We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three month and nine month periods ended July 31, 2022, compared to the same periods of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

Forward-Looking Statements

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



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




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

Available Information

Our website address is www.highwaterethanol.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), are available, free of charge, on our website at www.highwaterethanol.com under the link "SEC Compliance," as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Quarterly Report on Form 10-Q.

Overview

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

On August 26, 2020, we entered into an agreement with Nelson Baker BioTech, Inc. to install a system which will allow us to produce USP grade high purity alcohol for use in the sanitizer market. We commenced construction in November, 2020. The project was completed in October 2021. We expect to commence the production of high purity alcohol if current positive ethanol margins worsen and we determine that high purity alcohol sales would result in greater profitability for our business than ethanol sales. We have executed an agreement with RPMG, Inc. ("RPMG") to be the exclusive marketer of our high purity alcohol. RPMG is currently our exclusive marketer and distributor of ethanol and corn oil and will market our distillers grains beginning January 1, 2023. We are also an owner of Renewable Products Marketing Group, LLC, the parent entity of RPMG.

On May 23, 2022, we received an award from the USDA Biofuel Producer Program in the amount of approximately $4,100,000. On August 8, 2022, we executed a Second Amendment to the Third Amended and Restated Credit Agreement (the "Amendment"), which amends the Third Amended and Restated Credit Agreement dated March 15, 2021. The Amendment extends the maturity date of the Term Revolving Loan from January 22, 2023 to November 1, 2027. The Amendment also extends the maturity date of the Revolving Line of Credit Loan from January 22, 2023 to November 1, 2023. The Amendment provides that the maturity date of the Revolving Line of Credit Loan may be extended for up to four additional one year terms upon written request of the Company which will be deemed automatically granted by Compeer upon receipt of the request and written certification that there is no event of default. The Amendment also amends certain financial covenants that restrict distributions and require minimum debt service coverage and working capital requirements. The Amendment provides that the Company is allowed to make distributions to members as frequently as monthly in an amount equal to 75% of net income if working capital is greater than or equal to $9,000,000, or an unlimited amount if working capital is greater than or equal to $12,000,000. The Amendment eliminates the requirement to maintain a minimum debt service coverage ratio and raises the the minimum working capital requirement from $8,250,000 to $9,000,000, which is calculated as current assets plus the amount available for drawing under the Term Revolving Loan and undrawn amounts on outstanding letters of credit, less current liabilities, and is measured quarterly.

On August 26, 2022, we gave written notice of our election to terminate the Distiller's Grain Marketing Agreement with CHS, Inc. (the "CHS Agreement"). Pursuant to the terms of the CHS Agreement, CHS purchased all of the distillers grains produced at the plant. The CHS Agreement can be terminated by either party upon not less than 120 days written notice. The termination of the CHS Agreement becomes effective on January 1, 2023.

On August 26, 2022, we entered into a Distillers Grains Marketing Agreement (the "RPMG Agreement") with RPMG pursuant to which RPMG agrees to purchase and market all of the distillers grains produced at the plant. RPMG is expected to


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begin marketing our distillers grains on January 1, 2023. Following an initial term, the RPMG Agreement will be automatically extended for additional terms unless either party gives proper notice of non-extension. We may immediately terminate the RPMG Agreement upon written notice if RPMG fails on 3 separate occasions within any 12-month period to purchase or market distillers grains under circumstances where such breach or failure is not excused. RPMG may immediately terminate the RPMG Agreement upon written notice if the variance of our actual distillers grains inventory when compared to monthly production and inventory estimates exceeds certain threshold amounts. We will pay RPMG a fee to market distillers grains to third party end purchasers and reimburse RPMG for certain charges paid to third parties. RPMG agrees to market our distillers grains using commercially reasonable efforts and endeavor to maximize price and minimize freight and other costs but does not guarantee the price that will be obtained from the sale.

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

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