HIGHWATER ETHANOL LLC: Your Annual Report Investment Snapshot

This summary offers a clear and accessible overview of Highwater Ethanol LLC's performance and investment potential, based on its annual filing for the fiscal year ended October 31, 2025.

What Highwater Ethanol Does (Business Overview)

Minnesota-based Highwater Ethanol LLC, established in 2006, operates a state-of-the-art ethanol plant near Lamberton. The company's core business is transforming corn into fuel-grade denatured ethanol, a vital component in renewable energy and gasoline blends.

Highwater Ethanol began production in August 2009. Following an approved capacity expansion in October 2019, the plant now boasts an annual production capacity of 70.2 million gallons of denatured ethanol. For the fiscal year ended October 31, 2025, the company operated at approximately 95% of this expanded capacity, producing around 66.7 million gallons.

What They Sell (and How Each Product Contributes)

Highwater Ethanol generates revenue from three primary products:

• Ethanol: The main product, used as a fuel component.
• Distillers Grains (DDGS): A valuable co-product, primarily sold as high-protein animal feed.
• Corn Oil: Another co-product, used in various industries, including biodiesel production and animal feed.

The table below shows each product's contribution to total revenue over the last three fiscal years:

Product	Fiscal Year 2025	Fiscal Year 2024	Fiscal Year 2023
Ethanol	77%	74%	74%
Distillers Grains	14%	18%	18%
Corn Oil	9%	8%	8%

Key Trend: In Fiscal Year 2025, ethanol sales drove an even larger share of revenue, increasing to 77% from 74% in previous years. This shift suggests a stronger reliance on ethanol market prices and demand. Meanwhile, the contribution from Distillers Grains decreased, likely due to market price fluctuations or changes in sales volume for that co-product. Corn Oil's contribution saw a slight but positive increase.

Financial Performance: A Look at the Numbers

Highwater Ethanol delivered solid performance this past year, driven by efficient operations and favorable market conditions for ethanol.

• Revenue: Total revenue for Fiscal Year 2025 reached $285 million, a healthy increase from $270 million in FY2024 and $255 million in FY2023. Strong ethanol sales volumes and generally stable pricing primarily fueled this growth.
• Gross Profit & Margins: The company reported a gross profit of $42.75 million in FY2025, translating to a gross margin of 15%. This marks an improvement from 13% in FY2024, reflecting better cost management, particularly in corn procurement and energy usage, relative to product selling prices.
• Net Income: Highwater Ethanol achieved a net income of $22 million for FY2025, up from $18 million in FY2024 and $15 million in FY2023. This demonstrates consistent profitability and effective operational execution.

Management Discussion and Analysis (MD&A Highlights)

Management's discussion highlights the company's success in capitalizing on favorable market conditions and operational efficiencies during fiscal year 2025.

• Revenue Growth: Robust ethanol sales volumes primarily drove the increase in total revenue to $285 million. Consistent plant operations at approximately 95% of expanded capacity and generally stable market pricing for ethanol supported this growth.
• Improved Margins: The gross margin improved from 13% in FY2024 to 15% in FY2025. This improvement stems from effective cost management strategies, particularly in procuring corn feedstock and energy. These strategies allowed the company to maintain a healthy "crush spread" (the difference between product selling prices and raw material costs) despite commodity price volatility.
• Consistent Profitability: The consistent growth in net income over the past three years underscores effective operational execution and a disciplined approach to managing expenses.
• Revenue Mix Shift: The shift in revenue contribution, with ethanol sales increasing to 77%, reflects either a strategic focus or a market-driven opportunity in the ethanol segment. The slight decrease in DDGS contribution, conversely, points to market dynamics for co-products.
• Strategic Focus: Management continues to monitor commodity price spreads closely to optimize production and sales strategies.

Financial Health (Debt, Cash, Liquidity)

Highwater Ethanol demonstrates a healthy financial position and prudent liquidity management, supported by strong operating cash flow and systematic debt repayment.

• Balance Sheet Snapshot (as of October 31, 2025):
  • Total Assets: Approximately $150 million, primarily comprising property, plant, equipment, and working capital.
  • Total Liabilities: Around $60 million, including current liabilities and long-term debt.
  • Long-Term Debt: The company holds approximately $50 million in long-term debt, which it systematically repays.
  • Total Equity: Approximately $90 million, representing the owners' stake in the company.
• Cash Flow Highlights (FY2025):
  • Cash Flow from Operations: The company generated $30 million, indicating strong operational cash generation and providing ample liquidity for ongoing operations and debt service.
  • Capital Expenditures: Highwater Ethanol invested $5 million in plant maintenance and minor upgrades, ensuring continued operational efficiency and asset integrity.
  • Debt Repayment: The company paid down $10 million of its long-term debt, strengthening its financial position and reducing leverage.

Is Highwater Ethanol a Publicly Traded Company?

No, Highwater Ethanol is not publicly traded in the traditional sense. As a limited liability company (LLC), its "membership units" are not listed on any public stock exchange. This means no easy, liquid market exists for buying or selling units, unlike shares of publicly traded companies like Apple or Google.

As of April 30, 2025, non-insiders held units valued at approximately $39.95 million, based on an internal valuation of $10,000 per unit. There were 4,752 membership units outstanding as of January 22, 2026. Potential investors must understand that significant restrictions limit the transfer of these units, which can severely reduce liquidity and the ability to sell an investment quickly or at a desired price.

What Could Go Wrong? (Key Risk Factors)

Investing always carries risks. Highwater Ethanol highlights several factors that could impact its business and profitability:

• Commodity Price Swings: The cost of corn (its primary feedstock) and natural gas (for energy) can be highly volatile. While Highwater actively manages its exposure through hedging strategies for corn purchases and energy costs, significant adverse movements can still squeeze profit margins.
• Government Policies & Regulations: Changes to the Renewable Fuel Standard (RFS), which mandates renewable fuel blending, or other federal/state laws, could affect demand or subsidies for ethanol. For example, "small refinery exemptions" (SREs) granted by the EPA allow certain refineries to avoid RFS blending obligations, potentially reducing overall ethanol demand and prices. Highwater actively monitors legislative developments and advocates for policies supporting renewable fuels.
• Profitability Squeeze: The company's profitability depends on maintaining a healthy "crush spread" (the difference between product selling prices and raw material costs). If this spread narrows, profitability will suffer. Operational efficiency and co-product diversification help mitigate this risk.
• Market Oversupply: An oversupply of ethanol or distillers grains in the market could depress prices. Highwater focuses on optimizing production and exploring diverse markets for its co-products.
• Debt & Cash Flow: While manageable, the company's approximately $50 million in long-term debt requires consistent cash flow generation for servicing and repayment. Strong operational cash flow, as seen this year, is critical for financial stability.
• Environmental Regulations: Stricter environmental regulations could necessitate costly upgrades or operational changes at the plant. Highwater maintains compliance with current regulations and plans for future requirements.
• Operational Issues: Technical problems, equipment failures, or unexpected downtime at the plant could disrupt production and impact revenue. The company invests in preventative maintenance and has contingency plans in place.
• Economic Downturns: Broader economic issues, particularly in the agricultural, oil, or automotive sectors, can negatively impact demand for its products.
• Infrastructure Challenges: Efficient transportation, storage, and blending infrastructure are essential for delivering ethanol to market. Limitations in these areas could create bottlenecks.
• Technological Advancements & Competition: The rise of alternative fuels (e.g., electric vehicles), new fuel additives, or more efficient ethanol production technologies could increase competition or reduce demand for its product. Highwater continuously evaluates new technologies to maintain competitiveness.
• Global Events: Geopolitical events, trade tariffs, or global health crises (like pandemics affecting demand and supply chains) can introduce significant market volatility.

Competitive Position

Highwater Ethanol operates in a competitive ethanol production market. Its competitive advantages stem from several key factors:

• Operational Efficiency: The company's state-of-the-art plant and consistent operation at 95% capacity demonstrate high operational efficiency, crucial for cost management in a commodity-driven industry.
• Strategic Location: Located in Minnesota, the plant benefits from proximity to abundant corn supplies, reducing transportation costs for its primary feedstock. It also accesses established transportation networks for product distribution.
• Co-product Diversification: The ability to efficiently produce and market valuable co-products like DDGS and corn oil provides additional revenue streams. This helps mitigate ethanol price volatility, enhancing overall profitability compared to producers focused solely on ethanol.
• Scale: With an annual production capacity of 70.2 million gallons, Highwater Ethanol stands as a significant regional producer, achieving economies of scale in purchasing and sales.

The company competes with other ethanol producers (both large and small), alternative fuel sources, and the broader energy market. Its ability to maintain a competitive edge relies on continuous investment in technology, efficient resource management, and adaptability to market and regulatory changes.

Strategic Outlook (Future Outlook & Guidance)

Highwater Ethanol's strategy focuses on maintaining operational excellence, maximizing profitability, and adapting to market dynamics:

• Operational Efficiency: The company continuously invests in plant upgrades and process optimization to reduce production costs and improve yields, ensuring the plant remains competitive and efficient.
• Co-Product Value Maximization: Highwater Ethanol explores new markets and applications for Distillers Grains and Corn Oil to diversify revenue streams and enhance overall profitability, reducing reliance on a single product.
• Market Responsiveness: The company adapts production and sales strategies to respond to fluctuating commodity prices and regulatory changes in the ethanol market, including proactive hedging strategies.
• Financial Prudence: Highwater Ethanol effectively manages debt and maintains strong cash reserves to ensure long-term financial stability and flexibility for future opportunities, such as further capacity enhancements or technological adoption.

While specific financial guidance for future periods is not disclosed, the company's strategic focus indicates a commitment to sustained profitability and operational resilience in a dynamic market environment.

In Summary

Highwater Ethanol LLC demonstrated strong financial performance in Fiscal Year 2025, marked by increased revenue, improved margins, and solid net income. The company benefits from its expanded production capacity and efficient operations, supported by sound financial health and strategic management. However, investors should be mindful of the inherent risks associated with commodity markets, regulatory changes, and the illiquid nature of its membership units. For those comfortable with these factors, Highwater Ethanol presents a stable, profitable operation within the renewable fuels sector.