SB-2/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

PRE-EFFECTIVE AMENDMENT NO. 1 TO

FORM SB-2

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

HIGHWATER ETHANOL, LLC

(Name of small business issuer in its charter)

Minnesota	2860	20-4798531
State or jurisdiction of incorporation or organization	Primary Standard Industrial Classification Code Number	I.R.S. Employer Identification No.

205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152

(507) 752-6160

(Address and telephone number of principal executive offices and principal place of business)

Brian Kletscher, Chairman of the Board and President

205 S. Main Street, PO Box 96

Lamberton, Minnesota 56152

(507) 752-6160

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies of Communications to:

Harold N. Schneebeck

Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C.

666 Grand Avenue, Suite 2000, Des Moines, Iowa 50309-2510

(515) 242-2400

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

CALCULATION OF REGISTRATION FEE

Title of each class	Maximum number of	Proposed maximum		Proposed maximum
of securities to be	units to be	offering price per		aggregate offering		Amount of
registered	registered	unit		price		registration fee
Membership Units	6,000	$	10,000	$	60,000,000	$6,420 (1)

(1)Determined pursuant to Section 6(b) of the Securities Act of 1933 and Fee Rate Advisory #3 for Fiscal Year 2007, and Rule 457(o) of Regulation C.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

Preliminary Prospectus, Dated December 22, 2006

The information in this prospectus is not complete and may be changed. The securities offered by this prospectus may not be sold until the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is neither an offer to sell these securities nor a solicitation of an offer to buy these securities in any state where an offer or sale is not permitted.

Highwater Ethanol, LLC

a Minnesota Limited Liability Company

[Effective Date]

The Securities being offered by Highwater Ethanol, LLC are Limited Liability Company Membership Units

Minimum Offering Amount	$	45,000,000	Minimum Number of Units	4,500
Maximum Offering Amount	$	60,000,000	Maximum Number of Units	6,000

Offering Price: $10,000 per Unit

Minimum Purchase Requirement: One Unit ($10,000)

Additional Purchases in Increments of One Unit

We are offering limited liability company membership units in Highwater Ethanol, LLC, a development stage Minnesota limited liability company. We intend to use the offering proceeds to develop, construct and operate a 50 million gallon per year dry mill corn-processing ethanol manufacturing plant expected to be located in Redwood County, Minnesota near the City of Lamberton, Minnesota, however, our board of governors reserves the right to change the location of the plant site, in their sole discretion, for any reason. We estimate the total project, including operating capital, will cost approximately $110,000,000. We expect to use debt financing to complete project capitalization.  The offering will end no later than [twelve months from the effective date of this registration statement]. If we sell the maximum number of units prior to [twelve month date], the offering will end on or about the date that we sell the maximum number of units. We may also end the offering any time after we sell the minimum number of units and prior to [twelve month date]. In addition, if we abandon the project for any reason prior to [twelve month date], we will terminate the offering and promptly return offering proceeds to investors.  Proceeds from subscriptions for the units will be deposited in an interest-bearing escrow account under a written escrow agreement.  We will not release funds from the escrow account until specific conditions are satisfied.  Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

These securities are speculative securities and involve a significant degree of risk.  You should read this prospectus including the “RISK FACTORS” beginning on page 10.  You should consider these risk factors before investing in us.

·Your investment in us will be an investment in illiquid securities;

·We will need to obtain significant debt financing to fund construction of our proposed ethanol plant;

·The initial board of governors will serve until the first annual meeting following the date on which substantial operations of the proposed ethanol plant commence, which is not expected until autumn 2008; and

·Our governors and officers are inexperienced in the ethanol business.

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TABLE OF CONTENTS

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EXHIBITS
Articles of Organization	Appendix A
Member Control Agreement	Appendix B
Subscription Agreement	Appendix C

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PROSPECTUS SUMMARY

This summary only highlights selected information from this prospectus and may not contain all of the information that is important to you. You should carefully read the entire prospectus, the financial statements, and attached exhibits before you decide whether to invest.

The Company

Highwater Ethanol, LLC was formed as a Minnesota limited liability company on May 2, 2006, for the purpose of developing a project to build and operate a 50 million gallon dry mill corn-processing ethanol plant expected to be located in Redwood County, Minnesota near Lamberton. We are a development stage company with no prior operating history. We do not expect to generate any revenue until we begin operating the plant. Our ownership interests are represented by membership interests, which are designated as units. Our principal address and location is 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152. Our telephone number is (507) 752-6160.

The Offering

Minimum number of units offered	4,500 units
Maximum number of units offered	6,000 units
Purchase price per unit	$10,000
Minimum purchase amount	One ($10,000)
Additional Purchases	One unit increments
Use of proceeds	The purpose of this offering is to raise equity to help fund the construction and start-up costs of a 50 million gallon dry mill ethanol plant expected to be located in Redwood County, Minnesota.
Offering start date	We expect to start selling units as soon as possible following the declaration of effectiveness of this registration statement by the Securities and Exchange Commission.
Offering end date	The offering will end no later than [twelve month date]. If we sell the maximum number of units prior to [twelve month date],the offering will end on or about the date that we sell the maximum number of units. We may also end the offering any time after we sell the minimum number of units and prior to [twelve month date]. In addition, if we abandon the project for any reason prior to [twelve monthdate],we will terminate the offering and promptly return offering proceeds to investors.
Subscription Procedures	Before purchasing units, you must read and complete the subscription agreement, draft a check payable to “Minnwest Bank, Escrow Agent for Highwater Ethanol, LLC” in the amount of not less than 10% of the amount due for units for which subscription is sought, which amount will be deposited in the escrow account; sign a full recourse promissory note and security agreement for the remaining 90% of the total subscription price; and deliver to us these items and an executed copy of the signature page of our amended and restated operating agreement. The promissory note will become due within 20 days the subscribers receipt of written notice from Highwater Ethanol.
Escrow Procedures	Proceeds from the subscriptions for the units will be deposited in an interest bearing account that we have established with Minnwest as escrow agent under a written escrow agreement. We will not release funds from the escrow account until the following conditions are satisfied: (1) cash proceeds from unit sales deposited in the escrow account equals or exceeds $5,000,000, exclusive of interest; (2) our receipt of a written debt financing commitment for debt financing ranging from $48,320,000 to $63,320,000,

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	depending on the amount necessary to fully capitalize the project; (3) we have signed a definitive design build agreement with Fagen, Inc.; (4) we have been issued the environmental permits necessary to construct the ethanol plant; (5) we elect, in writing, to terminate the escrow agreement; and (6) Minnwest Bank provides an affidavit to the states in which the units have been registered stating that the requirements to release funds have been satisfied.
Units issued and outstanding if min. sold	4,886(1)
Units issued and outstanding if max. sold	6,386(1)
States in which we plan to register	Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin
Risk Factors	See “Risk Factors” beginning on page 7 of this prospectus for a discussion of factors that you should carefully consider before deciding to invest in our units.

(1)   Includes 236 seed capital units and 150 founder units currently issued and outstanding from our previous private placements.

We may offer or sell our units in other states in reliance upon exemptions from the registration requirements of the laws of those other states. The governors and officers identified on page 10 of this prospectus will offer the securities on our behalf directly to investors without the use of an underwriter.

The Project

If we are able to fully capitalize the project as described below, we intend to use the offering proceeds to build and operate a 50 million gallon per year dry mill corn-processing ethanol manufacturing plant in Redwood County, Minnesota. Ethanol is an alcohol that can be burned in engines like gasoline. Ethanol can be blended with gasoline as an oxygenate to decrease harmful emissions and meet clean air standards. We plan to build an ethanol plant with a name plate capacity of manufacturing 50 million gallons of denatured ethanol (fuel-grade ethanol) per year. Ethanol plants grind up the entire corn kernel, sending the non-fermentable corn oil, protein and fiber to the distillery along with the starch. These components, which make up a third of the kernel, remain after the starch is converted to alcohol and are dried and sold as distillers grains, also known by the acronyms DDG or DDGS (Distillers Dried Grains or Distillers Dried Grains with Solubles). Distillers grains are typically sold as a nutrient-rich ingredient for animal feed.  According to the engineering specifications from our anticipated design-builder, Fagen, Inc., we anticipate that on an annual basis the plant may be able to produce approximately 50 million gallons of ethanol, 160,000 tons of dried distillers grains with solubles, and 110,200 tons of carbon dioxide. While we believe our production estimates are reasonable, we can offer no assurances that our plant will produce in excess of 50 million gallons of ethanol per year.

We have entered into a design-build agreement with Fagen, Inc. for the design and construction of our proposed ethanol plant for a price of approximately $66,026,000, which does not include the anticipated cost of our water treatment facility we intend to construct, any change orders, or increases in the costs of materials.  See “DESCRIPTION OF BUSINESS – Design-Build Team” for detailed information about our design-build agreement with Fagen, Inc.

Construction of the project is expected to take approximately 16 to 18 months after construction commences. Our anticipated completion date is currently scheduled for autumn 2008. The anticipated completion date of autumn 2008 assumes that we are able to complete our financing arrangements, including this offering and debt financing in less than 12 months after the effective date of this registration statement. If we are not able to complete the equity offering and arrange debt financing, in less than 12 months after the effective date of our registration statement, our plant will likely not be complete in autumn 2008. Fagen, Inc.’s commitments to build other plants may also delay construction of our plant and postpone our start-up date. Except for our design-build agreement with Fagen, Inc., we do not have any binding or non-binding agreements with any other contractor or supplier for labor or materials necessary to construct the plant.

Our Anticipated Construction Schedule

·January – February 2007 – Conduct equity drive

·March 2007 – Negotiate and close debt financing

·Spring 2007 – Commence plant construction

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·Summer 2007 to  Autumn 2008 – Manage plant construction

·Autumn 2008 – Plant completion and commencement of operations

Most Significant Risk Factors

·Your investment in us will be an investment in illiquid securities;

·We will need to obtain significant debt financing to fund construction of our proposed ethanol plant;

·The initial board of governors will serve until the first annual meeting following the date on which substantial operations of the proposed ethanol plant commence, which is not expected until autumn 2008; and

·Our governors and officers are inexperienced in the ethanol business.

Our Financing Plan

We estimate the total project will cost approximately $110,000,000. We expect that the design and construction of the plant and the associated water treatment facility will cost approximately $78,526,000, with additional start-up and development costs of approximately $31,474,000. This is a preliminary estimate based primarily upon the experience of our anticipated general contractor, Fagen, Inc. with other plants it has built. We expect our estimate to change as we continue to develop the project. We expect to capitalize our project using a combination of equity and debt to supplement our seed capital proceeds. We raised $1,680,000 of seed capital equity in two private placements to fund our development, organizational and offering expenses. We intend to raise a minimum of $45,000,000 and a maximum of $60,000,000 of additional equity through this offering.  See “MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION — Project Capitalization.”

Depending on the level of equity raised in this offering and the amount of any bond financing and/or grants we may be awarded, we will need to obtain debt financing ranging from approximately $48,320,000 to $63,320,000 in order to supplement our seed capital proceeds of $1,680,000 and fully capitalize the project. We do not currently have a debt commitment from any financial institution or other lender for our debt financing.  We have started identifying and interviewing potential lenders, however, we have not signed any commitment for debt financing.  We estimated the range of debt financing we will need by subtracting the minimum and maximum amount of equity in this offering and the $1,680,000 we raised as seed capital from the estimated total project cost.  The following table describes our anticipated uses of equity and debt proceeds.

Use of Proceeds	Amount		Percent of Total
Plant construction	$	66,026,000	60.02	%
Water treatment facility	12,500,000		11.36	%
CCI Contingency	3,279,250		2.98	%
Land cost	810,000		0.74	%
Site development costs	8,140,000		7.40	%
Construction contingency	919,750		0.84	%
Construction performance bond	350,000		0.32	%
Construction insurance costs	150,000		0.14	%
Administrative building	350,000		0.32	%
Office equipment	80,000		0.07	%
Computers, Software, Network	150,000		0.14	%
Railroad	3,000,000		2.73	%
Rolling stock	400,000		0.36	%
Fire Protection and water supply	3,495,000		3.18	%
Capitalized interest	1,500,000		1.36	%
Start up costs:
Financing costs	600,000		0.55	%
Organization costs(1)	1,500,000		1.36	%
Pre-production period costs	750,000		0.68	%
Working capital	2,000,000		1.83	%
Inventory - corn	1,100,000		1.00	%
Inventory - chemicals and ingredients	400,000		0.36	%
Inventory - Ethanol	1,500,000		1.36	%
Inventory - DDGS	500,000		0.45	%
Spare parts - process equipment	500,000		0.45	%
Total	$	110,000,000	100.00	%

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Financial Information

We are a development stage company with no operating history and no revenues. Please see “SELECTED FINANCIAL DATA” for a summary of our finances and the index to our financial statements for our detailed financial information.

Membership in Highwater Ethanol and Our Member Control Agreement

If you purchase one or more of our units, you will become a member in Highwater Ethanol and your rights as a member will be governed by our member control agreement. Each member will have one vote per unit owned. Members may vote on a limited number of issues, such as dissolving the company, amending the member control agreement, and electing future governors. Generally we will allocate our profits and losses based upon the ratio each unit holder’s units bear to total units outstanding.

In the opinion of our counsel, Brown, Winick, Graves, Gross, Baskerville and Schoenebaum, P.L.C. of Des Moines, Iowa, we will be treated as a partnership for federal income tax purposes. As such, we will not pay any federal income taxes at the company level and will instead allocate net income to unit holders. Our unit holders must then include that income in his or her taxable income.

The transfer of units is restricted by our member control agreement, which, except in limited circumstances, does not allow unit transfers until the plant is operational. Once we are operational, certain unit transfers will be permitted. However, our units will not be listed on any national exchange and may not be readily traded due to certain restrictions imposed by tax and securities laws.  Please see “SUMMARY OF OUR MEMBER CONTROL AGREEMENT” and “FEDERAL TAX CONSEQUENCES OF OWNING OUR UNITS.”

Suitability of Investors

Investing in the units offered hereby involves a high degree of risk. Due to the high degree of risk, you cannot invest in this offering unless you meet the following suitability tests, which vary depending on the state in which you reside as follows:

For investors that reside in states other than Iowa and Kansas, the following suitability standard applies:

(1)You have annual income from whatever source of at least $45,000 and you have a net worth of at least $45,000 exclusive of home, furnishings and automobiles; or (2) you have a net worth of at least $150,000 exclusive of home, furnishings and automobiles.

For Iowa investors the following suitability standard applies:

(2)Iowa investors must have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $150,000 (exclusive of home, auto and furnishings).

For Kansas investors the following suitability standard applies:

(3)Kansas investors must have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $225,000 (exclusive of home, auto and furnishings).

For married persons, the tests will be applied on a joint husband and wife basis regardless of whether the purchase is made by one spouse or the husband and wife jointly.

With the exception of the specific suitability requirements for investors from Iowa and Kansas, we determined our suitability standards based on the North American Securities Administrators Association (“NASAA”) Statement of Policy Regarding Unsound Financial Condition.  This Statement defines an issuer in unsound financial condition as one with a going concern qualification on its financial statements and an accumulated deficit, negative stockholders’ equity, an inability to satisfy current obligations as they come due or negative cash flow/no revenue from operations.  Because we are a development-stage company with no revenue history, we are classified as an issuer in unsound financial condition.  Thus, we have imposed the above suitability standards for investors, and Iowa and Kansas each have additional investor suitability requirements for investors from their respective states.

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Units will be sold only to persons that meet these and other specific suitability requirements. Even if you represent that you meet the required suitability standards, the board of governors reserves the right to reject any portion or all of your subscription for any reason, including if the board determines that the units are not a suitable investment for you.  See “PLAN OF DISTRIBUTION – Suitability of Investors.”

Subscription Period and Procedures

The offering will end no later than [twelve months from the effective date of this registration statement]. If we sell the maximum number of units prior to [twelve month date], the offering will end on or about the date that we sell the maximum number of units. We may also end the offering any time after we sell the minimum number of units and prior to [twelve months from the effective date of this registration statement]. In addition, if we abandon the project for any reason prior to [twelve months from the effective date of this registration statement], we will terminate the offering and return offering proceeds to investors, including nominal interest on your investment less fees. We may continue to offer any remaining units to reach the maximum number to be sold until the offering closes. We reserve the right to cancel or modify the offering, to reject subscriptions for units in whole or in part, and to waive conditions to the purchase of units. Additionally, in our sole discretion, we may also determine that it is not necessary to sell all available units.

Before purchasing any units, you must read and complete the subscription agreement, draft a check payable to “Minnwest Bank, Escrow Agent for Highwater Ethanol, LLC” in the amount of not less than 10% of the amount due for units for which subscription is sought, which amount will be deposited in the escrow account; sign a full recourse promissory note and security agreement for the remaining 90% of the total subscription price; and deliver to us these items and an executed copy of the signature page of our amended and restated operating agreement.

Once you have executed the subscription agreement, you will not be able to withdraw funds from escrow, sell or transfer your units or otherwise cancel this agreement. Any time after we sell the minimum aggregate offering amount of $45,000,000, we may give written demand for payment and you will have 20 days to pay the balance of the purchase price due pursuant to the promissory note and security agreement. If you fail to pay the balance of the purchase price, you will forfeit your 10 percent cash deposit and you will not be entitled to any ownership interest in Highwater Ethanol. If we acquire sufficient equity cash proceeds to release funds from escrow prior to your initial investment, then you must pay the full purchase price at the time of subscription for the total number of units you wish to purchase.  See “PLAN OF DISTRIBUTION – Subscription Period” and “PLAN OF DISTRIBUTION – Subscription Procedures.”

Escrow Procedures

Proceeds from subscriptions for the units will be deposited in an interest-bearing escrow account that we have established with Minnwest Bank of Redwood Falls, Minnesota, as escrow agent, under a written escrow agreement.

We will not release funds from the escrow account until the following conditions are satisfied: (1) cash proceeds from unit sales deposited in the escrow account equals or exceeds $45,000,000, exclusive of interest; (2) our receipt of a written debt financing commitment for debt financing ranging from $48,320,000 to $63,320,000 depending on the amount necessary to fully capitalize the project; (3) we elect, in writing, to terminate the escrow agreement; (3) we have signed a definitive design build agreement with Fagen, Inc.; (4) we have been issued the environmental permits necessary to construct the ethanol plant; and (5) Minnwest Bank provides an affidavit to the states in which the units have been registered stating that the requirements to release funds have been satisfied.

RISK FACTORS

The purchase of units involves substantial risks and the investment is suitable only for persons with the financial capability to make and hold long-term investments not readily converted into cash. Investors must, therefore, have adequate means of providing for their current and future needs and personal contingencies. Prospective purchasers of the units should carefully consider the Risk Factors set forth below, as well as the other information appearing in this prospectus, before making any investment in the units. Investors should understand that there is a possibility that they could lose their entire investment in us.

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Risks Related to the Offering

If we fail to sell the minimum number of units, the offering will fail and your investment may be returned to you with nominal interest or no interest.

We may not be able to sell the minimum amount of units required to close on this offering. We must sell at least $45,000,000 worth of units to close the offering. If we do not sell units with a purchase price of at least $45,000,000 by [twelve months from the effective date of this registration statement], we cannot close the offering and must return investors’ money with nominal interest, less expenses for escrow agency fees. This means that from the date of your investment, you may earn a nominal rate of return on the money you deposit with us in escrow. If escrow fees exceed interest, investments may be returned without interest, but you will receive no less than the purchase price you paid for the units. We do not expect the termination date to be later than [twelve months from effective date of this prospectus].

We are not experienced in selling securities and no one has agreed to assist us or purchase any units that we cannot sell ourselves, which may result in the failure of this offering.

We are making this offering on a direct primary offering, which means that we will not use an underwriter or placement agent and if we are unsuccessful in selling the minimum aggregate offering amount by [twelve months from the effective date of this registration statement], we will be required to return your investment. We have no firm commitment from any prospective buyer to purchase our units and there can be no assurance that the offering will be successful. We plan to offer the units directly to investors by registering our securities in the states of Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin. We may hold informational meetings in each of these states. Our governors have significant responsibilities in their primary occupations in addition to trying to raise capital. Governors Brain D. Kletscher, John M. Schueller, Jason R. Fink and Timothy J. Van Der Wal all have full-time outside employment.  See “BUSINESS EXPERIENCE OF OUR GOVERNORS AND OFFICERS.”

Each of our governors involved in the sale of our units believes that he will be able to devote a significant portion (10-20 hours per  week) of his or her time to the offering. Nonetheless, the time that Governors Brain D. Kletscher, John M. Schueller, Jason R. Fink and Timothy J. Van Der Wal spend on our activities may prove insufficient to result in a successful equity offering.

These individuals have no broker-dealer experience or any experience with public offerings of securities. There can be no assurance that our governors will be successful in securing investors for the offering.

Proceeds of this offering are subject to promissory notes due after the offering is closed and investors unable to pay the 90 percent balance on their investment may have to forfeit their 10 percent cash deposit.

As much as 90 percent of the total offering proceeds of this offering could be subject to promissory notes that may not be due until after the offering is closed. If we sell the minimum number of units by [twelve months from the effective date of this registration statement], we will be able to break escrow without closing the offering. The promissory note will become due within 20 days the subscribers receipt of written notice from Highwater Ethanol.  Nonetheless, we will not be able to release funds from escrow until the notes are paid off and the cash proceeds in escrow equal or exceed $45,000,000, we have signed a definitive design build agreement with Fagen, Inc., we have been issued the environmental permits necessary to construct the ethanol plant, we have received a written debt financing commitment, the escrow agent provides an affidavit to the securities department of each state in which we have registered stating that the escrow agreement requirements have been satisfied, and we have received consent to release the funds on deposit from the state securities commissioners that condition escrow termination on our receipt of such consent.

The success of our offering will depend on the investors’ ability to pay the outstanding balances on these promissory notes.  We may choose to wait to call the balance on the notes for a variety of reasons related to construction and development of the project.  Under the terms of the offering, we may wait until the tenth day of the 11th month to call the balance.  If we wait to call the balance on the notes for a significant period of time after we sell the minimum, the risk of nonpayment on the notes may increase.  In order to become a member in Highwater Ethanol, each investor must, among other requirements, submit a check in the amount of 10 percent of the total amount due for the number of units for which subscription is sought, and a promissory note for the remaining 90 percent of the total amount due for the units. That balance will become due within 20 days of the date of our notice that our sales of units, including the amounts owed under the promissory notes, have exceeded the minimum escrow deposit of $45,000,000. We will take a security interest in the units. We intend to retain the initial payment and to seek damages from any investor who defaults on the promissory note obligation. This means that if you are unable to pay the 90 percent balance of your investment within 20 days of our notice, you may have to forfeit your 10 percent cash deposit. Accordingly, the success of the offering depends on the payment of these amounts by the obligors.

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Investors will not be allowed to withdraw their investments, which means that you should invest only if you are willing to have your investment unavailable to you for an indefinite period of time.

Investors will not be allowed to withdraw their investments for any reason, absent a rescission offer tendered by Highwater Ethanol. We do not anticipate making a rescission offer. You should only invest in us if you are willing to have your investment be unavailable until we break escrow, which could be up to one year after the effective date of our registration statement. If our offering succeeds, and we convert your cash investment into units of Highwater Ethanol, your investment will be denominated in our units until you transfer those units. There are significant transfer restrictions on our units. You will not have a right to withdraw from Highwater Ethanol and demand a cash payment from us. Therefore, your investment may be unavailable to you for an indefinite period of time.

Risks Related to the Units

There has been no independent valuation of the units, which means that the units may be worth less than the purchase price.

The per unit purchase price has been determined by us without independent valuation of the units and is $10,000 per unit.  We established the offering prices based on our estimate of capital and expense requirements, not based on perceived market value, book value, or other established criteria. We did not obtain an independent appraisal opinion on the valuation of the units. The units may have a value significantly less than the offering prices and there is no guarantee that the units will ever obtain a value equal to or greater than the offering price.

No public trading market exists for our units and we do not anticipate the creation of such a market, which means that it will be difficult for you to liquidate your investment.

There is currently no established public trading market for our units and an active trading market will not develop despite this offering. To maintain partnership tax status, you may not trade the units on an established securities market or readily trade the units on a secondary market (or the substantial equivalent thereof). We, therefore, will not apply for listing of the units on any national securities exchange or on the NASDAQ Stock Market. As a result, you will not be able to readily sell your units.

Public investors will experience immediate and substantial dilution as a result of this offering.

Our founders paid $3,333.33 per unit and our seed capital investors paid $5,000 per unit, which is substantially less per unit for our membership units than the current public offering price of $10,000 per unit. Accordingly, if you purchase units in this offering, you will experience immediate and substantial dilution of your investment. Based upon the issuance and sale of the minimum number of units (4,500) at the public offering price of $10,000 per unit, you will incur immediate dilution of $620.79 in the net tangible book value per unit if you purchase units in this offering. If we sell the maximum number of units (6,000) at the public offering price of $10,000 per unit, you will incur immediate dilution of $474.97 in the net tangible book value per unit if you purchase units in this offering.

We have placed significant restrictions on transferability of the units, limiting an investor’s ability to withdraw from the company.

The units are subject to substantial transfer restrictions pursuant to our member control agreement. In addition, transfers of the units may be restricted by state securities laws. As a result, you may not be able to liquidate your investment in the units and, therefore, may be required to assume the risks of investment in us for an indefinite period of time. See “SUMMARY OF OUR MEMBER CONTROL AGREEMENT.”

To help ensure that a secondary market does not develop, our member control agreement prohibits transfers without the approval of our board of governors. The board of governors will not approve transfers unless they fall within “safe harbors” contained in the publicly-traded partnership rules under the tax code, which include, without limitation, the following:

·transfers by gift to the member’s spouse or descendants;

·transfer upon the death of a member;

·transfers between family members; and

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·transfers that comply with the “qualifying matching services” requirements.

A qualified matching service is qualified only if: (1) it consists of a computerized or printed system that lists customers’ bid and/or ask prices in order to match unit holders who want to sell with persons who want to buy; (2) matching occurs either by matching the list of interested buyers with the list of interested sellers or through a bid and ask process that allows interested buyers to bid on the listed interest; (3) the seller cannot enter into a binding agreement to sell the interest until the 15th calendar day after his interest is listed, which time period must be confirmable by maintenance of contemporaneous records; (4) the closing of a sale effectuated through the matching service does not occur prior to the 45th calendar day after the interest is listed; (5) the matching service displays only quotes that do not commit any person to buy or sell an interest at the quoted price (nonfirm price quotes), or quotes that express an interest in acquiring an interest without an accompanying price (nonbinding indications of interest), and does not display quotes at which any person is committed to buy or sell an interest at the quoted price; (6) the seller’s information is removed within 120 days of its listing and is not reentered into the system for at least 60 days after its deletion; and (7) the sum of the percentage interests transferred during the entity’s tax year, excluding private transfers, cannot exceed ten percent of the total interests in partnership capital or profits.  See “Publicly Traded Partnership Rules,” below.

There is no assurance that an investor will receive cash distributions which could result in an investor receiving little or no return on his or her investment.

Distributions are payable at the sole discretion of our board of governors, subject to the provisions of the Minnesota Limited Liability Company Act, our member control agreement and the requirements of our creditors. We do not know the amount of cash that we will generate, if any, once we begin operations. Cash distributions are not assured, and we may never be in a position to make distributions. See “DESCRIPTION OF MEMBERSHIP UNITS.” Our board may elect to retain future profits to provide operational financing for the plant, debt retirement and possible plant expansion or the construction of additional plants. This means that you may receive little or no return on your investment and be unable to liquidate your investment due to transfer restrictions and lack of a public trading market. This could result in the loss of your entire investment.

These units will be subordinate to company debts and other liabilities, resulting in a greater risk of loss for investors.

The units are unsecured equity interests and are subordinate in right of payment to all our current and future debt. In the event of our insolvency, liquidation, dissolution or other winding up of our affairs, all of our debts, including winding-up expenses, must be paid in full before any payment is made to the holders of the units. In the event of our bankruptcy, liquidation, or reorganization, all units will be paid ratably with all our other equity holders, and there is no assurance that there would be any remaining funds after the payment of all our debts for any distribution to the holders of the units.  As of September 30, 2006, our most recent unaudited financial statement, Highwater Ethanol did not have any debt.  We do not anticipate having debt until we execute a debt financing loan in an amount ranging from $48,320,000 to $63,320,000.  Once we have executed a debt financing loan, our membership units will be subordinated in right of payment to all of Highwater Ethanol’s debt.

You may have limited access to information regarding our business because our obligations to file periodic reports with the Securities and Exchange Commission could be automatically suspended under certain circumstances.

Except for our duty to deliver audited annual financial statements to our members pursuant to our member control agreement, we are not required to deliver an annual report to security holders and currently have no plan to do so. We also will not be required to furnish proxy statements to security holders and our governors, officers and beneficial owners will not be required to report their beneficial ownership of units to the Securities and Exchange Commission pursuant to Section 16 of the Securities Exchange Act of 1934 until we have both 500 or more unit holders and greater than $10 million in assets. This means that your access to information regarding our business will be limited. However, as of effectiveness of our registration statement, we will be required to file periodic reports with the Securities and Exchange Commission which will be immediately available to the public for inspection and copying.  Except during the fiscal year that our registration statement becomes effective these reporting obligations will be automatically suspended under Section 15(d) of the Securities Exchange Act of 1934 if we have less than 300 members. If this occurs after the fiscal year in which our registration statement becomes effective, we will no longer be obligated to file periodic reports with the SEC and your access to our business information would then be even more restricted.

The presence of members holding 50 percent or more of the outstanding units is required to take action at a meeting of our members.

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In order to take action at a meeting, a quorum of members holding at least 50 percent of the outstanding units must be represented in person, by proxy or by mail ballot. See “SUMMARY OF OUR MEMBER CONTROL AGREEMENT.” Assuming a quorum is present, members take action by a vote of the majority of the units represented at the meeting and entitled to vote on the matter. The requirement of a 50 percent quorum protects the company from actions being taken when less than 50 percent of the members have not considered the matter being voted upon.  The requirement of a 50 percent quorum also means that members will not be able to take actions which may be in the best interests of the Company if we cannot secure the presence in person, by proxy, or by mail ballot of members holding 50 percent or more of the outstanding units.

After the plant is substantially operational, our member control agreement provides for staggered terms for our governors.

The terms of our initial governors expire at the first annual meeting following substantial completion of the ethanol plant. At that time, our members will elect governors for staggered three-year terms. Because our governors will serve on the board for staggered terms, it will be difficult for our members to replace our board of governors. In that event, your only recourse to replace these governors would be through an amendment to our member control agreement which could be difficult to accomplish.

Risks Related to Our Financing Plan

Even if we raise the minimum amount of equity in this offering, we may not obtain the debt financing necessary to construct and operate our ethanol plant, which would result in the failure of the project and Highwater Ethanol and the potential loss of your investment.

Our financing plan requires a significant amount of debt financing. We do not have contracts or commitments with any bank, lender, governmental entity, underwriter or financial institution for debt financing.

We will not release funds from escrow until we secure a written debt financing commitment sufficient to construct and operate the ethanol plant. If debt financing on acceptable terms is not available for any reason, we will be forced to abandon our business plan and return your investment from escrow plus nominal interest less deduction for escrow agency fees. Depending on the level of equity raised in this offering, we expect to require approximately $48,320,000 to $63,320,000 (less any grants we are awarded and any bond financing we can procure) in senior or subordinated long term debt from one or more commercial banks or other lenders. Because the amounts of equity, bond financing and grant funding are not yet known, the exact amount and nature of total debt is also unknown. If we do not sell the minimum amount of units, the offering will not close. Even though we must receive a debt financing commitment as a condition of closing escrow, the agreements to obtain debt financing may not be fully negotiated when we close on escrow. Therefore, there is no assurance that such commitment will be received, or if it is received, that it will be on terms acceptable to us. If agreements to obtain debt financing are arranged and executed, we expect that we will be required to use the funds raised from this offering prior to receiving the debt financing funds.

If we decide to spend equity proceeds and begin plant construction before we have fulfilled all of the loan commitment conditions, signed binding loan agreements or received loan proceeds, we may be unable to close the loan and you may lose all of your investment.

If we sell the aggregate minimum number of units prior to [one year from the effective date of this registration statement] and satisfy the other conditions of releasing funds from escrow, including our receipt of a written debt financing commitment, we may decide to begin spending the equity proceeds to begin plant construction or for other project-related expenses. If, after we begin spending equity proceeds, we are unable to close the loan, we may have to seek another debt financing source or abandon the project. If that happens, you could lose some or all of your investment.

If we successfully release funds from escrow but are unable to close our loan, we may decide to hold your investment while we search for alternative debt financing sources, which means your investment will continue to be unavailable to you and may decline in value.

We must obtain a written debt financing commitment prior to releasing funds from escrow. However, a debt financing commitment does not guarantee that we will be able to successfully close the loan. If we fail to close the loan, we may choose to seek alternative debt financing sources. While we search for alternative debt financing, we may continue to hold your investment in another interest-bearing account. Your investment will continue to be unavailable while we search for alternative debt financing. It is possible that your investment will decline in value while we search for the debt financing necessary to complete our project.

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Future loan agreements with lenders may hinder our ability to operate the business by imposing restrictive loan covenants, which could delay or prohibit us from making cash distributions to our unit holders.

Our debt load necessary to implement our business plan will result in substantial debt service requirements. Our debt load and service requirements could have important consequences which could hinder our ability to operate, including our ability to:

·Incur additional indebtedness;

·Make capital expenditures or enter into lease arrangements in excess of prescribed thresholds;

·Make distributions to unit holders, or redeem or repurchase units;

·Make certain types of investments;

·Create liens on our assets;

·Utilize the proceeds of asset sales; and

·Merge or consolidate or dispose of all, or substantially all, of our assets.

In the event that we are unable to pay our debt service obligations, our creditors could force us to (1) reduce or eliminate distributions to unit holders (even for tax purposes); or (2) reduce or eliminate needed capital expenditures. It is possible that we could be forced to sell assets, seek to obtain additional equity capital or refinance or restructure all or a portion of our debt. In the event that we would be unable to refinance our indebtedness or raise funds through asset sales, sales of equity or otherwise, our ability to operate our plant would be greatly affected and we may be forced to liquidate.

We do not have any bond financing commitments or contracts and if we are unable to obtain bond financing or if the bond financing is provided on unfavorable terms, our financial performance may suffer and the value of your investment may be reduced.

We may use bond financing to help capitalize the project, however, we do not have contracts or commitments with any lender, bank, financial institution, governmental entity or underwriter to provide bond financing for our project. There is no assurance that we will be able to use bond financing or that bond financing, if available, will be secured on terms that are favorable to us. If we do not use bond financing, we may be charged a higher interest rate or our secured lenders may require a greater amount of equity financing in order to complete project capitalization. If bond financing is not available or is only available on terms that are not favorable to us, our financial performance may suffer and your investment could lose value.

Risks Related to Highwater Ethanol as a Development Stage Company

Highwater Ethanol has no operating history, which could result in errors in management and operations causing a reduction in the value of your investment.

We were recently formed and have no history of operations. We cannot provide assurance that Highwater Ethanol can manage start-up effectively and properly staff operations, and any failure to manage our start-up effectively could delay the commencement of plant operations. A delay in start-up operations is likely to further delay our ability to generate revenue and satisfy our debt obligations. We anticipate a period of significant growth, involving the construction and start-up of operations of the plant. This period of growth and the start-up of the plant are likely to be a substantial challenge to us. If we fail to manage start-up effectively, you could lose all or a substantial part of your investment.

We have little to no experience in the ethanol industry, which increases the risk of our inability to build and operate the ethanol plant.

We are presently, and are likely for some time to continue to be, dependent upon our founding members, some of whom will serve as our initial governors. Most of these individuals are experienced in business generally but have very little or no experience in raising capital from the public, organizing and building an ethanol plant, and governing and operating a public company. None of our governors has expertise in the ethanol industry. See “GOVERNORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.” In addition, certain governors on our board are presently engaged in business and other activities which impose

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substantial demand on the time and attention of such governors. You should not purchase units unless you are willing to entrust all aspects of our management to our board of governors.

We will depend on Fagen, Inc. for expertise in beginning our operations in the ethanol industry and any loss of this relationship could cause us delay and added expense, placing us at a competitive disadvantage.

We will be dependent on our relationship with Fagen, Inc. and its employees. Any loss of this relationship with Fagen, Inc., particularly during the construction and start-up period for the plant, may prevent us from commencing operations and result in the failure of our business. The time and expense of locating new consultants and contractors would result in unforeseen expenses and delays. Unforeseen expenses and delays may reduce our ability to generate revenue and profitability and significantly damage our competitive position in the ethanol industry such that you could lose some or all of your investment.

If we fail to finalize critical agreements, such as the  co-product marketing agreements and utility supply agreements, orthe final agreements are unfavorable compared to what we currently anticipate, our project may fail or be harmed in ways that significantly reduce the value of your investment.

You should be aware that this prospectus makes reference to documents or agreements that are not yet final or executed, and plans that have not been implemented. In some instances such documents or agreements are not even in draft form. The definitive versions of those agreements, documents, plans or proposals may contain terms or conditions that vary significantly from the terms and conditions described. These tentative agreements, documents, plans or proposals may not materialize or, if they do materialize, may not prove to be profitable.

Our lack of business diversification could result in the devaluation of our units if our revenues from our primary products decrease.

We expect our business to solely consist of ethanol and distillers grains and any other co-product we are able to market. We do not have any other lines of business or other sources of revenue if we are unable to complete the construction and operation of the plant. Our lack of business diversification could cause you to lose all or some of your investment if we are unable to generate revenues by the production and sale of ethanol and distillers grain and other co-products since we do not expect to have any other lines of business or alternative revenue sources.

We have a history of losses and may not ever operate profitably.

From our inception on May 2, 2006 through September 30, 2006, we incurred an accumulated net loss of $303,177. We will continue to incur significant losses until we successfully complete construction and commence operations of the plant. There is no assurance that we will be successful in completing this offering and/or in our efforts to build and operate an ethanol plant. Even if we successfully meet all of these objectives and begin operations at the ethanol plant, there is no assurance that we will be able to operate profitably.

Your investment may decline in value due to decisions made by our initial board of governors and until the plant is built, your only recourse to replace these governors will be through amendment to our member control agreement.

Our member control agreement provides that the initial board of governors will serve until the first annual or special meeting of the members following commencement of substantial operations of the ethanol plant. If our project suffers delays due to financing or construction, our initial board of governors could serve for an extended period of time. In that event, your only recourse to replace these governors would be through an amendment to our member control agreement which could be difficult to accomplish.

We may not be able to hire employees capable of effectively operating the ethanol plant, which may hinder our ability to operate profitably.

We are a development stage company, and therefore, we currently have only one part-time office employee. If we are not able to hire additional employees who can effectively operate the plant, our ability to generate revenue will be significantly reduced or prevented altogether such that you could lose all or a substantial portion of your investment.

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Risks Related to Construction of the Ethanol Plant

We will depend on Fagen, Inc. and ICM, Inc. to design and build our ethanol plant and their failure to perform could force us to abandon our business, hinder our ability to operate profitably or decrease the value of your investment.

We will be highly dependent upon Fagen, Inc. and ICM, Inc. to design and build the plant. We have entered into a design-build agreement with Fagen, Inc. for various design and construction services. Fagen, Inc. will serve as our general contractor and will engage ICM, Inc. to provide design and engineering services.

If Fagen, Inc. terminates its relationship with us after initiating construction, there is no assurance that we would be able to obtain a replacement general contractor. Any such event may force us to abandon our business.

We are relying on Fagen, Inc. and ICM, Inc. to supply all of the technology necessary for the construction of our plant and the production of fuel-grade ethanol and distillers grains and we expect they will either own this technology or obtain a license to utilize it.

We will be dependent upon Fagen, Inc. and/or ICM, Inc. for all of the technology used in our plant that relates to construction of the plant and the plant’s production of fuel-grade ethanol and distillers grains.  We expect that Fagen, Inc. or ICM, Inc. will either own the technology or obtain a license necessary for its use.  If either Fagen, Inc. or ICM, Inc. fails to provide the necessary technology, we may not be able to build our plant or successfully operate it.

We may need to increase cost estimates for construction of the ethanol plant, and such increase could result in devaluation of our units if ethanol plant construction requires additional capital.

Fagen, Inc. will construct the plant for a fixed contract price of approximately $66,026,000 based on the plans and specifications in the design-build agreement. We have based our capital needs on a design for the plant that will cost approximately $78,526,000, which includes the cost of our water treatment equipment not contemplated by our design-build agreement, with additional start-up and development costs of approximately $31,474,000 for a total project completion cost of approximately $110,000,000. This price includes construction period interest. The estimated cost of the plant is based on preliminary discussions, and there is no assurance that the final cost of the plant will not be higher. There is no assurance that there will not be design changes or cost overruns associated with the construction of the plant. In addition, shortages of steel or other building materials could affect the final cost and final completion date of the project. Any significant increase in the estimated construction cost of the plant could delay our ability to generate revenues and reduce the value of your units because our revenue stream may not be able to adequately support the increased cost and expense attributable to increased construction costs.

Project construction costs may increase with the cost of construction materials which may result in a devaluation of our units.

The Company signed an agreement in September 2006 with Fagen, Inc. to design and build the ethanol plant at a total contract price of approximately $66,026,000. This contract price may be further increased if the construction cost index (“CCI”) published by Engineering News-Record Magazine reports a CCI greater than 7,660.29 in the month in which we issue to Fagen, Inc., a notice to proceed with plant construction. The amount of the contract price increase will be equal to the percentage increase in the CCI based upon the January 2006 CCI of 7,660.29. As of September 30, 2006, the CCI was reported at 7,763.15, which is significantly higher than the January 2006 level stated in the design build agreement. If the CCI remains at the September 2006 level or increases above that level in the month in which we issue to Fagen, Inc. a notice to proceed with plant construction, the contract price will accordingly increase by at least approximately $886,000.  Thus, we have allowed for a $3,279,250 contingency in our total estimated costs of the project. This may not be sufficient to offset any upward adjustment in our construction cost. Under the design-build agreement, our expenses will increase for any change orders we may approve.

Construction delays could result in devaluation of our units if our production and sale of ethanol and its co-products are similarly delayed.

We currently expect our plant to be complete and operating by autumn 2008; however, construction projects often involve delays in obtaining permits, construction delays due to weather conditions, or other events that delay the construction schedule. In addition, Fagen, Inc.’s involvement in the construction of a number of other plants while constructing our plant could cause delays in our construction schedule. Also, any changes in interest rates or the credit environment or any changes in political administrations at the federal, state or local level that result in policy changes toward ethanol or this project, could also cause construction and operation

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delays. If it takes longer to construct the plant than we anticipate, it would delay our ability to generate revenue and make it difficult for us to meet our debt service obligations. This could reduce the value of your units.

Fagen, Inc. and ICM, Inc. may have current or future commitments to design and build other ethanol manufacturing facilities ahead of our plant and those commitments could delay construction of our plant  and our ability to generate revenues.

We do not know how many ethanol plants Fagen, Inc. and ICM, Inc. have currently contracted to design and build.  It is possible that Fagen, Inc. and ICM, Inc. have outstanding commitments to other facilities that may cause the construction of our plant to be delayed.  It is also possible that Fagen, Inc. and ICM, Inc. will continue to contract with new facilities for plant construction and with operating facilities for expansion construction.  These current and future building commitments may reduce the available resources of Fagen, Inc. and ICM, Inc. to such an extent that construction of our plant is significantly delayed.  If this occurs, our ability to generate revenue will also be delayed and the value of your investment will be reduced.

Defects in plant construction could result in devaluation of our units if our plant does not produce ethanol and its co-products as anticipated,  or could put us at increased risk for fire or an explosion.

There is no assurance that defects in materials and/or workmanship in the plant will not occur. Such defects could delay the commencement of operations of the plant, or, if such defects are discovered after operations have commenced, could cause us to halt or discontinue the plant’s operation. Halting or discontinuing plant operations could delay our ability to generate revenues and reduce the value or your units.  In addition, defects in materials or workmanship could put us at an increased risk of loss due to fire or an explosion.  A loss due to fire or an explosion could cause us to slow or halt production which could reduce the value of your investment.

The plant site may have unknown environmental problems that could be expensive and time consuming to correct, which may delay or halt plant construction and delay our ability to generate revenue.

On June 7, 2006, we obtained an option to purchase a parcel of land, consisting of approximately 68 acres, in Redwood County, Minnesota. We anticipate locating our plant on this site, however, our board of governors reserves the right to change the location of the plant site, in their sole discretion, for any reason. The historical use of the site has been rural agriculture. Given the historical agricultural use of the property, we have no reason to believe that there is a material risk of environmental problems. Nonetheless, there can be no assurance that we will not encounter hazardous environmental conditions at the Redwood County site or any alternative site that may delay the construction of the plant. We do not anticipate Fagen, Inc. will be responsible for any hazardous environmental conditions encountered at the plant site. Upon encountering a hazardous environmental condition, Fagen, Inc. may suspend work in the affected area. If we receive notice of a hazardous environmental condition, we may be required to correct the condition prior to continuing construction. The presence of a hazardous environmental condition will likely delay construction of the plant and may require significant expenditure of our resources to correct the condition. In addition, Fagen, Inc. will be entitled to an adjustment in price and time of performance if it has been adversely affected by the hazardous environmental condition. If we encounter any hazardous environmental conditions during construction that require time or money to correct, such event could delay our ability to generate revenues and reduce the value or your units.

We have not received certain permits and failure to obtain these permits would prevent operation of the plant.

We expect that we will use water to cool our closed circuit systems in the proposed plant based upon engineering specifications. Permits will need to be acquired for the discharge of certain cooling waters. There can be no assurances that these permits will be granted to us. If these permits are not granted, then our plant may not be allowed to operate.

While we expect the plant to be located in Redwood County, Minnesota, we currently anticipate obtaining water from high capacity wells in Cottonwood County, Minnesota, which borders Redwood County. We have applied for a water permit application for appropriation of water from the State of Minnesota. The application is being processed, however, there is no assurance that this permit can be obtained.

We anticipate that we will obtain a number of other permits from the Minnesota Pollution Control Agency related to air emissions and wastewater and stormwater discharge.  While we anticipate receiving these permits, there is no assurance that we will obtain all of the necessary permits.  Our inability to obtain the necessary environmental permits could prohibit commencement of construction or operation of the plant thereby reducing the value of your investment.

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The ethanol industry is a feedstock limited industry.  An inadequate supply of corn, our primary feedstock, could cause the price of corn to increase and threaten the viability of our plant and cause you to lose some or all of your investment.

The number of ethanol manufacturing plants either in production or in the planning or construction phases continues to increase at a rapid pace.  This increase in the number of ethanol plants will affect both the supply and the demand for corn.  As more plants develop and go into production there may not be an adequate supply of feedstock to satisfy the demand of the ethanol industry and the livestock industry, which uses corn in animal rations.  Consequently, the price of corn may rise to the point where it threatens the viability of our project, or significantly decreases the value of your investment or threatens your investment altogether. See “Plan of Operations Until Start-Up of Ethanol Plant.”

Risks Related to Conflicts of Interest

We will have no independent governors which means that the agreements we enter into may not be negotiated on as favorable terms as they might have been if we had independent governors.

Our board will have no independent governors as defined by the North American Securities Administrators Association. Accordingly, any contracts or agreements we enter into, including those with Fagen, Inc. will not be approved by independent governors since there are none at this time.

Our governors and officers have other business and management responsibilities which may cause conflicts of interest in the allocation of their time and services to our project.

Since our project is currently managed by the board of governors rather than a professional management group, the devotion of the governors’ time to the project is critical. However, the governors and officers have other management responsibilities and business interests apart from our project. As a result, our governors and officers may experience conflicts of interest in allocating their time and services between us and their other business responsibilities. In addition, conflicts of interest may arise if the governors and officers, either individually or collectively, hold a substantial percentage of the units because of their position to substantially influence our business and management.

We may have conflicting financial interests with Fagen, Inc., and ICM, Inc., which could cause Fagen, Inc. and ICM, Inc. to put their financial interests ahead of ours.

Fagen, Inc. and ICM, Inc. and their affiliates may have conflicts of interest because Fagen, Inc., ICM, Inc. and their employees or agents are involved as owners, creditors and in other capacities with other ethanol plants in the United States. We cannot require Fagen, Inc. or ICM, Inc. to devote their full time or attention to our activities. As a result, Fagen, Inc. and ICM, Inc. may have, or come to have, a conflict of interest in allocating personnel, materials and other resources to our plant.

Affiliated investors may purchase additional units and influence decisions in their favor.

We may sell units to affiliated or institutional investors and they may acquire enough units to influence the manner in which we are managed. These investors may influence our business in a manner more beneficial to themselves than to our other investors. This may reduce the value of your units, impair the liquidity of your units and/or reduce our profitability.

Risks Related to the Production of Ethanol

We may not be able to purchase the necessary amounts of corn in the area surrounding our ethanol plant or the purchase may not be cost-effective due to the limited corn supply in our geographical area, potential disease, agricultural risks, and competition with other new plants.

Ethanol production at our ethanol plant will require significant amounts of corn. Our corn availability study prepared by PRX Geographic, Inc. indicates that adequate corn is available in the area surrounding our potential site for the plant   The corn availability study may not be accurate and may overstate the availability of corn in the Lamberton, Minnesota area.  Currently, we have a corn origination agreement with Meadowland Farmers Coop, however, if an adequate supply of corn is unavailable we may be forced to pay more for corn than our competitors, which may lead to a reduction in our profitability and may ultimately cause our project to fail.  

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Additionally, corn supplies, as with most other crops, can be subject to interruption or shortages caused by weather, transportation difficulties, disease and other various planting, growing or harvesting problems. A significant reduction in the quantity of corn harvested due to these factors could result in increased corn costs, which will reduce our profitability and the value of your units.

Finally, other new ethanol plants may be developed in the State of Minnesota or other nearby states. If these plants are successfully developed and constructed, we expect to compete with them for corn origination. Competition for corn origination may increase our costs of corn and harm our financial performance and the value of your investment.

The expansion of domestic ethanol production in combination with state bans on Methyl Tertiary Butyl Ether (MTBE) and/or state renewable fuels standards  may place strains on rail and terminal infrastructure such that our ethanol cannot be marketed and shipped to the blending terminals that would otherwise provide us the best cost advantages.

If the volume of ethanol shipments continues to increase and blenders switch from MTBE to ethanol, there may be weaknesses in infrastructure and its capacity to transport ethanol such that our product cannot reach its target markets.  Many terminals may need to make infrastructure changes to blend ethanol instead of MTBE.  If the blending terminals do not have sufficient capacity or the necessary infrastructure to make this switch, there may be an oversupply of ethanol on the market, which could depress ethanol prices and negatively impact our financial performance.  In addition, rail infrastructure may be inadequate to meet the expanding volume of ethanol shipments, which could prevent us from shipping our ethanol to target markets and may even cause our plant to slow or halt production.

Our financial performance will be significantly dependent on corn and natural gas prices and market prices for ethanol and distillers dried grains, and the value of your investment in us will be directly affected by changes in these market prices.

Our results of operations and financial condition will be significantly affected by the cost and supply of corn and natural gas. Changes in the price and supply of corn and natural gas are subject to and determined by market forces over which we have no control.

The availability and price of corn will significantly influence our financial performance. We will purchase our corn in the cash market and expect to hedge corn price risk through futures contracts and options to reduce short-term exposure to price fluctuations.   See “DESCRIPTION OF BUSINESS-Corn Feedstock Supply” for a  table illustrating corn prices and the amount of corn produced in the seven county area surrounding our proposed plant location. There is no assurance that our hedging activities will successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn prices. Hedging activities themselves can result in costs because price movements in corn contracts are highly volatile and are influenced by many factors that are beyond our control. We may incur such costs and they may be significant.

Generally, higher corn prices will produce lower profit margins. This is especially true if market conditions do not allow us to pass through increased corn costs to our customers. There is no assurance that we will be able to pass through higher corn prices. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to generate revenues because of the higher cost of operating and could potentially lead to the loss of some or all of your investment.

Our revenues will be greatly affected by the price at which we can sell our ethanol and distillers grains. These prices can be volatile as a result of a number of factors. These factors include the overall supply and demand, the price of gasoline, level of government support, and the availability and price of competing products. For instance, the price of ethanol tends to increase as the price of gasoline increases, and the price of ethanol tends to decrease as the price of gasoline decreases. Any lowering of gasoline prices will likely also lead to lower prices for ethanol, which may decrease our ethanol sales and reduce revenues, causing a reduction in the value of your investment.  See “DESCRIPTION OF BUSINESS-Distillers Grains Pricing” for a table illustrating the price of distillers grains pricing.

The price of ethanol has recently been much higher than its 10-year average. See “DESCRIPTION OF BUSINESS-Ethanol Pricing” for comparison charts of average ethanol and gasoline rack prices and a chart of the ten year history of the market price for ethanol. We do not expect these prices to be sustainable as supply from new and existing ethanol plants increases to meet increased demand. Increased production of ethanol may lead to lower prices. The increased production of ethanol could have other adverse effects. For example, the increased production could lead to increased supplies of  co-products from the production of ethanol, such as distillers grains. Those increased supplies could outpace demand, which would lead to lower prices for those co-products. Also, the increased production of ethanol could result in increased demand for corn. This could result in higher prices for corn and corn production creating lower profits. There can be no assurance as to the price of ethanol or distillers grains in the future. Any downward  

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changes in the price of ethanol and/or distillers grains may result in less income which would decrease our revenues and you could lose some or all of your investment as a result.

We rely on third parties for our supply of natural gas, which is consumed in the production of ethanol. The prices for and availability of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond our control such as higher prices resulting from colder than average weather conditions, overall economic conditions and foreign and domestic governmental regulations. Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol for our customers. Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition. See “DESCRIPTION OF BUSINESS-Utilites” for a table  illustrating the price of natural gas in recent years.

We will depend on others for sales of our products, which may place us at a competitive disadvantage and reduce profitability.

We expect to hire a third-party marketing firm to market all of the ethanol we plan to produce. We currently expect to market our own distillers grains by selling to local livestock markets. However, if the local markets do not provide an adequate outlet for our distillers grains at the prices we desire, we expect to contract with a broker to market and sell a portion or all of our distillers grains. As a result, we expect to be dependent on the ethanol broker and any distillers grains broker we engage. There is no assurance that we will be able to enter into contracts with any ethanol broker or distillers grains broker on terms that are favorable to us. If the ethanol or distillers grains broker breaches the contract or does not have the ability, for financial or other reasons, to market all of the ethanol or distillers grains we produce, we will not have any readily available means to sell our products. Our lack of a sales force and reliance on third parties to sell and market our products may place us at a competitive disadvantage. Our failure to sell all of our ethanol and distillers dried grains feed products may result in less income from sales, reducing our revenue stream, which could reduce the value of your investment.

Changes and advances in ethanol production technology could require us to incur costs to update our ethanol plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably.

Advances and changes in the technology of ethanol production are expected to occur. Such advances and changes may make the ethanol production technology 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. If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive. Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures. We cannot guarantee or assure you that third-party licenses will be available or, once obtained, will continue to be available on commercially reasonable terms, if at all. These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income, all of which could reduce the value of your investment.

Risks Related to the Ethanol Industry

Competition from the advancement of alternative fuels may lessen the demand for ethanol and negatively impact our profitability, which could reduce the value of your investment.

Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry offers a technological option to address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If the fuel cell and hydrogen industries continue to expand and gain broad acceptance, and hydrogen becomes readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, which would negatively impact our profitability, causing a reduction in the value of your investment.

Corn-based ethanol may compete with cellulose-based ethanol in the future, which could make it more difficult for us to produce ethanol on a cost-effective basis and could reduce the value of your investment.

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Most ethanol is currently produced from corn and other raw grains, such as milo or sorghum - especially in the Midwest. 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 U.S. Department of Energy entitled “Outlook for Biomass Ethanol Production and Demand” indicates that new conversion technologies may be developed in the future. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. We do not believe it will be cost-effective to convert the ethanol plant we are proposing into a plant which will use cellulose-based biomass to produce ethanol. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue will be negatively impacted and your investment could lose value.

As domestic ethanol production continues to grow, ethanol supply may exceed demand causing ethanol prices to decline and the value of your investment to be reduced.

The number of ethanol plants being developed and constructed in the United States continues to increase at a rapid pace. The recent passage of the Energy Policy Act of 2005 included a renewable fuels mandate that we expect will further increase the number of domestic ethanol production facilities. Archer Daniels Midland recently announced its plan to add approximately 500 million gallons per year of additional ethanol production capacity in the United States. ADM is currently the largest ethanol producer in the U.S. and controls a significant portion of the ethanol market. ADM’s plan to produce an additional 500 million gallons of ethanol per year will strengthen its position in the ethanol industry and cause a significant increase in domestic ethanol supply. As these plants begin operations, we expect domestic ethanol production to significantly increase. If the demand for ethanol does not grow at the same pace as increases in supply, we would 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.

Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, adds to air pollution, harms engines, reduces fuel efficiency and takes more energy to produce that it contributes may affect the demand for ethanol which could affect our ability to market our product and reduce the value of your investment.

Media reports in the popular press indicate that some consumers believe that use of ethanol will have a negative impact on gasoline prices at the pump. Many also believe that ethanol adds to air pollution and harms car and truck engines. It is also widely reported that ethanol products such as E-85 significantly reduce fuel economy and cause overall fuel costs to substantially increase.   Researchers have published studies reporting that the production of ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of ethanol that is produced. 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 lower demand for our product and negatively affect our profitability.

The inability of retailers to obtain pump certifications could prevent retailers from selling E85, which could decrease the overall demand for ethanol and could  reduce the value of your investment.

The demand for E85 is driven in part by the availability of E85 at retail stations.  Distributing E85 to consumers through retail stations depends, in part, on the ability of retailers to obtain quality certifications for E85 pumps.  Recently, a private product-safety testing group suspended its approval of various internal component parts of E85 pumps and its issuance of E85 pump certifications pending its own research on the ability of various component parts to withstand the corrosive properties of ethanol.  As a result, two stations in Ohio recently shut down E85 pumps and it is currently unclear whether more pumps will be shut down due to pending pump certifications.  If additional E85 pumps are shut down the distribution of E85 could be curtailed and the value of your investment in us may be reduced.

Competition from ethanol imported from Caribbean Basin countries may be a less expensive alternative to our ethanol, which would cause us to lose market share and reduce the value of your investment.

Ethanol produced or processed in certain countries in Central America and the Caribbean region is eligible for tariff reduction or elimination upon importation to the United States under a program known as the Caribbean Basin Initiative. Large ethanol producers, such as Cargill, have expressed interest in building dehydration plants in participating Caribbean Basin countries, such as El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to the United States. Ethanol imported from Caribbean Basin

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countries may be a less expensive alternative to domestically produced ethanol. Competition from ethanol imported from Caribbean Basin countries may affect our ability to sell our ethanol profitably, which would reduce the value of your investment.

Competition from ethanol imported from Brazil may be a less expensive alternative to our ethanol, which would cause us to lose market share and reduce the value of your investment.

Brazil is currently the world’s largest producer and exporter of ethanol. In Brazil, ethanol is produced primarily from sugarcane, which is also used to produce food-grade sugar. Brazil experienced a dramatic increase in ethanol production and trade in 2004, exporting approximately 112 million gallons to the U.S. alone. In 2005, the U.S. imported approximately 20 million gallons of ethanol from Brazil.  Ethanol imported from Brazil may be a less expensive alternative to domestically produced ethanol, which is primarily made from corn. Tariffs presently protecting U.S. ethanol producers may be reduced or eliminated. Competition from ethanol imported from Brazil may affect our ability to sell our ethanol profitably, which would reduce the value of your investment.

Risks Related to Regulation and Governmental Action

A change in government policies favorable to ethanol may cause demand for ethanol to decline, which could reduce the value of your investment.

Growth and demand for ethanol may be driven primarily by federal and state government policies, such as state laws banning Methyl Tertiary Butyl Ether (MTBE) and the national renewable fuels standard. The continuation of these policies is uncertain, which means that demand for ethanol may decline if these policies change or are discontinued. A decline in the demand for ethanol is likely to cause a reduction in the value of your investment.

Government incentives for ethanol production, including federal tax incentives, may be eliminated in the future, which could hinder our ability to operate at a profit and reduce the value of your investment in us.

The ethanol industry and our business are assisted by various federal ethanol tax incentives, including those included in the Energy Policy Act of 2005. The provision of the Energy Policy Act of 2005 likely to have the greatest impact on the ethanol industry is the creation of a national 7.5 billion gallon renewable fuels standard (RFS). The RFS began at 4 billion gallons in 2006, increasing to 7.5 billion gallons by 2012. The RFS helps support a market for ethanol that might disappear without this incentive. The elimination or reduction of tax incentives to the ethanol industry could reduce the market for ethanol, which could reduce prices and our revenues by making it more costly or difficult for us to produce and sell ethanol. If the federal tax incentives are eliminated or sharply curtailed, we believe that a decreased demand for ethanol will result, which could result in the failure of the business and the potential loss of some or all of your investment.

Another important provision involves an expansion in the definition of who qualifies as a small ethanol producer. Historically, small ethanol producers were allowed a 10 cents per gallon production income tax credit on up to 15 million gallons of production annually. The size of the plant eligible for the tax credit was limited to 30 million gallons. Under the Energy Policy Act of 2005 the size limitation on the production capacity for small ethanol producers increases from 30 million to 60 million gallons. Historically, small ethanol producers have been allowed a 10-cent per gallon production income tax credit on up to 15 million gallons of production annually. Thus the tax credit is capped at $1.5 million per year per producer. This tax credit may foster additional growth in ethanol plants of a larger size and increase competition in this particular plant size category. We anticipate that our plant will produce 50 million gallons of ethanol annually and therefore, we expect to be eligible for the credit if our plant is completed before the tax credit expires. The small ethanol producer tax credit is set to expire December 31, 2010.

Changes in environmental regulations or violations of the regulations could be expensive and reduce our profit and the value of your investment.

We will be subject to extensive air, water and other environmental regulations and we will need to obtain a number of environmental permits to construct and operate the plant. In addition, it is likely that our senior debt financing will be contingent on our ability to obtain the various environmental permits that we will require. 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. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to invest or spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profit and the value of your investment.

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The lack of any Minnesota ethanol supports or tax incentives may damage our competitive position in the ethanol industry and may weaken our financial performance relative to other ethanol plants operating in other states.

Currently, Minnesota does not provide incentives for the production or sale of ethanol. This may cause our plant to be less competitive than ethanol plants in other states that provide ethanol supports or tax incentives.

Risks Related to Tax Issues

EACH PROSPECTIVE MEMBER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE IMPACT THAT HIS OR HER PARTICIPATION IN THE COMPANY MAY HAVE ON HIS OR HER FEDERAL INCOME TAX LIABILITY AND THE APPLICATION OF STATE AND LOCAL INCOME AND OTHER TAX LAWS TO HIS OR HER PARTICIPATION IN THIS OFFERING.

IRS classification of the company as a corporation rather than as a partnership would result in higher taxation and reduced profits, which could reduce the value of your investment in us.

We are a Minnesota limited liability company that has elected to be taxed as a partnership for federal and state income tax purposes, with income, gain, loss, deduction and credit passed through to the holders of the units. However, if for any reason the IRS would successfully determine that we should be taxed as a corporation rather than as a partnership, we would be taxed on our net income at rates of up to 35 percent for federal income tax purposes, and all items of our income, gain, loss, deduction and credit would be reflected only on our tax returns and would not be passed through to the holders of the units. If we were to be taxed as a corporation for any reason, distributions we make to investors will be treated as ordinary dividend income to the extent of our earnings and profits, and the payment of dividends would not be deductible by us, thus resulting in double taxation of our earnings and profits. See “FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR UNITS- Partnership Status.” If we pay taxes as a corporation, we will have less cash to distribute to our Unit holders.

The IRS may classify your investment as passive activity income, resulting in your inability to deduct losses associated with your investment.

If you are not involved in our operations on a regular, continuing and substantial basis, it is likely that the Internal Revenue Service will classify your interest in us as a passive activity. If an investor is either an individual or a closely held corporation, and if the investor’s interest is deemed to be “passive activity,” then the investor’s allocated share of any loss we incur will be deductible only against income or gains the investor has earned from other passive activities. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. These rules could restrict an investor’s ability to currently deduct any of our losses that are passed through to such investor.

Income allocations assigned to an investor’s units may result in taxable income in excess of cash distributions, which means you may have to pay income tax on your investment with personal funds.

Investors will pay tax on their allocated shares of our taxable income. An investor may receive allocations of taxable income that result in a tax liability that is in excess of any cash distributions we may make to the investor. Among other things, this result might occur due to accounting methodology, lending covenants that restrict our ability to pay cash distributions or our decision to retain the cash generated by the business to fund our operating activities and obligations. Accordingly, investors may be required to pay some or all of the income tax on their allocated shares of our taxable income with personal funds.

An IRS audit could result in adjustments to our allocations of income, gain, loss and deduction causing additional tax liability to our members.

The IRS may audit our income tax returns and may challenge positions taken for tax purposes and allocations of income, gain, loss and deduction to investors. If the IRS were successful in challenging our allocations in a manner that reduces loss or increases income allocable to investors, you may have additional tax liabilities. In addition, such an audit could lead to separate audits of an investor’s tax returns, especially if adjustments are required, which could result in adjustments on your tax returns. Any of these events could result in additional tax liabilities, penalties and interest to you, and the cost of filing amended tax returns.

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Before making any decision to invest in us, investors should read this entire prospectus, including all of its exhibits, and consult with their own investment, legal, tax and other professional advisors to determine how ownership of our units will affect your personal investment, legal, and tax situation.

IMPORTANT NOTICES TO INVESTORS

This prospectus does not constitute an offer to sell or the solicitation of an offer to purchase any securities in any jurisdiction in which, or to any person to whom, it would be unlawful to do so.

Investing in our units involves significant risk. Please see “RISK FACTORS” to read about important risks you should consider before purchasing units in Highwater Ethanol. No representations or warranties of any kind are intended or should be inferred with respect to economic returns or tax benefits of any kind that may accrue to the investors of the securities.

These securities have not been registered under the securities laws of any state other than the states of Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin and may be offered and sold in other states only in reliance on exemptions from the registration requirements of the laws of those other states.

In making an investment decision, investors must rely upon their own examination of the entity creating the securities and the terms of the offering, including the merits and risks involved. Investors should not invest any funds in this offering unless they can afford to lose their entire investment. There is no public market for the resale of the units in the foreseeable future. Furthermore, state securities laws and our member control agreement place substantial restrictions on the transferability of the units. Investors should be aware that they will be required to bear the financial risks of this investment for an indefinite period of time.

During the course of the offering of the units and prior to the sale of the units, each prospective purchaser and his or her representatives, if any, are invited to ask questions of, and obtain additional information from, our representatives concerning the terms and conditions of this offering, us, our business, and other relevant matters. We will provide the requested information to the extent that we possess such information or can acquire it without unreasonable effort or expense. Prospective purchasers or representatives having questions or desiring additional information should contact us at (507) 752-6160, or at our business address: Highwater Ethanol, LLC, 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152. Also, you may contact any of the following directors directly at the phone numbers listed below:

NAME	POSITION	PHONE NUMBER
Brian D. Kletscher	President and Governor	507-762-3376
John M. Schueller	Vice President and Governor	507-342-5621
Jason R. Fink	Treasurer and Governor	507-637-4355
Timothy J. Van Der Wal	Secretary and Governor	507-342-5187

FORWARD LOOKING STATEMENTS

Throughout this prospectus, we make “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,” “should,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” “believe,” “expect” or “anticipate” or the negative of these terms or other similar expressions. The forward-looking statements are generally located in the material set forth under the headings “MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS,” “PLAN OF DISTRIBUTION,” “RISK FACTORS,” “USE OF PROCEEDS,” and “DESCRIPTION OF BUSINESS,” but may be found in other locations as well. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. Although we believe that our plans and objectives reflected in or suggested by such forward-looking statements are reasonable, we may not achieve such plans or objectives. Any forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by any forward-looking statements. Actual results may differ from projected results due, but not limited to, unforeseen developments, including developments relating to the following:

·The availability and adequacy of our cash flow to meet its requirements, including payment of loans;

·Economic, competitive, demographic, business and other conditions in our local and regional markets;

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·Changes or developments in laws, regulations or taxes in the ethanol, agricultural or energy industries;

·Actions taken or not taken by third-parties, including our suppliers and competitors, as well as legislative, regulatory, judicial and other governmental authorities;

·Competition in the ethanol industry;

·Overcapacity within the ethanol industry;

·Availability and costs of products and raw materials, particularly corn and natural gas;

·Fluctuations in petroleum prices;

·Changes and advances in ethanol production technology;

·The loss of any license or permit;

·The loss of our plant due to casualty, weather, mechanical failure or any extended or extraordinary maintenance or inspection that may be required;

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

·The availability of additional capital to support capital improvements and development; and

·Other factors discussed under the section entitled “RISK FACTORS” or elsewhere in this prospectus.

You should read this prospectus completely and with the understanding that actual future results may be materially different from what we expect. The forward-looking statements contained in this prospectus have been compiled as of the date of this prospectus and should be evaluated with consideration of any changes occurring after the date of this prospectus. Except as required under federal securities laws and SEC rules and regulations, we will not update forward-looking statements even though our situation may change in the future.

DETERMINATION OF OFFERING PRICE

There is no established market for our units. We established the offering price without an independent valuation of the units. We established the offering price based on our estimate of capital and expense requirements, not based on perceived market value, book value, or other established criteria. In considering our capitalization requirements, we determined the minimum and maximum aggregate offering amounts based upon our cost of capital analysis and debt to equity ratios generally acceptable in the industry. In determining the offering price per unit we considered the additional administrative expense which would likely result from a lower offering price per unit, such as the cost of increased unit trading. We also considered the dilution impact of our recent private placement offering to our founders and seed capital investors where units were priced at $3,333.33 per unit and $5,000.00 per unit, respectively, in determining an appropriate public offering price per unit. The units may have a value significantly less than the offering price and there is no guarantee that the units will ever obtain a value equal to or greater than the offering price.

DILUTION

As of September 30, 2006, we had 386 outstanding units. We sold 150 units to our founders for $3,333.33 per unit. We sold an additional 236 units to our seed capital investors for $5,000.00 per unit. The units, as of September 30, 2006, had a net tangible book value of $1,250,945, or $3,240.79 per unit. The net tangible book value per unit represents members’ equity less intangible assets divided by the number of units outstanding. The offering price of $10,000 per unit exceeds the net tangible book value per unit of our outstanding units. Therefore, all current holders will realize, on average, an immediate increase of at least $6,138.42 per unit in the pro forma net tangible book value of their units if the minimum is sold at a price of $10,000 per unit, and an increase of at least $6,284.24 per unit if the maximum is sold at a price of $10,000 per unit. Purchasers of units in this offering will realize an immediate dilution of at least $620.79 per unit in the net tangible book value of their units if the minimum is sold at a price of $10,000 per unit, and a decrease of at least $474.97 per unit if the maximum is sold at a price of $10,000 per unit.

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An investor purchasing units in this offering will receive units diluted by the prior purchase of units by our founders and our seed capital investors in our previous private placement offerings. We have sold units to our founders at prices below the price at which we are currently selling units. The presence of these previously sold units will dilute the relative ownership interests of the units sold in this offering because these earlier investors received a relatively greater share of our equity for less consideration than investors are paying for units issued in this offering. Generally, all investors in this offering will notice immediate dilution. We have and will continue to use this previously contributed capital to finance development costs and for initial working capital purposes. We intend to use any remaining balance for the same purposes as those of this offering.

The following table illustrates the increase to existing unit holders and the dilution to purchasers in the offering in the net tangible book value per unit assuming the minimum or the maximum number of units is sold. The table does not take into account any other changes in the net tangible book value of our units occurring after September 30, 2006, or offering expenses related to this offering.

	Minimum			Maximum
Net tangible book value per unit at September 30, 2006	$	3,240.79		$	3,240.79
Increase in pro forma net tangible book value per unit attributable to the sale of 4,500 (minimum) and 6,000 (maximum) units at $10,000 per unit(1)	$	6,138.42		$	6,284.24
Pro forma net tangible book value per unit at September 30, 2006, as adjusted for the sale of units	$	9,379.21		$	9,525.03
Dilution per unit to new investors in this offering	$	(620.79	)	$	(474.97	)

(1)The minimum and maximum number of units is circumscribed by the minimum offering amount of $45,000,000 and maximum offering amount of $60,000,000, less estimated remaining offering cost of $424,122. Total offering costs for the registered offering are estimated at $550,000.

We may seek additional equity financing in the future, which may cause additional dilution to investors in this offering, and a reduction in their equity interest. The holders of the units purchased in this offering will have no preemptive rights on any units to be issued by us in the future in connection with any such additional equity financing. We could be required to issue warrants to purchase units to a lender in connection with our debt financing. If we sell additional units or warrants to purchase additional units, the sale or exercise price could be higher or lower than what investors are paying in this offering.

The tables below set forth as of September 30, 2006, on an “as-if-converted” basis, the difference between the number of units purchased, and total consideration paid for those units, by existing unit holders, compared to units purchased by new investors in this offering without taking into account any offering expenses.

	Total Number of Units Purchased
	Minimum			Maximum
	Number	Percent		Number	Percent
Existing unit holders	386	7.90	%	386	6.04	%
New investors	4,500	92.10	%	6,000	93.96	%
Total	4,886	100.00	%	6,386	100.00	%

			Minimum						Maximum
	Amount		Percent		Average		Amount		Percent		Average
Existing unit holders	$	1,680,000	3.60	%	$	4,352.33	$	1,680,000	2.72	%	$	4,352.33
New investors	45,000,000		96.40	%	10,000.00		60,000,000		97.28	%	10,000.00
Total	$	46,680,000	100.00	%	$	9,553.83	$	61,680,000	100.00	%	$	9,658.63

CAPITALIZATION

We have issued a total of 386 units to our founders and seed capital investors. We sold 150 units to our founders for $3,333.33 per unit. We sold an additional 236 units to our seed capital investors for $5,000.00 per unit. We have total proceeds from our two previous private placements of $1,680,000. If the minimum offering amount of $45,000,000 is attained, we will have total membership proceeds of $46,680,000 at the end of this offering, less offering expenses. If the maximum offering of $60,000,000 is attained, we will have total membership proceeds of $61,680,000 at the end of this offering, less offering expenses.

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Capitalization Table

The following table sets forth our capitalization at September 30, 2006, on an actual and pro forma basis to reflect the units offered in this offering.

				Pro Forma (1)
	Actual			Minimum			Maximum
Unit holders’ equity	$	1,680,000		$	46,130,000		$	61,130,000
Accumulated deficit	(303,177		)	(303,177		)	(303,177		)
Total Unit holder’s equity	1,376,823			45,826,823			60,826,823
Total Capitalization (2)	$	1,376,823		$	45,826,823		$	60,826,823

(1)As adjusted to reflect gross proceeds from this less estimated offering costs of $550,000 and prior to securing a debt financing commitment.

(2)In order to fully capitalize the project, we will also need to obtain debt financing ranging from approximately $48,320,000 to $63,320,000 depending on the amount raised in this offering and less any grants we are awarded and any bond financing we can obtain. Our estimated long-term debt requirements are based upon our anticipated equity investments, preliminary discussions with lenders and our independent research regarding capitalization requirements for ethanol plants of similar size.

Our seed capital private placement was made directly by us without use of an underwriter or placement agent and without payment of commissions or other remuneration. The aggregate sales proceeds, after payment of offering expenses in immaterial amounts, were applied to our working capital and other development and organizational purposes.

With respect to the exemption from registration of issuance of securities claimed under Rule 506 and Section 4(2) of the Securities Act, neither we, nor any person acting on our behalf offered or sold the securities by means of any form of general solicitation or advertising. Prior to making any offer or sale, we had reasonable grounds to believe and believed that each prospective investor was capable of evaluating the merits and risks of the investment and were able to bear the economic risk of the investment. Each purchaser represented in writing that the purchaser was an accredited investor and that the securities were being acquired for investment for such purchaser’s own account. Each purchaser also agreed that the securities would not be sold without registration under the Securities Act or exemption from the Securities Act. Each purchaser further agreed that a legend was placed on each certificate evidencing the securities stating the securities have not been registered under the Securities Act and setting forth restrictions on their transferability.

DISTRIBUTION POLICY

We have not declared or paid any distributions on the units. We do not expect to generate revenues until the proposed ethanol plant is operational, which is expected to occur approximately 16 to 18 months after construction commences. After operation of the proposed ethanol plant begins, it is anticipated, subject to any loan covenants or restrictions with any senior and term lenders, that we will distribute “net cash flow” to our members in proportion to the units that each member holds relative to the total number of units outstanding. “Net cash flow,” means our gross cash proceeds less any portion, as determined by the board of governors in their sole discretion, used to pay or establish reserves for operating expenses, debt payments, capital improvements, replacements and contingencies. However, there can be no assurance that we will ever be able to pay any distributions to the unit holders, including you. Additionally, our lenders may further restrict our ability to make distributions during the initial period of the term debt.

SELECTED FINANCIAL DATA

The following table summarizes important financial information from our September 30, 2006 unaudited financial statements. You should read this table in conjunction with the financial statements and the notes included elsewhere in this prospectus.

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	From Inception (May 2, 2006) to September 30, 2006
	(unaudited)
Income Statement Data:
Revenues	$	—
Operating Expenses
Professional fees	301,233
General and administrative	21,592
Total	322,825
Operating Loss	(322,825		)
Other Income
Interest income	19,648
Net Loss	$	(303,177	)
Net Loss Per Unit (298 weighted average units outstanding)	$	(1,017	)

	September 30, 2006
	(unaudited)
Balance Sheet Data:
Assets:
Cash	$	1,446,462
Prepaid and other expenses	17,334
Total current assets	1,463,796
Equipment
Office equipment	1,416
Accumulated depreciation	(35		)
Net equipment	1,381
Other Assets
Deferred offering costs	125,878
Land options	12,000
Total other assets	137,878
Total Assets	$	1,603,055
Liabilities and equity:
Current Liabilities
Accounts payable	$	195,577
Accounts payable - members	30,655
Total current liabilities	226,232
Commitments and Contingencies
Members’ Equity
Members contributions, 386 units outstanding as of September 30, 2006	$	1,680,000
Deficit accumulated during development stage	(303,177		)
Total members’ equity	1,376,823
Total Liabilities and Members’ Equity	$	1,603,055

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MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

Overview

This prospectus contains forward-looking statements that involve risks and uncertainties. Actual events or results may differ materially from those indicated in such forward-looking statements. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those risk factors described elsewhere in this prospectus. The following discussion of the financial condition and results of our operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this prospectus.

We are a development stage Minnesota limited liability company formed on May 2, 2006, for the purpose of constructing a 50 million gallon per year ethanol plant expected to be located near Lamberton, Minnesota, approximately 150 miles southwest of Minneapolis, Minnesota. We do not expect to generate any revenue until the plant is completely constructed and operational. For more information about our potential plant site, please refer to “Description of Business - Project Location and Proximity to Markets.” Our board of governors reserves the right to change the location of the plant site, in their sole discretion, for any reason. We anticipate the final plant site will have access to both truck and rail transportation.

Based upon engineering specifications produced by Fagen, Inc., we expect the plant to annually consume approximately 18.5 million bushels of corn and annually produce approximately 50 million gallons of fuel grade ethanol and approximately 160,000 tons distillers grain. We currently estimate that it will take approximately 16 to 18 months after construction commences to complete plant construction.

We expect the project will cost approximately $110,000,000 to complete. Fagen, Inc. will construct the plant for a contract price of approximately $66,026,000 based on the plans and specifications in the design-build agreement, which does not include the anticipated cost of our water treatment facility we intend to construct, any change orders, or increases in the costs of materials provided by the CCI costs escalator provision contained in the design-build agreement. The agreement terminates on March 26, 2007, unless a valid Notice to Proceed has been accepted by Fagen, Inc. The termination date may be extended upon mutual written agreement.  We have based our capital needs on a design for the plant that will cost approximately $78,526,000, which includes the cost of our water treatment equipment not contemplated by our design-build agreement, with additional start-up and development costs of approximately $31,474,000 for a total project completion cost of approximately $110,000,000. Except for our design-build agreement with Fagen, Inc., we do not have any binding or non-binding agreements with any other contractor for the labor or materials necessary to build the plant. As a result, our anticipated total project cost is not a firm estimate and is expected to change from time to time as the project progresses. We are still in the development phase, and until the proposed ethanol plant is operational, we will generate no revenue. We anticipate that accumulated losses will continue to increase until the ethanol plant is operational.

Plan of Operations Until Start-Up of Ethanol Plant

We expect to spend at least the next 12 months focused on three primary activities: (1) project capitalization; (2) site acquisition and development; and (3) plant construction and start-up operations. Assuming the successful completion of this offering and the related debt financing, we expect to have sufficient cash on hand to cover all costs associated with construction of the project, including, but not limited to, site acquisition and development, utilities, construction and equipment acquisition. In addition, we expect our seed capital proceeds to supply us with enough cash to cover our costs through this period, including staffing, office costs, audit, legal, compliance and staff training.  We currently rent office space located at 205 S. Main Street in Lamberton, Minnesota for $422 per month.

Project Capitalization

We will not close the offering until we have raised the minimum offering amount of $45,000,000. We have until [twelve month date] to sell the minimum number of units required to raise the minimum offering amount. If we sell the minimum number of units prior to [twelve month date], we may decide to continue selling units until we sell the maximum number of units or [twelve month date], whichever occurs first. Even if we successfully close the offering by selling at least the minimum number of units by [twelvemonth date], we will not release the offering proceeds from escrow until the cash proceeds in escrow equal $45,000,000 or more and we secure a written debt financing commitment for debt financing ranging from a minimum of $48,320,000 to a maximum of $63,320,000 depending on the level of equity raised and the amount of bond financing and any grant funding we may receive. We estimated the range of debt financing we will need by subtracting the minimum and maximum amount of equity in this offering and the $1,680,000 contributed by our founders and seed capital investors from the estimated total project cost of $110,000,000.  

We have not yet obtained any commitments for equity, debt or bond financing. We have started identifying and interviewing potential lenders, however, we have not signed any commitment or contract for debt financing. Completion of the project relies entirely on our ability to attract these loans and close on this offering.

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A debt financing commitment only obligates the lender to lend us the debt financing that we need if we satisfy all the conditions of the commitment. These conditions may include, among others, the total cost of the project being within a specified amount, the receipt of engineering and construction contracts acceptable to the lender, evidence of the issuance of all permits, acceptable insurance coverage and title commitment, the contribution of a specified amount of equity and attorney opinions. At this time, we do not know what business and financial conditions will be imposed on us. We may not satisfy the loan commitment conditions before closing, or at all. If this occurs we may:

·commence construction of the plant using all or a part of the equity funds raised while we seek another debt financing source;

·hold the equity funds raised indefinitely in an interest-bearing account while we seek another debt financing source; or

·return the equity funds, if any, to investors with accrued interest, after deducting the currently indeterminate expenses of operating our business or partially constructing the plant before we return the funds.

While the foregoing alternatives may be available, we do not expect to begin substantial plant construction activity before satisfying the loan commitment conditions or closing the loan transaction because it is very likely that Fagen, Inc. will not begin any substantial plant construction and any lending institution will prohibit substantial plant construction activity until satisfaction of loan commitment conditions or loan closing. However, in the unlikely event that the loan commitment and Fagen, Inc. permit us to spend equity proceeds prior to closing the loan and obtaining loan proceeds, we may decide to spend equity proceeds on project development expenses, such as securing critical operating contracts or owner’s construction costs such as site development expenses. If we decide to proceed in that manner, we expect the minimum aggregate offering amount would satisfy our cash requirements for approximately three to four months and the maximum aggregate offering amount would satisfy our cash requirements for approximately six to seven months. We expect that proceeding with plant construction prior to satisfaction of the loan commitment conditions or closing the loan transaction could cause us to abandon the project or terminate operations. As a result, you could lose all or part of your investment. Please refer to the section of the prospectus entitled, “RISK FACTORS - Risks Related to Our Financing Plan,” on page 12 for a discussion of the risks involved in project capitalization.

Site Acquisition and Development

During and after the offering, we expect to continue working principally on the preliminary design and development of our proposed ethanol plant, the acquisition and development of a plant site in Redwood County, Minnesota, obtaining the necessary construction permits, identifying potential sources of debt financing and negotiating the corn supply, ethanol and co-product marketing, utility and other contracts. We plan to fund these activities and initiatives using the $1,680,000 of seed capital. We believe that our existing funds will permit us to continue our preliminary activities through the end of this offering. If we are unable to close on this offering by that time or otherwise obtain other funds, we may need to delay or abandon operations.

On June 7, 2006, we obtained the exclusive right and option to purchase a parcel of land, consisting of approximately 68 acres of land, in Redwood County, Minnesota. We paid $5,000 for the exclusive right and option. The option will terminate on December 31, 2006. The purchase price is approximately $476,000.

In September 2006, we obtained the right and option to purchase three additional adjacent parcels of land.  The first is to purchase approximately six to twelve acres of land for $7,000 per acre until December 31, 2008. We paid $1,000 for the option which will apply towards the purchase price if we elect to complete the purchase. The second is to purchase an undisclosed amount of land for $8,000 per acre until March 31, 2007. We paid $1,000 for the option which will apply towards the purchase price if we elect to complete the purchase. The third is to purchase an undisclosed amount of land for $7,000 per acre until December 31, 2006. We paid $5,000 for the option which will apply towards the purchase price if we elect to complete the purchase.

Plant Construction and Start-up of Plant Operations

We expect to complete construction of the proposed plant and commence operations approximately 16 to 18 months after construction commences. Our work will include completion of the final design and development of the plant. We also plan to negotiate and execute finalized contracts concerning the construction of the plant, provision of necessary electricity, natural gas and other power sources and marketing agreements for ethanol and co-products. Assuming the successful completion of this offering and our obtaining the necessary debt financing, we expect to have sufficient cash on hand to cover construction and related start-up costs

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necessary to make the plant operational. We estimate that we will need approximately $78,526,000 to construct the plant, which includes the anticipated cost of our water treatment facility we intend to construct, and a total of approximately $31,474,000 to cover all capital expenditures necessary to complete the project, make the plant operational and produce revenue.

Grain origination

We have signed a grain procurement agreement with Meadowland Farmers Co-op (“Meadowland”).  Meadowland has the exclusive right and responsibility to provide Highwater Ethanol with its daily requirements of corn meeting quality specifications set forth in the grain procurement agreement. Under the agreement, Highwater Ethanol will purchase corn at the local market price delivered to the ethanol plant plus a fixed fee per bushel of corn purchased.  Highwater Ethanol will provide Meadowland with an estimate of its usage at the beginning of each fiscal quarter and Meadowland agrees to at all times maintain a minimum of 7 days corn usage at the Highwater Ethanol plant.  The initial term of the agreement is 7 years from the time Highwater Ethanol requests its first delivery of corn.

Future Plans to Develop or Participate in Other Ethanol Manufacturing Facilities

In the future, we may pursue opportunities to develop or invest in other ethanol manufacturing facilities. We do not have any agreement or arrangement concerning any other ethanol project at this time. We will continue to monitor and evaluate these opportunities as they present themselves to determine if participation in any other project is in our best interests.

Trends and Uncertainties Impacting the Ethanol Industry and Our Future Revenues

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 revenues. Recently, the demand for ethanol increased relative to supply causing upward pressure on ethanol market prices. Increased demand, firm crude oil and gas markets, public acceptance, and positive political signals have all contributed to a strengthening of ethanol prices. In order to sustain these higher price levels however, management believes the industry will need to continue to grow demand to offset the increased supply brought to the market place by additional production.

We also will expect to benefit from federal ethanol supports and federal tax incentives. Changes to these supports or incentives could significantly impact demand for ethanol. On August 8, 2005, President George W. Bush signed into law the Energy Policy Act of 2005 (the “Act”). The Act contains numerous provisions that are expected to favorably impact the ethanol industry by enhancing both the production and use of ethanol. Most notably, the 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 RFS began at 4 billion gallons in 2006, and increase to 7.5 billion gallons by 2012. According to the Renewable Fuels Association, the Act is expected to lead to about $6 billion in new investment in ethanol plants across the country.

Ethanol production continues to rapidly grow as additional plants and plant expansions become operational. According to the Renewable Fuels Association, as of September 2006, 108 ethanol plants were producing ethanol with a combined annual production capacity of 5.16 billion gallons per year and current expansions and plants under construction constituted an additional future production capacity of 4.37 billion gallons per year. ADM recently announced its plan to add 500 million gallons of ethanol production, clearly indicating its desire to maintain a significant share of the ethanol market. Since the current national ethanol production capacity exceeds the 2006 RFS requirement, we believe that other market factors, such as the growing trend for reduced usage of MTBE by the oil industry, state renewable fuels standards and increases in voluntary blending by terminals, are primarily responsible for current ethanol prices. Accordingly, it is possible that the RFS requirements may not significantly impact ethanol prices in the short-term. However, the increased requirement of 7.5 billion by 2012 is expected to support ethanol prices in the long term. A greater supply of ethanol on the market from these additional plants and plant expansions could reduce the price we are able to charge for our ethanol. This may decrease our revenues when we begin sales of product.

Demand for ethanol may increase as a result of increased consumption of E85 fuel. E85 fuel is a blend of 70 percent to 85 percent ethanol and gasoline. According to the Energy Information Administration, E85 consumption is projected to increase from a national total of 11 million gallons in 2003 to 47 million gallons in 2025. E85 is used as an aviation fuel and as a hydrogen source for some fuel cells. In the U.S., there are currently about 3 million flexible fuel vehicles capable of operating on E85 and over 600 retail stations supplying it. Ford and

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General Motors have recently begun national campaigns to promote ethanol and flexible fuel vehicles. Ford and General Motors have recently begun national campaigns to promote ethanol and flexible fuel vehicles. Automakers have indicated plans to produce an estimated 2 million more flexible fuel vehicles per year. The demand for E85 is largely driven by flexible fuel vehicle penetration of the U.S. vehicle fleet, the retail price of E85 compared to regular gasoline and the availability of E85 at retail stations. Because flexible fuel vehicles can operate on both ethanol and gasoline, if the price of regular gasoline falls below E85, demand for E85 will decrease as well. In addition, gasoline stations offering E85 are relatively scarce. At the end of 2005, only 608 of the country’s 170,000 gas stations offered E85 as an alternative to ordinary gasoline. However, most of these stations are in the Upper Midwest, which will be our target market area. The National Ethanol Vehicle Coalition expects 2,000 stations to sell E85 by the end of 2006, which would represent approximately 1 percent of all refueling stations. The Energy Policy Act of 2005 established a tax credit of 30 percent for infrastructure and equipment to dispense E85, which became effective in 2006 and is scheduled to expire December 31, 2010. This tax credit is expected to encourage more retailers to offer E85 as an alternative to regular gasoline. According to the Minnesota Corn Growers Association, there are approximately 75 gasoline retailers offering E85 throughout Minnesota.

Demand for ethanol has been supported by higher oil prices and its refined components.  While the mandated usage required by the renewable fuels standard is driving demand, our management believes that the industry will require an increase in voluntary usage in order to experience long-term growth.  We expect this will happen only if the price of ethanol is deemed economical by blenders.  Our management also believes that increased consumer awareness of ethanol-blended gasoline will be necessary to motivate blenders to voluntarily increase the amount of ethanol blended into gasoline.  In the future, a lack of voluntary usage by blenders in combination with additional supply may damage our ability to generate revenues and maintain positive cash flows.

Although the Energy Policy Act of 2005 did not impose a national ban of MTBE, the primary competitor of ethanol as a fuel oxygenate, the Act’s failure to include liability protection for manufacturers of MTBE could result in refiners and blenders using ethanol as an oxygenate rather than MTBE to satisfy the Clean Air Act’s reformulated gasoline oxygenate requirement. While this may create some additional demand in the short term, the Act repeals the Clean Air Act’s 2 percent oxygenate requirement for reformulated gasoline immediately in California and 270 days after enactment elsewhere. However, the Clean Air Act also contains an oxygenated fuel requirement for areas classified as carbon monoxide non-attainment areas. These areas are required to establish an oxygenated fuels program for a period of no less than three months each winter. The minimum oxygen requirement for gasoline sold in these areas is 2.7 percent by weight. This is the equivalent of 7.7 percent ethanol by volume in a gasoline blend. This requirement was unaffected by the Act and a number of states, including California, participate in this program.

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. 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 sell our product and negatively affect our profitability.

Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Future 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. The 2005 corn crop was reported at 11.1 billion bushels and as of August 2006 the U.S. Department of Agriculture forecasts the 2006 corn crop at 10.975 billion bushels, down approximately 1 percent from 2005. Although we do not expect to begin operations until autumn 2008, we expect continued volatility in the price of corn, which will 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.

Natural gas is also an important input commodity to our manufacturing process. We estimate that our natural gas usage will be approximately 10 percent to 15 percent 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 long periods of time, and can be transported greater distances. Dried distillers grains have a much broader market base, including the western cattle feedlots, and the dairies of California and Florida. Recently, the price of natural gas has risen along with other energy sources. Natural gas prices are considerably higher than the 10-year average. In late August 2005, Hurricane Katrina caused dramatic damage to areas of Louisiana, which is the location of one of the largest natural gas hubs in the United States. As the damage from the hurricane became apparent, natural gas prices substantially increased. Hurricane Rita also impacted the Gulf Coast and caused shutdowns at several Texas refineries, which further increased natural gas prices. We

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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.

Employees

We expect to hire approximately 32 full-time employees before commencing 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 prospectus, we have hired one part-time office employee.

Liquidity and Capital Resources

From May 2006, through June 2006, we sold a total of 150 of our membership units to our to our founders at a price of $3,333.33 per unit and 236 of our membership units to our seed capital investors at a price of $5,000.00 per unit. We received aggregate seed capital proceeds of $1,680,000 from the two previous private placements. We determined the offering price per unit in the two previous private placements based upon the capitalization requirements necessary to fund our development, organization and financing activities as a development stage company. We did not rely upon any independent valuation, book value or other valuation criteria in determining the seed capital offering price per unit. We expect our seed capital offering proceeds to provide us with sufficient liquidity to fund the developmental, organizational and financing activities necessary to advance our project. All of the seed capital proceeds were immediately at-risk capital at the time of the investment.

As of September 30, 2006, we had total assets of $1,603,055 consisting primarily of cash. As of September 30, 2006, we had current liabilities of $226,232 consisting primarily of accounts payable. Total members’ equity as of September 30, 2006, was $1,376,823, taking into account the accumulated deficit. Since our inception, we have generated no revenue from operations. For the period from inception (May 2, 2006) through September 30, 2006, we have a net loss of $303,177, primarily due to start-up business costs.

Capitalization Plan

Based on our business plan and current construction cost estimates, we believe the total project will cost approximately $110,000,000. Our capitalization plan consists of a combination of equity, including our previous seed capital, debt financing, bond financing and government grants.

Equity Financing

We are seeking to raise a minimum of $45,000,000 and a maximum of $60,000,000 of equity in this offering. Depending on the level of equity raised in this offering, the amount of any grants awarded to us, and the amount of bond financing able to be procured, we expect to require debt financing ranging from approximately a minimum of $48,320,000 to a maximum of $63,320,000.

Debt and Bond Financing

We hope to attract senior debt financing from a major bank (with participating loans from other banks) and/or bond financing to construct the proposed ethanol plant. We expect the senior debt financing will be secured by all of our real property, including receivables and inventories. We plan to pay near prime rate on this loan, plus annual fees for maintenance and observation of the loan by the lender, however, there is no assurance that we will be able to obtain the senior debt financing or that adequate debt financing will be available on the terms we currently anticipate. Our senior debt financing may also include bond financing issued through a governmental entity or bonds guaranteed by a governmental agency. We do not have any contracts or commitments with any governmental entity or underwriter for bond financing and there is no assurance that we will be able to secure bond financing as part of the senior debt financing for the project. If we are unable to obtain senior debt in an amount necessary to fully capitalize the project, we may have to seek subordinated debt financing which would increase the cost of debt and could require us to issue warrants. The increased cost of the subordinated debt financing could reduce the value of our units.

We do not have contracts or commitments with any bank, lender, underwriter, governmental entity or financial institution for debt financing. We have started identifying and interviewing potential lenders, however, we have not signed any commitment or contract for debt financing. Completion of the project relies entirely on our ability to attract these loans and close on this offering.

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Grants and Government Programs

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.

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. Significant estimates include the deferral of expenditures for offering costs, which are dependent upon successful financing of the project. We defer the costs incurred to raise equity financing until that financing occurs. At the time we issue new equity, we will net these costs against the equity proceeds received. Alternatively, if the equity financing does not occur, we will expense the offering costs. It is at least reasonably possible that this estimate may change in the near term.

Off-Balance Sheet Arrangements.

We do not have any off-balance sheet arrangements.

ESTIMATED SOURCES OF FUNDS

The following tables set forth various estimates of our sources of funds, depending upon the amount of units sold to investors and based upon various levels of equity that our lenders may require. The information set forth below represents estimates only and actual sources of funds could vary significantly due to a number of factors, including those described in the section entitled “RISK FACTORS” and elsewhere in this prospectus.

Sources of Funds(1)	Maximum 6,000 Units Sold		Percent of Total
Unit Proceeds	$	60,000,000	54.54	%
Seed Capital Proceeds	1,680,000		1.53	%
Senior Debt Financing	48,320,000		43.93	%
Total Sources of Funds	$	110,000,000	100.00	%

Sources of Funds(1)	If 5,332 Units Sold		Percent of Total
Unit Proceeds	$	53,320,000	48.47	%
Seed Capital Proceeds	1,680,000		1.53	%
Term Debt Financing	55,000,000		50.00	%
Total Sources of Funds	$	110,000,000	100.00	%

Sources of Funds(1)	Minimum 4,500 Units Sold		Percent of Total
Unit Proceeds	$	45,000,000	40.91	%
Seed Capital Proceeds	1,680,000		1.53	%
Senior Debt Financing	63,320,000		57.56	%
Total Sources of Funds	$	110,000,000	100.00	%

(1)We may receive federal and state grants, however, we have not yet entered into any written definitive agreements for the grants. Additionally, we may receive bond financing. If we receive grants or bond financing, we expect to reduce the amount of equity proceeds or senior debt financing necessary for our capitalization by the same or similar amount.

ESTIMATED USE OF PROCEEDS

The gross proceeds from this offering, before deducting offering expenses, will be $45,000,000 if the minimum amount of equity offered is sold, and $60,000,000 if the maximum number of units offered is sold for $10,000 per unit. We estimate the offering

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expenses to be approximately $550,000.(1) Therefore, we estimate the net proceeds of the offering to be $44,450,000 if the minimum amount of equity is raised, and $59,450,000 if the maximum number of units offered is sold.

	Maximum Offering			Minimum Offering
Offering Proceeds ($10,000 per unit)	$	60,000,000		$	45,000,000
Less Estimated Offering Expenses (1)	(550,000		)	(550,000		)
Net Proceeds from Offering	$	59,450,000		$	44,450,000

(1) All of the following offering expenses are estimated, except for the SEC registration fee.

Securities and Exchange Commission registration fee	$	6,420
Legal fees and expenses	200,000
Consulting fees	75,000
Accounting fees	125,000
Blue Sky filing fees	5,000
Printing expenses	75,000
Advertising	50,000
Miscellaneous expenses	13,580
Total	$	550,000

We intend to use the net proceeds of the offering to construct and operate an ethanol plant with a 50 million gallon per year nameplate manufacturing capacity. We must supplement the proceeds of this offering with debt financing to meet our stated goals. We estimate that the total capital expenditures for the construction of the plant will be approximately $110,000,000. The total project cost is a preliminary estimate primarily based upon the experience of our general contractor, Fagen, Inc., with ethanol plants similar to the plant we intend to construct and operate. We expect the total project cost will change from time to time as the project progresses.

The following table describes our proposed use of proceeds. The actual use of funds is based upon contingencies, such as the estimated cost of plant construction, the suitability and cost of the proposed site, the regulatory permits required and the cost of debt financing and inventory costs, which are driven by the market. Therefore, the following figures are intended to be estimates only, and the actual use of funds may vary significantly from the descriptions given below depending on contingencies such as those described above.  In addition, depending on the level of equity raised, we may decide to implement technical or design upgrades or improvements to our plant.

Use of Proceeds	Amount		Percent of Total
Plant construction	$	66,026,000	60.02	%
Water treatment facility	12,500,000		11.36	%
CCI Contingency	3,279,250		2.98	%
Land cost	810,000		0.74	%
Site development costs	8,140,000		7.40	%
Construction contingency	919,750		0.84	%
Construction performance bond	350,000		0.32	%
Construction insurance costs	150,000		0.14	%
Administrative building	350,000		0.32	%
Office equipment	80,000		0.07	%
Computers, Software, Network	150,000		0.14	%
Railroad	3,000,000		2.73	%
Rolling stock	400,000		0.36	%
Fire Protection and water supply	3,495,000		3.18	%
Capitalized interest	1,500,000		1.36	%
Start up costs:
Financing costs	600,000		0.55	%
Organization costs(1)	1,500,000		1.36	%
Pre-production period costs	750,000		0.68	%
Working capital	2,000,000		1.83	%
Inventory - corn	1,100,000		1.00	%
Inventory - chemicals and ingredients	400,000		0.36	%
Inventory - Ethanol	1,500,000		1.36	%

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Inventory - DDGS	500,000		0.45	%
Spare parts - process equipment	500,000		0.45	%
Total	$	110,000,000	100.00	%

(1)Includes estimated offering expenses of $550,000.

Plant Construction. The construction of the plant itself is by far the single largest expense at approximately $66,026,000. We have a design-build agreement with Fagen, Inc.  See “Design-Build Team; Design-Build Agreement with Fagen, Inc.”

Water Treatment Facility.  We estimate that the construction of our water treatment facility will cost approximately $12,500,000, in addition to the cost of constructing the plant itself.

CCI Contingency. Under our design-build agreement, the contract price of approximately $66,026,000 may be further increased if the construction cost index (“CCI”) published by Engineering News-Record Magazine reports a CCI greater than 7,660.29 in the month in which we issue to Fagen, Inc., a notice to proceed with plant construction. The amount of the contract price increase will be equal to the increase in the CCI based upon the January 2006 CCI of 7,660.29. As of September 30, 2006, the CCI was reported at 7,763.15, which is significantly higher than the January 2006 level stated in the design build agreement. If the CCI remains at the September 2006 level or increases above that level in the month in which we issue to Fagen, Inc. a notice to proceed with plant construction, the contract price will accordingly increase by at least approximately $886,000. Thus, we have allowed for a $3,279,250 contingency in our total estimated costs of the project. This may not be sufficient to offset any upward adjustment in our construction cost.

Land Cost. On June 7, 2006, we obtained the exclusive right and option to purchase a parcel of land, consisting of approximately 68 acres of land, in Redwood County, Minnesota. We paid $5,000 for the exclusive right and option. The option shall terminate on December 31, 2006. The purchase price is $7,000 per acre, which is equivalent to $476,000 for the 68 acre parcel.  It may be necessary to purchase an alternative site or additional adjacent land if unforeseen circumstances make this particular site unusable.

In September 2006, we obtained the right and option to purchase three additional adjacent parcels of land.  The first is to purchase approximately six to twelve acres of land for $7,000 per acre until December 31, 2008. We paid $1,000 for the option which will apply towards the purchase price if we elect to complete the purchase. The second is to purchase an undisclosed amount of land for $8,000 per acre until March 31, 2007. We paid $1,000 for the option which will apply towards the purchase price if we elect to complete the purchase. The third is to purchase an undisclosed amount of land for $7,000 per acre until December 31, 2006. We paid $5,000 for the option which will apply towards the purchase price if we elect to complete the purchase. We may decide to exercise the options or we may let the options expire, depending on our need for additional land.

Site Development. We estimate that site development costs will be approximately $8,140,000.

Construction Contingency. We project approximately $919,750 for unanticipated expenditures in connection with the construction of our plant. We plan to use excess funds for our general working capital.

Construction Performance Bond and Insurance Costs. We estimate the construction bond for the project to cost approximately $350,000. We have budgeted approximately $150,000 for builder’s risk insurance, general liability insurance, workers’ compensation and property insurance. We have not yet determined our actual costs and they may exceed this estimate.

Administration Building, Furnishings, Office and Computer Equipment. We anticipate spending approximately $350,000 to build our administration building on the plant site. We expect to spend an additional $80,000 on our furniture and other office equipment and $150,000 for our computers, software and network.

Rail Infrastructure and Rolling Stock. If the plant is constructed near Lamberton, Minnesota, rail improvements, such as siding and switches may need to be installed at an estimated cost of $3,000,000. We anticipate the need to purchase rolling stock at an estimated cost of $400,000.

Fire Protection and Water Supply. We anticipate spending $3,495,000 to equip the plant with adequate fire protection and water supply.

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Capitalized Interest. This consists of the interest we anticipate incurring during the development and construction period of our project. For purposes of estimating capitalized interest and financing costs, we have assumed senior debt financing of approximately $55,000,000. We determined this amount of debt financing based upon an assumed equity amount of $53,320,000 and seed capital proceeds of $1,680,000. If any of these assumptions changed, we would need to revise the level of term debt accordingly. Loan interest during construction will be capitalized and is estimated to be $1,500,000, based upon senior debt of $55,000,000. We have estimated our financing costs of $600,000 based upon this same level of term debt.

Financing Costs. Financing costs consist of all costs associated with the procurement of approximately $55,000,000 of debt financing. These costs include bank origination and legal fees, loan processing fees, appraisal and title insurance charges, recording and deed registration tax, our legal and accounting fees associated with the financing and project coordinator fees, if any, associated with securing the financing. Our actual financing costs will vary depending on the amount we borrow.

Organizational Costs. We have budgeted $1,500,000 for developmental, organizational, consulting, legal, accounting and other costs associated with our organization and operation as an entity, including, but not limited to estimated offering expenses of $550,000.

Pre-Production Period Costs. We project $750,000 of pre-production period costs. These represent costs of beginning production after the plant construction is finished, but before we begin generating income.  Pre-production period costs are comprised of $120,000 of start-up costs, $200,000 of administrative labor, $400,000 of production labor and $30,000 of utilities.  We do not anticipate compensating our governors during this period.

Inventory.  We project $6,000,000 of inventory costs for the period between the completion of construction and our beginning generation of income.  The $6,000,000 inventory is comprised of $1,500,000 of initial inventories of corn and other ingredients,  initial $1,500,000 of ethanol inventory, $500,000 in initial dried distillers grain inventory, $500,000 of spare parts for our process equipment and $2,000,000 of working capital.

INDUSTRY OVERVIEW

Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains, and 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. Approximately 95 percent of all ethanol is used in its primary form for blending with unleaded gasoline and other fuel products. The implementation of the Federal Clean Air Act has made ethanol fuels an important domestic renewable fuel additive. Used as a fuel oxygenate, ethanol provides a means to control carbon monoxide emissions in large metropolitan areas.  The principal purchasers of ethanol are generally the wholesale gasoline marketer or blender. Oxygenated gasoline is commonly referred to as reformulated gasoline.

Over the past twenty years the U.S. fuel ethanol industry has grown from almost nothing to an estimated 4.8 billion gallons of ethanol production per year. As of September 2006, plans to construct new ethanol plants or expand existing plants have been announced which would increase capacity by approximately 3 billion gallons per year. According to the Renewable Fuels Association, there are currently over 100 ethanol production facilities producing ethanol throughout the United States. Most of these facilities are based in the Midwest because of the nearby access to the corn and grain feedstocks necessary to produce ethanol.

General Ethanol Demand and Supply

Demand for fuel ethanol in the United States reached a new high in 2004 of 3.57 billion gallons per year. In its report titled, “Ethanol Industry Outlook 2006,” (dated February 2006 and publicly available at www.ethanolrfa.org), the Renewable Fuels Association anticipates demand for ethanol to remain strong as a result of the national renewable fuels standard contained in the Energy Policy Act of 2005, rising gasoline and oil prices and increased state legislation banning the use of MTBE or requiring the use of renewable fuels.  The RFA also notes that interest in E85, a blend of 85 percent ethanol and 15 percent gasoline, has been invigorated due to continued efforts to stretch U.S. gasoline supplies. The RFA also expects that the passage of the Volumetric Ethanol Excise Tax Credit (“VEETC”) will provide the flexibility necessary to expand ethanol blending into higher blends of ethanol such as E85, E diesel and fuel cell markets.

The provision of the Energy Policy Act of 2005 likely to have the greatest impact on the ethanol industry is the creation of a 7.5 billion gallon renewable fuels standard (RFS). The RFS began at 4 billion gallons in 2006, increasing to 7.5 billion gallons by 2012. The RFS is a national flexible program that does not require that any renewable fuels be used in any particular area or state, allowing

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refiners to use renewable fuel blends in those areas where it is most cost-effective. We expect the bill to lead to about $6 billion in new investment in ethanol plants across the country. An increase in the number of new plants will bring an increase in the supply of ethanol. Thus, while this bill may cause ethanol prices to increase in the short term due to additional demand, future supply could outweigh the demand for ethanol in the future. This would have a negative impact on our earnings. Alternatively, since the RFS begins at 4 billion gallons in 2006 and national production is expected to exceed this amount, there could be a short-term oversupply until the RFS requirements exceed national production. This would have an immediate adverse effect on our earnings.

Source: American Coalition for Ethanol (ACE)

While we believe that the nationally mandated usage of renewable fuels is currently driving demand, we believe that an increase in voluntary usage will be necessary for the industry to continue its growth trend.  We expect that voluntary usage by blenders will occur only if the price of ethanol makes increased blending economical.  In addition, we believe that heightened consumer awareness and consumer demand for ethanol-blended gasoline may play an important role in growing overall ethanol demand and voluntary usage by blenders.  If blenders do not voluntarily increase the amount of ethanol blended into gasoline and consumer awareness does not increase, it is possible that additional ethanol supply will outpace demand and depress ethanol prices.

The supply of domestically produced ethanol is at an all-time high. In 2005, 95 ethanol plants located in 19 states annually produced a record 4 billion gallons according to the RFA’s website; an approximately 17 percent increase from 2004 and nearly 1.5 times the ethanol produced in 2000. As of September 2006, there were 102 ethanol production facilities operating in 22 states with a combined annual production capacity of more than 4.88 billion gallons, with an additional 43 new plants and seven expansions under construction expected to add an additional estimated 2.96 billion gallons of annual production capacity.

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Ethanol Production Capacity Ranked by State

(Largest to Smallest Online Production Capacity)

Rank	State	Online	Under Expansion/Construction	Total
1	Iowa	1522.5	998.0	2520.5
2	Nebraska	728.5	600.0	1328.5
3	Minnesota	700.6	196.5	897.1
4	Illinois	533.0	261.0	794.0
5	South Dakota	448.0	444.0	892.0
6	Kansas	245.5	55.0	300.5
7	Wisconsin	230.0	130.0	360.0
8	North Dakota	162.5	200.0	362.5
9	Missouri	155.0	0	155.0
10	Michigan	150.0	57.0	207.0
11	Indiana	102.0	551.0	653.0
12	Colorado	85.0	40.0	125.0
13	California	67.7	0	67.7
14	Tennessee	67.0	38.0	105.0
15	Kentucky	35.7	0	35.7
16	New Mexico	30.0	0	30.0
17	Wyoming	5.0	0	5.0
18	Ohio	3.0	270.0	273.0
19	Georgia	0.4	38.0	38.4
20	Texas	0	270.0	270.0
21	New York	0	114.0	114.0
22	Oregon	0	143.0	143.0
23	Washington	0	55.0	55.0
24	Arizona	0	55.0	55.0
Total U.S. Production Capacity		5,271.4	4,515.5	9,786.9

Sources: Renewable Fuels Association, http://www.ethanolrfa.org; Ethanol Producer Magazine, http://www.ethanolproducer.com.

We believe ethanol supply is also affected by ethanol produced or processed in certain countries in Central America and the Caribbean region. Ethanol produced in these countries is eligible for tariff reduction or elimination upon importation to the United States under a program known as the Caribbean Basin Initiative (“CBI”). Large ethanol producers, such as Cargill, have expressed interest in building dehydration plants in participating Caribbean Basin countries, such as El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to the United States. Ethanol imported from Caribbean Basin countries may be a less expensive alternative to domestically produced ethanol. The International Trade Commission recently announced the 2006 CBI import quota of 268.1 million gallons of ethanol, up from 240.4 million gallons in 2005.  In the past, legislation has been introduced in the Senate that would limit the transshipment of ethanol through the CBI.  It is possible that similar legislation will be introduced this year, however, there is no assurance or guarantee that such legislation will be introduced or that it will be successfully passed.

Federal Ethanol Supports

The ethanol industry is heavily dependent on several economic incentives to produce ethanol, including federal ethanol supports. The most recent ethanol supports are contained in the Energy Policy Act of 2005. Most notably, the Act creates a 7.5 billion gallon renewable fuels standard (RFS). The RFS requires refiners to use 4 billion gallons of renewable fuels in 2006, increasing to 7.5 billion gallons by 2012.  On December 28, 2005, the EPA released interim rules governing the implementation of the 2006 RFS requirement.  The EPA’s interim rule imposes a collective compliance approach, which means the requirement for 2006 fuel use is determined in the aggregate rather than on a refiner-by-refiner basis.  The EPA adopted this approach for 2006 because current uncertainties regarding the RFS might result in unnecessarily high costs of compliance if each party was required to independently comply.  Although there is not a requirement for individual parties to demonstrate compliance in 2006, the EPA found that increases in ethanol production and projections for future demand indicate that the 2006 volume is likely to be met.  However, in the unlikely event that

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the RFS is not met in 2006, the EPA expects to adjust the volume requirement in 2007 to cover the deficit. There are no other consequences for failure to collectively meet the 2006 standard.  The EPA expects to promulgate more comprehensive regulations by August 8, 2006, but the interim rules and collective compliance approach are expected to apply for the entire 2006 calendar year.  In 2007 and subsequent years, the EPA expects to specifically identify liable parties, determine the applicable RFS, and develop a credit trading program.  Further, the standards for compliance, record-keeping and reporting are expected to be clarified.

Historically, ethanol sales have also been favorably affected by the Clean Air Act amendments of 1990, particularly the Federal Oxygen Program which became effective November 1, 1992. The Federal Oxygen Program requires the sale of oxygenated motor fuels during the winter months in certain major metropolitan areas to reduce carbon monoxide pollution. Ethanol use has increased due to a second Clean Air Act program, the Reformulated Gasoline Program. This program became effective January 1, 1995, and requires the sale of reformulated gasoline in nine major urban areas to reduce pollutants, including those that contribute to ground level ozone, better known as smog.

The two major oxygenates added to reformulated gasoline pursuant to these programs are MTBE and ethanol, however MTBE has caused groundwater contamination and has been banned from use by many states. The Energy Policy Act of 2005 did not impose a national ban of MTBE but it also did not include liability protection for manufacturers of MTBE.  We expect the failure to include liability protection for manufacturers of MTBE to result in refiners and blenders using ethanol as an oxygenate rather than MTBE to satisfy the reformulated gasoline oxygenate requirement. While this may create increased demand in the short-term, we do not expect this to have a long term impact on the demand for ethanol as the Act repeals the Clean Air Act’s 2 percent oxygenate requirement for reformulated gasoline immediately in California and 270 days after enactment elsewhere. However, the Act did not repeal the 2.7 percent oxygenate requirement for carbon monoxide nonattainment areas which are required to use oxygenated fuels in the winter months. While we expect ethanol to be the oxygenate of choice in these areas, there is no assurance that ethanol will in fact be used.

The government’s regulation of the environment changes constantly. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. For example, changes in the environmental regulations regarding ethanol’s use due to currently unknown effects on the environment could have an adverse effect on the ethanol industry. Furthermore, plant operations likely will be governed by the Occupational Safety and Health Administration (“OSHA”). OSHA regulations may change such that the costs of the operation of the plant may increase. Any of these regulatory factors may result in higher costs or other materially adverse conditions effecting our operations, cash flows and financial performance.

The use of ethanol as an alternative fuel source has been aided by federal tax policy. On October 22, 2004, President Bush signed H.R. 4520, which contained the Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excise tax structure effective as of January 1, 2005. Prior to VEETC, ethanol-blended fuel was taxed at a lower rate than regular gasoline (13.2 cents on a 10 percent blend). Under VEETC, the ethanol excise tax exemption has been eliminated, thereby allowing the full federal excise tax of 18.4 cents per gallon of gasoline to be collected on all gasoline and allocated to the highway trust fund.  We expect the highway trust fund to add approximately $1.4 billion to the highway trust fund revenue annually. In place of the exemption, the bill creates a new volumetric ethanol excise tax credit of 5.1 cents per gallon of ethanol blended at 10 percent. Refiners and gasoline blenders apply for this credit on the same tax form as before only it is a credit from general revenue, not the highway trust fund. Based on volume, the VEETC is expected to allow much greater refinery flexibility in blending ethanol since it makes the tax credit available on all ethanol blended with all gasoline, diesel and ethyl tertiary butyl ether (“ETBE”), including ethanol in E-85 and the E-20 in Minnesota. The VEETC is scheduled to expire on December 31, 2010.

The Energy Policy Act of 2005 expands who qualifies for the small ethanol producer tax credit. Historically, small ethanol producers were allowed a 10 cents per gallon production income tax credit on up to 15 million gallons of production annually. The size of the plant eligible for the tax credit was limited to 30 million gallons. Under the Energy Policy Act of 2005 the size limitation on the production capacity for small ethanol producers increases from 30 million to 60 million gallons. The credit can be taken on the first 15 million gallons of production. The tax credit is capped at $1.5 million per year per producer. We do not anticipate that our annual production will exceed the production limit of 60 million gallons a year and that we will be eligible for the credit. The small ethanol producer tax credit is set to expire December 31, 2010.

In addition, the Energy Policy Act of 2005 creates a new tax credit that permits taxpayers to claim a 30 percent credit (up to $30,000) for the cost of installing clean-fuel vehicle refueling equipment, such as an E85 fuel pump, to be used in a trade or business of the taxpayer or installed at the principal residence of the taxpayer. Under the provision, clean fuels are any fuel of at least 85 percent of the volume of which consists of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas,

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and hydrogen and any mixture of diesel fuel and biodiesel containing at least 20 percent biodiesel. The provision is effective for equipment placed in service after December 31, 2005, and before January 1, 2010. While it is unclear how this credit will affect the demand for ethanol in the short term, we expect it will help raise consumer awareness of alternative sources of fuel and could positively impact future demand for ethanol.

The ethanol industry and our business depend upon continuation of the federal ethanol supports discussed above. These incentives have supported a market for ethanol that might disappear without the incentives. Alternatively, the incentives may be continued at lower levels than at which they currently exist. The elimination or reduction of such federal ethanol supports would make it more costly for us to sell our ethanol and would likely reduce our net income and the value of your investment.

State Ethanol Supports

The State of Minnesota does not provide incentives for the production or sale of ethanol. This may cause our plant to be less competitive than plants in other states that are eligible to participate in incentive programs and receive tax credits or cash payments in exchange for transfer of the credits.

On May 30, 2006 Governor of Iowa, Tom Vilsack, signed HF 2754 and its companion appropriation bill HF 2759 into Iowa law. The bill creates a renewable fuels usage policy including several new incentives. First, it establishes an Iowa Renewable Fuels Standard starting at 10 percent in 2009 and increasing to 25 percent by 2019. In addition, the current 2.5 cents income tax credit that retailers can claim on gallons of ethanol blends sold in excess of 60 percent of their total volume will remain in effect until December 31, 2008. To assist Iowa retailers in achieving the RFS schedule, beginning in 2009, the current incentive will be replaced by an Ethanol Promotion Tax Credit. This will be available for each gallon of ethanol sold in Iowa and will be determined based on the retailer’s achievement of the RFS schedule as follows:

·Retailers meeting the Iowa RFS for a given year will be entitled to a 6.5 cents tax credit for every gallon of ethanol sold.

·Retailers within 2 percent of the Iowa RFS schedule will be entitled to a 4.5 cents tax credit for every gallon of ethanol sold.

·Retailers within 4 percent of the Iowa RFS schedule will be entitled to a 2.5 cents tax credit for every gallon of ethanol sold.

·Retailers more than 4 percent below the Iowa RFS schedule will not be entitled to a tax credit.

An E85 Promotion Tax Credit of 25 cents per gallon was created for 2006 through 2008. Beginning in 2009-2010, the E85 Promotion Tax Credit will be 20 cents per gallon, and beginning in calendar year 2011, the tax credit will be 10 cents per gallon and decreases by one cent each year through 2020. Additionally, an expanded infrastructure program designed to help retailers and wholesalers offset the cost of bringing E85 and biodiesel blends to customers was created. Over $13,000,000 over three years was appropriated to this grant program. Finally, cost-share grant programs will be available to retailers to upgrade or install new E85 equipment. Under this program, retailers could receive 50 percent of the total cost of the project to a maximum of $30,000.

However, this new RFS does provide that in exigent circumstances the Governor may reduce or suspend the RFS schedule if: (1) Substantial economic harm would result from the schedule, (2) A shortage of feedstock supply occurs for renewable fuel production, or (3) Flexible Fuel Vehicle (FFV) fleet registration doesn’t reach target levels.

Although our ethanol plant is expected to be constructed in Minnesota, it is anticipated that it will be built approximately 70 miles north of the boarder between Iowa and Minnesota. While we expect the Iowa RFS to positively impact the ethanol market in the region, the schedule may also result in more ethanol plants being constructed in or near Iowa.  Additional ethanol plants in the region may increase competition for our corn feedstock supply and drive up our cost of corn. This could also result in a decrease in the price of ethanol and thus negatively impact your investment.

Our Primary Competition

We will be in direct competition with numerous other ethanol producers, many of whom have greater resources than we do. We also expect that additional ethanol producers will enter the market if the demand for ethanol continues to increase. Our plant will compete with other ethanol producers on the basis of price, and to a lesser extent, delivery service.  However, we believe that we can compete favorably with other ethanol producers due to the following factors:

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·rail access facilitating use of unit trains with large volume carrying capacity;

·access to a skilled workforce;

·the modern plant design will help us to operate more efficiently than older plants; and

·the use of a state-of-the-art process control system to provide product consistency.

The ethanol industry has grown to over 100 production facilities in the United States. The largest ethanol producers include Abengoa Bioenergy Corp., Archer Daniels Midland, Aventine Renewable Energy, Inc., Cargill, Inc., New Energy Corp. and VeraSun Energy Corporation, each of which is capable of producing more ethanol than we expect to produce. Currently, there are 16 operating ethanol plants in the State of Minnesota and there is at least one other ethanol plant currently under construction in the State of Minnesota. Additionally, there over 20 operating ethanol plants in the State of Iowa and there are several ethanol plants in various stages of planning and development throughout the State of Iowa.  Due to the preliminary nature of many of these projects, it is difficult to estimate the number of potential ethanol projects within our region.

The following table identifies most of the ethanol producers in the United States along with their production capacities.

U.S. FUEL ETHANOL INDUSTRY BIOREFINERIES AND PRODUCTION CAPACITY

million gallons per year (mmgy)

COMPANY	LOCATION	FEEDSTOCK	Current Capacity (mmgy)	Under Construction/ Expansions (mmgy)
Abengoa Bioenergy Corp.	York, NE	Corn/milo	55
	Colwich, KS		25
	Portales, NM		30
	Ravenna, NE			88
Aberdeen Energy*	Mina, SD	Corn		100
Absolute Energy, LLC*	St. Ansgar, IA	Corn		100
ACE Ethanol, LLC	Stanley, WI	Corn	41
Adkins Energy, LLC*	Lena, IL	Corn	40
Advanced Bioenergy	Fairmont, NE	Corn		100
AGP*	Hastings, NE	Corn	52
Agra Resources Coop. d.b.a EXOL*	Albert Lea, MN	Corn	40	8
Agri-Energy, LLC*	Luverne, MN	Corn	21
Alchem Ltd. LLLP	Grafton, ND	Corn	10.5
Al-Corn Clean Fuel*	Claremont, MN	Corn	35	15
Amaizing Energy, LLC*	Denison, IA	Corn	40
Archer Daniels Midland	Decatur, IL	Corn	1,070
	Cedar Rapids, IA	Corn
	Clinton, IA	Corn
	Columbus, NE	Corn
	Marshall, MN	Corn
	Peoria, IL	Corn
	Wallhalla, ND	Corn/barley
ASAlliances Biofuels, LLC	Albion, NE	Corn		100
	Linden, IN	Corn		100
	Bloomingburg, OH	Corn		100
Aventine Renewable Energy, Inc.	Pekin, IL	Corn	100	57
	Aurora, NE	Corn	50
Badger State Ethanol, LLC*	Monroe, WI	Corn	48
Big River Resources, LLC *	West Burlington, IA	Corn	52
Blue Flint Ethanol	Underwood, ND	Corn		50

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Broin Enterprises, Inc.	Scotland, SD	Corn	1
Bushmills Ethanol, Inc.*	Atwater, MN	Corn	40
Cardinal Ehtanol	Harrisville, IN	Corn		100
Cargill, Inc.	Blair, NE	Corn	85
	Eddyville, IA	Corn	35
Cascade Grain	Clatskanie, OR	Corn		108
Center Ethanol Company	Sauget, IL	Corn		54
Central Indiana Ethanol, LLC	Marion, IN	Corn		40
Central MN Ethanol Coop*	Little Falls, MN	Corn	21.5
Central Wisconsin Alcohol	Plover, WI	Seed corn	4
Chief Ethanol	Hastings, NE	Corn	62
Chippewa Valley Ethanol Co.*	Benson, MN	Corn	45
Commonwealth Agri-Energy, LLC*	Hopkinsville, KY	Corn	33
Conestoga Energy Partners	Garden City, KS	Corn/milo		55
Corn, LP*	Goldfield, IA	Corn	50
Cornhusker Energy Lexington, LLC	Lexington, NE	Corn	40
Corn Plus, LLP*	Winnebago, MN	Corn	44
Dakota Ethanol, LLC*	Wentworth, SD	Corn	50
DENCO, LLC*	Morris, MN	Corn	21.5
E3 Biofuels	Mead, NE	Corn		24
East Kansas Agri-Energy, LLC*	Garnett, KS	Corn	35
ESE Alcohol Inc.	Leoti, KS	Seed corn	1.5
Ethanol2000, LLP*	Bingham Lake, MN	Corn	32
Frontier Ethanol, LLC	Gowrie, IA	Corn	60
Front Range Energy, LLC	Windsor, CO	Corn	40
Glacial Lakes Energy, LLC*	Watertown, SD	Corn	50	50
Global Ethanol/Midwest Grain Processors	Lakota, IA	Corn	95
	Riga, MI	Corn		57
Golden Cheese Company of California*	Corona, CA	Cheese whey	5
Golden Grain Energy L.L.C.*	Mason City, IA	Corn	60	50
Golden Triangle Energy, LLC*	Craig, MO	Corn	20
Grain Processing Corp.	Muscatine, IA	Corn	20
Granite Falls Energy, LLC	Granite Falls, MN	Corn	52
Great Plains Ethanol, LLC*	Chancellor, SD	Corn	50
Green Plains Renewable Energy	Shenandoah, IA	Corn		50
	Superior, IA	Corn		50
Hawkeye Renewables, LLC	Iowa Falls, IA	Corn	105
	Fairbank, IA	Corn	115
Heartland Corn Products*	Winthrop, MN	Corn	35
Heartland Grain Fuels, LP*	Aberdeen, SD	Corn	9
	Huron, SD	Corn	12	18
Heron Lake BioEnergy, LLC	Heron Lake, MN	Corn		50
Holt County Ethanol	O’Neill, NE	Corn		100
Horizon Ethanol, LLC	Jewell, IA	Corn	60
Husker Ag, LLC*	Plainview, NE	Corn	26.5
Illinois River Energy, LLC	Rochelle, IL	Corn		50
Indiana Bio-Energy	Bluffton, IN	Corn		101
Iowa Ethanol, LLC*	Hanlontown, IA	Corn	50
Iroquois Bio-Energy Company, LLC	Rensselaer, IN	Corn		40
James Valley Ethanol, LLC	Groton, SD	Corn	50
KAAPA Ethanol, LLC*	Minden, NE	Corn	40
Land O’ Lakes*	Melrose, MN	Cheese whey	2.6
Levelland/Hockley County Ethanol, LLC	Levelland, TX	Corn		40

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Lincolnland Agri-Energy, LLC*	Palestine, IL	Corn	48
Lincolnway Energy, LLC*	Nevada, IA	Corn	50
Liquid Resources of Ohio	Medina, OH	Waste beverage	3
Little Sioux Corn Processors, LP*	Marcus, IA	Corn	52
Merrick/Coors	Golden, CO	Waste beer	3
MGP Ingredients, Inc.	Pekin, IL	Corn/wheat starch	78
	Atchison, KS
Michigan Ethanol, LLC	Caro, MI	Corn	50
Mid America Agri Products/Wheatland	Madrid, NE	Corn		44
Mid-Missouri Energy, Inc.*	Malta Bend, MO	Corn	45
Midwest Renewable Energy, LLC	Sutherland, NE	Corn	25
Millennium Ethanol	Marion, SD	Corn		100
Minnesota Energy*	Buffalo Lake, MN	Corn	18
Missouri Ethanol	Laddonia, MO	Corn	45
Missouri Valley Renewable Energy, LLC	Meckling, SD	Corn		60
NEDAK Ethanol	Atkinson, NE	Corn		44
New Energy Corp.	South Bend, IN	Corn	102
North Country Ethanol, LLC*	Rosholt, SD	Corn	20
Northeast Biofuels	Volney, NY	Corn		114
Northeast Missouri Grain, LLC*	Macon, MO	Corn	45
Northern Lights Ethanol, LLC*	Big Stone City, SD	Corn	50
Northstar Ethanol, LLC	Lake Crystal, MN	Corn	52
Otter Creek Ethanol, LLC*	Ashton, IA	Corn	55
Pacific Ethanol	Madera, CA	Corn	35
Panda Energy	Hereford, TX	Corn/milo		100
Panhandle Energies of Dumas, LP	Dumas, TX	Corn/Grain Sorghum		30
Parallel Products	Louisville, KY	Beverage Waste	5.4
	R. Cucamonga, CA
Patriot Renewable Fuels, LLC	Annawan, IL	Corn		100
Permeate Refining	Hopkinton, IA	Sugars & starches	1.5
Phoenix Biofuels	Goshen, CA	Corn	25
Pinal Energy, LLC	Maricopa, AZ	Corn		55
Pine Lake Corn Processors, LLC*	Steamboat Rock, IA	Corn	20
Pinnacle Ethanol, LLC	Corning, IA	Corn		60
Prairie Ethanol, LLC	Loomis, SD	Corn		60
Prairie Horizon Agri-Energy, LLC	Phillipsburg, KS	Corn	40
Premiere Ethanol	Portland, IN	Corn		60
Pro-Corn, LLC*	Preston, MN	Corn	42
Quad-County Corn Processors*	Galva, IA	Corn	27
Red Trail Energy, LLC	Richardton, ND	Corn		50
Redfield Energy, Inc.	Redfield, SD	Corn		50
Reeve Agri-Energy	Garden City, KS	Corn/milo	12
Renew Energy	Jefferson Junction, WI	Corn		130
Siouxland Energy & Livestock Coop*	Sioux Center, IA	Corn	25	10
Siouxland Ethanol, LLC	Jackson, NE	Corn		50
Sioux River Ethanol, LLC*	Hudson, SD	Corn	50
Southwest Iowa Renewable Energy, LLC*	Council Bluffs, IA	Corn		110
Sterling Ethanol, LLC	Sterling, CO	Corn	42
Summit Ethanol	Leipsic, OH	Corn		60
Tall Corn Ethanol, LLC*	Coon Rapids, IA	Corn	49
Tate & Lyle	Loudon, TN	Corn	67	38

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	Ft. Dodge, IA	Corn		105
The Andersons Albion Ethanol LLC	Albion, MI	Corn	55
The Andersons Clymers Ethanol, LLC	Clymers, IN	Corn		110
The Andersons Marathon Ethanol, LLC	Greenville, OH	Corn		110
Trenton Agri Products, LLC	Trenton, NE	Corn	40
United WI Grain Producers, LLC*	Friesland, WI	Corn	49
US BioAlbert City	Albert City, IA	Corn		100
US Bio Woodbury	Woodbury, MI	Corn	45
US Bio Hankinson	Hankinson, ND	Corn		100
US Bio Ord	Ord, NE			50
US Bio Platte Valley	Central City, NE		100
US Bio Dyersville	Dyersville, IA			100
U.S. Energy Partners, LLC (White Energy)	Russell, KS	Milo/wheat starch	48
Utica Energy, LLC	Oshkosh, WI	Corn	48
VeraSun Energy Corporation	Aurora, SD	Corn	230	330
	Ft. Dodge, IA	Corn
	Charles City, IA	Corn
	Welcome, MN	Corn
	Hartely, IA	Corn
Voyager Ethanol, LLC*	Emmetsburg, IA	Corn	52
Western Plains Energy, LLC*	Campus, KS	Corn	45
Western Wisconsin Renewable Energy, LLC*	Boyceville, WI	Corn	40
White Energy	Hereford, TX	Corn/Milo		100
Wind Gap Farms	Baconton, GA	Brewery Waste	0.4	38
Renova Energy	Torrington, WY	Corn	5
Xethanol BioFuels, LLC	Blairstown, IA	Corn	5	35
Yuma Ethanol	Yuma, CO	Corn		40
Total Current Capacity at 108 ethanol biorefineries			5,161.4
Total Under Construction (55)/ Expansions (7)				4,367.0
Total Capacity			9,528.4

* locally-owned Renewable Fuels Association
Updated: December 1, 2006

Competition from Alternative Fuels

Alternative fuels and ethanol production methods are continually under development by ethanol and oil companies with far greater resources. The major oil companies have significantly greater resources than we have to develop alternative products and to influence legislation and public perception of ethanol. New ethanol products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages and harm our business.

DESCRIPTION OF BUSINESS

We are a development stage Minnesota limited liability company formed on May 2, 2006, for the purpose of raising capital to develop, construct, own and operate a 50 million gallon dry mill corn-based ethanol plant near Lamberton, Minnesota, which is approximately 150 miles southwest of Minneapolis, Minnesota. Based upon engineering specifications from Fagen, Inc., we expect the ethanol plant to process approximately 18.5 million bushels of corn per year into approximately 50 million gallons of denatured fuel grade ethanol and approximately 160,000 tons dried distillers grains.

The following diagram from Fagen, Inc. depicts the 50 million gallon per year ethanol plant we anticipate building:

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1.Ethanol storage tanks:  Two ethanol storage tanks. Three tanks used for 190 proof ethanol and 200 proof undenatured ethanol and denaturant.  All of the described tanks will be within a retention berm.

2.Administration Building:  This building will have brick and/or siding on the exterior and will be approximately 2,700 square feet.

3.DDGS Building:  This will be a steel sided building and will be 21,875 square feet.  All dry distillers grain will be stored in this building.

4.Grain Receiving building:  The building will be a steel sided building 165’ long by 65’ wide and approximately 40’ tall.  There will be two truck bays and one rail bay.

5.Cement Corn Silos:  Two 200,000 bushel silos and two 15,000 bushel per hour legs.

6.Fermentation Tanks:  Three fermentation tanks and one beer well.

7.Main Process Building:  Structural steel frame building housing tanks, pumps and heat exchangers as well as a control room and laboratory.  Total square footage is approximately 25,000’.

8.Two Methanator tanks.

9.Thermal Oxidizer Stack: Approximately 125 feet tall.  The exact height will depend on air modeling and input from the Department of Natural Resources.

10.Distillation and Evaporation Center.

11.Stillage and Syrup tanks.

Primary Product - Ethanol

Ethanol is an alcohol that can be burned in engines like gasoline.  However, unlike gasoline, which is made by distilling crude oil, ethanol is made from the starchy parts of plants. It is produced by the fermentation of sugars found in grains and other biomass. Ethanol can be produced from a number of different types of grains, such as wheat and milo, as well as from agricultural waste products such as rice hulls, cheese whey, potato waste, brewery and beverage wastes and forestry and paper wastes. However, approximately 85 percent of ethanol in the United States today is produced from corn, and approximately 90 percent of ethanol is produced from a corn and other input mix. Corn produces large quantities of carbohydrates, which convert into glucose more easily than most other kinds of biomass. While the ethanol we intend to produce is the same alcohol used in beverage alcohol, it must meet fuel grade standards before it can be sold.

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We anticipate that our business will be that of the production and marketing of ethanol and its co-products. We do not have any other lines of business or other sources of revenue if we are unable to complete the construction and operation of the plant, or if we are not able to market ethanol and its co-products. We anticipate entering into an agreement with a company to market our ethanol, however, we have not yet negotiated or discussed the terms of an ethanol marketing agreement with any ethanol marketing company. Currently, there are no agreements to market carbon dioxide or dried distillers grains.

Description of Dry Mill Process

Our plant will produce ethanol by processing corn and possibly other raw grains such as grain sorghum or milo. The corn and other grains will be received by rail and by truck, then weighed and unloaded in a receiving building. It will then be transported to storage bins. Thereafter, it will be converted to a scalper to remove rocks and debris before it is transported to a hammermill or grinder where it is ground into a mash and conveyed into a slurry tank for enzymatic processing. Then, water, heat and enzymes are added to break the ground grain into a fine slurry. The slurry will be heated for sterilization and pumped to a liquefaction tank where additional enzymes are added. Next, the grain slurry is pumped into fermenters, where yeast is added, to begin a batch fermentation process. A vacuum distillation system will divide the alcohol from the grain mash. Alcohol is then transported through a rectifier column, a side stripper and a molecular sieve system where it is dehydrated. The 200 proof alcohol is then pumped to farm shift tanks and blended with five percent denaturant, usually gasoline, as it is pumped into storage tanks. The 200 proof alcohol and five percent denaturant constitute ethanol.

Corn mash from the distillation stripper is pumped into one of several decanter-type centrifuges for dewatering. The water (“thin stillage”) is then pumped from the centrifuges to an evaporator where it is dried into thick syrup. The solids that exit the centrifuge or evaporators (the “wet cake”) are conveyed to the distillers dried grains dryer system. Syrup is added to the wet cake as it enters the dryer, where moisture is removed. The process will produce distillers grains, which is processed corn mash that can be used as animal feed.

The following flow chart illustrates the dry mill process:

Source: Renewable Fuels Association, report entitled “How Ethanol is Made,” current as of June 20, 2006, available free of charge on the Internet at www.ethanolrfa.org.

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We expect that the ethanol production technology we will use in our plant will be supplied by Fagen, Inc. and/or ICM, Inc. and that they will either own the technology or have obtained any license to utilize the technology that is necessary.

Ethanol Markets

The principal purchasers of ethanol are generally the wholesale gasoline marketer or blender. The principal markets for our ethanol are petroleum terminals in the continental United States. We may also attempt to access local markets, but these will be limited and must be evaluated on a case-by-case basis.

We intend to serve the regional and national markets by rail. Because ethanol use results in less air pollution than regular gasoline, regional and national markets typically include large cities that are subject to anti-smog measures in either carbon monoxide or ozone non-attainment areas. We expect to reach these markets by delivering ethanol to terminals which will then blend the ethanol into E10 and E85 gasoline and transport the blended gasoline to retail outlets in these markets.

We believe that regional pricing tends to follow national pricing less the freight difference. As with national markets, the use of a group-marketing program or a broker is advantageous, especially in the first one to three years of operation.

Ethanol Pricing

The following chart provides a comparison of average ethanol and gasoline rack prices per gallon F.O.B. Omaha, Nebraska through the first ten months of 2006.  The following charts show ethanol prices over time and do not necessarily reflect the price of ethanol in Lamberton, Minnesota at any given point in time.

Ethanol and Unleaded Gasoline Average Rack Prices

F.O.B. Omaha, Nebraska, 1982-2005

Source: Nebraska Energy Office, http://www.neo.ne.gov/statshtml/66.html.

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The following table provides average monthly rack prices per gallon of ethanol in Omaha, Nebraska from 2000 to 2006:

Ethanol Average Rack Prices

F.O.B. Omaha, Nebraska, 2000-2006

(Price per Gallon)

Fuel Type Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Annual Average

Ethanol

2000	$	1.10	$	1.14	$	1.14	$	1.19	$	1.25	$	1.35	$	1.33	$	1.33	$	1.48	$	1.49	$	1.66	$	1.72	$	1.35
2001	$	1.77	$	1.70	$	1.51	$	1.46	$	1.76	$	1.63	$	1.41	$	1.49	$	1.53	$	1.36	$	1.14	$	0.97	$	1.48
2002	$	0.94	$	0.94	$	1.12	$	1.05	$	0.95	$	1.03	$	1.16	$	1.35	$	1.28	$	1.20	$	1.25	$	1.21	$	1.12
2003	$	1.15	$	1.30	$	1.44	$	1.25	$	1.12	$	1.27	$	1.28	$	1.27	$	1.38	$	1.38	$	1.65	$	1.72	$	1.35
2004	$	1.40	$	1.37	$	1.69	$	1.80	$	1.73	$	1.86	$	1.68	$	1.58	$	1.56	$	1.87	$	1.97	$	1.80	$	1.69
2005	$	1.72	$	1.56	$	1.31	$	1.20	$	1.20	$	1.42	$	1.78	$	2.07	$	2.74	$	2.47	$	2.09	$	1.99	$	1.80
2006	$	2.13	$	2.52	$	2.42	$	2.45	$	3.04	$	3.58	$	3.14	$	2.72	$	2.33	$	1.89	NA		NA		NA

Source: Nebraska Energy Office, http://www.neo.ne.gov/statshtml/66.html.

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Regional pricing tends to follow national pricing less the freight difference. Ethanol price histories for regional markets are presented in the following graph:

Source: California Energy Commission, available at http://www.energy.ca.gov/gasoline/graphs/, (last updated June 5, 2006).

Historic prices may not be indicative of future prices. On March 23, 2005, the Chicago Board of Trade (“CBOT”) launched the CBOT Denatured Fuel Ethanol futures contract. The new contract is designed to address the growing demand for an effective hedging instrument for domestically produced ethanol. Since we expect to employ a third party marketing firm to sell all of our ethanol we do not expect to directly use the new ethanol futures contract. However, it is possible that any ethanol marketing firm we employ may use the new ethanol futures contracts to manage ethanol price volatility.

Co-Products

The principal co-product of the ethanol production process is distillers grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry. Distillers grains contain bypass protein that is superior to other protein supplements such as cottonseed meal and soybean meal. Bypass proteins are more digestible to the animal, thus generating greater lactation in milk cows and greater weight gain in beef cattle. Dry mill ethanol processing creates three forms of distillers grains: distillers wet grains with solubles (“distillers wet grains”), distillers modified wet grains with solubles (“distillers modified wet grains”) and distillers dry grains. Distillers wet grains are processed corn mash that contains approximately 70 percent moisture and has a shelf life of approximately three days. Therefore, it can be sold only to farms within the immediate vicinity of an ethanol plant. Distillers modified wet grains are distillers wet grains that have been dried to approximately 50 percent moisture. It has a slightly longer shelf life of approximately three weeks and is often sold to nearby markets. Distillers dried grains are distillers wet grains that have been dried to

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10 percent moisture. Distillers dried grains has an almost indefinite shelf life and may be sold and shipped to any market regardless of its proximity to an ethanol plant.

The plant is expected to produce an estimated 160,000 tons per year of distillers grains. The distillers grain market is less volatile than the ethanol market and even though corn and distillers grain do not track exactly, they do tend to follow each other. Typically, distillers grains sell at 107 percent - 110 percent the price of corn. However, distillers grain prices are affected by soy meal markets, dairy and cattle markets, as well as seasonal changes due to summer pasturing. It is expected that distillers grain produced by the plant will be sold through a marketer. The marketer cost is assumed to be approximately 1% percent FOB fee based on the price of the distillers grains. Therefore, the marketer’s fee will vary depending on the price of the distillers grains.  In addition, it is likely that a marketer may require a significant payment to become a member of the marketing group.  We do not currently have an agreement with a marketer and we may not be able to enter into such an agreement on favorable terms or at all. We intend to market our distillers grains to the swine, dairy and beef cattle markets existing in Minnesota and the surrounding states, such as Iowa and Nebraska.

Distillers Grains Markets

According to the University of Minnesota’s DDGS-General Information website (June 20, 2006) approximately 3,200,000 to 3,500,000 tons of distillers grains are produced annually in North America, approximately 98 percent of which are produced by ethanol plants. Ethanol plants in South Dakota and Minnesota produce about 25 percent of this amount. The amount of distillers grains produced is expected to increase significantly as the number of ethanol plants increase.

The primary consumers of distillers grains are dairy and beef cattle, according to the Renewable Fuels Association’s Ethanol Industry Outlook (2006). In recent years, an increasing amount of distillers grains have been used in the swine and poultry markets. With the advancement of research into the feeding rations of poultry and swine, we expect these markets to expand and create additional demand for distillers grains, however, no assurance can be given that these markets will in fact expand, or if they do, that we will benefit from it. The market for distillers grains is generally confined to locations where freight costs allow it to be competitively priced against other feed ingredients. Distillers grains competes with three other feed formulations: corn gluten feed, dry brewers grain and mill feeds. The primary value of these products as animal feed is their protein content. Dry brewers grain and distillers grains have about the same protein content, and corn gluten feed and mill feeds have slightly lower protein contents.

As with ethanol, the distillers grains markets are both regional and national. These national markets are just emerging, primarily in the southeast and southwest United States where significant dairy and poultry operations are located. In addition, there is the possibility of some local marketing. Local markets are very limited and highly competitive for the use of distillers grains. We plan to initially market our distillers grains to the local livestock markets surrounding the plant, however, if the local livestock markets prove insufficient to absorb our distillers grains at the prices we desire, we will engage a company to market our distillers grains nationally. We have not yet discussed or negotiated the terms of a distillers grains marketing agreement with any distillers grains marketing company.

Distillers Grains Pricing

Historically, the price of distillers grains has been relatively steady. Various factors affect the price of distillers grains, including, among others, the price of corn, soybean meal and other alternative feed products, and the general supply and demand of domestic and international markets for distillers grains. We believe that unless demand increases, the price of distillers grains may be subject to future downward pressure as the supply of distillers grains increases because of increased ethanol production. As demonstrated in the table below, the price of distillers grains may be subject to downward pressure.

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Corn Feedstock Supply

We anticipate that our plant will need approximately 18.5 million bushels of grain per year for our dry milling process. The corn supply for our plant will be obtained from regional markets. Our corn availability study prepared by PRX Geographic, Inc. indicates that the 7 county region around the proposed plant produced over 219 million bushels of corn in the 2004 - 2005 crop year, while total use was under 143 million bushels for the same period. As a result, we currently do not anticipate that it will be necessary for us to transport corn from other areas.

The table below describes the amount of corn produced in the 7 county area surrounding our proposed plant for the 2004 and 2005 crop years:

County	2004 - 2005 Corn Production (millions of bushels)	2003 - 2004 Corn Production (millions of bushels)
Brown	26.1	24.0
Cottonwood	30.5	24.4
Lyon	28.3	23.8
Murray	28.4	23.7
Redwood	40.3	34.5
Renville	41.8	36.9
Watonwan	24.2	19.6
Total	219.6	186.9

We will be significantly dependent on the availability and price of corn. The price at which we will purchase corn will depend on prevailing market prices. There is no assurance that a shortage will not develop, particularly if there are other ethanol plants competing for corn, an extended drought or other production problems. According to PRX Geographic, Inc, the ten year average price of corn in the area surrounding the plant is $2.16 per bushel. However, we may have to pay more for corn. Higher corn prices will reduce our profitability. In addition, new corn demand within a market can have varying impacts on the corn price. Our corn availability study calculated the local basis impact result from the plant to be approximately $.03 per bushel.

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Grain prices are primarily dependent on world feedstuffs supply and demand and on U.S. and global corn crop production, which can be volatile as a result of a number of factors, the most important of which are weather, current and anticipated stocks and prices, export prices and supports and the government’s current and anticipated agricultural policy. 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.

Grain origination and risk management

We have signed a grain procurement agreement with Meadowland Farmers Co-op (“Meadowland”).  Meadowland has the exclusive right and responsibility to provide Highwater Ethanol with its daily requirements of corn meeting quality specifications set forth in the grain procurement agreement. Under the agreement, Highwater Ethanol will purchase corn at the local market price delivered to the ethanol plant plus a fixed fee per bushel of corn purchased. Highwater Ethanol will provide Meadowland with an estimate of its usage at the beginning of each fiscal quarter and Meadowland agrees to at all times maintain a minimum of 7 days corn usage at the Highwater Ethanol plant.  The initial term of the agreement is 7 years from the time Highwater Ethanol requests its first delivery of corn.

We expect to engage a professional commodities manager to ensure the consistent scheduling of corn deliveries and to establish and fill forward contracts through grain elevators. The professional commodities manager will utilize forward contracting and hedging strategies, including certain derivative instruments such as futures and option contracts, to manage our commodity risk exposure and optimize finished product pricing on our behalf. We anticipate that most of our grain will be acquired in this manner. Forward contracts allow us to purchase corn for future delivery at fixed prices without using the futures market. The corn futures market allows us to trade in standard units of corn for delivery at specific times in the future. Option contracts consist of call options (options to purchase a fixed amount of a commodity) and put options (options to sell a fixed amount of a commodity). We expect to use a combination of these derivative instruments in our hedging strategies to help guard against corn price volatility. Hedging means protecting the price at which we buy corn and the price at which we will sell our products in the future. It is a way to attempt to reduce the risk caused by price fluctuation. The effectiveness of such hedging activities will depend on, among other things, the cost of corn and our ability to sell enough ethanol and distillers grains to use all of the corn subject to futures and option contracts we have purchased as part of our hedging strategy. Although we will attempt to link hedging activities to sales plans and pricing activities, such hedging activities themselves can result in costs because price movements in corn contracts are highly volatile and are influenced by many factors that are beyond our control. We may incur such costs and they may be significant.

Project Location and Proximity to Markets

We anticipate building our plant near Lamberton, Minnesota, in southwest Minnesota. We reserve the right, in the sole discretion of our board of governors, to select a different location for the plant. We intend to locate the plant on approximately 68 acres. On June 7, 2006, we obtained the exclusive right and option to purchase a parcel, consisting of 68 acres of land, in Redwood County, Minnesota. We paid $5,000 for the exclusive right and option. The option shall terminate on December 31, 2006. The purchase price is $7,000 per acre, which is equivalent to $476,000 for the 68 acre parcel.  We have purchased three other options to purchase real estate, however, depending on our need for additional land we may not exercise such options.

We selected our anticipated primary plant site because of the site’s proximity to transportation infrastructure and the availability of grain capable of meeting plant needs. The site is currently zoned for agricultural uses and we intend to apply for a conditional use permit for a manufacturing plant involved in the processing of crops.

There can be no assurance that we will not encounter environmental hazardous conditions such as groundwater or other subsurface contamination at the plant site. We are relying on Fagen, Inc. to determine the adequacy of the site for construction of the ethanol plant. We may encounter environmental hazardous conditions at the chosen site that may delay the construction of the ethanol plant. We do not expect that Fagen, Inc. will be responsible for any environmental hazardous conditions encountered at the site. Upon encountering an environmental hazardous condition, Fagen, Inc. may suspend work in the affected area. If we receive notice of an environmental hazardous condition, we may be required to correct the condition prior to continuing construction. The presence of an environmental hazardous condition will likely delay construction of the ethanol plant and may require significant expenditure of our resources to correct the condition. In addition, it is anticipated that Fagen, Inc. will be entitled to an adjustment in price if it has been adversely affected by the environmental hazardous condition. If we encounter any environmental hazardous conditions during

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construction that require time or money to correct, such event may have a material adverse effect on our operations, cash flows and financial performance.

Transportation and Delivery

The plant is designed to have facilities to receive grain by truck and rail and to load ethanol and distillers grains onto trucks and rail cars. We expect that the Dakota, Minnesota, and Eastern Railroad Corporation (the “DM&E Railroad”) will provide rail service to the proposed site. However, we currently have no agreement with the DM&E Railroad and may be unable to obtain one on favorable terms, if at all. We will need to establish rail access directly to the plant from the main rail line that can provide 75 to 90- car unit trains. We engaged TranSystems Corporation to provide us with a Conceptual Rail Service Plan Drawing. We also anticipate that we will retain TranSystems Corporation for rail infrastructure design and construction services.  However, we do not currently have such an agreement.

We anticipate that locally grown corn will be delivered by Meadowland to our ethanol facility. The proposed plant site will be near U.S. Highway 71, which is a highway that runs north/south and provides access to Interstate 90, which is approximately 50 miles south of our proposed plant site.  The proposed site is adjacent to U.S. Highway 14, which is an east/west highway and provides access to Interstate 35, which is approximately 110 miles east of our proposed site and to Interstate 29, which is approximately 80 miles west of our proposed site.

Thermal Oxidizer

Ethanol plants such as ours may produce odors in the production of ethanol and its co-products, which some people may find unpleasant. We intend to eliminate odors by routing dryer emissions through thermal oxidizers. Based upon materials and information from ICM, Inc., we expect thermal oxidation to significantly reduce any unpleasant odors caused by the ethanol and distillers grains manufacturing process. We expect thermal oxidation, which burns emissions, will eliminate a significant amount of the volatile organic carbon compounds in emissions that cause odor in the drying process and allow us to meet the applicable permitting requirements. We also expect this addition to the ethanol plant to reduce the risk of possible nuisance claims and any related negative public reaction against us.

Utilities

The production of ethanol is a very energy intensive process that uses significant amounts of electricity and natural gas. Water supply and quality are also important considerations. We plan to enter into agreements with local gas and electric utilities to provide our needed energy and we plan to use water from existing and newly bored high capacity wells. However, we do not currently have such agreements. There can be no assurance that any utility provider that we contract with will be able to reliably supply the gas and electricity that we need.

If there is an interruption in the supply of energy or water for any reason, such as supply, delivery, regulatory, or mechanical problems, we may be required to halt production. If production is halted for an extended period of time, it may have a material adverse effect on our operations, cash flows, and financial performance.

Natural gas

Natural gas accounts for approximately 10-15 percent of the total production cost of ethanol. The plant will produce process steam from its own boiler system and dry the distillers dried grains co-product via a direct gas-fired dryer. If we operate at our project production volume of 50 million gallons per year, we will require approximately 1,600,000 Million British Thermal Units (“MMBtu”) of natural gas annually.

Our proposed site has access to an existing Northern Natural Gas interstate natural gas pipeline located approximately one half mile from the expected plant location.  The existing interstate pipeline is expected to have enough capacity to service the proposed plant and for future plant expansion.  We anticipate contracting with an independent company to construct the necessary lateral pipeline connecting the proposed plant site to the interstate pipeline. We have also entered into a 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

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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.

Natural gas prices have historically fluctuated dramatically, which could significantly affect the profitability of our operations. Recently, natural gas prices increased sharply as Hurricanes Katrina and Rita devastated operations and impacted infrastructure on the Gulf Coast.  We are uncertain as to how the disruption in natural gas supplies caused by Hurricanes Katrina and Rita will impact long term natural gas prices. Our natural gas costs could be prohibitively high if current price levels significantly increase.  The following table shows the spot price in the Chicago market at the beginning of each month for the 2002-2006 time period as reported by the Energy Information Administration.

Chicago Spot Prices at the Beginning of Each Month 2002-2006

$ per MM Btu  

Month	2006	2005	2004	2003	2002
JAN	9.31	5.62	5.86	4.81	2.71
FEB	8.24	7.26	5.49	5.70	2.19
MAR	5.98	6.70	5.23	9.32	2.56
APR	6.90	7.46	5.88	4.91	2.68
MAY	6.16	6.56	5.84	5.40	3.81
JUN	6.22	6.28	6.49	6.15	3.13
JUL	5.54	6.85	5.77	5.22	3.27
AUG	8.41	8.02	5.86	4.72	3.04
SEP	5.01	10.35	4.81	4.92	2.90
OCT	4.10	12.10	5.02	4.72	4.24
NOV	7.43	8.96	7.09	4.32	4.08
DEC	n/a	12.03	7.02	5.62	4.17

Data Source: The Energy Information Administration

Electricity

Based on engineering specifications, we expect to require a peak electricity demand of approximately 4.5 megawatts (“MW”) to operate the plant. This amount of electricity can be provided to our proposed site by the Redwood Electrical Cooperative, which has high voltage transmission lines on easements near the proposed site that are available to supply Highwater Ethanol with electricity through an onsite substation.  We have not yet negotiated or entered into any agreements for the provision of electrical service, but anticipate doing so before we begin construction of the plant.

Water

We will require a significant supply of water. We anticipate obtaining water from new or existing high capacity wells.  Permits are required for all water usage. Engineering specifications show our plant water requirements to be approximately 384 gallons per minute. That is approximately 552,960 gallons per day. We are in the process of applying for the necessary permits, however, there is no assurance that we will be able to obtain the requisite permits to use the water we need to operate the plant.

Much of the water used in an ethanol plant is recycled back into the process. There are, however, certain areas of production where fresh water is needed. Those areas include boiler makeup water and cooling tower water. Boiler makeup water is treated on-site to minimize all elements that will harm the boiler and recycled water cannot be used for this process. Cooling tower water is deemed non-contact water because it does not come in contact with the mash, and, therefore, can be regenerated back into the cooling tower process. The makeup water requirements for the cooling tower are primarily a result of evaporation. Depending on the type of technology utilized in the plant design, much of the water can be recycled back into the process, which will minimize the discharge water. This will have the long-term effect of lowering wastewater treatment costs. Many new plants today are zero or near zero effluent discharge facilities. We anticipate our plant design will incorporate an ICM/Phoenix Bio-Methanator wastewater treatment process.  The ICM/Phoenix Bio-Methanator is expected to result in a zero discharge of plant process water. We may alternatively,

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negotiate an arrangement with the City of Lamberton, MN, pursuant to which wastewater would be processed in the city’s municipal wastewater treatment facility.  Currently, we do not have any binding arrangement with the City of Lamberton.

Employees

Prior to completion of plant construction and 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 prospectus, we have hired one part-time office employee.

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

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 and your investment may lose value.

Design-Build Team

Design Builder: Fagen, Inc.

We have entered into a design-build agreement with Fagen, Inc. in connection with the design, construction and operation of the proposed plant. Fagen, Inc. was founded by Ron Fagen, CEO and President, and originally began in 1972, as Fagen-Pulsifer Building, Inc. It became Fagen, Inc. in 1988. Fagen, Inc. has more than 25 years experience in the ethanol industry and has been involved in the construction of more ethanol plants than any other company in this industry. Fagen, Inc. employed over 1,000 construction workers in 2005, and employs approximately 120 personnel at its headquarters and two regional offices. Fagen, Inc. continues to design and construct ethanol plants around the country. Based upon publicly available information sources, we estimate that Fagen, Inc. and ICM, Inc., are currently designing and building approximately 26 ethanol plants in the United States. This number is only our estimate based upon public information sources and it is very likely that the actual number varies from our estimate and could vary significantly. The actual number of ethanol plants being designed and built by Fagen, Inc. and ICM, Inc., is considered proprietary business information of Fagen, Inc. and ICM, Inc., and is not available to us. Fagen, Inc.’s other construction commitments could cause Fagen, Inc. to run

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out of sufficient resources to timely construct our plant. This could result in construction delays if Fagen, Inc. is not able to perform according to the timetable we anticipate.

Fagen Engineering, LLC was formed in 1996, to assist Fagen, Inc. with the construction process. Fagen Engineering, LLC is a full-service design engineering firm.

The expertise of Fagen, Inc. in integrating process and facility design into a construction and operationally efficient facility is very important. Fagen, Inc. also has knowledge and support to assist our management team in executing a successful start-up. Fagen, Inc. is a meaningful project participant because of its anticipated obligation to facilitate our project’s successful transition from start-up to day-to-day profitable operation.

Design-Build Agreement with Fagen, Inc.

We have executed a design-build agreement with Fagen, Inc. for the provision of design and construction services. The agreement terminates on March 26, 2007, unless a valid Notice to Proceed has been accepted by Fagen, Inc. The termination date may be extended upon mutual written agreement.  We expect to pay Fagen, Inc. approximately $66,026,000 in exchange for the following services:

·Performing services in connection with the construction of the plant including: engineering, design, procurement, construction, startup, testing and training for the operation and maintenance of the plant as well as the provision of materials, equipment, tools and labor necessary to complete the plant in accordance with the terms of the design-build agreement.

We expect to be responsible for certain site improvements, infrastructure, utilities, permitting and maintenance and power equipment costs. The base price estimate of $66,026,000 is subject to changes in construction costs as described below. The services of Fagen, Inc. are currently in high demand because of its extensive experience as a design-builder for ethanol production facilities. Our management believes that the contract price of the ethanol plant is reasonable in light of Fagen, Inc.’s expertise in the design and construction of ethanol production facilities and the level of current demand for its services.

Under our design-build agreement, the contract price of approximately $66,026,000 may be further increased if the construction cost index (“CCI”) published by Engineering News-Record Magazine reports a CCI greater than 7,660.29 in the month in which we issue to Fagen, Inc., a notice to proceed with plant construction. The amount of the contract price increase will be equal to the increase in the CCI based upon the January 2006 CCI of 7,660.29. As of September 30, 2006, the CCI was reported at 7,763.15, which is significantly higher than the January 2006 level stated in the design build agreement. If the CCI remains at the September 2006 level or increases above that level in the month in which we issue to Fagen, Inc. a notice to proceed with plant construction, the contract price will accordingly increase by at least approximately $886,000. Thus,  there is a CCI contingency of $3,279,250 included in our use of proceeds for the project. This may not be sufficient to offset any upward adjustment in our construction cost. Under the design-build agreement, our expenses will increase for any change orders we may approve. In addition, the price assumes the use of non-union labor. 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 costs associated with the use of union labor.

Phase I and II Engineering Services Agreement

We entered into an engineering services agreement with Fagen Engineering, LLC for the performance of certain engineering and design services. We expect to pay Fagen Engineering, LLC a lump sum fee in exchange for these services, and expect Fagen Engineering, LLC to provide the following services:

·Property Layout Drawings;

·Grading, Drainage and Erosion Control Plan Drawings;

·Culvert Cross Sections and Details;

·Roadway Alignment Drawings;

·Utility Layouts for Fire Loop, Potable Water, Well Water, Sanitary Sewer, Utility Water Blowdown, and Natural Gas;

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·Geometric Layout;

·Site Utility Piping Tables;

·Tank Farm Layout and Details;

·Sections and Details Drawing (if required); and

·Miscellaneous Details Drawing (if required).

We expect that any sums we pay to Fagen Engineering, LLC for engineering services will reduce the lump sum fee we owe to Fagen, Inc. under our design-build agreement.

Design Process Engineer: ICM, Inc.

ICM, Inc. is a full-service engineering, manufacturing and merchandising firm based in Colwich, Kansas. We expect ICM, Inc. to be the principal subcontractor for the plant. ICM, Inc. is expected to provide the process engineering operations for Fagen, Inc. ICM, Inc. has been involved in the research, design and construction of ethanol plants for many years. The principals of ICM, Inc. each have over 20 years of experience in the ethanol industry and have been involved in the design, fabrication and operations of many ethanol plants. ICM employs more than 250 engineers, professional and industry experts, craftsmen, welders and painters and full-time field employees that oversee the process. ICM, Inc. has been involved in 60 ethanol plant projects.

Service agreement with Earth Tech Consulting, Inc.

We have entered into a service agreement with Earth Tech Consulting, Inc. pursuant to which Earth Tech Consulting, Inc. will provide assistance in securing state approval (environmental permits) to start construction of the plant. The cost of Earth Tech Consulting, Inc.’s services will be based on a time and material basis. Additional costs may be imposed if Earth Tech Consulting, Inc. is required to address significant public comment and/or assist in lengthy agency negotiations regarding specific permit terms and conditions.

Ethanol Fuel Marketing Agreement with Renewable Products Marketing Group, LLC

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.

Construction and timetable for completion of the project

Assuming this offering is successful, and we are able to complete the debt portion of our financing, we estimate that the project will be completed approximately 16 to 18 months after construction commences. This schedule further assumes that two months of detailed design will occur prior to closing and a 16-month construction schedule will be followed by two months of testing and start-up. The schedule also assumes that weather will be the same as it has been over the last several years, and that we will not experience unusual weather conditions or events during the construction period, such as flooding. The timetable also assumes that a drastic change in the interest rates will not affect our ability to obtain debt financing commitment, and other factors beyond our control do not upset our timetable. There can be no assurance that the timetable that we have set will be followed, and factors or events beyond our control could hamper our efforts to complete the project in a timely fashion. Fagen, Inc. based its estimate of 16 to 18 months after construction commences on the average time it has taken to build plants over the past five years.

Other Consultants

Transaction with PRX Geographic, Inc.

We have entered into a consulting agreement with PRX Geographic, Inc. pursuant to which PRX Geographic, Inc. conducted a corn origination analysis and a small area supply demand analysis and provided us with a report containing their findings.  The  

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findings of the corn origination analysis can be located under “DESCRIPTION OF BUSINESS-Corn Feedstock Supply.” The origination analysis was performed on a study of approximately 60 counties and the supply demand analysis is specific to the counties PRX Geographic, Inc. determines to constitute the  most probable origination area for the proposed plant.  In exchange for their services, we have paid PRX Geographic, Inc. the sum of $24,750.

Regulatory Permits

We will be subject to extensive air, water and other environmental regulations and we will need to obtain a number of environmental permits to construct and operate the plant.  In addition, it is likely that our senior debt financing will be contingent on our ability to obtain the various required environmental permits.  We have submitted applications for an Air Emissions Permit, a Stormwater Permit, and an Above Ground Storage Tank Permit along with our Environmental Assessment Worksheet; however, as of the date of this prospectus we have not been granted any of these permits.  We have not submitted our application for our Permit for Discharge of Stormwater During Construction Activities, but anticipate doing so before we begin construction.  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.  In addition, the Minnesota Department of Natural Resources (“MnDNR”) or the Minnesota Pollution Control Agency (“MPCA”) could impose conditions or other restrictions in the permits that are detrimental to us or which increase costs to us above those assumed in this project.  The MnDNR, MPCA and the Federal Environmental Protection Agency (“EPA”) could also change their interpretation of applicable permit requirements or the testing protocols and methods necessary to obtain a permit either before, during or after the permitting process.

Even if we receive all required permits from the MnDNR and the MPCA, we may also be subject to regulations on emissions from the EPA. Currently the EPA’s statutes and rules do not require us to obtain separate EPA approval in connection with construction and operation of the proposed plant. Additionally, environmental laws and regulations, both at the federal and state level, are subject to change and changes can be made retroactively. Consequently, even if we have the proper permits at the present time, we may be required to invest or spend considerable resources to comply with future environmental regulations or new or modified interpretations of those regulations, to the detriment of our financial performance.

Even if we receive all required permits from the State of Minnesota, we may also be subject to regulatory oversight from the EPA. Currently, the EPA’s statutes and rules do not require us to obtain separate EPA approval in connection with the construction and operation of the proposed plant. Minnesota is authorized to enforce the EPA’s federal emissions program. However, the EPA does retain authority to take action if it decides that Minnesota is not correctly enforcing its emissions program. Additionally, environmental laws and regulations, both at the federal and state level, are subject to change, and changes can be made retroactively. Consequently, even if we have the proper permits at the present time, we may be required to invest or spend considerable resources to comply with future environmental regulations or new or modified interpretations of those regulations to the detriment of our financial performance.

Total Facility State Operating Permit for Air Emissions

Our preliminary estimates indicate that the plant will be considered a minor source of regulated air pollutants and will qualify for a total facility “State” operating permit. There are a number of emission sources that are expected to require permitting. These sources include the boiler, ethanol process equipment, storage tanks, scrubbers, and baghouses. The types of regulated pollutants that are expected to be emitted from our plant include particulate matter (“PM10”), carbon monoxide (“CO”), nitrous oxides (“NOx”) and volatile organic compounds (“VOCs”). The activities and emissions mean that we are expected to obtain a total facility “State” operating permit for the facility emissions. Because of regulatory requirements, we anticipate that we will agree to limit production levels to a certain amount, which may be slightly higher than the production levels described in this prospectus (currently projected at 50 million gallons per year at nameplate capacity with the permit at a slightly higher rate) in order to avoid having to obtain a Title V air permit. These production limitations will be a part of the total facility “State” operating permit. If we exceed these production limitations, we could be subjected to very expensive fines, penalties, injunctive relief and civil or criminal law enforcement actions. Exceeding these production limitations could also require us to pursue a Title V air permit. Further analysis prior to construction, changes in design assumptions or a changes in the interpretation of regulations may require us to file for a Title V air permit. If we must obtain a Title V air permit, then we will experience significantly increased expenses and a significant delay in obtaining a subsequently sought Title V air permit. The State of Minnesota may reject a Title V air permit application and request additional information, further delaying startup and increasing expenses. Even if we obtain a total facility “State” operating permit prior to construction, the air quality standards may change, thus forcing us to later apply for a Title V air permit. The area in which the plant is expected to be situated may be determined to be a non-attainment area for a particular pollutant. In this event, the threshold standards that require a Title V permit may be changed, thus requiring us to file for and obtain a Title V air permit. The cost of complying and

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documenting compliance should a Title V air permit be required is also higher. It is also possible that in order to comply with applicable air regulations or to avoid having to obtain a Title V permit, we would have to install additional air pollution control equipment such as additional or different scrubbers.

Air Pollution Standard

There are a number of standards which may affect the construction and operation of the plant going forward. The prevention of significant deterioration (“PSD”) regulation creates more stringent and complicated permit review procedures for construction permits. It is possible, but not expected, that the plant may exceed applicable PSD levels for NOx, CO, and VOCs.

Waste Water National Pollutant Discharge Elimination System Permits (NPDES Permit)

We expect that we will use water to cool our closed circuit systems in the proposed plant based upon engineering specifications. Although the water in the cooling system will be re-circulated to decrease facility water demands, a certain amount of water will be continuously replaced to make up for evaporation and to maintain a high quality of water in the cooling tower. In addition, there will be occasional blowdown water that will have to be discharged. We currently plan to discharge this water to a local municipal sewage treatment plant.  Such discharge will require modifications to that plant so that it can handle the increased discharge.  We will be responsible for that cost. Depending on the quality of the water we obtain from wells, another option may be to discharge water to a local river.  In either case, we will be required to obtain an NPDES waste water permit.  The exact details regarding the source of water and the amount and quality of non-process and other wastewater that needs to be discharged will not be known until tests confirm the water quality and quantity for the site. Although unknown at this time, the quality and quantity of the water source and the specific requirements imposed by the Minnesota Environmental Protection Division for discharge will materially affect our financial performance. We expect to file for a permit to allow the discharge of non-contact cooling and blowdown and boiler water. The proposed permit would require a 30-day public comment notice and a 30-day public hearing if there is a request for a hearing. We will also be required to file an environmental assessment worksheet for any option being considered for discharge of waste water (see comments below). However, while we anticipate receiving the permits, there can be no assurance that these permits will be granted to us. If these permits are not granted, then our plant may not be allowed to operate.

Well Permit

We anticipate that we will need to drill one or more new high capacity wells to meet the plant’s water needs.  Minnesota requires a public notice and hearing process before a well permit can be granted.  In the event this permit is not approved, we would need to explore alternative water supply sources, however, the cost of alternative water supply sources could prohibit their use.  It is possible that potential sites for the well might be unable to produce water in sufficient quantities to support plant operations.  It is also possible that the well might not produce water of sufficient quality to allow us to rely on that well for water supply.

Storm Water Discharge Permit (NDPES) and Storm Water Pollution Prevention Plan (SWPPP Permits)

Permit for Industrial Activity:

Before we can begin construction of our plant, we must obtain a Storm Water Discharge Permit for industrial activity from the applicable state agency.  This permit must be filed and obtained before construction begins.  A Storm Water Pollution Prevention Plan must also be in place that outlines various measures we plan to implement to prevent storm water pollution.

Minnesota imposes additional water quality test and effluent limits for stormwater discharges.  The inability to meet stormwater discharge levels may require other water discharge treatment options, including publicly owned treatment works, use of a holding pond, discharge to a receiving stream, subsurface infiltration, irrigation and other options.  If those treatment options are required, it could increase our expenses.  Although Minnesota’s NPDES general permit for industrial activity has expired, applicants for new sites are currently allowed to apply for the permit under the expired permit.  It is possible that the Minnesota regulations pertaining to NPDES permits for industrial activity could be changed in the future and that those regulations could add additional requirements for discharges of storm water.  On August 9, 2005 the Minnesota Court of Appeals issued a decision holding that no NPDES permits should be granted by the Minnesota Pollution Control Agency if the discharges would decrease water quality for a receiving waterway on Minnesota’s impaired waterways list.  Minnesota has appealed this decision.  A decision by the Minnesota Supreme Court is expected soon.  Pending new regulations or a reversal on appeal, we must be certain that stormwater discharges that could decrease water quality do not enter an impaired waterway of Minnesota.  Cottonwood Creek, which is near the site and which is a likely recipient of any storm water runoff,  is only listed as an impaired waterway for fecal coliform and turbidity.  Cottonwood Creek does  

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drain into the Minnesota River which eventually empties into the Mississippi River.  The Court of Appeals decision now on appeal dealt with phosphorus levels in the Mississippi River and held that the entire watershed ought to be considered by the State when granting permits.  We anticipate the phosphorus emissions from the plant being low and even if the Court of Appeals case is upheld we may be able to purchase phosphorous credits to offset any phosphorus emissions.  

Permit for Construction:

Prior to the commencement of construction of the plant, we must file for an NPDES/SDS permit.  If the Minnesota Pollution Control Agency does not object to the notice of intent, we could begin construction and allow storm water discharge in most circumstances within seven days of the notice if the area disturbed is less than fifty acres in size. Alternatively, if the area disturbed is fifty acres or more we would have to wait at least thirty days from the date notice of intent is given to begin construction.  As part of the application for the Minnesota NPDES/SDS permit, we will need to have a Storm Water Pollution Prevention Plan in place that outlines various measures we plan to implement to prevent storm water pollution.  Other compliance and reporting requirements may also apply depending upon the results of the agency review. We would also be subject to certain reporting and monitoring requirements.  We anticipate, but there can be no assurances, that we will be able to obtain these permits.  The ability to obtain a Construction Site Storm Water Discharge Permit in Minnesota may be affected by the Minnesota Court of Appeals decision as described above in the same way that Storm Water Discharge Permit for Industrial Activity is affected.

Environmental Assessment

We will be required to undergo an environmental assessment process before we can begin construction of the plant.  This process includes filing an Environmental Assessment Worksheet and allowing a public review period.  In addition, local governmental units have a right to request additional information.   It is also possible that the environmental assessment process could trigger a requirement for an environmental impact study.   No construction can begin and no permits can be issued until a decision is made on whether an environmental impact study is required, although applications  for permits may be filed and reviewed while the environmental assessment is being considered.  If an environmental impact study is required, there is no assurance that we will be granted permits to begin construction until the project has been approved as part of the environmental impact study process.  Even if an environmental impact study is not required, third parties can make a request that an environmental impact study be performed.  There is no assurance that the project will be approved upon review of an environmental impact study.  Failure to obtain approval by the reviewing agency would mean that the project cannot proceed until objections to the environmental impact of the site are met.  We may be unable to do so which may mean that the plant will not be constructed.

New source performance standards

The plant will be subject to new source performance standards for both the plant’s distillation processes and the storage of VOCs used in the denaturing process. These duties include initial notification, emissions limits, compliance, monitoring requirements, and record keeping requirements.Spill prevention, control, and countermeasures plan and Tank Permit

Before we can begin operations, we must prepare and implement a spill prevention control and countermeasure (“SPCC”) plan in accordance with the guidelines contained in 40 CFR § 112. This plan will address oil pollution prevention regulations and must be reviewed and certified by a professional engineer. The SPCC must be reviewed and updated every three years. Minnesota has an additional tank permitting program for tanks holding hazardous chemicals in capacities over one million gallons. This program requires record-keeping, spill protection and response requirements in addition to the SPCC program. We anticipate, but there can be no assurances, that we will be able to obtain this permit.

Alcohol and Tobacco Tax and Trade Bureau, Requirements

Before we can begin operations, we must comply with applicable Alcohol and Tobacco Tax and Trade Bureau (formerly the Bureau of Alcohol, Tobacco and Firearms) regulations. These regulations require that we first make application for and obtain an alcohol fuel producer’s permit. The application must include information identifying the principal persons involved in our venture and a statement as to whether any of them have ever been convicted of a felony or misdemeanor under federal or state law. The term of the permit is indefinite until terminated, revoked or suspended. The permit also requires that we maintain certain security measures. We must also secure an operations bond pursuant to 27 CFR § 19.957. There are other taxation requirements related to special occupational tax and a special stamp tax.

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Risk management plan

Pursuant to the Clean Air Act, stationary sources, such as our plant, with processes that contain more than a threshold quantity of a regulated substances, such as anhydrous ammonia, are required to prepare and implement a risk management plan. Since we plan to use anhydrous ammonia, we must establish a plan to prevent spills or leaks of the ammonia and an emergency response program in the event of spills, leaks, explosions or other events that may lead to the release of the ammonia into the surrounding area. The same requirement may also be true for the denaturant we blend with the ethanol produced at the plant. This determination will be made as soon as the exact chemical makeup of the denaturant is obtained. We will need to conduct a hazardous assessment and prepare models to assess the impact of an ammonia and/or denaturant release into the surrounding area. The program will be presented at one or more public meetings. In addition, it is likely that we will have to comply with the prevention requirements under OSHA’s process safety management standard. These requirements are similar to the risk management plan requirements. The risk management plan will need to be filed before use.

Environmental Protection Agency

Even if we receive all Minnesota environmental permits for construction and operation of the plant, we will also be subject to oversight activities by the EPA. There is always a risk that the EPA may enforce certain rules and regulations differently than Minnesota’s environmental administrators. Minnesota or EPA rules and regulations are subject to change, and any such changes may result in greater regulatory burdens.

Nuisance

Ethanol production has been known to produce an odor to which surrounding residents could object. Ethanol production may also increase dust in the area due to operations and the transportation of grain to the plant and ethanol and distillers dried grains from the plant. Such activities may subject us to nuisance, trespass, or similar claims by employees or property owners or residents in the vicinity of the plant. To help minimize the risk of nuisance claims based on odors related to the production of ethanol and its co-products, we intend to install a thermal oxidizer in the plant. See “DESCRIPTION OF BUSINESS - Thermal Oxidizer” for additional information. Nonetheless, any such claims or increased costs to address complaints may have a material adverse effect on us, our operations, cash flows, and financial performance.

We are not currently involved in any litigation involving nuisance or any other claims.

GOVERNORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Our member control agreement provides that our board of governors will be comprised of no fewer than three and no more than 15 members. We have 13 governors on our initial board of governors. The initial board of governors will serve until the first annual or special meeting of the members following the date on which substantial operations of the ethanol plant commences. If our project suffers delays due to financing or construction, our initial board of governors could serve for an extended period of time. In that event, your only recourse to replace these governors would be through an amendment to our member control agreement which could be difficult to accomplish.

The member control agreement provides for a staggered board of governors, where, upon the expiration of the initial board, the first group of governors shall serve for one year, the second group shall serve for two years, and the third group shall serve for three years. The successors for each group of governors shall be elected for a 3-year term and at that point, one-third of the total number of governors will be elected by the members each year. Prior to expiration of the initial governors terms, the initial governors shall, by written resolution, separately identify the governor positions to be elected and so classify each Group I (serving one year), Group II (serving two years), or Group III (serving three years).

Our board will have no independent governors as defined by the North American Securities Administrators Association. Accordingly, any contracts or agreements we enter into will not be approved by independent governors since there are none at this time.

Identification of Governors, Executive Officers and Significant Employees

The following table shows the governors and officers of Highwater Ethanol, LLC as of the date of this prospectus:

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Board Member	Position with the Company
Monica Rose Anderson	Governor
Russell J. Derickson	Governor
Jason R. Fink	Treasurer/Governor
George M. Goblish	Governor
Ronald E. Jorgenson	Governor
Brian D. Kletscher	President/Governor
Michael J. Landuyt	Governor
David G. Moldan	Governor
Warren Walter Pankonin	Governor
Todd A. Reif	Governor
Gilbert L. Schmitz	Governor
John M. Schueller	Vice President/Governor
Timothy J. Van Der Wal	Secretary/Governor

Business Experience of Governors and Officers

The following is a brief description of the business experience and background of our officers and governors.

Monica Rose Anderson, Governor, Age 44, 2736 211th Street, Walnut Grove, MN  56180.

For the past five years, Monica Rose Anderson has owned Brad Anderson Farms Limited Partnership of Walnut Grove, MN.  She has also been an office manager at Clear Lake Farmers Elevator in Clear Lake, Minnesota, and was a Lab Technician at Bauerly Brothers of Sauk Rapids, Minnesota.  Ms. Anderson has served as a member of the board of governors since May 2006.  Ms. Anderson will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

Russell J. Derickson, Governor, Age 42, 37720 210th Street, Lamberton, Minnesota 56152.

For the past five years, Russell J. Derickson has owned and managed his own farming operation, which produced corn, soybeans, and wheat.  He has also been an Agricultural Advisor and Warehouse Examiner for the Minnesota Department of Agriculture of St. Paul, Minnesota.  Mr. Derickson attended South Dakota State University where he received a M.Ed in Ag Education and B.S. in Agricultural Education and Mechanized Agriculture.  Mr. Derickson has served as a member of the board of governors since May 2006.  Mr. Derickson will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

Jason R. Fink, Treasurer and Governor, Age 27, 506 South Washington, Redwood Falls, Minnesota 56283.

For the past five years, Jason R. Fink has been the Assistant Vice President and Ag Loan Officer at Minnwest Bank of Redwood Falls, Minnesota.  Mr. Fink graduated from South Dakota State University of Brookings, South Dakota with a major in Agronomy and minors in Ag Business, Ag Marketing and Business.  Mr. Fink has served as a member of the board of governors since May 2006.  Mr. Fink will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

George M. Goblish, Governor, Age 37, 32866 Dayton Avenue, Vesta, Minnesota 56292.  For the past five years, George Michael Goblish has been farming near Vesta where he currently raises corn and soybeans.  He is also an Asgrow/Dekalb/Monsanto seed dealer.  Mr. Goblish attended Willmar Technical College where he received his Associate’s Degree in Agricultural Production and Management.  Mr. Goblish has served as a member of the board of governors since May 2006.  Mr. Goblish will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

Ronald E. Jorgenson, Governor, Age 46, 33689 County Road 4, Jeffers, Minnesota 56145.

For the past five years, Ronald E. Jorgenson has owned and operated his own farming operation.  In addition, Mr. Jorgenson attended the University of Minnesota of St. Paul, Minnesota.  Mr. Jorgenson has served as a member of the board of governors since May 2006.  Mr. Jorgenson will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

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Brian D. Kletscher, President and Governor, Age 45, 30427 County Highway 10, Vesta, Minnesota 56292.

For the past five years, Brian D. Kletscher has served as County Commissioner of Redwood County, Minnesota.  In addition, Mr. Kletscher owns and manages farming operations for Kletscher Farms — Brian & Laura Kletscher.  He has also been a sales representative for Lucan Feed Service of Lucan, Minnesota.  Mr. Kletscher has served as a member of the board of governors since May 2006.  Mr. Kletscher will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

Michael J. Landuyt, Governor, Age 31,  13526 Camp Avenue, Walnut Grove, Minnesota 56180.

For the past five years, Michael J. Landuyt has owned and managed farming operations for Landuyt Land Livestock of Walnut Grove, Minnesota.  Mr. Landuyt attended South Dakota State University where he received an Associate’s Degree in General Ag.  Mr. Landuyt has served as a member of the board of governors since May 2006.  Mr. Landuyt will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

David G. Moldan, Governor, Age 46, 25368 County Highway 4, Lamberton, Minnesota 56152.

For the past five years, David G. Moldan has been the President and Treasurer of Moldan & Sons, Inc., a farming operation, of Lamberton, Minnesota.  Mr. Moldan attended the University of Minnesota of Waseca, Minnesota where he received his Associate’s Degree in Applied Science and Diversified Ag Production.  Mr. Moldan has served as a member of the board of governors since May 2006.  Mr. Moldan will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

Warren Walter Pankonin, Governor, Age 68, 40840 200th Street, Lamberton, Minnesota 56152.

For the past five years, Warren Walter Pankonin has owned and managed Double Diamond Ranch, Inc. and Minnesota Supreme Feeders, Inc., where he buys and sells cattle.  He also crop farms with his son, Mark.  Mr. Pankonin has served as a member of the board of governors since May 2006.  Mr. Pankonin will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

Todd A. Reif, Governor, Age 44, 123 Savannah Heights Boulevard, Lynd, Minnesota 56175.

For the past five years, Todd A. Reif has been the General Manager of Cenex Harvest States in Marshall, Minnesota, a grain buying and farm supply company.  Mr. Reif attended Southwest State University of Marshall, Minnesota and graduated with a B.S. Degree in Ag Business.  Mr. Reif has served as a member of the board of governors since May 2006.  Mr. Reif will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

Gilbert L. Schmitz, Governor, Age 76, 513 Sunrise Boulevard, Redwood Falls, Minnesota 56283.

For the past five years, Gilbert L. Schmitz has served as Director of Great River Energy of Elk River, Minnesota, one of Minnesota’s largest electric utilities providing wholesale electric services to 28 member distribution cooperatives.  Mr. Schmitz has served as a member of the board of governors since May 2006.  Mr. Schmitz will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

John M. Schueller, Vice President and Governor, Age 48, 29157 250th Street, Wabasso, Minnesota 56293.

For the past five years, John M. Schueller has been farming in Wabasso, Minnesota.  He has also been a custom applicator for Crop Production in Wabasso, Minnesota, and a trucker for Christensen Family Farms of Sleepy Eye, Minnesota.  Mr. Schueller has served as a member of the board of governors since May 2006.  Mr. Schueller will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

Timothy J. Van Der Wal, Secretary and Governor, Age 40, 13347 U.S. Highway 71, Sanborn, Minnesota 56083.

For the past five years, Timothy J. Van Der Wal has been an Ag Loan Officer at the Wanda State Bank, Wanda Minnesota.  He had worked as a Beef Enterprise Consultant for the Land O Lakes Feed Division of Arden Hills, Minnesota prior to joining the bank. 

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Mr. Van Der Wal has served as a member of the board of governors since May 2006.  Mr. Van Der Wal will serve until our first annual meeting following substantial completion of our ethanol plant and in all cases until a successor is elected and qualified.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

The following table sets forth certain information regarding the beneficial ownership of our units as of the date of this prospectus, by each person or entity known by us to be the beneficial owner of more than five percent of the outstanding units:

Title of Class	Name (1)	Amount and nature of beneficial owner	Percent of Class
Membership Unit	George M. Goblish	24 units	6.22	%
Membership Unit	Ronald E. Jorgenson	24 units	6.22	%

(1)  The address of the beneficial owner is deemed to be the same address indicated above.

Security Ownership of Management

As of the date of this prospectus, our governors and officers own membership units as follows:

UNITS BENEFICIALLY OWNED BY GOVERNORS AND OFFICERS

								Percentage of Total After the Offering(2)
Title of Class	Name and Address of Beneficial Owner (1)	Number of Units Owned	Total Purchase  Price of Units			Percent of Class Prior to Offering		Maximum Units Sold in Offering		Minimum Units Sold in Offering
Membership Units	Monica Rose Anderson	18 units	$		60,000	4.66	%	0.28	%	0.37	%
Membership Units	Russell J. Derickson	9 units	30,000			2.33	%	0.14	%	0.18	%
Membership Units	Jason R. Fink	6 units	20,000			1.55	%	0.09	%	0.12	%
Membership Units	George M. Goblish	24 units	80,000			6.22	%	0.38	%	0.49	%
Membership Units	Ronald E. Jorgenson	24 units	80,000			6.22	%	0.38	%	0.49	%
Membership Units	Brian D. Kletscher	12 units	40,000			3.11	%	0.19	%	0.25	%
Membership Units	Michael J. Landuyt	6 units	20,000			1.55	%	0.09	%	0.12	%
Membership Units	David G. Moldan	9 units	30,000			2.33	%	0.14	%	0.18	%
Membership Units	Warren Walter Pankonin	15 units	50,000			3.89	%	0.23	%	0.31	%
Membership Units	Todd A. Reif	12 units	40,000			3.11	%	0.19	%	0.25	%
Membership Units	Gilbert L. Schmitz	3 units	10,000			0.78	%	0.05	%	0.06	%
Membership Units	John M. Schueller	9 units	30,000			2.33	%	0.14	%	0.18	%
Membership Units	Timothy J. Van Der Wal	3 units	10,000			0.78	%	0.05	%	0.06	%
All Governors and Officers as a Group:		150 Units	$	500,000		38.86	%	2.35	%	3.06	%

(1)The address of the beneficial owner is deemed to be the same address indicated above.

 (2)  Assumes that no additional units are purchased in this offering.

Beneficial ownership is determined in accordance with SEC rules and generally includes holding voting and investment power with respect to the securities.

EXECUTIVE COMPENSATION

Brian Kletscher is currently serving as our president and John Schueller is currently serving as our vice president. Jason R. Fink is our treasurer and Tim J. Van Der Wal is our secretary. We presently have compensation arrangements with three of our governors and officers.  Brian D. Kletscher receives $2,000 per month, Jason R. Fink receives $1,000 per month and Tim J. Van Der Wal receives $1,000 per month for their services as officers of Highwater Ethanol.  We do not presently compensate John M. Schueller for his service as an officer.

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In the future, each of our governors may receive compensation for attending board meetings.  We expect that any governor compensation will be a reasonable amount based on the standards in the industry.

Employment Agreements

We have no employment agreements with any executive officer or governor. In the future, we may enter into employment agreements with our executive officers or other employees that we may hire.

Reimbursement of Expenses

We reimburse our officers and governors for expenses incurred in connection with their service. Our reimbursement policy is to reimburse our officers and governors for out-of-pocket expenses.

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Our member control agreement provides that none of our governors or officers will be personally liable to us or our members for monetary damages for a breach of their fiduciary duty. This could prevent both us and our unit holders from bringing an action against any governor for monetary damages arising out of a breach of that governor’s fiduciary duty or grossly negligent business decisions. This provision does not affect possible injunctive or other equitable remedies to enforce a governor’s duty of loyalty for acts or omissions not taken in good faith, involving willful misconduct or a knowing violation of the law, or for any transaction from which the governor derived an improper financial benefit. It also does not eliminate or limit a governor’s liability for participating in unlawful payments or distributions or redemptions, or for violations of state or federal securities laws. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to governors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is contrary to public policy as expressed in the Securities Act of 1933, and is, therefore, unenforceable.

Under Minnesota law, no member or governor will be liable for any of our debts, obligations or liabilities solely because he or she is a member or governor. In addition, Minnesota law permits, and our member control agreement contains, extensive indemnification provisions which require us to indemnify any officer or governor who was or is party, or who is threatened to be made a party to a current or potential legal action because he or she is our governor or officer. We must also indemnify against expenses, including attorney fees, judgments, claims, costs and liabilities actually and reasonably incurred by these individuals in connection with any legal proceedings, including legal proceedings based upon violations of the Securities Act of 1933 or state securities laws. Our indemnification obligations may include criminal or other proceedings.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Since our inception, we have not entered into transactions with related parties. Our initial governors constitute our founding members. As such, we currently do not have outside governors or unaffiliated unit holders to evaluate related party transactions. Accordingly, any contracts or agreements third parties will not be approved by independent governors since there are none at this time. We do not believe that this will pose a problem, however, because the governors’ investment interest in our plant is generally adverse to interest of the parties with which we contract. We believe these adverse interests constitute sufficient protection to justify our lack of independent directors. At the first annual or special meeting of the members following substantial completion of the ethanol plant, an election will be held and a board of nine governors will be established. We anticipate independent governors being elected at that time, but cannot guarantee that any independent governors will be elected at that time.

Future transactions with governors, officers or 5% unit holders

     Our member control agreement permits us to enter into agreement and other arrangements with our governors, officers, members and their affiliates. We have not engaged in any transactions with any of our governors, officers or 5% unit holders. Should we engage in any such transactions in the future, all such arrangements will be on terms no more favorable to the governors, officers or members than generally afforded to non-affiliate parties in a similar transaction.

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PLAN OF DISTRIBUTION

Before purchasing any units, an investor must execute a subscription agreement, a promissory note and security agreement and sign our member control agreement. The subscription agreement will contain, among other provisions, an acknowledgement that the investor received a prospectus, such as this, and that the investor agrees to be bound by our member control agreement. All subscriptions are subject to approval by our governors and we reserve the right to reject any subscription agreement.

The Offering

We are offering, as a direct primary offering, a maximum of 6,000 units and a minimum of 4,500 units at a purchase price of $10,000 per unit. You must purchase a minimum of one unit to participate in the offering. Our board of governors determined the offering price for the units arbitrarily, without any consultation with third parties. The offering price of the units is not, therefore, based on customary valuation or pricing techniques for new issuances. We anticipate our four executive officers, Brian D. Kletscher, John M. Schueller, Jason R. Fink, and Tim J. Van Der Wal will sell our units in this offering, without the use of an underwriter. We will not pay commissions to our governors for these sales. These governors will rely on the safe harbor from broker-dealer registration set out in Rule 3a4-1 under the Securities Exchange Act of 1934.  We are exempt from broker-dealer registration with the NASD.  We will not pay commissions to our governors and officers for these services.

Our minimum offering amount is $45,000,000 and our maximum offering amount is $60,000,000. The offering will end no later than [twelve months from the effective date of this registration statement]. If we sell the maximum number of units prior to [twelve months from the effective date of this registration statement], the offering will end on or about the date the maximum number of units is sold. We may choose to end the offering any time prior to [twelve month date], after we sell the minimum number of units. If we abandon the project for any reason, we will terminate the offering. Even if we successfully close the offering by selling the minimum number of units by [one year date], we may still be required to return the offering proceeds to investors if we are unable to satisfy the conditions for releasing funds from escrow, which include our receipt of a written debt financing commitment. After the offering, there will be 6,386 units issued and outstanding if we sell the maximum number of units offered in this offering and 4,886 units issued and outstanding if we sell the minimum number of units offered in this offering. This includes 386 units issued in our founders and seed capital investors in the previous capital private placements.

Our governors and officers will be allowed to purchase the units that are being offered. These units may be purchased for the purpose of satisfying the minimum amount of units required to close the offering. Units purchased by these individuals and entities will be subject to the same restrictions regarding transferability as described in this prospectus and our member control agreement, and will, therefore, be purchased for investment, rather than resale.

You should not assume that we will sell the $45,000,000 minimum only to unaffiliated third party investors. We may sell units to affiliated or institutional investors that may acquire enough units to influence the manner in which we are managed. These investors may influence our business in a manner more beneficial to them than to other investors.

We currently plan to register the offering in the states of Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin. We may also offer or sell our units in other states in reliance on exemptions from the registration requirements of the laws of those other states. However, we may not generally solicit investors in any jurisdictions other than Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin. This limitation may result in the offering being unsuccessful.

We expect to incur offering expenses in the amount of approximately $550,000 to complete this offering.

Suitability of Investors

Investing in the units offered hereby involves a high degree of risk. Accordingly, the purchase of units is suitable only for persons of substantial financial means that have no need for liquidity in their investments and can bear the economic risk of loss of any investment in the units. Units will be sold only to persons that meet these and other requirements. Persons cannot invest in this offering unless they meet one of the following suitability tests:

·Persons who have annual income from whatever source of at least $45,000 and you have a net worth of at least $45,000 exclusive of home, furnishings and automobiles;

·Persons who have a net worth of at least $150,000 exclusive of home, furnishings and automobiles.

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·For Iowa Investors, persons who have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $150,000 (exclusive of home, auto and furnishings);

·For Kansas Investors, persons who have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $225,000 (exclusive of home, auto and furnishings);

For married persons, the tests will be applied on a joint husband and wife basis regardless of whether the purchase is made by one spouse or the husband and wife jointly.

Even if you represent that you meet the suitability standards set forth above, the board of governors reserves the right to reject any subscription for any reason, including if the board determines that the units are not a suitable investment for you. The board may assess investor suitability on the basis of information it obtains from prospective investors which may include the investor’s age, investment objectives, investment experience, income, net worth, financial situation, and other investments made by the prospective investor along with any other pertinent factors.

You must make certain written representations in the subscription agreement, including that you:

·have received a copy of our prospectus and the exhibits thereto;

·understand that our units are sold in reliance upon a federal securities registration; Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin securities registrations; and exemptions from securities registrations in various other states, and that you understand that our units can only be sold to a person meeting requirements of suitability;

·understand that the securities purchased have not been registered under the securities laws of any state other than the states of Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin, and that we are relying in part upon your representations;

·understand that the securities subscribed for have not been approved or disapproved by the Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota or Wisconsin securities departments or any other regulatory authority;

·intend to purchase the units for investment and not for resale;

·understand that there is no present market for our units and that there are significant restrictions on the transferability of our units;

·have been encouraged to seek the advice of your legal counsel and accountants or other financial advisers with respect to investor-specific tax and/or other considerations relating to the purchase and ownership of our units [Minnesota subscribers will not make this representation];

·have received a copy of our member control agreement and understand that upon closing the escrow, you and the membership units will be bound by the member control agreement;

·understand that our units are subject to substantial restrictions on transfer and that in order to sell the units an investor must sell or distribute them pursuant to the terms of the member control agreement, and the requirements of the Securities Act of 1933, as amended, and applicable state securities laws;

·meet the suitability test outlined in the agreement;

·is capable of bearing the economic risk of the investment, including the possible total loss of the investment [Minnesota    subscribers will not make this representation];

·understand that we will place a restrictive legend on any certificate representing any unit;

·understand that we may place a stop transfer order with its registrar and stock transfer agent (if any) covering all certificates representing any of the membership units;

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·may not transfer or assign the subscription agreement, or any of your interest herein;

·has written your correct taxpayer identification number on the subscription agreement;

·are not subject to back up withholding either because you have not been notified by the Internal Revenue Service (“IRS”) that you are subject to backup withholding as a result of a failure to report all interest or dividends, or the IRS has notified you that you are no longer subject to backup;

·understand that execution of the attached promissory note and security agreement will allow us to pursue the obligor for payment of the amount due thereon by any legal means, including, but not limited to, acquisition of a judgment against the obligor in the event that the subscriber defaults; and

·acknowledge that we may retain possession of certificates representing the units subscribed for to perfect our security interest in those units.

We will rely on these representations and others in determining whether you understand and have knowledge of the material terms and nature of the investment, so that we can determine whether investment is suitable for you. If we accept your subscription, we will use the information you give us in the subscription agreement for company purposes, such as tax reporting. We will use the representations regarding taxpayer information to defend ourselves if questioned by the Internal Revenue Service about your taxes. Also, if you do not fulfill your obligations under the promissory note and security agreement, we will use the applicable representations from your subscription agreement against you to show that you understood that we can take legal action for payment under the promissory note and security agreement, and/or retain possession of your membership certificate to perfect any security interest we have in the units. Finally, if you seek legal action to attempt to force us to allow an action prohibited by our member control agreement, we will use the applicable representation in your subscription agreement as evidence that you understood that you would be bound by the restrictions and provisions of the member control agreement, including the restrictions on transfers of our units.

Subscription Period

The offering must close upon the earlier occurrence of (1) our acceptance of subscriptions for units equaling the maximum amount of $60,000,000; or (2) [twelve months from the effective date of this registration statement]. However, we may close the offering any time prior to [twelve months from the effective date of this registration statement] upon the sale of the minimum aggregate offering amount of $45,000,000. If we abandon the project for any reason prior to [twelve month date], we will terminate the offering and promptly return funds to investors. Even if we successfully close the offering by selling at least the minimum number of units prior to [one year date], the offering proceeds will remain in escrow until we satisfy the conditions for releasing funds from escrow, including our receipt of a written debt financing commitment. We may admit members to Highwater Ethanol and continue to offer any remaining units to reach the maximum number to be sold until the offering closes. We reserve the right to cancel or modify the offering, to reject subscriptions for units in whole or in part and to waive conditions to the purchase of units. Additionally, in our sole discretion, we may also determine that it is not necessary to sell all available units. If we sell subscriptions for all of the available units, we have the discretion to reject any subscriptions, in whole or in part, for any reason.

This offering may be terminated for a variety of reasons, most of which are discussed in detail in the section entitled “RISK FACTORS.” In the event of termination of this offering prior to its successful closing, funds invested with us will be promptly  returned with interest, less escrow fees. Your proportional share of the escrow fees will be based on the amount of your investment and how long the investment was held in the escrow account compared to all of the other investments. If the amount of the escrow fees exceeds the amount of interest earned, we will use our seed capital proceeds to pay the remaining amount of escrow fees. The principal amount of your investment will not be used to pay escrow fees. If the offering is terminated prior to its successful closing, we intend to promptly return your investment by the close of the next business day or as soon as possible after the termination of the offering.

If you subscribe for the purchase of units, you may not withdraw your subscription at any time, either before or after we accept it. If the offering is successful, the interest earned on the escrow account will be used to cover the escrow agent’s fees. Any remaining interest will go to Highwater Ethanol. However, if we do not accept your subscription, we will promptly return your entire investment to you, plus nominal interest, less escrow fees.

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Subscription Procedures

Before purchasing any units, you must complete the subscription agreement included as Exhibit C to this prospectus, draft a check payable to “Minnwest Bank, Redwood Falls, Escrow Agent for Highwater Ethanol, LLC” in the amount of not less than 10 percent of the amount due for the units for which subscription is sought, which amount will be deposited in the escrow account; sign a full recourse promissory note and security agreement for the remaining 90 percent of the total subscription price; and deliver to us these items and an executed copy of the signature page of our member control agreement.  The promissory note will become due within 20 days the subscribers receipt of written notice from Highwater Ethanol.  In the subscription application, an investor must make representations to us concerning, among other things, that he or she has received our prospectus and any supplements, agrees to be bound by the member control agreement and understands that the units are subject to significant transfer restrictions. The subscription application also requires information about the nature of your desired ownership, your state of residence, and your taxpayer identification or Social Security Number. We encourage you to read the subscription agreement carefully.

Anytime after we receive subscriptions for the minimum amount of the offering, we may mail written notice to our investors that full payment under the promissory note is due within 20 days. We will deposit funds paid in satisfaction of the promissory notes into our escrow account where they will be held until we satisfy the conditions for releasing funds from escrow. Unpaid amounts will accrue nominal interest and each investor will agree to reimburse us for amounts we must spend to collect the outstanding balance. In the event that a subscriber defaults on the promissory note, we intend to pursue that defaulting subscriber for payments of the amount due by any legal means, including, but not limited to, retention of the initial 10 percent payment and acquisition of a judgment against the subscriber.

If you subscribe to purchase units after we have received subscriptions for the aggregate minimum offering amount of $45,000,000, you will be required to pay the full purchase price immediately upon subscription.

Rather than accepting or rejecting subscriptions as we receive them, we might not determine whether to accept or reject subscriptions until after we have received applications totaling at least $45,000,000 from investors or until a future date near the end of this offering. If we accept your subscription and meet the conditions for releasing funds from escrow, your subscription will be credited to your capital account in accordance with our member control agreement and we will issue to you a membership unit certificate signifying the ownership of your membership units. If we reject your subscription, we will return your subscription, check, and signature page within thirty days of rejection.

Changes in the offering’s material terms after the registration statement’s effectiveness will terminate the original offer and subscribers would then be entitled to a refund. Material changes include the following: (1) extension of the offering beyond the period of one year; (2) change in the offering price other than that disclosed in this prospectus; (3) change in the minimum purchase required of investors; (4) change in the amount of proceeds necessary to release the proceeds in escrow; and (5) material change in the application of proceeds.

If you are deemed the beneficial owners of 5 percent or more of our issued and outstanding units you may have reporting obligations under Section 13 and Section 16 of the Securities and Exchange Act. If you anticipate being a beneficial owner of 5 percent or more of our outstanding units you should consult legal counsel to determine what filing and reporting obligations may be required under the federal securities laws.

Escrow Procedures

Proceeds from subscriptions for the units will be deposited in an interest-bearing escrow account that we have established with Minnwest Bank of Redwood Falls, Minnesota, as escrow agent under a written escrow agreement. We will not release funds from the escrow account until specific conditions are satisfied. The conditions are (1) the cash subscription proceeds in the escrow account equals or exceeds $45,000,000, exclusive of interest; (2) our receipt of a written debt financing commitment for debt financing ranging from approximately 48,320,000 to $63,320,000, depending on the amount necessary to fully capitalize the project; (3) we have signed a definitive design build agreement with Fagen, Inc.; (4) we have been issued the environmental permits necessary to construct the ethanol plant; (5) we elect, in writing, to terminate the escrow agreement; (6) we have sent an affidavit prepared by our escrow agent to the states in which our units are registered stating that conditions (1), (2), (3), (4) and (5) have been met; and (7) we obtain consents to releasing funds from escrow from each state securities department from which such consent is required.  The escrow agent must receive cash payments equal to the 90 percent balance of the aggregate minimum offering amount no later than one year after the effective date of our registration statement prior to releasing funds from escrow.  If, at the end of the one-year period, cash proceeds  

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deposited with the escrow agent do not equal the aggregate minimum offering amount of $45,000,000, the escrow agreement must terminate and the cash deposits must be promptly returned to the purchasers.

Before we release funds from escrow, we must secure a written debt financing commitment. You should be aware that a commitment for debt financing is not a binding loan agreement and the lender may not be required to provide us the debt financing as set forth in the commitment. A commitment is an agreement to lend subject to certain terms and conditions. It is also subject to the negotiation, execution, and delivery of loan and loan-related documentation satisfactory to the lender. Therefore, even if we sell the aggregate minimum number of units prior to [twelve months from the effective date of this registration statement] and receive a debt financing commitment, we may not satisfy the loan commitment conditions before the offering closes, or at all. If this occurs, we have three alternatives:

·Begin construction of the plant using all or a part of the equity funds raised while we seek another debt financing source;

·Hold the equity funds raised indefinitely in an interest-bearing account while we seek another debt financing source; or

·Promptly return the equity funds, if any, to investors with accrued interest, after deducting the currently indeterminate expenses of operating our business or partially constructing the plant before we return the funds.

In addition to holding funds in one or more bank accounts, we will invest the escrow funds in short-term certificates of deposit issued by a bank and/or short-term securities issued by the United States government. Even if we are successful in releasing funds from escrow, we intend to allow the offering to continue until [twelve months from date of effectiveness of this registration statement] or some earlier date, at our discretion. If we sell units for the aggregate minimum offering price of $45,000,000 prior to [twelve months from the effective date of this registration statement], we may demand and collect the balance of the purchase price payable on these units after [twelve months from the effective date of this registration statement]. We may terminate the offering prior to closing the offering in which event we will return your investment along with your portion of the total interest earned on the account by the close of the next business day or as soon as possible after the termination of the offering under the following scenarios:

·if we determine in our sole discretion to terminate the offering prior to [twelve months from effective date of this registration statement]; or

·if we do not raise the $45,000,000 minimum aggregate offering amount by [twelve months from effective date of this registration statement].

For its service as escrow agent, we expect to pay Minnwest Bank of Redwood Falls, Minnesota an administration fee as well as transaction fees and fees for filing tax form 1099.  In the event we return the investments to the investors, we anticipate that we will pay our escrow bank a fee for 1099 filings, plus a transaction fee per subscriber and a 1099 filing fee per subscriber. The principal amount of your investment and your pro rata share of interest will not be used to pay escrow fees. Any escrow fees will be borne by the Company with other funds.

Delivery of Unit Certificates

If we satisfy the conditions for releasing funds from escrow, we will issue certificates for the units subscribed in the offering upon such release. Unless otherwise specifically provided in the subscription agreement, we will issue certificates for any subscription signed by more than one subscriber as joint tenants with full rights of survivorship. We will imprint the certificates with a conspicuous legend referring to the restrictions on transferability and sale of the units. See “DESCRIPTION OF MEMBERSHIP UNITS - Restrictive Legend on Membership Certificates.”

Summary of Promotional and Sales Material

In addition to and apart from this prospectus, we may use certain sales material in connection with this offering. The material may include a brochure, internet website, question-and-answer booklet, speech for public seminars, invitations to seminars, news articles, public advertisements and audio-visual materials. In certain jurisdictions, such sales materials may not be available. This offering is made only by means of this prospectus and other than as described herein, we have not authorized the use of any other sales material. Although the information contained in such sales materials does not conflict with any of the information contained in this prospectus,

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such material does not purport to be complete and should not be considered as a part of this prospectus or of the registration statement of which this prospectus is a part, or as incorporated in this prospectus or the registration statement by reference.

DESCRIPTION OF MEMBERSHIP UNITS

We are offering one class of securities. If we accept your subscription agreement, you will be both a holder of units and a member of the limited liability company. As a unit holder, you will be entitled to certain economic rights, such as the right to the distributions that accompany the units. As a member of the limited liability company, you will be entitled to certain other rights, such as the right to vote at our member meetings. If your membership in the company is terminated or if you transfer your units without the company’s approval, the role of unit holder may be separated from the role of member. The separation of such roles may include the loss of certain rights, such as voting rights. See “Separable Interests” below for greater detail about the loss of membership.

Membership Units

Ownership rights in us are evidenced by units. There is one class of membership units in Highwater Ethanol. Each unit represents a pro rata ownership interest in our capital, profits, losses and distributions. Unit holders who are also members have the right to vote and participate in our management as provided in the member control agreement. We maintain a membership register at our principal office setting forth the name, address, capital contribution and number of units held by each member.

Restrictive Legend on Membership Certificate

We will place restrictive legends on your membership certificate or any other document evidencing ownership of our units. The language of the legend will be similar to the following:

THE TRANSFERABILITY OF THE MEMBERSHIP UNITS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED.  SUCH UNITS MAY NOT BE SOLD, ASSIGNED, OR TRANSFERRED, AND NO ASSIGNEE, VENDEE, TRANS­FEREE OR ENDORSEE THEREOF WILL BE RECOGNIZED AS HAVING ACQUIRED ANY SUCH UNITS FOR ANY PURPOSES, UNLESS AND TO THE EXTENT SUCH SALE, TRANSFER, HYPOTHECATION, OR ASSIGNMENT IS PERMITTED BY, AND IS COMPLETED IN STRICT ACCORDANCE WITH, APPLICABLE FEDERAL AND STATE LAW AND THE TERMS AND CONDITIONS SET FORTH IN THE MEMBER CONTROL AGREEMENT OF THE COMPANY, AS AMENDED FROM TIME TO TIME.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS.

Voting Limitations

Each member is entitled to one vote per unit owned. Members may vote units in person or by proxy at a meeting of the unit holders, on all matters coming before a member vote. Members do not have cumulative voting or pre-emptive rights.

Separable Interests

Although we are managed by our governors, our member control agreement provides that certain transactions, such as amending our member control agreement or dissolving the company, require member approval. Each member has the following rights:

·To receive a share of our profits and losses;

·To receive distributions of our assets, if and when declared by our governors;

·To participate in the distribution of our assets in the event we are dissolved or liquidated;

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·To access information concerning our business and affairs at our place of business; and

·To vote on matters coming before a vote of the members.

Our member control agreement provides that if your membership is terminated, regardless of whether you transfer your units or we admit a substitute member, then you will lose all your rights to vote your units and the right to access information concerning our business and affairs at our place of business. Under our member control agreement, information that will be available exclusively to members includes state and federal tax returns and a current list of the names, addresses and capital account information of each member and unit holder. This information is available upon request by a member for purposes reasonably related to that person’s interest as a member. In addition, a member’s use of this information is subject to certain safety, security and confidentiality procedures established by us.

Unit holders who have only economic rights in our units but not voting rights will continue to have the right to a share of our profits and losses and the right to receive distributions of our assets and to participate in the distribution of our assets in the event we are dissolved or liquidated. Unit holders will also have access to company information that is periodically submitted to the Securities and Exchange Commission. See “DESCRIPTION OF BUSINESS.”

If you are an individual, you will cease to be a member upon your death or if you have been declared incompetent by a court of law. If you are a corporation, trust, limited liability company, or partnership, you will cease to be a member at the time your existence is terminated. If you are an estate, then your membership will terminate when the fiduciary of the estate distributes all of your units. Accordingly, it is possible to be a unit holder of Highwater Ethanol, but not a member.

If you transfer your units, and the transfer is permitted by the member control agreement, or has been approved by the board of governors, then the transferee will be admitted as a new member of Highwater Ethanol only if the transferee:

·Agrees to be bound by our member control agreement;

·Pays or reimburses us for legal, filing and publication costs that we incur relating to admitting such transferee as a new member, if any;

·Delivers, upon our request, any evidence of the authority such person or entity has to become a member of Highwater Ethanol; and

·Delivers, upon our request, any other materials needed to complete transferee’s transfer.

The board of governors, in its discretion, may prohibit the transferee from becoming a member if he or she does not comply with these requirements.

Distributions

Distributions are payable at the discretion of our board of governors, subject to the provisions of the Minnesota Limited Liability Company Act, our member control agreement and the requirements of our creditors. Our board has no obligation to distribute profits, if any, to members. We have not declared or paid any distributions on our units. Minnesota law prohibits us from making distributions to our members if the fair market value of our assets would be less than our liabilities after the distribution.

Unit holders are entitled to receive distributions of cash or property if and when a distribution is declared by our governors. Distributions will be made to investors in proportion to the number of units investors own as compared to all of our units that are then issued and outstanding. Our governors have the sole authority to authorize distributions based on available cash (after payment of expenses and resources), however, we will attempt to distribute an amount approximating the additional federal and state income tax attributable to investors as a result of profits allocated to investors.

We do not expect to generate revenues until the proposed plant is operational. After operation of the proposed plant begins, we anticipate, subject to any loan covenants or restrictions with our senior and subordinated lenders, distributing a portion of our net cash flow to our members in proportion to the units held and in accordance with our member control agreement. By net cash flow, we mean our gross cash proceeds received less any portion, as determined by our governors in their sole discretion, used to pay or establish reserves for our expenses, debt payments, capital improvements, replacements and contingencies. Our board may elect to retain future

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profits to provide operational financing for the plant, debt retirement and possible plant expansion or other business expansion opportunities.

We do not know the amount of cash that we will generate, if any, once we begin operations. At the start, we will generate no revenues and do not expect to generate any operating revenue until the proposed ethanol plant is operating fully. Cash distributions are not assured, and we may never be in a position to make distributions. Whether we will be able to generate sufficient cash flow from our business to make distributions to members will depend on numerous factors, including:

·Successful and timely completion of construction since we will not generate any revenue until our plant is constructed and operational;

·Required principal and interest payments on any debt and compliance with applicable loan covenants which will reduce the amount of cash available for distributions;

·Our ability to operate our plant at full capacity which directly impacts our revenues;

·Adjustments and amounts of cash set aside for reserves and unforeseen expenses; and

·State and federal regulations and subsidies, and support for ethanol generally which can impact our profitability and the cash available for distributions.

Capital Accounts and Contributions

The purchase price paid for our units constitutes a capital contribution for purposes of becoming a unit holder and will be credited to your capital account. As a unit holder, your capital account will be increased according to your share of our profits and other applicable items of income or gain specially allocated to you pursuant to the special allocation rules described below. In addition, we will increase your capital account for the amount of any of our liabilities that are assumed by you or are secured by any property which we distribute to you. We will decrease your capital account for your share of our losses and other applicable items of expenses or losses specially allocated to you pursuant to the special allocation rules described below. We will also decrease your capital account in an amount equal to the value of any property we distribute to you. In addition, we will decrease your capital account for the amount of any of your liabilities that are assumed by us or are secured by property you have contributed to us. In the event you transfer your units and we have approved such transfer, then your capital account, to the extent it relates to the units transferred, will be transferred to the transferee. Our member control agreement does not require you to make additional capital contributions to us. Interest will not accrue on your capital contributions, and you have no right to withdraw or be repaid your capital contributions made to us.

Allocation of Profits and Losses

Except as otherwise provided in the special allocation rules described below, profits and losses that we recognize will be allocated to you in proportion to the number of units you hold. Our profits and losses will be determined by our governors on either a daily, monthly, quarterly or other basis permitted under the Internal Revenue Code, as amended, and corresponding Treasury Regulations.

Special Allocation Rules

The amount of profits and losses that we allocate to you is subject to a number of exceptions referred to as special allocations. These include special allocations required by the Internal Revenue Code and Treasury Regulations aimed at highly leveraged limited liability companies that allocate taxable losses in excess of a unit holder’s actual capital contributions. Our member control agreement also requires that our governors make offsetting special allocations in any manner they deem appropriate that, after such offsetting allocations are made, each Unit holder’s capital account balance is equal to the capital account balance that that unit holder would have had if special allocations required by the Internal Revenue Code and Treasury Regulations were not made to that unit holder’s capital account.

Restrictions on Transfers of Units

The units will be subject to certain restrictions on transfers pursuant to our member control agreement. In addition, transfers of the units may be restricted by state securities laws. As a result, investors may not be able to liquidate their investments in the units and

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therefore may be required to assume the risks of investing in us for an indefinite period of time. Investment in us should be undertaken only by those investors who can afford an illiquid investment.

We have restricted the ability to transfer units to ensure that the Internal Revenue Service does not deem Highwater Ethanol to be a “publicly traded partnership” which results in corporate taxation. Under our member control agreement, no transfer may occur without the approval of the board of governors. Further, the board of governors will only permit transfers that fall within “safe harbors” contained in the publicly traded partnership rules under the Internal Revenue Code, to include the following:

·Transfers by gift to the member’s spouse and/or descendants;

·Transfers upon the death of a member;

·Certain other transfers provided that for the applicable tax year, the transfers in the aggregate do not exceed two percent of the total outstanding units; and

·Transfer through a Qualified Matching Service.

Transfers made through a Qualified Matching Service are limited to no more than 10 percent of the total outstanding units during a tax year. The 10 percent limit does not include private transfers, which are not limited in number, but does include certain other transfers subject to the two percent limit.

Any transfer in violation of the publicly traded partnership requirements or our member control agreement will be null and void. Furthermore, there is no public or other market for these securities. We do not anticipate such a market will develop.

The units are unsecured equity interests in Highwater Ethanol and are subordinate in right of payment to all of our current and future debt. In the event of our insolvency, liquidation, dissolution or other winding up of our affairs, all of our debts, including winding-up expenses, must be paid in full before any payment is made to the unit holders. There is no assurance that there would be any remaining funds for distribution to the unit holders, after the payment of all of our debts.

SUMMARY OF OUR MEMBER CONTROL AGREEMENT

Binding Nature of the Agreement

We will be governed primarily according to the provisions of our member control agreement and the Minnesota Limited Liability Company Act. Among other items, our member control agreement contains provisions relating to the election of governors, restrictions on transfers, member voting, and other company governance matters. If you invest in Highwater Ethanol, you will be bound by the terms of this agreement. Its provisions may not be amended without the approval of the affirmative vote of the holders of a majority of the units constituting a quorum, represented either in person or by proxy or mail ballot, at any regular or special meeting of the members.

Management

The number of initial governors of Highwater Ethanol shall be a minimum of seven and a maximum of fifteen. Information about our current governors, their business experience, and their terms are set out in further detail in “GOVERNORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS.” See “GOVERNORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS” for information regarding the election of our governors beginning with the first annual or special meeting after the plant is substantially operational.  The member control agreement also provides that officers and governors can only purchase the Company’s securities being sold to the public at a price equal to that paid by unaffiliated purchasers.

Governors are elected by plurality vote of the members which means that the nominees receiving the greatest number of votes relative to all other nominees are elected as governors.

Nominations for governors may be made by the nominating committee of the board of governors or by the board of governors as a whole. Members may also nominate candidates for our board by giving advance written notice to Highwater Ethanol with information about the nominee and the nominating member.

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The board of governors controls virtually all of our affairs. We do not expect to develop a vacancy on the board of governors until after substantial completion of the plant.

Our member control agreement is unlike the articles of incorporation or bylaws of typical public companies whose shares trade on NASDAQ or a stock exchange. Our units do not trade on an exchange and we are not governed by the rules of NASDAQ or a stock exchange concerning company governance.

The governors must elect a chairman who will preside over any meeting of the board of governors, and a vice-chairman who shall assume the chairman’s duties in the event the chairman is unable to act.

According to our member control agreement, the governors may not take certain actions without the consent of the members. See “SUMMARY OF OUR MEMBER CONTROL AGREEMENT - Members’ Meetings and Other Members’ Rights.”

Replacement of Governors

See “GOVERNORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS” for a description of the staggering of the terms of our governors beginning with the first member meeting following substantial completion of the plant.

Replacement governors may be nominated either by the board of governors or by the members provided that the members also meet other requirements, all of which are described in our member control agreement. In order for a petition to be considered timely, it must be delivered to our secretary not more than 90 days, nor less than 45 days prior to the first day of the month corresponding to the previous year’s annual meeting.

Members’ Meetings and Other Members’ Rights

There will be an annual meeting of members at which the board of governors will give our annual company report. Members will address any appropriate business including the election of governors to those governor seats becoming vacant under the then adopted staggered term format. In addition, members owning an aggregate of 10 percent of the units may demand in writing that the board call a special meeting of members for the purpose of addressing appropriate member business. The board of governors may also call a special meeting of members at any time.

Member meetings shall be at the place designated by the board or members calling the meeting. Members of record will be given notice of member meeting neither more than 60 days nor less than 15 days in advance of such meetings.

In order to take action at a meeting, members holding at least 50 percent of the outstanding units must be represented in person, by proxy or by mail ballot. Voting by proxy or by mail ballot shall be permitted on any matter if it is authorized by our governors. Assuming a quorum is present, members take action by a vote of the majority of the units represented at the meeting (in person, by proxy or by mail ballot) and entitled to vote on the matter, unless the vote of a greater or lesser proportion or numbers is otherwise required by our member control agreement or by the Minnesota Limited Liability Company Act. Our member control agreement requires the vote of a greater number of units on the following matters:

·the affirmative vote of a 75 percent majority in interest is necessary to dissolve, wind up and liquidate Highwater Ethanol;

·a proposed amendment to the member control agreement requires the affirmative vote of a majority of the membership voting interests constituting the quorum;

·no amendment to the member control agreement shall be approved without the consent of each member adversely affected if such amendment would modify the limited liability of a member or alter the membership financial rights of a member.

There are no other instances where the vote of a greater or lesser proportion or number is otherwise required by the Minnesota Limited Liability Company Act.

Additionally, according to our member control agreement, the governors may not take the following actions without the unanimous consent of the members:

·cause or permit Highwater Ethanol to engage in any activity that is inconsistent with our purposes;

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·knowingly act in contravention of the member control agreement or act in a manner that would make it impossible for us to carry on our ordinary business, except as otherwise provided in the member control agreement;

·possess our property or assign rights in specific company property other than for our purpose; or

·cause us to voluntarily take any action that would cause our bankruptcy.

In addition, without the consent of a majority of the membership voting interests the governors do not have the authority to cause the company to:

·merge, consolidate, exchange or otherwise dispose of at one time, all or substantially all of our property, except for a liquidating sale of the property in connection with our dissolution;

·issue units at a purchase price that is less than $5,000 per unit;

·issue more than an aggregate of 10,000 units; or

·cause us to acquire any equity or debt securities of any governor or any of its affiliates, or otherwise make loans to any governor or any of its affiliates.

For the purpose of determining the members entitled to notice of or to vote at any members’ meeting, the date on which notice of the meeting is mailed (or otherwise delivered) or the date on which the resolution declaring the distribution is adopted, as the case may be, shall be the record date for determination of the members.

Members do not have dissenter’s rights. This means that in the event we merge, consolidate, exchange or otherwise dispose of all or substantially all of our property, unit holders do not have the right to dissent and seek payment for their units.

We will maintain our books, accountings and records at our principal office. A member may inspect them during normal business hours. Our books and accountings will be maintained in accordance with generally accepted accounting principles.

Unit Transfer Restrictions

A unit holder’s ability to transfer units is restricted under the member control agreement. Unit holders may not transfer their units prior to the time that our ethanol plant is substantially operational unless such transfer is:

·To the investor’s administrator or trustee to whom such units are transferred involuntarily by operation of law, such as death; or

·Made without consideration to or in trust for the investor’s descendants or spouse.

Once we begin substantial operation of the proposed ethanol plant, investors may transfer their units to any person or organization only if the transfer meets certain conditions imposed by our member control agreement and the transfer:

·has been approved by our governors in writing and accordance with the terms of the member control agreement; or

·is made to any other member or to any affiliate or related party of another member or the transferring member.

Our member control agreement imposes the following conditions on transfers, all of which must be met prior to the board’s approval of a transfer:

·The transferring member and the proposed recipient of the units must execute and deliver the necessary paperwork and documents to us;

·The transferring member and the proposed recipient must pay all reasonable costs and expenses incurred by us in connection with the transfer;

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·The proposed recipient must provide us with his/her/its taxpayer identification number and other information reasonably required to permit us to file tax statements and returns;

·The transferring member or proposed recipient must provide us with a legal opinion letter stating that the units are either registered under the Securities Act of 1933, or exempt from registration; and

·The transferring member or proposed recipient must provide us with a legal opinion letter stating that the transfer will not cause the us to be an investment company under the Investment Company Act of 1940.

To maintain partnership tax status, the units may not be traded on an established securities market or readily tradable on a secondary market. We do not intend to list the units on the New York Stock Exchange, the NASDAQ Stock Market or any other stock exchange. To help ensure that a market does not develop, our member control agreement prohibits transfers without the approval of the governors. The governors will generally approve transfers so long as the transfers fall within “safe harbors” contained in the publicly traded partnership rules under the Internal Revenue Code. See DESCRIPTIONS OF MEMBERSHIP UNITS - Restrictions on Unit Transfers” for a description of the safe harbors.

If any person transfers units in violation of the publicly traded partnership rules or without our prior consent, the transfer will be null and void. These restrictions on transfer could reduce the value of an investor’s units.

Amendments

Our member control agreement may be amended by the affirmative vote of the holders of a majority of the units constituting a quorum, represented either in person or by proxy or mail ballot, at any regular or special meeting of the members. No amendment modify the liability of a member, without that member’s consent.

Dissolution

Our member control agreement provides that a voluntary dissolution of Highwater Ethanol may be affected only upon the prior approval of a 75% super majority of all units entitled to vote.

FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR UNITS

This section of the prospectus describes the material federal income tax risks and consequences of your participation in Highwater Ethanol. No information regarding state and local taxes is provided. Each prospective member should consult his or her own tax advisor concerning the impact that his or her investment in Highwater Ethanol may have on his or her federal income tax liability and the application of state and local income and other tax laws to his or her investment in Highwater Ethanol. Although we will furnish unit holders with such information regarding Highwater Ethanol as is required for income tax purposes, each unit holder will be responsible for preparing and filing his or her own tax returns.

The following discussion of the tax aspects of an investment in our units is based on the Internal Revenue Code of 1986, as amended (the “Code”), existing Treasury Department regulations (“Regulations”), and administrative rulings and judicial decisions interpreting the Code. Significant uncertainty exists regarding certain tax aspects of limited liability companies. Such uncertainty is due, in part, to continuing changes in federal tax law that have not been fully interpreted through regulations or judicial decisions. Tax legislation may be enacted in the future that will affect Highwater Ethanol and a unit holder’s investment in Highwater Ethanol. Additionally, the interpretation of existing law and regulations described here may be challenged by the Internal Revenue Service during an audit of our information return. If successful, such a challenge likely would result in adjustment of a unit holder’s individual return.

The tax opinion contained in this section and the opinion attached as exhibit 8.1 to the registration statement constitute the opinion of our tax counsel, Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C., regarding our classification for federal income tax purposes. An opinion of legal counsel represents an expression of legal counsel’s professional judgment regarding the subject matter of the opinion. It is neither a guarantee of any indicated result nor an undertaking to defend any indicated result should that result be challenged by the Internal Revenue Service. This opinion is in no way binding on the Internal Revenue Service or on any court of law.

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It is the opinion of our tax counsel that the statements and legal conclusions contained in this section regarding federal income tax consequences of owning our units as a result of our partnership tax classification are accurate in all material respects. The tax consequences to us and our members are highly dependent on matters of fact that may occur at a future date and are not addressed in our tax counsel’s opinion. With the exception of our tax counsel’s opinion that we will be treated as a partnership for federal income tax purposes, this section represents an expression of our tax counsel’s professional judgment regarding general federal income tax consequences of owning our units, insofar as it relates to matters of law and legal conclusions. This section is based on the assumptions and qualifications stated or referenced in this section. It is neither a guarantee of the indicated result nor an undertaking to defend the indicated result should it be challenged by the Internal Revenue Service. No rulings have been or will be requested from the Internal Revenue Service concerning any of the tax matters we describe. Accordingly, you should know that the opinion of our tax counsel does not assure the intended tax consequences because it is in no way binding on the Internal Revenue Service or any court of law. The Internal Revenue Service or a court may disagree with the following discussion or with any of the positions taken by us for federal income tax reporting purposes, and the opinion of our tax counsel may not be sufficient for an investor to use for the purpose of avoiding penalties relating to a substantial understatement of income tax under Section 6662(d). See “FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR UNITS - Interest on Underpayment of Taxes; Accuracy-Related Penalties; Negligence Penalties” below.

Investors are urged to consult their own tax advisors with specific reference to their own tax and financial situations, including the application and effect of state, local and other tax laws, and any possible changes in the tax laws after the date of this prospectus. This section is not to be constructed as a substitute for careful tax planning.

Partnership Status

Under Treasury regulations, known as “check-the-box” regulations, an unincorporated entity such as a limited liability company will be taxed as partnership unless the entity is considered a publicly traded limited partnership or the entity affirmatively elects to be taxed as a corporation.  Accordingly, it is the opinion of Brown, Winick, Graves, Gross, Baskerville and Schoenebaum, P.L.C. that we will be treated as a partnership for federal income tax purposes. This means that we will not pay any federal income tax and the unit holders will pay tax on their shares of our net income.

We will not elect to be taxed as a corporation and will endeavor to take steps as are feasible and advisable to avoid classification as a publicly traded limited partnership. Congress has shown no inclination to adopt legislation that would jeopardize the tax classification of the many entities that have acted in reliance on the check-the-box regulations.

As a partnership, if we fail to qualify for partnership taxation, we would be treated as a “C corporation” for federal income tax purposes. As a C corporation, we would be taxed on our taxable income at corporate rates, currently at a maximum rate of 35 percent. Distributions would generally be taxed again to unit holders as corporate dividends. In addition, unit holders would not be required to report their shares of our income, gains, losses or deductions on their tax returns until such are distributed. Because a tax would be imposed upon us as a corporate entity, the cash available for distribution to unit holders would be reduced by the amount of tax paid, in which case the value of the units would be reduced.

Publicly Traded Partnership Rules

To qualify for taxation as a partnership, we cannot be a publicly traded partnership under Section 7704 of the Internal Revenue Code. Generally, Section 7704 provides that a partnership will be classified as a publicly traded partnership and will be taxed as a corporation if its interests are:

·Traded on an established securities market; or

·Readily tradable on a secondary market or the substantial equivalent.

Although there is no legal authority on whether a limited liability company is subject to these rules, in the opinion of our counsel, we are subject to testing under the publicly traded partnership rules because we elected to be classified and taxed as a partnership.

We will seek to avoid being treated as a publicly traded partnership. Under Section 1.7704-1(d) of the Treasury Regulations, interests in a partnership are not considered traded on an established securities market or readily tradable on a secondary market unless the partnership participates in the establishment of the market or the inclusion of its interests in a market, or the partnership recognizes any transfers made on the market by redeeming the transferor partner or admitting transferee as a partner.

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We do not intend to list the units on the New York Stock Exchange, the NASDAQ Stock Market or any other stock exchange. In addition, our member control agreement prohibits any transfer of units without the approval of our governors. Our governors intend to approve transfers that fall within safe harbor provisions of the Treasury Regulations, so that we will not be classified as a publicly traded partnership. These safe harbor provisions generally provide that the units will not be treated as readily tradable on a secondary market, or the substantial equivalent, if the interests are transferred:

·In “private” transfers;

·Pursuant to a qualified matching service; or

·In limited amounts that satisfy a 2 percent test.

Private transfers include, among others:

·Transfers by gifts in which the transferee’s tax basis in the units is determined by reference to the transferor’s tax basis in the interests transferred;

·Transfers at death, including transfers from an estate or testamentary trust;

·Transfers between members of a family as defined in Section 267(c)(4) of the Internal Revenue Code;

·Transfers from retirement plans qualified under Section 401(a) of the Internal Revenue Code or an IRA; and

·“Block transfers.” A block transfer is a transfer by a unit holder and any related persons as defined in the Internal Revenue Code in one or more transactions during any thirty-calendar-day period of units that in the aggregate represents more than two percent of the total interests in partnership capital or profits.

Transfers through a qualified matching service are also disregarded in determining whether interests are readily tradable. A matching service is qualified only if:

·It consists of a computerized or printed system that lists customers’ bid and/or ask prices in order to match unit holders who want to sell with persons who want to buy;

·Matching occurs either by matching the list of interested buyers with the list of interested sellers or through a bid and ask process that allows interested buyers to bid on the listed interest;

·The seller cannot enter into a binding agreement to sell the interest until the 15th calendar day after his interest is listed, which time period must be confirmable by maintenance of contemporaneous records;

·The closing of a sale effectuated through the matching service does not occur prior to the 45th calendar day after the interest is listed;

·The matching service displays only quotes that do not commit any person to buy or sell an interest at the quoted price (nonfirm price quotes), or quotes that express an interest in acquiring an interest without an accompanying price (nonbinding indications of interest), and does not display quotes at which any person is committed to buy or sell an interest at the quoted price;

·The seller’s information is removed within 120 days of its listing and is not reentered into the system for at least 60 days after its deletion; and

·The sum of the percentage interests transferred during the entity’s tax year, excluding private transfers, cannot exceed ten percent of the total interests in partnership capital or profits.

In addition, interests are not treated as readily tradable if the sum of the percentage of the interests transferred during the entity’s tax year, excluding private transfers, do not exceed two percent of the total interests in partnership capital or profits. We expect to use a combination of these safe harbor provisions to avoid being treated as a publicly traded partnership.

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After we commence operations, we may decide to implement a qualified matching service in order to provide a mechanism for our members to transfer limited quantities of our membership units. A qualified matching service typically involves the use of a computerized or printed listing system that lists customers’ bids and/or ask prices to match members who want to dispose of their membership interests with persons who want to buy such interests. If we decide to do so, in addition to the tax laws described above, we must also comply with securities laws and rules regarding exemption from registration as a broker-dealer. Alternatively, we may determine to use an alternative trading service to handle qualified matching service matters for us. If we manage a qualified matching service ourselves, we will not undertake activities that are allowed by the tax laws, if such activities would disqualify us for exemption from registration as a broker-dealer. For example, while the tax rules allow interested buyers and interested sellers to locate each other via a qualified matching service, we could not directly participate in the match making without registering as a broker-dealer. We have no intention of registering as a broker-dealer. Therefore, among other restrictions, we must not have any involvement in matching interested buyers with interested sellers. This may make it difficult for our members to find buyers for their units.

Tax Treatment of Our Operation; Flow-Through Taxable Income and Loss; Use of Calendar Year

We will pay no federal income tax. Instead, as unit holders, investors will be required to report on their income tax return their allocable share of the income, gains, losses and deductions we have recognized without regard to whether they receive cash distributions.

Because we will be taxed as a partnership, we will have our own taxable year that is separate from the taxable years of our unit holders. Unless a business purpose can be established to support a different taxable year, a partnership must use the “majority interest taxable year” which is the taxable year that conforms to the taxable year of the holders of more than 50 percent of its interests. In this case, the majority interest taxable year is the calendar year.

Tax Consequences to Our Unit Holders

As a unit holder, for your taxable year with which or within which our taxable year ends you will be required to report on your own income tax return, your distributive share of our income, gains, losses and deductions regardless of whether you receive any cash distributions. To illustrate, a unit holder reporting on a calendar year basis will include his or her share of our 2006 taxable income or loss on his or her 2006 income tax return. A unit holder with a September 30 fiscal year will report his share of our 2006 taxable income or loss on his income tax return for the fiscal year ending September 30, 2007. We will provide each unit holder with an annual Schedule K-1 indicating such holder’s share of our income, loss and separately stated components.

Tax Treatment of Distributions

Distributions made by us to a unit holder will not be taxable to the unit holder for federal income tax purposes as long as distributions do not exceed the unit holder’s basis in his units immediately before the distribution, provided the distribution is not treated as a guaranteed payment under Section 707(c), a payment to a unit holder not in his or her capacity as a unit holder under Section 707(a), or a distribution subject to the disguised sale rules of Section 737 of the Internal Revenue Code. Cash distributions in excess of unit basis, which is unlikely to occur, are treated as gain from the sale or exchange of the units under the rules described below for unit dispositions.

Initial Tax Basis of Units and Periodic Basis Adjustments

Under Section 722 of the Internal Revenue Code, investors’ initial basis in the units investors purchase will be equal to the sum of the amount of money investors paid for investors’ units. Here, an investor’s initial basis in each unit purchased will be $10,000.

An investor’s’ initial basis in the units will be increased to reflect the investor’s distributive share of our taxable income, tax-exempt income, gains and any increase in the investor’s share of recourse and qualified non-recourse indebtedness. If the investor makes additional capital contributions at any time, the adjusted basis of the investor’s units will be increased by the amount of any cash contributed or the adjusted basis in any property contributed if additional units are not distributed to investors.

The basis of an investor’s units will be decreased, but not below zero, by:

·The amount of any cash we distribute to the investors;

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·The basis of any other property distributed to the investor;

·The investor’s distributive share of losses and nondeductible expenditures that are “not properly chargeable to capital account;” and

·Any reduction in the investor’s share of certain items of our debt.

The unit basis calculations are complex. A member is only required to compute unit basis if the computation is necessary to determine his tax liability, but accurate records should be maintained. Typically, basis computations are necessary at the following times:

·The end of a taxable year during which we suffered a loss, for the purpose of determining the deductibility of the member’s share of the loss;

·Upon the liquidation or disposition of a member’s interest, or

·Upon the non-liquidating distribution of cash or property to an investor, in order to ascertain the basis of distributed property or the taxability of cash distributed.

Except in the case of a taxable sale of a unit or Highwater Ethanol’s liquidation, exact computations usually are not necessary. For example, a unit holder who regularly receives cash distributions that are less than or equal to his or her share of our taxable income will have a positive unit basis at all times. Consequently, no computations are necessary to demonstrate that cash distributions are not taxable under Section 731(a)(1) of the Internal Revenue Code. The purpose of the basis adjustments is to keep track of a member’s tax investment in us, with a view toward preventing double taxation or exclusion from taxation of income items upon ultimate disposition of the units.

Deductibility of Losses; At-Risk and Passive Loss Limitations

A unit holder may deduct losses allocated to him, subject to a number of restrictions. An investor’s ability to deduct any losses we allocate to the investor is determined by applying the following three limitations dealing with basis, at-risk and passive losses:

·Basis. An investor may not deduct an amount exceeding the investor’s adjusted basis in the investor’s units pursuant to Internal Revenue Code Section 704(d). If the investor’s share of our losses exceed the investor’s basis in the investor’s units at the end of any taxable year, such excess losses, to the extent that they exceed the investor’s adjusted basis, may be carried over indefinitely and deducted to the extent that at the end of any succeeding year the investor’s adjusted basis in the investor’s units exceeds zero.

·At-Risk Rules. Under the “at-risk” provisions of Section 465 of the Internal Revenue Code, if an investor is an individual taxpayer, including an individual partner in a partnership, or a closely-held corporation, the investor may deduct losses and tax credits from a trade or business activity, and thereby reduce the investor’s taxable income from other sources, only to the extent the investor is considered “at risk” with respect to that particular activity. The amount an investor is considered to have “at risk” includes money contributed to the activity and certain amounts borrowed with respect to the activity for which the investor may be liable.

·Passive Loss Rules. Section 469 of the Internal Revenue Code may substantially restrict an investor’s ability to deduct losses and tax credits from passive activities. Passive activities generally include activities conducted by pass-through entities, such as a limited liability company, certain partnerships or S corporations, in which the taxpayer does not materially participate.  Losses from passive activities are deductible only to the extent of the taxpayer’s income from other passive activities. Passive activity losses that are not deductible may be carried forward and deducted against future passive activity income or may be deducted in full upon disposition of a unit holder’s entire interest in us to an unrelated party in a fully taxable transaction. It is important to note that “passive activities” do not include dividends and interest income that normally is considered to be “passive” in nature. For unit holders who borrow to purchase their units, interest expense attributable to the amount borrowed will be aggregated with other items of income and loss from passive activities and subjected to the passive activity loss limitation. To illustrate, if a unit holder’s only passive activity is our limited liability company, and if we incur a net loss, no interest expense on the related borrowing would be deductible. If that unit holder’s share of our taxable income were less than the related interest expense, the excess would be nondeductible. In both instances, the disallowed interest would be suspended  

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and would be deductible against future passive activity income or upon disposition of the unit holder’s entire interest in our limited liability company to an unrelated party in a fully taxable transaction.

Passive Activity Income

If we are successful in achieving our investment and operating objectives, investors may be allocated taxable income from us. To the extent that an investor’s share of our net income constitutes income from a passive activity, as described above, such income may generally be offset by the investor’s net losses and credits from investments in other passive activities.

Alternative Minimum Tax

Individual taxpayers are subject to an “alternative minimum tax” if such tax exceeds the individual’s regular income tax. Alternative minimum taxable income is the taxpayer’s adjusted gross income increased or decreased by the amount of certain adjustments and preference items. We may generate preference items affecting a member’s alternative minimum taxable income. Depending on a member’s other items of income, gain, loss, deduction and credit, the impact of the alternative minimum tax on a member’s overall federal income tax liability may vary from no impact to a substantial increase in tax. Accordingly, each prospective investor should consult with his tax advisor regarding the impact of an investment in Highwater Ethanol on the calculation of his alternative minimum tax, as well as on his overall federal income tax liability.

Allocations of Income and Losses

Your distributive share of our income, gain, loss or deduction for federal income tax purposes generally is determined in accordance with our member control agreement. Under Section 704(b) of the Internal Revenue Code, however, the Internal Revenue Service will respect our allocation, or a portion of it, only if it either has “substantial economic effect” or is in accordance with the “partner’s interest in the partnership.” If the allocation or portion thereof contained in our member control agreement does not meet either test, the Internal Revenue Service may reallocate these items in accordance with its determination of each member’s economic interest in us. Treasury Regulations contain guidelines as to whether partnership allocations have substantial economic effect. The allocations contained in the member control agreement are intended to comply with the Treasury Regulations’ test for having substantial economic effect. New unit holders will be allocated a proportionate share of income or loss for the year in which they became unit holders. The member control agreement permits our governors to select any method and convention permissible under Internal Revenue Code Section 706(d) for the allocation of tax items during the time any person is admitted as a unit holder. In addition, the member control agreement provides that upon the transfer of all or a portion of a unit holder’s units, other than at the end of the fiscal year, the entire year’s net income or net loss allocable to the transferred units will be apportioned between the transferor and transferee.

Tax Consequences Upon Disposition of Units

Gain or loss will be recognized on a sale of our units equal to the difference between the amount realized and the unit holder’s basis in the units sold. The amount realized includes cash and the fair market value of any property received plus the member’s share of certain items of our debt. Although unlikely, since certain items of our debt are included in an investor’s basis, it is possible that an investor could have a tax liability upon the sale of the investor’s units that exceeds the proceeds of sale.

Gain or loss recognized by a unit holder on the sale or exchange of a unit held for more than one year generally will be taxed as long-term capital gain or loss. However, to the extent the amount realized on the sale or exchange is attributable to unrealized receivables or inventory owned by us, such amount realized will not be treated as realized from the sale of a capital asset and will give rise to ordinary gain or loss. Unrealized receivables are defined under Internal Revenue Code Section 751(c) to include receivables not previously included in income under the company’s method of accounting and certain items of depreciation recapture. We will assist those members that sell units in determining that portion of the amount realized that is attributable to unrealized receivables or inventory of our company.

Effect of Tax Code Section 754 Election on Unit Transfers

The adjusted basis of each unit holder in his units, “outside basis,” initially will equal his proportionate share of our adjusted basis in our assets, “inside basis.” Over time, however, it is probable that changes in unit values and cost recovery deductions will cause the value of a unit to differ materially from the unit holder’s proportionate share of the inside basis. Section 754 of the Internal Revenue Code permits a partnership to make an election that allows a transferee who acquires units either by purchase or upon the death of a

84

unit holder to adjust his share of the inside basis to fair market value as reflected by the unit price in the case of a purchase or the estate tax value of the unit in the case of an acquisition upon death of a unit holder. Once the amount of the transferee’s basis adjustment is determined, it is allocated among our various assets pursuant to Section 755 of the Internal Revenue Code.

A Section 754 election is beneficial to the transferee when his outside basis is greater than his proportionate share of the entity’s inside basis. In this case, a special basis calculation is made solely for the benefit of the transferee that will determine his cost recovery deductions and his gain or loss on disposition of property by reference to his higher outside basis. The Section 754 election will be detrimental to the transferee if his outside basis is less than his proportionate share of inside basis.

If we make a Section 754 election, Treasury Regulations require us to make the basis adjustments. In addition, these regulations place the responsibility for reporting basis adjustments on us. We must report basis adjustments by attaching statements to our partnership returns. In addition, we are required to adjust specific partnership items in light of the basis adjustments. Consequently, amounts reported on the transferee’s Schedule K-1 are adjusted amounts.

Transferees are subject to an affirmative obligation to notify us of their bases in acquired interests. To accommodate concerns about the reliability of the information provided, we are entitled to rely on the written representations of transferees concerning either the amount paid for the partnership interest or the transferee’s basis in the partnership interest under Section 1014 of the Internal Revenue Code, unless clearly erroneous.

Our member control agreement provides our governors with authority to determine whether or not a Section 754 election will be made. Depending on the circumstances, the value of units may be affected positively or negatively by whether or not we make a Section 754 election. If we decide to make a Section 754 election, the election will be made on a timely filed partnership income tax return and is effective for transfers occurring in the taxable year of the return in which the election is made. Once made, the Section 754 election is irrevocable unless the Internal Revenue Service consents to its revocation.

Our Dissolution and Liquidation may be Taxable to Investors, Unless our Properties are Distributed In-Kind

Our dissolution and liquidation will involve the distribution to investors of the assets, if any, remaining after payment of all of our debts and liabilities. Upon dissolution, investors’ units may be liquidated by one or more distributions of cash or other property. If investors receive only cash upon the dissolution, gain would be recognized by investors to the extent, if any, that the amount of cash received exceeds investors’ adjusted bases in investors’ units. We will recognize no gain or loss if we distribute our own property in a dissolution event. However, since our primary asset will likely be the ethanol plant, it is unlikely that we will make a distribution in kind.

Reporting Requirements

The IRS requires a taxpayer who sells or exchanges a membership unit to notify us in writing within 30 days, or for transfers occurring on or after December 16 of any year, by January 15 of the following year. Although the IRS reporting requirement is limited to Section 751(a) exchanges, it is more likely than not that a transfer of a unit will constitute a Section 751(a) exchange which requires notification. The written notice required by the IRS must include the names and addresses of both parties to the exchange, the identifying numbers of the transferor, and if known, of the transferee, and the exchange date. Currently the IRS imposes a penalty of $50 for failure to file the written notice unless reasonable cause can be shown.

Tax Information to Members

We will annually provide each member with a Schedule K-1 (or an authorized substitute). Each member’s Schedule K-1 will set out the holder’s distributive share of each item of income, gain, loss, deduction or credit to be separately stated. Each member must report all items consistently with Schedule K-1 or, if an inconsistent position is reported, must notify the IRS of any inconsistency by filing Form 8062 “Notice of Inconsistent Treatment or Administrative Adjustment Request” with the original or amended return in which the inconsistent position is taken.

Audit of Income Tax Returns

The Internal Revenue Service may audit our income tax returns and may challenge positions taken by us for tax purposes and may seek to change our allocations of income, gain, loss and deduction to investors. If the IRS were successful in challenging our allocations in a manner that reduces loss or increases income allocable to investors, investors may have additional tax liabilities. In

85

addition, such an audit could lead to separate audits of an investor’s tax returns, especially if adjustments are required, which could result in adjustments on an investors’ tax returns. Any of these events could result in additional tax liabilities, penalties and interest to investors, and the cost of filing amended tax returns.

Generally, investors are required to file their tax returns in a manner consistent with the information returns filed by us, such as Schedule K-1, or investors may be subject to possible penalties, unless they file a statement with their tax returns describing any inconsistency. In addition, we will select a “tax matters member” who will have certain responsibilities with respect to any Internal Revenue Service audit and any court litigation relating to us. Investors should consult their tax advisors as to the potential impact these procedural rules may have on them.

Prior to 1982, regardless of the size of a partnership, adjustments to a partnership’s items of income, gain, loss, deduction or credit had to be made in separate proceedings with respect to each partner individually. Because a large partnership sometimes had many partners located in different audit districts, adjustments to items of income, gains, losses, deductions or credits of the partnership had to be made in numerous actions in several jurisdictions, sometimes with conflicting outcomes. The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) established unified audit rules applicable to all but certain small partnerships. These rules require the tax treatment of all “partnership items” to be determined at the partnership, rather than the partner, level. Partnership items are those items that are more appropriately determined at the partnership level than at the partner level, as provided by regulations. Since we will be taxed as a partnership, the TEFRA rules are applicable to our members and us.

The Internal Revenue Service may challenge the reporting position of a partnership by conducting a single administrative proceeding to resolve the issue with respect to all partners. But the Internal Revenue Service must still assess any resulting deficiency against each of the taxpayers who were partners in the year in which the understatement of tax liability arose. Any partner of a partnership can request an administrative adjustment or a refund for his own separate tax liability. Any partner also has the right to participate in partnership-level administrative proceedings. A settlement agreement with respect to partnership items binds all parties to the settlement. The TEFRA rules establish the “Tax Matters Member” as the primary representative of a partnership in dealings with the Internal Revenue Service. The Tax Matters Member must be a “member-manager” which is defined as a company member who, alone or together with others, is vested with the continuing exclusive authority to make the management decisions necessary to conduct the business for which the organization was formed. In our case, this would be a member of the board of governors who is also a unit holder of the company. Our member control agreement provides for board designation of the Tax Matters Member. The Internal Revenue Service generally is required to give notice of the beginning of partnership-level administrative proceedings and any resulting administrative adjustment to all partners whose names and addresses are furnished to the Internal Revenue Service.

Interest on Underpayment of Taxes; Accuracy-Related Penalties; Negligence Penalties

If we incorrectly report an investor’s distributive share of our net income, such may cause the investor to underpay his taxes. If it is determined that the investor underpaid his taxes for any taxable year, the investor must pay the amount of taxes he underpaid plus interest on the underpayment and possibly penalties from the date the tax was originally due. Under recent law changes, the accrual of interest and penalties may be suspended for certain qualifying individual taxpayers if the IRS does not notify an investor of amounts owing within 18 months of the date the investor filed his income tax return. The suspension period ends 21 days after the Internal Revenue Service sends the required notice. The rate of interest is compounded daily and is adjusted quarterly.

Under Section 6662 of the Internal Revenue Code, penalties may be imposed relating to the accuracy of tax returns that are filed. A 20 percent penalty is imposed with respect to any “substantial understatement of income tax” and with respect to the portion of any underpayment of tax attributable to a “substantial valuation misstatement” or to “negligence.” All those penalties are subject to an exception to the extent a taxpayer had reasonable cause for a position and acted in good faith.

The Internal Revenue Service may impose a 20 percent penalty with respect to any underpayment of tax attributable to negligence. An underpayment of taxes is attributable to negligence if such underpayment results from any failure to make a reasonable attempt to comply with the provisions of the Code, or any careless, reckless, or intentional disregard of the federal income tax rules or regulations. In addition, regulations provide that the failure by a taxpayer to include on a tax return any amount shown on an information return is strong evidence of negligence. The disclosure of a position on the taxpayer’s return will not necessarily prevent the imposition of the negligence penalty.

86

State and Local Taxes

In addition to the federal income tax consequences described above, investors should consider the state and local tax consequences of an investment in us. This prospectus makes no attempt to summarize the state and local tax consequences to an investor. Investors are urged to consult their own tax advisors regarding state and local tax obligations.

LEGAL MATTERS

The validity of the issuance of the units offered and the validity of the disclosure relating to the material federal income tax consequences of owning and disposing of the units offered will be passed upon for us by Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C., located at 666 Grand Avenue, Suite 2000, Des Moines, Iowa 50309.

Highwater Ethanol is not a party to any pending legal proceedings.

EXPERTS

Boulay, Heutmaker, Zibell & Co. P.L.L.P., an independent registered public accounting firm, has audited our financial statements at June 30, 2006, as set forth in their report appearing in this prospectus and registration statement. We have included our June 30, 2006, financial statements in the prospectus and elsewhere in this registration statement in reliance on the report from Boulay, Heutmaker, Zibell & Co. P.L.L.P., given on their authority as experts in accounting and auditing.

PRX Geographic, Inc. conducted a corn availability study and the results are referenced in this prospectus and registration statement.  We have included the study in the prospectus and elsewhere in this registration statement in reliance on the study from PRX Geographic, Inc. given their authority as experts in detailed grain market data and clear graphic support to aid in interpretation.

TRANSFER AGENT

We will serve as our transfer agent and registrar.

ADDITIONAL INFORMATION

We filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form SB-2 (the “Registration Statement”) under the Securities Act, with respect to the offer and sale of membership units pursuant to this prospectus. This prospectus, filed as a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules thereto in accordance with the rules and regulations of the Commission. The registration statement and the exhibits and schedules thereto filed with the Commission may be inspected, without charge, and copies may be obtained at prescribed rates, at the public reference facility maintained by the Commission at 100 F Street, NE, Washington, D.C. 20549. The Commission also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission.

As of effectiveness of our registration statement, we will be required to file periodic reports with the Securities and Exchange Commission (“SEC”) pursuant to Section 15 of the Securities Exchange Act of 1934. Our quarterly reports will be made on Form 10-QSB, and our annual reports are made on Form 10-KSB. As of the date of this prospectus, our filings will be made pursuant to Regulation S-B for small business filers. We will also make current reports on Form 8-K. We will deliver audited annual financial statements and other financial information to our members pursuant to our member control agreement.  Each filing we make with the SEC is immediately available to the public for inspection and copying at the Commission’s public reference facilities and the web site of the Commission referred to above or by calling the SEC at 1-800-SEC-0330.

[Remainder of page intentionally left blank.]

87

INDEX TO FINANCIAL STATEMENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2
AUDITED JUNE 30, 2006 FINANCIAL STATEMENTS
BALANCE SHEET	F-3
STATEMENT OF OPERATIONS	F-4
STATEMENT OF CHANGES IN MEMBERS’ EQUITY	F-5
STATEMENT OF CASH FLOWS	F-6
NOTES TO FINANCIAL STATEMENTS	F-7
UNAUDITED SEPTEMBER 30, 2006 FINANCIAL STATEMENTS
BALANCE SHEET	F-10
STATEMENT OF OPERATIONS	F-11
STATEMENT OF CHANGES IN MEMBERS’ EQUITY	F-12
STATEMENT OF CASH FLOWS	F-13
NOTES TO FINANCIAL STATEMENTS	F-14

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Governors

Highwater Ethanol, LLC

Lamberton, Minnesota

We have audited the accompanying balance sheet of Highwater Ethanol, LLC (a development stage company), as of June 30, 2006, and the related statements of operations, changes in members’ equity, and cash flows for the period from inception (May 2, 2006) to June 30, 2006.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Highwater Ethanol, LLC, (a development stage company) as of June 30, 2006, and the results of its operations and its cash flows for the period from inception (May 2, 2006) to June 30, 2006, in conformity with accounting principles generally accepted in the United States of America.

/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.

Certified Public Accountants

Minneapolis, Minnesota

September 19, 2006, except for Note 3 and

Note 4 for which the date is November 3, 2006

F-2

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Balance Sheet

	June 30,
	2006
ASSETS
Current Assets
Cash	$	1,616,253
Prepaid and other expenses	31,955
Total current assets	1,648,208
Other Assets
Deferred offering costs	24,991
Land option	5,000
Total other assets	29,991
Total Assets	$	1,678,199
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable	$	69,182
Accounts payable - members	36,136
Subscriptions payable	20,000
Total current liabilities	125,318
Commitments and Contingencies
Members’ Equity
Member contributions, net of subscriptions receivable, 386 units outstanding at June 30, 2006	1,650,000
Deficit accumulated during development stage	(97,119		)
Total members' equity	1,552,881
Total Liabilities and Members’ Equity	$	1,678,199

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

F-3

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Statement of Operations

	From Inception
	(May 2, 2006)
	to June 30, 2006
Revenues	$	—
Operating Expenses
Professional fees	99,115
General and administrative	1,142
Total operating expenses	100,257
Operating Loss	(100,257		)
Other Income (Expense)
Interest income	3,138
Net Loss	$	(97,119	)
Weighted average units outstanding	164
Net Loss Per Unit	$	(592.19	)

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

F-4

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Statement of Changes in Members' Equity

				Deficit Accumulated
	Member Contributions			During Development Stage
Balance - Inception, May 2, 2006	$	—		$	—
Capital contributions - 150 units, $3,333 per unit, May 2006	500,000			—
Capital contributions - 236 units, $5,000 per unit, June 2006	1,180,000			—
Less subscriptions receivable	(30,000		)	—
Net loss from inception to June 30, 2006	—			(97,119		)
Balance - June 30, 2006	$	1,650,000		$	(97,119	)

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

F-5

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Statement of Cash Flows

	From Inception
	(May 2, 2006)
	to June 30, 2006
Cash Flows from Operating Activities
Net loss	$	(97,119	)
Adjustments to reconcile net loss to net cash from operations:
Change in assets and liabilities
Prepaid and other expenses	(31,955		)
Accounts payable	92,142
Net cash used in operating activities	(36,932		)
Cash Flows from Investing Activities
Payment for land option	(5,000		)
Net cash used in investing activities	(5,000		)
Cash Flows from Financing Activities
Member contributions, net of subscriptions receivable	1,650,000
Subscriptions payable	20,000
Payments for deferred offering costs	(11,815		)
Net cash provided by financing activities	1,658,185
Net Increase in Cash	1,616,253
Cash – Beginning of Period	—
Cash – End of Period	$	1,616,253
Supplemental Disclosure of Noncash Financing Activities
Deferred offering costs included in accounts payable	$	13,176

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

F-6

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Financial Statements

June 30, 2006

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.  Construction is anticipated to begin in the spring of 2007 with expected completion in the fall of 2008.  As of June 30, 2006, the Company is in the development stage with its efforts being principally devoted to equity raising and organizational activities.

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.

Significant estimates include the deferral of expenditures for offering costs which are dependent upon successful financing and project development, as discussed below.  It is at least reasonably possible that these estimates may change in the near term.

Cash

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

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; or if the financing does not occur, they will be expensed.

Income Taxes

Highwater Ethanol, LLC is treated as a partnership for federal and state income tax purposes, and generally does not incur income taxes.  Instead its earnings and losses are included in the income tax returns of its members.  Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.

Fair Value of Financial Instruments

The carrying value of cash and accounts payable approximates the fair value.

Recently Issued Accounting Pronouncements

Management has reviewed recently issued, but not yet effective, accounting pronouncements and does not expect the implementation of these pronouncements to have a significant effect on the Company’s financial statements.

2.  DEVELOPMENT STAGE ENTERPRISE

The Company was formed on May 2, 2006 to have a perpetual life.  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 received $30,000 of these member contributions in July 2006.  Two  

F-7

investors choose to withdraw funds prior to the Company issuing units.  The amount was recorded as a subscription payable at June 30, 2006 and refunded in July 2006.  At June 30, 2006, there are 386 units outstanding.

Income and losses are allocated to all members based upon their respective percentage of units held. See Note 3 for further discussion of members’ equity.

3.  MEMBERS’ EQUITY

The Company is in the process of filing Form SB-2 Registration Statement with the Securities and Exchange Commission (SEC). The offering will be for a minimum of 4,500 and up to 6,000 membership units for sale at $10,000 per unit. The Company has one class of membership units with each unit representing a pro rata ownership interest in the Company’s capital, profits, losses and distributions.  Offering proceeds will be held in escrow until the earliest of the receipt of $45,000,000 or more in cash proceeds, one year from the effective date of the registration statement, or termination of the offering.

A member is providing certain legal services for the Company.  Through June 30, 2006, the Company had incurred approximately $36,000 related to these services.

4.  COMMITMENTS AND CONTINGENCIES

Design Build Agreement

The total cost of the project, including the construction of the ethanol plant and start-up expenses, is expected to approximate $110,000,000.  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 contract price is subject to changes based on corresponding changes to the Construction Cost Index (CCI), published by Engineering News-Record Magazine, from January 2006 (7660.29).  Due to increases in the CCI at September 30, 2006 to 7763.15, the estimated contract price is approximately $886,000 more than the price stipulated in the design build agreement. The agreement terminates on March 26, 2007 unless a valid Notice to Proceed has been accepted by the Design-Builder. The termination date may be extended upon mutual written agreement.  The Company entered into a Phase I and Phase II engineering services agreement with an affiliate of the general contractor. In exchange for the performance of certain engineering and design services, the Company has agreed to pay $92,500, which will be credited against the total design-build cost. The Company will also be required to pay certain reimbursable expenses per the agreement. Some employees of the general contractor are investors in the Company.  The Company anticipates funding the development of the ethanol plant by raising total equity of at least $46,680,000 and securing financing for up to $63,320,000, less any grants received.  The amount of debt financing needed depends on the amount of equity raised in the offering.

Land Contracts

In June 2006, the Company entered into an option to purchase approximately 68 acres of land for $7,000 per acre until December 31, 2006.  The Company paid a non-refundable option deposit of $5,000 which will apply towards the purchase price if the buyer elects to complete the purchase.  If the Company does not exercise the option by December 31, 2006, the agreement is null and void with the seller retaining the initial $5,000 deposit.  In November 2006, the Company agreed to amend this land option. In return for assistance with the potential development of this land, the Company has agreed to pay for certain zoning costs, regardless of whether the option is exercised. The Company’s comprehensive plan for the construction of the ethanol plant contemplates using this site, in conjunction with the three sites described below. These four sites are adjacent and are anticipated to be the site of the ethanol plant.

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 if the buyer elects to complete the purchase. If the Company does not exercise the option by December 31, 2008 the agreement is null and void with the seller retaining the initial $1,000 deposit.

In September 2006, the Company entered into an option with an unrelated party to purchase an undisclosed amount of land for $8,000 per acre until March 31, 2007.  The Company is in the process of having the land surveyed to determine the actual acres.  The  

F-8

Company paid a non-refundable option deposit of $1,000 which will apply towards the purchase price if the buyer elects to complete the purchase. If the Company does not exercise the option by March 31, 2007 the agreement is null and void with the seller retaining the initial $1,000 deposit.

In September 2006, the Company entered into an option with an unrelated party to purchase an undisclosed amount of land for $7,000 per acre until December 31, 2006.  The Company is in the process of having the land surveyed to determine the actual acres.  The Company paid a non-refundable option deposit of $5,000 which will apply towards the purchase price if the buyer elects to complete the purchase. If the Company does not exercise the option by December 31, 2006 the agreement is null and void with the seller retaining the initial $5,000 deposit.

Office Lease

In June 2006, the Company executed a rental lease agreement with an unrelated party for office space. The Company is to pay $422 per month for the term of one year, month to month thereafter.

Consulting Contracts

In May 2006, the Company entered into an agreement with an unrelated party for preliminary engineering services to develop a conceptual railway service. The fee for these services will be approximately $6,000 plus reimbursable expenses, with monthly progress billings throughout the agreement.  In July 2006, the agreement was expanded to include the design and specifications of a conceptual railway service for a lump sum fee of $85,000.

In May 2006, the Company entered into an agreement with an unrelated party for land and design surveying.  The fees for these services are billed on an hourly basis, with the total amount being estimated at approximately $28,000. As of June 30, 2006, the Company incurred approximately $12,000 related to this agreement.

In May 2006, the Company entered into an agreement with an unrelated party for consulting and energy management services for supplies of natural gas and electricity for the plant.  The agreement commenced on June 1, 2006 and will continue until twelve months after the plant’s completion date. The fee for these services is $3,050 per month plus pre-approved expenses.  This monthly fee is subject to a 4% increase on the anniversary date of the effective date of this agreement.  The agreement is terminable by either party with 60 days notice.

In June 2006, the Company entered into an agreement with an unrelated party to assist the Company in obtaining the necessary water discharge permits.  The Company will pay for these services on an hourly basis plus expenses.

In June 2006, the Company entered into an agreement with an unrelated party to conduct a corn origination analysis and a small area supply demand analysis.  In exchange for their services, the Company has agreed to pay them approximately $25,000.

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.

Marketing Agreement

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.

F-9

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Balance Sheet

	September 30,
	2006
	(Unaudited)
ASSETS
Current Assets
Cash	$	1,446,462
Prepaid and other expenses	17,334
Total current assets	1,463,796
Equipment
Office equipment	1,416
Accumulated depreciation	(35		)
Net equipment	1,381
Other Assets
Deferred offering costs	125,878
Land options	12,000
Total other assets	137,878
Total Assets	$	1,603,055

	September 30,
	2006
	(Unaudited)
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable	$	195,577
Accounts payable - members	30,655
Total current liabilities	226,232
Commitments and Contingencies
Members’ Equity
Member contributions, 386 units outstanding at September 30, 2006	1,680,000
Deficit accumulated during development stage	(303,177		)
Total members' equity	1,376,823
Total Liabilities and Members’ Equity	$	1,603,055

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

F-10

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Statement of Operations

	From Inception (May 2, 2006) to September 30, 2006
	(Unaudited)
Revenues	$	—
Operating Expenses
Professional fees	301,233
General and administrative	21,592
Total operating expenses	322,825
Operating Loss	(322,825		)
Other Income
Interest income	19,648
Net Loss	$	(303,177	)
Weighted average units outstanding	298
Net Loss Per Unit	$	(1,017.37	)

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

F-11

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Statement of Changes in Members' Equity

			Deficit Accumulated
	Member		During
	Contributions		Development Stage
Balance - Inception, May 2, 2006	$	—	$	—
Capital contributions - 150 units, $3,333 per unit, May 2006	500,000		—
Capital contributions - 236 units, $5,000 per unit, June 2006	1,180,000		—
Net loss from inception to September 30, 2006	—		(303,177		)
Balance - September 30, 2006 - Unaudited	$	1,680,000	$	(303,177	)

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

F-12

HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Statement of Cash Flows

	From Inception
	(May 2, 2006)
	to September 30, 2006
	(Unaudited)
Cash Flows from Operating Activities
Net loss	$	(303,177	)
Adjustments to reconcile net loss to net cash from operations:
Depreciation	35
Change in assets and liabilities
Prepaid and other expenses	(17,334		)
Accounts payable	142,419
Net cash used in operating activities	(178,057		)
Cash Flows from Investing Activities
Payment for land options	(12,000		)
Office equipment	(1,416		)
Net cash used in investing activities	(13,416		)
Cash Flows from Financing Activities
Member contributions	1,680,000
Payments for deferred offering costs	(42,065		)
Net cash provided by financing activities	1,637,935
Net Increase in Cash	1,446,462
Cash – Beginning of Period	—
Cash – End of Period	$	1,446,462
Supplemental Disclosure of Noncash Financing Activities
Deferred offering costs included in accounts payable	$	(83,813	)

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

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HIGHWATER ETHANOL, LLC

(A Development Stage Company)

Notes to Financial Statements (Unaudited)

September 30, 2006

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. Construction is anticipated to begin in spring of 2007 with expected completion in the fall of 2008. As of September 30, 2006, the Company is in the development stage with its efforts being principally devoted to equity raising and organizational activities.

Fiscal Reporting Perio d

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.

Significant estimates include the deferral of expenditures for offering costs which are dependent upon successful financing and project development, as discussed below.  It is at least reasonably possible that these estimates may change in the near term.

Cash

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

Property and Equipment

Property and equipment are stated at the lower of cost or estimated fair value. Depreciation is provided over an estimated life by use of the straight-line method.  Maintenance and repairs will be expensed as incurred; major improvements and betterments will be capitalized.

The Company has incurred substantial consulting, permitting, and other pre-construction services related to building its plant facilities. Due to the substantial current uncertainties regarding the Company’s ability to proceed with the ultimate facility construction until the Company has raised debt and equity financing, the Company expenses these pre-construction costs as incurred.

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; or if the financing does not occur, they will be expensed.

Income Taxes

Highwater Ethanol, LLC is treated as a partnership for federal and state income tax purposes, and generally does not incur income taxes.  Instead its earnings and losses are included in the income tax returns of its members.  Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.

Fair Value of Financial Instruments

The carrying value of cash and accounts payable approximates the fair value.

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Recently Issued Accounting Pronouncements

Management has reviewed recently issued, but not yet effective, accounting pronouncements and does not expect the implementation of these pronouncements to have a significant effect on the Company’s financial statements.

2.  DEVELOPMENT STAGE ENTERPRISE

The Company was formed on May 2, 2006 to have a perpetual life.  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. At September 30, 2006, there are 386 units outstanding.

Income and losses are allocated to all members based upon their respective percentage of units held. See Note 3 for further discussion of members’ equity.

3.  MEMBERS’ EQUITY

The Company is in the process of filing Form SB-2 Registration Statement with the Securities and Exchange Commission (SEC). The offering will be for a minimum of 4,500 and up to 6,000 membership units for sale at $10,000 per unit. The Company has one class of membership units with each unit representing a pro rata ownership interest in the Company’s capital, profits, losses and distributions.  Offering proceeds will be held in escrow until the earliest of the receipt of $45,000,000 or more in cash proceeds, one year from the effective date of the registration statement, or termination of the offering.

4.  RELATED PARTY TRANSACTIONS

A member is providing legal services for the Company.  Through September 30, 2006, the Company had incurred approximately $62,000 related to these services.

The Company is currently compensating three Governors for consulting services. As of September 30, 2006, the Company has incurred $12,000 related to these services.

5.  COMMITMENTS AND CONTINGENCIES

Design Build Agreement

The total cost of the project, including the construction of the ethanol plant and start-up expenses, is expected to approximate $110,000,000.  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 contract price is subject to changes based on corresponding changes to the Construction Cost Index (CCI), published by Engineering News-Record Magazine, from January 2006 (7660.29).  Due to increases in the CCI at September 30, 2006 to 7763.15, the estimated contract price is approximately $886,000 more than the price stipulated in the design build agreement. The agreement terminates on March 26, 2007 unless a valid Notice to Proceed has been accepted by the Design-Builder. The termination date may be extended upon mutual written agreement.  The Company entered into a Phase I and Phase II engineering services agreement with an affiliate of the general contractor. In exchange for the performance of certain engineering and design services, the Company has agreed to pay $92,500, which will be credited against the total design-build cost. The Company will also be required to pay certain reimbursable expenses per the agreement. Some employees of the general contractor are investors in the Company.  The Company anticipates funding the development of the ethanol plant by raising total equity of at least $46,680,000 and securing financing for up to $63,320,000, less any grants received.  The amount of debt financing needed depends on the amount of equity raised in the offering.

Land contracts

In June 2006, the Company entered into an option with an unrelated party to purchase approximately 68 acres of land for $7,000 per acre until December 31, 2006. The Company paid a non-refundable option deposit of $5,000 which will apply towards the purchase  

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price if the buyer elects to complete the purchase.  If the Company does not exercise the option by December 31, 2006 the agreement is null and void with the seller retaining the initial $5,000 deposit. In November 2006, the Company agreed to amend this land option. In return for assistance with the potential development of this land, the Company has agreed to pay for certain zoning costs, regardless of whether the option is exercised. The Company’s comprehensive plan for the construction of the ethanol plant contemplates using this site, in conjunction with the three sites described below. These four sites are anticipated to be the site of the ethanol plant.

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 if the buyer elects to complete the purchase. If the Company does not exercise the option by December 31, 2008 the agreement is null and void with the seller retaining the initial $1,000 deposit.

In September 2006, the Company entered into an option with an unrelated party to purchase an undisclosed amount of land for $8,000 per acre until March 31, 2007.  The Company is in the process of having the land surveyed to determine the actual acres.  The Company paid a non-refundable option deposit of $1,000 which will apply towards the purchase price if the buyer elects to complete the purchase. If the Company does not exercise the option by March 31, 2007 the agreement is null and void with the seller retaining the initial $1,000 deposit.

In September 2006, the Company entered into an option with an unrelated party to purchase an undisclosed amount of land for $7,000 per acre until December 31, 2006.  The Company is in the process of having the land surveyed to determine the actual acres.  The Company paid a non-refundable option deposit of $5,000 which will apply towards the purchase price if the buyer elects to complete the purchase. If the Company does not exercise the option by December 31, 2006 the agreement is null and void with the seller retaining the initial $5,000 deposit.

Office lease

In June 2006, the Company executed a rental lease agreement with an unrelated party for office space. The Company is to pay $422 per month for the term of one year, month to month thereafter.

Consulting contracts

In May 2006, the Company entered into an agreement with an unrelated party for preliminary engineering services to develop a conceptual railway service. The fee for these services will be approximately $6,000 plus reimbursable expenses, with monthly progress billings throughout the agreement.  In July 2006, the agreement was expanded to include the design and specifications of a conceptual railway service for a lump sum fee of $85,000. As of September 30, 2006 the Company has incurred approximately $23,000 related to this agreement.

In May 2006, the Company entered into an agreement with an unrelated party for land and design surveying.  The fees for these services are billed on an hourly basis, with the total amount being estimated at approximately $28,000. As of September 30, 2006 the Company has incurred approximately $15,000 related to this agreement.

In May 2006, the Company entered into an agreement with an unrelated party for consulting and energy management services for supplies of natural gas and electricity for the plant. The agreement commenced on June 1, 2006 and will continue until twelve months after the plant’s completion date. The fee for these services is $3,050 per month plus pre-approved expenses. This monthly fee is subject to a 4% increase on the anniversary date of the effective date of this agreement. The agreement is terminable by either party with 60 days notice. As if September 30, 2006 the Company has incurred approximately $9,000 related to this agreement.

In June 2006, the Company entered into an agreement with an unrelated party to assist the Company in obtaining the necessary permits to construct the plant. The Company will pay for these services on an hourly basis plus expenses. As of September 30, 2006 the Company has incurred approximately $78,000 related to this agreement.

In June 2006, the Company entered into an agreement with an unrelated party to conduct a corn origination analysis and a small area supply demand analysis. The Company paid approximately $25,000 for these services, which were complete in August 2006.

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In July 2006, the Company entered into an agreement with an unrelated party to conduct geotechnical exploration of the proposed site for the ethanol facility. Services include soil borings and electric cone soundings on the proposed site with laboratory testing of the samples to follow. Estimated costs for these services are approximately $50,000. As of September 30, 2006, no fees have been incurred related to this agreement.

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.

Marketing Agreement

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.

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[MN State Seal]	[Bar Code]
	18257890002

APPENDIX A

MINNESOTA SECRETARY OF STATE

ARTICLES OF ORGANIZATION FOR

A LIMITED LIABILITY COMPANY

MINNESOTA STATUTES CHAPTER 322B

PLEASE TYPE OR PRINT IN BLACK INK.

Before Completing this Form Please Read the Instructions on the Back.   FILING FEE $135.00

1. Name of Company:    Highwater Ethanol, LLC

2. Registered Office Address: (P.O. Box is Unacceptable)

300 O’Connell Street Marshall MN 56258-2638

Complete Street Address or Rural Route and Rural Route Box Number   City   State   ZIP Code

3. Name of Registered Agent (optional):     Kevin K. Stroup

4. Business Mailing Address: (if different from registered office address)

Address City State ZIP Code

5. Desired Duration of LLC: (in years)                    (If you do not complete this item, a perpetual duration is assumed by law.)

6. Does this LLC own, lease or have any interest in agricultural land or land capable of being farmed?

(Check One)      Yes      [No]      

7. Name and Address of Organizer(s):

	Complete Address
	Street
Name (print)	City	State	Zip	Original Signature (required)
Kevin K. Stroup	300 O’Connell Street			/s/ Kevin K. Stroup
	Marshall     MN  56258-2638

8. Name and Telephone Number of Contact Person for this LLC:			[STATE OF MINNESOTA]
Name	Kevin K. Stroup		[DEPARTMENT OF STATE]
Phone		(507)   537-0591	[FILED]
			[MAY 02 2006]
			[/s/ Marcy Kiffmeyer]
			[Secretary of State]

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APPENDIX B

AMENDED AND RESTATED MEMBER CONTROL AGREEMENT

OF

HIGHWATER ETHANOL, LLC

Dated:  Effective                               .

AMENDED AND RESTATED MEMBER CONTROL AGREEMENT

OF

HIGHWATER ETHANOL, LLC

TABLE OF CONTENTS

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B-ii

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AMENDED AND RESTATED MEMBER CONTROL AGREEMENT  
OF  
HIGHWATER ETHANOL, LLC

THIS AMENDED AND RESTATED MEMBER CONTROL AGREEMENT (the “Agreement”) is entered into effective as of the          of                        , 2006, by and among Highwater Ethanol, LLC, a Minnesota limited liability company (the “Company”), each of the Persons identified as Members on attached Exhibit “A,” and any other Persons that may from time-to-time be subsequently admitted as Members of the Company in accordance with the terms of this Agreement.  Capitalized terms used but not otherwise defined herein shall have the meaning set forth in Section 1.10.

In consideration of the covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I.  THE COMPANY

1.1           Formation and Agreement.  The initial Members formed the Company as a Minnesota limited liability company by filing Articles of Organization with the Minnesota Secretary of State on April 27, 2006.  The Members hereby agree that this Agreement constitutes a “Member Control Agreement” within the meaning of Section 322B.37 of the Act.  To the extent that the rights and obligations of any Member are different by reason of any provision of this Agreement than they would be in the absence of such provision, this Agreement, to the extent permitted by the Act, shall control.

1.2           Name.  The name of the Company shall be “Highwater Ethanol, LLC,” and all business of the Company shall be conducted in such name.

1.3           Purposes; Powers.  The nature of the business and purposes of the Company are to:  (i) own, construct, operate, lease, finance, contract with, and/or invest in ethanol production and co-product production facilities; (ii) process feedstocks into ethanol and related co-products, and market such ethanol and co-products; and (iii) engage in any other business and investment activity in which a Minnesota limited liability company may lawfully be engaged, as determined by the Board of Governors.  The Company has the power to do any and all acts necessary, appropriate, proper, advisable, incidental or convenient to, and in furtherance of, the purposes of the Company as set forth in this Section 1.3 and has, without limitation, any and all powers that may be exercised on behalf of the Company by the Board of Governors pursuant to Article V of this Agreement.

1.4           Principal Place of Business.  The Company shall continuously maintain a principal place of business in Minnesota.  The principal place of business of the Company shall be 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152 or elsewhere as the Governors may determine.  Any documents required by the Act to be kept by the Company shall be maintained at the Company’s principal place of business.

1.5           Term.  The term of the Company commenced on the date the Articles were filed with the Minnesota Secretary of State, and shall continue until the winding up and liquidation of the Company and its business is completed following a Dissolution Event as provided in Article X of this Agreement.

1.6           Registered Agent.  The Company shall continuously maintain a registered office and a registered agent for service of process in the State of Minnesota.  The name and address of the Company’s initial Registered Agent shall be Kevin K. Stroup, 300 O’Connell Street, Marshall, Minnesota  56258-2638.

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1.7           Title to Property.  All Property owned by the Company shall be owned by the Company as an entity and not in the name of any Member, and no Member shall have any ownership interest in such Property, except as a Member of the Company.  Each Member’s interest in the Company shall be personal property for all purposes.

1.8           Payment of Individual Obligations.  The Company’s credit and assets shall be used solely for the benefit of the Company, and no asset of the Company shall be Transferred or encumbered for, or in payment of, any individual obligation of any Member or Governor.

1.9           Independent Activities; Transactions With Affiliates.  The Governors shall be required to devote such time to the business and affairs of the Company as may be necessary to manage and operate the Company, and shall be free to serve any other Person or enterprise in any capacity that they deem appropriate in their discretion.  Neither this Agreement nor any activity undertaken pursuant hereto shall:  (i) prevent any Member or Governor or their Affiliates from engaging in whatever activities they choose, whether the same are competitive with the Company or otherwise, and any such activities may be undertaken without having or incurring any obligation to offer any interest in such activities to the Company or any other Member; or (ii) require any Member or Governor to permit the Company or any other Governor or Member or their Affiliates to participate in any such activities.  As a material part of the consideration for the execution of this Agreement by each Member, each Member hereby waives, relinquishes and renounces any such right or claim of participation.  To the extent permitted by applicable law and subject to the provisions of this Agreement, the Governors are hereby authorized to cause the Company to purchase Property from, sell Property to, or otherwise deal with, any Member (including any Member who is also a Governor), or any Affiliate of any Member; provided that any such purchase, sale or other transaction shall be made on terms and conditions which are no less favorable to the Company than if the sale, purchase or other transaction had been entered into with an independent third party in the same geographic location who provides comparable goods or services which could reasonably be made available to the Company.  For such transactions the Governors shall, as fiduciaries, determine such arrangements are in the best interest of the Company.  All such transactions shall be embodied in a written contract, the material terms of which shall be fully disclosed to the Members.  Such a contract may only be modified by vote of a majority of the then outstanding Membership Interest.  Such a contract shall contain a clause allowing termination without penalty on sixty (60) days notice.  Governors shall not engage in reciprocal business arrangements which circumvent any restrictions contained in the Agreement against dealing with Affiliates.  In addition, Officers and Governors can only purchase the Company’s securities being sold to the public at a price equal to that paid by unaffiliated purchasers.

1.10         Definitions.  Capitalized words and phrases used in this Agreement have the following meanings:

(a)           “Act” means the Minnesota Limited Liability Company Act, Chapter 322B, Minnesota Statutes (2004), as amended from time to time, or any corresponding provisions of any succeeding law.

(b)           “Adjusted Capital Account Deficit” means, with respect to any Unit Holder, the deficit balance, if any, in such Unit Holder’s Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments:  (i) crediting to such Capital Account any amounts which such Unit Holder is deemed to be obligated to restore pursuant to the next to the last sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and (ii) debiting to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of the Regulations.  The foregoing definition is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith.

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(c)           “Affiliate” means, with respect to any Person or entity:  (i) any Person directly or indirectly controlling, controlled by or under common control with such Person or entity; (ii) any officer, director, general partner, member or trustee of any such Person or entity; or (iii) any Person or entity who is an officer, director, general partner, member or trustee of any Person described in clauses (i) or (ii) of this sentence.  For purposes of this definition, the terms “controlling,” “controlled by” or “under common control with” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person or entity, whether through the ownership of voting securities, by contract or otherwise, or the power to elect a majority of the Governors, members, or persons exercising similar authority with respect to such Person or entities.

(d)           “Agreement” means the Company’s Amended and Restated Member Control Agreement, as amended from time to time.

(e)           “Articles” means the Company’s Articles of Organization on file with the Minnesota Secretary of State’s Office, as amended from time to time.

(f)            “Assignee” means a transferee of Units who is not admitted as a Substitute Member pursuant to Section 9.8 of this Agreement.

(g)           “Capital Account” means the separate capital account maintained for each Unit Holder in accordance with Section 2.3 of this Agreement.

(h)           “Capital Contributions” means, with respect to any Member, the amount of money (US Dollars), and the initial Gross Asset Value of any assets or property other than money, contributed by the Member or such Member’s predecessors in interest to the Company, (net of liabilities secured by such contributed property that the Company is considered to assume or take subject to under Code Section 752) with respect to the Units held or purchased by such Member, including additional Capital Contributions.

(i)            “Code” means the United States Internal Revenue Code of 1986, as amended from time to time.

(j)            “Company” means Highwater Ethanol, LLC, a Minnesota limited liability company.

(k)           “Company Minimum Gain” has the meaning given the term “partnership minimum gain” in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations.

(l)            “Debt” means:  (i) any indebtedness for borrowed money or the deferred purchase price of property as evidenced by notes, bonds or other instruments; (ii) obligations as lessee under capital leases; (iii) obligations secured by any mortgage, pledge, security interest, encumbrance, lien or charge of any kind existing on any asset owned or held by the Company, whether or not the Company has assumed or become liable for the obligations secured thereby; (iv) any obligation under any interest rate swap agreement; (v) accounts payable; and (vi) obligations, contingent or otherwise, under direct or indirect guarantees of indebtedness or obligations of the kinds referred to in clauses (i), (ii), (iii), (iv) and (v), above.  Notwithstanding the foregoing, however, Debt shall not include obligations in respect of any accounts payable that are incurred in the ordinary course of the Company’s business and are not delinquent or are being contested in good faith by appropriate proceedings.

(m)          “Depreciation” means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax  

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purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Fiscal Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Governors.

(n)           “Dissolution Event” shall have the meaning set forth in Section 10.1 of this Agreement.

(o)           “Effective Date” means                                                           .

(p)           “Facilities” means the ethanol and co-product production facilities to be constructed and operated by the Company.

(q)           “Fiscal Year” means:  (i) any twelve-month period commencing on November 1 and ending on October 31; and (ii) the period commencing on the immediately preceding November 1 and ending on the date on which all Property is distributed to the Unit Holders pursuant to Article X of this Agreement, or, if the context requires, any portion of a Fiscal Year for which an allocation of Profits or Losses or a distribution is to be made.

(r)            “GAAP” means generally accepted accounting principles in effect in the United States of America from time to time.

(s)           “Governor” means any Person who:  (i) is elected as a Governor pursuant to Article V of this Agreement or who has otherwise become a Governor pursuant to the terms of this Agreement; and (ii) has not ceased to be a Governor pursuant to the terms of this Agreement.  “Board of Governors” or “Governors” mean all such Persons.  A Governor shall be deemed to be an “Independent Governor” if; (i) the Governor is not an officer or employee of the Company, its subsidiaries, if any, or its affiliates and has not been an officer or employee of the Company, its subsidiaries, if any, or its affiliates within the last two (2) years; (ii) is not a promoter as defined by the North American Securities Administrators Association (NASAA); and (iii) does not have a material business or professional relationship with any of the Company’s affiliates, any such relationship shall be deemed material per se if it exceeds five (5) percent of the Governor’s annual gross revenue, derived from all sources, during either of the last two years, or the Governor’s net worth on a fair market value basis.

(t)            “Gross Asset Value” means with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows:  (i) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the Governors, provided that the initial Gross Asset Values of the assets contributed to the Company pursuant to Section 2.1 of this Agreement shall be as set forth in such Section; (ii) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking Code Section 7701(g) into account), as determined by the Governors as of the following times: (A) upon the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (B) upon the distribution by the Company to a Member of more than a de minimis amount of Company Property as consideration for an interest in the Company; and (C) upon the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), provided that an adjustment described in clauses (A) and (B) of this paragraph shall be made only if the Governors reasonably determine that such adjustment is necessary to reflect the relative economic interests of the Members in the Company; (iii) The Gross Asset Value of any item of Company assets distributed to any Member shall be adjusted to equal the gross fair market value (taking Code Section 7701(g) into account) of such asset on the date of distribution as determined by the Governors; and (iv) The Gross Asset Values  

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of Company assets shall be increased or decreased, as applicable, to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and subparagraph (vi) of the definition of “Profits” and “Losses” or Section 3.3(c) of this Agreement; provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (iv) to the extent that an adjustment pursuant to subparagraph (ii) is required in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (iv).  If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraph (ii) or (iv) of this paragraph, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Profits and Losses.

(u)           “Issuance Items” has the meaning set forth in Section 3.3(h) of this Agreement.

(v)           “Liquidation Period” has the meaning set forth in Section 10.6 of this Agreement.

(w)          “Liquidator” has the meaning set forth in Section 10.8 of this Agreement.

(x)            “Member” means any Person:  (i) whose name is set forth as such on Exhibit “A” initially attached hereto or as it may be amended from time to time, or who has become a Member pursuant to the terms of this Agreement; and (ii) who is the owner of one or more Units and has not ceased to be a Member pursuant to the terms of this Agreement.  “Members” means all such Persons.

(y)           “Membership Financial Rights” means collectively, a Member’s share of “Profits” and “Losses,” the right to receive distributions of the Company’s assets, and the right to information concerning the business and affairs of the Company as required by the Act.  The Membership Financial Rights of a Member is quantified by the unit of measurement referred to herein as “Units.”

(z)            “Membership Interest” means collectively, the Membership Financial Rights and the Membership Voting Interest.

(aa)         “Membership Voting Interest” means collectively, a Member’s right to vote as set forth in this Agreement or as required by the Act.  The Membership Voting Interest of a Member shall mean as to any matter to which the Member is entitled to vote hereunder or as may be required under the Act, the right to One (1) vote for each Unit registered in the name of such Member as shown in the Unit Holder Register.

(bb)         “Net Cash Flow” means the gross cash proceeds of the Company less the portion thereof used to pay or establish reserves for Company expenses, debt payments, capital improvements, replacements and contingencies, all as reasonably determined by the Governors.  “Net Cash Flow” shall not be reduced by Depreciation, amortization, cost recovery deductions or similar allowances, but shall be increased by any reductions of reserves previously established.

(cc)         “Nonrecourse Deductions” has the meaning set forth in Section 1.704-2(b)(1) of the Regulations.

(dd)         “Nonrecourse Liability” has the meaning set forth in Section 1.704-2(b)(3) of the Regulations.

(ee)         “Officer” means any Person who:  (i) is appointed as an Officer pursuant to Section 5.19 of this Agreement or who has otherwise become an Officer pursuant to the terms of this Agreement; and  

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(ii) has not ceased to be an Officer pursuant to the terms of this Agreement.  “Officers” mean all such Persons.

(ff)           “Permitted Transfer” has the meaning set forth in Section 9.2 of this Agreement.

(gg)         “Person” means any individual, general or limited partnership, joint venture, limited liability company, corporation, trust, estate, association, nominee or other entity.

(hh)         “Profits and Losses” mean, for each Fiscal Year, an amount equal to the Company’s taxable income or loss for such Fiscal Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication): (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition of “Profits” and “Losses” shall be added to such taxable income or loss; (ii) Any expenditures of the Company described in Code Section 705(a)(2)(b) or treated as Code Section 705(a)(2)(b) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition of “Profits” and “Losses” shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraphs (ii) or (iii) of the definition of Gross Asset Value above, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year, computed in accordance with the definition of Depreciation; (vi) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) is required, pursuant to Regulations Section 1.704-(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Unit Holder’s interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; and (vii) Notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Sections 3.3 and 3.4 of this Agreement shall not be taken into account in computing Profits or Losses.  The amounts of the items of Company income, gain, loss or deduction available to be specially allocated pursuant to Sections 3.3 and 3.4 of this Agreement shall be determined by applying rules analogous to those set forth in subparagraphs (i) through (vi) above.

(ii)           “Property” means all real and personal property acquired by the Company (including cash), and any improvements thereto, and shall include both tangible and intangible property.

(jj)           “Regulations” means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations are amended from time to time.

(kk)         “Regulatory Allocations” has the meaning set forth in Section 3.4 of this Agreement.

(ll)           “Related Party” means the adopted or birth relatives of any Person and such Person’s spouse (whether by marriage or common law), if any, including without limitation great-grandparents, grandparents, parents, children (including stepchildren and adopted children), grandchildren, and great-

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grandchildren thereof, and such Person’s (and such Person’s spouse’s) brothers, sisters, and cousins and their respective lineal ancestors and descendants, and any other ancestors and/or descendants, and any spouse of any of the foregoing, each trust created for the exclusive benefit of one or more of the foregoing, and the successors, assigns, heirs, executors, personal representatives and estates of any of the foregoing.

(mm)       “Securities Act” means the Securities Act of 1933, as amended.

(nn)         “Tax Matters Member” has the meaning set forth in Section 7.4 of this Agreement.

(oo)         “Transfer” means, as a noun, any voluntary or involuntary transfer, sale, pledge or hypothecation or other disposition and, as a verb, to voluntarily or involuntarily transfer, give, sell, exchange, assign, pledge, bequest, hypothecate or otherwise dispose of.

(pp)         “Unit” means an ownership interest in the Company issued in consideration of a Capital Contribution made as provided in Article II of this Agreement.

(qq)         “Unit Holder” means any Person who is the owner of one or more Units.  “Unit Holders” means all such Persons.

(rr)           “Unit Holder Nonrecourse Debt” has the same meaning as the term “partner nonrecourse debt” in Section 1.704-2(b)(4) of the Regulations.

(ss)         “Unit Holder Nonrecourse Debt Minimum Gain” means an amount, with respect to each Unit Holder Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Unit Holder Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations.

(tt)           “Unit Holder Nonrecourse Deductions” has the same meaning as the term “partner nonrecourse deductions” in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations.

(uu)         “Unit Holder Register” means the register maintained by the Company at its principal office or by the Company’s duly appointed agent, setting forth the name, address and Capital Contributions of each Unit Holder (or such Unit Holder’s predecessors in interest), and the number of Units, certificate number(s) and date of issuance of Units issued to each Unit Holder, which register shall be modified from time to time as additional Units are issued and as Units are Transferred pursuant to this Agreement.

ARTICLE II.  CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS

2.1           Initial Capital Contributions.  The name, address, initial Capital Contribution and initial Units quantifying the Membership Interest of each of the initial Members are set forth on Exhibit “A” attached hereto, and shall also be set forth on the Unit Holder Register.

2.2           Additional Capital Contributions; Additional Units.  No Unit Holder shall be obligated to make any additional Capital Contributions to the Company or to pay any assessment to the Company, other than any unpaid amounts on such Unit Holder’s original Capital Contributions, and no Units shall be subject to any calls, requests or demands for capital.  Subject to Section 5.6, additional Units may be issued in consideration of Capital Contributions as agreed to between the Governors and the Persons acquiring such Units.    The Members shall have no preemptive rights pursuant to Section 322B.33 of the Act.

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2.3           Capital Accounts.  A Capital Account shall be maintained for each Unit Holder in accordance with the following provisions:

(a)           To each Unit Holder’s Capital Account there shall be credited:  (i) such Unit Holder’s Capital Contributions; (ii) such Unit Holder’s distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Sections 3.3 and 3.4 of this Agreement; and (iii) the amount of any Company liabilities assumed by such Unit Holder or which are secured by any Property distributed to such Unit Holder;

(b)           To each Unit Holder’s Capital Account there shall be debited:  (i) the amount of money and the Gross Asset Value of any Property distributed to such Unit Holder pursuant to any provision of this Agreement; (ii) such Unit Holder’s distributive share of Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Sections 3.3 and 3.4 of this Agreement; and (iii) the amount of any liabilities of such Unit Holder assumed by the Company or which are secured by any Property contributed by such Unit Holder to the Company;

(c)           In the event Units are Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the Transferred Units; and

(d)           In determining the amount of any liability for purposes of subparagraphs (a) and (b) above Code Section 752(c) and any other applicable provisions of the Code and Regulations shall be taken into account.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent therewith.  In the event the Governors  determine that it is prudent to modify the manner in which Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Company or any Unit Holders), are computed in order to comply with such Regulations, the Governors may make such modification, provided that it is not likely to have a material effect on the amounts distributed to any Person pursuant to Article X of this Agreement upon the dissolution of the Company.  The Governors also shall:  (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Unit Holders and the amount of capital reflected on the Company’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q); and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b).

ARTICLE III.  ALLOCATIONS

3.1           Profits.  After giving effect to the special allocations in Sections 3.3 and 3.4 of this Agreement, Profits for any Fiscal Year shall be allocated among the Unit Holders in proportion to Units held.

3.2           Losses.  After giving effect to the special allocations in Sections 3.3 and 3.4 of this Agreement, Losses for any Fiscal Year shall be allocated among the Unit Holders in proportion to Units held.

3.3           Special Allocations.  The following special allocations shall be made in the following order:

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(a)           Minimum Gain Chargeback.  Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this Article III, if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Unit Holder shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Unit Holder’s share of the net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g).  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Unit Holder pursuant thereto.  The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations.  This Section 3.3(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith.

(b)           Unit Holder Minimum Gain Chargeback.  Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of this Article III, if there is a net decrease in Unit Holder Nonrecourse Debt Minimum Gain attributable to a Unit Holder Nonrecourse Debt during any Fiscal Year, each Unit Holder who has a share of the Unit Holder Nonrecourse Debt Minimum Gain attributable to such Unit Holder Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Unit Holder’s share of the net decrease in Unit Holder Nonrecourse Debt Minimum Gain, determined in accordance with Regulations Section 1.704-2(i)(4).  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Unit Holder pursuant thereto.  The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations.  This Section 3.3(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith.

(c)           Qualified Income Offset.  In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of the Regulations, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit as soon as practicable, provided that an allocation pursuant to this Section 3.3(c) shall be made only if and to the extent that the Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article III have been tentatively made as if this Section 3.3(c) were not in the Agreement.

(d)           Gross Income Allocation.  In the event any Member has a deficit Capital Account at the end of any Fiscal Year which is in excess of the sum of:  (i) the amount such Member is obligated to restore pursuant to any provision of this Agreement; and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations, then in such circumstance each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 3.3(d) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Article III have been made as if Sections 3.3(c) and 3.3(d) were not in this Agreement.

(e)           Nonrecourse Deductions.  Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated among the Members in proportion to Units held.

(f)            Unit Holder Nonrecourse Deductions.  Any Unit Holder Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Unit Holder who bears the economic risk of loss with respect to the Unit Holder Nonrecourse Debt to which such Unit Holder Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1).

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(g)           Section 754 Adjustments.  To the extent an adjustment to the adjusted tax basis of any Company asset, pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Unit Holder in complete liquidation of such Unit Holder’s interest in the Company, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Unit Holders in accordance with their interests in the Company in the event Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Unit Holder to whom such distribution was made in the event Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.

(h)           Allocations Relating to Taxable Issuance of Company Units.  Any income, gain, loss or deduction realized as a direct or indirect result of the issuance of Units by the Company to a Unit Holder (the “Issuance Items”) shall be allocated among the Unit Holders so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Unit Holder shall be equal to the net amount that would have been allocated to each such Unit Holder if the Issuance Items had not been realized.

3.4           Regulatory Allocations.  The allocations set forth in Sections 3.3(a), 3.3(b), 3.3(c), 3.3(d), 3.3(e), 3.3(f), 3.3(g) and 3.5 (the “Regulatory Allocations”) are intended to comply with certain requirements of the Regulations.  It is the intent of the Unit Holders that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Section 3.4.  Therefore, notwithstanding any other provision of this Article III (other than the Regulatory Allocations), the Governors shall make such offsetting special allocations of Company income, gain, loss or deduction in whatever manner they determine appropriate so that, after such offsetting allocations are made, each Unit Holder’s Capital Account balance is, to the extent possible, equal to the Capital Account balance such Unit Holder would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Sections 3.1, 3.2, and 3.3(h).

3.5           Loss Limitation.  Losses allocated pursuant to Section 3.2 of this Agreement shall not exceed the maximum amount of Losses that can be allocated without causing any Unit Holder to have an Adjusted Capital Account Deficit at the end of any Fiscal Year.  In the event some but not all of the Unit Holders would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 3.2 of this Agreement, the limitation set forth in this Section 3.5 shall be applied on a Unit Holder by Unit Holder basis and Losses not allocable to any Unit Holder as a result of such limitation shall be allocated to the other Unit Holders in accordance with the positive balances in such Unit Holder’s Capital Accounts so as to allocate the maximum permissible Losses to each Unit Holder under Section 1.704-1(b)(2)(ii)(d) of the Regulations.

3.6           Other Allocation Rules.

(a)           For purposes of determining Profits, Losses and any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly or other basis, as determined by the Governors using any permissible method under Code Section 706 and the Regulations thereunder.

(b)           The Unit Holders are aware of the income tax consequences of the allocations made by this Article III and hereby agree to be bound by the provisions of this Article III in reporting their shares of Company income and loss for income tax purposes.

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(c)           Solely for purposes of determining a Unit Holder’s proportionate share of the “excess nonrecourse liabilities” of the Company within the meaning of Regulations Section 1.752-3(a)(3), the Unit Holders’ aggregate interests in Company Profits shall be deemed to be as provided in the Capital Accounts.  To the extent permitted by Section 1.704-2(h)(3) of the Regulations, the Governors shall endeavor to treat distributions of Net Cash Flow as having been made from the proceeds of a Nonrecourse Liability or a Unit Holder Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Unit Holder.

(d)           Profits and Losses to the Unit Holders shall be allocated among the Unit Holders in the ratio which each Unit Holder’s Units bears to the total number of Units issued and outstanding.

3.7           Tax Allocations; Code Section 704(c).  In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any Property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Unit Holders so as to take account of any variation between the adjusted basis of such Property to the Company for federal income tax purposes and its initial Gross Asset Value.  In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraph (ii) of the definition of Gross Asset Value in Section 1.10(t) of this Agreement, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder.  Any elections or other decisions relating to such allocations shall be made by the Governors in any manner that reasonably reflects the purpose and intention of this Agreement.  Allocations pursuant to this Section 3.7 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Unit Holder’s Capital Account or share of Profits, Losses, other items or distributions pursuant to any provision of this Agreement.

3.8           Tax Credit Allocations.  All income tax credits with respect to the Company’s property or operations shall be allocated among the Members in accordance with their respective Membership Interests for the Fiscal Year during which the expenditure, production, sale or other event giving rise to such credits occurs.  This Section 3.8 is intended to comply with the applicable tax credit allocation principles of Regulations Section 1.704-1(b)(4)(ii) and shall be interpreted consistently therewith.

ARTICLE IV.  DISTRIBUTIONS

4.1           Net Cash Flow.  Subject to the terms and conditions of any applicable loan covenants and restrictions, the Governors, in their sole discretion, shall make distributions of Net Cash Flow, if any, to the Unit Holders in proportion to Units held.  In determining Net Cash Flow, the Governors shall endeavor to provide for cash distributions at such times and in such amounts as will permit the Unit Holders to make timely payment of income taxes.

4.2           Amounts Withheld.  All amounts withheld pursuant to the Code or any provision of any state, local or foreign tax law with respect to any payment, distribution or allocation to the Company or the Unit Holders shall be treated as amounts paid or distributed, as the case may be, to the Unit Holders with respect to which such amount was withheld pursuant to this Section 4.2 for all purposes under this Agreement.  The Company is authorized to withhold from payments and distributions, or with respect to allocations, to the Unit Holders and to pay over to any federal, state, local or foreign government, any amounts required to be so withheld, and shall allocate any such amounts to the Unit Holders with respect to which such amount was withheld.

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4.3           Limitations on Distributions.  The Company shall make no distributions to the Unit Holders except as provided in this Article IV and in Article X of this Agreement.  Notwithstanding any other provision, no distribution shall be made if not permitted to be made under the Act.

ARTICLE V.  MANAGEMENT

5.1           Board of Governors.  Except as otherwise provided in this Agreement or required by law, the Governors shall direct the business and affairs and exercise all of the powers of the Company, and shall adopt such policies, rules, regulations and actions as they deem advisable.  Subject to Section 5.6 of this Agreement or any other express provisions of this Agreement, the business and affairs of the Company shall be managed by or under the direction of the Governors and not by the Members.  No Member, other than a Member acting in his or her capacity as a Governor or Officer of the Company, has the power or authority to act for or on behalf of the Company, to bind the Company by any act, or to incur any expenditures on behalf of the Company.

5.2           Number of Governors.  The number of Governors shall be a minimum of Three (3) and a maximum of Fifteen (15).  Prior to any action by the Members to change or fix the number of Governors, the number of Governors may be changed from time to time within that variable range by the Governors.  Once the Members have taken action to change or fix the number of Governors, the Governors shall no longer have any authority to change the number of Governors from the number last approved by the Members.  The Members may increase or decrease the number of Governors last approved, and may change from a variable range to a fixed number or vice versa, at any annual or special meeting.  At the first annual meeting of Members and at each annual meeting thereafter the Members shall elect Governors to hold office for the term for which elected, and until the successors of such Governor shall have been elected and qualified.  Governors need not be residents of the State of Minnesota or Members of the Company.

5.3           Election of Governors.

(a)           Election of Governors and Terms.  The initial Governors shall be appointed by the initial Members and shall serve until the first annual meeting of the Members following the date on which substantial operations of the Facilities commence, and in all cases until a successor is elected and qualified, or until the earlier death, resignation, removal or disqualification of any such Governor.  In accordance with Section 5.2 of this Agreement, at the first annual meeting of the Members following the date on which substantial operations of the Facilities commence, the number of Governors shall automatically become fixed at Nine (9).  After the expiration of the initial terms of the Governors, at each annual meeting of the Members, Governors shall be elected by the Members for staggered terms of Three (3) years (except as hereafter provided with respect to the initial terms of Group I and Group II Governors) and until a successor is elected and qualified, or until the earlier death, resignation, removal or disqualification of any such Governor.  The initial Governors shall conduct a lottery to separately identify the Governor positions to be elected at the first annual meeting following the date on which substantial operations of the Facilities commence, and shall so classify each such Governor position as Group I, Group II or Group III, with such classification to serve as the basis for the staggering of terms among the elected Governors.  The term of Group I Governors shall expire first (initial term of 1 year with successors elected to 3 year terms thereafter), followed by those of Group II Governors (initial term of 2 years with successors elected to 3 year terms thereafter), and then Group III Governors (initial and subsequent terms of 3 years).

(b)           Nominations for Governors.  One or more nominees for Governor positions up for election shall be named by the then-current Governors or by a nominating committee established by the Governors.  Nominations for the election of Governors may also be made by any Member entitled to vote  

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in the election of Governors.  Any Member that intends to nominate a Person for election as a Governor may do so only if written notice of such Member’s intent to make such nomination is given, either by personal delivery or by United Stated mail, postage prepaid, to the Secretary of the Company not less than Forty-five (45) nor more than Ninety (90) days prior to the annual meeting of the Company at which such elections are to be held.  Each such notice shall set forth:  (i) the name and address of record of the Member who intends to make the nomination; (ii) a representation that the Member is a holder of record of Units entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the Person specified in the notice; (iii) the name, age, address and principal occupation or employment of each nominee; (iv) a description of all arrangements or understandings between the Member and each nominee and any other Person(s) pursuant to which such nominations are to be made; (v) such other information regarding each nominee as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (vi) the consent of each nominee to serve as a Governor of the Company if so elected.  The Company may require any proposed nominee to furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as a Governor.  The presiding Officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedures, and if so determined, the defective nomination shall be disregarded.  The amendment or repeal of this Section 5.3 or the adoption of any provision inconsistent therewith shall require the approval of a majority of the Membership Voting Interests.

5.4           Authority of Governors.  Subject to the limitations and restrictions set forth in this Agreement and the Act, the Governors shall direct the management of the business and affairs of the Company and shall have all of the rights and powers which may be possessed by a “Governor” under the Act including, without limitation, the right and power to do or perform, and the further right and power by resolution to delegate to the Officers or such other Persons as the Governors deem appropriate, the right and power to do or perform, the following:

(a)           Conduct the business and carry on the operations of the Company, and have and exercise the powers granted by the Act in any state, territory, district or possession of the United States, or in any foreign country, which may be necessary or convenient to effect any or all of the purposes for which the Company is organized;

(b)           Acquire by purchase, lease or otherwise any real or personal property which may be necessary, convenient, or incidental to the accomplishment of the purposes of the Company;

(c)           Operate, maintain, finance, improve, construct, own, operate, sell, convey, assign, mortgage and lease any real estate and any personal property necessary, convenient, or incidental to the accomplishment of the purposes of the Company;

(d)           Execute any and all agreements, contracts, documents, certifications and instruments necessary or convenient in connection with the management, maintenance and operation of the business and affairs of the Company, including executing amendments to this Agreement and the Articles in accordance with the terms of this Agreement, both as Governors and where permitted, as attorney-in-fact for the Members pursuant to any power of attorney granted by the Members to the Governors;

(e)           Borrow money and issue evidences of indebtedness necessary, convenient, or incidental to the accomplishment of the purposes of the Company, and secure the same by mortgage, pledge or other lien on any Company assets;

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(f)            Execute, in furtherance of any or all of the purposes of the Company, any deed, lease, mortgage, deed of trust, mortgage note, promissory note, bill of sale, contract or other instrument purporting to convey or encumber any or all of the Company assets;

(g)           Prepay in whole or in part, refinance, increase, modify or extend any liabilities affecting the assets of the Company and in connection therewith, execute any extensions or renewals of encumbrances on any or all of such assets;

(h)           Care for and distribute funds to the Members by way of cash income, return of capital or otherwise, all in accordance with the provisions of this Agreement, and perform all matters in furtherance of the objectives of the Company and this Agreement;

(i)            Hire or contract on behalf of the Company for the employment and services of employees and independent contractors, and delegate to such Persons the duty to manage or supervise any of the assets or operations of the Company;

(j)            Engage in any kind of activity and perform and carry out contracts of any kind necessary or incidental to, or in connection with, the accomplishment of the purposes of the Company, as may be lawfully carried on or performed by a limited liability company under the laws of each state in which the Company is then formed or qualified;

(k)           Take, or refrain from taking, all actions, not expressly proscribed or limited by this Agreement or the Articles, as may be necessary or appropriate to accomplish the purposes of the Company;

(l)            Institute, prosecute, defend, settle, compromise and dismiss lawsuits or other judicial or administrative proceedings brought on or in behalf of, or against, the Company, the Members or the Governors or Officers in connection with activities arising out of, connected with, or incidental to this Agreement, and engage counsel or others in connection therewith;

(m)          Purchase, take, receive, subscribe for or otherwise acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge, or otherwise dispose of, and otherwise use and deal in and with, shares or other interests in or obligations of domestic or foreign corporations, associations, general or limited partnerships, other limited liability companies, or individuals or direct or indirect obligations of the United States or of any government, state, territory, government district or municipality or of any instrumentality of any of them;

(n)           Agree with any Person as to the form and other terms and conditions of such Person’s Capital Contribution to the Company and cause the Company to issue Membership Interests and Units in consideration for such Capital Contribution;  and

(o)           Indemnify Members, Governors or Officers, or former Members, Governors or Officers, and to make any other indemnification that is authorized by this Agreement in accordance with, and to the fullest extent permitted by, the Act.

5.5           Governor as Agent.  Notwithstanding the power and authority of the Governors to manage the business and affairs of the Company, no Governor shall have authority to act as agent for the Company for the purposes of its business (including the execution of any instrument on behalf of the Company) unless the Governors have authorized the Governor to take such action.

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5.6           Restrictions on Authority of Governors.

(a)           Notwithstanding any provision in this Agreement to the contrary, the Governors shall not have authority to, and they covenant and agree that they shall not, do any of the following acts without the unanimous consent of the Members:

(i)Cause or permit the Company to engage in any activity that is not consistent with the purposes of the Company as set forth in Section 1.3 of this Agreement;

(ii)Knowingly engage in any act in contravention of this Agreement or which would make it impossible to carry on the ordinary business of the Company, except as otherwise provided in this Agreement;

(iii)Possess Company Property, or assign rights in specific Company Property, for other than a Company purpose; or

(iv)Cause the Company to voluntarily take any action that would cause a bankruptcy of the Company.

(b)           The Governors shall not have authority to, and they covenant and agree that they shall not cause the Company to, without the consent of a majority of the Membership Voting Interests:

(i)Merge, consolidate, exchange or otherwise dispose of all or substantially all of the Property, except for a liquidating sale of the Property in connection with the dissolution of the Company;

(ii)Issue Units at a purchase price of less than $5,000 per Unit;

(iii)Issue more than an aggregate of 10,000 Units; or

(iv)Cause the Company to acquire any equity or debt securities of any Governor or any of its Affiliates, or otherwise make loans to any Governor or any of its Affiliates.

The actions specified herein as requiring the consent of the Members shall be in addition to any actions by the Governor that are specified in the Act as requiring the consent or approval of the Members.  Unless otherwise required by this Agreement or the Act, any such required consent or approval may be given by a vote of a majority of the Membership Voting Interests.

5.7           Meetings.  A regular meeting of the Governors shall be held, without other notice than this Section, immediately after, and at the same place as, the annual meeting of the Members.  Additionally, the Governors may, by resolution, prescribe the time and place for holding regular meetings and may provide that such resolution constitutes notice thereof.  If the Governors do not prescribe the time and place for the holding of regular meetings, such regular meetings shall be held at the time and place specified in the notice of each such regular meeting.  Unless otherwise prescribed by statute, special meetings may be called by, or at the request of, the President or any Two (2) or more Governors.  The Governors may designate any location as the place of any regular or special meeting.  If no designation is made, the place of meeting shall be the principal office of the Company.

5.8           Notice.  Notice shall be given to each Governor with respect to any special meeting of the Governors,  stating the date, time and place of the meeting.  Such notice shall be given at least Two (2)  

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days prior thereto and shall be in writing, unless oral notice is reasonable under the circumstances.  If mailed, such notice shall be deemed to be delivered on the earlier of Five (5) days after deposit in the U.S. mail addressed to the Governor’s address as shown on the Company’s records with postage prepaid, or upon receipt.  Any Governor may waive notice of any meeting.  Except as provided in the next sentence, the waiver must be in writing, signed by the Governor entitled to notice, and filed with the minutes relating to the action taken.  A Governor’s attendance at a meeting shall constitute a waiver of notice of such meeting, except where such Governor attends the meeting for the express purpose of object­ing to the transaction of any business because the meeting was not lawfully called or convened.  Neither the business to be transacted at, nor the purpose of, any regular or spe­cial meeting of the Governors need be specified in the notice or waiver of notice of such meeting.

5.9           Conduct of Meeting.  All Governors, to the extent possible, shall personally attend all Governors meetings.  However, any Governor may participate in any regular or special meeting by any means of communication by which all Governors participating may simultaneously hear each other during the meeting.  A Governor participating in a meeting by this means is deemed to be present in person.

5.10         Quorum.  A majority of the duly elected and qualified Governors shall constitute a quorum for the transaction of business.  If less than a quorum is represented at a meeting, the Governors represented may adjourn the meeting and reschedule it for a later date without further notice.  At such adjourned and rescheduled meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the original meeting.  Governors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of Governors to leave less than a quorum.

5.11         Manner of Acting; Informal Action.  Except as otherwise provided in this Agreement, the act of a majority of the Governors at a meeting at which a quorum is present shall be the act of the Governors.  Unless otherwise provided by law, any action required or permitted to be taken at a meeting of the Governors may be taken without a meeting if a consent in writing setting forth the action so taken is signed by all Governors entitled to vote with respect the subject matter thereof.

5.12         Absentee Governor.  A Governor may give advance written consent or opposition to a proposal to be acted on at a meeting of the Governors.  If the Governor is not present at the meeting, consent or opposition to a proposal does not constitute presence for purpose of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the Governor has consented or objected.

5.13         Presumption of Assent.  A Governor present at a meeting shall be presumed to have assented to action taken, unless the dissent of such Governor is entered in the minutes of the meeting or unless such Governor files a written dissent to such action with the other Governors before the adjourn­ment thereof or forwards such dissent by mail to the other Governors immediately after the adjournment thereof.  Such right to dissent shall not apply to a Governor who voted in favor of an action.

5.14         Removal of Governors.  The Members may remove a Governor, with or without cause, at a meeting called for that purpose, if notice has been given that a purpose of the meeting is such removal.

5.15         Vacancies.  Any vacancy occurring in the Board of Governors may be filled by the affirmative vote of a majority of the remaining Governors.  A Governor elected to fill a vacancy shall be elected for the unexpired term of such Governor’s predecessor in office.  Any vacancy to be filled by reason of any  

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increase in the number of Governors shall be filled by election at an annual or special meeting of the Members called for that purpose.

5.16         Compensation.   The Governors shall have authority to establish reasonable compensation of all Governors for services to the Company as Governors, officers or otherwise, and to provide for reimbursement to Governors of their reasonable expenses of attending Governors’ meetings.

5.17         Committees; Authority. The Governors may create such committees, and appoint such Governors to serve on them, as the Governors deem appropriate.  Each committee must have Two (2) or more Governors, who serve at the pleasure of the Governors.  The creation of a committee, and the appointment of Governors to serve on it, must be approved by a majority of the Governors.  The procedural requirements for Board of Governor meetings under this Article V shall also apply to committee meetings.  Committees may exercise only those aspects of the Governors’ authority which are expressly conferred by the Governors by express resolution.  Notwithstanding the foregoing, however, a committee may not, under any circumstances:  (i) apportion or authorize distributions; (ii) approve or propose any action for which the Act requires Member approval; (iii) elect Officers; (iv) fill vacancies on the Board of Governors or on any of its committees; (v) adopt, amend, or repeal the Articles or this Agreement; (vi) approve a plan of merger; (vii) authorize or approve the reacquisition of Units, except according to a formula or method prescribed by the Governors; or (ix) authorize or approve the issuance or sale or contract for sale of Units or determine the designation and relative rights, preferences, and limitations of a class or series of Units.

5.18         Voting; Potential Financial Interest.  Any Governor shall be disqualified from voting on any matter solely by reason of such Governor’s (or his/her Affiliate’s) potential financial interest in the outcome of such vote  regardless of whether the Governor reasonably disclosed the potential conflict of interest at the time of such vote.

5.19         Duties and Obligations of Governors.  The Governors shall cause the Company to conduct its business and operations separate and apart from that of any Governor or any Governor’s Affiliates.  The Governors shall take all actions which may be necessary or appropriate:  (i) for the continuation of the Company’s valid existence as a limited liability company under the laws of the State of Minnesota and each other jurisdiction in which such existence is necessary to protect the limited liability of Members or to enable the Company to conduct the business in which it is engaged; and (ii) for the accomplishment of the Company’s purposes, including the acquisition, development, maintenance, preservation, and operation of Company Property in accordance with the provisions of this Agreement and applicable laws and regulations.  Each Governor shall have the duty to discharge the foregoing duties in good faith, in a manner the Governor believes to be in the best interests of the Company, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.  The Governors shall have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, whether or not in the Governor’s immediate possession or control.  The Governors shall not employ, or permit another to employ, such funds or assets in any manner except for the exclusive benefit of the Company.  The Company shall not permit Members to contract away the fiduciary obligation owed to Members by Governors under the common law.  The Governors shall be under no other fiduciary duty to the Company or the Members to conduct the affairs of the Company in a particular manner.  Governors shall not receive any rebates or give-ups, nor may they participate in any reciprocal business arrangements.  No Governor shall directly or indirectly pay or award any commissions or other compensation to any Person engaged to sell Units or give investment advice to potential Members, provided that this clause shall not prohibit the payment to a registered broker-dealer or other properly licensed Person of normal sales commissions for selling Units. All material and affiliated transactions and loans, and any forgiveness of loans, must be approved by a majority of the Company’s independent governors as defined in Section 1.10(s) who do not have an interest in the transactions and who have access, at the Company’s expense, to Company’s legal counsel.

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5.20         Officers.  The officers of the Company shall be appointed by the Governors and shall include a President, a Vice-President, a Secretary, a Treasurer, and such other Officers and assistant Officers as the Governors shall determine.  One person may simultaneously hold more than one office.  The Officers’ terms shall be specified by the Governors.  If no term is specified, they shall hold office until the first meeting of the Governors held after the next annual meeting of the Members.  If the appointment of Officers shall not be made at such meeting, such appointment shall be made as soon thereafter as is convenient.  Each Officer shall hold office until the officer’s successor is duly appointed and qualified, until the Officer’s death, or until the Officer resigns or is removed by the Governors.  The designation of a specified term does not grant to an Officer any contract rights; and unless otherwise provided in a signed contract with the Company, Officers will be “at-will employees” subject to removal by the Governors at any time, with or without cause.

Any officer may resign at any time by giving written notice to the President or the Secretary of the Company.  Unless otherwise noted in the notice, the resignation shall be effective upon receipt.

The Officers, and their duties and responsibilities shall be as follows:

(a)           President.  The President shall be the chief executive officer of the Company and shall, subject to Governors’ control, generally supervise and control the Company’s business and affairs.  The President shall, when present, preside at all Governors’ and Member meetings, and shall perform all duties incident to the office of President and such other duties as may be prescribed by this Agreement or by the Governors.  For purposes of the Act, the President shall be deemed the Chief Manager (as such term is defined and used in the Act) of the Company.

(b)           The Vice President(s).  If one or more Vice Presidents are appointed by the Governors, the Vice President (or in the event there be more than one, the appropriate Vice Presi­dent, as designated by the Governors, or in the absence of any designation, then in the order of appointment) shall perform the duties of the President in the event of the President’s absence, death, inabil­ity or refusal to act.  When so acting, a Vice President shall have all of the powers, and be subject to all of the restrictions upon, the President.  In addition, Vice Presidents shall perform such other duties as may be prescribed by this Agreement or by the Governors.

(c)           The Secretary.  The Secretary shall:  (i) keep the minutes of the Governor and Member meetings; (ii) see that all notices are duly given in accordance with this Agreement and as required by law; (iii) serve as the custodian of the Company’s records; (iv) when requested or required, authenticate any Company records; (v) keep and maintain the Unit Holder Register and the Unit transfer books of the Company; and (vi) perform all duties incident to the office of Secretary and such other duties as may be prescribed by this Agreement or by the Governors.

(d)           The Treasurer.  The Treasurer shall be the chief financial officer of the Company and shall:  (i) have charge and custody of, and be responsible for, all funds and securities of the Company; (ii) receive and give receipts for moneys due and payable to the Company, and deposit all such moneys in the name of the Company in such banks, trust com­panies or other depositories as shall be selected in accordance with this Agreement; and (iv) generally perform all duties incident to the office of Treasurer and such other duties as may be prescribed by this Agreement or by the Governors.

(e)           Other Assistants and Acting Officers.  The Governors shall have the power to appoint any Person to act as assistant to any Officer, or to perform the duties of such Offi­cer, whenever for any reason it is impracticable for such officer to act personally.  Any such assistant or acting Officer shall have the power to perform all the duties of the office to which he or she is appointed to be an assistant, or  

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as to which he or she is appointed to act, except as such power may be otherwise defined or restricted by the Governors.  Additionally, unless prohibited by a resolution of the Governors, any Officer may delegate in writing some or all of the duties and powers of such Officer’s position to other Persons.  An Officer who delegates the duties or powers of an office remains subject to the standard of conduct for such Officer with respect to the discharge of all duties and powers so delegated.

Salaries of the Officers shall be fixed from time to time by the Governors, and no Officer shall be prevented from receiving a salary due to the fact that such Officer is also a Governor.

5.21         Execution of Instruments.  All deeds, mortgages, bonds, checks, contracts and other instruments pertaining to the business and affairs of the Company shall be signed on behalf of the Company by:  (i) the President; or (ii) such other Officers or Persons who may be authorized to do so by specific resolution of the Governors.

5.22         Limitation of Liability; Indemnification.  To the maximum extent permitted under the Act and other applicable law, no Member, Governor or Officer shall be personally liable for any debt, obligation or liability of the Company merely by reason of being a Member, Governor or Officer.  Furthermore, no Governor or Officer shall be personally liable to the Company or its Members for monetary damages for a breach of fiduciary duty by such Governor or Officer; provided that this provision shall not eliminate or limit the liability of a Governor or Officer for any of the following:  (i) any breach of the duty of loyalty to the Company or its Members; (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law; (iii) a transaction from which the Governor or Officer derived an improper personal benefit (iv) a wrongful distribution in violation of Sections 80A.23 or 322B.56 of the Act; or (v) any act or omission occurring before the Effective Date of this Agreement.  To the maximum extent permitted under the Act and other applicable law, the Company, its receiver, or its trustee (in the case of its receiver or trustee, to the extent of Company Property) shall indemnify, save and hold harmless, and pay all judgments and claims against each Governor or Officer relating to any liability or damage incurred by reason of any act performed or omitted to be performed by such Governor or Officer, in connection with the business of the Company, or in the event of any action by a Unit Holder against a Governor, including a derivative suit, including reasonable attorneys’ fees incurred by such Governor or officer in connection with the defense of any action based on any such act or omission, provided that (i) the Governor or officer has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of the Company; (ii) the Governor or officer was acting on behalf of or performing services for the Company; (iii) such liability or loss was not the result of negligence or misconduct by the Governor or officer; and (iv) such indemnification or agreement to hold harmless is recoverable only out of Company net assets and not from the holders of any Membership Interests.  The advancement of Company funds to a Governor or officer for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought shall be allowed only if: (i) the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the Company; (ii) the legal action is initiated by a third party who is not a holder of any Membership Interests, or the legal action is initiated by a holder of a Membership Interest and a court of competent jurisdiction specifically approves such advancement; and (iii) the Governor or officer undertakes to repay the advanced funds to the Company, together with the applicable legal rate of interest thereon, in cases in which such person is found not to be entitled to indemnification.  Notwithstanding anything to the contrary above, a Governor or officer shall be indemnified for losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws only if one or more of the following conditions is met: (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee; (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or (iii) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made, and the court of law considering  

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the request for indemnification has been advised of the position of the Securities and Exchange Commission and the published position of any state securities regulatory authority in which securities of the Company were offered or sold as to indemnification for violations of securities laws.  Notwithstanding the foregoing provisions, no Governor or officer shall be indemnified by the Company to the extent prohibited or limited by the Act. The Company may purchase and maintain insurance on behalf of any Person in such Person’s official capacity against any liability asserted against and incurred by such Person in or arising from that capacity, so long as the Company does not incur the cost of that portion of liability insurance which insures such Person for any liability as to which the Person is prohibited from being indemnified under this paragraph.

ARTICLE VI.  MEMBERSHIP UNITS; MEMBERS

6.1           Membership Units.  The Company is initially organized with One (1) class of Membership Interests, designated in Units, which Units are initially the only class of equity in the Company.  The Units shall have no par value and shall be of a single class with identical rights.  The Company shall have a first lien on the Units of any Member for any debt or liability owed by such Member to the Company.  Additional and different classes of Membership Interests represented by different Units may be created and issued to new or existing Members on such terms and conditions as the Governors may determine.  Such additional and different classes may have different rights, powers and preferences (including, without limitation, voting rights and distribution preferences), which may be superior to those of existing Members.  Members shall have no preemptive rights to acquire additional or newly created Units.

6.2           Certificates; Surrender for Transfer.  Certificates representing Units shall be in such form as shall be determined by the Governors, in their discretion.  If a certificate is lost, destroyed or mutilated, a new one may be issued upon such terms and indemnity to the Company as the Governors may prescribe.  No new certificate shall be issued until the former certificate for a like number of Units has been surrendered and canceled.

6.3           Members.  Each Person who desires to become a Member must complete and execute a signature page to this Agreement in the form of Exhibit “B” attached hereto and such other documents as may be required by the Governors.  Membership Interests and Units of the Members shall be set forth on Exhibit “A” to this Agreement, as amended from time to time.

6.4           Additional Members.  No Person shall become a Member without the approval of the Governors.  The Governors may refuse to admit any Person as a Member in their sole discretion.  Any such admission must comply with the requirements described in this Agreement and will be effective only after such Person has executed and delivered to the Company such documentation as determined by the Governors to be necessary and appropriate to effect such admission.

6.5           Members’ Voting Rights.  Each Member shall be entitled to One (1) vote for each Unit registered in the name of such Member (as shown in the Unit Holder Register) as to any matter for which such Member is entitled to vote under this Agreement or the Act.  Members do not have cumulative voting rights as to any matter.  Except as otherwise expressly provided for in this Agreement, Members shall not have any right or power to take part in the management or control of the Company or its business and affairs or to act for or bind the Company in any way.

6.6           Member Meetings.  Beginning with the fiscal year ending in calendar year 2006, or sooner as determined by the Governors, and each Fiscal Year thereafter, an annual meeting of the Members shall be held within One Hundred Eighty (180) days of the close of the Company’s Fiscal Year, at a time and date determined by the Governors.  Special meetings of the Members, for any purpose(s) described in the meeting notice, may be called by the Governors, and shall be called by the Governors at the request of not  

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less than ten percent (10%) of all Members.  A call by the Members for a special meeting shall be in writing, signed by the persons calling for the same, addressed and delivered to the Secretary, and shall state the time and purpose(s) of such meeting.

6.7           Place of Meeting.  The Governors, or in the absence of action by the Governors, the President, may designate any place within or without of the State of Minnesota as the place for any meeting of the Members, unless by written consents, all Members entitled to vote at the meeting designate a different place for the holding of such meeting.  If no designation is made by the Governors, the President or by unanimous action of the Members, the place of meetings shall be at the principal office of the Company in the State of Minnesota.

6.8           Conduct of Meetings.  All meetings of the Members shall be presided over by the President.  All meetings of the Members shall be conducted with such rules and procedures as may be determined by the President in his or her discretion.  Subject to the discretion of the Governors, the Members may participate in any Member meeting by means of telephone conference or similar means of communication by which all participants in the meeting can hear and be heard by all other participants.

6.9           Notice.  Written notice stating the place and time of any annual or special Member meeting shall be delivered or mailed not less than Fifteen (15) nor more than Sixty (60) days prior to the meeting date, to each Member of record entitled to vote at such meeting as of the close of business on the day before said notice is delivered or mailed.  Notice of a special meeting of the Members shall be provided to the Members within Ten (10) days of the Secretary’s receipt of a call by the Members for a specical meeting in accordance with Section 6.6.  Such notices shall be deemed to be effective upon the earlier of:  (i) deposit postage-prepaid in the U.S. mail, addressed to the Member at the Member’s address as it appears on the Unit Holder Register, or such other address as may have been provided in writing to the Company by a Member; (ii) the date shown on the return receipt if sent by registered or certified mail, return receipt requested; or (iii) actual receipt.

6.10         Contents of Notice.  The notice of each Member meeting shall include a description of the purpose(s) for which the meeting is called.  If a purpose of any Member meeting is to consider:  (i) a proposed amendment to or restatement of the Articles requiring Member approval; (ii) a plan of merger or share exchange; (iii) the sale, lease, exchange or other disposition of all, or substantially all of the Company’s Property; (iv) the dissolution of the Company; or (v) removal of a Governor, then the notice must so state and must be accompanied, as applicable, by a copy or summary of the (1) amendment(s) to the Articles, (2) plan of merger or share exchange, (3) documents relating to the transaction for the disposition of all the Company’s property, and/or (4) plan and Articles of Dissolution.

6.11         Adjourned Meetings.  If any Member meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place, if the new date, time and place is announced at the meeting before adjournment; provided that, if a new record date for the adjourned meeting is or must be fixed, then notice must be given to new Members as of the new record date.

6.12         Waiver of Notice.  Whenever any notice is required to be given to any Member under the Act, the Articles or this Agreement, a waiver in writing, signed by such Member shall be deemed equivalent to the giving of such notice.  Furthermore, a Member’s attendance at a meeting waives any objection that the Member might otherwise raise based on lack of notice or defective notice, unless the Member:  (i) objects at the outset of the meeting; or (ii) in the case of an objection claiming that consideration of a particular matter is not within the purposes described in the meeting notice, objects at the time such matter is presented, and in either case, thereafter does not participate in the meeting.

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6.13         Fixing of Record Date.  For purposes of determining the Members entitled to notice of, or to vote at, any Member meeting or any adjournment thereof, or for purposes of determining the Members entitled to receive payment of any distribution, or in order to make a determination of the Members for any other purpose, the Governors may provide that the Unit Transfer books shall be closed for a stated period, not to exceed Sixty (60) days.  If the Unit Transfer books shall be closed for such purpose, such books shall be closed for at least Ten (10) days immediately preceding such meeting.  In lieu of closing the Unit Transfer books, the Governors may fix in advance a date as the record date for any such determination of Members, such date in any case to be not more than Sixty (60) days, and in case of a meeting of Members not less than Ten (10) days, prior to the date on which the particular action requiring such determination is to be taken.  If the Unit Transfer books are not closed and no record date is fixed for the determination, the date on which notice of the meeting is mailed or the date on which the resolution of the Governors declaring a dividend is adopted, as the case may be, shall be the record date for such determination.  When a determination of Members entitled to vote at any meeting of the Members has been made as provided in this Section, such determination shall apply to any adjournment thereof, unless the Governors fix a new record date, which it must do if the meeting is adjourned to a date more than One Hundred Twenty (120) days after the date fixed for the original meeting.

6.14         Quorum and Proxies.  The presence (in person or by proxy or mail ballot) of Members representing at least fifty percent (50%) of the Membership Voting Interests is required for the transaction of business at a meeting of the Members.  Voting by proxy or by mail ballot shall be permitted on any matter if authorized by the Governors.

6.15         Voting; Action by Members.  If a quorum is present, the affirmative vote of a majority of the Membership Voting Interests represented at the meeting and entitled to vote on the matter (including units represented in person, by proxy or by mail ballot when authorized by the Governors) shall constitute the act of the Members, unless the vote of a greater or lesser proportion or numbers is otherwise required by this Agreement.

6.16         Termination of Membership.  If for any reason the membership of a Member is terminated as provided in this Agreement or the Act, the Member whose membership has terminated loses all Membership Voting Interests and shall be considered merely an unadmitted Assignee of the Membership Financial Rights owned before the termination of membership, having only the rights provided for unadmitted Assignees in Section 9.7 hereof.

6.17         Continuation of the Company.  The Company shall not be dissolved upon the occurrence of any event that is deemed to terminate the continued membership of a Member, but rather the Company shall continue without dissolution, and its affairs shall not be required to be wound up.

6.18         No Member Right of Redemption or Return of Capital.  Except as otherwise provided in this Agreement or the Act, no Member or transferee of any Member shall have any right to demand or receive a return of his/her/its Capital Contribution or to require the redemption of his/her/its Units.

6.19         Waiver of Dissenters Rights.  To the fullest extent permitted by the Act, each Member hereby disclaims, waives and agrees not to assert:  (i) any dissenters’ or similar rights under the Act; (ii) any right to require partition or appraisal of the Company or of any of its assets, or to cause the sale of any Company Property; or (iii) any right to maintain any action for partition or to compel any sale with respect to such Member’s Units, or with respect to any Company Property.

6.20         Loans.  Any Member or Affiliate may, with the consent of the Governors, lend or advance money to the Company, in which case the amount of any such loan or advance shall not be treated as a  

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contribution to the capital of the Company but rather shall be a debt due from the Company, repayable out of the Company’s cash, and shall bear interest at a rate not in excess of the prime rate established, from time to time, by any major bank selected by the Governors for loans to its most creditworthy commercial borrowers, plus Four Percent (4%) per annum.  If a Governor or an Affiliate of a Governor is the lending Member, the rate of interest and the terms and conditions of such loan shall be no less favorable to the Company than if the lender had been an independent third party.  None of the Members or their Affiliates shall be obligated to make any loan or advance to the Company.

ARTICLE VII.  ACCOUNTING, BOOKS AND RECORDS

7.1           Accounting, Books and Records.  The books and records of the Company shall be kept, and the financial position and the results of its operations recorded, in accordance with GAAP.  The books and records shall reflect all Company transactions and shall be appropriate and adequate for the Company’s business.  The Company shall maintain at its principal place of business:  (i) a current list of the full name and last known address of each Member and Assignee set forth in alphabetical order, together with the Capital Contributions, Capital Account and Units of each Member and Assignee, such list updated at least quarterly; (ii) the full name and  address of each Governor; (iii) a copy of the Articles and any and all amendments thereto, together with executed copies of any powers of attorney pursuant to which the Articles or any amendments thereto have been executed; (iv) copies of the Company’s federal, state and local income tax and information returns and reports, if any, for the Six (6) most recent taxable years; (v) a copy of this Agreement and any and all amendments hereto, together with executed copies of any powers of attorney pursuant to which this Agreement or any amendments hereto have been executed; and (vi) copies of the financial statements of the Company, if any, for the Six (6) most recent Fiscal Years.  The Company shall use the accrual method of accounting in the preparation of its financial reports and for tax purposes and shall keep its books and records accordingly.

7.2           Delivery to Members and Inspection.  Any Member or such Member’s designated representative shall have reasonable access during normal business hours to the information and documents kept by the Company pursuant to Section 7.1 of this Agreement.  Upon the request of any Member for purposes reasonably related to such Member’s interest as a Member, the Governors shall promptly deliver to the requesting Member, at the expense of the requesting Member, a copy of the information required to be maintained under Section 7.1 of this Agreement.  Each Member has the right, upon reasonable request for purposes reasonably related to such Member’s interest as a Member and for proper purposes, to:  (i) inspect and copy during normal business hours any of the Company records described in Section 7.1 of this Agreement; and (ii) obtain from the Governors, promptly after their becoming available, copies of the Company’s federal, state and local income tax and information returns for each Fiscal Year.  Each Assignee shall have the right to information regarding the Company only to the extent required by the Act.  Upon the request of a copy of a current Member list, such list shall be mailed to any Member within ten (10) days of the request, such copy to be printed in alphabetical order, on white paper and in a readily readable type size, with a reasonable charge for copy work.  The purposes for which a Member list may be requested include, without limitation, matters relating to Members’ voting rights under the Agreement and the exercise of Members’ rights under federal proxy laws.  Any Person who neglects or refuses to exhibit, produce, or mail a copy of the Member list as requested shall be liable for costs, including attorney’s fees, incurred by the Member for compelling the production of the Member list, and for actual damages suffered by any Member by reason of such refusal or neglect.  It shall be a defense that the actual purpose and reason for the request for inspection is for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a Member relative to the affairs of the Company.

7.3           Reports.  The Treasurer of the Company shall be responsible for causing the preparation of financial reports of the Company and the coordination of financial matters of the Company with the  

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Company’s accountants.  The Company shall cause to be delivered to each Member the financial statements listed below, prepared, in each case (other than with respect to Member’s Capital Accounts, which shall be prepared in accordance with this Agreement) in accordance with GAAP consistently applied.  Delivery of the financial statements shall occur as soon as practicable following the end of each Fiscal Year (and in any event not later than 120 days after the end of such Fiscal Year), and at such time as distributions are made to the Unit Holders pursuant to Article X of this Agreement following the occurrence of a Dissolution Event.  The financial statements shall consist of a balance sheet of the Company as of the end of such Fiscal Year and the related statements of operations, Unit Holders’ Capital Accounts and changes therein, and cash flows for such Fiscal Year, together with appropriate notes to such financial statements and supporting schedules, all of which shall be audited and certified by the Company’s accountants, and in each case setting forth in comparative form the corresponding figures for the immediately preceding Fiscal Year end (in the case of the balance sheet) and the Two (2) immediately preceding Fiscal Years (in the case of the statements).  The report shall also contain (i) a report of the activities of the Company during the period covered by the report; (ii) a table comparing previously provided forecasts with actual results during the period covered by the report; (iii)  distributions to participants for the period, separately identifying distributions from cash flow from operations during the period, cash flow from operations during a prior period which have been held as reserves, proceeds from disposition of Company assets and reserves from the gross proceeds of the offering originally obtained from the Members.  The Company will also provide a report within sixty (60) days of the end of the first six months of each fiscal year containing an unaudited balance sheet, an unaudited statement of income for the period then ended, an unaudited statement of Unit Holders’ Capital Accounts and changes therein, an unaudited statement of cash flows for the period then ended and other pertinent material regarding the Company and its activities during the period covered by the report.  The Company shall provide, within seventy-five (75) days after the end of each Fiscal Year, all information necessary for the preparation of the Members’ federal income tax returns.

7.4           Tax Matters.  The Governors shall, without any further consent of the Unit Holders being required (except as specifically required herein), make any and all elections for federal, state, local and foreign tax purposes as the Governors shall determine appropriate and shall have the right and authority to represent the Company and the Unit Holders before taxing authorities or courts of competent jurisdiction in tax matters affecting the Company or the Unit Holders in their capacities as Unit Holders, and to file any tax returns and execute any agreements or other documents relating to or affecting such tax matters, including agreements or other documents that bind the Unit Holders with respect to such tax matters or otherwise affect the rights of the Company and the Unit Holders.  The Governors shall designate a Person to be specifically authorized to act as the “Tax Matters Member” under the Code and in any similar capacity under state or local law; provided, however, that the Governors shall have the authority to designate, remove and replace the Tax Matters Member who shall act as the tax matters partner within the meaning of and pursuant to Regulations Sections 301.6231(a)(7)-1 and -2 or any similar provision under state or local law.  Necessary tax information shall be delivered to each Unit Holder as soon as practicable after the end of each Fiscal Year, but not later than Three (3) months after the end of each Fiscal Year.

ARTICLE VIII.  AMENDMENTS

8.1           Amendments.  Amendments to this Agreement may be proposed by the Governors or any Member.  Following any such proposal, the Governors shall submit to the Members a verbatim statement of any proposed amendment, and the Governors shall include therewith a recommendation as to the proposed amendment.  The Governors shall seek the written vote of the Members on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate.  A proposed amendment shall be adopted and be effective as an amendment to this Agreement only if approved by the affirmative vote of a majority of the Membership Voting Interests represented at a Member meeting at which a quorum of the Members is present.  Notwithstanding any  

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provision of this Section 8.1 to the contrary, this Agreement shall not be amended without the consent of each Member adversely affected if such amendment would modify the limited liability of a Member, or alter the Membership Financial Rights of a Member.

ARTICLE IX.  TRANSFERS

9.1           Restrictions on Transfers.  Except as otherwise permitted by this Agreement, no Member shall Transfer all or any portion of such Member’s Units.  In the event that any Member pledges or otherwise encumbers all or any part of such Member’s Units as security for the payment of a Debt, any such pledge or hypothecation shall be made pursuant to a pledge or hypothecation agreement that requires the pledgee or secured party to be bound by all of the terms and conditions of this Agreement and all other agreements governing the rights and obligations of Unit Holders in the event such pledgee or secured party becomes a Unit Holder hereunder.

9.2           Permitted Transfers.  Subject to the conditions and restrictions set forth in this Article IX, a Unit Holder may:  (a) at any time Transfer all or any portion of such Unit Holder’s Units (i) to the transferor’s administrator or trustee to whom such Units are Transferred involuntarily by operation of law, or (ii) without consideration to or in trust for descendants of a Member; or (b) at any time following the date on which substantial operations of the Facilities commence, Transfer all or any portion of such Unit Holder’s Units (i) to any Person approved by the Governors, in writing, or (ii) to any Affiliate or Related Party of such Unit Holder.  Any such Transfer set forth in this Section 9.2 and meeting the conditions set forth in Section 9.3 below is referred to herein as a “Permitted Transfer.”

9.3           Conditions Precedent to Transfers.  In addition to the conditions set forth above, no Transfer of Units shall be effective unless and until all of the following conditions have been satisfied:

(a)           Except in the case of a Transfer involuntarily by operation of law, the transferor and transferee shall execute and deliver to the Company such documents and instruments of Transfer as may be necessary or appropriate in the opinion of counsel to the Company to affect such Transfer.  In the case of a Transfer of Units involuntarily by operation of law, the Transfer shall be confirmed by presentation to the Company of legal evidence of such Transfer, in form and substance satisfactory to counsel to the Company.  In all cases, the transferor and/or transferee shall pay all reasonable costs and expenses connected with the Transfer and the admission of the Transferee as a Member and incurred as a result of such Transfer, including but not limited to, legal fees and costs.

(b)           The transferor and transferee shall furnish the Company with the transferee’s taxpayer identification number, sufficient information to determine the transferee’s initial tax basis in the Units Transferred, and any other information reasonably necessary to permit the Company to file all required federal and state tax returns and other legally required information statements or returns.  The Company shall not be required to make any distribution otherwise provided for in this Agreement with respect to any Transferred Units until it has received such information.

(c)           Except in the case of a Transfer of any Units involuntarily by operation of law, either (i) such Units shall be registered under the Securities Act, and any applicable state securities laws, or (ii) the transferor shall provide an opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the Governors, to the effect that such Transfer is exempt from all applicable registration requirements and that such Transfer will not violate any applicable laws regulating the Transfer of securities.

(d)           Except in the case of a Transfer of Units involuntarily by operation of law, the transferor shall provide an opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the  

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Governors, to the effect that such Transfer will not cause the Company to be deemed to be an “investment company” under the Investment Company Act of 1940.

(e)           Unless otherwise approved by the Governors and Members representing in the aggregate a 75% majority of the Membership Voting Interests, no Transfer of Units shall be made except upon terms which would not, in the opinion of counsel chosen by the Governors, result in the termination of the Company within the meaning of Section 708 of the Code or cause the application of the rules of Sections 168(g)(1)(B) and 168(h) of the Code or similar rules to apply to the Company.  If the immediate Transfer of such Unit would, in the opinion of such counsel, cause a termination within the meaning of Section 708 of the Code, then if, in the opinion of such counsel, the following action would not precipitate such termination, the transferor Member shall be entitled to (or required, as the case may be):  (i) immediately Transfer only that portion of its Units as may, in the opinion of such counsel, be Transferred without causing such a termination; and (ii) enter into an agreement to Transfer the remainder of its Units, in one or more Transfers, at the earliest date or dates on which such Transfer or Transfers may be effected without causing such termination.  The purchase price for the Units shall be allocated between the immediate Transfer and the deferred Transfer or Transfers pro rata on the basis of the percentage of the aggregate Units being Transferred, each portion to be payable when the respective Transfer is consummated, unless otherwise agreed by the parties to the Transfer.  In the case of a Transfer by one Member to another Member, the deferred purchase price shall be deposited in an interest-bearing escrow account unless another method of securing the payment thereof is agreed upon by the transferor Member and the transferee Member(s).

(f)            No notice or request initiating the procedures contemplated by this Section 9.3 may be given by any Member after a Dissolution Event has occurred.  No Member may sell all or any portion of its Units after a Dissolution Event has occurred.

(g)           No Person shall Transfer any Unit if, in the determination of the Governors, such Transfer would cause the Company to be treated as a “publicly traded partnership” within the meaning of Section 7704(b) of the Code.

The Governors shall have the authority to waive any legal opinion or other condition required in this Section 9.3 other than the Member approval requirement set forth in Section 9.3(e).

9.4           Prohibited Transfers.  Any purported Transfer of Units that is not a Permitted Transfer shall be null and void and of no force or effect whatsoever; provided that, if the Company is required to recognize a Transfer that is not a Permitted Transfer (or if the Governors, in their sole discretion, elect to recognize a Transfer that is not a Permitted Transfer):  (i) the transferee’s rights shall be strictly limited to the transferor’s Membership Financial Rights associated with such Units; and (ii) the Company may offset against such Membership Financial Rights (without limiting any other legal or equitable rights of the Company) any debts, obligations or liabilities for damages that the transferor or transferee may have to the Company.  In the case of a Transfer or attempted Transfer of Units that is not a Permitted Transfer, the parties engaging or attempting to engage in such Transfer shall indemnify and hold harmless the Company and the other Members from all cost, liability and damage that such parties may incur (including, without limitation, incremental tax liabilities, attorneys’ fees and expenses) as a result thereof.

9.5           No Dissolution or Termination.  The Transfer of Units pursuant to the terms of this Article IX shall not dissolve or terminate the Company.  No Member shall have the right to have the Company dissolved or to have such Member’s Capital Contribution returned except as provided in this Agreement.

9.6           Prohibition of Assignment.  Notwithstanding the foregoing provisions of this Article IX, no Transfer of Units may be made if the Units sought to be sold, exchanged or Transferred, when added to  

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the total of all other Units sold, exchanged or Transferred within the period of Twelve (12) consecutive months prior thereto, would result in the termination of the Company under Section 708 of the Code.  In the event of a Transfer of any Units, the Members will determine, in their sole discretion, whether or not the Company will elect pursuant to Section 754 of the Code (or corresponding provisions of future law) to adjust the basis of the assets of the Company.

9.7           Rights of Unadmitted Assignees.  A Person who acquires Units but who is not admitted as a Substitute Member pursuant to Section 9.8 of this Agreement shall be entitled only to the Membership Financial Rights with respect to such Units in accordance with this Agreement, and shall not be entitled to the Membership Voting Interests with respect to such Units.  In addition, such Person shall have no right to any information or accounting of the affairs of the Company, shall not be entitled to inspect the books or records of the Company, and shall not have any of the other rights of a Member under the Act or this Agreement.

9.8           Admission of Substitute Members.  As to Permitted Transfers, a transferee of Units shall be admitted as a substitute Member provided that such transferee has complied with the following provisions:

(a)           The transferee shall, by written instrument in form and substance reasonably satisfactory to the Governors, agree to be bound by all of the terms and provisions of this Agreement, and assume the obligations of the transferor Member hereunder with respect to the Transferred Units.

(b)           The transferee shall pay for or reimburse the Company for all reasonable legal, filing and publication costs incurred in connection with the admission of the transferee as a Member; and

(c)           Except in the case of a Transfer involuntarily by operation of law, if required by the Governors, the transferee shall deliver to the Company evidence of his/her/its authority to become a Member.

(d)           The transferee and transferor shall each execute and deliver such other instruments as the Governors reasonably deem necessary or appropriate in connection with such Transfer.

9.9           Representations Regarding Transfers.  Each Member hereby covenants and agrees with the Company for the benefit of the Company and all Members, that:  (i) it is not currently making a market in Units and will not in the future make a market in Units; (ii) it will not Transfer its Units on an established securities market, a secondary market (or the substantial equivalent thereof) within the meaning of Code Section 7704(b) (and any Regulations, proposed Regulations, revenue rulings, or other official pronouncements of the IRS or the Treasury Department that may be promulgated or published thereunder); and (iii) in the event such Regulations, revenue rulings, or other pronouncements treat any or all arrangements which facilitate the selling of Units (commonly referred to as “matching services”) as being a secondary market or the substantial equivalent thereof, no Member will Transfer any Units through a matching service that is not approved in advance by the Company.  Each Member further agrees that it will not Transfer any Units to any Person unless such Person first agrees to be bound by this Article IX.

Each Member hereby represents and warrants to the Company and the Members that such Member’s acquisition of Units hereunder is made as principal for such Member’s own account and not for  

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resale or distribution of such Units.  Each Member further hereby agrees that the following legend, as the same may be amended by the Governors in their sole discretion, may be placed upon any counterpart of this Agreement, the Articles, or any other document or instrument evidencing ownership of Units:

THE TRANSFERABILITY OF THE MEMBERSHIP UNITS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED.  SUCH UNITS MAY NOT BE SOLD, ASSIGNED, OR TRANSFERRED, AND NO ASSIGNEE, VENDEE, TRANS­FEREE OR ENDORSEE THEREOF WILL BE RECOGNIZED AS HAVING ACQUIRED ANY SUCH UNITS FOR ANY PURPOSES, UNLESS AND TO THE EXTENT SUCH SALE, TRANSFER, HYPOTHECATION, OR ASSIGNMENT IS PERMITTED BY, AND IS COMPLETED IN STRICT ACCORDANCE WITH, APPLICABLE FEDERAL AND STATE LAW AND THE TERMS AND CONDITIONS SET FORTH IN THE MEMBER CONTROL AGREEMENT OF THE COMPANY, AS AMENDED FROM TIME TO TIME.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS.

9.10         Distributions And Allocations In Respect of Transferred Units.  If any Units are Transferred during any Fiscal Year in compliance with the provisions of this Article IX, Profits, Losses, each item thereof, and all other items attributable to the Transferred Units for such Fiscal Year shall be divided and allocated between the transferor and the transferee by taking into account their varying interests during the Fiscal Year in accordance with Code Section 706(d), using any conventions permitted by law and selected by the Governors. All distributions on or before the date of such Transfer shall be made to the transferor, and all distributions thereafter shall be made to the transferee.  Solely for purposes of making such allocations and distributions, the Company shall recognize such Transfer to be effective not later than the first day of the month following the month in which all documents to effectuate the Transfer have been executed and delivered to the Company, provided that, if the Company does not receive a notice stating the date such Units were Transferred and such other information as the Governors may reasonably require within Thirty (30) days after the end of the Fiscal Year during which the Transfer occurs, then all such items shall be allocated, and all distributions shall be made, to the person or entity who, according to the books and records of the Company, was the owner of the Units on the last day of such Fiscal Year.  Neither the Company nor any Member shall incur any liability for making allocations and distributions in accordance with the provisions of this Section 9.10, whether or not the Governors or the Company has knowledge of any Transfer of any Units.

9.11         Additional Members.  Additional Members may be admitted from time to time upon the approval of the Governors, and in accordance with such terms and conditions, as the Governors may determine.  All Members acknowledge that the admission of additional Members may result in a dilution of a Member’s Membership Interest.  Prior to admission as a Member, a prospective Member shall agree in writing to be bound by this Agreement shall and execute and deliver to the Company an Addendum to this Agreement in the form of Exhibit “B” attached hereto.  Upon the execution of such Addendum, such additional Member shall be deemed to be a party to this Agreement as if such additional Member had executed this Agreement on the original date hereof, and shall be bound by all of the provisions set forth herein.

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ARTICLE X.  DISSOLUTION AND WINDING UP

10.1         Dissolution.  The Company shall dissolve and shall commence winding up and liquidating upon the first to occur of any of the following (each a “Dissolution Event”):  (i) the affirmative vote of a 75% majority in interest of the Membership Voting Interests to dissolve, wind up and liquidate the Company; or (ii) the entry of a decree of judicial dissolution pursuant to the Act.  The Members hereby agree that, notwithstanding any provision of the Act, the Company shall not dissolve prior to the occurrence of a Dissolution Event.

10.2         Winding Up.  Upon the occurrence of a Dissolution Event, the Company shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors and Members; and no Member shall take any action that is inconsistent with, or not necessary to or appropriate for, winding up of the Company’s business and affairs.  Notwithstanding any provision in this Agreement to the contrary, the Members acknowledge and agree that all covenants and obligations set forth this Agreement shall continue to be fully binding upon the Members until such time as the Property has been distributed pursuant to this Section 10.2 and Articles of Dissolution have been filed pursuant to the Act.  The Liquidator shall be responsible for overseeing the prompt and orderly winding up and dissolution of the Company.  The Liquidator shall take full account of the Company’s liabilities and Property and shall cause the Property or the proceeds from the sale thereof (as determined pursuant to Section 10.8 of this Agreement), to the extent sufficient therefore, to be applied and distributed, to the maximum extent permitted by law, in the following order:  (i) first, to creditors (including Members and Governors who are creditors, to the extent otherwise permitted by law) in satisfaction of all of the Company’s Debts and other liabilities (whether by payment or the making of reasonable provision for payment thereof), other than liabilities for which reasonable provision for payment has been made; and (ii) second, except as provided in this Agreement, to Members in satisfaction of liabilities for distributions pursuant to the Act; (iii) third, the balance, if any, to the Unit Holders in accordance with the positive balance in their Capital Accounts calculated after making the required adjustment set forth in clause (ii)(C) of the definition of Gross Asset Value in Section 1.10 of this Agreement, after giving effect to all contributions, distributions and allocations for all periods.

10.3         Compliance with Certain Requirements of Regulations; Deficit Capital Accounts.  In the event the Company is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article X to the Unit Holders who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2).  If any Unit Holder has a deficit balance in such Member’s Capital Account (after giving effect to all contributions, distributions and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs), such Unit Holder shall have no obligation to make any contribution to the capital of the Company with respect to such deficit, and such deficit shall not be considered a debt owed to the Company or to any other Person for any purpose whatsoever.  In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the Unit Holders pursuant to this Article X may be:  (i) distributed to a trust established for the benefit of the Unit Holders for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company, in which case the assets of any such trust shall be distributed to the Unit Holders from time to time, in the reasonable discretion of the Liquidator, in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Unit Holders pursuant to Section 10.2 of this Agreement; or (b) withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Company, provided that such withheld amounts shall be distributed to the Unit Holders as soon as practicable.

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10.4         Deemed Distribution and Recontribution.  Notwithstanding any other provision of this Article X, in the event the Company is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Dissolution Event has occurred, the Property shall not be liquidated, the Company’s Debts and other liabilities shall not be paid or discharged, and the Company’s affairs shall not be wound up.

10.5         Rights of Unit Holders.  Except as otherwise provided in this Agreement, each Unit Holder shall look solely to the Property of the Company for the return of such Unit Holder’s Capital Contribution and shall have no right or power to demand or receive Property other than cash from the Company.  If the assets of the Company remaining after payment or discharge of the debts or liabilities of the Company are insufficient to return such Capital Contribution, the Unit Holders shall have no recourse against the Company or any other Unit Holder or Governors.

10.6         Allocations During Period of Liquidation.  During the period commencing on the first day of the Fiscal Year during which a Dissolution Event occurs and ending on the date on which all of the assets of the Company have been distributed to the Unit Holders pursuant to Section 10.2 of this Agreement (the “Liquidation Period”), the Unit Holders shall continue to share Profits, Losses, gain, loss and other items of Company income, gain, loss or deduction in the manner provided in Article III of this Agreement.

10.7         Character of Liquidating Distributions.  All payments made in liquidation of the interest of a Unit Holder shall be made in exchange for the interest of such Unit Holder in Property pursuant to Section 736(b)(1) of the Code, including the interest of such Unit Holder in Company goodwill.

10.8         The Liquidator.  The “Liquidator” shall mean a Person appointed by the Governors to oversee the liquidation of the Company.  Upon the consent of a majority in interest of the Members, the Liquidator may be the Governors.  The Company is authorized to pay a reasonable fee to the Liquidator for its services performed pursuant to this Article X and to reimburse the Liquidator for its reasonable costs and expenses incurred in performing those services.  The Company shall indemnify, save harmless, and pay all judgments and claims against such Liquidator and any officers, Governors, agents and employees of the Liquidator relating to any liability or damage incurred by reason of any act performed or omitted to be performed by the Liquidator, or any officers, Governors, agents or employees of the Liquidator in connection with the liquidation of the Company, including reasonable attorneys’ fees incurred in connection with the defense of any action based on any such act or omission, which attorneys’ fees may be paid as incurred, except to the extent such liability or damage is caused by fraud, intentional misconduct, or a knowing violation of the laws which was material to the cause of action.

10.9         Forms of Liquidating Distributions.  For purposes of making distributions required by Section 10.2 of this Agreement, the Liquidator may determine whether to distribute all or any portion of the Property in-kind or to sell all or any portion of the Property and distribute the proceeds therefrom.

ARTICLE XI.  MISCELLANEOUS

11.1         Notices.  Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be deemed to have been delivered, given, and received for all purposes (i) if delivered personally to the Person or to an officer of the Person to whom the same is directed, or (ii) when the same is actually received, if sent by regular or certified mail, postage prepaid, or by facsimile, if such facsimile is followed by a hard copy of the facsimile communication sent promptly thereafter by regular or certified mail, postage prepaid, addressed as follows, or to such other address as such Person may from time to time specify by notice to the Company:  (a) If to the Company, to the address determined pursuant to Section 1.4 of this Agreement; (b) If to the Governors, to the address set forth on record with the Company; (c) If to a Unit Holder, either to the  

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address set forth in the Unit Holder Register or to such other address that has been provided in writing to the Company.

11.2         Binding Effect.  Except as otherwise provided in this Agreement, every covenant, term and provision of this Agreement shall be binding upon, and shall inure to the benefit of, the Company and the Members, and their respective heirs, representatives, successors, transferees, and assigns.

11.3         Construction.  Every covenant, term, and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against the Company or any Member.

11.4         Headings.  Article, Section and other headings contained in this Agreement are for reference purposes only and are not intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision of this Agreement.

11.5         Severability.  Except as otherwise provided in the succeeding sentence, every provision of this Agreement is intended to be severable, and if any term or provision of this Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of this Agreement.  The preceding sentence of this Section 11.5 shall be of no force or effect if the consequence of enforcing the remainder of this Agreement without such illegal or invalid term or provision would be to cause any Member to lose the material benefit of its economic bargain.

11.6         Incorporation By Reference.  Every recital, exhibit, schedule and appendix attached to this Agreement and referred to herein is hereby incorporated into this Agreement by reference unless this Agreement expressly provides otherwise.

11.7         Variation of Terms.  All terms and variations thereof used in this Agreement shall be deemed to refer to masculine, feminine, or neuter, singular or plural, as the context may require.

11.8         Governing Law.  The laws of the State of Minnesota shall govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties arising hereunder.

11.9         Waiver of Jury Trial.  Each of the Members irrevocably waives, to the fullest extent permitted by law, all rights to trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement or the business and affairs of the Company.

11.10       Counterpart Execution.  This Agreement may be executed in any number of counterparts with the same effect as if all of the Members had signed the same document.  All counterparts shall be construed together and shall constitute one agreement.

11.11       Specific Performance.  Each Member acknowledges and agrees that the Company and the other Members would be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms, and that monetary damages would not provide an adequate remedy in such event.  Accordingly, it is agreed that, in addition to any other remedy to which the Company and the non-breaching Members may be entitled hereunder, at law or in equity, the Company and the non-breaching Members  shall  be  entitled  to injunctive  relief  to prevent  breaches  of  the provisions of  this Agreement and to specifically to enforce the terms and provisions of this Agreement.

11.12       No Third Party Rights.  None of the provisions contained in this Agreement shall be deemed to be for the benefit of or enforceable by any third parties, including without limitation, any creditors of any Member or the Company.

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DULY ADOPTED by the Company’s Board of Governors effective as of                           .

HIGHWATER ETHANOL, LLC
By:
Its:	President
Attest:
Its:	Secretary

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EXHIBIT “A”

Initial Membership List

Name and Address of Initial Members	Units
Brian Kletscher	12
Jason Fink	6
George Goblish	24
Ron Joregenson	24
Todd Reif	12
John Schueller	9
Mike Landuyt	6
Russ Derickson	9
Warren Pankonin	15
David Moldan	9
Tim VanDerWal	3
Monica Anderson	18
Gilbert Schmitz	3
TOTAL:	150

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EXHIBIT “B”

MEMBER SIGNATURE PAGE

ADDENDUM TO THE
AMENDED AND RESTATED MEMBER CONTROL AGREEMENT  
OF HIGHWATER ETHANOL, LLC

The undersigned does hereby warrant, represent, covenant and agree that:  (i) the undersigned, as a condition to becoming a Member in Highwater Ethanol, LLC, has received a copy of the Amended and Restated Member Control Agreement dated                 , and, if applicable, all amendments and modifications thereto; (ii) the undersigned shall be subject to and comply with all terms and conditions of such Amended and Restated Member Control Agreement in all respects, as if the undersigned had executed said Amended and Restated Member Control Agreement on the original date thereof; and (iii) the undersigned is and shall be bound by all of the provisions of said Amended and Restated Member Control Agreement from and after the date of execution of this Addendum.

Individuals:	Entities:
Name of Individual Member (Please Print)	Name of Entity (Please Print)
Signature of Individual	Print Name and Title of Officer
Name of Joint Individual Member (Please Print)	Signature of Officer
Signature of Joint Individual Member

Agreed to and Accepted on Behalf of the

Company and its Members:

HIGHWATER ETHANOL, LLC

By:

Its:

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APPENDIX C

HIGHWATER ETHANOL, LLC

SUBSCRIPTION AGREEMENT

Limited Liability Company Membership Units

$10,000 per Unit

Minimum Investment of 1 Unit ($10,000)
1 Unit Increments Thereafter ($10,000)

The undersigned subscriber (“Subscriber”), desiring to become a member Highwater Ethanol, LLC (“Highwater Ethanol”), a Minnesota limited liability company, with its principal place of business at 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152 hereby subscribes for the purchase of membership units of Highwater Ethanol, and agrees to pay the related purchase price, identified below.

A.SUBSCRIBER INFORMATION.  Please print your individual or entity name and address.  If we accept your subscription, the units will be titled in the name of the subscriber as it appears below.  Joint subscribers should provide both names.  Your name and address will be recorded exactly as printed below.  Please provide your home, business and/or mobile telephone number.  If desired, please also provide your e-mail address.

1.	Subscriber’s Printed Name
2.	Title, if applicable
3.	Subscriber’s Address
	Street
	City, State, Zip Code
4.	E-mail Address
5.	Home Telephone Number
6.	Business Telephone Number
7.	Mobile Telephone Number

B.NUMBER OF UNITS PURCHASED. You must purchase at least 1 unit.  The minimum number of units to be sold is 4,500 and the maximum number of units to be sold in the offering is 6,000.

                                 unit(s)

C.PURCHASE PRICE.  Indicate the dollar amount of your investment (minimum investment is $10,000).

1. Total Purchase Price ($10,000 per unit multiplied by number of units)	=	2. 1st Installment (10% of Total Purchase Price)	+	3. 2nd Installment (90% of Total Purchase Price)
	=		+

D.GENERAL INSTRUCTIONS FOR SUBSCRIBERS:

You should read the Prospectus dated [DATE OF EFFECTIVENESS] (the “Prospectus”) in its entirety including the exhibits for a complete explanation of an investment in Highwater Ethanol.

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INSTRUCTIONS IF YOU ARE SUBSCRIBING PRIOR TO THE COMPANY’S RELEASE OF FUNDS FROM ESCROW:  If you are subscribing prior to the Company’s release of funds from escrow, you must follow the instructions contained in paragraphs 1 through 5 below:

1.Complete all information required in this Subscription Agreement, and date and sign the Subscription Agreement on page 6 and the Member Signature Page to our Member Control Agreement attached to this Subscription Agreement as Exhibit A.

2.Immediately provide a personal (or business) check for the first installment of ten percent (10%) of your investment amount.  The check should be made payable to “Minnwest Bank, Redwood Falls, MN, escrow agent for Highwater Ethanol, LLC.”  You will determine this amount in box C.2 on page 1 of this Subscription Agreement.

3.Execute the Promissory Note and Security Agreement on page 7 of this Subscription Agreement evidencing your commitment to pay the remaining ninety percent (90%) due for the units.  The Promissory Note and Security Agreement is attached to this Subscription Agreement and grants Highwater Ethanol, LLC a security interest in your units.

4. Deliver the original executed documents referenced in paragraphs 1 and 3 of these instructions, together with a personal or business check as described in Paragraph 2 of these instructions to:

Highwater Ethanol, LLC

205 S. Main Street, PO Box 96

Lamberton, Minnesota 56152

5.Within 20 days of written notice from Highwater Ethanol that your subscription has been accepted, you must remit an additional personal (or business) check for the second installment of ninety percent (90%) of your investment amount made payable to “Minnwest Bank, Redwood Falls, MN, escrow agent for Highwater Ethanol, LLC” in satisfaction of the Promissory Note and Security Agreement.  You will determine this amount in box C.3 on page 1 of this Subscription Agreement.  You must deliver this check to the same address set forth above in paragraph 4 within twenty (20) days of the date of Highwater Ethanol’s written notice. If you fail to pay the second installment pursuant to the Promissory Note and Security Agreement, Highwater Ethanol shall be entitled to retain your first installment and to seek other damages, as provided in the Promissory Note and Security Agreement.  This means that if you are unable to pay the 90% balance of your investment amount within 20 days of our notice, you may have to forfeit the 10% cash deposit.

Your funds will be placed in Highwater Ethanol’s escrow account at Minnwest Bank, Redwood Falls, MN.  The funds will be released to Highwater Ethanol or returned to you in accordance with the escrow arrangements described in the Prospectus.  Highwater Ethanol may, in its sole discretion, reject or accept any part or all of your subscription.  If Highwater Ethanol rejects your subscription, your Subscription Agreement and investment will be promptly returned to you, plus nominal interest, minus escrow fees.  Highwater Ethanol may not consider the acceptance or rejection of your subscription until a future date near the end of this offering.

INSTRUCTIONS IF YOU ARE SUBSCRIBING AFTER THE COMPANY’S RELEASE OF FUNDS FROM ESCROW:  If you are subscribing after the Company’s release of funds from escrow, you must follow the instructions contained in paragraphs 1 through 3 below:

1.Complete all information required in this Subscription Agreement, and date and sign the Subscription Agreement on page 6 and the Member Signature Page to our Member Control Agreement attached to this Subscription Agreement as Exhibit A.

2.Immediately provide your personal (or business) check for the entire amount of your investment (as determined in box C.1 on page 1) made payable to “Highwater Ethanol, LLC.”

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3. Deliver the original executed documents referenced in paragraph 1 of these instructions, together with your personal or business check as described in paragraph 2 to:

Highwater Ethanol, LLC

205 S. Main Street, PO Box 96

Lamberton, Minnesota 56152

If you are subscribing after we have released funds from escrow and we accept your investment, your funds will be immediately at-risk as described in the Prospectus.  Highwater Ethanol may, in its sole discretion, reject or accept any part or all of your subscription.  If Highwater Ethanol rejects your subscription, your Subscription Agreement and investment will be returned to you promptly, plus nominal interest, minus escrow fees.  Highwater Ethanol may not consider the acceptance or rejection of your subscription until a future date near the end of this offering.

You may direct your questions to any of our governors listed below or to Highwater Ethanol at (507) 752-6160.

NAME	POSITION	PHONE NUMBER
Brian D. Kletscher	President and Governor	507-762-3376
John Michael Schueller	Vice President and Governor	507-342-5621
Jason Ray Fink	Treasurer and Governor	507-637-4355
Timothy James Van Der Wal	Secretary and Governor	507-342-5187

E.Additional Subscriber Information.  Subscriber, named above, certifies the following under penalties of perjury:

1.Form of Ownership.  Check the appropriate box (one only) to indicate form of ownership. If the subscriber is a Custodian, Corporation, Partnership or Trust, please provide the additional information requested.

oIndividual

oJoint Tenants with Right of Survivorship (Both signatures must appear on page 6.)

oCorporation, Limited Liability Company or Partnership (Corporate Resolutions, Operating Agreement or Partnership Agreement must be enclosed.)

oTrust

Trustee’s Name:                                                                                      

Trust Date:                                                                                               

oOther: Provide detailed information in the space immediately below.

2.Subscriber’s Taxpayer Information.  Check the appropriate box if you are a non-resident alien, a U.S. Citizen residing outside the United States, and/or subject to backup withholding.  All individual subscribers should provide their Social Security Numbers.  Trusts should provide the trust’s taxpayer identification number.  Custodians should provide the minor’s Social Security Number.  Other entities should provide the entity’s taxpayer identification number.

oCheck box if you are a non-resident alien

oCheck box if you are a U.S. citizen residing outside of the United States

oCheck this box if you are subject to backup withholding

Subscriber’s Social Security No.                                                                             

Joint Subscriber’s Social Security No.                                                                     

Taxpayer Identification No.                                                                                     

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3.Member Report Address.  If you would like duplicate copies of member reports sent to an address that is different than the address identified in section A, please complete this section.

Address:                                                                                            

4.State of Residence.

State of Principal Residence:                                                                                  

State where driver’s license is issued:                                                                     

State where resident income taxes are filed:                                                           

State(s) in which you have maintained your principal residence during the past three years:

a.                                                      b.                                                     c.

5.Suitability Standards.  You cannot invest in Highwater Ethanol unless you meet one of the following suitability tests (a or b or the heightened standards for Iowa and Kansas investors set forth in c and d) set forth below.  Please review the suitability tests and check the box next to the following suitability test that you meet.  For husbands and wives purchasing jointly, the tests below will be applied on a joint basis.

a.  o I (We) have annual income from whatever source of at least $45,000 and a net worth of at least $45,000, exclusive of home, furnishings and automobiles; or

b.  o I (We) have a net worth of at least $150,000, exclusive of home, furnishings and automobiles.

c.  o I (We) reside in Iowa and I (We) have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $150,000 (exclusive of home, auto and furnishings); or

d.  o I (We) reside in Kansas and I (We) have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $225,000 (exclusive of home, auto and furnishings).

If you reside in Minnesota please complete the following request for additional information:

I.Employment Information

A.Name and Address of Employer:                                                                                         

B.Nature of Employer’s Business:                                                                                          

C.Dates of Employment:                                                                                                         

D.Current Position or Title and Responsibilities:                                                                    

E.Age:                                                                                                  &n bsp;                                     

II.Educational Background

SCHOOL                       MAJOR                       DEGREE(S)                       YRS. ATTENDED

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III.	Do you have such knowledge and experience in financial and business matters that you are capable of evaluating the merits and risks of an investment in the Company?
		o       Yes	o       No
IV.	Do you understand the nature of an investment in the Company and the risks associated with such an investment?
		o       Yes	o       No
V.	Do you understand that there is no guarantee of any financial return on this investment and that you run the risk of losing your entire investment?
		o       Yes	o       No
VI.	Do you understand that this investment provides limited liquidity since the Units are not freely transferable and the Members have limited rights to withdraw capital from or to withdraw as Members of the Company?
		o       Yes	o       No
VII.	Do you have adequate means of providing for your current needs and personal contingencies in view of the fact that this investment provides limited liquidity?
		o       Yes	o       No
VIII.	If the investor is not a natural person:
	A.Was the investing entity formed for the purpose of investing in the Company?
		o       Yes	o       No
	B.Did the shareholders, partners, members, or grantors of the investing entity, as the case may be, contribute additional capital to such entity for the purpose of purchasing Units?
		o       Yes	o       No
	C.Does the undersigned’s investment in the Company, together with its interests in all other corporations, partnerships, trusts or associations represent more than ten percent of the undersigned’s total assets?
		o       Yes	o       No
IX.	Have you ever invested in securities?
		o       Yes	o       No
X.	Have you ever invested in investment partnerships, venture capital funds, or other non-marketable or restricted securities?
		o       Yes	o       No

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XI.	Indicate the frequency of your investments in non-marketable securities:
	o  Often                             o  Occasional	o  Seldom

Financial Information

Net worth (exclusive of home, home furnishings and automobiles):		Cash and cash equivalents and liquid securities (includes stocks, bonds, government obligations, etc., at fair market value):
o	Under $50,000
o	$50,000 - $250,000	o		Under $50,000
o	$250,000 - $500,000	o		$50,000 - $74,999
o	$500,000 - $1,000,000	o		$75,000 - $99,999
o	Over $1,000,000	o		Over $100,000
Investments in closely-held companies, personal business and/or real estate:		Equity in all real estate, net of mortgages:
		o	Under $50,000
o	Under $25,000	o	$50,000 - $74,999
o	$25,000 - $49,999	o	$75,000 - $99,999
o	$50,000 - $74,999	o	Over $100,000
o	Over $75,000
Other investments:		Annual gross income:
o	Under $25,000	2003
o	$25,000 - $49,999	o	Under $100,000
o	$50,000 - $74,999	o	Over $100,000
o	Over $75,000
		2004
		o	Under $100,000
		o	Over $100,000
		2005
		o	Under $100,000
		o	Over $100,000

6.Subscriber’s Representations and Warranties.  You must read and certify your representations and warranties by placing your initials where indicated and by signing and dating this Subscription Agreement.  Joint subscribers are also required to initial and sign as indicated.

(Initial here) (Joint initials) By signing below the subscriber represents and warrants to Highwater Ethanol that he, she or it:

a.has received a copy of Highwater Ethanol’s Prospectus dated [DATE OF EFFECTIVENESS] and the exhibits thereto or has received notice that this sale has been made pursuant to a registration statement in which a final prospectus would have been required to have been delivered in the absence of Rule 172;

b.understands that the units of Highwater Ethanol are offered and sold in reliance upon a federal securities registration; state registrations in Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota, and Wisconsin; and exemptions from securities registrations in various other states, and understands that the units to be issued pursuant to this subscription agreement can only be sold to a person meeting requirements of suitability;

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c.understands that the securities purchased pursuant to this Subscription Agreement have not been registered under the securities laws of any state other than Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota, and Wisconsin and that Highwater Ethanol is relying in part upon the representations of the undersigned Subscriber contained herein;

d.understands that the securities subscribed for have not been approved or disapproved by the SEC, or the Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota, and Wisconsin Securities Departments or any other regulatory authority, nor has any regulatory authority passed upon the accuracy or adequacy of the Prospectus;

e.intends to acquire the units for his/her/its own account without a view to public distribution or resale and that he/she/it has no contract, undertaking, agreement or arrangement to sell or otherwise transfer or dispose of any units or any portion thereof to any other person;

f.understands that there is no present market for Highwater Ethanol’s membership units, that the membership units will not trade on an exchange or automatic quotation system, that no such market is expected to develop in the future and that there are significant restrictions on the transferability of the membership units;

g.has been encouraged to seek the advice of his legal counsel and accountants or other financial advisers with respect to investor-specific tax and/or other considerations relating to the purchase and ownership of units [Minnesota subscribers should NOT initial this subsection];

h.has received a copy of the Highwater Ethanol Member Control Agreement, dated May 4, 2006, and understands that upon closing the escrow by Highwater Ethanol, the subscriber and the membership units will be bound by the provisions of the Member Control Agreement which contains, among other things, provisions that restrict the transfer of membership units;

i.understands that the units are subject to substantial restrictions on transfer under certain tax and securities laws along with restrictions in the Highwater Ethanol Member Control Agreement, and agrees that if the membership units or any part thereof are sold or distributed in the future, the subscriber shall sell or distribute them pursuant to the terms of the Member Control Agreement, and the requirements of the Securities Act of 1933, as amended, and applicable tax and securities laws;

j.meets the suitability test marked in Item E.5 above;

k.is capable of bearing the economic risk of this investment, including the possible total loss of the investment [Minnesota subscribers should NOT initial this subsection];

l.understands that Highwater Ethanol will place a restrictive legend on any certificate representing any unit containing substantially the following language as the same may be amended by the Governors of Highwater Ethanol in their sole discretion:

THE TRANSFERABILITY OF THE MEMBERSHIP UNITS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED.  SUCH UNITS MAY NOT BE SOLD, ASSIGNED, OR TRANSFERRED, AND NO ASSIGNEE, VENDEE, TRANS­FEREE OR ENDORSEE THEREOF WILL BE RECOGNIZED AS HAVING ACQUIRED ANY SUCH UNITS FOR ANY PURPOSES, UNLESS AND TO THE EXTENT SUCH SALE, TRANSFER, HYPOTHECATION, OR ASSIGNMENT IS PERMITTED BY, AND IS COMPLETED IN STRICT ACCORDANCE WITH, APPLICABLE FEDERAL AND STATE LAW AND THE TERMS AND CONDITIONS SET FORTH IN THE MEMBER CONTROL AGREEMENT OF THE COMPANY, AS AMENDED FROM TIME TO TIME.

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THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS.

m.understands that, to enforce the above legend, Highwater Ethanol may place a stop transfer order with its registrar and stock transfer agent (if any) covering all certificates representing any of the membership units;

n.may not transfer or assign this Subscription Agreement, or any of the subscriber’s interest herein without the prior written consent of Highwater Ethanol;

o.has written his, her, or its correct taxpayer identification number under Item E.2 on this Subscription Agreement;

p.is not subject to back up withholding either because he, she or it has not been notified by the Internal Revenue Service (“IRS”) that he, she or it is subject to backup withholding as a result of a failure to report all interest or dividends, or the IRS has notified him, her or it that he is no longer subject to backup withholding (Note this clause (p) should be crossed out if the backup withholding box in Item E.2 is checked);

q.understands that execution of the attached Promissory Note and Security Agreement will allow Highwater Ethanol or its assigns to pursue the obligor for payment of the amount due thereon by any legal means, including, but not limited to, acquisition of a judgment against the obligor in the event that the subscriber defaults on that Promissory Note and Security Agreement; and

r.acknowledges that Highwater Ethanol may retain possession of certificates representing subscriber’s units to perfect its security interest in those units.

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Signature of Subscriber/Joint Subscriber:

Date:

Individuals:	Entities:
Name of Individual Subscriber (Please Print)	Name of Entity (Please Print)
Signature of Individual	Print Name and Title of Officer
Name of Joint Individual Subscriber (Please Print)	Signature of Officer
Signature of Joint Individual Subscriber

ACCEPTANCE OF SUBSCRIPTION BY HIGHWATER ETHANOL, LLC:

Highwater Ethanol, LLC hereby accepts Subscriber’s subscription for              units.

Dated this              day of             , 200     .

HIGHWATER ETHANOL, LLC

By:

Its:

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PROMISSORY NOTE AND SECURITY AGREEMENT

Date of Subscription Agreement:                                                                          , 200    .

$10,000 per Unit

Minimum Investment of 1 Unit ($10,000); Units Sold in 1 Unit Increments Thereafter ($10,000 each)

	Number of Units Subscribed
	Total Purchase Price ($10,000 per unit multiplied by number of units subscribed)
(                            )	Less Initial Payment (10% of Principal Amount)
	Principal Balance

FOR VALUE RECEIVED, the undersigned hereby promises to pay to the order of Highwater Ethanol, LLC, a Minnesota limited liability company (“Highwater Ethanol”), at its principal office located at 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152, or at such other place as required by Highwater Ethanol, the Principal Balance set forth above in one lump sum to be paid without interest within 20 days following the call of the Highwater Ethanol Board of Governors, as described in the Subscription Agreement.  In the event the undersigned fails to timely make any payment owed, the entire balance of any amounts due under this full recourse Promissory Note and Security Agreement shall be immediately due and payable in full with interest at the rate of 12% per annum from the due date and any amounts previously paid in relation to the obligation evidenced by this Promissory Note and Security Agreement may be forfeited at the discretion of Highwater Ethanol.

The undersigned agrees to pay to Highwater Ethanol on demand, all costs and expenses incurred to collect any indebtedness evidenced by this Promissory Note and Security Agreement, including, without limitation, reasonable attorneys’ fees.  This Promissory Note and Security Agreement may not be modified orally and shall in all respects be governed by, construed, and enforced in accordance with the laws of the State of Minnesota.

The provisions of this Promissory Note and Security Agreement shall inure to the benefit of Highwater Ethanol and its successors and assigns, which expressly reserves the right to pursue the undersigned for payment of the amount due thereon by any legal means in the event that the undersigned defaults on obligations provided in this Promissory Note and Security Agreement.

The undersigned waives presentment, demand for payment, notice of dishonor, notice of protest, and all other notices or demands in connection with the delivery, acceptance, performance or default of this Promissory Note and Security Agreement.

The undersigned grants to Highwater Ethanol, and its successors and assigns (“Secured Party”), a purchase money security interest in all of the undersigned’s membership units of Highwater Ethanol now owned or hereafter acquired. This security interest is granted as non-exclusive collateral to secure payment and performance on the obligation owed Secured Party from the undersigned evidenced by this Promissory Note and Security Agreement. The undersigned further authorizes Secured Party to retain possession of certificates representing such membership units and to take any other actions necessary to perfect the security interest granted herein.

Dated:                     , 200   .

OBLIGOR/DEBTOR:	JOINT OBLIGOR/DEBTOR:
Printed or Typed Name of Obligor	Printed or Typed Name of Joint Obligor
By:	By:
(Signature)		(Signature)

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Officer Title if Obligor is an Entity

Address of Obligor

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Exhibit A

MEMBER SIGNATURE PAGE

ADDENDUM TO THE

AMENDED AND RESTATED MEMBER CONTROL AGREEMENT

OF HIGHWATER ETHANOL, LLC

The undersigned does hereby warrant, represent, covenant and agree that:  (i) the undersigned, as a condition to becoming a Member in Highwater Ethanol, LLC, has received a copy of the Amended and Restated Member Control Agreement dated                       , and, if applicable, all amendments and modifications thereto; (ii) the undersigned shall be subject to and comply with all terms and conditions of such Member Control Agreement in all respects, as if the undersigned had executed said Member Control Agreement on the original date thereof; and (iii) the undersigned is and shall be bound by all of the provisions of said Member Control Agreement from and after the date of execution of this Addendum.

Individuals:	Entities:
Name of Individual Member (Please Print)	Name of Entity (Please Print)
Signature of Individual	Print Name and Title of Officer
Name of Joint Individual Member (Please Print)	Signature of Officer
Signature of Joint Individual Member

Agreed to and accepted on behalf of the
Company and its Members:

HIGHWATER ETHANOL, LLC

By:

Its:

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MINIMUM 4,500 UNITS

MAXIMUM 6,000 UNITS

 

PROSPECTUS

                                               , 2007

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus.  We are offering to sell, and seeking offers to buy, units only in jurisdictions where offers and sales are permitted.  The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common shares.

No action is being taken in any jurisdiction outside the United States to permit a public offering of the units or possession or distribution of this prospectus in that jurisdiction.  Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.

Through and including                                          2007 (the 90th day after the effective date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.  This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

PART II - INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Directors and officers of Highwater Ethanol, LLC may be entitled to benefit from the indemnification provisions contained in the Company’s member control agreement and the Minnesota Limited Liability Company Act. The general effect of these provisions is summarized below.

Our member control agreement provides that to the maximum extent permitted under the Minnesota Limited Liability Company Act and any other applicable law, no member or director of Highwater Ethanol shall be personally liable for any debt, obligation or liability of the Company merely by reason of being a member or director or both. No director of the Company shall be personally liable to the Company or its members for monetary damages for a breach of fiduciary duty by such director; provided that the provision shall not eliminate or limit the liability of a director for the following: (1) receipt of an improper financial benefit to which the director is not entitled; (2) liability for receipt of distributions in violation of the articles of organization, member control agreement, or the Minnesota Limited Liability Company Act; (3) a knowing violation of law; or (4) acts or omissions involving fraud, bad faith or willful misconduct. To the maximum extent permitted under the Minnesota Limited Liability Company Act and other applicable law, the Company, its receiver, or its trustee (however in the case of a receiver or trustee only to the extent of Company property) is required to indemnify, save, and hold harmless and pay all judgments and claims against each director relating to any liability or damage incurred by reason of any act performed or omitted to be performed by such director or officer in connection with the business of the Company. The indemnification includes reasonable attorneys’ fees incurred by a director or officer in connection with the defense of any action based on covered acts or omissions. Attorneys’ fees may be paid as incurred, including those for liabilities under federal and state securities laws, as permitted by law. To the maximum extent permitted by law, in the event of an action by a unit holder against any director, including a derivative suit, we must indemnify, hold harmless and pay all costs, liabilities, damages and expenses of the director, including attorneys’ fees incurred in the defense of the action. Notwithstanding the foregoing provisions, no director shall be indemnified by the Company in contradiction of the Minnesota Limited Liability Company Act. The Company may purchase and maintain insurance on behalf of any person in his or her official capacity against any liability asserted against and incurred by the person arising from the capacity, regardless of whether the Company would otherwise be required to indemnify the person against the liability.

Generally, under Minnesota law, a member or manager is not personally obligated for any debt or obligation of the Company solely because they are a member or manager of the Company. However, Minnesota law allows a member or manager to agree to become personally liable for any or all debts, obligations, and liabilities if the member control agreement provides. Our member control agreement does not impose personal liability on our members.

The principles of law and equity supplement the Minnesota Limited Liability Company Act, unless displaced by particular provisions of the Act.

There is no pending litigation or proceeding involving a director, officer, employee or agent of the Company as to which indemnification is being sought. The Company is not aware of any other threatened litigation that may result in claims for indemnification by any director, officer, member, manager, employee or agent.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*

Securities and Exchange Commission registration fee	$	6,420
Legal fees and expenses	200,000
Consulting fees	75,000
Accounting fees	125,000
Blue Sky filing fees	5,000
Printing expenses	75,000
Advertising	50,000
Miscellaneous expenses	13,580
Total	$	550,000

All of the above offering expenses are estimated, except for the SEC registration fee.

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ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

During the time period beginning on Highwater Ethanol’s formation on May 2, 2006 and ending on September 30, 2006, we issued and sold 236 membership units to our seed capital investors at a purchase price of $5,000.00 per unit and 150 units to our founders at a purchase price of $3,333.33 per unit, without registering the units with the Securities and Exchange Commission. All sales were made pursuant to Rule 506 of Regulation D. Each of these sales was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) and Rule 506 of the Securities Act of 1933 as transactions by an issuer not involving a public offering. No underwriting discounts or commissions were paid in these transactions and we conducted no general solicitation in connection with the offer or sale of the securities. The purchasers of the securities in each transaction made representations to us regarding their status as accredited investors as defined in Regulation C and their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to unit certificates and instruments issued in such transactions. All purchasers were provided a private placement memorandum containing all material information concerning our company and the offering. All purchases were made with cash and the total amount of cash consideration for those securities was $1,680,000.

ITEM 27. EXHIBITS.

3.1	Articles of Organization dated May 2, 2006 filed as part of the registrant’s registration statement on Form SB-2 and incorporated by reference herein.
3.2	Member Control Agreement dated May 4, 2006 filed as part of the registrant’s registration statement on Form SB-2 and incorporated by reference herein.
3.3	Form of Amended and Restated Member Control Agreement filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
4.1	Form of Membership Unit Certificate filed as part of the registrant’s registration statement on Form SB-2 and incorporated by reference herein.
4.2	Form of Subscription Agreement filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
4.3	Form of Escrow Agreement filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
5.1	Form of Opinion of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. as to certain securities matters filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
8.1	Form of Opinion of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. as to certain tax matters filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.1	Letter of Intent dated June 7, 2006, between Highwater Ethanol, LLC and Fagen, Inc. filed as part of the registrant’s registration statement on Form SB-2 and incorporated by reference herein.*
10.2	Energy Management Agreement dated June 8, 2006, between Highwater Ethanol, LLC and U.S. Energy Services, Inc. filed as part of the registrant’s registration statement on Form SB-2 and incorporated by reference herein.
10.3	Building Lease dated June 7, 2006, between Highwater Ethanol, LLC and Interstate Power and Light Company filed as part of the registrant’s registration statement on Form SB-2 and incorporated by reference herein.
10.4	Purchase Agreement dated June 7, 2006, between Highwater Ethanol, LLC and Thomas Halter and Cathy Halter filed as part of the registrant’s registration statement on Form SB-2 and incorporated by reference herein.
10.5	Continuous Services Agreement for Engineering Services dated April 25, 2006, between Highwater Ethanol, LLC and TranSystems Corporation filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.6	Grain Procurement Agreement dated July 25, 2006, and Amendment dated July 25, 2006, between Highwater Ethanol, LLC and Meadowland Farmers Co-op filed as part of the registrant’s registration statement on Form SB-2 and incorporated by reference herein.
10.7	Phase I and II Engineering Services Agreement dated July 20, 2006 between Highwater Ethanol, LLC and Fagen Engineering, LLC filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.8	Lump Sum Design-Build Agreement dated September 28, 2006 between Highwater Ethanol, LLC and Fagen, Inc. filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.*

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10.9	Consulting Agreement and Authorization to Proceed dated May 4, 2006, between Highwater Ethanol, LLC and Earth Tech Consulting, Inc. filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.10	Design Survey Services Agreement dated April 24, 2006 between Highwater Ethanol, LLC and Yaggy Colby Associates filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.11	Option Agreement dated August 8, 2006 between Highwater Ethanol, LLC and David Geis and Steven and Kathleen Geis filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.12	Option to Purchase Real Estate dated October 27, 2005 between Arden and Lester Imker and Lamberton EDA filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.13	Assignment of Option to Purchase Real Estate dated August 9, 2006 between Highwater Ethanol, LLC and Lamberton EDA filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.14	Purchase Agreement dated August 14, 2006 between Highwater Ethanol, LLC and Lamberton EDA filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.15	Description of Compensation Arrangements with Officers of Highwater Ethanol, LLC filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
10.16	Ethanol Fuel Marketing Agreement dated September 28, 2006 between Highwater Ethanol, LLC and Renewable Products Marketing Group, LLC filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
23.1	Consent of Boulay, Heutmaker, Zibell & Co., PLLP dated December 22, 2006 filed as part of this Pre-Effective Amendment No. 1 to registrant’s registration statement on Form SB-2.
23.2	Consent of PRX Geographic, Inc. dated September 13, 2006 filed as part of the registrant’s registration statement on Form SB-2 and incorporated by reference herein.
23.3	Consent of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. (contained in Exhibit 5.1).
23.4	Consent of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. (contained in Exhibit 8.1).

*Portions omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.

ITEM 28. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:

(i) Include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the

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Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

(iii) Include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2) To deem, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the registered securities which remain unsold at the end of the offering.

(4) To determine the liability of the undersigned registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of the securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned small business issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

i.Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

ii.Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

iii.The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

iv.Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

(5) That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424 (b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

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SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing this Pre-Effective Amendment No. 1 to Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Lamberton, State of Minnesota on December 22, 2006.

	HIGHWATER ETHANOL, LLC
Date: December 22,2006	/s/ Brian D. Kletscher
	Brian D. Kletscher
	President and Governor
	(Principal Executive Officer)
Date: December 22,2006	/s/ Jason R. Fink
	Jason R. Fink
	Treasurer and Governor
	(Principal Financial and Accounting Officer)

In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated:

Date: December 22,2006	/s/ Brian D. Kletscher
	Brian D. Kletscher
	President and Governor
	(Principal Executive Officer)
Date: December 22,2006	/s/ John M. Schueller
	John M. Schueller
	Vice President and Governor
Date: December 22,2006	/s/ Jason R. Fink
	Jason R. Fink
	Treasurer and Governor
	(Principal Financial and Accounting Officer)
Date: December 22,2006	/s/ Timothy J. Van Der Wal
	Timothy J. Van Der Wal
	Secretary and Governor
Date: December 22,2006	/s/ Monica Rose Anderson
	Monica Rose Anderson, Governor
Date: December 22,2006	/s/ Russell J. Derickson
	Russell J. Derickson, Governor
Date: December 22,2006	/s/ George M. Goblish
	George M. Goblish, Governor
Date: December 22,2006	/s/ Ronald E. Jorgenson
	Ronald E. Jorgenson, Governor
Date: December 22,2006	/s/ Michael J. Landuyt
	Michael J. Landuyt, Governor
Date: December 22,2006	/s/ David G. Moldan
	David G. Moldan, Governor
Date: December 22,2006	/s/ Warren Walter Pankonin
	Warren Walter Pankonin, Governor
Date: December 22,2006	/s/ Todd A. Reif
	Todd A. Reif, Governor
Date: December 22,2006	/s/ Gilbert L. Schmitz
	Gilbert L. Schmitz, Governor

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INDEX TO EXHIBITS

3.1	Articles of Organization dated May 2, 2006.
3.2	Member Control Agreement dated May 4, 2006.
3.3	Form of Amended and Restated Member Control Agreement
4.1	Form of Membership Unit Certificate.
4.2	Form of Subscription Agreement.
4.3	Form of Escrow Agreement.
5.1	Form of Opinion of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. as to certain securities matters.
8.1	Form of Opinion of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. as to certain tax matters.
10.1	Letter of Intent dated June 7, 2006, between Highwater Ethanol, LLC and Fagen, Inc.*
10.2	Energy Management Agreement dated June 8, 2006, between Highwater Ethanol, LLC and U.S. Energy Services, Inc.
10.3	Building Lease dated June 7, 2006, between Highwater Ethanol, LLC and Interstate Power and Light Company.
10.4	Purchase Agreement dated June 7, 2006, between Highwater Ethanol, LLC and Thomas Halter and Cathy Halter.
10.5	Continuous Services Agreement for Engineering Services dated April 25, 2006, between Highwater Ethanol, LLC and TranSystems Corporation.
10.6	Grain Procurement Agreement dated July 25, 2006, and Amendment dated July 25, 2006, between Highwater Ethanol, LLC and Meadowland Farmers Co-op.
10.7	Phase I and II Engineering Services Agreement dated July 20, 2006 between Highwater Ethanol, LLC and Fagen Engineering, LLC
10.8	Lump Sum Design-Build Agreement dated September 28, 2006 between Highwater Ethanol, LLC and Fagen, Inc. *
10.9	Consulting Agreement and Authorization to Proceed dated May 4, 2006, between Highwater Ethanol, LLC and Earth Tech Consulting, Inc.
10.10	Design Survey Services Agreement dated April 24, 2006 between Highwater Ethanol, LLC and Yaggy Colby Associates
10.11	Option Agreement dated August 8, 2006 between Highwater Ethanol, LLC and David Geis and Steven and Kathleen Geis
10.12	Option to Purchase Real Estate dated October 27, 2005 between Arden and Lester Imker and Lamberton EDA
10.13	Assignment of Option to Purchase Real Estate dated August 9, 2006 between Highwater Ethanol, LLC and Lamberton EDA
10.14	Purchase Agreement dated August 14, 2006 between Highwater Ethanol, LLC and Lamberton EDA
10.15	Description of Compensation Arrangements with Officers of Highwater Ethanol, LLC
10.16	Ethanol Fuel Marketing Agreement dated September 28, 2006 between Highwater Ethanol, LLC and Renewable Products Marketing Group, LLC
23.1	Consent of Boulay, Heutmaker, Zibell & Co., PLLP dated December 22, 2006.
23.2	Consent of PRX Geographic, Inc. dated September 13, 2006.
23.3	Consent of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. (contained in Exhibit 5.1).
23.4	Consent of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. (contained in Exhibit 8.1).

*Portions omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.

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EX-3.3

Exhibit 3.3

AMENDED AND RESTATED MEMBER CONTROL AGREEMENT

OF

HIGHWATER ETHANOL, LLC


Dated:  Effective                               .

AMENDED AND RESTATED MEMBER CONTROL AGREEMENT
OF
HIGHWATER ETHANOL, LLC

TABLE OF CONTENTS

	Page
ARTICLE I. THE COMPANY	1
1.1 Formation and Agreement	1
1.2 Name	1
1.3 Purpose; Powers	1
1.4 Principal Place of Business	1
1.5 Term	1
1.6 Registered Agent	1
1.7 Title to Property	2
1.8 Payment of Individual Obligations	2
1.9 Independent Activities; Transactions With Affiliates	2
1.10 Definitions	2
ARTICLE II. CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS	7
2.1 Initial Capital Contributions	7
2.2 Additional Capital Contributions; Additional Units	7
2.3 Capital Accounts	8
ARTICLE III. ALLOCATIONS	8
3.1 Profits	8
3.2 Losses	8
3.3 Special Allocations	8
3.4 Regulatory Allocations	10
3.5 Loss Limitation	10
3.6 Other Allocation Rules	10
3.7 Tax Allocations: Code Section 704(c)	11
3.8 Tax Credit Allocations	11
ARTICLE IV. DISTRIBUTIONS	11
4.1 Net Cash Flow	11
4.2 Amounts Withheld	11
4.3 Limitations on Distributions	12
ARTICLE V. MANAGEMENT	12
5.1 Board of Governors	12
5.2 Number of Governors	12
5.3 Election of Governors	12
5.4 Authority of Governors	13
5.5 Governor as Agent	14
5.6 Restriction on Authority of Governors	14
5.7 Meetings	15

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5.8 Notice	15
5.9 Conduct of Meeting	16
5.10 Quorum	16
5.11 Manner of Acting; Informal Action	16
5.12 Absentee Governor	16
5.13 Presumption of Assent	16
5.14 Removal of Governors	16
5.15 Vacancies	16
5.16 Compensation	17
5.17 Committees; Authority	17
5.18 Voting; Potential Financial Interest	17
5.19 Duties and Obligations of Governors	17
5.20 Officers	18
5.21 Execution of Instruments	19
5.22 Limitation of Liability; Indemnification	19
ARTICLE VI. MEMBERSHIP UNITS; MEMBERS	20
6.1 Membership Units	20
6.2 Certificates; Surrender for Transfer	20
6.3 Members	20
6.4 Additional Members	20
6.5 Members’ Voting Rights	20
6.6 Member Meetings	20
6.7 Place of Meeting	21
6.8 Conduct of Meetings	21
6.9 Notice	21
6.10 Contents of Notice	21
6.11 Adjourned Meetings	21
6.12 Waiver of Notice	21
6.13 Fixing of Record Date	22
6.14 Quorum and Proxies	22
6.15 Voting; Action by Members	22
6.16 Termination of Membership	22
6.17 Continuation of the Company	22
6.18 No Member Right of Redemption or Return of Capital	22
6.19 Waiver of Dissenters Rights	22
6.20 Loans	22
ARTICLE VII. ACCOUNTING, BOOKS AND RECORDS	23
7.1 Accounting, Books and Records	23
7.2 Delivery to Members and Inspection	23
7.3 Reports	23
7.4 Tax Matters	24
ARTICLE VIII. AMENDMENTS	24
8.1 Amendments	24

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ARTICLE IX. TRANSFERS	25
9.1 Restrictions on Transfers	25
9.2 Permitted Transfers	25
9.3 Conditions Precedent to Transfers	25
9.4 Prohibited Transfers	26
9.5 No Dissolution or Termination	26
9.6 Prohibition of Assignment	27
9.7 Rights of Unadmitted Assignees	27
9.8 Admission of Substitute Members	27
9.9 Representations Regarding Transfers	27
9.10 Distributions And Allocations In Respect of Transfer Units	28
9.11 Additional Members	28
ARTICLE X. DISSOLUTION AND WINDING UP	29
10.1 Dissolution	29
10.2 Winding Up	29
10.3 Compliance with Certain Requirements of Regulations; Deficit Capital Accounts	29
10.4 Deemed Distribution and Recontribution	30
10.5 Rights of Unit Holders	30
10.6 Allocations During Period of Liquidation	30
10.7 Character of Liquidating Distributions	30
10.8 The Liquidator	30
10.9 Forms of Liquidating Distributions	30
ARTICLE XI. MISCELLANEOUS	30
11.1 Notices	30
11.2 Binding Effect	31
11.3 Construction	31
11.4 Headings	31
11.5 Severability	31
11.6 Incorporation By Reference	31
11.7 Variation of Terms	31
11.8 Governing Law	31
11.9 Waiver of Jury Trial	31
11.10 Counterpart Execution	31
11.11 Specific Performance	31
11.12 No Third Party Rights	31

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AMENDED AND RESTATED MEMBER CONTROL AGREEMENT
OF
HIGHWATER ETHANOL, LLC

THIS AMENDED AND RESTATED MEMBER CONTROL AGREEMENT (the “Agreement”) is entered into effective as of the          of                                 , 2006, by and among Highwater Ethanol, LLC, a Minnesota limited liability company (the “Company”), each of the Persons identified as Members on attached Exhibit “A,” and any other Persons that may from time-to-time be subsequently admitted as Members of the Company in accordance with the terms of this Agreement.  Capitalized terms used but not otherwise defined herein shall have the meaning set forth in Section 1.10.

In consideration of the covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I.  THE COMPANY

1.1           Formation and Agreement.  The initial Members formed the Company as a Minnesota limited liability company by filing Articles of Organization with the Minnesota Secretary of State on April 27, 2006.  The Members hereby agree that this Agreement constitutes a “Member Control Agreement” within the meaning of Section 322B.37 of the Act.  To the extent that the rights and obligations of any Member are different by reason of any provision of this Agreement than they would be in the absence of such provision, this Agreement, to the extent permitted by the Act, shall control.

1.2           Name.  The name of the Company shall be “Highwater Ethanol, LLC,” and all business of the Company shall be conducted in such name.

1.3           Purposes; Powers.  The nature of the business and purposes of the Company are to:  (i) own, construct, operate, lease, finance, contract with, and/or invest in ethanol production and co-product production facilities; (ii) process feedstocks into ethanol and related co-products, and market such ethanol and co-products; and (iii) engage in any other business and investment activity in which a Minnesota limited liability company may lawfully be engaged, as determined by the Board of Governors.  The Company has the power to do any and all acts necessary, appropriate, proper, advisable, incidental or convenient to, and in furtherance of, the purposes of the Company as set forth in this Section 1.3 and has, without limitation, any and all powers that may be exercised on behalf of the Company by the Board of Governors pursuant to Article V of this Agreement.

1.4           Principal Place of Business.  The Company shall continuously maintain a principal place of business in Minnesota.  The principal place of business of the Company shall be 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152 or elsewhere as the Governors may determine.  Any documents required by the Act to be kept by the Company shall be maintained at the Company’s principal place of business.

1.5           Term.  The term of the Company commenced on the date the Articles were filed with the Minnesota Secretary of State, and shall continue until the winding up and liquidation of the Company and its business is completed following a Dissolution Event as provided in Article X of this Agreement.

1.6           Registered Agent.  The Company shall continuously maintain a registered office and a registered agent for service of process in the State of Minnesota.  The name and address of the Company’s initial Registered Agent shall be Kevin K. Stroup, 300 O’Connell Street, Marshall, Minnesota  56258-2638.

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1.7           Title to Property.  All Property owned by the Company shall be owned by the Company as an entity and not in the name of any Member, and no Member shall have any ownership interest in such Property, except as a Member of the Company.  Each Member’s interest in the Company shall be personal property for all purposes.

1.8           Payment of Individual Obligations.  The Company’s credit and assets shall be used solely for the benefit of the Company, and no asset of the Company shall be Transferred or encumbered for, or in payment of, any individual obligation of any Member or Governor.

1.9           Independent Activities; Transactions With Affiliates.  The Governors shall be required to devote such time to the business and affairs of the Company as may be necessary to manage and operate the Company, and shall be free to serve any other Person or enterprise in any capacity that they deem appropriate in their discretion.  Neither this Agreement nor any activity undertaken pursuant hereto shall:  (i) prevent any Member or Governor or their Affiliates from engaging in whatever activities they choose, whether the same are competitive with the Company or otherwise, and any such activities may be undertaken without having or incurring any obligation to offer any interest in such activities to the Company or any other Member; or (ii) require any Member or Governor to permit the Company or any other Governor or Member or their Affiliates to participate in any such activities.  As a material part of the consideration for the execution of this Agreement by each Member, each Member hereby waives, relinquishes and renounces any such right or claim of participation.  To the extent permitted by applicable law and subject to the provisions of this Agreement, the Governors are hereby authorized to cause the Company to purchase Property from, sell Property to, or otherwise deal with, any Member (including any Member who is also a Governor), or any Affiliate of any Member; provided that any such purchase, sale or other transaction shall be made on terms and conditions which are no less favorable to the Company than if the sale, purchase or other transaction had been entered into with an independent third party in the same geographic location who provides comparable goods or services which could reasonably be made available to the Company.  For such transactions the Governors shall, as fiduciaries, determine such arrangements are in the best interest of the Company.  All such transactions shall be embodied in a written contract, the material terms of which shall be fully disclosed to the Members.  Such a contract may only be modified by vote of a majority of the then outstanding Membership Interest.  Such a contract shall contain a clause allowing termination without penalty on sixty (60) days notice.  Governors shall not engage in reciprocal business arrangements which circumvent any restrictions contained in the Agreement against dealing with Affiliates.  In addition, Officers and Governors can only purchase the Company’s securities being sold to the public at a price equal to that paid by unaffiliated purchasers.

1.10         Definitions.  Capitalized words and phrases used in this Agreement have the following meanings:

(a)           “Act” means the Minnesota Limited Liability Company Act, Chapter 322B, Minnesota Statutes (2004), as amended from time to time, or any corresponding provisions of any succeeding law.

(b)           “Adjusted Capital Account Deficit” means, with respect to any Unit Holder, the deficit balance, if any, in such Unit Holder’s Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments:  (i) crediting to such Capital Account any amounts which such Unit Holder is deemed to be obligated to restore pursuant to the next to the last sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and (ii) debiting to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of the Regulations.  The foregoing definition is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith.

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(c)           “Affiliate” means, with respect to any Person or entity:  (i) any Person directly or indirectly controlling, controlled by or under common control with such Person or entity; (ii) any officer, director, general partner, member or trustee of any such Person or entity; or (iii) any Person or entity who is an officer, director, general partner, member or trustee of any Person described in clauses (i) or (ii) of this sentence.  For purposes of this definition, the terms “controlling,” “controlled by” or “under common control with” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person or entity, whether through the ownership of voting securities, by contract or otherwise, or the power to elect a majority of the Governors, members, or persons exercising similar authority with respect to such Person or entities.

(d)           “Agreement” means the Company’s Amended and Restated Member Control Agreement, as amended from time to time.

(e)           “Articles” means the Company’s Articles of Organization on file with the Minnesota Secretary of State’s Office, as amended from time to time.

(f)            “Assignee” means a transferee of Units who is not admitted as a Substitute Member pursuant to Section 9.8 of this Agreement.

(g)           “Capital Account” means the separate capital account maintained for each Unit Holder in accordance with Section 2.3 of this Agreement.

(h)           “Capital Contributions” means, with respect to any Member, the amount of money (US Dollars), and the initial Gross Asset Value of any assets or property other than money, contributed by the Member or such Member’s predecessors in interest to the Company, (net of liabilities secured by such contributed property that the Company is considered to assume or take subject to under Code Section 752) with respect to the Units held or purchased by such Member, including additional Capital Contributions.

(i)            “Code” means the United States Internal Revenue Code of 1986, as amended from time to time.

(j)            “Company” means Highwater Ethanol, LLC, a Minnesota limited liability company.

(k)           “Company Minimum Gain” has the meaning given the term “partnership minimum gain” in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations.

(l)            “Debt” means:  (i) any indebtedness for borrowed money or the deferred purchase price of property as evidenced by notes, bonds or other instruments; (ii) obligations as lessee under capital leases; (iii) obligations secured by any mortgage, pledge, security interest, encumbrance, lien or charge of any kind existing on any asset owned or held by the Company, whether or not the Company has assumed or become liable for the obligations secured thereby; (iv) any obligation under any interest rate swap agreement; (v) accounts payable; and (vi) obligations, contingent or otherwise, under direct or indirect guarantees of indebtedness or obligations of the kinds referred to in clauses (i), (ii), (iii), (iv) and (v), above.  Notwithstanding the foregoing, however, Debt shall not include obligations in respect of any accounts payable that are incurred in the ordinary course of the Company’s business and are not delinquent or are being contested in good faith by appropriate proceedings.

(m)          “Depreciation” means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax

3

purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Fiscal Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Governors.

(n)           “Dissolution Event” shall have the meaning set forth in Section 10.1 of this Agreement.

(o)           “Effective Date” means                                                               .

(p)           “Facilities” means the ethanol and co-product production facilities to be constructed and operated by the Company.

(q)           “Fiscal Year” means:  (i) any twelve-month period commencing on November 1 and ending on October 31; and (ii) the period commencing on the immediately preceding November 1 and ending on the date on which all Property is distributed to the Unit Holders pursuant to Article X of this Agreement, or, if the context requires, any portion of a Fiscal Year for which an allocation of Profits or Losses or a distribution is to be made.

(r)            “GAAP” means generally accepted accounting principles in effect in the United States of America from time to time.

(s)           “Governor” means any Person who:  (i) is elected as a Governor pursuant to Article V of this Agreement or who has otherwise become a Governor pursuant to the terms of this Agreement; and (ii) has not ceased to be a Governor pursuant to the terms of this Agreement.  “Board of Governors” or “Governors” mean all such Persons.  A Governor shall be deemed to be an “Independent Governor” if; (i) the Governor is not an officer or employee of the Company, its subsidiaries, if any, or its affiliates and has not been an officer or employee of the Company, its subsidiaries, if any, or its affiliates within the last two (2) years; (ii) is not a promoter as defined by the North American Securities Administrators Association (NASAA); and (iii) does not have a material business or professional relationship with any of the Company’s affiliates, any such relationship shall be deemed material per se if it exceeds five (5) percent of the Governor’s annual gross revenue, derived from all sources, during either of the last two years, or the Governor’s net worth on a fair market value basis.

(t)            “Gross Asset Value” means with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows:  (i) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the Governors, provided that the initial Gross Asset Values of the assets contributed to the Company pursuant to Section 2.1 of this Agreement shall be as set forth in such Section; (ii) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking Code Section 7701(g) into account), as determined by the Governors as of the following times: (A) upon the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (B) upon the distribution by the Company to a Member of more than a de minimis amount of Company Property as consideration for an interest in the Company; and (C) upon the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), provided that an adjustment described in clauses (A) and (B) of this paragraph shall be made only if the Governors reasonably determine that such adjustment is necessary to reflect the relative economic interests of the Members in the Company; (iii) The Gross Asset Value of any item of Company assets distributed to any Member shall be adjusted to equal the gross fair market value (taking Code Section 7701(g) into account) of such asset on the date of distribution as determined by the Governors; and (iv) The Gross Asset Values

4

of Company assets shall be increased or decreased, as applicable, to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and subparagraph (vi) of the definition of “Profits” and “Losses” or Section 3.3(c) of this Agreement; provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (iv) to the extent that an adjustment pursuant to subparagraph (ii) is required in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (iv).  If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraph (ii) or (iv) of this paragraph, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Profits and Losses.

(u)           “Issuance Items” has the meaning set forth in Section 3.3(h) of this Agreement.

(v)           “Liquidation Period” has the meaning set forth in Section 10.6 of this Agreement.

(w)          “Liquidator” has the meaning set forth in Section 10.8 of this Agreement.

(x)            “Member” means any Person:  (i) whose name is set forth as such on Exhibit “A” initially attached hereto or as it may be amended from time to time, or who has become a Member pursuant to the terms of this Agreement; and (ii) who is the owner of one or more Units and has not ceased to be a Member pursuant to the terms of this Agreement.  “Members” means all such Persons.

(y)           “Membership Financial Rights” means collectively, a Member’s share of “Profits” and “Losses,” the right to receive distributions of the Company’s assets, and the right to information concerning the business and affairs of the Company as required by the Act.  The Membership Financial Rights of a Member is quantified by the unit of measurement referred to herein as “Units.”

(z)            “Membership Interest” means collectively, the Membership Financial Rights and the Membership Voting Interest.

(aa)         “Membership Voting Interest” means collectively, a Member’s right to vote as set forth in this Agreement or as required by the Act.  The Membership Voting Interest of a Member shall mean as to any matter to which the Member is entitled to vote hereunder or as may be required under the Act, the right to One (1) vote for each Unit registered in the name of such Member as shown in the Unit Holder Register.

(bb)         “Net Cash Flow” means the gross cash proceeds of the Company less the portion thereof used to pay or establish reserves for Company expenses, debt payments, capital improvements, replacements and contingencies, all as reasonably determined by the Governors.  “Net Cash Flow” shall not be reduced by Depreciation, amortization, cost recovery deductions or similar allowances, but shall be increased by any reductions of reserves previously established.

(cc)         “Nonrecourse Deductions” has the meaning set forth in Section 1.704-2(b)(1) of the Regulations.

(dd)         “Nonrecourse Liability” has the meaning set forth in Section 1.704-2(b)(3) of the Regulations.

(ee)         “Officer” means any Person who:  (i) is appointed as an Officer pursuant to Section 5.19 of this Agreement or who has otherwise become an Officer pursuant to the terms of this Agreement; and

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(ii) has not ceased to be an Officer pursuant to the terms of this Agreement.  “Officers” mean all such Persons.

(ff)           “Permitted Transfer” has the meaning set forth in Section 9.2 of this Agreement.

(gg)         “Person” means any individual, general or limited partnership, joint venture, limited liability company, corporation, trust, estate, association, nominee or other entity.

(hh)         “Profits and Losses” mean, for each Fiscal Year, an amount equal to the Company’s taxable income or loss for such Fiscal Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication): (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition of “Profits” and “Losses” shall be added to such taxable income or loss; (ii) Any expenditures of the Company described in Code Section 705(a)(2)(b) or treated as Code Section 705(a)(2)(b) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition of “Profits” and “Losses” shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraphs (ii) or (iii) of the definition of Gross Asset Value above, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year, computed in accordance with the definition of Depreciation; (vi) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) is required, pursuant to Regulations Section 1.704-(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Unit Holder’s interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; and (vii) Notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Sections 3.3 and 3.4 of this Agreement shall not be taken into account in computing Profits or Losses.  The amounts of the items of Company income, gain, loss or deduction available to be specially allocated pursuant to Sections 3.3 and 3.4 of this Agreement shall be determined by applying rules analogous to those set forth in subparagraphs (i) through (vi) above.

(ii)           “Property” means all real and personal property acquired by the Company (including cash), and any improvements thereto, and shall include both tangible and intangible property.

(jj)           “Regulations” means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations are amended from time to time.

(kk)         “Regulatory Allocations” has the meaning set forth in Section 3.4 of this Agreement.

(ll)           “Related Party” means the adopted or birth relatives of any Person and such Person’s spouse (whether by marriage or common law), if any, including without limitation great-grandparents, grandparents, parents, children (including stepchildren and adopted children), grandchildren, and

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great-grandchildren thereof, and such Person’s (and such Person’s spouse’s) brothers, sisters, and cousins and their respective lineal ancestors and descendants, and any other ancestors and/or descendants, and any spouse of any of the foregoing, each trust created for the exclusive benefit of one or more of the foregoing, and the successors, assigns, heirs, executors, personal representatives and estates of any of the foregoing.

(mm)       “Securities Act” means the Securities Act of 1933, as amended.

(nn)         “Tax Matters Member” has the meaning set forth in Section 7.4 of this Agreement.

(oo)         “Transfer” means, as a noun, any voluntary or involuntary transfer, sale, pledge or hypothecation or other disposition and, as a verb, to voluntarily or involuntarily transfer, give, sell, exchange, assign, pledge, bequest, hypothecate or otherwise dispose of.

(pp)         “Unit” means an ownership interest in the Company issued in consideration of a Capital Contribution made as provided in Article II of this Agreement.

(qq)         “Unit Holder” means any Person who is the owner of one or more Units.  “Unit Holders” means all such Persons.

(rr)           “Unit Holder Nonrecourse Debt” has the same meaning as the term “partner nonrecourse debt” in Section 1.704-2(b)(4) of the Regulations.

(ss)         “Unit Holder Nonrecourse Debt Minimum Gain” means an amount, with respect to each Unit Holder Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Unit Holder Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations.

(tt)           “Unit Holder Nonrecourse Deductions” has the same meaning as the term “partner nonrecourse deductions” in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations.

(uu)         “Unit Holder Register” means the register maintained by the Company at its principal office or by the Company’s duly appointed agent, setting forth the name, address and Capital Contributions of each Unit Holder (or such Unit Holder’s predecessors in interest), and the number of Units, certificate number(s) and date of issuance of Units issued to each Unit Holder, which register shall be modified from time to time as additional Units are issued and as Units are Transferred pursuant to this Agreement.

ARTICLE II.  CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS

2.1           Initial Capital Contributions.  The name, address, initial Capital Contribution and initial Units quantifying the Membership Interest of each of the initial Members are set forth on Exhibit “A” attached hereto, and shall also be set forth on the Unit Holder Register.

2.2           Additional Capital Contributions; Additional Units.  No Unit Holder shall be obligated to make any additional Capital Contributions to the Company or to pay any assessment to the Company, other than any unpaid amounts on such Unit Holder’s original Capital Contributions, and no Units shall be subject to any calls, requests or demands for capital.  Subject to Section 5.6, additional Units may be issued in consideration of Capital Contributions as agreed to between the Governors and the Persons acquiring such Units.    The Members shall have no preemptive rights pursuant to Section 322B.33 of the Act.

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2.3           Capital Accounts.  A Capital Account shall be maintained for each Unit Holder in accordance with the following provisions:

(a)           To each Unit Holder’s Capital Account there shall be credited:  (i) such Unit Holder’s Capital Contributions; (ii) such Unit Holder’s distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Sections 3.3 and 3.4 of this Agreement; and (iii) the amount of any Company liabilities assumed by such Unit Holder or which are secured by any Property distributed to such Unit Holder;

(b)           To each Unit Holder’s Capital Account there shall be debited:  (i) the amount of money and the Gross Asset Value of any Property distributed to such Unit Holder pursuant to any provision of this Agreement; (ii) such Unit Holder’s distributive share of Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Sections 3.3 and 3.4 of this Agreement; and (iii) the amount of any liabilities of such Unit Holder assumed by the Company or which are secured by any Property contributed by such Unit Holder to the Company;

(c)           In the event Units are Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the Transferred Units; and

(d)           In determining the amount of any liability for purposes of subparagraphs (a) and (b) above Code Section 752(c) and any other applicable provisions of the Code and Regulations shall be taken into account.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent therewith.  In the event the Governors  determine that it is prudent to modify the manner in which Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Company or any Unit Holders), are computed in order to comply with such Regulations, the Governors may make such modification, provided that it is not likely to have a material effect on the amounts distributed to any Person pursuant to Article X of this Agreement upon the dissolution of the Company.  The Governors also shall:  (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Unit Holders and the amount of capital reflected on the Company’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q); and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b).

ARTICLE III.  ALLOCATIONS

3.1           Profits.  After giving effect to the special allocations in Sections 3.3 and 3.4 of this Agreement, Profits for any Fiscal Year shall be allocated among the Unit Holders in proportion to Units held.

3.2           Losses.  After giving effect to the special allocations in Sections 3.3 and 3.4 of this Agreement, Losses for any Fiscal Year shall be allocated among the Unit Holders in proportion to Units held.

3.3           Special Allocations.  The following special allocations shall be made in the following order:

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(a)           Minimum Gain Chargeback.  Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this Article III, if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Unit Holder shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Unit Holder’s share of the net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g).  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Unit Holder pursuant thereto.  The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations.  This Section 3.3(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith.

(b)           Unit Holder Minimum Gain Chargeback.  Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of this Article III, if there is a net decrease in Unit Holder Nonrecourse Debt Minimum Gain attributable to a Unit Holder Nonrecourse Debt during any Fiscal Year, each Unit Holder who has a share of the Unit Holder Nonrecourse Debt Minimum Gain attributable to such Unit Holder Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Unit Holder’s share of the net decrease in Unit Holder Nonrecourse Debt Minimum Gain, determined in accordance with Regulations Section 1.704-2(i)(4).  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Unit Holder pursuant thereto.  The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations.  This Section 3.3(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith.

(c)           Qualified Income Offset.  In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of the Regulations, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit as soon as practicable, provided that an allocation pursuant to this Section 3.3(c) shall be made only if and to the extent that the Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article III have been tentatively made as if this Section 3.3(c) were not in the Agreement.

(d)           Gross Income Allocation.  In the event any Member has a deficit Capital Account at the end of any Fiscal Year which is in excess of the sum of:  (i) the amount such Member is obligated to restore pursuant to any provision of this Agreement; and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations, then in such circumstance each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 3.3(d) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Article III have been made as if Sections 3.3(c) and 3.3(d) were not in this Agreement.

(e)           Nonrecourse Deductions.  Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated among the Members in proportion to Units held.

(f)            Unit Holder Nonrecourse Deductions.  Any Unit Holder Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Unit Holder who bears the economic risk of loss with respect to the Unit Holder Nonrecourse Debt to which such Unit Holder Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1).

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(g)           Section 754 Adjustments.  To the extent an adjustment to the adjusted tax basis of any Company asset, pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Unit Holder in complete liquidation of such Unit Holder’s interest in the Company, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Unit Holders in accordance with their interests in the Company in the event Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Unit Holder to whom such distribution was made in the event Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.

(h)           Allocations Relating to Taxable Issuance of Company Units.  Any income, gain, loss or deduction realized as a direct or indirect result of the issuance of Units by the Company to a Unit Holder (the “Issuance Items”) shall be allocated among the Unit Holders so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Unit Holder shall be equal to the net amount that would have been allocated to each such Unit Holder if the Issuance Items had not been realized.

3.4           Regulatory Allocations.  The allocations set forth in Sections 3.3(a), 3.3(b), 3.3(c), 3.3(d), 3.3(e), 3.3(f), 3.3(g) and 3.5 (the “Regulatory Allocations”) are intended to comply with certain requirements of the Regulations.  It is the intent of the Unit Holders that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Section 3.4.  Therefore, notwithstanding any other provision of this Article III (other than the Regulatory Allocations), the Governors shall make such offsetting special allocations of Company income, gain, loss or deduction in whatever manner they determine appropriate so that, after such offsetting allocations are made, each Unit Holder’s Capital Account balance is, to the extent possible, equal to the Capital Account balance such Unit Holder would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Sections 3.1, 3.2, and 3.3(h).

3.5           Loss Limitation.  Losses allocated pursuant to Section 3.2 of this Agreement shall not exceed the maximum amount of Losses that can be allocated without causing any Unit Holder to have an Adjusted Capital Account Deficit at the end of any Fiscal Year.  In the event some but not all of the Unit Holders would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 3.2 of this Agreement, the limitation set forth in this Section 3.5 shall be applied on a Unit Holder by Unit Holder basis and Losses not allocable to any Unit Holder as a result of such limitation shall be allocated to the other Unit Holders in accordance with the positive balances in such Unit Holder’s Capital Accounts so as to allocate the maximum permissible Losses to each Unit Holder under Section 1.704-1(b)(2)(ii)(d) of the Regulations.

3.6           Other Allocation Rules.

(a)           For purposes of determining Profits, Losses and any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly or other basis, as determined by the Governors using any permissible method under Code Section 706 and the Regulations thereunder.

(b)           The Unit Holders are aware of the income tax consequences of the allocations made by this Article III and hereby agree to be bound by the provisions of this Article III in reporting their shares of Company income and loss for income tax purposes.

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(c)           Solely for purposes of determining a Unit Holder’s proportionate share of the “excess nonrecourse liabilities” of the Company within the meaning of Regulations Section 1.752-3(a)(3), the Unit Holders’ aggregate interests in Company Profits shall be deemed to be as provided in the Capital Accounts.  To the extent permitted by Section 1.704-2(h)(3) of the Regulations, the Governors shall endeavor to treat distributions of Net Cash Flow as having been made from the proceeds of a Nonrecourse Liability or a Unit Holder Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Unit Holder.

(d)           Profits and Losses to the Unit Holders shall be allocated among the Unit Holders in the ratio which each Unit Holder’s Units bears to the total number of Units issued and outstanding.

3.7           Tax Allocations; Code Section 704(c).  In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any Property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Unit Holders so as to take account of any variation between the adjusted basis of such Property to the Company for federal income tax purposes and its initial Gross Asset Value.  In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraph (ii) of the definition of Gross Asset Value in Section 1.10(t) of this Agreement, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder.  Any elections or other decisions relating to such allocations shall be made by the Governors in any manner that reasonably reflects the purpose and intention of this Agreement.  Allocations pursuant to this Section 3.7 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Unit Holder’s Capital Account or share of Profits, Losses, other items or distributions pursuant to any provision of this Agreement.

3.8           Tax Credit Allocations.  All income tax credits with respect to the Company’s property or operations shall be allocated among the Members in accordance with their respective Membership Interests for the Fiscal Year during which the expenditure, production, sale or other event giving rise to such credits occurs.  This Section 3.8 is intended to comply with the applicable tax credit allocation principles of Regulations Section 1.704-1(b)(4)(ii) and shall be interpreted consistently therewith.

ARTICLE IV.  DISTRIBUTIONS

4.1           Net Cash Flow.  Subject to the terms and conditions of any applicable loan covenants and restrictions, the Governors, in their sole discretion, shall make distributions of Net Cash Flow, if any, to the Unit Holders in proportion to Units held.  In determining Net Cash Flow, the Governors shall endeavor to provide for cash distributions at such times and in such amounts as will permit the Unit Holders to make timely payment of income taxes.

4.2           Amounts Withheld.  All amounts withheld pursuant to the Code or any provision of any state, local or foreign tax law with respect to any payment, distribution or allocation to the Company or the Unit Holders shall be treated as amounts paid or distributed, as the case may be, to the Unit Holders with respect to which such amount was withheld pursuant to this Section 4.2 for all purposes under this Agreement.  The Company is authorized to withhold from payments and distributions, or with respect to allocations, to the Unit Holders and to pay over to any federal, state, local or foreign government, any amounts required to be so withheld, and shall allocate any such amounts to the Unit Holders with respect to which such amount was withheld.

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4.3           Limitations on Distributions.  The Company shall make no distributions to the Unit Holders except as provided in this Article IV and in Article X of this Agreement.  Notwithstanding any other provision, no distribution shall be made if not permitted to be made under the Act.

ARTICLE V.  MANAGEMENT

5.1           Board of Governors.  Except as otherwise provided in this Agreement or required by law, the Governors shall direct the business and affairs and exercise all of the powers of the Company, and shall adopt such policies, rules, regulations and actions as they deem advisable.  Subject to Section 5.6 of this Agreement or any other express provisions of this Agreement, the business and affairs of the Company shall be managed by or under the direction of the Governors and not by the Members.  No Member, other than a Member acting in his or her capacity as a Governor or Officer of the Company, has the power or authority to act for or on behalf of the Company, to bind the Company by any act, or to incur any expenditures on behalf of the Company.

5.2           Number of Governors.  The number of Governors shall be a minimum of Three (3) and a maximum of Fifteen (15).  Prior to any action by the Members to change or fix the number of Governors, the number of Governors may be changed from time to time within that variable range by the Governors.  Once the Members have taken action to change or fix the number of Governors, the Governors shall no longer have any authority to change the number of Governors from the number last approved by the Members.  The Members may increase or decrease the number of Governors last approved, and may change from a variable range to a fixed number or vice versa, at any annual or special meeting.  At the first annual meeting of Members and at each annual meeting thereafter the Members shall elect Governors to hold office for the term for which elected, and until the successors of such Governor shall have been elected and qualified.  Governors need not be residents of the State of Minnesota or Members of the Company.

5.3           Election of Governors.

(a)           Election of Governors and Terms.  The initial Governors shall be appointed by the initial Members and shall serve until the first annual meeting of the Members following the date on which substantial operations of the Facilities commence, and in all cases until a successor is elected and qualified, or until the earlier death, resignation, removal or disqualification of any such Governor.  In accordance with Section 5.2 of this Agreement, at the first annual meeting of the Members following the date on which substantial operations of the Facilities commence, the number of Governors shall automatically become fixed at Nine (9).  After the expiration of the initial terms of the Governors, at each annual meeting of the Members, Governors shall be elected by the Members for staggered terms of Three (3) years (except as hereafter provided with respect to the initial terms of Group I and Group II Governors) and until a successor is elected and qualified, or until the earlier death, resignation, removal or disqualification of any such Governor.  The initial Governors shall conduct a lottery to separately identify the Governor positions to be elected at the first annual meeting following the date on which substantial operations of the Facilities commence, and shall so classify each such Governor position as Group I, Group II or Group III, with such classification to serve as the basis for the staggering of terms among the elected Governors.  The term of Group I Governors shall expire first (initial term of 1 year with successors elected to 3 year terms thereafter), followed by those of Group II Governors (initial term of 2 years with successors elected to 3 year terms thereafter), and then Group III Governors (initial and subsequent terms of 3 years).

(b)           Nominations for Governors.  One or more nominees for Governor positions up for election shall be named by the then-current Governors or by a nominating committee established by the Governors.  Nominations for the election of Governors may also be made by any Member entitled to vote

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in the election of Governors.  Any Member that intends to nominate a Person for election as a Governor may do so only if written notice of such Member’s intent to make such nomination is given, either by personal delivery or by United Stated mail, postage prepaid, to the Secretary of the Company not less than Forty-five (45) nor more than Ninety (90) days prior to the annual meeting of the Company at which such elections are to be held.  Each such notice shall set forth:  (i) the name and address of record of the Member who intends to make the nomination; (ii) a representation that the Member is a holder of record of Units entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the Person specified in the notice; (iii) the name, age, address and principal occupation or employment of each nominee; (iv) a description of all arrangements or understandings between the Member and each nominee and any other Person(s) pursuant to which such nominations are to be made; (v) such other information regarding each nominee as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (vi) the consent of each nominee to serve as a Governor of the Company if so elected.  The Company may require any proposed nominee to furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as a Governor.  The presiding Officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedures, and if so determined, the defective nomination shall be disregarded.  The amendment or repeal of this Section 5.3 or the adoption of any provision inconsistent therewith shall require the approval of a majority of the Membership Voting Interests.

5.4           Authority of Governors.  Subject to the limitations and restrictions set forth in this Agreement and the Act, the Governors shall direct the management of the business and affairs of the Company and shall have all of the rights and powers which may be possessed by a “Governor” under the Act including, without limitation, the right and power to do or perform, and the further right and power by resolution to delegate to the Officers or such other Persons as the Governors deem appropriate, the right and power to do or perform, the following:

(a)           Conduct the business and carry on the operations of the Company, and have and exercise the powers granted by the Act in any state, territory, district or possession of the United States, or in any foreign country, which may be necessary or convenient to effect any or all of the purposes for which the Company is organized;

(b)           Acquire by purchase, lease or otherwise any real or personal property which may be necessary, convenient, or incidental to the accomplishment of the purposes of the Company;

(c)           Operate, maintain, finance, improve, construct, own, operate, sell, convey, assign, mortgage and lease any real estate and any personal property necessary, convenient, or incidental to the accomplishment of the purposes of the Company;

(d)           Execute any and all agreements, contracts, documents, certifications and instruments necessary or convenient in connection with the management, maintenance and operation of the business and affairs of the Company, including executing amendments to this Agreement and the Articles in accordance with the terms of this Agreement, both as Governors and where permitted, as attorney-in-fact for the Members pursuant to any power of attorney granted by the Members to the Governors;

(e)           Borrow money and issue evidences of indebtedness necessary, convenient, or incidental to the accomplishment of the purposes of the Company, and secure the same by mortgage, pledge or other lien on any Company assets;

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(f)            Execute, in furtherance of any or all of the purposes of the Company, any deed, lease, mortgage, deed of trust, mortgage note, promissory note, bill of sale, contract or other instrument purporting to convey or encumber any or all of the Company assets;

(g)           Prepay in whole or in part, refinance, increase, modify or extend any liabilities affecting the assets of the Company and in connection therewith, execute any extensions or renewals of encumbrances on any or all of such assets;

(h)           Care for and distribute funds to the Members by way of cash income, return of capital or otherwise, all in accordance with the provisions of this Agreement, and perform all matters in furtherance of the objectives of the Company and this Agreement;

(i)            Hire or contract on behalf of the Company for the employment and services of employees and independent contractors, and delegate to such Persons the duty to manage or supervise any of the assets or operations of the Company;

(j)            Engage in any kind of activity and perform and carry out contracts of any kind necessary or incidental to, or in connection with, the accomplishment of the purposes of the Company, as may be lawfully carried on or performed by a limited liability company under the laws of each state in which the Company is then formed or qualified;

(k)           Take, or refrain from taking, all actions, not expressly proscribed or limited by this Agreement or the Articles, as may be necessary or appropriate to accomplish the purposes of the Company;

(l)            Institute, prosecute, defend, settle, compromise and dismiss lawsuits or other judicial or administrative proceedings brought on or in behalf of, or against, the Company, the Members or the Governors or Officers in connection with activities arising out of, connected with, or incidental to this Agreement, and engage counsel or others in connection therewith;

(m)          Purchase, take, receive, subscribe for or otherwise acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge, or otherwise dispose of, and otherwise use and deal in and with, shares or other interests in or obligations of domestic or foreign corporations, associations, general or limited partnerships, other limited liability companies, or individuals or direct or indirect obligations of the United States or of any government, state, territory, government district or municipality or of any instrumentality of any of them;

(n)           Agree with any Person as to the form and other terms and conditions of such Person’s Capital Contribution to the Company and cause the Company to issue Membership Interests and Units in consideration for such Capital Contribution;  and

(o)           Indemnify Members, Governors or Officers, or former Members, Governors or Officers, and to make any other indemnification that is authorized by this Agreement in accordance with, and to the fullest extent permitted by, the Act.

5.5           Governor as Agent.  Notwithstanding the power and authority of the Governors to manage the business and affairs of the Company, no Governor shall have authority to act as agent for the Company for the purposes of its business (including the execution of any instrument on behalf of the Company) unless the Governors have authorized the Governor to take such action.

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5.6           Restrictions on Authority of Governors.

(a)           Notwithstanding any provision in this Agreement to the contrary, the Governors shall not have authority to, and they covenant and agree that they shall not, do any of the following acts without the unanimous consent of the Members:

(i)Cause or permit the Company to engage in any activity that is not consistent with the purposes of the Company as set forth in Section 1.3 of this Agreement;

(ii)Knowingly engage in any act in contravention of this Agreement or which would make it impossible to carry on the ordinary business of the Company, except as otherwise provided in this Agreement;

(iii)Possess Company Property, or assign rights in specific Company Property, for other than a Company purpose; or

(iv)Cause the Company to voluntarily take any action that would cause a bankruptcy of the Company.

(b)           The Governors shall not have authority to, and they covenant and agree that they shall not cause the Company to, without the consent of a majority of the Membership Voting Interests:

(i)Merge, consolidate, exchange or otherwise dispose of all or substantially all of the Property, except for a liquidating sale of the Property in connection with the dissolution of the Company;

(ii)Issue Units at a purchase price of less than $5,000 per Unit;

(iii)Issue more than an aggregate of 10,000 Units; or

(iv)Cause the Company to acquire any equity or debt securities of any Governor or any of its Affiliates, or otherwise make loans to any Governor or any of its Affiliates.

The actions specified herein as requiring the consent of the Members shall be in addition to any actions by the Governor that are specified in the Act as requiring the consent or approval of the Members.  Unless otherwise required by this Agreement or the Act, any such required consent or approval may be given by a vote of a majority of the Membership Voting Interests.

5.7           Meetings.  A regular meeting of the Governors shall be held, without other notice than this Section, immediately after, and at the same place as, the annual meeting of the Members.  Additionally, the Governors may, by resolution, prescribe the time and place for holding regular meetings and may provide that such resolution constitutes notice thereof.  If the Governors do not prescribe the time and place for the holding of regular meetings, such regular meetings shall be held at the time and place specified in the notice of each such regular meeting.  Unless otherwise prescribed by statute, special meetings may be called by, or at the request of, the President or any Two (2) or more Governors.  The Governors may designate any location as the place of any regular or special meeting.  If no designation is made, the place of meeting shall be the principal office of the Company.

5.8           Notice.  Notice shall be given to each Governor with respect to any special meeting of the Governors,  stating the date, time and place of the meeting.  Such notice shall be given at least Two (2) days prior thereto and shall be in writing, unless oral notice is reasonable under the circumstances.  If

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mailed, such notice shall be deemed to be delivered on the earlier of Five (5) days after deposit in the U.S. mail addressed to the Governor’s address as shown on the Company’s records with postage prepaid, or upon receipt.  Any Governor may waive notice of any meeting.  Except as provided in the next sentence, the waiver must be in writing, signed by the Governor entitled to notice, and filed with the minutes relating to the action taken.  A Governor’s attendance at a meeting shall constitute a waiver of notice of such meeting, except where such Governor attends the meeting for the express purpose of object­ing to the transaction of any business because the meeting was not lawfully called or convened.  Neither the business to be transacted at, nor the purpose of, any regular or spe­cial meeting of the Governors need be specified in the notice or waiver of notice of such meeting.

5.9           Conduct of Meeting.  All Governors, to the extent possible, shall personally attend all Governors meetings.  However, any Governor may participate in any regular or special meeting by any means of communication by which all Governors participating may simultaneously hear each other during the meeting.  A Governor participating in a meeting by this means is deemed to be present in person.

5.10         Quorum.  A majority of the duly elected and qualified Governors shall constitute a quorum for the transaction of business.  If less than a quorum is represented at a meeting, the Governors represented may adjourn the meeting and reschedule it for a later date without further notice.  At such adjourned and rescheduled meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the original meeting.  Governors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of Governors to leave less than a quorum.

5.11         Manner of Acting; Informal Action.  Except as otherwise provided in this Agreement, the act of a majority of the Governors at a meeting at which a quorum is present shall be the act of the Governors.  Unless otherwise provided by law, any action required or permitted to be taken at a meeting of the Governors may be taken without a meeting if a consent in writing setting forth the action so taken is signed by all Governors entitled to vote with respect the subject matter thereof.

5.12         Absentee Governor.  A Governor may give advance written consent or opposition to a proposal to be acted on at a meeting of the Governors.  If the Governor is not present at the meeting, consent or opposition to a proposal does not constitute presence for purpose of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the Governor has consented or objected.

5.13         Presumption of Assent.  A Governor present at a meeting shall be presumed to have assented to action taken, unless the dissent of such Governor is entered in the minutes of the meeting or unless such Governor files a written dissent to such action with the other Governors before the adjourn­ment thereof or forwards such dissent by mail to the other Governors immediately after the adjournment thereof.  Such right to dissent shall not apply to a Governor who voted in favor of an action.

5.14         Removal of Governors.  The Members may remove a Governor, with or without cause, at a meeting called for that purpose, if notice has been given that a purpose of the meeting is such removal.

5.15         Vacancies.  Any vacancy occurring in the Board of Governors may be filled by the affirmative vote of a majority of the remaining Governors.  A Governor elected to fill a vacancy shall be elected for the unexpired term of such Governor’s predecessor in office.  Any vacancy to be filled by reason of any increase in the number of Governors shall be filled by election at an annual or special meeting of the Members called for that purpose.

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5.16         Compensation.  The Governors shall have authority to establish reasonable compensation of all Governors for services to the Company as Governors, officers or otherwise, and to provide for reimbursement to Governors of their reasonable expenses of attending Governors’ meetings.

5.17         Committees; Authority.  The Governors may create such committees, and appoint such Governors to serve on them, as the Governors deem appropriate.  Each committee must have Two (2) or more Governors, who serve at the pleasure of the Governors.  The creation of a committee, and the appointment of Governors to serve on it, must be approved by a majority of the Governors.  The procedural requirements for Board of Governor meetings under this Article V shall also apply to committee meetings.  Committees may exercise only those aspects of the Governors’ authority which are expressly conferred by the Governors by express resolution.  Notwithstanding the foregoing, however, a committee may not, under any circumstances:  (i) apportion or authorize distributions; (ii) approve or propose any action for which the Act requires Member approval; (iii) elect Officers; (iv) fill vacancies on the Board of Governors or on any of its committees; (v) adopt, amend, or repeal the Articles or this Agreement; (vi) approve a plan of merger; (vii) authorize or approve the reacquisition of Units, except according to a formula or method prescribed by the Governors; or (ix) authorize or approve the issuance or sale or contract for sale of Units or determine the designation and relative rights, preferences, and limitations of a class or series of Units.

5.18         Voting; Potential Financial Interest.  Any Governor shall be disqualified from voting on any matter solely by reason of such Governor’s (or his/her Affiliate’s) potential financial interest in the outcome of such vote  regardless of whether the Governor reasonably disclosed the potential conflict of interest at the time of such vote.

5.19         Duties and Obligations of Governors.  The Governors shall cause the Company to conduct its business and operations separate and apart from that of any Governor or any Governor’s Affiliates.  The Governors shall take all actions which may be necessary or appropriate:  (i) for the continuation of the Company’s valid existence as a limited liability company under the laws of the State of Minnesota and each other jurisdiction in which such existence is necessary to protect the limited liability of Members or to enable the Company to conduct the business in which it is engaged; and (ii) for the accomplishment of the Company’s purposes, including the acquisition, development, maintenance, preservation, and operation of Company Property in accordance with the provisions of this Agreement and applicable laws and regulations.  Each Governor shall have the duty to discharge the foregoing duties in good faith, in a manner the Governor believes to be in the best interests of the Company, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.  The Governors shall have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, whether or not in the Governor’s immediate possession or control.  The Governors shall not employ, or permit another to employ, such funds or assets in any manner except for the exclusive benefit of the Company.  The Company shall not permit Members to contract away the fiduciary obligation owed to Members by Governors under the common law.  The Governors shall be under no other fiduciary duty to the Company or the Members to conduct the affairs of the Company in a particular manner.  Governors shall not receive any rebates or give-ups, nor may they participate in any reciprocal business arrangements.  No Governor shall directly or indirectly pay or award any commissions or other compensation to any Person engaged to sell Units or give investment advice to potential Members, provided that this clause shall not prohibit the payment to a registered broker-dealer or other properly licensed Person of normal sales commissions for selling Units. All material and affiliated transactions and loans, and any forgiveness of loans, must be approved by a majority of the Company’s independent governors as defined in Section 1.10(s) who do not have an interest in the transactions and who have access, at the Company’s expense, to Company’s legal counsel.

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5.20         Officers.  The officers of the Company shall be appointed by the Governors and shall include a President, a Vice-President, a Secretary, a Treasurer, and such other Officers and assistant Officers as the Governors shall determine.  One person may simultaneously hold more than one office.  The Officers’ terms shall be specified by the Governors.  If no term is specified, they shall hold office until the first meeting of the Governors held after the next annual meeting of the Members.  If the appointment of Officers shall not be made at such meeting, such appointment shall be made as soon thereafter as is convenient.  Each Officer shall hold office until the officer’s successor is duly appointed and qualified, until the Officer’s death, or until the Officer resigns or is removed by the Governors.  The designation of a specified term does not grant to an Officer any contract rights; and unless otherwise provided in a signed contract with the Company, Officers will be “at-will employees” subject to removal by the Governors at any time, with or without cause.

Any officer may resign at any time by giving written notice to the President or the Secretary of the Company.  Unless otherwise noted in the notice, the resignation shall be effective upon receipt.

The Officers, and their duties and responsibilities shall be as follows:

(a)           President.  The President shall be the chief executive officer of the Company and shall, subject to Governors’ control, generally supervise and control the Company’s business and affairs.  The President shall, when present, preside at all Governors’ and Member meetings, and shall perform all duties incident to the office of President and such other duties as may be prescribed by this Agreement or by the Governors.  For purposes of the Act, the President shall be deemed the Chief Manager (as such term is defined and used in the Act) of the Company.

(b)           The Vice President(s).  If one or more Vice Presidents are appointed by the Governors, the Vice President (or in the event there be more than one, the appropriate Vice Presi­dent, as designated by the Governors, or in the absence of any designation, then in the order of appointment) shall perform the duties of the President in the event of the President’s absence, death, inabil­ity or refusal to act.  When so acting, a Vice President shall have all of the powers, and be subject to all of the restrictions upon, the President.  In addition, Vice Presidents shall perform such other duties as may be prescribed by this Agreement or by the Governors.

(c)           The Secretary.  The Secretary shall:  (i) keep the minutes of the Governor and Member meetings; (ii) see that all notices are duly given in accordance with this Agreement and as required by law; (iii) serve as the custodian of the Company’s records; (iv) when requested or required, authenticate any Company records; (v) keep and maintain the Unit Holder Register and the Unit transfer books of the Company; and (vi) perform all duties incident to the office of Secretary and such other duties as may be prescribed by this Agreement or by the Governors.

(d)           The Treasurer.  The Treasurer shall be the chief financial officer of the Company and shall:  (i) have charge and custody of, and be responsible for, all funds and securities of the Company; (ii) receive and give receipts for moneys due and payable to the Company, and deposit all such moneys in the name of the Company in such banks, trust com­panies or other depositories as shall be selected in accordance with this Agreement; and (iv) generally perform all duties incident to the office of Treasurer and such other duties as may be prescribed by this Agreement or by the Governors.

(e)           Other Assistants and Acting Officers.  The Governors shall have the power to appoint any Person to act as assistant to any Officer, or to perform the duties of such Offi­cer, whenever for any reason it is impracticable for such officer to act personally.  Any such assistant or acting Officer shall have the power to perform all the duties of the office to which he or she is appointed to be an assistant, or as to which he or she is appointed to act, except as such power may be otherwise defined or restricted by

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the Governors.  Additionally, unless prohibited by a resolution of the Governors, any Officer may delegate in writing some or all of the duties and powers of such Officer’s position to other Persons.  An Officer who delegates the duties or powers of an office remains subject to the standard of conduct for such Officer with respect to the discharge of all duties and powers so delegated.

Salaries of the Officers shall be fixed from time to time by the Governors, and no Officer shall be prevented from receiving a salary due to the fact that such Officer is also a Governor.

5.21         Execution of Instruments.  All deeds, mortgages, bonds, checks, contracts and other instruments pertaining to the business and affairs of the Company shall be signed on behalf of the Company by:  (i) the President; or (ii) such other Officers or Persons who may be authorized to do so by specific resolution of the Governors.

5.22         Limitation of Liability; Indemnification.  To the maximum extent permitted under the Act and other applicable law, no Member, Governor or Officer shall be personally liable for any debt, obligation or liability of the Company merely by reason of being a Member, Governor or Officer.  Furthermore, no Governor or Officer shall be personally liable to the Company or its Members for monetary damages for a breach of fiduciary duty by such Governor or Officer; provided that this provision shall not eliminate or limit the liability of a Governor or Officer for any of the following:  (i) any breach of the duty of loyalty to the Company or its Members; (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law; (iii) a transaction from which the Governor or Officer derived an improper personal benefit (iv) a wrongful distribution in violation of Sections 80A.23 or 322B.56 of the Act; or (v) any act or omission occurring before the Effective Date of this Agreement.  To the maximum extent permitted under the Act and other applicable law, the Company, its receiver, or its trustee (in the case of its receiver or trustee, to the extent of Company Property) shall indemnify, save and hold harmless, and pay all judgments and claims against each Governor or Officer relating to any liability or damage incurred by reason of any act performed or omitted to be performed by such Governor or Officer, in connection with the business of the Company, or in the event of any action by a Unit Holder against a Governor, including a derivative suit, including reasonable attorneys’ fees incurred by such Governor or officer in connection with the defense of any action based on any such act or omission, provided that (i) the Governor or officer has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of the Company; (ii) the Governor or officer was acting on behalf of or performing services for the Company; (iii) such liability or loss was not the result of negligence or misconduct by the Governor or officer; and (iv) such indemnification or agreement to hold harmless is recoverable only out of Company net assets and not from the holders of any Membership Interests.  The advancement of Company funds to a Governor or officer for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought shall be allowed only if: (i) the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the Company; (ii) the legal action is initiated by a third party who is not a holder of any Membership Interests, or the legal action is initiated by a holder of a Membership Interest and a court of competent jurisdiction specifically approves such advancement; and (iii) the Governor or officer undertakes to repay the advanced funds to the Company, together with the applicable legal rate of interest thereon, in cases in which such person is found not to be entitled to indemnification.  Notwithstanding anything to the contrary above, a Governor or officer shall be indemnified for losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws only if one or more of the following conditions is met: (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee; (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or (iii) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made, and the court of law considering the request for indemnification has been advised of the position of the Securities and Exchange

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Commission and the published position of any state securities regulatory authority in which securities of the Company were offered or sold as to indemnification for violations of securities laws.  Notwithstanding the foregoing provisions, no Governor or officer shall be indemnified by the Company to the extent prohibited or limited by the Act. The Company may purchase and maintain insurance on behalf of any Person in such Person’s official capacity against any liability asserted against and incurred by such Person in or arising from that capacity, so long as the Company does not incur the cost of that portion of liability insurance which insures such Person for any liability as to which the Person is prohibited from being indemnified under this paragraph.

ARTICLE VI.  MEMBERSHIP UNITS; MEMBERS

6.1           Membership Units.  The Company is initially organized with One (1) class of Membership Interests, designated in Units, which Units are initially the only class of equity in the Company.  The Units shall have no par value and shall be of a single class with identical rights.  The Company shall have a first lien on the Units of any Member for any debt or liability owed by such Member to the Company.  Additional and different classes of Membership Interests represented by different Units may be created and issued to new or existing Members on such terms and conditions as the Governors may determine.  Such additional and different classes may have different rights, powers and preferences (including, without limitation, voting rights and distribution preferences), which may be superior to those of existing Members.  Members shall have no preemptive rights to acquire additional or newly created Units.

6.2           Certificates; Surrender for Transfer.  Certificates representing Units shall be in such form as shall be determined by the Governors, in their discretion.  If a certificate is lost, destroyed or mutilated, a new one may be issued upon such terms and indemnity to the Company as the Governors may prescribe.  No new certificate shall be issued until the former certificate for a like number of Units has been surrendered and canceled.

6.3           Members.  Each Person who desires to become a Member must complete and execute a signature page to this Agreement in the form of Exhibit “B” attached hereto and such other documents as may be required by the Governors.  Membership Interests and Units of the Members shall be set forth on Exhibit “A” to this Agreement, as amended from time to time.

6.4           Additional Members.  No Person shall become a Member without the approval of the Governors.  The Governors may refuse to admit any Person as a Member in their sole discretion.  Any such admission must comply with the requirements described in this Agreement and will be effective only after such

Person has executed and delivered to the Company such documentation as determined by the Governors to be necessary and appropriate to effect such admission.

6.5           Members’ Voting Rights.  Each Member shall be entitled to One (1) vote for each Unit registered in the name of such Member (as shown in the Unit Holder Register) as to any matter for which such Member is entitled to vote under this Agreement or the Act.  Members do not have cumulative voting rights as to any matter.  Except as otherwise expressly provided for in this Agreement, Members shall not have any right or power to take part in the management or control of the Company or its business and affairs or to act for or bind the Company in any way.

6.6           Member Meetings.  Beginning with the fiscal year ending in calendar year 2006, or sooner as determined by the Governors, and each Fiscal Year thereafter, an annual meeting of the Members shall be held within One Hundred Eighty (180) days of the close of the Company’s Fiscal Year, at a time and date determined by the Governors.  Special meetings of the Members, for any purpose(s) described in the meeting notice, may be called by the Governors, and shall be called by the Governors at the request of not

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less than ten percent (10%) of all Members.  A call by the Members for a special meeting shall be in writing, signed by the persons calling for the same, addressed and delivered to the Secretary, and shall state the time and purpose(s) of such meeting.

6.7           Place of Meeting.  The Governors, or in the absence of action by the Governors, the President, may designate any place within or without of the State of Minnesota as the place for any meeting of the Members, unless by written consents, all Members entitled to vote at the meeting designate a different place for the holding of such meeting.  If no designation is made by the Governors, the President or by unanimous action of the Members, the place of meetings shall be at the principal office of the Company in the State of Minnesota.

6.8           Conduct of Meetings.  All meetings of the Members shall be presided over by the President.  All meetings of the Members shall be conducted with such rules and procedures as may be determined by the President in his or her discretion.  Subject to the discretion of the Governors, the Members may participate in any Member meeting by means of telephone conference or similar means of communication by which all participants in the meeting can hear and be heard by all other participants.

6.9           Notice.  Written notice stating the place and time of any annual or special Member meeting shall be delivered or mailed not less than Fifteen (15) nor more than Sixty (60) days prior to the meeting date, to each Member of record entitled to vote at such meeting as of the close of business on the day before said notice is delivered or mailed.  Notice of a special meeting of the Members shall be provided to the Members within Ten (10) days of the Secretary’s receipt of a call by the Members for a specical meeting in accordance with Section 6.6.  Such notices shall be deemed to be effective upon the earlier of:  (i) deposit postage-prepaid in the U.S. mail, addressed to the Member at the Member’s address as it appears on the Unit Holder Register, or such other address as may have been provided in writing to the Company by a Member; (ii) the date shown on the return receipt if sent by registered or certified mail, return receipt requested; or (iii) actual receipt.

6.10         Contents of Notice.  The notice of each Member meeting shall include a description of the purpose(s) for which the meeting is called.  If a purpose of any Member meeting is to consider:  (i) a proposed amendment to or restatement of the Articles requiring Member approval; (ii) a plan of merger or share exchange; (iii) the sale, lease, exchange or other disposition of all, or substantially all of the Company’s Property; (iv) the dissolution of the Company; or (v) removal of a Governor, then the notice must so state and must be accompanied, as applicable, by a copy or summary of the (1) amendment(s) to the Articles, (2) plan of merger or share exchange, (3) documents relating to the transaction for the disposition of all the Company’s property, and/or (4) plan and Articles of Dissolution.

6.11         Adjourned Meetings. If any Member meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place, if the new date, time and place is announced at the meeting before adjournment; provided that, if a new record date for the adjourned meeting is or must be fixed, then notice must be given to new Members as of the new record date.

6.12         Waiver of Notice.  Whenever any notice is required to be given to any Member under the Act, the Articles or this Agreement, a waiver in writing, signed by such Member shall be deemed equivalent to the giving of such notice.  Furthermore, a Member’s attendance at a meeting waives any objection that the Member might otherwise raise based on lack of notice or defective notice, unless the Member:  (i) objects at the outset of the meeting; or (ii) in the case of an objection claiming that consideration of a particular matter is not within the purposes described in the meeting notice, objects at the time such matter is presented, and in either case, thereafter does not participate in the meeting.

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6.13         Fixing of Record Date.  For purposes of determining the Members entitled to notice of, or to vote at, any Member meeting or any adjournment thereof, or for purposes of determining the Members entitled to receive payment of any distribution, or in order to make a determination of the Members for any other purpose, the Governors may provide that the Unit Transfer books shall be closed for a stated period, not to exceed Sixty (60) days.  If the Unit Transfer books shall be closed for such purpose, such books shall be closed for at least Ten (10) days immediately preceding such meeting.  In lieu of closing the Unit Transfer books, the Governors may fix in advance a date as the record date for any such determination of Members, such date in any case to be not more than Sixty (60) days, and in case of a meeting of Members not less than Ten (10) days, prior to the date on which the particular action requiring such determination is to be taken.  If the Unit Transfer books are not closed and no record date is fixed for the determination, the date on which notice of the meeting is mailed or the date on which the resolution of the Governors declaring a dividend is adopted, as the case may be, shall be the record date for such determination.  When a determination of Members entitled to vote at any meeting of the Members has been made as provided in this Section, such determination shall apply to any adjournment thereof, unless the Governors fix a new record date, which it must do if the meeting is adjourned to a date more than One Hundred Twenty (120) days after the date fixed for the original meeting.

6.14         Quorum and Proxies.  The presence (in person or by proxy or mail ballot) of Members representing at least fifty percent (50%) of the Membership Voting Interests is required for the transaction of business at a meeting of the Members.  Voting by proxy or by mail ballot shall be permitted on any matter if authorized by the Governors.

6.15         Voting; Action by Members.  If a quorum is present, the affirmative vote of a majority of the Membership Voting Interests represented at the meeting and entitled to vote on the matter (including units represented in person, by proxy or by mail ballot when authorized by the Governors) shall constitute the act of the Members, unless the vote of a greater or lesser proportion or numbers is otherwise required by this Agreement.

6.16         Termination of Membership.  If for any reason the membership of a Member is terminated as provided in this Agreement or the Act, the Member whose membership has terminated loses all Membership Voting Interests and shall be considered merely an unadmitted Assignee of the Membership Financial Rights owned before the termination of membership, having only the rights provided for unadmitted Assignees in Section 9.7 hereof.

6.17         Continuation of the Company.  The Company shall not be dissolved upon the occurrence of any event that is deemed to terminate the continued membership of a Member, but rather the Company shall continue without dissolution, and its affairs shall not be required to be wound up.

6.18         No Member Right of Redemption or Return of Capital.  Except as otherwise provided in this Agreement or the Act, no Member or transferee of any Member shall have any right to demand or receive a return of his/her/its Capital Contribution or to require the redemption of his/her/its Units.

6.19         Waiver of Dissenters Rights.  To the fullest extent permitted by the Act, each Member hereby disclaims, waives and agrees not to assert:  (i) any dissenters’ or similar rights under the Act; (ii) any right to require partition or appraisal of the Company or of any of its assets, or to cause the sale of any Company Property; or (iii) any right to maintain any action for partition or to compel any sale with respect to such Member’s Units, or with respect to any Company Property.

6.20         Loans.  Any Member or Affiliate may, with the consent of the Governors, lend or advance money to the Company, in which case the amount of any such loan or advance shall not be treated as a

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contribution to the capital of the Company but rather shall be a debt due from the Company, repayable out of the Company’s cash, and shall bear interest at a rate not in excess of the prime rate established, from time to time, by any major bank selected by the Governors for loans to its most creditworthy commercial borrowers, plus Four Percent (4%) per annum.  If a Governor or an Affiliate of a Governor is the lending Member, the rate of interest and the terms and conditions of such loan shall be no less favorable to the Company than if the lender had been an independent third party.  None of the Members or their Affiliates shall be obligated to make any loan or advance to the Company.

ARTICLE VII.  ACCOUNTING, BOOKS AND RECORDS

7.1           Accounting, Books and Records.  The books and records of the Company shall be kept, and the financial position and the results of its operations recorded, in accordance with GAAP.  The books and records shall reflect all Company transactions and shall be appropriate and adequate for the Company’s business.  The Company shall maintain at its principal place of business:  (i) a current list of the full name and last known address of each Member and Assignee set forth in alphabetical order, together with the Capital Contributions, Capital Account and Units of each Member and Assignee, such list updated at least quarterly; (ii) the full name and  address of each Governor; (iii) a copy of the Articles and any and all amendments thereto, together with executed copies of any powers of attorney pursuant to which the Articles or any amendments thereto have been executed; (iv) copies of the Company’s federal, state and local income tax and information returns and reports, if any, for the Six (6) most recent taxable years; (v) a copy of this Agreement and any and all amendments hereto, together with executed copies of any powers of attorney pursuant to which this Agreement or any amendments hereto have been executed; and (vi) copies of the financial statements of the Company, if any, for the Six (6) most recent Fiscal Years.  The Company shall use the accrual method of accounting in the preparation of its financial reports and for tax purposes and shall keep its books and records accordingly.

7.2           Delivery to Members and Inspection.  Any Member or such Member’s designated representative shall have reasonable access during normal business hours to the information and documents kept by the Company pursuant to Section 7.1 of this Agreement.  Upon the request of any Member for purposes reasonably related to such Member’s interest as a Member, the Governors shall promptly deliver to the requesting Member, at the expense of the requesting Member, a copy of the information required to be maintained under Section 7.1 of this Agreement.  Each Member has the right, upon reasonable request for purposes reasonably related to such Member’s interest as a Member and for proper purposes, to:  (i) inspect and copy during normal business hours any of the Company records described in Section 7.1 of this Agreement; and (ii) obtain from the Governors, promptly after their becoming available, copies of the Company’s federal, state and local income tax and information returns for each Fiscal Year.  Each Assignee shall have the right to information regarding the Company only to the extent required by the Act.  Upon the request of a copy of a current Member list, such list shall be mailed to any Member within ten (10) days of the request, such copy to be printed in alphabetical order, on white paper and in a readily readable type size, with a reasonable charge for copy work.  The purposes for which a Member list may be requested include, without limitation, matters relating to Members’ voting rights under the Agreement and the exercise of Members’ rights under federal proxy laws.  Any Person who neglects or refuses to exhibit, produce, or mail a copy of the Member list as requested shall be liable for costs, including attorney’s fees, incurred by the Member for compelling the production of the Member list, and for actual damages suffered by any Member by reason of such refusal or neglect.  It shall be a defense that the actual purpose and reason for the request for inspection is for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a Member relative to the affairs of the Company.

7.3           Reports.  The Treasurer of the Company shall be responsible for causing the preparation of financial reports of the Company and the coordination of financial matters of the Company with the

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Company’s accountants.  The Company shall cause to be delivered to each Member the financial statements listed below, prepared, in each case (other than with respect to Member’s Capital Accounts, which shall be prepared in accordance with this Agreement) in accordance with GAAP consistently applied.  Delivery of the financial statements shall occur as soon as practicable following the end of each Fiscal Year (and in any event not later than 120 days after the end of such Fiscal Year), and at such time as distributions are made to the Unit Holders pursuant to Article X of this Agreement following the occurrence of a Dissolution Event.  The financial statements shall consist of a balance sheet of the Company as of the end of such Fiscal Year and the related statements of operations, Unit Holders’ Capital Accounts and changes therein, and cash flows for such Fiscal Year, together with appropriate notes to such financial statements and supporting schedules, all of which shall be audited and certified by the Company’s accountants, and in each case setting forth in comparative form the corresponding figures for the immediately preceding Fiscal Year end (in the case of the balance sheet) and the Two (2) immediately preceding Fiscal Years (in the case of the statements).  The report shall also contain (i) a report of the activities of the Company during the period covered by the report; (ii) a table comparing previously provided forecasts with actual results during the period covered by the report; (iii)  distributions to participants for the period, separately identifying distributions from cash flow from operations during the period, cash flow from operations during a prior period which have been held as reserves, proceeds from disposition of Company assets and reserves from the gross proceeds of the offering originally obtained from the Members.  The Company will also provide a report within sixty (60) days of the end of the first six months of each fiscal year containing an unaudited balance sheet, an unaudited statement of income for the period then ended, an unaudited statement of Unit Holders’ Capital Accounts and changes therein, an unaudited statement of cash flows for the period then ended and other pertinent material regarding the Company and its activities during the period covered by the report.  The Company shall provide, within seventy-five (75) days after the end of each Fiscal Year, all information necessary for the preparation of the Members’ federal income tax returns.

7.4           Tax Matters.  The Governors shall, without any further consent of the Unit Holders being required (except as specifically required herein), make any and all elections for federal, state, local and foreign tax purposes as the Governors shall determine appropriate and shall have the right and authority to represent the Company and the Unit Holders before taxing authorities or courts of competent jurisdiction in tax matters affecting the Company or the Unit Holders in their capacities as Unit Holders, and to file any tax returns and execute any agreements or other documents relating to or affecting such tax matters, including agreements or other documents that bind the Unit Holders with respect to such tax matters or otherwise affect the rights of the Company and the Unit Holders.  The Governors shall designate a Person to be specifically authorized to act as the “Tax Matters Member” under the Code and in any similar capacity under state or local law; provided, however, that the Governors shall have the authority to designate, remove and replace the Tax Matters Member who shall act as the tax matters partner within the meaning of and pursuant to Regulations Sections 301.6231(a)(7)-1 and -2 or any similar provision under state or local law.  Necessary tax information shall be delivered to each Unit Holder as soon as practicable after the end of each Fiscal Year, but not later than Three (3) months after the end of each Fiscal Year.

ARTICLE VIII.  AMENDMENTS

8.1           Amendments.  Amendments to this Agreement may be proposed by the Governors or any Member.  Following any such proposal, the Governors shall submit to the Members a verbatim statement of any proposed amendment, and the Governors shall include therewith a recommendation as to the proposed amendment.  The Governors shall seek the written vote of the Members on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate.  A proposed amendment shall be adopted and be effective as an amendment to this Agreement only if approved by the affirmative vote of a majority of the Membership Voting Interests represented at a Member meeting at which a quorum of the Members is present.  Notwithstanding any

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provision of this Section 8.1 to the contrary, this Agreement shall not be amended without the consent of each Member adversely affected if such amendment would modify the limited liability of a Member, or alter the Membership Financial Rights of a Member.

ARTICLE IX.  TRANSFERS

9.1           Restrictions on Transfers.  Except as otherwise permitted by this Agreement, no Member shall Transfer all or any portion of such Member’s Units.  In the event that any Member pledges or otherwise encumbers all or any part of such Member’s Units as security for the payment of a Debt, any such pledge or hypothecation shall be made pursuant to a pledge or hypothecation agreement that requires the pledgee or secured party to be bound by all of the terms and conditions of this Agreement and all other agreements governing the rights and obligations of Unit Holders in the event such pledgee or secured party becomes a Unit Holder hereunder.

9.2           Permitted Transfers.  Subject to the conditions and restrictions set forth in this Article IX, a Unit Holder may:  (a) at any time Transfer all or any portion of such Unit Holder’s Units (i) to the transferor’s administrator or trustee to whom such Units are Transferred involuntarily by operation of law, or (ii) without consideration to or in trust for descendants of a Member; or (b) at any time following the date on which substantial operations of the Facilities commence, Transfer all or any portion of such Unit Holder’s Units (i) to any Person approved by the Governors, in writing, or (ii) to any Affiliate or Related Party of such Unit Holder.  Any such Transfer set forth in this Section 9.2 and meeting the conditions set forth in Section 9.3 below is referred to herein as a “Permitted Transfer.”

9.3           Conditions Precedent to Transfers.  In addition to the conditions set forth above, no Transfer of Units shall be effective unless and until all of the following conditions have been satisfied:

(a)           Except in the case of a Transfer involuntarily by operation of law, the transferor and transferee shall execute and deliver to the Company such documents and instruments of Transfer as may be necessary or appropriate in the opinion of counsel to the Company to affect such Transfer.  In the case of a Transfer of Units involuntarily by operation of law, the Transfer shall be confirmed by presentation to the Company of legal evidence of such Transfer, in form and substance satisfactory to counsel to the Company.  In all cases, the transferor and/or transferee shall pay all reasonable costs and expenses connected with the Transfer and the admission of the Transferee as a Member and incurred as a result of such Transfer, including but not limited to, legal fees and costs.

(b)           The transferor and transferee shall furnish the Company with the transferee’s taxpayer identification number, sufficient information to determine the transferee’s initial tax basis in the Units Transferred, and any other information reasonably necessary to permit the Company to file all required federal and state tax returns and other legally required information statements or returns.  The Company shall not be required to make any distribution otherwise provided for in this Agreement with respect to any Transferred Units until it has received such information.

(c)           Except in the case of a Transfer of any Units involuntarily by operation of law, either (i) such Units shall be registered under the Securities Act, and any applicable state securities laws, or (ii) the transferor shall provide an opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the Governors, to the effect that such Transfer is exempt from all applicable registration requirements and that such Transfer will not violate any applicable laws regulating the Transfer of securities.

(d)           Except in the case of a Transfer of Units involuntarily by operation of law, the transferor shall provide an opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the

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Governors, to the effect that such Transfer will not cause the Company to be deemed to be an “investment company” under the Investment Company Act of 1940.

(e)           Unless otherwise approved by the Governors and Members representing in the aggregate a 75% majority of the Membership Voting Interests, no Transfer of Units shall be made except upon terms which would not, in the opinion of counsel chosen by the Governors, result in the termination of the Company within the meaning of Section 708 of the Code or cause the application of the rules of Sections 168(g)(1)(B) and 168(h) of the Code or similar rules to apply to the Company.  If the immediate Transfer of such Unit would, in the opinion of such counsel, cause a termination within the meaning of Section 708 of the Code, then if, in the opinion of such counsel, the following action would not precipitate such termination, the transferor Member shall be entitled to (or required, as the case may be):  (i) immediately Transfer only that portion of its Units as may, in the opinion of such counsel, be Transferred without causing such a termination; and (ii) enter into an agreement to Transfer the remainder of its Units, in one or more Transfers, at the earliest date or dates on which such Transfer or Transfers may be effected without causing such termination.  The purchase price for the Units shall be allocated between the immediate Transfer and the deferred Transfer or Transfers pro rata on the basis of the percentage of the aggregate Units being Transferred, each portion to be payable when the respective Transfer is consummated, unless otherwise agreed by the parties to the Transfer.  In the case of a Transfer by one Member to another Member, the deferred purchase price shall be deposited in an interest-bearing escrow account unless another method of securing the payment thereof is agreed upon by the transferor Member and the transferee Member(s).

(f)            No notice or request initiating the procedures contemplated by this Section 9.3 may be given by any Member after a Dissolution Event has occurred.  No Member may sell all or any portion of its Units after a Dissolution Event has occurred.

(g)           No Person shall Transfer any Unit if, in the determination of the Governors, such Transfer would cause the Company to be treated as a “publicly traded partnership” within the meaning of Section 7704(b) of the Code.

The Governors shall have the authority to waive any legal opinion or other condition required in this Section 9.3 other than the Member approval requirement set forth in Section 9.3(e).

9.4           Prohibited Transfers.  Any purported Transfer of Units that is not a Permitted Transfer shall be null and void and of no force or effect whatsoever; provided that, if the Company is required to recognize a Transfer that is not a Permitted Transfer (or if the Governors, in their sole discretion, elect to recognize a Transfer that is not a Permitted Transfer):  (i) the transferee’s rights shall be strictly limited to the transferor’s Membership Financial Rights associated with such Units; and (ii) the Company may offset against such Membership Financial Rights (without limiting any other legal or equitable rights of the Company) any debts, obligations or liabilities for damages that the transferor or transferee may have to the Company.  In the case of a Transfer or attempted Transfer of Units that is not a Permitted Transfer, the parties engaging or attempting to engage in such Transfer shall indemnify and hold harmless the Company and the other Members from all cost, liability and damage that such parties may incur (including, without limitation, incremental tax liabilities, attorneys’ fees and expenses) as a result thereof.

9.5           No Dissolution or Termination.  The Transfer of Units pursuant to the terms of this Article IX shall not dissolve or terminate the Company.  No Member shall have the right to have the Company dissolved or to have such Member’s Capital Contribution returned except as provided in this Agreement.

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9.6           Prohibition of Assignment.  Notwithstanding the foregoing provisions of this Article IX, no Transfer of Units may be made if the Units sought to be sold, exchanged or Transferred, when added to the total of all other Units sold, exchanged or Transferred within the period of Twelve (12) consecutive months prior thereto, would result in the termination of the Company under Section 708 of the Code.  In

the event of a Transfer of any Units, the Members will determine, in their sole discretion, whether or not the Company will elect pursuant to Section 754 of the Code (or corresponding provisions of future law) to adjust the basis of the assets of the Company.

9.7           Rights of Unadmitted Assignees.  A Person who acquires Units but who is not admitted as a Substitute Member pursuant to Section 9.8 of this Agreement shall be entitled only to the Membership Financial Rights with respect to such Units in accordance with this Agreement, and shall not be entitled to the Membership Voting Interests with respect to such Units.  In addition, such Person shall have no right to any information or accounting of the affairs of the Company, shall not be entitled to inspect the books or records of the Company, and shall not have any of the other rights of a Member under the Act or this Agreement.

9.8           Admission of Substitute Members.   As to Permitted Transfers, a transferee of Units shall be admitted as a substitute Member provided that such transferee has complied with the following provisions:

(a)           The transferee shall, by written instrument in form and substance reasonably satisfactory to the Governors, agree to be bound by all of the terms and provisions of this Agreement, and assume the obligations of the transferor Member hereunder with respect to the Transferred Units.

(b)           The transferee shall pay for or reimburse the Company for all reasonable legal, filing and publication costs incurred in connection with the admission of the transferee as a Member; and

(c)           Except in the case of a Transfer involuntarily by operation of law, if required by the Governors, the transferee shall deliver to the Company evidence of his/her/its authority to become a Member.

(d)           The transferee and transferor shall each execute and deliver such other instruments as the Governors reasonably deem necessary or appropriate in connection with such Transfer.

9.9           Representations Regarding Transfers.  Each Member hereby covenants and agrees with the Company for the benefit of the Company and all Members, that:  (i) it is not currently making a market in Units and will not in the future make a market in Units; (ii) it will not Transfer its Units on an established securities market, a secondary market (or the substantial equivalent thereof) within the meaning of Code Section 7704(b) (and any Regulations, proposed Regulations, revenue rulings, or other official pronouncements of the IRS or the Treasury Department that may be promulgated or published thereunder); and (iii) in the event such Regulations, revenue rulings, or other pronouncements treat any or all arrangements which facilitate the selling of Units (commonly referred to as “matching services”) as being a secondary market or the substantial equivalent thereof, no Member will Transfer any Units through a matching service that is not approved in advance by the Company.  Each Member further agrees that it will not Transfer any Units to any Person unless such Person first agrees to be bound by this Article IX.

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Each Member hereby represents and warrants to the Company and the Members that such Member’s acquisition of Units hereunder is made as principal for such Member’s own account and not for resale or distribution of such Units.  Each Member further hereby agrees that the following legend, as the

same may be amended by the Governors in their sole discretion, may be placed upon any counterpart of this Agreement, the Articles, or any other document or instrument evidencing ownership of Units:

THE TRANSFERABILITY OF THE MEMBERSHIP UNITS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED.  SUCH UNITS MAY NOT BE SOLD, ASSIGNED, OR TRANSFERRED, AND NO ASSIGNEE, VENDEE, TRANS­FEREE OR ENDORSEE THEREOF WILL BE RECOGNIZED AS HAVING ACQUIRED ANY SUCH UNITS FOR ANY PURPOSES, UNLESS AND TO THE EXTENT SUCH SALE, TRANSFER, HYPOTHECATION, OR ASSIGNMENT IS PERMITTED BY, AND IS COMPLETED IN STRICT ACCORDANCE WITH, APPLICABLE FEDERAL AND STATE LAW AND THE TERMS AND CONDITIONS SET FORTH IN THE MEMBER CONTROL AGREEMENT OF THE COMPANY, AS AMENDED FROM TIME TO TIME.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS.

9.10         Distributions And Allocations In Respect of Transferred Units.  If any Units are Transferred during any Fiscal Year in compliance with the provisions of this Article IX, Profits, Losses, each item thereof, and all other items attributable to the Transferred Units for such Fiscal Year shall be divided and allocated between the transferor and the transferee by taking into account their varying interests during the Fiscal Year in accordance with Code Section 706(d), using any conventions permitted by law and selected by the Governors. All distributions on or before the date of such Transfer shall be made to the transferor, and all distributions thereafter shall be made to the transferee.  Solely for purposes of making such allocations and distributions, the Company shall recognize such Transfer to be effective not later than the first day of the month following the month in which all documents to effectuate the Transfer have been executed and delivered to the Company, provided that, if the Company does not receive a notice stating the date such Units were Transferred and such other information as the Governors may reasonably require within Thirty (30) days after the end of the Fiscal Year during which the Transfer occurs, then all such items shall be allocated, and all distributions shall be made, to the person or entity who, according to the books and records of the Company, was the owner of the Units on the last day of such Fiscal Year.  Neither the Company nor any Member shall incur any liability for making allocations and distributions in accordance with the provisions of this Section 9.10, whether or not the Governors or the Company has knowledge of any Transfer of any Units.

9.11         Additional Members.  Additional Members may be admitted from time to time upon the approval of the Governors, and in accordance with such terms and conditions, as the Governors may determine.  All Members acknowledge that the admission of additional Members may result in a dilution of a Member’s Membership Interest.  Prior to admission as a Member, a prospective Member shall agree in writing to be bound by this Agreement shall and execute and deliver to the Company an Addendum to this Agreement in the form of Exhibit “B” attached hereto.  Upon the execution of such Addendum, such additional Member shall be deemed to be a party to this Agreement as if such additional Member had

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executed this Agreement on the original date hereof, and shall be bound by all of the provisions set forth herein.

ARTICLE X.  DISSOLUTION AND WINDING UP

10.1         Dissolution.  The Company shall dissolve and shall commence winding up and liquidating upon the first to occur of any of the following (each a “Dissolution Event”):  (i) the affirmative vote of a 75% majority in interest of the Membership Voting Interests to dissolve, wind up and liquidate the Company; or (ii) the entry of a decree of judicial dissolution pursuant to the Act.  The Members hereby agree that, notwithstanding any provision of the Act, the Company shall not dissolve prior to the occurrence of a Dissolution Event.

10.2         Winding Up.  Upon the occurrence of a Dissolution Event, the Company shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors and Members; and no Member shall take any action that is inconsistent with, or not necessary to or appropriate for, winding up of the Company’s business and affairs.  Notwithstanding any provision in this Agreement to the contrary, the Members acknowledge and agree that all covenants and obligations set forth this Agreement shall continue to be fully binding upon the Members until such time as the Property has been distributed pursuant to this Section 10.2 and Articles of Dissolution have been filed pursuant to the Act.  The Liquidator shall be responsible for overseeing the prompt and orderly winding up and dissolution of the Company.  The Liquidator shall take full account of the Company’s liabilities and Property and shall cause the Property or the proceeds from the sale thereof (as determined pursuant to Section 10.8 of this Agreement), to the extent sufficient therefore, to be applied and distributed, to the maximum extent permitted by law, in the following order:  (i) first, to creditors (including Members and Governors who are creditors, to the extent otherwise permitted by law) in satisfaction of all of the Company’s Debts and other liabilities (whether by payment or the making of reasonable provision for payment thereof), other than liabilities for which reasonable provision for payment has been made; and (ii) second, except as provided in this Agreement, to Members in satisfaction of liabilities for distributions pursuant to the Act; (iii) third, the balance, if any, to the Unit Holders in accordance with the positive balance in their Capital Accounts calculated after making the required adjustment set forth in clause (ii)(C) of the definition of Gross Asset Value in Section 1.10 of this Agreement, after giving effect to all contributions, distributions and allocations for all periods.

10.3         Compliance with Certain Requirements of Regulations; Deficit Capital Accounts.  In the event the Company is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article X to the Unit Holders who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2).  If any Unit Holder has a deficit balance in such Member’s Capital Account (after giving effect to all contributions, distributions and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs), such Unit Holder shall have no obligation to make any contribution to the capital of the Company with respect to such deficit, and such deficit shall not be considered a debt owed to the Company or to any other Person for any purpose whatsoever.  In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the Unit Holders pursuant to this Article X may be:  (i) distributed to a trust established for the benefit of the Unit Holders for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company, in which case the assets of any such trust shall be distributed to the Unit Holders from time to time, in the reasonable discretion of the Liquidator, in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Unit Holders pursuant to Section 10.2 of this Agreement; or (b) withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the

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Company, provided that such withheld amounts shall be distributed to the Unit Holders as soon as practicable.

10.4         Deemed Distribution and Recontribution.  Notwithstanding any other provision of this Article X, in the event the Company is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Dissolution Event has occurred, the Property shall not be liquidated, the Company’s Debts and other liabilities shall not be paid or discharged, and the Company’s affairs shall not be wound up.

10.5         Rights of Unit Holders.  Except as otherwise provided in this Agreement, each Unit Holder shall look solely to the Property of the Company for the return of such Unit Holder’s Capital Contribution and shall have no right or power to demand or receive Property other than cash from the Company.  If the assets of the Company remaining after payment or discharge of the debts or liabilities of the Company are insufficient to return such Capital Contribution, the Unit Holders shall have no recourse against the Company or any other Unit Holder or Governors.

10.6         Allocations During Period of Liquidation.  During the period commencing on the first day of the Fiscal Year during which a Dissolution Event occurs and ending on the date on which all of the assets of the Company have been distributed to the Unit Holders pursuant to Section 10.2 of this Agreement (the “Liquidation Period”), the Unit Holders shall continue to share Profits, Losses, gain, loss and other items of Company income, gain, loss or deduction in the manner provided in Article III of this Agreement.

10.7         Character of Liquidating Distributions.  All payments made in liquidation of the interest of a Unit Holder shall be made in exchange for the interest of such Unit Holder in Property pursuant to Section 736(b)(1) of the Code, including the interest of such Unit Holder in Company goodwill.

10.8         The Liquidator.  The “Liquidator” shall mean a Person appointed by the Governors to oversee the liquidation of the Company.  Upon the consent of a majority in interest of the Members, the Liquidator may be the Governors.  The Company is authorized to pay a reasonable fee to the Liquidator for its services performed pursuant to this Article X and to reimburse the Liquidator for its reasonable costs and expenses incurred in performing those services.  The Company shall indemnify, save harmless, and pay all judgments and claims against such Liquidator and any officers, Governors, agents and employees of the Liquidator relating to any liability or damage incurred by reason of any act performed or omitted to be performed by the Liquidator, or any officers, Governors, agents or employees of the Liquidator in connection with the liquidation of the Company, including reasonable attorneys’ fees incurred in connection with the defense of any action based on any such act or omission, which attorneys’ fees may be paid as incurred, except to the extent such liability or damage is caused by fraud, intentional misconduct, or a knowing violation of the laws which was material to the cause of action.

10.9         Forms of Liquidating Distributions.  For purposes of making distributions required by Section 10.2 of this Agreement, the Liquidator may determine whether to distribute all or any portion of the Property in-kind or to sell all or any portion of the Property and distribute the proceeds therefrom.

ARTICLE XI.  MISCELLANEOUS

11.1         Notices.  Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be deemed to have been delivered, given, and received for all purposes (i) if delivered personally to the Person or to an officer of the Person to whom the same is directed, or (ii) when the same is actually received, if sent by regular or certified mail, postage prepaid, or by facsimile, if such facsimile is followed by a hard copy of the facsimile communication sent promptly thereafter by regular or certified mail, postage prepaid, addressed as follows, or to such other address as such Person may from time to time specify by notice to the Company:

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(a) If to the Company, to the address determined pursuant to Section 1.4 of this Agreement; (b) If to the Governors, to the address set forth on record with the Company; (c) If to a Unit Holder, either to the address set forth in the Unit Holder Register or to such other address that has been provided in writing to the Company.

11.2         Binding Effect.  Except as otherwise provided in this Agreement, every covenant, term and provision of this Agreement shall be binding upon, and shall inure to the benefit of, the Company and the Members, and their respective heirs, representatives, successors, transferees, and assigns.

11.3         Construction.  Every covenant, term, and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against the Company or any Member.

11.4         Headings.  Article, Section and other headings contained in this Agreement are for reference purposes only and are not intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision of this Agreement.

11.5         Severability.  Except as otherwise provided in the succeeding sentence, every provision of this Agreement is intended to be severable, and if any term or provision of this Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of this Agreement.  The preceding sentence of this Section 11.5 shall be of no force or effect if the consequence of enforcing the remainder of this Agreement without such illegal or invalid term or provision would be to cause any Member to lose the material benefit of its economic bargain.

11.6         Incorporation By Reference.  Every recital, exhibit, schedule and appendix attached to this Agreement and referred to herein is hereby incorporated into this Agreement by reference unless this Agreement expressly provides otherwise.

11.7         Variation of Terms.  All terms and variations thereof used in this Agreement shall be deemed to refer to masculine, feminine, or neuter, singular or plural, as the context may require.

11.8         Governing Law.  The laws of the State of Minnesota shall govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties arising hereunder.

11.9         Waiver of Jury Trial.  Each of the Members irrevocably waives, to the fullest extent permitted by law, all rights to trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement or the business and affairs of the Company.

11.10       Counterpart Execution.  This Agreement may be executed in any number of counterparts with the same effect as if all of the Members had signed the same document.  All counterparts shall be construed together and shall constitute one agreement.

11.11       Specific Performance.  Each Member acknowledges and agrees that the Company and the other Members would be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms, and that monetary damages would not provide an adequate remedy in such event.  Accordingly, it is agreed that, in addition to any other remedy to which the Company and the non-breaching Members may be entitled hereunder, at law or in equity, the Company and the non-breaching Members  shall  be  entitled  to injunctive  relief  to prevent  breaches  of  the provisions of  this Agreement and to specifically to enforce the terms and provisions of this Agreement.

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11.12       No Third Party Rights.  None of the provisions contained in this Agreement shall be deemed to be for the benefit of or enforceable by any third parties, including without limitation, any creditors of any Member or the Company.

DULY ADOPTED by the Company’s Board of Governors effective as of                       .

HIGHWATER ETHANOL, LLC
By:
Its:		President
Attest:
Its:	Secretary

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EXHIBIT “A”
Initial Membership List

Name and Address of Initial Members	Units
Brian Kletscher	12
Jason Fink	6
George Goblish	24
Ron Joregenson	24
Todd Reif	12
John Schueller	9
Mike Landuyt	6
Russ Derickson	9
Warren Pankonin	15
David Moldan	9
Tim VanDerWal	3
Monica Anderson	18
Gilbert Schmitz	3
TOTAL:	150

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EXHIBIT “B”

MEMBER SIGNATURE PAGE

ADDENDUM TO THE
AMENDED AND RESTATED MEMBER CONTROL AGREEMENT
OF HIGHWATER ETHANOL, LLC

The undersigned does hereby warrant, represent, covenant and agree that:  (i) the undersigned, as a condition to becoming a Member in Highwater Ethanol, LLC, has received a copy of the Amended and Restated Member Control Agreement dated                 , and, if applicable, all amendments and modifications thereto; (ii) the undersigned shall be subject to and comply with all terms and conditions of such Amended and Restated Member Control Agreement in all respects, as if the undersigned had executed said Amended and Restated Member Control Agreement on the original date thereof; and (iii) the undersigned is and shall be bound by all of the provisions of said Amended and Restated Member Control Agreement from and after the date of execution of this Addendum.

Individuals:	Entities:
Name of Individual Member (Please Print)	Name of Entity (Please Print)
Signature of Individual	Print Name and Title of Officer
Name of Joint Individual Member (Please Print)	Signature of Officer
Signature of Joint Individual Member

Agreed to and Accepted on Behalf of the
Company and its Members:

HIGHWATER ETHANOL, LLC

By:

Its:

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EX-4.2

Exhibit 4.2

HIGHWATER ETHANOL, LLC

SUBSCRIPTION AGREEMENT

Limited Liability Company Membership Units

$10,000 per Unit

Minimum Investment of 1 Unit ($10,000)
1 Unit Increments Thereafter ($10,000)

The undersigned subscriber (“Subscriber”), desiring to become a member Highwater Ethanol, LLC (“Highwater Ethanol”), a Minnesota limited liability company, with its principal place of business at 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152 hereby subscribes for the purchase of membership units of Highwater Ethanol, and agrees to pay the related purchase price, identified below.

A.            SUBSCRIBER INFORMATION.   Please print your individual or entity name and address.  If we accept your subscription, the units will be titled in the name of the subscriber as it appears below.  Joint subscribers should provide both names.  Your name and address will be recorded exactly as printed below.  Please provide your home, business and/or mobile telephone number.  If desired, please also provide your e-mail address.

1.	Subscriber’s Printed Name
2.	Title, if applicable
3.	Subscriber’s Address
	Street
	City, State, Zip Code
4.	E-mail Address
5.	Home Telephone Number
6.	Business Telephone Number
7.	Mobile Telephone Number

B.            NUMBER OF UNITS PURCHASED. You must purchase at least 1 unit.  The minimum number of units to be sold is 4,500 and the maximum number of units to be sold in the offering is 6,000.

  
Unit(s)

C.PURCHASE PRICE.  Indicate the dollar amount of your investment (minimum investment is $10,000).

1. Total Purchase Price ($10,000 per unit multiplied by number of units)	=	2. 1st Installment (10% of Total Purchase Price)	+	3. 2nd Installment (90% of Total Purchase Price)
	=		+

D.            GENERAL INSTRUCTIONS FOR SUBSCRIBERS:

You should read the Prospectus dated [DATE OF EFFECTIVENESS] (the “Prospectus”) in its entirety including the exhibits for a complete explanation of an investment in Highwater Ethanol.

INSTRUCTIONS IF YOU ARE SUBSCRIBING PRIOR TO THE COMPANY’S RELEASE OF FUNDS FROM ESCROW:  If you are subscribing prior to the Company’s release of funds from escrow, you must follow the instructions contained in paragraphs 1 through 5 below:

1.             Complete all information required in this Subscription Agreement, and date and sign the Subscription Agreement on page 6 and the Member Signature Page to our Member Control Agreement attached to this Subscription Agreement as Exhibit A.

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2.             Immediately provide a personal (or business) check for the first installment of ten percent (10%) of your investment amount.  The check should be made payable to “Minnwest Bank, Redwood Falls, MN, escrow agent for Highwater Ethanol, LLC.”  You will determine this amount in box C.2 on page 1 of this Subscription Agreement.

3.            Execute the Promissory Note and Security Agreement on page 7 of this Subscription Agreement evidencing your commitment to pay the remaining ninety percent (90%) due for the units.  The Promissory Note and Security Agreement is attached to this Subscription Agreement and grants Highwater Ethanol, LLC a security interest in your units.

4.             Deliver the original executed documents referenced in paragraphs 1 and 3 of these instructions, together with a personal or business check as described in Paragraph 2 of these instructions to:

Highwater Ethanol, LLC
205 S. Main Street, PO Box 96
Lamberton, Minnesota 56152

5.            Within 20 days of written notice from Highwater Ethanol that your subscription has been accepted, you must remit an additional personal (or business) check for the second installment of ninety percent (90%) of your investment amount made payable to “Minnwest Bank, Redwood Falls, MN, escrow agent for Highwater Ethanol, LLC” in satisfaction of the Promissory Note and Security Agreement.  You will determine this amount in box C.3 on page 1 of this Subscription Agreement.  You must deliver this check to the same address set forth above in paragraph 4 within twenty (20) days of the date of Highwater Ethanol’s written notice. If you fail to pay the second installment pursuant to the Promissory Note and Security Agreement, Highwater Ethanol shall be entitled to retain your first installment and to seek other damages, as provided in the Promissory Note and Security Agreement.  This means that if you are unable to pay the 90% balance of your investment amount within 20 days of our notice, you may have to forfeit the 10% cash deposit.

Your funds will be placed in Highwater Ethanol’s escrow account at Minnwest Bank, Redwood Falls, MN.  The funds will be released to Highwater Ethanol or returned to you in accordance with the escrow arrangements described in the Prospectus.  Highwater Ethanol may, in its sole discretion, reject or accept any part or all of your subscription.  If Highwater Ethanol rejects your subscription, your Subscription Agreement and investment will be promptly returned to you, plus nominal interest, minus escrow fees.  Highwater Ethanol may not consider the acceptance or rejection of your subscription until a future date near the end of this offering.

INSTRUCTIONS IF YOU ARE SUBSCRIBING AFTER THE COMPANY’S RELEASE OF FUNDS FROM ESCROW:  If you are subscribing after the Company’s release of funds from escrow, you must follow the instructions contained in paragraphs 1 through 3 below:

1.             Complete all information required in this Subscription Agreement, and date and sign the Subscription Agreement on page 6 and the Member Signature Page to our Member Control Agreement attached to this Subscription Agreement as Exhibit A.

2.             Immediately provide your personal (or business) check for the entire amount of your investment (as determined in box C.1 on page 1) made payable to “Highwater Ethanol, LLC.”

3.             Deliver the original executed documents referenced in paragraph 1 of these instructions, together with your personal or business check as described in paragraph 2 to:

Highwater Ethanol, LLC
205 S. Main Street, PO Box 96
Lamberton, Minnesota 56152

If you are subscribing after we have released funds from escrow and we accept your investment, your funds will be immediately at-risk as described in the Prospectus.  Highwater Ethanol may, in its sole discretion, reject or accept any part or all of your subscription.  If Highwater Ethanol rejects your subscription, your Subscription Agreement and investment will be returned to you promptly, plus nominal interest, minus escrow fees.  Highwater Ethanol may not consider the acceptance or rejection of your subscription until a future date near the end of this offering.

You may direct your questions to any of our governors listed below or to Highwater Ethanol at (507) 752-6160.

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NAME		POSITION	PHONE NUMBER
Brian D. Kletscher	President and Governor		507-762-3376
John Michael Schueller	Vice President and Governor		507-342-5621
Jason Ray Fink	Treasurer and Governor		507-637-4355
Timothy James Van Der Wal	Secretary and Governor		507-342-5187

E.             Additional Subscriber Information.  Subscriber, named above, certifies the following under penalties of perjury:

1.Form of Ownership.  Check the appropriate box (one only) to indicate form of ownership. If the subscriber is a Custodian, Corporation, Partnership or Trust, please provide the additional information requested.

oIndividual

oJoint Tenants with Right of Survivorship (Both signatures must appear on page 6.)

oCorporation, Limited Liability Company or Partnership (Corporate Resolutions, Operating Agreement or Partnership Agreement must be enclosed.)

oTrust

     Trustee’s Name: _________________________________________

     Trust Date: _____________________________________________

o            Other: Provide detailed information in the space immediately below.

_________________________________________________________

_________________________________________________________

2.Subscriber’s Taxpayer Information.  Check the appropriate box if you are a non-resident alien, a U.S. Citizen residing outside the United States, and/or subject to backup withholding.  All individual subscribers should provide their Social Security Numbers.  Trusts should provide the trust’s taxpayer identification number.  Custodians should provide the minor’s Social Security Number.  Other entities should provide the entity’s taxpayer identification number.

oCheck box if you are a non-resident alien

oCheck box if you are a U.S. citizen residing outside of the United States

oCheck this box if you are subject to backup withholding

Subscriber’s Social Security No.

Joint Subscriber’s Social Security No.

Taxpayer Identification No.

3.Member Report Address.  If you would like duplicate copies of member reports sent to an address that is different than the address identified in section A, please complete this section.

Address:

4.State of Residence.

State of Principal Residence:  

State where driver’s license is issued:  

State where resident income taxes are filed:  

State(s) in which you have maintained your principal residence during the past three years:

a.
b.
c.

5.Suitability Standards and Confidential Investor Information.  You cannot invest in Highwater Ethanol unless you meet one of the following suitability tests (a or b or the heightened standards for Iowa and Kansas investors set forth in c and d) set forth below.  Please review the suitability tests and check the box next to the following suitability test that you meet.  For husbands and wives purchasing jointly, the tests below will be applied on a joint basis.

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a.  o I (We) have annual income from whatever source of at least $45,000 and a net worth of at least $45,000, exclusive of home, furnishings and automobiles; or

b.  o I (We) have a net worth of at least $150,000, exclusive of home, furnishings and automobiles.

c.  o I (We) reside in Iowa and I (We) have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $150,000 (exclusive of home, auto and furnishings); or

d.  o I (We) reside in Kansas and I (We) have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $225,000 (exclusive of home, auto and furnishings).

If you reside in Minnesota please complete the following request for additional information:

I.	Employment Information
	A.	Name and Address of Employer:
	B.	Nature of Employer’s Business:
	C.	Dates of Employment:

D. Current Position or Title and Responsibilities:

	E.	Age:
II.	Educational Background

SCHOOL MAJOR DEGREE(S) YRS. ATTENDED

III.	Do you have such knowledge and experience in financial and business matters that you are capable of evaluating the merits and risks of an investment in the Company?
	o   Yes               o   No
IV.	Do you understand the nature of an investment in the Company and the risks associated with such an investment?
	£   Yes               £   No
V.	Do you understand that there is no guarantee of any financial return on this investment and that you run the risk of losing your entire investment?
	£   Yes               £   No
VI.	Do you understand that this investment provides limited liquidity since the Units are not freely transferable and the Members have limited rights to withdraw capital from or to withdraw as Members of the Company?
	£   Yes               £   No

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VII.	Do you have adequate means of providing for your current needs and personal contingencies in view of the fact that this investment provides limited liquidity?
	£   Yes               £   No
VIII.	If the investor is not a natural person:
	A	Was the investing entity formed for the purpose of investing in the Company?
	£   Yes               £   No
	B.	Did the shareholders, partners, members, or grantors of the investing entity, as the case may be, contribute additional capital to such entity for the purpose of purchasing Units?
		£   Yes               £   No
	C.	Does the undersigned’s investment in the Company, together with its interests in all other corporations, partnerships, trusts or associations represent more than ten percent of the undersigned’s total assets?
	£   Yes               £   No
IX.	Have you ever invested in securities?
	£   Yes               £   No
X.	Have you ever invested in investment partnerships, venture capital funds, or other non-marketable or restricted securities?
	£   Yes               £   No
XI.	Indicate the frequency of your investments in non-marketable securities:
	£   Often               £   Occasional               £   Seldom

Financial Information

Net worth (exclusive of home, home furnishings and automobiles):	Cash and cash equivalents and liquid securities (includes stocks, bonds, government obligations, etc., at fair market value):
o  Under $50,000 o  $50,000 - $250,000 o  $250,000 - $500,000 o  $500,000 - $1,000,000 o  Over $1,000,000	o  Under $50,000 o  $50,000 - $74,999 o  $75,000 - $99,999 o  Over $100,000
Investments in closely-held companies, personal business and/or real estate:	Equity in all real estate, net of mortgages:
o  Under $25,000 o  $25,000 - $49,999 o  $50,000 - $74,999 o  Over $75,000	o  Under $50,000 o  50,000 - $74,999 o  $75,000 - $99,999 o  Over $100,000
Other investments:	Annual gross income:
o  Under $25,000 o  $25,000 - $49,999	2003 o  Under $100,000

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o  $50,000 - $74,999 o  Over $75,000	o  Over $100,000
	2004 o  Under $100,000 o  Over $100,000
	2005 o  Under $100,000 o  Over $100,000

6.Subscriber’s Representations and Warranties.  You must read and certify your representations and warranties by placing your initials where indicated and by signing and dating this Subscription Agreement.  Joint subscribers are also required to initial and sign as indicated.

(Initial here) (Joint initials) By signing below the subscriber represents and warrants to Highwater Ethanol that he, she or it:

a.    has received a copy of Highwater Ethanol’s Prospectus dated [DATE OF EFFECTIVENESS] and the exhibits thereto or has received notice that this sale has been made pursuant to a registration statement in which a final prospectus would have been required to have been delivered in the absence of Rule 172;

b.    understands that the units of Highwater Ethanol are offered and sold in reliance upon a federal securities registration; state registrations in Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota, and Wisconsin; and exemptions from securities registrations in various other states, and understands that the units to be issued pursuant to this subscription agreement can only be sold to a person meeting requirements of suitability;

c.    understands that the securities purchased pursuant to this Subscription Agreement have not been registered under the securities laws of any state other than Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota, and Wisconsin and that Highwater Ethanol is relying in part upon the representations of the undersigned Subscriber contained herein;

d.    understands that the securities subscribed for have not been approved or disapproved by the SEC, or the Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota, and Wisconsin Securities Departments or any other regulatory authority, nor has any regulatory authority passed upon the accuracy or adequacy of the Prospectus;

e.    intends to acquire the units for his/her/its own account without a view to public distribution or resale and that he/she/it has no contract, undertaking, agreement or arrangement to sell or otherwise transfer or dispose of any units or any portion thereof to any other person;

f.    understands that there is no present market for Highwater Ethanol’s membership units, that the membership units will not trade on an exchange or automatic quotation system, that no such market is expected to develop in the future and that there are significant restrictions on the transferability of the membership units;

g.    has been encouraged to seek the advice of his legal counsel and accountants or other financial advisers with respect to investor-specific tax and/or other considerations relating to the purchase and ownership of units [Minnesota subscribers should NOT initial this subsection];

h.    has received a copy of the Highwater Ethanol Member Control Agreement, dated May 4, 2006, and understands that upon closing the escrow by Highwater Ethanol, the subscriber and the membership units will be bound by the provisions of the Member Control Agreement which contains, among other things, provisions that restrict the transfer of membership units;

i.    understands that the units are subject to substantial restrictions on transfer under certain tax and securities laws along with restrictions in the Highwater Ethanol Member Control Agreement, and agrees that if the membership units or any part thereof are sold or distributed in the future, the subscriber shall sell or distribute them pursuant to the terms of the Member Control Agreement, and the requirements of the Securities Act of 1933, as amended, and applicable tax and securities laws;

j.    meets the suitability test marked in Item E.5 above;

k.    is capable of bearing the economic risk of this investment, including the possible total loss of the investment [Minnesota subscribers should NOT initial this subsection];

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l.    understands that Highwater Ethanol will place a restrictive legend on any certificate representing any unit containing substantially the following language as the same may be amended by the Governors of Highwater Ethanol in their sole discretion:

THE TRANSFERABILITY OF THE COMPANY UNITS REPRESENTED BY THIS DOCUMENT IS RESTRICTED.  SUCH UNITS MAY NOT BE SOLD, ASSIGNED, OR TRANSFERRED, NOR WILL ANY ASSIGNEE, VENDEE, TRANSFEREE, OR ENDORSEE THEREOF BE RECOGNIZED AS HAVING ACQUIRED ANY SUCH UNITS FOR ANY PURPOSES, UNLESS AND TO THE EXTENT SUCH SALE, TRANSFER, HYPOTHECATION, OR ASSIGNMENT IS PERMITTED BY, AND IS COMPLETED IN STRICT ACCORDANCE WITH, THE TERMS AND CONDITIONS SET FORTH IN THE MEMBER CONTROL AGREEMENT AND AGREED TO BY EACH MEMBER.

THE UNITS REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, OFFERED FOR SALE, OR TRANSFERRED IN ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS.

m.    understands that, to enforce the above legend, Highwater Ethanol may place a stop transfer order with its registrar and stock transfer agent (if any) covering all certificates representing any of the membership units;

n.    may not transfer or assign this Subscription Agreement, or any of the subscriber’s interest herein without the prior written consent of Highwater Ethanol;

o.    has written his, her, or its correct taxpayer identification number under Item E.2 on this Subscription Agreement;

p.    is not subject to back up withholding either because he, she or it has not been notified by the Internal Revenue Service (“IRS”) that he, she or it is subject to backup withholding as a result of a failure to report all interest or dividends, or the IRS has notified him, her or it that he is no longer subject to backup withholding (Note this clause (p) should be crossed out if the backup withholding box in Item E.2 is checked);

q.    understands that execution of the attached Promissory Note and Security Agreement will allow Highwater Ethanol or its assigns to pursue the obligor for payment of the amount due thereon by any legal means, including, but not limited to, acquisition of a judgment against the obligor in the event that the subscriber defaults on that Promissory Note and Security Agreement; and

r.    acknowledges that Highwater Ethanol may retain possession of certificates representing subscriber’s units to perfect its security interest in those units.

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Signature of Subscriber/Joint Subscriber:

Date:_____________________________________________
Individuals:	Entities:
Name of Individual Subscriber (Please Print)	Name of Entity (Please Print)
Signature of Individual	Print Name and Title of Officer
Name of Joint Individual Subscriber (Please Print)	Signature of Officer
Signature of Joint Individual Subscriber

ACCEPTANCE OF SUBSCRIPTION BY HIGHWATER ETHANOL, LLC:

Highwater Ethanol, LLC hereby accepts Subscriber’s subscription for ___________ units.

Dated this             day of                                             , 200       .

HIGHWATER ETHANOL, LLC

By:                                                                                                         

Its:                                                                                                         

8

PROMISSORY NOTE AND SECURITY AGREEMENT

Date of Subscription Agreement: ___________________________________, 200__.

$10,000 per Unit

Minimum Investment of 1 Unit ($10,000); Units Sold in 1 Unit Increments Thereafter ($10,000 each)

	Number of Units Subscribed
	Total Purchase Price ($10,000 per unit multiplied by number of units subscribed)
(                   )	Less Initial Payment (10% of Principal Amount)
	Principal Balance

FOR VALUE RECEIVED, the undersigned hereby promises to pay to the order of Highwater Ethanol, LLC, a Minnesota limited liability company (“Highwater Ethanol”), at its principal office located at 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152, or at such other place as required by Highwater Ethanol, the Principal Balance set forth above in one lump sum to be paid without interest within 20 days following the call of the Highwater Ethanol Board of Governors, as described in the Subscription Agreement.  In the event the undersigned fails to timely make any payment owed, the entire balance of any amounts due under this full recourse Promissory Note and Security Agreement shall be immediately due and payable in full with interest at the rate of 12% per annum from the due date and any amounts previously paid in relation to the obligation evidenced by this Promissory Note and Security Agreement may be forfeited at the discretion of Highwater Ethanol.

The undersigned agrees to pay to Highwater Ethanol on demand, all costs and expenses incurred to collect any indebtedness evidenced by this Promissory Note and Security Agreement, including, without limitation, reasonable attorneys’ fees.  This Promissory Note and Security Agreement may not be modified orally and shall in all respects be governed by, construed, and enforced in accordance with the laws of the State of Minnesota.

The provisions of this Promissory Note and Security Agreement shall inure to the benefit of Highwater Ethanol and its successors and assigns, which expressly reserves the right to pursue the undersigned for payment of the amount due thereon by any legal means in the event that the undersigned defaults on obligations provided in this Promissory Note and Security Agreement.

The undersigned waives presentment, demand for payment, notice of dishonor, notice of protest, and all other notices or demands in connection with the delivery, acceptance, performance or default of this Promissory Note and Security Agreement.

The undersigned grants to Highwater Ethanol, and its successors and assigns (“Secured Party”), a purchase money security interest in all of the undersigned’s membership units of Highwater Ethanol now owned or hereafter acquired. This security interest is granted as non-exclusive collateral to secure payment and performance on the obligation owed Secured Party from the undersigned evidenced by this Promissory Note and Security Agreement. The undersigned further authorizes Secured Party to retain possession of certificates representing such membership units and to take any other actions necessary to perfect the security interest granted herein.

Dated:		, 200__.
OBLIGOR/DEBTOR: :				JOINT OBLIGOR/DEBTOR
	Printed or Typed Name of Obligor		Printed or Typed Name of Joint Obligor
By:			By:
	(Signature)			(Signature)
Officer Title if Obligor is an Entity
Address of Obligor

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Exhibit A

MEMBER SIGNATURE PAGE

ADDENDUM TO THE
AMENDED AND RESTATED MEMBER CONTROL AGREEMENT
OF HIGHWATER ETHANOL, LLC

The undersigned does hereby warrant, represent, covenant and agree that:  (i) the undersigned, as a condition to becoming a Member in Highwater Ethanol, LLC, has received a copy of the Amended and Restated Member Control Agreement dated                     , and, if applicable, all amendments and modifications thereto; (ii) the undersigned shall be subject to and comply with all terms and conditions of such Member Control Agreement in all respects, as if the undersigned had executed said Member Control Agreement on the original date thereof; and (iii) the undersigned is and shall be bound by all of the provisions of said Member Control Agreement from and after the date of execution of this Addendum.

Individuals:	Entities:
Name of Individual Member (Please Print)	Name of Entity (Please Print)
Signature of Individual	Print Name and Title of Officer
Name of Joint Individual Member (Please Print)	Signature of Officer
Signature of Joint Individual Member
Agreed to and accepted on behalf of the
Company and its Members:
HIGHWATER ETHANOL, LLC
By:
Its:

EX-4.3

Exhibit 4.3

ESCROW AGREEMENT

THIS ESCROW AGREEMENT (this “Agreement”) is made this      day of                    , 200  , by and between Highwater Ethanol, LLC a Minnesota limited liability company (“Highwater Ethanol”) and Minnwest Bank of Redwood Falls, Minnesota as escrow agent (the “Escrow Agent”).

W I T N E S S E T H:

WHEREAS, Highwater Ethanol proposes to offer a minimum of 4,500 and a maximum of 6,000 of its Membership Units (the “Units”) at a price of $10,000 per Unit, in minimum blocks of one (1) Unit in an offering registered with the Securities and Exchange Commission and in the states of Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota, Wisconsin and possibly offered in other states pursuant to state securities registration exemptions and under the provisions of the Securities Act of 1933, as amended (the “Offering”);

WHEREAS, Highwater Ethanol will file a registration statement to register the Units with the Securities and Exchange Commission, the states of Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota, Wisconsin, and possibly other states;

WHEREAS, Highwater Ethanol will allow investors in the Offering to deliver the purchase price of the subscribed Units in installments; and

WHEREAS, Highwater Ethanol desires to comply with the requirements of federal and state securities laws and regulations, and desires to protect the investors in the Offering by providing, under the terms and conditions herein set forth, for the return to subscribers of the money which they may pay on account of purchases of Units in the Offering if the Minimum Escrow Deposit (hereinafter defined) is not deposited with the Escrow Agent.

NOW, THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties agree as follows:

1.             Acceptance of Appointment.  Minnwest Bank of Redwood Falls, Minnesota hereby agrees to act as Escrow Agent under this Agreement.  The Escrow Agent shall have no duty to enforce any provision hereof requiring performance by any other party hereunder.

2.             Establishment of Escrow Account.  An escrow account (the “Escrow Account”) is hereby established with the Escrow Agent for the benefit of the investors in the Offering.  Except as specifically provided in this Agreement, the Escrow Account shall be created and maintained subject to the customary rules and regulations of the Escrow Agent pertaining to such accounts.

3.             Ownership of Escrow Account.  Until such time as the funds deposited in the Escrow Account (the “Deposited Funds”) shall equal the Minimum Escrow Deposit (as hereinafter defined), all funds deposited in the Escrow Account by Highwater Ethanol shall not become the property of Highwater Ethanol or be subject to the debts of Highwater Ethanol or any other person but shall be

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held by the Escrow Agent solely for the benefit of the investors who have purchased Units in the Offering.

4.             Deposit of Proceeds.  All proceeds from sales of Units in the Offering shall be delivered by Highwater Ethanol to the Escrow Agent, within forty-eight hours of the receipt thereof from investors, endorsed (if appropriate) to the order of the Escrow Agent, together with an appropriate written statement setting forth name, address and social security number of each person purchasing Units, the number of Units purchased, and the amount paid by each such purchaser.  Any such proceeds deposited with the Escrow Agent in the form of uncollected checks shall be promptly presented by the Escrow Agent for collection through customary banking and clearing house facilities.  As the proceeds of each sale are deposited with the Escrow Agent, Highwater Ethanol shall reserve the number of Units confirmed to the purchaser thereof in connection with such sale.  All such deposited proceeds are referred to herein as the “Escrow Funds”.

5.             Investment of Escrow Account.  The Escrow Funds shall be credited by the Escrow Agent and recorded in the Escrow Account.  The Escrow Agent shall be permitted, and is hereby authorized to deposit, transfer, hold and invest all funds received under this Agreement, including principal and interest, in those investments directed, in writing by Highwater Ethanol.  The Escrow Agent is hereby authorized to invest Escrow Funds in the Federated Treasury Obligations Money Market Mutual Fund for temporary investment without written direction.  Any interest received by the Escrow Agent with respect to the Escrow Funds shall be paid to Highwater Ethanol, or the investors, as indicated elsewhere in this Agreement.

6.             Termination of Escrow.  This Agreement and the Escrow created hereunder shall be terminated as provided in paragraph 7 hereof or as of the date in calendar year 2007 (the “Termination Date”), which is one year and one day following the date in calendar year 2006 upon which the Securities and Exchange Commission authorizes the Offering (the “Offering’s Effective Date”).  Highwater Ethanol shall notify Escrow Agent of the Offering’s Effective Date within thirty (30) days of the receipt of notice of the Offering’s Effective Date from the Securities and Exchange Commission.

7.             Disposition of Escrow Funds.  The Escrow Agent shall have the following duties and obligations under this Agreement:

A.            The Escrow Agent shall send a written notice acknowledging the receipt of the Deposited Funds every seven days to Highwater Ethanol.

B.            The Escrow Agent shall give Highwater Ethanol prompt written notice when the Deposited Funds equal $4,500,000 (exclusive of interest).  Following receipt of such notice, Highwater Ethanol will advise the purchasers of Units to remit to the Escrow Agent the balance of the purchase price within twenty (20) days.  Thereafter, Escrow Agent shall give Highwater Ethanol written notice acknowledging the receipt of the Deposited Funds every seven days.  The Escrow Agent shall give Highwater Ethanol prompt written notice when the Deposited Funds total $45,000,000 (exclusive of interest).

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C.            At the time (and in the event) that: (i) the Deposited Funds shall, during the term of this Agreement, equal $45,000,000  in subscription proceeds (exclusive of interest) (the “Minimum Escrow Deposit”);  (ii) the Escrow Agent shall have received written confirmation from Highwater Ethanol that Highwater Ethanol has obtained a written debt financing commitment for debt financing ranging from a minimum of $$48,320,000 to a maximum of $63,320, depending on the amount necessary to fully capitalize the project;  (iii) Highwater Ethanol has affirmatively elected in writing to terminate this Agreement; (iv) Highwater Ethanol has signed a definitive design build agreement with Fagen, Inc.; (v) Highwater Ethanol has been issued the environmental permits necessary to construct the ethanol plant (vi) the Escrow Agent shall have provided to each state securities department in which Highwater Ethanol has registered its securities for sale, as communicated to the Escrow Agent by Highwater Ethanol, an affidavit stating that the foregoing requirements (i), (ii), (iii), (iv) and (v) of this subsection 7C have been satisfied; and (vii) in each state in which consent is required, the state securities commissioners have consented to release of the funds on deposit, then this Agreement shall terminate, and the Escrow Agent shall promptly disburse the funds on deposit, including interest, to Highwater Ethanol to be used in accordance with the provisions set out in Highwater Ethanol’s registration statement.  Highwater Ethanol will deliver a copy of its registration statement to the Escrow Agent upon execution of this Agreement.  The Escrow Agent will have no responsibility to examine the registration statement with regard to the Escrow Account or otherwise and the registration statement shall contain a provision to such effect.  Upon the making of such disbursement, the Escrow Agent shall be completely discharged and released of any and all further responsibilities hereunder.

D.            In the event the Deposited Funds do not equal or exceed the Minimum Escrow Deposit on or before the Termination Date or if Highwater Ethanol has not received a written debt financing commitment as described herein on or before the Termination Date, the Escrow Agent shall return to each of the purchasers of the Units in the Offering, as promptly as possible after such Termination Date and on the basis of its records pertaining to the Escrow Account:  (i) the sum which each purchaser initially paid in on account of purchases of the Units in the Offering and (ii) each purchaser’s portion of the total interest earned on the Escrow Account as of the Termination Date, (iii) reduced by the transaction fees provided in paragraph 10 hereof.  Computation of any purchaser’s share of the net interest earned will be a weighted average based on the proportion of such purchaser’s deposit in the Escrow Account from the Offering to all such purchasers’ deposits held by the Escrow Agent and upon the length of time in days such deposit was held in the Escrow Account as compared to all such deposits.  All computations with respect to each purchaser’s allocable share of net interest shall be made by the Escrow Agent, which determinations shall be final and conclusive.  Any amount paid or payable to a purchaser pursuant to this paragraph shall be deemed to be the property of such purchaser, free and clear of any and all claims of Highwater Ethanol or its agents or creditors; and the respective purchases of the Units made and entered into in the Offering shall thereupon be deemed, ipso facto, to be cancelled without any further liability of the purchasers or any of them to pay for the Units purchased.  At such time as the Escrow Agent shall have made all the payments called for in this paragraph, the Escrow Agent shall be completely discharged and released of any and all further responsibilities hereunder, and the Units reserved (as provided in paragraph 5) shall be released from such reservation, except that Escrow Agent shall be required to prepare and issue a single IRS Form 1099 to each investor in the event that funds are returned to investors.

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8.             Agreement with Escrow Agent.  To induce Escrow Agent to act hereunder, it is agreed by Highwater Ethanol that:

A.            The sole duty of the Escrow Agent, other than as herein specified, shall be to receive the Escrow Funds and hold them subject to release, in accordance herewith, and the Escrow Agent shall be under no duty to determine whether Highwater Ethanol is complying with the requirements of this Agreement in tendering to the Escrow Agent said proceeds of the sale of said Units.  The Escrow Agent may conclusively rely upon and shall be protected in acting upon any statement, certificate, notice, request, consent, order or other document believed by it to be genuine and to have been signed or presented by the proper party or parties.  The Escrow Agent shall have no duty or liability to verify any such statement, certificate, notice, request, consent, order or other document, and its sole responsibility shall be to act only as expressly set forth in this Agreement.  The Escrow Agent shall be under no obligation to institute or defend any action, suit or proceeding in connection with this Agreement unless first indemnified to its satisfaction.  The Escrow Agent may consult counsel in respect of any question arising under this Agreement and the Escrow Agent shall not be liable for any action taken or omitted in good faith upon advice of such counsel.

B.            Highwater Ethanol hereby indemnifies and holds harmless the Escrow Agent from and against any and all loss, liability, cost, damage and expense, including, without limitation, reasonable counsel fees, which the Escrow Agent may suffer or incur by reason of any action, claim or proceeding brought against the Escrow Agent arising out of or relating in any way to this Agreement or any transaction to which this Agreement relates unless such action, claim or proceeding is the result of the gross negligence or willful misconduct of the Escrow Agent.

9.             Resignation and Removal of Escrow Agent Successors.  The Escrow Agent may resign upon thirty (30) days advance written notice to Highwater Ethanol.  If a successor Escrow Agent is not appointed within the 30-day period following such notice, Escrow Agent may petition any court of competent jurisdiction to name a successor Escrow Agent.  Any commercial banking institution or trust company with which Escrow Agent may merge or consolidate, and any commercial banking institution or trust company to which Escrow Agent transfers all or substantially all of its corporate trust business shall be the successor Escrow Agent without further act.

10.           Fees and Expenses of Escrow Agent.  Highwater Ethanol agrees to pay the Escrow Agent the fees specified in the Escrow Agent’s fee schedule attached hereto as Exhibit A, in the manner set forth therein, unless otherwise agreed to by the parties in writing.  The parties further agree that Highwater Ethanol shall be solely responsible for the payment of such fees and the Escrow Agent shall not seek payment of the fees from investors or apply any principal deposited by investors in the escrow account or interest on the escrow account against such fees.  The fee agreed upon  herein is intended as full consideration for the Escrow Agent’s services as contemplated by this Agreement; provided, however, that in the event the Escrow Agent renders any material service not contemplated in this Agreement or there is any assignment of interest in the subject matter of this Agreement, or any material modification hereof; or if any material controversy arises hereunder, or the Escrow Agent is made a party to any litigation pertaining to this Agreement, or the subject matter hereof, then the

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Escrow Agent shall be reasonably compensated for such extraordinary services and reimbursed for all costs and expenses, including reasonable attorney’s fees, occasioned by any delay, controversy, litigation or event, and the same shall be recoverable from Highwater Ethanol, but not from the escrow account.

11.           Notices.  All notices, requests, demands, and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given, (b) on the day of transmission if sent by facsimile transmission to the facsimile number given below, and telephonic confirmation of receipt is obtained promptly after completion of transmission, (c) on the next day on which such deliveries are made in Lamberton, Minnesota, when delivery is to Federal Express or similar overnight courier or the Express Mail service maintained by the United States Postal Service, or (d) on the fifth day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid, and properly addressed, return receipt requested, to the party as follows:

If to Escrow Agent:

Minnwest Bank of Redwood Falls, Minnesota

1275 East Bridge, P.O. Box 439

Redwood Falls, MN 56283

Attn:

Fax: (507) 637-8377

Phone: (507) 637-5343

If to Highwater Ethanol:

Highwater Ethanol, LLC

205 S. Main Street, PO Box 96

Lamberton, Minnesota 56152

Attn: Brian Kletscher, Chairman of the Board and President

Fax: (507) 762-3376

with a required copy to:

Brown, Winick, Graves, Gross, Baskerville and Schoenebaum, P.L.C.

666 Grand Avenue, Suite 2000

Des Moines, IA 50309

Attention: Harold N. Schneebeck

Fax: (515) 323-8509

12.           Governing Law.  This Agreement shall be construed, performed, and enforced in accordance with, and governed by, the internal laws of the State of Minnesota, without giving effect to the principles of conflict of laws thereof.

13.           Successors and Assigns.  Except as otherwise provided in this Agreement, no party hereto shall assign this Agreement or any rights or obligations hereunder without the prior written

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consent to the other parties hereto and any such attempted assignment without such prior written consent shall be void and of no force and effect.  This Agreement shall inure to the benefit of and shall be binding upon the successors and permitted assigns of the parties hereto.

14.           Severability.  In the event that any part of this Agreement is declared by any court or other judicial or administrative body to be null, void, or unenforceable, said provision shall survive to the extent it is not so declared, and all of the other provisions of this Agreement shall remain in full force and effect.

15.           Further Assurances.  Each of the parties shall execute such documents and other papers and take such further actions, as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby.

16.           Amendments.  This Agreement may be amended or modified, and any of the terms, covenants, representations, warranties, or conditions hereof may be waived, only by a written instrument executed by the parties hereto, or in the case of a waiver, by the party waiving compliance.  Any waiver by any party of any condition, or of the breach of any provision, term, covenant, representation, or warranty contained in the Agreement, in any one or more instances, shall not be deemed to be nor construed as further or continuing waiver of any such conditions, or of the breach of any other provision, term, covenant, representation, or warranty of this Agreement.

17.           Entire Agreement.  This Agreement contains the entire understanding among the parties hereto with respect to the escrow contemplated hereby and supersedes and replaces all prior and contemporaneous agreements and understandings, oral or written, with regard to such escrow.

18.           Section Headings.  The section headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

19.           Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have hereunto affixed their signatures as of the day and year first written above.

HIGHWATER ETHANOL:	ESCROW AGENT
HIGHWATER ETHANOL, LLC	MINNWEST BANK OF REDWOOD FALLS, MINNESOTA
By:	By:
Brian Kletscher,
Chairman of the Board and President	Printed Name:
	Title:

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Exhibit A

Minnwest Bank of Redwood Falls, Minnesota
Escrow Agent Fee Schedule

Escrow Agreement
Highwater Ethanol, LLC

Administration	$
Transaction Fees
Subscriber	$
Disbursement/Each	$
1099 Filing	$
Subscriber/Filing	$

All out of pocket costs and expenses, including postage, supplies, long distance telephone charges, wires and reasonable attorney’s fees will be in addition hereto.

We reserve the right to revise fees, including establishing new minimums, as necessitated by changing economic conditions.

All fees are charged in arrears and are quoted on an annualized basis; however we reserve the right to bill in advance, or on a more frequent basis.

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EX-5.1

Exhibit 5.1

, 2007	direct phone: 515-242-2409
	direct fax: 515-323-8509
	email: schneebeck@brownwinick.com

Board of Governors
Highwater Ethanol, LLC
205 S. Main Street, PO Box 96
Lamberton, Minnesota  56152

Re:          2006 Registration Statement on Form SB-2; Securities Matters

Dear Governors:

In connection with the proposed offer and sale of up to 6,000 units of the membership interests (the “Membership Units”) of Highwater Ethanol, LLC (the “Company”), we have made such legal examination and inquiries as we have deemed advisable or necessary for the purpose of rendering this opinion and have examined originals or copies of the following documents and corporate records:

1.The Company’s Articles of Organization and any amendments thereof;

2.The Company’s Member Control Agreement;

3.The Company’s Form of Amended and Restated Member Control Agreement;

4.The Company’s resolutions of the Board of Governors authorizing the issuance of units;

5.The Company’s Registration Statement on Form SB-2, as filed by the Company on                          , 2006 with the United States Securities and Exchange Commission, together with all pre-effective amendments thereto; and

6.The Company’s Form of Subscription Agreement for the purchase of Membership Units offered pursuant to the Registration Statement.

In rendering our opinions, with the consent of the Company, we have relied upon:  (i) the representations of the Company and other representatives as set forth in the aforementioned documents as to those factual matters that we were unable to ascertain ourselves; and (ii) certificates and assurances from public officials as we have deemed necessary for purposes of expressing the opinions expressed herein.  We have not undertaken any independent investigation to determine or verify any information and representations made by the Company and its members and representatives in the foregoing documents or in such certificates, and we have relied upon such information and representations in expressing our opinions.

We have assumed in rendering these opinions that no person or party has taken any action inconsistent with the terms of the above-described documents or prohibited by law.  We have confirmed that no attorney in this office who has provided legal services within the past six months has notice or knowledge of any misstatements or inaccuracies in the representations upon which we have relied.

, 2007
Page 2

The opinions set forth herein are based upon existing law and regulations, all of which are subject to change prospectively and retroactively.  Our opinions are based on the facts and the above documents as they exist on the date of this letter, and we assume no obligation to revise or supplement such opinions as to future changes of law or fact.  This opinion letter is limited to the matters stated herein and no opinions are to be implied or inferred beyond the matters expressly stated herein.

Based on our examination and inquiry, we are of the opinion that, the Membership Units will be validly issued, duly authorized, fully paid, and non-assessable when issued and sold in the manner referred to in the Registration Statement and under the applicable subscription agreement(s), provided that the Registration Statement is effective.

Very truly yours,

Harold N. Schneebeck

HNS:tlr

EX-8.1

Exhibit 8.1

___________________, 2007	direct phone: 515-242-2416
	direct fax: 515-323-8516
	email: carey@brownwinick.com

Board of Governors
Highwater Ethanol, LLC
205 S. Main Street, PO Box 96
Lamberton, Minnesota  56152

Re:          2006 Registration Statement on Form SB-2; Tax Matters

Dear Governors:

As counsel for Highwater Ethanol, LLC (the “Company”), we furnish the following opinion in connection with the proposed issuance by the Company of up to 6,000 of its membership interests (the “Units”).

We have acted as legal counsel to the Company in connection with its offering of the Units.  As such, we have participated in the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933 of a Form SB-2 Registration Statement dated                          , 2007 relating to that offering (the “Registration Statement”), together with all pre-effective amendments thereto.

You have requested our opinion as to matters of federal tax law that are described in the Registration Statement.  We are assuming that the offering will be consummated and that the operations of the Company will be conducted in a manner consistent with that described in the Registration Statement.  We have examined the Registration Statement and such other documents as we have deemed necessary to render our opinion expressed below.

Based on the foregoing, all statements relating to the Company’s classification as a partnership for federal income tax purposes and the taxation of investors on their allocable share of the Company’s income, gains, losses and deductions recognized by the Company without regard to cash distributions as described under the section heading, “Federal Income Tax Consequences of Owning Our Units” in the Registration Statement constitute our opinion.  That section of the Registration Statement is a description of the material federal income tax consequences that are expected to arise from the ownership and disposition of Units, insofar as it relates to matters of law and legal conclusions.  That section is the opinion of counsel on all material federal income tax consequences to prospective Unit holders of the ownership and disposition of Units.

Our opinion extends only to matters of law and, with limited exceptions, the discussion relates only to individual citizens and residents of the United States and has limited applicability to corporations, trusts, estates or nonresident aliens.  The opinion set forth herein is based upon known facts and existing law and regulations, all of which are subject to change prospectively and retroactively.  We assume no obligation to revise or supplement such opinions as to future changes of law or fact.

An opinion of legal counsel represents an expression of legal counsel’s professional judgment regarding the subject matter of the opinion.  It is neither a guarantee of the indicated result nor is it an undertaking to defend the indicated result should it be challenged by the Internal Revenue Service.  This opinion is in no way binding on the Internal Revenue Service or on any court of law.

We consent to the disclosure of our opinion contained in the Registration Statement, the filing of this opinion as an exhibit to the Registration Statement and to the reference to our law firm in the Registration Statement.

Yours truly,

Paul E. Carey

PEC:tlr

EX-10.5

Exhibit 10.5

CONTINUOUS SERVICES AGREEMENT

FOR

ENGINEERING SERVICES

THIS CONTINUOUS SERVICES AGREEMENT is made this 25th day of April, 2006, between Highwater Ethanol (“OWNER”) and TranSystems Corporation (“TRANSYSTEMS”).

WITNESSETH:

WHEREAS, OWNER desires to engage TRANSYSTEMS on a non-exclusive basis to provide engineering, design and other professional services for OWNER in connection with a variety of projects at various job sites, the general scope of work, duties and responsibilities for which will be described in separate “Request for Services” for each project; and

WHEREAS, TRANSYSTEMS desires to provide OWNER with such design, engineering and other professional services as may be requested by Owner in connection with the various Owner’s projects, all in accordance with the terms and conditions of this Agreement; and

WHEREAS, the parties hereto desire to enter into this Agreement to set forth the general terms and conditions applicable to OWNER’s overall relationship with TRANSYSTEMS with respect to each project on which OWNER may engage TRANSYSTEMS; and

WHEREAS, the parties hereto intend that OWNER shall issue a separate “Request for Services” for each project for which OWNER desires to engage TRANSYSTEMS to provide services pursuant to this Agreement and each such Request for Services shall describe and define the exact scope of the project, the scope of work and the exact services to be performed by TRANSYSTEMS on the particular project; the respective duties of Owner and TRANSYSTEMS on the particular project, any special pricing or special fees applicable to the particular project, the time for completion of the particular project and any other special or unique terms and conditions with respect to the particular project;

NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, the parties hereto agree as follows:

Highwater Ethanol

April 25, 2006

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SECTION 1

DESCRIPTION OF AGREEMENT

Section 1.1Continuous Services agreement. This Agreement consists of this contract document that stipulates the general terms and conditions that will govern the services the OWNER has engaged TRANSYSTEMS to perform as defined in a separate “Request for Services” document.

Section 1.2Entire Agreement. This Agreement, as defined in Section 1.1 and as adopted by the particular Request for Services Agreement, sets forth the full and complete understanding of the parties responsibilities as of the date first stated above.

Section 1.3Conflicting Provisions. Unless expressly agreed to the contrary, in the Request For Services Agreement, In the event of any conflict between this Agreement and any Requests for Services issued pursuant to Section 2.1, the Request for Service Agreement shall control.

SECTION 2

SCOPE OF WORK

Section 2.1Description of Work; Requests for Services. TRANSYSTEMS shall perform on an “on call” basis, engineering, design, master planning or other professional services (including, but not limited to, civil, structural, mechanical, electrical, industrial and railroad engineering services and architectural design services) in connection with various of OWNER’s projects at various of OWNER’s facilities all as specified in particular written Requests for Services issued by OWNER from time to time during the term of this Agreement (the “Services”).  Each Request for Services shall make specific reference to this Agreement and shall not be effective or binding upon TRANSYSTEMS until such Request for Services has been accepted by TRANSYSTEMS in writing under the signature of its authorized representative.  Requests for Services shall not amend or add to the general terms and conditions set forth in this Agreement in any respect except to define and describe: i) the particular project on which TRANSYSTEMS is being engaged to perform Services (the “Project”); ii) the scope of work and the exact Services to be performed by TRANSYSTEMS on the particular Project; iii) the respective special or unique responsibilities or duties of OWNER and TRANSYSTEMS, if any, on the particular Project; iv) any special pricing or special fees, if any, applicable to the particular Project; v) the time for completion of the particular Project, if any; and, vi) any other special or unique terms and conditions which are necessary to describe the particular Project or the Services to be performed by TRANSYSTEMS on the particular Project. Additional or conflicting contractual terms or conditions may be added only by formal amendment to this Agreement and not through Requests for Services; any such terms and conditions contained in Requests for Services shall be of no force or effect.

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In addition, the OWNER agrees, to the fullest extent permitted by law, to indemnify and hold harmless TRANSYSTEMS, its officers, directors, employees and subconsultants (collectively, Consultant) against all damages, liabilities or costs, including reasonable attorneys’ fees and defense costs, arising out of or in any way connected with the performance of such services by other persons or entities and from any and all claims arising from modifications, clarifications, interpretations, adjustments or changes made to the Contract Documents to reflect changed field or other conditions, except for claims, to the extent caused by the negligence or willful misconduct of TRANSYSTEMS.

Section 2.2Agreed Upon Changes in the Services.  It is the desire of the parties to keep changes in the scope of the Services under each approved Request for Services at a minimum, but the parties recognize that such changes may become necessary and agree that OWNER may initiate deletions, additions, modifications or changes to the Services by advising TRANSYSTEMS in writing of the change believed to be necessary.  As soon thereafter as practical, TRANSYSTEMS shall prepare a cost estimate of the change and shall inform OWNER of the adjustment in the compensation due TRANSYSTEMS under Section 5 hereof (“TRANSYSTEMS’ Compensation”) and/or the Completion Date set forth in Section 4 hereof, if any, applicable to the Request for Service for which the change is requested. OWNER shall then advise TRANSYSTEMS in writing of its approval or disapproval of the change.  If OWNER approves the change, a written Contract Amendment shall be executed by both parties and TRANSYSTEMS shall perform the Services as changed and the adjustment in TRANSYSTEMS’ Compensation and/or the Completion Date set forth in the executed Contract Amendment shall become effective.  TRANSYSTEMS may initiate changes in the Services by advising OWNER in writing that in its opinion a change is necessary.  If OWNER approves, it shall so advise TRANSYSTEMS and, thereafter, the change shall be handled as if initiated by OWNER.  If a change is not approved, or if a written Contract Amendment is not executed, by both OWNER and TRANSYSTEMS, the change shall not become effective and TRANSYSTEMS shall not be obligated to perform the change.

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Section 2.3Constructive Changes and Other Additional Costs.  In the event of (1) the OWNER’s addition to, modification or change of or deletion from the Services to be performed by TRANSYSTEMS (other than additions, modifications, changes or deletions handled through the provisions of Section 2.2 above); (2) a request for or approval from OWNER of performance of Services in excess of TRANSYSTEMS’ standard work day or work week or such shorter times as are provided by applicable collective bargaining agreements, or on a holiday customarily observed by TRANSYSTEMS; (3) the discovery of any subsurface or other conditions, which differ materially from those shown in or reasonably inferable from the documents or other information on which this Agreement is based and/or those ordinarily encountered and generally recognized as inherent in the locality of the Project; (4) a modification of applicable law by which TRANSYSTEMS is required to pay increased or additional taxes, government-regulated transportation costs, insurance or other amounts which are not required as of the date of this Agreement; (5) delay, suspension of, acceleration of or interference with, TRANSYSTEMS’ performance of the Services by OWNER or by any other person or entity including, but not limited to national, state or local governments; (6) wage, benefit or payroll tax increases due to governmental action or area agreements; (7) modification to or delay in furnishing design criteria or other information supplied by any person or entity, other than TRANSYSTEMS, if TRANSYSTEMS’ performance of the Services under this Agreement depends upon such criteria or information; and/or (8) any other increase in TRANSYSTEMS’ costs, or the time required for completion of the Services due to “Force Majeure Event” as set forth in Section 4 hereof, a change in applicable law or any other cause beyond TRANSYSTEMS’ reasonable control, then the TRANSYSTEMS’ Compensation and/or the Completion Date, if any, applicable to that particular Request for Services effected by said change, shall be equitably adjusted and TRANSYSTEMS shall be paid, and TRANSYSTEMS’ Compensation under that particular Request for Services shall be adjusted by, an amount equal to the additional costs to TRANSYSTEMS resulting therefrom.

SECTION 3

DUTIES AND RESPONSIBILITIES

Section 3.1TRANSYSTEMS’ Responsibilities. TRANSYSTEMS,  subject to the terms and provisions of this Agreement and each specific Request for Services, shall:

Section 3.1.1Furnish the services of all necessary supervisors, engineers, designers, draftsmen, and other personnel (including independent professional associates and consultants) which TRANSYSTEMS deems reasonably necessary to provide or perform the Services set forth in an approved Request for Services;

Section 3.1.2Obtain all process and other licenses required to be obtained by TRANSYSTEMS pursuant to an approved Request for Services;

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Section 3.1.3Perform or provide the Services to be performed or provided by TRANSYSTEMS pursuant to an approved Request for Services and perform any other specific responsibilities and duties, if any, set forth in an approved Request for Services,

Section 3.1.4Appoint one or more individuals who shall be authorized to act on behalf of TRANSYSTEMS and with whom OWNER may consult at all reasonable times, and whose instructions, requests, and decisions will be binding upon TRANSYSTEMS as to all matters pertaining to this Agreement and the performance of the parties hereunder.

Section 3.1.5Upon request by the OWNER, TRANSYSTEMS shall evaluate and make recommendations regarding substitutions of materials, products or equipment proposed by the OWNER’s consultants or contractors.  TRANSYSTEMS shall be compensated for these services, as well as any services required to modify and coordinate the construction documents prepared by TRANSYSTEMS with those of TRANSYSTEMS’s subconsultants and the OWNER’s consultants, as Additional Services.  TRANSYSTEMS also shall be entitled to an adjustment in schedule caused by this additional effort.

Section 3.1.6TRANSYSTEMS shall not supervise, direct or have control over the Contractor’s work nor have any responsibility for the construction means, methods, techniques, sequences or procedures selected by the Contractor nor for the Contractor’s safety precautions or programs in connection with the Work.  These rights and responsibilities are solely those of the Contractor in accordance with the Contract Documents.

TRANSYSTEMS shall not be responsible for any acts or omissions of the Contractor, subcontractor, any entity performing any portions of the Work, or any agents or employees of any of them.  TRANSYSTEMS does not guarantee the performance of the Contractor and shall not be responsible for the Contractor’s failure to perform its Work in accordance with the Contract Documents or any applicable laws, codes, rules or regulations.

Section 3.1.7The Contractor may, after exercising due diligence to locate required information, request from TRANSYSTEMS clarification or interpretation of the requirements of the Contract Documents.  TRANSYSTEMS shall, with reasonable promptness, respond to such Contractor’s requests for clarification or interpretation.  However, if the information requested by the Contractor is apparent from field observations, is contained in the Contract Documents or is reasonably inferable from them, the Contractor shall be responsible to the OWNER for all reasonable costs charged by TRANSYSTEMS to the OWNER for the work required to provide such information.

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Section 3.1.8If, during the term of this Agreement, circumstances or conditions that were not originally contemplated by or known to TRANSYSTEMS are revealed, to the extent that they affect the scope of services, compensation, schedule, allocation of risks or other material terms of this Agreement, TRANSYSTEMS may call for renegotiation of appropriate portions of this Agreement.  TRANSYSTEMS shall notify the OWNER of the changed conditions necessitating renegotiation, and TRANSYSTEMS and the OWNER shall promptly and in good faith enter into renegotiation of this Agreement to address the changed conditions.  If terms cannot be agreed to, the parties agree that either party has the absolute right to terminate this Agreement, in accordance with the Termination provision hereof.

Section 3.2Owner’s Responsibilities.  OWNER, subject to the terms and provisions of this Agreement and each specific Request for Services, shall do the following in a timely manner so as to not delay the Services of TRANSYSTEMS:

Section 3.2.1Designate a person to act as OWNER’s representative with respect to the Services to be rendered under this Agreement.  Such person shall have complete authority to transmit instructions, receive information, interpret, and define OWNER’S policies and decisions with respect to TRANSYSTEMS’ Services for the particular Project;

Section 3.2.2Provide all criteria, all available information pertinent to each Project, and full information as to OWNER’S requirements for each Project.  OWNER agrees that TRANSYSTEMS shall be entitled to rely upon the accuracy and completeness of all such information;

Section 3.2.3Arrange for access to and make all provisions for TRANSYSTEMS to enter upon public and private property as required for TRANSYSTEMS to perform services under this Agreement.  All such access shall be provided without condition or restriction unacceptable to TRANSYSTEMS nor shall TRANSYSTEMS be required to indemnify or insure any third party as a condition to such access.

Section 3.2.4Examine all studies, reports, sketches, drawings, specifications, proposals, and other documents presented by TRANSYSTEMS, obtain advice of an attorney, insurance counselor and other consultants as OWNER deems appropriate for such examination and render in writing decisions pertaining thereto within a reasonable time so as not to delay the Services of TRANSYSTEMS;

Section 3.2.5Give prompt written notice to TRANSYSTEMS whenever OWNER observes or otherwise becomes aware of any development that affects the scope or timing of TRANSYSTEMS’ Services, or any defect or non-conformance in the Services by TRANSYSTEMS

6

(or its independent professional associates or consultants) or in the work of any other party performing or providing work or services in connection with the Project;

Section 3.2.6When OWNER deems it necessary or appropriate for services in addition to the Services to be performed in connection with a particular Request for Services,  OWNER shall furnish such additional services or direct TRANSYSTEMS to provide such additional services either by the issuance of a new and additional Request for Services or by following the provisions set forth in Section 2.2 of this Agreement;

Section 3.2.7Provide TRANSYSTEMS with any necessary governmental allocations or priorities, obtain all permits and licenses required to be taken out in the name of OWNER which are necessary for the performance of the Services and, except where such permits, processes or licenses are by the terms of a particular approved Request for Services the responsibility of TRANSYSTEMS, obtain any permits, processes and other licenses which are required for the Project or the Services;

Section 3.2.8Perform any other duties, obligations or responsibilities of the OWNER set forth elsewhere in this Agreement, including, but not limited to, the obligation to make the payments called for under Section 5 hereof and perform any responsibilities and duties of the OWNER which may be identified on a particular Request for Services, if any;

Section 3.2.9Pay for and be responsible for all taxes incurred in connection with each Project, regardless of whether such taxes are assessed against OWNER, TRANSYSTEMS or others.

Section 3.2.10Bear all costs incident to compliance with the requirements of this Section 3.2.

Section 3.2.11The OWNER shall promptly report to TRANSYSTEMS any defects or suspected defects in TRANSYSTEMS’s services of which the OWNER becomes aware, so that TRANSYSTEMS may take measures to minimize the consequences of such a defect.  The OWNER further agrees to impose a similar notification requirement on all Contractors in its OWNER/Contractor contract and shall require all subcontracts at any level to contain a like requirement.  Failure by the OWNER and the OWNER’s contractors or subcontractors to notify TRANSYSTEMS shall relieve TRANSYSTEMS of the costs of remedying the defects above the sum such remedy would have cost had prompt notification been given when such defects were first discovered;

Section 3.2.12In the event OWNER, OWNER’s contractors or subcontractors, or

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anyone for whom OWNER is legally liable makes or permits to be made any changes to any reports, plans, specifications or other construction documents prepared by TRANSYSTEMS without obtaining TRANSYSTEMS’s prior written consent, OWNER shall assume full responsibility for the results of such changes;  therefore, OWNER agrees to waive any claim against TRANSYSTEMS and to release TRANSYSTEMS from any liability arising directly or indirectly from such changes.

In addition, OWNER agrees, to the fullest extent permitted by law, to indemnify and hold harmless TRANSYSTEMS from any damages, liabilities or costs, including reasonable attorneys’ fees and costs of defense, arising from such changes.

In addition, OWNER agrees to include in any contracts for construction appropriate language that prohibits the Contractor or any subcontractors of any tier from making any changes or modifications to TRANSYSTEMS’s construction documents without the prior written approval of TRANSYSTEMS and that further requires the Contractor to indemnify both TRANSYSTEMS and OWNER from any liability or cost arising from such changes made without such proper authorization.

SECTION 4

PERIODS OF SERVICE, COMPLETION DATE, FORCE MAJEURE

Section 4.1Period of Service.  This Agreement shall continue until this Agreement is terminated pursuant to Section 7.1 and all Services under those Requests for Services which are pending at the time of said termination are completed.

Section 4.2Completion Date.  Unless a specific Completion Date is expressly set forth in a particular Request for Services as the date the Services under that Request for Services must be completed, any date set forth in a Request for Service shall be an estimated, but not guaranteed, date for the completion of the Services under that particular Request for Services.  If any such Completion Date is exceeded through no fault of TRANSYSTEMS, all rates, measures and compensation provided herein shall be subject to equitable adjustment. The Completion Date (and TRANSYSTEMS’ obligation to complete the Services by such date, if any) is subject to reasonable extensions for the performance of additional Services, constructive changes or other extra work and is subject to reasonable extensions for a Force Majeure Event.

The OWNER and Consultant are aware that many factors outside TRANSYSTEMS’s control may affect TRANSYSTEMS’ ability to complete the services to be provided under this Agreement.  TRANSYSTEMS will perform these services with reasonable diligence and expediency consistent with sound professional practices.

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If TRANSYSTEMS becomes aware of delays due to time allowances for review and approval being exceeded, delay by the Contractor, the OWNER, the OWNER’s consultants or any other cause beyond the control of TRANSYSTEMS, which will result in the schedule for performance of TRANSYSTEMS’s services not being met, TRANSYSTEMS shall promptly notify the OWNER.  If the OWNER becomes aware of any delays or other causes that will affect TRANSYSTEMS’s schedule, the OWNER shall promptly notify TRANSYSTEMS.  In either event, TRANSYSTEMS’s schedule for performance of its services shall be equitably adjusted.

Section 4.3Force Majeure.   For purposes hereof, a “Force Majeure Event” shall mean the occurrence of a failure or delay due to circumstances beyond TRANSYSTEMS’ control including, without limitation, acts of God, acts of a public enemy, fires, floods, earthquakes, wars, civil disturbances, sabotage, accidents, insurrection, blockages, embargoes, storms, explosions, catastrophes, epidemics, damage to a particular Project, lack of access to a particular Project, unavailable utilities and power, water, labor disputes, OWNER’s failure to timely perform its obligations under this Agreement or other causes beyond TRANSYSTEMS’ control.

SECTION 5

TRANSYSTEMS’ COMPENSATION

Section 5.1Compensation for Services and Expenses of TRANSYSTEMS.  Unless other compensation or fee arrangements are expressly set forth in a particular approved Request for Services (in which case OWNER shall pay TRANSYSTEMS in accordance with any such compensation or fee arrangements), OWNER shall compensate TRANSYSTEMS for its Services performed or furnished under a particular Request for Service as follows:

Section 5.1.1For Services. As compensation for the performance of the Services rendered by TRANSYSTEMS under a particular Request for Services, OWNER shall pay TRANSYSTEMS, in accordance with the provisions of Section 5.3.

Section 5.1.2For Reimbursable Expenses.  In addition to payments provided for in paragraphs 5.1.1. OWNER shall also pay TRANSYSTEMS for all Reimbursable Expenses incurred in connection with all Services provided pursuant to a particular Request for Service.  For purposes hereof, “Reimbursable Expenses” are those costs and expenses incurred by TRANSYSTEMS in connection with the performance of the Services under this Agreement or a particular Request for Service, including, but not limited to, the costs and expenses incurred by TRANSYSTEMS for travel, reproduction, mailing costs, computer time, supplies and materials, taxes, transportation, telephone and communications, independent professional associates and consultants and subconsultants and any other expense items which are described on TRANSYSTEMS’ Schedule of Rates and Expenses in effect at the time the Services are provided

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and the Reimbursable Expenses are incurred.

Section 5.2Monthly Invoices.  TRANSYSTEMS shall submit monthly statements for Services rendered and for Reimbursable Expenses incurred under each Request for Services.  The statements will be based upon TRANSYSTEMS’ estimate of the proportion of the total Services actually completed at the time of billing or upon the time spent and costs incurred by TRANSYSTEMS during the period covered by such statement.  OWNER shall make prompt monthly payments in response to TRANSYSTEMS’ monthly statements.

Section 5.3Other Provisions Concerning Payments.

Section 5.3.1Interest, Suspension of Services.  If OWNER fails to make any payment due TRANSYSTEMS for services and expenses within thirty (30) days after receipt of TRANSYSTEMS’ statement therefor, TRANSYSTEMS shall be entitled interest on the unpaid amounts due TRANSYSTEMS at the lesser of: i) 1.5 % per month; or, ii) the highest rate of interest allowed under applicable law.   The entire unpaid balance due TRANSYSTEMS shall bear said rate of interest from the thirtieth day after OWNER’s receipt of TRANSYSTEMS’ statement,  until the entire unpaid balance has been paid to TRANSYSTEMS.  In addition to being entitled to interest, TRANSYSTEMS may, after giving seven (7) days written notice to OWNER, suspend services under this Agreement until TRANSYSTEMS has been paid in full all amounts due for Services, expenses, and charges.

Section 5.3.2Payments after Termination by OWNER.  In the event of termination under Section 7.1, TRANSYSTEMS will be paid for Services rendered and Reimbursable Expenses incurred to the date of termination on those particular Requests for Services terminated, on the basis of TRANSYSTEMS’ Invoiced Services and Expenses then in effect.  TRANSYSTEMS shall also be reimbursed for the charges of independent professional associates and consultants employed by TRANSYSTEMS to render Services and all reasonable demobilization costs incurred by TRANSYSTEMS, including any cancellation charges by independent professional associates, consultants and others performing or furnishing Services through TRANSYSTEMS under those particular Request for Services terminated, and TRANSYSTEMS shall be paid all other amounts due it under this Agreement which are earned through the date of the termination.

Section 5.3.3Records.  Records of TRANSYSTEMS’ salary costs pertinent to TRANSYSTEMS’ compensation under this Agreement will be kept in accordance with generally accepted accounting practices.  If OWNER desires to have copies of such records, copies will be made available to OWNER upon OWNER’s request prior to final payment for TRANSYSTEMS’ Services under a particular Request for Services.  TRANSYSTEMS shall be reimbursed the cost of any such copies by OWNER.

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Section 5.3.4Cost Factors.  Whenever a factor is applied to salary costs or other expenses in determining compensation payable to TRANSYSTEMS that factor will be adjusted periodically and equitably to reflect changes in the various elements that comprise such factor.  All such adjustments will be in accordance with generally accepted accounting practices as applied on a consistent basis by TRANSYSTEMS and consistent with TRANSYSTEMS’ overall compensation practices and procedures.

SECTION 6

OPINIONS OF COST AND SCHEDULE

Section 6.1Opinions of Cost and Schedule.  Since TRANSYSTEMS has no control over the cost of labor, materials, equipment or services furnished by others, or over the resources provided by others to meet construction or other Project schedules, or over the methods of others in determining prices, or over competitive bidding or market conditions,  TRANSYSTEMS’ opinions of probable costs (including probable Total Project Costs and Construction Cost) and of Project Schedules shall be made on the basis of TRANSYSTEMS’ experience and qualifications and represent TRANSYSTEMS’ best judgment as an experienced and qualified professional engineer, familiar with the construction industry; but TRANSYSTEMS cannot and does not guarantee that proposals, bids or actual Project Costs (including Total Project Costs or Construction Costs) will not vary from opinions of probable cost prepared by TRANSYSTEMS or that actual schedules will not vary from the projected schedules prepared by TRANSYSTEMS.  TRANSYSTEMS makes no warranty, express or implied, that the bids or the negotiated cost of the work will not vary from TRANSYSTEMS’ opinion of probable construction cost.

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SECTION 7

GENERAL CONSIDERATIONS

Section 7.1Termination.  The obligation to provide further Services under this Agreement may be terminated by either party upon thirty (30) days written notice to the other party.  In the event such a termination is of a particular Request for Services, then this Agreement shall remain in effect for all other outstanding requests for services and any future approved Requests for Services.  In the event said termination is for the entire Agreement, then the termination shall effect and terminate this Agreement and all outstanding Requests for Services.

If TRANSYSTEMS for any reason is not allowed to complete all the services called for by this Agreement, TRANSYSTEMS shall not be held responsible for the accuracy, completeness or constructability of the construction documents prepared by TRANSYSTEMS if used, changed or completed by the OWNER or by another party.  Accordingly, the OWNER agrees, to the fullest extent permitted by law, to indemnify and hold harmless TRANSYSTEMS, its officers, directors, employees and subconsultants (collectively, Consultant) from any damages, liabilities or costs, including reasonable attorneys’ fees and defense costs, arising or allegedly arising from such use, change or completion by any other party of any construction documents prepared by TRANSYSTEMS.

Section 7.2Reuse of Documents.  All documents, drawings, sketches, studies, analysis, information, schedules, estimates, reports and other items prepared or furnished by TRANSYSTEMS (or TRANSYSTEMS’ independent professional associates and consultants) pursuant to this Agreement,  including, but not limited to Drawings and Specifications,  are instruments of service in respect of the particular Project for which they were prepared and TRANSYSTEMS shall retain an ownership and property interest therein whether or not the particular Project is completed.  Provided, however, that such documents, drawings, sketches, studies, analysis, information, schedules, estimates, reports and other items are not intended or represented to be suitable for reuse by OWNER or others on extensions of the particular Project or on any other project.  Any reuse without written verification or adaptation by TRANSYSTEMS for the specific purpose intended will be at OWNER’s sole risk and without liability or legal exposure to TRANSYSTEMS, or to TRANSYSTEMS’ independent professional associates or consultants, and OWNER does hereby, to the fullest extent permitted by law, indemnify and hold harmless TRANSYSTEMS, TRANSYSTEMS’ officers, employees and agents and TRANSYSTEMS’ independent professional associates and consultants from all claims, suits, demands, damages, liabilities, losses, expenses and costs, including but not limited to reasonable attorney’s fees and other costs of defense, arising out of or resulting therefrom.  The provisions of this Section 7.2 shall survive the termination of this Agreement.

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Section 7.3Use of Electronic Media.

In the event that OWNER requests any electronic deliverables under this agreement, TRANSYSTEMS and OWNER shall execute a separate CADD agreement.  Otherwise, in accepting and utilizing any drawings, reports and data on any form of electronic media generated and furnished by TRANSYSTEMS, the OWNER agrees that all such electronic files are instruments of service of TRANSYSTEMS, who shall be deemed the author, and shall retain all common law, statutory law and other rights, including copyrights.

The OWNER agrees not to reuse these electronic files, in whole or in part, for any purpose other than for the Project.  The OWNER agrees not to transfer these electronic files to others without the prior written consent of TRANSYSTEMS.  The OWNER further agrees to waive all claims against TRANSYSTEMS resulting in any way from any unauthorized changes to or reuse of the electronic files for any other project by anyone other than TRANSYSTEMS.

Electronic files furnished by either party shall be subject to an acceptance period of sixty (60) days during which the receiving party agrees to perform appropriate acceptance tests.  The party furnishing the electronic file shall correct any discrepancies or errors detected and reported within the acceptance period.  After the acceptance period, the electronic files shall be deemed to be accepted and neither party shall have any obligation to correct errors or maintain electronic files.

The OWNER is aware that differences may exist between the electronic files delivered and the printed hard-copy construction documents.  In the event of a conflict between the signed construction documents prepared by TRANSYSTEMS and electronic files, the signed or sealed hard-copy construction documents shall govern.

In addition, the OWNER agrees, to the fullest extent permitted by law, to indemnify and hold harmless TRANSYSTEMS, its officers, directors, employees and subconsultants (collectively, Consultant) against all damages, liabilities or costs, including reasonable attorneys’ fees and defense costs, arising from any changes made by anyone other than TRANSYSTEMS or from any reuse of the electronic files without the prior written consent of TRANSYSTEMS.

Under no circumstances shall delivery of electronic files for use by the OWNER be deemed a sale by TRANSYSTEMS, and TRANSYSTEMS makes no warranties, either express or implied, of merchantability and fitness for any particular purpose.  In no event shall TRANSYSTEMS be liable for indirect or consequential damages as a result of the OWNER’s use or reuse of the electronic files.

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Section 7.4Standard of Practice, Warranties.  Services performed by TRANSYSTEMS under this Agreement will be conducted in a manner consistent with the level of care, diligence and skill ordinarily possessed and exercised by members of the profession currently practicing in the same locality under similar conditions.  Except as expressly set forth above, no other representations, expressed or implied, and no warranty or guarantee, express or implied, is included in this Agreement, or in any document, drawing, sketch, study, analysis, schedule, estimate, report, opinion, specification and other item prepared or furnished by TRANSYSTEMS (or TRANSYSTEMS’ independent professional associates and consultants) pursuant to this Agreement.

Section 7.5Limitation of Responsibility, Job Site Safety/Techniques.  Neither the professional activities of TRANSYSTEMS, nor the presence of TRANSYSTEMS or its employees and subconsultants at a construction/project site, shall relieve the Contractor of its obligations, duties and responsibilities including, but not limited to, construction means, methods, sequence, techniques or procedures necessary for performing, superintending and coordinating the Work in accordance with the Contract Documents and any health or safety precautions required by any regulatory agencies.  TRANSYSTEMS and its personnel have no authority to exercise any control over any construction contractor or its employees in connection with their work or any health or safety programs or procedures.  The OWNER agrees that the Contractor shall be solely responsible for job site safety, and warrants that this intent shall be carried out in the OWNER’s contract with the Contractor.  The OWNER also agrees that the OWNER, TRANSYSTEMS and TRANSYSTEMS’ subconsultants shall be indemnified by the Contractor and shall be made additional insureds under the Contractor’s policies of general liability insurance.  In addition, TranSystems shall not be responsible for (i) the failure of any other project party to fulfill their respective contractual responsibilities and obligations to OWNER or to comply with Federal, State or local laws, rules, regulations or codes; (ii) the schedules of any of the other project parties or the failure of any of the other project parties to carry out their work in accordance with their respective agreements.  TranSystems shall not have control over or charge of and shall not be responsible for acts or omissions of the other project parties, or their agents or employees, or of any other persons performing portions of the work on the project.

Section 7.6Insurance.

Section 7.6.1TRANSYSTEMS Insurance.  TRANSYSTEMS shall maintain throughout the duration of this Agreement insurance in the following amounts and will, upon request of the OWNER furnish a copy of certification thereof:

(a)Worker’s Compensation and Employer’s Liability

Worker’s Compensation Statutory

Employer’s Liability $500,000/$500,000/$500,000

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(b)Comprehensive Automobile Liability

$1,000,000 combined single limit Bodily Injury and Property Damage

(c)Comprehensive General Liability

$1,000,000 - per occurrence

$2,000,000 - annual aggregate

$2,000,000 product / completed operations per occurrence

$1,000,000 - - personal injury / advertising liability

(d)Umbrella/Excess Liability

$1,000,000 -per occurrence

$1,000,000 - -annual aggregate

(e)Professional Liability Insurance in an amount of $1,000,000 per claim and annual aggregate.

Section 7.6.2If, pursuant to the provisions of Exhibit A, OWNER is required to obtain certain insurance coverages, OWNER agrees to obtain and maintain throughout the duration of this Agreement (or, as applicable, cause its contractors to obtain and maintain) such insurance in the coverages and the amounts specified on Exhibit A.  OWNER will furnish TRANSYSTEMS with a copy of certification of such insurance.  TRANSYSTEMS’ interests shall be covered under any such insurance coverage. [Note: Deletion of Section 7.6.2 was agreed to and initialed by Brian Kletscher, President of Highwater Ethanol, LLC and Timothy P. Rock, Assistant Vice President of TranSystems Corporation on November 16, 2006.]

Section 7.7Liability and Indemnification.

Section 7.7.1General.  Having considered the potential liabilities that may exist during the performance of the Services, the benefits of the Project, and TRANSYSTEMS’ Compensation for the performance of the Services, and in consideration of the promises contained in this Agreement, OWNER and TRANSYSTEMS agree to allocate and limit such liabilities in accordance with the provisions of this Section 7.7.

Section 7.7.2TRANSYSTEMS Indemnification. TRANSYSTEMS agrees, to the fullest extent permitted by law, to indemnify and hold the OWNER harmless from any damage, liability or cost (including reasonable attorney’s fees and costs of defense) to the extent caused by TRANSYSTEMS’ negligent acts, errors or omissions in the performance of professional services under this Agreement and those of its subconsultants or anyone for whom TRANSYSTEMS is legally liable.  TRANSYSTEMS is not obligated to indemnify the OWNER in any manner whatsoever for the OWNER’S own negligence.

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Section 7.7.3OWNER Indemnification.   The OWNER agrees, to the fullest extent permitted by law, to indemnify and hold TRANSYSTEMS harmless from any damage, liability or cost (including reasonable attorney’s fees and costs of defense) to the extent caused by the OWNER’S negligent acts, errors or omissions and those of its contractors, subcontractors or consultants or anyone for whom the OWNER is legally liable, and arising from the Project that is the subject of this Agreement.  The OWNER is not obligated to indemnify TRANSYSTEMS in any manner whatsoever for TRANSYSTEMS’ own negligence.

Section 7.7.4Contractor Indemnification. OWNER agrees to cause each of its other contractors on each particular Project to include an indemnification provision in OWNER’s contract with each such contractor that indemnifies and holds harmless TRANSYSTEMS and any of its officers or employees from all loss, damage, cost or expense to the extent caused by such contractors (or its employees or subcontractors) negligence or willful misconduct.

Section 7.7.5Employee Claims.  TRANSYSTEMS shall indemnify OWNER against any loss, damage, cost or expense arising out of claims by TRANSYSTEMS’ employees (unless such claim arises out of or as a result of the negligence of OWNER, its employees, agents or contractors). OWNER shall indemnify TRANSYSTEMS against any loss, damage, cost or expense arising out of claims by OWNER’S employees (unless such claim arises out of or as a result of the negligence of TRANSYSTEMS, its employees, agents or subcontractors).

Section 7.7.6Consequential Damages.  To the fullest extent permitted by law, TRANSYSTEMS shall not, in any event,  be liable to OWNER for any special, indirect, incidental or consequential damages, including, but not limited to,  damages from delay, distribution, loss of product, loss of use, loss of profits or revenue or increased cost of operation, the cost of capital or the cost of purchased or replacement equipment, systems or power.

Section 7.7.7Limitation of Liability.  To the fullest extent permitted by law, TRANSYSTEMS’ total liability to OWNER for all claims, losses, damages and expenses resulting or arising in any way from the performance of the Services (including TRANSYSTEMS’ indemnity obligations hereunder) shall not exceed the total compensation received by TRANSYSTEMS under this Agreement or the limits of any professional liability insurance requirements outlined in Section 7.6.1(e), whichever is greater.  BK

Section 7.7.8Survival.  The terms and conditions of this Section 7.7 shall survive the termination of this Agreement and/or the completion of the Services.

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Section 7.7.9Betterment. If, due to TRANSYSTEMS’ negligence, a required item or component of the Project is omitted from TRANSYSTEMS’ construction documents, TRANSYSTEMS shall not be responsible for paying the cost required to add such item or component to the extent that such item or component would have been required and included in the original construction documents.  In no event will TRANSYSTEMS be responsible for any cost or expense that provides betterment or upgrades or enhances the value of the Project.

Section 7.7.10Protection of Supplanting Consultant.  In consideration of the risks and rewards involved in this Project, the OWNER agrees, to the maximum extent permitted by law, to indemnify and hold harmless TRANSYSTEMS from any damages, liabilities or costs, including reasonable attorneys’ fees and defense costs, arising or allegedly arising from any negligent acts, errors or omissions by any prior consultant employed by the OWNER on this project and from any claims of copyright or patent infringement by TRANSYSTEMS arising from the use of any documents prepared or provided by the OWNER or any prior consultant of the OWNER’s.  The OWNER warrants that any documents provided to TRANSYSTEMS by the OWNER or by the prior consultant may be relied upon as to their accuracy and completeness without independent investigation by TRANSYSTEMS and that the OWNER has the right to provide such documents to TRANSYSTEMS free of any claims of copyright or patent infringement or violation of any other party’s rights in intellectual property.

SECTION 8

SPECIAL PROVISIONS, EXHIBITS AND SCHEDULES

Section 8.1Special Provisions.  This Agreement is subject to no special provisions.

Section 8.2Entire Agreement.  This Agreement together with all approved Requests for Services constitute the entire agreement between OWNER and TRANSYSTEMS and supersede all prior written or oral understandings.  This Agreement may only be amended, supplemented, modified, or canceled by a duly executed written instrument.

Nothing contained in this Agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the OWNER or TRANSYSTEMS.  TRANSYSTEMS’ services under this Agreement are being performed solely for the OWNER’s benefit, and no other party or entity shall have any claim against TRANSYSTEMS because of this Agreement or the performance or nonperformance of services hereunder.  The OWNER and Consultant agree to require a similar provision in all contracts with contractors, subcontractors, subconsultants, vendors and other entities involved in this Project to carry out the intent of this provision.

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TRANSYSTEMS shall not be required to execute any documents subsequent to the signing of this Agreement that in any way might, in the sole judgment of TRANSYSTEMS, increase TRANSYSTEMS’ contractual or legal obligations or risks, or adversely affect the availability or cost of its professional or general liability insurance.

Section 8.3Hazardous Materials.  Unless otherwise provided in this Agreement, TRANSYSTEMS shall have no responsibility for the discovery, presence, handling, removal or disposal of or exposure of persons to hazardous materials in any form at the Project site.  However, TRANSYSTEMS shall report to OWNER the presence and location of any hazardous material which it notices or which an engineer of similar skill and experience should have noticed.

Section 8.4Attorneys Fees.  In the event that either party hereto employs an attorney to enforce any provision of this Agreement or to collect damages for default or breach of this Agreement, or pursue claims in litigation or arbitration, the prevailing party in any such action shall be entitled to recover from the other such attorneys’ fees and costs of collection as the prevailing party may expend or incur with respect thereto.  In the event that a settlement is reached between the parties before a final decision in any such litigation or arbitration, then neither party shall be entitled to recover its attorneys fees or costs from the other and neither party shall be responsible for the other party’s attorney’s fees or costs, unless otherwise agreed by the parties.

Section 8.5Disputes.  In the event a dispute arises between TRANSYSTEMS and OWNER regarding the application or interpretation of any provision of this Agreement, or quality of Services by TRANSYSTEMS, the aggrieved party shall promptly notify the other party to this Agreement of the dispute, but in no event more than 20 days after such dispute arises.  If the parties fail to resolve the dispute within 20 days after receipt of such notice, each party shall, within five days thereafter, proceed to non-binding mediation, with each party to bear its own costs and attorneys’ fees (except as otherwise provided in Section 8.4 above) and the parties shall share equally in the cost of the mediator.  In the event that the mediation is unsuccessful, the aggrieved party may elect to litigate its dispute with the other party.  All disputes shall be governed by the laws of the State of Missouri and the jurisdiction and venue for litigation between the parties shall be solely and exclusively in Jackson County, Missouri, or the United States District Court for the Western District of Missouri.

It is intended by the parties to this Agreement that TRANSYSTEMS’ services in connection with the Project shall not subject TRANSYSTEMS’ individual employees, officers or directors to any personal legal exposure for the risks associated with this Project.  Therefore, and notwithstanding anything to the contrary contained herein, the OWNER agrees that as the OWNER’s sole and exclusive remedy, any claim, demand or suit shall be directed and/or asserted only against TRANSYSTEMS, a Missouri corporation, and not against any of TRANSYSTEMS’ individual employees, officers or directors.

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Section 8.6Independent Contractor. TRANSYSTEMS shall be an independent contractor with respect to the Services to be performed hereunder.  Neither TRANSYSTEMS, nor its independent professional associates, consultants or subcontractors, nor the employees of any of the foregoing, shall be deemed to be the servants, employees or agents of OWNER.

Section 8.7Representations and Remedies.  TRANSYSTEMS makes no representations, covenants, warranties or guarantees, express or implied, other than those expressly set forth herein.  IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE SPECIFICALLY EXCLUDED.  The parties’ rights, liabilities, responsibilities and remedies with respect to the Services, whether in contract or otherwise, shall be exclusively those expressly set forth in this Agreement.

Section 8.8Assignment, Subcontractors. This Agreement shall not be assignable by either party without the prior written consent of the other party hereto, except that it may be assigned without such consent to the successor of either party, or to a person, firm or corporation acquiring all or substantially all of the business assets of such party or to a wholly owned subsidiary of either party, but such assignment shall not relieve the assigning party of any of its obligations under this Agreement.  No assignment of this Agreement shall be valid until this Agreement shall have been assumed by the assignee.  This Agreement shall be binding upon and shall inure to the benefit of TRANSYSTEMS’ and OWNER’s respective successors and assigns. Nothing in this Section 8.9 shall prevent or be deemed to prevent TRANSYSTEMS from employing, contracting with or engaging independent professional associates, consultants and other subcontractors to perform or assist in the performance of the Services.

Section 8.9Interpretation.

(a)This Agreement shall be governed by and interpreted in accordance with the laws of Missouri.

(b)Headings and titles of sections, paragraphs and other subparts of this Agreement are for convenience of reference only and shall not be considered in interpreting the text of this Agreement.  Modifications or amendments to this Agreement must be in writing and executed by duly authorized representatives of each party.

(c)Unless specifically stated to the contrary therein, indemnities against, releases from and limitations on liability expressed in this Agreement shall apply even in the event of the fault, negligence or strict liability of the party indemnified or released or whose liability is limited and shall extend to the officers, directors, employees, agents, licensors and related entities of such party.

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(d)In the event that any portion or all of this Agreement is held to be void or unenforceable, the parties agree to negotiate in good faith to reach an equitable agreement which shall effect the intent of the parties as set forth in this Agreement.

(e)No failure by either party to insist on performance of any term, condition, or instruction, or to exercise any right or privilege included in this Agreement, and no waiver of any breach shall constitute a waiver of any other or subsequent term, condition, instruction, breach, right or privilege.

(f)The parties acknowledge and agree that the terms and conditions of this Agreement, including but not limited to those relating to allocations and assumptions of, releases from, exclusions against and limitations of liability, have been freely and fairly negotiated.  Each party acknowledges that in executing this Agreement they have relied solely on their own judgment, belief, and knowledge, and such advice as they may have received from their own counsel, and they have not been influenced by any representation or statements made by any other party or its counsel.  No provision in this Agreement is to be interpreted for or against any party because that party or its counsel drafted such provision.

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Section 8.11Certifications, Guarantees and Warranties.  TRANSYSTEMS shall not be required to sign any documents, no matter by whom requested, that would result in TRANSYSTEMS’ having to certify, guarantee or warrant the existence of conditions whose existence TRANSYSTEMS cannot ascertain.  The OWNER also agrees not to make resolution of any dispute with TRANSYSTEMS or payment of any amount due to TRANSYSTEMS in any way contingent upon TRANSYSTEMS’ signing any such certification.

As used herein, the word “certify” shall mean an expression of TRANSYSTEMS’ professional opinion to the best of its information, knowledge and belief, and does not constitute a warranty or guarantee by TRANSYSTEMS.

IN WITNESS WHEREOF, the parties hereto have made and executed this Agreement as of the 4th day of May 2006

Highwater Ethanol					TranSystems Corporation
By:	/s/ Brian Kletscher			By:		/s/ Timothy P. Rock
Printed Name:			Brian Kletscher	Printed Name:				Timothy P. Rock
Title:		President		Title:			Assistant Vice President

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EX-10.7

Exhibit 10.7

PHASE I AND PHASE II

ENGINEERING SERVICES AGREEMENT

BETWEEN

HIGHWATER ETHANOL, LLC

AND

FAGEN ENGINEERING, LLC

July 20, 2006

TABLE OF CONTENTS

		Page
Article 1	Definitions; Rules of Interpretation	1
1.1	Rules of Construction	1
1.2	Defined Terms	2
Article 2	Retention of Agent	4
2.1	Retention of Services	4
Article 3	Engineer Responsibilities	4
3.1	Services	4
3.2	Phase I Design Package	4
3.3	Delivery of Phase I Design Package	4
3.4	The Phase II Design Package	4
3.5	Delivery of Phase II Design Package	5
3.6	Delays	5
3.7	Utility Routing and Design Services Limited	5
Article 4	Client Responsibilities	5
4.1	Client’s Representative	5
4.2	Client’s Requirements	6
4.3	Other Information	6
4.4	Access to Property	6
4.5	Review of Documents	6
4.6	Consents, Approvals, Licenses, and Permits	6
4.7	Bids	6
4.8	Other Services	6
4.9	Services Outside Scope of Engineer’s Services	6
4.10	Deviation from Design	6
4.11	Developments Affecting Scope or Timing of Services	7
Article 5	Compensation And Payment	7
5.1	Compensation	7
5.2	Reimbursement of Engineer Expenses	7
5.3	Reimbursement of Subcontractor Expenses	7
5.4	Fees for Work Outside Scope of Services	7
5.5	Collection of Unpaid Amounts	7
5.6	Reimbursement Schedules Subject to Change	7
5.7	Invoices	8
5.8	Payment	8
5.9	Late Payment and Interest	8
5.10	Suspension for Failure to Pay	8

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		Page
5.11	Payment	8
5.12	Withholding Payments	8
5.13	Purchase Orders	8
5.14	Changes in Project	8
Article 6	Construction Cost And Cost Estimates	8
6.1	Cost Estimates	8
Article 7	Termination	9
7.1	Termination Upon Default	9
7.2	Termination Upon Abandonment of Plant	9
Article 8	Ownership of Work Product	9
8.1	Work Product	9
8.2	Copies Provided to Client	9
8.3	Prohibited Use of Work Product	9
8.4	Derogation of Engineer’s Rights to Work Product	9
Article 9	Successors and Assigns	10
9.1	Successors	10
9.2	Written Consent Required	10
9.3	No Third-Party Beneficiaries	10
Article 10	Warranty	10
10.1	No Warranty Extended	10
10.2	No Responsibility for Construction	10
Article 11	Indemnification	10
11.1	Engineer’s Indemnification	10
11.2	Client’s Indemnification	11
11.3	Hazardous Materials Indemnification	11
Article 12	Dispute Resolution	11
12.1	Arbitration	11
Article 13	Confidentiality	12
13.1	Non-Disclosure Obligation	12
13.2	Publicity and Advertising	12
13.3	Term of Obligation	12
Article 14	Miscellaneous	12
14.1	Governing Law	12
14.2	Severability	12
14.3	No Waiver	13

ii

				Page
14.4	Captions and Headings			13
14.5	Engineer’s Accounting Records			13
14.6	Counterparts			13
14.7	Survival			13
14.8	No Privity with Client’s Contractors			13
14.9	Amendments			13
14.10	Entire Agreement			13
14.11	Notice			13
14.12	Extent of Agreement			14
14.13	Subrogation Waiver			14
EXHIBIT A		Reimbursement Schedule	16
EXHIBIT B		Reimbursable Expense Schedule	17
EXHIBIT C		Client’s Deliverable Site Obligations	18

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PHASE I AND PHASE II

ENGINEERING SERVICES AGREEMENT

THIS PHASE I AND PHASE II ENGINEERING SERVICES AGREEMENT (the “Agreement”) is made as of July 20, 2006, (the “Effective Date”) by and between Highwater Ethanol, LLC, a Minnesota Limited Liability Company (the “Client”) and Fagen Engineering, LLC a Minnesota Limited Liability Company (the “Engineer”).  Each of the Client and Engineer are referred to herein individually as a “Party” and collectively as the “Parties.”

RECITALS

WHEREAS,  Client is developing a 50 million gallons per year dry grind ethanol production facility to be located in Lamberton, MN (the “Plant”) to be owned and operated by Client; and

WHEREAS,  Client and Fagen, Inc. (“Design - Builder”) intend to enter into that certain Lump-Sum Design-Build Agreement (“Design-Build Agreement”) under which Fagen, Inc., an affiliate of Engineer,  will serve as the design-builder for the Plant and provide design, engineering, procurement and construction services for the development and construction of the Plant; and

WHEREAS,   Client wishes to retain an entity in advance of entering into the Design-Build Agreement to perform certain engineering and design work that will be required under the Design-Build Agreement on the terms and conditions set forth in this Agreement, and Engineer desires to act as such entity upon the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound by this Agreement, the parties do hereby agree as follows:

Article 1
Definitions; Rules of Interpretation

1.1          Rules of Construction.

The capitalized terms listed in this Article 1 shall have the meanings set forth herein whenever the terms appear in this Agreement, whether in the singular or the plural or in the present or past tense.  Other terms used in this Agreement but not listed in this Article shall have meanings as commonly used in the English language and, where applicable, in generally accepted construction and design-build industry standards.  Words not otherwise defined herein that have well known and generally accepted technical or trade meanings are used herein in accordance with such recognized meanings.  In addition, the following rules of interpretation shall apply:

(a)           The masculine shall include the feminine and neuter.

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(b)References to “Articles,” “Sections,” “Schedules,” or “Exhibits” shall be to Articles, Sections, Schedules or Exhibits of this Agreement.

(c)This Agreement was negotiated and prepared by each of the Parties with the advice and participation of counsel.  The Parties have agreed to the wording of this Agreement and none of the provisions hereof shall be construed against one Party on the ground that such Party is the author of this Agreement or any part hereof.  The following definitions will apply in this Agreement:

1.2          Defined Terms.

In addition to definitions appearing elsewhere in this Agreement, the following terms have the following meanings:

Agreement will have the meaning given to such term in the Preamble to this Agreement.

Applicable Law means

(a)any and all laws, legislation, statutes, codes, acts, rules, regulations, ordinances, treaties or other similar legal requirements enacted, issued or promulgated by a Governmental Authority;

(b)any and all orders, judgments, writs, decrees, injunctions, Governmental Approvals or other decisions of a Governmental Authority; and

(c)any and all legally binding announcements, directives or published practices or interpretations, regarding any of the foregoing in (a) or (b) of this definition, enacted, issued or promulgated by a Governmental Authority;

to the extent, for each of the foregoing in (a), (b) and (c) of this definition, applicable to or binding upon (i) a Party, its affiliates, its shareholders, its members, it partners or their respective representatives, to the extent any such person is engaged in activities related to the Services; or (ii) the property of a Party, its affiliates, its shareholders, its members, its partners or their respective representatives, to the extent such property is used in connection with the Services or an activity related to the Services.

Client will have the meaning given to such term in the Preamble to this Agreement.

Client’s Representative will have the meaning given to such term in Section 4.1

Design-Build Agreement will have the meaning given to such term in the Recitals to this Agreement.

Effective Date will have the meaning given to such term in the Preamble to this Agreement.

Engineer will have the meaning given to such term in the Preamble to this Agreement.

Engineer Responsible Parties will have the meaning given to such term in Section 4.10.

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Governmental Approvals will mean any material authorizations or permissions issued or granted by any Governmental Authority to the Project, the Client, the Engineer, subcontractors and their affiliates in connection with any activity related to the Services.

Governmental Authority will mean any federal, state, local or municipal governmental body; any governmental, quasi-governmental, regulatory or administrative agency, commission, body or other authority exercising or entitled to exercise any administrative, executive, judicial, legislative, policy, regulatory or taxing authority or power; or any court or governmental tribunal; in each case having jurisdiction over the Client, the Engineer, the Plant, or the Site.

Monthly Invoice will have the meaning given to such term in Section 5.7.

Party or Parties will have the meaning given to such term in the Preamble to this Agreement.

Phase I Deliverables will mean the Client’s deliverable obligations pursuant to Exhibit C attached to this Agreement.

Phase I Design Package will have the meaning given to such term in Section 3.2.

Phase II Deliverables will mean the Client’s deliverable obligations pursuant to Exhibit C

Phase II Design Package will have the meaning given to such term in Section 3.4 attached to this Agreement.

Plant will have the meaning given to such term in the Recitals to this Agreement.

Project will mean the Plant, together with all equipment, labor, services and materials furnished under the Design-Build Agreement.

Services will have the meaning given to such term in Section 3.1.

Site will mean the land or premises on which the Plant is located.

Subcontractor will mean any person or entity, including but not limited to independent engineers, associates, and consultants, retained by Engineer, or by any person or entity retained directly or indirectly by Engineer, in each case as an independent contractor, to perform a portion of the Services.

Work Product will have the meaning given to such term in Section 8.1.

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Article 2

Retention of the Agent

2.1          Retention of Services.  On the terms and subject to the conditions hereinafter set forth, Client hereby retains Engineer to perform, and Engineer hereby agrees to perform, the Services.  Engineer will provide such Services solely pursuant to the terms and conditions set forth herein including any indemnifications and limitations on liability.

Article 3

Engineer Responsibilities

3.1          Services.  Engineer shall perform the Phase I Design Package and Phase II Design Package engineering services necessary to facilitate Client’s completion of the Phase I and Phase II Site work required of Client prior to the issuance of a Notice to Proceed pursuant to the Design-Build Agreement (collectively, the “Services”).

3.2          Phase I Design Package. (Grading and Drainage). The Phase I Design Package to be provided by Engineer shall consist of the engineering and design of the Plant Site and shall include the following drawings:

a)Cover Sheet

b)Property Layout Drawing

c)Grading, Drainage and Erosion Control Plan Drawing (Multiple Drawings if Required)

i.Used for Land Disturbance Permitting

ii.Site grading is held 6-inches low for topsoil and seeding

d)Roadway Alignment Drawing

e)Culvert Cross Sections and Details (Multiple Drawings)

f)Seeding and Landscaping (If Required)

g)Geometric layout drawing (includes contractor’s trailer, parking and laydown areas)

Plan sets along with a Bid Tabulation Sheet will be supplied to the Client so all contractors bid the same quantities.  A telephone conference call for a Phase I pre-bid meeting will be provided upon Client’s request.

3.3          Delivery of Phase I Design Package.   Engineer shall deliver the completed Phase I Design Package no later than 60 days after the receipt of all the Phase I Owner Deliverables, however, the 60 day time frame will commence no sooner than December 5, 2006.

3.4          Phase II Design Package.  The Phase II Design Package to be provided by Engineer shall provide the engineering and design of Site work and utilities for the Plant, all within the property line of Plant, and shall consist of the following:

a)Cover Sheet

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b)Property Layout Drawing

c)Site Grading and Drainage Drawing (Final Interior Plant Grading)

d)Roadway Alignment

e)Utility Layout (Fire Loop)

f)Utility Layout (Potable Water)

g)Utility Layout (Well Water) if using on-Site wells

h)Utility Layout (Sanitary Sewer)

i)Utility Layout (Utility Water Blowdown)

j)Utility Layout (Natural Gas)

i.Fagen Engineering provides a preferred routing through the Site, line size and pipe specifications are typically provided by the gas supplier.

k)Geometric Layout (For Project Control Verification)

l)Site Utility Piping Tables Drawing

m)Tank Farm Layout Drawing

n)Tank Farm Details Drawing

o)Sections and Details Drawing (If required)

p)Miscellaneous Details Drawing (If required)

A telephone conference call for a Phase II pre-bid meeting will be provided upon Client’s request.

3.5          Delivery of Phase II Design Package.  Engineer shall deliver the completed Phase II Design Package no later than 60 days after the receipt of all Phase II Deliverables.

3.6          Delays.  The Parties agree that Engineer shall not be responsible for delays in providing the Services under this Agreement due to factors beyond Engineer’s control.

3.7          Utility Routing and Design Services Limited.  The Parties agree that Engineer shall provide the routing and design for the utilities necessary for the Plant only within the Plant property line and up to the Plant property line, and that, for purposes of this Agreement, Engineer assumes a tie-in point to a city utility.  The Parties agree that, if there is no city tie-in point, Engineer will route the utilities to the Plant property line and stop.  Any special tie-in requirements necessary to connect the utilities at the Plant property line are not included in the compensation or the scope of this Agreement and shall only be designed and engineered by Engineer as change in the Project which affects the Services hereunder.

Article 4

Client Responsibilities

4.1          Client’s Representative.  Client shall, prior to the commencement of Services by Engineer, name a representative (“Client’s Representative”) with authority to receive information and transmit instructions for Client.  Client’s Representative shall be vested with authority to act on behalf of Client and Engineer shall be entitled to rely on Client’s Representative’s communications with regard to the Services.

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4.2          Client’s Requirements.  Client shall, prior to the commencement of Services by Engineer, provide Engineer with Client’s requirements for the Project, including objectives and constraints, design and construction standards, bonding and insurance requirements, and contract forms.

4.3          Other Information.  Prior to the commencement of Services by Engineer, Client shall provide Engineer with all other information available to Client and pertinent to the Project and the Services including, but not limited to, all items required pursuant to Exhibit C.  The items required by Client pursuant to this Section 4.3 shall be furnished at Client’s expense, and Engineer shall be entitled to rely upon the accuracy and completeness thereof.

4.4          Access to Property.   Prior to the commencement of Services and as necessary during the performance of Services, Client shall arrange for access by Engineer upon public and private property, as required for the performance of the Services under this Agreement.

4.5          Review of Documents.  As related to the performance of Services hereunder, Client shall examine documents presented by Engineer, obtain legal and other advice as Client deems appropriate, and render written decisions within reasonable time.  The items required by Client pursuant to this Section 4.5 shall be furnished at Client’s expense, and Engineer shall be entitled to rely upon the accuracy and completeness thereof.

4.6          Consents, Approvals, Licenses and Permits.  Prior to the commencement of Services and as necessary during the performance of the Services, Client shall obtain all consents, approvals, licenses, permits, and other Governmental Approvals necessary for the Project and for the performance of the Services.  The items required by Client pursuant to this Section 4.6 shall be furnished at Client’s expense, and Engineer shall be entitled to rely upon the accuracy and completeness thereof.

4.7          Bids.  Client shall advertise for and open bids when scheduled.

4.8          Other Services  Client shall furnish all legal, accounting and insurance counseling services as may be necessary at any time for the Services, including auditing services the Client may require to verify the monthly invoices or to ascertain how or for what purposes the Engineer and/or Subcontractors have used the money paid by or on behalf of the Client.

4.9          Service Outside Scope of Engineer’s Services.    Client shall, at its own expense, as necessary for the performance and completions of the Services, provide any additional services necessary for the Project that are outside the scope of the Services provided by Engineer under this Agreement.  Engineer shall be entitled to rely upon, as applicable, the completeness and accuracy of such additional services.

4.10        Deviation from Design.   Client shall indemnify and hold harmless Engineer, its employees, its agents, its affiliates, and any other persons or entities within its control or for whom Engineer would otherwise be responsible (“Engineer Responsible Parties”) against claims arising out of Engineer’s design, if there has been, in the completion of the Phase I and Phase II Site work required of Client prior to the issuance of a Notice to Proceed pursuant to the Design-Build

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Agreement, a failure to follow Engineer’s recommendation and such deviation or failure caused the claims.

4.11        Developments Affecting Scope or Timing of Services.  Client shall promptly notify Engineer, in writing, when Client learns of contractor error or any development that affects the scope or timing of Engineer’s Services.

Article 5

Compensation and Payment

5.1          Compensation.   In consideration of its performance of the Services, Client shall pay Engineer for Engineer’s time in the performance of the Services at a fixed fee of $92,500 (“Fixed Fee”) as compensation.  Engineer’s compensation under this Section 5.1 shall be pursuant to the Fee schedule attached hereto as Exhibit A, as such schedule may be modified from time to time. The full amount of compensation paid by Client under this Section 5.1 shall be included in and credited to the Design-Build Agreement’s contract price if entered into upon payment in full by Client.

5.2          Reimbursement of Engineer Expenses.    In addition to the fixed fee in 5.1, Client shall reimburse Engineer for its expenses related to the performance of the Services in accordance with Engineer’s current reimbursable expense schedule attached hereto as Exhibit B.

5.3          Reimbursement of Subcontractor Expenses.

5.3.1       Subcontractor charges related to time spent in the performance of the Services shall not be marked-up by Engineer.  Client shall reimburse Engineer for costs related to Subcontractors’ time in accordance with the Subcontractors’ invoices for the work.

5.3.2       Subcontractor reimbursable expenses will be marked up in accordance with the current reimbursable expense schedule attached hereto as Exhibit B.

5.4          Fees for Work Outside Scope of Services.  Fees for all work outside the scope of Engineer’s responsibilities described in Article 3, including change order work, shall be computed in accordance with Engineer’s current fee schedules, attached hereto as Exhibits A and B, as such schedules may be revised from time to time, unless otherwise agreed to in writing.

5.5          Collection of Unpaid Amounts.  If any amount due is not paid in accordance with this Agreement and Engineer must collect that amount, Engineer shall be entitled to recover, in addition to the amount due, the cost of collection, including reasonable attorney’s fees in connection with those collection efforts.

5.6          Reimbursement Schedules Subject to Change.  Engineer’s reimbursement schedule and reimbursable expense schedule attached hereto as Exhibits A and B are subject to change on January 1 of each year.

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5.7          Invoices.  Engineer shall submit a monthly invoice (“Monthly Invoice”) for Services provided and for reimbursable expenses incurred by Engineer and any Subcontractors.

5.8          Payment.    Within thirty (30) days after Client’s receipt of each Monthly Invoice, Client shall pay Engineer all amounts due.

5.9          Late Payment and Interest.  If Client fails to make payment within thirty (30) days after receipt of Monthly Invoice, interest at the maximum legal rate or at an annual rate of 18%, whichever is less, shall accrue

5.10        Suspension for Failure to Pay.  If Client fails to make payment within thirty (30) days after receipt of Monthly Invoice, Engineer may, at its option, after giving seven (7) days’ written notice, suspend Services until all amounts due to Engineer by Client have been paid in full.

5.11        Payments from Lawful Sources.  Client shall provide for payment from one or more lawful source of all sums to be paid Engineer.

5.12        Withholding Payments.  Engineer’s compensation shall not be reduced on account of any amounts withheld from payment to Subcontractors.

5.13        Purchase Orders.  If Client issues a purchase order or other document to initiate the commencement of Services hereunder, it is expressly agreed that any terms and conditions appearing thereon shall have no application and only the provisions of this Agreement shall apply.

5.14        Changes in Project.  If Client requests changes in the Project which affect the Services, compensation for and time of performance of Engineer’s services shall be adjusted appropriately.

Article 6

Construction Cost and Cost Estimates

6.1          Cost Estimates.  Client and Engineer acknowledge that Engineer has no control over cost of labor, materials, equipment or services furnished by others, over contractors’ methods of determining prices, or other competitive bidding or market conditions and that Engineer’s estimates of Project construction cost will be made on the basis of its employees’ experience and qualifications and will represent Engineer’s employees’ best judgment as experienced and qualified professionals, familiar with the construction industry.  Engineer does not guarantee that proposal, bids, or actual construction cost will not vary from its estimates of Project cost and Client acknowledges the same.

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Article 7

Termination

7.1          Termination Upon  Default.  Either party may terminate this Agreement upon twenty (20) days’ written notice if the non-terminating party has defaulted through no fault of the terminating party.

7.2          Termination Upon Abandonment of Plant.   Client may terminate Engineer’s obligation to provide further services upon twenty (20) days’ written notice if Client abandons development of the Plant.  In such event, all past due amounts for services rendered (including Subcontractor’s fees, if any) and any unpaid reimbursable expenses shall be immediately due and payable by Client.

Article 8

Ownership of Work Product

8.1          Work Product.  All tangible items prepared by Engineer, including but not limited to all drawings, specifications, calculations, data, notes and other materials and documents, including electronic data furnished by Engineer to Client and to Subcontractors under this Agreement  (“Work Product”) shall be instruments of service, and Engineer  shall retain the ownership and property interests therein, including the copyrights thereto.

8.2          Copies Provided to Client.  Client may retain copies of Work Product for reference; provided, however, that Client may not make copies of the Work Product available without Engineer’s written permission, and, granted such permission, may only do so to the extent the use of such copies of the Work Product directly pertains to the Services, the Plant, or the construction thereof.  Pursuant to Section 8.1 of this Agreement, Engineer retains ownership of and property interests in any Work Product made available and/or copied.

8.3          Prohibited Use of Work Product.  Reuse of the Work Product on any another Project without Engineer’s written consent is prohibited.  Client shall indemnify and hold harmless Engineer Responsible Parties against claims resulting from such prohibited reuse.  Said items are not intended to be suitable for completion of this Project by others.

8.4          Derogation of Engineer’s Rights to Work Product.  Submittal or distribution of Work Product in connection with the performance and completion of the Services and the construction of the Project does not constitute publication in derogation of Engineer’s rights and does not in any way diminish Engineer’s Work Product rights established herein.

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Article 9

Successors and Assigns

9.1          Successors.  The Parties intend that the provisions of this Agreement are binding upon the Parties, their employees, agents, heirs, successors and assigns.

9.2          Written Consent Required.  Neither Party shall assign, sublet, or transfer any interest in this Agreement without written consent of the other; provided, however, that Engineer may employ such Subcontractors as it may deem appropriate and may transfer or assign any interest in this Agreement or the Work Product to Design-Builder without consent of Client.

9.3          No Third-Party Beneficiaries.  None of the provisions of this Agreement will be for the benefit of or enforceable by any person other than the Parties hereto, their successors and permitted assigns and legal representatives

Article 10

Warranty

10.1        No Warranty Extended.  Engineer shall use reasonable care to reflect requirements of all Applicable Laws, rules, or regulations of which Engineer has knowledge or about which Client specifically advises in writing, which are in effect on the date of this Agreement.  ENGINEER INTENDS TO RENDER SERVICES IN ACCORDANCE WITH GENERALLY ACCEPTED PROFESSIONAL STANDARDS, BUT NO OTHER WARRANTY IS EXTENDED, EITHER EXPRESS OR IMPLIED, IN CONNECTION WITH SUCH SERVICES.  Client’s rights and remedies in this Agreement are exclusive.

10.2        No Responsibility for Construction.  Engineer shall not be responsible for construction of the Plant, contractors’ construction means, methods, techniques, sequences, or procedures, or for contractors’ safety precautions and programs, or for contractors’ failure according to contract documents.

Article 11

Indemnification

11.1        Engineer’s Indemnification.  To the fullest extent permitted by law, Engineer shall indemnify and hold harmless Client, Client’s officers, directors, partners, employees, and agents from and against any and all claims for bodily injury and for damage to tangible property caused solely by the negligent acts or omissions of Engineer or Engineer Responsible Parties and Engineer’s Engineers in the performance and furnishing of Engineer’s Services under this Agreement.  Any indemnification shall be limited to the terms and amounts of coverage of the Engineer’s insurance policies.

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11.2        Client’s Indemnification.  To the fullest extent permitted by law, Client shall indemnify and hold harmless Engineer, Engineer’s officers, directors, partners, employees, and agents and Engineer’s Engineers from and against any and all claims for bodily injury and for damage to tangible property caused solely by the negligent acts of omission of Client or Client’s officers, directors, partners, employees, agents, and Client’s Engineers with respect to this Agreement or the Project.

11.3        Hazardous Materials Indemnification. In addition to the indemnity provided under this section, and to the fullest extent permitted by law, Client shall indemnify and hold harmless Engineer and its officers, directors, partners, employees, and agents and Engineer’s Engineers from and against all claims, costs, losses, and damages (including but not limited to all fees and charges of engineers, architects, attorneys, and other professionals and all court or arbitration or other dispute resolution costs) caused by, arising out of, or relating to the presence, discharge, release, or escape of asbestos, PCBs, petroleum, hazardous waste, or radioactive materials at, on, under, or from the Site.

Article 12

Dispute Resolution

12.1        Arbitration.  In an effort to resolve any conflicts that arise out of or relate to this Agreement, the Client and the Engineer agree that all disputes shall be submitted first to nonbinding mediation.  If mediation does not resolve the conflicts, the controversy shall be decided by final and binding arbitration conducted in Minneapolis, Minnesota in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect, unless the Parties mutually agree otherwise.

The award of the arbitrator(s) shall be final and binding upon the Parties without the right of appeal to the courts.  Judgment may be entered upon it in accordance with Applicable Law by any court having jurisdiction thereof.

Engineer and Client expressly agree that any arbitration pursuant to this Section 12.1 may be joined or consolidated with any arbitration involving any other person or entity (i) necessary to resolve the claim, dispute or controversy, or (ii) substantially involved in or affected by such claim, dispute or controversy.  Both Engineer and Client will include appropriate provisions in all contracts they execute with other parties in connection with the Services to require such joinder or consolidation.

The prevailing Party in any arbitration, or any other final, binding dispute proceeding upon which the Parties may agree, shall be entitled to recover from the other Party reasonable attorneys’ fees and expenses incurred by the prevailing Party.

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Article 13

Confidentiality

13.1        Non-Disclosure Obligation.  Except as required by court order, subpoena, or Applicable Law, neither Party shall disclose to third parties any confidential or proprietary information regarding the other Party’s business affairs, finances, technology, processes, plans or installations, product information, know-how, or other information that is received from the other Party pursuant to this Agreement or the Parties’ relationship prior thereto or is developed pursuant to this Agreement, without the express written consent of the other Party, which consent shall not be unreasonably withheld.  The Parties shall at all times use their respective reasonable efforts to keep all information regarding the terms and conditions of this Agreement confidential and shall disclose such information to third Persons only as reasonably required for the permitting of the Project; financing the development, construction, ownership, operation and maintenance of the Plant; or as reasonably required by either Party for performing its obligations hereunder and if prior to such disclosure, the disclosing Party informs such third Persons of the existence of this confidentiality obligation and only if such third Persons agree to maintain the confidentiality of any information received.  This Article 13 shall not apply to information that was already in the possession of one Party prior to receipt from the other, that is now or hereafter becomes a part of the public domain through no fault of the Party wishing to disclose, or that corresponds in substance to information heretofore or hereafter furnished by third parties without restriction on disclosure.

13.2        Publicity and Advertising.  Neither Client nor Engineer shall make or permit any of their subcontractors, agents, or vendors to make any external announcement or publication, release any photographs or information concerning the Project or any part thereof, or make any other type of communication to any member of the public, press, business entity, or any official body which names the other Party unless prior written consent is obtained from the other Party, which consent shall not be unreasonably withheld.

13.3        Term of Obligation.  The confidentiality obligations of the Parties pursuant to this Article 13 shall survive for a period five (5) years following the later to occur of termination of this Agreement or completion of the Plant.

Article 14

Miscellaneous

14.1        Governing Law.  This Agreement shall be governed by and construed and enforced in accordance with, the substantive laws of the state of Minnesota, without regard to the conflict of laws provisions thereof.

14.2        Severability.  If any provision or any part of a provision of the Agreement shall be finally determined to be superseded, invalid, illegal, or otherwise unenforceable pursuant to any applicable Legal Requirements, such determination shall not impair or otherwise affect the

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validity, legality, or enforceability of the remaining provision or parts of the provision of the Agreement, which shall remain in full force and effect as if the unenforceable provision or part were deleted.

14.3        No Waiver.  The failure of either Engineer or Client to insist, in any one or more instances, on the performance of any of the obligations required by the other under this Agreement shall not be construed as a waiver or relinquishment of such obligation or right with respect to future performance.

14.4        Captions and Headings.  The table of contents and the headings used in this Agreement are for ease of reference only and shall not in any way be construed to limit, define, extend, describe, alter, or otherwise affect the scope or the meaning of any provision of this Agreement.

14.5        Engineer’s Accounting Records.  Records of Engineer’s personnel time, reimbursable expenses, and accounts between parties shall be maintained on a generally recognized accounting basis.

14.6        Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same Agreement, and may be executed and delivered by facsimile signature, which shall be considered an original.

14.7        Survival.  Notwithstanding any provisions herein to the contrary, the Work Product provisions set forth in Article 8 and the indemnity obligations set forth herein shall survive (in full force) the expiration or termination of this Agreement, and shall continue to apply to the Parties to this Agreement even after termination of this Agreement or the transfer of such Party’s interest in this Agreement.

14.8        No Privity with Client’s Contractors.  Nothing in this Agreement is intended or deemed to create any legal or contractual relationship between Engineer and any Client contractor or subcontractor retained to perform the Phase I and Phase II Site work required of Client prior to the issuance of a Notice to Proceed pursuant to the Design-Build Agreement.

14.9        Amendments.  This Agreement may not be changed, altered, or amended in any way except in writing signed by a duly authorized representative of each Party.

14.10      Entire Agreement.  This Agreement consists of the terms and conditions set forth herein, as well as the Exhibits hereto, which are incorporated by reference herein and made a part hereof.  This Agreement sets forth the full and complete understanding of the Parties as of the Effective Date with respect to the subject matter hereof.

14.11      Notice.  Whenever the Agreement requires that notice be provided to a Party, notice shall be delivered in writing to such party at the address listed below.  Notice will be deemed to have been validly given if delivered (i) in person to the individual intended to receive such notice, (ii) by registered or by certified mail, postage prepaid to the address indicated in the

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Agreement within four (4) days after being sent, or (iii) by facsimile, by the time stated in a machine-generated confirmation that notice was received at the facsimile number of the intended recipient.

If to Engineer, to:

Fagen Engineering LLC
501 W. Highway 212
P. O. Box 159
Granite Falls, MN  56241
Attention: John Austgen
Fax:  (320) 564-4861

with a copy to:

Fagen, Inc.
501 W. Highway 212
P. O. Box 159
Granite Falls, MN  56241
Attention: Bruce Langseth
Fax:  (320) 564-3278

If to Client, to:

Highwater Ethanol, LLC
30427 County Highway 10
Vesta, MN 56292
Attention: Brian Kletscher

14.12      Extent of Agreement.  This Agreement and the Exhibits incorporated therein represent the entire agreement between the Parties and may be amended only by written instrument signed by both Parties.

14.13      Subrogation Waiver.  The Parties waive all rights against each other, and against the contractors, Engineers, agents, and employees of the other for damages covered by any property insurance during construction, and each shall require similar waivers from their contractors, Engineers, and agents.

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IN WITNESS WHEREOF, the Parties hereto have caused their names to be hereunto subscribed by their officers thereunto duly authorized, intending thereby that this Agreement shall be effective as of this July 20, 2006.

HIGHWATER ETHANOL, LLC			FAGEN ENGINEERING, LLC
By:	/s/ Brian Kletscher		By:	/s/ John Austgen
Title:		President	Title:		Senior Vice President
Address for giving notices:			Address for giving notices:
30427 County Highway 10			501 West Highway 212
Vesta, MN 56292			PO Box 159
			Granite Falls, MN  56241

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EXHIBIT A

FAGEN ENGINEERING LLC

Fee Schedule FY 2006

CONFIDENTIAL

TYPICAL ASSIGNMENT	BILLING CLASS	BILLING RATE
Clerical / CADD Operator	1	$	32.40
Clerical / CADD Operator	2	$	50.01
CADD Operator / Designer	3	$	64.76
CADD Operator / Designer / Engineer	4	$	80.94
Designer / Engineer / PM	5	$	97.48
Engineer / Senior Engineer / PM	6	$	113.83
Senior Engineer / PM	7	$	130.38
Senior Engineer / PM	8	$	146.56
Senior Engineer / PM / Principal	9	$	163.10
PM / Principal	10	$	179.45
Principal	11	$	195.80
Principal	12	$	212.18
Principal	13	$	228.52

Subject to Revision January 1, 2007

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EXHIBIT B

Fagen Engineering LLC
Reimbursable Expense Billing Schedule

Effective January 1, 2006

CONFIDENTIAL

Expense Code	Expense Description	Billing Rate
BCA	Blackline Print Copy – A	$	1.00
BCB	Blackline Print Copy – B	$	1.00
BCC	Blackline Print Copy – C	$	1.25
BCD	Blackline Print Copy – D	$	1.90
BCE	Blackline Print Copy – E	$	3.70
BOA	Paper Print Original – A	$	1.25
BOB	Paper Print Original – B	$	1.55
BOC	Paper Print Original – C	$	1.90
BOD	Paper Print Original – D	$	2.20
BOE	Paper Print Original – E	$	4.40
DISK	Floppy Disk 3½”/ea	$	2.50
FAX	Fax Machine Usage/Page	$	1.20
LD	Long Distance Phone Calls	cost plus 10% markup
LODGING	Lodging	cost plus 10% markup
MEALS	Meal Expense	cost plus 10% markup
MILEAGE	Mileage/Mile	$	.485
PC1	Photocopies 8½x11 (<100)/ea	$	.24
PC2	Photocopies 11x17/ea	$	.50
PC3	Photocopies 8(1/2)x11 (>100)/ea	$	.17
PO	Postage	cost plus 10% markup
PROSVC	Outside Professional Services	Cost
PROSVCEXP	Outside Professional Services Expenses	cost plus 10% markup
FLM	Film & Developing	cost plus 10% markup
SPECCOV	Specification Book - Cover & Binder/ea	$	3.15
TRANS	Transportation	cost plus 10% markup
UPS	Delivery Service Charges	cost plus 10% markup
VELLUM	Original Print/square foot	$	3.15

Subject to Revision January 1, 2007

17

EXHIBIT C

Client’s Deliverable Site Obligations

Phase I Deliverables

Prior to Engineer’s commencement of the Phase I Design Package work, the Client shall provide Engineer with the following Phase I Deliverables:

1.A legal description of the Site

2.Temporary and permanent easements, zoning, and other requirements and encumbrances affecting land use or necessary to permit the proper design and construction of the Project and enable Design-Builder to perform the Work

3.To the extent available, as-built and record drawings of any existing structures at the Site

4.Environmental studies, reports and impact statements describing the environmental conditions, including Hazardous Conditions, in existence at the Site

5.Topographic Survey to one (1) foot contours including property boundaries and at least two (2) benchmarks including existing service and utility lines.

6.Any special sizing or other requirements for ethanol storage tank farm.

7.Preliminary approval from Client’s Rail service provider of rail design as prepared by Client’s Rail Designer.

8.Preliminary location and design of administration building.

9.Client’s written approval of final site layout including rail design and environmental permitting emission points.

10.Soil borings logs for all soil borings complete at Engineer’s specified locations.

11.Geotechnical Report regarding subsurface conditions with Client’s Geotechnical Engineer’s recommendations from Engineer approved Geotechnical Engineer (Terracon is preferred) including soil borings, and any other surveys or information available describing other latent or concealed physical conditions at the Site.

12.Review, comment, and written approval of Client’s air permit application.

13.Owner is required to provide approval of and understand the cost implications of the soil stabilization and foundation systems required for the project.  This approval will be based on the recommendations of the geotechnical and structural engineers.

14.Location and form for delivery of temporary electrical service.

15.On-site location for Storm Water discharge.

16.Preliminary NPDES discharge location for water discharges from utility discharges including, but not limited to the water pre-treatment system, water softeners, and cooling tower blowdown.

17.Preliminary indication of source, analysis, and location of Client’s water supply.

18.Client’s risk insurance provider’s specific requirements for fire protection or approval to design fire protection to Liberty Insurance standards.

18

Phase II Deliverables

Prior to Engineer’s commencement of the Phase II Design Package work, the Client shall provide Engineer with the following Phase II Deliverables:

1.Final location, source and quality of Client’s water supply.

2.Off-site utility tie-in locations at or near the property lines (this includes, but is not limited to, gas supply, electrical supply, water supply if no on-site wells, on-site or off-site sanitary sewer)

3.Final NPDES discharge location for Utility Water Blowdown.

4.An insurance provider to allow the proper positioning and number of required hydrants and hydrants with monitors.

5.Written approval of final rail design from the Client’s rail service provider.

6.Final location and design (general arrangement) of the Client’s administration building.

7.Final water pre-treatment design and operating parameters.

8.Design and location of sanitary sewer discharge point of septic system.

9.Provide verification that an application for a permit has been made for the construction of a lined settling pond with wetland discharge for receiving the ethanol plant non-contact waste streams and filter backwash (if applicable).  The settling pond maybe required for meeting the NPDES discharge limits set forth by the state.  This application process can take in excess of 6 months.  Owner is required to apply for this settling pond permit.  A determination will be made upon receipt of the NPDES permit on whether or not the settling pond is required for the project.

19

EX-10.8

Exhibit 10.8

LUMP SUM DESIGN-BUILD AGREEMENT


BETWEEN


HIGHWATER ETHANOL, LLC (“OWNER”)


AND


FAGEN, INC. (“DESIGN-BUILDER”)


September 28, 2006

* Portions omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.

TABLE OF CONTENTS

		Page
Article 1	Definitions; Rules of Interpretation	1
1.1	Rules of Construction	1
1.2	Defined Terms	2
Article 2	The Project	6
2.1	Services to be Performed	6
2.2	Extent of Agreement	6
2.3	Conflicting Provisions	7
Article 3	Design-Builder Responsibilities	7
3.1	Design-Builder’s Services in General	7
3.2	Design Development and Services	8
3.3	Standard of Care	8
3.4	Government Approvals and Permits	9
3.5	Subcontractors	9
3.6	Maintenance of Site	9
3.7	Project Safety	9
3.8	Submission of Reports	10
3.9	Training	10
Article 4	Owner’s Responsibilities	11
4.1	Duty to Cooperate	11
4.2	Furnishing of Services and Information	11
4.3	Financial Information; Cooperation with Lenders; Failure to Obtain Financial Closing	12
4.4	Owner’s Representative	12
4.5	Government Approvals and Permits	12
4.6	Owner’s Separate Contractors	13
4.7	Security	13
Article 5	Ownership of Work Product; Risk of Loss	13
5.1	Work Product	13
5.2	Owner’s Limited License Upon Payment in Full	13
5.3	Owner’s Limited License Upon Owner’s Termination for Convenience or Design-Builder’s Election to Terminate	14
5.4	Owner’s Limited License Upon Design-Builder’s Default	14
5.5	Owner’s Indemnification for Use of Work Product	14
5.6	Risk of Loss	15
Article 6	Commencement and Completion of the Project	15
6.1	Phase I and Phase II Engineering	15
6.2	Notice to Proceed; Commencement	15
6.3	Project Start-Up and Testing	16

i

		Page
6.4	Substantial Completion	16
6.5	Final Completion	17
6.6	Post Completion Support	18
Article 7	Performance Testing	18
7.1	Performance Guarantee	18
7.2	Performance Testing	19
7.3	Failure to Attain Timely Final Completion	20
7.4	Bonds and Other Performance Security	20
Article 8	Warranties	21
8.1	Design-Builder Warranty	21
8.2	Correction of Defective Work	21
8.3	Warranty Period Not Limitation to Owner’s Rights	22
Article 9	Contract Price	22
9.1	Contract Price	22
9.2	Effect of Construction Cost Index Increase on Contract Price	22
Article 10	Payment Procedures	23
10.1	Payment at Financial Closing	23
10.2	Progress Payments	23
10.3	Final Payment	24
10.4	Failure to Pay Amounts Due	24
10.5	Design-Builder’s Payment Obligations	25
10.6	Record Keeping and Finance Controls	25
Article 11	Hazardous Conditions and Differing Site Conditions	25
11.1	Hazardous Conditions	25
11.2	Differing Site Conditions; Inspection	26
Article 12	Force Majeure; Change in Legal Requirements	27
12.1	Force Majeure Event	27
12.2	Effect of Force Majeure Event	27
12.3	Change in Legal Requirements	28
12.4	Time Impact And Availability	28
12.5	Effect of Industry-Wide Disruption on Contract Price	28
Article 13	Changes to the Contract Price and Scheduled Completion Dates	29
13.1	Change Orders	29
13.2	Contract Price Adjustments	29
13.3	Emergencies	30
13.4	Failure to Complete Owner’s Milestones	30
Article 14	Indemnity	30
14.1	Tax Claim Indemnification	30
14.2	Payment Claim Indemnification	30

ii

		Page
14.3	Design-Builder’s General Indemnification	30
14.4	Owner’s General Indemnification	31
Article 15	Stop Work; Termination for Cause	32
15.1	Owner’s Right to Stop Work	32
15.2	Owner’s Right to Perform and Terminate for Cause	32
15.3	Owner’s Right to Terminate for Convenience	33
15.4	Design-Builder’s Right to Stop Work	33
15.5	Design-Builder’s Right to Terminate for Cause	34
15.6	Bankruptcy of Owner or Design-Builder	35
15.7	Lenders’ Right to Cure	35
Article 16	Representatives of the Parties	35
16.1	Designation of Owner’s Representatives	35
16.2	Designation of Design-Builder’s Representatives	36
Article 17	Insurance	37
17.1	Insurance	37
17.2	Design-Builder’s Insurance Requirements	37
17.3	Owner’s Liability Insurance	38
17.4	Owner’s Property Insurance	39
Article 18	Representations and Warranties	40
18.1	Design-Builder and Owner Representations and Warranties	40
18.2	Design-Builder Representations and Warranties	41
Article 19	Dispute Resolution	41
19.1	Dispute Avoidance and Mediation	41
19.2	Arbitration	41
19.3	Duty to Continue Performance	42
19.4	No Consequential Damages	42
19.5	Limitation of Liability	42
Article 20	Confidentiality of Shared Information	43
20.1	Non-Disclosure Obligation	43
20.2	Publicity and Advertising	44
20.3	Term of Obligation	44
Article 21	Miscellaneous	44
21.1	Assignment	44
21.2	Successors	44
21.3	Governing Law	45
21.4	Severability	45
21.5	No Waiver	45
21.6	Headings	45
21.7	Notice	45
21.8	No Privity with Design Consultant/Subcontractors	46

iii

			Page
21.9	Amendments		46
21.10	Entire Agreement		46
21.11	Third-Party Beneficiaries		47
21.12	Counterparts		47
21.13	Survival		47
EXHIBIT A		Performance Guarantee Criteria	A-1
EXHIBIT B		General Project Scope	B-1
EXHIBIT C		Owner’s Responsibilities	C-1
EXHIBIT D		ICM License Agreement	D-1
EXHIBIT E		Schedule of Values	E-1
EXHIBIT F		Form of Informational Report	F-1
EXHIBIT G		Required Permits	G-1
EXHIBIT H		Form of Performance Bond	H-1
EXHIBIT I		Form of Payment Bond	I-1
EXHIBIT J		Draw (Payment) Schedule	J-1
EXHIBIT K		Air Emissions Application or Permit	K-1
EXHIBIT L		Phase I and Phase II Engineering Services Agreement	L-1
EXHIBIT M		Form of Application for Payment	M-1
EXHIBIT N		Form of Lien Waiver	N-1
EXHIBIT O		Form of Consent to Assignment	O-1

iv

LUMP SUM DESIGN-BUILD CONTRACT

This LUMP SUM DESIGN-BUILD CONTRACT (the “Agreement”) is made as of September 28, 2006, (the “Effective Date”) by and between Highwater Ethanol, LLC a Minnesota limited liability company (the “Owner”) and Fagen, Inc., a Minnesota corporation (the “Design-Builder”) (each a “Party” and collectively, the “Parties”).

RECITALS

A.    The Owner desires to develop, construct, own and operate a fifty (50)  million gallons per year (“MGY”) dry grind ethanol production facility located at Lamberton, Minnesota (the “Plant”); and

B.    Design-Builder desires to provide design, engineering, procurement and construction services for the Plant.

NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein and for other good and valuable consideration, Owner and Design-Builder agree as follows.

AGREEMENT

Article 1

Definitions; Rules of Interpretation

1.1          Rules of Construction.  The capitalized terms listed in this Article shall have the meanings set forth herein whenever the terms appear in this Agreement, whether in the singular or the plural or in the present or past tense.  Other terms used in this Agreement but not listed in this Article shall have meanings as commonly used in the English language and, where applicable, in generally accepted construction and design-build standards of the fuel ethanol industry in the Midwest United States.  Words not otherwise defined herein that have well known and generally accepted technical or trade meanings are used herein in accordance with such recognized meanings.  In addition, the following rules of interpretation shall apply:

(a)The masculine shall include the feminine and neuter.

(b)References to “Articles,” “Sections,” “Schedules,” or “Exhibits” shall be to Articles, Sections, Schedules or Exhibits of this Agreement.

(c)This Agreement was negotiated and prepared by each of the Parties with the advice and participation of counsel.  The Parties have agreed to the wording of this Agreement and none of the provisions hereof shall be construed against one Party on the ground that such Party is the author of this Agreement or any part hereof.

1.2Defined Terms.  In addition to definitions appearing elsewhere in this Agreement, the following terms have the following meanings:

AAA is defined in Section 19.1.

Agreement is defined in the Preamble.

Air Emissions Tester means a third party entity engaged by Owner meeting all required state and federal requirements for such testing entities, to conduct air emissions testing of the Plant in accordance with Exhibit A.

Applicable Law means

(a)any and all laws, legislation, statutes, codes, acts, rules, regulations, ordinances, treaties or other similar legal requirements enacted, issued or promulgated by a Governmental Authority;

(b)any and all orders, judgments, writs, decrees, injunctions, Governmental Approvals or other decisions of a Governmental Authority; and

(c)any and all legally binding announcements, directives or published practices or interpretations, regarding any of the foregoing in (a) or (b) of this definition, enacted, issued or promulgated by a Governmental Authority;

to the extent, for each of the foregoing in (a), (b) and (c) of this definition, applicable to or binding upon (i) a Party, its affiliates, its shareholders, its members, its partners or their respective representatives, to the extent any such person is engaged in activities related to the Project; or (ii) the property of a Party, its affiliates, its shareholders, its members, its partners or their respective representatives, to the extent such property is used in connection with the Project or an activity related to the Project.        

Application for Payment is defined in Section 10.2.1.

As Built Plans is defined in Section 5.2.

Bankrupt Party is defined in Section 15.6.1.

Baseline Index is defined in Section 9.2.1.

Change Order is defined in Section 13.1.1.

CCI is defined in Section 9.2.

Certificate of Substantial Completion is defined in Section 6.4.3.

Confidential Information is defined in Section 20.1.

Construction Documents is defined in Section 3.2.1.

Contract Documents is defined in Section 2.2.

Contract Price is defined in Section 9.1.

2

Contract Time(s) means scheduled dates provided for in the Contract Documents including Scheduled Substantial Completion Date and Final Completion Date.

Damages is defined in Section 14.3.1.

Day or Days shall mean calendar days unless otherwise specifically noted in the Contract Documents.

Design-Builder is defined in the Preamble.

Design-Builder’s Representative is defined in Section 16.2.

Design-Builder’s Senior Representative is defined in Section 16.2.

Design Consultant is a qualified, licensed design professional that is not an employee of Design-Builder, but is retained by Design-Builder, or employed or retained by anyone under contract with Design-Builder or Subcontractor, to furnish design services required under the Contract Documents.

Differing Site Conditions is defined in Section 11.2.1.

Effective Date is defined in the Preamble.

Fagen Engineering is defined in Section 6.1.

Final Application for Payment is defined in Section 10.3.

Final Completion is defined in Section 6.5.2.

Final Completion Date is defined in Section 6.5.1.

Final Payment is defined in Section 10.3.

Financial Closing means the execution of the Financing Documents by all the parties thereto, and the fulfillment of all conditions precedent thereunder necessary to permit the advance of funds to pay amounts due under this Agreement.

Financing Documents means the final loan documents with the Lender or Lenders providing financing for the construction or term financing of the Plant and any and all agreements necessary to demonstrate a binding commitment of Owner or Lenders to fund the construction of the Plant.

Force Majeure Event is defined in Section 12.1.

3

Governmental Approvals are any material authorizations or permissions issued or granted by any Governmental Authority to the Project, its Owner, the Design-Builder, Subcontractors and their affiliates in connection with any activity related to the Project.

Governmental Authority means any federal, state, local or municipal governmental body; any governmental, quasi-governmental, regulatory or administrative agency, commission, body or other authority exercising or entitled to exercise any administrative, executive, judicial, legislative, policy, regulatory or taxing authority or power; or any court or governmental tribunal; in each case having jurisdiction over the Owner, the Design-Builder, the Project, or the Site.

Hazardous Conditions are any materials, wastes, substances and chemicals deemed to be hazardous under applicable Legal Requirements, or the handling, storage, remediation, or disposal of which are regulated by applicable Legal Requirements.

ICM means ICM, Inc., a Kansas corporation.

ICM License Agreement means the license agreement to be executed between Owner and ICM, Inc., substantially in the form attached hereto as Exhibit D.

Indemnified Parties is defined in Section 5.2.

Independent Engineer means Owner’s and Lenders’ independent engineer.

Industry-Wide Disruption is defined in Section 12.4.

Informational Report is defined in Section 3.8.

Legal Requirements or Laws are all applicable federal, state and local statutes, laws, codes, ordinances, rules, regulations, judicial decisions, orders, decrees, plans, injunctions, permits, tariffs, governmental agreements and governmental restrictions, whether now or hereafter in effect, of any government or quasi-government entity having jurisdiction over the Project or Site, the practices involved in the Project or Site, or any Work, including any consensus standards for materials, products, systems, and services established by ASTM International, any successor organization thereto, or any Governmental Authority.

Lenders means the lenders that are party to the Financing Documents.

Lenders’ Agent means an agent or agents acting on behalf of the Lenders.

Manufacturer’s Warranty shall mean a warranty provided by the original manufacturer or vendor of equipment used by Design-Builder in the Plant.

MGY is defined in the Recitals.

Notice to Proceed is defined in Section 6.2.

4

Operating Procedures means, without limitation, the process equipment and specifications manuals, standards of quality, service protocols, data collection methods, construction specifications, training methods, engineering standards and any other information prescribed by Design-Builder and ICM from time to time concerning the ownership, operation, maintenance and repair of the Plant, subject to the limitations provided in the Agreement and in the ICM License Agreement.

Owner is defined in the Preamble.

Owner Indemnified Parties is defined in Section 14.3.1.

Owner’s Milestones is defined in Section 13.4.

Owner’s Operator means the entity that Owner identifies, upon written notice to Design-Builder, as operator of the Project or any other entity that Owner chooses, upon notice to Design-Builder, to replace such entity as operator of the Project.

Owner’s Representative is defined in Section 16.1.

Owner’s Senior Representative is defined in Section 16.1.

Party or Parties is defined in the Preamble.

Pass Through Warranties mean any warranties provided to Design-Builder by a Subcontractor which are assigned to Owner.

Pay Period means, with respect to a given Application for Payment, the one (1) month period following the last day of the previous Pay Period to which the immediately prior Application for Payment is applied; provided that the initial Pay Period shall commence on the date of delivery of the Notice to Proceed and end on the twenty-fourth (24th) day of the calendar month during which the Notice to Proceed is issued.

Payment Bond is defined in Section 7.4.2.

Performance Bond is defined in Section 7.4.1.

Performance Guarantee Criteria means the criteria listed in Exhibit A.

Performance Tests is defined in Section 7.2.1.

Phase I is defined in Exhibit L.

Phase I and Phase II Engineering Services Agreement is defined in Section 6.1.

Phase II is defined in Exhibit L.

Plant is defined in the Recitals.

Project is defined in Section 2.1.

5

Punch List is defined in Section 6.4.3.

Qualified Independent Expert means an expert retained by Owner and approved by Design-Builder pursuant to Section 11.1.2.

Safety Representative is defined in Section 3.7.1.

Schedule of Values is defined in Section 10.2.5.

Scheduled Substantial Completion Date is defined in Section 6.4.1.

Site is the land or premises on which the Project is located.

Subcontractor is any person or entity retained by Design-Builder, or by any person or entity retained directly or indirectly by Design-Builder, in each case as an independent contractor to perform a portion of the Work, and shall include materialmen and suppliers.

Substantial Completion is defined in Section 6.4.2.

Work is defined in Section 3.1.

Work Product is defined in Section 5.1.

Article 2

The Project

2.1          Services to be Performed.  Pursuant to this Agreement, Design-Builder shall perform all work and services in connection with the engineering, design, procurement, construction startup, testing and training for the operation and maintenance of the Plant, and provide all material, equipment, tools and labor necessary to complete the Plant in accordance with the terms of this Agreement.   The Plant, together with all equipment, labor, services and materials furnished hereunder is defined as the “Project.”

2.2          Extent of Agreement.  This Agreement consists of the following documents, and all exhibits, schedules, appendices and attachments hereto and thereto (collectively, the “Contract Documents”):

2.2.1       All written modifications, amendments and change orders to this Agreement.

2.2.2       This Agreement, including all exhibits and attachments, executed by Owner and Design-Builder, including those below:

6

List of Exhibits
Exhibit A	Performance Guarantee Criteria
Exhibit B	General Project Scope
Exhibit C	Owner’s Responsibilities
Exhibit D	ICM License Agreement
Exhibit E	Schedule of Values
Exhibit F	Form of Informational Report
Exhibit G	Required Permits
Exhibit H	Form of Performance Bond
Exhibit I	Form of Payment Bond
Exhibit J	Draw (Payment) Schedule
Exhibit K	Air Emissions Application or Permit
Exhibit L	Phase I and Phase II Engineering Services Agreement
Exhibit M	Form of Application for Payment
Exhibit N	Form of Lien Waiver
Exhibit O	Form of Consent to Assignment

2.2.3       Construction Documents to be prepared by Design-Builder pursuant to Section 3.2.1 shall be incorporated in this Agreement.

2.3          Conflicting Provisions.  In the event of any conflict or inconsistency between the body of this Agreement and any Exhibit or Schedule hereto, the terms and provisions of this Agreement, as amended from time to time, shall prevail and be given priority.  Subject to the foregoing, the several documents and instruments forming part of this Agreement are to be taken as mutually explanatory of one another and in the case of ambiguities or discrepancies within or between such parts the same shall be explained and interpreted, if possible, in a manner which gives effect to each part and which avoids or minimizes conflicts among such parts.  No oral representations or other agreements have been made by the Parties except as specifically stated in the Contract Documents.

Article 3

Design-Builder Responsibilities

3.1          Design-Builder’s Services in General.  Except for services and information to be provided by Owner and specifically set forth in Article 4 and Exhibit C, Design-Builder shall perform or cause to be performed all design, engineering, procurement, construction services, supervision, labor, inspection, testing, start-up, material, equipment, machinery, temporary utilities and other temporary facilities to complete construction of the Project consistent with the Contract Documents (the “Work”).  All design and engineering and construction services and other Work of the Design-Builder shall be performed in accordance with (i) the general project scope guidelines set forth in Exhibit B, (ii) the Construction Documents, (iii) all Legal Requirements, and (iv) generally accepted construction and design-build standards of the fuel ethanol industry in the United States during the relevant time period.  Any design and engineering or other professional service to be performed pursuant to this Agreement, which under Applicable Law must be performed by licensed personnel, shall be performed by licensed personnel as required by Law.  The enumeration of specific duties and obligations to be

7

performed by the Design-Builder under the Contract Documents shall not be construed to limit in any way the general undertakings of the Design-Builder as set forth herein.  Design-Builder’s Representative shall be reasonably available to Owner and shall have the necessary expertise and experience required to supervise the Work.  Design-Builder’s Representative shall communicate regularly with Owner and shall be vested with the authority to act on behalf of Design-Builder.

3.2          Design Development and Services.

3.2.1       Where required by Law, Design-Builder shall provide through qualified, licensed design professionals employed by Design-Builder, or procured from qualified, independent licensed Design Consultants, the necessary design services, including architectural, engineering and other design professional services, for the preparation of the required drawings, specifications and other design submittals required to permit construction of the Work in accordance with this Agreement (such drawings, specifications and design submittals collectively, the “Construction Documents”). To the extent not prohibited by Legal Requirements, Design-Builder may prepare Construction Documents for a portion of the Work to permit construction to proceed on that portion of the Work prior to completion of the Construction Documents for the entire Work.

3.2.2     Construction of the Plant shall be consistent with the Construction Documents.

3.2.3       Design-Builder shall maintain a current, complete set of drawings and specifications at the Site.  Owner shall have the right to review such drawings and specifications.  Owner and Independent Engineer may not make copies of the available drawings and specifications without Design-Builder’s written permission, and, granted such permission, may only do so to the extent such drawings and specifications directly pertain to the Plant; provided however that, pursuant to Section 5.1 of this Agreement, Design-Builder retains ownership of and property interests in any drawing or specifications made available and/or copied.

3.2.4       Except as provided elsewhere in this Agreement, it is understood and agreed that review, comment and/or approval by Owner (or its designees) or Independent Engineer of any documents or submittals that Design-Builder is required to submit to Owner (or its designees) or Independent Engineer hereunder for their review, comment and/or approval (including without limitation the Construction Documents pursuant to Sections 3.2.1 and 3.2.3 hereof) shall not relieve or release Design-Builder from any of its duties, obligations or liabilities provided for under the terms of this Agreement or transfer any design liability from Design-Builder to Owner.

3.3          Standard of Care.  All services performed by the Design-Builder and its Subcontractors pursuant to the Construction Documents shall be performed in accordance with the  standard of care and skill generally accepted in the fuel ethanol industry in the Midwest United States during the relevant time period or in accordance with any of the practices, methods and acts that in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, safety and expedition.  This standard of care is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to be acceptable practices, methods or acts generally accepted in the construction and

8

design-build standards of the fuel ethanol industry in the Midwest United States.  Design-Builder and its Subcontractors shall perform all construction activities efficiently and with the requisite expertise, skill, competence, resources and care to satisfy the requirements of the Contract Documents and all applicable Legal Requirements.  Design-Builder shall at all times exercise complete and exclusive control over the means, methods, sequences and techniques of construction.

3.4           Government Approvals and Permits.  Except as identified in Exhibit C and, with respect to items identified as Owner’s responsibility, in Exhibit G (which items shall be obtained by Owner pursuant to Section 4.5), Design-Builder shall obtain and pay for all necessary permits, approvals, licenses, government charges and inspection fees required for the prosecution of the Work by any government or quasi-government entity having jurisdiction over the Project. Design-Builder shall provide reasonable assistance to Owner in obtaining those permits, approvals and licenses that are Owner’s responsibility.

3.5          Subcontractors.

3.5.1       Design-Builder may subcontract portions of the Work in accordance with the terms hereof.

3.5.2       Design-Builder assumes responsibility to Owner for the proper performance of the Work of Subcontractors and any acts and omissions in connection with such performance.  Nothing in the Contract Documents is intended or deemed to create any legal or contractual relationship between Owner and any Subcontractor, including but not limited to any third-party beneficiary rights.

3.5.3       Design-Builder shall coordinate the activities of all of Design-Builder’s Subcontractors.  If Owner performs other work on the Project or at the Site with separate contractors under Owner’s control, Design-Builder agrees to reasonably cooperate and coordinate its activities with those separate contractors so that the Project can be completed in an orderly and coordinated manner without unreasonable disruption.

3.5.4       Design-Builder shall ensure that each subcontract with a Subcontractor is assignable to Owner without consent of the Subcontractor or any other person or entity in the event that Design-Builder shall be in an uncured default or terminated with cause under the terms of this Agreement.

3.6          Maintenance of Site.  Design-Builder shall keep the Site reasonably free from debris, trash and construction wastes to permit Design-Builder to perform its construction services efficiently, safely and without interfering with the use of adjacent land areas.  Upon Substantial Completion of the Work Design-Builder shall remove all debris, trash, construction wastes, materials, equipment, machinery and tools arising from the Work to permit Owner to occupy the Project for its intended use.

3.7          Project Safety.

3.7.1       Design-Builder recognizes the importance of performing the Work in a safe manner so as to prevent damage, injury or loss to (i) any individuals at the Site, whether

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working or visiting, (ii) the Work, including materials and equipment incorporated into the Work or stored on-Site or off-Site, and (iii) any other property at the Site or adjacent thereto.  Design-Builder assumes responsibility for implementing and monitoring all safety precautions and programs related to the performance of the Work.  Design-Builder shall, prior to commencing construction, designate a representative (the “Safety Representative”) with the necessary qualifications and experience to supervise the implementation and monitoring of all safety precautions and programs related to the Work. Unless otherwise required by the Contract Documents, Design-Builder’s Safety Representative shall be an individual stationed at the Site who may have responsibilities on the Project in addition to safety.  The Safety Representative shall make routine daily inspections of the Site and shall hold weekly safety meetings with Design-Builder’s personnel, Subcontractors and others as applicable.

3.7.2       Design-Builder and Subcontractors shall comply with all Legal Requirements relating to safety, as well as any Owner-specific safety requirements set forth in the Contract Documents; provided, that such Owner-specific requirements do not violate any applicable Legal Requirement.  As promptly as practicable, Design-Builder will report in writing any safety-related injury, loss, damage or accident arising from the Work to Owner’s Representative and, to the extent mandated by Legal Requirements, to all government or quasi-government authorities having jurisdiction over safety-related matters involving the Project or the Work.

3.7.3       Design-Builder’s responsibility for safety under this Section 3.7 is not intended in any way to relieve Subcontractors of their own contractual and legal obligations and responsibility for (i) complying with all Legal Requirements, including those related to health and safety matters, and (ii) taking all necessary measures to implement and monitor all safety precautions and programs to guard against injury, losses, damages or accidents resulting from their performance of the Work.

3.8          Submission of Reports.  Design-Builder shall provide Owner with a monthly informational report substantially in the form of Exhibit F attached hereto (“Informational Report”).

3.9          Training.  At a mutually agreed time prior to start-up, Design-Builder shall provide up to two (2) weeks of training at a facility designated by ICM for all of Owner’s employees and Owner Operator’s employees required for the operation and maintenance of the Plant in accordance with all design specifications therefor contained in the Contract Documents and necessary in order to maintain the Performance Guarantee Criteria, including operators, laboratory personnel, general, plant and maintenance managers. Other personnel of Owner and Owner Operator may receive such training by separate arrangement between Owner and Design-Builder and as time is available.  All training personnel and costs associated with such training personnel, including labor and all training materials will be provided to Owner and Owner Operator within the Contract Price at no additional cost. Owner and Owner Operator will be responsible for all travel and expenses of their employees and the Owner and Owner Operator will pay all wages and all other expenses for their personnel during the training. The training services will include training on computers, laboratory procedures, field operating procedures, and overall plant section performance expectations.  Prior to the start-up training, Design-Builder shall provide Owner training manuals and operating manuals and other documents reasonably necessary for the start-up process.

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Article 4

Owner’s Responsibilities

4.1          Duty to Cooperate.

4.1.1       Owner shall, throughout the performance of the Work, cooperate with Design-Builder and perform its responsibilities, obligations and services in a timely manner to facilitate Design-Builder’s timely and efficient performance of the Work and so as not to delay or interfere with Design-Builder’s performance of its obligations under the Contract Documents.

4.1.2       Owner shall pay all reasonable costs incurred by Design-Builder for frost removal so that winter construction can proceed.  Such costs may include, but are not limited to, equipment costs, equipment rental costs, sheltering costs, special material costs, fuel costs and associated labor costs.  Owner acknowledges and agrees that such costs are in addition to, and not included in, the Contract Price, and that the payment of such costs, which shall be billed on a weekly basis, shall not require the issuance of a Change Order or the obtaining of any Owner approval prior to the issuance of invoices for such costs.

4.2          Furnishing of Services and Information.

4.2.1       Prior to the issuance of the Notice to Proceed, at its own cost and expense, Owner shall provide the following items to Design-Builder for Design-Builder’s information and use and all of which Design-Builder is entitled to rely upon in performing the Work:

(a)surveys describing the property, boundaries, topography and reference points for use during construction, including existing service and utility lines;

(b)geotechnical studies describing subsurface conditions including soil borings, and other surveys describing other latent or concealed physical conditions at the Site;

(c)temporary and permanent easements, zoning and other requirements and encumbrances affecting land use, or necessary to permit the proper design and construction of the Project and enable Design-Builder to perform the Work;

(d)A legal description of the Site;

(e)to the extent available, as-built and record drawings of any existing structures at the Site; and

(f)all environmental studies, reports and impact statements describing the environmental conditions, including Hazardous Conditions, in existence at the Site that have been conducted or performed.

4.2.2       Owner shall provide to Design-Builder all Owner’s deliverables under Exhibit C pursuant to Owner’s Milestones.  Such deliverables shall be provided, at Owner’s own cost and expense, for Design-Builder’s information and use. Design-Builder is entitled to rely upon such deliverables in performing the Work.

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4.2.3       Owner is responsible for securing and executing all necessary agreements with adjacent land or property owners that are necessary to enable Design-Builder to perform the Work and that have been identified and notified in writing by Design-Builder to Owner prior to the Effective Date.  Owner is further responsible for all costs, including attorneys’ fees, incurred in securing these necessary agreements.

4.3          Financial Information; Cooperation with Lenders; Failure to Obtain Financial Closing.  Design-Builder acknowledges that Owner is seeking financing for the Project.  Design-Builder agrees to cooperate with Owner in good faith in order to satisfy the reasonable requirements of Owners’ financing arrangements, including, where appropriate and reasonable, the execution and delivery of documents or instruments necessary to accommodate the Financial Closing.  Owner agrees to pay all documented costs incurred by Design-Builder incurred prior to and at Financial Closing, and thereafter during the term of this Agreement, in connection with satisfying the requirements of Owners’ financing arrangements including all documented attorney’s fees.  Design-Builder and Owner also acknowledge that the Lenders, as a condition to providing financing for the Plant, shall require Owner to provide the Independent Engineer with certain reasonable participation and review rights with respect to Design-Builder’s performance of the Work.  Design-Builder acknowledges and agrees that such reasonable participation and review rights shall consist of the right to (i) enter the Site and inspect the Work upon reasonable notice to Design-Builder; (ii) attend all start-up and testing procedures; and (iii) review and approve such other items for which Owner is required by Lenders to obtain the concurrence, opinion or a certificate of the Independent Engineer or the Lenders pursuant to the Financing Documents which items do not alter the rights or impose additional obligations on Design-Builder.  Nothing in this Section 4.3 shall be deemed to require Design-Builder to agree to any amendments to this Agreement that would adversely affect Design-Builder’s risks, rights or obligations under this Agreement.  Upon Financial Closing, Owner shall promptly provide to Design-Builder an officer’s certificate certifying that Financial Closing has occurred and such Owner’s officer’s certificate shall constitute evidence satisfactory to Design-Builder that Owner has adequate funds available and committed to fulfill its obligations under the Contract Documents for all purposes hereunder.  Owner must provide such officer’s certificate prior to issuing the Notice to Proceed.

4.4          Owner’s Representative.  Owner’s Representative, as set forth in Section 16.1 hereof, shall be responsible for providing Owner-supplied information and approvals in a timely manner to permit Design-Builder to fulfill its obligations under the Contract Documents.  Owner’s Representative shall also provide Design-Builder with prompt notice if it observes any failure on the part of Design-Builder to fulfill its contractual obligations, including any errors, omissions or defects in the performance of the Work.  Owner’s Representative shall be vested with the authority to act on behalf of Owner and Design-Builder shall be entitled to rely on written communication from Owner’s Representative with respect to a Project matter.

4.5          Government Approvals and Permits.  Owner shall obtain and pay for all necessary Governmental Approvals required by Law, including permits, approvals, licenses, government charges and inspection fees set forth in Exhibit C and, to the extent identified as Owner’s responsibility, Exhibit G.  Owner shall provide reasonable assistance to Design-Builder in obtaining those permits, approvals and licenses that are Design-Builder’s responsibility pursuant to Exhibit G and Section 3.4.

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4.6          Owner’s Separate Contractors.  Owner is responsible for all work, including such work listed on Exhibit C, performed on the Project or at the Site by separate contractors under Owner’s control.  Owner shall contractually require its separate contractors to cooperate with, and coordinate their activities so as not to interfere with, Design-Builder in order to enable Design-Builder to timely complete the Work consistent with the Contract Documents.

4.7          Security.  Owner shall be responsible for Site security (including fencing, alarm systems, security guarding services and the like) at all times during the term of this Agreement to prevent vandalism, theft and danger to the Project, the Site, and personnel.  Owner shall coordinate and supervise ingress and egress from the Site so as to minimize disruption to the Work.

Article 5

Ownership of Work Product; Risk of Loss

5.1          Work Product.  All drawings, specifications, calculations, data, notes and other materials and documents, including electronic data furnished by Design-Builder to Owner under this Agreement (“Work Product”) shall be instruments of service and Design-Builder shall retain the ownership and property interests therein, including the copyrights thereto.

5.2          Owner’s Limited License Upon Payment in Full.  Upon Owner’s payment in full for all Work performed under the Contract Documents, Design-Builder shall grant Owner a limited license to use the Work Product in connection with Owner’s occupancy and repair of the Plant.  Design-Builder acknowledges and agrees that the limited license to use the Work Product granted hereby shall provide Owner sufficient rights in and to the Work Product as shall be necessary for Owner to operate and maintain the Plant and shall include any Pass Through Warranties in connection therewith.  Design-Builder shall provide Owner with a copy of the plans of the Plant, as built, (the “As Built Plans”) conditioned on Owner’s express understanding that its use of the Work Product and its acceptance of the As Built Plans is at Owner’s sole risk and without liability or legal exposure to Design-Builder or anyone working by or through Design-Builder, including Design Consultants of any tier (collectively the “Indemnified Parties”); provided, however, that any warranties (of equipment or otherwise) shall remain in effect according to the terms of this Agreement.

5.2.1       Design-Builder is utilizing certain proprietary property and information of ICM in the design and construction of the Project and Design-Builder may incorporate proprietary property and information of ICM into the Work Product.  Owner’s use of the proprietary property and information of ICM shall be governed by the terms and provisions of the ICM License Agreement, to be executed by Owner and ICM in connection with the execution of this Agreement.  Owner shall be entitled to use the Work Product solely for purposes relating to the Plant, but shall not be entitled to use the Work Product for any other purposes whatsoever, including without limitation, expansion of the Plant.  Notwithstanding the foregoing sentence, Owner shall be entitled to use the Work Product for the operation, maintenance and repair of the plant including the interconnection of, but not the design of, any

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future expansions to the Plant.  The limited license granted to Owner under Sections 5.2, 5.3 or 5.4 to use the Work Product shall be limited by and construed according to the same terms contained in the ICM License Agreement, attached hereto as Exhibit D and incorporated herein by reference thereto, except (i) references in such ICM License Agreement to ICM and Proprietary Property shall refer to Design-Builder and Work Product, respectively, (ii) the Laws of the State of Minnesota shall govern such limited license, and (iii) the dispute resolution provisions contained in Article 19 hereof shall apply to any breach or threatened breach of Owner’s duties or obligations under such limited license, except that Design-Builder shall have the right to seek injunctive relief in a court of competent jurisdiction against Owner or its Representatives for any such breach or threatened breach.  This paragraph also applies to Sections 5.3 and 5.4 below.

5.3          Owner’s Limited License Upon Owner’s Termination for Convenience or Design-Builder’s Election to Terminate.  If Owner terminates the Project for its convenience as set forth in Section 15.3 hereof, or if Design-Builder elects to terminate this Agreement in accordance with Section 15.5, Design-Builder shall, upon Owner’s payment in full of the amounts due Design-Builder under this Agreement, grant Owner a limited license to use the Work Product to complete the Plant and subsequently occupy and repair the Plant, subject to the following:

(a)Use of the Work Product is at Owner’s sole risk without liability or legal exposure to any Indemnified Party; provided, however, that any Pass Through Warranties regarding equipment or express warranties regarding equipment provided by this Agreement shall remain in effect according to their terms; and

(b)If the termination for convenience is by Owner in accordance with Section 15.3 hereof, or if Design-Builder elects to terminate this Agreement in accordance with Section 15.5, then Owner agrees to pay Design-Builder the additional sum of One Million Two Hundred Fifty Thousand Dollars ($1,250,000.00) as compensation for the limited right to use the Work Product completed “as is” on the date of termination in accordance with this Article 5.

5.4          Owner’s Limited License Upon Design-Builder’s Default.  If this Agreement is terminated due to Design-Builder’s default pursuant to Section 15.2 and (i) it is adjudged that Design-Builder was in default, and (ii) Owner has fully satisfied all of its obligations under the Contract Documents through the time of Design-Builder’s default, then Design-Builder shall grant Owner a limited license to use the Work Product in connection with Owner’s completion and occupancy and repair of the Plant.  This limited license is conditioned on Owner’s express agreement that its use of the Work Product is at Owner’s sole risk without liability or legal exposure to any Indemnified Party; provided, however, that any Pass Through Warranties regarding equipment or express warranties regarding equipment provided by this Agreement shall remain in effect according to their terms.  This limited license grants Owner the ability to repair the Plant at Owner’s discretion.

5.5          Owner’s Indemnification for Use of Work Product.  If Owner uses the Work Product or Plant under any of the circumstances identified in this Article 5, to the fullest extent allowed by Law, Owner shall defend, indemnify and hold harmless the Indemnified Parties from and against any and all claims, damages, liabilities, losses and expenses, including attorneys’

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fees, arising out of or resulting from the use of the Work Product and Plant; provided, however, that any Pass Through Warranties regarding equipment or express warranties regarding equipment provided by this Agreement shall remain in effect according to their terms.

5.6          Risk of Loss.  Design-Builder shall have no liability for a physical loss of or damage to the Work unless such loss or damage is caused by the willful misconduct or gross negligence of Design-Builder or someone acting under its direction or control. Design-Builder shall not be liable for physical loss of or damage to the Work where such loss or damage is caused by the willful misconduct or gross negligence of Owner’s employees or third parties who are not Subcontractors.  Design-Builder shall have no liability for a physical loss of or damage to the Work occurring after Final Completion.  Design-Builder shall have no liability for losses or damages for which insurance coverage under this Agreement is available to Owner; in such circumstances, any liability for losses and damages as described in this Section 5.6 shall be limited to losses or damages which exceed insurance coverage available to the Owner without the application of any reductions from such coverages due to deductible, retention, or retrospective premiums.

Article 6

Commencement and Completion of the Project

6.1          Phase I and Phase II Engineering.  Owner shall have entered into that certain Phase I and Phase II Engineering Services Agreement dated July 20, 2006 between Owner and Fagen Engineering, LLC (“Fagen Engineering”) and attached hereto as Exhibit L (“Phase I and Phase II Engineering Services Agreement”). The Phase I and Phase II Engineering Services Agreement provides for Fagen Engineering to commence work on the Phase I and Phase II engineering for the Project as set forth therein.  Owner has agreed to pay Fagen Engineering Ninety-two Thousand Five Hundred Dollars ($92,500.00) for such engineering services pursuant to the terms of that agreement, the full amount of which shall be included in and credited to the Contract Price.  Notwithstanding the foregoing sentence, if a Notice to Proceed is not issued pursuant to Section 6.2, or Financial Closing is not obtained pursuant to Section 4.3, then no amount paid under the Phase I and Phase II Engineering Services Agreement shall be refunded to Owner.

6.2          Notice to Proceed; Commencement.  The Work shall commence within five (5) Days of Design-Builder’s receipt of Owner’s written valid notice to proceed (“Notice to Proceed”) unless the Parties mutually agree otherwise in writing.  The Parties agree that a valid Owner’s Notice to Proceed cannot be given until:  (1) Owner has title to the real estate on which the Project will be constructed; (2) the Phase I and Phase II Site work required of Owner, as described in Exhibit L is completed along with redline drawings and such Phase I and Phase II Site work and redline drawings have been reviewed and deemed adequate by Design-Builder; (3) the air permit(s) and/or other applicable local, state or federal permits necessary so that construction can begin, as listed on Exhibit G, have been obtained; (4) Owner has obtained Financial Closing pursuant to Section 4.3; (5) if applicable, Owner has executed a sales tax exemption certificate and provided the same to Design-Builder; (6) Owner has provided the name of its property/all-risk insurance carrier and the specific requirements for fire protection; (7) Owner has provided an insurance certificate or copy of insurance policy demonstrating that

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Owner has obtained builder’s risk insurance pursuant to Section 17.4.3 hereof, and (8) Design-Builder provides Owner written notification of its acceptance of the Notice to Proceed, provided that Design-Builder shall not be required to accept the Notice to Proceed prior to March 26, 2007. Owner and Design-Builder mutually agree that time is of the essence with respect to the dates and times set forth in the Contract Documents.  Owner must complete the prerequisites to the issuance of a valid Notice to Proceed, as listed in items number (1) through (7) of this Section 6.2 and submit a Notice to Proceed to Design-Builder for Design-Builder’s acceptance by March 26, 2007; otherwise this Agreement may be terminated, at Design-Builder’s sole option.  If Design-Builder chooses to terminate this Agreement pursuant to its right under the immediately preceding sentence, then Design-Builder shall have no further obligations hereunder.

6.2.1       Notice to Proceed shall be delivered by Owner to Design-Builder pursuant to the notice requirements set forth in Section 21.7 hereof, with a copy to:

Fagen, Inc.
501 W. Highway 212
P. O. Box 159
Granite Falls, MN  56241
Attention: Becky Dahl
Fax:  (320) 564-5190

6.3          Project Start-Up and Testing.  Owner shall provide, at Owner’s cost, equipment, tools, instruments and materials necessary for Owner to comply with its obligations under Exhibit C, raw materials, consumables and personnel necessary for start-up and testing of the Plant, and Design-Builder shall provide supervision, standard and special test instruments, tools, equipment and materials required to perform component and equipment checkout and testing, initial start-up, operations supervision and corrective maintenance of all permanent Plant equipment within the scope of the Work.  Notwithstanding the foregoing sentence, Design-Builder shall be responsible for raw materials and consumables to the extent such amounts provided by Owner are destroyed or damaged (as opposed to consumed in the ordinary course of start-up and testing) by Design-Builder or its personnel during start-up and testing. Design-Builder shall supervise and direct Owner’s employees and Owner Operator’s personnel who shall participate in the start-up activities with Design-Builder’s personnel to become familiar with all aspects of the Plant. Owner and the Independent Engineer may witness start-up and testing activities.  Performance testing will be conducted in accordance with the provisions of Section 7.2 hereof.

6.4          Substantial Completion.

6.4.1       Substantial Completion of the entire Work shall be achieved no later than Five Hundred Forty-five (545) Days after the date of the Notice to Proceed, subject to adjustment in accordance with the Contract Documents hereof (the “Scheduled Substantial Completion Date”).

6.4.2     “Substantial Completion” shall be deemed to occur on the date on which the Work is sufficiently complete so that Owner can occupy and use the Plant for its intended purposes.  Substantial Completion shall be attained at the point in time when the Plant is ready to

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grind the first batch of corn and begin operation for its intended use.  No production is guaranteed on the date of Substantial Completion.

6.4.3       Procedures.  Design-Builder shall notify Owner in writing when it believes Substantial Completion has been achieved with respect to the Work.  Within five (5) Days of Owner’s receipt of Design-Builder’s notice, Owner and Design-Builder will jointly inspect such Work to verify that it is substantially complete in accordance with the requirements of the Contract Documents.  If such Work is deemed substantially complete, Design-Builder shall  prepare and issue a “Certificate of Substantial Completion” for the Work that will set forth (i) the date of Substantial Completion, (ii) the remaining items of Work that have to be completed before Final Payment (“Punch List”), (iii) provisions (to the extent not already provided in this Agreement) establishing Owner’s and Design-Builder’s responsibility for the Project’s security, maintenance, utilities and insurance pending Final Payment, and (iv) an acknowledgment that warranties with respect to the Work commence on the date of Substantial Completion, except as may otherwise be noted in the Certificate of Substantial Completion.  Upon Substantial Completion of the entire Work and satisfaction of the Performance Guarantee Criteria listed in Exhibit A, Owner shall release to Design-Builder all retained amounts, less an amount equal to the reasonable value of all remaining or incomplete items of Work as noted in the Certificate of Substantial Completion, and less an amount equal to the value of any Subcontractor lien waivers not yet obtained.

6.5          Final Completion.

6.5.1       Final Completion of the Work shall be achieved within ninety (90) Days after the earlier of the actual date of Substantial Completion or the Scheduled Substantial Completion Date (the “Final Completion Date”).

6.5.2     “Final Completion” shall be achieved when the Owner reasonably determines that the following conditions have been met:

(a)Substantial Completion has been achieved;

(b)any outstanding amounts owed by Design-Builder to Owner have been paid in full;

(c)the items identified on the Punch List have been completed by Design-Builder;

(d)clean-up of the Site has been completed;

(e)all permits required to have been obtained by Design-Builder have been obtained;

(f)the information in Section 6.5.4 has been provided to Owner;

(g)release and waiver of all claims and liens from Design-Builder and Subcontractors have been provided; and

(h)the Performance Tests have been successfully completed.

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6.5.3     After receipt of a Final Application for Payment from Design-Builder, Owner shall make Final Payment in accordance with Section 10.3, less an amount equal to the value of any Subcontractor lien waivers not yet obtained.

6.5.4     At the time of submission of its Final Application for Payment, Design-Builder shall provide the following information:

(a)an affidavit that there are no claims, obligations or liens outstanding or unsatisfied for labor, services, material, equipment, taxes or other items performed, furnished or incurred for or in connection with the Work which will in any way affect Owner’s interests;

(b)a general release executed by Design-Builder waiving, upon receipt of final payment by Design-Builder, all claims for payment, additional compensation, or damages for delay, except those previously made to Owner in writing and remaining unsettled at the time of Final Payment provided such general release shall not waive defenses to claims that may be asserted by Owner after payment or claims arising after payment;

(c)consent of Design-Builder’s surety, if any, to Final Payment; and

(d)a hard copy of the As Built Plans; provided, however, that such plans will remain the Work Product of the Design-Builder and subject in all respects to Article 5.

6.5.5       Upon making Final Payment, Owner waives all claims against Design-Builder except claims relating to (i) Design-Builder’s failure to satisfy its payment obligations, (ii) Design-Builder’s failure to complete the Work consistent with the Contract Documents, including defects appearing within one (1) year after Substantial Completion, and (iii) the terms of any warranties required by the Contract Documents.

6.6          Post Completion Support.  Adequate personnel to complete all Work within the Contract Time(s) will be maintained on-Site by Design-Builder or a Subcontractor until Final Completion has been achieved.  In addition to prosecuting the Work until Final Completion has been achieved, Design-Builder or its Subcontractor will provide one (1) month of on-Site operational support for Owner’s and Owner Operator’s personnel after successful completion of the Performance Tests and, from the date of Substantial Completion, will provide six (6) months of off-Site technical and operating procedure support by telephone and other electronic data transmission and communication.

Article 7

Performance Testing

7.1          Performance Guarantee.  The Design-Builder guarantees that the Plant will meet the performance criteria listed in Exhibit A (the “Performance Guarantee Criteria”) during a performance test conducted and concluded pursuant to the terms hereof not later than Ninety (90) Days after the date of Substantial Completion.  If there is a performance shortfall, Design-Builder will pay all design and construction costs associated with making the necessary

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corrections.  Design-Builder retains the right to use its sole discretion in determining the method (which shall be in accordance with generally accepted construction and design-build standards of the fuel ethanol industry in the Midwest United States) to remedy any performance related issues.

7.2          Performance Testing.

7.2.1       The Design-Builder shall direct and supervise the tests and, if necessary, the retests of the Plant using Design-Builder’s supervisory personnel and the Air Emissions Tester shall conduct the air emissions test, in each case, in accordance with the testing procedures set forth in Exhibit A (the “Performance Tests”), to demonstrate, at a minimum, compliance with the Performance Guarantee Criteria.  Owner is responsible for obtaining Air Emissions Tester and for ensuring Air Emissions Tester’s timely performance.  Design-Builder shall cooperate with the Air Emissions Tester to facilitate performance of all air emissions tests.  Design-Builder shall not be held responsible for the actions of Owner’s employees and third parties involved in the Performance Testing, including but not limited to Air Emissions Tester.

7.2.2     No later than thirty (30) Days prior to the earlier of the Scheduled Substantial Completion Date or Substantial Completion, Design-Builder shall provide to Owner for review a detailed testing plan for the Performance Tests (other than for air emissions).  Owner and Design-Builder shall agree upon a testing plan that shall be consistent with the Performance Test Protocol contained in Exhibit A hereto.  After such agreement has been reached, Design-Builder shall notify the Owner five (5) business days prior to the date Design-Builder intends to commence the Performance Tests and shall notify the Owner upon commencement of the Performance Tests. Owner and Independent Engineer each have the right to witness all testing, including the Performance Tests and any equipment testing, whether at the Site or at the Subcontractor’s or equipment supplier’s premises during the course of this Agreement.  Notwithstanding the foregoing sentence, Owner shall bear the costs of providing a witness to any such testing and all such witnesses shall comply at all times with Design-Builder’s, Subcontractor’s or equipment supplier’s safety and security procedures and other reasonable requirements, and otherwise conduct themselves in a manner that does not interfere with Design-Builder’s, Subcontractor’s or equipment supplier’s activities or operations.

7.2.3     Design-Builder shall provide to Owner a Performance Test report (excluding results from air emissions testing), including all applicable test data, calculations and certificates indicating the results of the Performance Tests and, within five (5) business days of Owner’s receipt of such results, Owner, Independent Engineer and Design-Builder will jointly inspect such Work and review the results of the Performance Tests to verify that the Performance Guarantee Criteria have been met.   If Owner or Independent Engineer reasonably determines that the Performance Guarantee Criteria have not been met, Owner shall notify Design-Builder the reasons why Owner determined that the Performance Guarantee Criteria have not been met and Design-Builder shall promptly take such action or perform such additional work as will achieve the Performance Guarantee Criteria and shall issue to the Owner another notice in accordance with Section 7.2.2; provided however that if the notice relates to a retest, the notice may be provided no less than two (2) business days prior to the Performance Tests.  Such procedure shall be repeated as necessary until Owner and Independent Engineer verifies that the Performance Guarantee Criteria have been met.

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7.2.4       If Owner, for whatever reason, prevents Design-Builder from demonstrating the Performance Guarantee Criteria within thirty (30) Days of Design-Builder’s notice that the Plant is ready for Performance Testing, then Design-Builder shall be excused from demonstrating compliance with the Performance Guarantee Criteria during such period of time that Design-Builder is prevented from demonstrating compliance with the Performance Guarantee Criteria; provided however that Design-Builder will be deemed to have fulfilled all of its obligations to demonstrate that the Plant meets the Performance Guarantee Criteria should such period of time during which Design-Builder is prevented from demonstrating the Performance Criteria exceed thirty (30) Days or extend beyond the Final Completion Date.

7.3          Failure to Attain Timely Final Completion.  Owner agrees and hereby acknowledges that it has waived any and all claims and damages against Design-Builder, including without limitation any and all costs, losses, expenses, and carrying charges, incurred as a result of Design-Builder’s failure to timely attain the Contract Time(s).

7.4          Bonds and Other Performance Security.

7.4.1       On or prior to the date of Financial Closing, if requested by Owner, the Design-Builder shall deliver to Owner a bond substantially in the form attached as Exhibit H (the “Performance Bond”) in an initial amount equivalent to the Contract Price.  Owner shall pay on the date of Financial Closing all costs of obtaining such bond, plus pay Design-Builder a fee of seven and one half percent (7.5%) for obtaining such bond, such fee to be calculated by multiplying seven and one half percent (7.5%) times the cost of the Performance Bond.  Any amounts payable to the surety due to Design-Builder’s default under this Agreement or the Performance Bond shall be for the account of Design-Builder.

(a)Design-Builder shall post additional bonds or security (which must be in form and substance satisfactory to Owner and the Lenders) or shall increase the amount of the Performance Bond by the amount of any increases to the Contract Price; provided, however, that Owner shall pay all costs of obtaining such bonds or security, plus pay Design-Builder a fee of seven and one half percent (7.5%) for obtaining such bonds or security, such fee to be calculated by multiplying seven and one half percent (7.5%) times the cost of the bonds or security.

(b)The Performance Bond shall secure the Design-Builder’s obligations to complete the Work in accordance with this Agreement.

7.4.2       On or prior to the date of Financial Closing, if requested by Owner, the Design-Builder shall deliver to Owner a bond substantially in the form attached as Exhibit I (the “Payment Bond”) in an initial amount equivalent to the Contract Price.  Owner shall pay on the date of Financial Closing all costs of obtaining such bond, plus pay Design-Builder a fee of seven and one half percent (7.5%) for obtaining such bond, such fee to be calculated by multiplying seven and one half percent (7.5%) times the cost of the Payment Bond but any amounts payable to the surety due to Design-Builder’s default under this Agreement or the Payment Bond shall be for the account of Design-Builder.

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(a)Design-Builder shall post additional bonds or security (which must be in form and substance reasonably satisfactory to Owner and the Lenders) or shall increase the amount of the Payment Bond by the amount of any increase to the Contract Price.

(b)The Payment Bond shall secure the Design-Builder’s obligations to pay its Subcontractors, vendors and suppliers.

(c)The Payment Bond shall provide the conditions upon which Subcontractors, vendors and suppliers may draw upon such Payment Bond following Design-Builder’s failure to pay amounts due such Subcontractors, vendors and suppliers.

Article 8

Warranties

8.1          Design-Builder Warranty.  Design-Builder warrants to Owner that the construction, including all materials and equipment furnished as part of the construction, shall be new, of good quality, in conformance with the Contract Documents and all Legal Requirements, free of defects in materials and workmanship.  Design-Builder’s warranty obligation excludes defects caused by abuse, alterations, or failure to maintain the Work by persons other than Design-Builder or anyone for whose acts Design-Builder may be liable. Nothing in this warranty is intended to limit any Manufacturer’s Warranty which provides Owner with greater warranty rights than set forth in this Section 8.1 or the Contract Documents.  Design-Builder will provide to Owner all manufacturers’ and Subcontractors’ warranties upon the earlier of Substantial Completion or termination of this Agreement.   Owner’s failure to comply with all Operating Procedures shall void those guarantees, representations and warranties, whether expressed or implied, that were given by Design-Builder to Owner, concerning the performance of the Plant that are reasonably determined by Design-Builder to be affected by such failure.  If Design-Builder reasonably determines that all damage caused by such failure can be repaired and Owner makes all repairs needed to correct such damage, as reasonably determined by Design-Builder, all guarantees, representations and warranties shall be reinstated for the remaining term thereof, if any, from the date of the repair.

8.2          Correction of Defective Work.

8.2.1       Design-Builder agrees to correct any Work that is found to not be in conformance with the Contract Documents, including that part of the Work subject to Section 8.1, within a period of one (1) year from the date of Substantial Completion of the Work; provided that Owner must report such non-conformance within seven (7) days of the appearance of such failure or non-conformance and that such one (1)-year period shall be extended one (1) Day for any part of the Work that is found to be not in conformance with the Contract Documents for each Day that such part of the Work is not operating in conformity with the Contract Documents, including any  time during which any part of the Work is repaired or replaced pursuant to this Article 8.

8.2.2       Design-Builder shall, within seven (7) Days of receipt of written notice from Owner that the Work is not in conformance with the Contract Documents, take meaningful steps to commence correction of such nonconforming Work, including the correction, removal or

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replacement of the nonconforming Work and correction or replacement of any Work damaged by such nonconforming Work.  If Design-Builder fails to commence the necessary steps within such seven (7) Day period or fails to continue to perform such steps through completion, Owner, in addition to any other remedies provided under the Contract Documents, may provide Design-Builder with written notice that Owner will commence or assume correction of such nonconforming Work and repair of such damaged Work with its own resources.  If, following such written notice, Owner performs such corrective and repair Work, Design-Builder shall be responsible for all reasonable costs incurred by Owner in performing the correction.

8.3          Warranty Period Not Limitation to Owner’s Rights.  The one (1)-year period referenced in Section 8.2 above applies only to Design-Builder’s obligation to correct nonconforming Work and is not intended to constitute a period of limitations for any other rights or remedies Owner may have regarding Design-Builder’s other obligations under the Contract Documents.

Article 9

Contract Price

9.1          Contract Price.  As full consideration to Design-Builder for full and complete performance of the Work and all costs incurred in connection therewith, Owner shall pay Design-Builder in accordance with the terms of Article 10, the sum of Sixty-six Million Twenty-five Thousand Eight Hundred Forty-eight Dollars ($66,025,848.00) (“Contract Price”), subject to adjustments made in accordance with Article 13.  The Contract Price does not include the water pre-treatment system and the fire protection system which shall be provided by Design-Builder pursuant to a separate side-letter agreement executed by Owner and Design-Builder at Design-Builder’s standard time plus material rates during the relevant time period and at the relevant locale.  Owner acknowledges that it has taken no action which would impose a union labor or prevailing wage requirement on Design-Builder, Owner or the Project.  The Parties acknowledge and agree that if after the date hereof, an Owner’s action, a change in Applicable Law, or a Governmental Authority acting pursuant to a change in Applicable Law shall require Design-Builder to employ union labor or compensate labor at prevailing wages, the Contract Price shall be adjusted upwards to include any increased costs associated with such labor or wages.  Such adjustment shall include, but not be limited to, increased labor, subcontractor, and material and equipment costs resulting from any union or prevailing wage requirement; provided, however, that if an option is made available to either employ union labor, or to compensate labor at prevailing wages, such option shall be at Design-Builder’s sole discretion and that if such option is executed by Owner without Design-Builder’s agreement, Design-Builder shall have the right to terminate this agreement and shall be entitled to compensation pursuant to Section 15.3.1 hereof.

9.2          Effect of Construction Cost Index Increase on Contract Price.  If between the Effective Date and the date on which a Notice to Proceed is given to Design-Builder the Construction Cost Index published by Engineering News-Record Magazine (“CCI”) increases over the Baseline Index established in Section 9.2.1, Design-Builder shall notify Owner in writing that it is adjusting the Contract Price.

9.2.1               The Baseline Index for this Agreement shall be 7660.29 (January 2006) (“Baseline Index”).

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9.2.2               In the event that the CCI as of the date on which the Notice to Proceed is given increases over the Baseline Index, the Contract Price shall be increased by a percentage amount equal thereto.

Article 10

Payment Procedures

10.1        Payment at Financial Closing.  As part of the Contract Price, Owner shall pay Design-Builder Five Million Dollars ($5,000,000.00), as a mobilization fee, as soon as allowed by its organizational documents and any other agreements or Laws and at the latest, at the earlier to occur of Financial Closing or the issuance of a Notice to Proceed. The Five Million Dollar ($5,000,000.00) mobilization fee payment shall be subject to retainage as provided by Section 10.2.7.

10.2        Progress Payments.

10.2.1     Application for Payment.  Following the issuance of Notice to Proceed pursuant to Section 6.2, Design-Builder shall submit to Owner, on or before the twenty-fifth (25th) Day of each month, its request for payment for all Work performed and not paid for during the previous Pay Period (the “Application for Payment”).  The Application for Payment shall be substantially in the form attached hereto as Exhibit M.  Design-Builder shall submit to Owner, along with each Application for Payment, signed lien waivers, substantially in the form attached hereto as Exhibit N, received from Subcontractors and suppliers for the Work included in the Application for Payment submitted for the immediately preceding Pay Period and for which payment has been received.

10.2.2     The Application for Payment shall constitute Design-Builder’s representation that the Work has been performed consistent with the Contract Documents and has progressed to the point indicated in the Application for Payment.  The Parties agree that the work completed at the Site, the comparison of the Application for Payment against the work schedule, and the Schedule of Values shall provide sufficient substantiation of the accuracy of the Application for Payment and that no additional documentation will be provided to Owner or Independent Engineer in support of an Application for Payment.  Title to the Work, including Work reflected in an Application for Payment which is in process, is in transit, is in storage, or has been incorporated into the Site, shall pass to Owner free and clear of all claims, liens, encumbrances, and security interests upon Design-Builder’s receipt of payment therefor.

10.2.3     Within ten (10) Days after Owner’s receipt of each Application for Payment, Owner shall pay Design-Builder all amounts properly due, but in each case less the total of payments previously made, and less amounts properly withheld under this Agreement.

10.2.4     The Application for Payment may request payment for equipment and materials not yet incorporated into the Project; provided that (i) Owner is satisfied that the equipment and materials are suitably stored at either the Site or another acceptable location, (ii) the equipment and materials are protected by suitable insurance, and (iii) upon payment, Owner will receive the equipment and materials free and clear of all liens and encumbrances except for

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liens of the Lenders and other liens and encumbrances permitted under the Financing Documents.

10.2.5     Schedule of Values.  The schedule of values attached hereto as Exhibit E (the “Schedule of Values”) (i) subdivides the Work into its respective parts, (ii) includes values for all items comprising the Work, and (iii) serves as the basis for monthly progress payments made to Design-Builder throughout the Work.

10.2.6     Withholding of Payments.  On or before the date set forth in Section 10.2.3, Owner shall pay Design-Builder all amounts properly due.  If Owner determines that Design-Builder is not entitled to all or part of an Application for Payment, it will notify Design-Builder in writing at least five (5) Days prior to the date payment is due.  The notice shall indicate the specific amounts Owner intends to withhold, the reasons and contractual basis for the withholding, and the specific measures Design-Builder must take to rectify Owner’s concerns.  Design-Builder and Owner will attempt to resolve Owner’s concerns prior to the date payment is due.  If the Parties cannot resolve such concerns, Design-Builder may pursue its rights under the Contract Documents, including those under Article 19.  Notwithstanding anything to the contrary in the Contract Documents, Owner shall pay Design-Builder all undisputed amounts in an Application for Payment within the times required by the Agreement.

10.2.7     Retainage on Progress Payments.  Owner will retain ten percent (10%) of each payment up to a maximum of Three Million Three Hundred One Thousand Two Hundred Ninety-two Dollars ($3,301,292.00). Once Three Million Three Hundred One Thousand Two Hundred Ninety-two Dollars ($3,301,292.00) has been retained, in total, Owner will not retain any additional amounts from any subsequent payments. Owner will also reasonably consider reducing retainage for Subcontractors completing their work early in the Project.  Upon Substantial Completion of the Work Owner shall release to Design-Builder all retained amounts less an amount equal to the reasonable value of all remaining or incomplete items of Work and less an amount equal to the value of any Subcontractor lien waivers not yet obtained, as noted in the Certificate of Substantial Completion, provided that such payment shall only be made if Design-Builder has met the Performance Guarantee Criteria listed in Exhibit A.

10.3        Final Payment.  Design-Builder shall deliver to Owner a request for final payment (the “Final Application for Payment”) when Final Completion has been achieved in accordance with Section 6.5. Owner shall make final payment within thirty (30) Days after Owner’s receipt of the Final Application for Payment (“Final Payment”).

10.4        Failure to Pay Amounts Due.

10.4.1     Interest.  Payments which are due and unpaid by Owner to Design-Builder, whether progress payments or Final Payment, shall bear interest commencing five (5) Days after payment is due at the rate of eighteen percent (18%) per annum, or  the maximum rate allowed by Law.

10.4.2     Right to Suspend Work.  If Owner fails to pay Design-Builder any undisputed amount that becomes due, Design-Builder, in addition to all other remedies provided in the Contract Documents, may stop Work pursuant to Section 15.4 hereof.  All payments properly due and unpaid shall bear interest at the rate set forth in Section 10.4.1.

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10.4.3     Failure to Make Final Payment.  Owner’s failure to make Final Payment pursuant to section 10.3 hereof shall void any and all warranties, whether express or implied, provided by Design-Builder pursuant to this Agreement.

10.5        Design-Builder’s Payment Obligations.  Design-Builder will pay Design Consultants and Subcontractors, in accordance with its contractual obligations to such parties, all the amounts Design-Builder has received from Owner on account of their work.  Design-Builder will impose similar requirements on Design Consultants and Subcontractors to pay those parties with whom they have contracted.  Design-Builder will indemnify and defend Owner against any claims for payment and mechanic’s liens as set forth in Section 14.2 hereof.

10.6        Record Keeping and Finance Controls.  With respect to changes in the Work performed on a cost basis by Design-Builder pursuant to the Contract Documents, Design-Builder shall keep full and detailed accounts and exercise such controls as may be necessary for proper financial management, using accounting and control systems in accordance with generally accepted accounting principles and as may be provided in the Contract Documents.  During the performance of the Work and for a period of three (3) years after Final Payment, Owner and Owner’s accountants shall be afforded access from time to time, upon reasonable notice, to Design-Builder’s records, books, correspondence, receipts, subcontracts, purchase orders, vouchers, memoranda and other data relating to changes in the Work performed on a cost basis in accordance with the Contract Documents, all of which Design-Builder shall preserve for a period of three (3) years after Final Payment.

Article 11

Hazardous Conditions and Differing Site Conditions

11.1        Hazardous Conditions.

11.1.1     Unless otherwise expressly provided in the Contract Documents to be part of the Work, Design-Builder is not responsible for any Hazardous Conditions encountered at the Site.  Upon encountering any Hazardous Conditions, Design-Builder will stop Work immediately in the affected area and as promptly as practicable notify Owner and, if Design-Builder is specifically required to do so by Legal Requirements, all Governmental Authorities having jurisdiction over the Project or Site.  Design-Builder shall not remove, remediate or handle in any way (except in case of emergency) any Hazardous Conditions encountered at the Site without prior written approval of Owner.

11.1.2     Upon receiving notice of the presence of suspected Hazardous Conditions, Owner shall take the necessary measures required to ensure that the Hazardous Conditions are remediated or rendered harmless.  Such necessary measures shall include Owner retaining Qualified Independent Experts to (i) ascertain whether Hazardous Conditions have actually been encountered, and, if they have been encountered, (ii) prescribe the remedial measures that Owner is required under applicable Legal Requirements to take with respect to such Hazardous Conditions in order for the Work to proceed.  Owner’s choice of such Qualified Independent Experts shall be subject to the prior approval of Design-Builder, which approval shall not be unreasonably withheld or delayed.

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11.1.3     Design-Builder shall be obligated to resume Work at the affected area of the Project only after Owner’s Qualified Independent Expert provides it with written certification that (i) the Hazardous Conditions have been removed or rendered harmless, and (ii) all necessary approvals have been obtained from all government entities having jurisdiction over the Project or Site and a remediation plan has been undertaken permitting the Work to proceed.

11.1.4     Design-Builder will be entitled, in accordance with this Article 11, to an adjustment in its Contract Price and/or Contract Time(s) to the extent Design-Builder’s cost and/or time of performance have been adversely impacted by the presence of Hazardous Conditions, provided that such Hazardous Materials were not introduced to the Site by Design-Builder, Subcontractors or anyone for whose acts they may be liable.

11.1.5     To the fullest extent permitted by Law, Owner shall indemnify, defend and hold harmless Design-Builder, Design Consultants, Subcontractors, anyone employed directly or indirectly for any of them, and their officers, directors, employees and agents, from and against any and all claims, losses, damages, liabilities and expenses, including attorneys’ fees and expenses, arising out of or resulting from the presence, removal or remediation of Hazardous Conditions at the Site.

11.1.6     Notwithstanding the preceding provisions of this Section 11.1, Owner is not responsible for Hazardous Conditions introduced to the Site by Design-Builder, Subcontractors or anyone for whose acts they may be liable.  Design-Builder shall indemnify, defend and hold harmless Owner and Owner’s officers, directors, employees and agents from and against all claims, losses, damages, liabilities and expenses, including attorneys’ fees and expenses, arising out of or resulting from those Hazardous Conditions introduced to the Site by Design-Builder, Subcontractors or anyone for whose acts they may be liable.

11.2        Differing Site Conditions; Inspection.

11.2.1     Concealed or latent physical conditions or subsurface conditions at the Site that (i) differ from the conditions indicated in the Contract Documents, or (ii) are of an unusual nature, differing from the conditions ordinarily encountered and generally recognized as inherent in the Work are collectively referred to herein as “Differing Site Conditions.”  If Design-Builder encounters a Differing Site Condition, Design-Builder will be entitled to an adjustment in the Contract Price and/or Contract Time(s) to the extent Design-Builder’s cost and/or time of performance are adversely impacted by the Differing Site Condition.

11.2.2     Upon encountering a Differing Site Condition, Design-Builder shall provide prompt written notice to Owner of such condition, which notice shall not be later than fourteen (14) business days after such condition has been encountered.  Design-Builder shall, to the extent reasonably possible, provide such notice before the Differing Site Condition has been substantially disturbed or altered.

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Article 12

Force Majeure; Change in Legal Requirements

12.1        Force Majeure Event.  A force Majeure event shall mean a cause or event beyond the reasonable control of, and without the fault or negligence of a Party claiming Force Majeure, including, without limitation, an emergency, floods, earthquakes, hurricanes, tornadoes, adverse weather conditions not reasonably anticipated or acts of God; sabotage; vandalism beyond that which could reasonably be prevented by a Party claiming Force Majeure; terrorism; war; riots; fire; explosion; blockades; insurrection; strike; slow down or labor disruptions (even if such difficulties could be resolved by conceding to the demands of a labor group); economic hardship or delay in the delivery of materials or equipment that is beyond the control of a Party claiming Force Majeure, and action or failure to take action by any Governmental Authority after the Effective Date (including the adoption or change in any rule or regulation or environmental constraints lawfully imposed by such Governmental Authority), but only if such requirements, actions, or failures to act prevent or delay performance; and inability, despite due diligence, to obtain any licenses, permits, or approvals required by any Governmental Authority (any such event, a “Force Majeure Event”).

12.2        Effect of Force Majeure Event.  Neither Party shall be considered in default in the performance of any of the obligations contained in the Contract Documents, except for the Owners or the Design-Builder’s obligations to pay money (including but not limited to, Progress Payments which become due and payable with respect to the period prior to the occurrence of the Force Majeure Event), when and to the extent the failure of performance shall be caused by a Force Majeure Event.  If either Party is rendered wholly or partly unable to perform its obligations under the Contract Documents because of a Force Majeure Event, such Party will be excused from performance affected by the Force Majeure Event to the extent and for the period of time so affected; provided that:

(a)the nonperforming Party, within forty-eight (48) hours after the nonperforming Party actually becomes aware of the occurrence and impact of the Force Majeure Event, gives the other Party written notice describing the event or circumstance in detail, including an estimation of its expected duration and probable impact on the performance of the affected Party’s obligations hereunder and continues to furnish timely regular reports with respect thereto during the continuation of and upon the termination of the Force Majeure Event;

(b)the suspension of performance is of no greater scope and of no longer duration than is reasonably required by the Force Majeure Event;

(c)the obligations of either Party that arose before the occurrence causing the suspension of performance and the performance that is not prevented by the occurrence, shall not be excused as a result of such occurrence;

(d)the nonperforming Party uses its best efforts to remedy its inability to perform and mitigate the effect of such event and resumes its performance at the earliest practical time after cessation of such occurrence or until such time that performance is practicable;

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(e)when the nonperforming Party is able to resume performance of its obligations under the Contract Documents, that Party shall give the other Party written notice to that effect; and

(f)Design-Builder shall be entitled to a Day-for-Day time extension for those events set forth in Section 12.1 to the extent the occurrence of such event delayed Design-Builder’s performance of its obligations under this Agreement.

12.3        Change in Legal Requirements.  The Contract Price and/or the Contract Time(s) shall be adjusted to compensate Design-Builder for the effects of any changes to the Legal Requirements that occur after the date of this Agreement and as a result of such change, the performance of the Work is adversely affected.  Such effects may include, without limitation, revisions Design-Builder is required to make to the Construction Documents because of changes in Legal Requirements.

12.4        Time Impact And Availability.  If the Design-Builder is delayed at any time in the commencement or progress of the Work due to a delay in the delivery of, or unavailability of, essential materials or labor to the Project as a result of a significant industry-wide economic fluctuation or disruption beyond the control of and without the fault of the Design-Builder or its Subcontractors which is experienced or expected to be experienced by certain markets providing essential materials and equipment to the Project during the performance of the Work and such economic fluctuation or disruption adversely impacts the price, availability, and delivery timeframes of essential materials, equipment, or labor  (such event an “Industry-Wide Disruption”), the Design-Builder shall be entitled to an equitable extension of the Contract Time(s) on a day-for-day basis equal to such delay.  The Owner and Design-Builder shall undertake reasonable steps to mitigate the effect of such delays.  Notwithstanding any other provision to the contrary, the Design-Builder shall not be liable to the Owner for any expenses, losses or damages arising from a delay, or unavailability of, essential materials or labor to the Project as a result of an Industry-Wide Disruption.

12.5        Effect of Industry-Wide Disruption on Contract Price.  In the event of an Industry-Wide Disruption, the Contract Price shall be adjusted to allocate the risk of such market conditions between the Owner and Design-Builder through the following equitable escalation in the Contract Price:

12.5.1     If during the course of the Project the CCI increases over the Baseline Index established in Section 9.2.1, Design-Builder shall notify Owner in writing that it is adjusting the Contract Price.

12.5.2     In the event that the CCI increases over the Baseline Index, the Contract Price shall be adjusted to reflect such increase, but only with respect to those Applications for Payment submitted after the date on which written notice of the adjustment in Contract Price is given.

12.5.3     Payment for any adjustment in the Contract Price as a result of this Article 12 shall be made in accordance with the terms of this Agreement.

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Article 13

Changes to the Contract Price and Scheduled Completion Dates

13.1        Change Orders.

13.1.1     A change order (“Change Order”) is a written instrument issued after execution of this Agreement signed by Owner and Design-Builder, stating their agreement upon all of the following:

(a)the scope of the change in the Work;

(b)the amount of the adjustment to the Contract Price; and

(c)the extent of the adjustment to the Contract Time(s).

13.1.2     All changes in the Work authorized by an applicable Change Order shall be performed under the applicable conditions of the Contract Documents.  Owner and Design-Builder shall negotiate in good faith and as expeditiously as possible the appropriate adjustments for such changes.  Prior to incurring any costs with respect to estimating services, design services and any other services involved in the preparation of the proposed revisions to the Contract Documents, Design-Builder must obtain the written approval of Owner for such costs.

13.1.3     If Owner requests a proposal for a change in the Work from Design-Builder and subsequently elects not to proceed with the change, a Change Order shall be issued to reimburse Design-Builder for reasonable costs incurred for estimating services, design services and any other services involved in the preparation of proposed revisions to the Contract Documents; provided that such costs were previously approved by Owner pursuant to Section 13.1.2.

13.2        Contract Price Adjustments.

13.2.1     The increase or decrease in Contract Price resulting from a change in the Work shall be a mutually accepted lump sum, properly itemized and supported by sufficient substantiating data to permit evaluation by Owner.

13.2.2     If Owner and Design-Builder disagree upon whether Design-Builder is entitled to be paid for any services required by Owner, or if there are any other disagreements over the scope of Work or proposed changes to the Work, Owner and Design-Builder shall resolve the disagreement pursuant to Article 19 hereof.  As part of the negotiation process, Design-Builder shall furnish Owner with a good faith estimate of the costs to perform the disputed services in accordance with Owner’s interpretations.  If the Parties are unable to agree and Owner expects Design-Builder to perform the services in accordance with Owner’s interpretations, Design-Builder shall proceed to perform the disputed services, conditioned upon Owner issuing a written order to Design-Builder (i) directing Design-Builder to proceed, and (ii) specifying Owner’s interpretation of the services that are to be performed.  If this occurs, Design-Builder shall be entitled to submit in its Applications for Payment an amount equal to fifty percent (50%) of its reasonable estimated direct cost to perform the services, and Owner agrees to pay such amounts, with the express understanding that (x) such payment by Owner

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does not prejudice Owner’s right to argue that it has no responsibility to pay for such services, and (y) receipt of such payment by Design-Builder does not prejudice Design-Builder’s right to seek full payment of the disputed services if Owner’s order is deemed to be a change to the Work.

13.3        Emergencies.  In any emergency affecting the safety of persons and/or property, Design-Builder shall act, at its discretion, to prevent threatened damage, injury or loss and shall notify the Owner as soon as practicable and in any event within forty-eight (48) hours after Design-Builder becomes aware of the emergency.  The notice to Owner shall describe the emergency in detail, including a reasonable estimation of its expected duration and impact, if any, on the performance of Design-Builder’s obligations hereunder.  Any change in the Contract Price and/or the Contract Time(s) on account of emergency work shall be determined as provided in this Article 13.

13.4        Failure to Complete Owner’s Milestones.  The dates when Owner’s obligations are required to be completed to enable Design-Builder to achieve the Contract Time(s) are identified in Table 3 in Exhibit C (“Owner’s Milestones”).  The Contract Time(s) shall be revised to provide a Day-for-Day extension of the Contract Time(s) for completion of the Work for each full Day during which Owner fails to timely complete its obligations pursuant to the Owner’s Milestones.  In the event of Owner’s failure to timely complete its obligations pursuant to Owner’s Milestones results in the extension of the Contract Time(s), the Contract Price shall be adjusted to compensate Design-Builder for the effects, if any, of such change.

Article 14

Indemnity

14.1        Tax Claim Indemnification.  If, in accordance with Owner’s direction, an exemption for all or part of the Work is claimed for taxes, Owner shall indemnify, defend and hold harmless Design-Builder (and its officers, directors, agents, successors and assigns) from and against any and all damages, claims costs, losses, liabilities, and expenses (including penalties, interest, fines, taxes of any kind, attorneys’ fees, accountants and other professional fees and associated expenses) incurred by Design-Builder in connection with or as a result of any action taken by Design-Builder in accordance with Owner’s directive.

14.2        Payment Claim Indemnification.  To the extent Design-Builder has received payment for the Work, Design-Builder shall indemnify, defend and hold harmless Owner Indemnified Parties from any claims or mechanic’s liens brought against Owner Indemnified Parties or against the Project as a result of the failure of Design-Builder, or those for whose acts it is responsible, to pay for any services, materials, labor, equipment, taxes or other items or obligations furnished or incurred for or in connection with the Work.  Within three (3) business days of receiving written notice from Owner that such a claim or mechanic’s lien has been filed, Design-Builder shall commence to take the steps necessary to discharge such claim or lien.

14.3        Design-Builder’s General Indemnification.

14.3.1     Design-Builder, to the fullest extent permitted by Law, shall indemnify, hold harmless and defend Owner, Lenders, Lenders’ Agent, and their successors, assigns,

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officers, directors, employees and agents (“Owner Indemnified Parties”) from and against any and all losses, costs, damages, injuries, liabilities, claims, demands, penalties, interest and causes of action, including without limitation attorney’s fees (collectively, the “Damages”) for bodily injury, sickness or death, and property damage or destruction (other than to the Work itself) to the extent resulting from the negligent or intentionally wrongful acts or omissions of Design-Builder, Design Consultants, Subcontractors, anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable.

14.3.2     If an employee of Design-Builder, Design Consultants, Subcontractors, anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable has a claim against Owner Indemnified Parties, Design-Builder’s indemnity obligation set forth in Section 14.3.1 above shall not be limited by any limitation on the amount of damages, compensation or benefits payable by or for Design-Builder, Design Consultants, Subcontractors, or other entity under any employee benefit acts, including workers’ compensation or disability acts.

14.3.3     Without limiting the generality of Section 14.3.1 hereof, Design-Builder shall fully indemnify, save harmless and defend the Owner Indemnified Parties from and against any and all Damages in favor of any Governmental Authority or other third party to the extent caused by (a) failure of Design-Builder or any Subcontractor to comply with Legal Requirements as required by this Agreement, or (b) failure of Design-Builder or any Subcontractor to properly administer and pay any taxes or fees required to be paid by Design-Builder under this Agreement.

14.3.4     Nothing in the Design-Builder’s General Indemnification contained in this Section 14.3 shall be read to limit in any way any entitlement Design-Builder shall have to insurance coverage under any insurance policy, including any insurance policy required by either Party under this Agreement.

14.4        Owner’s General Indemnification.  Owner, to the fullest extent permitted by Law, shall indemnify, hold harmless and defend Design-Builder and any of Design-Builder’s officers, directors, employees, or agents from and against claims, losses, damages, liabilities, including attorneys’ fees and expenses, for bodily injury, sickness or death, and property damage or destruction (other than to the Work itself) to the extent resulting from the negligent acts, willful misconduct, or from omissions of Owner, its officers, directors, employees, agents, or anyone for whose acts any of them may be liable.

14.4.1     Without limiting the generality of Section 14.4 hereof, Owner shall fully indemnify, save harmless and defend the Design-Builder and any of Design-Builder’s officers, directors, employees, or agents from and against any and all Damages in favor of any Governmental Authority or other third party to the extent caused by (a) failure of Owner or any of Owner’s agents to comply with Legal Requirements as required by this Agreement, or (b) failure of Owner or Owner’s agents to properly administer and pay any taxes or fees required to be paid by Owner under this Agreement.

14.4.2     Nothing in the Owner’s General Indemnification contained in this Section 14.4 shall be read to limit in any way any entitlement Owner shall have to insurance coverage

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under any insurance policy, including any insurance policy required by either Party under this Agreement.

Article 15

Stop Work; Termination for Cause

15.1        Owner’s Right to Stop Work.  Owner may, without cause and for its convenience, order Design-Builder in writing to stop and suspend the Work.  Such suspension shall not exceed sixty (60) consecutive Days or aggregate more than ninety (90) Days during the duration of the Project.  Design-Builder is entitled to seek an adjustment of the Contract Price and/or the Contract Time(s) if its cost or time to perform the Work has been adversely impacted by any suspension or stoppage of work by Owner.

15.2        Owner’s Right to Perform and Terminate for Cause.

15.2.1     If Design-Builder persistently fails to: (i) provide a sufficient number of skilled workers; (ii) supply the materials required by the Contract Documents; (iii) comply with applicable Legal Requirements; (iv) timely pay, without cause, Design Consultants or Subcontractors; (v)  perform the Work with promptness and diligence to ensure that the Work is completed by the Contract Time(s), as such times may be adjusted in accordance with this Agreement; or (vi) perform material obligations under the Contract Documents; then Owner, in addition to any other rights and remedies provided in the Contract Documents or by law or equity, shall have the rights set forth in Sections 15.2.2 and 15.2.3 below.

15.2.2     Upon the occurrence of an event set forth in Section 15.2.1 above, Owner may provide written notice to Design-Builder that it intends to terminate the Agreement unless the problem cited is cured, or commenced to be cured within seven (7) Days of Design-Builder’s receipt of such notice.  If Design-Builder fails to cure, or reasonably commence to cure such problem and thereafter diligently pursue such cure to completion, then Owner may give a second written notice to Design-Builder of its intent to terminate following an additional seven (7) Day period.  If Design-Builder, within such second seven (7) Day period, fails to cure, or reasonably commence to cure such problem and thereafter diligently pursue such cure to completion, then Owner may declare the Agreement terminated for default by providing written notice to Design-Builder of such declaration.  If (i) the insurance coverage required by Design-Builder pursuant Article 17 hereof is suspended or cancelled without Design-Builder providing immediate replacement coverage (and, in any case, within fourteen (14) Days of the occurrence thereof) meeting the requirements specified in Article 17 hereof; (ii) if applicable, a default occurs under the Performance Bond or the Payment Bond, or the Performance Bond or Payment Bond is revoked or terminated and such Performance Bond or the Payment Bond is not immediately replaced (and, in any case, within fourteen (14) Days of the occurrence thereof) by Design-Builder with a Performance Bond or a Payment Bond providing at least the same level of coverage in a form and from a surety acceptable to Owner and Lenders, or the surety under the Performance Bond or Payment Bond institutes or has instituted against it a case under the United States Bankruptcy Code; (iii) Design-Builder purports to make an assignment of this Agreement in breach of the provisions of Section 21.1 hereof, or (iv) any representation or warranty made by Design-Builder under Section 18.1 hereof was false or materially misleading when made, then Owner may terminate this Agreement upon written notice to Design-Builder.

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15.2.3     Upon declaring the Agreement terminated pursuant to Section 15.2.2 above, Owner may enter upon the premises and take possession, for the purpose of completing the Work, of all materials, equipment, scaffolds, tools, appliances and other items thereon, which have been purchased for the performance of the Work, all of which Design-Builder hereby transfers, assigns and sets over to Owner for such purpose, and to employ any person or persons to complete the Work and provide all of the required labor, services, materials, equipment and other items.  In the event of such termination, Design-Builder shall not be entitled to receive any further payments under the Contract Documents until the Work shall be finally completed in accordance with the Contract Documents.  At such time, if the unpaid balance of the Contract Price exceeds the cost and expense incurred by Owner in completing the Work, Design-Builder will be paid promptly by Owner for Work performed prior to its default.  If Owner’s cost and expense of completing the Work exceeds the unpaid balance of the Contract Price, then Design-Builder shall be obligated to promptly pay the difference to Owner.  Such costs and expense shall include not only the cost of completing the Work, but also losses, damages, costs and expenses, including attorneys’ fees and expenses, incurred by Owner in connection with the re-procurement and defense of claims arising from Design-Builder’s default, subject to the waiver of consequential damages set forth in Section 19.4 and the limitation of liability set forth in Section 19.5 hereof.

15.2.4     If Owner improperly terminates the Agreement for cause, the termination for cause will be converted to a termination for convenience in accordance with the provisions of Section 15.3.

15.3        Owner’s Right to Terminate for Convenience.

15.3.1     Upon ten (10) Days’ written notice to Design-Builder, Owner may, for its convenience and without cause, elect to terminate this Agreement.  In such event, Owner shall pay Design-Builder for the following:

(a)to the extent not already paid, all Work executed, and for proven loss, cost or expense in connection with the Work;

(b)the reasonable costs and expenses attributable to such termination, including demobilization costs;

(c)amounts due in settlement of terminated contracts with Subcontractors and Design Consultants;

(d)overhead and profit margin in the amount of fifteen percent (15%) on the sum of items (a) and (b) above; and

(e)all retainage withheld by Owner on account of Work that has been completed in accordance with the Contract Documents.

15.3.2     If Owner terminates this Agreement pursuant to this Section 15.3 and proceeds to design and construct the Project through its employees, agents or third parties, Owner’s rights to use the Work Product shall be as set forth in Section 5.3.

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15.4        Design-Builder’s Right to Stop Work.

15.4.1     Design-Builder may, in addition to any other rights afforded under the Contract Documents or at Law, stop work for Owner’s failure to pay amounts properly due under Design-Builder’s Application for Payment.

15.4.2     If any of the events set forth in Section 15.4.1 above occur, Design-Builder has the right to stop work by providing written notice to Owner that Design-Builder will stop work unless such event is cured within seven (7) Days from Owner’s receipt of Design-Builder’s notice. If Owner fails to cure or reasonably commence to cure such problem and thereafter diligently pursue such cure to completion, then Design-Builder may give a second written notice to Owner of its intent to stop work within an additional seven (7) Day period.  If Owner, within such second seven (7) Day period, fails to cure, or reasonably commence to cure such problem and thereafter diligently pursue such cure to completion, then Design-Builder may stop work.  In such case, Design-Builder shall be entitled to make a claim for adjustment to the Contract Price and Contract Time(s) to the extent it has been adversely impacted by such stoppage.

15.5        Design-Builder’s Right to Terminate for Cause.

15.5.1     Design-Builder, in addition to any other rights and remedies provided in the Contract Documents or by Law, may terminate the Agreement for cause for the following reasons:

(a)The Work has been stopped for sixty (60) consecutive Days, or more than ninety (90) Days during the duration of the Project, because of court order, any Governmental Authority having jurisdiction over the Work, or orders by Owner under Section 15.1 hereof, provided that such stoppages are not due to the acts or omissions of Design-Builder, Design Consultant and their respective officers, agents, employees, Subcontractors or any other person for whose acts the Design-Builder may be liable under Law.

(b)Owner’s failure to provide Design-Builder with any information, permits or approvals that are Owner’s responsibility under the Contract Documents which result in the Work being stopped for sixty (60) consecutive Days, or more than ninety (90) Days during the duration of the Project, even though Owner has not ordered Design-Builder in writing to stop and suspend the Work pursuant to Section 15.1 hereof.

(c)Owner fails to meet its obligations under Exhibit C and such failure results in the Work being stopped for sixty (60) consecutive Days, or more than ninety (90) Days during the duration of the Project even though Owner has not ordered Design-Builder in writing to stop and suspend the Work pursuant to Section 15.1 hereof.

(d)Owner’s failure to cure the problems set forth in Section 15.4.1 above within seven (7) Days after Design-Builder has stopped the Work.

15.5.2     Upon the occurrence of an event set forth in Section 15.5.1 above, Design-Builder may elect to terminate this Agreement by providing written notice to Owner that it intends to terminate the Agreement unless the problem cited is cured within seven (7) Days of Owner’s receipt of such notice.  If Owner fails to cure, or reasonably commence to cure, such problem, then Design-Builder may give a second written notice to Owner of its intent to

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terminate within an additional seven (7) Day period.  If Owner, within such second seven (7) Day period, fails to cure such problem, then Design-Builder may declare the Agreement terminated for default by providing written notice to Owner of such declaration.  In such case, Design-Builder shall be entitled to recover in the same manner as if Owner had terminated the Agreement for its convenience under Section 15.3.

15.6        Bankruptcy of Owner or Design-Builder.

15.6.1     If either Owner or Design-Builder institutes or has instituted against it a case under the United States Bankruptcy Code (such Party being referred to as the “Bankrupt Party”), such event may impair or frustrate the Bankrupt Party’s ability to perform its obligations under the Contract Documents.  Accordingly, should such event occur:

(a)The Bankrupt Party, its trustee or other successor, shall furnish, upon request of the non-Bankrupt Party, adequate assurance of the ability of the Bankrupt Party to perform all future obligations under the Contract Documents, which assurances shall be provided within ten (10) Days after receiving notice of the request; and

(b)The Bankrupt Party shall file an appropriate action within the bankruptcy court to seek assumption or rejection of the Agreement within sixty (60) Days of the institution of the bankruptcy filing and shall diligently prosecute such action.

15.6.2     If the Bankrupt Party fails to comply with its foregoing obligations, the non-Bankrupt Party shall be entitled to request the bankruptcy court to reject the Agreement, declare the Agreement terminated and pursue any other recourse available to the non-Bankrupt Party under this Article 15.

15.6.3     The rights and remedies under this Section 15.6 shall not be deemed to limit the ability of the non-Bankrupt Party to seek any other rights and remedies provided by the Contract Documents or by Law, including its ability to seek relief from any automatic stays under the United States Bankruptcy Code or the right of Design-Builder to stop Work under any applicable provision of this Agreement.

15.7        Lenders’ Right to Cure.  At any time after the occurrence of any event set forth in Section 15.4.1 or Section 15.5.1, but within the timeframes set forth therein, the Lenders shall have the right, but not the obligation, to cure such default on behalf of Owner.

Article 16

Representatives of the Parties

16.1        Designation of Owner’s Representatives.  Owner designates the individual listed below as its senior representative (“Owner’s Senior Representative”), which individual has the authority and responsibility for avoiding and resolving disputes under Article 19:

Brian Kletscher
President and Chairman
30427 Co Hwy 10

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Vesta, MN 56292
Cell Phone:  (507) 828-1429
Home Telephone:   (507) 762-3376
E-mail:  brian_k@co.redwood.mn.us

Owner designates the individual listed below as its representative (“Owner’s Representative”), which individual has the authority and responsibility set forth in Section 4.4:

Brian Kletscher
President and Chairman
30427 Co Hwy 10
Vesta, MN 56292
Cell Phone:  (507) 828-1429
Home Telephone:   (507) 762-3376

E-mail:  brian_k@co.redwood.mn.us

16.2        Designation of Design-Builder’s Representatives.  Design-Builder designates the individual listed below as its senior representative (“Design-Builder’s Senior Representative”), which individual has the authority and responsibility for avoiding and resolving disputes under Article 19:

Roland “Ron” Fagen
CEO and President
501 W. Highway 212
P.O. Box 159
Granite Falls, MN 56241
Telephone:  (320) 564-3324
Facsimile: (320) 564-3278

Design-Builder designates the individual listed below as its representative (“Design-Builder’s Representative”), which individual has the authority and responsibility set forth in Section 3.1:

Aaron Fagen
Chief Operating Officer
501 W. Highway 212
P.O. Box 159
Granite Falls, MN 56241
Telephone:  (320) 564-3324
Facsimile: (320) 564-3278

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Article 17

Insurance

17.1        Insurance.  Design-Builder shall procure and maintain in force through the Final Completion Date the following insurance coverages with the policy limits indicated, and otherwise in compliance with the provisions of this Agreement:

Commercial General Liability:
General Aggregate
Products-Comp/Op AGG	$	2,000,000
Personal & Adv Injury	$	1,000,000
Each Occurrence	$	1,000,000
Fire Damage (Any one fire)	$	50,000
Med Exp (Any one person)	$	5,000
Automobile Liability:
Combined Single Limit
Each Occurrence	$	1,000,000
Excess Liability — Umbrella Form:
Each Occurrence	$	20,000,000
Aggregate	$	20,000,000

Workers’ Compensation

Statutory limits as required by the state in which the Work is performed.

Employers’ Liability:
Each Accident	$	1,000,000
Disease-Policy Limit	$	1,000,000
Disease-Each Employee	$	1,000,000
Professional Errors and Omissions
Per Claim	$	5,000,000
Annual	$	5,000,000

17.2        Design-Builder’s Insurance Requirements.

17.2.1     Design-Builder is responsible for procuring and maintaining from insurance companies authorized to do business in the state in which the Project is located, the following insurance coverages for certain claims which may arise from or out of the performance of the Work and obligations under the Contract Documents:

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(a)coverage for claims arising under workers’ compensation, disability and other similar employee benefit Laws applicable to the Work;

(b)coverage for claims by Design-Builder’s employees for bodily injury, sickness, disease, or death;

(c)coverage for claims by any person other than Design-Builder’s employees for bodily injury, sickness, disease, or death;

(d)coverage for usual personal injury liability claims for damages sustained by a person as a direct or indirect result of Design-Builder’s employment of the person, or sustained by any other person;

(e)coverage for claims for damages (other than to the Work) because of injury to or destruction of tangible property, including loss of use;

(f)coverage for claims of damages because of personal injury or death, or property damage resulting from ownership, use and maintenance of any motor vehicle; and

(g)coverage for contractual liability claims arising out of Design-Builder’s obligations under Section 14.2.

17.2.2     Design-Builder’s liability insurance required by this Section 17.2 shall be written for the coverage amounts set forth in Section 17.1 and shall include completed operations insurance for the period of time set forth in the Agreement.

17.2.3     Design-Builder’s liability insurance set forth in Sections 17.2.1 (a) through (g) above shall specifically delete any design-build or similar exclusions that could compromise coverages because of the design-build delivery of the Project.

17.2.4     To the extent Owner requires Design-Builder or any Design Consultant to provide professional liability insurance for claims arising from the negligent performance of design services by Design-Builder or the Design Consultant, the coverage limits, duration and other specifics of such insurance shall be as set forth in the Agreement.  Any professional liability shall specifically delete any design-build or similar exclusions that could compromise coverages because of the design-build delivery of the Project.  Such policies shall be provided prior to the commencement of any design services hereunder.

17.2.5     Prior to commencing any construction services hereunder, Design-Builder shall provide Owner with certificates evidencing that (i) all insurance obligations required by the Contract Documents are in full force and in effect and will remain in effect for the duration required by the Contract Documents and (ii) no insurance coverage required hereunder will be canceled, renewal refused, or changed unless at least thirty (30) Days prior written notice is given to Owner.

17.3        Owner’s Liability Insurance.  Owner shall procure and maintain from insurance companies authorized to do business in the state in which the Project is located such liability insurance to protect Owner from claims which may arise from the performance of Owner’s obligations under the Contract Documents or Owner’s conduct during the course of the Project.

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The general and professional liability insurance obtained by Owner shall name Design-Builder, Design Consultants, Subcontractors, the Lenders and Lenders’ Agent as additional insureds, without application of deductible, retention or retrospective premiums as to the additional insureds.

17.4        Owner’s Property Insurance.

17.4.1     Unless otherwise provided in the Contract Documents, Owner shall procure from insurance companies authorized to do business in the state in which the Project is located, and maintain through Final Completion, property insurance upon the entire Project in a minimum amount equal to the full insurable value of the Project, including professional fees, overtime premiums and all other expenses incurred to replace or repair the insured property.  The property insurance obtained by Owner shall include as additional insureds the interests of Owner, Design-Builder, Design Consultants, Subcontractors, the Lenders and Lenders’ Agent and shall insure against the perils of fire and extended coverage, theft, vandalism, malicious mischief, collapse, flood, earthquake, debris removal and other perils or causes of loss as called for in the Contract Documents and without application of any deductible, retention or retrospective premium.  Owner shall maintain coverage equal to or in excess of the value of each of Design-Builder’s, Design Consultants’, and Subcontractors’ property on the Site.  The property insurance shall include physical loss or damage to the Work, including materials and equipment in transit, at the Site or at another location as may be indicated in Design-Builder’s Application for Payment and approved by Owner.

17.4.2     Unless the Contract Documents provide otherwise, Owner shall procure and maintain boiler and machinery insurance that will include as additional insureds the Owner, Design-Builder, Design Consultants, and Subcontractors, in an amount not less than Contract Price and without application of any deductible, retention or retrospective premium as to the additional insureds. Owner shall maintain coverage equal to or in excess of the value of each of Design-Builder’s, Design Consultants’, and Subcontractors’ interest or investment in boiler or machinery equipment on the Site.

17.4.3     Prior to Design-Builder commencing any Work, Owner shall obtain a builder’s risk insurance policy naming Owner as the insured, with Design-Builder, Design Consultants and Subcontractors as additional insureds, in an amount not less than the Contract Price and without application of deductible, retention or retrospective premium as to the additional insureds.

17.4.4     Owner shall also obtain, prior to Design-Builder commencing any Work, terrorism coverage as described by the Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297, 116 Stat. 2322 (2002), as extended by the Terrorism Risk Insurance Extension Act of 2005, Pub. L. No. 109-144 (2005), or any successor act or renewing act for the period during which the Terrorism Risk Insurance Act or any successor act or renewing act is in effect.

17.4.5     Prior to Design-Builder commencing any Work, Owner shall provide Design-Builder with copies of the insurance certificates reflecting coverages required under this Section 17.4 evidencing that (i) all Owner’s insurance obligations required by the Contract Documents are in full force and in effect and will remain in effect until Design-Builder has completed all of the Work and has received Final Payment from Owner, and (ii) no insurance

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coverage will be canceled, renewal refused, or changed unless at least thirty (30) Days prior written notice is given to Design-Builder.  Owner’s property insurance shall not lapse or be cancelled during the term of this Agreement.  Promptly after Owner’s receipt thereof, Owner shall be required to provide Design-Builder with copies of all insurance policies to which Design-Builder, Design Consultants, and Subcontractors are named as additional insureds.  In the event Owner replaces insurance providers for any policy required under this Section, revises policy coverages, or otherwise modifies any applicable insurance policy in any way, Owner shall provide Design-Builder, for its review or possession as provided under this Section 17.4.5, the certificate of insurance and a copy of such new, revised or modified policy when available.

17.4.6     Any loss covered under Owner’s property insurance shall be adjusted with Owner and Design-Builder and made payable to both of them as trustees for the insureds as their interests may appear, subject to any applicable mortgage clause.  All insurance proceeds received as a result of any loss will be placed in a separate account and distributed in accordance with such agreement as the interested parties may reach.  Any disagreement concerning the distribution of any proceeds will be resolved in accordance with Article 19 hereof.

17.4.7     Owner and Design-Builder waive against each other and Owner’s separate contracts, Design Consultants, Subcontractors, agents and employees of each and all of them all damages covered by property insurance provided herein, except such rights as they may have to the proceeds of such insurance.  Design-Builder and Owner shall, where appropriate, require similar waivers of subrogation from Owner’s separate contractors, Design Consultants Subcontractors, and insurance providers and shall require each of them to include similar waivers in their contracts or policies.

Article 18

Representations and Warranties

18.1        Design-Builder and Owner Representations and Warranties.  Each of Design-Builder and Owner represents that:

(a)it is duly organized, validly existing and in good standing under the Laws of its formation  and has all requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby;

(b)this Agreement has been duly executed and delivered by such Party and constitutes the legal, valid and binding obligations of such Party, enforceable against such Party in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium or similar Laws affecting creditor’s rights or by general equitable principles;

(c)the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby do not and will not conflict with or violate (a) the certificate of incorporation or bylaws or equivalent organizational documents of such Party, or (b) any Law applicable to such Party and other than

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the permits listed on Exhibit G, such execution, delivery and performance of this Agreement does not require any Governmental Approval; and

(d)there is no action pending or, to the knowledge of such Party, threatened, which would hinder, modify, delay or otherwise adversely affect such Party’s ability to perform its obligations under the Contract Documents.

18.2        Design-Builder Representations and Warranties.  Design-Builder further represents that it has the necessary financial resources to fulfill its obligations under this Agreement.

Article 19

Dispute Resolution

19.1        Dispute Avoidance and Mediation.  The Parties are fully committed to working with each other throughout the Project and agree to communicate regularly with each other at all times so as to avoid or minimize disputes or disagreements.  If disputes or disagreements do arise, Design-Builder and Owner each commit to resolving such disputes or disagreements in an amicable, professional and expeditious manner so as to avoid unnecessary losses, delays and disruptions to the Work.

Design-Builder and Owner will first attempt to resolve disputes or disagreements at the field level through discussions between Design-Builder’s Representative and Owner’s Representative.

If a dispute or disagreement cannot be resolved through Design-Builder’s Representative and Owner’s Representative, Design-Builder’s Senior Representative and Owner’s Senior Representative, upon the request of either Party, shall meet as soon as conveniently possible, but in no case later than thirty (30) Days after such a request is made, to attempt to resolve such dispute or disagreement.  Prior to any meetings between the Senior Representatives, the Parties will exchange relevant information that will assist the Parties in resolving their dispute or disagreement.

If, after meeting, the Senior Representatives determine that the dispute or disagreement cannot be resolved on terms satisfactory to both Parties, the Parties shall submit the dispute or disagreement to non-binding mediation.  The mediation shall be conducted in Minneapolis, Minnesota by a mutually agreeable impartial mediator or, if the Parties cannot so agree, a mediator designated by the American Arbitration Association (“AAA”) pursuant to its Construction Industry Arbitration Rules and Mediation Procedures.  The mediation will be governed by and conducted pursuant to a mediation agreement negotiated by the Parties or, if the Parties cannot so agree, by procedures established by the mediator.

19.2        Arbitration.  Any claims, disputes or controversies between the Parties arising out of or relating to the Agreement, or the breach thereof, which have not been resolved in accordance with the procedures set forth in Section 19.1 above shall be decided by arbitration to be conducted in Minneapolis, Minnesota in accordance with the Construction Industry Arbitration Rules and Mediation Procedures of the AAA then in effect, unless the Parties mutually agree otherwise.

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The award of the arbitrator(s) shall be final and binding upon the Parties without the right of appeal to the courts.  Judgment may be entered upon it in accordance with Applicable Law by any court having jurisdiction thereof.

Design-Builder and Owner expressly agree that any arbitration pursuant to this Section 19.2 may be joined or consolidated with any arbitration involving any other person or entity (i) necessary to resolve the claim, dispute or controversy, or (ii) substantially involved in or affected by such claim, dispute or controversy.  Both Design-Builder and Owner will include appropriate provisions in all contracts they execute with other parties in connection with the Project to require such joinder or consolidation.

The prevailing Party in any arbitration, or any other final, binding dispute proceeding upon which the Parties may agree, shall be entitled to recover from the other Party reasonable attorneys’ fees and expenses incurred by the prevailing Party.

19.3        Duty to Continue Performance.  Unless provided to the contrary in the Contract Documents, Design-Builder shall continue to perform the Work and Owner shall continue to satisfy its payment obligations to Design-Builder, pending the final resolution of any dispute or disagreement between Design-Builder and Owner.

19.4        No Consequential Damages.

19.4.1     Notwithstanding anything herein to the contrary, neither Design-Builder nor Owner shall be liable to the other for any consequential losses or damages, whether arising in contract, warranty, tort (including negligence), strict liability or otherwise, including but not limited to, losses of use, profits, business, reputation or financing, except that Design-Builder does not waive any such damages resulting from or arising out of any breach of Owner’s duties and obligations under the limited license granted by Design-Builder to Owner pursuant to Article 5.

19.5        Limitation of Liability.  Notwithstanding anything else in this Agreement to the contrary, the aggregate liability of Design-Builder, its Subcontractors, vendors, suppliers, agents and employees,  to Owner (or any successor thereto or assignee thereof) for any and all claims and/or liabilities arising out of or relating in any manner to the Work or to Design-Builder’s performance or non-performance of its obligations hereunder, whether based in contract, tort (including negligence), strict liability, or otherwise, shall not exceed, in the aggregate, the Contract Price and shall be reduced, upon the issuance of each Application for Payment, by the total value of such Application for Payment; provided, however, that upon the earlier of Substantial Completion or such point in time requests for payment pursuant to Article 10 have been made for ninety percent (90%) of the Contract Price, Design-Builder’s aggregate liability shall be limited to the greater of (1) Ten Percent (10%) of the Contract Price or (2) the amount of insurance coverage available to respond to the claim or liability under any policy of insurance provided by Design-Builder under this Agreement. The aggregate liability of Design-Builder shall not include increased costs of purchasing equipment, materials, supplies, or services, except to the extent Owner has terminated the Agreement pursuant to Section 15.2 and such equipment, materials, supplies, and services are required to complete the Work.

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Article 20

Confidentiality of Shared Information

20.1        Non-Disclosure Obligation.  Except as required by court order, subpoena, or Applicable Law, the Parties will hold in confidence, and will use only for the purposes of completing the Project, any and all Confidential Information disclosed to each other.  Neither Party shall disclose to third parties any Confidential Information without the express written consent of the other Party, which consent shall not be unreasonably withheld.  The Parties shall at all times use their respective reasonable efforts to keep all Confidential Information and information regarding the terms and conditions of this Agreement confidential.  However, the Parties may disclose Confidential Information to their respective lenders, lenders’ agents, advisors and/or consultants only as reasonably necessary in connection with the financing of the Plant or to enable them to advise the Parties with regard to the Contract Documents and the Project, provided that prior to such disclosure any party to whom Confidential Information is disclosed is informed by the disclosing Party of the existence of this confidentiality obligation and agrees to be obligated to maintain the confidentiality of any information received. The term “Confidential Information” will mean (i) confidential or proprietary information regarding the other Party’s business affairs, finances, technology, processes, plans or installations, product information, know-how, or other information that is received from the other Party pursuant to this Agreement or the Parties’ relationship prior thereto or is developed pursuant to this Agreement, (ii) any and all information concerning the Contract Documents, the Agreement, or the terms thereof, and (iii) all information which one Party, directly or indirectly, may acquire from another Party; however,   Confidential Information will not include information falling into any of the following categories:

(a)information that, at the time of disclosure hereunder, is in the public domain;

(b)information that, after disclosure hereunder, enters the public domain other than by breach of this Agreement or the obligation of confidentiality;

(c)information that, prior to disclosure hereunder, was already in the recipient’s possession, either without limitation on disclosure to others or subsequently becoming free of such limitation;

(d)information obtained by the recipient from a third party having an independent right to disclose this information; and

(e)information that is available through discovery by independent research without use of or access to the Confidential Information acquired from the other Party; and

(f)photographs and descriptive information regarding the Project, including Plant capacity, Owner’s name, and Project location, as used by Fagen for purposes of marketing and promotion.

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Each Party’s obligation to maintain Confidential Information in confidence will be deemed performed if such Party observes with respect thereto the same safeguards and precautions which such Party observes with respect to its own Confidential Information of the same or similar kind.  It will not be deemed to be a breach of the obligation to maintain Confidential Information in confidence if Confidential Information is disclosed upon the order of a court or other authorized Governmental Authority, or pursuant to other Legal Requirements.  However, if Owner is required to file the Contract Documents or a portion thereof with a Governmental Authority, it agrees that it will not do so without first informing Design-Builder of the requirement and seeking confidential treatment of the Contract Documents prior to filing the documents or a portion thereof.

20.2        Publicity and Advertising.  Owner shall not make or permit any of its subcontractors, agents, or vendors to make any external announcement or publication, release any photographs or information concerning the Project or any part thereof, or make any other type of communication to any member of the public, press, business entity, or any official body which names Fagen unless prior written consent is obtained from Fagen, which consent shall not be unreasonably withheld.

20.3        Term of Obligation.  The confidentiality obligations of the Parties pursuant to this Article 20 shall survive the expiration or other termination of this Agreement for a period of five (5) years.

Article 21

Miscellaneous

21.1        Assignment.  This Agreement shall be binding upon, shall inure to the benefit of, and may be performed by, the successors and permitted assigns of the Parties, except that neither Design-Builder nor Owner shall, without the written consent of the other, assign or transfer this Agreement or any of the Contract Documents.  Design-Builder’s subcontracting portions of the Work in accordance with this Agreement shall not be deemed to be an assignment of this Agreement.  Owner may assign all of its rights and obligations under the Contract Documents to its Lenders or Lenders’ Agent as collateral security in connection with Owner obtaining or arranging any financing for the Project; provided, however, Owner shall deliver, at least ten (10) Days prior to any such assignment, to Design-Builder (i) written notice of such assignment and (ii) a copy of the instrument of assignment in form and substance reasonably acceptable to Design-Builder, whose approval shall not be unreasonably withheld.  The Lenders or Lenders’ Agent may assign the Contract Documents or their rights under the Contract Documents, including without limitation in connection with any foreclosure or other enforcement of their security interest.  Design-Builder shall execute, if requested, a consent to assignment for the benefit of the Lenders and/or the Lenders’ Agent in form and substance reasonably acceptable to Design-Builder, a form of which is attached hereto as Exhibit O, provided that with respect to any such assignments such assignee demonstrates to Design-Builder’s satisfaction that it has the capability to fulfill Owner’s obligations under this Agreement.

21.2        Successors.  Design-Builder and Owner intend that the provisions of the Contract Documents are binding upon the Parties, their employees, agents, heirs, successors and assigns.

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21.3        Governing Law.  This Agreement shall be governed by and construed and enforced in accordance with, the substantive laws of the state of Minnesota, without regard to the conflict of laws provisions thereof.

21.4        Severability.  If any provision or any part of a provision of the Contract Documents shall be finally determined to be superseded, invalid, illegal, or otherwise unenforceable pursuant to any applicable Legal Requirements, such determination shall not impair or otherwise affect the validity, legality, or enforceability of the remaining provision or parts of the provision of the Contract Documents, which shall remain in full force and effect as if the unenforceable provision or part were deleted.

21.5        No Waiver.  The failure of either Design-Builder or Owner to insist, in any one (1) or more instances, on the performance of any of the obligations required by the other under the Contract Documents shall not be construed as a waiver or relinquishment of such obligation or right with respect to future performance.

21.6        Headings.  The table of contents and the headings used in this Agreement or any other Contract Document, are for ease of reference only and shall not in any way be construed to limit, define, extend, describe, alter, or otherwise affect the scope or the meaning of any provision of this Agreement.

21.7        Notice.  Whenever the Contract Documents require that notice be provided to a Party, notice shall be delivered in writing to such Party at the address listed below.  Notice will be deemed to have been validly given if delivered (i) in person to the individual intended to receive such notice, (ii) by registered or by certified mail, postage prepaid to the address indicated in the Agreement within four (4) Days after being sent, or (iii) by facsimile, by the time stated in a machine-generated confirmation that notice was received at the facsimile number of the intended recipient.

If to Design-Builder, to:

Fagen, Inc.
501 W. Highway 212
P. O. Box 159
Granite Falls, MN  56241
Attention: Aaron Fagen
Fax:  (320) 564-3278

with a copy to:

Fagen, Inc.
501 W. Highway 212
P. O. Box 159
Granite Falls, MN  56241
Attention: Jennifer Johnson
Fax:  (320) 564-3278

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and to:

Fagen, Inc.
501 W. Highway 212
P. O. Box 159
Granite Falls, MN  56241
Attention: Wayne Mitchell
Fax:  (320) 564-5190

If to Owner, to:

Brian Kletscher
President and Chairman
30427 Co Hwy 10
Vesta, MN 56292
Cell Phone:  (507) 828-1429
Home Phone:  (507) 762-3376
E-mail:  brian_k@co.redwood.mn.us

and

Kevin K. Stroup
STONEBERG, GILES & STROUP, P.A.
300 O’Connell Street
Marshall, MN 56258
Telephone:  (507) 537-0591
Fax:  (507) 532-3498
E-mail:  kevin@sgslawyers.com

and

Lender’s Agent at the address provided for Lender’s Agent to Design-Builder by Owner by notice within five (5) Days following the Financial Closing.

21.8        No Privity with Design Consultant/Subcontractors.  Nothing in the Contract Documents is intended or deemed to create any legal or contractual relationship between Owner and any Design Consultant or Subcontractor.

21.9        Amendments.  The Contract Documents may not be changed, altered, or amended in any way except in writing signed by a duly authorized representative of each Party.

21.10      Entire Agreement.  This Agreement consists of the terms and conditions set forth herein, as well as the Exhibits hereto, which are incorporated by reference herein and made a part hereof.  This Agreement sets forth the full and complete understanding of the Parties as of the Effective Date with respect to the subject matter hereof.

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21.11      Third-Party Beneficiaries.  Except as expressly provided herein, this Agreement is intended to be solely for the benefit of the Owner, the Design-Builder and permitted assigns, and is not intended to and shall not confer any rights or benefits on any person not a signatory hereto.

21.12      Counterparts.  This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same Agreement, and may be executed and delivered by facsimile signature, which shall be considered an original.

21.13      Survival.   Notwithstanding any provisions herein to the contrary, the Work Product provisions set forth in Article 5 and the indemnity obligations set forth herein shall survive (in full force and effect) the expiration or termination of this Agreement and shall continue to apply to the Parties to this Agreement even after termination of this Agreement or the transfer of such Party’s interest in this Agreement.

[The next page is the signature page.]

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IN WITNESS WHEREOF, the Parties hereto have caused their names to be hereunto subscribed by their officers thereunto duly authorized, intending thereby that this Agreement shall be effective as of this September 28, 2006.

OWNER:		DESIGN-BUILDER:
Highwater Ethanol, LLC		Fagen, Inc.
(Name of Owner)		(Name of Design-Builder)
/s/ Brian Kletscher		/s/ Ron Fagen
(Signature)		(Signature)
Brian Kletscher		Roland “Ron” Fagen
(Printed Name)		(Printed Name)
President		CEO and President
(Title)             (Title)
Date:	9-28-06	Date:	9/28/06

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EXHIBIT A

Performance Guarantee Criteria

Criteria	Specification	Testing Statement	Documentation
Plant Capacity — fuel grade ethanol	Operate at a rate of 50 million gallons per year of denatured fuel grade ethanol meeting the specifications of ASTM 4806 based on 353 days of operation per calendar year and 4.76% denaturant.	Seven day performance test	Production records and written report by Design-Builder.
Corn to Ethanol Conversion ratio; [*]	Not be less than 2.80 denatured gallons of ethanol per bushel (56#) of corn	As determined by meter readings during a seven day performance test.	Production records and written analysis by Design-Builder.
Electrical Energy	0.75 kWh per denatured gallon of fuel grade ethanol [*]	As determined by meter readings during a seven day performance test.	Production records and written analysis by Design-Builder.
Natural Gas	Shall not exceed 34,000 Btu per denatured gallon of fuel grade ethanol. (This Performance Criteria relates to production of ethanol and excludes any natural gas usage that may occur for drying corn.)	As determined by meter readings during a seven day performance test.	Production records and written analysis by Design-Builder.

*  Portion omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.

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Process Water Discharge (not including cooling tower and boiler blowdown and water pre-treatment (RO) discharge)	Zero gallons under normal operations.	Process discharge meter.	Control System reports.
Air Emissions	Must meet the requirements prescribed as of the date hereof by the State of Minnesota Pollution Control Agency, Air Quality Division.	Must meet the requirements as prescribed in the Air Permit Application to be provided by Owner, approved by Design-Builder, and attached as Exhibit K.	Written report by Owner’s Air Emission Tester.

As part of the Performance Guarantee Criteria the Plant shall operate in accordance with all Legal Requirements.

DISCLAIMER:

Owner’s failure to materially comply with the operating procedures issued by ICM, Inc./Fagen, Inc. shall void all performance guaranties and warranties set forth in this Design-Build Agreement.

Owner understands that the startup of the plant requires resources and cooperation of the Owner, vendors and other suppliers to the project.  Design-Builder disclaims any liability and Owner indemnifies Design-Builder for non-attainment of the Performance Guarantee Criteria directly or indirectly caused by material non-performance or negligence of third parties not retained by Design-Builder.

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EXHIBIT B

General Project Scope

Construct a fifty (50) MGY dry mill fuel ethanol plant near Lamberton, Minnesota.  The plant will grind approximately seventeen million eight hundred seventy-five thousand (17,875,000) bushels of corn per year to produce approximately fifty (50) MGY of denatured fuel ethanol.  The plant will also produce approximately one hundred sixty thousand seven hundred fifty (160,750) tons per year of 11% moisture dried distillers grains with solubles (DDGS), and approximately one hundred fifty-one thousand two hundred fifty (151,250) tons per year of raw carbon dioxide (CO2) gas.

Delivered corn will be dumped in the receiving building.  The receiving building will have two truck grain receiving bays and a rail receiving bay, including an underground conveyor from the rail pit to the second truck receiving bay both of which share a common receiving leg.  The truck driver will drive onto the pitless scale located near the administration building, be weighed and sampled, then drive to the receiving building, dump the grain, then proceed back to the pitless scale and obtain a final weight ticket from the scale operator.  Two independent 15,000 -bushel legs will lift the corn to one of two 250,000 — bushel concrete storage bins.  A dust collection system will be installed on the grain receiving system to limit particulate emissions as described in the Air Quality Permit application.

Ground corn will be mixed in a slurry tank, routed through a pressure vessel and steam flashed off in a flash vessel.  Cooked mash will continue through liquefaction tanks and into one of the fermenters.  Simultaneously, propagated yeast will be added to the mash as the fermenter is filling.  After batch fermentation is complete, the beer will be pumped to the beer well and then to the beer column to vaporize the alcohol from the mash.

Alcohol streams are dehydrated in the rectifier column, the side stripper and the molecular sieve system.  Two hundred proof alcohol is pumped to the tank farm day tank and blended with five percent natural gasoline as the product is being pumped into one of two seven hundred fifty thousand (750,000) gallon final storage tanks.  Loading facilities for truck and rail cars will be provided.  Tank farm tanks include:  one tank for 190 proof storage, one tank for 200 proof storage, one tank for denaturant storage and two seven hundred fifty thousand (750,000) gallon tanks for denatured ethanol storage.

Corn mash from the beer stripper is dewatered in the centrifuge(s).  Wet cake from the centrifuge(s) is conveyed to the DDGS dryer system. Wet cake is conveyed from the centrifuges to the dryer(s) where the water is removed from the cake and the product is dried to 11% moisture.  A modified wet or wet cake pad is located along side the DDGS dryer building to divert modified wet or wet cake to the pad when necessary or for limited production of modified wet or wet cake for sales.  Water in the thin stillage is evaporated and recycled by the Bio-Methanation system.  Syrup is added to the wet cake entering the dryer(s).  DDGS is cooled and conveyed to flat storage in the DDGS storage building.  Shipping is accomplished by scooping and pushing the product with a front-end loader into an in-floor conveyor system.  The DDGS load out pit has capacity for approximately one semi-trailer load.  DDGS is weighed as it is loaded for shipment through a bulk-weigh system.

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Fresh water for the boilers, cooking, cooling tower and other processes will be obtained from the Owner supplied water pretreatment system.  Boiler water conditioned in regenerative softeners will be pumped through a deaerator scrubber and into a deaerator tank.  Appropriate boiler chemicals will be added as preheated water is sent to the boiler.

Steam energy will be provided by one Thermal Oxidizer (TO) driven boiler system utilizing a high percentage of condensate return to a condensate receiver tank.

The TO/Heat Recovery Steam Generator is a process used to thermally oxidize the exhaust gasses from the Dryers.  This process will be used to reduce VOCs and particulates that are in the dryer exhaust and ensure compliance with environmental regulations.  The energy required to complete thermal oxidization will then be ducted to a waste heat boiler that will produce 100% of the steam requirements of the ethanol plant.  The exhaust gasses from the waste heat boiler will be ducted through stack gas economizer(s) to recover the maximum amount of energy possible from the exhaust gas stream.  After the economizer(s), the gas stream will be vented to atmosphere through a stack.

The process will be cooled by circulating water through heat exchangers, a chiller, and a cooling tower.

The design includes a compressed air system consisting of air compressor(s), a receiver tank, pre-filter, coalescing filter, and double air dryer(s).

The design also incorporates the use of a clean-in-place (CIP) system for cleaning cook, fermentation, distillation, evaporation, centrifuges, and other systems.  Fifty percent caustic soda is received by truck and stored in a tank.

Under normal operating circumstances, the plant will not have any wastewater discharges that have been in contact with corn, corn mash, cleaning system, or contact process water.  An ICM/Phoenix Bio-Methanator will reduce the BOD in process water allowing complete reuse within the plant.  The plant will have blowdown discharges from the cooling tower and may have water discharge from any water pre-treatment processes.  Owner shall provide on-site connection to sanitary sewer or septic system.

Most plant processes are computer controlled by a Siemens/Moore APACS distributed control system with graphical user interface and three workstations.  The control room control console will have dual monitors to facilitate operator interface between two graphics screens at the same time.  Additional programmable logic controllers (PLCs) will control certain process equipment.  Design-Builder provides lab equipment.

The cooking system requires the use of anhydrous ammonia, and other systems require the use of sulfuric acid.  Therefore, a storage tank for ammonia and a storage tank for acid will be on site to provide the quantities necessary.  The ammonia storage requires that plant management implement and enforce a Process Safety Management (PSM) program.  The plant design may require additional programs to ensure safety and to satisfy regulatory authorities.

NOTE:  This Exhibit B is a general description of the Plant’s basic design and operation only.  It is not intended to be the final Project scope or to establish the final specifications.  The final

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design of the Plant, including equipment incorporated, and equipment specifications will be reflected in the As Built Plans.

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EXHIBIT C

Owner’s Responsibilities

The Owner shall perform and provide the permits, authorizations, services and construction as specifically described hereafter:

1)Land and Grading — Owner shall provide a site near Lamberton, Minnesota.  Owner shall obtain all legal authority to use the site for its intended purpose and perform technical due diligence to allow Design-Builder to perform including, but not limited to, proper zoning approvals, building permits, elevation restrictions, soil tests, and water tests. The site shall be rough graded per Design-Builder specifications and be +/- three inches of final grade including the rough grading for Site roadways.  The site soils shall be modified as required to provide a minimum allowable soil bearing pressure as described in Table 1.

Other items to be provided by the Owner include, but are not limited to, the following: initial site survey (boundary and topographic) as required by the Design-Builder, layout of the property corners including two construction benchmarks, Soil Borings and subsequent Geotechnical Report describing recommendation for Roads, foundations and if required, soil stabilization/remediation, land disturbance permit, erosion control permit, site grading as described above with minimum soil standards, placement of erosion control measures, plant access road from a county, state or federal road designed to meet local county road standards, plant storm and sanitary sewers, fire water system with hydrants and plant water main branches taken from the system to be within five feet of the designated building locations, all tanks, motors and other equipment associated with or necessary to operate the fire water loop and associated systems, plant roads as specified and designed for the permanent elevations and effective depth, spill containment and drainage systems from both rail and truck loading spots into the tank farm or other location, “construction” grading plan as drawn (including site retention pond), plant water well and associated permit(s).  The Owner shall provide for Design-Builder aggregate covered areas for construction trailers and parking along with adequate aggregate covered area or areas for material laydown purposes.  The recommended aggregate specifications shall be as specified by the Owner’s geotechnical engineer.  Owner shall also provide the final grading, seeding, and mulching, and the site fencing at the site.

Owner is encouraged to obtain preliminary designs/information and estimates of the cost of performing all Owner required permits and services as stated in this Exhibit C.  Specifically, the cost of the fire water systems (including associated fire water pumps, required tank, building (if required), sprinklers, and all other equipment and materials associated with the fire water delivery systems) is estimated being in excess of $800,000.  The requirements of each state and the decisions of each Owner will increase or decrease the actual cost.  Additionally, the cost of the required soil stabilization in Table 1 can be in the range of, or may exceed, $2.5MM which cost is not included in the Contract Price.  The specific soil stabilization requirements for the grain and DDGS areas will be developed in coordination with the grain/DDGS area subcontractor.  Owner shall prepare site according to Design-Builder’s engineering plans provided for the site work under the Phase I and Phase II Engineering Services Agreement.

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2)Permits - - Owner shall obtain all Operating Permits including, but not limited to, air quality permits, in a timely manner to allow construction and startup of the plant as scheduled by Design-Builder.

3)Storm Water Runoff Permit — Owner shall obtain the construction storm-water runoff permit and permanent storm-water runoff permit. Design-Builder shall obtain the erosion control/land disturbance permit.

4)Minnesota Pollutant Elimination Discharge Permit — Owner shall obtain a permit to discharge cooling tower water, boiler blowdown water, reverse osmosis (“R.O.”) reject water, and any other waste water directly to a designated waterway or other location.  If required by item 9 below, Owner will secure appropriate permits for emergency process water discharges.

5)Natural Gas Supply and Service Agreement — Continuous supply of natural gas of at least 1.5 billion cubic feet per year, at a minimum rate of 200-400 MCF per hour and at a minimum pressure of 75 — 200 psi at the plant site.  Pressure reducing stations must be located so as to provide stable pressure at the point of use.  Owner shall provide all gas piping to the use points and supply meters and regulators to provide burner tip pressures as specified by Design-Builder.  Owner shall also supply a digital flowmeter on-site with appropriate output for monitoring by the plant’s computer control system.

6)Temporary Electrical Service — Owner shall secure electrical service to supply a minimum 750 KW of 3-phase, 480/277 volt electrical power during construction.  Owner shall procure, install, and maintain temporary service to up to three 3-phase, 480/277 volt temporary service transformers located throughout the site.  The transformer sizing, locations, and underground electrical feed routing layout are to be determined jointly by the Owner, the Design-Builder and the energy supplier.  Design-Builder shall pay energy demand and usage charges up to Substantial Completion.

7)Permanent Electrical Service — (1) Owner is responsible to secure continuous service from an energy supplier to serve the facility.  The service from the energy supplier shall be of sufficient size to provide at a minimum 10 MW of electrical capacity to the site.  (2) The Owner is responsible for procurement, installation and maintenance of the site supply and distribution system, including but not limited to the required substation and all associated distribution lines.  An on-site digital meter is also to be supplied for monitoring of electrical usage.  (3) The responsibility of the Design-Builder starts at the secondary electrical terminals of the site distribution system transformers that have been installed by Owner (i.e., the 480 volt terminals for the process building transformers; the 480 volt terminals for the energy center transformers; the 480 volt terminals for the grains transformer; the 480 volt terminals for the pumphouse transformer; and the 4160 volt terminals for the chiller transformer; and the 4160 volt terminals of the thermal oxidizer transformer). (4)  The site distribution system requirements, layout, and meters are to be determined jointly by the Owner, the Design-Builder and the energy supplier.

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Design-Builder will be providing soft start motor controllers for all motors greater than 150 horsepower and where demanded by process requirements.  Owner is encouraged to discuss with its electrical supplier whether additional soft start motor controllers are advisable for this facility and such can be added, with any increased cost being an Owner’s cost.

Design-Builder will provide power factor correction to 0.92 lagging at plant nameplate capacity.  Owner is encouraged to discuss with its electrical service supplier any requirements for power factor correction above 0.92 lagging.  Additional power factor correction can be added with any increased cost being an Owner’s cost.

8)Water Supply, Service Agreement, and Pre-Treatment System — Owner shall supply on-site process wells or other water source that is capable of providing a quantity of raw water satisfying the needs of the Plant.  Owner should consider providing a redundant water supply source.  Owner will supply one process fresh water supply line terminating within five (5) feet of the point of entry designated by Design-Builder, and one potable supply line terminating within five (5) feet of the process building and to the administration building at a point of entry designated by administration building contractor.

Owner shall pay for a water pre-treatment system to be designed and constructed by Design-Builder and to be integrated into the Plant.  The pre-treatment system will be designed to provide the Plant with the quantity and quality of raw and treated water needed to supply the Plant’s process needs. The water pre-treatment system design will also consider and recommend to Owner equipment required to meet the discharge requirements under the Plant’s wastewater discharge permit.  Owner is to execute side-letter agreements as necessary for the design and construction of such water pre-treatment system.  Design-Builder shall recover costs for the design and construction of such system from the Owner at Design-Builder’s standard time plus material rates during the relevant time period and at the relevant locale.    A side-letter agreement between Owner and Design-Builder shall be executed by Owner and Design-Builder to compensate Design-Builder, at Design-Builder’s standard time plus materials rates during the relevant time period and at the relevant locale, for any costs and expenses related to such water pre-treatment system.

9)Wastewater Discharge System, Permits and/or Service Agreement — Owner to provide discharge piping, septic tank and drainfield system or connect to municipal system as required for the sanitary sewer requirements of the Plant.  These provisions shall comply with all federal, state, and local regulations, including any permitting issues.

10)Roads and Utilities — Owner shall provide and maintain the ditches and permanent roads, including the gravel, pavement or concrete, with the roads passing standard compaction tests.  (Design-Builder will maintain aggregate construction roads during construction of the Plant and will return to original pre-construction condition prior to Owner completing final grade and surfacing.)

Except as otherwise specifically stated herein the Owner shall install all utilities so that they are within five (5) feet of the designated building/structure locations.

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11)Administration Building — The administration building — one story free standing, office computer system, telephone system, office copier and fax machine and office furniture and any other office equipment and personal property for the administration building shall be the sole and absolute cost and responsibility of Owner and Design-Builder shall have no responsibility in regards thereto.

12) Maintenance and Power Equipment — The maintenance and power equipment as described in Table 2 and any other maintenance and power equipment as required by the plant or desired by Owner shall be the sole and absolute cost and responsibility of Owner and Design-Builder shall have no responsibility in regards thereto.

13)Railroads — Owner is responsible for any costs associated with the railroads including, but not limited to, all rail design and engineering and construction and Design-Builder shall have no responsibility in regards thereto.  Owner shall supply drawings and Phase II redline drawings to Design-Builder.

14)Drawings — Owner shall supply drawings to Design-Builder of items supplied under items 11) and 13) and also supply Phase II redline drawings.

15)Fire Protection System — Fire Protection System requirements vary by governmental requirements per location and by insurance carrier requirements.  Owner is responsible to provide the required fire protection system for the Plant.  This may include storage tanks, pumps, underground fire water mains, fire hydrants, foam or water monitor valves, sprinkler systems, smoke and heat detection, deluge systems, or other provisions as required by governmental codes or Owner’s insurance carrier’s fire protection criteria.

Owner shall pay for a Fire Protection System to be designed and constructed by Design-Builder and to be integrated into the Plant.  The Fire Protection System shall be designed and constructed to meet the governmental and insurance requirements.  Owner is to execute side-letter agreements as necessary for the design and construction of such Fire Protection System.  Design-Builder shall recover costs for the design and construction of such system from Owner at Design-Builder’s standard time plus material rates during the relevant time period and at the relevant locale.  A side-letter agreement between Owner and Design-Builder shall be executed by Owner and Design-Builder to compensate Design-Builder, at Design-Builder’s standard time plus materials rates during the relevant time period and at the relevant locale, for any costs and expenses related to such Fire Protection System.

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Table 1 Minimum Soil Bearing Pressure — Responsibility of Owner
** Subject to revision based on detailed design and engineering.

Description	Required Allowable Soil Bearing Pressure (pounds per square foot)
Grain Storage Silos	8,000
DDGS Storage Silos	8,000
Corn/DDGS Building	4,000
Cook Water Tank	3,500
Methanator Feed Tank	3,500
Liquefaction Tank #1	3,500
Liquefaction Tank #2	3,500
Fermentation Tank #1	5,000
Fermentation Tank #2	5,000
Fermentation Tank #3	5,000
Fermentation Tank #4	5,000
Beerwell	5,000
Whole Stillage Tank	3,500
Thin Stillage Tank	3,500
Syrup Tank	3,500
190 Proof Day Tank	3,000
200 Proof Day Tank	3,000
Denaturant Tank	3,000
Fire Water Tank	3,000
Denatured Ethanol Tank #1	4,000
Denatured Ethanol Tank #2	4,000
All Other Areas	3,000

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Table 2 Maintenance and Power Equipment — Responsibility of Owner

Description	Additional Description
Spare Parts	Spare parts
	Parts bins
	Misc. materials, supplies and equipment
Shop supplies and equipment	One shop welder
	One portable gas welder
	One plasma torch
	One acetylene torch
	One set of power tools
	Two sets of hand tools with tool boxes
	Carts and dollies
	Hoists (except centrifuge overhead crane)
	Shop tables
	Maintenance office furnishings & supplies
	Fire Extinguishers
	Reference books
	Safety manuals
	Safety cabinets & supplies, etc.
	Safety showers as required
Rolling stock	Used 1 ½ yard front end loader
	New Skid loader
	Used Fork lift
	Used Scissors lift, 30 foot
	Used Pickup truck
	Track Mobile

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Table 3 Owner’s Milestones

Owner’s Responsibilities	Number Of Days To Be Completed After Notice To Proceed
Temporary Electrical Service In Place	0
Obtain Builder’s Risk policy in the amount of the Contract Price, obtain Boiler and Machinery Insurance, and obtain Terrorism Coverage per TRIA as long as it is required under Article 17 of the Agreement.	0
Storm Water Permits Complete: Modify the existing storm water discharge permit to reflect the ethanol plant, if required.	60
Natural Gas/Propane Transportation / Storage Agreement Complete	90
Water Supply and Service Agreements Complete	90
Electrical Service Arrangement	90
Wastewater Discharge System Complete	180
TTB Operating Permits Complete	200
Discharge Permits Complete	200
Pumphouse/Water System Complete	305
Fire Protection System Complete	305
Paving (Plant Roads) Complete	90 days prior to SC
Rail Spur Complete	90 days prior to SC
Permanent Electrical Service Complete	60 days prior to SC
Maintenance and Power Equipment Onsite (Table 2)	60 days prior to SC
Employees Hired and Ready for Training	60 days prior to SC
Natural Gas Pipeline/Delivery System Complete	60 days prior to SC

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EXHIBIT D

ICM License Agreement

THIS LICENSE AGREEMENT (this “License Agreement”) is entered into and made effective as of the 28th day of September, 2006 (“Effective Date”) by and between Highwater Ethanol, LLC, a Minnesota limited liability company (“OWNER”), and ICM, Inc., a Kansas corporation (“ICM”).

WHEREAS, OWNER has entered into that certain Design-Build Lump Sum Contract dated September 28, 2006 (the “Contract”) with Fagen, Inc., a Minnesota corporation (“Fagen”), under which Fagen is to design and construct a 50 million gallon per year ethanol plant for OWNER to be located in or near Lamberton, Minnesota (the “Plant”);

WHEREAS, ICM has granted Fagen the right to use certain proprietary technology and information of ICM in the design and construction of the Plant; and

WHEREAS, OWNER desires from ICM, and ICM desires to grant to OWNER, a license to use such proprietary technology and information in connection with OWNER’s ownership, operation, maintenance and repair of the Plant, all upon the terms and conditions set forth herein;

NOW, THEREFORE, the parties, in consideration of the foregoing premises and the mutual promises contained herein and for other good and valuable consideration, receipt of which is hereby acknowledged, agree as follows:

1.     Upon substantial completion of the Plant by Fagen pursuant to the terms of the Contract or, if later, payment by OWNER of all amounts due and owing to Fagen under the Contract, ICM grants to OWNER a limited license to use the Proprietary Property (hereinafter defined) solely in connection with the ownership, operation, maintenance and repair of the Plant, subject to the limitations provided herein (the “Purpose”).

2.     The “Proprietary Property” means, without limitation, documents, Operating Procedures (hereinafter defined), materials and other information that are furnished by ICM to OWNER in connection with the Purpose, whether orally, visually, in writing, or by any other means, whether tangible or intangible, directly or indirectly (including, without limitation, through Fagen) and in whatever form or medium including, without limitation, the design, arrangement, configuration, and specifications of (i) the combinations of distillation, evaporation, and alcohol dehydration equipment (including, but not limited to, pumps, vessels, tanks, heat exchangers, piping, valves and associated electronic control equipment) and all documents supporting those combinations; (ii) the combination of the distillers grain drying (DGD), and heat recovery steam generation (HRSG) equipment (including, but not limited to, pumps, vessels, tanks, heat exchangers, piping and associated electronic control equipment) and all documents supporting those combinations; and (iii) the computer system, known as the distributed control system (DCS and/or PLC) (including, but not limited to, the software configuration, programming, parameters, set points, alarm points, ranges, graphical interface, and system hardware connections) and all documents supporting that system.  The “Operating Procedures” means, without limitation, the process equipment and specifications manuals, standards of quality, service protocols, data collection methods, construction specifications, training methods, engineering standards and any other information prescribed by ICM from time to time concerning the Purpose.  Proprietary Property shall not include any information or materials that OWNER can demonstrate by clear and convincing written evidence:  (i) was lawfully in the possession of OWNER prior to disclosure by ICM or Fagen; (ii) was in the public domain prior to disclosure by ICM or Fagen; (iii) was disclosed to OWNER by a third party other than Fagen having the legal right to

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possess and disclose such information or materials; or (iv) after disclosure by ICM or Fagen comes into the public domain through no fault of OWNER or its members, directors, officers, employees, agents, contractors, consultants or other representatives (hereinafter collectively referred to as “Representatives”).  Information and materials shall not be deemed to be in the public domain merely because such information is embraced by more general disclosures in the public domain, and any combination of features shall not be deemed to be within the foregoing exceptions merely because individual features are in the public domain if the combination itself and its principles of operation are not in the public domain.

3.     OWNER shall not use the Proprietary Property for any purpose other than the Purpose.  OWNER shall not use the Proprietary Property in connection with any expansion or enlargement of the Plant.  ICM and its Representatives shall have the express right at any time to enter upon the premises of the Plant to inspect the Plant and its operation to ensure that OWNER is complying with the terms of this License Agreement.

4.     OWNER’s failure to materially comply with the Operating Procedures shall void all guarantees, representations and warranties, whether expressed or implied, if any, that were given by ICM to OWNER, directly or indirectly through Fagen, concerning the performance of the Plant that ICM reasonably determines are materially affected by OWNER’s failure to materially comply with such Operating Procedures.  OWNER agrees to indemnify, defend and hold harmless ICM, Fagen and their respective Representatives from any and all losses, damages and expenses including, without limitation, reasonable attorneys’ fees resulting from, relating to or arising out of Owner’s or its Representatives’ (a) failure to materially comply with the Operating Procedures  or (b) negligent use of the Proprietary Property.

5.     Any and all modifications to the Proprietary Property made by OWNER or its Representatives shall be the property of ICM.  OWNER shall promptly notify ICM of any such modification and OWNER agrees to assign all right, title and interest in such modification to ICM; provided, however, OWNER shall retain the right, at no cost, to use such modification in connection with the Purpose.

6.     ICM has the exclusive right and interest in and to the Proprietary Property and the goodwill associated therewith.  OWNER will not, directly or indirectly, contest ICM’s ownership of the Proprietary Property.  OWNER’s use of the Proprietary Property does not give OWNER any ownership interest or other interest in or to the Proprietary Property except for the limited license granted to OWNER herein.

7.     OWNER shall pay no license fee or royalty to ICM for OWNER’s use of the Proprietary Property pursuant to this License Agreement, the consideration for the limited license granted herein is certain payments by Fagen to ICM, which is funded by and included in the amounts payable by OWNER to Fagen for the construction of the Plant under the Contract.

8.     OWNER may not assign the limited license granted herein, in whole or in part, without the prior written consent of ICM, which will not be unreasonably withheld or delayed.  Prior to any assignment, OWNER shall obtain from such assignee a written instrument, in form and substance reasonably acceptable to ICM, agreeing to be bound by all the terms and provisions of this License Agreement.  Any assignment of this License Agreement shall not release OWNER from (i) its duties and obligations hereunder concerning the disclosure and use of the Proprietary Property by OWNER or its Representatives, or (ii) damages to ICM resulting from, or arising out of, a breach of such duties or obligations by OWNER or its Representatives.  ICM may assign its right, title and interest in the Proprietary Property, in whole or part, subject to the limited license granted herein.

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9.     The Proprietary Property is confidential and proprietary.  OWNER shall keep the Proprietary Property confidential and shall use all reasonable efforts to maintain the Proprietary Property as secret and confidential for the sole use of OWNER and its Representatives for the Purpose.  OWNER shall retain all Proprietary Property at its principal place of business and/or the Plant.  OWNER shall not at any time without ICM’s prior written consent, copy, duplicate, record, or otherwise reproduce the Proprietary Property, in whole or in part, or otherwise make the same available to any unauthorized person provided, OWNER shall be permitted to copy, duplicate or otherwise reproduce the Proprietary Property in whole or in part in connection with, and to the extent it is necessary and essential for, the Purpose so long as all such copies, duplicates or reproductions are kept at its principal place of business and/or the Plant and are treated the same as any other Proprietary Property.  OWNER shall not disclose the Proprietary Property except to its Representatives who are directly involved with the Purpose, and even then only to such extent as is necessary and essential for such Representative’s involvement.  OWNER shall inform such Representatives of the confidential and proprietary nature of such information and, if requested by ICM, OWNER shall obtain from such Representative a written instrument, in form and substance reasonably acceptable to ICM, agreeing to be bound by all of the terms and provisions of this License Agreement to the same extent as OWNER.  OWNER shall make all reasonable efforts to safeguard the Proprietary Property from disclosure by its Representatives to anyone other than permitted hereby.  OWNER shall notify ICM immediately upon discovery of any unauthorized use or disclosure of the Proprietary Property, or any other breach of this License Agreement by OWNER or its Representatives, and shall cooperate with ICM in every reasonable way to help ICM regain possession of the Proprietary Property and prevent its further unauthorized use or disclosure.  In the event that OWNER or its Representatives are required by law to disclose the Proprietary Property, OWNER shall provide ICM with prompt written notice of same so that ICM may seek a protective order or other appropriate remedy.  In the event that such protective order or other appropriate remedy is not obtained, OWNER or its Representatives will furnish only that portion of the Proprietary Property which in the reasonable opinion of its or their legal counsel is legally required and will exercise its reasonable efforts to obtain reliable assurance that the Proprietary Property so disclosed will be accorded confidential treatment.

10.   OWNER agrees to indemnify ICM for any and all damages (including, without limitation, reasonable attorneys’ fees) arising out of or resulting from any unauthorized disclosure or use of the Proprietary Property by OWNER or its Representatives.  OWNER agrees that ICM would be irreparably damaged by reason of a violation of the provisions contained herein and that any remedy at law for a breach of such provisions would be inadequate.  OWNER agrees that ICM shall be entitled to seek injunctive or other equitable relief in a court of competent jurisdiction against OWNER or its Representatives for any unauthorized disclosure or use of the Proprietary Property without the necessity of proving actual monetary loss or posting any bond.  It is expressly understood that the remedy described herein shall not be the exclusive remedy of ICM for any breach of such covenants, and ICM shall be entitled to seek such other relief or remedy, at law or in equity, to which it may be entitled as a consequence of any breach of such duties or obligations.

11.   The duties and obligations of OWNER under this License Agreement, and all provisions relating to the enforcement of such duties and obligations shall survive and remain in full force and effect notwithstanding any termination or expiration of the Contract or this License Agreement.

12.   ICM may terminate this License Agreement upon written notice to OWNER if OWNER willfully or wantonly (a) uses the Proprietary Property for any purpose, or (b) discloses the Proprietary Property to anyone, in each case other than permitted herein.  Upon termination of this License Agreement, OWNER shall cease using the Proprietary Property for any purpose (including the Purpose) and, upon request by ICM, shall promptly return to ICM all documents or other materials in OWNER’s or its Representatives’ possession that contain Proprietary Property in whatever format,

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whether written or electronic, including any and all copies or reproductions of the Proprietary Property.  OWNER shall permanently delete all such Proprietary Property from its computer hard drives and any other electronic storage medium (including any backup or archive system).  OWNER shall deliver to ICM a written certificate which certifies that all electronic copies or reproductions of the Proprietary Property have been permanently deleted.

13.   The laws of the State of Kansas, United States of America (or US), shall govern the validity of the provisions contained herein, the construction of such provisions, and the interpretation of the rights and duties of the parties.  Any legal action brought to enforce or construe the provisions of this License Agreement shall be brought in the federal or state courts located in Wichita, Kansas, and the parties agree to and hereby submit to the exclusive jurisdiction of such courts and agree that they will not invoke the doctrine of forum non conveniens or other similar defenses in any such action brought in such courts.  Notwithstanding the foregoing, nothing in this License Agreement will affect any right ICM may otherwise have to bring any action or proceeding relating to this License Agreement against OWNER or its properties in the courts of any jurisdiction.  In the event the Plant is located in, or OWNER is organized under the laws of, a country other than the US, OWNER hereby specifically agrees that any injunctive or other equitable relief granted by a court located in the State of Kansas, US, or any award by a court located in the State of Kansas, shall be specifically enforceable as a foreign judgment in the country in which the Plant is located, OWNER is organized or both, as the case may be, and agrees not to contest the validity of such relief or award in such foreign jurisdiction, regardless of whether the laws of such foreign jurisdiction would otherwise authorize such injunctive or other equitable relief, or award.

14.   OWNER hereby agrees to waive all claims against ICM and ICM’s Representatives for any consequential damages that may arise out of or relate to this License Agreement, the Contract or the Proprietary Property whether arising in contract, warranty, tort (including negligence), strict liability or otherwise, including but not limited to losses of use, profits, business, reputation or financing.  OWNER further agrees that the aggregate recovery of OWNER and Fagen (and everyone claiming by or through OWNER and Fagen), as a whole, against ICM and ICM’s Representatives, collectively, for any and all claims that arise out of, relate to or result from this License Agreement, the Proprietary Property or the Contract, whether arising in contract, warranty, tort (including negligence), strict liability or otherwise, shall not exceed One Million US Dollars ($1,000,000).

15.   The terms and conditions of this License Agreement constitute the entire agreement between the parties with respect to the subject matter hereof and supersede any prior understandings, agreements or representations by or between the parties, written or oral.  Any rule of construction to the effect that any ambiguity is to be resolved against the drafting party shall not be applicable in the interpretation of this License Agreement.  This License Agreement may not be modified or amended at any time without the written consent of the parties.

16.   All notices, requests, demands, reports, statements or other communications (herein referred to collectively as “Notices”) required to be given hereunder or relating to this License Agreement shall be in writing and shall be deemed to have been duly given if transmitted by personal delivery or mailed by certified mail, return receipt requested, postage prepaid, to the address of the party as set forth below.  Any such Notice shall be deemed to be delivered and received as of the date so delivered, if delivered personally, or as of the third business day following the day sent, if sent by certified mail.  Any party may, at any time, designate a different address to which Notices shall be directed by providing written notice in the manner set forth in this paragraph.

17.   In the event that any of the terms, conditions, covenants or agreements contained in this License Agreement, or the application of any thereof, shall be held by a court of competent jurisdiction to be

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invalid, illegal or unenforceable, such term, condition, covenant or agreement shall be deemed void ab initio and shall be deemed severed from this License Agreement.  In such event, and except if such determination by a court of competent jurisdiction materially changes the rights, benefits and obligations of the parties under this License Agreement, the remaining provisions of this License Agreement shall remain unchanged unaffected and unimpaired thereby and, to the extent possible, such remaining provisions shall be construed such that the purpose of this License Agreement and the intent of the parties can be achieved in a lawful manner.

18.   The duties and obligations herein contained shall bind, and the benefits and advantages shall inure to, the respective successors and permitted assigns of the parties hereto.

19.   The waiver by any party hereto of the breach of any term, covenant, agreement or condition herein contained shall not be deemed a waiver of any subsequent breach of the same or any other term, covenant, agreement or condition herein, nor shall any custom, practice or course of dealings arising among the parties hereto in the administration hereof be construed as a waiver or diminution of the right of any party hereto to insist upon the strict performance by any other party of the terms, covenants, agreement and conditions herein contained.

20.   In this License Agreement, where applicable, (i) references to the singular shall include the plural and references to the plural shall include the singular, and (ii) references to the male, female, or neuter gender shall include references to all other such genders where the context so requires.

IN WITNESS WHEREOF, the parties hereto have executed this License Agreement, the Effective Date of which is indicated on page 1 of this License Agreement.

OWNER:		ICM:
Highwater Ethanol, LLC		ICM, Inc.
By:	/s/ Brian Kletscher	By:	/s/ Dave Vande Griend
Title: President		Title: President and CEO
Date Signed:9/28/06		Date Signed:10-9-06
Address for giving notices:		Address for giving notices:
Brian Kletscher 30427 Co Hwy 10 Vesta, MN 56292		301 N First Street Colwich, KS 67030
Kevin K Stroup STONEBERG, GILES & STROUP, P.A. 300 O’Connell Street Marshall, MN 56258

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EXHIBIT E

Schedule of Values

Schedule of Values for:

HIGHWATER ETHANOL, LLC

Lamberton, MN

50 MGY Dry Grind Ethanol Plant

	DESCRIPTION
1	MOBILIZATION	$	5,000,000
2	ENGINEERING	$	[*]
3	GENERAL CONDITIONS	$	[*]
4	SITEWORK	$	[*]
5	CONCRETE	$	[*]
6	MASONRY / ARCHITECTURAL	$	[*]
7	STRUCTURAL STEEL - MISC. METALS	$	[*]
8	PRE-ENGINEERED BUILDINGS	$	[*]
9	GRAIN HANDLING SYSTEM	$	[*]
10	PROCESS TANKS & VESSELS	$	[*]
11	FIELD ERECTED TANKS	$	[*]
12	HEAT EXCHANGERS	$	[*]
13	PROCESS EQUIPMENT	$	[*]
14	CENTRIFUGES	$	[*]
15	CHILLER	$	[*]
16	TRUCK SCALES & PROBE	$	[*]
17	ETHANOL LOADOUT & FLARE SYSTEM	$	[*]
18	COOLING TOWER	$	[*]
19	DUAL DRYER SYSTEM	$	[*]
20	THERMAL OXIDIZER	$	[*]
21	METHANATOR	$	[*]
22	PROCESS PIPING & VALVES	$	[*]
23	PAINTING	$	[*]
24	INSULATION	$	[*]
25	PLUMBING & HVAC	$	[*]
26	ELECTRICAL - INSTRUMENTATION	$	[*]
27	START-UP	$	[*]
28	DEMOBILIZATION	$	[*]
		$	—
	TOTAL	$	66,025,848

*  Portions omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.

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EXHIBIT F

Form of Informational Report

PROJECT MEETING: Two-Week Look Ahead(s)

JOBSITE:	MEETING
	DATE:

· MANPOWER MANPOWER	TOTALS ·
Fagen, Inc.	0
(sub)	0
	0
	0
	0
	0
	0
	0
	0
	0
JOBSITE TOTAL	0

· SAFETY ISSUES

1.     text
2.     text

· WAREHOUSE ISSUES

1.     text

2.     text

· PROCUREMENT ISSUES

1.     text

2.     text

· OPERATIONS ISSUES

1.     text

2.     text

· CIVIL

Area

1.     text

2.     text

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· STRUCTURAL

Area

1.     text

2.     text

· SIDING / INSULATION

Area

1.     text

2.    

· MILLWRIGHT

Area

1.     text

2.    

· PIPE

Area

1.     text

2.    

· ELECTRICAL

Area

1.     text

2.    

· DELIVERIES

Area

1.     text

· SUBCONTRACTOR

Subcontractor Name

1.     text

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EXHIBIT G

Required Permits

No.	Type of Application/Permit	Responsibility for Obtaining Permit	Assistance in Preparation	Notes
1	Underground Utility Locating Service	Design-Builder/Owner		Notification service for underground work.
2	Septic Tank & Drain Field Permit	Owner
3	Railroad Permit/Approval	Owner	Design-Builder
4	Archeological Survey	Owner
5	Highway Access Permit	Owner		State Department of Transportation or County
6	Building Permits	Design-Builder
	Mechanical	Design-Builder
	Electrical	Design-Builder
	Structures	Design-Builder
7	Construction Air Permit	Owner	Design-Builder
8	Construction Permit	Owner	Design-Builder
9	Operations Permit	Owner	Design-Builder
10	Wastewater Permit	Owner	Design-Builder
11	Water Appropriation Permit	Owner	Design-Builder
12	Fire Protection	Owner	Design-Builder
13	Above Ground Storage Tank Permit	Owner
14	TTB Permit	Owner

G-1

EXHIBIT H

Form of Performance Bond

PERFORMANCE BOND
The American Institute of Architects,
AIA Document No. A312 (December, 1984 Edition)
Any singular reference to Contractor, Surety, Owner or other
party shall be considered plural where applicable.

CONTRACTOR (Name and Address):			Amount: [Amount]
Fagen, Inc.			Description (Name and Location):
P. O. Box 159			[Project Name and Location]
Granite Falls, MN 56241			OWNER (Name and Address):
CONSTRUCTION CONTRACT			[Owner Name/Address]
Date:			SURETY (Name and Principal Place of Business): [Name/Place of Business]
BOND#
Date (Not earlier than Construction Contract Date):
Amount:
Modifications to this Bond:		q None		q See Page 2
CONTRACTOR AS PRINCIPAL			SURETY
Company:	(Corporate Seal)		Company:		(Corporate Seal)
Fagen, Inc.
Signature:			Signature:
Name and Title:			Name and Title:
(Any additional signatures appear an page 2.)
(FOR INFORMATION Only- Name, Address and Telephone)			OWNER’S REPRESENTATIVE (Architect,
AGENT or BROKER:			Engineer or other party):

1.             The Contractor and the Surety, jointly and severally, bind themselves, their heirs, executors, administrators, successors and assigns to the Owner for the performance of the Construction Contract, which is incorporated herein by reference.

2.             If the Contractor performs the Construction Contract, the Surety and the Contractor shall have no obligation under this Bond, except to participate in conferences as provided in Subparagraph 3.1.

3.             If there is no Owner Default, the Surety’s obligation under this Bond shall arise after:

3.1           The Owner has notified the Contractor and the Surety at its address described in Paragraph 10 below that the Owner is considering declaring a Contractor Default and has requested and attempted to arrange a conference with the Contractor and the Surety to be held not later than fifteen days after receipt of such notice to discuss methods of performing the Construction Contract.  If the Owner, the Contractor and the Surety agree, the Contractor shall be allowed a reasonable time to perform the Construction Contract, but such an agreement shall not waive the Owner’s right, if any, subsequently to declare a Contractor Default; and

3.2           The Owner has declared a Contractor Default and formally terminated the Contractor’s right to complete the contract.  Such Contractor Default shall not be declared earlier than twenty days after the Contractor and Surety have received notice as provided in Subparagraph 3.1; and

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3.3           The Owner has agreed to pay the Balance of the Contract Price to the Surety in accordance with the terms of the Construction Contract or to a contractor selected to perform the Construction Contract in accordance with the terms of the contract with the Owner.

4.             When the Owner has satisfied the conditions of Paragraph 3, the Surety shall promptly and at the Surety’s expense take one of the following actions:

4.1           Arrange for the Contractor with consent of the Owner, to perform and complete the Construction Contract; or

4.2           Undertake to perform and complete the Construction Contract itself, through its agents or through independent contractors; or

4.3           Obtain bids or negotiated proposals from qualified contractors acceptable to the Owner for a contract for performance and completion of the Construction Contract, arrange for a contract to be prepared for execution by the Owner and the contractor selected with the Owner’s concurrence, to be secured with performance and payment bonds executed by a qualified surety equivalent to the bonds issued on the Construction Contract, and pay to the Owner the amount of damages as described in Paragraph 6 in excess of the Balance of the Contract Price incurred by the Owner resulting from the Contractor’s default; or

4.4           Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances:

.1             After investigation, determine the amount for which it may be liable to the Owner and, as soon as practicable after the amount is determined, tender payment therefor to the Owner; or

.2             Deny liability in whole or in part and notify the Owner citing reasons therefor.

5.             If the Surety does not proceed as provided in Paragraph 4 with reasonable promptness, the Surety shall be deemed to be in default on this Bond fifteen days after receipt of an additional written notice from the Owner to the Surety demanding that the Surety perform its Obligations under this Bond, and the Owner shall be entitled to enforce any remedy available to the Owner.  If the Surety proceeds as provided in Subparagraph 4.4, and the Owner refuses the payment tendered or the Surety has denied liability, in whole or in part, without further notice the Owner shall be entitled to enforce any remedy available to the Owner.

6.             After the Owner has terminated the Contractor’s right to complete the Construction Contract, and if the Surety elects to act under Subparagraph 4.1, 4.2, or 4.3 above, then the responsibilities of the Surety to the Owner shall not be greater than those of the Contractor under the Construction Contract, and the responsibilities of the Owner to the Surety shall not be greater than those of the Owner under the Construction Contract.  To the limit of the amount of this Bond, but subject to commitment by the Owner of the Balance of the Contract Price to mitigation of costs and damages on the Construction Contract, the Surety is obligated without duplication for:

6.1           The responsibilities of the Contractor for correction of defective work and completion of the Construction Contract;

6.2           Additional legal design professional and delay costs resulting from the Contractor’s Default, and resulting from the actions or failure to act of the Surety under Paragraph 4; and

6.3           Liquidated damages, or if no liquidated damages are specified in the Construction Contract, actual damages caused by delayed performance or non-performance of the Contractor.

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7.             The Surety shall not be liable to the Owner or others for obligations of the Contractor that are unrelated to the Construction Contract and the Balance of the Contract Price shall not be reduced or set off on account of any such unrelated obligations. No right of action shall accrue on this Bond to any person or entity other than the Owner or its heirs, executors, administrators or successors.

8.             The Surety hereby waives notice of any change, including changes of time, to the Construction Contract or to related subcontracts, purchase orders and other obligations.

9.             Any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction in the location in which the work or part of the work is located and shall be instituted within two years after Contractor Default or within two years after the Contractor ceased working or within two years after the Surety refuses or fails to perform its obligations under this Bond, whichever occurs first.  If the provisions of this Paragraph are void or prohibited by law, the minimum period of limitation available to sureties as a defense in the jurisdiction of the suit shall be applicable.

10.           Notice to the Surety, the Owner or the Contractor shall be mailed or delivered to the address shown on the signature page.

11.           When this Bond has been furnished to comply with a statutory or other legal requirement in the location where the construction was to be performed, any provision in this Bond conflicting with said statutory or legal requirement shall be deemed deleted herefrom and provisions conforming to such statutory or other legal requirement shall be deemed incorporated herein. The intent is that this Bond shall be construed as a statutory bond and not as a common law bond.

12.           DEFINITIONS

12.1         Balance of the Contract Price: The total amount payable by the Owner to the Contractor under the Construction Contract after all proper adjustments have been made, including allowance to the Contractor of any amounts received or to be received by the Owner in settlement of insurance or other claims for damages to which the Contractor is entitled, reduced by all valid and proper payments made to or on behalf of the Contractor under the Construction Contract.

12.2         Construction Contract: The agreement between the Owner and the Contractor identified on the signature page, including all Contract Documents and changes thereto.

12.3         Contractor Default: Failure of the Contractor, which has neither been remedied nor waived, to perform or otherwise to comply with the terms of the Construction Contract.

12.4         Owner Default: Failure of the Owner, which has neither been remedied nor waived, to pay the Contractor as required by the Construction Contract or to perform and complete or comply with the other terms thereof.

MODIFICATIONS TO THIS BOND ARE AS FOLLOWS:

This bond is subject to the attached Dual Obligee Rider dated

(Space is provided below for additional signatures of added parties other than those appearing on the cover page.)

H-3

CONTRACTOR AS PRINCIPAL		SURETY
	(Corporate Seal)		(Corporate Seal)
Company:		Company:
Address:		Address:
Name and Title:		Name and Title:
Signature:		Signature:

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DUAL OBLIGEE RIDER

(TO BE ATTACHED TO BOND AT TIME OF ISSUANCE)

TO BE ATTACHED TO AND FORM PART OF Performance and Payment Bond NO.                   , dated concurrently with the execution of this Rider, issued by the                        , a                         corporation, as Surety, on behalf of Fagen, Inc., as Principal, and in favor of                        , as Obligee.

IT IS HEREBY UNDERSTOOD AND AGREED that the above described bond(s) are hereby amended to include the following paragraph:

Notwithstanding anything contained herein to the contrary, there shall be no liability on the part of the Principal or Surety under this bond to the Obligees, or either of them, unless the Obligees, or either of them, shall make payments to the Principal or to the Surety in case it arranges for completion of the Contract upon default of the Principal, strictly in accordance with the terms of said Contract as to payments, and shall perform all the other obligations required to be performed under said Contract at the time and in the manner therein set forth.

IT IS FURTHER UNDERSTOOD AND AGREED that nothing herein contained shall be held to change, alter or vary the terms of the above described bond(s) except as hereinbefore set forth.

SIGNED, SEALED AND DATED this          day of                        , 200 .

Fagen, Inc.

(Contractor)

By:

[                                     ]

(Surety)

By:

H-5

EXHIBIT I

Form of Payment Bond

PAYMENT BOND
The American Institute of Architects,
AIA Document No. A312 (December, 1984 Edition)
Any singular reference to Contractor, Surety, Owner or other
party shall be considered plural where applicable.

CONTRACTOR (Name and Address): Fagen, Inc. P. O. Box 159 Granite Falls, MN 56241	SURETY (Name and Principal Place of Business):
OWNER (Name and Address): [NAME AND ADDRESS]
CONSTRUCTION CONTRACT Date: Amount: Description (Name and Location):
BOND # Date (Not earlier than Construction Contract Date): Amount:
Modifications to this Bond:    o None          o See Page 2
CONTRACTOR AS PRINCIPAL       SURETY
Company:                       (Corporate Seal)             Company:                                   (Corporate Seal)
Fagen, Inc.
Signature:	Signature:
Name and Title:	Name and Title:
(Any additional signatures appear an page 2.)
(FOR INFORMATION Only—Name, Address and Telephone)	OWNER’S REPRESENTATIVE (Architect, Engineer or other party):
AGENT or BROKER:

1.             The Contractor and the Surety, jointly and severally, bind themselves, their heirs, executors, administrators, successors and assigns to the Owner to pay for labor, materials and equipment furnished for use in the performance of the Construction Contract, which is incorporated herein by reference.

2.             With respect to the Owner, this obligation shall be null and void if the Contractor:

2.1           Promptly makes payment, directly or indirectly, for all sums due Claimants, and

2.2           Defends, indemnifies and holds harmless the Owner from claims, demands, liens or suits by any person or entity whose claim, demand, lien or suit is for the payment for labor, materials or equipment furnished for use in the performance of the Construction Contract, provided the Owner has promptly notified the Contractor and the Surety

I-1

(at the address described in Paragraph 12) of any claims; demands, liens or suits and tendered defense of such claims, demands, liens or suits to the Contractor and the Surety, and provided there is no Owner Default.

3.             With respect to Claimants, this obligation shall be null and void if the Contractor promptly makes payment, directly or Indirectly, for all sums due.

4.             The Surety shall have no obligation to Claimants under this Bond until:

4.1           Claimants who are employed by or have a direct contract with the Contractor have given notice to the Surety (at the address described in Paragraph 12) and sent a copy, or notice thereof, to the owner, stating that a claim is being made under this Bond and, with substantial accuracy, the amount of the claim.

4.2           Claimants who do not have a direct contract with the Contractor:

4.2.1        Have furnished written notice to the Contractor and sent a copy, or notice thereof, to the Owner, within 90 days after having last performed labor or last furnished materials or equipment included in the claim stating, with substantial accuracy, the amount of the claim and the name of the party to whom the materials were furnished or supplied or for whom the labor was done or performed; and

4.2.2        Have either received a rejection in whole or in part from the Contractor, or not received within 30 days of furnishing the above notice any communication from the Contractor by which the Contractor has indicated the claim will be paid directly or Indirectly; and

4.2.3        Not having been paid within the above 30 days, have sent a written notice to the Surety (at the address described in Paragraph 12) and sent a copy, or notice thereof, to the Owner, stating that a claim is being made under this Bond and enclosing a copy of the previous written notice furnished to the Contractor.

5.             If a notice required by Paragraph 4 is given by the Owner to the Contractor or to the Surety that is sufficient compliance.

6.             When the Claimant has satisfied the conditions of Paragraph 4, the Surety shall promptly and at the Surety’s expense take the following actions:

6.1           Send an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed.

6.2           Pay or arrange for payment of any undisputed amounts.

7.             The Surety’s total obligation shall not exceed the amount of this Bond, and the amount of this Bond shall be credited for any payments made in good faith by the Surety.

I-2

8.             Amounts owed by the Owner to the Contractor under the Construction Contract shall be used for the performance of the Construction Contract and to satisfy claims, if any, under any Construction Performance Bond.  By the Contractor furnishing and the Owner accepting this Bond, they agree that all funds earned by the Contractor in the performance of the Construction Contract are dedicated to satisfy obligations of the Contractor and the Surety under this Bond, subject to the Owner’s priority to use the funds for the completion of the work.

9.             The Surety shall not be liable to the Owner, Claimants or others for obligations of the Contractor that are unrelated to the Construction Contract.  The Owner shall not be liable for payment of any costs or expenses of any Claimant under this Bond, and shall have under this Bond no obligation to make payments to, give notices on behalf of, or otherwise have obligations to Claimants under this Bond.

10.           The Surety hereby waives notice of any change, including changes of time, to the Construction Contract or to related subcontracts, purchase orders and other obligations.

11.           No suit or action shall be commenced by a Claimant under this Bond other than in a court of competent jurisdiction in the location in which the work or part of the work is located or after the expiration of one year from the date (1) on which the Claimant gave the notice required by Subparagraph 4.1 or Clause 4.2.3, or (2) on which the last labor or service was performed by anyone or the last materials or equipment were furnished by anyone under the Construction Contract, whichever of (1) or (2) first occurs. If the provisions of this Paragraph are void or prohibited by law, the minimum period of limitation available to sureties as a defense in the jurisdiction of the suit shall be applicable.

12.           Notice to the Surety, the Owner or the Contractor shall be mailed or delivered to the address shown on the signature page. Actual receipt of notice by Surety, the Owner or the Contractor, however accomplished, shall be sufficient compliance as of the date received at the address shown on the signature page.

13.           When this Bond has been furnished to comply with a statutory or other legal requirement in the location where the construction was to be performed, any provision in this Bond conflicting with said statutory or legal requirement shall be deemed deleted herefrom and provisions conforming to such statutory or other legal requirement shall be deemed incorporated herein.  The intent is that this Bond shall be construed as a statutory bond and not as a common law bond.

14.           Upon request by any person or entity appearing to be a potential beneficiary of this Bond, the Contractor shall promptly furnish a copy of this Bond or shall permit a copy to be made.

15.           DEFINITIONS

15.1         Claimant: An individual or entity having a direct contract with the Contractor or with a subcontractor of the Contractor to furnish labor, materials or equipment for use in the performance of the Contract. The intent of this Bond shall be to include without limitation in the terms “labor, materials or equipment” that part of water, gas, power, light, heat, oil, gasoline, telephone service or rental equipment used in the Construction Contract,

I-3

architectural and engineering services required for performance of the work of the Contractor and the Contractor’s subcontractors, and all other items for which a mechanic’s lien may be asserted in the jurisdiction where the labor, materials or equipment were furnished.

15.2         Construction Contract: The agreement between the Owner and the Contractor identified on the signature page, including all Contract Documents and changes thereto.

15.3         Owner Default: Failure of the Owner, which has neither been remedied nor waived, to pay the Contractor as required by the Construction Contract or to perform and complete or comply with the other terms thereof.

MODIFICATIONS TO THIS BOND ARE AS FOLLOWS:

This bond is subject to the attached Dual Obligee Rider dated [                     ].

(Space is provided below for additional signatures of added parties other than those appearing on the cover page.)

CONTRACTOR AS PRINCIPAL	SURETY
(Corporate Seal)	(Corporate Seal)
Company:	Company:
Address:	Address:
Name and Title:	Name and Title:
Signature:	Signature:

DUAL OBLIGEE RIDER

(TO BE ATTACHED TO BOND AT TIME OF ISSUANCE)

TO BE ATTACHED TO AND FORM PART OF Performance and Payment Bond NO.                    , dated concurrently with the execution of this Rider, issued by the                               , a                            corporation, as Surety, on behalf of Fagen, Inc., as Principal, and in favor of                                   , as Obligee.

IT IS HEREBY UNDERSTOOD AND AGREED that the above described bond(s) are hereby amended to include the following paragraph:

Notwithstanding anything contained herein to the contrary, there shall be no liability on the part of the Principal or Surety under this bond to the Obligees, or either of them, unless the Obligees, or either of them, shall make payments to the Principal or to the Surety in case it arranges for completion of the Contract upon default of the Principal, strictly in accordance with the terms of said Contract as to payments, and shall perform all the other obligations required to be performed under said Contract at the time and in the manner therein set forth.

IT IS FURTHER UNDERSTOOD AND AGREED that nothing herein contained shall be held to change, alter or vary the terms of the above described bond(s) except as hereinbefore set forth.

SIGNED, SEALED AND DATED this          day of                           , 200  .

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Fagen, Inc.

(Contractor)

By:

[                                      ]

(Surety)

By:

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EXHIBIT J

Draw (Payment) Schedule

HIGHWATER ETHANOL, LLC
Lamberton,
MN
Monthly Draw Schedule - 18 Month Project

			Previously
Month #	This Month		Completed		Total
1	$	[*]	$	[*]	$	[*]
2	$	[*]	$	[*]	$	[*]
3	$	[*]	$	[*]	$	[*]
4	$	[*]	$	[*]	$	[*]
5	$	[*]	$	[*]	$	[*]
6	$	[*]	$	[*]	$	[*]
7	$	[*]	$	[*]	$	[*]
8	$	[*]	$	[*]	$	[*]
9	$	[*]	$	[*]	$	[*]
10	$	[*]	$	[*]	$	[*]
11	$	[*]	$	[*]	$	[*]
12	$	[*]	$	[*]	$	[*]
13	$	[*]	$	[*]	$	[*]
14	$	[*]	$	[*]	$	[*]
15	$	[*]	$	[*]	$	[*]
16	$	[*]	$	[*]	$	[*]
17	$	[*]	$	[*]	$	[*]
18	$	[*]	$	[*]	$	66,025,848
			$	66,025,848

***$5,000,000 Mobilization Fee included in 1st Billing

*Portions omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.

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EXHIBIT K

Air Emissions Application or Permit

Air Permit Application to be provided by Owner and approved by Design-Builder.

K-1

EXHIBIT L

Phase I and Phase II Engineering Services Agreement

See attached Phase I and Phase II Engineering Services Agreement

L-1

EXHIBIT M

Form of Application for Payment

See Attached Form of Application for Payment

M-1

EXHIBIT N

Form of Lien Waiver

GENERAL CONTRACTOR’S PARTIAL WAIVER OF MECHANIC’S LIEN
RIGHTS AND AFFIDAVIT OF DEBTS AND CLAIMS
CONDITIONAL LIEN WAIVER

STATE: (INSERT STATE)	FAGEN, INC.
COUNTY: (INSERT COUNTY)

The undersigned is the General Contractor (aka Design-Builder) regarding labor and materials for construction and maintenance work performed for (INSERT OWNER/PLANT NAME), at the Facility located at or near (INSERT PLANT CITY & STATE) under the terms of a contract.

On condition of receiving full payment for billings up to date hereof under the terms of the above mentioned contract, and other good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned does hereby waive and release any and all liens, and any and all claims and rights to lien on the Facility  (including all buildings on the premises) under the statutes of the State of (   INSERT STATE   ) relating to mechanic’s liens on account of labor and materials furnished by the undersigned up to the date hereof at the Facility, as located on real estate legally described as follows:

TRACT 1:  (INSERT LEGAL DESCRIPTION)

TRACT 2:  (INSERT LEGAL DESCRIPTION)

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The undersigned further certifies that all obligations of General Contractor entered into between suppliers/subcontractors and General Contractor regarding this Facility are current as of this date, including all obligations of General Contractor for all work, labor and services performed; materials and equipment furnished; and all known indebtedness and claims against General Contractor for damages arising in any manner in connection with General Contractor’s performance of the contract mentioned above for which General Contractor or property of General Contractor might in any way be held responsible.

Dated this              day of                                       , 200    

GENERAL CONTRACTOR:

FAGEN, INC.

By (Print):

Title:

(Signature):

Witness (Print):

(Signature):

In the alternative (or if requested):

Subscribed and sworn to before me this
               day of                               , 200    .

Notary Public         

My Commission Expires:                                     

N-2

EXHIBIT O

Form of Consent to Assignment

FAGEN CONSENT TO ASSIGNMENT

THIS CONSENT TO ASSIGNMENT (this “Consent”), dated as of September 28, 2006, is made among FAGEN, INC., a Minnesota corporation (the “Obligor”), HIGHWATER ETHANOL, LLC, a Minnesota limited liability company (“Assignor”), and the financial institution party to this Agreement, not in its individual capacity, but acting solely in the capacity of collateral agent on behalf of the below defined Lenders (such financial institution in such capacity, or such other financial institution acting in such capacity, the “Collateral Agent”).

The Assignor seeks to construct and operate a fifty (50) million gallon per year fuel-grade ethanol production plant in Lamberton, Minnesota (the “Project”).  The Obligor and the Assignor have entered into the Lump-Sum Design-Build Agreement dated as of September 28, 2006 (as amended, modified, supplemented and in effect from time to time, the “Assigned Agreement”).  The Assignor and certain other financial institutions (the “Lenders”) intend to finance certain costs of the Assignor for the development, construction and operation of the Project pursuant to various financing arrangements (the “Financing Arrangements”).  The Assignor and the Collateral Agent (on behalf of the Lenders) intend to enter into certain security arrangements (the “Security Documents”), pursuant to which the Assignor will pledge and assign to the Collateral Agent a lien on and a security interest in all of the Assignor’s right, title and interest in, among other things, the Assigned Agreement.

SECTION 1.           CONSENT TO ASSIGNMENTS; LIABILITY; CURE RIGHTS; ETC.

1.1           Acknowledgments and Consents. The Obligor (i) acknowledges that the Assigned Agreement is in full force and effect and that there are no other amendments, modifications or supplements thereto, either oral or written; (ii) represents and warrants that it has not assigned, transferred or pledged the Assigned Agreement to any third party; (iii) represents and warrants that it has no knowledge of any existing default by the Assignor in the performance of any provision of the Assigned Agreement; (iv) acknowledges and consents to the Assignor’s pledge and assignment of the Assigned Agreement to the Collateral Agent; (v) acknowledges the right of the Collateral Agent in the exercise of its rights and remedies under the Security Documents to take all actions and exercise all rights of the Assignor under the Assigned Agreement as if it were the Assignor; (vi) acknowledges and agrees that this Consent satisfies Section 21.1 of the Assigned Agreement; and (vii) acknowledges and agrees that the Collateral Agent is entitled to notices under the Assigned Agreement pursuant to Section 21.7 thereof.

1.2           Limitation on Assumption of Obligations.  The Collateral Agent shall not be liable for the performance or observance of any of the obligations or duties of the Assignor under the Assigned Agreement, nor shall the Security Documents give rise to any duties or obligations whatsoever, except that, insofar as the Collateral Agent exercises any of Assignor’s rights under the Assigned Agreement and/or makes any claims with respect to any payments, deliveries or other obligations under the Assigned Agreement, the satisfaction of the terms and conditions of the Assigned Agreement applicable to such exercise of rights or such claims shall be a condition precedent to the Obligor’s obligations with respect thereto.  Upon any transfer to a third party of

O-1

the rights of the Collateral Agent under the Assigned Agreement pursuant to its exercise of its remedies under the Security Documents as described in Section 1.4 below which transfer of the Assigned Agreement shall be subject in all respects  to the terms and conditions of the Assigned Agreement, including Section 21.1 thereof (i) the transferee shall succeed to all right, title and interest of the Assignor and the Collateral Agent and (ii) the Collateral Agent shall have no further liabilities, duties or obligations to the Assignor under the Assigned Agreement.

1.3           Cure Periods.  The Obligor hereby confirms that it will provide to the Collateral Agent the same notices as are to be provided to the Assignor pursuant to Sections 15.4.2, 15.5, 15.6.1(d), and 15.5.2 of the Assigned Agreement.

1.4           Substitute Owner.  The Obligor acknowledges that upon an event of default by the Assignor under the Financing Arrangements and an exercise of remedies by the Collateral Agent under the Security Documents, the Collateral Agent may (but shall not be obligated to) assume, or cause any purchaser at any foreclosure sale or any assignee or transferee under any instrument of assignment or transfer in lieu of foreclosure to assume, all of the interests, rights and obligations of the Assignor thereafter arising under the Assigned Agreement.  Each assuming party shall agree in writing to be bound by, and to assume the terms and conditions of, the Assigned Agreement pursuant to an assignment agreement in form and substance satisfactory to the Obligor pursuant to Section 21.1 of the Assigned Agreement, and the Obligor shall continue to perform its obligations under the Assigned Agreement in favor of the assuming party as if such party had been an original party to the Assigned Agreement; provided, that the assuming party shall cure any  defaults, whether monetary or otherwise, then existing under the Assigned Agreement in such assuming party’s capacity as “Owner” under the Assigned Agreement (as defined in such agreement) after giving effect to assignment of Assignor’s rights and obligations to such assuming party; but provided, further, that the liability of the Collateral Agent (or any entity acting on behalf of the Collateral Agent or any of the other Secured Parties) shall not exceed all of its right, title and interest in and to the Project.

1.5           No Amendments.  The Obligor acknowledges that under the terms of the Financing Arrangements, the Assignor is required to obtain the consent of the Lenders for certain amendments to the Assigned Agreement.

SECTION 2.           NOTICES.  The first paragraph of Section 21.7 of the Assigned Agreement is hereby incorporated in this Consent, as if set forth herein in its entirety.  For purposes of Section 21.7 of the Assigned Agreement, the initial address for notice to the Collateral Agent shall be as follows:

[BANK]

[ADDRESS]

Attn: [NAME/TITLE]

Fax: [FAX NUMBER]

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The Obligor acknowledges and agrees that the delivery of the Collateral Agent’s notice information in this Section 2 shall be deemed to satisfy the requirement of the Owner in Section 21.7 of the Assigned Agreement to deliver such information to the Obligor.

SECTION 3.           MISCELLANEOUS.

THIS CONSENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND SHALL BE BINDING UPON THE PARTIES HERETO AND THEIR PERMITTED SUCCESSORS AND ASSIGNS AND SHALL INURE TO THE BENEFIT OF THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS.  THE PARTIES HERETO HEREBY AGREE TO EXECUTE AND DELIVER ALL SUCH INSTRUMENTS AND TAKE ALL SUCH ACTION AS MAY BE REASONABLY NECESSARY TO EFFECTUATE FULLY THE PURPOSES OF THIS CONSENT.

[THE NEXT PAGE IS THE SIGNATURE PAGE]

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IN WITNESS WHEREOF, the parties hereto have caused this Consent to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written.

FAGEN, INC.,		Consented and Agreed to:
as Obligor
		HIGHWATER ETHANOL, LLC
By:		as Assignor
Name:
Title:		By:
		Name:
Address for Notices:		Title:
	Fagen, Inc.	Highwater Ethanol, LLC
	501 W. Highway 212	30427 Co Hwy 10, Vesta, MN 56292
	P.O. Box 159	Attn:  Brian Kletscher
	Granite Falls, MN 56241	Phone:  (507) 828-1429
	Attn: Aaron Fagen
	Fax: (320) 564-3278
With a copy to:
	Fagen, Inc.
	501 W. Highway 212
	P.O. Box 159
	Granite Falls, MN 56241
	Attn: Bruce Langseth
	Fax: (320) 564-3278
[BANK NAME]
not in its individual capacity, but solely as Collateral Agent
By:
Name:
Title:
Address for Notices:
[BANK]
[ADDRESS]
Attn: [NAME/TITLE]
Fax:  [FAX NUMBER]

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EX-10.9

Exhibit 10.9

CONSULTING AGREEMENT AND AUTHORIZATION TO PROCEED

This Agreement between EARTH TECH, Inc, d.b.a. Earth Tech Consulting, Inc., a California corporation, (“ETI”) with offices at 3033 Campus Drive North, Suite 290, Minneapolis, Minnesota 55441 and Highwater Ethanol (“CLIENT”), with offices at 30427 County Highway 10, Vesta, Minnesota 56292.

1.ETI agrees to perform the services described in its PROPOSAL dated 04/26/06, including attachments and amendments (“SERVICES”).

2.CLIENT authorizes ETI to perform these SERVICES for the following project and location:

Environmental Permitting for the Proposed Highwater Ethanol Facility near Lamberton, Minnesota.

3.ETI is willing to perform the SERVICES in exchange for the following fee (check and complete):

oCLIENT will pay on a time and material basis.  ETI will invoice according to the Fee Schedule* attached to the PROPOSAL.

oCLIENT will pay a lump sum of $                .  ETI will invoice monthly on a percentage completed basis.

xCLIENT will pay on a time and material basis not to exceed the sum of $88,625.50.  ETI will invoice according to the Fee Schedule* attached to the PROPOSAL up to the stated limit.  Upon reaching the limit, ETI will stop performing unless CLIENT authorizes further work in writing.

oCLIENT will pay a retainer in the amount of $                , to be applied against the fee.

*ETI reserves the right to adjust its Fee Schedule annually.

4.Billing:ETI will submit invoices to CLIENT monthly.  CLIENT recognizes that timely payment is a material part of this Agreement.  Each invoice is due and payable within thirty (30) calendar days of the date of the invoice.  CLIENT will pay an additional charge of one and one-half percent per month not to exceed the maximum rate allowed by law for any payment received by ETI more than thirty (30) calendar days from the date of the invoice.  CLIENT will pay when due that portion of invoice, if any, not in dispute.  If CLIENT fails to pay any undisputed invoiced amounts within thirty (30) calendar days of the date of the invoice, ETI may suspend its performance or terminate this Agreement without incurring any liability to CLIENT and without waiving any other claim against CLIENT.

5.Special Provisions:           x      NONE           o      ATTACHMENT

6.CLIENT RECOGNIZES THAT THE PRESENCE OF HAZARDOUS MATERIALS OR POLLUTION ON OR BENEATH THE SURFACE OF A SITE MAY CREATE RISKS AND LIABILITIES.  CONSULTANT HAS NEITHER CREATED NOR CONTRIBUTED TO THIS POLLUTION.  CONSEQUENTLY, CLIENT RECOGNIZES THIS AGREEMENT WILL ACCORDLINGLY LIMIT CONSULTANT’S LIABILITY.

CLIENT confirms reading this document in full (including the terms 7 through 18 on the following page).  This Agreement when executed by Earth Tech is an offer to perform their services, open for acceptance within 30 days.  This Agreement becomes effective on the date CLIENT signs below.

CLIENT:		ETI – EARTH TECH, Inc., d.b.a Earth Tech Consulting, Inc.
By:	/s/ Brian Kletscher	By:	/s/ J. Michael Valentine
Name:	Brian Kletscher	Name:	J. Michael Valentine
Title:	President	Title:	Vice President
Date:	5/4/06	Date:	04/26/06

7.Standard of Care:  ETI will perform the Services in accordance with the standards of care and diligence normally practiced by consulting firms performing services of a similar nature in the same locale.

8.Indemnity/Limitation of Liability:  Subject to any limitations stated in this Agreement, ETI will indemnify and hold harmless CLIENT, its officers, directors, employees, and subcontractors, from and against all claims and actions, including reasonable attorneys fees, arising out of damages or injuries to persons or tangible property to the extent they are caused by a professionally negligent act, error, or omission of ETI or any of its agents, subcontractors, or employees in the performance of Services under this Agreement.  ETI will not be responsible for any loss, damage, or liability arising from any contributing negligent acts by CLIENT, its subcontractors, agents, staff, or consultants.  Neither party will be responsible to the other for consequential damages including, but not limited to, loss of profit, loss of investment or business interruption.  The CLIENT also agrees to seek recourse only against ETI and not against its officers, employees, directors, or shareholders.  The CLIENT agrees to limit ETI’s liability due to breach of contract, warranty or negligent acts, errors or omissions of ETI to $50,000 or the fee paid to ETI under this Agreement, whichever is greater.

9.Insurance:  During the period that Services are performed under this Agreement, ETI will maintain the following insurance:  (1) Workers’ Compensation coverage in accordance with the laws of the states having jurisdiction over its employees engaged in the Services and Employer’s Liability Insurance (limit of $500,000 each occurrence.); (2) Commercial General Liability Policy with a limit of $1,000,000 per occurrence and a $2,000,000 aggregate; (3) Commercial Automobile Liability with a limit of $500,000 per occurrence and a $1,000,000 aggregate; and (4) Professional Liability coverage with a $500,000 limit on each claim and a $1,000,000 aggregate.  Client agrees ETI will not be liable for any loss, damage, or liability arising out of this Agreement beyond the coverage, and conditions of such insurance with limits as stated above.

10.Hazardous Substances/Hazardous Waste:  CLIENT represents that if CLIENT knows or has reason to suspect that hazardous substances or pollution may exist at the project site, CLIENT has fully informed ETI.  In the event ETI encounters hazardous substances or contamination significantly beyond that originally represented by CLIENT, ETI may suspend its Services and enter into good faith renegotiation of this Agreement.  CLIENT acknowledges that ETI has no responsibility as a generator, treater, storer, or disposer of hazardous or toxic substances found or identified at a site and CLIENT agrees to defend, indemnify, and hold harmless ETI, from any claim or liability, arising out of ETI’s performance of work under this Agreement and made or brought against ETI for any actual or threatened environmental pollution or contamination except to the extent that ETI has negligently caused or contributed to any such pollution or contamination.  This indemnification includes reasonable attorney fees and expenses incurred by ETI in defense of such claim.

11.Sample Ownership:  All samples and cuttings of materials containing hazardous contaminants are the property and responsibility of CLIENT.  Removal of cuttings from the project site will remain the obligation of CLIENT.  Absent direction from CLIENT, ETI may return all contaminated samples and laboratory byproducts to the CLIENT for proper disposal or treatment.

12.Buried Utilities:  In those situations where ETI performs subsurface exploration, CLIENT, to the extent of its knowledge, will furnish to ETI information identifying the type and location of utilities and other man-made objects beneath the surface of the project site.  ETI will take reasonable precautions to avoid damaging these utilities or objects.  Prior to penetrating the site’s surface, ETI will furnish CLIENT a plan indicating the locations intended for penetration.  CLIENT will approve the location of these penetrations and authorize ETI to proceed.

13.Documents and Records:  CLIENT acknowledges that ETI’s reports, boring logs, field data, field notes, laboratory test data, calculations, estimates and other similar documents (“Records”) are instruments of professional service, not products.  All data ETI prepares for CLIENT under this Agreement will remain the property of ETI.  CLIENT will not use any ETI data or report for any purpose other than its original purpose as defined in the PROPOSAL.  CLIENT has no rights to incomplete or partial data.  ETI will retain these Records for a period of three (3) years following completion of this project.  During this time, ETI will reasonably make available the records to the CLEINT.  ETI may charge a reasonable fee in addition to its professional fees for retrieving or copying such records.

14.Change Orders:  ETI will treat as a change order any written or oral order (including directions, instructions, interpretations or determinations) from CLIENT which request changes in the Services.  ETI will give CLIENT notice within ten (10) days of the change order of any resulting increase in fee.  Unless Client objects in writing within five (5) days, the change order becomes a part of this Agreement.

15.Third-Party Rights:  Except as specifically stated in this Agreement, this Agreement does not create any rights or benefits to parties other than CLIENT and ETI.

16.Assignment/Status:  The CLIENT will not delegate, assign, sublet, or transfer any interest in this Agreement without the written consent of ETI.  ETI is an independent consultant and not the agent or employee of CLIENT.

17.Termination:  Either party may terminate the Services with or without cause upon ten (10) days advance written notice.  If Client terminates without cause, CLIENT will pay ETI costs incurred, noncancelable commitments, and fees earned to the date of termination and through demobilization, including any cancellation charges of vendors and subcontractors.

18.Complete Agreement:  The Parties acknowledge this Agreement, including the Proposal and any Attachments constitute the entire Agreement between them.  Unless stated otherwise in this Agreement, this Agreement may not be modified except in a writing signed by both parties.  The parties agree that California law governs this Agreement and any dispute involving this Agreement.

EX-10.10

Exhibit 10.10

April 24, 2006

Brian Kletscher
Highwater Ethanol, LLC
30427 County Highway 10
Vesta, Minnesota 56292

RE:Ethanol Plant Design Survey

Highway Ethanol, LLC

Vesta, Minnesota

Dear Brian:

Thank you for the opportunity to submit this proposal for design survey services for your ethanol plant project.  As you may be aware, Yaggy Colby Associates has been involved with almost all Fagen, Inc., ethanol plants in Minnesota and Iowa in some manner.  In many instances, Yaggy Colby Assoicates has performed the design survey and site civil design.  In addition, Yaggy Colby Associates has provided such civil services for large development projects for over thirty-five (35) years.

It is our understanding that Highwater Ethanol intends to construct an ethanol production facility on land shown on the attached map.  It is further understood that the total land parcels involved is not exactly known at this time.  Therefore, the proposal will account for this.

The scope of services for your project will be broken into two phases: design survey and land survey.  The design survey includes gathering detailed topographic surface and utility features to provide the basis of design for the project.  The land survey leads to the legal documents which described the boundaries of the property.  More specifically, the scope of work for the above is as follows:

1.Design Survey

·Detailed survey of land surface features including roads, railroad tracks, fences, culverts, vegetation and structures.

·Detailed survey of utilities as located by the locating services.

·Drafting of survey data.

·Electronic file package to be sent to Fagen for design.

2.Land Survey

·Property research.

·Determination of property boundaries.

·Setting property pins.

·Developing plat of survey.

All above work is performed with state of the art equipment including GPS.

Equal Opportunity Employer
yaggy.com

Yaggy Colby Associates proposes the above scope of services on an hourly rate basis with estimated fees as follows:

1.Design survey of Parcel 1 and 2 - $10,100

2.Design survey of all 3 - $12,100

3.Land survey of all parcels - $6,500

The above fees are based on minimal difficulty finding section corners and access with an ATV.  Should conditions arise or a change in scope of work be requested by the owner, a fee proposal will be submitted for approval.  Additional work will no proceed without authorization.

The firm’s standard terms and conditions have been included as part of this proposal.  Authorization of this proposal is for approval of costs only.  Yaggy Colby Associates will only perform the work requested by Highwater Ethanol.  Please feel free to call with any questions.

Sincerely,

YAGGY COLBY ASSOCIATES

/s/ Thomas K. Madden

Thomas K. Madden, PE

Project Engineer

Enclosure

TKM/jmw

Highwaterethanol.doc

AUTHORIZATION

I hereby authorize Yaggy Colby Associates to proceed with the work identified herein.

/s/ Brian Kletscher	May 4, 2006
Authorized Signature	Date

YAGGY COLBY ASSOCIATES (YCA)
TERMS AND CONDITIONS

ARTICLE 1 – PAYMENT TO YCA

1.01Other Provisions Concerning Payments

A.Preparation of Invoices.  Invoices will be prepared monthly in accordance with YAGGY COLBY ASSOCIATES’ standard invoicing practices and will be submitted to OWNER by YCA, unless otherwise agreed.  The amount billed in each invoice will be calculated as set forth in Proposal.

B.Payment of Invoices.  Invoices are due and payable upon receipt.  If OWNER fails to make any payment due YCA for services and expenses within 30 days after receipt of their invoice therefore, the amounts due YCA will be increased at the rate of 1.5% per month (or the maximum rate of interest permitted by law, if less.)  In addition, YCA may after giving seven days written notice to OWNER, suspend services under this Agreement until YCA has been paid in full all amounts due for services, expenses, and other related charges.  Design professionals shall not have any liability whatsoever to the client for any costs or damages as a result of such suspension caused by any breach of this Agreement by the Client.  Payments will be credited first to interest and then to principal.

C.As required by the Construction Lien Law, YCA hereby notifies Owner that persons or companies furnishing labor or materials for the construction on Owner’s land may have lien rights on Owner’s land and buildings if not paid.

D.Disputed Invoices.  If the Client objects to any portion of an invoice, the Client shall so notify the Design Professional in writing within 30 calendar days of receipt of the invoice.  The Client shall identify the specific cause of the disagreement and shall pay when due that portion of the invoice not in dispute.  Interest as stated shall be paid by the client on all disputed invoiced amounts resolved in the Design Professional’s favor and unpaid for more than 30 calendar days after date of submission.

E.Payments Upon Termination.  In the event of any termination under Paragraph 2.04, YCA will be entitled to invoice OWNER and will be paid in accordance with Proposal for all services performed or furnished and all Reimbursable Expenses incurred through the effective date of termination.

ARTICLE 2 – GENERAL CONSIDERATIONS

2.01Standards of Performance

A.The standard of care for all professional services and related services performed or furnished by YAGGY COLBY ASSOCIATES under this Agreement will be the care and skill ordinarily used by members of their profession practicing under similar circumstances at the same time and in the same locality.  YCA makes no warranties, expressed or implied, under this Agreement or otherwise, in connection with their services.

B.YCA shall perform or furnish professional services and related services in phases of the Project to which this Agreement applies.  YCA shall serve as OWNER’s prime professional for the Project.  YCA may employ such Subconsultants as they deems necessary to assist in the performance or furnishing of the services.  YCA shall not be required to employ any Subconsultant unacceptable to them.

C.YCA and OWNER will endeavor to comply with applicable Laws or regulations.  This Agreement is based on these requirements as of its Effective Date.  Changes to these

YCA Terms & Conditions YCASTND

1

requirements after the Effective Date of this Agreement may be the basis for modifications to OWNER’s responsibilities or to YCA’s scope of services, times of performance, or compensation.

E.OWNER shall be responsible for, and YCA may rely upon, the accuracy and completeness of all requirements, programs, instructions, reports, data, and other information furnished by OWNER to TCA pursuant to this Agreement.  YCA may use such requirements, reports, data, and information in performing or furnishing services under this Agreement.

F.OWNER shall make decisions and carry out its other responsibilities in a timely manner and shall bare all costs incident thereto so as not to delay the services of YCA.

2.02Use of Documents

A.All Documents are instruments of service in respect to this Project, and YAGGY COLBY ASSOCIATES shall retain an ownership and property interest therein (including the right of reuse at the discretion of YCA) whether or not the Project is completed.

B.Copies of Documents that may be relied upon by OWNER are limited to the printed copies (also known as hard copies) that are signed or sealed by YCA.  Files in electronic media format of text, data, graphics, or of other types that are furnished by YCA or OWNER are only for convenience of OWNER.  Any conclusion or information obtained or derived from such electronic files will be at the user’s sole risk.

C.OWNER may make, and retain, and reuse copies of Documents for information and reference in connection with use on the Project by OWNER with written permission from YCA.  Such Documents are not intended or represented to be suitable for reuse by OWNER or others on extensions of Project or on any other project.  Any such reuse or modification without written verification or adaptation by YCA, as appropriate for the specific purpose intended, will be at OWNER’s sole risk and without liability or legal exposure to YCA or to its Subconsultants.  OWNER shall indemnify and hold harmless YCA and its Subconsultants from all claims, damages, losses, and expenses, including attorneys’ fees arising out of or resulting therefrom.

D.If there is a discrepancy between the electronic files and the hard copies, the hard copies govern.

2.03Insurance

A.YAGGY COLBY ASSOCIATES shall procure and maintain Professional Liability, General Liability, Workers Compensation, and Automotive Liability which are applicable to the Project.

B.OWNER shall procure and maintain General Liability or Property Insurance policies which are applicable to the Project.

2.04Termination

A.The obligation to provide further services under this Agreement may be terminated.

1.For cause, by either party upon 30 days written notice in the event of substantial failure by the other party to perform in accordance with the terms hereof through no fault of the terminating party.

2.For convenience, by OWNER effective upon the receipt of notice by YCA.

2

2.05Dispute Resolution

A.OWNER and YAGGY COLBY ASSOCIATES agree to negotiate all disputes between them in good faith for a period of 30 days from the date of notice, prior to exercising their rights under provisions of this Agreement, or under law.

B.Mediation – In an effort to resolve any conflicts that arise during the design or construction of the project or following the completion of the project, the Client and the Design Professional agree that all disputes between them arising out of or relating to this Agreement shall be submitted to nonbonding mediation unless the parties mutually agree otherwise.  The Client and the Design Professional further agree to include a similar mediation provision in all agreements with independent contractors and consultants retained for the project and to require all independent contractors and consultants also to include a similar mediation provision in all agreements with subcontractors, subconsultants, suppliers or fabricators so retained, thereby providing mediation as the primary method for dispute resolution between the parties to those agreements.

2.05Hazardous Environmental Condition

A.OWNER represents to YAGGY COLBY ASSOCIATES that to the best of its knowledge, a Hazardous Environmental Condition does not exist.

B.OWNER has disclosed to the best of its knowledge to YCA the existence of all Asbestos, PCB’s Petroleum, Hazardous Waste, or Radioactive Material located at or near the Project site, including type, quantity, and location.

C.It is acknowledged by both parties that YCA’s scope of services does not include any services related to asbestos or hazardous or toxic materials.  In the event the Design Professional or any other party encounters asbestos or hazardous or toxic materials at the jobsite, or should it become known in any way that such materials may be present at the jobsite or any adjacent areas that may affect the performance of the Design Professional’s services, the Design Professional may, at his or her option and without liability for consequential or any other damages, suspend performance of services on the project until the Client retains appropriate specialist consultants or contractors to identify, abate and/or remove the asbestos or hazardous toxic materials, and warrant that the jobsite is in full compliance with applicable laws and regulations.

D.The Client agrees, notwithstanding any other provision of this Agreement, to the fullest extent permitted by law, defend, to indemnify and hold harmless the Design Professional, his or her officers, partners, employees, agents and consultants from and against any and all claims, suits, demands, liabilities, losses, or costs, including reasonable attorneys’ fees and defense costs, resulting or accruing to any and all persons, firms, and any other legal entity, caused by, arising out of or in any way connected with the detection, presence, handling, removal, abatement, or disposal of any asbestos or hazardous toxic substances, products or materials that exist on, about or adjacent to the jobsite, whether liability arises under breach of contract or warranty, tort, including negligence, strict liability or statutory liability or any other cause of action.

2.07Allocation of Risk

A.Indemnification

1.To the fullest extent permitted by law, YAGGY COLBY ASSOCIATES shall indemnify and hold harmless OWNER, OWNER’s officers, directors, partners, and employees from and against any and all costs, losses, and damages (including but not limited to all fees and charges of engineers, architects, attorneys, and other professions, and all court or arbitration or other dispute resolution costs) caused solely by the negligent acts or omissions of YCA or its officers,

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directors, partners, employees in the performance and furnishing of YCA’s services under this Agreement.

2.To the fullest extent permitted by law, OWNER shall indemnify and hold harmless YCA, its officers, directors, partners, employees, and Subconsultants from and against any and all costs, losses, and damages (including but not limited to all fees and charges of engineers, architects, attorneys, and other professionals, and all court or arbitration or other dispute resolution costs) caused solely by the negligent acts or omissions of OWNER or OWNER’s officers, directors, partners, employees, and OWNER’s Consultants with respect to this Agreement or the Project.

3.To the fullest extent permitted by law, YCA’s total liability to OWNER and anyone claiming by, through, or under OWNER for any cost, loss, or damages caused in part by the negligence of YCA and in part by the negligence of OWNER or any other negligent entity or individual, shall not exceed the percentage share that YCA’s negligence bears to the total negligence of OWNER, YCA, and all other negligent entities and individuals.

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EX-10.11

Exhibit 10.11

OPTION AGREEMENT

THIS OPTION AGREEMENT (the “Agreement”) is made this 8th day of August, 2006, by and between Highwater Ethanol, LLC a Minnesota limited liability company (the “Buyer”) and David Geis and                            Gies, husband and wife, and Steven Geis and Kathleen Gies, husband and wife (the “Seller”).

WITNESSETH:

WHEREAS, Seller is the owner of certain real property legally described on Exhibit “A” attached hereto (which real property, together with all easements and other rights appurtenant thereto, shall be defined herein as the “Property”);

WHEREAS, Buyer desires to acquire an option to purchase the Premises (as defined in paragraph 1 hereof) from Seller in accordance with the terms and conditions of this Agreement (the “Option”); and

WHEREAS, the parties hereto desire to set forth their agreement concerning the terms and conditions of such Option.

NOW, THEREFORE, in consideration of the foregoing, the mutual promises of the parties hereto and the mutual benefits to be gained by the performance hereof, and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1.Grant and Exercise of Option.  Buyer shall have the option to purchase: i) Seller’s right, title and interest in and to at least a six (6) acre and up to a twelve (12) acre portion of the Property, consisting of one or more contiguous six (6) acre parcels to be more accurately located and described following Buyer’s completion of well digging and water exploration on the property; and ii) a permanent easement over such other portions of the Property as may be necessary to accommodate the construction and maintenance of a pipeline to transport water produced on the Premises to an ethanol production facility proposed by Buyer at or near Lamberton, Minnesota, and in and to any easements, hereditaments and other rights appurtenant thereto in accordance with the terms and conditions of this Agreement (the “Premises”).  The parties acknowledge that the Premises shall be contiguous with the township right-of-way touching the property.  The first six (6) tract shall begin at the Southeast corner of the property and then 300 feet North and then a sufficient number of feet West to make six (6) acres.  If an additional six (6) acres is purchased it shall be correspondingly 300 feet in width, located along the township road, and contiguous with the prior or first six (6) acres purchased.  The measurement shall begin the middle of the road to determine the six (6) acres for each tract.  The Premises shall include any wells completed by Buyer under a contemporaneous License Agreement between the parties hereto.  This option shall continue in full force and effect for a period commencing upon the date hereof and continuing until earlier of the date of Buyer’s delivery to Seller of the “Option Notice” (as defined in Paragraph 8 hereof), or December 31, 2008, whichever occurs first.

2.Purchase Price.  The purchase price for the Premises (the “Purchase Price”) shall be Seven Thousand and No/100 Dollars ($7,000.00) per purchased acre.  Said acreage shall be described and depicted by a boundary survey to be completed at the expense of the Buyer.  Said Purchase Price, subject to adjustments and prorations as provided herein, shall be paid as follows:

(a)A non-refundable deposit of One Thousand and No/100 Dollars ($1,000.00) (the “Option Fee”) shall be paid to Seller upon execution of this Agreement and disbursed in accordance with the terms hereof.  Except as otherwise designated herein, the principal amount of the Option Fee shall be credited against the Purchase Price payable at “Closing” (as the term is defined in Paragraph 3 hereof);

(b)The balance of the Purchase Price, subject to prorations and adjustments as provided herein, shall be payable by Buyer to Seller in cash or immediately available funds at Closing.

3.Closing Date.  The closing (the “Closing”) of this purchase and sale shall take place at a mutually agreeable location, on the business day designated by Buyer in the Option Notice (as defined in Paragraph 8 hereof), which day of Closing shall be defined herein as the “Date of Closing”.

4.Deliveries by Seller at Closing.  If Buyer shall have exercised its option in a timely manner and shall have performed all of its obligations hereunder to the Date of Closing, then Seller shall, on the Date of Closing, execute, where necessary, and deliver to Buyer the following:

(a)A general warranty deed in recordable form executed by Seller and conveying marketable fee titled to the Premises to Buyer, free and clear of all liabilities, liens, encroachments, encumbrances, easements, obligations, charges and options of any kind whatsoever, except those disclosed by the abstract or Commitment to be delivered pursuant to Paragraph 6 hereof;

(b)An easement, if requested by Buyer, in recordable form executed by Seller and conveying a right of way over and across the Property, in a width to be negotiated by the parties hereto, for the purpose of constructing, maintaining and operating thereon a water pipeline as further described in Paragraph 1 hereof;

(c)An affidavit indicating that on the Date of Closing there are no outstanding, unsatisfied judgments, tax liens or bankruptcies against or involving the Seller, that there has been no skill, labor, or material furnished to the Premises by Seller for which mechanics’ liens could be filed, and that there are no other unrecorded interests in the Premises of

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any kind, including, but not limited to, any leasehold interest in the Premises;

(d)A Well Certificate in the form required by Minn. Stat. § 103I.235, or a designation on the deed that otherwise satisfies said statutory requirements; and

(e)Such additional documents that are reasonable in form as shall reasonably be necessary to carry out the intent of this Agreement.

5.Deliveries by Buyer at Closing.  If Seller shall have performed all of its obligations hereunder to the Date of Closing, the Buyer shall, on the Date of Closing, execute, where necessary, and deliver the following:

(a)The Purchase Price;

(b)The reasonable value of any crops growing on the Premises if Closing occurs following planting but prior to harvest; and

(c)Such additional documents as shall reasonably be necessary to carry out the intent of this Agreement.

At closing, Seller shall pay the state deed tax payable upon recording the above warranty deed and easement and Buyer shall pay the recording fees for the filing of said warranty deed and easement.  Each party shall be responsible for the payment of any attorneys’ fees that it may incur in this transaction.  Any closer’s fee incurred in the closing of this sale transaction shall be paid by Buyer.

6.Title Examination.  Within forty-five (45) days after the date of the delivery by Buyer of an Option Notice, Seller, as its sole cost and expense, shall deliver to buyer, for Buyer’s examination, an updated abstract of title for the Premises.  In the alternative, in lieu of providing the Abstract of Title, the Seller may provide a commitment (the “Commitment”) for the issuance of an ALTA owner’s policy of the insurance, with extended coverage issued by Title Company, in the amount of the Purchase Price, committing to insure that Buyer will have good and marketable title to the Premises and its appurtenances on the Date of Closing free and clear of any liens and exceptions to title and including relevant tax lien, special assessment, judgment and bankruptcy searches.

In the event Buyer does not timely receive the updated abstract or Commitment within the time specified, Buyer may obtain such document, at Seller’s cost and expense.  Title to the Premises and its appurtenances shall be subject to Buyer’s approval and all objections to the status of title shall be delivered to Seller in writing within ten (10) business days after receipt of the abstract or Commitment.  Seller shall correct all such objections within sixty (60) days of Seller’s receipt thereof, it being understood that marketable fee title and not insurable title to the Premises an is appurtenances is to be conveyed by Seller to Buyer; provided, in the event such objection cannot be corrected

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within said sixty (60) day period, such period shall be extended to the ext3nt reasonably necessary to complete such correction so long as Seller commences an effective cure thereof within said sixty (60) day period and prosecutes such cure diligently to completion.  If title to the Premises and its appurtenances is not marketable and is not made so by Seller within sixty (60) days of the delivery of said objections, or such longer period as may be available to Seller hereunder, Buyer shall have the option, in addition to other remedies available at law or in equity, to:

(a)Declare this Agreement null and void; or

(b)Waive any defect in title and, in such event, proceed to close the transaction contemplated by this Agreement; provided, Buyer shall have the option, at Closing, to pay directly any liens, mortgages, charges or similar encumbrances against the Premises that are liquidated in amount, and Buyer may deduct the amount so paid from the Purchase Price.

7.Prorations.  Real estate taxes, if any, that are levied or assessed against the Premises and that are currently payable in the year in which Closing occurs shall be prorated as of the Date of Closing.  Seller shall pay the entirety of all special assessments and deferred taxes, if any, that are levied against the Premises as of the Date of Closing.

8.Option Notice.  Seller acknowledges that Buyer and other third-parties are seeking, or will seek, at their sole expense, various approvals from governmental or private authorities having jurisdiction over the Premises necessary to develop the Premises and nearby properties as desired by Buyer and such third-parties (collectively, the “Required Approvals”).  Upon Buyer or such third-parties’ receipt of all Required Approvals, Buyer may provide Seller written notice to that effect (the “Option Notice”).  The Option Notice shall designate the Date of Closing; provided, however, the Date of Closing shall occur within sixty (60) days of the date the Option Notice is delivered to Seller. Upon the delivery of the Option Notice, Buyer shall be obligated to close upon its purchase of the Premises in accordance with the terms hereof.  Seller acknowledges that Buyer has made no representation or warranty that an Option Notice will be delivered by Seller hereunder.  Notwithstanding any contrary provision herein, the event that, for whatever reason, Buyer fails to deliver the Option Notice to Seller on or before December 31, 2008, this Agreement shall be deemed expired and all of Buyer’s rights hereunder shall be deemed waived and of no further force and effect.  In the event of any expiration or earlier termination of this Agreement, either party shall, upon the request of the other, execute and deliver an instrument that is reasonable in form and that memorializes the occurrence and effect of such expiration or termination.

9.Assignment.  Seller acknowledges that Buyer may not be the party that will be developing this Premises, and that Buyer may assign its rights under this contract to a third party.  The parties acknowledge and agree that Buyer shall have the right to sell, assign and transfer this Option, and all rights, title and interests created herein, without Seller’s prior approval.  Buyer shall provide copies of any and all documentation to Seller contemporaneous with any such assignment.

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10.Seller’s Option to Rent Back Tillable Acres.  If Buyer rents out any tillable acres that is purchases hereby, Seller shall have the first right to rent such at $50 per tillable acre.

11.Miscellaneous.

(a)Notices.  Any notice required herein shall be deemed effective if it is personally delivered, delivered prepaid to a nationally-recognized overnight air courier for overnight delivery, to Seller or Buyer at the following addresses:

To Seller:David and                   Geis

To Buyer:Highwater Ethanol, LLC

c/o Kevin Stroup

300 O’Connell Street

Marshall, MN  56258

Either party may designate an additional or another address upon giving notice to the other party pursuant to this paragraph.  Notice given in any manner other than as stated herein, shall be deemed effective only upon receipt by the party to whom such notice is given.

(b)Interpretation.  This Agreement constitutes the entire understanding between the parties.  It may be amended or modified only in a writing signed by Seller and Buyer.  This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

(c)Waivers.  Neither the extension of time nor payment of any sum of money to be paid hereunder nor any waiver by Seller of its right to declare this Agreement forfeited by reasons of any breach hereof, shall in any manner affect the right of Seller to terminate this Agreement because of a subsequent default.  No extension of time or waiver shall be effective unless given in writing signed by Seller.

(d)Additional Documents.  After the Closing, each of the parties, without further consideration, agrees to execute such additional documents as may reasonably be necessary to carry out the purposes and intent of this Agreement and to fulfill the obligations of the respective parties hereunder.  Upon the expiration or earlier termination of this Agreement and upon Sellers written request therefore, Buyer shall execute and deliver to Seller a quit claim deed to the Premises or other instrument that is

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reasonable in form and that memorializes the occurrence and effect of any such expiration or termination.

(e)Commissions.  Seller hereby warrants to Buyer and Buyer hereby warrants to Seller that no broker, agent or finder has been retained by either party and that no broker’s commissions, finder’s fees or like charges have been incurred in connection with this transaction.

(f)Headings.  The headings in this Agreement are inserted for convenience only and shall not constitute a part hereof.

(g)Parties.  This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

(h)Survival.  The covenants contained herein shall survive Closing of this transaction.

(i)Use of Premises.  To the extent permitted by applicable law, and without waiving the provisions of Minn. Stat. Chapter 466, Buyer hereby agrees to indemnify and hold Seller and the Premises harmless from and against any and all liens, losses, claims, causes of action, liabilities and costs of defense incurred by Seller arising out of the actions of Buyer, its agents, employees, contractors o invitees upon the Premises prior to closing, except to the extent caused by the negligence or willful misconduct of Seller or its agents, employees or contractors.

(j)Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument.

12.REPAIR TILE.  Buyer shall repair any tile damage by its exercise of this option (or the corresponding License Agreement) and/or use of this property.

13.USE OF FIELD ROAD.  Seller shall have the right to use the field road for access to their remaining property.  Seller shall also be granted a permanent easement for ingress and egress across any property sold hereby as access to Seller’s remaining property, subject to the limitation that such use shall not affect any wells or the use thereof as placed on said property by Buyer.

THIS OPTION AGREEMENT has been executed and delivered as of the date first above written.

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SELLER:			BUYERS:
			Highwater Ethanol, LLC
By:	/s/ David Geis		By:	/s/ Brian Kletscher
	David Geis
				Its:	President
By:			By:	/s/ Warren Pankonin
		Geis
				Its:	Director
By:	/s/ Steven Geis
	Steven Geis
By:	/s/ Kathleen Geis
	Geis

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EXHIBIT “A”

Legal Description of Premises

The Southwest Quarter (SW1/4) of Section 29, Township 109 North, Range 37 West, Redwood County, Minnesota.

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EX-10.12

Exhibit 10.12

OPTION TO PURCHASE REAL ESTATE

The undersigned, Arden Imker and Lester Imker, general partners of Imker Farms, a general partnership under the laws of the State of Minnesota, of Lamberton, Minnesota, hereinafter referred to as seller, hereby acknowledges receipt of Five Thousand and no/100 dollars ($5,000.00) from the Lamberton EDA of Lamberton, Minnesota, hereinafter referred to as purchaser.  In consideration of such payment, seller hereby gives and grants to purchaser the exclusive option to purchase for the price and on the terms and conditions hereinafter set forth, part of the real property of seller situated in the Township of Lamberton, County of Redwood, State of Minnesota, and particularly described as follows:

All that part of the Southeast Quarter (SE1/4) of Section Twenty-one (21), Township One Hundred Nine (109) North, Range Thirty-seven (37) West located north of the north right-of-way line of the railroad; subject to easements, road easements, and railroad right-of-way, and further subject to the terms of this agreement,

Hereinafter referred to as the property.

1.  The full purchase price for the property is Seven Thousand and no/100 Dollars ($7,000.00) per acre.

If this option is not exercised, the $5,000.00 paid by the purchaser shall be retained by the seller, in consideration of the option.  If the option is exercised the $5,000.00 paid by the purchaser shall be considered part of the purchase price.

2.  The purchaser agrees to cooperate with the seller in completing a like kind exchange under Section 1031 of the Internal Revenue code so as to enable seller to acquire replacement property with the proceeds of the purchase.

3.  This option may be exercised by written notice of such exercise delivered to seller at Imker Farms, c/o Arden Imker, 24794 120 Street, Lamberton, County of Redwood, State of Minnesota, on or before 12:00 p.m. on December 31, 2006, or such extension of such period as seller may grant in writing within the original period of the option.  Notice shall be deemed effective if deposited in the United States mail on or before 12:00 p.m. December 31, 2006.

4.  Seller shall convey to purchaser or his nominee good and marketable title to the property herein described, subject only to: highway, utility and drainage easements of record.  Seller shall furnish abstract of title, certified to date, to include proper searches covering bankruptcies and state and federal judgment and liens.  If any objections are made by the purchaser, seller shall be allowed 120 days to make such title marketable.  Pending correction of title, payments required hereunder shall be postponed, but upon correction of the title, and within 10 days after notice to purchaser, the parties shall perform this agreement according to its terms.

Conveyance of title and transfer of possession to purchaser or its nominee shall be executed within sixty (60) days after exercise of the option.  During such period, title may be examined by purchaser or its nominee by any method selected. The purchase price shall be paid

in cash at the time of closing.  At the time of closing the seller agrees to convey the property to the purchaser by a general Warranty Deed conveying to the purchaser marketable title to the property.

The Seller reserves for itself and its assigns the right to farm the tillable acres undeveloped on the property after closing, until the purchaser sells the property, or until Arden Imker, a partner of Imker Farms, Inc. shall no longer be farming, or until December 31, 2009, whichever occurs first.  The Seller will pay to the purchaser cash rent of $105 for each acre of tillable land.  The right reserved by the seller to farm the tillable acres undeveloped on the property after closing shall not be assignable by the seller.

If the purchaser fails to exercise the option with the period provided hereinbefore, this agreement shall be void and of no further force and effect.

5.  Ad valorem taxes against the property for the year in which the sale is consummated, whether or not a lien, and whether or not assessed, shall be prorated between the parties as to the date of delivery of title.  If such taxes are not ascertainable at such time, the base of proration shall be the amount of the ad valorem taxes for the previous year.  All existing special assessments, if any, shall be prorated by the parties as of the date of closing.

6.  The purchaser shall reimburse the sellers and/or their lessee(s) for the actual crop loss sustained if the sellers and/or their lessee(s) have growing crops on the property at the time this Option is exercised and construction has begun.  If the property is sold after the crop is planted, any destroyed crop will be reimbursed for the cost of material (seed, fertilizer, etc.), rent and labor.

7.  All rights of the purchaser hereunder are assignable, but written notice of any assignment by Purchaser, and of each subsequent assignment or nomination to take title, shall be given in writing to seller at the address set forth below.  Seller is not restricted from conveying the above described real estate prior to the exercise of this option provided, however, that seller in such event agrees to convey said real estate subject to the terms and conditions of this option.

8.  This agreement shall be binding on the heirs, successors and assigns of the parties and the terms and conditions herein shall survive a sale if completed.

9.  This agreement shall constitute the entire contract between the parties hereto, and no modification hereof shall be binding unless endorsed hereon in writing.

Dated this 27th day of October, 2005.

IMKER FARMS
By:	/s/ Arden Imker
Arden Imker, General Partner

By:	/s/ Lester Imker
Lester Imker, General Partner
LAMBERTON EDA of Lamberton, Minnesota
By:	/s/ Steven Krinke
By:	/s/ Gwen Batalden

STATE OF MINNESOTA	)
	) SS.
COUNTY OF REDWOOD	)

The foregoing instrument was acknowledged before me this 27th day of October, 2005, by Arden Imker and Lester Imker, General Partners of Imker Farms, a general partnership under the laws of the State of Minnesota, on behalf of the partnership.

[KATHERYN R. WILLE]	/s/ Katheryn R. Wille
[NOTARY PUBLIC-MINNESOTA]	Notary Public
[My Commission Expires 1-31-2008]

STATE OF MINNESOTA	)
	) SS.
COUNTY OF REDWOOD	)

On this 19th day of October, 2005, before me, a Notary Public within and for said County and State, personally appeared Steven Krinke and Gwen Gatalden, the President and Secretary of Lamberton EDA, Lamberton, Minnesota, to me known to be the persons described in and who executed the foregoing instrument, and acknowledged, each of them, that they executed the same as their free act and deed on behalf of the Lamberton EDA, Lamberton, Minnesota.

/s/ Barbara J. Anderson

Notary Public

[BARBARA J. ANDERSON]

[NOTARY PUBLIC-MINNESOTA]

[My Commission Expires 1-31-2008]

EX-10.13

Exhibit 10.13

ASSIGNMENT OF OPTION TO PURCHASE REAL ESTATE

WHEREAS, Imker Farms has entered into an Option to Purchase Real Estate (as seller) with Lamberton EDA of Lamberton, Minnesota (as buyer), said Option to Purchase Real Estate dated October 27, 2005, and

Lamberton EDA of Lamberton, Minnesota, desires to sell and assign all of its rights (as buyer) therein to Highwater Ethanol, LLC.

NOW, THEREFORE, the undersigned parties agree as follows:

1.             Lamberton EDA of Lamberton, Minnesota, hereby assigns all of its rights, title, interest and obligations in and to said Option to Purchase Real Estate (including its right to purchase said real estate) to Highwater Ethanol, LLC.

2.             Highwater Ethanol, LLC will pay Lamberton EDA of Lamberton, Minnesota, Five Thousand and no/100 Dollars ($5,000.00) in order to obtain this assignment.

3.             Imker Farms, a general partnership under the laws of the State of Minnesota, hereby consents and agrees to said assignment to Highwater Ethanol, LLC (but acknowledge that pursuant to paragraph 7 of said Option, that such is freely assignable by Lamberton EDA, without any consent by Imker Farms).

4.             Imker Farms hereby agrees to cooperate, including, but not limited to executing ay and all applications or documents necessary, so that Highwater Ethanol, LLC can proceed to rezone and/or obtain any permission or approvals necessary so Highwater Ethanol, LLC can proceed to develop and then construct an ethanol facility on or adjoining the real estate covered by said Option to Purchase Real Estate.

5.             This Assignment shall be binding on the heirs, successors and assigns of the parties hereto and constitutes the entire contract between the parties hereto and no modification hereof shall be binding unless endorsed in writing by the party to be affected.

Dated: August 9, 2006
ASSIGNOR:	ASSIGNEE:
LAMBERTON EDA	HIGHWATER ETHANOL, LLC
LAMBERTON, MINNESOTA

By:	/s/ Steve Krinke			By:	/s/ Brian Kletscher
		Its:	EDA President			Its:	President
By:	/s/ Gwen E. Batalden			By:	/s/ David G. Moldan
		Its:	Secretary			Its:	director

The undersigned hereby consents to the terms contained herein, specifically including the “cooperation” clause contained herein.

IMKER FARMS
By:	/s/ Arden Imker
	Arden Imker, a general partner
By:	/s/ Lester Imker
	Lester Imker, a general partner

EX-10.14

Exhibit 10.14

PURCHASE AGREEMENT

This agreement, made and entered into this 14th day of August, 2006, by and between Lamberton EDA, hereinafter “Seller”, and Highwater Ethanol, LLC, hereinafter “Buyer”.

1.Buyer offers to purchase and Seller agrees to sell real property in Redwood County, Minnesota, legally described as:

That portion of the South One Half of Section Twenty-two (22), Lamberton Township, Redwood County, State of Minnesota, located North of the DM and E rail line.  Including up to 200 feet along the northern portion of the DM and E rail line, running the length of the Lamberton EDA property, also including all or a portion of Lot 9 and Lot 10 of the Preliminary Plat Layout of the Cottonwood River Eco-Energy Park.  {Attached}  If necessary, legal descriptions to be determined by survey.  Purchaser to pay for the survey.

2.Any of the following items of personal property and fixture owned by Seller and currently located on property are included in the sale: NONE.

3.The consideration for this agreement includes and initial payment of One Thousand and no/100 Dollars ($1,000.00) and other good and valuable consideration, including, but not limited to the reliance by Highwater Ethanol, LLC on this Purchase Agreement.  The initial payment of $1,000.00 will be paid upon execution of this Agreement, and will apply towards to purchase price if Buyer elects to complete the purchase.

The sale price for the property will be $8000.00 per acre, with acreage determined by agreement of the parties or, if necessary, survey.  The price for any partial acre to be pro rated.  Acreage shall be determined as is customary for farmland sales, without reduction for roads or ditches.  The balance of the purchase price, after application of the initial payment, will be due in full at closing.

This Purchase Agreement shall be construed as an option, with the terms of this Purchase Agreement binding on the parties through and including March 31, 2007.  If Highwater Ethanol, LLC does not exercise the option by March 31, 2007, as of March 31, 2007 this Agreement shall be null and void and without further force and effect.  In the event that the Agreement becomes void, then Seller shall retain the initial deposit of $1000.00.

If and when Highwater Ethanol, LLC desires to proceed to close, they will give written notice to Seller and the transaction will close sixty {60} days after the date of said written notice as given by Highwater Ethanol, LLC to Seller; or earlier at Buyer’s option.

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Seller shall cooperate with Buyer to execute the appropriate documents to meet Federal, State and Local permits and regulations as required – so Buyer can proceed to construct an ethanol facility.

4.Upon performance by Buyer, Seller shall execute and deliver a Warranty Deed conveying marketable title, subject to:

1.             Building and zoning laws, ordinances, State and Federal regulations;

2.             Restrictions relating to use or improvement of the property without effective forfeiture provisions;

3.             Reservation of any mineral rights by the State of Minnesota;

4.             Utility and drainage easements which do not interfere with existing improvements;

5.             Protective covenants of record;

6.             Existing road easements.

5.Real estate taxes shall be paid as follows:  All prior year real estate taxes shall be paid by Seller.  The real estate taxes due and payable in 2006 shall be prorated to closing date.  Buyer shall pay real estate taxes due and payable in 2007 and thereafter.

6.Special assessments shall be paid as follows:  Seller shall pay in full all special assessments levied as of the date of closing.

7.Damages to real property.  If the real property is substantially damaged prior to closing, this Agreement shall terminate and the earnest money shall be refunded to Buyer.  If the real property is damaged materially but less than substantially prior to closing, Buyer may rescind this Agreement by notice to seller within Twenty-one {21} days Buyer may inspect the real property, and in the event of such rescission, the earnest money shall be refunded to Buyer.

8.Seller’s boundary line, access restrictions and lien warranties.  Seller warrants that buildings, if any, are entirely with in the boundary lines of the property.  Seller warrants that there is a right of access to the real property from a public right of way.  Seller warrants that there has been no labor or material furnished to the property for which payment has no been made.  Seller warrants that there are no present violations of any restrictions relating to the use or improvement of the property.  These warrants shall survive the delivery of the deed or contract for deed.

9.Buyer acknowledges and warrants that Buyer has personally inspected the premises and accepts them in an “As Is” condition as of the date hereof.  Seller has made no representations or warranties in connection with the condition of the premises, or in regard to any other matter except title as

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explicitly set out herein.  The property is specifically being sold “As Is” with no express or implied representation or warranties as to physical conditions, quality of construction, workmanship, or fitness for any particular purpose and Buyer acknowledges that they accept said property in said “As Is” condition.

10.Seller shall deliver possession of the property not later than the date of closing.  All utilities shall be prorated between the parties as of the date of closing.

11.Examination of title; Within a reasonable time after Buyer gives written notice to close, Seller shall furnish Buyer with and abstract of title or a registered property abstract certified to date including proper searches covering bankruptcies and state and federal judgments, liens, and levied and pending special assessments.  Buyer shall have fifteen {15} business days after receipt of the abstract of title or registered property abstract either to have Buyer’s attorney examine the title and provide Seller with written objections or, at Buyers own expense, to make an application for a title insurance policy and notify Seller of the application.  Buyer shall have ten {10} business days after receipt of the commitment and written objections.  Buyer shall be deemed to have waived any title objections not made within the applicable ten {10} days period for above, except that this shall no operate as a waiver of Seller’s covenant to deliver a statutory warranty deed, unless a warranty deed is no specified above.

12.Title corrections and remedies.  Seller shall have 120 days from receipt of Buyers written title objection to make title marketable.  Upon receipt of buyer’s title objections, Seller shall, within ten {10} business days, notify Buyers of Seller’s intention to make title marketable within the 120 day period.  Liens or encumbrances for liquidated amounts which can be released by payment or escrow from proceeds of closing shall not delay the closing.  Cure of the defects by Seller shall be reasonable, diligent, and prompt.  Pending correction of title, all payments required herein and the closing shall be postponed.

1.If notice is given and Seller makes title marketable, then upon presentation to Buyer and proposed lender of documentation establishing that title has been made marketable, and if no objected to in the same time and manner as the original title objections, the closing shall take place within ten {10} business days or on the scheduled closing date, whichever is later.

2.If notice is given and Seller proceeds in good faith to make title marketable but the 120 day period expires without title being made marketable, Buyer may declare this Agreement null and void by

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notice to Seller, neither party shall be liable for damages hereunder to the other, and the earnest money shall be refunded to Buyer.

3.If Seller does not give notice of intention to make title marketable, or if notice is given but 120 day period expires without title being made marketable due to Seller’s failure to proceed in good faith, Buyer may seek, as permitted by law, any one or more of the following:

1.Proceed to closing without waiver or merger in the deed of the objections to title and without waiver of any remedies, and may:

a.Seek damages, cost and reasonable attorney’s fees from Sellers as permitted by law {damages under this subparagraph {a} shall be limited to the cost of curing objections to title, and consequential damages are excluded} or;

b.Undertake proceedings to correct the objections to title;

2.Rescission of this purchase agreement by notice as provided herein, in which case the purchase agreement shall be null and void and all earnest money paid hereunder shall be refunded to Buyer;

3.Damages from Seller including costs and reasonable attorney’s fees, as permitted by law;

4.Specific performance within six {6} months after such right of action arises.

5.             If title is marketable, or is made marketable as provided herein, and Buy3r defaults in any of the agreements herein, Seller may elect either of the following options, as permitted by law:

1.Seek damages from Seller including costs and reasonable attorney’s fees;

2.See specific performance within six months after such right of action arises.

13.TIME IS OF THE ESSENCEFOR ALL PROVISIONS OF THIS CONTRACT.  This Purchase Agreement, and any attached exhibits and any addendum or amendments signed by the parties, shall constitute the entire agreement between Seller and Buyer, and supersedes any other written or oral agreements between Seller and Buyer.  This Purchase Agreement can be modified only in writing signed by Seller and Buyer. 

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Buyer understands and agrees that this Purchase Agreement is subject to acceptance by Seller in writing.

14.buyer acknowledges that no oral representations have been made regarding possible problems with water in basement, or damage caused by water or ice build-up on the roof of the property and Buyer relies solely on tat regard in the following statement by Seller:

Seller has not had a wet basement, and has not had roof, wall or ceiling damage caused by water or ice build-up.  Buyer o has x has not received a real estate transfer disclosure statement.  Seller represents that there o is x is not a well on the property.  If there is a well, Buyer has received the well disclosure statement required by Minnesota Statutes 103I235.  Seller represents that there o is x is not and individual sewage treatment system on the property.  If there is such a system, Buyer has received the disclosure statement required by Minnesota Statutes 115.5, subd. 6

15.Environmental Concerns: To the best of the Seller’s knowledge there are no hazardous substances or underground storage tanks on the property, except herein noted;
NONE

16.This Purchase Agreement o is x is not subject contingency addendum.

17.This Purchase Agreement o is x is not subject to cancellation of a previously written Purchase Agreement.

18.Subdivision of Land: If this sale constitutes or requires a subdivision of land owned by Seller, Buyers shall pay all subdivision expenses, including any required survey, and obtained all necessary governmental approvals.  Sellers warrants that the legal description of the real property to be conveyed has been or will be approved for recording as of the date of closing.

19.Any crop damage {if crop is growing and is harmed by Buyer} shall be paid to seller of it Seller has leased the property, to the Tenant.  Crop damage shall be determined by multiplying the acreage damaged by the actual yield per acre obtained on the balance of the property and multiplied by the cash price at such time at Meadowland Farmers Coop, which shall be payable within ten {10} days of determination of the amount.  This provision shall survive the closing.

20.If any tile lines are affected by any construction or activity of Buyer on the real estate being purchased hereby, Buyer, at its sole and exclusive cost,

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shall repair or reroute the tile lines so that any drainage of Seller remains in effect and the condition as such existed prior to the purchase of said real estate by Buyer.  The terms of this paragraph shall survive the closing of this transaction.

21.Buyer agrees to pay all expenses of the transaction, including document preparation, Deed Tax, abstracting and recording fees.

We the owner of the property, accept this agreement.

Dated	8-14-2006	/s/ Steve Krinke
		Steve Krinke, President, Lamberton EDA
		/s/ Gwen E. Batalden
		Gwen Batalden, Secretary, Lamberton EDA

We agree to purchase the property for the price and on the terms and conditions set forth above.

Date:	8-14-2006	Highwater Ethanol, LLC
			By:	/s/ Brian Kletscher
				Brian Kletscher
				Its: President
			ID Number: 20-4798531

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EX-10.15

Exhibit 10.15

Pursuant to Item 601(b)(10)(ii)(A) of Regulation S-B the following is a description of the oral compensation arrangements between Highwater Ethanol, LLC and three of the Officers, also serving as Governors of the Board of Governors.

Compensation Arrangement with Officers and Governors:

Highwater Ethanol, LLC has agreed to pay the following Officers for their time and services related to the organization and development of the Highwater Ethanol, LLC ethanol project: (1) Brain D. Kletscher is paid $2,000 per month for his services as President and a Governor, (2) Tim J. Van Der Wal is paid $1,000 per month for his services as Secretary and a Governor, and (3) Jason R. Fink is paid $1,000 for his services as Treasurer and a Governor.

Highwater Ethanol, LLC will continue to compensate these Officers in this fashion until the Board of Governors adopts an alternative compensation plan.

EX-10.16

Exhibit 10.16

RPMG

RENEWABLE PRODUCTS Marketing Group

ETHANOL FUEL
MARKETING AGREEMENT

ETHANOL FUEL MARKETING AGREEMENT

THIS AGREEMENT, entered into this 28th day of September, 2006, by and between RENEWABLE PRODUCTS MARKETING GROUP, L.L.C., hereinafter referred to as “RENEWABLE PRODUCTS”; and HIGHWATER ETHANOL, LLC, a Minnesota limited liability company, hereinafter referred to as “HIGHWATER ETHANOL.”

WITNESSETH:

WHEREAS, RENEWABLE PRODUCTS is a limited liability company formed for the purpose of marketing ethanol for its members and others, and,

WHEREAS, HIGHWATER ETHANOL, is intending to construct a plant in Lamberton, Minnesota for the production of fuel grade ethanol, and,

WHEREAS, the parties have agreed that, for the duration of this marketing agreement, the sale and marketing of all of the ethanol produced by HIGHWATER ETHANOL should be undertaken by RENEWABLE PRODUCTS.

NOW, THEREFORE, In consideration of the mutual covenants and promises herein contained, the parties hereto agree as follows:

1.             Exclusive Marketing Representative.  That if HIGHWATER ETHANOL constructs a facility for the production of fuel grade ethanol, RENEWABLE PRODUCTS shall be the sole marketing representative for the entire production of said facility subject to all the terms and conditions of this agreement.

2.             Plant Construction/Ethanol Specifications.  That HIGHWATER ETHANOL promises and agrees to proceed, with due diligence, toward the planning, financing and construction of a facility for the production of fuel grade ethanol with a capacity of approximately 50 million gallons per year, which fuel grade ethanol will be at least 200 proof (denatured), and conform to the specifications described in A.S.T.M. 4806 and such other specifications that may be, from time-to-time, promulgated by the industry for E-Grade denatured fuel ethanol.  HIGHWATER ETHANOL contemplates that said facility is anticipated

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to be in production by September, 2008, and will make every good faith effort to begin production by that time.

3.             Rail and Truck Loading Facilities.  That the facility to be constructed and operated by HIGHWATER ETHANOL, as aforesaid, shall include reasonable and convenient railcar and tank truck access at the facility of a size and design appropriate to handle production of approximately 50 million gallons of ethanol per year.  All such railcar and tank truck loading facilities shall meet all industry and governmental safety standards and shall be capable of delivering a minimum of 1,200 gallons of product per minute to railcars and trucks combined.  HIGHWATER ETHANOL will be solely responsible for all demurrage charges for railcars in service for its use.  HIGHWATER ETHANOL shall provide personnel reasonably needed to load trucks or rail cars at its facility in a timely manner.

4.             Storage Capacity.  That the facility to be constructed and operated by HIGHWATER ETHANOL as aforesaid shall have sufficient storage capacity for not less than 10 days ethanol production.

5.             Best Efforts to Market.  That since RENEWABLE PRODUCTS shall have the exclusive right to market all the fuel grade ethanol produced by HIGHWATER ETHANOL at this facility during the term of this agreement, RENEWABLE PRODUCTS promises and agrees to use its best good faith efforts to market all such fuel grade ethanol; provided, however, that RENEWABLE PRODUCTS’ obligation hereunder shall be excused in case of fire, flood, other natural calamity, labor dispute or any adverse governmental statute, regulations or decree (including any court order or decree).

6.             Risk of Loss.  RENEWABLE PRODUCTS will be responsible for the marketing (subject to the terms of this agreement) of all such fuel grade ethanol produced by HIGHWATER ETHANOL, from the time the product crosses the loading flange, and the common carrier accepts responsibility for the product at HIGHWATER ETHANOL’s facility in either a railcar and/or tank truck.  In addition, RENEWABLE PRODUCTS shall bear the risk of loss for all such product that has been accepted for shipment by the common carrier.

7.             Specific Marketing Tasks.  RENEWABLE PRODUCTS shall be totally responsible for the marketing, sale and delivery of all the production from HIGHWATER ETHANOL’s facility during the term of this agreement, including, but not limited to:

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·Obtaining sufficient railcar, tank trucks and other transport as may be needed to handle said production;

·Negotiating the rates and tariffs to be charged for delivery of such production to the customer;

·Promoting and advertising the sale of fuel grade ethanol as appropriate;

·Ascertaining that such production is delivered where contracted and intended;

·Handling all purchase agreements with consumers and any complaints in connection therewith; and

·Collecting all accounts and undertaking any legal collection procedures as may be necessary.

8.             Negotiation of Ethanol Price.  That RENEWABLE PRODUCTS will use its best efforts to obtain the best price for all fuel grade ethanol sold by it pursuant to the terms of this agreement.

9.Compensation/Pooling.

HIGHWATER ETHANOL will pay RENEWABLE PRODUCTS 1% of the FOB netback returned each month for each gallon of ethanol sold by RENEWABLE PRODUCTS for the account of HIGHWATER ETHANOL.  RENEWABLE PRODUCTS shall have the right to deduct this fee from payments due HIGHWATER ETHANOL as described in paragraph 10.  The members of RENEWABLE PRODUCTS market their ethanol as a pool.  It is the intent of RENEWABLE PRODUCTS to treat the production of HIGHWATER ETHANOL in a similar manner in the future.  The parties hereto agree that, upon request in writing, either party may require the other to make available its books and records, at reasonable intervals, in order to audit those books and records and to account for all dealings, transactions and sums relevant to this Agreement.

10.          Accounts Receivable/Rail Car Leases/Termination of Contract.  It will be the responsibility of RENEWABLE PRODUCTS to do all billing in regard to the sale of ethanol, to collect all receivables and to be responsible for any bad accounts.  RENEWABLE PRODUCTS shall make payment to HIGHWATER ETHANOL within 10 days after the date on which the product crosses the loading flange into common carrier truck or into railcar.  All risks associated with accounts receivables shall be borne by RENEWABLE PRODUCTS.  RENEWABLE PRODUCTS will lease approximately 145 railcars to be used by HIGHWATER ETHANOL.  A separate payment for leased railcars is not applicable as HIGHWATER ETHANOL’s production of fuel grade is part of the RENEWABLE

4

PRODUCTS marketing pool.  If this contract is terminated, by non-renewal or otherwise, the lease for the rail cars leased by RENEWABLE PRODUCTS for the transport of HIGHWATER ETHANOL’s ethanol will be assigned to HIGHWATER ETHANOL, who will be obligated to the terms and conditions of said lease.  RENEWABLE PRODUCTS shall provide HIGHWATER ETHANOL the opportunity to review and approve of the terms and conditions of any such rail car lease before RENEWABLE PRODUCTS first executes the same.  The parties understand that the assignment of the lease is subject to the approval of the lessor of the rail cars.

11.          No “Take or Pay.”  The parties agree that this is not a “take or pay contract” and that RENEWABLE PRODUCTS’ liability is limited to ethanol passing custody at HIGHWATER ETHANOL’s facility.

12.          Term.  The term of this agreement shall commence on the first day of the month that HIGHWATER ETHANOL initially ships ethanol and shall continue for a period of at least 24 months, but will terminate at the end of the first traditional ethanol marketing contract period; end of March or end of September which ever occurs first after the 24 month period.  This Agreement shall be automatically extended for an additional one (1) year term following the end of the initial term unless either party gives written notice of non-extension not less than one hundred and eighty (180) days before the end of the current expiration date.

13.          Licenses and Permits.  At all times from the commencement of this contract, HIGHWATER ETHANOL will have all of the licenses and permits necessary to operate its production facilities.

14.          Expected Volume.  During the term of this agreement, or any renewals thereof, HIGHWATER ETHANOL agrees to have RENEWABLE PRODUCTS market all of the ethanol produced by HIGHWATER ETHANOL it at its production facility.  The average monthly volume of ethanol produced by HIGHWATER ETHANOL is estimated to be approximately 4,166,667 gallons.

15.          Estimated 12-Month Volume.  As of the effective date of this agreement, HIGHWATER ETHANOL will provide RENEWABLE PRODUCTS with HIGHWATER ETHANOL’s best estimate of its anticipated monthly ethanol production for the next twelve (12) months, to assist RENEWABLE PRODUCTS in developing appropriate marketing strategies for the ethanol to be produced by HIGHWATER ETHANOL.

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16.          Updated Monthly Volume Estimates.  On or before the first day of each month, HIGHWATER ETHANOL will provide RENEWABLE PRODUCTS with its updated best estimate of HIGHWATER ETHANOL’s anticipated monthly ethanol production for the next twelve (12) months, so that RENEWABLE PRODUCTS will have ethanol production estimates from HIGHWATER ETHANOL twelve (12) months into the future during the entire time that this agreement is in effect.

17.          Good and Marketable Title.  HIGHWATER ETHANOL represents that it will have good and marketable title to all of the ethanol marketed for it by RENEWABLE PRODUCTS and that said ethanol will be free and clear of all liens and encumbrances.

18.          Establishment of Price and Other Sale Terms.  When RENEWABLE PRODUCTS sells the ethanol marketed pursuant to the terms of this agreement to its customers, the parties understand and agree that the ethanol sales prices and all other terms and conditions of ethanol sales to customers under this agreement will be established by RENEWABLE PRODUCTS.  RENEWABLE PRODUCTS may make these decisions, without the need of obtaining consent from HIGHWATER ETHANOL.  Notwithstanding the foregoing, RENEWABLE PRODUCTS agrees to use its best efforts to communicate with HIGHWATER ETHANOL the terms and conditions of ethanol sales.

19.          Independent Contractor.  Nothing contained in this agreement will make RENEWABLE PRODUCTS the agent of HIGHWATER ETHANOL for any purpose whatsoever.  RENEWABLE PRODUCTS and its employees shall be deemed to be independent contractors, with full control over the manner and method of performance of the services they will be providing on behalf of HIGHWATER ETHANOL under this agreement.

20.          Separate Entities.  The parties hereto are separate entities and nothing in this agreement or otherwise shall be construed to create any rights or liabilities of either party to this agreement with regard to any rights, privileges, duties or liabilities of any other party to this agreement.

21.          Working Relationship.  Because the parties hereto have not done business together in the past in the manner described in this agreement, they have not yet attempted to develop efficient and effective procedures related to ordering, delivering ethanol and shipping ethanol and, therefore, agree to work together

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promptly and in good faith to develop effective and efficient policies and procedures to cover these matters.

22.          Ethanol Shortage/Open Market Purchase.  If HIGHWATER ETHANOL is unable to deliver its estimated monthly ethanol production and if as a consequence of the non-delivery and in order to meet its sale obligation to third parties, RENEWABLE PRODUCTS may purchase ethanol in the market place to meet its delivery obligations.  If it does so, and as a result thereof incurs a financial loss, HIGHWATER ETHANOL will reimburse RENEWABLE PRODUCTS for any such loss.  Under such circumstances, if RENEWABLE PRODUCTS realizes a financial gain, it will pay such gain to HIGHWATER ETHANOL.

23.          Testing of Samples.  At the request of RENEWABLE PRODUCTS, HIGHWATER ETHANOL agrees to provide RENEWABLE PRODUCTS with samples of its ethanol produced at its production facility so that it may be tested for product quality on a regular basis.

24.          Insurance.  During the entire term of this agreement, HIGHWATER ETHANOL will maintain insurance coverage that is standard, in the reasonable opinion of RENEWABLE PRODUCTS, for a company of its type and size that is engaged in the production and selling of ethanol.  At a minimum, HIGHWATER ETHANOL’s insurance coverage must include:

a.Comprehensive general product and public liability insurance, naming RENEWABLE PRODUCTS as an additional named insured, with liability limits of at least $5 million in the aggregate.

b.Property and casualty insurance adequately insuring its production facilities and its other assets against theft, damage and destruction on a replacement cost basis.

c.RENEWABLE PRODUCTS as a named insured under the comprehensive general product and public liability insurance policy and the property and casualty insurance policy.

d.             Workers’ compensation insurance to the extent required by law.

HIGHWATER ETHANOL will not change its insurance coverage during the term of this agreement, except to increase it or enhance it, without the

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prior written consent of RENEWABLE PRODUCTS which consent will not be unreasonably withheld.

25.          Indemnifications and Hold Harmless— HIGHWATER ETHANOL.  If a third party makes a claim against RENEWABLE PRODUCTS or any person or organization related to it as the result of the actions or omissions of HIGHWATER ETHANOL or any person or organization related to HIGHWATER ETHANOL including, but not limited to, claims relating to the quality of ethanol produced by HIGHWATER ETHANOL, then HIGHWATER ETHANOL agrees to indemnify RENEWABLE PRODUCTS and its related persons and organizations and to hold them harmless from any liabilities, damages, costs and/or expenses, including costs of litigation and reasonable attorneys fees which they incur as a result of any claims, arising solely from the marketing of HIGHWATER ETHANOL’s ethanol under this Agreement, made against them by third parties.

26.          Indemnifications and Hold Harmless—RENEWABLE PRODUCTS.  The indemnification obligations of the parties under this agreement will be mutual and RENEWABLE PRODUCTS, therefore, makes the same commitment to indemnify HIGHWATER ETHANOL and its related persons or organizations that HIGHWATER ETHANOL has made to RENEWABLE PRODUCTS in the preceding paragraph.

27.          Survival of Terms/Dispute Resolution.  All representations, warranties and agreements made in connection with this agreement will survive the termination of this agreement.  The parties will, therefore, be able to pursue claims related to those representations, warranties and agreements after the termination of this agreement, unless those claims are barred by the applicable statute of limitations.  Similarly, any claims that the parties have against each other that arise out of actions or omissions that take place while this agreement is in effect will survive the termination of this agreement.  This means that the parties may pursue those claims even after the termination of this agreement, unless applicable statutes of limitation bar those claims.  The parties agree that, should a dispute between them arise in connection with this agreement, the parties will complete, in good faith, a mediation session prior to the filing of any action in any court.  Such mediation session shall occur at a place that is mutually agreeable, and shall be conducted by a mediator to be selected by mutual agreement of the parties.

28.          Choice of Law.  The parties agree that this agreement will be governed by, interpreted under and enforced in accordance with Minnesota law.

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29.          Assignment.  Neither party may assign its rights or obligations under this agreement without the written consent of the other party, which consent will not be unreasonably withheld.

30.          Entire Agreement.  This Agreement constitutes the entire agreement between the parties covering everything agreed upon or understood in the transaction.  There are no oral promises, conditions, representations, understandings, interpretations, or terms of any kind as conditions or inducements to the execution hereof or in effect between Buyer and Seller, except as expressed in this Agreement.  No change or addition shall be made to this Agreement except by a written document signed by all parties hereto.

31.          Execution of Counterparts.  This Agreement may be executed by the parties on any number of separate counterparts, and by each party on separate counterparts, each of such counterparts being deemed by the parties to be an original instrument; and all of such counterparts, taken together, shall be deemed to constitute one and the same instrument.

32.          Duplicate Counterpart Includes Facsimile.  The parties specifically agree and acknowledge that a duplicate hereof shall include, but not be limited to, a counterpart produced by virtue of a facsimile (“fax”) machine.

33.          Binding Effect.  This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and there respective heirs, personal representatives, successors and assigns.

34.          Termination.  The agreement may be terminated if either party engages in an uncured breach.  After receiving written notice, the breaching party will have 30 days to cure the breach.  If the breaching party does not cure the breach in the required time, the agreement will terminate 30 days later.

35.        Confidential Information.  The parties acknowledge that they will be exchanging information about their businesses under this Agreement which is confidential and proprietary, and the parties agree to handle that confidential and proprietary information in the manner described in this Section 35.

(a)     Definition of Confidential Information.  For purposes of this Agreement, the term “Confidential Information” means information

9

related to the business operations of HIGHWATER ETHANOL or RENEWABLE PRODUCTS that meets all of the following criteria:

(i)     The information must not be generally known to the public, and must not be a part of the public domain.

(ii)    The information must belong to the party claiming it is confidential, and must be in that party’s possession.

(iii)   The information must have been protected and safeguarded by the party claiming it is confidential by measures that were reasonable under the circumstances before the information was disclosed to the other party.

(iv)    Written information must be clearly designated in writing as “Confidential Information” by the party claiming it is confidential before it is disclosed to the other party, except that all information about costs and prices will always be considered Confidential Information under this Agreement, without the need for specifically designating it as such.

(v)     Verbal Confidential Information which is disclosed to the other party must be summarized in writing, designated in writing as “Confidential Information,” and transmitted to the other party within ten (10) days of the verbal disclosure.

(b)     Limitations on the Use of Confidential Information.  Each party agrees that it will not use any Confidential Information that it obtains about the other party for any purpose, other than to perform its obligations under this Agreement.

(c)     The Duty not to Disclose Confidential Information.  The parties agree that they will not disclose any Confidential information about each other to any person or organization, other than their respective legal counsel and accountants, without first getting written consent to do so from the other party.  Notwithstanding the foregoing, if a party or anyone to whom such party transmits Confidential Information in accordance with this Agreement is requested or required (by deposition, interrogatories, requests for information or documents in

10

legal proceedings, subpoenas, civil investigative demand or similar process, SEC filings or administrative proceedings) in connection with any proceeding, to disclose any Confidential Information, such party will give the disclosing party prompt written notice of such request or requirement so that the disclosing party may seek an appropriate protective order or other remedy and/or waive compliance with the provisions of this Agreement, and the receiving party will cooperate with the disclosing party to obtain such protective order.  The fees and costs of obtaining such protective order, including payment of reasonable attorney’s fees, shall be paid for by the disclosing party.  If such protective order or other remedy is not obtained or the disclosing party waives compliance with the relevant provisions of this Agreement, the receiving party (or such other persons to whom such request is directed) will furnish only that portion of the Confidential Information which, in the opinion of legal counsel, is legally required to be disclosed, and upon the disclosing party’s request, use commercially reasonable efforts to obtain assurances that the confidential treatment will be accorded to such information.  This will be the case both while this Agreement is in effect and for a period of five (5) years after it has been terminated.

(d)     The Duty to Notify the Other Party in Cases of Improper Use or Disclosure.  Each party agrees to immediately notify the other party if either party becomes aware of any improper use of or any improper disclosure of the Confidential Information of the other party at any time while this Agreement is in effect, and for a period of five (5) years after it has been terminated.

(e)     Protection of the Confidential Information.  Each party agrees to develop effective procedures for protecting the Confidential Information that it obtains from the other party, and to implement those procedures with the same degree of care that it uses in protecting its own Confidential Information.

(f)     Return of the Confidential Information.  Immediately upon the termination of this Agreement, each party agrees to return to the other party all of the other party’s Confidential Information that is in its possession or under its control.”

(g)        Disclosure in SEC Filings. Notwithstanding any other provision contained in this agreement, RENEWABLE PRODUCTS

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acknowledges and agrees that the disclosure of this agreement and the transactions contemplated hereby by HIGHWATER ETHANOL (i) on a Form 8-K or other report filed with the Securities and Exchange Commission at any time after the date hereof, or (ii) in a customary press release or on a customary analyst call, will not be violation of this Section 35. HIGHWATER ETHANOL will cooperate with any reasonable requests of RENEWABLE PRODUCTS to request confidential treatment concerning sensitive/confidential items.

36.       Notices.  Any notice or other communication required or permitted hereunder shall be in writing and shall be considered delivered in all respects when it has been delivered by hand or mailed by first class mail postage prepaid, addressed as follows:

TO:RENEWABLE PRODUCTS MARKETING
GROUP, L.L.C.
809 East Main Street
Suite 2
Belle Plaine, MN  56011

TO:         HIGHWATER ETHANOL, LLC

Lamberton, MN

IN WITNESS WHEREOF, the parties hereto have set their hands the day and year first written above.

RENEWABLE PRODUCTS MARKETING GROUP, LLC
By	/s/ C. Stephen Bleyl
	Its	CEO
HIGHWATER ETHANOL, LLC
By	/s/ Brian Kletscher
	Its		President

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EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the inclusion of our report dated September 19, 2006, except for Note 3 and Note 4 for which the date is November 3, 2006, on the financial statements of Highwater Ethanol, LLC as of June 30, 2006, and the related statements of operations, changes in members’ equity, and cash flows for the period from inception (May 2, 2006) to June 30, 2006 in the Pre-Effective Amendment No. 1 to Form SB-2 Registration Statement of Highwater Ethanol, LLC dated on or about December 22, 2006 and to the reference to our Firm under the caption “Experts” in the Prospectus included therein.

/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.

Certified Public Accountants

Minneapolis, Minnesota
December 22, 2006