** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM10-Q**

 

| **T** | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
|-------|-----------------------------------------------------------------------------------------|

 

**For the quarterly period ended September 30, 2007**

** **

**OR**

|       |
|------------|
| **£** | **Transition  report under Section 13 or 15(d) of the Exchange Act.** |

 

**For the transition period from              to**

** **

**Commission file number****0001170106**

 

**EASTKANSAS AGRI-ENERGY, LLC**

(Exactname of Registrant as specified in its charter)

** **

| **KANSAS**                                                       | ** ** | **48-1251578**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (STATE OR OTHER  JURISDICTION OF  INCORPORATION OR ORGANIZATION) |       | (I.R.S. EMPLOYER  IDENTIFICATION NO.) |

 

| **1304 S. M**ain, Garnett, Kansas 66032       |
|-----------------------------------------------|
| **(Address of  principal executive offices)** |
| ** **                                    |
| **(785) 448-2888**                            |
| **(Registrant’s  telephone number)**     |

** **

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.
|   | x   Yes          o  No |
|--------|------------------------------------------------------------------------------------|

 

 Indicate bycheck mark whether the registrant is a large accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated  Filer  o | Accelerated Filer   o              | Non-Accelerated Filer   x  |
|----------------------------------|------------------------------------------------------------------------------------------------|--------------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).
|   |  o Yes          x  No |
|--------|----------------------------------------------------------------------------------------|

 

Indicate the number of shares outstanding for each ofthe issuer’s classes of common equity as of the latest practicable date:

 

Asof September 30, 2007, there were 21,898 membership units outstanding.

 

 

----

** **

**INDEX**

 

| **PART  I.**     FINANCIAL  INFORMATION | ** **                                                                                              |
|------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                       | **Item  1. Financial Information**                                                                      |
| ** **                                                       | **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |
| ** **                                                       | **Item 3. Quantitative and Qualitative Disclosures about  Market Risk.**                                |
| ** **                                                       | **Item 4. Controls and Procedures.**                                                                    |
| **PART  II.**     OTHER  INFORMATION    | ** **                                                                                              |
| ** **                                                       | **Item  1. Legal Proceedings.**                                                                         |
| ** **                                                       | **Item  1A. Risk Factors.**                                                                             |
| ** **                                                       | **Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds.**                               |
| ** **                                                       | **Item 3. Defaults Upon Senior Securities.**                                                            |
| ** **                                                       | **Item 4. Submission of Matters to a Vote of Security  Holders.**                                       |
| ** **                                                       | **Item  5. Other Information.**                                                                         |
| ** **                                                       | **Item 6.  Exhibits.**                                                                                  |
|                                                                  |                                                                                                         |  |

 

2

----

 

 

**PARTI.     FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

EASTKANSAS AGRI-ENERGY, LLC

BALANCESHEETS

 

| ** **                                                                                                           | ** ** | **September 30, 2007** | ** **      | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|-----------------|-----------------------|------------|
| ** **                                                                                                           | ** ** | **(Unaudited)**        | ** **      | ** **            | ** ** |
| **ASSETS**                                                                                                           | ** ** | ** **             | ** **      | ** **            | ** ** |
| CURRENT ASSETS                                                                                                       |       |                   |            |                  |       |
| Cash and cash equivalents                                                                                            |       | **$**                  | **6,836,826**   |                  | $          | 5,281,272 |   |
| Trade accounts receivable - related party                                                                            |       | **4,693,151**          |            | 3,423,118             |       |
| Inventory                                                                                                            |       | **4,922,334**          |            | 2,282,222             |       |
| Investment in commodity contracts                                                                                    |       | **1,786,643**          |            | 1,345,752             |       |
| Interest receivable                                                                                                  |       | **1,287,067**          |            | 319,107               |       |
| Prepaid expense                                                                                                      |       | **62,858**             |            | 498,083               |       |
| Total current assets                                                                                                 |       | **19,588,879**         |            | 13,149,554            |       |
|                                                                                                                 |       |                   |            |                  |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                        |       |                   |            |                  |       |
| Land                                                                                                                 |       | **580,322**            |            | 580,322               |       |
| Land improvements                                                                                                    |       | **2,179,578**          |            | 2,179,578             |       |
| Office equipment                                                                                                     |       | **304,554**            |            | 270,866               |       |
| Buildings                                                                                                            |       | **1,817,258**          |            | 1,785,915             |       |
| Equipment                                                                                                            |       | **48,164,183**         |            | 46,675,432            |       |
| Vehicles                                                                                                             |       | **22,743**             |            | 22,743                |       |
| Construction in progress                                                                                             |       | **31,698**             |            | 65,698                |       |
|                                                                                                                 | ** ** | **53,100,336**         |            | 51,580,554            |       |
| Less accumulated depreciation                                                                                        |       | **(7,331,997**         | )               | (4,742,172            | )          |
| Total property, plant, and equipment                                                                                 |       | **45,768,339**         |            | 46,838,382            |       |
|                                                                                                                 |       |                   |            |                  |       |
| OTHER ASSETS                                                                                                         |       |                   |            |                  |       |
| Investment in Industrial Revenue Bonds                                                                               |       | **47,866,117**         |            | 47,866,117            |       |
| Idle property                                                                                                        |       | **2,317,398**          |            | 2,317,398             |       |
| Other investment                                                                                                     |       | **200**                |            | 200                   |       |
| Financing costs                                                                                                      |       | **615,288**            |            | 615,288               |       |
| Less accumulated amortization                                                                                        |       | **(137,540**           | )               | (79,298               | )          |
| Total other assets                                                                                                   |       | **50,661,463**         |            | 50,719,705            |       |
| Total assets                                                                                                         |       | **$**                  | **116,018,681** |                  | $          | 110,707,641 |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                             | ** ** | ** **             | ** **      | ** **            | ** ** |
| CURRENT LIABILITIES                                                                                                  |       |                   |            |                  |       |
| Current portion of long-term debt                                                                                    |       | **$**                  | **3,398,656**   |                  | $          | 3,076,532 |   |
| Accounts payable                                                                                                     |       |                   |            |                  |       |
| Trade                                                                                                                |       | **640,750**            |            | 595,285               |       |
| Related parties                                                                                                      |       | **2,298,486**          |            | 1,384,572             |       |
| Accrued payroll, taxes and withholdings                                                                              |       | **170,212**            |            | 136,871               |       |
| Other accrued expenses                                                                                               |       | **624,198**            |            | 302,817               |       |
| Accrued interest                                                                                                     |       | **1,309,307**          |            | 363,742               |       |
| Total current liabilities                                                                                            |       | **8,441,609**          |            | 5,859,819             |       |
| LONG-TERM DEBT (less current maturities)                                                                             | ** ** | **7,189,580**          |            | 12,059,916            |       |
| LEASE OBLIGATION                                                                                                     | ** ** | **47,866,117**         |            | 47,866,117            |       |
|                                                                                                                 |       |                   |            |                  |       |
| MEMBERS’ EQUITY                                                                                                 |       |                   |            |                  |       |
| Capital contributions, 40,000 units authorized, 23,798 units issued  of which 1,900 units are held as treasury stock |       | **24,707,100**         |            | 24,707,100            |       |
| Treasury stock, at cost                                                                                              |       | **(3,800,000**         | )               | (3,800,000            | )          |
| Retained earnings                                                                                                    |       | **31,614,275**         |            | 24,014,689            |       |
| Total members’ equity                                                                                           |       | **52,521,375**         |            | 44,921,789            |       |
| Total liabilities and members’ equity                                                                           |       | **$**                  | **116,018,681** |                  | $          | 110,707,641 |   |
|                                                                                                                      |            |                        |                 |                       |            |  |  |  |  |

 

 

3

----

 

 

EASTKANSAS AGRI-ENERGY, LLC

STATEMENTOF OPERATIONS (UNAUDITED)

 

| ** **                                   | ** ** | **Three Months**  | ** **     | **Nine Months**   | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|----------------------------------------------|------------|-------------------|----------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **Ended**         | ** **     | **Ended**         | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                                   | ** ** | **September 30,** | ** **     | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                   | ** ** | **2007**          | ** **     | **2007**          | ** ** | **2006**          | ** ** | **2006**          | ** ** |
|                                         |       |              |           |              |       |              |       |              |       |
| REVENUE                                      |       |              |           |              |       |              |       |              |       |
| Related parties                              |       | **$**             | **27,386,532** | ** **        | **$**      | **79,415,254**    | ** ** | 26,494,091        |       | $ | 70,787,304 |   |
| Incentive funds                              |       | **783,161**       | ** **     | **783,161**       | ** ** | 943,000           |       | 1,876,037         |       |
|                                         | ** ** | **28,169,693**    | ** **     | **80,198,415**    |       | 27,437,091        |       | 72,663,341        |       |
|                                         |       |              |           |              |       |              |       |              |       |
| COST OF SALES                                |       |              |           |              |       |              |       |              |       |
| Related parties                              |       | **(15,324,726**   | **)**          | **(45,822,544**   | **)**      | (9,238,787        | )          | (25,561,050       | )          |
| Other                                        |       | **(5,565,952**    | **)**          | **(17,642,707**   | **)**      | (5,677,168        | )          | (17,502,735       | )          |
|                                         | ** ** | **(20,890,678**   | **)**          | **(63,465,251**   | )          | (14,915,955       | )          | (43,063,785       | )          |
|                                         |       |              |           |              |       |              |       |              |       |
| GROSS PROFIT                                 | ** ** | **7,279,015**     | ** **     | **16,733,164**    |       | 12,521,136        |       | 29,599,556        |       |
|                                         |       |              |           |              |       |              |       |              |       |
| OPERATING EXPENSES                           |       |              |           |              |       |              |       |              |       |
| General, administrative and selling expenses |       | **959,495**       | ** **     | **2,591,004**     | ** ** | 821,989           |       | 2,489,255         |       |
|                                         |       |              |           |              |       |              |       |              |       |
| INCOME FROM OPERATIONS                       | ** ** | **6,319,520**     | ** **     | **14,142,160**    |       | 11,699,147        |       | 27,110,301        |       |
|                                         |       |              |           |              |       |              |       |              |       |
| OTHER INCOME (EXPENSE)                       |       |              |           |              |       |              |       |              |       |
| Interest income                              |       | **1,023,772**     | ** **     | **2,989,650**     | ** ** | 1,017,204         |       | 2,803,048         |       |
| Interest expense                             |       | **(233,536**      | **)**          | **(825,278**      | **)**      | (409,614          | )          | (1,533,033        | )          |
| Plant lease interest expense                 |       | **(978,596**      | **)**          | **(2,882,604**    | **)**      | (978,596          | )          | (2,706,148        | )          |
| Other income                                 |       | **227**           | ** **     | **526**           | ** ** | 232               |       | 968               |       |
|                                         | ** ** | **(188,133**      | **)**          | **(717,706**      | )          | (370,774          | )          | (1,435,165        | )          |
|                                         |       |              |           |              |       |              |       |              |       |
| NET INCOME                                   | ** ** | **$**             | **6,131,387**  | ** **        | **$**      | **13,424,454**    |       | $                 | 11,328,373 |   | $ | 25,675,136 |   |
|                                         |       |              |           |              |       |              |       |              |       |
| BASIC AND DILUTED INCOME PER UNIT            | ** ** | **$**             | **280**        | ** **        | **$**      | **613**           |       | $                 | 517        |   | $ | 1,172 |   |
|                                         |       |              |           |              |       |              |       |              |       |
| WEIGHTED AVERAGE UNITS                       |       |              |           |              |       |              |       |              |       |
| OUTSTANDING BASIC AND DILUTED                | ** ** | **21,898**        | ** **     | **21,898**        |       | 21,898            |       | 21,898            |       |
|                                              |            |                   |                |                   |            |                   |            |                   |            |  |  |  |  |  |  |  |

 

4

----

 

EASTKANSAS AGRI-ENERGY, LLC

STATEMENTOF CASH FLOWS (UNAUDITED)

 

| ** **                                                                    | ** ** | **Nine Months**   | ** **     | **Nine Months**   | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|----------------|-------------------|------------|
| ** **                                                                    | ** ** | **Ended**         | ** **     | **Ended**         | ** ** |
| ** **                                                                    | ** ** | **September 30,** | ** **     | **September 30,** | ** ** |
| ** **                                                                    | ** ** | **2007**          | ** **     | **2006**          | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                          |       |              |           |              |       |
| Net income                                                                    |       | **$**             | **13,424,454** |              | $          | 25,675,136 |   |
| Adjustments to reconcile net income to net cash used in operating  activities |       |              |           |              |       |
| Depreciation                                                                  |       | **2,589,825**     |           | 2,334,983         |       |
| Amortization                                                                  |       | **58,242**        |           | 69,680            |       |
|                                                                          |       |              |           |              |       |
| (Increase) decrease in current assets                                         |       |              |           |              |       |
| Accounts receivable                                                           |       | **(1,270,033**    | )              | (1,207,934        | )          |
| Inventory                                                                     |       | **(2,640,112**    | )              | 54,160            |       |
| Commodity contracts                                                           |       | **(440,891**      | )              | (114,160          | )          |
| Prepaid expense                                                               |       | **435,225**       |           | 180,725           |       |
| Interest receivable                                                           |       | **(967,960**      | )              | (975,367          | )          |
| Increase (decrease) in current liabilities:                                   |       |              |           |              |       |
| Accounts payable                                                              |       | **1,276,364**     |           | (474,981          | )          |
| Accrued expenses                                                              |       | **1,300,287**     |           | 1,436,051         |       |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                     | ** ** | **13,765,401**    |           | 26,978,293        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                          |       |              |           |              |       |
| Purchase of plant and equipment, including construction in progress           |       | **(1,836,767**    | )              | (4,990,526        | )          |
| Proceeds from refund of prior year plant and equipment costs                  |       | **—**        |           | 90,207            |       |
| NET CASH (USED IN) INVESTING ACTIVITIES                                       | ** ** | **(1,836,767**    | **)**          | (4,900,319        | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES                                          |       |              |           |              |       |
| Payment of financing fees                                                     |       | **—**        |           | (24,379           | )          |
| Proceeds from refund of financing fees                                        |       | **—**        |           | 80,000            |       |
| Repayment of long-term debt                                                   |       | **(4,548,212**    | )              | (8,147,610        | )          |
| Acquistion of treasury units                                                  |       | **—**        |           | (3,800,000        | )          |
| Distributions                                                                 |       | **(5,824,868**    | )              | (7,773,790        | )          |
| NET CASH (USED IN) FINANCING ACTIVITIES                                       | ** ** | **(10,373,080**   | )              | (19,665,779       | )          |
| NET INCREASE (DECREASE) IN CASH AND   CASH EQUIVALENTS                        |       | **1,555,554**     |           | 2,412,195         |       |
| CASH AND CASH EQUIVALENTS,   BEGINNING OF PERIOD                              |       | **5,281,272**     |           | 4,569,145         |       |
| CASH AND CASH EQUIVALENTS,   END OF PERIOD                                    |       | **$**             | **6,836,826**  |              | $          | 6,981,340 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW   INFORMATION                            |       |              |           |              |       |
| Cash paid for interest                                                        |       | **$**             | **2,762,317**  |              | $          | 3,317,012 |   |
| NON CASH INVESTING AND FINANCING ACTIVITIES                                   |       |              |           |              |       |
| Property, plant, and equipment costs incurred                                 |       | **$**             | **21,350**     |              | $          | 949,747 |   |
|                                                                               |            |                   |                |                   |            |  |  |  |  |  |

 

 

5

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

** **

**NOTE 1 -               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Nature of Business*

 

East Kansas Agri-Energy, LLC, (a Kansas limited liability company)located in Garnett, Kansas, was organized to own and operate a 35 milliongallon ethanol plant with distribution within the United States. East KansasAgri-Energy, LLC (the Company) was formally organized as a limited liabilitycompany as of October 16, 2001. Prior to that date the Company operated as ageneral partnership with no formal partnership agreement.

 

*Basis of Accounting*

 

The unaudited financial statements contained herein have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission.  Accordingly, they do notinclude all the information and footnotes required by accounting principlesgenerally accepted in the United States of America.

 

In the opinion of management, all adjustments, consisting of normalrecurring accruals, considered necessary for a fair presentation have beenincluded in the accompanying financial statements.  The results of operations for the nine monthsended September 30, 2007 and 2006, are not necessarily indicative of theresults expected for a full year.

 

These financial statements should be read in conjunction with thefinancial statements and notes included in the Company’s financial statementsfor the year ended December 31, 2006.

 

*Accounts Receivable*

 

Accounts receivable are presented at face value, net of the allowancefor doubtful accounts.  The allowance fordoubtful accounts is established through provisions charged against income andis maintained at a level believed adequate by management to absorb estimatedbad debts based on historical experience and current economic conditions.  Management believes all receivables will becollected and therefore the allowance has been established to be zero atSeptember 30, 2007.

 

The Company’s policy isto charge simple interest on trade receivables past due balances; accrual ofinterest is discontinued when management believes collection is doubtful.  Receivables are considered past due basedupon payment terms set forth at the date of the related sale.  The Company has no receivables accruinginterest September 30, 2007.

 

*FinancingCosts*

 

Costs incurred related to origination of debt financing are recorded asan asset and amortized over the expected term of the debt.

 

*Estimates*

 

Management uses estimates and assumptions inpreparing financial statements. Those estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses. Actual results could differ from theestimates used.

 

*EarningsPer Unit*

 

Earnings per unit are calculated based on the period of time units havebeen issued and outstanding. For purposes of calculating diluted earnings percapital unit, units subscribed for but not issued are included in thecomputation of outstanding capital units.

 

6

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER30, 2007

 

*General,administrative and selling expenses*

 

The primary components of general and administrative expenses aremanagement fees, insurance expense, selling expenses and payroll.

 

*RevenueRecognition*

 

Revenue from the production of ethanol and related products is recordedupon transfer of title to our customers. The transfer takes place at the plant site and therefore shipping termsare FOB shipping point.  Interest incomeis recognized as earned.  Income fromfederal and state incentives are recognized when received due to uncertainty ofavailable funds and pro-rations used by the sponsoring organizations.

 

*Costof Sales*

 

The primary components of cost of sales from the production of ethanoland related products are grain expense, energy expense (natural gas andelectricity), raw materials expense (chemicals and denaturant), labor anddepreciation on process equipment.

 

*Shippingand Handling*

 

Shipping and handling costs are expensed as incurred and are includedin the cost of sales.

 

*IncomeTaxes*

 

The Company is organized as a limited liability company under state lawand is treated as a partnership for income tax purposes.  Under this type of organization, the Company’searnings pass through to the partners and are taxed at the partner level.  Accordingly, no income tax provision has beencalculated.  Differences betweenfinancial statement basis of assets and tax basis of assets is related tocapitalization and amortization of organizational and start-up costs for taxpurposes, whereas these costs are expensed for financial statement purposes,and the difference between the recorded amounts of financial statement and taxdepreciation, unrealized gains or losses on commodity contracts and incentiveprograms payments.

 

*CashEquivalents*

 

For purposes of the statement of cash flows, the Company considers allhighly liquid debt instruments purchased with an original maturity of three monthsor less to be cash equivalents.

 

*FairValue of Financial Instruments*

 

The Company believes the carrying value of cash and cash equivalentsapproximates fair value due to the short maturity of these instruments.  The Company estimates the fair market valueof the investment in Industrial Revenue Bonds to approximate cost.

 

The Company believes the carrying amount of long-term note payableobligations approximates fair value.  Forthe permanent financing, fair value approximates the carrying amount due to thevariable interest rate feature of the debt.

 

*Inventory*

 

Inventory is stated at the lower of cost, determinedon a first in, first out basis, or market value.

 

7

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

* *

*Investmentin Commodity Contracts*

 

SFASNo. 133 requires a company to evaluate its contracts to determine whether thecontracts are derivatives. Certain contracts that literally meet the definitionof a derivative may be exempted from SFAS No. 133 as normal purchases or normalsales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business. Contracts that meetthe requirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

TheCompany enters into short-term cash grain, option and futures contracts as ameans of securing grain for the ethanol plant and managing exposure to changesin commodity prices. All derivatives are designated as non-hedge derivatives.Although the contracts are effective economic hedges of specified risks, theyare not designated as and accounted for as hedging instruments.

As part of itstrading activity, the Company uses futures and option contracts offered throughregulated commodity exchanges to reduce risk and are exposed to risk of loss inthe market value of inventories. To reduce that risk, the Company generallytakes positions using cash and futures contracts and options. During the ninemonth ended September 30, 2007 and 2006 this activity resulted in net losses of$715,830 and 1,214,840, respectively, which are reported in cost of sales.

 

*Propertyand Equipment*

 

Depreciation is computed over the estimated usefullife of each asset using the straight-line method.  Estimated useful lives generally used incomputing depreciation are:

 

| Land improvements       |   | 15 to 20 years |
|-------------------------|--------|----------------|
| Buildings               |   | 40 years       |
| Machinery and equipment |   | 7 to 15 years  |
| Office equipment        |   | 5 to 10 years  |
| Computers and software  |   | 3 to 5 years   |
| Vehicles                |   | 5 years        |

 

The Company’s property and equipment were acquiredunder lease agreements pursuant to an industrial revenue bond issue.  The Company is required to make semi-annualdeposits with the Trustee sufficient to service the principal maturities andinterest requirements.  Title to theproperty will be transferred to the Company when the lease is terminated uponretirement of the bonds.  Accordingly,the bonds have been recorded as a direct obligation of the Company.  The Company is also the holder of the bonds.

 

The Company reviews its property and equipment forimpairment whenever events indicate that the carrying amount of the asset maynot be recoverable.  An impairment lossis recorded if the sum of the future cash flows is less than the carryingamount of the asset.  The amount of theloss is determined by comparing the fair market value of the asset to thecarrying amount of the asset.  Suchassessments did not result in any adjustment to the value of the non-currentassets.

 

*IdleProperty*

 

The Company has incurred $2,317,398 of costs relatedto the preliminary construction of a rail spur project.  The Company does not currently have anestimate of when and if the project is going to be completed.  Accordingly, the costs have been classifiedas idle property.  The Company plans tocontinue to evaluate the status of this project in future periods.

 

8

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

* *

*EnvironmentalLiabilities*

 

The Company’s operations are subject to federal, state and localenvironmental laws and regulations. These laws require the Company to investigate and remediate the effectsof the release or disposal of materials at its location.  Accordingly, the Company has adoptedpolicies, practices and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage; and to limit thefinancial liability which could result from such events.  Environmental liabilities are recorded whenthe liability is probable and the costs can be reasonably estimated.

 

**NOTE2 -**                  INCENTIVE PAYMENTS

TheCompany qualified for the federal U.S. Department of Agriculture Bio EnergyProgram.  The federal program was managedby the Commodity Credit Corporation and was designed to expand the productionof fuel grade ethanol by offering incentives for incremental productioncompared to the same quarter of the prior year. The annually funded program ran through the federal government’s fiscalyear 2006 and incentive payments were pro-rated if applications for incentivesexceeded the annual funding.  The maximumannual incentive program payments the Company could receive was $7,500,000;individual producers were also subject to an annual limitation of 5% of thetotal funding.  During the nine monthsended September 30, 2006 the Company received $726,116 in federal incentives.

TheCompany has been approved for the Kansas Qualified Agricultural EthanolProducer Incentive Fund.  The incentiverate is $.075 per gallon of ethanol produced. The Company must establish they have produced 5,000,000 gallons ofethanol before the State of Kansas will disburse the funds.  Incentive payments are limited to 15,000,000gallons per production year.  During thenine months ended September 30, 2007 and 2006, the Company received $783,161and $1,149,921, respectively.

 

**NOTE3 -**                  INVENTORY

 

Inventories are summarized as follows:

 

| ** **       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------|------------|-------------------|------------|------------------|------------|
| ** **       | ** ** | **2007**          | ** ** | **2006**         | ** ** |
|             |       |              |       |             |       |
| Raw Material     |       | $                 | 3,668,021  |             | $          | 977,820 |   |
| Work in Progress |       | 574,577           |       | 563,362          |       |
| Finished Goods   |       | 679,736           |       | 741,040          |       |
|             |       |              |       |             |       |
|             |       | $                 | 4,922,334  |             | $          | 2,282,222 |   |

 

**NOTE 4 -**                    LONG-TERM DEBT

 

On November 23, 2004, theCompany entered into a Credit Agreement with Home Federal Savings Bank,establishing a construction loan facility for the construction of a 35 milliongallon per year ethanol plant. The construction financing is in the amount of$26,000,000 consisting of a $21,000,000 conventional term loan and a $5,000,000loan, with both loans being secured by substantially all of our assets.

 

During the constructionphase, the Company made monthly payments of interest only at a variableinterest rate equal to prime plus 1.75% with a floor of 6%. On September 20, 2005,following construction completion, the loan was segmented into two loans(1) a $5,000,000 loan (Loan A), and (2) a $21,000,000 conventional termloan (Loan B). The $5,000,000 loan has an amortization period and 

 

9

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

 

maturity date of ten years.The Company makes monthly payments of principal and interest on the $5,000,000loan at an interest rate equal to prime. The $21,000,000 conventional loan has an amortization period of tenyears but will mature at the end of five years. The Company makes monthlypayments of principal and interest on the $21,000,000 loan at an interest rateequal to prime.  The effective interestrate for both loans at September 30, 2007 was 7.75%.

 

The Company pays a $20,000annual administration fee related to the credit facility.  The credit facility is secured by a mortgageon our real property and a security interest in all personal and intangibleassets of the Company, including assignment of all material contracts.

 

On May 4, 2006, the Company agreed to renegotiate terms of their bankfinancing.  The new terms provide for a$4,000,000 term revolving loan in addition to the existing term loans.  The interest rate on the term revolving loanis the prime rate.  The term revolvingloan available credit balance is reduced by $400,000 annually beginningDecember 31, 2007 and matures on October 1, 2010.  At September 30, 2007, the Company has not usedany amount related to the term revolving loan.

 

During the term of the loan,all deposit accounts related to the Company must be maintained at Home FederalSavings Bank. The Company is subject to certain financial loan covenantsconsisting of minimum working capital, minimum fixed charge coverage, minimumcurrent ratio, minimum debt service, minimum net worth and maximum debt to networth covenants during the term of the loan. The Company is also prohibitedfrom making distributions to their members; however, the Company is allowed todistribute 50% of our net income to our members after our lender has receivedaudited financial statements for the fiscal year. If the Company meets certainfinancial ratio requirements, it may distribute an additional 10% of netincome.  The Company must be incompliance with all financial ratio requirements and loan covenants before andafter any distributions to the members. The lender temporarily waived, through December 31, 2007, the capitalexpenditure covenant.  With the waiver,the Company is in compliance with the applicable loan covenants as of September30, 2007.

 

The Company is only allowed to make annual capital expenditures up to$500,000 annually without the lender’s prior approval. During the term of theloan, the Company is required to pay to the lender an annual amount equal tothe greater of: 1) 75% of any Commodity Credit Corporation Bio-Energy incomepayments received during the year, or 2) 25% of the Company’s free cash flowfor each year. Payments consisting of USDA Commodity Credit CorporationBio-Energy income must be paid to the lender within 15 days of receipt of anysuch payments. These payments will continue until an aggregate sum of$7,500,000 has been received by the lender. The Company is in compliance with the applicable loan covenants as ofSeptember 30, 2007. The Company has made $7,500,000 in payments and no futureincentives or free cash payments will be required.

 

The Company financed its waste water reuse facilitythrough two bond issues by the City of Garnett. The Utility System Revenue Bonds require annual principal paymentsbeginning on October 1, 2006 and continue through 2015.  Interest payments on these bonds are duesemi-annually, at interest rates ranging from 4.6% to 5.2%.  The first interest payment was due April 1,2006.  The Community Development BlockGrant (CDBG) Bonds require semi-annual principal and interest paymentsbeginning on July 1, 2006 and continue through 2015.  The bonds have a fixed interest rate of 2%

 

10

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

 

Long-termobligations of the Company are summarized as follows at September 30, 2007:

 
| ** **                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                   | ** ** | **2007**          | ** ** | **2006**         | ** ** |
|                         |       |              |       |             |       |
| Loan B                       |       | $                 | 7,945,659  |             | $          | 11,580,282 |   |
| Loan A                       |       | 1,896,580         |       | 2,747,614        |       |
| Utility System Revenue Bonds |       | 440,000           |       | 485,000          |       |
| CDBG Bonds                   |       | 305,997           |       | 323,552          |       |
|                         |       |              |       |             |       |
| Less current portion         |       | (3,398,656        | )          | (3,076,532       | )          |
|                         |       |              |       |             |       |
| Long-term portion            |       | $                 | 7,189,580  |             | $          | 12,059,916 |   |

 

The estimatedmaturities of long-term debt at September 30, 2007, are as follows:

 
| **12 Month  Period Ending September 30** | ** ** | **Amount** | ** ** |
|------------------------------------------|------------|------------|------------|
|                                     |       |       |       |
| 2008                                     |       | $          | 3,398,656  |   |
| 2009                                     |       | $          | 3,714,466  |   |
| 2010                                     |       | $          | 2,933,193  |   |
| 2011                                     |       | $          | 87,830     |   |
| 2012                                     |       | $          | 93,590     |   |
| Thereafter                               |       | 360,501    |       |
|                                     |       |       |       |
|                                     |       | $          | 10,588,236 |   |

 

**NOTE5 -**                  MEMBERS’ EQUITY

 

As specified in the Company’s Operating Agreement, voting rights areone vote for each voting unit registered in the name of such Member as shown onthe Membership Registration maintained by the Company. No Member shall directlyor indirectly own or control more than 25% of the issued and outstanding votingmembership interest in the Company at any time.

 

Income and losses of the Company shall be allocated among the Membersin proportion to each Member’s respective percentage of units when comparedwith the total Units issued.

 

The Company’s cash flow shall first be applied to the payment of theCompany’s operating expenses (including debt service) and then to maintenance ofadequate cash reserves as determined by the board of directors in its solediscretion, and then shall be distributed from time to time to the Members inproportion to their respective percentage units. No member has the right todemand and receive any distribution from the Company other than in cash. Nodistribution shall be made if, as a result thereof, the Company would be inviolation of any loan agreement, and of if the Company would be in violation ofany loan agreement, of if the Company’s total assets would be less than the sumof its total liabilities.

 

Transfer, disposition or encumbrance of Capital Units is subject tocertain restrictions, including approval by the board of directors.

 

The board of directors approved the redemption of 1,900 units from amember.  The redemption represents themember’s entire unit balance.  On May 10,2006, the Company purchased the member’s units for a total of $3,800,000.

 

11

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

 

On March 23, 2007, the Company made a dividend distribution to itsmembers in the amount of $132 per share, for a total payment of$2,890,536.  On May 23, 2007, the Companymade a dividend distribution to its members in the amount of $55 per share, fora total payment of $1,204,390.  On August28, 2007, the Company made a dividend distribution to its members in the amountof $79 per share, for a total payment of $1,729,942.

 

**NOTE6 -**                  CONCENTRATION OFCREDIT RISK

 

The Company maintains cash balances at five financial institutions inits trade area. The accounts are secured by the Federal Deposit InsuranceCorporation up to $100,000. At times, the Company’s bank balance may exceed$100,000.

 

**NOTE7 -**                  COMMITMENTS ANDCONTINGENCIES

 

On November 12, 2004, the Company entered into aTrading Agreement with United Bio Energy Trading, LLC, an affiliated relatedparty, in which United Bio Energy Trading, LLC will provide market informationand consulting services for the Company. The Company anticipates that the termof the agreement will be for at least five years and will pay a monthly fee of$6,000.

 

On November 12, 2004, the Company entered into a Distillers GrainsMarketing Agreement with United Bio Energy Ingredients, LLC, an affiliatedrelated party, pursuant to which United Bio Energy Ingredients, LLC willpurchase all dried and wet distillers grains produced at the plant for a termof at least five years at a price of 98% of the FOB plant price United BioEnergy Ingredients, LLC charges its buyers of dried distillers grains, and 95%of the FOB plant price United Bio Energy Ingredients, LLC charges its buyers ofwet distillers grains. United Bio Energy Ingredients, LLC, will use its bestefforts to achieve the highest resale price available under prevailing marketconditions. The Company is responsible for supplying all labor and equipment toload or unload trucks or rail cars without charge to United Bio EnergyIngredients, LLC and is required to provide storage for at least 10 daysproduction of wet and dry distiller grains. In addition, the distiller grainsmust meet quality requirements so that they will meet current industrystandards for primary animal feed ingredients. If the Company fails to supplydistiller grains that comply with industry standards, United Bio EnergyIngredients, LLC may reject them.  TheCompany paid commissions of $382,366 and $235,583 for the nine months endedSeptember 30, 2007 and 2006, respectively, related to this marketing agreement.

 

On November 12, 2004, the Company entered into a RawGrains Agreement with United Bio Energy Ingredients, LLC, an affiliated relatedparty. The Raw Grains Agreement provides for the Company to purchase all raw grainsnecessary for ethanol production from United Bio Energy Ingredients, LLC for aperiod of at least five years. Pursuant to the agreement, United Bio EnergyIngredients, LLC will use its best efforts to arrange for the purchase of grainat the lowest price available under prevailing market conditions and we willsupply all labor and equipment necessary to load or unload trucks or rail cars.For its service, the Company will pay United Bio Energy Ingredients, LLC theactual cash procurement price and all reasonable and necessary expenses to getthe grain to the plant plus a $.02 per bushel fee. The title, risk of loss, andresponsibility for the quality of grain will transfer to the Company when itunloads the grain at the plant. Prior to that time, United Bio EnergyIngredients, LLC will bear the risk of loss. All grain delivered to the plantshall meet certain quality standards and the Company will have the option toreduce the price the Company will pay or fully reject any delivery that failsto conform to these standards, depending upon the severity of thenoncompliance.  For the nine months endedSeptember 30, 2007 and 2006, the Company paid $251,172 and $215,526,respectively, in brokerage fees for grain purchases made under this agreement.

 

On September 28, 2007, the Company provided 90 dayswritten notice to United Bio Energy of their intent to terminate the Distiller’sGrain Marketing, Trading and Raw Grains Agreements.  Because the Agreements are being terminatedwithout cause during the initial five year period, the Company must pay acancellation fee.  The cancellation feeestimated to be $207,823, has been accrued and is included in the related partyaccounts payable at September 30, 2007.

 

12

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

 

On November 12, 2004, the Company also entered into anEthanol Agreement with United Bio Energy Fuels, LLC, an affiliated relatedparty.  United Bio Energy Fuels, LLC changedtheir name to Provista Renewable Fuels Marketing, LLC (Provista).  The terms of the agreement provide thatProvista will market all fuel-grade ethanol produced at our plant. In exchange,the Company agrees to pay Provista a fee of $.01 for each gallon of ethanolproduced at the Company’s plant during the term of the agreement. The Companyexpects that the term of the agreement will be at least 5 years. Provista alsoagreed to use its best efforts to obtain the highest price for ethanolavailable under prevailing market conditions. For the nine months ended September 30, 2007 and 2006, the Company paid$325,877 and $302,804, respectively, in marketing fees for ethanol marketingunder this agreement.

 

On November 12, 2004, the Company entered into a ManagementAgreement with United Bio Energy Management, LLC, a related party, in whichUnited Bio Energy Management, LLC would supervise and direct the generaloperations of the plant for an anticipated period of at least five years.United Bio Energy Management, LLC would provide the services of a full-timegeneral manager to the plant.  TheCompany had agreed to compensate United Bio Energy Management, LLC an annualfee of $250,000 for these services payable in monthly installments of $20,833,plus an incentive bonus based on the attainment of certain financialbenchmarks. United Bio Energy Management, LLC would appoint a general managerto be based on site at our plant, and shall work exclusively for us. In theevent of a dispute, the Management Agreement provides that the Company willfirst attempt to amicably settle any dispute or difference privately betweenUnited Bio Energy Management, LLC and the Company. If the Company cannotresolve the dispute as a result of the discussions, then the Company must submitthe matter to non-binding mediation. In the event that the dispute is notsettled through mediation, the matter must be resolved by non-appealablearbitration in accordance with the rules of the American ArbitrationAssociation as applicable in the State of Kansas. The determination of thearbitrator is expected to be final and may not be appealed to any court. Theprevailing party in any arbitration proceeding is entitled to recoverreasonable attorneys’ fees and expenses incurred. The agreement commencedduring March 2005.  For the nine monthsended September 30, 2006, the Company incurred costs of $462,500 related tothis agreement including reimbursable expenses. On December 13, 2006 theCompany reached an agreement with United Bio Energy Management, LLC toterminate the above Management Agreement effective December 31, 2006.  The Company has agreed to continueparticipating in the UBE Plant Manager Program and Group Buying Program for amonthly fee of $10,000 for a term of one year, with the first monthlyinstallment due and payable on January 1, 2007.

 

Thefollowing is a schedule of the annual commitments related to the aboveagreements.

 

| **12 months ending September 30,** | ** ** |
|------------------------------------|------------|
|                               |       |   |   |
| 2008                               |       | $ | 398,108 |   |
| 2009                               |       | 332,108 |   |
| 2010                               |       | 332,108 |   |
| 2011                               |       | 332,108 |   |
| 2012                               |       | 332,108 |   |
| Thereafter                         |       | 332,107 |   |
|                               |       |   |   |
|                               |       | $ | 2,058,647 |   |

 

TheCompany is involved in various claims arising in the normal course ofbusiness.  Management believes that anyfinancial responsibility that may be incurred would not be material and thereforeno additional accrual is deemed necessary.

 

13

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

 

**NOTE8 -**                  SALE / LEASEBACKTRANSACTION

 

On December 20, 2005, theCompany completed an industrial revenue bond financing with the City ofGarnett, Kansas that will provide property tax savings for 10 years on theplant site.  As part of the financing,title to the plant site and improvements have been transferred to the City ofGarnett, Kansas, as security for the repayment of the bonds, and the Company isleasing back the site in an amount that is equal to the amount of the principaland interest to be paid on The City of Garnett, Kansas bonds.  Home Federal Savings Bank consented to thistransaction, and the bonds have been pledged to Home Federal Savings Bank assecurity for any obligations under the Home Federal Savings Bank CreditAgreement.  As part of the financing, theCompany paid the bond underwriter, Gilmore & Bell, P.C. $40,000.  The maximum principal amount of the bonds is$50,000,000.  The bonds were initiallyissued in the principal amount of $47,866,117, which is the amount of theCompany’s expenditures on the plant as of December 20, 2005.

 

The $40,000 of financingfees paid to the bond underwriter and $23,656 of legal and other costassociated with the bond closing will be amortized over the approximately 10.5year life of the bonds.  A total of$4,535 and $4,301 of amortization expense related to these costs was recognizedduring the nine months ended September 30, 2007 and 2006, respectively.

 

From the proceeds of thebond, the Company purchased the bonds as an investment.  The Company, as holder of the industrialrevenue bonds, is due interest at 8.0% per annum with interest payablesemi-annually on June 1st and December 1st, commencingJune 1, 2006.  The interest income isdirectly offset by the lease payments on the plant.  Both the bond and the corresponding leasehave terms commencing December 20, 2005 and terminating on June 1, 2016.  The entire outstanding principal is due upontermination of the bonds.  Theoutstanding principal at September 30, 2007 was $47,866,117.  The lease qualifies as a capital lease.  Interest income recognized on the IndustrialRevenue Bonds for the nine months ended September 30, 2007 and 2006 was$2,882,604 and $2,706,148, respectively. These amounts are equal to the lease expense of the plant for thoseperiods.

 

Future debt service requirements on the Industrial Revenue Bonds at September 30, 2007 are as follows:

 

| **12 months  ending**        | ** ** | **Interest** | ** ** | ** **    | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------|------------|--------------|------------|---------------|------------|--------------|------------|------------|------------|
| **September  30**            | ** ** | **Rate**     | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Total**  | ** ** |
|                         |       |         |       |          |       |         |       |       |       |
| 2008                         |       | 8%           |       | $             | —     |         | $          | 3,829,289  |       | $ | 3,829,289 |   |
| 2009                         |       | 8%           |       | —        |       | 3,829,289    |       | 3,829,289  |       |
| 2010                         |       | 8%           |       | —        |       | 3,829,289    |       | 3,829,289  |       |
| 2011                         |       | 8%           |       | —        |       | 3,829,289    |       | 3,829,289  |       |
| 2012                         |       | 8%           |       | —        |       | 3,829,289    |       | 3,829,289  |       |
| Thereafter                   |       | 8%           |       | 47,866,117    |       | 15,317,159   |       | 63,183,276 |       |
|                         |       |         |       |          |       |         |       |       |       |
| Totals                       |       |         |       | $             | 47,866,117 |         | $          | 34,463,604 |       | $ | 82,329,721 |   |
|                         |       |         |       |          |       |         |       |       |       |
| Amount representing interest |       |         |       |          |       | (34,463,604  | )          |
|                         |       |         |       |          |       |         |       |       |       |
| Long-Term Obligation         |       |         |       |          |       | $            | 47,866,117 |       |

 

14

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

 

**NOTE9 -**                   RETIREMENT PLAN

 

During2005, the Company began a SIMPLE 401(k), Savings Incentive Match Plan forEmployees, retirement plan for all eligible employees.  All employees are eligible to participate inthe plan.  The Company makes a matchingcontribution of 3% of participants’ eligible wages.  The employees are fully vested uponcontribution to the plan.  The Companymatch for the nine months ended September 30, 2007 and 2006 was $40,085 and$30,767, respectively.

 

15

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** **

**ITEM 2.                  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.**

 

We prepared the following discussion and analysis tohelp you better understand our financial condition, changes in our financialcondition, and results of operations for the three and nine month periods endedSeptember 30, 2007, compared to the same periods of the prior fiscal year.  This discussion and analysis should be readin conjunction with the financial statements and notes to financial statementsincluded elsewhere in this report and the information contained in our annualreport on Form 10-KSB for the fiscal year ended December 31, 2006.

 

**Forward Looking Statements**

 

This report contains orincorporates by reference “forward-looking statements” that involve futureevents, our future performance and our expected future operations andactions.  In some cases you can identify forward-looking statements by theuse of words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,”“plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,”“continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerousassumptions, risks and uncertainties, including, but not limited to thosedescribed in the “Risk Factors” section of our Annual Report on Form 10-KSB,those listed below and those business risks and factors described elsewhere inthis report and our other Securities and Exchange Commission filings.

 

•                  Projected growth, overcapacity or contraction in theethanol market in which we operate;

•                  Fluctuations in the price and market for ethanol anddistillers grains;

•                  Changes in plant production capacity, variations inactual ethanol and distillers grains production from expectations or technicaldifficulties in operating the plant;

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

•                  Changes in our business strategy, capital improvementsor development plans for expanding, maintaining or contracting our presence inthe market in which we operate;

•                  Changes in interest rates and the availability ofcredit to support capital improvements, development, expansion and operations;

•                  Our ability to market and our reliance on thirdparties to market our products;

•                  Our ability to distinguish ourselves from our currentand future competition;

•                  Changes to infrastructure, including:

•                  expansion of rail capacity,

•                  increases in truck fleets capable of transportingethanol within localized markets,

•                  additional storage facilities for ethanol, expansionof refining and blending facilities to handle ethanol,

•                  growth in service stations equipped to handle ethanolfuels, and

•                  growth in the fleet of FFVs capable of using E85 fuel;

•                  Changes in or elimination of governmental laws,tariffs, trade or other controls or enforcement practices such as:

•                  national, state or local energy policy;

•                  federal ethanol tax incentives;

•                  legislation mandating the use of ethanol or otheroxygenate additives;

•                  state and federal regulation restricting or banningthe use of MTBE; or

•                  environmental laws and regulations that apply to ourplant operations and their enforcement;

•                  Increased competition in the ethanol and oilindustries;

•                  Fluctuations in US oil consumption and petroleumprices;

•                  Changes in general economic conditions or theoccurrence of certain events causing an economic impact in the agriculture, oilor automobile industries;

•                  The availability and adequacy of our cash flow to meetour requirements, including repayment of debt;

•                  Our liability resulting from litigation;

•                  Our ability to retain key employees and maintain laborrelations;

•                  Changes and advances in ethanol production technology;and

•                  Competition from alternative fuels and alternativefuel additives.

 

16

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Our actual results oractions could and likely will differ materially from those anticipated in theforward-looking statements for many reasons, including the reasons described inthis report.  We are not under any duty to update the forward-lookingstatements contained in this report.  We cannot guarantee future results,levels of activity, performance or achievements.  We caution you not toput undue reliance on any forward-looking statements, which speak only as ofthe date of this report.  You should read this report and the documentsthat we reference in this report and have filed as exhibits, completely andwith the understanding that our actual future results may be materiallydifferent from what we currently expect.  We qualify all of ourforward-looking statements by these cautionary statements.

 

**Overview**

 

EastKansas Agri-Energy, LLC was formed as a Kansas limited liability company onOctober 16, 2001.  References to “we”, “us”,“our” and “East Kansas” refer to East Kansas Agri-Energy, LLC  Our principal business office is currentlylocated at 1304 South Main Street, Garnett, Kansas 66032.  We are managed by an 11 member board ofdirectors.

 

SinceJune 2005, we have been engaged in the production of ethanol anddistillers grains.   We currentlypurchase all of our corn and milo from United Bio Ingredients, LLC (UBEI), anaffiliate of US BioEnergy Corporation, pursuant to a Raw Grains Agreement. Wepaid $251,172 in brokerage fees under the Raw Grains Agreement for the periodended September 30, 2007.  On September28, 2007, we provided 90 days written notice to UBEI of our intent to terminatethe Raw Grains Agreement. Because we are terminating the Agreement without causeduring the initial five year period, we must pay to UBEI, within 30 days of thetermination, an amount equal to the product of three multiplied by the averagemonthly fee paid to UBEI for the six months prior to the termination date.  Termination of the Agreement will beeffective on December 31, 2007.   Thereafter, we expect to purchase the raw grains necessary to operateour plant from local producers and various commercial grain suppliers throughEKAE employees.

 

Ourrevenues are derived from the sale and distribution of our ethanol anddistillers grains, which are sold to Provista Renewable Fuels Marketing, LLC(Provista), successor to United Bio Energy Fuels, LLC, and United Bio EnergyIngredients, LLC, respectively, which subsequently markets and sells ourproducts.  The principal markets for our ethanol areregional petroleum terminals located in major population centers in Kansas andneighboring states, including such cities as Kansas City, Missouri; Wichita,Kansas; Tulsa, Oklahoma; and St. Louis, Missouri.  We paid $325,897 in marketing fees under theEthanol Agreement for the period ended September 30, 2007 and $382,366 incommissions under the Distiller’s Grains Marketing Agreement for the periodended September 30, 2007.

 

On September 28, 2007, we provided 90 dayswritten notice to UBEI of our intent to terminate our Distiller’s GrainsMarketing Agreement.  Because we areterminating the Agreement without cause during the initial five year period, wemust pay to UBEI, within 30 days of the termination, an amount equal to theproduct of three multiplied by the average monthly fee paid to UBEI, for thesix months prior to the termination date.  Termination of the Distiller’s Grains Marketing Agreement will beeffective December 31, 2007.  Thereafter,we expect to market our distiller’s grains to various customers through EKAEemployees.

 

On November 2, 2004, we entered into aTrading Agreement with United Bio Energy Trading, LLC (UBET), under which UBETprovided commodity trading and hedging consulting services, including marketanalysis, risk management, and transaction execution, for us in exchange for amonthly fee of $6,000.  On September 28,2007, we provided 90 days written notice to UBET of our intent to terminate theTrading Agreement.  Termination of theTrading Agreement will be effective December 31, 2007.  We have entered into a one year agreementwith FC Stone, LLC to provide risk management services to our Company.  FC Stone will provide commodity trading andhedging consulting services, including market analysis, risk management, andtransaction execution, for us in exchange for a monthly fee of $2,000.

 

Ouroperating results are largely driven by the prices at which we sell ethanol anddistillers grain and the costs related to their production.  Historically,the price of ethanol has fluctuated with the price of petroleum-based productssuch as unleaded gasoline, heating oil, and crude oil.  Most recently the price of ethanol hasdecreased from about $2.50 per gallon two years ago to a low of $1.50, which inconjunction with the higher corn prices, is causing 

 

17

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concern in theindustry.  The price of distillers grainsis primarily influenced by the price of corn as a substitute livestockfeed.  In addition, our revenues are alsoimpacted by such factors as our dependence on one or a few major customers whomarket and distribute our products; the intensely competitive nature of ourindustry; possible legislation at the federal, state, and/or local level; andchanges in federal ethanol tax incentives.

 

Our largest costs ofproduction are corn, natural gas, and manufacturing chemicals.  The cost of corn is affected primarily bysupply and demand factors such as crop production, carryout, exports,government policies and programs, risk management and weather, much of which wehave no control over.  Recently, theincreased production of ethanol has placed upward pressure on the price andsupply of corn, resulting in higher than normal corn prices.  Natural gas prices fluctuate with the energycomplex in general.  Over the last fewyears, natural gas prices have trended higher than average and it appearsprices will continue to trend higher due to the high price of alternative fuelssuch as fuel oil.  Our costs ofproduction are affected by the cost of complying with the extensiveenvironmental laws that regulate our industry.

 

We have announced ourintent to engage in a reclassification and reorganization of the Company’smembership units.  The proposedtransaction will provide for the reclassification of our units into threeseparate and distinct classes.  If ourmembers approve the proposed amendments to our operating agreement and thereclassification is implemented, we anticipate having fewer than 300 unitholders of record in our current class with the remaining approximately 400unit holders split into two additional classes, which would enable us tovoluntarily suspend the registration of our units under the Securities andExchange Act of 1934.  On October 22,2007, we filed the materials with the Securities and Exchange Commission thatare necessary to initiate the deregistration process.  Once the SEC has reviewed the materials andwe have resolved any SEC comments, a vote of the members will be held toapprove the amendments to the operating agreement and the reclassificationtransaction.

 

**Results ofOperations for the Three Months Ended September 30, 2007 and 2006**

 

The following table showsthe results of our operations and the percentage of revenues, cost of sales,operating expenses and other items to total revenues in our statements ofoperations for the three months ended September 30, 2007 and 2006:

 

 
| ** **                | ** ** | **September 30, 2007** | ** **    | **September 30, 2006** | ** ** |
|---------------------------|------------|------------------------|---------------|------------------------|------------|
| **Income Statement Data** | ** ** | **Amount**             | ** **    | **% of  Revenues**     | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** |
|                      |       |                   |          |                   |       |   |   |   |   |
| Revenues                  |       | $                      | 28,169,693    |                   | 100.0      | % | $ | 27,437,091 |   | 100.0 | % |
| Cost of Sales             |       | $                      | 20,890,678    |                   | 74.2       | % | $ | 14,915,955 |   | 54.4 | % |
| Gross Profit              |       | $                      | 7,279,015     |                   | 25.8       | % | $ | 12,521,136 |   | 45.6 | % |
|                      |       |                   |          |                   |       |   |   |   |   |
| Operating Expenses        |       | $                      | 959,495       |                   | 3.4        | % | $ | 821,989 |   | 3.0 | % |
| Operating Income          |       | $                      | 6,319,520     |                   | 22.4       | % | $ | 11,699,147 |   | 42.6 | % |
|                      |       |                   |          |                   |       |   |   |   |   |
| Other Income (Expense)    |       | $                      | (188,133      | )                      | (0.7       | )% | $ | (370,774 | ) | (1.4 | )% |
| **Net Income**            | ** ** | **$**                  | **6,131,387** | ** **             | **21.8**   | **%** | **$** | **11,328,373** | ** ** | **41.3** | **%** |
|                           |            |                        |               |                        |            |  |  |  |  |  |  |  |

 

Revenues. Our revenues from operations come from two primary sources:  ethanol sales and distillers grainsales.  The following table shows thesources of our revenues for the three months ended September 30, 2007 and 2006:

 
| ** **                 | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
|----------------------------|------------|------------------------|------------|------------------------|------------|
| **Revenue Sources**        | ** ** | **Amount**             | ** ** | **% of  Revenues**     | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** |
|                       |       |                   |       |                   |       |   |   |   |   |
| Ethanol Sales              |       | $                      | 23,127,930 |                   | 82.1       | % | $ | 23,484,496 |   | 85.6 | % |
| Distillers Grains Sales    |       | $                      | 4,258,602  |                   | 15.1       | % | $ | 3,009,595 |   | 11.0 | % |
| Ethanol Incentive Payments |       | $                      | 783,161    |                   | 2.8        | % | $ | 943,000 |   | 3.4 | % |
| Total Revenues             |       | $                      | 28,169,693 |                   | 100.0      | % | $ | 27,437,091 |   | 100.0 | % |

 

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The increase in revenuesfrom the three months ended September 30, 2007 compared to the three monthsended September 30, 2006 is due primarily to an increase in volume of ethanolmade possible by some production modifications made to the plant.  Theaverage price per gallon of ethanol sold decreased approximately 9% in thethree months ended September 30, 2007 compared to the three months endedSeptember 30, 2006.  Volume of ethanolsold in the three months ended September 30, 2007 was 8% more than in the threemonths ended September 30, 2006.  Theincrease in volume of ethanol offset the lower price per gallon of ethanolsold.  Revenue from sales of ourco-products increased by 41.5% in the three months ended September 30, 2007compared to the three months ended September 30, 2006, primarily due toincreasing cost of corn as a comparable feed product, the product mix betweenwet and dry distiller’s grains and the additional feed produced as a result ofincreased production of ethanol.

 

Increasedethanol production in our market has led to increased availability of theco-product.  Continued increased supplyof dry and wet distillers grains on the market from other ethanol plants couldreduce the price we are able to charge for our distillers dried grains.  This could have a negative impact on ourrevenues.

 

We received no incomefrom the United States Department of Agriculture’s Commodity Credit CorporationBioenergy Program for the three months ending September 30, 2007.  In the three months ended September 30, 2006,we received $248,749.  This was the finalpayment from the CCC Bioenergy Program because of termination of the program onJune 30, 2006.

 

Wereceived $783,161 from the State of Kansas through the Kansas QualifiedAgricultural Ethyl Alcohol Producer’s Program for the three months ended September 30, 2007,compared to $694,251 received for the same period in 2006.  We donot expect more than minimal payments under this program for our 2007 fiscalyear.

 

Cost of Sales.  Our cost of sales as a percentage of revenues was 74.2% and 54.4%for the three months ended September 30, 2007 and 2006, respectively.  Ourcost of sales increased by approximately $5,974,723 in the three months endedSeptember 30, 2007 as compared to the three months ended September 30, 2006,even though our revenue only increased by approximately $732,602.  This significant increase in the cost ofsales is primarily a result of significantly higher corn prices.  Over the past year, corn prices reachedrecord highs approaching $4.00 a bushel. Over the same period, ethanol prices fell to nearly $1.50 a gallon.  This has resulted in an inability of someethanol plants to operate profitably, and caused some plants to decide to delayconstruction of their projects or scale back production at existing plants.

 

Our total corn costsincreased by approximately 56% for the three months ended September 30, 2007 ascompared to the same period of 2006. With the increased demand for corn from increased ethanol production, weexpect to have high corn prices throughout the fiscal year 2007.  These high corn prices might be mitigatedsomewhat due to increased corn planting in the 2007 growing season.  On October 12,2007, the United States Department of Agriculture (“USDA”) released its CropProduction report, which estimated the 2007 grain corn crop at 13.32 billionbushels.  The October 12, 2007 estimateof the 2007 corn crop is approximately 26% above the USDA’s estimate of the2006 corn crop of 10.53 billion bushels. If this is the case, it could offset some of theadditional corn demand from the ethanol industry.  Management however expects to continue toendure high corn prices into the near future. If corn prices continue to rise and ethanol prices continue to fall, ourability to operate at a profit could suffer and we may be forced to reduce orcease production until market conditions improve or permanently.

 

For the three monthsended September 30, 2007, our natural gas costs increased by approximately 9%as compared to the three months ended September 30, 2006.  Our natural gas consumption increased byapproximately 8% for the three months ended September 30, 2007, as compared tothe same period of 2006.   Currentnatural gas prices are considerably higher than the 10-year average.  Global demand for natural gas is expected tocontinue to increase, further driving up prices.  As a result, we expect natural gas prices to remainhigher than average in the short to mid term. Increases in the price of natural gas increase our cost of productionand negatively impact our profit margins.

 

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We engage in hedgingactivities with respect to corn, natural gas, and ethanol sales.  We recognize the gains or losses that resultfrom the changes in the value of our derivative instruments in cost of goodssold as the changes occur.  As corn and natural gas prices fluctuate, thevalue of our derivative instruments are impacted, which affects our financialperformance.  We partially offset these losses with the cash price we paidfor corn.  We anticipate continued volatility in our cost of goods solddue to the timing of the changes in value of the derivative instrumentsrelative to the cost and use of the commodity being hedged.

 

Operating Expenses. Our operating expenses as a percentage of revenues were consistent fromperiod to period.  These percentages were 3.4% and 3.0% for the three monthsended September 30, 2007 and 2006, respectively.  We expect that these expenses will remainconstant and keep in line with sales and production.

 

Operating Income. Our income from operations for the three months ended September 30, 2007was 22.4% of revenues compared to 42.6% of revenues for the three months endedSeptember 30, 2006.  This was a result of increased corn prices and theirimpact on our cost of sales.

 

Other Income (Expense). We had other expenses totaling $188,133 for the three months endedSeptember 30, 2007 compared to other expenses totaling $370,774 for the threemonths ended September 30, 2006.  This change was primarily a result of adecrease in interest expense. Our interest expense decreased to $233,536 forthe three months ended September 30, 2007 from $409,614 for the three monthsended September 30, 2006.

 

**Results of Operations for theNine Months Ended September 30, 2007 and 2006**

 

The following table showsthe results of our operations and the percentage of revenues, cost of goodssold, operating expenses and other items to total revenues in our statement ofoperations for the nine months ended September 30, 2007 and 2006:

 

 
| ** **                 | ** ** | **Nine  Months Ended September   30, 2007** | ** **           | **Nine  Months Ended September  30, 2006** | ** ** |
|----------------------------|------------|---------------------------------------------|----------------------|--------------------------------------------|------------|
| ** **                 | ** ** | **(Unaudited)**                             | ** **           | **(Unaudited)**                            | ** ** |
| ** **                 | ** ** | **Amount**                                  | ** **           | **% of  Revenues**                         | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** |
| **Income  Statement Data** |       |                                        |                 |                                       |       |   |   |   |   |
| Revenues                   |       | $                                           |  80,198,415     |                                       | 100.0      | % | $ |  72,663,341 |   | 100.0 | % |
| Cost of Sales              |       | $                                           |  63,465,251     |                                       | 79.1       | % | $ |  43,063,785 |   | 59.3 | % |
| Gross Profit               |       | $                                           |  16,733,164     |                                       | 20.9       | % | $ |  29,599,556 |   | 40.7 | % |
|                       |       |                                        |                 |                                       |       |   |   |   |   |
| Operating Expenses         |       | $                                           |  2,591,004      |                                       | 3.2        | % | $ |  2,489,255 |   | 3.4 | % |
| Operating Income           |       | $                                           |  14,142,160     |                                       | 17.6       | % | $ |  27,110,301 |   | 37.3 | % |
|                       |       |                                        |                 |                                       |       |   |   |   |   |
| Other Income (Expense)     |       | $                                           |  (717,706       | )                                          | (0.9       | )% | $ |  (1,435,165 | ) | (2.0 | )% |
| **Net Income**             | ** ** | **$**                                       | ** 13,424,454** | ** **                                 | **16.7**   | **%** | **$** | ** 25,675,136** | ** ** | **35.3** | **%** |

 

*Revenues**.*The increase in revenues from the ninemonths ended September 30, 2007 compared to the nine months ended September 30,2006 is primarily due to a combination of increased production by the ethanolplant and a higher average selling price for distillers grains.  We experienced approximately a 9% increase inethanol production for the nine months ended September 30, 2007 compared to thesame period of 2006.  However, weexperienced approximately a 26% decrease in the price we received for ourethanol for the nine months ended September 30, 2007 compared to the sameperiod of 2006.  Along with the increasein ethanol production, we experienced a 27% increase in distillers grainsproduction for the nine months ended September 30, 2007 compared to the sameperiod of 2006.  Additionally, weexperienced approximately a 23% increase in the price we received for ourdistillers grains for the nine months ended September 30, 2007 compared to thesame period of 2006.

 

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*Cost of Sales*. Our cost of sales as a percentage ofrevenues increased by approximately 19.8% for the nine months ended September30, 2007 as compared to the same period of 2006.  This increase in cost of sales was dueprimarily to increased corn costs in the nine months ended September 30, 2007compared to the same period in 2006 and increased consumption of corn due toincreased production of ethanol and distillers grains.  The average price we paid for corn for thenine months ended September 30, 2007 was approximately 59% higher than theprice we paid for the same period of 2006. The increase in our cost of goods sold percentage is directly correlatedto the increase in the price we paid for corn and our derivative instrumentactivity during the nine months ended September 30, 2007 as compared to thesame period of 2006.

*Operating Expenses*. Our operating expenses as a percentageof revenues decreased slightly from 3.4% to 3.2% for the nine months endedSeptember 30, 2006 and 2007 respectively.  Because the majority of ouroperating expenses are fixed, the percentage decrease is caused by the increasein total revenues from 2006 to 2007.

*Operating Income**.*Our income from operations decreased fromapproximately $27,110,301 for the nine months ended September 30, 2006 toapproximately $14,142,160 for the nine months ended September 30, 2007.  This decrease in operating income wasprimarily the result of a significant increase in our cost of sales, primarilycorn, for the nine months ended September 30, 2007 compared to the same periodof 2006.  Our income from operations as apercentage of revenues decreased by approximately 19.7% for the nine monthsended September 30, 2007 compared to the same period of 2006.  This lower percentage of income fromoperations is primarily the result of increased cost of sales due to increasedcorn costs.

*                Other Income (Expense).*Our other income (expense) as apercentage of revenues was (0.9)% and (2.0)% for the nine months endedSeptember 30, 2007 and 2006, respectively. The change resulted from decreased interest expense for the nine monthsended September 30, 2007 compared to the same period of 2006.

 

**Changesin Financial Condition for the Nine Months Ended September 30, 2007**

 

                The following table highlightsthe changes in our financial condition for the nine months ended September 30,2007:

 

| ** **           | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------|------------|------------------------|------------|-----------------------|------------|
| Current Assets       |       | $                      | 19,588,879 |                  | $          | 13,149,554 |   |
| Current Liabilities  |       | $                      | 8,441,609  |                  | $          | 5,859,819 |   |
| Long-Term Debt       |       | $                      | 7,189,580  |                  | $          | 12,059,916 |   |
| Lease Obligation     |       | $                      | 47,866,117 |                  | $          | 47,866,117 |   |
| Members’ Equity |       | $                      | 52,521,375 |                  | $          | 44,921,789 |   |
|                      |            |                        |            |                       |            |  |  |  |  |

 

Current Assets. Current assets totaled $19,588,879 at September 30, 2007, up from$13,149,554 at December 31, 2006.  The increase in current assetsprimarily is the result of increased inventories, mostly attributable to theincreased cost of corn, which was $4,922,334 at September 30, 2007 compared to$2,282,223 at December 31, 2006, and by an increase in interest receivablewhich was $1,287,067 at September 30, 2007 compared to $319,107 at December 31,2006.  In addition, our cash and cashequivalents increased to $6,836,826 at September 30, 2007 compared to $5,281,272at December 31, 2006.

 

Current Liabilities. Current liabilities totaled $8,441,609 at September 30, 2007, up fromthe $5,859,819 at December 31, 2006.  This change is largely due toan increase in trade and related parties accounts payable which combined for atotal of $2,939,236 at September 30, 2007, up from $1,979,857 at December 31,2006, and an increase in accrued interest which was $1,309,307 at September 30,2007 and $363,742 at December 31, 2006.

 

Long-Term Debt. Long-term debt, net of current maturities, totaled $7,189,580 at September30, 2007, down from $12,059,916 at December 31, 2006, due to our regularlyscheduled loan payments and additional reductions to our loans from normaloperations.

 

Capital Lease Obligation. Our capital lease obligation totaled $47,866,117 for the nine monthsended September 30, 2007 as well as for the period ended December 31, 2006.

 

 

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Members’ Equity. The members’ contributions are $24,707,100.  Retained earnings asof September 30, 2007 is $31,614,275 compared to $24,014,689 at December 31,2006.  Total members’ equity as ofSeptember 30, 2007, is $52,521,375, up from $44,921,789 at December 31, 2006.

 

**PlantOperations**

 

                Management anticipates our plant will continue tooperate at or above name-plate capacity of 35 million gallons per year for thenext 12 months.  We expect to havesufficient cash from cash flow generated by continuing operations, currentlines of credit through our revolving promissory note, and cash reserves tocover our usual operating costs over the next 12 months, which consistprimarily of corn supply, natural gas supply, staffing, office, audit, legal,compliance, working capital costs and debt service obligations.  A number of factors that are outside of ourcontrol affect our operating costs and revenues, including, but not limited to,the following:

 

•                  Changes in theavailability and price of corn;

•                  Changes in theprice of ethanol;

•                  Changes in thefederal ethanol tax incentives;

•                  Changes in theenvironmental regulations that apply to our plant operations;

•                  Increasedcompetition in the ethanol industry;

•                  Changes ininterest rates or the availability of credit;

•                  Changes inplant production capacity or technical difficulties in operating the plant;

•                  Changes ingeneral economic conditions or the occurrence of certain events causing aneconomic impact in the agriculture, oil or automobile industries;

•                  Changes in theavailability and price of natural gas;

•                  Increases ordecreases in the supply and demand for distillers grains; and

•                  Changes infederal and/or state laws (including the elimination of any federal and/orstate ethanol tax incentives).

 

**Trends and Uncertainties Impacting the Ethanol Industry andour Future Operations**

 

Our revenues primarily consist of sales of ethanol anddistillers grains. Ethanol sales constitute the bulk of our revenues.Historically, the demand for ethanol increased relative to supply, which causedupward pressure on ethanol market prices. Increased demand, firm crude oil andgas markets, public acceptance, and positive political signals contributed tothose strong ethanol prices.  Those highprices were not sustained, however, due to increased ethanol production,transportation and logistics problems in the industry, and high feedstockprices.  Management believes the industrywill need to continue to grow demand and have governmental support, corn priceswill need to fall, and transportation and logistical problems will need to bealleviated in order for the industry to realize higher ethanol market prices.

 

We expect to benefit from federal ethanol supports andfederal tax incentives. Changes to these supports or incentives couldsignificantly impact demand for ethanol, and could negatively impact ourbusiness. On August 8, 2005, President George W. Bush signed into law theEnergy Policy Act of 2005 (the “Act”). The Act contains numerous provisionsthat are expected to favorably impact the ethanol industry by enhancing boththe production and use of ethanol. Most notably, the Act created a 7.5 billiongallon renewable fuels standard (the “RFS”). The RFS is a national renewablefuels mandate as to the total amount of national renewable fuels usage butallows flexibility to refiners by allowing them to use renewable fuel blends inthose areas where it is most cost-effective rather than requiring renewablefuels to be used in any particular area or state. The RFS began at 4 billion gallonsin 2006, is set at 4.7 billion gallons in 2007 and 5.4 billion gallons in 2008,and will increase to 7.5 billion gallons by 2012. According to the RenewableFuels Association, the Act is expected to lead to about $6 billion in newinvestment in ethanol plants across the country.

 

Ethanol productioncontinues to rapidly grow as additional plants and plant expansions becomeoperational. According to the Renewable Fuels Association, as of October 2007,131 ethanol plants were producing ethanol with a combined annual productioncapacity of 6.9 billion gallons per year and current expansions and plantsunder construction constituted an additional future production capacity of 6.6billion gallons per year.  POET 

 

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and ADM control a significant portion of the ethanol market, producingan aggregate of over 2 billion gallons of ethanol annually.  POET plans to produce an additional 375million gallons of ethanol per year and ADM plans to produce an additional 550million gallons of ethanol per year through plant expansions, which willstrengthen their positions in the ethanol industry and cause a significantincrease in domestic ethanol supply. Excess capacity in the ethanol industry may have an adverse effect onour results of operations, cash flows and financial condition.  In a manufacturing industry with excesscapacity, producers have an incentive to manufacture additional products for solong as the price exceeds the marginal cost of production (i.e., the cost ofproducing only the next unit, without regard to interest, overhead or fixedcosts).  This incentive can result in thereduction of the market price of ethanol to a level that is inadequate togenerate sufficient cash flow to cover costs. If the demand for ethanol does not grow at the same pace as increases insupply, we expect the price for ethanol to continue to decline.  Declining ethanol prices will result in lowerrevenues and may reduce or eliminate profits causing the value of your investmentto be reduced.

 

 Because the current national ethanol productioncapacity exceeds the 2006 RFS requirement, we believe that other marketfactors, such as the growing trend for reduced usage of MTBE by the oilindustry, state renewable fuels standards and increases in voluntary blendingby terminals, were primarily responsible for recent years’ high ethanol prices.Accordingly, it is possible that the RFS requirements may not significantlyimpact ethanol prices in the short-term, and they may remain lower than in pastyears. In addition, management expects the increased requirement of 7.5 billionby 2012 may be unable to support ethanol prices in the long term, and anincrease in the RFS requirement may be necessary to raise and sustain ethanolprices. A greater supply of ethanol on the market from these additional plantsand plant expansions could further reduce the price we are able to charge forour ethanol. This may decrease our revenues.

 

Demand for ethanol may increase as a result ofincreased consumption of E85 fuel. E85 fuel is a blend of 70% to 85% ethanoland gasoline. According to the Energy Information Administration, E85consumption is projected to increase from a national total of 22 milliongallons in 2004 to 200 million gallons in 2030. E85 can be used as an aviation fuel, as reported by the National CornGrowers Association, and as a hydrogen source for fuel cells. According to theRFA, virtually every vehicle in the United States is capable of using ethanolblends up to 10%, but it takes a flexible fuel vehicle (FFV) to use higherblends up to E85.  According to the National Ethanol Vehicle Coalition,there are currently about 6.0 million FFVs capable of operating on E85.  Automakers such as Ford and General Motorshave begun national campaigns to promote ethanol and have indicated plans toproduce an estimated 4 million more FFVs per year.

 

The demand for E85 is largely driven by flexible fuelvehicle penetration of the United States vehicle fleet, the retail price of E85compared to regular gasoline and the availability of E85 at retail stations.Because flexible fuel vehicles can operate on both ethanol and gasoline, if theprice of regular gasoline falls below E85, demand for E85 will decrease aswell. In addition, gasoline stations offering E85 are relatively scarce. From2003 to 2007, the number of retail stations that supply E85 increased from lessthan 200 to over 1,300 as reported by the American Coalition for Ethanol.  This remains a relatively small percentage ofthe total number of retail gasoline stations in the United States, which isapproximately 170,000.  Most of thesestations are in the Upper Midwest. The Energy Policy Act of 2005 established atax credit of 30% for infrastructure and equipment to dispense E85, whichbecame effective in 2006 and is scheduled to expire December 31, 2010.Legislation was introduced in the first day of the 2007 Congress which proposesa permanent extension of this tax credit; however, there is no guarantee thatthis proposed legislation will be adopted. This tax credit is expected to encourage more retailers to offer E85 asan alternative to regular gasoline. However, some gas station operators may behesitant to install pumps to dispense E85, as it is essentially a competitor tothe stations’ main product, gasoline.

 

In addition, if the volume of ethanol shipmentscontinues to increase with the nation’s increased production capacity andblenders switch from MTBE to ethanol, there may be weaknesses in infrastructureand its capacity to transport ethanol such that our product cannot reach itstarget markets.  Additionally, ethanoldestinational terminals may not have adequate capacity to handle the supply ofethanol, and will have to quickly adapt by building more tanks to holdincreased inventory before shipping ethanol to the blenders.  According to some industry insiders such asPRX Geographic, Inc., blenders may be logistically unable to blend ethanol intogasoline at the pace at which ethanol is being produced; some refer to this asa “blend wall.”  Many blending terminalsmay need to make infrastructure changes to blend ethanol instead of MTBE and toblend the quantities of ethanol that are being produced.  A consultant to the Renewable FuelsAssociation stated that about 85% of the nation’s 400 to 500 

 

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gasoline terminalsthat blend ethanol are not equipped to take in rail cars.  In addition, most gasoline blenders mustinstall new tanks, pipes and pumps to handle ethanol.  Blenders may be unwilling to spend largeamounts of capital to expand infrastructure, or may be disinclined to blendethanol absent a legislative mandate to increase blending.  If the blending terminals do not havesufficient capacity or the necessary infrastructure to market his switch, orare reluctant to make such large capital expenditures to blend ethanol, theremay be an oversupply of ethanol on the market, which could depress ethanolprices and negatively impact our financial performance.

 

Demand for ethanol has been supported by higher oilprices and its refined components.  Whilethe mandated usage required by the renewable fuels standard is driving demand,our management believes that the industry will require an increase in voluntaryusage in order to experience long-term growth. We expect this will happen only if the price of ethanol is deemedeconomical by blenders.  Our managementalso believes that increased consumer awareness of ethanol-blended gasolinewill be necessary to motivate blenders to voluntarily increase the amount ofethanol blended into gasoline.  In thefuture, a lack of voluntary usage by blenders in combination with additionalsupply may damage our ability to generate revenues and maintain positive cashflows.

 

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

 

Consumer resistance to the use of ethanol may affectthe demand for ethanol which could affect our ability to market our product andreduce the value of your investment. According to media reports in the popularpress, some consumers believe that use of ethanol will have a negative impacton retail gasoline prices. Many also believe that ethanol adds to air pollutionand harms car and truck engines. Still other consumers believe that the processof producing ethanol actually uses more fossil energy, such as oil and naturalgas, than the amount of energy in the ethanol that is produced. In addition,recent high corn prices have added to consumer backlash against ethanol, asmany consumers blame ethanol for high food prices.  These consumer beliefs could potentially bewide-spread. If consumers choose not to buy ethanol, it would affect the demandfor the ethanol we produce which could negatively affect our ability to sellour product and negatively affect our profitability.

 

**Trends and Uncertainties Impacting the Corn andNatural Gas Markets and Our****Cost of Goods Sold**

 

Our cost of goods sold consist primarily of costsrelating to the corn and natural gas supplies necessary to produce ethanol anddistillers grains for sale. On October 12, 2007, the UnitedStates Department of Agriculture (“USDA”) released its Crop Production report,which estimated the 2007 grain corn crop at 13.32 billion bushels.  The October 12, 2007 estimate of the 2007corn crop is approximately 26% above the USDA’s estimate of the 2006 corn cropof 10.53 billion bushels.  According tothe report, 2007 is expected to be a record year for corn production, asfarmers are expected to harvest more acres than in 1933.  The report stated that Kansas’ cornproduction for 2007 is estimated at 493 million bushels.  We expect continued volatility in the price of corn,which will significantly impact our cost of goods sold. The number of operatingand planned ethanol plants in our immediate surrounding area and nationwidewill also significantly increase the demand for corn. This increase will likelydrive the price of corn upwards in our market which will impact our ability tooperate profitably.

 

Natural gas is also an important input commodity to ourmanufacturing process. Our natural gas usage is approximately 10% to 15% of ourannual total production cost. We use natural gas to dry our distillers grainproducts to moisture contents at which they can be stored for extended periodsof time and transported greater distances. Distillers dried grains have a much broader market base, including thewestern cattle feedlots, and the dairies of California and Florida. Recently,the price of natural gas has risen along with other energy sources. Natural gasprices are considerably higher than the 10-year average. In late August 2005,Hurricane Katrina caused dramatic damage to areas of Louisiana, which is thelocation of one of the largest natural gas hubs in the United 

 

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States. As thedamage from the hurricane became apparent, natural gas prices increasedsubstantially. Hurricane Rita also impacted the Gulf Coast and caused shutdownsat several Texas refineries, which further increased natural gas prices. Weexpect continued volatility in the natural gas market. Any ongoing increases inthe price of natural gas will increase our cost of production and maynegatively impact our future profit margins.

 

**Technology Developments**

 

                Most ethanol iscurrently produced from corn and other raw grains, such as milo or sorghum —especially in the Midwest.  The currenttrend in ethanol production research is to develop an efficient method ofproducing ethanol from cellulose-based biomass, such as agricultural waste,forest residue, municipal solid waste, and energy crops.  This trend is driven by the fact thatcellulose-based biomass is generally cheaper than corn, and producing ethanolfrom cellulose-based biomass would create opportunities to produce ethanol inareas which are unable to grow corn. Although current technology is not sufficiently efficient to becompetitive, a recent report by the United States Department of Energy entitled“Outlook for Biomass Ethanol Production and Demand” indicates that newconversion technologies may be developed in the future.  In his January 2007 state of the UnionAddress, President Bush proposed to increase the scope of the current RenewableFuel Standard (RFA), by expanding it to an Alternative Fuel Standard(AFS).  On April 19, 2007, theAlternative Fuel Standard Act of 2007 was introduced in the Senate.  The AFS would amend the Clean Air Act’sexisting RFS to include energy sources such as corn ethanol, cellulosicethanol, biodiesel, methanol, butanol, hydrogen and alternative fuels, eventhose derived from gas and coal.  Ifadopted, the Act would replace the current RFS by requiring 10 billion gallonsof alternative fuel to be used in 2010 and increasing to 35 billion gallons by2018.

 

                In addition, inJune 2007, the Senate passed H.R. 6 which is being called the Renewable Fuels,Consumer Protection and Energy Efficiency Act of 2007.  The bill requires an increasing portion ofrenewable fuels to be ‘advanced’ biofuels including cellulosic ethanol,biobutanol and other fuels derived from unconventional biomass feedstocksbeginning in 2016.  The bill also expandsthe RFS by increasing the gallons of renewable fuels to 8.5 billion gallons in2008 and progressively increases to 36 billion gallons by 2022.  The Senate version requiring production of ‘advanced’biofuels may negatively affect demand for ethanol.  The House passed a version of this bill inAugust 2007, but the House version does not provide for the renewable fuelsproduction mandate.  It is unknownwhether the bill will be enacted and if enacted what final provisions it willcontain.

 

**Liquidity and Capital Resources**

 

Our liquidity needs areprimarily met through internally generated cash flow.  Our primary uses ofcash are cost of sales, operating expenses, debt service and capitalexpenditures.  The following table shows cash flows for the nine months ended September30, 2007 and 2006:

 

| ** **                                           | ** ** | **September 30,  2007** | ** **  | **September 30,  2006** | ** **  |
|------------------------------------------------------|------------|------------------------------|-------------|-------------------------|-------------|
| Net cash  provided by (used in) operating activities |       | $                            | 13,765,401  |                    | 26,978,293  |   |
| Net cash provided by (used in) investing activities  |       | $                            | (1,836,767  | )                       | (4,900,319  | ) |
| Net cash provided by (used in) financing activities  |       | $                            | (10,373,080 | )                       | (19,665,779 | ) |

 

CashFlow Provided By Operations*. *Ouroperating activities for the nine months ended September 30, 2007, generated$13,765,401 of net cash flow, down from $26,978,293 in 2006 primarily due to adecrease in net income of $13,424,454 in 2007 as compared to $25,675,136 in2006.  In addition, we used approximately$2,640,112 in cash for inventory in 2007 as opposed to generating $54,160 ininventory in 2006.  The net cash fromoperating activities primarily includes net income from operations adjusted fordepreciation and amortization of $2,648,067.

 

                Cash Flow Used In Investing Activities*. *We used $1,836,767 of cash for investing activities for the nine months ended September 30, 2007, down from the $4,900,319 we used in the nine months ended September 30, 2006.  This decrease was primarily due to reduced capital spending in 2007.

 

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We estimate thatapproximately $400,000 in capital expenditures will be made in the next twelvemonths, all of which are expected to be financed from a portion of cash flowsfrom operations or from cash provided through a revolving credit agreement withHome Federal Savings Bank.

 

Cash Flow Used In Financing Activities.  Cash used for financing activities decreased for the nine months ended September 30, 2007 as compared to the cash used for financing activities for the nine months ended September 30, 2006.  The decrease was primarily due to not reducing our long term debt in 2007 like we did in 2006 because of reduced profits.    We also made $5.8 million in aggregate cash distributions to our members during the nine months ended September 30, 2007 as compared to $7.8 in the nine months ended September 30, 2006.  In the nine months ended September 30, 2006, we purchased $3,800,000 of Treasury Stock.

 

Management anticipates sufficient cash flow from operating activities and revolving debt to cover debt service obligations, operations and planned capital expenditures for the next 12 months.

 

**Indebtedness**

 

### **Short-Term Debt.** Wemaintain a revolving line of credit with Home Federal Savings Bank ofRochester, Minnesota, tofinance short-term working capital requirements.  Under the revolving line of credit, we mayborrow up to a maximum of $4,000,000 through December 31, 2007.  As of September 30, 2007, there was nooutstanding balance on the revolving line, although we may access these fundsin the future.  Beginning onJanuary 1, 2008, the maximum available credit balance will be reduced by$400,000 each year until the revolving line expires.  The interest rate on the revolving line of credit isat prime.  The revolving line of credit expires on September30, 2010 and is payable in full on October 1, 2010.

 

Long-Term Debt. On November 23, 2004, we entered into a Credit Agreement with HomeFederal Savings Bank of Rochester, Minnesota, establishing a construction loanfacility in the amount of $26,000,000 and secured by substantially all of ourassets. We converted the construction loan into two term loans onSeptember 20, 2005, consisting of (1) a$21,000,000 conventional term loan (“Loan B”), and(2) a $5,000,000 term loan with a potential USDA guarantee of up to 80% ofthe loan value (“Loan A”).  The $5,000,000 loan has an amortization periodand maturity date of 10 years.  We makemonthly payments of principal and interest on the $5,000,000 loan at aninterest rate of prime.  The $21,000,000conventional loan has an amortization period of ten years but will mature atthe end of five years.  We make monthlypayments of principal and interest on the $21,000,000 loan at a rate equal toprime.  We pay a $20,000 annualadministration fee for the credit facility. As of September 30, 2007, the principal balance on Loan A was $1,896,580and the principal balance on the Loan B was $7,945,659.  At September 30, 2007, the effective interestrate for both loans was 7.75%.  Asinterest rates increase, we will incur higher interest payments, which couldadversely affect our net income.

 

During the term of theloan, all our deposit accounts must be maintained at Home Federal SavingsBank.  We are subject to certainfinancial loan covenants consisting of minimum working capital, minimum fixedcharge coverage, minimum current ratio, minimum debt service, minimum net worthand maximum debt to net worth covenants during the term of the loan.  We are also prohibited from makingdistributions to our members; however, we are allowed to distribute 50% of ournet income to our members after our lender has received audited financialstatements for the fiscal year.  If wemeet certain financial ratio requirements, we may distribute an additional 10%of net income.  We must be in compliancewith all financial ratio requirements and loan covenants before and after anydistributions to the members.  The lendertemporarily waived, through December 31, 2007, certain minimum net worth and maximumdebt to net worth covenants.  With thewaiver, we are in compliance with the applicable loan covenants as of September30, 2007.

 

Industrial Revenue Bonds. On December 20, 2005, we completed an industrial revenue bondfinancing with the City of Garnett, Kansas, which we expect to provide propertytax savings for 10 years on the plant site. The maximum principal amount of the bonds is $50,000,000, of which$47,866,117 is outstanding as of September 30, 2007.  As holder of the industrial revenue bonds, weare due interest at 8.0% per annum with interest payable semi-annually onJune 1st and December 1st.  This interestincome is directly offset by the lease payments we pay on the plant.  We and the City of Garnett have waived thepayment of the lease payments and the interest income amounts since theyoffset; however, they are recorded for accounting purposes.  Both the bond and the 

 

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corresponding lease have 10-year terms which expireJune 1, 2016.  The entire outstandingprincipal is due upon termination of the bonds.

 

Waste Water BondFinancing.  We financed our waste water reuse facilitythrough two bonds issued by the City of Garnett - Utility System Revenue Bonds(“USR Bonds”) and Community Development Block Grant Bonds (“CDBG Bonds”).  The USR Bonds require annual principalpayments beginning on October 1, 2006 and continue through 2015.  Intereston USR Bonds is at rates ranging from 4.6% to 5.2% and is duesemi-annually beginning April 1, 2006. The CDBG Bonds require semi-annual principal and interest paymentsbeginning on July 1, 2006 and continue through 2015, at a fixed interest rateof 2%.  As of September 30, 2007, theprincipal balance on the USR Bonds was $440,000 and the principal balance onthe CDBG Bonds was $305,997.

 

Contractual Obligationsand Commercial Commitments.  On September28, 2007, we provided 90 days written notice to United Bio Energy Ingredients,LLC of our intent to terminate our Raw Grains Agreement.  Termination of the Raw Grains Agreement willbe effective on December 31, 2007.  OnSeptember 28, 2007, we provided 90 days written notice to United Bio EnergyIngredients, LLC of our intent to terminate our Distiller’s Grains MarketingAgreement.  Termination of the Distiller’sGrain Marketing Agreement will be effective on December 31, 2007.  On September 28, 2007, we provided 90 dayswritten notice to United Bio Energy Trading, LLC of our intent to terminate ourTrading Agreement.  Termination of theTrading Agreement will be effective December 31, 2007.

 

**Distributionto Unit Holders**

 

The loan agreement with Home Federal Savings Bank limits distributions to our members; except we may distribute up to 50% of our net income if our lender has received audited financial statements for the fiscal year demonstrating our compliance with all financial ratio requirements and loan covenants before and after any distributions to the members.  We take all of these factors into consideration, in addition to our anticipated cash requirements for future operations, in evaluating the propriety of any future distributions to members.

 

On August 15, 2007, our board of directors approved acash distribution of $79.00 per membership unit for a total distribution of$1,729,942 to unit holders of record as of June 30, 2007.  The distribution was paid in August2007.  We do not expect that thisdistribution will affect our ability to maintain financial covenants and meetoperating costs.

 

**Applicationof Critical Accounting Estimates**

 

                There was no material changes in our accounting estimatesduring the three months ended September 30, 2007.

 

**Off Balance Sheet Arrangements.**

 

We donot have any off-balance sheet arrangements.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK****.**

 

We are exposed to theimpact of market fluctuations associated with commodity prices as discussedbelow.  We have no exposure to foreigncurrency risk as all of our business is conducted in U.S. Dollars. We usederivative financial instruments as part of an overall strategy to managemarket risk. We use cash, futures and option contracts to hedge changes to thecommodity prices of corn, natural gas and ethanol. We do not enter into thesederivative financial instruments for trading or speculative purposes, nor do wedesignate these contracts as hedgesfor accounting purposes pursuant to the requirementsof SFAS 133, *Accounting for DerivativeInstruments and Hedging Activities*.

 

**CommodityPrice Risk**

 

We are also exposed tomarket risk from changes in commodity prices.  Exposure to commodity pricerisk results from our dependence on corn and natural gas in the ethanolproduction process and from fluctuations in the 

 

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price of ethanol that we sell.  We seek tominimize the risks from fluctuations in the prices of corn, natural gas andethanol through the use of hedging instruments.  In practice, as marketsmove, we actively manage our risk and adjust hedging strategies asappropriate.  Although we believe our hedge positions accomplish an economichedge against our future purchases, they are not designated as such for hedgeaccounting purposes, which would match the gain or loss on our hedge positionsto the specific commodity purchase being hedged.  We are marking to marketour hedge positions, which means as the current market price of our hedgepositions changes, the gains and losses are immediately recognized in our costof sales.

 

The immediate recognitionof hedging gains and losses can cause net income to be volatile from quarter toquarter due to the timing of the change in value of the derivative instrumentsrelative to the cost and use of the commodity being hedged.  We recorded anet loss of approximately $715,830 related to derivative instruments for thenine months ended September 30, 2007.  Werecorded a net loss of approximately $1,214,840 related to derivativeinstruments for the nine months ended September 30, 2006.  There areseveral variables that could affect the extent to which our derivativeinstruments are impacted by price fluctuations in the cost of corn, natural gasor ethanol.  However, it is likely that commodity cash prices will havethe greatest impact on the derivatives instruments with delivery dates nearestthe current cash price.

 

To manage our corn pricerisk, our hedging strategy is designed to establish a price ceiling and floorfor our corn purchases.  We have taken a net long position on our exchangetraded futures and options contracts, which allows us to offset increases ordecreases in the market price of corn.  The upper limit of loss on ourfutures contracts is the difference between the contract price and the cashmarket price of corn at the time of the execution of the contract. The upperlimit of loss on our exchange traded and over-the-counter option contracts is limitedto the amount of the premium we paid for the option.

 

We estimate that ourexpected corn usage is approximately 16 million bushels per year for theproduction of 44 million gallons of ethanol.  We have price protection forapproximately 30 % of our expected corn usage for fiscal year endedDecember 31, 2007 using CBOT futures and options and Over the Counteroption contracts.  As we move forward, additional protection may benecessary.  As corn prices move in reaction to market trends andinformation, our income statement will be affected depending on the impact suchmarket movements have on the value of our derivative instruments.  As wemove forward, additional price protection may be required to solidify ourmargins into fiscal year 2008.  Depending on market movements, cropprospects and weather, these price protection positions may cause immediateadverse effects, but are expected to produce long-term positive growth for us.

 

We have price protectionin place for approximately 7% of our natural gas needs for fiscal year endedDecember 31, 2007 using CBOT futures and options and Over the Counter optioncontracts.    As we move forward,additional price protection may be required to solidify our margins into fiscalyear 2008.  However, we may not be ableto secure natural gas for prices less than current market price and we may notrecover high costs of production resulting from high natural gas prices, whichmay raise our costs of production and reduce our net income.

 

A sensitivity analysishas been prepared to estimate our exposure to corn and natural gas price risk.The table presents the fair value of our derivative instruments as of September30, 2007 and June 30, 2007 and the potential loss in fair value resulting froma hypothetical 10% adverse change in such prices. The fair value of thepositions is a summation of the fairvalues calculated by valuing each net position at quoted market prices as ofthe applicable date. The results of this analysis, which may differ from actualresults, are as follows:

 

| ** **         | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse  Change— Market Risk** | ** ** |
|--------------------|------------|----------------|------------|---------------------------------------------------------------|------------|
| September 30, 2007 |       | $              | 2,090,033  |                                                          | $          | (209,003 | ) |
| June 30, 2007      |       | $              | 134,607    |                                                          | $          | (13,461 | ) |

 

**ITEM4.                  CONTROLSAND PROCEDURES****.**

 

We maintain disclosure controls and proceduresdesigned to ensure that information required to be disclosed in our reportsunder the Securities and Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. These 

 

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disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that the information required to bedisclosed is accumulated and communicated to management, including ourPrincipal Executive Officer and Principal Financial Officer, to allow fortimely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, thePrincipal Executive Officer and Principal Financial Officer recognize that anycontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving the desired control objectives, andmanagement is necessarily required to apply judgment in evaluating thecost-benefit relationship of possible controls and objectives.

 

Our management (including the Principal ExecutiveOfficer and Principal Financial Officer) has evaluated the effectiveness of ourdisclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,as amended (the “Exchange Act”)), as of the end of the period covered by thisQuarterly Report on Form 10-Q.  Based onsuch evaluation, the Principal Executive Officer and Principal FinancialOfficer have agreed that, as of the end of such period, our disclosure controlsand procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act.

 

Our management (including the Principal ExecutiveOfficer and Principal Financial Officer) has reviewed and evaluatedany changes in our internal control over financial reporting that occurred asof September 30, 2007 and there has been no change that has materially affectedor is reasonably likely to materially affect our internal control overfinancial reporting.

 

**PART II — OTHER INFORMATION**

 

**ITEM1.                  LEGALPROCEEDINGS.**

 

                No materialdevelopments have occurred in the three months ended September 30, 2007.

 

**ITEM 1A.               RISK FACTORS.**

 

**               **There have been no material changes fromthe factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Reporton Form 10-KSB for the year ended December 31, 2006.  In addition to the other information setforth in this report, you should carefully consider the factors discussed inPart I, “Item 1A. Risk Factors” in our Annual Report on Form 10-KSB for theyear ended December 31, 2006, which could materially affect our business,financial condition or future results. The risks described in our Annual Reporton Form 10-KSB are not the only risks facing us.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

 

**ITEM 2.                  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS.**

 

                None.

 

**ITEM 3.                  DEFAULTS UPON SENIOR SECURITIES.**

 

None.

 

**ITEM 4.                  SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS****.**

 

None.

 

 

**ITEM 5.                  OTHER INFORMATION.**

 

None.

 

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**ITEM 6.                  EXHIBITS.**

 

The following exhibits are filed as part of this report.

 
| **Exhibit No.** | ** ** | **Exhibit**                                          |
|----------------------|------------|------------------------------------------------------|
| 31.1                 |       | Certificate Pursuant to  17 CFR 240.13(a)-14(a)      |
|                 |       |                                                 |
| 31.2                 |       | Certificate Pursuant to  17 CFR 240.13(a)-14(a)      |
|                 |       |                                                 |
| 32.1                 |       | Certificate Pursuant to  18 U.S.C. Section 1350 |
|                 |       |                                                 |
| 32.2                 |       | Certificate Pursuant to  18 U.S.C. Section 1350 |

 

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**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   |   |              | EAST KANSAS AGRI-ENERGY, LLC                                            |
|--------|--------|-------------------|-------------------------------------------------------------------------|
|   |   |              |                                                                    |   |
| Date:  |   | November 14, 2007 |                                                                    | /s/ William R. Pracht |   |
|   |   |              | William R. Pracht                                                       |   |
|   |   |              | President (Principal Executive Officer)                                 |   |
|   |   |              |                                                                    |   |
| Date:  |   | November 14, 2007 |                                                                    | /s/ Thomas D. Leitnaker |   |
|   |   |              | Thomas D. Leitnaker                                                     |   |
|   |   |              | Chief Financial Officer (Principal Financial &  Accounting Officer) |   |

 

 

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