash Flows from Investing Activities

Capital expenditures

(1,245,336
)
(174,506
)
Construction in progress

(10,794
)
(44,845,389
)
Net cash used in investing activities

(1,256,130
)
(45,019,895
)

Cash Flows from Financing Activities

Payments on line of credit

(1,000,000
)
—

Increase in restricted cash from net interest earned

(67,275
)
(173,944
)
Payments on long-term debt

(1,453,177
)
—

Proceeds from long-term debt

—

47,416,614

Payments for debt issuance costs

—

(109,442
)
Net cash provided by (used in) financing activities

(2,520,452
)
47,133,228

Net Increase in Cash

1,221,653

202,946

Cash - Beginning of period

2,620,833

1,355,827

Cash - End of period

$
3,842,486

$
1,558,773

Supplemental Cash Flow Information

Cash paid for interest expense

$
3,289,987

$
—

Cash paid for interest capitalized

$
—

$
2,251,271

Total

$
3,289,987

$
2,251,271

Supplemental Disclosure of Noncash Financing and Investing Activities

Unrealized gains on restricted marketable securities

$
23,004

$
105,758

Redemption of restricted marketable securities - restricted cash

$
—

$
5,374,000

Increase in restricted cash from long term debt proceeds

$
524,160

$
—

Construction in progress included in construction payable

$
—

$
3,212,688

Capital expenditures included in accounts payable

$
1,256,335

$
—

Construction payable paid from restricted cash

$
524,160

$
—

Construction in progress paid from restricted cash

$
—

$
6,584,098

Interest payments made from restricted cash

$
—

$
1,419,330

Accrued interest capitalized in construction in progress

$
—

$
373,557

Loan costs capitalized with construction in progress

$
—

$
153,849

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

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HIGHWATER ETHANOL, LLC

Notes to Unaudited Condensed Financial Statements

~~July~~January 31, ~~2010~~2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended October 31, ~~2009,~~2010, contained in the Company’s Form 10-K.

In the opinion of management, the interim condensed financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for fair presentation of the Company’s financial position as of ~~July~~January 31, ~~2010~~2011 and the results of operations and cash flows for all periods presented.

Nature of Business

Highwater Ethanol, LLC, (a Minnesota Limited Liability Company) operates a 50 million gallon per year ethanol plant in Lamberton, Minnesota. The Company produces and sells fuel ethanol and distillers grains, a co-product of the fuel ethanol production process, in the continental United States, Mexico and Canada.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for significant matters, among others, the carrying value of property and equipment and related impairment testing, inventory valuation, and ~~derivatives.~~derivative instruments. Actual results could differ from those estimates and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions and the effects of revisions are reflected in the period in which the revision is made.

~~Restricted Cash~~

The Company maintains restricted cash balances as part of the capital lease financing agreement. The restricted cash balances include money market accounts and similar debt instruments which currently exceed amounts insured by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. The Company does not believe it is exposed to any significant credit risk on these balances.

~~In February 2010, the Company made their final withdrawal on the construction loan of $524,000. These funds were placed into a restricted account for the payment of open construction invoices.~~

Revenue Recognition

The Company generally sells ethanol and related products pursuant to marketing agreements. The Company’s products are shipped FOB shipping point. Revenues are recognized when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. For ethanol sales, title transfers when loaded into the rail car and for distiller’s grains when the loaded rail cars leave the plant facility.

In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees and freight due to the marketers are deducted from the gross sales price at the time incurred. Revenue is recorded net of these marketing fees and freight as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products.

7Derivative Instruments

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

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HIGHWATER ETHANOL, LLC

Notes to Unaudited Condensed Financial Statements

~~July~~January 31, ~~2010~~2011

~~Carrying Value~~Contracts are evaluated to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of ~~Long-Lived Assets~~

~~Long-lived assets, such~~a derivative may be exempted as ~~property~~“normal purchases or normal sales”. Normal purchases and ~~equipment, and~~normal sales are contracts that provide for the purchase or sale of something other ~~long-lived assets subject to amortization, are reviewed for impairment whenever events~~than a financial instrument or ~~changes~~derivative instrument that will be delivered in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flowsquantities expected to be ~~generated~~used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting as derivatives, therefore, are not marked to market in our financial statements.

In order to reduce the risk caused by interest rate fluctuations, the Company entered into an ~~asset~~interest rate swap agreement. This contract is used with the intention to ~~the carrying~~limit exposure to increased interest rates. The fair value of ~~the asset. If the carrying value of the long-lived asset~~this contract is ~~not recoverable~~based on ~~an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various~~widely accepted valuation techniques including discounted cash flow ~~models, quoted~~analysis which includes observable market-based inputs. The fair value of the derivative is continually subject to change due to changing market ~~values~~conditions. Although this serves as an economic hedge, the Company does not formally designate this instrument as a hedge and, ~~third-party independent appraisals, as considered necessary.~~therefore, records in earnings adjustments caused from marking the instrument to market on a monthly basis.

~~In August 2009, the~~The Company ~~completed construction of its ethanol production facilities with installed capacity of 50 million gallons per year. The carrying value of these facilities at~~ July 31, 2010 was approximately $99 million. In accordance with the Company’s policy for evaluating impairment of long-lived assets described above, management evaluates the recoverability of the facilities based on projected futureentered into corn commodity-based derivatives in order to protect cash flows from ~~operations over~~fluctuations caused by volatility in commodity prices. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ~~facilities’ estimated useful lives. In determining~~ineffective portions of qualifying hedges, the ~~projected future undiscounted cash flows,~~change in fair value is recorded through earnings in the ~~Company makes significant assumptions concerning the future viability~~period of ~~the ethanol industry, the future price~~change. Corn derivative changes in fair market value are included in costs of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity. The Company has determined that there is no impairment of long-lived assets at July 31, 2010.goods sold.

Fair Value of Financial Instruments

The carrying value of cash, ~~restricted cash,~~accounts receivable, and accounts payable, and other working capital items approximate fair value at January 31, 2011 due to the short maturity nature of these instruments.

The carrying value of restricted marketable securities approximate their fair value based on quoted market prices at year end. The Company believes the carrying value of the derivative ~~instrument approximates~~instruments approximate fair value based on widely accepted valuation techniques including quotes obtained from an independent pricing service and discounted cash flow analysis which includes observable market-based inputs.

The Company believes the carrying amount of the long-term debt approximates the fair value ~~due to~~because a significant portion of total indebtedness contains variable interest rates and this rate is a market interest rate for these ~~borrowings.~~borrowings as evidenced by recent debt negotiations.

Reclassifications

The ~~carrying value~~Company made reclassifications to certain consulting and bank costs fees in the Condensed Statement of ~~cash, accounts receivable, and accounts payable, and other working capital items approximate fair value at July~~Operations for the three months ended January 31, 2010, ~~due~~ to conform with classifications for the ~~short maturity nature of these instruments.~~three months ended January 31, 2011. These reclassifications had no effect on members’ equity, net income or cash flows as previously presented.

2. UNCERTAINTIES

The Company derives substantially all of its revenues from the sale of ethanol and distillers grains. These products are commodities and the market prices for these products display substantial volatility and are subject to a number of factors which are beyond the control of the Company. The Company’s most significant manufacturing inputs are corn and natural gas. The price of these commodities is also subject to substantial volatility and uncontrollable market factors. In addition, these input costs do not necessarily fluctuate with the market prices for ethanol and distillers grains. As a result, the Company is subject to significant risk that its operating margins can be reduced or eliminated due to the relative movements in the market prices of its products and major manufacturing inputs. As a result, market fluctuations in the price of or demand for these commodities can have a significant adverse effect on ~~the Company’s operations, profitability, and availability of cash flows to make loan payments and maintain compliance with the loan agreement.~~

As further described in Note 7, at July 31, 2010, the Company was out of compliance with certain financial covenant requirement provisions of its construction loan agreement with First National Bank of Omaha (FNBO). In addition, the Company anticipates being out of compliance with these and other financial covenants as of its fiscal year end of October 31, 2010.

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HIGHWATER ETHANOL, LLC

Notes to Unaudited Condensed Financial Statements

~~July~~January 31, ~~2010~~2011

~~The Company is diligently working~~the Company’s operations, profitability, and availability of cash flows to make loan payments and maintain compliance with ~~its lender to modify~~ the ~~construction~~ loan agreement and remains current on principal and interest payments with FNBO and the capital lease, which U.S. Bank National Association (U.S. Bank) is the trustee for, as well all vendors and suppliers. The Company is currently in negotiations with FNBO regarding the forbearance of the covenant violations of the construction loan agreement, as well as possible modifications to future covenant requirements. Among the provisions being discussed for modification are the compliance thresholds for financial covenants, possible change of scheduled maturities to interest only for a portion of the debt, increase of the rate floor on that portion of the debt, increase of the excess cash flow sweep and immediate pre-payment of the Long Term Revolver. At July 31, 2010, the Company had approximately $4,854,000 outstanding on the Long Term Revolver. There is no assurance, however, when the forbearance or modifications will be provided by the lender or that the Company will be able to comply with future financial covenants and obligations of the construction loan agreement or other outstanding debt agreements. As such, at July 31, 2010 the Company has reclassified the long-term debt related to the FNBO agreements as well as the capital lease to U.S. Bank to current liabilities. At July 31, 2010, FNBO and/or U.S Bank have a right to demand immediate repayment, among other rights as secured lenders. If FNBO and U.S. Bank exercised their right to accelerate the maturity of the debt outstanding under the construction loan agreement and/or capital lease agreement, the Company would not have adequate available cash to repay the amounts currently outstanding.agreement.

3. FAIR VALUE MEASUREMENTS

Various inputs are considered when determining the value of financial instruments. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below:

·	Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

·	~~Level 2 inputs include the following:~~
	·	~~Quoted prices in active markets for similar assets or liabilities.~~
	·	~~Quoted prices in markets that are not active for identical or similar assets or liabilities.~~
	·	~~Inputs other than quoted prices that are observable for the asset or liability.~~
	·	~~Inputs that are derived primarily from or corroborated by observable market data by correlation or other means.~~

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

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

Fair Value as of

Fair Value Measurement Using

July 31, 2010

Level 1

Level 2

Level 3

Restricted cash — current

$
101,517

$
101,517

$
—

$
—

Restricted marketable securities - current

$
106,455

$
106,455

$
—

$
—

Restricted marketable securities — long-term

$
1,518,000

$
1,518,000

$
—

$
—

Interest rate swap

$
(2,534,522
)
$
—

$
(2,534,522
)
$
—

~~Table of Contents~~

~~HIGHWATER ETHANOL, LLC~~

~~Notes to Unaudited Condensed Financial Statements~~

~~July 31, 2010~~

	Fair Value as of			Fair Value Measurement Using
	January 31, 2011			Level 1			Level 2			Level 3
Restricted marketable securities - current	$	79,405		$	79,405		$	—		$	—
Restricted marketable securities — long-term	$	1,518,000		$	1,518,000		$	—		$	—
Derivative instruments — Interest rate swap	$	(2,102,082	)	$	—		$	(2,102,082	)	$	—
Derivative instruments — Corn contracts	$	(43,488	)	$	(43,488	)	$	—		$	—

The fair value of restricted ~~cash, which includes money market funds, and restricted~~ marketable securities ~~are~~is based on quoted market prices in an active market. The Company determined the fair value of the interest rate swap by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each instrument. The analysis reflects the contractual terms of the swap agreement, including the period to maturity and uses observable market-based inputs and uses the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The Company determines the fair value of the commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade.

4. RESTRICTED MARKETABLE SECURITIES

The cost and fair value of the Company’s restricted marketable securities consist of the following at ~~July~~January 31, ~~2010:~~2011:

	Amortized Cost		Gross Unrealized Gains		Fair Value		Amortized Cost		Gross Unrealized Gains		Fair Value

Restricted marketable securities - Current Municipal obligations	$	106,455	$	—	$	106,455	$	79,405	$	—	$	79,405

Restricted marketable securities — Long-term Municipal obligations	1,402,662		115,338		1,518,000		1,429,712		88,288		1,518,000

Total restricted marketable securities	$	1,509,117	$	115,338	$	1,624,455	$	1,509,117	$	88,288	$	1,597,405

The long-term restricted marketable securities relate to the debt service reserve fund required by the capital lease agreement. The Company had gross unrealized gains of ~~$115,338~~$88,288 and ~~$92,334~~$118,438 included in accumulated other comprehensive income at ~~July~~January 31, ~~2010~~2011 and October 31, ~~2009,~~2010, respectively.

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HIGHWATER ETHANOL, LLC

Notes to Unaudited Condensed Financial Statements

January 31, 2011

Shown below are the contractual maturities of marketable securities with fixed maturities at ~~July~~January 31, ~~2010.~~2011. Actual maturities may differ from contractual maturities because certain securities may contain early call or prepayment rights.

Due within 1 year	$	—	$	—
Due in 1 to 3 years	1,372,651		1,349,451
Due in 3 to 5 years	251,804		247,954
Total	$	1,624,455	$	1,597,405

5. INVENTORIES

Inventories consisted of the following at:

	July 31, 2010		October 31, * 2009		January 31, 2011		*October 31, 2010**

Raw materials	$	1,546,353	$	964,374	$	1,616,176	$	1,972,604
Spare parts and supplies	165,558		67,487		194,410		190,386
Work in process	724,802		705,422		1,135,871		930,377
Finished goods	546,503		619,387		1,084,083		1,344,305

Total	$	2,983,216	$	2,356,670	$	4,030,540	$	4,437,672

*Derived from Audited financial statements

6. DERIVATIVE INSTRUMENTS

As of January 31, 2011, the Company had entered into corn derivative instruments and an interest rate swap agreement, which are required to be recorded as either assets or liabilities at fair value in the statement of financial position. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge, a cash flow hedge or a hedge against foreign currency exposure.

Interest Rate Swap

At January 31, 2011, the Company had a notional amount of approximately $22,366,000 outstanding in the swap agreement that fixes the interest rate at 7.6% until June 2014. The interest rate swap is not designated as a hedge for accounting purposes.

Commodity Contracts

As of January 31, 2011, the Company has open positions for 80,000 bushels of corn on the Chicago Board of Trade. These derivatives have not been designated as a hedge for accounting purposes. Management expects all open positions outstanding as of January 31, 2011 to be realized within the next fiscal year.

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HIGHWATER ETHANOL, LLC

Notes to Unaudited Condensed Financial Statements

January 31, 2011

The following tables provide details regarding the Company’s derivative instruments at January 31, 2011:

Instrument	Balance Sheet location	Assets		Liabilities

Interest rate swap	Derivative instruments	$	—	$	2,102,082
Corn contracts	Derivative instruments	—		43,488

The following tables provide details regarding the gains from the Company’s derivative instruments in statements of operations, none of which are designated as hedging instruments:

	Statement of	Three Months Ended January 31,
	Operations location	2011		2010
Interest rate swap	Gain on derivative instrument	$	525,760	$	17,317

Corn contracts	Cost of goods sold	56,456		—

7. DEBT FINANCING

Long-term debt consists of the following at:

	January 31,		October 31,*
	2011		2010

Fixed rate note payable, see terms below	$	23,606,034	$	24,040,752

Variable rate note payable, see terms below	18,884,794		19,255,952

Long-term revolving note payable, see terms below	4,671,199		4,763,988

Capital lease	15,180,000		15,180,000

Total	62,342,027		63,240,692

Less amounts due within one year	6,372,024		6,801,375

Net long-term debt	$	55,970,003	$	56,439,317

*Derived from Audited financial statements

In January 2011, the Company entered into an amendment to the construction loan agreement with its primary lender (Lender). Pursuant to the amended agreement, the Company is required to make an immediate $3,000,000 prepayment on the long-term revolving note payable, which was completed in February 2011. In exchange for the prepayment, the variable rate note payable will have interest only payments going forward with quarterly 50% excess cash flow payments which will be applied first to interest and then to principal on the variable rate note, with

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HIGHWATER ETHANOL, LLC

Notes to Unaudited Condensed Financial Statements

~~July~~January 31, ~~2010~~2011

~~6. DERIVATIVE INSTRUMENTS~~

a minimum annual reduction of principal of $750,000. The Company ~~does not enter into derivative transactions for trading purposes.~~Asis also required to make a $750,000 mandatory principal repayment on the long-term revolving note payable prior to February 2012 and reduce the outstanding principal balance to zero as of ~~July 31, 2010,~~February 2013. The amendment also modifies the ~~Company has an interest rate swap agreement.~~

~~Interest Rate Swap~~

At July 31, 2010, the Company had a notional amount of approximately $23,305,000 outstanding in the swap agreement that fixes the interest rate at 7.6% until June 2014. The interest rate swap is not designated as an effective hedge for accounting purposes.

~~The following tables provide details regarding the Company’s derivative instruments at July 31, 2010:~~

Instrument

Balance Sheet location

Assets

Liabilities

Interest rate swap

Derivative instruments

$
—

$
2,534,522

~~The following tables provide details regarding the losses from the Company’s derivative instrument in the statements of operations:~~

Statement of

Three Months Ended July 31,

Operations location

2010

2009

Interest rate swap

Gain (loss) on derivative instrument

$
(455,755
)
$
204,276

Statement of

Nine Months Ended July 31,

Operations location

2010

2009

Interest rate swap

Loss on derivative instrument

$
(405,874
)
$
(1,477,435
)

~~7. DEBT FINANCING~~

~~Long-term debt consists of the following at:~~

July 31,

October 31,*

2010

2009

Construction loan

$
—

$
49,875,840

Fixed rate note payable, see terms below

24,475,470

—

Variable rate note payable, see terms below

19,617,082

—

Long-term revolving note payable, see terms below

4,854,271

—

Capital lease

15,180,000

15,180,000

Total

64,126,823

65,055,840

Less amounts due within one year

64,126,823

2,343,508

Net long-term debt

$
—

$
62,712,332

*Derived from Audited financial statements

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~~HIGHWATER ETHANOL, LLC~~

~~Notes to Unaudited Condensed Financial Statements~~

~~July 31, 2010~~

~~At July 31, 2010, the Company was not in compliance with the~~minimum working capital, minimum net worth, fixed charge coverage, and ~~maximum~~ leverage ~~requirements of~~ratios contained in the ~~construction~~ loan ~~agreement with FNBO. As a result of reclassifying long-term debt to current liabilities, the~~documents. The Company ~~was not~~anticipates being in compliance with ~~the working capital requirement at July~~these revised covenant requirements through January 31, ~~2010. Additionally, the Company anticipates being out of compliance with these and one or more additional covenants as of fiscal year end October 31, 2010 as well as through July 31, 2011.~~2012.

The financial covenant conditions ~~under~~approved as part of the January 2011 amendment to the debt agreement ~~as of July 31, 2010~~ are as follows:

Covenant Type

Compliance Dates

Covenant Requirements

Calculation as of
July 31, 2010

Compliance Dates

Covenant Requirements

Fixed charge coverage

Quarterly

No less than 1.25:1.00

0.88

Quarterly

No less than 1.10:1.00

Net worth

Annually

$44,775,000

$41,592,000

Annually

41,250,000

Working capital

Quarterly

No less than $3,000,000

$3,225,000

Working Capital

Quarterly

No less than $6,000,000

Maximum leverage

Quarterly

No greater than 1.65:1.00

1.74

Annually

No greater than 1.65:1.00

*~~Requirement as~~ The Net Worth covenant requirement will be increased each fiscal year by an amount equal to the greater of ~~October 31, 2010, net~~$250,000 or the amount of undistributed earnings accumulated during the fiscal year just ended (less any ~~intangible costs including debt issuance costs of approximately $1,515,000 and receivables from members of approximately $41,000.~~

#~~Working capital calculation is before reclassification of long-term debt~~allowable distributions attributable to ~~current liabilities.~~the just ended fiscal year’s earnings).

# The ~~Company~~minimum Working Capital covenant requirement of $6,000,000 will commence on May 1, 2011. Until that time, the minimum Working Capital covenant requirement is negotiating with FNBO to forbear the actual and probable violations of the loan agreement, however has not yet received forbearance from FNBO. There is no assurance when any forbearance or amendment will be provided by the lender, or that the Company will be able to comply in the future with all covenants and obligations of the construction loan agreement. The Company has reclassified as current liabilities the principal balance of the fixed rate note payable, variable rate note payable and long-term revolving note payable because FNBO has the ability to exercise all rights and remedies pursuant to the terms of the loan agreement, including the right to accelerate the indebtedness and declare it immediately due. Additionally, the Company has reclassified the capital lease to current liabilities as U.S. Bank also has the right to accelerate the indebtedness and declare it immediately due as a result of the default with FNBO. In the absence of a forbearance agreement, amendment to the loan agreement or refinancing of the loan agreement, the Company does not have adequate capital to repay all of the amounts that would become due upon acceleration. The Company is, however, current on its payments of interest and principal to FNBO and U.S. Bank and anticipates remaining current with scheduled payments. The Company is currently in active discussions with FNBO to forbear the aforementioned violations of the loan agreement and to modify the future covenants within the construction loan agreement. There is no assurance that any amendment or forbearance of violations will be provided by FNBO. See Note 2 regarding the presentation of the financial information contained in this Form 10-Q in light of this event of default.$4,500,000.

Bank Financing

On February 26, 2010 the construction loan was converted to three new promissory notes including a $25,200,000 Fixed Rate Note, a $20,200,000 Variable Rate Note, and a $5,000,000 Long-Term Revolving note, as described in the credit agreement and below. The credit agreement also provided a line of credit for $5,000,000 and supported the issuance of letters of credit up to $5,600,000, all of which are secured by substantially all ~~of the Company’s~~ assets.

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~~HIGHWATER ETHANOL, LLC~~

~~Notes to Unaudited Condensed Financial Statements~~

~~July 31, 2010~~

Fixed Rate Note

The Fixed Rate Note was $25,200,000 at conversion with a variable interest rate that is fixed with an interest rate swap. The Company makes monthly principal payments on the Fixed Rate Note initially for approximately $145,000 plus accrued interest which commenced in March 2010. Interest accrues on the Fixed Rate Note at the greater of the one-month LIBOR rate plus 300 basis points or 4%, which was 4% at ~~July~~January 31, ~~2010. The Company entered into an interest rate swap which fixes the interest rate on the Fixed Rate Note at 7.6% for five years which began in June 2009.~~2011. A final balloon payment on the Fixed Rate Note of approximately ~~$15,184,000~~$15,189,000 will be due February 26, 2015.

Variable Rate Note

The Variable Rate Note was $20,200,000 at conversion. For the Variable Rate Note, the Company makes monthly payments initially for approximately $147,000 plus accrued interest which commenced in March 2010. Interest accrues on the Variable Rate Note at the greater of the one-month LIBOR rate plus 350 basis points or 4%~~, which was 4% at July 31, 2010.~~. A final balloon payment of approximately ~~$14,807,000~~$15,306,000 will be due February 26, 2015. Under the amendment entered into in January 2011, the minimum interest rate on the variable rate note increased to 5% and the principal balance increased by $336,000.

Long-term Revolving Note

The Long-Term Revolving Note was $5,000,000 at conversion. The amount available on the Long-Term Revolving Note will decline annually by the greater of $125,000 or 50% of the excess cash flow, as defined by the agreement. The Long-Term Revolving Note accrues interest monthly at the greater of the one-month LIBOR plus 350 basis points or 4% until maturity on February 26, 2015, which was 4% at ~~July~~January 31, ~~2010.~~2011. Under the amendment entered

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HIGHWATER ETHANOL, LLC

Notes to Unaudited Condensed Financial Statements

January 31, 2011

into in January 2011, there was a prepayment of $3,000,000 made on the long-term revolving note, the maximum availability was reduced to $4,500,000, and $336,000 of the remaining balance was allocated to the variable rate note. Additionally, the payment terms were adjusted as discussed above. The prepayment on the long-term revolving note was made in February 2011.

Line of Credit

The Company’s Line of Credit accrues interest at the greater of the 90-day LIBOR plus 450 basis points or 5.5%, which was 5.5% at ~~July~~January 31, ~~2010.~~2011. The line of credit requires monthly interest payments and was payable in full in February 2010. In February 2010, the Company signed an amendment to extend the maturity date to February 26, 2011. In February 2011, the Company signed an amendment to extend approximately $948,000 of the line of credit to June 30, 2011 and $4,052,000 to August 28, 2011. On June 30, 2011, the maximum principal amount available under the line of credit will be reduced by approximately $948,000. As of ~~July~~January 31, ~~2010, there are no borrowings~~2011, the Company had $1,500,000 outstanding ~~and~~on the ~~maximum availability was $3,111,000.~~line of credit.

~~The~~As part of the amendment entered into in January 2011, the Company is required to make additional payments ~~annually~~quarterly on debt for up to 50% of the excess cash flow, as defined by the agreement. As part of the bank financing agreement, the premium above LIBOR on the loans may be reduced based on a financial ratio. The loan agreements are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements.

As ~~described above, the Company is currently out~~ of ~~compliance with the construction loan agreement and has reclassified the amount due on the debt with FNBO to current liabilities.~~

~~As of~~ ~~July~~January 31, ~~2010,~~2011, the Company has letters of credit outstanding of ~~$4,950,000 as mentioned previously.~~$4,250,000. The Company pays interest at a rate of 1.75% on amounts outstanding and the letters of credit are valid until March 2011. One of the letters of credit will automatically renew for an additional one year period in the amount of $4,000,000.

Capital Lease

In April 2008, the Company entered into a lease agreement with the City of Lamberton, Minnesota, (the City) in order to finance equipment for the plant. The ~~outstanding balances under~~lease has a term from April 1, 2008 through April 1, 2028 or until earlier terminated. The City financed the ~~line~~purchase of ~~credit~~equipment through Solid Waste Facilities Revenue Bonds Series 2008A totaling $15,180,000.

Under the equipment lease agreement with the City, the Company started making interest payments on November 25, 2008 and monthly thereafter at an implicit interest rate of 8.5%. The monthly capital lease interest payments correspond to 1/6 the semi-annual interest payments due on the Bonds on the next interest payment date. Monthly capital lease payments for principal were $0originally scheduled to begin on November 25, 2009; however, the City amended the agreement in September 2008 which adjusted the start date for principal payments to begin on November 25, 2014. These payments will equal 1/12 the annual principal payments scheduled to become due on the corresponding bonds on the next principal payment date.

The Company has guaranteed that if such assessed lease payments are not sufficient for the required bond payments, the Company will provide such funds as are needed to fund the shortfall. The lease agreement is secured by substantially all business assets and ~~$1,000,000~~is subject to various financial and non-financial covenants that limit distributions and leverage and require minimum debt service coverage, net worth, and working capital requirements, and are secured by all business assets.

The capital lease includes an option to purchase the equipment at ~~July 31, 2010~~fair market value at the end of the lease term. Under the capital lease agreement, the proceeds are for project costs and ~~October 31, 2009, respectively.~~the establishment of a capitalized interest fund and a debt service reserve fund. The Company received proceeds of approximately $14,876,000, after financing costs of approximately $304,000.

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HIGHWATER ETHANOL, LLC

Notes to Unaudited Condensed Financial Statements

~~July~~January 31, ~~2010~~2011

The estimated maturities of the long-term debt at ~~July~~January 31, ~~2010~~2011 are as ~~follows (after reclassification of approximately $60,500,000 of the long-term debt to current, as noted above):~~follows:

2011

$
64,126,823

2012

—

2013

—

2014

—

2015

—

Long-term debt

$
64,126,823

The estimated maturities include the fixed rate note, variable rate note, long-term revolving note, and capital lease as due currently as FNBO and U.S. Bank have not yet called the loans and the Company is negotiating with FNBO to forbear the actual and probable violations of the loan agreement.

2012	$	6,372,024
2013	3,516,491
2014	2,929,991
2015	4,081,386
2016 and thereafter	45,442,135

Long-term debt	$	62,342,027

8. LEASES

In April 2009, the Company entered into a five-year operating lease agreement with an unrelated party for 50 covered hopper cars. The Company pays approximately $425 per car per month. In addition, a surcharge of $0.03 per mile will be assessed for each mile in excess of 30,000 miles per year a car travels. Total lease expense for the three ~~and nine~~ months ending ~~July~~January 31, ~~2010~~2011 was approximately ~~$91,000 and $224,500, respectively.~~

The Company has also entered into a capital lease agreement and has reclassified the capital lease to current liabilities as U.S. Bank has the right to declare it immediately due as discussed in Notes 2 and 7.$63,750.

Future minimum lease payments under the operating and capital ~~lease~~leases are as follows at ~~July~~January 31, ~~2010:~~2011:

	Operating		Capital			Operating		Capital
2011	$	255,000	$	15,180,000	*
2012	255,000		—			$	255,000	$	1,290,300
2013	255,000		—			255,000		1,290,300
2014	233,750		—			255,000		1,290,300
2015	—		—			106,250		1,523,633
After 2015	—		—
2016						—		2,690,467
After 2016						—		18,396,600
Total	998,750		15,180,000			871,250		26,481,600
Less amount representing interest	—		—		*	—		11,301,600
Present value of minimum lease payments	998,750		15,180,000			871,250		15,180,000
Less current maturities	—		15,180,000			—		—
Long-term debt	$	998,750	$	—		$	871,250	$	15,180,000

* Amount does not include any interest9. COMMITMENTS AND CONTINGENCIES

Marketing Agreements

The Company entered into a new ethanol marketing agreement with their current marketer that ~~would be accrued~~became effective February 1, 2011. Under the new marketing agreement, the marketer will continue to purchase, market, and ~~payable~~distribute all the ethanol produced by the Company. The Company also entered into a member control agreement with the marketer whereby the Company will make a capital contribution and become a minority owner of the marketing company. The member control agreement became effective on February 1, 2011 and provides the Company a membership interest with voting rights. The marketing agreement would terminate if the ~~capital lease was declared as immediately due or~~Company ceases to be a member. The Company would ~~be paid~~assume certain of the member’s rail car leases if the ~~payments were made through the original maturity.~~agreement is terminated.

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HIGHWATER ETHANOL, LLC

Notes to Unaudited Condensed Financial Statements

~~July~~January 31, ~~2010~~

~~9. COMMITMENTS AND CONTINGENCIES~~2011

Regulatory Agencies

The Company is subject to ~~discussions with~~oversight from regulatory agencies regarding environmental concerns which arise in the ordinary course of its business. While the ultimate outcome of these matters is not presently determinable, it is in the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company. Due to the uncertainties in the settlement process, it is at least reasonably possible that management’s view of outcomes will change in the near term.

Construction in Progress

The Company had construction in progress of approximately ~~$351,000~~$14,600 at ~~July~~January 31, ~~2010~~2011 for ~~additions~~enhancements to the ~~water treatment center.~~gas monitoring system. The addition is expected to amount to ~~$400,000.~~$36,500.

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

Cautionary Statements Regarding Forward-Looking Statements

This report contains forward-looking statements that involve known and unknown risks and relate to future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “will,” “may,”�� “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to:

· Changes in our business strategy, capital improvements or development plans;

· Volatile commodity and financial markets;

· Limitations and restrictions contained in the instruments and agreements governing our indebtedness;

· Our ability to comply with the financial covenants contained in our credit agreements with our lender;

· Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw materials costs;

· Our ability to generate free cash flow to invest in our business and service our debt;

· Changes in interest rates and lending conditions;

· The results of our hedging transactions and other risk management strategies;

· Changes in the environmental regulations or in our ability to comply with such regulations;

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

· Changes in the availability of credit to support the level of liquidity necessary to implement our risk management activities;

· Changes in or elimination of federal and/or state laws or policies impacting the ethanol industry (including the elimination of any federal and/or state ethanol tax incentives);

· Ethanol and distillers grains supply exceeding demand and corresponding price reductions;

· Changes in plant production capacity or technical difficulties in operating the plant;

· Changes and advances in ethanol production technology;

· Our ability to retain key employees and maintain labor relations;

· Changes in our ability to secure credit or obtain additional debt or equity financing, if we so require;

· Lack of transportation, storage and blending infrastructure preventing our products from reaching high demand markets;

· Competition from alternative fuel additives; and

· Elimination of the United States tariff on imported ethanol.

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We are not under any duty to update the forward-looking statements contained in this report. Furthermore, we cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Available Information

Our website address is www.highwaterethanol.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), are available, free of charge, on our website at www.highwaterethanol.com under the link “SEC Compliance,” as soon as reasonably practicable after we

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electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Quarterly Report on Form 10-Q.

Overview

Highwater Ethanol, LLC (“we,” “our,” “Highwater” or the “Company”) is a Minnesota limited liability company organized on May 2, 2006 for the purpose of developing, constructing, owning and operating a fuel-grade ethanol plant near Lamberton, Minnesota. Since August 2009, we have been engaged in the production of ethanol and distillers grains at the ethanol plant. Our plant has nameplate capacity of 50 million gallons of undenatured ethanol per year. However, our environmental permits allow us to produce ethanol at a rate of 55 million gallons per year. Management anticipates our plant will continue to produce approximately 54.9 million gallons per year.

Our operating results are largely driven by the prices at which we sell our ethanol and distillers grains as well as the other costs related to production. We market our products through professional third party marketers. Our ethanol is marketed by Renewable Products Marketing Group, LLC (RPMG). Our distillers grains are marketed by CHS, Inc. (CHS).

The price of ethanol has historically fluctuated with the price of petroleum-based products such as unleaded gasoline, heating oil and crude oil. The price of distillers grains has historically been influenced by the price of corn as a substitute livestock feed. We expect these price relationships to continue for the foreseeable future, although recent volatility in the commodities markets makes historical pricing relationships less reliable. Our largest costs of production are corn, natural gas, depreciation and manufacturing chemicals. The cost of corn is largely impacted by geopolitical supply and demand factors and the outcome of our risk management strategies. Prices for natural gas, manufacturing chemicals and denaturant are tied directly to the overall energy sector, crude oil and unleaded gasoline.

~~There have been a number of recent developments in legislation that impact the ethanol industry. One such development concerns the federal Renewable Fuels Standard (RFS). In February~~During 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of green house gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in green house gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% green house gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in green house gases, and cellulosic biofuels must accomplish a 60% reduction in green house gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these green house gas reductions has been a contentious issue. Many in the ethanol industry ~~were concerned that corn based ethanol would not meet the 20% green house gas reduction requirement based on certain parts of the environmental impact model that many~~experienced a significant increase in distiller grains exports to China. Animal feeding operations in China are growing which has prompted a significant increase in animal feed demand from China, including increased distillers grain demand. However, China recently began investigating United States distillers grains exporters for dumping distillers grains in the ~~ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides~~Chinese market. These dumping allegations may lead to China imposing high tariffs on distillers grains that ~~corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Many in the ethanol industry~~ are ~~concerned that certain provisions of RFS2 as adopted may disproportionately benefit ethanol~~ produced ~~from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive~~ in the United States ~~ethanol market. If this were~~and transported to ~~occur, it could reduce demand for the ethanol that we produce.~~

In addition to RFS2 which included greenhouse gas reduction requirements, in 2009, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to RFS2. Management believes that this lifecycle analysis is based on unsound scientific principles that unfairly harms corn based ethanol. Management believes that these new regulations may preclude corn based ethanol from being used in California. California represents a significant ethanol demand market. If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce. Several lawsuits have been filed challenging the California LCFS.

~~Ethanol production in~~China. While the United States ~~benefits from various tax incentives. The most significant of these tax incentives is~~distillers grains industry believes that China’s dumping claims are without merit and are retaliation by the ~~federal Volumetric Ethanol Excise Tax Credit (VEETC) which provides a volumetric ethanol~~

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~~excise tax credit of 4.5 cents per gallon of ethanol blended~~Chinese government related to other trade disputes with gasoline at a rate of 10% (this is based on a total credit of 45 cents per gallon of ethanol blended). VEETC is scheduled to expire on December 31, 2010. If this tax credit is not renewed, it likely would have a negative impact on the price of ethanol and demand for ethanol in the marketplace.

Under current law, small ethanol producers are allowed a 10 cents per gallon, production income tax credit on up to 15 million gallons of production, annually. The credit, which is capped at $1.5 million per year per producer, is only available to small scale ethanol producers with an annual production capacity of no more than 60 million gallons per year. The credit can be claimed against the producer’s income tax liability. The Small Ethanol Producer Tax Credit (“SEPTC”) is set to expire on December 31, 2010. Legislation has been introduced in both the House of Representatives and the Senate which would extend the small ethanol producers and VEETC for five years, through the end of 2015. If this credit is allowed to expired, it would likely have a negative impact on the price of ethanol and demand for ethanol in the marketplace.

In addition to the tax incentives, United States ethanol production is also benefited by a 54 cent per gallon tariff imposed on ethanol imported into the United States. However, the 54 cent per gallon tariff is set to expire at the end of the 2010 calendar year. Elimination of the tariff that protects the United States, ~~ethanol industry could lead~~these developments may negatively impact distillers grains exports to ~~the importation of ethanol produced in other countries, especially in areas of~~China. If China were to impose a high tariff on distillers grains imports from the United States, that are easily accessible by international shipping ports. Ethanol imported from other countries may be a less expensive alternative to domestically produced ethanol and may affect our ability to sell our ethanol profitably.

Additionally, the EPA is considering allowing a blend of 15% ethanol and 85% gasoline (called E15) for use in standard vehicles. Along with such change the EPA may restrict what vehicles can use E15 which may lead to gasoline retailers refusing to carry E15. Further, the EPA may mandate labeling requirements for the E15 blend which may be unattractive to gasoline consumers and may result in decreased demand. Management believes that if the EPA approves an increase in the ethanol blend rate for standard (non-flex fuel) vehicles, it could ~~positively~~negatively impact ~~ethanol demand and ethanol prices. Conversely, ethanol prices could decrease if additional ethanol supply capacity enters~~ the market ~~without corresponding increases in ethanol demand. This~~price of distillers grains which could ~~result if the EPA does not implement an increase in the ethanol blend rate and the ethanol industry reaches the blending wall of approximately 13.5 billion gallons of ethanol during~~negatively impact our ~~2011 fiscal year.~~financial performance.

Results of Operations for the Three Months Ended ~~July~~January 31, 2011 and 2010

Our plant did not become operational until August 2009. Accordingly, we do not yet have comparable income, production and sales data for the three months ended July 31, 2010, from the three months ended July 31, 2009, because we were not generating revenue for the three months ended July 31, 2009. Consequently, we do not provide a comparison of our financial results between reporting periods in this report. If you undertake your own comparison of our results for the three months ended July 31, 2010, and the three months ended July 31, 2009, it is important that you keep this in mind.

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The following table shows the ~~result~~results of our operations and the approximate percentage of revenues, ~~cost~~costs of goods sold, operating expenses and other items to total revenues in our ~~statement~~unaudited statements of operations for the three months ended ~~July~~January 31, ~~2010.~~2011 and 2010:

	Three Months Ended July 31, 2010 (Unaudited)					Three Months Ended January 31, 2011 (Unaudited)					Three Months Ended January 31, 2010 (Unaudited)
Statement of Operations Data	Amount			Percent		Amount			Percent		Amount			Percent
Revenues	$	23,691,592		100.00	%	$	36,269,498		100.0	%	$	27,734,962		100.0	%

Cost of Goods Sold	22,441,106			94.7	%	34,185,426			94.25	%	23,507,912			84.76	%

Gross Profit	1,250,486			5.3	%	2,084,072			5.75	%	4,227,050			15.24	%

Operating Expenses	287,681			1.2	%	437,292			1.21	%	571,250			2.06	%

Operating Profit	962,805			4.1	%	1,646,780			4.54	%	3,655,800			13.18	%

Other Expense, net	(1,603,425		)	(6.8	)%
Other Income (Expense), net						(602,133		)	(1.66	)%	(1,171,811		)	(4.23	)%

Net Loss	$	(640,620	)	(2.7	)%
Net Income						$	1,044,647		2.88	%	$	2,483,989		8.96	%

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Revenues

Our revenues are derived from the sale of our ethanol and distillers grains.

The following table shows the sources of our revenue for the three months ended ~~July~~January 31, 2011.

	Amount (Unaudited)		Percentage of Total Revenues (Unaudited)
Revenue Sources

Ethanol Sales	$	30,969,714	85.39	%
Distillers Grains Sales	5,299,784		14.61	%
Total Revenues	$	36,269,498	100.00	%

The following table shows the sources of our revenue for the three months ended January 31, 2010.

					Amount (Unaudited)		Percentage of Total Revenues (Unaudited)
Revenue Sources	Amount		Percentage of Total Revenues

Ethanol Sales	$	20,288,023	85.50	%	$	24,012,930	86.58	%
Distillers Grains Sales	3,403,569		14.50	%	3,722,031		13.42	%
Total Revenues	$	23,691,592	100.0	%	$	27,734,962	100.00	%

The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended ~~July~~January 31, ~~2010:~~2011 and 2010.

~~Additional Data~~		~~Three Months~~ ~~Ended July 31, 2010~~ ~~(Unaudited)~~
~~Ethanol sold (gallons)~~		~~13,879,000 gallons~~
~~Dried distillers grains sold (tons)~~		~~35,000 tons~~
~~Modified distillers grains sold (tons)~~		~~1,720 tons~~
~~Ethanol average price per gallon~~		~~$1.48 per gallon~~ ~~(before marketing fees)~~
~~Dried distillers grains average price per ton~~		~~$96.88~~ ~~(after freight, before marketing fees)~~
~~Modified distillers grains average price per ton~~		~~$44.15~~ ~~(before marketing fees)~~
~~Average corn costs per bushel~~		~~$3.38~~

Additional Data	Three Months Ended January 31, 2011 (Unaudited)		Three Months Ended January 31, 2010 (Unaudited)
Ethanol sold (gallons)	14,578,000		13,315,000
Dried distillers grains sold (tons)	37,000		34,000
Modified distillers grains sold (tons)	2,000		2,500
Ethanol average price per gallon	$	2.15	$	1.85
Dried distillers grains average price per ton	$	151.44	$	110.42
Modified distillers grains average price per ton	$	53.88	$	38.12
Average corn costs per bushel	$	5.49	$	3.54

Revenues

Our total revenues ~~are derived from~~were higher for our first quarter of 2011 compared to the ~~sale of our~~same period in 2010, primarily due to increased sales and prices for ethanol and distillers grains. For the three month period ended January 31, 2011, ethanol sales accounted for approximately 85.39% of our total revenue and distillers grains sales accounted for approximately 14.61% of our total revenue. For the three month period ended January 31, 2010, ethanol sales accounted for approximately 86.58% of our total revenue and distillers grains sales accounted for approximately 13.42% of our total revenue.

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Management believes that distillers grains represent a larger portion of our revenues during the three months ended January 31, 2011 compared to the same period of 2010 as a result of the higher distillers grains prices we received. Management believes these higher distillers grains prices are a result of the high price of other feed products available to livestock producers.

We experienced an increase in the gallons of ethanol sold in the three month period ended ~~July~~January 31, ~~2010~~2011 as compared to ~~the three month period ended April 30, 2010 and~~ the three month period ended January 31, 2010. We sold ~~13,879,000~~14,578,000 gallons of ethanol during the three month period ended ~~July~~January 31, ~~2010~~2011 compared to ~~13,622,000 gallons and~~ 13,315,000 gallons for the three months ended ~~April 30, 2010 and~~ January 31, ~~2010, respectfully. The~~2010. During the three months ended January 31, 2011, the Company had ~~total~~revenues from the sale of ethanol of approximately $30,970,000 compared to revenues of approximately

~~Table~~ $24,013,000 from the sale of ~~Contents~~

~~$23,692,000~~ethanol for the three months ended ~~July~~January 31, ~~2010, compared to total revenues~~2010. The average ethanol sales price we received for the three month period ended January 31, 2011 was approximately 16.21% higher than the average price we received for the same period of ~~approximately $23,221,000~~2010. For the three month period ended January 31, 2011, the Company received an average price of $2.15 per gallon of ethanol sold. In comparison, the Company received an average price of $1.85 per gallon of ethanol sold for the three months ended ~~April 30, 2010~~January 31, 2010. Management attributes this increase in the average price we received for our ethanol with higher corn and ~~total~~energy prices along with increased ethanol exports to Europe which positively impacted ethanol demand during the three month period ended January 31, 2011. Recent geopolitical events in northern Africa and the Middle East have caused significant uncertainty about the global supply of crude oil and other petroleum based products. Management anticipates that the price of ethanol will continue to be volatile during our 2011 fiscal year as a result of these factors. Since the end of our fiscal quarter on January 31, 2011, ethanol prices have increased.

The Company received revenues from the sale of its dried distillers grains of approximately $5,300,000 (after freight and marketing fees) for the three months ended January 31, 2011, compared to revenues of approximately ~~$27,735,000~~$3,722,000 for the three months ended January 31, 2010. For the three months ended ~~July~~January 31, ~~2010, ethanol sales comprised approximately 85.50% of our revenues and distillers grains sales comprised approximately 14.50% percent of our revenues.~~

~~During~~2011, the current fiscal year, ethanol prices were the highest in November 2009. Management attributes the subsequent decreasing trend in ethanol prices to increased production of ethanol and steady demand. The Company received an average price of ~~$1.85 and $1.46 (before~~$151.44 (after freight but before marketing fees) per ~~gallon~~ton for the approximately 37,000 tons of ~~ethanol~~dried distillers grains sold. In comparison, the Company received an average price of $110.42 (after freight but before marketing fees) per ton for approximately 34,000 tons of dried distillers grains sold for the three months ended January 31, 2010. Management attributes this increase in dried distillers grains prices during the three months ended January 31, ~~2010~~2011 with higher corn prices and ~~April 30, 2010 respectively, compared to an average price of $1.48 (before marketing fees) per gallon of ethanol sold during the three months ended July 31, 2010. Increased ethanol~~increased export demand for dried distillers grains. Generally, as corn prices ~~during the last calendar quarter of 2009 allowed the ethanol industry to realize more favorable margins, resulting in many plants in the industry reporting~~increase, distillers grains prices also increase since distillers grains are typically used as a profit during that time period. Management believes the increased margins led some idled ethanol plants to again commence production, which resulted in an increased supply of ethanol thereby decreasing the price of ethanol. During the three months ended July 31, 2010, the Company had revenues from the sale of ethanol of approximately $20,288,000 compared to revenues of approximately $19,671,000feed substitute for ~~the three months ended April 30, 2010 and revenues of approximately $24,385,000 from the sale of ethanol for the three months ended January 31, 2010.~~

corn. Management anticipates that distillers grains prices will continue to increase because of the recent increases in corn prices. However, in the event China ceases importing distillers grains from the United States, we may experience excess supply of distillers grains in the market. While we do not export a significant amount of distillers grains to China, management believes that changes in China’s imports of distillers grains may affect the market price of ~~ethanol may be stronger during the fourth fiscal quarter of our 2010 fiscal year as a result of slowly improving worldwide economics and continued strength~~distillers grains in the sugar market resulting in less ethanol production in Brazil. Additionally, if the EPA allows E15 for use in standard vehicles management believes it could positively impact ethanol demand and ethanol prices during our 2010 fiscal year. Conversely, ethanol prices could decrease if additional ethanol supply capacity enters the market without corresponding increases in ethanol demand. This could result if the EPA does not implement an increase in the ethanol blend rate and the ethanol industry reaches the blending wall of approximately 13.5 billion gallons of ethanol during our 2010 fiscal year.United States.

Management also anticipates that our results of operations for our ~~2010~~2011 fiscal year may be affected by high corn prices, a surplus of ethanol, and volatility in the commodity markets. If plant operating margins remain low for an extended period of time, management anticipates that this could significantly impact our liquidity, especially if our raw material costs increase. Management believes the industry will need to continue to grow demand and further develop an ethanol distribution system to facilitate additional blending of ethanol and gasoline to offset the increased supply brought to the marketplace by additional production. Going forward, we are optimistic that ethanol demand will continue to grow and ethanol distribution will continue to expand as a result of the positive blend economics that currently exist once ~~VEETC~~the Volumetric Ethanol Excise Tax Credit (“VEETC”) is accounted for by the gasoline refiners and blenders. However, if VEETC is not renewed or if it is repealed, it likely would have a negative impact on the price of ethanol and demand for ethanol in the marketplace.

The Company received revenues from the sale of its dried distillers grains of approximately $3,404,000 (after freight and marketing fees) for the three months ended July 31, 2010, compared to revenues of approximately $3,457,000 for the three months ended April 30, 2010 and revenues of approximately $3,253,000 for the three months ended January 31, 2010. For the three months ended July 31, 2010, the Company received an average price of $96.88 (after freight but before marketing fees) per ton for the approximately 35,000 tons of dried distillers grains sold resulting in revenues of approximately $3,391,000 (before deducting marketing fees). In comparison, the Company received an average price of $95.12 (after freight but before marketing fees) per ton for approximately 37,000 tons of dried distillers grains sold resulting in revenues of approximately $3,532,000 (before deducting marketing fees) for the three months ended April 30, 2010 and an average price of $98.88 (after freight but before marketing fees) per ton for approximately 34,000 tons of dried distillers grains sold resulting in revenues of approximately $3,332,000 (before deducting marketing fees) for the three months ended January 31, 2010. Management believes that distillers grains prices will largely depend on corn and soybean prices. If we experience significant decreases in corn and soybean prices, management anticipates that distillers grains prices will similarly decrease. Recently, distillers grains prices have been decreasing. Management believes these lower distillers grains prices are a result of an abundant supply of feed product available to livestock producers and continued economic distress in the livestock and dairy industries resulting in reduced animal numbers.

Cost of Goods Sold

Our costs of goods sold as a percentage of revenues were approximately ~~94.7%~~94.25% for the three months ended ~~July~~January 31, ~~2010~~2011 compared to ~~101.2%~~84.76% for the three months ended ~~April 30, 2010 and 83.44%~~January 31, 2010. Our two largest costs of production are corn (79.57% of cost of goods sold for the three months ended January 31, 2011) and natural gas (5.88% of cost of goods sold for the three months ended January 31, 2011). Our cost of goods sold increased to approximately $34,185,000 for the three months ended January 31, 2011 from approximately $23,508,000 in the three months ended January 31, 2010.

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January 31, 2010. Our two largest costs of production are corn (73.59% of cost of goods sold for the three months ended July 31, 2010) and natural gas (8.45% of cost of goods sold for the three months ended July 31, 2010).

For the three months ended ~~July~~January 31, ~~2010,~~2011, the Company paid an average price for corn of ~~$3.38~~$5.49 per bushel, compared to an average price of ~~$3.39 per bushel for the three months ended April 30, 2010 and an average price of $3.59~~$3.54 per bushel for the three months ended January 31, 2010. Management anticipates that corn prices will remain ~~steady for the next several months similar~~high throughout much of our 2011 fiscal year until we are assured of a large 2011 corn crop which would increase corn carryover. Should we experience an unfavorable growing season during 2011, we may continue to endure high corn prices through the rest of our 2011 fiscal year and beyond.

For the three month period ended January 31, 2011, we experienced ~~over the past few months but may~~a decrease ~~slightly during the Company’s fourth fiscal quarter if this year’s harvest is more normal than last year’s late harvest. Despite the June flooding~~ in the Midwest, the preliminary estimates by the USDA August 12, 2010 Crop Production report indicate that corn production is forecasted to produce the second largest corn crop in history at 12.3 billion bushels, which is down 6 percent from the record set in 2009, but up 17 percent from 2006. If demand for corn increases significantly, such as from improved global economic conditions or from increased ethanol production in the United States dueour overall natural gas costs compared to the ~~implementation~~same period of ~~a 15% ethanol blend, we could experience increased corn~~2010. We attribute this significant decrease in natural gas costs to improved efficiencies and lower natural gas prices. ~~Management does not anticipate having difficulty securing all the corn that it requires to operate the ethanol plant at capacity in the next 12 months.~~

Management anticipates that natural gas prices will be relatively stable in the next several months. However, should we experience a more robust economic recovery, it could increase demand for energy which could lead to increases in natural gas prices. Further, should we experience any natural gas supply disruptions, including disruptions from hurricane activity, this could result in significant increases in natural gas prices.

~~The Company may chose to~~We occasionally engage in hedging activities with respect to ~~corn, natural gas or denaturant in the future. In such instance, the Company would~~corn. We recognize the gains or losses that result from the changes in the value of ~~its~~our derivative instruments in cost of goods sold as the changes occur. As corn ~~natural gas and denaturant~~ prices fluctuate, the value of its derivative instruments would be impacted, which ~~affects~~effects would affect the Company’s financial performance. Any future use of hedging by the Company may result in the volatility in the Company’s cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Operating Expense

Our operating expenses as a percentage of revenues were ~~1.2%~~1.21% for the three months ended ~~July~~January 31, ~~2010,~~2011, compared to ~~2.0% for the three months ended April 30, 2010 and 3.46%~~2.06% for the three months ended January 31, 2010, as a result of the ethanol facility operating more efficiently. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. Management is pursuing strategies to optimize efficiencies and maximize production. These efforts may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses do not vary with the level of production at the plant, we expect our operating expenses to remain ~~steady.~~steady with first quarter 2011 levels.

Operating ~~Profit~~Income

We had a profit from operations for the three months ended ~~July~~January 31, ~~2010,~~2011, of approximately ~~4.1%~~4.54% of our ~~revenues.~~revenues compared to 13.09% for the three months ended January 31, 2010. For the three months ended ~~July~~January 31, ~~2010,~~2011, we reported an operating profit of approximately ~~$963,000, for the three months ended April 30, 2010, we reported an operating loss of approximately $728,000~~$1,647,000, and for the three months ended January 31, 2010, we reported an operating profit of approximately ~~$3,631,000. Our~~$3,656,000. This decrease in operating ~~profit for~~income is primarily due to escalating corn prices that outpaced the ~~three months ended July 31, 2010 was the net result of our revenues exceeding our costs of goods sold~~rising ethanol and ~~our operating expenses, as a result of an increase in revenues as the result of a slight increase in the average price per gallon of ethanol.~~distillers grains revenues.

Other Income (Expense)

We had total other expense (net) for the three months ended ~~July~~January 31, ~~2010,~~2011, of approximately ~~$1,603,000~~$602,000 compared to other expense (net) of approximately ~~$1,183,000 for the three months ended April 30, 2010 and approximately $1,147,000~~$1,172,000 for the three months ended January 31, 2010. Our other expense for the three months ended ~~July~~January 31, ~~2010,~~2011, consisted primarily of interest ~~expense. During~~expense offset by derivative instrument gains. The net decrease in other expense is due to the increase in the gain on derivative instrument for the three months ~~ending July~~ended January 31, ~~2010, the~~

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interest rate swap liability incurred a market interest rate decrease. The decrease in interest rates resulted in a loss of approximately $456,000 due to the fair value of the derivative liability increasing.

~~Results of Operations for the Nine Months Ended July 31, 2010~~

Our plant did not become operational until August 2009. Accordingly, we do not yet have comparable income, production and sales data for the nine months ended July 31, 2010, from the nine months ended July 31, 2009, because we were not generating revenue for the nine months ended July 31, 2009. Consequently we do not provide a comparison of our financial results between reporting periods in this report. If you undertake your own comparison of our results for the nine months ended July 31, 2010, and the nine months ended July 31, 2009, it is important that you keep this in mind.

The following table shows the result of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the nine months ended July 31, 2010.

Nine Months
Ended July 31, 2010
(Unaudited)

Statement of Operations Data

Amount

Percent

Revenues

$
74,647,203

100.00
%

Cost of Goods Sold

69,073,711

92.5
%

Gross Profit

5,573,492

7.5
%

Operating Expenses

1,707,708

2.3
%

Operating Profit

3,865,784

5.2
%

Other Expense, net

(3,933,645
)
(5.3
)%

Net Loss

$
(67,861
)
(0.1
)%

~~Revenues~~

Our revenues are derived from the sale of our ethanol and distillers grains. For the nine months ended July 31, 2010, ethanol sales comprised approximately 86.07 percent of our revenues and distillers grains sales comprised approximately 13.93 percent of our revenues.

~~Cost of Goods Sold~~

~~Our costs of goods sold as a percentage of revenues were approximately 92.5% for the~~ nine months ended July 31, 2010. Our two largest costs of production are corn (73.31% of cost of goods sold for the nine months ended July 31, 2010) and natural gas (9.30% of cost of goods sold for the nine months ended July 31, 2010).

~~Operating Expense~~

Our operating expenses as a percentage of revenues were 2.3% for the nine months ended July 31, 2010. We experienced a significant increase in our operating expenses for the nine months ended July 31, 2010,2011 compared to the same period of 2009 primarily due to an increase in the number of employees employed as a result of our plant becoming fully operational. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. Management is pursuing strategies to optimize

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~~efficiencies and maximize production. These efforts may result in a decrease in our operating expenses on a per gallon basis. However,~~2010 because ~~these expenses do not vary with the level of production at the plant, we expect our operating expenses to remain steady.~~

~~Operating Profit~~

Our profit from operations for the nine months ended July 31, 2010, was approximately 5.2% of our revenues compared to a loss for the same period of 2009. Our operating profit for the nine months ended July 31, 2010, was the net result of our revenues exceeding our costs of goods sold and our operating expenses.

~~Other Income (Expense)~~

We had total other expense (net) for the nine months ended July 31, 2010 of approximately $3,934,000 compared to other expense (net) of approximately $1,308,500 for the same period of 2009. Our other expense for the nine months ended July 31, 2010, consisted primarily of interest expense. For the nine months ended July 31, 2009, interest expense was capitalized during the time we were constructing the plant and therefore, it consisted primarily of loss on derivative instrument. During the third quarter of 2010, the interest rate swap liability incurred a market interest rate decrease. The decrease in interest rates resulted in a loss of approximately $406,000 due to the fair value of the ~~derivative liability increasing.~~underlying variable rate increasing from October 31, 2010.

Changes in Financial Condition for the ~~Nine~~Three Months Ended ~~July~~January 31, ~~2010~~2011

The following table highlights the changes in our financial condition for the ~~nine~~three months ended ~~July~~January 31, ~~2010~~2011 from our previous fiscal year ended October 31, ~~2009:~~2010:

	July 31, 2010		October 31, 2009
	(unaudited)				January 31, 2011 (unaudited)		October 31, 2010*
Current Assets	$	10,879,618	$	8,956,961	$	16,054,821	$	13,940,788
Current Liabilities	69,852,650		7,818,927		10,709,047		10,252,887
Long-Term Debt	0		62,712,332		55,970,003		56,439,317
Members’ Equity	43,148,311		43,193,168		46,986,175		45,971,678

* Derived from audited financial statements

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Total and Current Assets. Total assets were approximately ~~$113,001,000~~$115,048,000 at ~~July~~January 31, ~~2010,~~2011, compared to approximately ~~$115,288,000~~$114,451,000 at October 31, ~~2009.~~2010. Current assets at ~~July~~January 31, ~~2010,~~2011, increased from October 31, ~~2009~~2010 as a result of an increase in our cash on hand due to improved conditions in the ethanol market ~~and~~as well as the $1,500,000 drawn on our line of credit. Also, we experienced an increase in our ~~restricted cash due to the deposit~~accounts receivables primarily because of the ~~remainder~~higher ethanol and distillers grains prices as of ~~our construction loan funds. Additionally, we experienced an increase of approximately $627,000 in the~~January 31, 2011.

Property and Equipment. The net value of our ~~inventory~~property and equipment was lower at ~~July~~January 31, ~~2010 as~~2011 compared to October 31, ~~2009.~~2010 as a result of depreciation taken on our operating assets during the period.

Current Liabilities. ~~At July~~Total current liabilities increased and totaled approximately $10,709,000 at January 31, ~~2010, the Company was out of compliance with certain financial covenant requirement provisions of its construction loan agreement with its primary lender. The Company~~2011 and ~~its primary lender continue to cooperate and participate in discussions regarding the forbearance of the covenant violations of the construction loan agreement.~~$10,253,000 at October 31, 2010. As of ~~the date~~January 31, 2011 we had drawn $1,500,000 on our line of ~~this report the Company and its primary lender have discussed terms and conditions~~credit. Additionally, current maturities of ~~a potential agreement, however the parties have not yet signed a final agreement relating~~long-term debt included $3,000,000 reclassified from long-term debt due to the ~~forbearance or modification of~~prepayment on the financial covenants. As a result of a final agreement not yet being executed, the Company has reclassified the long-term debt related to the construction loan agreement as well as the capital lease agreement as current maturities. As a result, our total current liabilities at July 31, 2010 were much larger as compared to October 31, 2009, as a result of the classification our long-term debt as current maturities.Long-Term Revolving Note made in February 2011.

Long-term Liabilities. Long-term debt decreased from approximately ~~$62,712,000~~$56,439,000 at October 31, ~~2009,~~2010, to approximately $0$55,970,000 at ~~July~~January 31, ~~2010,~~2011, primarily because we continue to pay down our loans with FNBO and have reclassified $3,000,000 to current liabilities due to the ~~reclassification of our long-term debt as current maturities.~~prepayment on the Long-Term Revolving Note made in February 2011.

Liability and Capital Resources

Our primary ~~source~~sources of liquidity include: (1) cash, (2) Long-Term Revolving Note, and (3) line of ~~credit, which are discussed in greater detail below.~~ credit. On January 31, 2011 we amended our Construction Loan Agreement with First National Bank of Omaha of Omaha, Nebraska as administrative agent and collateral agent for the banks (collectively referred to as “FNBO”). For a description of the modifications to our loan documents see below “Modifications to Loan Documents”.

Based on financial forecasts performed by our management, we anticipate that

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we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months. However, as discussed in greater detail below the Company was out of compliance with certain financial covenant requirement provisions of its loan agreement with its primary lender. Even though the Company has always been and remains current on principal and interest payments to its primary lender, pursuant to the terms of the loan agreement, the primary lender does In addition, we have the right to accelerate the maturity of the debt outstanding. In the event our primary lender exercised its right to accelerate the maturity of the debt outstanding under the loan agreements, the Company would not have adequate available cash to repay the amounts currently outstanding. The Company and its primary lender are diligently working together to modify the loan agreement and the Company remains current on principal and interest payments to the primary lender and U.S. Bank, as well as all vendors and suppliers. We did not have any amount outstanding on oura revolving line of credit with maximum available funds up to $5,000,000. We had $1,500,000 drawn on this credit facility as of ~~July~~January 31, ~~2010,~~2011 and $3,500,000 available.

We do not currently anticipate seeking additional equity or debt financing in the near term. However, should we ~~had more than $3,111,000~~experience unfavorable operating conditions in ~~cash and cash equivalents as of July 31, 2010.~~the future, we may have to secure additional debt or equity financing for working capital or other purposes.

We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital resources in the next 12 months. However, management is currently installing an equalization tank in order to enhance the Company’s water treatment center. This capital addition is expected to amount to $400,000, of which $351,000 has already been incurred. Management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations, which may require more capital expenditures.

Additionally, in connection with the Company’s non-compliance with certain financial covenant requirement provisions of its construction loan agreement with its primary lender, the Company and its primary lender continue to participate in discussions regarding the forbearance of covenant violations as well as possible modifications to the construction loan agreement. One of the potential modifications being discussed is the immediate pre-payment of the Long-Term Revolving Note. The pre-payment of the Long-Term Revolving Note may be accomplished utilizing the Company’s cash on hand and/or additional capital resources secured by the Company.

The following table shows cash flows for the ~~nine~~three months ended ~~July~~January 31, ~~2010~~2011 and ~~2009:~~2010:

	Nine Months Ended July 31						Three Months Ended January
	2010			2009			2011			2010
Net cash provided by (used in) operating activities	$	4,998,235		$	(1,910,387	)
Net cash provided by operating activities							$	1,556,505		$	3,850,992
Net cash used in investing activities	(1,256,130		)	(45,019,895		)	(380,855		)	(596,483		)
Net cash provided by (used in) financing activities	(2,520,452		)	47,133,228			601,335			(1,000,000		)

Cash Flow From Operations

We experienced a ~~significant change~~decrease of approximately $2,294,000 in our cash flows from operations for the ~~nine~~three month period ended ~~July~~January 31, ~~2010,~~2011, compared to the same period in ~~2009.~~2010. This ~~change is related~~decrease was due to decreased net income primarily driven by increased prices for corn during the 2011 period as well as a decrease in our ~~commencement~~working

Table of ~~operations at our ethanol facility in August 2009, which provided for non-cash depreciation and amortization expenses of approximately $4,896,000, and cash generated from lower working~~ Contents

capital ~~amounts.~~items. During the ~~nine~~three months ended ~~July~~January 31, ~~2010,~~2011, our capital needs were being adequately met through cash from our operating activities and our credit facilities.

Cash Flow From Investing Activities

We used ~~significantly~~ less cash for investing activities for the ~~nine~~three month period ended ~~July~~January 31, ~~2010,~~2011, as compared to ~~2009.~~2010. This decrease was primarily a result of the construction and completion of our ethanol plant during our 2009 fiscal year. During the nine months ended July 31, 2010, we paid approximately $1,245,000 to pay down our construction payables that were outstanding at October 31, 2009.reduced capital expenditures.

Cash Flow From Financing Activities

We ~~used~~had net cash ~~in our~~provided by financing activities induring our ~~nine~~three months ended ~~July~~January 31, ~~2010, to pay down~~2011, as a result of the $1,500,000 draw on our line of credit ~~and long-term debt as compared~~offset by cash paid to decrease the ~~same period in 2009 when we were receiving proceeds from long-term debt for the construction of~~principal balance on our ~~ethanol plant.~~

~~Table of Contents~~loans with FNBO by approximately $899,000.

Short-Term and Long-Term Debt Sources

On April 24, 2008, we entered into a Construction Loan Agreement (the “Agreement”) with ~~First National Bank of Omaha of Omaha, Nebraska (“FNBO”)~~FNBO for the purpose of funding a portion of the cost of the ethanol plant. Under the Agreement, FNBO agreed to loan us up to $61,000,000, consisting of a $50,400,000 Construction Loan, together with a $5,000,000 Revolving Loan, and $5,600,000 to support the issuance of letters of credit by FNBO. As of ~~July~~January 31, ~~2010,~~2011, the Company had issued ~~$4,950,000~~$4,250,000 in letters of credit.

With construction complete and the ethanol plant commencing operations, the construction loan converted on February 26, 2010 to a $25,200,000 Fixed Rate Note, a $20,200,000 Variable Rate Note, a $5,000,000 Long-Term Revolving Note, and a $5,000,000 line of credit.

Modifications to Loan Documents

On January 31, 2011 we entered into a Third Amendment of Construction Loan Agreement with FNBO (“Third Amendment”). The ~~Company and~~Long-term Revolving Note was initially $5,000,000. Pursuant to the amended agreement, we paid $3,000,000 in February 2011 to FNBO as a principal prepayment of our Long-term Revolving Note. In addition, we have ~~been and continue~~agreed to ~~be engaged~~make an additional mandatory principal prepayment of not less than $750,000 on the Long-term Revolving Note on or before February 1, 2012, as well as an additional mandatory principal payment on or before February 1, 2013, in ~~cooperative discussions~~an amount sufficient to ~~forbear~~reduce the actual and probable covenant violations of the Agreement. Even though a formal agreement is not in place, the Company and FNBO have discussed terms and conditions of the prospective agreement. There is no assurance when any forbearance or amendment will be provided by FNBO. However, Management believes that the prospective forbearance agreement and modification of the Agreement, will allow the Company to be in compliance with the Agreement until loan maturity. Consequently, as discussed above, the Company has reclassified as current maturities theoutstanding principal balance of the ~~Fixed~~Long-term Revolving Note to $0. The maximum allowable principal balance outstanding on our Long-term Revolving Note has also been reduced to $4,500,000 and FNBO has no obligation to advance any additional funds on our Long-term Revolving Note and will only advance such funds as approved in its sole discretion. Furthermore, we have agreement to make no distributions without the prior consent of FNBO. For a complete description of the modifications to the Long-term Revolving Note see below “Long-term Revolving Note”. Our Variable Rate Note will now have a minimum interest rate floor of 5% and we will make monthly interest payments. In addition, we will make quarterly fifty percent (50%) excess cash flow payments, with a maximum annual reduction of $750,000, which will be applied first to interest, then to principal on the Variable Rate Note and ~~Long-Term~~then, if there is still a balance, to the Long-term Revolving Note ~~payable~~described below under “Variable Rate Note”. The amendment also modifies the minimum working capital, minimum tangible net worth, fixed coverage charge and leverage ratios contained in the loan documents as described below under “Covenants and other Miscellaneous Financing Agreement Terms”. Additionally, FNBO also granted a waiver regarding the violations of the fixed coverage ratio and the leverage ratio financial covenants when tested on July 31, 2010, as well as ~~amounts owed under~~ the ~~capital lease agreement~~minimum net worth financial covenant when tested on October 31, 2010. We are currently in compliance with ~~U.S. Bank. The Company has been and continues to be current on all payments~~our financial loan covenants as modified.

Effective February 26, 2011 we entered into a Fourth Amendment of Construction Loan Agreement with FNBO ~~its vendors~~(“Fourth Amendment”). Pursuant to the Fourth Amendment, a portion of our line of credit will terminate on June 30, 2011 with the remainder terminating on August 28, 2011. We have agreed to pay such amounts as are necessary to fully pay the outstanding principal balance and ~~its suppliers.~~accrued and unpaid interest on the portion of the line of credit terminating on June 30, 2011. Also, on June 30, 2011, the maximum principal amount of the line of credit will be reduced by approximately $948,000.

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Fixed Rate Note

The Fixed Rate Note was initially for $25,200,000 with a variable interest rate that is fixed with an interest rate swap. We commenced making monthly principal payments on the Fixed Rate Note initially for approximately $145,000 plus accrued interest in March 2010. Interest will accrue on the Fixed Rate Note at the greater of the one-month LIBOR Rate, in effect from time to time, plus 300 basis points or 4%. The applicable interest rate was 4% at ~~July~~January 31, ~~2010.~~2011. However, the Company entered into an interest rate swap agreement with FNBO, which fixes the interest rate on the Fixed Rate Note at 7.6% until June 2014. The Company entered into the fixed rate swap agreement to alter its exposure to the impact of changing interest rates on its results of operations and future cash outflows for interest. A final balloon payment on the Fixed Rate Note of approximately ~~$15,184,000~~$15,188,000 will be due February 26, 2015.

Variable Rate Note

The Variable Rate Note was initially for $20,200,000. As part of our loan modifications with FNBO approximately $336,000 from the Long-term Revolving Note was added to the principal balance of the Variable Rate Note. We commenced making monthly payments initially for approximately $147,000 plus accrued interest in March 2010. As part of the Third Amendment, the Variable Rate Note was modified to monthly interest only payments and we will remit quarterly excess cash flow payments to FNBO which will be applied first to interest and then to principal on the Variable Rate Note with a minimum annual principal reduction of $750,000.

Interest will accrue on the Variable Rate Note at the greater of the one-month LIBOR rate plus 350 basis points or 4%5%. The applicable interest rate at ~~July~~January 31, ~~2010~~2011, was 4%5%. A final balloon payment of approximately ~~$14,807,000~~$15,306,000 will be due February 26, 2015.

Long-term Revolving Note

The Long-term Revolving Note was initially for $5,000,000. ~~The amount available~~As part of the Third Amendment, in February 2011 we prepaid $3,000,000 on the Long-term Revolving Note. On or before February 1, 2012, we will remit an additional mandatory principal prepayment on the Long-term Revolving Note in an amount not less than $750,000. On or before February 1, 2013, we will ~~decline annually by~~make another additional mandatory principal prepayment on the ~~greater of $125,000 or 50%~~Long-term Revolving Note in an amount sufficient to reduce the outstanding principal balance of the ~~excess cash flow,~~Long-term Revolving Note to $0. In addition, the commitment on the Long-term Revolving Note was reduced from $5,000,000 to $4,500,000. FNBO has no obligation to advance any additional funds and will only advance such sums as ~~defined by~~approved in its sole discretion. Also, approximately $336,000 of the ~~agreement.~~ Long-term Revolving Note balance was transferred to the Variable Rate Note.

The Long-term Revolving Note will accrue interest monthly at the greater of the one-month LIBOR plus 350 basis points, or 4% until ~~maturity~~it is paid off on or before February ~~26, 2015.~~1, 2013. The applicable interest rate at ~~July~~October 31, 2010 was 4%.

Line of Credit

The Company has a line of credit available equal to the amount of the Company’s Borrowing Base, with a maximum limit of $5,000,000. The Company’s Borrowing Base will vary and may at times be less than $5,000,000. The Company has maximum availability of ~~$3,768,000~~$3,500,000 under the line of credit at ~~July~~January 31, ~~2010.~~2011. The Company’s line of credit accrues interest at the greater of the 90-day LIBOR plus 450 basis points or 5.5%, which was 5.5% at ~~July~~January 31, ~~2010.~~2011. The line of credit requires monthly interest payments. ~~In February 2010, Highwater signed an~~

25The Company signed an amendment to the Construction Loan Agreement to extend approximately $948,000 of the line of credit to June 30, 2011 and $4,052,000 to August 28, 2011. We have agreed to pay such amounts as are necessary to fully pay the outstanding principal balance and accrued and unpaid interest on the portion of the line of credit terminating on June 30, 2011. Also, on June 30, 2011, the maximum principal amount of the line of credit will be reduced by approximately $948,000. As of January 31, 2011, there was $1,500,000 outstanding.

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~~amendment to the Construction Loan Agreement to extend the maturity date of the line of credit to February 26, 2011. As of July 31, 2010, there are no borrowings outstanding.~~

Covenants and other Miscellaneous Financing Agreement Terms

The Company is required to make additional payments on debt for up to 50% of the excess cash flow, as defined by the bank financing agreement which is measured annually. As part of the bank financing agreement, the premium above LIBOR on the loans may be reduced based on a financial ratio. The loan agreements are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements.

~~The Company is~~ On January 31, 2011 we amended our Construction Loan Agreement with FNBO. Pursuant to the amendment agreements we are required to maintain ~~at all times~~ working capital of not less than ~~$3,000,000.~~$6,000,000 measured quarterly beginning in May 2011. Additionally, ~~we are limited to annual~~the amount available on the Long-term Revolving Note will be included in the working capital ~~expenditures~~covenant calculation.

Also, as part of $1,000,000 without prior approval of FNBO. We will also be prohibited from making distributions to our members of greater than 45% of our net income during any fiscal year if our interest coverage ratio (combined total liabilities to net worth) is greater than or equal to 1.1:1.0. Also,the Third Amendment, the Company must maintain a fixed charge coverage ratio (earnings before interest, taxes, depreciation and amortization less taxes, less capital expenditures and less tax distributions and other permitted distributions plus the maximum availability on the Long-term Revolving Note compared to scheduled payments on the principal and interest of the construction loans, excluding any principal repaid on the Revolving Loan and Long-Term Revolving ~~Note)~~Note and excluding the negative termination value of swap contracts) of no less than ~~1.25:~~1.10:1.0. ~~The~~As part of the Third Amendment, the Company shall maintain a net worth (total assets less total liabilities and intangible assets) of not less than ~~$44,775,000~~$41,250,000 measured ~~annually.~~annually which shall increase each fiscal year by an amount equal to the greater of $250,000 or the amount of undistributed earnings accumulated during the fiscal year just ended (less any allowable distributions attributable to the just ended fiscal year’s earnings). The Company shall maintain a maximum leverage ratio (tangible book equity to total liabilities) of no greater than 1.65.

The financial covenant conditions ~~under~~approved as part of the ~~Agreement as of July 31, 2010~~Third Amendment are as follows:

Covenant Type

Compliance Dates

Covenant Requirements

Calculation as of
July 31, 2010

Compliance Dates

Covenant Requirements

Fixed Charge Coverage

Quarterly

No less than 1.25:1.00

0.88

Quarterly

No less than 1.10:1.00

Net Worth

Annually

$44,775,000

$41,592,000

Annually

41,250,000

Working Capital

Quarterly

No less than $3,000,000

$3,225,000

Quarterly

No less than $6,000,000

Maximum Leverage

Quarterly

No greater than 1.65:1.00

1.74

Quarterly

No greater than 1.65:1.00

* ~~Requirement as of October 31, 2010, net of any intangible costs including debt issuance costs of approximately $1,515,000 and receivables from members of approximately $41,000.~~

~~# Working Capital calculation is before reclassification of long-term debt to current liabilities~~

~~As of July 31, 2010, we failed to meet our fixed coverage charge and maximum leverage worth ratios. Additionally, due~~The Net Worth covenant requirement will be increased each fiscal year by an amount equal to the ~~nature~~greater of $250,000 or the ~~industry, there is a risk that we may be out~~amount of compliance with certain additional covenants when they are measured in subsequent periods. In particular, the Company anticipates being out of compliance with the working capital and net worth covenants as ofundistributed earnings accumulated during the fiscal year ~~end October 31, 2010. Management~~just ended (less any allowable distributions attributable to the just ended fiscal year’s earnings.

#The minimum Working Capital covenant requirement of $6,000,000 will commence on May 1, 2011. Until that time, the minimum Working Capital covenant requirement is currently in discussion with FNBO regarding the forbearance of the covenant violations of the Agreement, as well as possible modifications to future covenant requirements. Current discussions include modification of the compliance thresholds for financial covenants, revision of scheduled maturities to interest only through maturity for a portion of the debt, an increase of the quarterly excess cash flow sweep and an immediate pre-payment of the Long-Term Revolving Note. There is no assurance, however, when the forbearance or modifications will be provided by FNBO or that the Company will be able to comply with future financial covenants and obligations of the Agreement. However, Management believes that the prospective forbearance and loan covenant modification agreement will allow the Company to remain in compliance with its revised financial covenants in the future.$4,500,000.

~~Our failure~~Additionally, we are limited to ~~comply with~~annual capital expenditures of $1,000,000 without prior approval of FNBO. We will also be prohibited from making distributions to our members without the protective loan covenants or maintain the required financial ratios allows FNBO to exercise its rights and remedies under the Agreement. The Company continues to work diligently with FNBO to modify the Agreement and remains current on principal and interest payments with FNBO, as well as all vendors and suppliers.prior approval of FNBO.

In connection with the bank financing agreement, we executed a mortgage in favor of FNBO creating a first lien on our real estate and plant and a security interest in all personal property located on the property. In addition, we

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assigned in favor of FNBO, all rents and leases to our property, our marketing contracts, our risk management services contract, and our natural gas, electricity, water service and grain procurement agreements.

We will continue to work with our lenders to try to ensure that the terms of our loan agreements are met going forward. However, we cannot provide any assurance that our actions will result in sustained profitable operations or that we will not be in violation of our loan covenants or in default on our principal payments in the future. Presently, we are meeting our liquidity needs and complying with our financial covenants and the other terms of our loan agreements as modified. Should unfavorable market conditions result in our violation of the terms or covenants of our loan and we fail to obtain a waiver of any such term or covenant, our primary lender could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans. In the event of a default, our lender could also elect to proceed with a foreclosure action on our plant.

Capital Lease

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proceeds from the sale of the solid waste facilities revenue bonds, Series 2008A (the “Bonds”) issued by the City in the aggregate principal amount of $15,180,000 pursuant to a trust indenture between the City and the Trustee (“Trust Indenture”). The City has undertaken the issuance of the Bonds to finance the acquisition and installation of certain solid waste facilities in connection with our ethanol plant to be located near Lamberton, Minnesota. Highwater received proceeds of approximately $14,876,000, after financing costs of approximately $304,000. The remaining proceeds were held as restricted cash or marketable securities based on anticipated use and are split between a project fund of approximately $11,527,000, a capitalized interest fund of approximately $1,831,000, and a debt service reserve fund of approximately $1,518,000. The Bonds mature on December 1, 2022 and bear interest at a rate of 8.5%.

Under this equipment lease agreement with the City, we started making interest payments on November 25, 2008 and monthly thereafter at an implicit interest rate of 8.5%. The monthly capital lease interest payments correspond to 1/6 the semi-annual interest payments due on the Bonds on the next interest payment date. Monthly capital lease payments for principal were originally scheduled to begin on November 25, 2009; however, the City amended the agreement in September 2008 which adjusted the start date for principal payments to begin on November 25, 2014. These payments will equal 1/12 the annual principal payments scheduled to become due on the corresponding bonds on the next principal payment date.

The Company has guaranteed that if such assessed lease payments are not sufficient for the required bond payments, the Company will provide such funds as are needed to fund the shortfall. The lease agreement is secured by substantially all business assets of the Company and is also subject to various financial and non-financial covenants that limit distributions and leverage and require minimum debt service coverage, net worth, and working-capital requirements.

Pursuant to the terms of the Company’s lease arrangements with the City and U.S. Bank any violation of the Company’s financings agreements with FNBO results in a violation of the Company’s lease arrangements with the City and U.S. Bank. Therefore, as a result of the Company’s non-compliance with the loan covenants as discussed above, the Company is not in compliance with the terms of its financing arrangements with the City and U.S. Bank. The Company has reclassified the capital lease to current liabilities as U.S. Bank also has the right to exercise all rights and remedies available pursuant to the terms of its agreements as a result of the default with FNBO. The Company has made and continues to make all of its scheduled payments to U.S. Bank.

Compliance with Environmental Law

We are subject to extensive air, water and other environmental regulations and we ~~have been~~were required to obtain a number of environmental permits to construct and operate the ethanol ~~facility. As~~plant. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations. Additionally, any changes that are made to the ethanol ~~facility~~plant or its operations must be reviewed to determine if amended permits need to be obtained in order to implement these changes.

The National Pollutant Discharge Elimination System/State Disposal System (NPDES/SDS) permit, which regulates the water treatment, water disposal and stormwater systems at the ~~ethanol~~ facility, requires renewal every five years. We will be required to submit a renewal application to the Minnesota Pollution Control Agency (“MPCA”) in 2012. The Company has retained Mike Valentine & Associates and Barr Engineering to prepare the Company’s permits for renewal in May 2012. The Company anticipates submitting the renewal requests in 2011.

On December 9, 2009, we received a Notice of Violation from the MPCA notifying us of alleged water treatment permit violations discovered by the MPCA staff during an inspection in September 2009. On December 29, 2009, we received a Notice of Violation from the MPCA notifying us of alleged air emission permit violations discovered by the MPCA staff during an inspection in September 2009. The Notices of Violation require us to take immediate corrective actions and provides us with an opportunity to respond to the alleged violations. We have responded to the MPCA’s Notices of Violation and are in the process of rectifying the environmental and permitting

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concerns of MPCA. We are currently negotiating with the MPCA regarding the Notices of Violation as management does not believe all of the alleged violations are warranted. As a result of our negotiations with the MPCA, the Company has installed an equalization tank in order to provide a constant flow into the clarifier. ~~However, management anticipates additional purchases to increase the efficiency of the water treatment plant may be necessary. Additionally, the Company may receive other sanctions from the MPCA.~~ Management believes that the Company will have enough money from operations to pay for any additional equipment or monetary fines.

Trends and Uncertainties Impacting the Ethanol and Distillers Grains Industries and Our Future Revenues

Our revenues primarily consist of sales of the ethanol and distillers grains we produce. The ethanol industry needs to continue to expand the market for ethanol and distillers grains in order to maintain current price levels. According to the Renewable Fuels Association (“RFA”), as of March 3, 2011, there were 204 ethanol plants nationwide with the capacity to produce approximately 14.1 billion gallons of ethanol annually. The RFA estimates that plants with an

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annual production capacity of approximately 13.5 billion gallons are currently operating and that approximately 4.25% of the nameplate production capacity is not currently operational. Management believes the production capacity of the ethanol industry is greater than ethanol demand which may continue to depress ethanol prices.

The ethanol industry is dependent on several economic incentives to produce ethanol, including federal tax incentives and ethanol use mandates. One significant federal ethanol support is the Renewable Fuels Standard (the “RFS”). The RFS requires that in each year, a certain amount of renewable fuels be utilized in the United States. The RFS requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. The RFS for 2011 is approximately 14 billion gallons, of which corn based ethanol can be used to satisfy approximately 12.6 billion gallons. Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” biofuels, which are alternative biofuels produced without using corn starch such as cellulosic ethanol and biomass-based biodiesel, with 21 billion gallons of the mandated 36 billion gallons of renewable fuel required to come from advanced biofuels by 2022. This requirement essentially caps the corn based ethanol volume at 15 billion gallons. Current ethanol production capacity exceeds the 2011 RFS requirement which can be satisfied by corn based ethanol.

In February 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% green house gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in green house gases, and cellulosic biofuels must accomplish a 60% reduction in green house gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of renewable fuel under the RFS program. Many in the ethanol industry are concerned that certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.

Many in the ethanol industry believe that it will be difficult to meet the RFS requirement in coming years without allowing higher percentage blends of ethanol to be used in conventional automobiles. Currently, ethanol is blended with conventional gasoline for use in standard vehicles to create a blend which is 10% ethanol and 90% gasoline. Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons per year. This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. Many in the ethanol industry believe that we will reach this blending wall in 2011, since the RFS requirement for 2011 is 14 billion gallons, much of which will come from ethanol. The RFS mandate requires that 36 billion gallons of renewable fuels be used each year by 2022 which equates to approximately 27% renewable fuels used per gallon of gasoline sold. In order to meet the RFS mandate and expand demand for ethanol, management believes higher percentage blends of ethanol must be utilized in conventional automobiles.

Such higher percentage blends of ethanol have continued to be a contentious issue. Recently, the EPA allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2007 and later as well as for cars and light duty trucks manufactured in the model years between 2001 and 2006. The EPA is considering instituting labeling requirements associated with E15 which may unfairly discourage consumers from purchasing E15. Additionally, according to EPA estimates, flex-fuel vehicles make up only 7.3 million of the 240 million vehicles on the nation’s roads and there are only about 2,000 E85 pumps in the United States. As a result, the approval of E15 may not significantly increase demand for ethanol. Two lawsuits were filed on November 9, 2010, by representatives of the food industry and the petroleum industry challenging the EPA’s approval of E15 for use in vehicles 2007 and newer. Representatives of the food industry and the petroleum industry filed lawsuits on March 11, 2011, challenging the EPA’s approval of E15 for use in vehicle models 2001 through 2006. It is unclear what effect these lawsuits will have on the implementation of E15 in the United States retail gasoline market. Additionally, members of both the United States House of Representatives and the United States Senate proposed legislation in February 2011 to prevent the EPA from implementing E15. While the initial legislation proposed as amendments to the Full Year Continuing Appropriations Act 2011 did not survive, recently proposed legislation has been approved by the House Energy and Power Subcommittee. It is unclear whether any legislation introduced will be enacted into law, however, if such legislation is enacted it likely would have a

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negative impact on the price of ethanol and demand for ethanol in the market.

In addition to the RFS, the ethanol industry depends on the Volumetric Ethanol Excise Tax Credit (“VEETC”). VEETC provides a volumetric tax credit of 4.5 cents per gallon of gasoline that contains at least 10% ethanol. VEETC was recently renewed until December 31, 2011. However, in March 2011, a bill was introduced into the United States Senate that would repeal VEETC. If this tax credit is repealed or if it is not renewed beyond December 31, 2011, it likely would have a negative impact on the price of ethanol and demand for ethanol in the market due to reduced discretionary blending of ethanol. However, due to the RFS, we anticipate that demand for ethanol will continue to mirror the RFS requirement, even if the VEETC is repealed or if it is not renewed past 2011. If the RFS is reduced or eliminated, the decrease in demand for ethanol related to the elimination of VEETC may be more substantial.

The USDA recently announced that it will provide financial assistance to help implement more “blender pumps” in the United States in order to increase demand for ethanol and to help offset the cost of introducing mid-level ethanol blends into the United States retail gasoline market. Blender pumps typically can dispense E10, E20, E30, E40, E 50 and E85. These blender pumps accomplish these different ethanol/gasoline blends by internally mixing ethanol and gasoline which are held in separate tanks at the retail gas stations. Many in the ethanol industry believe that increased use of blender pumps will increase demand for ethanol by allowing gasoline retailers to provide various mid-level ethanol blends in a cost effective manner and allowing consumers with flex-fuel vehicles to purchase more ethanol through these mid-level blends. However, blender pumps cost approximately $25,000 each, so it may take time before they become widely available in the retail gasoline market.

Effect of Governmental Regulation

The ethanol industry and our business depend upon the continuation of federal ethanol supports discussed above. These incentives have supported a market for ethanol that might disappear without the incentives. Alternatively, the incentives may be continued at lower levels. The elimination or reduction of such federal ethanol supports would likely reduce our net income and negatively impact our future financial performance.

The government’s regulation of the environment changes constantly. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. Furthermore, plant operations are governed by the Occupational Safety and Health Administration (“OSHA”). OSHA regulations may change such that the costs of operating the plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions effecting our operations, cash flows and financial performance.

In late 2009, California passed a Low Carbon Fuel Standard (“LCFS”). The California LCFS requires that renewable fuels in California must accomplish certain reductions in green house gases, which is measured using a lifecycle analysis, similar to RFS2. Management believes that this lifecycle analysis is based on unsound scientific principles that unfairly harms corn based ethanol. Management believes that these new regulations will preclude corn based ethanol from being used in California. California represents a significant ethanol demand market. If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce. Currently, several lawsuits have been filed challenging the California LCFS.

United States ethanol production is currently benefited by a 54 cent per gallon tariff imposed on ethanol imported into the United States. The 54 cent per gallon tariff was recently extended until December 31, 2011. If this tariff is eliminated, it could lead to the importation of ethanol produced in other countries, especially in areas of the United States that are easily accessible by international shipping ports. Ethanol imported from other countries may be a less expensive alternative to domestically produced ethanol and may affect our ability to sell our ethanol profitably.

Contracting Activity

We entered into a new member ethanol marketing agreement with RPMG in order to receive more favorable marketing fees offered by RPMG to its owners as well as to share in profits generated by RPMG. This new

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agreement was effective as of February 1, 2011.

We also entered into a Contribution Agreement and a Member Control Agreement with RPMG whereby we made a capital contribution and became a minority owner of RPMG which became effective as of February 1, 2011.

Critical Accounting Estimates

Management uses various estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:

Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which do not reflect unanticipated events and circumstances that may occur. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of carrying value of property and equipment to be a critical accounting estimate.

Inventory Valuation

We value our inventory at lower of cost or market. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or market on inventory to be a critical accounting estimate.

Derivatives

We are exposed to market risks from changes in interest rates, corn, natural gas, and ethanol prices. We may seek to minimize these commodity price fluctuation risks through the use of derivative instruments. In the event we utilize derivative instruments, we will attempt to link these instruments to financing plans, sales plans, market developments, and pricing activities, such instruments in and of themselves can result in additional costs due to unexpected directional price movements. Should we use derivative instruments in the future, we may incur such costs and they may be significant.

In April 2008, we entered into an interest fixed rate swap agreement, which is a derivative instrument, in order to manage our exposure to the impact of changing interest rates. The initial notional amount of the swap was $23,305,000. The interest rate swap fixes the interest rate on the notional amount at 7.6% until June 2014, even though variable interest rates may be less than this rate. The changes in the fair value of the interest rate swap are recorded currently in operations. As of ~~July~~January 31, ~~2010,~~2011, we had ~~liabilities~~a notional amount of approximately ~~$2,535,000 related to~~$22,366,000 outstanding in the ~~interest rate swap.~~swap agreement.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.

Item 4. Controls and Procedures.

~~Management of Highwater Ethanol is responsible for maintaining~~We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that ~~the Company files~~we file or ~~submits under~~submit pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and ~~forms. In addition, the disclosure controls~~forms, and ~~procedures must ensure~~ that such information is accumulated and communicated to ~~the Company’s~~our management, including ~~its~~our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required ~~financial and other required~~ disclosures.

Our management, including our Chief Executive Officer (the principal executive officer), Brian Kletscher, ~~(the Principal Executive Officer),~~ along with our Chief Financial Officer (the principal financial officer), Mark Peterson, ~~(the Principal Financial Officer),~~ have reviewed and evaluated the effectiveness of our disclosure controls and procedures ~~(as defined in Rule 13a — 15(e) under the Exchange Act~~as of ~~1934, as amended) as of~~ ~~July~~January 31, ~~2010.~~2011. Based upon this review and evaluation, these officers have concluded that our disclosure controls and procedures ~~were not effective. This was due~~are effective to ~~material weaknesses~~ensure that ~~existed as of October 31, 2009~~information required to be disclosed in the ~~design~~reports that we file or ~~operation~~submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our ~~internal control over~~management including our principal executive and principal financial ~~reporting that adversely affected our disclosure controls.~~officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Our management, including our ~~Principal Executive Officer~~principal executive officer and ~~Principal Financial Officer,~~principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred during the ~~fiscal~~ quarter ended ~~July~~January 31, ~~2010. Our management~~2011 and there has been no change that has materially affected or is in the process of addressing the above material weaknesses. The Company has implemented procedures in which the Chief Executive Officer and the Chief Financial Officer review all incoming correspondence as well as all new or renewal contracts. We are also developing a routing process for the proper distribution of information internally. Management has already implemented several key parts of its plan and intendsreasonably likely to have the program implemented by the end of fiscal 2010. However, the material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.materially affect our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

~~None.~~On December 9, 2009, we received a Notice of Violation from the MPCA notifying us of alleged water treatment permit violations discovered by the MPCA staff during an inspection in September 2009. On December 29, 2009, we received a Notice of Violation from the MPCA notifying us of alleged air emission permit violations discovered by the MPCA staff during an inspection in September 2009. The Notices of Violation require us to take immediate corrective actions and provides us with an opportunity to respond to the alleged violations. We have responded to the MPCA’s Notices of Violation and are in the process of rectifying the environmental and permitting concerns of MPCA.

We are currently negotiating a stipulation agreement, including possible monetary sanctions with the MPCA regarding the Notices of Violation as management does not believe all of the alleged violations are warranted.

Item 1A. Risk Factors.

The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factors set forth below should be read in conjunction with the ~~Risk Factors~~risk factors section and the Management’s Discussion and Analysis section for the fiscal year ended October 31, ~~2009,~~2010, included in our annual report on Form 10-K.

~~We have violated the terms of our credit agreements and financial covenants which could result in our lender demanding immediate repayment of our loans.~~ We have been involved in discussions with our primary lender, FNBO, regarding certain past and potential future non-compliance with our loan covenants that have resulted from our financial condition. As of July 31, 2010, we were not in compliance with the fixed charge coverage and maximum leverage requirements of the construction loan agreement with FNBO. Additionally, we anticipate being out of compliance with these and one or more additional covenants as of fiscal year end October 31, 2010. Accordingly, we requested a waiver of the maximum leverage and fixed charge coverage covenants contained in the construction loan agreement. We have also been working diligently with FNBO to modify the net worth covenant

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contained in the construction loan document as the Company does not anticipate being able to achieve compliance with the current net worth requirement. FNBO has indicated its willingness to work with us; however, there is no assurance as to when the forbearance or modifications will be provided by FNBO. FNBO has the right to demand immediate repayment, among other rights as a secured lender. If FNBO exercised its right to accelerate the maturity of the debt outstanding under the construction loan agreement, we would not have adequate available cash to repay the amounts currently outstanding.

Additionally, as we are not in compliance with our loan covenants for FNBO, we have also violated the terms of our capital lease agreement with U.S. Bank. U.S. Bank also has the right to demand immediate repayment, among other things as a secured lender. If U.S. Bank exercised its right to accelerate the maturity of the debt outstanding under the capital lease agreement, we would not have adequate available cash to repay the amounts currently outstanding.

If the ~~Federal Volumetric~~Small Ethanol ~~Excise~~Producer Tax Credit (“~~VEETC”~~SEPTC”) expires on December 31, ~~2010, it could negatively impact our profitability.~~ The ethanol industry is benefited by VEETC which is a federal excise tax credit of 45 cents per gallon of ethanol blended with gasoline at a rate of at least 10%. This excise tax credit is set to expire on December 31, 2010. We believe that VEETC positively impacts the price of ethanol. On December 31, 2009, the portion of VEETC that benefits the biodiesel industry was allowed to expire. This resulted in the biodiesel industry ceasing to produce biodiesel because the price of biodiesel without the tax credit was uncompetitive with the cost of petroleum based diesel. If the portion of VEETC that benefits ethanol is allowed to expire, it could negatively impact the price we receive for our ethanol and could negatively impact our profitability.

~~The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability.~~ Recently, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which are measured using a lifecycle analysis. Management believes that these new regulations could preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce. Any decrease in ethanol demand could negatively impact ethanol prices which could reduce our revenues and negatively impact our ability to profitably operate the ethanol plant.

~~If the 54 cent per gallon tariff on imported ethanol expires at the end of the 2010 calendar year,~~2011, it could negatively impact our profitability. ~~United States~~The Small Ethanol Producer Tax Credit (“SEPTC”) is a tax incentive allowing small ethanol ~~production is benefited by~~producers a 5410 cent per gallon ~~tariff imposed~~federal income tax credit on ~~ethanol imported into~~up to 15 million gallons of production. Our investor directly benefit from the ~~United States. However,~~SEPTC. If the ~~54 cent per gallon tariff~~SEPTC is ~~set~~allowed to expire aton December 31, 2011, along with the ~~end~~VEETC, it would negatively impact our investors.

Competition from the advancement of alternative fuels may lessen the ~~2010 calendar year. Elimination~~demand for ethanol. Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the ~~tariff~~long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol process that ~~protects the United States ethanol industry could lead to the importation~~might adversely affect our results of ~~ethanol produced in other countries, especially in areas of the United States~~operations and financial condition.

We may incur casualty losses that are ~~easily accessible~~not covered by ~~international shipping ports. Ethanol imported~~our insurance which could negatively impact the value of our units. We have purchased insurance which we believe adequately covers our losses from ~~other countries~~foreseeable risks. However, there are risks that we may beencounter for which there is no insurance or for which insurance is not available on terms that are acceptable to us. If we experience a ~~less expensive alternative to domestically produced ethanol and may affect~~loss which materially impairs our ability to ~~sell~~operate the ethanol plant which is not covered by insurance, the value of our ~~ethanol profitably.~~units could be reduced or eliminated.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

~~Construction Loan Agreement~~

On April 24, 2008, we entered into a Construction Loan 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 ethanol plant. Upon completion of construction and the ethanol plant commencing operations, the Company’s construction loan with FNBO converted on February 26, 2010 to a $25,200,000 Fixed Rate Note, a $20,200,000 Variable Rate Note, a $5,000,000 Long-Term Revolving Note, and a $5,000,000 line of credit.

The Company is required to maintain a fixed charge coverage ratio (earnings before interest, taxes, depreciation and amortization less taxes, less capital expenditures and less tax distributions and other permitted distributions compared to scheduled payments on the principal and interest of the construction loans, excluding any principal

~~Table of Contents~~

repaid on the Long-Term Revolving Note) of no less than 1.25:1.0. The Company shall maintain a net worth (total assets less total liabilities and intangible assets) of not less than $44,775,000 measured annually. The Company shall maintain a maximum leverage ratio (tangible book equity to total liabilities) of no greater than 1.65. The Company is also required to maintain at all times working capital of not less than $3,000,000. The financial covenant conditions under the Agreement as of July 31, 2010 are as follows:

Covenant Type

Compliance Dates

Covenant Requirements

Calculation as of
July 31, 2010

Fixed Charge Coverage

Quarterly

No less than 1.25:1.00

0.88

Net Worth

Annually

$44,775,000

$41,592,000
*
Working Capital

Quarterly

No less than $3,000,000

$3,225,000
#
Maximum Leverage

Quarterly

No greater than 1.65:1.00

1.74

* Requirement as of October 31, 2010, net of any intangible costs including debt issuance costs of approximately $1,515,000 and receivables from members of approximately $41,000.

~~# Working Capital calculation is before reclassification of long-term debt to current liabilities~~

As of July 31, 2010, we failed to meet our fixed coverage charge and maximum leverage worth ratios. Furthermore, as a result of the reclassification of long-term debt to current liabilities we are also in violation of our working capital covenant. Additionally, due to the nature of the industry, there is a risk that we may be out of compliance with certain additional covenants when they are measured in subsequent periods. In particular, the Company anticipates being out of compliance with the working capital and net worth covenants as of the fiscal year end October 31, 2010. Management is currently in discussion with FNBO regarding the forbearance of the covenant violations of the Agreement, as well as possible modifications to future covenant requirements. Management believes that the prospective forbearance and loan covenant modification agreement will allow the Company to remain in compliance with its revised financial covenants in the future.

Our failure to comply with the protective loan covenants or maintain the required financial ratios allows FNBO to exercise all of its rights and remedies, contained in the agreement. The Company continues to work diligently with FNBO to modify the Agreement and remains current on principal and interest payments with FNBO, as well as all vendors and suppliers.

~~Capital Lease~~

On April 24, 2008, we entered into certain financing and credit arrangements with U.S. Bank National Association, as trustee (the “Trustee”) and the City of Lamberton, Minnesota (the “City”) in order to secure the proceeds from the sale of the solid waste facilities revenue bonds, Series 2008A (the “Bonds”) issued by the City in the aggregate principal amount of $15,180,000 pursuant to a trust indenture between the City and the Trustee (“Trust Indenture”). The City has undertaken the issuance of the Bonds to finance the acquisition and installation of certain solid waste facilities in connection with our ethanol plant to be located near Lamberton, Minnesota. Highwater received proceeds of approximately $14,876,000, after financing costs of approximately $304,000. The remaining proceeds were held as restricted cash or marketable securities based on anticipated use and are split between a project fund of approximately $11,527,000, a capitalized interest fund of approximately $1,831,000, and a debt service reserve fund of approximately $1,518,000. The Bonds mature on December 1, 2022 and bear interest at a rate of 8.5%.

Pursuant to the terms of the Company’s lease arrangements with the City and U.S. Bank any violation of the Company’s financings agreements with FNBO results in a violation of the Company’s lease arrangements with the City and U.S. Bank. Therefore, as a result of the Company’s non-compliance with the loan covenants as discussed above, the Company is not in compliance with the terms of its financing arrangements with the City and U.S. Bank. The Company has reclassified the capital lease to current liabilities as U.S. Bank also has the right to exercise all of its rights and remedies contained in the lease arrangements as a result of the default with FNBO. The Company has made and continues to make all of its scheduled payments to U.S. Bank.

~~Table of Contents~~None.

Item 4. (Removed and Reserved)

Item 5. Other Information.

None.

Item 6. Exhibits. The following exhibits are included herein:

Exhibit No.	Description
3.2	Second Amended and Restated Member Control Agreement of the registrant.	*

10.1	Fourth Amendment of Construction Loan Agreement between First National Bank of Omaha and Highwater Ethanol, LLC dated February 26, 2011.	*

10.2	Third Amended and Restated Revolving Promissory Note with Deere Credit, Inc. dated February 26, 2011.	*

10.3	Third Amended and Restated Revolving Promissory Note with First National Bank of Omaha dated February 26, 2011.	*

10.4	Third Amended and Restated Revolving Promissory Note with First Bank & Trust dated February 26, 2011.	*

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31.1	Certificate Pursuant to 17 CFR 240.15d-14(a).	*

31.2	Certificate Pursuant to 17 CFR 240.15d-14(a).	*

32.1	Certificate Pursuant to 18 U.S.C. § 1350.	*

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

(*) Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		HIGHWATER ETHANOL, LLC

Date:	~~September 20, 2010~~March 22, 2011	/s/ Brian Kletscher
		Brian Kletscher
		Chief Executive Officer
		(Principal Executive Officer)


Date:	~~September 20, 2010~~March 22, 2011	/s/ Mark Peterson
		Mark Peterson
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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	Statement of	Three Months Ended July 31,
	Operations location	2010			2009
Interest rate swap	Gain (loss) on derivative instrument	$	(455,755	)	$	204,276

	Statement of	Nine Months Ended July 31,
	Operations location	2010			2009

Interest rate swap	Loss on derivative instrument	$	(405,874	)	$	(1,477,435	)