CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve future events, our future financial performance and our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings.
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Changes in the availability and price of corn and natural gas;
Volatile commodity and financial markets;
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 free 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 (including the elimination of any federal and/or state ethanol tax incentives);
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; and
Our ability to retain key employees and maintain labor relations.
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 any persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, 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
Information is also available at our website at www.highwaterethanol.com, under “SEC Compliance,” which includes links to reports we have filed with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K. The Securities and Exchange Commission also maintains an Internet site (http://www.sec.gov) through which the public can access our reports.
ITEM 1. BUSINESS
Business Development
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 a 50 million gallon per year ethanol plant near Lamberton, Minnesota. Since August 2009, we have been engaged in the production of ethanol and distillers grains at the plant.
On January 31, 2011, we executed and delivered a Third Amendment of Construction Loan Agreement with First National Bank of Omaha ("FNBO"). Pursuant to the amended agreement, we paid $3,000,000 on our Long-term Revolving Note in February 2011. In addition, we made an additional payments in amounts sufficient to reduce the outstanding principal balance of the Long-term Revolving Note to $0 at October 31, 2011. We have and will continue to make quarterly fifty percent (50%) excess cash flow payments, with a maximum annual reduction of $750,000, on our Variable Rate Note. Effective August 26, 2011, we entered into another amendment with FNBO extending our line of credit to April 1, 2012. The terms of our FNBO loans are described in more detail below in the section entitled “Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Following our 2011 fiscal year, we signed a non-binding letter of intent with Butamax Advanced Biofuels for the purpose of discussing the possible implementation of biobutanol technology at our facility. Management believes that the possible conversion to biobutanol production offers the opportunity to be on the cutting edge of next generation biofuels production. We will be working with Butamax Advanced Biofuels to develop a scope of definitive agreements in the next 6 to 9 months. However, there is no guarantee that definitive agreements will be executed. In the event we proceed with biobutanol technology, there are no assurances that there will be a market for biobutanol. In the event we do proceed with definitive agreements and convert our facility to a biobutanol facility there are no assurance that the biobutanol technology as developed by Butamax Advanced Biofuels will be effective. We may need to convert our facility back to ethanol production.
Highwater Ethanol believes the possible conversion to biobutanol production will fit well into our long term plan as it will offer the opportunity to be on the cutting edge of next generation biofuels production. The production of biobutanol will allow operations to remain consistent with our business model, to produce a renewable biofuel with the efficiencies that we currently pride ourselves on relating to our ethanol production. These efficiencies will allow Highwater Ethanol the opportunity that every facility looks for in production of biofuels. We believe biobutanol production will enhance the biofuels industry as it fits very well with ethanol production.
We will be working with Butamax Advanced Biofuels to develop a scope of definitive agreements in the next 6 to 9 months. Our goal is to have the cost of manufacturing biobutanol competitive to ethanol on an energy equivalent basis; however, what is more important is the production of butanol may provide sustainable improvement to our margins.
Financial Information
Please refer to “Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations” for information about our revenue, profit and loss measurements and total assets and liabilities and “Item 8 - Financial Statements and Supplementary Data” for our financial statements and supplementary data.
Principal Products
The principal products we produce at the ethanol plant are ethanol and distillers grains.
Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains, which can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute. The ethanol we produce is manufactured from corn. Although the ethanol industry continues to explore production technologies employing various feedstocks, such as biomass, corn-based production technologies remain the most practical and provide the lowest operating risks. Ethanol produced in the United States is primarily used for blending with unleaded gasoline and other fuel products. The principal purchasers of ethanol are generally wholesale gasoline marketers or blenders. The principal markets for our ethanol are petroleum terminals in the continental United States. However, recently the United States ethanol industry has experienced increased ethanol exports, including exports to the European Union and Brazil.