Highwater Ethanol (HEOL) 10-Q/A 2008 Q3 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

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

For the quarterly period ended July 31, 2008

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

For the transition period from                            to                            

Commission file number 000-53588

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 £ 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).  £ 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 ¨	Accelerated filer ¨
Non-accelerated filer ¨	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).  £ 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 12, 2008 there were 4,953 membership units outstanding.  As of September 25, 2009, there were 4,953 membership units outstanding.

Explanatory Note Regarding Amendment No. 1

This Amendment No. 1 to the Quarterly Report on Form 10-QSB of Highwater Ethanol, LLC (the “Company”) for the fiscal quarter ended July 31, 2008, is being filed for the purpose of amending and restating Items 1, 2 and 3A(T) to correct an error that occurred with the omission of an interest rate swap agreement.  The interest rate swap fixes the interest rate on a portion of the Company’s long-term debt at 7.60% for a period of five years beginning in June 2009.  The Company did not previously record the interest rate swap, which is a liability due to the decline in market interest rates.  As a result of this error, an interest rate swap was unrecorded at July 31, 2008.  The value of the agreement was not reflected in the liabilities, members’ equity and net income (loss) amounts.  In accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, the complete text of such Items, as amended are set forth herein. In addition to the filing of this Amendment No. 1 and pursuant to Rule 12b-15, the Company is including certain currently dated certifications. The remainder of the Company’s Form 10-QSB has not been updated to reflect events occurring subsequent to the original reporting date.

Therefore, the Company has:

·Increased liabilities by approximately $284,000, resulting in an increase in net earnings of approximately $238,000 or $47.97 per weighted average unit outstanding, for the three months ended July 31, 2008.

·Increased net loss by approximately $284,000 or $117.21 per weighted average unit outstanding for the nine months ended July 31, 2008.

·Decreased members’ equity by approximately $284,000 as of July 31, 2008.

In addition, based on the continued assessment and evaluation of the Company’s internal control over financial reporting, the Company believes it has a material weakness due to the omission of the interest rate swap transaction and related effects on prior periods.  As part of the Company’s continued evaluation of its internal controls, the Company hired a Chief Financial Officer in February 2009.  Due to the addition of Mark Peterson as the Company’s Chief Financial Officer he is now the signatory and certifier effective March 5, 2009 of the financial statements and reports filed with the United States Securities and Exchange Commission.  Prior to Mr. Peterson joining the Company, the financial statements and reports were signed and certified by Jason Fink who was the Company’s Treasurer (Principal Financial and Accounting Officer).

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

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PART I.     FINANCIAL INFORMATION

Item 1.  Financial Statements.

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Condensed Balance Sheets

	July 31,			October 31,
ASSETS	2008			2007
	(Unaudited - restated)
Current Assets
Cash	$	16,725,480		$	98,697
Restricted cash	5,769,312			56,254
Restricted marketable securities	8,930,230			—
Prepaids and other	21,886			35,353
Total current assets	31,446,908			190,304
Property and Equipment
Land and land improvements	1,240,753			1,018,252
Construction in progress	32,800,348			20,854
Office equipment	18,166			17,283
Accumulated depreciation	(5,024		)	(2,386		)
Total property and equipment	34,054,243			1,054,003
Other Assets
Restricted marketable securities	183,478			—
Deposit	500,000			—
Deferred offering costs	—			717,363
Debt issuance costs, net	1,869,051			2,209
Land options	—			2,000
Total other assets	2,552,529			721,572
Total Assets	$	68,053,680		$	1,965,879

	July 31,			October 31,
LIABILITIES AND EQUITY	2008			2007
	(Unaudited - restated)
Current Liabilities
Note payable	$	—		$	1,100,000
Accounts payable	40,774			577,231
Accounts payable - members	12,421			125,589
Construction payable	7,307,698			—
Accrued expenses	345,788			13,956
Derivative instrument	10,605			—
Total current liabilities	7,717,286			1,816,776
Long-Term Debt	15,180,000			—
Derivative Instrument	272,935			—
Commitments and Contingencies
Members’ Equity
Member contributions, net of costs related to capital contributions, 4,953 and 386 units outstanding at July 31, 2008 and October 31, 2007	46,653,590			1,680,000
Deficit accumulated during development stage	(1,746,315		)	(1,530,897		)
Accumulated other comprehensive loss	(23,816		)	—
Total members’ equity	44,883,459			149,103
Total Liabilities and Members’ Equity	$	68,053,680		$	1,965,879

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

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HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Condensed Statement of Operations

	Three Months			Three Months
	Ended			Ended
	July 31, 2008			July 31, 2007
	(Unaudited - restated)			(Unaudited)
Revenues	$	—		$	—
Operating Expenses
Professional fees	147,501			136,106
General and administrative	48,097			65,350
Total operating expenses	195,598			201,456
Operating Loss	(195,598		)	(201,456		)
Other Income (Expense)
Interest income	180,764			2,342
Other income	—			1,125
Interest expense	—			(15,500		)
Gain on derivative instrument	237,608			—
Total other income (expense), net	418,372			(12,033		)
Net Income (Loss)	$	222,774		$	(213,489	)
Weighted Average Units Outstanding - Basic and Diluted	4,953			386
Net Income (Loss) Per Unit - Basic and Diluted	$	44.98		$	(553.08	)

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

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HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Condensed Statements of Operations

	Nine Months			Nine Months			From Inception
	Ended			Ended			(May 2, 2006)
	July 31, 2008			July 31, 2007			to July 31, 2008
	(Unaudited - restated)			(Unaudited)			(Unaudited - restated)
Revenues	$	—		$	—		$	—
Operating Expenses
Professional fees	612,712			847,337			1,944,766
General and administrative	249,241			134,653			475,922
Total operating expenses	861,953			981,990			2,420,688
Operating Loss	(861,953		)	(981,990		)	(2,420,688		)
Other Income (Expense)
Interest income	917,731			27,027			967,886
Other income	12,344			3,225			15,569
Interest expense	—			(23,500		)	(25,542		)
Loss on derivative instrument	(283,540		)	—			(283,540		)
Total other income, net	646,535			6,752			674,373
Net Loss	$	(215,418	)	$	(975,238	)	$	(1,746,315	)
Weighted Average Units Outstanding	2,419			386			1,048
Net Loss Per Unit	$	(89.05	)	$	(2,526.52	)	$	(1,666.33	)

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

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HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Condensed Statement of Cash Flows

	Nine Months			Nine Months			From Inception
	Ended			Ended			(May 2, 2006)
	July 31, 2008			July 31, 2007			to July 31, 2008
	(Unaudited - restated)			(Unaudited)			(Unaudited - restated)
Cash Flows from Operating Activities
Net loss	$	(215,418	)	$	(975,238	)	$	(1,746,315	)
Adjustments to reconcile net loss to net cash from operations
Depreciation and amortization	4,847			3,780			11,085
Change in fair value of derivative instrument	283,540			—			283,540
Other	14,272			—			13,018
Change in assets and liabilities
Prepaids and other	13,467			(22,922		)	(21,886		)
Accounts payable, including members	(436,139		)	223,081			37,445
Accrued expenses	(12,248		)	5,167			1,708
Net cash used in operating activities	(347,679		)	(766,132		)	(1,421,405		)
Cash Flows from Investing Activities
Capital expenditures	(221,384		)	(847,499		)	(1,216,919		)
Construction in progress	(25,108,183		)	—			(25,129,037		)
Deposit	(500,000		)	—			(500,000		)
Payments for land options	—			(30,000		)	(42,000		)
Net cash used in investing activities	(25,829,567		)	(877,499		)	(26,887,956		)
Cash Flows from Financing Activities
Proceeds from note payable	—			738,939			1,038,939
Payments on notes payable	(1,100,000		)	—			(1,100,000		)
Funds received from restricted cash	36,721			—			36,721
Increase in restricted cash from net interest earned	(30,436		)	—			(30,436		)
Member contributions	45,670,000			—			47,350,000
Forfeited investor deposits	40,000			—			40,000
Payments for deferred offering costs	(248,283		)	(301,838		)	(736,410		)
Payments for debt issuance costs	(1,563,973		)	—			(1,563,973		)
Net cash provided by financing activities	42,804,029			437,101			45,034,841
Net Increase (Decrease) in Cash	16,626,783			(1,206,530		)	16,725,480
Cash - Beginning of period	98,697			1,264,371			—
Cash - End of period	$	16,725,480		$	57,841		$	16,725,480
Supplemental Cash Flow Information
Cash paid for interest expense	$	—		$	18,333		$	23,667
Cash paid for interest capitalized	$	87,179		$	—		$	97,179
Total	$	87,179		$	18,333		$	120,846
Supplemental Disclosure of Noncash Financing and Investing Activities
Unrealized losses on restricted marketable securities	$	23,816		$	—		$	23,816
Restricted cash received as part of capital lease	$	14,876,400		$	—		$	14,876,400
Restricted cash received as part of note payable	$	—		$	55,000		$	55,000
Purchase of restricted marketable securities with restricted cash	$	9,137,524					$	9,137,524
Capital expenditures included in construction payable	$	7,307,698		$	—		$	7,307,698
Capital expenditures included in accounts payable	$	15,750		$	130,698		$	15,750
Construction in progress paid from restricted cash	$	19,533		$	—		$	19,533
Accrued interest included in construction in progress	$	344,080		$	—		$	344,080
Deferred offering costs included in accounts payable	$	—		$	204,455		$	—
Debt issuance costs financed through capital lease	$	303,600		$	—		$	303,600
Debt issuance costs financed with note payable	$	—		$	6,061		$	6,061
Costs of raising capital offset against equity raised	$	736,410		$	—		$	736,410
Land options exercised for land purchase	$	2,000		$	40,000		$	42,000

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

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HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

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, 2007, contained in the Company’s Form 10-KSB.

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 31, 2008 and the results of operations and cash flows for all periods present.

Nature of Business

Highwater Ethanol, LLC, (a Minnesota Limited Liability Company) was organized with the intentions of developing, owning and operating a 50 million gallon dry mill corn-processing ethanol plant near Lamberton, Minnesota. The Company was formed on May 2, 2006 to have a perpetual life. As of July 31, 2008, the Company is in the development stage with its efforts being principally devoted to organizational activities and construction of the plant.  The Company anticipates completion of the plant in May 2009.

Fiscal Reporting Period

The Company has adopted a fiscal year ending October 31 for reporting financial operations.

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.  Actual results could differ from those estimates.

Cash

The Company maintains its accounts primarily at one financial institution.  At times throughout the year, the cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation.

Restricted Cash

The Company maintains cash balances as part of the capital lease financing agreement described in Note 7.

Restricted Marketable Securities

The Company maintains restricted marketable securities in debt securities as part of the capital lease financing agreement described in Note 7.  The restricted marketable securities consist primarily of municipal obligations, U.S. treasury obligations, and corporate obligations.  Restricted marketable securities are classified as “available-for-sale” and are carried at their estimated fair market value based on quoted market prices at year end. Realized gains and losses, determined using the specific identification method, are included in earnings; unrealized holding gains and losses on available-for-sale securities are reported as a separate component of members’ equity in accumulated other comprehensive income and excluded from earnings until realized.

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HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

Property and Equipment

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

The Company capitalizes construction costs and construction period interest as construction in progress until the assets are placed in service.  As of July 31, 2008, the Company had construction in progress of approximately $32,800,000, which includes approximately $456,000 of capitalized interest, including amounts accrued.

Carrying Value of Long-Lived Assets

The Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.

Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

Deferred Offering Costs

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

Debt Issuance Costs

Costs associated with the issuance of debt are recorded as debt issuance costs and are amortized over the term of the related debt by use of the effective interest method.

Fair Value of Financial Instruments

The carrying value of cash, restricted cash, and restricted marketable securities approximates their fair value.

The Company believes the carrying value of the derivative instrument approximates fair value based on widely accepted valuation techniques including discounted cash flow analysis which includes observable market-based inputs.

The Company believes the carrying amount of the debt financing approximates the fair value due to the terms of the debt and the current interest rate environment.

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HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

Derivative Instrument

The Company accounts for derivative instruments in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133 requires the recognition of derivative instruments in the balance sheet and the measurement of these instruments 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 recorded in the statement of operations along with items being hedged.  The Statement of Cash Flows includes the non-cash effects of changes in the interest rate swap as a change in fair value of derivative instrument.

Additionally, SFAS No. 133 requires a company to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal are documented as normal and exempted from the accounting and reporting requirements of SFAS No. 133, and 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 interest rate swap agreement. This contract is used with the intention to limit exposure to increased interest rates.  The fair value of this contract is based on widely accepted valuation techniques including discounted cash flow analysis which includes observable market-based inputs. The fair value of the derivative is continually subject to change due to changing market conditions. The Company did not formally designate this instrument as a hedge and, therefore, records in earnings adjustments caused from marking this instrument to market on a monthly basis.

Recently Issued Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 160 (SFAS 160), Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51(Consolidated Financial Statements). SFAS 160 establishes accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. In addition, SFAS 160 requires certain consolidation procedures for consistency with the requirements of SFAS 141, Business Combinations. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 with earlier adoption prohibited. SFAS 160 must be adopted concurrently with the effective date of SFAS 141(R). The Company is evaluating the effect, if any, that the adoption of SFAS 160 will have on its results of operations, financial position, and the related disclosures.

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

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HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not believe that implementation of this standard will have a material effect on its consolidated financial position, results of operations or cash flows.

2.  RESTRICTED MARKETABLE SECURITIES

The cost and fair value of the Company’s restricted marketable securities consist of the following at July 31, 2008:

July 31, 2008	Amortized Cost		GrossUnrealizedGains		GrossUnrealizedLosses			Fair Value
Short-term restricted marketable securities
Municipal obligations	$	2,163,793	$	614	$	(14,032	)	$	2,150,375
U.S. treasury obligations	639,791				(5,543		)	634,248
Corporate obligations	6,149,957				(4,350		)	6,145,607
Totals	8,953,541		614		(23,925		)	8,930,230
Long-term restricted marketable securities
Municipal obligations	183,983				(505		)	183,478
Total restricted marketable securities	$	9,137,524	$	614	$	(24,430	)	$	9,113,708

Other comprehensive income (loss) is a loss of approximately $39,000 for the three months ended July 31, 2008 and income of approximately $44,000 for the nine months ended July 31, 2008. Other comprehensive income (loss) includes unrealized losses on restricted marketable securities of approximately $24,000.

Shown below are the contractual maturities of marketable securities with fixed maturities at July 31, 2008.  Actual maturities may differ from contractual maturities because certain securities may contain early call or prepayment rights.

Due within 1 year	$	7,208,931
Due in 1 to 3 years	410,197
Due in 3 to 5 years	1,266,025
Due in more than 5 years	228,555
Total	$	9,113,708

3.  INTERIM FINANCING

The Company had a note payable for $800,000 from a bank to finance a land purchase.  The note carried annual interest at 7.50% and was repaid in April 2008.

In July 2007, the Company obtained an unsecured note payable for $300,000 from the general contractor.  The note carried interest at 7.50% and was payable in full at the earlier of financial close or January 2, 2008.  In January 2008, the Company executed an extension agreement for the note to be payable in full at the earlier of financial close or April 15, 2008.  In April 2008, the Company paid all principal and interest due on this note.

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HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

4. DERIVATIVE INSTRUMENT

At July 31, 2008, the Company recorded a liability for a derivative instrument of approximately $284,000 related to the interest rate swap described in Note 7. This derivative instrument was not designated as a cash flow hedge. The Company has recognized a gain on the interest rate swap of approximately $238,000 included in other income and expense for the three-months ended July 31, 2008. The Company has recognized a loss on the interest rate swap of approximately $284,000 included in other income and expense for the nine-months ended July 31, 2008.

5.  MEMBERS’ EQUITY

The Company has one class of membership units, which include certain transfer restrictions as specified in the operating agreement and pursuant to applicable tax and securities law, with each unit representing a pro rata ownership in the Company’s capital, profits, losses and distributions. Income and losses are allocated to all members based upon their respective percentage of units held.

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

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

6.  RELATED PARTY TRANSACTIONS

A member is providing legal services for the Company.  The Company has incurred approximately $113,000 for the nine months ended July 31, 2008 related to these services.

7.  DEBT FINANCING

Bank Financing

In April 2008, the Company entered into a credit agreement with a financial institution for the purpose of funding a portion of the cost of the ethanol plant.  Under the credit agreement, the lender will provide a construction loan of $50,400,000, a construction revolving loan for $5,000,000 and will support the issuance of letters of credit up to $5,600,000, all of which are secured by substantially all assets.  At July 31, 2008, the Company had issued $4,700,000 in letters of credit.  The Company will make monthly interest payments for all amounts owed during the construction phase at the greater of LIBOR plus 350 basis points or 4%.  No amounts have been drawn on this financing at July 31, 2008.  Upon the completion of construction, a maximum of $25,200,000 of the construction loan will convert into a Fixed Rate Note, a maximum of $20,200,000 will convert into a Variable Rate Note, and a maximum of $5,000,000 will convert into a Long-term Revolving Note, as described in the credit agreement and further below.

Fixed Rate Note

The Fixed Rate Note is for up to $25,200,000 with a variable interest rate that is fixed with an interest rate swap.  The Company will make 59 monthly principal payments on the Fixed Rate Note initially for approximately $145,000 plus accrued interest commencing one month immediately following the construction loan termination date. Interest will accrue on the Fixed Rate Note at the greater of the one-month LIBOR rate plus 300 basis points or 4%. A final balloon payment on the Fixed Rate Note of approximately $15,184,000 will be due five years following the construction loan termination date.  The Company entered into an interest rate swap which fixes the interest rate on the fixed rate note at 7.6% for five years beginning in June 2009.

Variable Rate Note

The Variable Rate Note is for up to $20,200,000.  For the variable rate note, the Company will make 59 monthly payments initially for approximately $147,000 plus accrued interest commencing one month immediately following the construction loan termination date for the

11

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

Variable Rate Note. Interest will accrue on the Variable Rate Note at the greater of the one-month LIBOR rate plus 350 basis points or 4%. A final balloon payment of approximately $14,807,000 will be due five years following the construction loan termination date.

Long-term Revolving Note

The Long-term Revolving Note is for up to $5,000,000 initially.  The amount available 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 will accrue interest monthly at the greater of the one-month LIBOR plus 350 basis points, or 4% until maturity will be due five years following the construction loan termination date.

Line of Credit

The construction revolving loan is the Company’s line of credit and accrues interest at the greater of the one-month LIBOR plus 350 basis points or 4%.  The line of credit requires monthly interest payments and is payable in full on April 24, 2009.

The Company is required to make additional payments annually 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 of July 31, 2008, the Company has letters of credit outstanding of $4,700,000 as mentioned previously.  The Company pays interest at a rate of 3% on amounts outstanding and the letters of credit are valid until July 2009. One of the letters of credit will automatically renew for an additional 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 lease has a term from April 1, 2008 through April 1, 2028 or until earlier terminated. The City financed the purchase of equipment through Solid Waste Facilities Revenue Bonds Series 2008A totaling $15,180,000.

Under the equipment lease agreement with the City, the Company will start making interest payments on November 25, 2008 and monthly thereafter at an implicit interest rate of 8.5%. The 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 start on November 25, 2009 in an amount equal to 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 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 fair market value at the end of the lease term.  Under the capital lease agreement, the proceeds are for project costs and 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.  At close when the funds were distributed, the remaining proceeds were held as restricted cash 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.

12

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

Estimated principal payments on long-term debt are as follows at July 31, 2008:

2009	$	—
2010	1,050,000
2011	1,490,000
2012	1,617,500
2013	1,755,000
After 2013	9,267,500
Total	$	15,180,000

Future minimum lease payments under the capital lease are as follows at July 31, 2008:

2009	$	1,634,380
2010	2,340,300
2011	2,780,300
2012	2,907,800
2013	3,045,300
After 2013	17,343,350
Total	30,051,430
Less amount representing interest	14,871,430
Present value of minimum lease payments	15,180,000
Less current maturities	—
Long-term debt	15,180,000
	$	15,180,000

8.  COMMITMENTS AND CONTINGENCIES

Construction Contracts

The total cost of the project, including the construction of the ethanol plant and start-up expenses, is expected to approximate $113,580,000.  The Company signed an agreement in September 2006 with a general contractor, an unrelated party, to design and build the ethanol plant at a total contract price of approximately $66,026,000. The design-build agreement provided for an upward adjust of the construction price over the construction cost index (CCI) published in January 2006 of 7660.29.  As the notice to proceed was executed in April 2008, the contract price increased, with change orders, to approximately $69,950,000.  Monthly applications will be submitted for work performed in the previous period.  Final payment will be due when final completion has been achieved.  As of July 31, 2008, the Company has incurred approximately $28,703,000 for these services.

Site Improvement Contracts

In November 2007, the Company entered into an agreement with an unrelated party for dirt work related to the construction of the plant for an amount of approximately $1,761,000.  The Company shall pay a monthly fee of 90% of the value based on the amount of work completed, with the remaining 10% held as retainage.  As of July 31, 2008, the Company has incurred approximately $1,703,000 under this agreement.

In July 2008, the Company entered into an agreement with an unrelated party for rail work for approximately $4,361,000.  The Company shall pay a monthly fee of 90% of the value based on the amount of work completed, with the remaining 10% held as retainage.  The contractor shall begin work on August 15, 2008, and must complete

13

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

the project by January 15, 2009.  The contractor shall pay the Company $750 for damages each day that work extends beyond January 15, 2009.

In July 2008, the Company entered into an agreement with an unrelated party for the installation of piling for support of grain silos for approximately $428,000.  The contract required a 10% down payment of approximately $43,000 upon signing, and the company will make monthly progress payments once construction begins.

Land contracts

In March 2007, the Company purchased approximately 125 acres of land related to the two land options that were exercised in December 2006. The total purchase price was approximately $876,000. The Company subsequently secured financing for a portion of the land purchased as described in Note 3.  The Company’s comprehensive plan for the construction of the ethanol plant includes using this site and will also utilize both of the following adjacent parcels for its site.

In September 2006, the Company entered into an option with an unrelated party to purchase approximately six to twelve acres of land for $7,000 per acre until December 31, 2008. The Company paid a non-refundable option deposit of $1,000 which will apply towards the purchase price. In April 2008, the Company paid approximately $43,000 to purchase the land.

In September 2006, the Company entered into an option with an unrelated party to purchase approximately thirteen acres of land for $8,000 per acre. The Company paid a non-refundable option deposit of $1,000 which will apply towards the purchase price. In April 2008, the Company paid approximately $104,000 to purchase the land.

In addition, in April 2008, the Company purchased six additional acres of land from an unrelated party for approximately $75,000.

Consulting contracts

In June 2007, the Company entered into an agreement with an unrelated party to be the exclusive provider of electricity for the plant. The agreement is to commence the earlier of the first day of the month in which the plant begins operations or June 1, 2008. The agreement is to remain in effect for a period of ten years following commencement. The rates for these services will be a fixed charge of $12,000 per month along with monthly electric usage based on rates listed in the agreement. The rates for the first five years of the agreement are guaranteed.  The estimated construction cost of the electrical infrastructure is $1,300,000.  If the plant is not completed as planned or if the plant does not continue in operations for the entire term of the contract, the Company is liable for incurred project costs to date minus any salvage value.   The agreement requires the Company to provide a letter of credit upon request in the amount of $700,000, which was issued in July 2008, for the period of the construction and continuing for one year after commercial operation.  In June 2008, there was a verbal agreement to suspend the $12,000 monthly fee until operations begin.

In May 2008, the Company entered into an agreement with an unrelated party to provide construction management services.  The agreement will remain in effect until terminated.  The fees for these services are $10,250 per month plus expense reimbursement.  As of July 31, 2008, the Company has incurred approximately $33,000 under this agreement.

In June 2008, the Company entered into an agreement with an unrelated party for construction of a natural gas pipeline, which is expected to be in April 2009. and to be the exclusive provider of natural gas for the plant. The agreement commences upon completion of the pipeline and will remain in effect for ten years.  The rates for these services will be based on the agreed upon minimum usage at rates listed in the agreement.  The estimated construction cost of the pipeline is $4,000,000.  The agreement requires a cash deposit or letter of credit of $4,000,000 plus three months of capacity payments payable in installments determined by the unrelated party before

14

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

construction begins.  The agreement also required the Company to provide a security deposit of $500,000, which will be returned to the Company over the term of the agreement. The Company made the security deposit payment of $500,000 in June 2008, and secured a $4,000,000 letter of credit in July 2008.

Marketing Agreements

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

In October 2007, the Company entered into a marketing agreement with an unrelated party to purchase all of the distiller’s dried grains with solubles (DDGS), wet distillers grains (WDG), and solubles the Company is expected to produce.  The buyer agrees to pay the Company 98% of the selling price for DDGS and 96% of the selling price for WDG and a fee of $2 per ton for solubles, with a minimum fee of $1.50 per ton for sales of DDGS and WDG.  The agreement commences on completion and start-up of operations of the plant and continues for one year.  The agreement will remain in effect thereafter unless a 120 day advance written notice of termination is provided by either party.

Grain Procurement Contract

In July 2006, the Company entered into a grain procurement agreement with an unrelated party to provide all of the corn needed for the operation of the ethanol plant.  Under the agreement, the Company will purchase corn at the local market price delivered to the plant plus a fixed fee per bushel of corn.  The agreement begins when operations commence and continues for seven years.

9.  RESTATEMENT

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

Balance Sheet	July 31, 2008			July 31, 2008
	(As previously reported)			(As restated)
Derivative instrument liability	$	—		$	(283,540	)
Deficit accumulated during the development stage	$	(1,462,775	)	$	(1,746,315	)

Statement of Operations	Three Months EndedJuly 31, 2008			Three Months Ended July 31, 2008
	(As previously reported)			(As restated)
Gain on derivative instrument	$	—		$	237,608
Net Income (Loss)	$	(14,834	)	$	222,774
Net Income (Loss) Per Unit	$	(2.99	)	$	44.98

15

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

July 31, 2008

Statement of Operations	Nine Months EndedJuly 31, 2008		Nine Months Ended July 31, 2008
	(As previously reported)		(As restated)
Loss on derivative instrument	$	—	$	283,540
Net Income (Loss)	$	68,122	$	(215,418	)
Net Income (Loss) Per Unit	$	28.16	$	(89.05	)

16

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

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 “may,” “will,” “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.  Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the following factors:

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

· Construction delays and technical difficulties in constructing the plant;

· Increases in the cost of construction;

· Changes in the environmental regulations or in our ability to comply with the environmental regulations that apply to our plant site and our anticipated operations;

· 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 and price of corn and natural gas and the market for ethanol and distillers grains;

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

· Difficulties we may encounter during the construction of our plant;

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

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

· Competition from alternative fuel additives.

We are not under any duty to update the forward-looking statements contained in this report.  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.

Overview

Highwater Ethanol, LLC (“we”, “our”, “Highwater Ethanol” or the “Company”) is a development-stage Minnesota limited liability company. Highwater Ethanol was formed on May 2, 2006 for the purpose of raising capital to develop, construct, own and operate a 50 million gallon per year ethanol plant near Lamberton, Minnesota.  We have not yet engaged in the production of ethanol and distillers grains. Based upon engineering specifications from Fagen, Inc., our design-builder, we expect the ethanol plant, once built, will process approximately

17

18.5 million bushels of corn per year into 50 million gallons of undenatured fuel grade ethanol and approximately 160,000 tons of dried distillers grains with solubles.

Plant construction is progressing on schedule.  Construction of the project is expected to take 16 to 18 months from the date site work commenced. We commenced site work in November 2007.  Our notice to proceed with construction to Fagen, Inc. was executed on April 7, 2008.  We anticipate that our plant will be operational in May 2009.

We are financing the development and construction of the ethanol plant with a combination of equity and debt.  Through private placements, we raised aggregate proceeds of $1,680,000 to fund our development, organizational and offering expenses.  In addition, we filed a federal registration statement for an initial public offering of our units with the Securities and Exchange Commission on Form SB-2 (SEC Registration No. 333-137482), as amended, which became effective on April 5, 2007.  We also registered these units with the state securities authorities in Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin.  We closed our offering on April 5, 2008 and subsequently released funds from escrow on April 7, 2008.  We raised approximately $45,670,000 in our public offering.  We issued approximately 4,567 registered units to our members, which supplemented the 386 units issued to our founders and seed capital members.  On April 21, 2008, we closed our debt financing arrangement with First National Bank of Omaha, Omaha, Nebraska (“FNBO”) and certain other financial institutions (collectively the “Banks”).  Our credit facility is in the amount of $61,000,000, consisting of a $50,400,000 construction note, a $5,000,000 revolving line of credit with $5,600,000 in letters of credit by FNBO.  We have issued letters of credit to Redwood Electric Cooperative, Inc. and Northern Natural Gas Company for the amount of $700,000 and $4,000,000, respectively.  The details of the letters of credit are described below in Plant Construction and Start-Up of Plant Operations.

Also, in April 2008, we entered into a long term equipment lease agreement with the City of Lamberton, Minnesota, (the “City”) in order to finance equipment for the plant.  The City financed the purchase of equipment through Solid Waste Facilities Revenue Bonds Series 2008A totaling $15,180,000.  We received proceeds of approximately $14,876,000, after financing costs of approximately $304,000.  The remaining proceeds, of $14,876,000, are held as restricted cash based on anticipated use and are split between a project fund of approximately $11,564,000, a capitalized interest fund of approximately $1,818,000, and a debt service reserve fund of approximately $1,501,000.  Based upon our current total project cost of $113,580,000, we expect our equity and debt sources to be sufficient to complete plant construction and begin start-up operations.

On September 28, 2006, we entered into a design-build contract with Fagen, Inc. for the design and construction of the ethanol plant for a total price of $66,026,000, which does not include change orders or increases in the costs of materials provided by the Construction Cost Index published by Engineering News-Record Magazine (“CCI”) costs escalator provision contained in the design-build agreement.  The design-build agreement provided for an upward adjustment of the construction price over the CCI published in January 2006 of 7660.29.  As the notice to proceed was executed in April 2008, the contract price increased with change orders, to approximately $69,950,000.  We budgeted for this potential increase within our CCI Contingency and Construction Contingency estimates, which we believe covers the increase.

We have engaged CHS, Inc. to market our distillers grain and RPMG to market our ethanol.  In addition, we have entered into a grain procurement agreement with Meadowland Farmers Co-op.

We are still in the development phase, and until the ethanol plant is operational, we will generate no revenue. We have incurred and will continue to incur net losses until the ethanol plant is operational. Since we have not yet become operational, we do not yet have comparable income, production or sales data.

Plan of Operations to Start-Up of the Ethanol Plant

We began site work in November 2007.  Our notice to proceed with construction to Fagen, Inc. was executed on April 7, 2008.  We anticipate that our plant will be operational in May 2009.  As a result of our successful completion of the registered offering and related debt financing, we expect to have sufficient cash on hand to cover all costs associated with the completion of construction and start-up operations.  However, any significant changes in our estimated budget may require us to seek additional sources of financing.  We estimate that

18

we need approximately $113,580,000 to complete the project, including, but not limited to, site development, utilities, construction and equipment acquisition.

Project Capitalization

We issued 150 units to our founding members, for an aggregate of $500,000.  In addition, we issued 236 units to our seed capital members in exchange for aggregate proceeds of approximately $1,180,000.  We received total proceeds from our private placements of $1,680,000.

We filed a registration statement on Form SB-2 with the Securities and Exchange Commission (“SEC”) which became effective on April 5, 2007.  We closed the offering on April 5, 2008.

The proceeds from the sale of our units were held in escrow until April 7, 2008, at which time we terminated our escrow agreement with Minnwest Bank of Redwood Falls, Minnesota and escrow proceeds of approximately $45,670,000 were transferred to our account at First National Bank of Omaha.  We issued 4,567 registered units to our members which supplemented the 386 units issued in our private placement offerings to our founders and our seed capital investors.

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.  Under the Agreement, FNBO has 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.  We have issued letters of credit to Redwood Electric Cooperative, Inc. and Northern Natural Gas Company for the amount of $700,000 and $4,000,000 respectively.  The details of the letters of credit are described below in Plant Construction and Start-Up of Plant Operations.

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

The Fixed Rate Note has a variable interest rate that is fixed with an interest rate swap.  We will make monthly principal payments on the Fixed Rate Note ranging from approximately $145,000 to $197,000 plus accrued interest on the eighth day of every month commencing one month immediately following the Construction Loan Termination Date.  A final balloon payment of approximately $15,184,000 will be due on the termination date of the Fixed Rate Note.  We will make monthly payments ranging from approximately $147,000 to $211,000 on the eighth day of every month commencing one month immediately following the Construction Loan Termination Date which shall be allocated as follows: (i) first to accrued and unpaid interest on the Long Term Revolving Note, (ii) next to accrued and unpaid interest on the Variable Rate Note, and (iii) next to principal on the Variable Rate Note.  In connection with the Company’s Construction Loan Agreement with FNBO, the Company entered into an interest rate swap which fixes the interest rate on the Fixed Rate Note at 7.6% for five years beginning in June 2009.

In connection with the Construction Loan 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 assigned in favor of FNBO, all rents and leases to our property, the design/build contract, our marketing contracts, our risk management services contract, and our natural gas, electricity, water service and grain procurement agreements.

In addition, during the term of the loans, we will be subject to certain financial covenants consisting of minimum working capital, minimum net worth, and maximum debt service coverage ratios.  After our construction phase we will be limited to annual capital expenditures of $1,000,000 without prior approval of the Banks.  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 debt leverage ratio (combined total liabilities to net worth) is greater than or equal to 1.0:1.0.  Our failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the term notes and revolving note and/or the imposition of fees, charges or penalties.  Any acceleration of the debt financing or imposition of the significant fees, charges or

19

penalties may restrict or limit our access to the capital resources necessary to continue plant construction or operations.  The lease agreement is secured by substantially all business assets and 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.

Also 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 are held as restricted cash based on anticipated use and are split between a project fund of approximately $11,564,000, a capitalized interest fund of approximately $1,818,000, and a debt service reserve fund of approximately $1,501,000.  The Bonds mature on December 1, 2022 and bear interest at a rate of 8.5%.

We plan to apply for grants from the USDA and other sources. Although we may apply under several programs simultaneously and may be awarded grants or other benefits from more than one program, it must be noted that some combinations of programs are mutually exclusive. Under some state and federal programs, awards are not made to applicants in cases where construction on the project has started prior to the award date. There is no guarantee that applications will result in awards of grants or loans.

Site Acquisition and Development

We expect to continue work principally on the development and construction of our ethanol plant, the development of our plant site in Redwood County, Minnesota, obtaining the permits necessary to operate the plant and negotiating contracts necessary for the operation of the plant.

In March 2007, we purchased approximately 125 acres of land related to two adjacent land options that were exercised in December 2006.  The total purchase price was approximately $876,000.  We had obtained the right and option to purchase two additional adjacent parcels of land in September 2006 and have since exercised the option on both parcels.  The first parcel was for six acres of land with a total purchase price of approximately $43,000.  The second option was for thirteen acres of land with a total purchase price of approximately $104,000.  We also purchased an additional six acres for approximately $75,000 in April 2008.

Plant Construction and Start-Up of Plant Operations

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

On September 28, 2006, we entered into a design-build contract with Fagen, Inc. for the design and construction of our ethanol plant for a total price of $66,026,000, which does not include any change orders or increases in the CCI costs escalator provision contained in the design-build agreement.  Our design-build agreement with Fagen, Inc. provides for an upward adjustment of the construction price in an amount equal to the percentage increase in the CCI for April 2008, the month in which our notice to proceed was executed, over the CCI published for January 2006.  The amount of the contract price increase will be equal to the increase in the CCI based upon the January 2006 CCI of 7660.29.  Due to the increase in the CCI and a change order, the increase in the contract price is approximately $3,924,000 based upon the CCI in April 2008 of 8112.45.  We have included a CCI Contingency estimate as well as a Construction Contingency estimate in our overall budget which will be used to cover the additional CCI amount under the design-build contract.  If Fagen, Inc. is required to employ union labor, excluding union labor for the grain system and energy center, the contract price will be increased to include any increased

20

costs associated with the use of union labor.  We paid a mobilization fee of $5,000,000 to Fagen, Inc. when we issued our notice to proceed with construction in April 2008 pursuant to the terms of the design-build contract.  As of July 31, 2008, we have incurred approximately $28,703,000 for services under our design-build contract.

We have executed a Phase I and Phase II Engineering Services Agreement with Fagen Engineering, LLC, an entity related to our design-builder Fagen, Inc., for the performance of certain engineering and design work. Fagen Engineering, LLC performs the engineering services for projects constructed by Fagen, Inc. In exchange for certain engineering and design services, we have agreed to pay Fagen Engineering, LLC a lump-sum fixed fee, which will be credited against the total design-build costs.

We also entered into a license agreement with ICM, Inc. for limited use of ICM, Inc.’s proprietary technology and information to assist us in operating, maintaining, and repairing the ethanol production facility.  We are not obligated to pay a fee to ICM, Inc. for use of the proprietary information and technology because our payment to Fagen, Inc. for the construction of the plant under our design-build agreement is inclusive of these costs.   Under the license agreement, ICM, Inc. retains the exclusive right and interest in the proprietary information and technology and the goodwill associated with that information.  ICM, Inc. may terminate the agreement upon written notice if we improperly use or disclose the proprietary information or technology at which point all proprietary property must be returned to ICM, Inc.

On November 28, 2007 we executed a Phase 1 Mass Grading and Drainage Agreement with R and G Construction Co. for certain improvements to the project site which involves mass grading and drainage activities. We agreed to pay a monthly fee of 90% of the value based on the amount of work completed with the remaining 10% held as retainage.  As of July 31, 2008, we incurred approximately $1,703,000 for R and G’s services under this agreement.

In July 2008, we entered into an agreement with L.A. Colo., LLC for rail work in the amount of approximately $4,361,000.  We agreed to pay a monthly fee of 90% of the value on the amount of work completed with the remaining 10% held as retainage.  The project is scheduled to be completed by January 15, 2009.  As of July 31, 2008, we had not incurred any costs under this agreement.

Also, in July 2008, we entered into an agreement with McCormick Construction Company for the installation of auger cast pilings for support of grain silos for approximately $428,000.  We paid a 10% down payment of approximately $43,000 upon execution of the documents, and will make monthly progress payments once construction begins.

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

·Administration Building—Bids for the construction of the administration building were received by the Company at the end of July and we have recently selected a contractor.  We expect construction of the building to commence in September.

·Maintenance Building—The construction of the maintenance building is complete.

·Process Area—All four of the fermentation tanks have been built and are in the process of installing the internal components.  The slurry tanks are in place and the liquefaction tanks have been built and internal components assembled.  All of the evaporators are on site and set in place.

·Energy Center—The dryers for the Energy Center were delivered in late August and set it place.  The structural steel for the building is now being assembled around the dryers.

·Cooling Tower/Water Treatment—The cooling tower foundation is done and erection of the cooling tower is underway.  We anticipate completion in October.  Construction on the water

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treatment building has not yet commenced, however, the design has been finalized and we expect construction to commence in October.

·Tank Farm—The liner for the tank farm has been laid and the two ethanol storage tanks have been constructed and the three remaining 100,000 gallon tanks are currently under construction.

·DDG Building—The wall footings for the DDG building have been completed and two-thirds of the structural steel is up and approximately three-fourths of the floor has been poured.

·Grains Area—The grain receiving area is approximately 20% complete.

·Rail Loop Track—Due to rains in the month of July, R & G was delayed in working on the rail siding and spur areas.  Dirt work is about 95% complete and the drainage work complete.  We anticipate completion by the end of September.  We are already starting to receive the rail materials on site with track construction commencing shortly thereafter.

·Electrical Substation—Redwood Electric is setting electrical switch gear structures and equipment for the electrical substation.

We estimate that we will need approximately $69,950,000 to construct the plant and a total of approximately $43,630,000 to cover all other expenditures necessary to complete the project, commence plant operations and produce revenue.  Included in the total budget is $3,741,000 for the CCI increases and $1,179,000 in construction contingency which we believe will cover the increased cost of plant construction.

Marketing Agreements

Ethanol Marketing Agreement

We have entered into an ethanol marketing agreement with Renewable Products Marketing Group, LLC (“RPMG”) pursuant to which RPMG will be our exclusive ethanol marketer.  RPMG will use its best efforts to market and obtain the best price for the ethanol we expect to produce in exchange for a percentage of the price we receive for each gallon of ethanol sold.  The initial term of the RPMG agreement is for 24 months and shall be automatically extended for 12 months unless either party gives the other prior written notice.  The RPMG agreement can be terminated for any uncured breach of the terms of the agreement.  In the event the agreement is not renewed, Highwater may assume certain rail car leases currently controlled by RPMG.

Distillers Grain Marketing Agreement

We entered into a Distillers Grains Marketing Agreement with CHS, Inc.  CHS, Inc. is a diversified energy, grains and foods company owned by farmers, ranchers and cooperatives.  CHS, Inc. provides products and services ranging from grain marketing to food processing to meet the needs of its customers around the world.  CHS, Inc. will market our distillers grains and we will receive a percentage of the selling price actually received by CHS, Inc. in marketing our distillers grains to its customers.  Under the agreement, CHS, Inc. will pay to us a price equal to 98% of the FOB plant price actually received by CHS, Inc. for all dried distillers grains removed by CHS, Inc. from our plant and a price equal to 96% of the FOB plant price actually received by CHS, Inc. for all our wet distillers grains. The term of our agreement with CHS, Inc. is for one year commencing as of the completion and start-up of the plant.  Thereafter, the agreement will remain in effect unless otherwise terminated by either party with 120 days notice.  Under the agreement, CHS, Inc. will be responsible for all transportation arrangements for the distribution of our distillers grains.

Grain Procurement Agreement

Meadowland Farmers Co-op

We have entered into a grain procurement agreement with Meadowland Farmers Co-op (“Meadowland”).  Meadowland has the exclusive right and responsibility to provide us with our daily requirements of corn meeting

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quality specifications set forth in the grain procurement agreement.  Under the agreement, we will purchase corn at the local market price delivered to the ethanol plant plus a fixed fee per bushel of corn purchased.  We will provide Meadowland with an estimate of our usage at the beginning of each fiscal quarter and Meadowland agrees to at all times maintain a minimum of 7 days corn usage at our plant.  The initial term of the agreement is 7 years from the time we request our first delivery of corn.

Other Consultants

Agreement for Electric Service

On June 28, 2007 we entered into an Agreement for Electric Service with Redwood Electric Cooperative, Inc. for the sale and delivery of electric power and energy necessary to operate our ethanol plant.  In exchange for its services, we agreed to pay Redwood Electric Cooperative, Inc. a monthly facilities charge of approximately $12,000 plus the Cooperative’s standard electrical rates. Pursuant to the agreement the contract rate will be guaranteed for up to five years. Upon execution of the agreement, we became a member of the Cooperative and are bound by its articles of incorporation and bylaws. This agreement will remain in effect for ten years following the initial billing period.  In the event we wish to continue receiving electrical service from the Cooperative beyond the ten year period, we will need to enter into a new agreement with the Cooperative at least one year prior to the expiration of the initial ten year period.  If the agreement is terminated by either party for any reason prior to the expiration of the initial ten year period, we will be required to pay for the entire amount of the facility charge for the remainder of the initial ten year period.  Also, pursuant to this agreement, Highwater provided the Cooperative with a Letter of Credit in the amount of $700,000 at the expense of Highwater for the entire period of construction and continuing for a period of one year of commercial operation.  The Cooperative agrees to release the Letter of Credit requirement after one full year of commercial operation upon a showing by Highwater that it is solvent.  In the event that Highwater is not solvent after one year of commercial operation, the Letter of Credit will remain in effect; provided, however, the Cooperative agrees to review Highwater’s financial situation after each subsequent one year period has passed and if Highwater establishes that it is solvent at any of those review dates, the letter of credit will be released.

Energy Management Agreement

We have entered into an energy management agreement with U.S. Energy Services, Inc. pursuant to which U.S. Energy will provide us with the necessary natural gas management services. Some of their services may include an economic comparison of distribution service options, negotiation and minimization of interconnect costs, submission of the necessary pipeline “tap” request, supplying the plant with and/or negotiating the procurement of natural gas, development and implementation of a price risk management plan targeted at mitigating natural gas price volatility and maintaining profitability, providing consolidated monthly invoices that reflect all natural gas costs, and U.S. Energy will be responsible for reviewing and reconciling all invoices. In exchange for these services, we will pay U.S. Energy a monthly retainer fee of $3,050 for an initial contract term of 12 months.  If we decide to utilize U.S. Energy’s hedging service we will have to pay an additional $.01 per MMBTu administrative fee for physical or financial natural gas hedging.  Additional fees may apply for additional services and for time and travel.

Construction Consulting Agreement

On May 27, 2008 we entered into an Agreement for Consulting Services with Granite Falls Energy, LLC (“Granite Falls”) to assist us in monitoring the construction and reviewing project plans and documents.  Some of their services may include reviewing project budget and timeline, reviewing contracts, weekly on-site inspections, obtaining competitive bids and executing contracts for services not currently under contract and providing recommendation and analysis of change order requests.  In exchange for these services, we will pay Granite Falls a Consultant fee of $10,250 per month for its consulting services.  Additional services will be billed to Highwater in accordance with a set fee schedule.  The agreement commenced May 1, 2008 and will continue unless terminated by either party, by providing the other with a 30 day advance written notice of termination.

Natural Gas Service Agreement

On July 1, 2008, we entered into a natural gas service agreement with CenterPoint Energy Resources Corp., d.b.a. CenterPoint Energy Minnesota Gas (“CenterPoint Energy”).  CenterPoint Energy will construct a pipeline

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from the Northern Natural Gas Company (“Northern”) Town Border Station for Highwater (Highwater TBS”) terminating at Highwater’s selected location.  Construction shall be completed by the later of April 1, 2009 or within 15 days of Northern’s completion of the Highwater TBS.  Additionally, Highwater agrees to purchase all of its natural gas requirements from CenterPoint Energy’s pipeline.  This Agreement will continue until October 31, 2019.  Also, pursuant to this agreement, Highwater has provided Northern with a Letter of Credit for $4,000,000.  Northern may draw on the Letter of Credit only if (1) Highwater is in default of its obligations under this agreement and all applicable notice and cure periods have expired or (2) Northern’s contractual obligations with Highwater extend beyond the expiration date of the Letter of Credit and either Highwater or the Issuing Bank has provided notice to Northern that the Letter of Credit will not be extended beyond its currently effective expiration period.

Permitting and Regulatory Activities

We will be subject to extensive air, water and other environmental regulations.  We have obtained the required air and construction permits necessary to begin construction of the plant and are in the process of obtaining any additional permits necessary to operate the plant.   Fagen, Inc. and Earth Tech Consulting, Inc. are coordinating and assisting us with obtaining certain environmental permits, and advising us on general environmental compliance.  In addition, we will retain consultants with expertise specific to the permits being pursued to ensure all permits are acquired in a cost efficient and timely manner.

We have received our Air Emissions Permit, a Stormwater Permit, a Discharge of Stormwater During Construction Activities Permit, Groundwater Permit, and an Above Ground Storage Tank Permit.  Additionally, we have received the water appropriation permits from the Minnesota Department of Natural Resources as well as Notice from the Redwood Conservation District approving an exemption to place force mains through a wetland area.

We are currently in the processing of working in connection with the City of Lamberton to obtain the necessary permits from Minnesota Pollution Control Agency (MPCA) for treatment of our wastewater.  If we are able to obtain the necessary permits we will be able to use the City of Lamberton’s holding ponds for disposal of our wastewater.  In the event we are unable to obtain the necessary permits from MPCA, we may have to construct our own water treatment facility which may potentially increase our construction budget.

The remaining permits will be required shortly before or shortly after we begin to operate the plant.  If for any reason any of these permits are not granted, construction costs for the plant may increase, or the plant may not be constructed at all.  Currently, we do not anticipate problems in obtaining the required permits; however, such problems may arise in which case our plant may not be allowed to operate.

Derivatives

Once we become operational we will be exposed to market risk from changes in corn, natural gas and ethanol prices.  We may seek to minimize these commodity price fluctuation risks through the use of derivative instruments.  Although we will attempt to link these instruments to sales plans, market developments and pricing activities, such instruments in and of themselves can result in additional costs due to unexpected directional price movements.  We may incur such costs and they may be significant.

In April 2008, we entered into an interest rate swap agreement in order to manage a portion of our exposure to the impact of changing interest rates.  As of July 31, 2008, the Company recorded a liability for a derivative instrument of approximately $284,000 related to the interest rate swap described in Note 7.  This derivative instrument was not designated as a cash flow hedge.  The Company has recognized a gain on the interest rate swap of approximately $238,000 included in other income and expense for the three-months ended July 31, 2008.  The Company has recognized a loss on the interest rate swap of approximately $284,000 included in other income and expense for the nine-months ended July 31, 2008.

Trends and Uncertainties Impacting the Ethanol Industry

If we are successful in building and constructing the ethanol plant, we expect our future revenues will primarily consist of sales of ethanol and distillers grains. We expect ethanol sales to constitute the bulk of our

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revenues. Historically, the demand for ethanol increased relative to supply, which caused upward pressure on ethanol market prices. Increased demand, firm crude oil and gas markets, public acceptance, and positive political signals contributed to those strong ethanol prices.  Those high prices were not sustained, however, due to increased ethanol production, and transportation and logistics problems in the industry.  Management believes the industry will need to continue to grow demand and have governmental support, and transportation and logistical problems will need to be alleviated in order for the industry to realize higher ethanol market prices.

We expect to benefit from federal ethanol supports and federal tax incentives. Changes to these supports or incentives could significantly impact demand for ethanol, and could negatively impact our business. On August 8, 2005, President George W. Bush signed into law the Energy Policy Act of 2005 which contained numerous provisions that favorably impacted the ethanol industry by enhancing both the production and use of ethanol. Most notably, the Energy Policy Act created a 7.5 billion gallon renewable fuels standard (the “RFS”). The RFS is a national renewable fuels mandate as to the total amount of national renewable fuels usage but allows flexibility to refiners by allowing them to use renewable fuel blends in those areas where it is most cost-effective rather than requiring renewable fuels to be used in any particular area or state.   The Energy Independence and Security Act (the “Act”) amended the RFS to set the volume at 9 billion gallons in 2008, increasing to 36 billion gallons in 2022.  However, the Act expanded the definition of several renewable fuels which may be used by blenders to meet the RFS requirement.  As a result, conventional biofuels, advanced biofuels, cellulosic biofuels and biodiesel, all can be used to meet the RFS, in addition to the conventional biofuels which we intend to produce.  In addition, the RFS total annual requirement is allocated differently in each subsequent year to encourage the use of more cellulosic biofuels, advanced biofuels and biodiesel.  The RFS for conventional biofuel, including corn-based ethanol, will reach 15 billion gallons in 2015 and will not increase in subsequent years.

On June 18, 2008, the United States Congress overrode a presidential veto of the Food, Conservation and Energy Act of 2008, otherwise known as the Farm Bill to ensure that all parts of the 2008 Farm Bill are enacted into law.  Passage of the 2008 Farm Bill reauthorizes the 2002 farm bill and adds new provisions regarding energy, conservation, rural development, crop insurance as well as other subjects.  The energy title continues the energy programs contained in the 2002 farm bill but refocuses certain provisions on the development of cellulosic ethanol technology.  The new legislation provides assistance for the production, storage and transport of cellulosic feedstocks and provides support for ethanol production from such feedstocks in the form of grants, loans and loan guarantees.  The 2008 Farm Bill also modifies the ethanol fuel credit from 51 cents per gallon to 45 cents per gallon beginning in 2009.  The bill also extends the 54 cent per gallon tariff on imported ethanol for two years, to January 2011.  The 2008 Farm Bill is distinct from the Energy Independence and Security Act of 2007, which contains the renewable fuels standards as described above.

Ethanol production continues to rapidly grow as additional plants and plant expansions become operational. According to the Renewable Fuels Association, as of August 19, 2008, 167 ethanol plants were producing ethanol with a combined annual production capacity of 9.91 billion gallons per year and current expansions and plants under construction constituted an additional future production capacity of 3.66 billion gallons per year.  According to the August 2008, Renewable Fuels Association report, there are currently 19 ethanol plants in operation within the State of Minnesota with approximate annual production capacity of 842.1 million gallons and there are another 3 ethanol plants under construction or expansion with an anticipated annual production capacity of approximately 235 million gallons.  Excess capacity in the ethanol industry will have an adverse effect on our results of operations, cash flows and financial condition once we are operational.  In a manufacturing industry with excess capacity, producers have an incentive to manufacture additional products for so long as the price exceeds the marginal cost of production (i.e., the cost of producing only the next unit, without regard to interest, overhead or fixed costs).  This incentive can result in the reduction of the market price of ethanol to a level that is inadequate to generate sufficient cash flow to cover costs.  As ethanol production continues to grow in 2008, we expect continued pressure on the ethanol prices.  If the demand for ethanol does not grow at the same pace as increases in supply, we expect the price for ethanol to decline.  Declining ethanol prices will result in lower revenues and may reduce or eliminate profits causing the value of your investment to be reduced.

Increased ethanol production has led to increased availability of distillers grains, which has resulted in a larger supply.  Continued increased supply of dried distillers grains on the market from other plants could reduce the price we will be able to charge for our distillers dried grains.  This could have a negative impact on our revenues.

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Consumer resistance to the use of ethanol may affect the demand for ethanol which could affect our ability to market our product and reduce the value of your investment. According to media reports in the popular press, some consumers believe that use of ethanol will have a negative impact on retail gasoline prices. Many also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy in the ethanol that is produced. In addition, recent high corn prices have added to consumer backlash against ethanol, as many consumers blame ethanol for high food prices.  These consumer beliefs could potentially be wide-spread. If consumers choose not to buy ethanol, it would affect the demand for the ethanol we produce which could negatively affect our ability to sell our product and negatively affect our profitability.

Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Cost of Goods Sold

We expect our future cost of goods sold will consist primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers grains for sale. According to the United States Department of Agriculture, the 2007 U.S. corn crop produced 13.1 billion bushels eclipsing the previous record, set in 2004, of 11.8 billion bushels.  Despite the large 2007 corn crop, corn prices have increased sharply since 2006 and remained high throughout 2007 and 2008.  U.S. farmers are on pace to produce the second largest corn crop in history, despite June’s severe flooding in the Midwest.  According to a report issued by the United States Department of Agriculture on August 12, 2008, corn production is forecasted at 12.3 billion bushels, down 6 percent from last year’s record, but up 17 percent from 2006.  Based on conditions as of August 1, 2008, corn yields are expected to average 155 bushels per acre, up 3.9 bushels from last year.  Despite the recent drop in corn prices, we expect the price of corn to remain high for the remainder of the 2008 fiscal year.  Although we do not expect to begin operations until May 2009, we expect continued volatility in the price of corn, which could significantly impact our cost of goods sold.  The number of operating and planned ethanol plants in our immediate surrounding area and nationwide will also significantly increase the demand for corn. This increase will likely drive the price of corn upwards in our market which will impact our ability to operate profitably.

There is no assurance that a corn shortage will not develop, particularly if there are other ethanol plants competing for corn, an extended drought or other production problems. Historical grain pricing information indicates that the price of grain has fluctuated significantly in the past and may fluctuate significantly in the future. Because the market price of ethanol is not related to grain prices, ethanol producers are generally not able to compensate for increases in the cost of grain feedstock through adjustments in prices charged for their ethanol. We, therefore, anticipate that our plant’s profitability will be negatively impacted during periods of high corn prices.  However, the negative impact on profitability resulting from high corn prices may be mitigated, in part, by the increased value of the distillers grains we intend to market, as the price of corn and the price of distillers grains have historically fluctuated in tandem.

Natural gas is also an important input commodity to our manufacturing process. We estimate that our natural gas usage will be approximately 15% to 20% of our annual total production cost. We use natural gas to dry our distillers grain products to moisture contents at which they can be stored for extended periods of time and transported greater distances.  The price of natural gas has fallen sharply the last few months, from a peak of just over $13.00 per MMBTU to $8.33.  This is due in part, to a large increase in production coming from the lower 48 states, where after several years of no growth in production, there have been large year-over-year increases in production.  A report from the Energy Information Administration shows a 9% increase in production in the first quarter of 2008 over the same quarter in 2007.  We expect continued volatility in the natural gas market. Any ongoing increases in the price of natural gas will increase our cost of production and may negatively impact our future profit margins.

Technology Developments

Most ethanol is currently produced from corn and other raw grains, such as milo or sorghum.  The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops.  This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas which are unable to grow corn.  Although current technology is not sufficiently efficient to be competitive, a recent report by the United States Department of Energy

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entitled “Outlook for Biomass Ethanol Production and Demand” indicates that new conversion technologies may be developed in the future.

As indicated above, the Energy Independence and Security Act expanded the definition of several renewable fuels which may be used by blenders to meet the RFS requirement.  The RFS now includes conventional biofuels, advanced biofuels, cellulosic biofuels and biodiesel, all of which can be used to meet the RFS.  In addition, the RFS total annual requirement is allocated differently in each subsequent year to encourage the use of more cellulosic biofuels, advanced biofuels and biodiesel.

The Act also authorizes several grants for the advancement of the renewable fuels industry.  It authorizes $500 million annually for 2008 to 2015 for the production of advanced biofuels that have at least an 80% reduction in GHG emissions.  In addition, it authorizes $25 million annually in 2008 through 2010 for research and development and commercial application of biofuels production in states with low rates of ethanol and cellulosic ethanol production.

Advances and changes in the technology used to produce ethanol may make the technology we installed in our plant less desirable or obsolete.  These advances could also allow our competitors to produce ethanol at a lower cost than us.  If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete.

Operating Expenses

When the ethanol plant nears completion, we expect to incur various operating expenses, such as supplies, utilities and salaries for administration and production personnel.  Along with operating expenses, we anticipate that we will have significant expenses relating to financing and interest.  We have allocated funds in our budget for these expenses, but cannot assure that the funds allocated will be sufficient to cover actual expenses.  We may need additional funding to cover these costs if sufficient funds are not available or if costs are higher than expected.

Critical Accounting Estimates

Management uses 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.  However, there are no accounting estimates which management deems critical at this time.

Employees

Prior to commencement of operations, we intend to hire approximately 32 full-time employees.  Approximately six of our employees will be involved primarily in management and administration and the remainder will be involved primarily in plant operations. Our officers are Brian D. Kletscher, President; John M. Schueller, Vice President; Jason R. Fink, Treasurer; and Timothy J. Van Der Wal, Secretary. As of the date of this report, we have hired three part-time office employees.

The following table represents some of the anticipated positions within the plant and the minimum number of individuals we expect will be full-time personnel:

	# Full-Time
Position	Personnel
General Manager	1
Plant Manager	1
Commodities Manager	1
Controller	1
Lab Manager	1
Lab Technician	2
Secretary/Clerical	3
Office Manager	1
Shift Supervisor	4
Maintenance Supervisor	1
Maintenance Craftsmen	4
Plant Operators	12
TOTAL	32

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The positions, titles, job responsibilities and number allocated to each position may differ when we begin to employ individuals for each position.

We intend to enter into written confidentiality and assignment agreements with our key officers and employees. Among other things, these agreements will require such officers and employees to keep all proprietary information developed or used by us in the course of our business strictly confidential.

Our success will depend in part on our ability to attract and retain qualified personnel at a competitive wage and benefit level. We must hire qualified managers and other personnel. We operate in a rural area with low unemployment. There is no assurance that we will be successful in attracting and retaining qualified personnel at a wage and benefit structure at or below those we have assumed in our project. If we are unsuccessful in this regard, we may not be competitive with other ethanol plants.

Liquidity and Capital Resources

Sources of Funds

Through our previous private placements, we raised $1,680,000 of seed capital equity to fund our development, organizational and offering expenses.  We conducted a public offering of our units.  We raised approximately $45,670,000 in the offering.  We closed the offering on April 5, 2008 and released funds from escrow on April 7, 2008.  We then issued 4,567 registered units to our members.  In addition, we secured debt financing in the amount of $61,000,000 from First National Bank of Omaha as discussed above in “Plan of Operations to Start-Up of the Ethanol Plant-Project Capitalization.”  Additionally, we plan to apply for grants from the USDA and other sources.

The following schedule sets forth estimated sources of funds to build our ethanol plant near Lamberton, Minnesota and begin start-up operations.  This schedule could change in the future depending on whether we receive additional grants.

Estimated Sources of Funds (1)			Percent
Offering Proceeds (2)	$	45,670,000	40.21	%
Seed Capital Proceeds (3)	$	1,680,000	1.48	%
Senior Debt Financing (4)	$	51,354,000	48.13	%
Bond Financing (5)	$	14,876,000	10.18	%
Estimated Total Sources of Funds	$	113,580,000	100.00	%

(1)The amount of estimated offering proceeds and senior debt financing may be adjusted depending on the level of grants we are able to obtain.

(2)We received proceeds for approximately $45,670,000 in our registered offering and issued 4,567 registered units to our investors.

(3)We issued a total of 386 units in our two private placements in exchange for proceeds of $1,680,000.  We issued a total of 236 units to our seed capital investors at a price of $5,000.00 per unit. In addition, we issued 150 units to our founders at a price of $3,333.33 per unit.

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

(5)We have entered into a long term lease agreement with the City of Lamberton, Minnesota in order to finance equipment for the plant.  The City financed the purchase of equipment through Solid Waste Facilities Revenue Bonds Series 2008A totaling $15,180,000.  We received proceeds of approximately $14,876,000, after financing costs of approximately $304,000.  The remaining proceeds are held as restricted cash based on anticipated use and are split between a project fund of approximately $11,564,000, a capitalized interest fund of approximately $1,818,000, and a debt service reserve fund of approximately $1,501,000.

We expect to have sufficient cash on hand through our equity and debt financing to cover all costs associated with construction of the project, including, but not limited to, site development, utilities, construction and equipment acquisition.

Estimated Uses of Proceeds

The following tables describe our proposed estimated use of our offering and debt financing proceeds.  These estimates are based on discussions with Fagen, Inc., our design-builder.  The following figures are estimates only, and the actual uses of proceeds may vary significantly from the descriptions given below due to a variety of factors described elsewhere in this report.

Use of Proceeds	Amount		Percent ofTotal
Plant construction	$	66,026,000	58.13	%
CCI Contingency	3,741,000		3.29	%
Land cost	1,098,000		0.97	%
Site development costs	14,641,800		12.89	%
Construction contingency	1,179,000		1.04	%
Construction performance bond	350,000		0.31	%
Construction insurance costs	164,000		0.14	%
Administrative building	350,000		0.31	%
Office equipment	80,000		0.07	%
Computers, Software, Network	150,000		0.13	%
Railroad	4,900,000		4.31	%
Rolling stock	400,000		0.35	%
Fire Protection and water supply	5,495,000		4.84	%
Construction Manager Fees	100,000		0.09	%
Capitalized interest	2,578,000		2.27	%
Start up costs:
Financing costs	1,840,700		1.62	%
Cost of Raising Capital	434,000		0.38	%
Organization costs	1,414,500		1.25	%
Pre-production period costs	750,000		0.66	%
Debt Service Reserve	1,888,000		1.66	%
Working capital	2,000,000		1.76	%
Inventory - corn	1,100,000		0.97	%
Inventory - chemicals and ingredients	400,000		0.35	%
Inventory - Ethanol	1,500,000		1.32	%
Inventory - DDGS	500,000		0.44	%
Spare parts - process equipment	500,000		0.44	%
Total	$	113,580,000	100.00	%

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The sources and uses for the project have been modified to reflect the updated costs and financing sources for the project.  We removed the water treatment facility from our budget as we are in discussions with the City of Lamberton, Minnesota for the treatment of our wastewater.  In the event we are unable to enter into an agreement with the City of Lamberton for the treatment of our wastewater we may have to include the construction of our own water treatment facility in our use of proceeds.  In addition, our use of proceeds budget was increased due to increases in the budgeted amounts for the CCI contingency, site development costs, construction performance bond, railroad costs, fire protection and water supply, and financing costs.  Our use of proceeds is measured from date of inception and we have already incurred some of the related expenditures.

Quarterly Financial Results

As of July 31, 2008, we had cash of approximately $16,725,000 and total assets of approximately $68,054,000, which includes approximately $32,800,000 in construction in progress.  As of July 31, 2008, we had current liabilities of approximately $7,717,000 consisting mainly of accrued interest in the amount of approximately $344,000 and construction payable in the amount of approximately $7,308,000.  In addition, we have long term debt of approximately $15,180,000 and a long-term derivative instrument of approximately $273,000.    Total members’ equity as of July 31, 2008, was approximately $44,883,000.  Since inception, we have generated no revenue from operations, and as of July 31, 2008, have accumulated net losses of approximately $1,746,000 and accumulated other comprehensive loss of approximately $24,000.

At July 31, 2008, the Company recorded a liability for a derivative instrument of approximately $284,000 related to the interest rate swap. The Company has recognized a gain on the interest rate swap of approximately $238,000 included in other income and expense for the three-months ended July 31, 2008. The Company has recognized a loss on the interest rate swap of approximately $284,000 included in other income and expense for the nine-months ended July 31, 2008.

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3A(T).           Controls and Procedures

Our management, including our Chief Executive Officer, Brian Kletscher (the Principal Executive Officer), along with our Chief Financial Officer, Mark Peterson (the Principal Financial Officer), have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2008.  Based upon this review and evaluation, these officers have concluded that our disclosure controls and procedures were not effective based upon the material weaknesses discussed in our Annual Report for the fiscal year ending October 31, 2007 filed on Form 10-KSB, as well as for the omission of the Interest Rate Swap Agreement and its effect upon the financial statements and reports.  Our management will continue our efforts to remediate these material weaknesses through ongoing process improvements and the implementation of enhanced policies and improving standards.  We are in the process of strengthening internal controls including enhancing our internal control systems and procedures to assure that these weaknesses are corrected and remediated.  No material weaknesses will be considered remediated until the remedial procedures have operated for an appropriate period, have been tested, and management has concluded that they are operating effectively.

Changes in Internal Control Over Financial Reporting

Our management, consisting of our Principal Executive Officer and our Principal Financial Officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred as of July 31,

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2008, and there has been no change that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Item 6.    Exhibits

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

Exhibit No.	Description	Method of Filing
10.2	Lease Agreement dated April 1, 2008 with the City of Lamberton, MN	(2)
10.3	Trust Indenture dated April 1, 2008 with the City of Lamberton, MN and U.S. Bank National Association	(2)
10.4	Guaranty Agreement dated April 1, 2008 with U.S. Bank National Association	(2)
10.5	Bill of Sale dated April 25, 2008 from Highwater Ethanol, LLC to City of Lamberton, MN	(2)
10.6	Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement dated April 1, 2008 with U.S. Bank National Association	(2)
10.7	Security Agreement dated April 1, 2008 with U.S. Bank National Association	(2)
10.8	Intercreditor Agreement dated April 24, 2008 with First National Bank of Omaha and U.S. Bank National Association.	(2)
10.9	Disbursing Agreement dated April 24, 2008 with First National Bank of Omaha, Homestead Escrow and Exchange Company and Dakota Homestead Title Insurance Company.	(2)
10.10	Construction Loan Agreement dated April 24, 2008 with First National Bank of Omaha.	(2)
10.11	Construction Loan Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement dated April 24, 2008 with First National Bank of Omaha.	(2)
10.12	Security Agreement dated April 25, 2008 with First National Bank of Omaha.	(2)
10.13	$10,000,000 Construction Note dated April 24, 2008 with First National Bank of Omaha.	(2)
10.14	$2,000,000 Construction Note dated April 25, 2008 with First National Bank of Omaha.	(2)
10.15	$9,000,000 Construction Note dated April 25, 2008 with First National Bank of Omaha.	(2)
10.16	$13,646,000 Construction Note dated April 25, 2008 with First National Bank of Omaha.	(2)
10.17	$500,000 Construction Note dated April 25, 2008 with First National Bank of Omaha.	(2)
10.18	$1,000,000 Construction Note dated April 25, 2008 with First National Bank of Omaha.	(2)

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

(*)           Filed herewith.

(+)Material has been omitted pursuant to a request for confidential treatment and such materials have been filed separately with the Securities and Exchange Commission.

(1)Incorporated by reference to Exhibit 99.1 in Form 8-K filed with the Securities and Exchange Commission on April 1, 2008.

(2)Incorporated by reference to exhibits of the same numbers in Form 10-QSB filed with the Securities and Exchange Commission on June 13, 2008.

(3)Incoroporated by reference to Exhibit of the same number in Form 10-QSB for the quarter ended July 31, 2008 as filed with the Securities and Exchange Commission on September 15, 2008.

SIGNATURES

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

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		HIGHWATER ETHANOL, LLC
Date:	September 28, 2009	/s/ Brian Kletscher
		Brian Kletscher
		Chief Executive Officer (Principal Executive Officer)
Date:	September 28, 2009	/s/ Mark Peterson
		Mark Peterson
		Chief Financial Officer (Principal Financial Officer)

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