** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WashingtonD.C. 20549**

 

**FORM 10-K**

 

| **x**  | ** ** | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |                                                                                                                                                                                                                                                                                                           |
|--------|------------|---------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                        |                                                                                                                                                                                                                                                                                                           |
|   |       | ** **                                                                                  | **For the  fiscal year ended   September 30, 2007**                                                                                                                                                                                                                                                  |
|   |       |                                                                                        |                                                                                                                                                                                                                                                                                                           |
|   | **o**      | ** **                                                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                |
|   |       |                                                                                        |                                                                                                                                                                                                                                                                                                           |
|   |       |                                                                                        | **For the  transition period  from                    to                        ** |
|        |            |                                                                                             |                                                                                                                                                                                                                                                                                                                |  |  |  |

 

**Commission file number: 0-50714**

 

**Western Plains Energy, L.L.C.**

(Exact name of registrant as specified in its charter)

 

| **Kansas**                       | ** ** | **48-1247506**                        |
|----------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |       |                                  |

 

**3022 County Road 18, Oakley, Kansas 67748**

(Address of principal executive offices)

 

Registrant’s telephone number, including area code:**(785) 672-8810**

 

Securities registered pursuant to Section 12(b) of theAct:  **None**

 

Securities registered pursuant to Section 12(g) of theAct:  **Class A Capital Units**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes  o   No  x

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the ExchangeAct during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   Yes  x No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o                        Acceleratedfiler  o                             Non-acceleratedfiler  x

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act).   Yes  o     No  x

 

The aggregate market value of the capital units held by non-affiliatesof the registrant as of September 30, 2007, was $110,320,000, computed byreference to the price at which membership units were last sold. There is noestablished public trading market for our securities.

 

As of December 28, 2007, 2,286 Class A Capital Units, 1,744 Class BCapital Units and 50 Class C Capital Units of the registrant wereoutstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE:**  TheDefinitive Proxy Statement for the next annual meeting of members isincorporated by reference herein into Part III, Items 10-14.

 

 

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**TABLE OF CONTENTS**

 

 
| PART I   |                                                                                        |   |
|---------------|---------------------------------------------------------------------------------------------|--------|
| Item 1.       | Business                                                                                    |   |
| Item 1A.      | Risk Factors                                                                                |   |
| Item 2.       | Properties                                                                                  |   |
| Item 3.       | Legal Proceedings                                                                           |   |
| Item 4.       | Submission of Matters to a  Vote of Security Holders                                        |   |
|          |                                                                                        |   |
| PART II  |                                                                                        |   |
| Item 5.       | Market for  Registrant’s Equity                                                        |   |
| Item 6.       | Selected Financial  Data                                                                    |   |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
| Item 8.       | Financial  Statements and Supplementary Data                                                |   |
| Item 9.       | Changes in and  Disagreements with Accountants                                              |   |
| Item 9A.      | Controls and  Procedures                                                                    |   |
|          |                                                                                        |   |
| PART III |                                                                                        |   |
|          |                                                                                        |   |
| PART IV  |                                                                                        |   |
| Item 15.      | Exhibits,  Financial Statements and Schedules                                               |   |
|          |                                                                                        |   |
| SIGNATURES    |                                                                                        |

 

**Additional Information**

 

Descriptions in this report are qualified byreference to the contents of any contract, agreement or other documentdescribed herein and are not necessarily complete. Reference is made to eachsuch contract, agreement or document as an exhibit to this report, orincorporated by reference as permitted by regulations of the Securities andExchange Commission. For more information regarding these documents, see the section titled“Exhibits” in this report.

 

**Special Note RegardingForward-Looking Statements**

 

Pleasesee the note under “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” for a description of special factors potentiallyaffecting forward-looking statements included in this report.

 

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**PART I**

 

**Item 1. Business.**

 

**Overview.**

 

Our business focuses on the production and sale ofethanol and its co-products. Ethanol is a type of alcohol which in the U.S. istypically produced from corn, but may be produced from other grains and biomass.Ethanol is primarily used as a blend component for gasoline, and is typicallyadded by refiners or distributors to increase octane and reduce tailpipeemissions from vehicles. The ethanol industry has grown significantly over thepast few years, increasing production capacity in the U.S. by approximately128% between 2002 and 2007. We believe ethanol production will continue to growas a result of many factors, some of which are its favorable productioneconomics relative to gasoline, a shortage of domestic petroleum refiningcapacity, its clean-burning characteristics and federally mandated renewablefuel usage. We also believe that E85 (see “Our Products and Their Markets,”below) will also become increasingly important over time as an alternative tounleaded gasoline.

 

We produce fuel grade ethanol by processing corn andmilo utilizing what is known as “dry-milling” technology. The grain is receivedby semitrailer truck, weighed and cleaned of rocks and debris before it isconveyed to concrete storage silos. The grain is then transported to a hammermill or grinder where it is ground into flour and conveyed into a slurry tankfor processing. We add water, heat and enzymes to break the ground grain into amash. The mash is heat sterilized and pumped into a tank where other enzymesare added to convert the starches into glucose sugars. Next, the mash is pumpedinto one of four fermenters, where yeast is added to begin a 48 to 50 hourbatch fermentation process. A distillation process vaporizes the alcohol fromthe mash. The alcohol is further dried in a rectifier and molecular sieve. Theresulting 200 proof-alcohol is then pumped to shift tanks and blended toachieve a mixture consisting of approximately 95% ethanol and 5% gasoline as itis pumped into denatured ethanol storage tanks.

 

Grain mash exiting the distillation process ispumped into one of several centrifuges. Water from the centrifuges, called thinstillage, is condensed into a thicker syrup called condensed solubles. Thesolids that exit the centrifuge are called distillers wet grains (“WDGS”). Aportion of these distillers wet grains are sold in that form and a portionare subsequently dried and mixed with condensed solubles to produce distillersgrains with solubles, which may be used as animal feed and are known asdistillers dry grains (“DDGS”). See “Our Products and Their Markets,” below. Duringour 2007 fiscal year, which ended September 30, 2007, we produced 46.14million gallons of fuel grade ethanol and 396,923 tons of WDGS. The sales pricefor WDGS exceeded that of DDGS, therefore we chose not to produce any DDGSduring fiscal 2007.

 

**History.**

 

We were organized as a Kansas limited liabilitycompany in 2001. We constructed our facility, located in western Kansas, during2003 and began production of ethanol in January 2004. Our historicnameplate production was 30 million gallons of ethanol per year. During the2005 fiscal year, we completed construction of an expansion of our facility togive us nameplate capacity of 40 million gallons of ethanol per year. Duringfiscal 2007, we completed capital improvements to our plant giving us increasedstorage capacity for grain which enables us to further manage our increasedproduction capacity. For a more detailed discussion, see 

 

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“Management’sDiscussion and Analysis of Financial Condition and Results of Operations”below.

 

**Recent Developments.**

 

The increased productioncapacity in the ethanol industry during fiscal 2007 had a significant impact onour business. Producers wishing to take advantage of favorable economics inthis industry commenced or completed numerous new plants or expanded existingplants. We believe the increased production capacity helped drive corn priceshigher and the larger supply of ethanol in the market as compared to prioryears contributed to the decreasing price of ethanol. These metrics adverselyaffected the entire ethanol industry during the second half of calendar 2007.

 

In October 2006, we acquired a grain storagefacility on an adjacent property. In addition to purchasing this grain storagefacility, we have constructed two new grain storage bins and hammer mills onour property which have increased our grain storage capacity by 567% if alladditional storage space is utilized. The increase in storage capacity hasallowed us to more efficiently operate our ethanol plant. The risk ofproduction interruption due to an inability to receive new shipments of grainis lessened. We will also benefit by having increased flexibility in when wemake grain purchases as a result of being able to time purchases farther inadvance of anticipated need for production.

 

The ethanol industry underwent some demographicchanges during the last fiscal year. Record production capacity in the industrycontributed to a supply of ethanol in excess of demand in the market, which inturn led to higher corn prices and lower ethanol prices than previouslyexperienced. In addition to dramatic growth in the number of operating andproposed ethanol plants which are locally owned and operated, the industry alsobegan to experience a trend toward consolidation. A few large ethanol producersbegan expanding their businesses by constructing or acquiring additionalethanol plants in new markets, developing their own marketing and resaleservices and changing their organizational form to a corporate structureto allow their equity to be publicly traded on national securities exchanges. Someexamples of these companies are VeraSun Energy Corporation, Aventine RenewableEnergy Holdings, Inc. and US BioEnergy Corporation. Additionally, proposedmergers between larger ethanol producers may also be seen more frequentlyin the near future. An example of one such merger was recently announcedinvolving VeraSun Energy Corporation and US BioEnergy.

 

**Our Products and Their Markets.**

 

*Ethanol.*Weproduce ethanol to be used as a fuel component that serves as:

 

•                  Anoctane enhancer in fuels;

•                  Anoxygenated fuel additive that can reduce carbon monoxide vehicle emissions; and

•                  Anon-petroleum-based gasoline extender.

 

Ethanolin its primary form is mostly used for blending with unleaded gasoline andother fuel products. The implementation of the federal Clean Air Act has madeethanol fuels an important domestic renewable fuel additive. According to theAmerican Coalition for Ethanol (“ACE”), approximately one-third of all gasolinesold in the U.S. is blended with ethanol. Most of the ethanol is blended asE10, a mixture of 10% ethanol and 90% petroleum gasoline. This fuel is coveredby warranty for use in all makes and models of vehicles. Some ethanol isblended as E85, a mixture of 85% ethanol and 15% gasoline. This mixture is usedin flexible fuel vehicles (“FFVs”), which are increasingly becoming availableto consumers as auto companies produce 

 

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moreFFV models. Used as a fuel oxygenate, ethanol provides a means to reduce carbonmonoxide vehicle emissions.

 

The principal purchasers of ethanol are generallythe refined and wholesale gasoline marketer or blender. The principal endmarkets for our ethanol are petroleum terminals on the east and west coasts ofthe United States. During the 2007 fiscal year, 83% of our net revenue wasderived from the sale of ethanol, and we expect the sale of ethanol to comprisea substantial majority of our revenue in the future. The remainder of ourrevenue is derived from the sale of distillers grains, discussed in more detailbelow.

 

*Distillers Grains.*A principal co-product of the ethanol production process is distillers grains,which is a high-protein, high-energy animal feed supplement primarily marketedto the dairy and beef industry. By using the dry-milling ethanol productionprocess with a dryer system that can produce two moisture levels, we are ableto produce both WDGS and DDGS. WDGS are processed grain mash and condensedsolubles that contain approximately 65% moisture. It has a shelf life slightlylonger than three days and is sold to nearby markets. DDGS are mash that hasbeen dried to 10% moisture. It has an almost indefinite shelf life and is soldand shipped via truck or railcar to many markets regardless of their vicinityto our ethanol plant. During the 2007 fiscal year, approximately 17% of our netrevenue was derived from the sale of distillers grains, and we expect the saleof distillers grains to continue to comprise a minority of our revenue in thefuture when compared to our revenue from ethanol.

 

**Raw Materials.**

 

*Corn and Milo Procurement.*During the 2007 fiscal year, we used approximately 16.7 million bushelsof corn and milo to produce ethanol. We obtained a majority of this grain fromproducers in western Kansas, where our plant is located. According to theKansas Agricultural Statistic Service, approximately 114.5 million bushels ofcorn for grain were produced in the northwest and west central portions ofKansas in calendar 2007. We believe that grain producers in proximity to ourplant will produce sufficient grain for our needs for the foreseeable future. Inthe event such producers are unable to deliver our requirements, we believe anadequate supply is available from producers in other states, such as Nebraskaand Colorado.

 

Prior to June 2007, we provided a freightallowance to our Class A members who delivered grain or purchaseddistillers’ grains from our plant. At our annual meeting held in June 2007,the freight allowance provided to our Class A members was eliminated.

 

An increase in the number of ethanol plants in ourgeographic region adversely affected the availability of corn, milo and othergrain products to us in fiscal 2007 and may continue to do so in thefuture. According to the Renewable Fuels Association (“RFA”), between January 2002and December 2007, the number of ethanol plants currently producing fuelgrade ethanol in the U.S. increased from 61 to 135 and an additional 65 ethanolplants are currently under construction. Some of these plants are located inKansas, eastern Colorado and southwestern Nebraska and they may competewith us for procurement of local grain. On a national level, the emergence ofnew ethanol plants will increase competition for our grain requirements and we may beforced to satisfy our requirements from other parts of the country.

 

We enter into hedging transactions in an effort tostabilize the price that we pay for grain.  Hedging involves the acquisition of option andfutures contracts, designed as hedges of specific volumes of grain expected tobe used in our production process. We also use derivative financial instrumentsto manage the exposure to price risk related to grain purchases. At September 30,2007, we had open long and short positions in option contracts, which positionswere recorded in 

 

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ourfinancial statements at fair value. As a result, we recorded $2,236,677 ofunrealized losses for the year ended September 30, 2007 with respect tooption and future contracts.

 

The price and availability of corn and milo aresubject to significant fluctuations depending upon a number of factors whichaffect grain commodity prices in general, including crop conditions,pestilence, weather, supply and demand, government programs and foreignpurchases. Because the market price of ethanol is not related to grain prices,ethanol producers are generally not able to compensate for increases in thecost of grain through adjustments and prices charged for their ethanol. Weexperienced this during the 2007 fiscal year as the price of corn hit a 10-yearhigh due to increased demand while an increased supply in available ethanolreduced the price we received for our ethanol production from previous years. Fora more detailed discussion, please see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” below.

 

Drought and other environmental occurrences couldadversely effect the production and availability of corn, milo and other grainproducts in the future. Because of its relative aridity, the western UnitedStates is more susceptible to drought than certain other areas of the country. Thedrought experienced in the western United States during 2002 was partiallymitigated between 2003 and 2006, but there is no assurance that the conditionsduring 2002 will not repeat. In that event, we anticipate that our grainrequirements could be satisfied from other parts of the country, althoughtransportation costs would be significantly higher.

 

All of the corn and milo we purchase is tested andmust meet high quality control standards to ensure the efficient operation andquality production of our plant. We use the United States Department ofAgriculture’s grade requirements for U.S. Number Two Corn and U.S. Number TwoGrain Sorghum. From time to time, we also accept grain that does not meet thecriteria for U.S. Number Two Corn or U.S. Number Two Grain Sorghum or isotherwise substandard. When we do, we discount the price or make otherallowances to account for the lesser grade quality or condition at delivery.

 

*Other Raw Materials.*The other critical raw materials for the production of ethanol arewater and natural gas. Water is mixed with the processed grain to begin thefermentation process. Natural gas is used to heat the resulting mixture inconjunction with the fermentation process.

 

An adequate supply of water is important to ourethanol business. We currently have water wells to the north and east of ourplant site from which we pipe water to our facility. There are two additionalwells located on our property which are not currently permitted for industrialuse. We believe that we have sufficient water to operate our plant. However,should we require more water, we believe that we can obtain it from theexisting wells on our property. See “Description of Property.”  We have received all necessary permits to obtainwater and believe that we currently are operating in compliance with allregulations of the Kansas Department of Agriculture, Division of WaterResources.

 

In order to be assured of a steady source of naturalgas, we entered into a Natural Gas Service Agreement with Midwest Energy, Inc.(“Midwest”) in September 2003 pursuant to which they deliver natural gasto our plant. We purchase the gas from another third party. This agreementsupplements a previous agreement with Kinder Morgan Energy Partners and KinderMorgan Interstate Gas Transmission LLC to deliver the gas to Midwest. Inexchange for our agreement not to bypass its local gas distribution system,Midwest agreed to install and maintain a gas main directly to our property inGove County, Kansas. We pay a monthly charge based on the amount of gasutilized each month. The rates are fixed through December 31, 2008, andare subject to 

 

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changethereafter based on increases or decreases applicable to distribution servicesgenerally and subject to review by the Kansas Corporation Commission. Ourcontract with Midwest extends through December 31, 2013.

 

We also contract with Post Rock Gas, LLC (“PRG”) toacquire the gas that is transported by Kinder Morgan and Midwest to our plant. Ouragreement with PRG commenced in December 2003 and is terminable by eitherparty on not less than 30 days’ advance notice. The price we paid for gasduring the 2007 fiscal year was determined by reference to a published “spot”price. We believe our agreements with PRG, Kinder Morgan and Midwest willprovide an ample supply of natural gas for the foreseeable future.

 

Our agreement with PRG helps us manage our risk fromnatural gas price fluctuations. Due to uncertainty in gas prices, weperiodically evaluate our gas requirements and expectations of future pricesand may purchase forward contracts and implement derivative instruments ona portion of our requirements to allow us to benefit in the event natural gasprices decline. Prices for natural gas decreased during the second half offiscal 2007 as the market supply recovered from hurricane-related shortagesduring the first part of the fiscal year and have remained at lower levelsthrough fiscal 2007. We currently have contracts in place to supplyapproximately 70% of our natural gas for the first quarter and 30% for thesecond quarter of fiscal 2008.

 

We have entered into an agreement with U.S. EnergyService, Inc. under which U.S. Energy Service provides consulting servicesto us to help us manage our energy use and costs. The agreement is effectivethrough August 31, 2008 and is renewable for additional one-year termsunless terminated by either party with 30 days advance notice. 

 

**Customers.**

 

We sell essentially all of our products to twomarketing firms, which in turn sell to other purchasers. We have executed anexclusive marketing agreement to market the ethanol produced at our plant withEthanol Products LLC (“Ethanol Products”) of Wichita, Kansas. The agreement iseffective for an initial term of five years beginning January 2004 and isautomatically renewable for subsequent five-year terms unless terminated byeither party prior to expiration. Ethanol Products has agreed to purchase allof the ethanol that is produced at our plant and is solely responsible fordetermining the price and terms at which the ethanol acquired from our plant issold and to whom it will be sold. In exchange, we receive the gross sales priceof the ethanol, less the costs of transportation and storage and anadministrative fee of $0.01 per gallon sold. In the event that our relationshipwith Ethanol Products is interrupted for any reason, we believe that we wouldbe able to locate another entity to market our ethanol. However, anyinterruption could temporarily disrupt the sale of our principal product andadversely affect our operating results.

 

We have also executed an exclusive agreement tomarket all of our distillers grains with United Bio Energy Ingredients, LLC (“UBE”),which was previously an affiliate of ICM, Inc. ICM was the generalcontractor for our ethanol plant. Under the terms of that agreement, we receivethe gross selling price of all distillers grains sold by UBE, less applicabletransportation costs and a fee of 2-2 1/2 % of the gross selling pricedepending on whether we sell DDG or WDG. The agreement with UBE expires September 30,2008 and may be automatically renewed each year unless the agreement isterminated by either party following 90 days advance written notice. As with themarketing arrangement with Ethanol 

 

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Products,any interruption in our relationship with UBE could temporarily affect ourbusiness, although we believe that we could find another entity to market our grains.

 

**Transportation and Delivery.**

 

The grain that we receive is delivered by trucks.Due to our proximity to Interstate 70, transportation to and from the plant isefficient. Distillers grains are transported exclusively by semitruck. UBE, asour exclusive purchaser of distillers grains, selects the carrier.

 

Our plant was designed with a rail spur andconnection to the Union Pacific railway system, which facilitates transportingour ethanol to national markets. Our plant is also located adjacent to Interstate70. We ship our ethanol by rail and by truck, determined with reference to areview and analysis of the current market conditions, transportation costs andapplicable environmental regulations. The target for rail-transported ethanolincludes the State of California, the southwest and eastern United States. Ethanoltargeted for more proximate markets is transported by truck.

 

**Legislation and Federal and State Supports or Subsidies.**

 

*Legislation.*TheEnergy Policy Act, which was enacted in 2005, will likely enhance the use ofethanol as a fuel additive for the foreseeable future. The Energy Policy Actestablished the first ever Renewable Fuel Standard (“RFS”) in federal law,requiring that at least 4 billion gallons of ethanol and biodiesel be used in 2006,increasing to at least 7.5 billion gallons in 2012. For reference purposes,approximately 4.8 billion gallons of fuel grade ethanol was produced duringcalendar 2006. The recently enacted Energy Independence and Security Act of2007 mandates an increase in the amount of ethanol to be used in the U.S. to 36billion gallons a year by 2022. Pursuant to the Energy Policy Act, the UnitedStates Environmental Protection Agency (“EPA”) has promulgated rules requiringrefineries, blenders, distributors and importers to introduce or sell volumesof ethanol and biodiesel into commerce in accordance with the annual RFS. Thefollowing table describes minimum ethanol and biodiesel use for years 2006through 2012 established by the Energy Policy Act:

 
| **Year** | ** ** | **Ethanol Demand  (in billions of gallons)** | ** ** |
|----------|------------|------------------------------------------------------------------|------------|
| 2007     |       | 4.7                                                              |       |
| 2008     |       | 5.4                                                              |       |
| 2009     |       | 6.1                                                              |       |
| 2010     |       | 6.8                                                              |       |
| 2011     |       | 7.4                                                              |       |
| 2012     |       | 7.5                                                              |       |

 

Whilethe precise impact of the new legislation on the RFS mandate to the EPA cannotyet be determined, we anticipate that it will maintain or enhance production ofethanol in the United States, since it sets minimum standards for use which isapproximately 5 times higher than the RFS set for 2012.

 

The American Jobs Creation Act of 2004 contained theVolumetric Ethanol Excise Tax Credit (“VEETC”). This law amended the Federalgasoline excise tax structure effective January 1, 2005. As amended, thelaw creates a new volumetric ethanol excise tax credit of $0.51 per gallon ofethanol blended at 10%. The credit provided by VEETC replaced an exemptionwhich allowed ethanol blended fuel to be taxed at a lower rate than regulargasoline. The use of ethanol as a fuel additive is enhanced by the availabilityof a credit from the federal gasoline excise tax.

 

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In addition to the legislation discussed above,ethanol sales have been favorably affected by other legislation, including theClear Air Act Amendments of 1990, particularly the federal oxygenation program,which became effective November 1, 1992. The program requires the sale ofoxygenated motor fuels during the fall and winter months in certain majormetropolitan areas to reduce carbon monoxide pollution. Ethanol use also hasincreased due to a second Clean Air Act program, the Reformulated Gasoline Program.This program became effective January 1, 1995, and requires the sale ofreformulated gasoline in certain major urban areas to reduce pollutants,including those that contribute to ground level ozone, better known as smog.

 

The use of ethanol as an oxygenate to blend withfuel to comply with federal mandates also has been aided by federal tax policy.The Energy Tax Act of 1978 exempted ethanol blended gasoline from the federalgas tax as a means of stimulating the development of a domestic ethanol industryand mitigating the United State’s dependence on foreign oil. As amended, thefederal gasoline tax credit currently allows the market price of ethanol tocompete with the price of domestic gasoline. Although the federal tax credit isnot directly available to us, it allows us to sell our ethanol at prices thatare competitive with other less expensive additives and gasoline.

 

Fuel grade ethanol prices traditionally have varieddirectly with the wholesale price of gasoline. However, in some states, fuelgrade ethanol typically sells for a higher price per gallon than wholesalegasoline because of the aforementioned excise tax incentives. Historically,fuel grade ethanol prices also have reflected a premium due to the oxygenateand octane enhancing properties of this motor fuel additive.

 

*Federal Ethanol Supports.*As anticipated, we received no further compensation through the UnitedStates Department of Agriculture Commodity Credit Corporation Bioenergy Programduring 2007. The purpose of the program was to encourage increased purchases ofeligible commodities for the purpose of expanding the production of commercialfuel grade ethanol and commercial biodiesel and support new production capacityfor such bioenergy. The program was terminated June 30, 2006.

 

A federal tax credit for small ethanol producers isgenerally available to our company and its members. Eligibility to receive thecredit is based upon plant capacity and the Energy Policy Act increased thecapacity limit from 30 million to 60 million gallons of production. Ethanolproducers that qualify for the credit can deduct from their federal income tax$0.10 per gallon on the first 15 million gallons produced annually. The smallproducer credit is scheduled to expire by its terms on December 31, 2008.Due to the pass-through nature of our partnership taxation structure, we expectthis credit will be passed through to our members. However, the amount of anysuch credit received by our members must also be included in his or her grossincome, which could result in taxation on the amount of the credit passedthrough to the member. Also, the use of the credit by our members may belimited, so each member should consult his or her tax advisor. This tax credit may fosteradditional growth in ethanol plants of a larger size and increase competitionin this particular plant size category.

 

*State Ethanol Supports.*The State of Kansas provides an incentive production payment to ethanolproducers. The production incentive available to Kansas ethanol producers thatcommence production after July 1, 2001 and sell at least 5 million gallonsconsists of a direct payment of $0.075 per gallon for up to 15 million gallonsper year. Accordingly, the maximum amount a Kansas ethanol producer cancurrently receive in a year is $1,125,000. These incentive payments areavailable for the first seven years of production. The available statewidefunding for these incentive payments was $1.5 million per year for 2002-2004and increased to $3.5 

 

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millionper year for 2005-2011 plus any excess balance carried over from the prior year’scurrent production account. Any shortfall in the available funds will result ina pro rata decrease in the incentives paid to the individual ethanol producers.During the 2007 fiscal year, we were entitled to the maximum amount availableto producers. We received payments of $878,111, and have accrued an additional$246,889 at fiscal year end which we received November 18, 2007.

 

We are unable to predict what effect, if any,expiration or termination of federal and state subsidies will have on themarket or price for our ethanol in the future. However, either event may adverselyaffect our business. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” for further information relating tosupports and subsidies.

 

**Environmental Matters.**

 

The construction and expansion of our plant requiredvarious state and local permits to comply with existing governmental regulationsdesigned to protect the environment and worker safety. While we are alsosubject to regulations on emissions by the EPA, current EPA rules did notrequire us to obtain any permits or approvals in connection with theconstruction and operation of our business. Additional expenditures which may berequired to achieve or maintain compliance with future laws and more stringentstandards for environmental matters may also limit our operatingflexibility.

 

Our ethanol production requires us to emit asignificant amount of carbon dioxide into the air. Current Kansas lawregulating emissions does not restrict or prevent us from emitting carbondioxide gas into the air, but this could change in the future. However, the EPAhas promulgated National Emissions Standards for Hazardous Air Pollutants (“NESHAP”),under the Clean Air Act and it could apply to our facility if the emissions ofhazardous air pollutants exceed certain thresholds. If our facility isauthorized to emit hazardous air pollutants above the threshold level, then weare required to comply with NESHAP for our manufacturing process and would berequired to come into compliance with another NESHAP standard applicable toboilers and process heaters. We could also be subject to environmental ornuisance claims from adjacent property owners or residents in the area based onfoul smells or other air or water discharges from the plant.

 

We obtained what we believe are all the necessaryair and water permits to operate our plant before we commenced operations, includinga permit to discharge wastewater from our plant. Under normal conditions, ourplant utilizes a closed system and will not discharge process wastewater, butwe obtained a permit to discharge wastewater in case of emergency failure ofour wastewater treatment equipment. We also obtained a permit to dischargewater used in our cooling tower and boiler.

 

In addition to the foregoing regulations affectingair and water quality, we are subject to regulation for our fuel storage tanks.If we are found to have violated federal, state or local environmentalregulations in the future, we could incur liability for clean-up costs, damageclaims from third parties and civil or criminal penalties that could adverselyaffect our business.

 

**Our Competitive Strengths.**

 

*Absence of significant debt*. In June 2006, we paid off the outstanding balance on our termloan with AgCountry. While we do maintain a revolving line of credit, theabsence of term debt positions us favorably *vis-a-vis* othercompetitors who have long-term debt and who are required to service that debtfrom operations. As a result of our improved leverage, we may be less 

 

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sensitiveto fluctuations in revenue as a result of changes in the price of ethanol orthe costs of our raw materials as compared to similarly situated ethanol plantsthat are required to make payments under long-term debt contracts. Additionally,our cash flow allows us to have more flexibility in determining how to useworking capital.

 

*Plant expansion and improvements.*We expanded the nameplate capacity of ourethanol plant in fiscal 2005 to 40 million gallons per year. The expansionincluded, among other things, a 750,000 gallon beer well, expansion of ourexisting cooling towers by one cell, a new cooling pump, a new style burner anda new centrifuge. The expansion was built on our existing plant site by ICM, Inc.,the contractor for our original plant, and did not require the acquisition ofany additional property. Our expansion was placed into service during thesecond quarter of fiscal 2005. In 2006 and 2007, we also increased our grainstorage capacity approximately 1.5 million bushels by purchasing the grainelevator adjacent to our plant and constructing two 250,000 bushel grain bins.We believe our increase in production and storage capacity positions usfavorably in the marketplace and provides increased operating flexibility.

 

*Plant technology and efficiency*. At September 30, 2007, our plant wasproducing ethanol at or above the nameplate capacity, primarily due to capitalimprovements we made in addition to the expansion. We purchased and installedan additional boiler to provide additional steam to our plant and upgraded ourthermal oxidizer which helps maintain more consistent temperatures during themanufacturing process. We believe we will continue to compete as a low-costproducer of ethanol in the future due to the improved efficiency from ourequipment upgrades.

 

*Proximity to grain*. The proximity of our plant to producers of the grain we need to makeethanol favors us over some of our competitors. Local producers generallyproduce more than enough grain to meet our requirements, and the closeproximity for delivery can result in competitively favorable prices for us. Additionally,many local grain producers are members of our company who supply us atcompetitive prices.

 

**Competition.**

 

We are in direct competition with numerous otherethanol producers, many of which have greater resources than we do. Accordingto the RFA, ten producers in the State of Kansas produce approximately 320million gallons of fuel grade ethanol annually and additional ethanolproduction facilities are currently under construction. Nationally, fuel gradeethanol plants produced over 4.8 billion gallons of ethanol in 2006, a 24%increase from 2005 and 128% increase since 2002. We also expect that additionalethanol producers will enter the market if the demand for ethanol continues toincrease. Our ethanol plant competes with other ethanol producers on the basisof price and, to a lesser extent, delivery service. We believe we can competefavorably with other ethanol producers due to our proximity to ample corn andmilo supplies at competitive prices.

 

Several large ethanol producers are structured ascorporations and have securities which are publicly traded on a nationalsecurities exchange. These producers may have an advantage over us withrespect to access to capital, as it is typically easier to obtain additionalfinancing as a publicly traded company. While we are required to file reportswith the SEC, our securities are presently not traded on an exchange, thus we may havemore limited access to capital markets.

 

The largest ethanol producers include AbengoaBioenergy Corp., Archer Daniels Midland Company, Aventine Renewable Energy,LLC, Cargill, Inc., Hawkeye Renewables, LLC, New Energy Corporation andVeraSun Energy Corporation, all of which are capable of producing 

 

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moreethanol than we produce. Producers of this size may have an advantage overus from economies of scale and negotiating position with purchasers. Inaddition, there are many regional, farmer-owned entities recently formed, or inthe process of formation, of a similar size and with similar resources to ours.Most ethanol plants also produce distillers grains.

 

In addition, new plants are under construction andplans to expand existing plants have been announced, which would increase theethanol production capacity of our competitors. We are unable to determine thenumber and production capacity of plants that ultimately may beconstructed, or the timing of such construction; however it appears that theeffect of resulting production increases over the past year has lowered theprice received for our ethanol.

 

Technological advances in and government initiativesfor using biomass in lieu of grain to produce ethanol, known as cellulosicethanol production, will create additional competitors to our business in thefuture unless we were to convert our operations from traditional grain basedproduction to cellulosic production. By way of example, the first wood basedcellulosic plant is presently under construction in Georgia with anticipatedethanol production beginning in 2008.

 

We may also compete with international ethanolproducers from countries such as Brazil, who may have lower productioncosts and comparable transportation costs to coastal markets and countries likeCosta Rica and El Salvador and others subject to favorable tariff treatment bythe U.S. under the Caribbean Basin Initiative.

 

We also compete with non-ethanol oxygenates which may costless to produce than ethanol. Alternative fuels, gasoline oxygenates andethanol production methods are continually under development by ethanol and oilcompanies with far greater resources than we have. Development of new productsand methods of ethanol production by larger and financially more viablecompetitors could provide them with significant competitive advantages over usand thus could harm our business. These companies, some of which are publiclytraded on national securities exchanges, generally have access to largercapital and financing markets and thus may be able to obtain financingeasier and at more favorable terms than us.

 

**Research and Development.**

 

During the 2007 fiscal year, we participated inresearch and development programs sponsored by our suppliers. This research wasfocused primarily on energy reduction and other issues related to plantoperation and production methods to develop more efficient methods of producingethanol. We did not make any material expenditures on research and developmentduring that time.

 

**Employees.**

 

As of the date of filing this report, we have 36full-time employees. These include a general manager, plant manager whooversees plant operations and production, a commodities manager to overseegrain acquisition and risk management, a safety director, a lab manager, amaintenance manager, a controller, an office manager and an administrative assistant.The remainder of our employees includes administrative, production andmaintenance support personnel. None of our employees are the subject ofcollective bargaining by labor unions, and we believe that we enjoy excellentrelations with our employees.

 

From time to time, we also retain the services ofoutside consultants to supplement the services provided by our employees. Theseinclude engineering, construction, legal, accounting 

 

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andfinancial advisors. We believe that we can obtain the services of all personnelnecessary to operate our business.

 

**Item 1A. Risk Factors.**

 

*You should carefully read and consider the risks and uncertaintiesbelow and the other information contained in this report. The risks anduncertainties below are not the only risks we may face. The followingrisks, together with additional risks and uncertainties not currently known tous or that we currently deem immaterial could impair our financial conditionand results of operation.*

 

**Risks Related to Our Business**

 

***We operate in an emerging growthindustry.***Wecommenced production of ethanol at our plant in January 2004. Accordingly,we have a limited operating history from which you can evaluate our businessand prospects. Our operating results have fluctuated significantly in the pastand could fluctuate significantly in the future as a result of a variety offactors, including those discussed throughout this report. Many of thesefactors are outside our control. As a result of these factors, our operatingresults may not be indicative of future operating results and you shouldnot rely on them as indications of our future performance. In addition, ourprospects must be considered in light of the risks and uncertainties encounteredby an early-stage company and in rapidly growing industries, such as theethanol industry, where supply and demand may change substantially in ashort amount of time.

 

***Our business is not diversified.***Our success depends largely upon our abilityto profitably operate our ethanol plant. We do not have any other lines ofbusiness or other sources of revenue if we are unable to operate our ethanolplant and manufacture ethanol and distillers grains. If economic or politicalfactors adversely affect the market for ethanol, the company has no other lineof business to rely on if the ethanol business declines. Our business wouldalso be significantly harmed if our ethanol plant could not operate at fullcapacity for any extended period of time.

 

***Our financial performance issignificantly dependent on corn and natural gas prices.***Our results of operations and financialcondition are significantly affected by the cost and supply of corn and naturalgas. If our region becomes saturated by ethanol plants, the corn for ethanolcould consume a significant portion of the total corn production in our region,which would likely drive up local corn prices. The amount of corn we used inour operations increased 13% from 2006 to 2007 as a result of our plantexpansion. If more corn-based ethanol plants are constructed or existing plantsexpand their capacity, the increase in demand for local corn and natural gas may driveup the prices of those commodities. Generally, we cannot pass on increases ininput prices to our customers. Changes in the price and supply of corn andnatural gas are subject to and determined by market forces over which we haveno control.

 

***Corn, as with most other crops,is affected by weather, disease and other environmental conditions.***The price of corn is also influenced bygeneral economic, market and government factors. These factors include weatherconditions, farmer planting decisions, domestic and foreign government farmprograms and policies, global demand and supply and quality. Changes in theprice of corn can significantly affect our business. The annualized price ofcorn increased 83% in fiscal 2007 when compared to fiscal 2006. We expect cornprices to remain high into fiscal 2008. If a period of high corn prices issustained for some time, such pricing may reduce our ability to generaterevenues because of the higher cost of operating and may make ethanol 

 

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uneconomicalto use in fuel markets. We cannot offer any assurance that we will be able tooffset any increase in the price of corn by increasing the price of ourproducts. If we cannot offset increases in the price of corn, our financialperformance may be materially and adversely affected.

 

***The price of natural gas is alsoaffected by market and environmental conditions and other factors beyond ourcontrol.***Theprices for and availability of natural gas are subject to volatile marketconditions, including supply shortages and infrastructure incapacities. Seasonalchanges tend to affect the price of natural gas and increases during coldermonths tend to increase our costs of production. Significant disruptions in thesupply of natural gas could impair our ability to manufacture ethanol for ourcustomers. Furthermore, increases in natural gas prices or changes in ournatural gas costs relative to natural gas costs paid by competitors may adverselyaffect our results of operations and financial condition.

 

***The spread between ethanol andcorn prices can vary significantly.***Corn costs significantly impact our cost ofgoods sold. Our gross margins are principally dependent upon the spread betweenethanol and corn prices. Subsequent to fiscal year end, the spread betweenethanol and corn prices has been small, primarily as a result of high corn pricesand decreasing ethanol prices. However, this spread fluctuated in 2007 and may fluctuatesignificantly in the future. Any reduction in the spread between ethanol andcorn prices, whether as a result of an increase in corn prices or a reductionin ethanol prices, would adversely affect our results of operations andfinancial condition.

 

***Our revenues will be greatlyaffected by the price at which we can sell our ethanol and distillers grains.*** The prices of ethanol and distillers grainscan be volatile as a result of a number of factors. These factors include theoverall supply and demand, the price of gasoline, level of government support,and the availability and price of competing products. For instance, the priceof ethanol tends to increase as the price of gasoline increases, and the priceof ethanol tends to decrease as the price of gasoline decreases. Any loweringof gasoline prices will likely also lead to lower prices for ethanol, which may decreaseour ethanol sales and reduce revenues.

 

***The price of ethanol hasdecreased as new ethanol plants become operational.***Increased production of ethanol may leadto lower prices. The increased production of ethanol could have other adverseeffects. For example, the increased production could lead to increased suppliesof co-products from the production of ethanol, such as distillers grains. Thoseincreased supplies could outpace demand, which would lead to lower prices forthose by-products. Also, the increased production of ethanol could result inincreased demand for corn. This could result in higher prices for corn and cornproduction creating lower profits. There can be no assurance as to the price ofethanol or distillers grains in the future. Any downward changes in the priceof ethanol and/or distillers grains may result in less income which woulddecrease our revenues and profitability.

 

***We sell all of the ethanol weproduce to Ethanol Products under our ethanol marketing agreement.***Ethanol Products is the sole buyer of all ofour ethanol, and we rely heavily on its marketing efforts to successfully sellour product. Because Ethanol Products sells ethanol for a number of otherproducers, we have limited control over its sales efforts. Our financialperformance is dependent upon the financial health of Ethanol Products, as asignificant portion of our accounts receivable are attributable to EthanolProducts. If Ethanol Products breaches the ethanol marketing agreement or isnot in the financial position to purchase and market all of the ethanol weproduce, we could experience a material loss and we may not have anyreadily available means to sell our ethanol, and our financial performance willbe adversely and 

 

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materiallyaffected. If our agreement with Ethanol Products terminates, we may seekother arrangements to sell our ethanol, including selling our own product, butwe give no assurance that our sales efforts would achieve results comparable tothose achieved by Ethanol Products.

 

***We sell all of the distillersgrains we produce to UBE under our distillers grains marketing agreement.***UBE is the sole buyer of all of ourdistillers grains that we sell locally, and we rely heavily on its marketingefforts to successfully sell our product. Because UBE sells distillers grainsfor a number of other producers, we have limited control over its sales efforts.Our financial performance is dependent in part upon the financial healthof UBE, as a significant portion of our accounts receivable are attributable toUBE. If UBE breaches the distillers grains marketing agreement or is not in thefinancial position to purchase and market all of the distillers grains weproduce, we could experience a material loss and we may not have anyreadily available means to sell our distillers grains, and our financialperformance will be adversely and materially affected. If our agreement withUBE terminates, we may seek other arrangements to sell our distillersgrains, including selling our own product, but there is no assurance that oursales efforts would achieve results comparable to those achieved by UBE.

 

***We engage in hedging transactionsthat may be costly and ineffective.***We are exposed to market risk from changes incommodity prices. Exposure to commodity price risk results from our dependenceon corn and natural gas in the ethanol production process. We seek to minimizethe risks from fluctuations in the prices of corn and natural gas through theuse of hedging instruments. The effectiveness of our hedging strategies is dependentupon the cost of corn and natural gas and our ability to sell sufficientproducts to use all of the corn and natural gas for which we have futurescontracts. There is no assurance that our hedging activities will successfullyreduce the risk caused by price fluctuation which may leave us vulnerableto high corn and natural prices. Alternatively, we may choose not toengage in hedging transactions in the future. As a result, our results ofoperations and financial conditions may also be adversely affected duringperiods in which corn and/or natural gas prices increase.

 

***Hedging activities themselves canresult in costs because price movements in corn and natural gas contracts arehighly volatile and are influenced by many factors that are beyond our control.***There are severalvariables that could affect the extent to which our derivative instruments areimpacted by price fluctuations in the cost of corn or natural gas. However, itis likely that commodity cash prices will have the greatest impact on the derivativesinstruments with delivery dates nearest the current cash price. We may incursuch costs and they may be significant.

 

***Advances in ethanol productiontechnology could require us to incur costs to update our plant or couldotherwise hinder our ability to compete or operate profitably.***Advances and changes in the technology ofethanol production are expected to occur. Such advances and changes may makethe ethanol production technology installed in our plant less desirable orobsolete. These advances could also allow our competitors to produce ethanol ata lower cost than us. If we are unable to adopt or incorporate technologicaladvances, our ethanol production methods and processes could be less efficientthan our competitors, which could cause our plant to become uncompetitive orcompletely obsolete. If our competitors develop, obtain or license technologythat is superior to ours or that makes our technology obsolete, we may berequired to incur significant costs to enhance or acquire new technology sothat our ethanol production remains competitive. Alternatively, we may berequired to seek third-party licenses, which could also result in significantexpenditures. We cannot assure you that third-party licenses will be availableor, once obtained, will continue to be available on commercially reasonableterms, if at 

 

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all.These costs could negatively impact our financial performance by increasing ouroperating costs and reducing our net income.

 

**Risks Related to Ethanol Industry**

 

***New plants or decreases in thedemand for ethanol may result in excess production capacity.***The supply of domestically produced ethanolis at an all-time high. Domestic fuel grade ethanol production was 4.8 billiongallons in 2006 and the RFA estimates that ethanol production in calendar 2007will reach a record 7.2 billion gallons. This amount will likely be surpassedin calendar 2008. Production of fuel grade ethanol has increased 128% since2002. There are at least 134 production facilities currently operating in theUnited States with more under construction or planned for construction in theforeseeable future. Excluding our facility, Kansas currently has at least 10ethanol plants operating or under currently under construction andapproximately 10 more in various stages of planning. Excess capacity in theethanol industry would have an adverse impact on our results of operations,cash flows and general financial condition. Excess capacity may alsoresult or intensify from increases in production capacity coupled withinsufficient demand. If the demand for ethanol does not grow at the same paceas increases in supply, we would expect the price for ethanol to decline. Ifexcess capacity in the ethanol industry occurs, the market price of ethanol may declineto a level that is inadequate to generate sufficient cash flow to cover ourcosts.

 

***We operate in a competitiveindustry and compete with larger, better financed entities.***There is significant competition amongethanol producers with numerous producer and privately owned ethanol plantsplanned and operating throughout the Midwest and elsewhere in the United States.The number of ethanol plants being developed and constructed in the UnitedStates continues to increase at a rapid pace. The recent passage of the EnergyPolicy Act of 2005 included a renewable fuels mandate that we expect willfurther increase the number of domestic ethanol production facilities. Thelargest ethanol producers include Abengoa Bioenergy Corp., Archer DanielsMidland Company, Aventine Renewable Energy, LLC, Cargill, Inc., HawkeyeRenewables, LLC, New Energy Corp. and VeraSun Energy Corporation, each of whichare capable of producing more ethanol than we expect to produce. Larger, betterfinanced ethanol producers may be able to expand their production capacityand adapt to new technologies easier than us. Archer Daniels Midland iscurrently the largest ethanol producer in the U.S. and controls a significantportion of the ethanol market. If the demand for ethanol does not grow at thesame pace as increases in supply, we expect that lower prices for ethanol willresult which may adversely affect our ability to generate profits and ourfinancial condition.

 

***We compete with other gasolineadditives.***Ourethanol plant also competes with producers of other gasoline additives madefrom raw materials other than corn having similar octane and oxygenate valuesas ethanol, including but not limited to methyl tertiary butyl ether (“MTBE”).Alternative fuels, gasoline oxygenates and alternative ethanol productionmethods are also continually under development. The major oil companies havesignificantly greater resources than we have to market MTBE, to developalternative products, and to influence legislation and public perception ofMTBE and ethanol. These companies also have significant resources to beginproduction of ethanol should they choose to do so.

 

***Competition from the advancementof alternative fuels may lessen the demand for ethanol.***Alternative fuels, gasoline oxygenates andethanol production methods are continually under development. A number ofautomotive, industrial and power generation manufacturers are developingalternative clean power systems using fuel cells or clean burning gaseousfuels. Like ethanol, the emerging fuel cell industry offers a technologicaloption to address increasing 

 

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worldwideenergy costs, the long-term availability of petroleum reserves andenvironmental concerns. Fuel cells have emerged as a potential alternative tocertain existing power sources because of their higher efficiency, reducednoise and lower emissions. Fuel cell industry participants are currentlytargeting the transportation, stationary power and portable power markets inorder to decrease fuel costs, lessen dependence on crude oil and reduce harmfulemissions. If the fuel cell and hydrogen industries continue to expand and gainbroad acceptance, and hydrogen becomes readily available to consumers for motorvehicle use, we may not be able to compete effectively. This additionalcompetition could reduce the demand for ethanol, resulting in lower ethanolprices that might adversely affect our results of operations and financialcondition.

 

***Corn-based ethanol may competewith cellulose-based ethanol in the future.***Especially in the Midwest, most ethanol iscurrently produced from corn and other raw grains, such as milo or sorghum. Thecurrent trend in ethanol production research is to develop an efficient methodof producing ethanol from cellulose-based biomass, such as agricultural waste,forest residue, municipal solid waste, and energy crops. This trend is drivenby the fact that cellulose-based biomass is generally cheaper than corn, andproducing ethanol from cellulose-based biomass would create opportunities toproduce ethanol in areas which are unable to grow corn. The Energy Policy Actof 2005 included incentives designed to boost production of cellulose-basedethanol. Although current cellulose technology is not sufficiently efficient tobe competitive, new conversion technologies may be developed in the futureand one of our competitors recently announced it was beginning construction ona facility slated to be cellulose-based. If an efficient method of producingethanol from cellulose-based biomass is developed, we may not be able tocompete effectively. We do not believe it will be cost-effective to convert ourethanol plant into a plant which will use cellulose-based biomass to produceethanol. If we are unable to produce ethanol as cost-effectively ascellulose-based producers, our ability to generate revenue and financialcondition will be negatively impacted.

 

***Ethanol imported from Caribbeanbasin countries and Brazil may be a less expensive alternative to ourethanol.***Ethanolproduced or processed in certain countries in Central America and the Caribbeanregion is eligible for tariff reduction or elimination upon importation to theUnited States under a program known as the Caribbean Basin Initiative. Largeethanol producers, such as Cargill, have expressed interest in buildingdehydration plants in participating Caribbean Basin countries, such as ElSalvador, which would convert ethanol into fuel-grade ethanol for shipment tothe United States. Ethanol imported from Caribbean Basin countries may bea less expensive alternative to domestically produced ethanol. Competition fromethanol imported from Caribbean Basin countries may affect our ability tosell our ethanol profitably, adversely affect our results of operations andfinancial condition.

 

Brazil is currently the world’s largest exporter ofethanol. In Brazil, ethanol is produced primarily from sugarcane, which is alsoused to produce food-grade sugar. Ethanol imported from Brazil may be aless expensive alternative to domestically produced ethanol, which is primarilymade from corn. Tariffs presently protecting U.S. ethanol producers may bereduced or eliminated. Competition from ethanol imported from Brazil may affectour ability to sell our ethanol profitably and our financial condition.

 

***Consumer beliefs may affectthe demand for ethanol.***We believe that certain consumers perceive the use of ethanol to have anegative impact on gasoline prices at the pump. Some consumers also believethat ethanol adds to air pollution and harms car and truck engines. Still otherconsumers believe that the process of producing ethanol actually uses morefossil energy, such as oil and natural gas, than the amount of ethanol that isproduced. These consumer beliefs 

 

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couldpotentially be widespread. If consumers choose not to buy ethanol, it wouldaffect the demand for the ethanol we produce which could lower demand for ourproduct and negatively affect our profitability and financial condition.

 

**Risks Related to Regulation and Governmental Action**

 

***A change in government policiesfavorable to ethanol may cause demand for ethanol to decline.***Growth and demand for ethanol may bedriven primarily by federal and state government policies, such as state lawsbanning MTBE and the national renewable fuels standard. The continuation ofthese policies is uncertain, which means that demand for ethanol may declineif these policies change or are discontinued. A decline in the demand forethanol is likely to cause lower ethanol prices which in turn will negativelyaffect our results of operations, financial condition and cash flows.

 

***Government incentives for ethanolproduction may be eliminated in the future.***The ethanol industry and our business areassisted by various federal ethanol tax incentives, including those containedin the Energy Policy Act of 2005. The provision of the Energy Policy Act of2005 likely to have the greatest impact on the ethanol industry is the creationof a 7.5 billion gallon Renewable Fuels Standard (“RFS”). The RFS mandatesbegin with 4 billion gallons in 2006, and increase to 7.5 billion gallons by2012 and new legislation increased the mandate to 36 billion gallons by 2022. Additionally,the State of Kansas may pass state legislation setting its own renewablefuel standard in the foreseeable future. The RFS helps support a market forethanol that might disappear without this incentive. The elimination orreduction of tax incentives to the ethanol industry could reduce the market forethanol, which could reduce prices and our revenues by making it more costly ordifficult for us to produce and sell ethanol. If the federal tax incentives areeliminated or sharply curtailed, we believe that a decreased demand for ethanolwill result, which could negatively affect our profitability and financialcondition.

 

***Changes in environmentalregulations or violations of the regulations could reduce our profitability.***We are subject to extensive air, water andother environmental laws and regulations. In addition some of these lawsrequire our plant to operate under a number of environmental permits. Theselaws, regulations and permits can often require expensive pollution controlequipment or operation changes to limit actual or potential impacts to theenvironment. A violation of these laws and regulations or permit conditions canresult in substantial fines, damages, criminal sanctions, permit revocationsand/or plant shutdowns. We do not assure you that we have been, are or will beat all times in complete compliance with these laws, regulations or permits orthat we have had or have all permits required to operate our business. We donot assure you that we will not be subject to legal actions brought byenvironmental advocacy groups and other parties for actual or allegedviolations of environmental laws or our permits. Additionally, any changes inenvironmental laws and regulations, both at the federal and state level, couldrequire us to invest or spend considerable resources in order to comply withfuture environmental regulations. The expense of compliance could besignificant enough to reduce our profitability and negatively affect ourfinancial condition.

 

**Item 2.****                           ****Properties.**

 

We currently own 411 acres of real property in thestate of Kansas, most of which is currently undeveloped. In October 2003,we completed an industrial revenue bond financing with Gove County that willprovide us with property tax savings on our plant site. As part of thefinancing, title to our plant site and all of our facilities have beentransferred to Gove County as security for the repayment of the bonds. We areleasing back the site for an amount that is equal to the amount 

 

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ofthe principal and interest that is payable on the bonds. The term of the leaseis 30 years or as long as the bonds are outstanding. Also under the terms ofthe lease, we can repurchase the site for a nominal amount upon repayment ofthe bonds.

 

We initially acquired a 53.5 acre parcel ofpartially developed land in Gove County for the purpose of constructing ourplant. Our plant was developed on approximately 20 acres of the 53.5 acreparcel. In February 2002, we acquired a 137 acre parcel approximately oneand a half miles east of the parcel where our plant is located. In December 2004,we acquired a 141 acre parcel of land immediately to the east of our plant site.Property measuring approximately 80 acres separated the land surrounding ourplant site from the 137 acre parcel we had previously acquired. In December 2005,we acquired the 80 acre parcel for $96,000 and now own a contiguous parcel ofproperty in Gove County.

 

We acquired water appropriation rights for two wellswhen we purchased the 137 acre parcel and one well when we purchased the 80acre parcel. We applied to the Kansas Department of Agriculture, Division ofWater Resources to change the type of water use from agricultural irrigationuse to industrial use for the well on the 80 acre parcel and constructed anirrigation system for delivery of water from that well to our plant. Weanticipate the same undertaking if we decide to utilize the wells on the 137acre parcel, which would be likely to occur in the event we further expand ourplant capacity. We have agreed to lease the 137 acre property back to one ofthe sellers for a period of five years with the amount of rent based on theportion of the land that is dry land acres and the portion that is irrigatedacres, with the seller expressly recognizing that the water available forirrigation may be dramatically reduced, and possibly eliminated, if we usethe water from this property in our ethanol plant operations. On February 6,2007, we purchased 340 acre feet of water rights on property adjacent to one ofour parcels for $340,308. We have filed with the State of Kansas to convert theclassification of these water rights from agriculture to industrial use.Pursuant to Kansas State water laws, we anticipate a reduction in allowablewithdrawal of approximately 15-20%.

 

In addition to our ethanol plant, we also own anadministrative building adjacent to the plant. The administrative buildingconsists of approximately 3,000 finished square feet (including a partiallyfinished basement) and provides offices for our administrative staff. Webelieve our existing facilities are sufficient for the foreseeable future.

 

In October 2006, we acquired a grain elevatorlocated on a neighboring parcel for $1,200,000. The underlying land is owned byUnion Pacific Railroad and we assumed the prior owner’s lease with the railroad.To further increase our storage capacity for grain, we constructed 500,000bushels of additional storage bins near our ethanol plant including two hammermills and necessary infrastructure for the conveyance of the grain.

 

**Item 3.****                           ****Legal Proceedings.**

 

From time to time we may be subject tolitigation that is incidental to our business. However, we are not currently aparty to any pending legal proceedings that are not routine litigationincidental to our business.

 

**Item 4.****                           ****Submission of Matters to a Voteof Security Holders.**

 

None.

 

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**PART II**

 

**Item 5.  Market for Our CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities.**

 

**Market Information**

 

Thereis no public trading market for our capital units. Article 4 of our ThirdAmended and Restated Operating Agreement (“Operating Agreement”) provides anumber of restrictions on the transfer of capital units by our members. Inessence, any proposed transfer must be approved by our Board of Managers.

 

Inaddition to the restrictions on transfer contained in our operating agreement,we are also subject to limitations imposed by the United States InternalRevenue Code (“Code”). In order to maintain our status as a partnership forincome tax purposes, we must not be treated as a “publicly traded partnership”under relevant provisions of the Code. Generally, the Code provides that a publicly traded partnership will betaxed as a corporation. In order to comply with these rules, we do not intendto list any of our capital units on a stock exchange or apply for quotations inany electronic trading system.

 

Whilewe currently do not participate in a matching service, our Board of Managersrecently approved efforts to participate in a trading system maintained by athird party.  However, there is noassurance that we will begin using the matching service to enable our capitalunits to trade in a secondary market. Until such time as we implement the matching service, if ever, theholders of our capital units who locate a purchaser or receive an offer topurchase can sell the capital units to the purchaser subject to the approval ofthe Board of Managers.  Our OperatingAgreement also allows transfer of the capital units by:

 

·                  Gift;

·                  Last will or the laws of descent;

·                  Transfers between members of a family; and

·                  “Block” transfers.

 

Ablock transfer is a transfer by a member and any related person, as defined inthe Code, of membership interests representing in the aggregate more than 2% ofthe total interest in our capital or profits in one or more transactions duringany 30 calendar day period.

 

**Capital Unit Holders**

 

Asof December 28, 2007, there were 2,286 Class A capital units, 1,744 Class Bcapital units and 50 Class C capital units outstanding, owned by a totalof approximately 628 members.

 

**Distributions to Members**

 

Underthe terms of our Operating Agreement, we are required to make an annualdistribution to our members of a minimum of 20% of the net cash we earn fromoperations, as defined in the Operating Agreement, as long as net cash fromoperations exceeds $500,000 for that year. However, we are prohibited from making any distributions if it wouldviolate or cause us to default under any of the terms of any of our creditfacilities or debt instruments.

 

Duringthe 2007 fiscal year, we made distributions to our members approximately onceeach quarter for a total of $28,560,000 in cash paid to our members.  During the 2006 fiscal year, we 

 

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distributeda total of $28,560,000 in cash to our members. Future distributions may be subject to restrictions that materiallylimit our ability to pay such distributions, such as our credit facilities ifwe have an outstanding balance with our lender. To the extent we are not subject to any restriction that materiallylimits our ability to pay distributions, however, future distributions inexcess of the amount required under our Operating Agreement will be made in thediscretion of our Board of Managers.

 

**Securities Authorized for Issuance under Equity Compensation Plans**

 

Wecurrently have no equity compensation plan.

 

**Item 6.  Selected Financial Data.**

 

Wecompleted construction of our plant and started operations in January 2004.  We changed our fiscal year end from December 31to September 30 beginning in 2004. The following selected financial datasets forth our summary historical financial data as of and for the years ended September 30,2007, 2006, 2005  the period January 1,2004 through September 30, 2004, and for the year ended December 31,2003.  This information was derived fromour audited financial statements and notes thereto for each year. Our selectedhistorical financial data is qualified in its entirety by, and should be readin conjunction with, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the financial statements and the notesthereto included elsewhere in this report. For additional information relatingto our operations, see “Business” and “Properties.”

 
| ** **                                   | ** ** | **Year  Ended****September 30,** | ** **  | **Nine  Months****Ended****September  30,** | ** ** | **Year  Ended****December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|-------------|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2007**                              | ** **  | **2006**                                    | ** ** | **2005**                             | ** ** | **2004(1)** | ** ** | **2003(2)** | ** ** |
| **Income Statement data:**                   |       |                                  |        |                                        |       |                                 |       |   |   |   |   |
| Net sales                                    |       | $                                     | 108,761,200 |                                        | $          | 108,044,168                          |       | $ | 61,730,872 |   | $ | 39,862,629 |   | $ | — |   |
| Net Income (loss)                            |       | 16,656,276                            |        | 45,895,967                                  |       | 13,009,369                           |       | 7,393,563 |   | (532,031 | ) |
| Earnings (loss) per capital unit             |       | 4,082                                 |        | 11,249                                      |       | 3,189                                |       | 1,812 |   | (433 | ) |
| Cash distributions declared per capital unit |       | 7,000                                 |        | 7,000                                       |       | 2,110                                |       | — |   | — |   |
| Book value per capital unit(3)               |       | 8,261                                 |        | 11,727                                      |       | 7,493                                |       | 6,270 |   | 4,610 |   |
|                                              |            |                                       |             |                                             |            |                                      |            |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Balance Sheet data:**                |       |                   |       |                  |       |   |   |   |   |   |   |
| Total assets                           |       | $                      | 69,786,878 |                  | $          | 82,304,265 |   | $ | 70,731,153 |   | $ | 73,879,570 |   | $ | 53,920,581 |   |
| Total debt (current and long term) (4) |       | 36,081,860             |       | 34,458,846            |       | 40,158,220 |   | 48,298,319 |   | 35,109,968 |   |
| Members’ equity                   |       | 33,705,018             |       | 47,845,419            |       | 30,572,933 |   | 25,581,251 |   | 18,810,613 |   |
|                                        |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) – The information for 2004 representsoperations for the nine months ending September 30, 2004 resulting from achange in fiscal year end.  We beganproducing ethanol in January 2004.

 

19

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(2) – The Company was in start-up phase during2003 and therefore had no operating revenue.

(3) – Members’ equity divided by membershipunits outstanding as of the end of the period.

(4) – Includes a $32,000,000 lease obligationrelated to our sale and leaseback transaction with Gove County.   We sold our property to Gove County inexchange for industrial revenue bonds and the amount of our lease obligation isoffset by the amount of interest we receive on the bonds.

 

**Item 7.    Management’s Discussion and Analysis.**

 

***Except for the historical information, thefollowing discussion contains forward-looking statements that are subject torisks and uncertainties.  We caution younot to put undue reliance on any forward-looking statements, which speak onlyas of the date of this report.  Ouractual results or actions may differ materially from these forward-lookingstatements for many reasons, including the risks described in “Risk Factors”and elsewhere in this annual report.  Ourdiscussion and analysis of our financial condition and results of operationsshould be read in conjunction with the financial statements and related notesand with the understanding that our actual future results may be materiallydifferent from what we currently expect.***

 

**Introduction**

 

The following discussionanalyzes our operating results for the three fiscal years ended September 30,2007 and our financial condition at September 30, 2007, 2006 and 2005,with a particular emphasis on the year ended September 30, 2007.

 

Wederive revenue from the sale of fuel grade ethanol and distillers grains.  We operate in one industry segment foraccounting purposes.  We commencedproduction of ethanol in January 2004. Prior to that date, we were considered to be in the development stagefor accounting purposes.

 

**Results of Operations for the Year Ended September 30, 2007compared to September 30, 2006**

 

*Overview*.  Thefollowing table highlights certain of our operating results for the years endedSeptember 30, 2007, 2006 and 2005. This table should be read in conjunction with our financial statementsand accompanying notes under Item 8 of this report:

 
| ** **                                 | ** ** | **Fiscal Year Ended  September 30, 2007** | ** **  | **Fiscal Year Ended  September 30, 2006** | ** ** | **Fiscal Year Ended  September 30, 2005** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------|-------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Revenue                                    |       | $                                                             | 108,761,200 |                                                          | $          | 108,044,168                                                   |       | $ | 61,730,872 |   |
| Cost of sales                              |       | 84,457,974                                                    |        | 55,377,115                                                    |       | 43,476,560                                                    |       |
| Gross profit                               |       | 24,303,226                                                    |        | 52,667,053                                                    |       | 18,254,312                                                    |       |
| General & administrative expenses |       | 2,835,635                                                     |        | 2,235,393                                                     |       | 1,716,228                                                     |       |
| Income from operations                     |       | 15,568,216                                                    |        | 44,746,901                                                    |       | 11,050,831                                                    |       |
| Other income                               |       | 1,088,060                                                     |        | 1,149,066                                                     |       | 1,958,538                                                     |       |
| Interest expense                           |       | (110,092                                                      | )           | (241,950                                                      | )          | (931,710                                                      | )          |
|                                       |       |                                                          |        |                                                          |       |                                                          |       |
| Net income                                 |       | 16,656,276                                                    |        | 45,895,967                                                    |       | 13,009,369                                                    |       |
| Net income per unit                        |       | 4,082                                                         |        | 11,249                                                        |       | 3,189                                                         |       |
| Comprehensive income                       |       | 14,419,599                                                    |        | 45,832,486                                                    |       | 12,977,556                                                    |       |
|                                            |            |                                                               |             |                                                               |            |                                                               |            |  |  |  |

 

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Asshown in the table, our operating results decreased significantly from 2006 to2007.  The results are primarilyattributable to ethanol prices retreating from historic highs and grain pricesrising to 10 year highs during fiscal 2007. Although the demand for fuel grade ethanol remained high during thecalendar year 2007, the industry continues to expand at a rapid rate.  This increase in supply continues to exertdownward price pressure on ethanol.

 

*Net Income*.  Net incomedecreased $29,239,691, or approximately 65% in 2007 from 2006.  We attribute this decrease to a decrease in ourprofit margin during fiscal 2007 resulting from lower ethanol prices and higherraw material costs, especially corn.

 

Operatingincome for the 2007 fiscal year decreased by $29,178,685, or approximately 65%,from 2006.  This decrease results fromthe substantial increase in cost of sales from higher grain costs.  Operating income excludes the effect of otherincome or expense, which primarily includes government grants and subsidies.

 

*Revenue*.  Revenue forthe 2007 fiscal year increased $717,032, or approximately 1%, from 2006.Production volume, which is limited by plant capacity, was consistent from yearto year.  The average price we receivedfor sale of ethanol was also consistent, despite significant intra-yearfluctuations, as was the spot price for ethanol at September 30, 2007compared to September 30, 2006. Revenue consisted of approximately 83% in ethanol sales and 17% from thesale of distillers grains, a decrease of approximately 6% from the 2006relative to the amount of revenue derived from ethanol sales.  This modest increase in revenue is primarilydue to the increase in the price we received for distillers grain, which isbased on the current price of corn.  Totalrevenue derived from distillers grain sales increased by $6,775,816, or approximately58% compared to 2006.  We expectdistillers grain prices to remain firm and ethanol prices to increasemoderately during fiscal 2008.

 

*Costs of Goods Sold*.  Our cost of goods sold for the 2007 fiscalyear equaled 78% of revenue, resulting in a gross profit margin of 22%. Thisrepresents a substantial decline from 2006, when our profit margin was 49%. Weattribute the decline to several factors including:

 

·      Lower average prices for ethanol; and

·      A significant increase in the price of grain;

 

Grainprices, which represent the significant majority of our cost of goods sold,increased dramatically in 2007.  Priceswere driven by a rapid increase in demand globally.  Additionally, global weather conditionsadversely effected the production of grains, which caused increased demand forU.S. grain in the global market.  Theincreased demand coupled with dwindling world grain stocks is expected tocontinue into 2008. The average price we paid for grain increased approximately83% in 2007 as compared to 2006.  Weexpect grain prices to remain at or near record-highs for 2008, adjusted forseasonal fluctuations.

 

Ourincreased grain storage capacity helps us manage our grain costs by enabling usto purchase grain when costs are lower. As costs rise, we reduce grain inventory and manage to avoid purchasinggrain at market prices if higher than the price we paid for the grain in storage.

 

Webelieve we continue to improve the efficiency with which we operate our plantbased on a year-over-year basis.  As aresult, our production costs (exclusive of commodity costs) continue todecrease.

 

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Energycosts, representing the second largest component of our costs of good sold, sawa steady decrease during our 2007 fiscal year. Natural gas prices saw a significant decrease during the winter of 2006and the summer and fall of 2007 as a result of the lack of interruption ofproduction in the Gulf of Mexico experienced in previous years due tohurricanes.  As a result of the lack ofdisruption of supply and mild weather, natural gas storage levels have reachedhistorically high levels. The cost of electricity also decreased, since asignificant amount of electricity is generated by natural gas.  We expect gas price volatility to remain lowin 2008

 

Wecontinue to believe that hedging is an integral part of our business as a meansof risk management.  Our strategy is tomitigate the impact of large adverse price changes in costs, such as naturalgas and grain, as well as the products we sell. Our operating results include both realized and unrealized gains orlosses in these hedging activities. For the 2007 fiscal year, we realized $1,311,604in losses to operations relating to grain futures contracts and $1,659,177 inrealized losses from natural gas futures contracts, which amounts are includedin costs of goods sold.  In addition, werecorded an unrealized loss on grain hedging contracts of $2,236,677 at September 30,2007.

 

*General and Administrative Expenses*.  During fiscal 2007, general andadministrative expenses increased $600,242 or approximately 26.8% from fiscal2006. Significant components of these expenses include salaries, professionalfees and insurance. We incurred a non-reoccurring expense related to possiblemerger and/or sale of the company during fiscal 2007 which comprises themajority of this increase.

 

*Depreciation and Amortization.*  Depreciation and amortization remainedrelatively constant from the fiscal year ended September 30, 2006 throughthe 2007 fiscal year.  During that time,depreciation and amortization expenses increased approximately 3.8%. The slightincrease during 2007 is attributable to the additional expense of the grainstorage facility that we placed in service during 2007.

 

*Other Income.*  Otherincome for the 2007 fiscal year decreased from the year ended September 30, 2006, falling $192,864, orapproximately 13.9%. A significant portion of that decrease represents reducedgrants and subsidies from the federal government, which fell $224,630, orapproximately 16.6%.  The largest factorcontributing to the decrease in grants and subsidies was the cessation of thefederal Bioenergy Program, administered by the United States Department ofAgriculture’s Commodity Credit Corporation. That program paid subsidies to eligible participants for year-over-yearincreases in ethanol production.  Theprogram was discontinued during 2006.

 

Wewere awarded the maximum amount of $1,125,000 from the State of Kansas as partof its state ethanol support program. Interest expense for the 2007 fiscal year decreased $131,858, orapproximately 54.5%, from the prior year, primarily attributable to our reduceddebt.

 

**Results of Operations for the Year Ended September 30, 2006compared to September 30, 2005**

 

*Overview*.  Ouroperating results improved significantly from 2005 to 2006.  The results are primarily attributable toethanol prices reaching historic highs and favorable grain prices during fiscal2006 along with strong demand for ethanol. Specifically, the price of and demand for fuel grade ethanol remainedhigh during the summer months of calendar 2006 when ethanol prices typicallydecrease.  This was due in part to thefact that high gasoline prices, most likely the result 

 

22

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ofhurricane-related shortages the previous fall and winter, helped drive up theprice for ethanol and also in part because many refiners delayed their decisionto purchase ethanol for MTBE replacement. Additionally, we believe our ethanol marketer was able to take advantageof these favorable prices and capitalize on the market.  We did not experience similar prices forethanol during fiscal 2007.

 

During2005, we also placed into service an expansion of our ethanol plant, whichincreased our production from a nameplate capacity of 30 million gallons to 40million gallons.  This allowed us to reapthe added benefit of ten million gallons of additional nameplate capacityproduction in fiscal 2006 at historically high prices. The increase inproduction at favorable prices more than offset the increase in productioncosts associated with the expansion.

 

*Net Income*.  Net incomefor the 2006 fiscal year increased $32,886,598, or approximately 253%, fromfiscal 2005.  We attribute this increaseprimarily to a significant increase in revenue as a result of high ethanolprices and an improved profit margin due to relatively stable grain prices anddecreasing natural gas costs during the 2006 fiscal year.

 

Operatingincome for the 2006 fiscal year increased more dramatically than net income,rising $33,696,070, or approximately 305%, from 2005.

 

*Revenue*.  Revenue forthe 2006 fiscal year increased $46,313,296, or approximately 75%, from2005.  Revenue consisted of approximately90% in ethanol sales and 10% from the sale of distillers grains, an increase by6% from 2005 in the relative amount of revenue derived from ethanol sales.

 

Weattribute the increase in revenue for the 2006 fiscal year compared to 2005 toboth an increase in production and historic highs for ethanol prices.  The average price that we received for ourethanol increased approximately 21% during fiscal 2006 compared to 2005, addingto the increase in revenue.  2006 alsomarked the first time we reported revenue for a full fiscal year afterexpanding our plant capacity. Accordingly, the results of our operations for the 2005 fiscal yearincluded approximately six months of lower production.

 

Ethanolprices, which typically experience a seasonal decline in the spring and summermonths, had an uncharacteristic jump in price from May through September 2006,resulting from high gasoline prices and increased demand for ethanol as areplacement for MTBE.  Historically,ethanol prices have been seasonal, increasing in the late summer and fall asgasoline blenders and marketers increase inventory in anticipation of mandatoryblending in the winter months, and decreasing in the spring and summer when mandatoryblending ceases.  The rise in ethanolprices during 2006 was remarkable because it started sooner than the seasonalnorm and rose higher than historical norms, due to a variety of factors,including increased prices for gasoline resulting from hurricane-relatedshortages and the world geopolitical situation. Also remarkable is the fact that ethanol prices, which tend to trackwith gas prices, remained high despite declines in the price of gasoline andnatural gas at the end of summer months.

 

*Costs of Goods Sold*.  Our cost of goods sold for the 2006 fiscalyear totaled 51% of revenue, resulting in a gross profit margin of 49%.  This represents a substantial improvementfrom 2005, when our profit margin was 30%. We believe this improvement can be attributed to several factorsincluding:

 

·      Higher average prices for ethanol in 2006;

·      A relatively small increase in the price of grain during thesame time;

 

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·      Lower prices for natural gas in fiscal 2006 compared to 2005;and

·      Increased operating efficiencies during 2006.

 

Grainprices, which represent the significant majority of our cost of goods sold,increased during the second half of fiscal 2006 and reached a ten-year highsubsequent to the fiscal year end. However, due in part to our hedging efforts, our cost of grain for 2006was relatively constant from 2005.  Theaverage price we paid for grain decreased approximately 3% in 2006 as comparedto 2005.  We believe the increased priceof grain stems in part from increased demand, in part attributable to moreethanol plants being placed in production.

 

Webelieve we continue to improve the efficiency with which we operate our plantbased on a year-over-year basis.  As aresult, our production costs (exclusive of commodity costs) continue todecrease.

 

Energycosts, representing the second largest component of our costs of good sold, sawa steady decrease during our 2006 fiscal year. Natural gas prices saw a significant increase during the summer and fallof calendar 2005 and the winter of calendar 2006 as a result of the hurricanesand the interruption of production in the Gulf of Mexico.  Prices almost doubled as a result of thehurricanes, and it took several months for prices to begin falling.  We were able to control some of our coststhrough hedging activities during the year. Due to the high gas prices at the beginning of fiscal 2006, we forwardcontracted for a substantial amount of our natural gas needs and maintainedprovisions in our contracts that allowed us to benefit from decreases inprices.

 

Forthe 2006 fiscal year, we credited $182,272 to operations relating to grain andother futures contracts, which amount is included in costs of goods sold.  In addition, we recorded an unrealized losseson grain hedging contracts of $63,481 at September 30, 2006.

 

*General and Administrative Expenses.*  General and administrative expenses for the2006 fiscal year increased $519,165, or approximately 30% from 2005.  Significant components of these expensesinclude salaries, professional fees and insurance.  We attribute a portion of the increase toadditional administrative expenses to an increase in the cost of professionalfees, insurance, advertising expenses, and director expenses.  The increase in professional fees, in turn,is attributable to the strategic alternatives that we explored during the year.

 

*Depreciation and Amortization.*  Depreciation and amortization remainedrelatively constant from the fiscal year ended September 30, 2005 throughthe 2006 fiscal year.  During that time,depreciation and amortization expenses increased approximately 3.5%. Weattribute this smaller increase to the purchase and construction of theadditional grain storage.

 

*Other Income.*  Otherincome for the 2006 fiscal year decreased by $1,499,232 from 2005, orapproximately 52%.  A significant portionof that decrease represents reduced grants and subsidies from state and federalgovernments, which decreased $1,434,846 from 2005 to 2006, or approximately52%.  The largest factor contributing tothe decrease in grants and subsidies was the cessation of the federal BioenergyProgram, administered by the United States Department of Agriculture’sCommodity Credit Corporation.  Thatprogram paid subsidies to eligible participants for year-over-year increases inethanol production.  However, we receivednotice during fiscal 2006 that this program was discontinued.

 

Wewere awarded the maximum amount of $1,125,000 from the State of Kansas as partof its state ethanol support program in 2006. Interest expense for the 2006 fiscal year decreased $689,758, orapproximately 74%, from 2005, primarily as a result of the reduction in ourdebt.

 

24

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**Trends that may Impact our Future Operating Results**

 

*Prices for Ethanol. *Demand for andthe price of ethanol can vary significantly over time and a decrease in theprice of ethanol will adversely affect our profitability.  The price of ethanol tends to fluctuate withthe price of petroleum gasoline.  Sincegasoline prices have risen to  historichighs caused in part by global demand and geopolitical tension, we expectethanol prices to receive at least minimal support during 2008.  However, another factor that may affect theprice of ethanol is the increased supply anticipated to result from the newplants coming on line and expected to be coming on line in the future.  The increase in production capacity willincrease the supply of ethanol, which will tend to reduce the price for ethanolif demand does not also increase.

 

*Supply and price of grain.*  Rising grain prices produce lower profitmargins for the production of ethanol and therefore, represent unfavorablemarket conditions.  The grain market isdependent upon a variety of factors unrelated to the ethanol market.  The price of grain is generally dependentupon regional and international grain supplies, which can be very volatile.Grain supplies and the resultant prices are affected by weather, governmentalpolicy, disease and other conditions. Grain markets were relatively volatile during 2007, corn prices steadilyincreased during fiscal 2007, and we expect grain prices to remain high for theforeseeable future.

 

*Government supports.*  As discussed elsewhere in this report,current federal law is favorable to ethanol because it mandates certainoxygenate blending. In addition, as noted above in the section titled “Business,”the RFS established by the Energy Policy Act of 2005 mandates that fuelrefiners use a certain minimum amount of ethanol and other renewable fuels,which was subsequently increased by the Energy Independence and Security Act of2007 enacted in December 2007.  While the RFS may not have an immediateimpact on the ethanol market since current national ethanol production capacityexceeds the 2007 RFS requirement of 4.7 billion gallons, it is likely that thenewly increased RFS requirement of 36 billion gallons of renewable fuel by 2022will continue to support the ethanol industry in the long-term.  It is also possible that cessation ofsupports and incentives may adversely affect price and demand.

 

*Production of ethanol.*  As noted above, with the new ethanol plantsand plant expansions currently under construction along with new constructionexpected in the near future, the nationwide production capacity for ethanol isexpected to increase dramatically in the next couple of years. Experts in theethanol industry have differing views as to whether this increased productionwill create a surplus in the ethanol market. At a minimum, this increasedcapacity creates some uncertainty for the ethanol industry. Although we believethat there will be an increase in the demand for ethanol as a result of thephase out of MTBE, we cannot provide any assurance or guarantee that there willbe any material or significant increases in the demand for ethanol. If theproduction of ethanol exceeds either the demand for ethanol or the petroleumindustry’s ability to blend ethanol with gasoline, then the price of ethanolwould be expected to fall, and such fall in ethanol prices could besignificant. In that case, our revenues would decrease accordingly.  However, we believe that our lack ofsignificant long-term debt positions us favorably to weather lower ethanolprices compared to some of our competitors.

 

**Liquidity and Capital Resources**

 

*Overview*.  Thefollowing table highlights certain information relating to our liquidity andcapital resources at September 30, 2007 and 2006:

 

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| ** **           | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
|----------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Working Capital      |       | $                                | 7,413,269  |                             | $          | 20,127,552 |   |
| Current Assets       |       | 11,486,108                       |       | 22,543,454                       |       |
| Current Liabilities  |       | 4,072,839                        |       | 2,415,902                        |       |
| Long-term Debt       |       | 9,021                            |       | 42,944                           |       |
| Members’ Equity |       | 33,705,018                       |       | 47,845,419                       |       |
|                      |            |                                  |            |                                  |            |  |  |

 

Ourworking capital at September 30, 2007 decreased by $12,714,283, orapproximately 63.2%, from September 30, 2006.  Current assets decreased $11,057,346, orapproximately 49%, while current liabilities increased $1,656,937, orapproximately 68.6%.  We attribute the decreasein current assets and working capital to several factors.  Available cash decreased as a result ofreduced net income and cash flow from operations for fiscal 2007 compared to2006.  Also, we distributed $28,560,000in cash to our members in fiscal 2007, of which approximately $14,000,000 waspaid from excess cash from 2006 operations. Additionally, accounts receivable at September 30, 2007 decreased42% from September 30, 2006 primarily due to lower ethanol prices.  We believe all of these factors led to adecrease in current assets and working capital during 2007.  However, we believe we have sufficientliquidity and capital for the foreseeable future.

 

Underthe terms of our Operating Agreement, we are required to make an annualdistribution of cash to our members of a minimum of 20% of the net cash we earnfrom operations, as defined in that agreement, as long as net cash fromoperations exceeds $500,000 for that year. Additional distributions may be made in the sole discretion of our Boardof Managers.  However, we are prohibitedfrom making any distribution that would violate or cause a default under any ofthe terms of our credit facilities or debt instruments.  While we foresee making distributions to ourmembers in the future, it is unlikely the distributions will continue to be ofthe same magnitude as during 2006 and 2007 given our current margins.

 

Ourcapital resources consist of:  (i) cashfrom operations; (ii) permanent financing, in the form of capitalcontributions by our members; (iii) a revolving line of credit; and (iv) industrialdevelopment bonds.  At September 30,2007, we believe the mix of our capital resources was appropriate and adequatefor the foreseeable future.  Other thanfinancing continuing operations, additional capital would be necessary shouldwe decide to further expand our plant or pursue acquisitions of additionalproperty, plant or equipment.

 

*Cash Flow.*  Net cashgenerated during the 2007 fiscal year decreased $14,364,727, as compared tofiscal 2006.  The biggest factors causingthe decrease in cash flow was the increase in our grain inventory, net changein our commodities trading account, purchase of Plant and Equipment, and thecombination of an increased cost of grain and lower price of ethanol, whichcaused a significant decrease in net income during 2007.  The decrease in net income of $29,239,691during 2007 greatly reduced cash provided by operating activities.

 

Theuse of cash for our investing activities during fiscal 2007 increased by$4,629,301 from fiscal 2006.  Weattribute this increase to the grain storage addition in fiscal 2007. Weinvested $4,433,862 in property, plant and equipment in fiscal 2007, of whichmost of the investment was attributable to the grain storage addition.

 

26

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Cashused in financing activities decreased by $6,969,308 in 2007 as compared to2006.  The decrease primarily reflectsthe absence of payments on long-term debt.

 

*Equity Financing.*  Ourmembers contributed $19,801,035 in equity financing, primarily from our initialpublic offering completed in 2003.  We donot anticipate that any additional equity financing will be necessary in theforeseeable future.  During the 2007fiscal year, our members’ equity decreased $14,140,401, or approximately 30%,as a result of distributions paid to members during the period.

 

*Debt Financing.*  Underour arrangement with AgCountry, we borrowed $22,000,000 under a constructionloan in 2003.  The proceeds of that loanwere used by us to complete construction of the plant and to commenceoperations.  In August 2004, weconverted the loan to permanent financing in the form of a $16,000,000 termloan and a line of credit in the amount of $5,000,000.  At that time, we paid AgCountry $5,000,000 toreduce the loan, all of which was used to create the line of credit.  We paid the AgCountry term loan in full in June 2006and continue to maintain the line of credit. Pursuant to the Fifth Amendment to the Credit Agreement dated July 29,2003, which became effective May 2, 2007, the amount available on the lineof credit was increased to $8,000,000 with variable interest at LIBOR plus2.0%. We had a balance of $900,000 at the end of the 2007 fiscal year which waspaid off subsequent to year end and as of December 28, 2007, there is nolonger a balance outstanding on this line of credit.

 

Ourknown obligations at fiscal year end are set forth in the table below:

 
| **Contractual Obligations** | ** ** | **Total**  | ** ** | **Less than 1  year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than 5  years** | ** ** |
|----------------------------------|------------|------------|------------|---------------------------------|------------|----------------|------------|----------------|------------|----------------------------------|------------|
| Capital lease(1)                 |       | $          | 32,000,000 |                            |       |           |       |           |       |                             | 32,000,000 |   |
| Vehicle purchase                 |       | 19,846     |       | 10,824                          |       | 9,022          |       |           |       |                             |       |
| Land purchase                    |       | 24,000     |       | 24,000                          |       |           |       |           |       |                             |       |
| Total                            |       | 32,043,846 |       | 34,824                          |       | 9,022          |       |           |       | 32,000,000                       |       |
|                                  |            |            |            |                                 |            |                |            |                |            |                                  |            |  |

 

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(1)             Includes a $32,000,000 leaseobligation related to our sale and leaseback transaction with Gove County.   We sold our property and facilities to GoveCounty in exchange for industrial revenue bonds.  The amount of our lease obligation is offsetby the amount of interest we receive on the bonds.

 

Ourexisting repayment obligations under the credit agreement with AgCountry aresecured by all of our tangible and intangible real and personal property.  In addition, the bonds acquired from GoveCounty have been pledged to AgCountry to secure our borrowing.  As part of the credit agreement, we agreed tocertain affirmative, negative and financial covenants which potentially affectour operations, including, but not limited to, the following:

 

·               We must provide AgCountry with audited annualand unaudited quarterly financial statements, annual budgetary and businessplan information, and a notice of the occurrence of an event of default andother material events;

 

·               We must permit AgCountry representatives tovisit and inspect our properties, conduct audits of the collateral, examine ourbooks and records and review documents related to construction of our plant;

 

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·               With certain exceptions, we may not incuradditional indebtedness, allow our real or personal properties to be used ascollateral for any other obligations or make any other investments of any kind;

 

·               We can distribute up to 75% of our net incometo our members.  If we maintain aleverage ratio of 0.60:1.00 and working capital greater than $5 million (eachas reported in audited year-end financial statements prepared in accordancewith generally accepted accounting principles), we can distribute 100% of ournet income to our members.

 

·               We must maintain certain financial ratios,beginning at various times, including a fixed charge coverage ratio and currentratio and we must meet a minimum net worth requirement of $25,000,000.  We also may not, after completion ofconstruction of the plant, make any capital expenditures in excess of $500,000during any fiscal year without AgCountry’s prior written approval.

 

AtSeptember 30, 2007, we believe we satisfied all of the covenants under theloan agreement.

 

**Critical Accounting Policies and Estimates**

 

*Use of Estimates*. Preparation of our financial statements necessarily requires estimatesand judgments to be made that affect the amounts of assets, liabilities,revenues and expenses reported. Such decisions include the selection of theappropriate accounting principles to be applied and the assumptions on which tobase accounting estimates. Our management continually evaluates these estimatesbased on assumptions it believes to be reasonable under the circumstances.

 

Thedifficulty in applying these policies arises from the assumptions, estimatesand judgments that must be made currently about matters that are inherentlyuncertain, such as future economic conditions, operating results andvaluations, as well as management intentions. As the uncertainty increases, thelevel of precision decreases, meaning that actual results can, and probablywill be, different from those currently estimated.

 

Ofthe significant accounting policies described in the notes to the financialstatements, we believe that the following may involve a higher degree ofestimates, judgments and complexity:

 

*Revenue Recognition. *Revenue from the production of ethanol and related products is recordedupon delivery to customers. Interest income is recognized as earned.  Income from government grant programs isrecognized as costs are incurred.  Governmentsubsidies are recognized based on fulfillment of program criteria, completionof application and determination of available funding.

 

*Derivatives and Financial Instruments. *Weaccount for derivatives in accordance with Statement of FinancialAccounting Standards (SFAS) No. 133, “Accounting for DerivativeInstruments and Hedging Activities”. SFAS No. 133 requires the recognitionof derivatives in the balance sheet and the measurement of these instruments atfair value. Changes in the fair value of derivatives are recorded as acomponent of Cost of Sales unless the normal purchase or sale exception appliesor hedge accounting is elected.

 

Weenter into derivative instruments including future contracts and swapagreements and purchased options to fix prices for a portion of future rawmaterial requirements. We have 

 

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designated,documented and assessed for hedge relationships, which mostly resulted in cashflow hedges that require us to record the derivative assets and liabilities attheir fair value on the balance sheet with an offset in other comprehensiveincome. Amounts are removed from other comprehensive income as the underlyingtransactions occur and realized gains or losses are recorded.   We have included in its cost of sales anaggregate of $2,970,781 of losses on completed contracts related to its hedgingactivities for corn and natural gas and have recorded an aggregate of$2,236,677 of unrealized losses for the year ended September 30, 2007, asa charge to comprehensive income as compared to $800,662 losses on contractsand $63,481 of unrealized losses for the period ended September 30,2006.  At September 30, 2007, theCommodities trading account-futures and options contracts amounted to $2,188,278,representing the lower of the cost or fair market value of the futures andoptions contracts recorded on the balance sheet.

 

*Commitments and Contingencies. *Contingencies, by theirnature, relate to uncertainties that require management to exercise judgmentboth in assessing the likelihood that a liability has been incurred, as well asin estimating the amount of the potential expense. In conformity withaccounting principles generally accepted in the United States, we accrue anexpense when it is probable that a liability has been incurred and the amountcan be reasonably estimated.

 

*Long-Lived Assets. *Depreciation and amortization of our property, plant and equipment isapplied on the straight-line method by charges to operations at rates basedupon the expected useful lives of individual or groups of assets placed inservice. Economic circumstances or other factors may cause management’sestimates of expected useful lives to differ from the actual useful lives.Differences between estimated lives and actual lives may be significant, butmanagement does not expect events that occur during the normal operation of ourplant related to estimated useful lives to have a significant effect on resultsof operations.

 

Long-livedassets, including property, plant and equipment and investments, are evaluatedfor impairment on the basis of undiscounted cash flows whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. An impaired asset is written down to its estimated fair marketvalue based on the best information available. Considerable management judgmentis necessary to estimate future cash flows and may differ from actual cashflows. Management does not expect an impairment of assets will exist based ontheir assessment of the risks and rewards related to the ownership of theseassets and the expected cash flows generated from the operation of the plant.

 

**Recent Accounting Pronouncements**

 

On February 15, 2007, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities” (SFAS No. 159).SFAS No. 159 permits entities to choose to measure many financialinstruments and other items at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently, without having to apply complex hedge accounting procedures. SFAS No. 159also establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementattributes for similar types of assets and liabilities. The Statement isexpected to expand the use of fair value measurements, which is consistent withthe Board’s long-term measurement objectives for accounting for financialinstruments. SFAS No. 159 will be effective for our 2009 fiscal year andwill be required to be adopted by us effective July 1, 2008. Management atthis time has not evaluated the impact, if any, of adopting SFAS No. 159on its financial statements.

 

29

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InDecember 2007, the FASB issued SFAS No. 160 Noncontrolling Interestsin Consolidated Financial Statements–an amendment of ARB No. 51. SFAS 160establishes accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. The guidance willbecome effective as of the beginning of our fiscal year beginning after December 15,2008. Management believes the adoption of this pronouncement will not have amaterial impact on our consolidated financial statements.

 

**Forward-Looking Statements**

 

This report contains orincorporates by reference “forward-looking statements,” as that term is used infederal securities laws, about our financial condition, results of operationsand business.  These statements include,among others:

 

·                 statements concerning the benefits that weexpect will result from our business activities and certain transactions thatwe have completed, such as increased revenues, decreased expenses and avoidedexpenses and expenditures; and

·                 statements of our expectations,beliefs, future plans and strategies, anticipated developments and othermatters that are not historical facts.

 

Thesestatements may be made expressly in this document or may be incorporated byreference to other documents that we will file with the SEC.  You can find many of these statements bylooking for words such as “believes,” “expects,” “anticipates,” “estimates” orsimilar expressions used in this report or incorporated by reference in thisreport.

 

Theseforward-looking statements are subject to numerous assumptions, risks anduncertainties that may cause our actual results to be materially different fromany future results expressed or implied by us in those statements.  Because the statements are subject to risksand uncertainties, actual results may differ materially from those expressed orimplied.  We caution you not to put unduereliance on these statements, which speak only as of the date of thisreport.  Further, the informationcontained in this document or incorporated herein by reference is a statementof our present intention, is based on present facts and assumptions and maychange at any time and without notice based on changes in such facts orassumptions.

 

Afew of the uncertainties that could affect the accuracy of forward-lookingstatements, besides the specific “Risk Factors” identified above, include:

 

·                 The state of the UnitedStates economy and how it affects the desire for automobile travel;

·                 The relative price ofgasoline and other competing fuels;

·                 Changes in governmentregulations for air and water quality or subsidies for production of ethanol andother fossil fuel alternatives;

·                 Technological advances inthe process for producing ethanol; and

·                 Drought and otherenvironmental conditions.

 

**Item 7A.  Quantitative andQualitative Disclosures About Market Risk.**

 

Weare exposed to the impact of market fluctuations associated with interest ratesand commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business isconducted in U.S. Dollars. We use derivative financial instruments as part ofan overall strategy to manage market risk. We use cash, futures and optioncontracts to hedge 

 

30

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changesto the commodity prices of corn and natural gas. We do not enter into thesederivative financial instruments for trading or speculative purposes, nor do wedesignate these contracts as hedges for accounting purposes pursuant to therequirements of SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*.

 

**Interest Rate Risk**

 

Weare exposed to market risk from changes in interest rates. Exposure to interestrate risk results from holding a revolving promissory note which bears avariable interest rate. At September 30, 2007 there was $900,000 balanceon this note, however as of December 28, 2007 there was no balanceoutstanding.  We are subject to interestat the rate of LIBOR plus 2.0% on the outstanding balance.

 

** Commodity Price Risk**

 

Weare also exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results fromour dependence on grain and natural gas in the ethanol production process.  We seek to minimize the risks fromfluctuations in the prices of grain and natural gas through the use of hedginginstruments.  In practice, as marketsmove, we actively manage our risk and adjust hedging strategies as we believeappropriate.  Although we believe ourhedge positions accomplish an economic hedge against our future purchases, theyare not designated as such for hedge accounting purposes, which would match thegain or loss on our hedge positions to the specific commodity purchase beinghedged.  We are marking to market ourhedge positions, which means as the current market price of our hedge positionschanges, the gains and losses are immediately recognized in our cost of goodssold.  For example, it is likely and wewould generally expect that a 10% increase in the cash price of grain andnatural gas would produce an increase in the fair value of our derivativeinstruments equal to approximately $218,828 based on our positions at September 30,2007.

 

Theimmediate recognition of hedging gains and losses can cause net income to bevolatile from quarter to quarter due to the timing of the change in value ofthe derivative instruments relative to the cost and use of the commodity beinghedged.  As of September 30, 2007,the fair value of our derivative instruments for grain is an asset in theamount of $2,188,278.  We recorded a lossin the amount of $2,236,677 for the fiscal year ended September 30,2007.  There are several variables thatcould affect the extent to which our derivative instruments are impacted byprice fluctuations in the cost of grain or natural gas.  However, it is likely that commodity cashprices will have the greatest impact on the derivatives instruments withdelivery dates nearest the current cash price.

 

Tomanage our grain price risk, our hedging strategy is designed to establish aprice ceiling and floor for our purchases. We have taken a net long position on our exchange traded futures andoptions contracts, which allows us to offset increases or decreases in themarket price of grain.  The upper limitof loss on our futures contracts is the difference between the contract priceand the cash market price of corn and milo at the time of the execution of thecontract. The upper limit of loss on our exchange traded and over-the-counteroption contracts is limited to the amount of the premium we paid for theoption.

 

Weestimate that our expected grain usage is approximately 16.6 million bushelsper year for the production of 44.8 million gallons of ethanol.  We have price protection for approximately30% of our expected grain usage for fiscal year ending September 30, 2008using CBOT futures and options and over the counter option contracts.  As we move forward, additional protection 

 

31

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maybe necessary.  As grain 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 moveforward, additional price protection may be required to solidify our marginsinto fiscal year 2008.  Depending onmarket movements, crop prospects and weather, these price protection positionsmay cause immediate adverse effects, but are expected to produce long-termpositive growth for us.

 

Tomanage our natural gas price risk, we entered into a natural gas purchaseagreement with our natural gas supplier. This purchase agreement fixes the price at which we purchase naturalgas.  We estimate that we have forwardcontracts in place for approximately 18% of our natural gas needs for fiscal2007. We expect to acquire additional fiscal 2008 contracts for gas during August 2007which is historically the month when the lowest annual prices occur.

 

Atthe time we purchased price protection for natural gas, the market wasexperiencing a great deal of price uncertainty. Due to this uncertainty, we purchased amounts of gas for most of theplant’s needs and implemented derivative instruments on a portion of ourrequirements to allow us to benefit in the event natural gas pricesdeclined.  Energy sector prices haveincreased and natural gas, as a portion of the total energy market, hasresponded with higher prices to be cost competitive with its alternatives. Inthe future, we may not be able to secure natural gas for prices less thancurrent market price and we may not recover high costs of production resultingfrom high natural gas prices, which may raise our costs of production.

 

Asensitivity analysis has been prepared to estimate our exposure to grain andnatural gas price risk. The table presents the fair value of our derivativeinstruments as of September 30, 2007 and September 30, 2006 and thepotential 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:

 
| **Period Ended**   | ** ** | **Fair Value** | ** ** | **Effect of  Hypothetical Adverse  Change - Market Risk** | ** ** |
|-------------------------|------------|---------------------|------------|------------------------------------------------------------------------------------|------------|
| September 30, 2007 |       | $                   | 2,188,278  |                                                                               | $          | 218,828 |   |
| September 30, 2006 |       | 202,065             |       | 20,207                                                                             |       |
|                         |            |                     |            |                                                                                    |            |  |  |

 

Weare also exposed to market risk from changes in ethanol prices. These pricefluctuations are minimized in part by advanced contract pricing of our ethanol,which is designed to establish a price floor for our ethanol sales. Currently,we have entered into priced contracts for the entire amount of our anticipatedethanol production through the first three months of fiscal 2008.  We have contracted for approximately 71% and5% of our anticipated production through the second and third quarter of fiscal2008, respectively.  We will continue toadvance contract for ethanol sales in fiscal 2008 to attempt to further reduceour risk related to price decreases. While this strategy minimizes the riskassociated with downward price fluctuations of ethanol, it may also prevent usfrom realizing the full benefit of upward price movements. Although usingpriced contracts makes our revenue more predictable, we cannot predict theextent to which other factors such as inflation, government regulation orchanging prices may affect our financial performance.

 

**Item 8.  Financial Statements andSupplementary Data.**

 

Ourfinancial statements and supplementary data are included on pages F-1 toF-17 of this report.

 

32

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**Item 9.    Changes in andDisagreements with Accountants on Accounting and Financial Disclosure.**

 

Therehas been no change in our independent accountants since 2003.  Stark Winter Schenkein & Co., LLPhas been our independent registered accounting firm since that time.

 

**Item 9A.  Controls andProcedures.**

 

Wemaintain a system of controls and procedures designed to provide reasonableassurance as to the reliability of the financial statements and otherdisclosures included in this report. As of September 30, 2007, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, management has evaluated the effectiveness of the design andoperation of our disclosure controls and procedures. Based on that evaluation,the Chief Executive Officer and the Chief Financial Officer concluded that our disclosurecontrols and procedures were effective in timely alerting them to therequirements to be included in our periodic filing with the SEC. No significantchanges were made to internal controls or other factors that couldsignificantly affect those controls subsequent to the date of their evaluation.

 

**PART III**

 

Pursuant to General Instruction E of Form 10-K,the information contained in Part III of this report (Items 10, 11, 12, 13and 14) is incorporated by reference to our Definitive Proxy Statement, whichis expected to be filed with the SEC on or before January 28, 2008.

 

**PART IV**

 

**Item 15.  Exhibits, FinancialStatement Schedules.**

 

SeeExhibit Index following financial statements in this report for a listingof exhibits filed with, or incorporated by reference into, this report.

 

33

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**SIGNATURES**

 

 Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this Report to be signed on its behalf by the undersigned thereunto dulyauthorized in Oakley, Kansas on December 28, 2007.

 
|   |   |   | WESTERN  PLAINS ENERGY, L.L.C. |
|--------|--------|--------|--------------------------------|
|   |   |   |                           |
|   |   |   |                           |
|   |   |   | By:                            | /s/  Steven R. McNinch |   |
|   |   |   |                           | Steven  R. McNinch, Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed by the following persons in the capacities and on the datesindicated.

 
| **Signature**          | ** ** | **Title**                  | ** **                       | **Date** |
|------------------------|------------|----------------------------|----------------------------------|----------|
|                   |       |                       |                             |     |
| /s/  Steven R. McNinch |       |                       | Chief  Executive Officer         |     | December 28,  2007 |
| Steven  R. McNinch     |       |                       |                             |     |
|                   |       |                       |                             |     |
| /s/  Jeff Torluemke    |       |                       | President,  Manager              |     | December 28,  2007 |
| Jeff  Torluemke        |       |                       |                             |     |
|                   |       |                       |                             |     |
| /s/  Richard Sterrett  |       |                       | Vice  President, Chief Financial |     | December 28,  2007 |
| Richard  Sterrett      |       | Officer,  Chief Accounting |                             |     |
|                   |       | Officer,  Manager          |                             |     |
|                   |       |                       |                             |     |
| /s/  Brian Baalman     |       |                       | Manager                          |     | December 28,  2007 |
| Brian  Baalman         |       |                       |                             |     |
|                   |       |                       |                             |     |
| /s/  Ronald Blaesi     |       |                       | Manager                          |     | December 28,  2007 |
| Ronald  Blaesi         |       |                       |                             |     |
|                   |       |                       |                             |     |
| /s/  Ben Dickman       |       |                       | Manager                          |     | December 28,  2007 |
| Ben  Dickman           |       |                       |                             |     |
|                   |       |                       |                             |     |
| /s/  David Mann        |       |                       | Manager                          |     | December 28,  2007 |
| David  Mann            |       |                       |                             |     |
|                        |            |                            |                                  |          |  |  |  |  |  |  |  |

 

34

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**WESTERN PLAINS ENERGY, L.L.C.**

**BALANCE SHEETS**

**SEPTEMBER 30, 2007 AND 2006**

 
| ** **                                                 | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                 |       |        | ** ** | ** **  | ** ** |
| ** **                                                 |       |        | ** ** | ** **  | ** ** |
| **CURRENT ASSETS**                                         |       |        |       |        |       |
| Cash                                                       |       | $           | 625,511    |        | $          | 14,990,238 |   |
| Accounts receivable                                        |       | 3,219,078   |       | 5,624,619   |       |
| Accounts receivable - government subsidies                 |       | 246,889     |       | 222,064     |       |
| Inventory                                                  |       | 5,003,137   |       | 1,456,464   |       |
| Prepaid expense                                            |       | 203,215     |       | 48,004      |       |
| Commodities trading account- futures and options contracts |       | 2,188,278   |       | 202,065     |       |
| **Total current assets**                                   |       | 11,486,108  |       | 22,543,454  |       |
|                                                       |       |        |       |        |       |
| **PROPERTY AND EQUIPMENT**                                 |       |        |       |        |       |
| Land                                                       |       | 701,872     |       | 701,872     |       |
| Water rights                                               |       | 340,408     |       | —      |       |
| Land improvements                                          |       | 766,586     |       | 748,371     |       |
| Manufacturing equipment                                    |       | 38,282,030  |       | 38,211,022  |       |
| Buildings                                                  |       | 1,679,925   |       | 1,429,128   |       |
| Vehicles                                                   |       | 490,599     |       | 316,424     |       |
| Grain handling and other equipment                         |       | 1,183,763   |       | 167,268     |       |
| Office equipment, furniture, fixtures                      |       | 174,803     |       | 174,803     |       |
| Construction-in-progress                                   |       | 3,488,767   |       | 1,099,730   |       |
| Spare parts                                                |       | 402,693     |       | 228,967     |       |
|                                                       |       | 47,511,446  |       | 43,077,585  |       |
| Less:  Accumulated depreciation                       |       | (21,712,858 | )          | (15,859,396 | )          |
|                                                       |       | 25,798,588  |       | 27,218,189  |       |
| **OTHER ASSETS**                                           |       |        |       |        |       |
| Investment in industrial development revenue bonds         |       | 32,000,000  |       | 32,000,000  |       |
| Loan origination fees, net                                 |       | 230,363     |       | 264,071     |       |
| Financing fees, net                                        |       | 173,985     |       | 180,717     |       |
| Deposits                                                   |       | 97,834      |       | 97,834      |       |
|                                                       |       | 32,502,182  |       | 32,542,622  |       |
|                                                       |       |        |       |        |       |
| **TOTAL ASSETS**                                           |       | $           | 69,786,878 |        | $          | 82,304,265 |   |
| ** **                                                 |       |        |       |        |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                   |       |        |       |        |       |
|                                                       |       |        |       |        |       |
| **CURRENT LIABILITIES**                                    |       |        |       |        |       |
| Accounts payable and accrued expenses                      |       | $           | 3,129,432  |        | $          | 2,378,714 |   |
| Accrued interest                                           |       | 8,582       |       | 2,363       |       |
| Current portion of long term debt                          |       | 934,825     |       | 34,825      |       |
| **Total current liabilities**                              |       | 4,072,839   |       | 2,415,902   |       |
|                                                       |       |        |       |        |       |
| **LONG TERM DEBT**                                         |       | 9,021       |       | 42,944      |       |
|                                                       |       |        |       |        |       |
| **LEASE OBLIGATION**                                       |       | 32,000,000  |       | 32,000,000  |       |
|                                                       |       |        |       |        |       |
| **COMMITMENTS AND CONTINGENCIES**                          |       |        |       |        |       |
|                                                       |       |        |       |        |       |
| **MEMBERS’ EQUITY**                                   |       |        |       |        |       |
| Class A Capital Units, 2,286 issued                   |       | 10,910,140  |       | 10,910,140  |       |
| Class B Capital Units, 1,744 issued                   |       | 8,640,895   |       | 8,640,895   |       |
| Class C Capital Units, 50 issued                      |       | 250,000     |       | 250,000     |       |
| Membership distributions                                   |       | (65,728,800 | )          | (37,168,800 | )          |
| Accumulated comprehensive (loss)                           |       | (2,331,970  | )          | (95,293     | )          |
| Retained earnings                                          |       | 81,964,753  |       | 65,308,477  |       |
| **Total members’ equity**                             |       | 33,705,018  |       | 47,845,419  |       |
|                                                       |       |        |       |        |       |
| **TOTAL LIABILITIES AND MEMBERS’ EQUITY**             |       | $           | 69,786,878 |        | $          | 82,304,265 |   |

 

Please refer to accompanying notes to financial statements.

 

F-1

----

 

**WESTERN PLAINS ENERGY, L.L.C.**

**STATEMENTS OF INCOME**

**FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2007, 2006,AND 2005**

 
| ** **                                         | ** ** | **2007**   | ** **  | **2006**   | ** ** | **2005**    | ** ** |
|----------------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|
| ** **                                         | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** |
| **REVENUE**                                        |       | $          | 108,761,200 |       | $          | 108,044,168 |       | $ | 61,730,872 |   |
| **COST OF SALES**                                  |       | 84,457,974 |        | 55,377,115 |       | 43,476,560  |       |
| **GROSS PROFIT**                                   |       | 24,303,226 |        | 52,667,053 |       | 18,254,312  |       |
|                                               |       |       |        |       |       |        |       |
| **EXPENSES**                                       |       |       |        |       |       |        |       |
| General and administrative expenses                |       | 2,835,635  |        | 2,235,393  |       | 1,716,228   |       |
| Depreciation expense                               |       | 5,858,935  |        | 5,644,319  |       | 5,446,248   |       |
| Amortization expense                               |       | 40,440     |        | 40,440     |       | 41,005      |       |
| **Total expenses**                                 |       | 8,735,010  |        | 7,920,152  |       | 7,203,481   |       |
|                                               |       |       |        |       |       |        |       |
| **Income from operations**                         |       | 15,568,216 |        | 44,746,901 |       | 11,050,831  |       |
|                                               |       |       |        |       |       |        |       |
| **Other income (expense)**                         |       |       |        |       |       |        |       |
| Interest expense                                   |       | (110,092   | )           | (241,950   | )          | (931,710    | )          |
| Interest income                                    |       | 57,480     |        | 164,052    |       | 39,699      |       |
| Interest from industrial development revenue bonds |       | 1,120,000  |        | 1,120,000  |       | 1,120,000   |       |
| Plant lease expense                                |       | (1,120,000 | )           | (1,120,000 | )          | (1,120,000  | )          |
| Grant and subsidy income                           |       | 1,125,000  |        | 1,349,630  |       | 2,784,476   |       |
| Other income (expense)                             |       | 15,672     |        | (122,666   | )          | 66,073      |       |
|                                               |       |       |        |       |       |        |       |
| **Total other income**                             |       | 1,088,060  |        | 1,149,066  |       | 1,958,538   |       |
|                                               |       |       |        |       |       |        |       |
| **NET INCOME**                                     |       | 16,656,276 |        | 45,895,967 |       | 13,009,369  |       |
|                                               |       |       |        |       |       |        |       |
| **Unrealized losses on grain contracts**           |       | (2,236,677 | )           | (63,481    | )          | (31,813     | )          |
|                                               |       |       |        |       |       |        |       |
| **COMPREHENSIVE INCOME**                           |       | $          | 14,419,599  |       | $          | 45,832,486  |       | $ | 12,977,556 |   |
|                                               |       |       |        |       |       |        |       |
| **NET INCOME PER UNIT**                            |       |       |        |       |       |        |       |
| **BASIC AND DILUTED**                              |       | $          | 4,082.42    |       | $          | 11,249.01   |       | $ | 3,188.57 |   |
|                                               |       |       |        |       |       |        |       |
| **DISTRIBUTIONS PER UNIT**                         |       | $          | 7,000.00    |       | $          | 7,000.00    |       | $ | 2,110.00 |   |
| **WEIGHTED AVERAGE UNITS OUTSTANDING**             |       |       |        |       |       |        |       |
| **BASIC AND DILUTED**                              |       | 4,080      |        | 4,080      |       | 4,080       |       |

 

Pleaserefer to accompanying notes to financial statements.

 

F-2

----

 

**WESTERNPLAINS ENERGY, L.L.C.**

**STATEMENTOF CHANGES IN MEMBERS’ EQUITY**

**FORTHE FISCAL YEARS ENDED SEPTEMBER 30, 2005, 2006, AND 2007**

 
|                              |   | **Class A** | ** ** | **Class B** | ** ** | **Class C** | ** ** | **Membership** | ** ** | **Retained** | ** ** | **Accumulated  Comprehensive** | ** ** | ** **        | ** ** |
|-----------------------------------|--------|------------------|------------|------------------|------------|------------------|------------|----------------|------------|--------------|------------|--------------------------------|------------|-------------------|------------|
|                              |   | **Units**        | ** ** | **Amount**       | ** ** | **Units**        | ** ** | **Amount**     | ** ** | **Units**    | ** ** | **Amount**                     | ** ** | **Distributions** | ** ** | **Earnings** | ** ** | **(Loss)** | ** ** | **Total** | ** ** |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Balance,  September 30, 2004 |   | 2,286            |       | $                | 10,910,140 |             | 1,744      |           | $          | 8,640,895    |       | 50                             |       | $                 | 250,000    |   | $ | — |   | $ | 6,403,141 |   | $ | (622,925 | ) | $ | 25,581,251 |   |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Distributions to  members         |   | —           |       | —           |       | —           |       | —         |       | —       |       | —                         |       | (8,608,800        | )          | — |   | — |   | (8,608,800 | ) |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Change in grain  hedge contracts  |   | —           |       | —           |       | —           |       | —         |       | —       |       | —                         |       | —            |       | — |   | 591,113 |   | 591,113 |   |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Net income                        |   | —           |       | —           |       | —           |       | —         |       | —       |       | —                         |       | —            |       | 13,009,369 |   | — |   | 13,009,369 |   |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Balance  September 30, 2005  |   | 2,286            |       | 10,910,140       |       | 1,744            |       | 8,640,895      |       | 50           |       | 250,000                        |       | (8,608,800        | )          | 19,412,510 |   | (31,812 | ) | 30,572,933 |   |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Distributions to  members         |   | —           |       | —           |       | —           |       | —         |       | —       |       | —                         |       | (28,560,000       | )          | — |   | — |   | (28,560,000 | ) |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Change in grain  hedge contracts  |   | —           |       | —           |       | —           |       | —         |       | —       |       | —                         |       | —            |       | — |   | (63,481 | ) | (63,481 | ) |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Net income                        |   | —           |       | —           |       | —           |       | —         |       | —       |       | —                         |       | —            |       | 45,895,967 |   | — |   | 45,895,967 |   |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Balance  September 30, 2006  |   | 2,286            |       | 10,910,140       |       | 1,744            |       | 8,640,895      |       | 50           |       | 250,000                        |       | (37,168,800       | )          | 65,308,477 |   | (95,293 | ) | 47,845,419 |   |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Distributions to  members         |   | —           |       | —           |       | —           |       | —         |       | —       |       | —                         |       | (28,560,000       | )          | — |   | — |   | (28,560,000 | ) |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Change in grain  hedge contracts  |   | —           |       | —           |       | —           |       | —         |       | —       |       | —                         |       | —            |       | — |   | (2,236,677 | ) | (2,236,677 | ) |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Net income                        |   | —           |       | —           |       | —           |       | —         |       | —       |       | —                         |       | —            |       | 16,656,276 |   | — |   | 16,656,276 |   |
|                              |   |             |       |             |       |             |       |           |       |         |       |                           |       |              |       |   |   |   |   |   |   |
| Balance  September 30, 2007  |   | 2,286            |       | $                | 10,910,140 |             | 1,744      |           | $          | 8,640,895    |       | 50                             |       | $                 | 250,000    |   | $ | (65,728,800 | ) | $ | 81,964,753 |   | $ | (2,331,970 | ) | $ | 33,705,018 |   |

 

Pleaserefer to accompanying notes to financial statements.

 

F-3

----

 

**WESTERN PLAINS ENERGY, L.L.C.**

**STATEMENTS OF CASH FLOWS**

**FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2007, 2006,AND 2005**

 
| ** **                                                     | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|----------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                           |       |        |       |        |       |        |       |
| **OPERATING ACTIVITIES**                                       |       |        |       |        |       |        |       |
| Net income                                                     |       | $           | 16,656,276 |        | $          | 45,895,967  |       | $ | 13,009,369 |   |
| Depreciation                                                   |       | 5,858,935   |       | 5,644,319   |       | 5,446,248   |       |
| Amortization                                                   |       | 40,440      |       | 40,440      |       | 41,005      |       |
| Gain on disposal of equipment                                  |       | (5,473      | )          | —      |       | —      |       |
| Change in unrealized gains (losses) on grain hedging contracts |       | (2,236,677  | )          | (63,481     | )          | 591,113     |       |
| Changes in assets and  liabilities                             |       |        |       |        |       |        |       |
| Accounts receivable                                            |       | 2,405,541   |       | (2,033,752  | )          | (1,398,022  | )          |
| Accounts receivable - government subsidies                     |       | (24,825     | )          | 268,808     |       | 1,870,363   |       |
| Inventory                                                      |       | (3,546,673  | )          | 57,796      |       | (258,578    | )          |
| Prepaid expenses                                               |       | (155,211    | )          | (15,614     | )          | 1,330       |       |
| Accounts payable and accrued expenses                          |       | 750,717     |       | 407,551     |       | 1,610,986   |       |
| Accrued interest                                               |       | 6,219       |       | (3,695      | )          | 4,430       |       |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                  |       | 19,749,270  |       | 50,198,340  |       | 20,918,244  |       |
|                                                           |       |        |       |        |       |        |       |
| **INVESTING ACTIVITIES**                                       |       |        |       |        |       |        |       |
| Purchase of property, plant and equipment                      |       | (4,433,862  | )          | (1,908,675  | )          | (4,640,399  | )          |
| Investment in commodity trading accounts                       |       | (21,319,616 | )          | (1,107,098  | )          | —      |       |
| Withdrawals from commodity trading accounts                    |       | 19,333,404  |       | 1,225,000   |       | 108,838     |       |
| **NET CASH (USED IN) INVESTING ACTIVITIES**                    |       | (6,420,074  | )          | (1,790,773  | )          | (4,531,561  | )          |
|                                                           |       |        |       |        |       |        |       |
| **FINANCING ACTIVITIES**                                       |       |        |       |        |       |        |       |
| Distributions to members                                       |       | (28,560,000 | )          | (28,560,000 | )          | (8,608,800  | )          |
| Proceeds from notes payable                                    |       | 20,850,000  |       | 80,475      |       | 687,500     |       |
| Payment of notes payable                                       |       | (19,983,923 | )          | (6,183,706  | )          | (10,462,500 | )          |
| **NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES**       |       | (27,693,923 | )          | (34,663,231 | )          | (18,383,800 | )          |
|                                                           |       |        |       |        |       |        |       |
| **NET INCREASE (DECREASE) IN CASH**                            |       | (14,364,727 | )          | 13,744,335  |       | (1,997,117  | )          |
|                                                           |       |        |       |        |       |        |       |
| **CASH - BEGINNING OF YEAR**                                   |       | 14,990,238  |       | 1,245,903   |       | 3,243,020   |       |
|                                                           |       |        |       |        |       |        |       |
| **CASH - END OF YEAR**                                         |       | $           | 625,511    |        | $          | 14,990,238  |       | $ | 1,245,903 |   |
|                                                           |       |        |       |        |       |        |       |
| **SUPPLEMENTAL CASH FLOW INFORMATION**                         |       |        |       |        |       |        |       |
|                                                           |       |        |       |        |       |        |       |
| Cash paid for income taxes                                     |       | $           | —     |        | $          | —      |       | $ | — |   |
| Cash paid for interest                                         |       | $           | 103,872    |        | $          | 245,647     |       | $ | 927,281 |   |

 

F-4

----

 

**WESTERN PLAINS ENERGY, L.L.C.**

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 AND 2006**

 

**NOTE 1 - NATURE OF OPERATIONS**

 

*Principal Business Activity*

 

WesternPlains Energy, L.L.C. (a Kansas limited liability company with its principalplace of business in Gove County, Kansas) owns and operates a 40 million gallonethanol plant. Western Plains Energy, L.L.C. (the Company) was organized on July 10,2001.  The Company began its principaloperations in January 2004.  Priorto that date, the Company was considered to be in the development stage.

 

**NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Revenue Recognition*

 

Revenue from the production of ethanol and related products is recordedupon delivery to customers. Interest income is recognized as earned.  Income from government grant programs isrecognized as costs are incurred. Government subsidies are recognized based on fulfillment of programcriteria, completion of application and determination of available funding.

 

*Derivatives and Financial Instruments*

 

TheCompany accounts for derivatives in accordance with Statement of FinancialAccounting Standards (SFAS) No. 133, “Accounting for DerivativeInstruments and Hedging Activities”. SFAS No. 133 requires the recognitionof derivatives in the balance sheet and the measurement of these instruments atfair value. Changes in the fair value of derivatives are recorded as acomponent of Cost of Sales unless the normal purchase or sale exception appliesor hedge accounting is elected.

 

TheCompany enters into derivative instruments including future contracts and swapagreements and acquires options to fix prices for a portion of future rawmaterial requirements. The Company has designated, documented and assessed forhedge relationships, which mostly result in cash flow hedges that require theCompany to record the derivative assets and liabilities at their fair value onthe balance sheet with an offset in other comprehensive income. Amounts areremoved from other comprehensive income as the underlying transactions occurand realized gains or losses are recorded. The Company has included in its costof sales an aggregate of $1,311,604 of losses on completed contracts related toits hedging activities and has recorded an aggregate of $2,236,677 ofunrealized losses for the fiscal year ended September 30, 2007, as acharge to comprehensive income as compared to $182,272 gains on contracts and $63,481of unrealized losses for fiscal year ended September 30, 2006. At September 30,2007, the commodities trading account-futures and options contracts amounted to$2,188,278, representing 

 

F-5

----

 

thelower of the cost or fair market value of the futures and options contracts recordedon the balance sheet.

 

*Cash and Cash Equivalents*

 

The Company considers all highly liquidinvestments with an original maturity of three months or less to be cashequivalents.

 

*Property and Equipment*

* *

Propertyand equipment are recorded at cost. Depreciation of assets is computed usingthe straight-line method over the following estimated useful lives:

 
| Building  and manufacturing equipment         |   | 5 - 31.5 years |
|-----------------------------------------------|--------|----------------|
| Land  improvements                            |   | 15 years       |
| Vehicles,  grain handling and other equipment |   | 7 years        |
| Office  equipment and furniture               |   | 7 years        |

 

Depreciationexpense for the fiscal years ended September 30, 2007, 2006 and 2005 amountedto $5,858,935, $5,644,319 and $5,446,248 respectively.

 

*Long-Lived Assets*

 

TheCompany reviews the value of its non-current assets for impairment wheneverevents indicate that the carrying amount of the asset may not be recoverable.An impairment loss is recorded if the sum of the future cash flows is less thanthe 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 result in any adjustment to the value ofnon-current assets during any of the years presented.

 

*Offering Costs*

 

Costsincurred related to the initial public offering of Class A and Class Bcapital units were recorded as prepaid offering costs until the subscriptionsfor Class A and Class B capital units related to the offering wereaccepted by the Company. Prepaid offering costs were then allocated to members’equity in proportion to the number of units issued versus the total number ofunits issuable from the Company’s offering.  Offering costs include directcosts related to the offering such as legal fees, registration costs and otherdirect costs associated with the offering.

 

F-6

----

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and revenues and expenses during the reporting period.Actual results could differ from those estimates.

 

*Concentration of Credit Risk*

* *

TheCompany’s cash balances are maintained in bank depositories and periodicallyexceed federally insured limits.  At September 30,2007, the Company’s balances exceeded insured limits by $1,108,474.

 

*Fair Value of Financial Instruments*

 

Fairvalue estimates discussed herein are based upon certain market assumptions andpertinent information available to management as of September 30, 2007.The respective carrying value of certain on-balance-sheet financial instrumentsapproximated their fair values. These financial instruments include cash,accounts receivable, accounts payable, accrued liabilities, and long-term debt.Fair values were assumed to approximate carrying values for these financialinstruments other than long term debt because they are short term in nature andtheir carrying amounts approximate fair values. The carrying value of theCompany’s long-term debt approximated fair values based on the current marketconditions for similar debt instruments.

 

*Income Taxes*

 

TheCompany is organized as a limited liability company under state law. As alimited liability company that has elected to be taxed as a partnership, theCompany’s earnings pass through to the members and are taxed at the memberlevel. Accordingly, no income tax provision has been included in thesefinancial statements except in the unaudited proforma income statement data.

 

*Earnings Per Capital Unit*

 

Forpurposes of calculating basic earnings per capital unit, capital units issuedby the Company are considered outstanding on the effective date of issuance.

 

* **Segment Information*

 

TheCompany follows SFAS 130, “Disclosures about Segments of an Enterprise andRelated Information”. Certain information is disclosed, per SFAS 130, based onthe way management organizes financial information for making operatingdecisions and assessing performance. The Company currently operates in a singlesegment and will evaluate additional segment disclosure requirements if itexpands its operations.

 

F-7

----

 

*Comprehensive Income*

 

The Company reports comprehensive income in accordance with SFAS 131, “ReportingComprehensive Income,” which requires the reporting of all changes in equityduring a period, except those resulting from investment by owners and distributionto owners, in a financial statement for the period in which they arerecognized.  This encompasses unrealized gains and losses fromavailable-for-sale securities held. The Company recorded comprehensive lossesof $2,236,677, $63,481 and $31,813 for the years ended September 30, 2007,2006 and 2005 respectively, which recognized a decrease in the fair value ofunfulfilled future purchase contracts for raw materials at that date.

 

*Accounts Receivable*

* *

The Company’s accountsreceivable are due from distributors in the ethanol and livestock feedindustries. Credit is extended based on evaluation of a customer’s financialcondition and collateral is not required. Accounts receivable are due within 30days and are stated at amounts due from customers net of an allowance fordoubtful accounts. Accounts outstanding longer than the contractual paymentterms are considered past due. The Company determines its allowance byconsidering a number of factors, including the length of time trade accountsreceivable are past due, the Company’s previous loss history, the customer’s perceivedcurrent ability to pay its obligation to the Company, and the condition of thegeneral economy and the industry as a whole. The Company writes-off accountsreceivable when they become uncollectible, and payments subsequently receivedon such receivables are credited to the allowance for doubtful accounts. Therewas no allowance for doubtful accounts at September 30, 2007 or 2006.

 

*Inventories*

* *

Inventories are stated atthe lower of cost or market, determined on a first-in, first-out basis.Inventory reserves are established for obsolescence based on expiration datingof perishable products and excess levels of inventory on hand. Inventories at September 30,2007 and 2006, consist of the following:

 
| ** **      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 3,247,008  |     | $          | 462,133 |   |
| Work-in-process |       | 894,381  |       | 719,689  |       |
| Finished goods  |       | 861,748  |       | 274,642  |       |
|            |       | $        | 5,003,137  |     | $          | 1,456,464 |   |

 

F-8

----

 

*Shipping and Handling*

 

The cost of shippingproducts to customers is included in cost of goods sold.  Amounts billed to a customer in a saletransaction related to shipping and handling is classified as revenue.

 

*Reclassifications*

 

Certainreclassifications have been made to amounts reported for 2006 and 2005 in orderto conform to the 2007 presentation.

 

*Recent Accounting Pronouncements*

* *

On February 15, 2007, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 159, “*The Fair ValueOption for Financial Assets and Financial Liabilities”*(SFAS No. 159).SFAS No. 159 permits entities to choose to measure many financialinstruments and other items at fair value. The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently, without having to apply complex hedge accountingprocedures. SFAS No. 159 also establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets and liabilities.The Statement is expected to expand the use of fair value measurements, whichis consistent with the Board’s long-term measurement objectives for accountingfor financial instruments. SFAS No. 159 will be effective for the Company’s2009 fiscal year and will be required to be adopted by the Company effective July 1,2008. Management at this time has not evaluated the impact, if any, of adoptingSFAS No. 159 on its financial statements.

 

In December 2007, the FASB issuedSFAS No. 160 Noncontrolling Interests in Consolidated FinancialStatements—an amendment of ARB No. 51 . SFAS 160 establishes accountingand reporting standards for the noncontrolling interest in a subsidiary and forthe deconsolidation of a subsidiary. The guidance will become effective as ofthe beginning of the Company’s fiscal year beginning after December 15,2008. Management believes the adoption of this pronouncement will not have amaterial impact on the Company’s consolidated financial statements.

 

**NOTE 3 – ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT**

 

During the fiscal year ended September 30, 2005, the Company capitalized land costs of $101,968 in acquiring land with a railway site to facilitate possible plant expansion in the future.

 

During the fiscal year ended September 30, 2006, the Company capitalized land costs of $96,000 in acquiring 80 acres of land with water rights to facilitate possible plant expansion in the future.

 

F-9

 

OnFebruary 6, 2007, the Company purchased 340 acre feet of water rights onproperty adjacent to one of the Company’s parcels for $340,308. The agreementallows water withdrawal at a rate not to exceed 475 gallons per minute to amaximum annual withdrawal of 340 acre feet. The Company has filed with theState of Kansas to convert the classification of these water rights fromagricultural to industrial use. Pursuant to applicable Kansas State Water UseLaws, the Company anticipates a reduction in allowable withdrawal ofapproximately 15-20%.

 

On October 10, 2006, the Companypurchased a 1,000,000 bushel grain storage facility located on land adjacent tothe Company’s plant for $1,200,000. The storage facility is situated on landowned by Union Pacific, consequently the Company assumed the existing 20 yearlease with Union Pacific for the balance of its term. The lease expires in 2020and may be renewed upon agreement of the parties.

 

In September 2006, the Company enteredinto a contract to construct two 250,000 bushel grain bins, two hammer mills,and all the required conveyance equipment to connect the storage facility tothe ethanol plant. The contract price was $2,961,105 of which $975,000 was paidprior to September 30, 2006. During the fiscal year ended September 30,2007, the Company received pay applications totaling $2,233,249, whichincludes change orders totaling $226,474, and paid $2,087,144.

 

**NOTE 4 – MEMBERS’ EQUITY**

 

Asspecified in the Company’s Third Amended and Restated Operating Agreement, theCompany had four classes of membership capital units: Class A, B, C and D.Capital units of each class were issued in denominations of $5,000.

 

Class Aand Class B capital units were offered for sale in the publicoffering.  The Company’s Class A capital units were offered only toproducers of agricultural products, with a minimum purchase of two (2) Class ACapital Units per investor.  The Company also offered to sell Class Bcapital units with a minimum purchase of seven (7) Class B capitalunits per investor.  The Offering was competed in 2003 with 2,120 Class Aand 1,744 Class B units sold for gross proceeds of $19,330,000.

 

Class Ccapital units were subscribed in a private placement prior to the public offeringin 2003 and the Company sold 50 Class C Units to Ethanol Products,LLC.  Class D capital units were offered for sale prior to thepublic offering at a price of $5,000 per unit to the members of the Board of Managersand certain others. Upon completion of the public offering, which occurred in March 2003,83 Class D units automatically converted into 166 Class A capitalunits.  The Company must approve alltransfers or other dispositions of capital units.

 

F-10

----

 

Votingrights are one vote per member for Class A capital units, and one vote perunit for Class B and Class C capital units.  Members elect theBoard of Managers, and members must approve any merger or consolidation withanother business entity, sale of substantially all of the Company’s assets orvoluntary dissolution.  The Board of Managers decides all other mattersregarding operation and management of the Company, including amendment of theOperating Agreement.

 

Incomeand losses are allocated to members based on their respective percentage ofmembership interest. Distributions to members must be no less than 20% of netcash from operations, as defined in the Operating Agreement, if net cash fromoperations exceeds $500,000 on an annual basis, provided that any suchdistribution does not constitute or cause a default under any of the Company’sloan documents or credit facilities.

 

Upondissolution of the Company, and after the payment of all debts and liabilitiesof the Company, the assets shall be distributed to the unit holders ratably inproportion to the credit balances in their respective capital accounts for allclasses of units.

 

The Company made distributions to its members of$28,560,000 during each of the fiscal years ended September 30, 2007 and2006. In fiscal year ended September 30, 2005 distributions totaling$8,608,800 were paid.

 

**NOTE 5 -**** ****FINANCING ARRANGEMENTS**

 

*Construction and permanent financing*

 

DuringJuly 2003, the Company entered into a credit agreement with Ag Country FarmCredit Services, FLCA (AgCountry) that established a $22,000,000 (or 55% ofconstruction costs, whichever is less) multiple-advance, non-revolvingconstruction loan for construction of the ethanol plant. The construction noteexpired August 1, 2004, with the amount outstanding converted into apermanent term loan to be amortized over a 10 year period. This loan was paidin full June 30, 2006. $5,000,000 of this note was converted to arevolving credit facility to reduce interest costs and to aid cash management.The borrowing amount available under the revolving credit line was reduced to $4,000,000 at September 30,2006. During the construction period, interest-only payments equal to theLondon Interbank Offered Rate (LIBOR) plus 4% were due monthly.

 

Therevolving credit facility was paid in full during September 2004. Inaddition, the Company entered into an agreement with Ag Country Farm CreditServices in October 2004 that established a $3,500,000 expansion loan tofund a portion of a plant expansion to increase ethanol production to40,000,000 gallons per year capacity. This note was paid in full prior to September 30,2005.

 

F-11

----

 

Theterm loan is subject to certain restrictive covenants, and required payment oforigination, participation and other fees totaling $337,107 and an annualadministrative fee of $25,000. The $362,107 of financing costs are beingamortized over the life of the loan (10 years), commencing with the loan’sconversion into a permanent loan which occurred during August 2004. Ofthat amount, $40,440, $40,440 and $41,005 was amortized and expensed in the fiscalyears ended September 30, 2007, 2006, and 2005, respectively

 

The Third Amendment to the Credit Agreement dated July 29,2003, was executed on March 7, 2006, which increased allowable dividendsup to 75% of net income with distributions up to 100% of net income, so long asBorrower maintains working capital that exceeds $5,000,000 and a definedleverage ratio of .60:1. The Amendment also waived certain compliancerequirements for dividends paid in prior periods.

 

The Fourth Amendment to the Credit Agreement dated July 29,2003, between the Company and Agcountry Farm Credit Services, was entered intoon October 2, 2006, reducing the variable interest rate applicable to the “RevolvingLoan” to LIBOR plus 2.50%. In addition, the annual administration fee wassuspended and the quarterly “Unused commitment fee” was reduced from .5% to..25% of the unused Revolving Loan Commitment balance during the quarter. TheCapital Expenditure section was deleted and replaced with a requirement forpre-approval of capital expenditures in excess of $2,500,000 for any fiscalyear. Written approval is required for capital expenditures which exceed this limit.

 

The Fifth Amendment to the Credit Agreement dated July 29,2003, between the Company and AgCountry Farm Credit Services, was entered intoon May 2, 2007, increasing the “Revolving Loan” to $8,000,000 and reducingthe variable interest rate from LIBOR plus 2.50% to LIBOR plus 2.00%.

 

Duringthe period ended September 30, 2004, the Company entered into twoirrevocable standby letters of credit (the Letters of Credit) for $120,000 and$500,000, respectively.  The Letters ofCredit are for the benefit of the Company’s utility provider.  The Letters of Credit expire on December 31,2011.

 

TheCompany purchased a new vehicle June 30, 2006. The purchase was financedpartially by the value of a vehicle traded-in ($11,133), and the balance of$34,475 was financed by an offer from GMAC Financing for a term of 36 months at0.00% interest. The monthly payment is $902. The balance of the note at September 30,2007, is $19,846.

 

InDecember 2005, the Company purchased 80 acres of land for $96,000. Theterms of the agreement required the Company to pay $24,000 prior to December 31,2005, and an additional $24,000 prior to January 31, 2006. All paymentswere made in a timely manner. The balance of $24,000 will be paid in January 2008plus accrued interest at the rate of 6.0% per annum. The balance of this noteat September 30, 2007 was $24,000 with accrued interest payable of $1,097.

 

F-12

----

 

**NOTE 6 - COMMITMENTS, CONTINGENCIES AND AGREEMENTS**

 

TheBoard of Managers has entered into various agreements regarding the formation,operation and management of the Company. Significant agreements are as follows:

 

*Employee401-K Plan*

 

TheCompany established a 401-K retirement plan November 1, 2004, for itsemployees. The Company matches employee contributions to the plan up to 5% ofemployee’s gross income. The amount contributed by the Company is vested 25%per year on behalf of the employee. The Company contributed $99,003,  $88,421, and $52,202 for fiscal years ended September 30,2007, 2006 and 2005, respectively.

 

*Energy Management Services*

 

TheCompany has entered into an agreement with U.S. Energy Service, Inc. forenergy management and engineering services.  The initial term of theagreement expired on August 31, 2003, and is renewable for one-year termsunless terminated by either party with 30 days advance notice.  Theagreement provides for fees of $2,800 per month.   The agreement was renewed through August 31,2007, and again through August 31, 2008.

 

*Sales Service Agreement*

 

TheCompany has entered into an agreement with United Bio Energy, LLC(see Notes 7and 10) for the sale of the bulk feed grade products (distiller’s grains)produced from the plant.  The agreement expired September 30, 2007,and was automatically renewed for a one-year term pursuant to the terms of theagreement.  Under the terms of the agreement, United Bio Energy, LLCpurchases all products at a price equal to 98% or 97.5% of the selling pricedepending on whether it is wet or dry grains, less applicablefreight.   United Bio Energy, LLC isresponsible for billing and account servicing of the product sales and forlosses related to non-payment unless such non-payment relates to substandardproducts.

 

*Marketing Agreement*

 

TheCompany entered into an agreement on October 31, 2001 with EthanolProducts, LLC (see Notes 7 and 10) for the marketing of the Company’s ethanoland certain administrative services.  The agreement as amended on October 18,2002, has a term of five years and commenced upon 

 

F-13

----

 

startof ethanol production in January, 2004, with a fee of $.01 per gallon ofethanol produced.  The agreement is renewable for five-year terms unlessnotice of termination has been delivered at least 90 days prior to expiration.

 

*StorageExpansion Contract*

 

TheCompany entered into a contract to construct two 250,000 bushel grain bins, twohammer mills, and all the required conveyance and other infrastructure to connectthe storage facility, the new bins, and the ethanol plant. The total contractprice is $2,961,105 plus change orders totaling $247,144. During the fiscalyear ended September 30, 2007, $3,062,144 was paid, pursuant to the termsof the contract.

 

*Back-upTransformer*

 

TheCompany contracted with their energy supplier to purchase a back-up transformercapable of supplying the entire facility in the event that the existingtransformer fails. The Company paid $124,730 upon execution of the contract andthe balance will be due when the transformer is delivered which is estimated tobe in early 2008. The sum of the initial payments for the transformer and thestorage expansion is classified as construction–in-progress at September 30,2007 and 2006.

 

**NOTE 7 - RELATED PARTY TRANSACTIONS**

 

TheCompany has reimbursed members of the Board of Managers for certain expensesincurred by the Company and paid by the Managers including attending Boardmeetings. Expense reimbursements for the years ended September 30, 2007, September 30,2006, and September 30, 2005 totaled $43,035, $29,944 and $19,239,respectively.

 

EthanolProducts, LLC, an entity controlled by a former member of the Board of Managers,owns all 50 Class C capital units, purchased for $250,000. Revenues wereconcentrated in Ethanol Products which purchases denatured ethanol, while UnitedBio Energy, LLC, an affiliate of a former board member purchases distiller’sgrain from the Company on a delivered basis. The following table displaysamounts of product purchased by the Company’s marketers with the relatedmarketing fees paid:

 
| ** **                  | ** ** | **Fiscal year ended** | ** ** | **Fiscal year ended** | ** ** | **Fiscal year ended** | ** ** |
|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Sept. 30, 2007**    | ** ** | **Sept. 30, 2006**    | ** ** | **Sept.30, 2005**          | ** ** |
| Ethanol Products            |       |                            |       |                            |       |                            |       |
| Revenue (including freight) |       | $                               | 91,189,858 |                            | $          | 97,066,671                      |       | $ | 51,855,217 |   |
| Marketing fees paid         |       | 462,771                         |       | 455,353                         |       | 355,185                         |       |
| United Bio Energy           |       |                            |       |                            |       |                            |       |
| Revenue (including Freight) |       | $                               | 18,510,882 |                            | $          | 11,728,308                      |       | $ | 10,491,961 |   |
| Marketing fees paid         |       | 476,769                         |       | 295,458                         |       | 261,121                         |       |

 

F-14

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TheCompany purchases grain from local elevators as well as some growers who areunit holders in the Company. The Company purchased $913,000, $517,500, and$649,400 of grain from member unit holders in fiscal years ended September 30,2007, 2006, and 2005, respectively.

 

###### **NOTE8 – INCENTIVE PAYMENTS**

###### ** **

Duringthe year ended September 30, 2007, the Company received no incentivepayments for its ethanol production as compared to $224,630 in fiscal yearended September 30, 2006 pursuant to a United States Department ofAgriculture Bio-Energy program. This program was terminated by the U.S.D.A. on June 30,2006. Additionally, the Company qualifies for additional production incentivepayments under a State of Kansas program. The Kansas program is limited to $1,125,000 per year for each producerin excess of five million gallons per year at the rate of $.075 per gallon. TheCompany recorded revenue of $1,125,000, from the Kansas incentive programduring the fiscal year ended September 30, 2007, received an aggregate of$878,111, and recorded a receivable of $246,889 at September 30, 2007. TheCompany also qualified for the maximum payment of $1,125,000 and recorded thisamount of income during the fiscal years ended September 30, 2006 and 2005.

 

**NOTE 9 – SALE / LEASEBACK TRANSACTION**

 

OnOctober 3, 2003, the Company completed an industrial revenue bondfinancing with Gove County, Kansas in the amount of $32,000,000 that willprovide property tax savings for 10 years on the plant site.  As part ofthe financing, title to the plant site and improvements have been transferredto Gove County, as security for the repayment of the bonds, and the Company isleasing back the site for an amount that is equal to the amount of interest tobe paid on the Gove County bonds.  AgCountry consented to thistransaction, and the bonds have been pledged to AgCountry as security for anyobligations under the AgCountry Credit Agreement (See Note 5). As part of thefinancing, the Company paid the bond underwriter, W.R. Taylor, $160,000 andagreed to pay an additional $40,000 only if the bonds are converted to avariable rate and remarketed by W.R. Taylor.

 

The$160,000 of financing fees paid to the bond underwriter and $42,040 of legaland other cost associated with the bond closing are being amortized over the 30-yearlife of the bonds. A total of $ 6,732, $6,732, and $6,735 of amortizationexpense was recognized during the years ended September 30, 2007, September 30,2006, and September 30, 2005, respectively.

 

TheCompany, as holder of the industrial revenue bonds, is due interest at 3.5% perannum with interest payable semi-annually on March 1st and September 1st.  This interest income is directly 

 

F-15

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offsetby the lease payments on the plant.  Boththe bond and the corresponding lease have terms of 30 years.  The lease qualifies as a capital lease.Interest income recognized on the Industrial Revenue Bonds for the fiscal yearsended September 30, 2007, 2006, and 2005 was $1,120,000 per year. Thisamount is equal to the lease expense of the plant in each respective period.

 

**NOTE 10 – CONCENTRATION OF CUSTOMERS**

 

TheCompany sells essentially all of its products to two marketers, which in turnsell to other purchasers. The Company has executed an exclusive marketingagreement with Ethanol Products LLC (“Ethanol Products”) of Wichita, Kansas(see Notes 6 and 7) to market the ethanol produced at its plant.  The agreement is effective for an initialterm of five years beginning January 2004, the first month of ethanolproduction, and is automatically renewable for subsequent five-year termsunless terminated by either party prior to expiration.  Ethanol Products has agreed to purchase allof the ethanol that is produced at the plant. Ethanol Products is solely responsible for determining the price andterms at which the ethanol acquired from the plant is sold and to whom it issold.  In the event that the relationshipwith Ethanol Products is interrupted for any reason, the Company believes thatit would be able to locate another entity to market the ethanol.  However, any interruption could temporarilydisrupt the sale of the Company’s principal product and adversely affect itsoperations.

 

TheCompany also has executed an exclusive agreement with ICM Marketing, Inc.to market all of the distiller’s grains produced at the plant.  The rights and obligations of ICM under thatagreement were subsequently assigned to United Bio Energy, LLC (“UBE”).  The initial term of the agreement with UBE wasthree years expiring September 30, 2006 and was automatically renewed for twoadditional one-year terms which will automatically be renewed unless terminatedby the Company or UBE following 90 days advance written notice.  As with the marketing arrangement withEthanol Products, any interruption in the relationship with UBE couldtemporarily affect the Company’s business, although it is believed that theCompany could find another entity to market the grains (see Note 6).

 

**NOTE 11- REGULATION**

 

Theconstruction of the plant required various state and local permits to complywith existing governmental regulations designed to protect the environment andworker safety.  While the Company issubject to regulations on emissions by the United States EnvironmentalProtection Agency (“EPA”), current EPA rules do not require the Company toobtain any permits or approvals in connection with the construction of theplant or operation of the Company’s business. However, state and federal rules can and do change and such changescould result in greater regulatory burdens on the Company.

 

F-16

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The ethanol production will require the Company to emit a significantamount of carbon dioxide into the air. Current Kansas law regulating emissions does not restrict or prevent theCompany from emitting carbon dioxide gas into the air, but this could change inthe future.

 

The Company obtained what is believed to be all the necessary air andwater permits to operate the plant, including a permit to discharge wastewaterfrom the plant.

 

Inaddition to the foregoing regulations affecting air and water quality, theCompany is subject to regulation for fuel storage tanks.  If the Company is found to have violatedfederal, state or local environmental regulations in the future, the Companycould incur liability for clean-up costs, damage claims from third parties andcivil or criminal penalties that could adversely affect its business.

 

**NOTE 12 - SUBSEQUENT EVENTS**

 

Based on the Company’s financial results for thequarter ended September 30, 2007, the Board of Managers declared adistribution to members equal to $500 per unit totaling $2,040,000. Thisdistribution was paid on October 18, 2007.

 

On December 18, 2007,the Board of Managers approved two amendments to the Company’s Third Amendedand Restated Operating Agreement dated July 7, 2003 (“Operating Agreement”).The first amendment revised Section 4.3 to allow voluntary redemption ofmembership units by the Company. The second amendment revised Article 10to allow the Company to issue membership units in uncertificated form.

 

On December 18, 2007,the Board of Managers approved a resolution authorizing a seven (7) forone (1) forward split of the Company’s membership interests to beeffective as of a future date to be determined by the Board. Following thismembership interest split, the number of outstanding membership interests ofthe Company will increase from 4,080 to 28,560.

 

F-17

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                               | ** ** | ** **                                                                                                                                    |
|-------------|------------|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| **No**      | ** ** | **Description**                                                                          | ** ** | **Incorporated by Reference From**                                                                                             |
| 3.1(i)      |       | Articles of Organization                                                                 |       | Appendix A of our prospectus filed with the Commission pursuant to  Rule 424(b)(3) on June  11, 2002 (File No. 333-74982) |
|        |       |                                                                                     |       |                                                                                                                                          |
| 3.1(ii)     |       | Third Amended and Restated Operating Agreement                                           |       | Exhibit  3 to our Form  10-QSB for the quarter ended  June 30, 2003                                                            |
|        |       |                                                                                     |       |                                                                                                                                          |
| 4.1         |       | Form of Class A Capital Unit Certificate                                       |       | Exhibit 4.1 to our Form SB-2 filed with the Commission on  December 12, 2001 (File No. 333-74982)                         |
|        |       |                                                                                     |       |                                                                                                                                          |
| 4.2         |       | Form of Class B Capital Unit Certificate                                       |       | Exhibit 4.2 to our Form SB-2 filed with the Commission on  December 12, 2001 (File No. 333-74982)                         |
|        |       |                                                                                     |       |                                                                                                                                          |
| 4.3         |       | Form of Class C Capital Unit Certificate                                       |       | Exhibit 4.3 to our Form SB-2 filed with the Commission on  December 12, 2001 (File No. 333-74982)                         |
|        |       |                                                                                     |       |                                                                                                                                          |
| 10.1        |       | Credit Agreement with AgCountry Farm Credit Services, FLCA dated  July 29, 2003     |       | Exhibit  10.1 to our Quarterly Report on Form  10-QSB for  the quarter ended June 30, 2003 (File No. 333-74982)           |
|        |       |                                                                                     |       |                                                                                                                                          |
| 10.2        |       | DDGS/SWGS Marketing Agreement with ICM Marketing, Inc., dated  October 1, 2001 |       | Exhibit  10.5 to our Form SB-2 filed with the Commission on  December  12, 2001 (File No. 333-74982)                      |
|        |       |                                                                                     |       |                                                                                                                                          |
| 10.3        |       | Land Exchange Agreement, dated November 23, 2001                                    |       | Exhibit  10.9 to our Form SB-2 filed with the Commission on  December 12, 2001 (File No.  333-74982)                      |
|        |       |                                                                                     |       |                                                                                                                                          |
| 10.4        |       | Real Estate Purchase Agreement, dated December 21, 2001                             |       | Exhibit  10.10 to our Form SB-2 filed with the Commission  on May 1, 2002 (File No. 333-74982)                            |
|        |       |                                                                                     |       |                                                                                                                                          |
| 10.5        |       | Well Construction and Pumping Agreement, dated November 19, 2001                    |       | Exhibit  10.11 to our Form SB-2 filed with the Commission  on December  12, 2001 (File No. 333-74982)                     |
|        |       |                                                                                     |       |                                                                                                                                          |
| 10.6        |       | Design/Build Agreement with ICM Inc., dated April 4, 2002                           |       | Exhibit  10.12 to our Form SB-2 filed with the Commission  on May 1, 2002 (File No. 333-74982)                            |
|        |       |                                                                                     |       |                                                                                                                                          |
| 10.7        |       | Agreement between the Company and ICM, Inc. dated  August 26, 2004 for         |       | Exhibit 10.7 to our Annual Report on Form10-KSB  for the fiscal year ended September  30, 2004 (File No. 0-50714)              |

 

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|   |   | expansion of our plant                                                                                                       |   |                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 10.8   |   | Agreement between the Company and United Bio Energy Ingredients, LLC,  dated August 2, 2004                             |   | Exhibit 10.8 to our Annual Report on Form 10-KSB for the  fiscal year ended September  30, 2004(File  No. 0-50714)  |
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 10.9   |   | Form of Second Amendment to the Credit Agreement with AgCountry  dated July 29, 2004                               |   | Exhibit 10.9 to our Annual Report on Form 10-KSB for the  fiscal year ended September  30, 2004(File  No. 0-50714)  |
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 10.10  |   | Promissory Note/Loan Agreement with AgCountry dated November 16,  2004                                                  |   | Exhibit 10.10 to our Annual Report on Form 10-KSB for the  fiscal year ended September  30, 2004(File  No. 0-50714) |
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 10.11  |   | Third Amendment to Credit Agreement with AgCountry dated  March 7, 2006                                                 |   | Exhibit 10.1 to our Report on Form 8-K dated March 27,  2006 (File No. 0-50714)                                     |
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 10.12* |   | Fourth Amendment to Credit Agreement with AgCountry dated  October 2, 2006                                              |   |                                                                                                                                    |
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 10.13  |   | Employment Agreement with Steven McNinch effective January 25,  2007                                                    |   | Exhibit 10.1 to our Report on Form 8-K dated April 17,  2007 (File No. 0-50714)                                     |
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 10.14  |   | Fifth Amendment to Credit Agreement with AgCountry dated May 2,  2007                                                   |   | Exhibit 10.1 to our Quarterly Report on Form 10-Q for the  quarter ended June 30, 2007(File No. 0-50714)            |
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 14.1   |   | Western Plains Energy, L.L.C. Code of Ethics for Principal Executive  and Senior Financial Officers                          |   | Exhibit 14.1 to our Annual Report on Form 10-KSB for the  fiscal year ended September  30, 2005(File  No. 0-50714)  |
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 31.1*  |   | Certifications pursuant to Rule 13a-14(a) or  15d-14(a) under the Securities Exchange Act of 1934             |   |                                                                                                                                    |
|   |   |                                                                                                                         |   |                                                                                                                                    |
| 31.2*  |   | Certifications pursuant to Rule 13a-14(a) or  15d-14(a) under the Securities Exchange Act of 1934, as amended |   |                                                                                                                                    |

 

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| 32* |   | Certifications pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |   |   |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------|--------|--------|

 

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* Filed herewith

 

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