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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the fiscal year ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from  to
 Commission File Number: 000-51764
 
 LINCOLNWAY ENERGY, LLC
  
 Iowa
    
    20-1118105(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
       Identification No.)59511 W. Lincoln Highway, Nevada, Iowa
(Address of principal executive offices)
    
    50201
(Zip Code)
 (515) 382-8899
 None
 Limited Liability Company Units
 o þ
 o þ
 þ o
 þ
  o o þ
 o þ




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##### 



LINCOLNWAY ENERGY, LLC
FORM 10-K
For the Fiscal Year Ended September 30, 2006
 INDEX
 Part I.Item 1.
    
    Business.Item 1A.
    
    Risk Factors.Item 1B.
    
    Unresolved Staff Comments.Item 2.
    
    Properties.Item 3.
    
    Legal Proceedings.Item 4.
    
    Submission of Matters to a Vote of Security Holders.Part II.Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Item 6.
    
    Selected Financial Data.Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation.Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk.Item 8.
    
    Financial Statements and Supplementary Data.Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.Item 9A.
    
    Controls and Procedures.Item 9B.
    
    Other Information.Part III.Item 10.
    
    Directors and Executive Officers of the Registrant.Item 11.
    
    Executive Compensation.Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Item 13.
    
    Certain Relationships and Related Transactions.Item 14.
    
    Principal Accountant Fees and Services.Part IV.Item 15.
    
    Exhibits and Financial Statement Schedules.SIGNATURESDenaturant Purchase AgreementCertification of President and COOCertification of Chief Financial OfficerSection 1350 Certification of President and COOSection 1350 of Chief Financial Officer




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CAUTIONARY STATEMENT ON FORWARD LOOKING STATEMENTS  AND INDUSTRY AND MARKET DATA
 Lincolnway Energy
cannot guarantee Lincolnway Energys future results, performance or business conditions, and strong
reliance must not be placed on any forward looking statements.




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PART I
 
 Item 1. Business.
 General Overview
        1




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General Developments
   Financial Information
  Principal Products and Their Markets
  Ethanol
   2




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Distillers Grains
  3




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4




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Carbon Dioxide
  Sources and Availability of Raw Materials
  Corn
    5




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Coal
    6




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Other Raw Materials
    Rail Access
  Expansion Plans
   Research and Development Activities
  7




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Competition
       8




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Government Oversight and Regulation
     10




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##### Table of Contents



Employees
  
 Item 1A. Risk Factors.
  Risks Relating to Lincolnway Energy and Its Business
 Lincolnway Energy Has A Limited Operating History.
 Lincolnway Energys Managers And Officers Do Not Have Substantial Experience With An
Ethanol Plant Or In The Ethanol Industry.
 Lincolnway Energy Is Heavily Dependent On A Management Team And Certain Suppliers And
Service Providers, But Could Lose Any Of Their Services At Any Time.
 11




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Lincolnway Energys Ethanol Plant Has Only Been Operating Since May 22, 2006.
 Lincolnway Energy Is Subject To Risk Because Its Ethanol Plant Utilizes Coal.
     12




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Lincolnway Energys Business Is Not Diversified Because It Is Limited To The Operation
Of A Single Ethanol Plant In The Midwest.
  If Lincolnway Energy Ever Expands, It Will Be Subject To The Risks Inherent In The
Development And Construction Process.
 Lincolnway Energy May Make Other Investments Or Engage In Other Business.
 Lincolnway Energy Is Leveraged And Has Substantial Debt And Debt Service Requirements.
 13




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Lincolnway Energys Financing Costs Will Rise If Interest Rates Increase.
 14




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Lincolnway Energys Potential Success Is Almost Exclusively Dependent On Ethanol Sales,
And The Price Of Ethanol And Gasoline Can Vary Greatly And Are Beyond Lincolnway
Energys Control.
     The Increase In Supplies Of Ethanol May Adversely Affect Ethanol And Ethanol Byproduct
Prices.
   Purchases Of Ethanol Blended Gasoline Will Decline If The Price Exceeds The Price For
Regular Unleaded Gasoline.
 15




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##### Table of Contents



Continued Growth In The Ethanol Industry Depends On Changes To And Expansion Of Related
Infrastructure Which May Not Occur On A Timely Basis, If At All.
 
    
    Additional rail and rail car capacity;
    
    Additional storage facilities for ethanol;
    
    Increases in truck fleets capable of transporting ethanol within localized
markets;
    
    Expansion of refining and blending facilities to handle ethanol;
    
    Growth in service stations equipped to handle ethanol fuels, and in
particular E85 fuels; and
    
    Growth in the fleet of flexible fuel vehicles which are capable of using
fuel with significantly higher ethanol content than 10%.
  Any Significant Dependence On Any Particular Customer Or Supplier Could Have Adverse
Effects On Lincolnway Energy In The Event Of The Loss Of Any Such Customer Or Supplier.
 Lincolnway Energys Results Of Operations, Financial Position And Business Outlook Will
Likely Fluctuate Substantially Because Lincolnway Energys Business Is Highly Dependent
On Commodity Prices, Which Are Subject To Significant Volatility And Uncertainty, And On
The Availability Of Raw Materials Supplies.
 16




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The Supply And Costs Of The Inputs Required By Lincolnway Energy Can Vary Greatly And
Adversely Affect Lincolnway Energys Profits And Financial Position
   17




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18




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Market Prices And Futures Prices For Ethanol And For Corn, Coal And Other Inputs Are
Very Difficult To Predict Because They Are Speculative And Volatile.
 
    
    Changing supply and demand relationships and trade deficit issues;
    
    Weather and other environmental conditions;
    
    Acts of God, including drought and storms;
    
    Agricultural, fiscal, monetary, economic, trade and exchange control programs
and policies of governments;
    
    International, national, regional and local political and economic events and
policies;
    
    Rumors or speculation about, or actual changes in, fuel and energy costs or
in interest rates or rates of inflation;
    
    Controversies or disputes about the use of biotechnology in crops, or rumors
or speculation about or actual findings of, errors or adverse reactions caused
by the use of biotechnology in crops, such as the past issues with Starlink
corn;
    
    Rumors or speculation about, or actual findings of, infestations or diseases
in crops;
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
    
    Rumors or speculation about, or threatened or actual, acts of terrorism or
war, both nationally and internationally, including in the Middle East;
    
    Illegal or improper activities or scandals by participants in the markets,
such as those that have recently occurred in the accounting industry, the stock
and mutual fund industry and the insurance industry; and
    
    The general emotions and psychology of businesses, consumers and of the
market place in general, which at times can be totally unrelated to actual
economic or market conditions or other more tangible factors.
     The Use Of Hedging Strategies Or The Futures Markets By Lincolnway Energy Could Be
Unsuccessful And Result In Losses.
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There Are Many Factors Important To The Success Of An Ethanol Plant And The Operation Of
An Ethanol Plant Which Are Beyond The Control Of Lincolnway Energy.
 
    
    The ability to retain qualified employees and other personnel, and on
favorable terms;
    
    Labor disputes or other employee issues;
    
    Increases in the price of corn, labor, gas or fuel, and in truck and rail
transportation costs;
    
    Railcar and truck shortages or strikes within those industries;
    
    The price of oil and gas;
    
    The demand for and consumption of petroleum products generally and ethanol
specifically;
    
    Environmental and other regulations which impact both the demand for
ethanol and the operation of the ethanol plant;
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
    
    Governmental regulations and incentives; and
    
    General market fluctuations and economic conditions.
  Lincolnway Energys Operations Are Subject To Substantial And Extensive Governmental
Laws And Regulations Which Restrict And Increase The Costs Of Lincolnway Energys
Business.
   22




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Lincolnway Energy May Become Subject To Various Environmental And Health And Safety And
Property Damage Type Claims And Liabilities.
 Loss Of Current Governmental Support And Incentives For Ethanol Would Reduce The Use Of
Ethanol And Materially And Adversely Affect Lincolnway Energys Results Of Operations
And Financial Position.
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##### Table of Contents




    
    The cost of production of ethanol is made significantly more competitive
with regular gasoline by federal tax incentives, sometimes referred to as the
blenders credit. Before January 1, 2005, the federal excise tax incentive
program allowed gasoline distributors who blended ethanol with gasoline to
receive a federal excise tax rate reduction for each blended gallon they sold.
If the fuel was blended with 10% ethanol, the refiner/marketer paid $0.052 per
gallon less tax, which equated to an incentive of $.52 per gallon of ethanol.
The $.52 per gallon incentive for ethanol was reduced to $.51 per gallon in
2005 and is scheduled to expire in 2010. The blenders credit may not be
renewed in 2010 or may be renewed on different terms. In addition, the
blenders credit, as well as other federal and state programs benefiting
ethanol
(such as tariffs), generally are subject to U.S. government obligations under
international trade agreements, such as the World Trade Organization Agreement
on Subsidies and Countervailing Measures, and might be the subject of challenges
under those trade agreements. The elimination or significant reduction in the
blenders credit could have a material adverse effect on Lincolnway Energys
results of operations and financial position.
    
    Congress passed the Freedom to Farm Act in 1996, which allows farmers
continued access to government subsidies while reducing restrictions on
farmers decisions about land use. The Act increased acreage dedicated to corn
crops and also allowed farmers more flexibility to respond to increases in corn
prices by planting greater amounts of corn. Any changes to, or the elimination
of, the Act could have a material adverse effect on the amount of corn
available in future years and could reduce the farming industrys
responsiveness to the increasing corn needs of ethanol producers. There may be
changes to the Act given the increasing budget and deficit issues facing the
federal government.
    
    Imported ethanol is generally subject to a $.54 per gallon tariff that was
designed to offset the $.51 per gallon ethanol incentive available under the
federal excise tax incentive program for refineries that blend ethanol in their
fuel. A special exemption from the tariff exists for ethanol imported from 24
countries in Central America and the Caribbean islands, but is limited to a
 24




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total of 7% of U.S. production per year. Imports from the exempted countries
might increase as a result of new ethanol plants that are under development.
Production costs for ethanol in those countries can be significantly less than
in the U.S. and the duty free import of lower price ethanol through the
countries exempted from the tariff may reduce the demand for U.S. ethanol and
the price at which Lincolnway Energy can sell its ethanol. Recently, in
response to higher gasoline prices, a number of federal legislators have called
for a reduction or temporary lifting of the tariff. Also, in May 2006, bills
were introduced in both the U.S. House of Representatives and the U.S. Senate
to repeal the $.54 per gallon tariff. Lincolnway Energy does not know the
extent to which the volume of imports would increase or the effect on U.S.
prices for ethanol if the proposed legislation is enacted or if the tariff is
not otherwise renewed beyond its current expiration in December 2007, but any
changes in the tariff or exemption from the tariff could have a material
adverse effect on U.S. ethanol production and on Lincolnway Energys results of
operation and financial position. In addition, the North America Free Trade
Agreement which went into effect on January 1, 1994 allows Canada and Mexico to
import ethanol duty free or at a reduced rate. Canada is exempt from the duty
under the current North America Free Trade Agreement guidelines, and Mexicos
duty rate is currently $.10 per gallon.
    
    The Energy Policy Act of 2005 established the renewable fuels standard that
mandates minimum annual volumes of renewable fuel to be used by refiners in the
fuel supply. The annual requirement grows to 7.5 billion gallons per year by
2012.
    
    The use of fuel oxygenates, including ethanol, was mandated through
regulation, and much of the forecasted growth in demand for ethanol was
expected to result from additional mandated use of oxygenates. Most of this
growth was projected to occur in the next few years as the remaining markets
switch from MTBE to ethanol. The 2005 federal energy bill, however, eliminated
the mandated use of oxygenates and established minimum nationwide levels of
renewable fuels to be included in gasoline. Renewable fuels for this purpose
include ethanol, biodiesel or any other liquid fuel produced from biomass or
biogas. Biodiesel and other renewable fuels, in addition to ethanol, are
therefore counted toward the minimum usage requirements, so the elimination of
the oxygenate requirement for gasoline may result in a decline in ethanol
consumption. The energy bill also included provisions for trading of credits
for use of renewable fuels. The rules for implementation of the renewable
fuels standard in the energy bill are still under development.The energy bill did not include MTBE liability protection sought by refiners,
and this lack of protection might result in an accelerated removal of MTBE and
increased demand for ethanol. Refineries may, however, use other possible
replacement additives, such as iso-octane, iso-octene and alkylate.
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The actual
demand for ethanol may therefore increase at a lower rate than estimated, which
could result in excess production capacity in the ethanol industry.The U.S. Department of Energy, in consultation with the Secretary of Agriculture
and the Secretary of Energy, may waive the renewable fuels mandate with respect
to one or more states if the Administrator of the Environmental Protection
Agency determines that implementing the requirements would severely harm the
economy or the environment of the state, a region or the U.S., or that there is
inadequate supply to meet the requirement. Any waiver of the renewable fuels
standard with respect to one or more states would adversely affect demand for
ethanol and could have a material adverse effect on the ethanol industry.
 Lincolnway Energy Currently Has No Expansion Plans And Any Expansion Plans That May Be
Developed May Not Be Able To Be Implemented By Lincolnway Energy.
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Interruptions In The Supply Of Water, Electricity, Gas, Coal Or Other Energy Sources Or
Other Interruptions In Production Would Have An Adverse Effect On An Ethanol Plant.
     27




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Competition From Other Ethanol Producers Or Energy Sources Will Adversely Affect
Lincolnway Energy And Could Reduce Lincolnway Energys Profitability.
     28




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Loss Of Rights To Technology Or The Occurrence Of Technological Advances Could Make
Lincolnway Energys Ethanol Plant Obsolete.
  29




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There Are Potential Conflicts Of Interest In The Structure And Operation Of Lincolnway
Energy.
 Risks Relating To Lincolnway Energys Units.
 Lincolnway Energys Units Are Not A Liquid Investment.
 There Is No Guarantee Of Any Distributions From Lincolnway Energy.
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The Staggered Terms Of Lincolnway Energys Board May Delay Or Prevent Lincolnway
Energys Acquisition By A Third Party.
 Taxation And Other Risks.
 Members Will Owe Taxes On Lincolnway Energys Profits But May Never Receive Any
Distributions From Lincolnway Energy.
   The Internal Revenue Service Could Challenge Allocations And Audit Lincolnway Energys
Tax Returns.
  The Tax Laws May Change To The Detriment Of Lincolnway Energy And Its Members.
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judicial action. Any such changes could significantly alter the tax consequences
and decrease the after tax rate of return on investment in the units.For example, although Lincolnway Energy anticipates being treated as a partnership for
tax purposes, if for some reason Lincolnway Energy was classified or treated as a
corporation, or Lincolnway Energys board determined that it would be beneficial for
Lincolnway Energy and its members for Lincolnway Energy to become taxed as a
corporation, Lincolnway Energy would pay corporate income tax and no profits or losses
would flow through to the members. The payment of taxes by Lincolnway Energy would
lower the cash available for distribution to the members, and any distributions would be
taxed to the members as dividends.Software Problems And Computer Viruses May Have A Materially Adverse Effect Upon
Lincolnway Energy.Lincolnway Energy will utilize various software applications in
connection with its ethanol operation. There is no assurance that the operation of any
software or other computer systems will be uninterrupted or error free or will otherwise
be successful. There is also no assurance or guarantee that the software will continue
to be available to Lincolnway Energy or that the software will be able to be maintained
and updated as necessary from time to time.Lincolnway Energy s use of its software and other computer systems will be subject to
attack by computer hackers and to failure or interruption through viruses or acts of God
or other occurrences beyond the control of Lincolnway Energy, such as computer failure,
communications line failure, power failure, mechanical failure, equipment malfunction or
failure, and lightning.The refiners, suppliers and other persons who Lincolnway Energy has business
relationships with are also subject to the same software and computer system risks, and
may affect their ability to do business with Lincolnway Energy.Any problems with any software or other computer systems might have material adverse
effects on Lincolnway Energy.
 
 Item 1B.
    
    Unresolved Staff Comments.
 This Item is not applicable to Lincolnway Energy because Lincolnway Energy is not an
accelerated filer, a large accelerated filer or a well-known seasoned issuer, as those
terms are defined in the rules of the Securities and Exchange Commission.Lincolnway Energy has not, however, received any written comments from the Securities
and Exchange Commission regarding Lincolnway Energys periodic or current reports under
the Securities Exchange Act of 1934 that have not been resolved.
 
 Item 2.
    
    Properties.
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Lincolnway Energys office and its ethanol plant are located on approximately 160 acres
in Story County, Iowa, near Nevada. Iowa. Lincolnway Energy owns the real estate and
its office and ethanol plant, but all of those properties are subject to a first
mortgage and security interest held by Lincolnway Energys primary lender, CoBank, and
to other mortgages and security interests held by the Iowa Department of Economic
Development, the Iowa Department of Transportation, and Fagen, Inc.Lincolnway Energys office building has approximately 1,400 square feet. Lincolnway
Energy utilizes the office building for office space for Lincolnway Energys management
and other staff. Lincolnway Energy was utilizing approximately 90% of the available
office space as of the date of this annual report, with the remaining 10% of the
available office space being available to accommodate any staff expansion. The office
building also includes grain receiving facilities.Lincolnway Energys ethanol plant and related facilities include the following material
buildings and related fixtures and equipment:
 
    
    process building containing lab, offices and control room;
    
    maintenance building containing offices, storage and a welding shop;
    
    administration building containing furniture and fixtures, office equipment,
computers, telephone system, board room and grain receiving
    
    rail tracks and rail spur, paved access roads, dryers, evaporators,
fermenters, grain bins and storage facilities for ethanol and distillers
grains.
 Lincolnway Energys ethanol plant has a nameplate capacity of 50,000,000 gallons of
ethanol per year, and at that capacity will generate approximately 144,000 tons of
distillers grains per year. The ethanol plant became operational in May 2006, and
Lincolnway Energy has attempted to operate the plant at full capacity since that time,
subject to normal shutdown and other maintenance related days and matters.Lincolnway Energy also owns approximately 93 acres of real estate which is adjacent to
the 160 acre parcel noted above. Lincolnway Energy may utilize the real estate as part
of any expansion of its business, but currently is planning on custom farming the land.Lincolnway Energy also currently leases 90 rail cars which are used for transporting
distillers grains. The lease has a 5 year term which is scheduled to expire on March
25, 2011.Lincolnway Energy also leases various other miscellaneous office equipment and equipment
utilized in the operation of the ethanol plant.
 
 Item 3.
    
    Legal Proceedings.
 As of the date of this annual report, Lincolnway Energy was not aware of any material
pending legal proceeding to which Lincolnway Energy was a party or of
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which any of Lincolnway Energys property was the subject, other than ordinary routine
litigation, if any, that was incidental to Lincolnway Energys business. As of the date
of this annual report, Lincolnway Energy was not aware that any governmental authority
was contemplating any proceeding against Lincolnway Energy or any of Lincolnway Energys
property.
 
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
 No matters were submitted to a vote of the members of Lincolnway Energy, through the
solicitation of proxies or otherwise, during the period of July 1, 2006 through
September 30, 2006.
 
 PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Lincolnway Energy is authorized to issue an unlimited number of units. Lincolnway
Energy had 42,859 outstanding units as of November 30, 2006, which were held by 939
different members. The determination of the number of members is based upon Lincolnway
Energys internal unit records.Lincolnway Energys units are not listed on any exchange, and there is no public trading
market for Lincolnway Energys units. An investment in Lincolnway Energys units is not
a liquid investment because the operating agreement of Lincolnway Energy establishes
various conditions on the issuance of additional units and various restrictions on the
assignment or transfer of units.The operating agreement of Lincolnway Energy provides that the board of Lincolnway
Energy may not issue units at a purchase price of less than $500 per unit, or issue more
than an aggregate of 45,608 units, without the consent of the members holding at least a
majority of the outstanding units.The operating agreement of Lincolnway Energy also provides that no member shall directly
or indirectly own or control more than 49% of the issued and outstanding units at any
time. The operating agreement provides that units under indirect ownership or control
by a member for this purpose include units owned or controlled by the members related
parties, subsidiaries and affiliates, as those terms are defined in the operating
agreement.The operating agreement of Lincolnway Energy also establishes restrictions on the
assignment or transfer of units. The operating agreement provides, in general, that no
member may assign or transfer any units unless all of the conditions precedent set forth
in the operating agreement has been satisfied, as determined by the board of Lincolnway
Energy. The conditions precedent include:
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
    
    The transferor and transferee must provide Lincolnway Energy with all of the
documents, instruments and other information that is required by the board of
Lincolnway Energy.
    
    The assignment or transfer of the units must be made in compliance with
applicable federal and state securities laws and must not cause Lincolnway
Energy to be deemed to be an investment company, and the board of Lincolnway
Energy may require a legal opinion to such effect.
    
    The consent of the directors and the members holding at least 75% of the
outstanding units is necessary to authorize an assignment or transfer if the
assignment or transfer would result in the termination of Lincolnway Energy
within the meaning of Section 708 of the Internal Revenue Code.
    
    No assignment or transfer may be made after a dissolution event has occurred
with respect to Lincolnway Energy.
    
    No assignment or transfer may be made if the assignment or transfer would
cause Lincolnway Energy to be treated as a publicly traded partnership under
the applicable statutes and regulations of the Internal Revenue Service.
 The publicly traded partnership statutes and regulations significantly limit the
assignment and transfer of units of Lincolnway Energy because, under those statutes and
regulations as in effect on the date of this annual report, Lincolnway Energy is, in
general, limited to permitting the assignment and transfer of no more than 10% of the
outstanding units of Lincolnway Energy during any taxable year. The general rule under
the publicly traded partnership rules is that no more than 2% of the issued and
outstanding interests may be transferred during any taxable year, but Lincolnway Energy
has established a qualified matching service on Lincolnway Energys website, which
allows Lincolnway Energy to permit the assignment and transfer of up to an aggregate of
10% of the outstanding units during any taxable year, so long as the assignments and
transfers are made in accordance with the terms of the qualified matching service.The following assignments and transfers have been made pursuant to Lincolnway Energys
qualified matching service through November, 2006:
 Month
    
    Number of Units
    
    Purchase Price Per UnitJuly, 2006
    
    
    30
    
    
    $
    4,175August, 2006
    
    
    22
    
    
    $
    2,612September, 2006
    
    
    25
    
    
    $
    3,000October, 2006
    
    
    5
    
    
    $
    3,750November, 2006
    
    
    170
    
    
    $
    2,500
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The operating agreement of Lincolnway Energy prohibited the transfer of units until
after substantial completion of the ethanol plant, which occurred May 22, 2006, with
limited exceptions for certain family transfers and transfers by operation of law.The purchase price and other terms of any transactions pursuant to Lincolnway Energys
qualified matching service are established by the seller and the buyer. Lincolnway
Energy does not endorse or recommend any sale of units and is not responsible for the
fairness of the purchase price paid in any transactions made pursuant to its qualified
matching service, or for the payment or other terms of any transaction. Lincolnway
Energy therefore does not represent or guarantee in any way that any of the above prices
are fair or accurately reflect the value of Lincolnway Energys units, and Lincolnway
Energy does not endorse or recommend any sales of units at any of the prices listed
above or on the same or similar terms.As of the date of this annual report, Lincolnway Energy did not have any equity
compensation plans in place for any directors, officers or employees.As of the date of this annual report, Lincolnway Energy had no plans to, and had not
agreed to, register any of its units under any federal or state securities laws.There were no outstanding warrants, options or other rights to purchase any units of
Lincolnway Energy as of the date of this annual report, and there were no outstanding
securities which were convertible or exchangeable into or for any units of Lincolnway
Energy. Lincolnway Energys units are not convertible in any other securities.The payment of distributions to members by Lincolnway Energy is within the discretion of
the board of Lincolnway Energy, and there is no assurance of any distributions from
Lincolnway Energy. The payment of distributions by Lincolnway Energy is also subject to
Lincolnway Energys compliance with the various covenants and requirements of Lincolnway
Energys credit and loan agreements, and it is possible that those covenants and
requirements will at times prevent Lincolnway Energy from paying a distribution to its
members.The only distribution that has been declared by Lincolnway Energy since Lincolnway
Energy was organized on May 19, 2004 was a distribution in the amount of $150 per unit,
which was declared by the board of Lincolnway Energy on November 15, 2006. The
distribution was payable to members of record on November 15, 2006, and is payable
during the week of December 18, 2006. Lincolnway Energy had 42,859 outstanding units on
November 15, 2006.Lincolnway Energy does not contemplate being able to establish a definite or regular
distribution policy or history because the determination of whether a distribution can
or should be made by Lincolnway Energy will need to be made by the board of Lincolnway
Energy based upon the then existing facts and circumstances of Lincolnway Energy, which
could change materially from time to time.
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Item 6.
    
    Selected Financial Data.
 The following information is summary selected financial data for Lincolnway Energy for
the fiscal years ended September 30, 2006, 2005 and Period from May 19, 2004 (Date of
inception) to September 30, 2004, with respect to the statements of operations data, and
as of September 30, 2006 and 2005 with respect to the balance sheet data. The data is
qualified by, and must be read in conjunction with, Item 7 of this annual report,
Managements Discussion and Analysis of Financial Condition and Results of Operation,
and with the financial statements and supplementary data included in Item 8 of this
annual report.
 Statements of Operations Data:
    
    2006
    
    
    2005
    
    
    2004Revenues
    
    $
    44,883,457
    
    
    $
    
    
    
    $
    Cost of goods sold
    
    
    25,886,144
    
    
    
    
    
    
    
    Gross Profit
    
    
    18,997,313
    
    
    
    
    
    
    
    General and administrative expense
    
    
    2,082,597
    
    
    
    427,478
    
    
    
    247,506Operating income (loss)
    
    
    16,914,716
    
    
    
    (427,478
    )
    
    
    (247,506
    )Interest expense
    
    
    (1,281,287
    )
    
    
    
    
    
    
    Other income- interest and grants
    
    
    274,292
    
    
    
    625,679
    
    
    
    3,728Net income (loss)
    
    $
    15,907,721
    
    
    $
    198,201
    
    
    $
    (243,778
    )Weighted average units outstanding
    
    
    42,293
    
    
    
    32,816
    
    
    
    1,636Net income (loss) per unit  basic and diluted
    
    $
    376.13
    
    
    $
    6.04
    
    
    $
    (149.01
    )
 Balance Sheet Data:
    
    2006
    
    
    2005Working Capital
    
    $
    6,548,336
    
    
    $
    4,212,119Net Property Plant & Equipment
    
    
    78,170,697
    
    
    
    35,125,192Total Assets
    
    
    93,027,237
    
    
    
    43,084,240Long-Term Obligations
    
    
    29,548,706
    
    
    
    1,100,000Members Equity
    
    
    55,662,249
    
    
    
    38,640,778Book Value Per Member Unit
    
    
    1,299
    
    
    
    919
 Lincolnway Energy was organized on May 19, 2004, and its ethanol plant became
operational during May 2006.
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Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation.
 Except for the historical information, the following discussion contains forward-looking
statements that are subject to risks and uncertainties, and undue reliance must not be
placed on any forward-looking statements, which speak only as of the date of this annual
report. Lincolnway Energys actual results or actions may differ materially from these
forward-looking statements for many reasons, including the risks described in Item 1A of
this annual report and elsewhere in this annual report. This Item should be read in
conjunction with the financial statements and related notes and with the understanding
that Lincolnway Energys actual future results may be materially different from what is
currently expected by Lincolnway Energy.OverviewLincolnway Energy is an Iowa limited liability company that was formed on May 19, 2004
for the purpose of constructing and operating a dry mill, coal fired ethanol plant.
Since May 22, 2006, Lincolnway Energy has been engaged in the production of ethanol and
distillers grains. As of June 22, 2006, the plant passed performance testing and became
fully operational. For the months of July through September, 2006, Lincolnway Energy has
exceeded the nameplate rate of approximately 4,167,000 gallons of ethanol per month.
Lincolnway Energy had a planned shut down during the month of October 2006 to complete
some maintenance work, and production of ethanol for October was 3,884,521 gallons.
Lincolnway Energy exceeded nameplate production in November.Lincolnway Energys revenues are derived from the sale and distribution of Lincolnway
Energys ethanol and distillers grains throughout the United States and Mexico.
Lincolnway Energys ethanol is marketed by Renewable Products Marketing Group (RPMG)
pursuant to an ethanol marketing agreement. The agreement is effective until terminated
by forty-five days notice. The agreement has an initial 12 month term through June
2007. Under this agreement, Lincolnway Energy elected to use a pooled marketing
arrangement, which means that the ethanol Lincolnway Energy produces is pooled with
other ethanol producers and marketed by RPMG. Lincolnway Energy pays RPMG a pooling fee
of $.01 per gallon for ethanol delivered to the pool and RPMG pays Lincolnway Energy a
netback price per gallon that is based upon the difference between the pooled average
delivered ethanol selling price and the pooled average distribution expense. These
averages are calculated based upon each pool participants selling price and expense
averaged in direct proportion to the volume of ethanol supplied by each participant to
the pool.Lincolnway Energys distillers grain is marketed by Commodity Specialist Company (CSC).
Under its agreement with CSC, Lincolnway Energy pays CSC 2% of the FOB plant price
received by CSC. The term of the agreement is for one year commencing on May 22, 2006,
but the agreement may be terminated by either party upon ninety days written notice.
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Lincolnway Energys operating income or loss is significantly tied to the price at which
ethanol and distillers grain are sold. Historically, the price of ethanol tends to
fluctuate in the same direction as the price of unleaded gas and other petroleum
products. Surplus ethanol supplies tend to put downward pressure on ethanol. In
contrast, the price of distillers grains generally tends to fluctuate based on the price
of substitute livestock feed, such as corn and soybean meal. Surplus grains tend to put
downward price pressure on distillers grains.Since Lincolnway Energy only became operational in May 2006, Lincolnway Energy does not
have prior fiscal year income, production, sales or other data to use for comparison
purposes against the fiscal year ended September 30, 2006. Lincolnway Energy is
accordingly not providing a comparison of Lincolnway Energys financial results between
reporting periods in this annual report, but the fact that Lincolnway Energy did not
start producing ethanol until May 2006 must be kept in mind when making any comparison
or review of Lincolnway Energys fiscal year ended September 30, 2005 and the fiscal
year ended September 30, 2006.Plan of Operations for the Next 12 MonthsLincolnway Energy expects to spend the next 12 months operating the ethanol plant to
produce and sell ethanol and distillers grains. All plant construction has been
completed. Lincolnway Energys primary focus will be concentrated on operating the
plant as efficiently as possible and pursuing cost-effective purchasing of important
manufacturing inputs such as corn and coal. Lincolnway Energy also plans to continue
to explore possibilities for the expansion of the plant, construction of other plants
and exploration of marketing alternatives to increase profit margins.On July 22, 2006, Lincolnway Energy entered into a purchase agreement with an unrelated
party to acquire a parcel of land near the Nevada site for the purpose of gaining
additional railroad access. Lincolnway Energy took possession of this property on
November 8, 2006.Air Permit TestingThe Certification Report for Continuous Opacity Monitoring System (COMS)
for the stack on the ethanol plants coal system was performed in June 2006. The
Continuous Emissions Monitoring System (CEMS) RATA certification and the CEMS 7 day
drift test were performed in August 2006. The results of those tests met the
requirements of the Iowa Department of Natural Resources. Engineering tests were
also performed in August 2006 on the coal stack. These tests were not official
permit tests, but the test results were within Lincolnway Energys permits.
Lincolnway Energys stack testing is scheduled for mid December. The stack tests
will take approximately two weeks to complete and are intended to verify that
Lincolnway Energy is meeting the air permit parameters. The stack tests will be
performed on the coal fired bubbling fluid bed, combustor, CO2 scrubber, distillers
grain transport and storage, hammer
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milling bag house, distillers grain load out bag house, grain unloading equipment,
flyash pneumatic conveying and storage bag house, coal and limestone receiving and
storage bag house and rail load out.Water Permit TestingPlant outfall water is sampled weekly for analysis, and monthly reports of the analysis
results are sent to the Iowa Department of Natural Resources. Most of the weekly water
analyses have been out of specification for iron content. Lincolnway Energys water
source has over 5 ppm of iron content, and Lincolnway Energys water pre-treatment
system is not adequate to reliably lower the iron content to make the outfall meet
Lincolnway Energy permit limits. On December 4th, 2006, Lincolnway Energy
received a Notice of Violation from the Iowa Department of Natural Resources addressing
this issue of excess iron deposits. Lincolnway Energy has developed plans to add three
larger, permanent conical backwash water storage tanks on the west side of the water
pretreatment building. A filter press will be added to form a cake from the iron that
settles in these tanks; the solid cake will be disposed of at a sanitary disposal
project. It is expected with greater backwash storage, a more complete backwash of the
iron filters can be done, which will improve the iron removal performance of the
greensand filters and eliminate the excess iron deposits. The Iowa Department of
Natural Resources is aware of this plan and supports the process. The project should be
completed by the end of December 2006. Lincolnway Energy anticipates the cost of this
project to be approximately $160,000.Operating Budget and Financing of Plant OperationsLincolnway Energy expects to have sufficient cash from cash flow generated by plant
operations and Lincolnway Energys available lines of credit to cover Lincolnway
Energys operating costs over the next 12 months, including the cost of corn and coal
supplies, other production costs, staffing, office, audit, legal, compliance and working
capital costs. The following is an estimate of Lincolnway Energy operating costs and
expenditures over the next 12 months. The following numbers exclude depreciation, which
is a non-cash transaction and interest expense.
 Operating Costs:Corn Costs (Average cost $3.19 per bushel)
    
    $
    62,600,000Energy Costs
    
    
    8,900,000Chemical Costs
    
    
    7,100,000Other Production Costs
    
    
    4,400,000General and Administrative Costs
    
    
    2,100,000Total Estimated Operating Costs:
    
    $
    85,100,000
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The table above is managements estimates. Lincolnway Energys actual expenses and
costs could be much higher due to a variety of factors outside Lincolnway Energys
control, such as:
 
    
    Changes in the availability and price of corn;
    
    Changes in environmental regulations that apply to Lincolnway Energys plant
operations;
    
    Increased competition in the ethanol and oil industries;
    
    Changes in Lincolnway Energys business strategy, capital improvements or
development plans;
    
    Changes in plant production capacity or technical difficulties in operating the
plant;
    
    Changes in general economic conditions or the occurrence of certain events
causing an economic impact in the agriculture, oil or automobile industries; and
    
    Changes in the availability and price of coal.
 Financial Summary and Analysis of Fiscal Year Ended September 30, 2006Lincolnway Energy started ethanol production operations on May 22, 2006. Accordingly,
the income, production and sales data for the year ended September 30, 2006 do not
reflect a full year of operations.Lincolnway Energys net income for the year ended September 30, 2006 was approximately
$15.9 million, consisting of $16.9 million of operating income, $0.3 million of other
income (consisting of grants and interest income), and offset by $1.3 million of
interest expense.Revenues for the year ended September 30, 2006 were approximately $44.9 million,
consisting of $40.5 million of ethanol (90%) and $4.4 million of sales in dried
distillers grain (10%). Lincolnway Energy sold approximately 17.4 million gallons of
ethanol at an average price of $2.33 per gallon and 44,000 tons of dried distillers
grain at an average price of $100.00 per ton for the year ended September 30, 2006.
Increase in revenues for the year ended September 30, 2006 resulted from the start up of
operations on May 22, 2006. While Lincolnway Energy anticipates continued strong demand
for ethanol, Lincolnway Energy is uncertain as to the sustainability of current ethanol
prices given the increasing ethanol supply as new plants begin production and existing
plants continue to expand.Lincolnway Energys cost of goods sold for the year ended September 30, 2006 totaled
approximately $25.9 million. Cost of goods sold major components are: corn costs, energy
costs, ingredient costs, production labor, repairs and maintenance, process
depreciation, ethanol and distillers grain freight expense and marketing fees. Also
included in cost of goods sold, which is recognized in corn costs, is a combined
unrealized and realized net gain of $515,300 from derivative instruments.
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Corn costs for the year ended September 30, 2006 totaled approximately $12.8 million.
Approximately 6.9 million bushels of corn was purchased for the year at an average cost
of $1.86 per bushel. Corn costs represented 50% of cost of goods sold for the year
ended September 30, 2006. Lincolnway Energy recognizes the gains and losses that result
from the changes in value of Lincolnway Energys derivative instruments in corn costs as
the changes occur. As corn prices fluctuate, the value of Lincolnway Energys
derivative instruments are impacted, which affects Lincolnway Energy financial
performance. Lincolnway Energy anticipates continued volatility in Lincolnway Energys
corn costs due to the timing of the change in value of the derivative instruments
relative to the cost and use of the corn being hedged.Energy costs for the year ended September 30, 2006 totaled approximately $3.1 million or
12% of cost of goods sold. Energy costs consist of coal costs, electricity and propane.
For the year ended September 30, 2006, Lincolnway Energy purchased approximately 33,000
tons of coal at an approximate total cost of $1.7 million. Electricity and propane
costs amounted to approximately $1.4 million.Ingredient costs for the year ended September 30, 2006 totaled approximately $2.4
million or 9% of cost of goods sold. Ingredient costs consist of denaturant and process
chemicals.Production labor, repairs and maintenance and other plant costs totaled approximately
$1.8 million, or 7% of cost of goods sold, for the year ended September 30, 2006.Depreciation totaled approximately $2.3 million, or 8% of cost of goods sold, for the
year ended September 30, 2006.Ethanol and distillers grain freight expense and marketing fees totaled approximately
$3.5 million, or 14% of cost of goods sold, during the year ended September 30, 2006.Financial Summary and Analysis of Fourth Quarter 2006As of September 30, 2006, Lincolnway Energy had the following assets: cash and cash
equivalents of $4,731,873, current assets of $14,364,618 and total assets of
$93,027,237. As of September 30, 2006, Lincolnway Energy had current liabilities of
$7,816,282 and long-term debt of $29,548,706. Members equity was $55,662,249 and
consisted of retained earnings of $15,862,144 and members contributions, net of cost of
raising capital, of $39,800,105.Current assets increased by $ 1,466,370 from third quarter of fiscal year 2006 to
fourth quarter 2006 due to an increase in cash and derivative instruments. Long-term
debt decreased by $13,826,069 from the third quarter fiscal year 2006 to fourth quarter
2006, due mainly from paying down debt on Lincolnway Energys construction term loan.
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For the fourth quarter of fiscal year 2006, net income totaled approximately $13.4
million, which was an increase from net income of approximately $3.2 million in the
third quarter of fiscal year 2006. The increase is due to a full quarter of production
in the fourth quarter, compared to a partial quarter of production in the third quarter.Revenues from operations for the fourth quarter of fiscal year 2006 totaled
approximately $34 million, up from approximately $10.9 million in the third quarter of
fiscal year 2006. Net gallons of denatured ethanol sold totaled approximately
13,408,000 in the fourth quarter of fiscal year 2006, compared to 4,021,000 gallons in
the third quarter of fiscal year 2006. The tons of distillers grain sold totaled
approximately 36,000 in the fourth quarter of fiscal year 2006, compared to 8,000 tons
in the third quarter of fiscal year 2006. The increase is due to a full quarter of
production in the fourth quarter of fiscal year 2006, compared to 1 month of production
due to the start up of operations in the third quarter of fiscal year 2006. Lincolnway
Energy experienced high ethanol prices in the fourth quarter of fiscal year 2006. While
Lincolnway Energy anticipates continued strong demand for ethanol, Lincolnway Energy is
uncertain as to the sustainability of current ethanol prices given the increasing
ethanol supply as new plants begin production and existing plants continued to expand.Lincolnway Energys cost of goods sold for the fourth quarter of fiscal year 2006
totaled approximately $19.2 million, an increase from approximately $6.7 million in the
third quarter of fiscal year 2006. The increase is due to a full quarter of production
costs in the fourth quarter, compared to a partial quarter of production costs in the
third quarter.General and administrative expenses for the fourth quarter of fiscal year 2006 totaled
approximately $.67 million, compared to $.83 million in the third quarter of fiscal year
2006. The net decrease of $.16 million is due to additional board compensation that was
expensed in the third quarter of approximately $.30 million and additional professional
fees for legal and consulting that were incurred in the fourth quarter of approximately
$.14 million.Other income and expense for the fourth quarter of fiscal year 2006 totaled
approximately $.89 million net expense, compared to $.15 million net expense in the
third quarter of fiscal year 2006. The increase in expense is due to an increase in
interest expense that is no longer being capitalized as part of the ethanol plant
construction upon commencement of operations.Critical Accounting Estimates and Accounting PoliciesLincolnway Energys financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and follow general
practices within the industries in which Lincolnway Energy operates. This preparation
requires management to make estimates, assumptions, and judgments that affect the
amounts reported in the financial statements and accompanying notes.
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These estimates, assumptions and judgments are based on information available as of the
date of the financial statements; accordingly, as this information changes, actual
results could differ from the estimates, assumptions, and judgments reflected in the
financial statements. Certain policies inherently have a greater reliance on the use of
estimates, assumptions, and judgments and, as such, have a greater possibility of
producing results that could be materially different than originally reported.
Management believes the following policies are both important to the portrayal of
Lincolnway Energys financial condition and results of operations and require subjective
or complex judgments; therefore, management considers the following to be critical
accounting policies.Derivative InstrumentsLincolnway Energy enters into derivative contracts to hedge its exposure to price risk
related to forecasted corn needs and forward corn purchase contracts. Lincolnway Energy
does not typically enter into derivative instruments other than for hedging purposes.
All the derivative contracts are recognized on the September 30, 2006 balance sheet at
their fair market value. Although Lincolnway Energy believes Lincolnway Energys
derivative positions are economic hedges, none has been designated as a hedge for
accounting purposes. Accordingly, any realized or unrealized gain or loss related to
these derivative instruments is recorded in the statement of operations as a component
of cost of goods sold.During the fiscal year ended September 30, 2006, Lincolnway Energy had combined net
realized and unrealized gains of $515,300. Unrealized gains of $1,313,212 are included
in derivative financial instruments on the balance sheet as of September 30, 2006.
Unrealized gains and losses on forward contracts, in which delivery has not occurred,
are deemed normal purchases and normal sales under FASB Statement No. 133, as amended,
and therefore are not marked to market in Lincolnway Energys financial statements. As
of September 30, 2006, Lincolnway Energy had outstanding commitments for 3,157,000
bushels of corn amounting to approximately $7.4 million under cash contracts, in which
the related commodity will be delivered through December 2006.Liquidity and Capital ResourcesFor the fiscal year ended September 30, 2006, cash provided by operating activities was
$11.4 million, compared to cash provided by operating activities of $.2 million for the
fiscal year ended September 30, 2005. The increase is due to activity related to the
start up of operations which increased net income, depreciation, trade accounts
receivable, derivative instruments, inventories and accounts payable.Cash flows used in investing activities reflect the impact of property and equipment
acquired for the ethanol plant. Net cash used in investing activities increased by
$16.6 million for the fiscal year ended September 30, 2006, when compared to the fiscal
year ended September 30, 2005.
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Cash flows from financing activities include transactions and events whereby cash is
obtained from depositors, creditors or investors. Net cash provided by financing
activities decreased by $4.4 million for the fiscal year ended September 30, 2006, when
compared to the fiscal year ended September 30, 2005. The net decrease is primarily due
to increased borrowings for the plant construction of $45.5 million, increased from
other long-term borrowings of $.9 million and cash proceeds of $.8 million received from
the issuance of additional membership units. The above increase was offset by the
reduction in cash proceeds from issuance of membership units net of offering costs of
$38 million that was received in the fiscal year ended September 30, 2005 financing
costs of $.4 million and the payment of $14 million for debt in the fiscal year ended
September 30, 2006.Lincolnway Energy expects to have available cash to meet Lincolnway Energys currently
anticipated liquidity needs for the next fiscal year.In March 2005, Lincolnway Energy closed on Lincolnway Energys debt financing with
CoBank, ACB, (Co-Bank). Lincolnway Energy entered into a $39,000,000 construction
term loan, at a variable interest rate based on Lincolnway Energys selection of prime
plus .45%. The agreement requires that Lincolnway Energy make 30 principal payments of
$1,250,000 per quarter commencing in December 2006, with the final installment due in
May 2014. In addition, Lincolnway Energy must make an additional principal payment for
each September 30 year end through September 2008 equal to 75% of Free Cash Flow, as
defined by the agreement with Co-Bank. The total Free Cash Flow payments will not
exceed $7,500,000. Lincolnway Energy chose to make a Free Cash flow payment of
$7,500,000 in the month of September 2006. The Free Cash Flow obligation has been met,
and Lincolnway Energy will no longer be subject to this additional payment requirement.
Lincolnway Energy also chose to make Lincolnway Energys December payment in October
2006 due to excess cash balances and the opportunity to reduce Lincolnway Energys
interest expense. The agreement requires the maintenance of certain financial and
nonfinancial covenants. Borrowings under the agreement are collateralized by
substantially all of Lincolnway Energys assets. The agreement also includes certain
prepayment penalties. Lincolnway Energy has not been subject to any penalties.Lincolnway Energy also has a $10,000,000 construction/revolving term credit agreement
and a $4,000,000 revolving credit agreement with Co-Bank. These agreements provide for
a variable interest rate based on Lincolnway Energys selection of prime plus .45%.
Lincolnway Energys borrowings under these agreements are subject to borrowing base
restrictions as defined in the agreements. The construction/revolving term credit
agreement contains a decreasing commitment provision of $2,000,000 semiannually that
commences upon the maturity of the $39,000,000 construction term loan, with a final
maturity date in September 2016. The revolving credit agreement expires in April 2007,
at which time the outstanding principal is due. Lincolnway Energy chose to make a
payment of $5,045,982 on July
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28, 2006 to pay off this loan. There was no balance remaining as of September 30, 2006
on the construction/revolving term credit agreement or the revolving credit agreement.Lincolnway Energy executed a mortgage in favor of Co-Bank creating a first lien on
substantially all of Lincolnway Energys assets, including the real estate and plant and
all personal property located on its property, for the loan and credit agreements
discussed above. As of September 30, 2006, Lincolnway Energy had borrowed $39,000,000
on Lincolnway Energys construction term loan. As of September 30, 2006, Lincolnway
Energy had made payments of $7,500,000 on Lincolnway Energys construction term loan.
The balance remaining as of September 30, 2006 on the construction loan was $31,500,000.Lincolnway Energy also has subordinated debt financing of approximately $3,250,000,
which includes a subordinated note of $1,250,000 payable to Fagen, Inc., with an
interest rate of 4%, and a $1,100,000 note payable to Fagen, Inc., with an interest rate
of 5%. Lincolnway Energy also has subordinate debt financing for a $500,000 loan
agreement with the Iowa Department of Transportation in February 2005. Under the
agreement, the loan proceeds will be disbursed upon submission of paid invoices and
interest at 2.11% begins to accrue on January 1, 2007. Lincolnway Energy also has
subordinate debt financing for a $300,000 loan agreement and a $100,000 forgivable loan
agreement with the Iowa Department of Economic Development. The $300,000 loan does not
impose any interest, and the $100,000 loan is forgivable upon the completion of
Lincolnway Energys plant and the production of at least 50 million gallons of ethanol
before the project completion date of October 31, 2008. As of September 30, 2006,
Lincolnway Energy has received $400,000 from the Iowa Department of Economic Development
and $346,293 from the Iowa Department of Transportation. On November 15, 2006,
Lincolnway Energy received the remaining loan proceeds of $153,707 from the Iowa
Department of Transportation.Lincolnway Energy entered into an agreement with an unrelated entity on March 3, 2006 to
lease railcars. The 5 year term of the agreement will end in March 2011. The agreement
required a $351,000 letter of credit facility as partial security for Lincolnway
Energys obligations under the agreement. The letter of credit facility was funded
through the $4,000,000 revolving credit agreement, and is effective until May 1, 2007.
The other party to the agreement may, however, require Lincolnway Energy to extend the
letter of credit facility beyond that date.In addition to long-term debt obligations, Lincolnway Energy has certain other
contractual cash obligations and commitments. The following tables provide information
regarding Lincolnway Energys consolidated contractual obligations and commitments as of
September 30, 2006:
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Payment Due By PeriodOne to
    
    
    Three toLess than
    
    
    Three
    
    
    Five
    
    
    More than FiveContractual Obligations
    
    Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsLong-Term Debt Obligations
    
    $
    34,596,293
    
    
    $
    5,047,587
    
    
    $
    10,252,753
    
    
    $
    10,156,730
    
    
    $
    9,139,223Interest Obligation of
Long-Term Debt
    
    
    10,202,985
    
    
    
    2,627,383
    
    
    
    5,501,546
    
    
    
    1,471,895
    
    
    
    602,161Capital Lease Obligation
    
    
    16,250
    
    
    
    16,250
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    3,194,643
    
    
    
    737,485
    
    
    
    1,459,512
    
    
    
    997,646
    
    
    
    Purchase ObligationsCoal Supplier Commitment
    
    
    4,616,100
    
    
    
    3,692,880
    
    
    
    923,220
    
    
    
    
    
    
    
    Corn Supplier Commitment
    
    
    7,377,000
    
    
    
    7,377,000
    
    
    
    
    
    
    
    
    
    
    
    Denaturant Commitment
    
    
    1,459,000
    
    
    
    1,459,000
    
    
    
    
    
    
    
    
    
    
    
    Membership Agreement
    
    
    248,300
    
    
    
    248,300
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    61,710,571
    
    
    $
    21,205,885
    
    
    $
    18,137,031
    
    
    $
    12,626,271
    
    
    $
    9,741,384
 Off-balance Sheet ArrangementsLincolnway Energy has the following contractual commitments that could have a current or
future effect on Lincolnway Energys financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources.Lincolnway Energy has an agreement with the Heart of Iowa Cooperative (HOIC), a member
of Lincolnway Energy, pursuant to which HOIC may be required to provide 100% of
Lincolnway Energys requirements for corn for use in the operation of the ethanol plant.
The agreement became effective when Lincolnway Energy began accepting corn for use at
the ethanol plant and may continue for a period of 20 years. Lincolnway Energy will pay
a handling fee of $.075 per bushel of corn purchased and delivered by HOIC. If
Lincolnway Energy chooses to buy corn that is not elevated by HOIC, and is outside a 60
mile radius of Nevada, Iowa, Lincolnway Energy will be required to pay HOIC $.03 per
bushel of corn. The agreement also provides for the use of certain grain handling
assets owned by HOIC. The agreement may be terminated by Lincolnway Energy or HOIC
before the end of the term by providing six months notice of termination and paying the
other party $2,000,000, reduced by $50,000 for each completed year of the agreement.
The amount is payable over four years with interest at the prime rate on the date of
termination. As of September 30, 2006, Lincolnway Energy has several cash corn
contracts with HOIC, for a commitment of approximately $7.4 million. The contracts
mature on various dates through December 2006.On July 14, 2005, Lincolnway Energy entered into an agreement with an unrelated party to
provide the coal supply for the ethanol plant. The agreement includes the purchase of
coal at a fixed price per ton, subject to certain specified adjustments, including based
on the quality of the coal and inflation type measures and a
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transportation cost per ton as defined in the agreement. If Lincolnway Energy
fails to purchase the minimum number of tons of coal for calendar years 2006 and 2007,
Lincolnway Energy is required to pay an amount per ton multiplied by the difference of
the minimum requirement and actual quantity purchased. The calendar year 2006 and 2007
purchase commitments under the agreement total $1.8 million and $3.7 million,
respectively.On July 6, 2006, Lincolnway Energy entered into a membership agreement with a company
that promotes ethanol. Lincolnway Energy has agreed to contribute a fee equaling a
monthly payment of $.0050 for each gallon of non-denatured ethanol produced by
Lincolnway Energy. The term of the membership agreement is one year from the date of
contribution of the membership fee. The calendar year 2006 and 2007 purchase
commitments under the membership agreement total approximately $21,000 and $228,000,
respectively.On May 8, 2006, Lincolnway Energy entered into a six-month contract with a supplier of
denaturant. The contract price of the denaturant is the national gasoline daily average
price plus $.27/usg. The minimum purchase quantity is 180,000 gallons per month. The
term of the contract is May 1, 2006 through October 31, 2006. On December 6, 2006,
Lincolnway Energy entered into a three-month and six-month contract with a supplier of
denaturant. The contract price of the denaturant for the three-month contract is $1.73
per gallon. The minimum purchase quantity is 45,000 gallons per month. The term of the
contract is January 1, 2007 through March 31, 2007. The contract price for the
six-month contract is $1.77 per gallon. The minimum purchase quantity is 90,000 gallons
per month. The term of this contract is April 1, 2007 through September 30, 2007. The
total purchase commitments with the three contracts are $1,459,000.EmployeesAs of December 15, 2006, Lincolnway had 43 employees in the following general positions:
 Position
    
    # EmployedPresident and Chief Executive Officer
    
    
    1Chief Financial Officer
    
    
    1Plant Manager
    
    
    1Commodities Manager
    
    
    1Controller
    
    
    1Lab Manager
    
    
    1Production Manager
    
    
    1Maintenance Manager
    
    
    1Admin/Clerical
    
    
    5Shift Supervisors
    
    
    4Maint/Instrument Technicians
    
    
    8
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Position
    
    # EmployedLab Technicians
    
    
    2Plant Operators
    
    
    16Total
    
    
    43
 
 Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk.
 In addition to risks inherent in Lincolnway Energys operation, Lincolnway Energy is exposed to various market risks.
The primary market risks arise as a result of possible changes in interest rates and certain commodity prices.Interest Rate RiskLincolnway Energy has various outstanding loan agreements and promissory notes which expose Lincolnway Energy to
market risk related to changes in the interest rate imposed under those loan agreements and promissory notes.Lincolnway Energy has loan agreements and/or promissory notes with the following entities, and with the principal
balance and interest rates indicated:
 Principal Balance
    
    
    InterestLender
    
    as of September 30, 2006
    
    
    RateCo-Bank
    
    $
    31,500,000
    
    
    
    8.7
    %IA Department Economic Development
    
    
    400,000
    
    
    
    0.0
    %IA Department of Transportation
    
    
    346,293
    
    
    
    2.11
    %Fagen, Inc.
    
    
    1,100,000
    
    
    
    5.0
    %Fagen, Inc.
    
    
    1,250,000
    
    
    
    4.0
    %$
    34,596,293
 The interest rate under all of the loan agreements and promissory notes, other than
with CoBank, are fixed at the interest rates specified above. The interest rates under
all of the CoBank loan agreements are prime, plus .45%, and were at 8.7% per annum as of
September 30, 2006.A hypothetical increase of 1% in the interest rates under the CoBank loan agreements
would result in additional interest expense of approximately $297,000 during the fiscal
year ending September 30, 2007.Commodity Price RiskLincolnway Energy is also exposed to market risk with respect to the price of ethanol,
Lincolnway Energys principal product, and the price and availability of corn, the
principal commodity used by Lincolnway Energy to produce ethanol. The other primary
product of Lincolnway Energy is distillers grains, and Lincolnway Energy is also subject
to market risk with respect to the price for distillers grains.
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In general, rising ethanol and distillers grains prices result in higher profit margins,
and therefore represent favorable market conditions. Ethanol and distillers grains
prices are, however, influenced by various factors beyond the control of Lincolnway
Energys management, including the supply and demand for gasoline, the availability of
substitutes and the effect of laws and regulations.In general, rising corn prices result in lower profit margins and, accordingly,
represent unfavorable market conditions. Lincolnway Energy will generally not be able
to pass along increased corn costs to its ethanol customers. The availability and price
of corn is subject to wide fluctuations due to various unpredictable factors which are
beyond the control of the management of Lincolnway Energy, including weather conditions,
farmer planting decisions, governmental policies with respect to agriculture and local,
regional, national and international trade, demand and supply. Lincolnway Energys
average gross corn costs for the fiscal year ended September 30, 2006 was approximately
$2.12 per bushel. Lincolnway Energy began processing corn in the third quarter ending
June, 2006.Over the five year period from September 30, 2001 through September 30, 2006, corn
prices (based on the Chicago Board of Trade daily futures data) have ranged from a low
of $1.86 per bushel in November 2005 to a high of $3.3525 per bushel in April 2004, with
prices averaging $2.30 per bushel over that five year period. On December 15, 2006, the
Chicago Board of Trade price per bushel of March 2007 corn was $3.685.All of Lincolnway Energys ethanol is marketed by Renewable Products Marketing Group.
Under this agreement, Lincolnway Energy elected to use a pooled marketing arrangement,
which means that the ethanol Lincolnway Energy produces is pooled with other ethanol
producers and marketed by Renewable Products Marketing Group. Lincolnway Energy pays
Renewable Products Marketing Group a pooling fee for ethanol delivered to the pool and
Renewable Products Marketing Group pays Lincolnway Energy a netback price per gallon
that is based upon the difference between the pooled average delivered ethanol selling
price and the pooled average distribution expense. These averages are calculated based
upon each pool participants selling price and expense averaged in direct proportion to
the volume of ethanol supplied by each participant to the pool.As of December 15, 2006, Lincolnway Energy had cash, futures and/or option contract
price protection in place for approximately 48% of Lincolnway Energys expected 19.6
million bushels of corn usage for the next twelve months.Although Lincolnway Energy believes that its futures and option positions accomplish an
economic hedge against Lincolnway Energys future purchases of corn, Lincolnway Energy
has chosen not to use hedge accounting for those positions, which would match the gain
or loss on the positions to the specific commodity purchase being hedged. Lincolnway
Energy is instead using fair value accounting for the positions, which generally means
that as the current market price of the positions
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changes, the realized or unrealized gains and losses are immediately recognized in
Lincolnway Energys costs of goods sold in the statement of operations. The immediate
recognition of gains and losses on those positions can cause net income to be volatile
from quarter to quarter due to the timing of the change in value of the positions
relative to the cost and use of the commodity being hedged. For example, Lincolnway
Energys gain/(loss) that was included in its earnings for the year ended September 30,
2006 was $515,300, as opposed to $(471,882) for the nine month period ending June 30,
2006.Another important raw material for the production of Lincolnway Energys ethanol is
coal. Lincolnway Energy is currently operating with a fixed price contract for coal,
subject to certain specified adjustments, including adjustments based on the quality of
the coal, increases in transportation costs and inflation type measures. The contract
runs through December 31, 2007. Lincolnway Energys cost for coal may vary upon
expiration of that contract, and the variations could be material. Coal costs
represented approximately 6% of Lincolnway Energys total cost of goods sold for the
fiscal year ended September 30, 2006.The extent to which Lincolnway Energy may enter into arrangements with respect to its
ethanol or corn during the year may vary substantially from time to time based on a
number of factors, including supply and demand factors affecting the needs of customers
or suppliers to purchase ethanol or sell Lincolnway Energy raw materials on a fixed
basis, Lincolnway Energys views as to future market trends, seasonable factors and the
cost of futures contracts.
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Item 8.
    
    Financial Statements and Supplementary Data.
 Contents
 Report of Independent Registered Public Accounting Firm
    
    1Financial StatementsBalance Sheets
    
    2 - 3Statements of Operations
    
    4Statements of Members Equity
    
    5Statements of Cash Flows
    
    6 - 7Notes to Financial Statements
    
    8 - 16
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Report of Independent Registered Public Accounting Firm
 
     
 
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##### Table of Contents



Lincolnway Energy, LLC
 
 Balance Sheets
September 30, 2006 and 2005
 2006
    
    2005ASSETS (Note 4)CURRENT ASSETSCash and cash equivalents
    
    $
    4,731,873
    
    
    $
    7,511,537Derivative instruments, due from broker
    
    
    701,448
    
    
    
    Trade and other accounts receivable (Note 7)
    
    
    4,472,238
    
    
    
    Inventories (Note 3)
    
    
    2,988,794
    
    
    
    Prepaid expenses and other
    
    
    157,053
    
    
    
    44,044Derivative financial instruments (Note 8)
    
    
    1,313,212
    
    
    
    Total current assets
    
    
    14,364,618
    
    
    
    7,555,581PROPERTY AND EQUIPMENTLand and land improvements
    
    
    4,874,727
    
    
    
    1,597,841Buildings and improvements
    
    
    1,385,202
    
    
    
    108,040Plant and process equipment
    
    
    72,860,565
    
    
    
    24,027Construction in progress
    
    
    1,190,762
    
    
    
    33,383,947Office furniture and equipment
    
    
    544,620
    
    
    
    18,72480,855,876
    
    
    
    35,132,579Accumulated depreciation
    
    
    (2,685,179
    )
    
    
    (7,387
    )78,170,697
    
    
    
    35,125,192OTHER ASSETSFinancing costs, net of amortization of
2006 $37,543; 2005 none
    
    
    434,419
    
    
    
    401,467Deposit
    
    
    55,503
    
    
    
    Investments
    
    
    2,000
    
    
    
    2,000491,922
    
    
    
    403,467$
    93,027,237
    
    
    $
    43,084,240
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2006
    
    2005LIABILITIES AND MEMBERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    1,578,598
    
    
    $
    3,260,878Accounts payable, related party (Note 6)
    
    
    163,039
    
    
    
    Current maturities of long-term debt (Note 4)
    
    
    5,063,837
    
    
    
    Accrued expenses
    
    
    1,010,808
    
    
    
    82,584Total current liabilities
    
    
    7,816,282
    
    
    
    3,343,462LONG-TERM DEBT, less current maturities (Note 4)
    
    
    29,548,706
    
    
    
    1,100,000COMMITMENTS (Notes 5, 6, 7 and 8)MEMBERS EQUITY (Note 2)Member contributions 42,859 and 42,049 units issued and outstanding
in 2006 and 2005, respectively
    
    
    39,800,105
    
    
    
    38,686,355Retained earnings (deficit)
    
    
    15,862,144
    
    
    
    (45,577
    )55,662,249
    
    
    
    38,640,778$
    93,027,237
    
    
    $
    43,084,240
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Lincolnway Energy, LLC
 
 Statements of Operations
Years Ended September 30, 2006 and 2005 and Period from
May 19, 2004 (Date of Inception) to September 30, 2004
 2006
    
    2005
    
    2004Revenues (Note 7)
    
    $
    44,883,457
    
    
    $
    
    
    
    $
    Cost of goods sold
    
    
    25,886,144
    
    
    
    
    
    
    
    Gross profit
    
    
    18,997,313
    
    
    
    
    
    
    
    General and administrative expenses (Note 2)
    
    
    2,082,597
    
    
    
    427,478
    
    
    
    247,506Operating income (loss)
    
    
    16,914,716
    
    
    
    (427,478
    )
    
    
    (247,506
    )Other income (expense):Grants
    
    
    151,859
    
    
    
    73,141
    
    
    
    Interest income
    
    
    117,732
    
    
    
    552,538
    
    
    
    3,728Interest (expense)
    
    
    (1,281,287
    )
    
    
    
    
    
    
    Other
    
    
    4,701
    
    
    
    
    
    
    
    (1,006,995
    )
    
    
    625,679
    
    
    
    3,728Net income (loss)
    
    $
    15,907,721
    
    
    $
    198,201
    
    
    $
    (243,778
    )Weighted average units outstanding
    
    
    42,293
    
    
    
    32,816
    
    
    
    1,636Net income (loss) per unit  basic and diluted
    
    $
    376.13
    
    
    $
    6.04
    
    
    $
    (149.01
    )
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Lincolnway Energy, LLC
 
 Statements of Members Equity
Years Ended September 30, 2006 and 2005 and Period from
May 19, 2004 (Date of Inception) to September 30, 2004
 RetainedMember
    
    EarningsContributions
    
    (Deficit)
    
    TotalBalance, May 19, 2004 (date of inception)
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of 1,924 membership units (Note 2)
    
    
    962,000
    
    
    
    
    
    
    
    962,000Net (loss)
    
    
    
    
    
    
    (243,778
    )
    
    
    (243,778
    )Balance, September 30, 2004
    
    
    962,000
    
    
    
    (243,778
    )
    
    
    718,222Issuance of 40,125 membership units (Note 2)
    
    
    38,118,750
    
    
    
    
    
    
    
    38,118,750Offering costs
    
    
    (394,395
    )
    
    
    
    
    
    
    (394,395
    )Net income
    
    
    
    
    
    
    198,201
    
    
    
    198,201Balance, September 30, 2005
    
    
    38,686,355
    
    
    
    (45,577
    )
    
    
    38,640,778Issuance of 810 membership units (Note 2)
    
    
    810,000
    
    
    
    
    
    
    
    810,000Compensation from issuance of membership units
    
    
    303,750
    
    
    
    
    
    
    
    303,750Net income
    
    
    
    
    
    
    15,907,721
    
    
    
    15,907,721Balance, September 30, 2006
    
    $
    39,800,105
    
    
    $
    15,862,144
    
    
    $
    55,662,249
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Lincolnway Energy, LLC
 
 Statements of Cash Flows
Years Ended September 30, 2006 and 2005 and Period from
May 19, 2004 (Date of Inception) to September 30, 2004
 2006
    
    2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    15,907,721
    
    
    $
    198,201
    
    
    $
    (243,778
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    2,715,906
    
    
    
    6,221
    
    
    
    1,166Compensation expense  issuance of membership
units
    
    
    303,750
    
    
    
    
    
    
    
    Changes in working capital components:(Increase) in prepaid expenses and other
    
    
    (113,009
    )
    
    
    (35,844
    )
    
    
    (8,200
    )(Increase) in trade and other accounts receivable
    
    
    (4,472,238
    )
    
    
    
    
    
    
    (Increase) in derivative instruments, due from
broker
    
    
    (701,448
    )
    
    
    
    
    
    
    (Increase) in inventories
    
    
    (2,988,794
    )
    
    
    
    
    
    
    (Increase) in deposits
    
    
    (55,503
    )
    
    
    
    
    
    
    (Increase) in derivative financial instruments
    
    
    (1,313,212
    )
    
    
    
    
    
    
    Increase (decrease) in accounts payable
    
    
    1,027,090
    
    
    
    (19,487
    )
    
    
    25,173Increase in accounts payable, related party
    
    
    163,039
    
    
    
    
    
    
    
    Increase in accrued expenses
    
    
    928,224
    
    
    
    78,314
    
    
    
    4,270Net cash provided by (used in) operating
activities
    
    
    11,401,526
    
    
    
    227,405
    
    
    
    (221,369
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (48,400,737
    )
    
    
    (31,833,640
    )
    
    
    (57,031
    )Proceeds from sale of equipment
    
    
    
    
    
    
    33,284
    
    
    
    Payment of consideration for land option
    
    
    
    
    
    
    
    
    
    
    (20,000
    )Purchase of cost basis investment
    
    
    
    
    
    
    (2,000
    )
    
    
    Net cash (used in) investing activities
    
    
    (48,400,737
    )
    
    
    (31,802,356
    )
    
    
    (77,031
    )CASH FLOWS FROM FINANCING ACTIVITIESIssuance of membership units
    
    
    810,000
    
    
    
    38,118,750
    
    
    
    962,000Payments for financing costs
    
    
    (70,495
    )
    
    
    (386,467
    )
    
    
    (15,000
    )Proceeds from long-term borrowings  financial
institution
    
    
    45,525,398
    
    
    
    
    
    
    
    Proceeds from long-term borrowings  IDED
    
    
    400,000
    
    
    
    
    
    
    
    Proceeds from long-term borrowings  IDOT
    
    
    346,292
    
    
    
    
    
    
    
    Proceeds from long-term borrowings  Fagen
    
    
    1,250,000
    
    
    
    1,100,000
    
    
    
    Proceeds from short-term borrowings
    
    
    
    
    
    
    639,166
    
    
    
    Payments on long-term borrowings  financial
institution
    
    
    (14,025,398
    )
    
    
    
    
    
    
    Payments of short-term borrowings
    
    
    
    
    
    
    (639,166
    )
    
    
    Payments on long-term borrowings  capital lease
obligation
    
    
    (16,250
    )
    
    
    
    
    
    
    Payments of offering costs
    
    
    
    
    
    
    (163,691
    )
    
    
    (230,704
    )Net cash provided by financing activities
    
    
    34,219,547
    
    
    
    38,668,592
    
    
    
    716,296
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Lincolnway Energy, LLC
 Statements of Cash Flows (Continued)
Years Ended September 30, 2006 and 2005 and Period from May
19, 2004 (Date of Inception) to September 30, 2004
 2006
    
    2005
    
    2004Net increase (decrease) in cash and cash
equivalents
    
    $
    (2,779,664
    )
    
    $
    7,093,641
    
    
    $
    417,896CASH AND CASH EQUIVALENTSBeginning
    
    
    7,511,537
    
    
    
    417,896
    
    
    
    Ending
    
    $
    4,731,873
    
    
    $
    7,511,537
    
    
    $
    417,896SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION, cash paid for interest, net of
amount capitalized
    
    $
    1,271,011
    
    
    $
    
    
    
    $
    SUPPLEMENTAL DISCLOSURES OF NONCASH
OPERATING AND FINANCING ACTIVITIES
Construction in progress included in accounts payable
    
    $
    545,822
    
    
    $
    3,255,192
    
    
    $
    Capital lease obligation incurred for equipment
    
    
    32,501
    
    
    
    
    
    
    
    Deferred offering costs in accounts payable
    
    
    
    
    
    
    (15,785
    )
    
    
    15,785
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Lincolnway Energy, LLC
 
 Notes to Financial Statements
 Note 1. Nature of Business and Significant Accounting Policies
 Principal business activity
  Use of estimates
 Concentrations of credit risk
 Cash and cash equivalents
 Trade accounts receivable
 Inventories
 Financing costs
 Property and equipment
 YearsLand improvements
    
    20Buildings and improvements
    
    40Plant and process equipment
    
    5 - 20Office furniture and equipment
    
    3 - 7
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Lincolnway Energy, LLC
 Notes to Financial Statements
  Investments
 Derivative financial instruments
 Deposit
 Revenue recognition
  Reclassification
 Income taxes
 Earnings per unit
 Grants
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Lincolnway Energy, LLC
 Notes to Financial Statements
 Fair value of financial instruments
 New accounting pronouncements Share-Based Payment (SFAS 123(R)) Accounting for Stock-Based Compensation
 Exchanges of Nonmonetary Assets  an amendment of
APB Opinion No. 29 (SFAS No. 153) Accounting for Nonmonetary Exchanges
 Note 2. Members Equity
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##### Table of Contents



Lincolnway Energy, LLC
 Notes to Financial Statements
  Note 3. Inventories
  2006
    
    2005Raw materials, including corn, coal, chemicals and supplies
    
    $
    1,356,456
    
    
    $
    Work in process
    
    
    770,593
    
    
    
    Ethanol and distillers grains
    
    
    861,745
    
    
    
    Total
    
    $
    2,988,794
    
    
    $
    
 Note 4. Long-Term Debt
  2006
    
    2005Construction term loan. (A)
    
    $
    31,500,000
    
    
    $
    Note payable to contractor, interest-only quarterly payments at 5%
due through maturity date of November 2014, secured by real
estate and subordinate to financial institution debt commitments.
    
    
    1,100,000
    
    
    
    1,100,000Note payable to contractor, unsecured, interest-only quarterly
payments at 4% due through maturity date of June 2022.
    
    
    1,250,000
    
    
    
    Note payable to Iowa Department of Economic Development. (C)
    
    
    300,000
    
    
    
    Note payable to Iowa Department of Economic Development. (C)
    
    
    100,000
    
    
    
    Note payable to Iowa Department of Transportation. (D)
    
    
    346,293
    
    
    
    Capital lease obligation, due in monthly installments of $2,708
through March 2007, secured by equipment.
    
    
    16,250
    
    
    
    34,612,543
    
    
    
    1,100,000Less current maturities
    
    
    (5,063,837
    )
    
    
    $
    29,548,706
    
    
    $
    1,100,000
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Lincolnway Energy, LLC
 Notes to Financial Statements
  Years ended September 30:2007
    
    $
    5,063,8372008
    
    
    5,175,8902009
    
    
    5,076,8632010
    
    
    5,077,8572011
    
    
    5,078,873Thereafter
    
    
    9,139,223$
    34,612,543
 
 (A)
    
    The Company has a $39,000,000 construction and term loan with a financial institution.
Borrowings under the term loan include a variable interest rate based on prime plus .45%. The
agreement requires 30 principal payments of $1,250,000 per quarter commencing in December 2006
through March 2014, with the final installment due May 2014. In addition, for each September
30 year-end, beginning with September 30, 2006 and ending with September 30, 2008, the Company
shall also make an additional principal payment equal to 75% of Free Cash Flow as defined in
the agreement. The Company chose to make a Free Cash Flow payment of $7,500,000 in the month
of September 2006. The Free Cash Flow obligation has been met; the Company will no longer be
subject to this additional payment requirement. The agreement requires the maintenance of
certain financial and nonfinancial covenants. Borrowings under this agreement are
collateralized by substantially all of the Companys assets. The agreement also includes
certain prepayment penalties.
 (B)
    
    The Company has a $10,000,000 construction/revolving term credit facility and a $4,000,000
revolving credit agreement with a financial institution. Borrowings under the credit facility
and revolving credit agreement include a variable interest rate based on prime plus .45% for
each advance under the agreement. Borrowings are subject to borrowing base restrictions as
defined in the agreement. The credit facility and revolving credit agreement require the
maintenance of certain financial and nonfinancial covenants. Borrowings under this agreement
are collateralized by substantially all of the Companys assets. The revolving credit
agreement expires in April 2007 at which time the principal outstanding is due. The
agreements also include certain prepayment penalties. There was no balance remaining as of
September 30, 2006.
  (C)
    
    The Company also has a $300,000 loan agreement and a $100,000 forgivable loan agreement with
the Iowa Department of Economic Development (IDED). The $300,000 loan is noninterest-bearing
and due in monthly payments of $2,500 beginning December 2006 and a final payment of $152,500
due November 2012. Borrowings under this agreement are collateralized by substantially all of
the Companys assets and subordinate to the above $39,000,000 financial institution debt and
construction and revolving loan/credit
agreements included in (A) and (B). The $100,000 loan is forgivable upon the completion of
the ethanol production facility and the production of at least 50 million gallons of ethanol
before the project completion date of October 31, 2008.
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##### Table of Contents



Lincolnway Energy, LLC
 Notes to Financial Statements
 (D)
    
    The Company entered into a $500,000 loan agreement with the Iowa Department of
Transportation (IDOT) in February 2005. The proceeds will be disbursed upon submission of
paid invoices. The remaining proceeds will be funded after the final inspection of the
project is made by the IDOT. Interest at 2.11% will begin accruing on January 1, 2007.
Principal payments will be due semiannually through July 2016. The loan is secured by all
rail track material constructed as part of the plan construction. The debt is subordinate
to the above $39,000,000 financial institution debt and construction and revolving
loan/credit agreements included in (A) and (B).
 Note 5. Lease Commitments
    Years ending September 30:2007
    
    $
    737,4852008
    
    
    734,8042009
    
    
    724,7082010
    
    
    704,5172011
    
    
    293,129$
    3,194,643
  13




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##### Table of Contents



Lincolnway Energy, LLC
 Notes to Financial Statements
 Note 6. Related Party Transactions
   Note 7. Commitments and Major Customer
    14




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Lincolnway Energy, LLC
 Notes to Financial Statements
   Note 8. Risk Management
    Note 9. Retirement Plan
  Note 10. Subsequent Event
  15




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##### Table of Contents



Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.Lincolnway Energy has not had any change in its accountants or any
disagreements with its accountants which are required to be disclosed under
this Item.
 
 Item 9A.
    
    Controls and Procedures.Evaluation of Disclosure Controls and ProceduresLincolnway Energys management, with the participation of Lincolnway Energys chief financial officer and
the other executive officers whose certifications accompany this annual report, have evaluated the
effectiveness of Lincolnway Energys disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities  Exchange Act of 1934) as of the end of the period
covered by this report. As a result of such
evaluation, the chief financial officer and such other executive officers have concluded that such
disclosure controls and procedures are effective to provide reasonable assurance that the information
required to be disclosed in the reports Lincolnway Energy files or submits
under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and (ii) accumulated and communicated to
management, including Lincolnway Energys principal executive and principal
financial officers or persons performing such functions, as appropriate, to
allow timely decisions regarding disclosure. Lincolnway Energy believes that a
control system, no matter
how well designed and
operated, cannot provide
absolute assurance that the
objectives of the control
system are met, and no
evaluation of controls can
provide absolute assurance
that all control issues and
instances of fraud, if any,
within a company have been
detected.Changes in Internal Control over Financial ReportingNo change in Lincolnway Energys system of internal control over financial reporting
occurred during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, internal control over financial reporting.
 
 Item 9B.
    
    Other Information.Lincolnway Energy did not have any information which was required
to be disclosed in a report on Form 8-K during the fourth quarter
of the fiscal year covered by this annual report, but which was
not so reported.
 53




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PART III
 
 Item 10.
    
    Directors and Executive Officers of the Registrant.The directors and executive officers of Lincolnway Energy as of
the date of this annual report were as follows:
 Name
    
    Age
    
    Position(s)William Couser
    
    
    52
    
    
    Director and ChairmanJeff Taylor
    
    
    40
    
    
    Director and Vice
PresidentTimothy Fevold
    
    
    46
    
    
    Director and SecretaryTerrill Wycoff
    
    
    64
    
    
    Director and TreasurerDavid Eggers
    
    
    58
    
    
    DirectorJames Hill
    
    
    61
    
    
    DirectorBrian Conrad
    
    
    45
    
    
    DirectorRick Vaughan
    
    
    47
    
    
    DirectorDavid Hassebrock
    
    
    50
    
    
    Director
President and ChiefRichard Brehm
    
    
    53
    
    
    Executive OfficerKim Supercynski
    
    
    44
    
    
    Chief Financial Officer
 William CouserMr. Couser has been a director of Lincolnway Energy since Lincolnway Energy was
organized in May, 2004. His current term as a director will end at the annual meeting
of the members which will be held in 2009. Mr. Couser has been the chairman of
Lincolnway Energy since Lincolnway Energy was organized in May, 2004. He also served as
the interim president and CEO of Lincolnway Energy from May, 2004 until July 13, 2005.
Mr. Couser has been self-employed as a farmer since 1977, with his farming operations
including row crops and cattle.
 54




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##### Table of Contents



Jeff Taylor
  Timothy Fevold
  Terrill Wycoff
  David Eggers
  James Hill
  55




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##### Table of Contents



Brian Conrad
  Rick Vaughan
  David Hassebrock
  Richard Brehm
   56




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Kim Supercynski
      57




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There were no material changes during the fiscal year ended September 30, 2006 to the
procedures by which the members of Lincolnway Energy may recommend nominees to
Lincolnway Energys board of directors.Lincolnway Energy had not, as of the date of this annual report, adopted a code of
ethics that applies to Lincolnway Energys principal executive officer, principal
financial officer, principal accounting officer or controller or persons performing
similar functions. Although Lincolnway Energy intends to continue to monitor the need
for a code of ethics and may adopt a code of ethics at some point, Lincolnway Energy
currently believes that a code of ethics policy is not necessary given Lincolnway
Energys size and its other existing internal processes and procedures.
 
 Item 11.
    
    Executive Compensation.The following table shows the compensation paid by Lincolnway
Energy to Richard Brehm, Lincolnway Energys president and chief
executive officer, during the period from May 19, 2004 (date of
inception) to September 30, 2004 and fiscal years ended
September 30, 2005 and 2006.
 Summary Compensation TableName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other AnnualPrincipal Position
    
    Fiscal Year2
    
    Salary3
    
    Bonus
    
    Compensation42004
    
    
    $
    -0-
    
    
    $
    -0-
    
    
    $
    -0-Richard Brehm,
    
    
    2005
    
    
    $
    43,269
    
    
    $
    2,500
    
    
    $
    -0-President and CEO1
    
    
    2006
    
    
    $
    131,154
    
    
    $
    20,000
    
    
    $
    2,158
 Note 1:
    
    Richard Brehm became employed by Lincolnway Energy on May 17, 2005.
On July 13, 2005 the board of directors appointed Mr. Brehm as President
and Chief Executive Officer.Note 2:
    
    Lincolnway Energy was organized on May 19, 2004, and its fiscal year
ends on September 30.Note 3:
    
    This amount includes contributions into Lincolnway Energys deferred
compensation plan.Note 4:
    
    This amount represents Lincolnway Energys contributions to the
employee deferred compensation plan.
 William Couser served as the interim president and chief executive officer of Lincolnway
Energy from the inception of Lincolnway Energy in May, 2004 until July 13, 2005.
William Couser did not, however, receive any compensation from Lincolnway Energy during
that time period.
 58




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Employment Agreements and Termination of Employment and Change in Control Arrangements
   Director Compensation
    59




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Compensation Committee Interlocks and Insider ParticipationOne of the committees of the board of Lincolnway Energy is the Human Resources, Benefits
& Compensation Committee. The members of that committee from May 19, 2004 to April 18,
2006 were Jim Penney, Rick Vaughan, Terry Wycoff, Jim Hill, Jeff Taylor and Bill Couser.
Terry Wycoff, Timothy Fevold, David Eggers and Rick Vaughan were appointed as members
of the committee on April 19, 2006. The members of the committee are also all members
of the board of Lincolnway Energy. Terry Wycoff also serves as the treasurer of
Lincolnway Energy, and Timothy Fevold also serves as the secretary of Lincolnway Energy.
 
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.As of the date of this annual report, Lincolnway Energy was only
authorized to issue units of membership interest, and Lincolnway
Energy did not have any other classes or series of units.As of the date of this annual report, Lincolnway Energy did not
have any units authorized for issuance under any equity
compensation plan, including any individual compensation
arrangement.The following table sets forth certain information regarding the
beneficial ownership of units of Lincolnway Energy as of November
30, 2006 by the directors and executive officers of Lincolnway
Energy. Lincolnway Energy had an aggregate of 42,859 outstanding
units on November 30, 2006.
 Amount and NatureName of Beneficial Owner
    
    Of Beneficial Ownership1
    
    Percent of ClassWilliam Couser, Director
and Chairman
    
    
    513
    
    
    
    1.20
    %Jeff Taylor, Director
and Vice President
    
    
    500
    
    
    
    1.17
    %Timothy Fevold,
Director and Secretary
    
    
    201
    
    
    
    .47
    %Terrill Wycoff,
Director and Treasurer
    
    
    325
    
    
    
    .76
    %David Eggers, Director
    
    
    301
    
    
    
    .70
    %James Hill, Director
    
    
    201
    
    
    
    .47
    %
 60




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Amount and NatureName of Beneficial Owner
    
    Of Beneficial Ownership1
    
    Percent of ClassBrian Conrad, Director
    
    
    553
    
    
    
    1.29
    %Rick Vaughan, Director
    
    
    100
    
    
    
    .23
    %David Hassebrock, Director
    
    
    35
    
    
    
    .08
    %Richard Brehm,
President and Chief
Executive Officer
    
    
    -0-
    
    
    
    0
    %Kim Supercynski, 
Chief Financial Officer
    
    
    25
    
    
    
    .06
    %All directors and
executive officers as a
group
    
    
    2,754
    
    
    
    6.43
    %
 
 1
    
    Unless otherwise indicated by a footnote, all of the units are directly
owned by the listed individual. To Lincolnway Energys knowledge, as of the date of this annual report:
 
    
    No person or group is the beneficial owner of more than 5% of Lincolnway
Energys outstanding units, and no person or group holds more than 5% of
Lincolnway Energys outstanding units pursuant to a voting trust or similar
agreement, and
    
    There are no arrangements, including any pledge by any person of units of
Lincolnway Energy, the operation of which may at a subsequent date result in
a change in control of Lincolnway Energy.
 
 Item 13.
    
    Certain Relationships and Related Transactions.Lincolnway Energy has not been a party to any transaction, or series of similar
transactions, since the beginning of Lincolnway Energys last fiscal year, or any
currently proposed transaction, or series of similar transactions, to which Lincolnway
Energy was or is to be a party, in which the amount involved exceeds $60,000 and in
which any of the following types of persons had, or will have, a direct or indirect
material interest:
 
    
    any director or executive officer of Lincolnway Energy;
    
    any unit holder who is known by Lincolnway Energy to own of record or
beneficially more than 5% of Lincolnway Energys outstanding units; or
    
    any member of the immediate family of any of the foregoing persons.
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To Lincolnway Energys knowledge, no director of Lincolnway Energy is, or during the
last fiscal year has been:
 
    
    an executive officer of, or owns, or during the last fiscal year has owned,
of record or beneficially in excess of 10% equity interest in any business or
professional entity:
 (1)
    
    that has made during Lincolnway Energys last
full fiscal year, or proposes to make during Lincolnway Energys
current fiscal year, payments to Lincolnway Energy for property or
services in excess of 5% of Lincolnway Energys consolidated gross
revenues for its last full fiscal year, or the other entitys
consolidated gross revenues for its last full fiscal year;(2)
    
    to which Lincolnway Energy has made during
Lincolnway Energys last full fiscal year, or proposes to make during
Lincolnway Energys current fiscal year, payments for property or
services in excess of 5% of Lincolnway Energys consolidated gross
revenues for its last full fiscal year, or the other entitys
consolidated gross revenues for its last full fiscal year; or(3)
    
    to which Lincolnway Energy was indebted at
the end of Lincolnway Energys last full fiscal year in an aggregate
amount in excess of 5% of Lincolnway Energys total consolidated
assets at the end of such fiscal year;
 
    
    A member of, or counsel to, a law firm that Lincolnway Energy has retained
during the last fiscal year or proposes to retain during the current fiscal
year;
    
    A partner or executive officer of any investment banking firm that has
performed services for Lincolnway Energy; or
    
    Any other relationships that Lincolnway Energy is aware of between the
director and Lincolnway Energy that is substantially similar in nature and
scope to those relationships listed in the preceding subparagraphs.
 None of the following types of persons have been indebted to Lincolnway Energy at any
time since the beginning of Lincolnway Energys last fiscal year in an amount in excess
of $60,000:
 
    
    Any director or executive officer of Lincolnway Energy;
    
    Any member of the immediate family of any director or executive officer of
Lincolnway Energy;
 62




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##### Table of Contents




    
    Any corporation or organization (other than Lincolnway Energy) of which any
of the persons specified in the preceding subclauses is an executive officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities; or
    
    Any trust or other estate in which any of the persons specified in the first
two subclauses above has a substantial beneficial interest or to which such
person serves as a trustee or in a similar capacity.
 
 Item 14.
    
    Principal Accountant Fees and Services.The following table presents fees for professional services rendered by McGladrey &
Pullen, LLP for the audit of Lincolnway Energys annual financial statements for the
fiscal years ended September 30, 2005 and 2006, and fees billed for other services
rendered by McGladrey & Pullen, LLP and its affiliate RSM McGladrey, Inc. during those
periods:
 Year Ended September 30,2005
    
    
    2006Audit Fees
    
    $
    32,130
    
    
    $
    93,000Tax Fees
    
    $
    10,774
    
    
    $
    17,000All Other Fees
    
    $
    
    
    
    $
    38,128Total
    
    $
    42,904
    
    
    $
    148,128
 Audit Fees. The audit fees were incurred for the audit by McGladrey & Pullen,
LLP of Lincolnway Energys annual financial statements and review of the financial
statements included in Lincolnway Energys quarterly reports on Form 10-Q or services
that are normally provided by McGladrey & Pullen, LLP in connection with statutory and
regulatory filings or engagements for the fiscal years ended September 30, 2005 and
2006. Lincolnway Energys Form 10 became effective on March 28, 2006, and Lincolnway
Energy was required to file quarterly reports on Form 10-Q beginning with the quarterly
period ended December 31, 2005.Tax Fees. The tax fees were billed for services rendered by RSM McGladrey, Inc.
for tax compliance, tax advice and tax planning. The nature of the services comprising
the tax fees was for year end tax preparation of the partnership return and associated
K-1s.All Other Fees. The all other fees were billed to Lincolnway Energy for
products and services provided by RSM McGladrey, Inc which are not included under audit
fees, audit-related fees or tax fees. The nature of the products and services
comprising the all other fees was a cost segregation study and a director and officer
compensation review.
 63




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##### Table of Contents



Lincolnway Energys board has concluded that the provision of the non-audit services
listed above is compatible with maintaining the independence of McGladrey & Pullen, LLP.Each specific engagement of McGladrey & Pullen, LLP and its affiliates RSM McGladrey,
Inc is approved by the board of Lincolnway Energy. None of the services included within
tax fees or all other fees were approved by the board of Lincolnway Energy pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.The percentage of hours expended on McGladrey & Pullen, LLPs engagement to audit
Lincolnway Energys financial statements for the fiscal year ended September 30, 2006
that were attributed to work performed by persons other than McGladrey & Pullen, LLPs
full time, permanent employees did not exceed 50%.
 
 PART IV
 
 Item 15.
    
    Exhibits and Financial Statement Schedules.
 (a)
    
    Financial Statements and Schedules.The financial statements are set forth under Item 8 of this annual report.
Financial statement schedules have been omitted because they are not required or
are not applicable, or the information is otherwise included in this annual
report.(b)
    
    Exhibits.The following exhibits are filed as part of this annual report. Exhibits
previously filed are incorporated by reference, as noted.
 Incorporated by ReferenceExhibit
    
    
    
    Filed Herewith;
    
    
    
    
    
    Period
    
    
    
    
    
    FilingNumber
    
    Exhibit Description
    
    Page Number
    
    Form
    
    Ending
    
    Exhibit
    
    Date3.1
    
    Articles of Organization
    
    
    
    
    10
    
    
    
    
    
    3.1
    
    
    1/27/063.2
    
    Operating Agreement
    
    
    
    
    10
    
    
    
    
    
    3.2
    
    
    1/27/06*10.1
    
    Design/Build Contract
Between Lincolnway
Energy, LLC and Fagen,
Inc.
    
    
    
    
    10
    
    
    
    
    
    10.1
    
    
    1/27/0610.2
    
    Master Loan Agreement
Between Lincolnway
Energy, LLC and Farm
Credit Services of
America
    
    
    
    
    10
    
    
    
    
    
    10.2
    
    
    1/27/06
 64




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##### Table of Contents



Incorporated by ReferenceExhibit
    
    
    
    Filed Herewith;
    
    
    
    
    
    Period
    
    
    
    
    
    FilingNumber
    
    Exhibit Description
    
    Page Number
    
    Form
    
    Ending
    
    Exhibit
    
    Date10.3
    
    Construction and Term
Loan Supplement Between
Lincolnway Energy, LLC
and
FarmCredit Services of
America
    
    
    
    
    10
    
    
    
    
    
    10.3
    
    
    1/27/0610.4
    
    Construction and
Revolving Term Loan
Supplement Between
Lincolnway Energy, LLC
and Farm Credit
Services of America
    
    
    
    
    10
    
    
    
    
    
    10.4
    
    
    1/27/0610.5
    
    Loan Agreement Between
Lincolnway Energy, LLC
and Iowa Department of
Transportation
    
    
    
    
    10
    
    
    
    
    
    10.5
    
    
    1/27/0610.6
    
    Ethanol Fuel Marketing
Agreement Between
Lincolnway Energy, LLC
and
Renewable Products
Marketing Group
    
    
    
    
    10
    
    
    
    
    
    10.6
    
    
    1/27/0610.7
    
    Distillers Grain
Marketing Agreement
Between Lincolnway
Energy, LLC and
Commodity Specialist
Company
    
    
    
    
    10
    
    
    
    
    
    10.7
    
    
    1/27/0610.8
    
    Coal/Energy Consulting
Agreement Between
Lincolnway Energy, LLC
And U.S. Energy
    
    
    
    
    10
    
    
    
    
    
    10.8
    
    
    1/27/06*10.9
    
    Coal Supply Agreement
Between Lincolnway
Energy, LLC and William
Bulk Transfer, Inc.
    
    
    
    
    10
    
    
    
    
    
    10.9
    
    
    1/27/0610.10
    
    Loan Agreement Between
Lincolnway Energy, LLC
and Iowa Department of
Economic Development
    
    
    
    
    10
    
    
    
    
    
    10.10
    
    
    1/27/06
 65




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##### Table of Contents



Incorporated by ReferenceExhibit
    
    
    
    Filed Herewith;
    
    
    
    
    
    Period
    
    
    
    
    
    FilingNumber
    
    Exhibit Description
    
    Page Number
    
    Form
    
    Ending
    
    Exhibit
    
    Date10.11
    
    Amended and Restated
Grain Handling
Agreement Between
Lincolnway Energy, LLC
and Heart of Iowa
Cooperative
    
    
    
    
    10
    
    
    
    
    
    10.11
    
    
    1/27/0610.13
    
    Industry Track
Contract Between
Lincolnway Energy, LLC
and Union Pacific
Railroad
    
    
    
    
    10-Q
    
    
    6/30/06
    
    
    10.13
    
    
    8/14/0610.14
    
    Denaturant Purchase
Agreement Between
Lincolnway Energy, LLC
and Quadra Energy
Trading Inc,
    
    E-1E-531.1
    
    Rule 13a-14(a)
Certification of
President and Chief
Operating Officer
    
    E-631.2
    
    Rule 13a-14(a)
Certification
of Chief Financial
Officer
    
    E-732.1
    
    Section 1350
Certification of
President and Chief
Operating Officer
    
    E-832.2
    
    Section 1350
Certification of
Chief Financial Officer
    
    E-9
 
 *
    
    Material has been omitted pursuant to a request for confidential treatment and such material
has been filed separately with the Securities and Exchange Commission. 66




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##### Table of Contents



SIGNATURES
  LINCOLNWAY ENERGY, LLCDate: December 20, 2006
    
    By:
    
    /s/ Richard BrehmRichard Brehm, President and Chief
Executive OfficerDate: December 20, 2006
    
    By:
    
    /s/ Kim SupercynskiKim Supercynski, Chief Financial
Officer
  Date: December 20, 2006
    
    /s/ William CouserWilliam Couser, Director and
ChairmanDate: December 20, 2006
    
    /s/ Jeff TaylorJeff Taylor, Director and
Vice PresidentDate: December 20, 2006
    
    /s/ Timothy FevoldTimothy Fevold, Director and
SecretaryDate: December 20, 2006
    
    /s/ Terrill WycoffTerrill Wycoff, Director and
TreasurerDate: December 20, 2006
    
    /s/ David EggersDavid Eggers, DirectorDate: December 20, 2006
    
    /s/ James HillJames Hill, Director
 67




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Date: December 20, 2006
    
    /s/ Brian ConradBrian Conrad, DirectorDate: December 20, 2006
    
    /s/ David HassebrockDavid Hassebrock, DirectorDate: December 20, 2006
    
    /s/ Rick VaughanRick Vaughan, DirectorDate: December 20, 2006
    
    /s/ Richard BrehmRichard Brehm, President and
Chief Executive OfficerDate: December 20, 2006
    
    /s/ Kim SupercynskiKim Supercynski, Chief Financial
Officer
 68