**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**
| **x**                                                                                                                                                                                                         | **Quarterly report under Section  13 or 15(d) of the Securities Exchange Act of 1934.** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|
|                                                                                                                                                                                                          |                                                                                    |
| **For the  quarterly period ended June 30, 2007**                                                                                                                                                             |
|                                                                                                                                                                                                          |                                                                                    |
| **OR**                                                                                                                                                                                                        |
|                                                                                                                                                                                                          |                                                                                    |
| **o**                                                                                                                                                                                                         | **Transition report under Section 13 or 15(d) of  the Exchange Act.**                   |
|                                                                                                                                                                                                          |                                                                                    |
| **For the  transition period from              to              ** |

 

**Commissionfile number 0001170106**

**EASTKANSAS AGRI-ENERGY, LLC**(Exact name 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. Main, 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 |
|--|--------------|-------------|

 

Indicatethe number of shares outstanding for each of the issuer’s classes of commonequity as of the latest practicable date:

As of August 1, 2007,there were 21,898 membership units outstanding.

 

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**INDEX**
| **PART  I.   FINANCIAL INFORMATION** | ** ** | ** **                                                                                               |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                          | ** ** | ** **                                                                                               | ** ** | ** ** |
| ** **                                          | ** ** | **Item 1. Financial  Statements**                                                                        | ** ** | ** ** |
| ** **                                          | ** ** | **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  I.   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

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**PART I.   FINANCIALINFORMATION**

**ITEM1.  FINANCIAL STATEMENTS**

EASTKANSAS AGRI-ENERGY, LLCBALANCE SHEETS
| ** **                                                                                                            | ** ** | **June 30, 2007** | ** **      | **December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-----------------|---------------------------------|------------|
| ** **                                                                                                            | ** ** | **(Unaudited)**             | ** **      | ** **                      | ** ** |
| **ASSETS**                                                                                                            | ** ** | ** **                  |            |                            |       |
| CURRENT ASSETS                                                                                                        | ** ** | ** **                  |            |                            |       |
| Cash and cash  equivalents                                                                                            | ** ** | **$**                       | **5,712,341**   |                            | $          | 5,281,272 |   |
| Trade accounts  receivable - related party                                                                            | ** ** | **4,024,095**               |            | 3,423,118                       |       |
| Inventory                                                                                                             | ** ** | **3,217,901**               |            | 2,282,222                       |       |
| Investment in  commodity contracts                                                                                    | ** ** | **1,111,418**               |            | 1,345,752                       |       |
| Interest  receivable                                                                                                  | ** ** | **311,588**                 |            | 319,107                         |       |
| Prepaid expense                                                                                                       | ** ** | **182,517**                 |            | 498,083                         |       |
| Total current  assets                                                                                                 | ** ** | **14,559,860**              |            | 13,149,554                      |       |
| PROPERTY, PLANT AND  EQUIPMENT                                                                                        | ** ** | ** **                  |            |                            |       |
| Land                                                                                                                  | ** ** | **580,322**                 |            | 580,322                         |       |
| Land  improvements                                                                                                    | ** ** | **2,179,578**               |            | 2,179,578                       |       |
| Office equipment                                                                                                      | ** ** | **270,866**                 |            | 270,866                         |       |
| Buildings                                                                                                             | ** ** | **1,785,915**               |            | 1,785,915                       |       |
| Equipment                                                                                                             | ** ** | **46,772,158**              |            | 46,675,432                      |       |
| Vehicles                                                                                                              | ** ** | **22,743**                  |            | 22,743                          |       |
| Construction in  progress                                                                                             | ** ** | **1,177,110**               |            | 65,698                          |       |
|                                                                                                                  | ** ** | **52,788,692**              |            | 51,580,554                      |       |
| Less accumulated  depreciation                                                                                        | ** ** | **(6,462,977**              | **)**           | (4,742,172                      | )          |
| Total property,  plant, and equipment                                                                                 | ** ** | **46,325,715**              |            | 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                                                                                        | ** ** | **(118,126**                | **)**           | (79,298                         | )          |
| Total other  assets                                                                                                   | ** ** | **50,680,877**              |            | 50,719,705                      |       |
| Total assets                                                                                                          | ** ** | **$**                       | **111,566,452** |                            | $          | 110,707,641 |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                              | ** ** | ** **                  |            |                            |       |
| CURRENT LIABILITIES                                                                                                   | ** ** | ** **                  |            |                            |       |
| Current portion  of long-term debt                                                                                    | ** ** | **$**                       | **3,163,685**   |                            | $          | 3,076,532 |   |
| Accounts payable                                                                                                      | ** ** | ** **                  |            |                            |       |
| Trade                                                                                                                 | ** ** | **267,537**                 |            | 595,285                         |       |
| Related parties                                                                                                       | ** ** | **487,939**                 |            | 1,384,572                       |       |
| Accrued payroll,  taxes and withholdings                                                                              | ** ** | **135,852**                 |            | 136,871                         |       |
| Other accrued  expenses                                                                                               | ** ** | **923,827**                 |            | 302,817                         |       |
| Accrued interest                                                                                                      | ** ** | **357,181**                 |            | 363,742                         |       |
| Total current  liabilities                                                                                            | ** ** | **5,336,021**               |            | 5,859,819                       |       |
| LONG-TERM DEBT (less  current maturities)                                                                             | ** ** | **10,244,385**              |            | 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**              | **)**           | (3,800,000.00                   | )          |
| Retained  earnings                                                                                                    | ** ** | **27,212,829**              |            | 24,014,689                      |       |
| Total members’  equity                                                                                           | ** ** | **48,119,929**              |            | 44,921,789                      |       |
| Total liabilities and  members’ equity                                                                           | ** ** | **$**                       | **111,566,452** |                            | $          | 110,707,641 |   |

 

SeeNotes to Unaudited Financial Statements

3

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EASTKANSAS AGRI-ENERGY, LLCSTATEMENT OF OPERATIONS (UNAUDITED)
| ** **                                                | ** ** | **Three Months** | ** **     | **Six Months** | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|----------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                | ** ** | **Ended**             | ** **     | **Ended**           | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                                | ** ** | **June 30,**     | ** **     | **June 30,**   | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                                                | ** ** | **2007**              | ** **     | **2007**            | ** ** | **2006**              | ** ** | **2006**            | ** ** |
|                                                      |       |                  | ** **     | ** **          |       |                  |       |                |       |
| REVENUE                                                   |       |                  | ** **     | ** **          |       |                  |       |                |       |
|   Related parties                               | ** ** | **$**                 | **26,423,551** | ** **          | **$**      | **52,028,722**        |       | 23,277,515          |       | $ | 44,293,213 |   |
|   Incentive funds                               | ** ** | **—**            | ** **     | **—**          |       | 252,207               |       | 933,037             |       |
|                                                      | ** ** | **26,423,551**        | ** **     | **52,028,722**      |       | 23,529,722            |       | 45,226,250          |       |
|                                                      | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
| COST OF SALES                                             |       |                  |           |                |       |                  |       |                |       |
|   Related parties                               | ** ** | **(15,929,143**       | **)**          | **(30,497,819**     | **)**      | (8,180,750            | )          | (16,322,262         | )          |
|   Other                                         | ** ** | **(5,140,931**        | **)**          | **(12,076,755**     | **)**      | (5,325,806            | )          | (11,825,567         | )          |
|                                                      | ** ** | **(21,070,074**       | **)**          | **(42,574,574**     | **)**      | (13,506,556           | )          | (28,147,829         | )          |
|                                                      | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
| GROSS PROFIT                                              | ** ** | **5,353,477**         | ** **     | **9,454,148**       |       | 10,023,166            |       | 17,078,421          |       |
|                                                      | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
| OPERATING  EXPENSES                                       | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
|   General, administrative and selling  expenses | ** ** | **789,498**           | ** **     | **1,631,509**       |       | 792,217               |       | 1,667,266           |       |
|                                                      | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
| INCOME FROM  OPERATIONS                                   | ** ** | **4,563,979**         | ** **     | **7,822,639**       |       | 9,230,949             |       | 15,411,155          |       |
|                                                      | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
| OTHER INCOME  (EXPENSE)                                   | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
|   Interest income                               | ** ** | **972,845**           | ** **     | **1,965,878**       |       | 808,772               |       | 1,785,844           |       |
|   Interest expense                              | ** ** | **(283,212**          | **)**          | **(591,742**        | **)**      | (547,238              | )          | (1,123,418          | )          |
|   Plant lease interest expense                  | ** ** | **(946,686**          | **)**          | **(1,904,008**      | **)**      | (783,343              | )          | (1,727,552          | )          |
|   Other income                                  | ** ** | **132**               | ** **     | **299**             |       | 736                   |       | 736                 |       |
|                                                      | ** ** | **(256,921**          | **)**          | **(529,573**        | **)**      | (521,073              | )          | (1,064,390          | )          |
|                                                      | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
| NET INCOME                                                | ** ** | **$**                 | **4,307,058**  | ** **          | **$**      | **7,293,066**         |       | $                   | 8,709,876  |   | $ | 14,346,765 |   |
|                                                      | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
| BASIC AND  DILUTED INCOME PER UNIT                        | ** ** | **$**                 | **197**        | ** **          | **$**      | **333**               |       | $                   | 398        |   | $ | 655 |   |
|                                                      | ** ** | ** **            | ** **     | ** **          |       |                  |       |                |       |
| WEIGHTED AVERAGE UNITS OUTSTANDING  BASIC AND DILUTED     | ** ** | **21,898**            | ** **     | **21,898**          |       | 21,898                |       | 21,898              |       |

 

SeeNotes to Unaudited Financial Statements

4

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EASTKANSAS AGRI-ENERGY, LLCSTATEMENT OF CASH FLOWS (UNAUDITED)
| ** **                                                                    | ** ** | **Six Months** | ** **    | **Six Months** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------|---------------|---------------------|------------|
| ** **                                                                    | ** ** | **Ended**           | ** **    | **Ended**           | ** ** |
| ** **                                                                    | ** ** | **June 30,**   | ** **    | **June 30,**   | ** ** |
| ** **                                                                    | ** ** | **2007**            | ** **    | **2006**            | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                         | ** ** | ** **          |          |                |       |
| Net income                                                                    | ** ** | **$**               | **7,293,066** |                | $          | 14,346,765 |   |
| Adjustments to reconcile net income to net cash used  in operating activities | ** ** | ** **          |          |                |       |
| Depreciation                                                                  | ** ** | **1,720,805**       |          | 1,535,378           |       |
| Amortization                                                                  | ** ** | **38,828**          |          | 46,756              |       |
|                                                                          | ** ** | ** **          |          |                |       |
| (Increase) decrease in current assets                                         | ** ** | ** **          |          |                |       |
| Accounts receivable                                                           | ** ** | **(600,977**        | **)**         | (1,290,655          | )          |
| Inventory                                                                     | ** ** | **(935,679**        | **)**         | (401,634            | )          |
| Commodity contracts                                                           | ** ** | **234,334**         |          | (37,657             | )          |
| Prepaid expense                                                               | ** ** | **315,566**         |          | 194,704             |       |
| Interest receivable                                                           | ** ** | **7,519**           |          | 2,394               |       |
| Increase (decrease) in current liabilities:                                   | ** ** | ** **          |          |                |       |
| Accounts payable                                                              | ** ** | **(924,241**        | **)**         | (491,061            | )          |
| Accrued expenses                                                              | ** ** | **613,430**         |          | 529,480             |       |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                    | ** ** | **7,762,651**       |          | 14,434,470          |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                         | ** ** | ** **          |          |                |       |
| Purchase of plant and equipment, including  construction in progress          |       | **(1,508,278**      | **)**         | (3,758,304          | )          |
| NET CASH (USED  IN) INVESTING ACTIVITIES                                      | ** ** | **(1,508,278**      | **)**         | (3,758,304          | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                         | ** ** | ** **          |          |                |       |
| Payment of financing fees                                                     | ** ** | **—**          |          | (14,507             | )          |
| Proceeds from refund of financing fees                                        | ** ** | **—**          |          | 80,000              |       |
| Repayment of long-term debt                                                   | ** ** | **(1,728,378**      | **)**         | (4,336,514          | )          |
| Acquistion of treasury units                                                  | ** ** | **—**          |          | (3,800,000          | )          |
| Distributions                                                                 | ** ** | **(4,094,926**      | **)**         | —              |       |
| NET CASH (USED  IN) FINANCING ACTIVITIES                                      | ** ** | **(5,823,304**      | **)**         | (8,071,021          | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                         | ** ** | **431,069**         |          | 2,605,145           |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                               |       | **5,281,272**       |          | 4,569,145           |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                     |       | **$**               | **5,712,341** |                | $          | 7,174,290 |   |
|                                                                          | ** ** | ** **          |          |                |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                             | ** ** | ** **          |          |                |       |
| Cash paid for interest                                                        | ** ** | **$**               | **2,502,311** |                | $          | 2,895,623 |   |
|                                                                          | ** ** | ** **          |          |                |       |
| NON CASH  INVESTING AND FINANCING ACTIVITIES                                  | ** ** | ** **          |          |                |       |
| Property, plant, and equipment costs incurred                                 | ** ** | **$**               | **38,195**    |                | $          | 912,712 |   |
|                                                                          | ** ** | ** **          |          |                |       |
| Accrued  dividends payable                                                    | ** ** | **$**               | **—**    |                | $          | 4,292,008 |   |

 

See Notes to Unaudited Financial Statements

5

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EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2007

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

*Natureof Business*

East Kansas Agri-Energy,LLC, (a Kansas limited liability company) located in Garnett, Kansas, was organizedto own and operate a 35 million gallon ethanol plant with distribution withinthe United States. East Kansas Agri-Energy, LLC (the Company) was formallyorganized as a limited liability company as of October 16, 2001. Prior to thatdate the Company operated as a general partnership with no formal partnershipagreement.

*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 considered necessary fora fair presentation have been included in the accompanying financialstatements.  The results of operationsfor the six months ended June 30, 2007 and 2006, are not necessarily indicativeof the results expected for a full year.

These financial statements should be read in conjunction with the financialstatements and notes included in the Company’s financial statements for theyear ended December 31, 2006.

*Accounts Receivable*

Accountsreceivable are presented at face value, net of the allowance for doubtfulaccounts.  The allowance for doubtful accountsis established through provisions charged against income and is maintained at alevel believed adequate by management to absorb estimated bad debts based onhistorical experience and current economic conditions.  Management believes all receivables will becollected and therefore the allowance has been established to be zero at June30, 2007.

The Company’s policy is to charge simple interest ontrade receivables past due balances; accrual of interest is discontinued whenmanagement believes collection is doubtful. Receivables are considered past due based upon payment terms set forthat the date of the related sale.  TheCompany has no receivables accruing interest June 30, 2007.

*Financing Costs*

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

*Estimates*

Management usesestimates and assumptions in preparing financial statements. Those estimatesand assumptions affect the reported amounts of assets and liabilities, the disclosureof contingent assets and liabilities at the date of the financial statements,and the reported amounts of revenues and expenses. Actual results could differfrom the estimates used.

*Earnings Per Unit*

Earnings per unitare calculated based on the period of time units have been issued andoutstanding. For purposes of calculating diluted earnings per capital unit,units subscribed for but not issued are included in the computation ofoutstanding capital units.

6

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EAST KANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 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 threemonths or 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 isstated at the lower of cost, determined on a first in, first out basis, ormarket value.

*Investmentin Commodity Contracts*

SFAS No. 133 requires a company to evaluate itscontracts to determine whether the contracts are derivatives. Certain contractsthat literally meet the definition of a derivative may be exempted from SFASNo. 133 as normal 

7

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EAST KANSAS AGRI-ENERGY,LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2007

purchases or normal sales. Normal purchases and normalsales are contracts that provide for the purchase or sale of something otherthan a financial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business. Contracts that meet the requirements of normal are documentedas normal and exempted from the accounting and reporting requirements of SFASNo. 133.

The Company enters into short-term cash grain, optionand futures contracts as a means of securing grain for the ethanol plant andmanaging exposure to changes in commodity prices. All derivatives aredesignated as non-hedge derivatives. Although the contracts are effectiveeconomic hedges of specified risks, they are not designated as and accountedfor 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 theperiods ended June 30, 2007 and 2006 this activity resulted in net losses of$1,212,683 and $1,053,343, respectively, which are reported in cost of sales.

*Propertyand Equipment*

Depreciation iscomputed over the estimated useful life of each asset using the straight-linemethod.  Estimated useful lives generallyused in computing 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’sproperty and equipment were acquired under lease agreements pursuant to anindustrial revenue bond issue.  TheCompany is required to make semi-annual deposits with the Trustee sufficient toservice the principal maturities and interest requirements.  Title to the property will be transferred tothe Company when the lease is terminated upon retirement of the bonds.  Accordingly, the bonds have been recorded asa direct obligation of the Company.  TheCompany is also the holder of the bonds.

The Companyreviews its property and equipment for impairment whenever events indicate thatthe carrying amount of the asset may not be recoverable.  An impairment loss is recorded if the sum ofthe future cash flows is less than the carrying amount of the asset.  The amount of the loss is determined bycomparing the fair market value of the asset to the carrying amount of theasset.  Such assessments did not resultin any adjustment to the value of the non-current assets.

*IdleProperty*

The Company hasincurred $2,317,398 of costs related to the preliminary construction of a railspur project.  The Company does notcurrently have an estimate 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.

*EnvironmentalLiabilities*

The Company’s operations are subject to federal, state and local environmentallaws and regulations.  These laws requirethe Company to investigate and remediate the effects of the release or disposalof materials at its location. Accordingly, the Company has adopted policies, practices and proceduresin the areas of pollution control, occupational health, and the production,handling, storage and use of hazardous materials to prevent materialenvironmental or other damage; and to limit the financial liability which couldresult from such events.  Environmentalliabilities are recorded when the liability is probable and the costs can bereasonably estimated.

8

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**EAST KANSASAGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2007**

**NOTE 2 -**   INCENTIVE PAYMENTS

The Company qualified for the federal U.S. Departmentof Agriculture Bio Energy Program.  Thefederal program was managed by the Commodity Credit Corporation and wasdesigned to expand the production of fuel grade ethanol by offering incentivesfor incremental production compared to the same quarter of the prior year.  The annually funded program ran through thestate’s fiscal year 2006 and incentive payments were pro-rated if applicationsfor incentives exceeded the annual funding. The maximum annual incentive program payments the Company could receivewas $7,500,000; individual producers were also subject to an annual limitationof 5% of the total funding.  During theperiod ended June 30, 2006 the Company received $477,366 in federal incentives.

The Company has been approved for the Kansas QualifiedAgricultural Ethanol Producer Incentive Fund. The incentive rate is $.075 per gallon of ethanol produced.  The Company must establish they have produced5,000,000 gallons of ethanol before the State of Kansas will disburse thefunds.  Incentive payments are limited to15,000,000 gallons per production year. During the periods ended June 30, 2007 and 2006, the Company received $0and $455,671, respectively.

**NOTE 3 -**   INVENTORY

Inventories aresummarized as follows:
|                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------|------------|-------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|             |       |              |       |                  |       |
| Raw Material     |       | $                 | 1,498,061  |                  | $          | 977,820 |   |
| Work in Progress |       | 613,010           |       | 563,362               |       |
| Finished Goods   |       | 1,106,830         |       | 741,040               |       |
|             |       |              |       |                  |       |
|             |       | $                 | 3,217,901  |                  | $          | 2,282,222 |   |

 

**NOTE 4-**     LONG-TERM DEBT

On November 23, 2004, the Company entered into aCredit Agreement with Home Federal Savings Bank, establishing a constructionloan facility for the construction of a 35 million gallon per year ethanolplant. The construction financing is in the amount of $26,000,000 consisting ofa $21,000,000 conventional term loan and a $5,000,000 loan, with both loansbeing secured by substantially all of our assets.

During the construction phase, the Company mademonthly payments of interest only at a variable interest rate equal to primeplus 1.75% with a floor of 6%. On September 20, 2005, following constructioncompletion, the loan was segmented into two loans (1) a $5,000,000 loan(Loan A), and (2) a $21,000,000 conventional term loan (Loan B). The $5,000,000loan has an amortization period and maturity date of ten years. The Companymakes monthly payments of principal and interest on the $5,000,000 loan at aninterest rate equal to prime.  The$21,000,000 conventional loan has an amortization period of ten years but willmature at the end of five years. The Company makes monthly payments ofprincipal and interest on the $21,000,000 loan at an interest rate equal toprime.  The effective interest rate forboth loans at June 30, 2007 was 8.25%.

The Company pays a $20,000 annual administration feerelated to the credit facility.  Thecredit facility is secured by a mortgage on our real property and a securityinterest in all personal and intangible assets of the Company, includingassignment of all material contracts.

9

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EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2007

On May 4, 2006,the Company agreed to renegotiate terms of their bank financing.  The new terms provide for a $4,000,000 termrevolving 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 June 30, 2007, the Company has not usedany amount related to the term revolving loan.

During the term of the loan, all deposit accountsrelated to the Company must be maintained at Home Federal Savings Bank. TheCompany is subject to certain financial loan covenants consisting of minimumworking capital, minimum fixed charge coverage, minimum current ratio, minimumdebt service, minimum net worth and maximum debt to net worth covenants duringthe term of the loan. The Company is also prohibited from making distributionsto their members; however, the Company is allowed to distribute 50% of our netincome to our members after our lender has received audited financialstatements for the fiscal year. If the Company meets certain financial ratiorequirements, it may distribute an additional 10% of net income.  The Company must be in compliance with allfinancial ratio requirements and loan covenants before and after anydistributions to the members.  The lendertemporarily waived, through December 31, 2007, the capital expenditurecovenant.  With the waiver, the Companyis in compliance with the applicable loan covenants as of June 30, 2007.

The Company isonly allowed to make annual capital expenditures up to $500,000 annuallywithout the lender’s prior approval. During the term of the loan, the Companyis required to pay to the lender an annual amount equal to the greater of: 1)75% of any Commodity Credit Corporation Bio-Energy income payments receivedduring the year, or 2) 25% of the Company’s free cash flow for each year.Payments consisting of USDA Commodity Credit Corporation Bio-Energy income mustbe paid to the lender within 15 days of receipt of any such payments. Thesepayments will continue until an aggregate sum of $7,500,000 has been receivedby the lender.  The Company is incompliance with the applicable loan covenants as of June 30, 2007. The Companyhas made $7,500,000 in payments and no future incentives or free cash paymentswill 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%

Long-termobligations of the Company are summarized as follows at June 30, 2007:
|                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                          |       |              |       |                  |       |
| Loan B                        |       | $                 | 10,167,150 |                  | $          | 11,580,282 |   |
| Loan A                        |       | 2,432,368         |       | 2,747,614             |       |
| Utility System  Revenue Bonds |       | 485,000           |       | 485,000               |       |
| CDBG Bonds                    |       | 323,552           |       | 323,552               |       |
|  Less current portion    |       | (3,163,685        | )          | (3,076,532            | )          |
|                          |       |              |       |                  |       |
|  Long-term  portion      |       | $                 | 10,244,385 |                  | $          | 12,059,916 |   |

 

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

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EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2007

 
| 12 Month Period Ending June 30 | ** ** | **Amount** | ** ** |
|---------------------------------------------------------|------------|------------|------------|
|                                                    |       |       |       |
| 2008                                                    |       | $          | 3,163,685  |   |
| 2009                                                    |       | $          | 3,428,617  |   |
| 2010                                                    |       | $          | 3,721,206  |   |
| 2011                                                    |       | $          | 2,621,462  |   |
| 2012                                                    |       | $          | 93,208     |   |
| Thereafter                                              |       | 379,892    |       |
|                                                    |       |       |       |
|                                                    |       | $          | 13,408,070 |   |

 

**NOTE 5 -    MEMBERS’ EQUITY**

As specified inthe Company’s Operating Agreement, voting rights are one vote for each votingunit registered in the name of such Member as shown on the MembershipRegistration maintained by the Company. No Member shall directly or indirectlyown or control more than 25% of the issued and outstanding voting membershipinterest in the Company at any time.

Income and lossesof the Company shall be allocated among the Members in proportion to eachMember’s respective percentage of units when compared with the total unitsissued.

The Company’s cashflow shall first be applied to the payment of the Company’s operating expenses(including debt service) and then to maintenance of adequate cash reserves asdetermined by the board of directors in its sole discretion, and then shall bedistributed from time to time to the Members in proportion to their respectivepercentage units. No member has the right to demand and receive anydistribution from the Company other than in cash. No distribution shall be madeif, as a result thereof, the Company would be in violation of any loanagreement or if the Company’s total assets would be less than the sum of itstotal liabilities.

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

The board ofdirectors approved the redemption of 1,900 units from a member.  The redemption represents the member’s entireunit balance.  On May 10, 2006, theCompany purchased the member’s units for a total of $3,800,000.

On March 23, 2007,the Company made a dividend distribution to its members in the amount of $132per share, for a total payment of $2,890,536. On May 23, 2007, the Company made a dividend distribution to its membersin the amount of $55 per share, for a total payment of $1,204,390.

**NOTE 6 -    CONCENTRATION OF CREDIT RISK**

The Companymaintains cash balances at five financial institutions in its trade area. Theaccounts are secured by the Federal Deposit Insurance Corporation up to$100,000. At times, the Company’s bank balance may exceed $100,000.

**NOTE 7-     COMMITMENTS AND CONTINGENCIES**

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.

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EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2007

On November 12,2004, the Company entered into a Distillers Grains Marketing Agreement withUnited Bio Energy Ingredients, LLC, an affiliated related party, pursuant towhich United Bio Energy Ingredients, LLC will purchase all dried and wetdistillers grains produced at the plant for a term of at least five years at aprice of 98% of the FOB plant price United Bio Energy Ingredients, LLC chargesits buyers of dried distillers grains, and 95% of the FOB plant price UnitedBio Energy Ingredients, LLC charges its buyers of wet distillers grains. UnitedBio Energy Ingredients, LLC, will use its best efforts to achieve the highestresale price available under prevailing market conditions. The Company is responsiblefor supplying all labor and equipment to load or unload trucks or rail carswithout charge to United Bio Energy Ingredients, LLC and is required to providestorage for at least 10 days production of wet and dry distillers grains. Inaddition, the distillers grains must meet quality requirements so that theywill meet current industry standards for primary animal feed ingredients. Ifthe Company fails to supply distillers grains that comply with industrystandards, United Bio Energy Ingredients, LLC may reject them.  The Company paid commissions of $260,711 and$151,307 for the periods ended June 30, 2007 and 2006, respectively, related tothis 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 rawgrains necessary for ethanol production from United Bio Energy Ingredients, LLCfor a period of at least five years. Pursuant to the agreement, United BioEnergy Ingredients, LLC will use its best efforts to arrange for the purchaseof grain at the lowest price available under prevailing market conditions andwe will supply all labor and equipment necessary to load or unload trucks or railcars. For its service, the Company will pay United Bio Energy Ingredients, LLCthe actual cash procurement price and all reasonable and necessary expenses toget the grain to the plant plus a $.02 per bushel fee. The title, risk of loss,and responsibility for the quality of grain will transfer to the Company whenit unloads 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 periods endedJune 30, 2007 and 2006, the Company paid $158,963 and $140,338, respectively,in brokerage fees for grain purchases made under this agreement.

On November 12, 2004, the Company also entered into anEthanol Agreement with United Bio Energy Fuels, LLC, an affiliated relatedparty.  United Bio Energy Fuels, LLCchanged their 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 periods ended June 30, 2007 and 2006, the Company paid $214,276and $196,048, respectively, in marketing fees for ethanol marketing under thisagreement.

On November 12, 2004, the Company entered into aManagement Agreement with United Bio Energy Management, LLC, a related party,in which United Bio Energy Management, LLC will supervise and direct thegeneral operations of the plant for an anticipated period of at least fiveyears. United Bio Energy Management, LLC will provide the services of afull-time general manager to the plant. The Company had agreed to compensate United Bio Energy Management, LLCan annual fee 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 will appoint a general manager tobe based on site at our plant, and shall work exclusively for us. In the eventof a dispute, the Management Agreement provides that the Company will firstattempt to amicably settle any dispute or difference privately between UnitedBio Energy Management, LLC and the Company. If the Company cannot resolve thedispute as a result of the discussions, then the Company must submit the matterto non-binding mediation. In the event that the dispute is not settled throughmediation, the matter must be resolved by non-appealable arbitration inaccordance with the rules of the American Arbitration Association as applicablein the State of Kansas. The determination of the arbitrator is expected to befinal and may not be appealed to any court. The prevailing party in anyarbitration proceeding is entitled to recover reasonable attorneys’ fees andexpenses incurred. The agreement commenced during March 2005.  For the period ended June 30, 2006, theCompany incurred costs of $400,000 related to this agreement includingreimbursable expenses. On December 13, 2006 the Company reached an agreementwith United Bio Energy Management, LLC to terminate the above ManagementAgreement effective 

12

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EAST KANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2007

December 31, 2006. The Company has agreed to continue participating in the UBE PlantManager Program and Group Buying Program for a monthly fee of $10,000 for aterm of one year, with the first monthly installment due and payable on January1, 2007.

On December 1,2006, the Company entered into an agreement with Jade Millrights, Inc. forconstruction of a grain bin for $905,100. As of June 30, 2007, the Company has incurred $872,525 related to theagreement and $296,892 of additional expenses related to the project, none ofwhich are included in accounts payable.

The following is a schedule of the annual commitmentsrelated to the above agreements.
| 12 months ending June 30, | ** ** |
|---------------------------|------------|
|                      |       |   |   |
| 2008                      |       | $ | 474,775 |   |
| 2009                      |       | 404,108 |   |
| 2010                      |       | 380,108 |   |
| 2011                      |       | 332,108 |   |
| 2012                      |       | 332,108 |   |
| Thereafter                |       | 944,305 |   |
|                      |       |   |   |
|                      |       | $ | 2,867,512 |   |

 

The Company is involved in various claims arising inthe normal course of business. Management believes that any financial responsibility that may beincurred would not be material and therefore no additional accrual is deemednecessary.

**NOTE 8-          SALE / LEASEBACKTRANSACTION**

On December 20, 2005, the Company completed anindustrial revenue bond financing with the City of Garnett, Kansas that willprovide property tax savings for 10 years on the plant site.  As part of the financing, title to the plantsite and improvements have been transferred to the City of Garnett, Kansas, assecurity for the repayment of the bonds, and the Company is leasing back thesite in an amount that is equal to the amount of the principal and interest tobe paid on The City of Garnett, Kansas bonds. Home Federal Savings Bank consented to this transaction, and the bondshave been pledged to Home Federal Savings Bank as security for any obligationsunder the Home Federal Savings Bank Credit Agreement.  As part of the financing, the Company paidthe 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 additional $2,133,883 is available forfuture capital project costs.

The $40,000 of financing fees paid to the bondunderwriter and $23,656 of legal and other costs associated with the bondclosing will be amortized over the approximately 10.5 year life of thebonds.  A total of $3,024 and $2,867 ofamortization expense related to these costs was recognized during the periodsended June 30, 2007 and 2006, respectively.

From the proceeds of the bond, the Company purchasedthe bonds as an investment.  The Company,as holder of the industrial revenue bonds, is due interest at 8.0% per annumwith interest payable semi-annually on June 1st and December 1st, commencing June 1, 2006.  The interest income is directly offset by thelease payments on the plant.  Both thebond and the corresponding lease have terms commencing December 20, 2005 andterminating on June 1, 2016.  The entireoutstanding principal is due upon termination of the bonds.  The outstanding principal at June 30, 2007was $47,866,117.  The lease qualifies asa capital lease.  Interest incomerecognized on the Industrial Revenue 

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EAST KANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2007

Bonds for the periods ended June 30, 2007 and 2006 was$1,904,008 and $1,727,552, respectively. These amounts are equal to the lease expense of the plant for thoseperiods.

Future debt servicerequirements on the Industrial Revenue Bonds at June 30, 2007 are as follows:
| 12 months ending   June 30 | ** ** | **Interest  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 |   |

 

**NOTE 9- RETIREMENT PLAN**

During 2005, the Company began a SIMPLE 401(k),Savings Incentive Match Plan for Employees, retirement plan for all eligibleemployees.  All employees are eligible toparticipate in the plan.  The Companymakes a matching contribution of 3% of participants’ eligible wages.  The employees are fully vested uponcontribution to the plan.  The Companymatch for the periods ended June 30, 2007 and 2006 was $26,263 and $20,585,respectively.

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**ITEM2. **                                               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATION.

Weprepared the following discussion and analysis to help you better understandour financial condition, changes in our financial condition, and results ofoperations for the three and six month periods ended June 30, 2007, compared tothe same periods of the prior fiscal year. This discussion and analysis should be read in conjunction with thefinancial statements and notes to financial statements included elsewhere inthis report and the information contained in our annual report on Form 10-KSBfor the fiscal year ended December 31, 2006.

**ForwardLooking Statements**

This report contains or incorporates by reference “forward-lookingstatements” that involve future events, our future performance and our expectedfuture operations and actions.  In some cases you can identifyforward-looking statements by the use 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 orother similar expressions.  These forward-looking statements are only ourpredictions and involve numerous assumptions, risks and uncertainties,including, but not limited to those described in the “Risk Factors” section ofour Annual Report on Form 10-KSB, those listed below and those business risksand factors described elsewhere in this report and our other Securities andExchange Commission filings.

·                  Projected growth, overcapacity orcontraction in the ethanol market in which we operate;

·                  Fluctuations in the price and marketfor ethanol and distillers grains;

·                  Changes in plant production capacity,variations in actual ethanol and distillers grains production from expectationsor technical difficulties in operating the plant;

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

·                  Changes in our business strategy,capital improvements or development plans for expanding, maintaining orcontracting our presence in the market in which we operate;

·                  Changes in interest rates and theavailability of credit to support capital improvements, development, expansionand operations;

·                  Our ability to market and ourreliance on third parties to market our products;

·                  Our ability to distinguish ourselvesfrom our current and future competition;

·                  Changes to infrastructure, including

·                  expansion of rail capacity,

·                  increases in truck fleets capable oftransporting ethanol within localized markets,

·                  additional storage facilities forethanol, expansion of refining and blending facilities to handle ethanol,

·                  growth in service stations equippedto handle ethanol fuels, and

·                  growth in the fleet of FFVs capableof using E85 fuel;

·                  Changes in or elimination ofgovernmental laws, tariffs, trade or other controls or enforcement practicessuch as:

·                  national, state or local energypolicy;

·                  federal ethanol tax incentives;

·                  legislation mandating the use ofethanol or other oxygenate additives;

·                  state and federal regulationrestricting or banning the use of MTBE; or

·                  environmental laws and regulationsthat apply to our plant operations and their enforcement;

·                  Increased competition in the ethanoland oil industries;

·                  Fluctuations in US oil consumptionand petroleum prices;

·                  Changes in general economicconditions or the occurrence of certain events causing an economic impact inthe agriculture, oil or automobile industries;

·                  The availability and adequacy of ourcash flow to meet our requirements, including repayment of debt;

·                  Our liability resulting fromlitigation;

·                  Our ability to retain key employeesand maintain labor relations;

·                  Changes and advances in ethanolproduction technology; and

·                  Competitionfrom alternative fuels and alternative fuel additives.

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Our actual results or actions could and likely willdiffer materially from those anticipated in the forward-looking statements formany reasons, including the reasons described in this report.  We are notunder any duty to update the forward-looking statements contained in thisreport.  We cannot guarantee future results, levels of activity,performance or achievements.  We caution you not to put undue reliance onany forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this reportand have filed as exhibits, completely and with the understanding that ouractual future results may be materially different from what we currentlyexpect.  We qualify all of our forward-looking statements by thesecautionary statements.

**Overview**

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

Since June 2005, wehave been engaged in the production of ethanol and distillers grains.   We purchase all of our corn and milo fromUnited Bio Ingredients, LLC, an affiliate of US BioEnergy Corporation.  Our revenues are derived from the sale anddistribution of our ethanol and distillers grains, which are sold to ProvistaRenewable Fuels Marketing, LLC (Provista), successor to United Bio EnergyFuels, LLC, and United Bio Energy Ingredients, LLC, respectively, whichsubsequently markets and sells our products.  The principal markets for ourethanol are regional petroleum terminals located in major population centers inKansas and neighboring states, including such cities as Kansas City, Missouri; Wichita, Kansas; Tulsa,Oklahoma; and St. Louis, Missouri.

Our operating results arelargely driven by the prices at which we sell ethanol and distillers grain andthe costs related to their production.  Historically, the price of ethanolhas fluctuated with the price of petroleum-based products such as unleadedgasoline, heating oil, and crude oil. The price of distillers grains is primarily influenced by the price ofcorn as a substitute livestock feed.  Weexpect these price relationships to continue for the foreseeable future. Inaddition, our revenues are also impacted by such factors as our dependence onone or a few major customers who market and distribute our products; theintensely competitive nature of our industry; possible legislation at thefederal, state, and/or local level; and changes in federal ethanol taxincentives.

Our largest costs of production are corn, natural gas,and manufacturing chemicals.  The cost ofcorn is affected primarily by supply and demand factors such as cropproduction, carryout, exports, government policies and programs, riskmanagement and weather, much of which we have no control over.  Recently, the increased production of ethanolhas placed upward pressure on the price and supply of corn, resulting in higherthan normal corn prices.  Natural gasprices fluctuate with the energy complex in general.  Over the last few years, natural gas priceshave trended higher than average and it appears prices will continue to trendhigher due to the high price of alternative fuels such as fuel oil.  Our costs of production are affected by thecost of complying with the extensive environmental laws that regulate ourindustry.

We recently announced our intent to engage in areclassification and reorganization of the Company’s membership units.  The proposed transaction will provide for thereclassification of our units into three separate and distinct classes.  If our members approve the proposedamendments to our operating agreement and the reclassification is implemented,we anticipate having fewer than 300 unit holders of record in our current classwith the remaining approximately 400 unit holders split into two additional classes,which would enable us to voluntarily terminate the registration of our unitsunder the Securities and Exchange Act of 1934.

**Resultsof Operations for the Fiscal Quarters Ended June 30, 2007 and 2006**

The following table shows the results of our operationsand the percentage of revenues, cost of sales, operating expenses and otheritems to total revenues in our statements of operations for the fiscal quartersended June 30, 2007 and 2006:

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| ** **                          | ** ** | **June 30, 2007** | ** **    | **June 30, 2006** | ** ** |
|-------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
| **Income Statement Data** | ** ** | **Amount**                  | ** **    | **% of  Revenues**     | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** |
|                                |       |                        |          |                        |       |   |   |   |   |
| Revenues                            |       | $                           | 26,423,551    |                        | 100.0      | % | $ | 23,529,722 |   | 100.0 | % |
| Cost of Sales                       |       | $                           | 21,070,074    |                        | 79.7       | % | $ | 13,506,556 |   | 57.4 | % |
| Gross Profit                        |       | $                           | 5,353,477     |                        | 20.3       | % | $ | 10,023,166 |   | 42.6 | % |
|                                |       |                        |          |                        |       |   |   |   |   |
| Operating  Expenses                 |       | $                           | 789,498       |                        | 3.0        | % | $ | 792,217 |   | 3.4 | % |
| Operating Income                    |       | $                           | 4,563,979     |                        | 17.3       | % | $ | 9,230,949 |   | 39.2 | % |
|                                |       |                        |          |                        |       |   |   |   |   |
| Other Income  (Expense)             |       | $                           | (256,921      | )                           | (1.0       | )% | $ | (521,073 | ) | (2.2 | )% |
| **Net Income**                      | ** ** | **$**                       | **4,307,058** | ** **                  | **16.3**   | **%** | **$** | **8,709,876** | ** ** | **37.0** | **%** |

 

Revenues.  Our revenues from operations come from twoprimary sources:  ethanol sales anddistillers grain sales.  The followingtable shows the sources of our revenues for the fiscal quarters ended June 30,2007 and 2006:
| ** **                  | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Revenue Sources**    | ** ** | **Amount**                  | ** ** | **% of  Revenues**     | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** |
|                        |       |                        |       |                        |       |   |   |   |   |
| Ethanol Sales               |       | $                           | 22,415,106 |                        | 84.8       | % | $ | 21,163,142 |   | 89.9 | % |
| Distillers  Grains Sales    |       | $                           | 4,008,445  |                        | 15.2       | % | $ | 2,114,373 |   | 9.0 | % |
| Ethanol  Incentive Payments |       | $                           | 0          |                        | 0          | % | $ | 252,207 |   | 1.1 | % |
| Total Revenues              |       | $                           | 26,423,551 |                        | 100.0      | % | $ | 23,529,722 |   | 100.0 | % |

 

The increase in revenues from the three months endedJune 30, 2007 compared to the three months ended June 30, 2006 is due primarilyto an increase in volume of ethanol made possible by some productionmodifications made to the plant.  The average price per gallon of ethanolsold decreased approximately 6% in the three months ended June 30, 2007compared to the three months ended June 30, 2006.  Volume of ethanol sold in the three monthsended June 30, 2007 was 13% more than in the three months ended June 30,2006.  Revenue from sales of ourco-products also increased by 90% in the three months ended June 30, 2007compared to the three months ended June 30, 2006, primarily due to increasingcost of corn as a comparable feed product and the product mix between wet anddry distiller’s grains.

We also sell distillers grain feeds.  Increased ethanol production has led toincreased availability of the co-product. Continued increased supply of dry and wet distillers grains on themarket from other ethanol plants could reduce the price we are able to chargefor our distillers dried grains.  Thiscould have a negative impact on our revenues.

We received no income from the United StatesDepartment of Agriculture’s Commodity Credit Corporation Bioenergy Program forthe three months ending June 30, 2007 or for the same period in 2006.  This significant decrease is a result oftermination of the program on June 30, 2006.

We received no income fromthe State of Kansas through the Kansas Qualified Agricultural Ethyl AlcoholProducer’s Program for the three months ended June 30, 2007, compared toincome received for the same period in 2006. We do not expect morethan minimal payments under this program for our 2007 fiscal year.

Cost of Sales.   Our cost of sales as a percentage ofrevenues was 79.74% and 57.40% for the three months ended June 30, 2007 and2006, respectively.  Our cost of sales increased by approximately$7,563,518 in the three months ended June 30, 2007 as compared to the threemonths ended June 30, 2006, even though our revenue only increased byapproximately $2,893,829.  Thissignificant increase in the cost of sales is primarily a result ofsignificantly higher corn prices.  Ourtotal corn costs increased by approximately 94% for the three months ended June30, 2007 as compared to the same period of 2006.  With the increased demand for corn fromincreased ethanol 

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production, we expect to have high corn pricesthroughout the fiscal year 2007.  Thesehigh corn prices might be mitigated somewhat due to increased corn planting inthe 2007 growing season.  Farmers haveresponded to these high corn prices by planting more than 92.9 million acres ofcorn, an approximately 19% increase over the corn production acres for the 2006growing season.  This is expected toincrease the number of bushels of corn produced to approximately 13 billionbushels from the 2006 growing season.  Ifthis is the case, it could offset some of the additional corn demand from theethanol industry.  Management howeverexpects to continue to endure high corn prices into the near future.

For the three months ended June 30, 2007, our naturalgas costs increased by approximately 33%. This increase is due to a similar increase in the price of natural gas.Our natural gas consumption increased by approximately 10% for the three monthsended June 30, 2007, as compared to the same period of 2006.  Recently, the price of natural gas hasfollowed other energy commodities to historically high levels.  Current natural gas prices are considerablyhigher than the 10-year average.  Globaldemand for natural gas is expected to continue to increase, further driving upprices.  As a result, we expect naturalgas prices to remain higher than average in the short to mid term.  Increases in the price of natural gasincreases our cost of production and negatively impacts our profit margins.

We engage in hedging activities with respect to corn,natural gas, and ethanol sales.  Werecognize the gains or losses that result from the changes in the value of ourderivative instruments in cost of goods sold as the changes occur.  Ascorn and natural gas prices fluctuate, the value of our derivative instrumentsare impacted, which affects our financial performance.  We partially offsetthese losses with the cash price we paid for corn.  We anticipatecontinued volatility in our cost of goods sold due to the timing of the changesin value of the derivative instruments relative to the cost and use of thecommodity being hedged.

Operating Expenses.  Our operating expenses as a percentage ofrevenues were consistent from period to period.  These percentages were3.0% and 3.4% for the three months ended June 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 threemonths ended June 30, 2007 was 17.3% of revenues compared to 39.2% of revenuesfor the three months ended June 30, 2006.  This was a result of increasedcorn prices and their impact on our cost of sales.

Other Income (Expense).  We had other expenses totaling $256,921 forthe three months ended June 30, 2007 compared to other expenses totaling$521,073 for the three months ended June 30, 2006.  This change was primarilya result of a decrease in interest expense, as partially offset by an increasein plant lease interest expense.  In addition, our interest incomeincreased to $972,845 for the three month period ended June 30, 2007 ascompared to $808,772 for the three months period ending June 30, 2006.  Our interest expense decreased to $283,212for the three months ended June 30, 2007 from $547,238 for the three monthsended June 30, 2006.  This decrease is a result of a reduction in both theprincipal amount outstanding on the loans and the interest rate that we arecharged.   Our plant lease interestexpense increased to $946,686 for the three months ended June 30, 2007 from$783,343 for the same period in 2006.

**Results of Operations for the SixMonths Ended June 30, 2007 and 2006**

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our statement of operations forthe six months ended June 30, 2007 and 2006:
| ** **                          | ** ** | **Six Months Ended  June 30, 2007  (Unaudited)** | ** ** | **Six Months Ended  June 30, 2006  (Unaudited)** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Income Statement Data** | ** ** | **Amount**                                                           | ** ** | **%**                                                                | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                            |       | $                                                                    | 52,028,722 |                                                                 | 100.0      |   | $ | 45,226,250 |   | 100.0 |   |
|                                |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Cost of Sales                       |       | $                                                                    | 42,574,574 |                                                                 | 81.8       |   | $ | 28,147,829 |   | 62.2 |   |
|                                |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Gross Profit                        |       | $                                                                    | 9,454,148  |                                                                 | 18.2       |   | $ | 17,078,421 |   | 37.8 |   |
|                                |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Operating  Expenses                 |       | $                                                                    | 1,631,509  |                                                                 | 3.1        |   | $ | 1,667,266 |   | 3.7 |   |
|                                |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Operating Income                    |       | $                                                                    | 7,822,639  |                                                                 | 15.0       |   | $ | 15,411,155 |   | 34.1 |   |
|                                |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Other Income  (Expense)             |       | $                                                                    | (529,573   | )                                                                    | (1.0       | ) | $ | (1,064,390 | ) | (2.4 | ) |
|                                |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Net Income                          |       | $                                                                    | 7,293,066  |                                                                 | 14.0       |   | $ | 14,346,765 |   | 31.7 |   |

 

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*Revenues.*The increase in revenues from the six months ended June 30, 2007 comparedto the six months ended June 30, 2006 is primarily due to a combination of increasedproduction by the ethanol plant and a higher average selling price for ethanoland distillers grains.  We experiencedapproximately a 9% increase in ethanol production for the six months ended June30, 2007 compared to the same period of 2006. Additionally, we experienced approximately a 5% increase in the price wereceived for our ethanol for the six months ended June 30, 2007 compared to thesame period of 2006.  Along with theincrease in ethanol production, we experienced a 34% increase in distillersgrains production for the six months ended June 30, 2007 compared to the sameperiod of 2006.  Additionally, weexperienced approximately a 7% increase in the price we received for ourdistillers grains for the six months ended June 30, 2007 compared to the sameperiod of 2006.

*Cost ofSales*. Our cost of sales as a percentage of revenuesincreased by approximately 19.6% for the six months ended June 30, 2007 ascompared to the same period of 2006. This increase in cost of sales was due primarily to increased corn costsin the first and second fiscal quarters of 2007 compared to the first sixmonths of 2006 and increased consumption of corn due to increased production ofethanol and distillers grains.  The averageprice we paid for corn for the six months ended June 30, 2007 was approximately66% higher than the price we paid for the same period of 2006.  The increase in our cost of goods soldpercentage is directly correlated to the increase in the price we paid for cornand our derivative instrument activity during the six months ended June 30,2007 as compared to the same period of 2006.

*OperatingExpenses*. Our operating expenses as a percentage ofrevenues decreased slightly from 3.7% to 3.1% for the six months ended June 30,2006 and 2007 respectively.  Because the majority of our operatingexpenses are fixed, the percentage decrease is caused by the increase in totalrevenues from 2006 to 2007.

*OperatingIncome.*Our income from operations decreased fromapproximately $15,411,155 for the six months ended June 30, 2006 toapproximately $7,822,639 for the six months ended June 30, 2007.  This decrease in operating income wasprimarily the result of a significant increase in our cost of sales, primarilycorn, for the six months ended June 30, 2007 compared to the same period of2006.  Our income from operations as apercentage of revenues decreased by approximately 19.1% for the six monthsended June 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.

*OtherIncome (Expense).*Our other income (expense) as apercentage of revenues was (1.0)% and (2.4)% for the six months ended June 30,2007 and 2006, respectively.  The changeresulted from decreased interest expense for the six months ended June 30, 2007compared to the same period of 2006.

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**Changesin Financial Condition for the Six Months Ended June 30, 2007**

Thefollowing table highlights the changes in our financial condition for the sixmonths ended June 30, 2007:
|                      | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Current Assets       |       | $                           | 14,559,860 |                            | $          | 13,149,554 |   |
| Current  Liabilities |       | $                           | 5,336,021  |                            | $          | 5,859,819 |   |
| Long-Term Debt       |       | $                           | 10,244,385 |                            | $          | 12,059,916 |   |
| Lease Obligation     |       | $                           | 47,866,117 |                            | $          | 47,866,117 |   |
| Members’ Equity |       | $                           | 48,119,929 |                            | $          | 44,921,789 |   |

 

Current Assets.  Current assets totaled $14,559,850 at June30, 2007, up from $13,149,554 at December 31, 2006.  The increase incurrent assets primarily is the result of increased inventories, mostlyattributable to the increased cost of corn, which was $3,217,901 at June 30,2007 compared to $2,282,223 at December 31, 2006, and by an increase inaccounts receivable which was $4,335,683 at June 30, 2007 compared to$3,742,225 at December 31, 2006.  Inaddition, our cash and cash equivalents increased to $5,712,341 at June 30,2007 compared to $5,281,272 at December 31, 2006.

Current Liabilities.  Current liabilities totaled $5,336,021 atJune 30, 2007, down from the $5,859,819 at December 31, 2006.  Thischange is largely due to a decrease in trade and related parties accountspayable which combined for a total of $755,476 at June 30, 2007, down   from $1,979,857  at December 31, 2006, partially offset by anincrease in other accrued expenses which was $923,827 at June 30, 2007 and$302,817 at December 31, 2006.

Long-Term Debt.  Long-term debt, net of current maturities,totaled $10,244,385 at June 30, 2007, down from $12,059,916 at December 31,2006, due to our regularly scheduled loan payments, reductions to the principalamounts due to the free flow cash covenants of our credit agreement and areduction required when we renegotiated our credit facility with Home FederalSavings Bank.

Capital Lease Obligation.  Our capital lease obligation totaled$47,866,117 for the six months ended June 30, 2007 as well as for the periodended December 31, 2006.

Members’ Equity.  The members’ contributions are$24,707,100.  Retained earnings as of June 30, 2007 is $27,212,829compared to $24,014,689 at December 31, 2006. Total members’ equity as of June 30, 2007, is $48,119,929, up from$44,921,789 at December 31, 2006.

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**PlantOperations**

Management anticipates our plant will continue tooperate at or above name-plate capacity of 40 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 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 in plantproduction 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).

**Trendsand Uncertainties Impacting the Ethanol Industry and our Future Operations**

We continued to enjoy very favorable ethanol pricesduring the second quarter of 2007.  Thefavorable market price for ethanol was primarily due to high demand forethanol, created by a number of factors, including the declining use of MethylTertiary Butyl Ether (“MTBE”) as an oxygenate, and the current price ofgasoline.  However, we cannot guaranteethat the price of ethanol will not significantly decrease due to factors beyondour control.

Management expects ethanol prices to remain higherthan historical averages in the short-term. Based on existing market conditions, we expect favorable pricing tocontinue at least through the end of our third fiscal quarter because the priceof unleaded gasoline is expected to remain at or above its current price levelsas we continue through the peak summer driving season. In addition, the priceof unleaded gasoline has recently risen as a result of the flooding that hasoccurred in the southern Midwest.  As aresult, we expect our percentage of revenues from the sale of fuel ethanol toincrease.  In order to sustain thesehigher price levels, however, management believes the industry will need tocontinue to grow demand to offset the increased supply brought to themarketplace by additional production. According to the Renewable Fuels Association, there are currently 124ethanol plants in operation nationwide that have the capacity to annuallyproduce approximately 6.48 billion gallons of ethanol.  In addition, planned expansion of existingplants and current construction of new plants is expected to add approximately6.40 billion gallons of yearly nationwide production capacity.  This is likely to lead to a significantincrease in the supply of ethanol, which could lead to less favorable pricinglevels.

In April 2007, a final rule was adopted fully implementing the provisions of the Renewable Fuels Standard as contained in the Energy Policy Act of 2005.  The Renewable Fuels Standard requires the fuel blending industry to blend 4.7 billion gallons of renewable fuels in 2007.  This amount increases incrementally to 7.5 billion gallons by the year 2012.  The Renewable Fuels Standard is not likely to have a significant impact on the supply and demand relationship in the ethanol industry due to the fact that production capacity in the ethanol industry is currently 1.2 billion gallons more than the 2007 requirement.  This trend is likely to continue in the future such that it is not likely the Renewable Fuels Standard will significantly increase demand for ethanol.  If this is the case, the ethanol industry will have to generate its own demand for its product based on competitive advantages ethanol may have over other renewable fuels and conventional petroleum based fuel sources.  If the ethanol industry cannot grow sufficient demand to offset current and future increases in ethanol supply, the price of ethanol will decline which would affect our revenues.

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Consumerresistance to the use of ethanol may affect the demand for ethanol which couldaffect our ability to market our product and reduce the value of yourinvestment.  Certain individuals believethat use of ethanol will have a negative impact on prices at the pump or thatit will reduce fuel efficiency to such an extent that it costs more to useethanol than it does to use gasoline. Many also believe that ethanol adds to air pollution and harms car and truckengines.  Still other consumers believethat the process of producing ethanol actually uses more fossil energy, such asoil and natural gas, than the amount of energy contained in the ethanolproduced.  These consumer beliefs couldpotentially be wide-spread.  If consumerschoose not to buy ethanol, it would affect the demand for the ethanol weproduce which could negatively affect our ability sell our product andnegatively affect our profitability.

However, consumer acceptance continues to increase and we expect ethanol prices will be positively impacted by increased consumer acceptance and exposure of ethanol.  Renewable fuels use has become an important issue in both federal and state government which has lead to an outpouring of support for the ethanol industry.  Many states are pursuing increased use of renewable fuels.  The price of ethanol is also favorably impacted by current higher petroleum prices.  If the price of gasoline continues to trend higher, consumers may look for lower priced alternative fuels.  This presents the ethanol industry the opportunity to increase its market share through a competitive price advantage over the price of petroleum.  This is the type of voluntary ethanol blending and increased market share that will be required to support current ethanol prices.  The Consumer Federation of America published a report that states that consumers could save up to $0.08 per gallon at the pump if ethanol were blended at 10%.  Since ethanol blended fuel is currently a less expensive alternative for consumers, the demand for such ethanol-blended fuel could increase, thus increasing the overall demand for ethanol.  This could positively affect our earnings.  However, a greater supply of ethanol on the market from additional plants and plant expansions could reduce the price we are able to charge for our ethanol, especially if supply outpaces demand.

We expect ethanol prices may also be positivelyimpacted by increased ethanol demand as blenders and refineries increase theiruse of ethanol in response to environmental liability concerns aboutMTBE.  Although the Energy Policy Act of 2005 effectively eliminatedreformulated gasoline (“RFG”) requirements with the enactment of the nationalrenewable fuel standard, federal air quality laws in some areas of the countrystill require the use of RFG. Historically, RFG has been formulated with either MTBE or ethanol.  Ethanol has emerged as the replacement ofchoice for MTBE which has lead to some increased demand for ethanol.

Imported ethanol isgenerally subject to a $0.54 per gallon tariff that was designed to offset the$0.51 per gallon ethanol incentive available under the federal excise taxprogram for refineries that blend ethanol in their fuel.  There is, however, a special exemption fromthis tariff under a program known as the Caribbean Basin Initiative for ethanolimported from 24 countries in Central America and the Caribbean Islands, whichis limited to a total of 7% of U.S. ethanol production per year.  Imports from the exempted countries mayincrease as a result of new plants in development.  Since production costs for ethanol in thesecountries are significantly less than what they are in the U.S., the duty-freeimport of ethanol through the countries exempted from the tariff may negativelyaffect the demand for domestic ethanol and the price at which we sell ourethanol.

Demand for ethanol mayalso increase as a result of increased consumption of E85 fuel.  E85 fuel is a blend of 70% to 85% ethanol andgasoline.  According to the EnergyInformation Administration, E85 consumption is projected to increase from anational total of 11 million gallons in 2003 to 47 million gallons in2025.  E85 is used as an aviation fueland as a hydrogen source for fuel cells. In the U.S., there are currently about 6 million flexible fuel vehiclescapable of operating on E85 and approximately 1,244 retail stations supplyingit.  Automakers have indicated plans toproduce an estimated 4 million more flexible fuel vehicles per year.

The support for and useof E85 fuel has and will continue to be increased by supportive Congressionallegislation.  The Energy Policy Act of2005 created a new incentive that permits taxpayers to claim a 30% tax credit(up to $30,000) for the cost of installing clean-fuel vehicle refuelingequipment, such as an E85 fuel pump, in a trade or business vehicle.  Under the provision, clean fuels are any fuelthat is at least 85% comprised of ethanol, natural gas, compressed natural gas,liquefied natural gas, liquefied petroleum gas, or hydrogen and any mixture ofdiesel fuel and biodiesel containing at least 20% biodiesel.  This provision is effective for equipmentplaced in service after December 31, 2005, and before January 1, 2010.  The production and use of E85 fuel may alsobe increased in the future due to the reintroduction of the BioFuels SecurityAct to the 110th Congress. Such bill, known as S. 23 or H.R. 559, was reintroduced on January 4,2007, by sponsors Tom Harkin, Richard Luger, and others.  If passed, the legislation would acceleratethe current renewable fuels standard by requiring 10 billion gallons ofrenewable fuels 

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to be used by 2010, 30 billion gallons by 2020 and 60billion gallons by 2030.  The bill wouldalso require 50% of all branded gasoline stations to have at least one E85 pumpavailable for use by 2017.  Furthermore,the bill would require 100% of all new automobiles to be dual-fueled by2017.  Currently, the Senate version ofthe bill has been referred to the Senate Commerce, Science, and TransportationCommittees.  Its House of Representativescounterpart has been referred to the House Energy and Commerce Committee, HouseOversight and Government Reform Committee and House Judiciary Committee.

TheUnited States Supreme Court recently held in the case of *Massachusettsv. EPA*, that the EPA has a duty under § 202 of the Clean Air Act toregulate the level of emissions of the four main “greenhouse gases”, includingcarbon dioxide, from new motor vehicles. Other similar lawsuits have been filed seeking to require the EPA toregulate the level of carbon dioxide emissions from stationary sources, such asethanol plants.  If these lawsuits aresuccessful, our cost of complying with new or changing environmentalregulations may increase in the future.

**TechnologyDevelopments**

A new technology has recentlybeen introduced, to remove corn oil from concentrated thin stillage (aco-product of “dry milling” ethanol processing facilities) which would be usedas an animal feed supplement or possibly as an input for biodiesel production.Although the recovery of oil from the thin stillage may be economicallyfeasible, it fails to produce the advantages of removing the oil prior to thefermentation process. The FWS Group of Companies, headquartered in Canada withoffices in the United States, is currently working on a starch separationtechnology that would economically separate a corn kernel into its maincomponents. The process removes the germ, pericarp and tip of the kernelleaving only the endosperm of the corn kernel for the production of ethanol.This technology has the capability to reduce drying costs and the loading ofvolatile organic compounds. The separated germ would also be available throughthis process for other uses such as high oil feeds or biodiesel production.Each of these new technologies is currently in its early stages of development.There is no guarantee that either technology will be successful or that we willbe able to implement the technology in our ethanol plant.

**Liquidityand Capital Resources**

Our liquidity needs are primarily met throughinternally generated cash flow.  Our primary uses of cash are cost ofsales, operating expenses, debt service and capital expenditures.  The following table shows cash flows for the six months ended June 30,2007 and 2006:

|                                                      | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Net cash  provided by (used in) operating activities |       | $                           | 7,762,651  |                        | 14,434,470 |   |
| Net cash  provided by (used in) investing activities |       | $                           | (1,508,278 | )                           | (3,758,304 | ) |
| Net cash provided by  (used in) financing activities |       | $                           | (5,823,304 | )                           | (8,071,021 | ) |

 

Cash Flow Provided By Operations*. *Ouroperating activities for the six months ended June 30, 2007, generated$7,762,651 of net cash flow, down from $14,434,470 in 2006 primarily due to adecrease in net income of $7,293,066 in 2007 as compared to $14,346,765 in2006.  In addition, we used approximately$935,679 in cash for inventory in 2007 as opposed to $401,634 in inventory in2006, partially offset by a decrease in accounts receivable to $600,977 in 2007from $1,290,655 in 2006.  The net cashfrom operating activities primarily includes net income from operationsadjusted for depreciation and amortization of $1,759,633.

Cash Flow Used In Investing Activities*. *We used $1,508,278 of cash for investing activities for the six months ended June 30, 2007, down from the $3,758,304 we used in the six months ended June 30, 2006.  This decrease was primarily due to reduced capital spending in 2007.

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We estimate that approximately $3,500,000 in capitalexpenditures will be made in the next twelve months, all of which are expectedto be financed from a portion of cash flows from operations or from cashprovided through a revolving credit agreement with Home Federal Savings Bank.

Cash Flow Used In Financing Activities.  Cash used for financing activities decreased for the six months ended June 30, 2007 as compared to the cash used for financing activities for the six months ended June 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 $4 million in aggregate cash distributions to our members during the three months ended June 30, 2007 as compared to $0 in the three months ended June 30, 2006.  In the six months ended June 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.  We maintain a revolving line of credit with Home Federal Savings Bank of Rochester,Minnesota, to finance 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 ofJune 30, 2007, there was no outstanding balance on the revolving line, althoughwe may access these funds in the future. Beginning on January 1, 2008, the maximum available credit balancewill be reduced by $400,000 each year until the revolving line expires.  Theinterest rate on the revolving line of credit is at prime.  The revolving line of credit expires onSeptember 30, 2010 and is payable in full on October 1, 2010.

Long-Term Debt.  On November 23, 2004, we entered into aCredit Agreement with Home Federal Savings Bank of Rochester, Minnesota,establishing a construction loan facility in the amount of $26,000,000 andsecured by substantially all of our assets. We converted the construction loaninto two term loans on September 20, 2005, consisting of (1) a $21,000,000conventional term loan (“Loan B”), and (2) a $5,000,000 term loan with apotential USDA guarantee of up to 80% of the loan value (“Loan A”).  The$5,000,000 loan has an amortization period and maturity date of 10 years.  We make monthly payments of principal andinterest on the $5,000,000 loan at an interest rate of prime.  The $21,000,000 conventional loan has anamortization period of ten years but will mature at the end of five years.  We make monthly payments of principal andinterest on the $21,000,000 loan at a rate equal to prime.  We pay a $20,000 annual administration feefor the credit facility.  As of June 30,2007, the principal balance on Loan A was $2,432,368 and the principal balanceon the Loan B was $10,157,150.  At June30, 2007, the effective interest rate for both loans was 8.25%.  As interest rates increase, we will incurhigher interest payments, which could adversely affect our net income.

During the term of the loan, all our deposit accountsmust be maintained at Home Federal Savings Bank.  We are subject to certain financial loancovenants consisting of minimum working capital, minimum fixed charge coverage,minimum current ratio, minimum debt service, minimum net worth and maximum debtto 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 andmaximum debt to net worth covenants. With the waiver, we are in compliance with the applicable loan covenantsas of June 30, 2007.

Industrial Revenue Bonds.  On December 20, 2005, we completed anindustrial revenue bond financing with the City of Garnett, Kansas, which weexpect to provide property tax 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 June 30, 2007.  Additional costs of $2,133,883 are plannedand are expected to be eligible for submission for the bond trustee foradditional bond issuances.  As holder ofthe industrial revenue bonds, we are due interest at 8.0% per annum withinterest payable semi-annually on June 1st and December 1st.  This interest income is directly offset bythe lease payments we pay on the plant. We and the City of Garnett have waived the payment of the lease paymentsand the interest income amounts since they offset; however, they are recordedfor accounting purposes.  Both the bondand 

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the corresponding lease have 10-year terms whichexpire June 1, 2016.  The entireoutstanding principal is due upon termination of the bonds.

Waste Water BondFinancing.  We financedour waste water reuse facility through two bonds issued by the City of Garnett- Utility System Revenue Bonds (“USR Bonds”) and Community Development BlockGrant Bonds (“CDBG Bonds”).  The USRBonds require annual principal payments beginning on October 1, 2006 and continuethrough 2015.  Interest on USR Bonds is at rates ranging from 4.6% to 5.2% andis due semi-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 June 30, 2007, theprincipal balance on the USR Bonds was $485,000 and the principal balance onthe CDBG Bonds was $323,552.

Contractual Obligationsand Commercial Commitments. There were no material changes in our contractual obligations andcommercial commitments during the three months ended June 30, 2007.

**Distribution to 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 May 16, 2007, our board of directors approved a cash distribution of $55 permembership unit for a total distribution of $1,204,390 to our unit holders ofrecord as of March 31, 2007.  Thedistribution was paid in May 2007.  We donot expect that this distribution will affect our ability to maintain financialcovenants and meet operating costs.

**Applicationof Critical Accounting Estimates**

There was nomaterial changes in our accounting estimates during the three months ended June30, 2007.

**OffBalance Sheet Arrangements.**

We do not have anyoff-balance sheet arrangements.

**ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK****.**

We are exposed to the impact of market fluctuationsassociated with commodity prices as discussed below.  We have no exposure to foreign currency riskas all of our business is conducted in U.S. Dollars. We use derivative financialinstruments as part of an overall strategy to manage market risk. We use cash,futures and option contracts to hedge changes to the commodity prices of corn,natural gas and ethanol. We do not enter into these derivative financialinstruments for trading or speculative purposes, nor do we designate thesecontracts as hedges for accounting purposes pursuant to the requirements ofSFAS 133, *Accounting for DerivativeInstruments and Hedging Activities*.

**Commodity Price Risk**

We are also exposed to market risk from changes incommodity prices.  Exposure to commodity price risk results from ourdependence on corn and natural gas in the ethanol production process and fromfluctuations in the price of ethanol that we sell.  We seek to minimizethe risks from fluctuations in the prices of corn, natural gas and ethanolthrough the use of hedging instruments.  In practice, as markets move, weactively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge againstour future purchases, they are not designated as such for hedge accountingpurposes, which would match the gain or loss on our hedge positions to thespecific commodity purchase being hedged.  We are marking to market our hedgepositions, which means as the current market price of our hedge positionschanges, the gains and losses are immediately recognized in our cost of sales.

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The immediate recognition of hedging gains and lossescan cause net income to be volatile from quarter to quarter due to the timingof the change in value of the derivative instruments relative to the cost anduse of the commodity being hedged.  We recorded a net loss ofapproximately $125,560 related to derivative instruments for the three monthsended June 30, 2007.  We recorded a netloss of approximately $451,005 related to derivative instruments for the threemonths ended June 30, 2006.  There are several variables that could affectthe extent to which our derivative instruments are impacted by price fluctuationsin the cost of corn, natural gas or ethanol.  However, it is likely thatcommodity cash prices will have the greatest impact on the derivativesinstruments with delivery dates nearest the current cash price.

To manage our corn price risk, our hedging strategy isdesigned to establish a price ceiling and floor for our corn purchases. We have taken a net long position on our exchange traded futures and optionscontracts, which allows us to offset increases or decreases in the market priceof corn.  The upper limit of loss on our futures contracts is thedifference between the contract price and the cash market price of corn at thetime of the execution of the contract. The upper limit of loss on our exchangetraded and over-the-counter option contracts is limited to the amount of thepremium we paid for the option.

We estimate that our expected corn usage isapproximately 14 million bushels per year for the production of 40 milliongallons of ethanol.  We have price protection for approximately 7% of ourexpected corn usage for fiscal year ended December 31, 2007 using CBOTfutures and options and Over the Counter option contracts.  As we moveforward, additional protection may be necessary.  As corn prices move inreaction to market trends and information, our income statement will beaffected depending on the impact such market movements have on the value of ourderivative instruments.  As we move forward, additional price protectionmay be required to solidify our margins into fiscal year 2008.  Dependingon market movements, crop prospects and weather, these price protectionpositions may cause immediate adverse effects, but are expected to producelong-term positive growth for us.

We have price protection in place for approximately14% of our natural gas needs for fiscal year ended December 31, 2007 using CBOTfutures and options and Over the Counter option contracts.    As we move forward, additional priceprotection may be required to solidify our margins into fiscal year 2008.  However, we may not be able to secure naturalgas for prices less than current market price and we may not recover high costsof production resulting from high natural gas prices, which may raise our costsof production and reduce our net income.

A sensitivity analysis has been prepared to estimateour exposure to corn and natural gas price risk. The table presents the fairvalue of our derivative instruments as of June 30, 2007 and March 31, 2007 andthe potential loss in fair value resulting from a hypothetical 10% adverse changein such prices. The fair value of the positions 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** | ** ** |
|----------------|------------|---------------------|------------|-----------------------------------------------------------------------------------|------------|
| June 30, 2007  |       | $                   | 134,607    |                                                                              | $          | (13,461 | ) |
| March 31, 2007 |       | $                   | 258,628    |                                                                              | $          | (25,863 | ) |

 

**ITEM 4. ****                                               CONTROLSAND PROCEDURES****.**

Wemaintain disclosure controls and procedures designed to ensure that informationrequired to be disclosed in our reports under the Securities and Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms. Thesedisclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that the information required to be disclosed isaccumulated and communicated to management, including our Principal Executive Officerand Principal Financial Officer, to allow for timely decisions regardingrequired disclosure.   In designing andevaluating the disclosure controls and procedures, the Principal ExecutiveOfficer and Principal Financial Officer recognize that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is necessarily required to apply judgment in evaluating thecost-benefit relationship of possible controls and objectives.

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Ourmanagement (including the Principal Executive Officer and Principal FinancialOfficer) has evaluated the effectiveness of our disclosure controls andprocedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as ofthe end of the period covered by this Quarterly Report on Form 10-Q.  Based on such evaluation, The PrincipalExecutive Officer and Principal Financial Officer have agreed that, as of theend of such period, our disclosure controls and procedures are effective inrecording, processing, summarizing and reporting, on a timely basis,information required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act.

Ourmanagement (including the Principal Executive Officer and Principal FinancialOfficer) has reviewed and evaluated any changes in our internal control overfinancial reporting that occurred as of June 30, 2007 and there has been nochange that has materially affected or is reasonably likely to materiallyaffect our internal control over financial reporting.

**PART II –OTHER INFORMATION**

**ITEM 1. ****                                               LEGALPROCEEDINGS.**

Nomaterial developments have occurred in the three months ended June 30, 2007.

**ITEM 1A.****                                            RISKFACTORS.**

Therehave been no material changes from the factors discussed in Part I, “Item 1A.Risk Factors” in our Annual Report on Form 10-KSB for the year ended December31, 2006.  In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form10-KSB for the year ended December 31, 2006, which could materially affectour business, financial condition or future results. The risks described in ourAnnual Report on 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.

**ITEM2. ****                                               UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

None.

**ITEM 3.  ****                                               DEFAULTSUPON SENIOR SECURITIES.**

None.

**ITEM 4.  ****                                               SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS****.**

We held our 2007 annual members meeting on Saturday, June 2, 2007 for the purposeof electing directors.  Votes were solicited in person and byproxy.  Pursuant to our Amended andRestated Operating Agreement, as amended, four (4) director positions wereopen.  We had five (5) nominees for the vacant positions.  Thefollowing persons were nominated and the four nominees receiving the greatestnumber of votes were elected to serve on our board of directors:
|                  | ** ** | **NUMBER OF   VOTES FOR** | ** ** |
|------------------|------------|------------------------------------------|------------|
| Steve Doering    |       | 10,867                                   |       |
| Daniel V. Morgan |       | 10,466                                   |       |
| Scott Brittenham |       | 10,583                                   |       |
| Donald S. Meats  |       | 10,871                                   |       |
| Harold Wilmarth  |       | 1,575                                    |       |

 

For the matter on which votes were entitled to becast, there were no abstentions or broker non-votes.

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Eight(8) initial directors, each appointed by the initial members, and three (3)appointed directors, each appointed by the initial directors served as ourinitial board of directors.  The initialterm for these directors ended upon the first annual or special meeting of themembers following substantial completion of our facilities, and in all caseswhen successor directors were elected and qualified.  Our facilities were substantially completedin June 2005; therefore, the June 10, 2006 election of directors terminated theinitial terms of the eleven (11) directors.   Pursuant to our operating agreement, the board passed a resolutiondividing the board into three (3) classes which will serve staggered termsuntil 2007, 2008, or 2009.  As a result,in accordance with our operating agreement, which provides for a minimum ofseven and a maximum of eleven directors, four directors served one-year terms (“GroupI”), three directors will serve two-year terms (“Group II”), and four directors(“Group III”) will serve three-year terms. At the 2007 Annual Meeting of Members, the members voted for fourdirectors to serve three-year terms.  Asa result the board will serve terms asfollows:
| DIRECTOR          | ** ** | **POSITION**            | ** ** | **TERM ENDS** |
|-------------------|------------|-------------------------|------------|---------------|
| Steve Doering     |       | Director                |       | 2010          |
| Daniel V. Morgan  |       | Director                |       | 2010          |
| Scott Brittenham  |       | Director                |       | 2010          |
| Donald S. Meats   |       | Director                |       | 2010          |
| Jill A. Zimmerman |       | Director, Secretary     |       | 2008          |
| Charles P. Torrey |       | Director                |       | 2008          |
| Daniel Guetterman |       | Director                |       | 2008          |
| William R. Pracht |       | Director, Chairman      |       | 2009          |
| Glenn A. Caldwell |       | Director                |       | 2009          |
| Scott A. Burkdoll |       | Director, Vice-Chairman |       | 2009          |
| Roger J. Brummel  |       | Director                |       | 2009          |

 

**ITEM 5.  ****                                               OTHERINFORMATION.**

None.

**ITEM6.  ****                                              ****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 with Section 13 or 15(d) ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|        |           | EAST KANSAS AGRI-ENERGY, LLC                                            |
|--------|----------------|-------------------------------------------------------------------------|
|   |           |                                                                    |
| Date:  | August 9, 2007 |                                                                    |   /s/ William R. Pracht |
|   |           | William R. Pracht                                                       |
|   |           | President (Principal Executive Officer)                                 |
|   |           |                                                                    |
|   |           |                                                                    |
| Date:  | August 9, 2007 |                                                                    |   /s/ Thomas D. Leitnaker |
|   |           | Thomas D. Leitnaker                                                     |
|   |           | Chief Financial Officer (Principal Financial &  Accounting Officer) |

 

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