Highwater Ethanol LLC

03/04/2026 | Press release | Distributed by Public on 03/04/2026 13:31

Quarterly Report for Quarter Ending January 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three month period ended January 31, 2026, 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, 2025.
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, distillers grains and corn oil;
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 and plug-in hybrids;
Use by the EPA of small refinery exemptions;
Competition from the increased use of electric vehicles;
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; and
Changes in trade policy, trade actions, international trade disputes, and the institution of tariffs by the United States or foreign governments.
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.comunder 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.
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.
Results of Operations for the Three Months Ended January 31, 2026 and 2025
The following table shows the results of our operations and the approximate percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our unaudited statements of operations for the three months ended January 31, 2026 and 2025:
2026 2025
Statements of Operations Data Amount
(unaudited) 		% Amount
(unaudited) 		%
Revenues $ 34,401,853 100.00 % $ 33,218,600 100.00 %
Cost of Goods Sold 30,878,792 89.76 % 32,248,207 97.08 %
Gross Profit 3,523,061 10.24 % 970,393 2.92 %
Operating Expenses 1,438,403 4.18 % 1,294,225 3.90 %
Operating Income 2,084,658 6.06 % (323,832) (0.97) %
Other Income, net 3,525,274 10.25 % 332,140 1.00 %
Net Income $ 5,609,932 16.31 % $ 8,308 0.03 %
The following table shows the sources of our revenue for the three months ended January 31, 2026 and 2025:
2026 2025
Revenue Sources Amount
(Unaudited) 		% Amount
(Unaudited) 		%
Ethanol Sales $ 25,782,158 74.95 % $ 25,088,382 75.52 %
Modified Distillers Grains Sales 1,549,281 4.50 % 1,683,594 5.07 %
Dried Distillers Grains Sales 3,756,471 10.92 % 3,833,090 11.54 %
Corn Oil Sales 3,313,943 9.63 % 2,613,534 7.87 %
Total Revenues $ 34,401,853 100.00 % $ 33,218,600 100.00 %
Revenue
Ethanol
Our ethanol revenues were higher for the three months ended January 31, 2026, as compared to the three months ended January 31, 2025. Revenue from ethanol sales increased by approximately 2.8% during the three months ended January 31, 2026, as compared to the three months ended January 31, 2025.
The average price per gallon of ethanol sold for the three months ended January 31, 2026 was approximately the same compared to the average price for the three months ended January 31, 2025.
Approval of federal legislation to allow year round ethanol sales of E15 in the United States would likely have a positive effect on domestic ethanol demand and the market price of ethanol. In addition, the approval of E15 in California in October of 2025 could create additional domestic demand. Other factors likely to affect ethanol prices in the future include domestic corn prices and corn supply, energy prices, seasonal demand and inventory levels. In addition, trade actions and the possible institution of tariffs by the United States and retaliatory actions by foreign governments could have a negative effect on foreign ethanol demand, increase the volatility in commodity prices and impact the market price of ethanol.
The number of gallons of ethanol sold during the three months ended January 31, 2026 increased by approximately 2.0%, as compared to the three months ended January 31, 2025 due to the increase in bushels ground. Our ethanol production levels for the three months ended January 31, 2026 were at an annual rate of approximately 70 million gallons. Management anticipates that the amount of ethanol produced could decrease in the future if operating conditions worsen and we reduce ethanol production levels. Ethanol production could also decrease if delayed rail car shipments affect our ability to get sufficient rail cars to transport our ethanol.
We had gains related to ethanol based derivative instruments of $1,656 and $6,131 for the three months ended January 31, 2026 and 2025, respectively, which increased our ethanol revenue during the period.
Distillers Grains
Revenue from distillers grains sales decreased by approximately 3.8% during the three months ended January 31, 2026, as compared to the three months ended January 31, 2025 primarily due to lower distillers grains prices during the three months ended January 31, 2026 compared to the same period of 2025.
For the three months ended January 31, 2026, the average price per ton of dried distillers grains sold was approximately 8.0% lower than the average price we received during the three months ended January 31, 2025, due primarily to a decrease in the domestic prices of soybean meal. For the three months ended January 31, 2026, the average price per ton of modified distillers grains sold was approximately 2.8% lower than during the three months ended January 31, 2025, due primarily to decreases in the domestic prices of soybeans and additional soybean production resulting in lower protein prices.
Distillers grains prices typically change in proportion to domestic corn and other feed products including soybeans and soybean meal. Distillers grains prices are also influenced by seasonal demand and the number of livestock on feed. Other factors likely to affect distillers grains prices include prices and availability of other commodities and trade actions by foreign governments or the United States including the possible imposition of tariffs and retaliatory actions.
The tons of dried distillers grains sold during the three months ended January 31, 2026, increased by approximately 7.4%, as compared to the three months ended January 31, 2025. The tons of modified distillers grains sold during the three
months ended January 31, 2026, decreased by approximately 5.4%, as compared to the three months ended January 31, 2025. Management anticipates that the amount of distillers grains produced could decrease in the future if operating conditions worsen and there is a reduction in ethanol production levels which would then have a corresponding effect on distillers grains. In addition, an increase in ethanol or corn oil yields could have a negative effect of distillers grains production levels.
Corn Oil
Revenue from corn oil sales increased by approximately 26.8% during the three months ended January 31, 2026, as compared to the three months ended January 31, 2025, due primarily to higher corn oil prices and an increase in pounds of corn oil sold. The average price per pound of corn oil sold was approximately 20.5% higher during the three months ended January 31, 2026, as compared to the three months ended January 31, 2025, due primarily to an increase in soy oil prices. Factors likely to affect corn oil prices include corn oil and soy oil supply, biodiesel demand, prices of corn and soybeans, the status of the biodiesel blenders' tax credit and new crop corn oil content.
The pounds of corn oil sold increased by approximately 4.7%, as compared to the three months ended January 31, 2025. Management anticipates that the amount of corn oil produced may decrease in the future if there is a reduction in ethanol production levels which would then have a corresponding effect on corn oil. However, an increase in corn oil yields due to improved efficiencies or a corn crop with higher oil content could contribute to higher corn oil production levels.
At January 31, 2026, we had 3,072,000 pounds of forward corn oil sales contracts valued at approximately $1,716,000 or various delivery periods through March 31, 2026.
Cost of Goods Sold
Our two largest costs of production are corn (75.6% of cost of goods sold for the three months ended January 31, 2026) and natural gas (8.0% of cost of goods sold for the three months ended January 31, 2026). Our total cost of goods sold was approximately 4.2% less during the three months ended January 31, 2026, as compared to the three months ended January 31, 2025.
Corn
Our average price per bushel of corn for the three months ended January 31, 2026 decreased by approximately 5.7% per bushel, as compared to the three months ended January 31, 2025, due primarily to lower market value for corn as a result of higher corn stocks. We used approximately 1.7% more bushels of corn in the three months ended January 31, 2026, as compared to the three months ended January 31, 2025 due to an increase in gallons of ethanol sold.
Management expects there to be an adequate corn supply available in our area to operate the ethanol plant. However, corn prices are dependent on weather conditions, supply and demand, stocks and other factors which could contribute to price volatility and significantly impact our costs of production. In addition, corn prices could continue to be impacted in the future by global economic uncertainty, rising inflation, market disruptions and increased volatility in commodity prices.
At January 31, 2026, we had 1,867,527 bushels of forward fixed basis corn purchase contracts and 1,620,635 bushels of forward fixed price corn contracts valued at approximately $6,647,000. These purchase contracts are for various delivery periods through December 31, 2026.
We had gains related to corn derivative instruments of $90,769 and $497,087 for the three months ended January 31, 2026 and 2025, respectively, which reduced our cost of goods sold during the period.
Natural Gas
The average market price per MMBTU of natural gas was approximately 1.2% higher for the three months ended January 31, 2026, as compared to the three months ended January 31, 2025, due primarily to an increase in our natural gas transportation costs. Factors such as industry production problems or large increases in natural gas demand in the future could have a negative effect on natural gas prices.
For the three months ended January 31, 2026, we used approximately 1.1% less MMBTUs of natural gas as compared to the three months ended January 31, 2025, due primarily to an increase in efficiencies.
At January 31, 2026, we had 528,500 MMBTUs of forward fixed basis natural gas purchase contracts and 2,173,800 MMBTUs of fixed price natural gas purchase contracts valued at approximately $7,385,000 for delivery periods through October 31, 2029.
We had gains related to natural gas derivative instruments of $139,654 for the three months ended January 31, 2026, which reduced our cost of goods sold during the period. We had losses related to natural gas derivative instruments of ($19,292) for the three months ended January 31, 2025, which increased our cost of goods sold during the period.
Operating Expense
Our operating expenses for the three months ended January 31, 2026 were $1,438,403 compared to $1,294,225 for the three months ended January 31, 2025. Management attributes this increase in operating expenses to an increase in professional fees. Management continues to pursue strategies to optimize efficiencies and maximize production. These efforts may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady.
Other Income, net
We had total other income, net for the three months ended January 31, 2026 of $3,525,274, as compared to $332,140 for the three months ended January 31, 2025. Our other income, net for the three months ended January 31, 2026, was higher due primarily to our recognition of $3,300,000 in federal tax credits for the three months ended January 31, 2026 associated with incentives under Section 45Z.
Changes in Financial Condition for the Three Months Ended January 31, 2026
The following table highlights the changes in our financial condition as of January 31, 2026 from our previous fiscal year ended October 31, 2025:
January 31, 2026 October 31, 2025
Current Assets $ 37,452,020 $ 43,423,174
Current Liabilities 10,113,533 11,571,070
Long-Term Liabilities 455,355 493,444
Current Assets
The decrease in current assets is primarily the result of decreases in cash and cash equivalents at January 31, 2026, as compared to October 31, 2025, due primarily to cash distributions of $6,652,100 paid to our members on December 16, 2025, and corn payments to producers that were deferred until after the first of the year. We also experienced decreases in inventories at January 31, 2026, as compared to October 31, 2025, due primarily to lower value of corn inventory.
Current Liabilities
The decrease in current liabilities is primarily the result of decreases in accounts payable at January 31, 2026, as compared to October 31, 2025, due primarily to timing of deferred corn payments.
Long-Term Liabilities
Long-term liabilities decreased at January 31, 2026, as compared to October 31, 2025, due primarily to decreasing liabilities owed under a contract for use of a natural gas pipeline to transport natural gas to our facility.
Liquidity and Capital Resources
Based on financial forecasts prepared by our management, we anticipate that we will have sufficient cash on hand, cash from our current credit facilities, and cash from our operations to continue to operate the ethanol plant for the next 12 months. We do not currently anticipate seeking additional equity or debt financing in the near term in order to fund operations. However, if market conditions worsen, we could have difficulty maintaining our liquidity and may need to rely on our revolving lines of credit or seek increases.
The following table shows cash flows for the three months ended January 31, 2026 and 2025:
2026 2025
(unaudited) (unaudited)
Net cash provided by (used in) operating activities $ 4,271,323 $ (9,708,463)
Net cash used in investing activities (1,249,596) (555,144)
Net cash used in financing activities (6,688,155) (8,123,380)
Cash Flow From Operations
We used less cash in operating activities for the three months ended January 31, 2026, as compared to the same period in 2025. This increase in cash from operations was primarily due to an increase in net income along with changes in inventories and accounts payable for the three months ended January 31, 2026, as compared to the same period in 2025.
Cash Flow From Investing Activities
We used more cash in investing activities for the three months period ended January 31, 2026, as compared to the same period in 2025. This change was primarily due to an increase in capital expenditures during the three months ended January 31, 2026.
Cash Flow From Financing Activities
We used less cash in financing activities during the three month ended January 31, 2026, as compared to the same period in 2025. Our cash used in financing activities decreased primarily due to decreased distributions to our members during the three months ended January 31, 2026.
Short-Term and Long-Term Debt Sources
Our loan facility with Compeer Financial f/k/a AgStar Financial Services, PCA ("Compeer") includes a $20,000,000 Term Revolving Loan and a Revolving Line of Credit Loan. Our loan facility with Compeer is secured by substantially all business assets and also subjects the Company to various financial and non-financial covenants.
Term Revolving Loan
The Term Revolving Loan is for up to $20,000,000 with a variable interest rate based on the Wall Street Journal's Prime Rate plus 10 basis points with a minimum interest rate of 2.10%. The applicable interest rate at January 31, 2026 was 7.10%. The Term Revolving Loan may be advanced, repaid and re-borrowed during the term. Monthly interest payments are due on the Term Revolving Loan with payment of all amounts outstanding due on November 1, 2027. The outstanding balance on this note was $0 at January 31, 2026. We pay interest at a rate of 1.50% on amounts outstanding for letters of credit which also reduce the amount available under the Term Revolving Loan. We had no letters of credit outstanding at January 31, 2026. We are also required to pay unused commitment fees for the Term Revolving Loan.
Revolving Line of Credit Loan
The Revolving Line of Credit Loan is for an amount equal to the borrowing base, with a maximum limit of $10,000,000 with a variable interest rate based on the Wall Street Journal's Prime Rate plus 10 basis points with a minimum interest rate of 2.10%. The amount available to borrow per the borrowing base calculations at January 31, 2026 was approximately $564,000. The applicable interest rate at January 31, 2026 was 7.10%. The Revolving Line of Credit Loan may be advanced, repaid and re-borrowed during the term. Monthly interest payments are due on the Revolving Line of Credit Loan with payment of all amounts outstanding due on November 1, 2026. The maturity date may be extended for up to one additional one year term upon our written request which will be deemed automatically granted by Compeer upon written certification that there is no event of default. The Company has previously been granted three extensions. The outstanding balance on this note was $0 at January 31, 2026. We are also required to pay unused commitment fees for the Revolving Line of Credit Loan.
Covenants and Other Miscellaneous Financing Agreement Terms
The loan facility with Compeer is secured by substantially all business assets. We executed a mortgage in favor of Compeer creating a first lien on our real estate and plant and a security interest in all personal property located on the premises and assigned in favor of Compeer, all rents and leases to our property, our marketing contracts, our risk management services contract, and our natural gas, electricity, water service and grain procurement agreements.
We are also subject to various financial and non-financial covenants that limit distributions and new debt and require minimum working capital requirements. We are limited to incurring additional debt over certain amounts without prior approval and making additional investments as described in the Amended and Restated Credit Agreement without prior approval of Compeer. We are required to maintain a minimum working capital requirement of $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. We are allowed to make cash 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.
Presently, we are meeting our liquidity needs and complying with our financial covenants and the other terms of our loan agreements. We will continue to work with Compeer to try to ensure that the terms of our loan agreements are met going forward. However, we cannot provide any assurance that our actions will result in sustained profitable operations or that we will not be in violation of our loan covenants or in default on our principal payments in the future. Should unfavorable market conditions result in our violation of the terms or covenants of our loan and we fail to obtain a waiver of any such term or covenant, Compeer could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans. In the event of a default, Compeer could also elect to proceed with a foreclosure action on our plant.
Grants
The Minnesota State Legislature established the Bioincentive Program in 2015 to encourage commercial-scale production of advanced biofuels, renewable chemicals, and biomass thermal energy through production incentive payments. Eligible producers of cellulosic ethanol may receive $0.16 per gallon of cellulosic ethanol produced subject to program funding limitations. We received awards from the Bioincentive Program of approximately $72,000, recorded in the first quarter of fiscal 2026 in other income. We received awards from the Bioincentive Program of approximately $93,000, recorded in the first quarter of fiscal 2025 in other income, $102,000 recorded in the second quarter of fiscal 2025 in other income and $69,000, recorded in the third quarter of fiscal 2025 in other income.
Capital Expenditures
We entered into an agreement with ICM, Inc. to construct a sieve bottle and an EVAP Zero which are expected to increase efficiencies. The construction commenced in the spring of 2025. The sieve bottle was completed in August 2025 and the EVAP Zero was completed in approximately November 2025, at an aggregate cost of approximately $4,200,000. We funded the project from operations and existing debt facilities.
Tax Credit Generation
For the three months ended January 31, 2026, we recognized $3,300,000 of Section 45Z tax credits. This amount includes the gross credit amount of approximately $3,700,000 net of broker fees, energy credits and compliance payments of approximately $400,000. We recorded $3,300,000 as an increase to Other Income and an asset recorded within Other Assets. We plan to monetize these tax credits through sale of such credits to third parties. The recognition of these tax credits is contingent on meeting the requirements of Section 45Z.
Critical Accounting Estimates
Management uses various estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:
Inventory Valuation
We value our inventory at lower of cost or net realizable value. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or net realizable value on inventory to be a critical accounting estimate.
Derivatives
We are exposed to market risks from changes in interest rates, corn, natural gas, and ethanol prices. We may seek to minimize these commodity price fluctuation risks through the use of derivative instruments. In the event we utilize derivative instruments, we will attempt to link these instruments to financing plans, sales plans, market developments, and pricing activities. Such instruments in and of themselves can result in additional costs due to unexpected directional price movements.
We have entered into ethanol, corn and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices. In practice, as markets move, we actively attempt to manage our risk and adjust hedging strategies as appropriate. We do not use hedge accounting which would match the gain or loss on our hedge positions to the specific commodity contracts being hedged. Instead, we use fair value accounting for our hedge positions, which means that as the current market price of our hedge position changes, the gains and losses are immediately recognized in our statement of operations. The immediate recognition of hedging gains and losses under fair value accounting can cause net income (loss) to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
As of January 31, 2026, the fair values of our commodity-based derivative instruments are a net liability of approximately $474,000. As the prices of the hedged commodity moves in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to protect the Company over the term of the contracts for the hedged amounts.
Highwater Ethanol LLC published this content on March 04, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on March 04, 2026 at 19:31 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]