Highwater Ethanol, LLC: A Comprehensive Review of the 2024 10-K Filing

Introduction

Highwater Ethanol, LLC, a Minnesota-based company, has been a significant player in the ethanol production industry since its inception in 2006. The company operates a 70.2 million gallon per year ethanol plant near Lamberton, Minnesota. This blog post delves into the company's 2024 10-K filing, providing insights into its business operations, financial performance, risk factors, and overall investment potential.

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Business Overview

Highwater Ethanol, LLC is primarily engaged in the production of fuel-grade ethanol, distillers grains, and corn oil. The company markets its products through third-party marketers, with ethanol being the primary revenue driver, accounting for 74% of total revenues in 2024. The company also produces distillers grains and corn oil, contributing 18% and 8% to the total revenue, respectively.

The ethanol produced is primarily sold in the domestic market due to high transportation costs and the company's location, which is not near a major international shipping port. The company has an exclusive marketing agreement with RPMG, Inc. for ethanol and corn oil, and a separate agreement for distillers grains.

Financial Performance

Revenue and Profitability

For the fiscal year ended October 31, 2024, Highwater Ethanol reported total revenues of $141.8 million, a significant decrease from $199.1 million in 2023. This decline was primarily due to a 29.2% decrease in ethanol sales, attributed to lower average ethanol prices and a slight decrease in production volume.

The company reported a net income of $6.1 million, down from $16.7 million in 2023. The decrease in net income was primarily due to lower revenues and a slight increase in operating expenses.

Cost of Goods Sold

The cost of goods sold (COGS) for 2024 was $132.8 million, representing 93.64% of total revenues. The primary components of COGS are corn and natural gas, which accounted for 74.4% and 5.5% of COGS, respectively. The average price per bushel of corn decreased by 31.2% compared to 2023, which helped mitigate some of the revenue decline.

Cash Flow and Liquidity

Highwater Ethanol generated $14.1 million in cash from operating activities in 2024, down from $29.1 million in 2023. The decrease in cash flow was primarily due to lower net income and changes in working capital. The company used $5.5 million in investing activities, primarily for capital expenditures, and $16.3 million in financing activities, mainly for member distributions.

Risk Factors

Highwater Ethanol faces several risk factors that could impact its future performance:

1. Commodity Price Volatility: The company's profitability is highly sensitive to fluctuations in the prices of corn and ethanol. Any adverse changes in these prices could negatively impact margins.
2. Regulatory Risks: Changes in environmental regulations or government policies, such as the Renewable Fuel Standard, could affect the demand for ethanol and the company's operations.
3. Market Competition: The ethanol industry is highly competitive, with larger players having greater resources and economies of scale.
4. Dependence on RPMG: The company's reliance on RPMG for marketing its products poses a risk if the marketer fails to perform.

Investment Potential

Despite the challenges, Highwater Ethanol has a solid operational foundation and a strategic location in the corn-rich Midwest. The company's focus on cost management and strategic marketing partnerships provides a buffer against market volatility. However, the declining revenue and net income in 2024 highlight the need for caution.

Investment Score: 6.5/10

Highwater Ethanol presents a moderate investment opportunity. The company's strong market position and strategic partnerships are positives, but the volatility in commodity prices and regulatory risks warrant a cautious approach. Investors should closely monitor market conditions and regulatory developments affecting the ethanol industry.

Conclusion

Highwater Ethanol, LLC's 2024 10-K filing provides a comprehensive view of its operations, financial performance, and risks. While the company faces challenges, its strategic initiatives and market position offer potential for growth. Investors should weigh the risks and opportunities carefully before making investment decisions.