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OFFON

HIGHWATER ETHANOL, LLC

(HEOL)
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HIGHWATER ETHANOL LLC : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

03/10/2021 | 01:59pm EDT

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three month period ended January 31, 2021, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

Forward-Looking Statements

This report contains forward-looking statements that involve 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 the availability and price of corn and natural gas;
      Reduction or elimination of the Renewable Fuel Standard;
      Volatile commodity and financial markets;
      Changes in legislation benefiting renewable fuels;
      Our ability to comply with the financial covenants contained in our credit agreements
      with our lenders;
      Our ability to profitably operate the ethanol plant and maintain a positive spread
      between the selling price of our products and our raw material costs;
      Results of our hedging activities and other risk management strategies;
      Ethanol and distillers grains supply exceeding demand and corresponding price
      reductions;
      Our ability to generate cash flow to invest in our business and service our debt;
      Changes in the environmental regulations that apply to our plant operations and changes
      in our ability to comply with such regulations;
      Changes in our business strategy, capital improvements or development plans;
      Changes in plant production capacity or technical difficulties in operating the plant;
      Changes in general economic conditions or the occurrence of certain events causing an
      economic impact in the agriculture, oil or automobile industries;
      Lack of transportation, storage and blending infrastructure preventing ethanol from
      reaching high demand markets;
      Changes in federal and/or state laws or policies impacting the ethanol industry;
      Changes and advances in ethanol production technology and the development of
      alternative fuels and energy sources and advanced biofuels;
      Competition from alternative fuel additives;
      Changes in interest rates and lending conditions;
      Decreases in the price we receive for our ethanol and distillers grains;
      Our inability to secure credit or obtain additional equity financing we may require in
      the future;
      Our ability to retain key employees and maintain labor relations;
      Changes in the price of oil and gasoline;
      Competition from clean power systems using fuel cells, plug-in hybrids and electric
      cars;
      International trade disputes and the imposition of tariffs by foreign governments on
      our products;
      Use by the EPA of small refinery exemptions; and
      A slowdown in global and regional economic activity, reduced demand for our products
      and the potential for labor shortages and shipping disruptions resulting from the
      COVID-19 pandemic.


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

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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 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 Ethanol" or the "Company") was formed as a Minnesota limited liability company organized on May 2, 2006, for the purpose of constructing, owning, and operating an ethanol plant near Lamberton, Minnesota. Since August 2009, we have been engaged in the production of ethanol and distillers grains at the plant. In October 2019, our air permit application to the Minnesota Pollution Control Agency to allow for 70.2 million gallons of denatured ethanol per 12-month rolling average was approved.

The ethanol industry experienced industry-wide record low ethanol prices throughout most of 2018 and 2019 due to reduced demand and high industry inventory levels. This continued into 2020 and the situation was compounded by the impact of the COVID-19 pandemic. In response to unfavorable operating conditions, we reduced our ethanol production levels by up to 25%. As conditions improved in June 2020, we began increasing production levels to an annual rate of approximately 65 million gallons.

On August 26, 2020, we entered into an agreement with Nelson Baker BioTech, Inc. to install a system which will allow us to produce hydrous USP grade ethanol for use in the sanitizer market. Construction began in November 2020 and we expect to complete the project during the second quarter of our 2021 fiscal year.

On September 26, 2013, we entered into a series of related definitive agreements with Butamax Advanced Biofuels, LLC ("Butamax") for the installation, leasing and license of a corn oil separation system and technology. On December 3, 2020, we entered into a Termination and Asset Purchase Agreement (the "Purchase Agreement") pursuant to which Butamax agreed to sell us the corn oil separation system and provide a license of the corn oil separation technology. In exchange for the purchase of the corn oil separation system and the license, we paid a one-time fee to Butamax. The Purchase Agreement also provided for the termination of related agreements between the Company and Butamax as of December 3, 2020.

On December 23, 2020, we executed a High Purity Alcohol Member Marketing Agreement (the "Agreement") with RPMG, Inc. ("RPMG"). The terms of the Agreement were effective January 1, 2021. RPMG is currently our exclusive marketer and distributor of ethanol and corn oil. We are also an owner of Renewable Products Marketing Group, LLC ("RPMG LLC"), the parent entity of RPMG. The Agreement provides that RPMG will serve as our exclusive marketer of high purity alcohol excluding certain high purity alcohol marketed or sold under contracts already in effect. In exchange for the exclusive marketing services, we will pay a marketing fee to RPMG and RPMG will use commercially reasonable efforts to obtain the best price for all high purity alcohol conforming to certain specifications sold under the Agreement. RPMG shall purchase high purity alcohol at an amount equal to the FOB price less any applicable cost. The Agreement shall automatically terminate if we cease to be an owner of RPMG LLC, subject to the expiration of the initial term. In addition, upon breach by the other party, the Agreement may be terminated by either party after providing notice and expiration of the applicable cure period. RPMG may terminate the Agreement upon our insolvency, receivership, or bankruptcy or if we cease to produce high purity alcohol for thirty days or more. We may terminate the Agreement, following expiration of the initial term, upon notice and provided we deliver all high purity alcohol subject to confirmations of sale. We would also be obligated to accept assignment from RPMG of the lease of certain rail cars following termination.

We expect to fund our operations during the next 12 months using cash flow from our continuing operations and our current credit facilities. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we may need to seek additional funding.



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