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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington D.C. 20549**

 

**FORM 10-K**

 

**x****     ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year ended****September 30,2009**

** **

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                 to                 **

** **

**Commission file number:****0-50714**

 

**WesternPlains 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) |       | (Zip code) |

 

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 ACapital 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 SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.    Yes x No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files.    Yes o 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, a non-accelerated filer or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer o       |
|---------------------------|--------|---------------------------|
|                      |   |                      |
| Non-accelerated filer x   |   | Small reporting company o |

 

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

 

The aggregate market value of the capital units held by non-affiliatesof the registrant as of March 31, 2009 was $49,735,000, computed byreference to the price at which membership units were last sold prior to thatdate.  There is no established publictrading market for our securities.

 

As of December 28, 2009, 16,002 Class A Capital Units, 12,068 Class B CapitalUnits and 350 Class C Capital Units of the registrant were outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE:**  The Definitive Proxy Statement for the nextannual meeting of members is incorporated by reference herein into Part III,Items 10-14.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **  | ** **                                                                                  | **Page** |
|-------------|---------------------------------------------------------------------------------------------|----------|
| ** **  | **PART I**                                                                             |     |
|        |                                                                                        |     |
| ITEM 1:     | BUSINESS                                                                                    | 1        |
| ITEM 1A:    | RISK FACTORS                                                                                | 11       |
| ITEM 1B:    | UNRESOLVED STAFF  COMMENTS                                                                  | 17       |
| ITEM 2:     | PROPERTIES                                                                                  | 17       |
| ITEM 3:     | LEGAL PROCEEDINGS                                                                           | 18       |
| ITEM 4:     | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                        | 18       |
|        |                                                                                        |     |
| ** **  | **PART II**                                                                            |     |
|        |                                                                                        |     |
| ITEM 5:     | MARKET FOR  COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES   | 19       |
| ITEM 6:     | SELECTED FINANCIAL  DATA                                                                    | 20       |
| ITEM 7:     | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 21       |
| ITEM 8:     | FINANCIAL  STATEMENTS                                                                       | 36       |
| ITEM 9:     | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       | 36       |
| ITEM 9A(T): | CONTROLS AND  PROCEDURES                                                                    | 36       |
| ITEM 9B:    | OTHER INFORMATION                                                                           | 36       |
|        |                                                                                        |     |
| ** **  | **PART III**                                                                           | 37       |
|        |                                                                                        |     |
| ** **  | **PART IV**                                                                            |     |
|        |                                                                                        |     |
| ITEM 15:    | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES                                                    | 37       |
|        |                                                                                        |     |
| ** **  | **SIGNATURES**                                                                              | 38       |
|        |                                                                                        |     |
| ** **  | **EXHIBIT  INDEX**                                                                          |     |

 

**Additional Information**

 

Descriptionsin this report are qualified by reference to the contents of any contract,agreement or other document described herein and are not necessarilycomplete.  Reference is made to each suchcontract, agreement or document filed as an exhibit to this report, orincorporated by reference as permitted by regulations of the Securities andExchange Commission.  For moreinformation regarding these documents, see the section titled “Exhibits” inthis report.

 

**Special Note Regarding Forward-Looking Statements**

 

Pleasesee the note under “**Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**”for a description of special factors potentially affecting forward-lookingstatements included in this report.

 

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**PART I**

 

**Item 1. Business.**

 

**Overview.**

 

Ourbusiness focuses on the production and sale of ethanol and itsco-products.  Ethanol is a type ofalcohol which in the United States, which we refer to as the U.S., is typicallyproduced from corn, but may be produced from other grains and biomass.  Ethanol is primarily used as a blendcomponent for gasoline, and is typically added by refiners or distributors toincrease octane and reduce tailpipe emissions from vehicles.  The ethanol industry has grown significantlyover the past few years, increasing production capacity in the U.S. byapproximately 308% between 2003 and 2008**. **The industry grew approximately10.5% in 2009 and is projected to grow as much as an additional 18% in 2010.****Production capacity in operation during 2009 decreasedslightly due to the financial crisis of 2009. This capacity has largely come back on-line as operating margins haveimproved in recent months. We believe that E85 and other blends greater than10% (see “**Our Products and Their Markets**,”below) will also become increasingly important over time as an alternative tounleaded gasoline.

 

Weproduce fuel grade ethanol by processing corn and milo utilizing what is knownas “dry-milling” technology.  The grainis received by semitrailer truck, weighed and cleaned of rocks and debrisbefore it is conveyed to storage silos. The grain is then transported to ahammer mill or grinder where it is ground into flour and conveyed into a slurrytank for processing. We add water, heat and enzymes to break the ground graininto a mash. The mash is heat sterilized and pumped into a tank where otherenzymes are added to convert the starches into glucose sugars. Next, the mashis pumped into one of four fermenters, where yeast is added to begin a 48 to 55hour batch fermentation process. A distillation process vaporizes the alcoholfrom the mash. The alcohol is further dried in a rectifier and molecular sieve.The resulting 200 proof-alcohol is then pumped to shift tanks and blended toachieve a mixture consisting of approximately 97.8% ethanol and 2.2% gasolineas it is pumped into denatured ethanol storage tanks.

 

Grainmash exiting the distillation process is pumped into one of severalcentrifuges. Water from the centrifuges, called thin stillage, is condensedinto a thicker syrup called condensed solubles. The solids that exit thecentrifuge are called distillers wet grains (“WDGS”). A portion of thesedistillers wet grains are sold in that form and a portion are subsequentlydried and mixed with condensed solubles to produce distillers grains withsolubles, which may be used as animal feed and are known as distillers drygrains (“DDGS”).  See “**Our Products and Their Markets**,”below.  During our 2009 fiscal year,which ended September 30, 2009, we produced 48,659,282 gallons of fuelgrade ethanol, 393,051 tons of WDGS and 15,766 tons of DDGS.

 

**History.**

 

Wewere organized as a Kansas limited liability company in 2001.  We completed the initial public distributionof our membership units in 2003, raising proceeds of $19,330,000.  In 2008, we declared a forward split of ouroutstanding units on a seven (7) for one (1) basis.

 

Weconstructed our facility, located in western Kansas, during 2003 and beganproduction of ethanol in January 2004. Our initial nameplate (estimated) production capacity was 30 milliongallons of ethanol per year.  During our2005 fiscal year, we completed construction of an expansion of our facility togive us nameplate capacity of 40 million gallons of ethanol per year.  During our 2007 fiscal year, we completedcapital improvements to our plant giving us increased storage capacity forgrain which enables us to further manage our increased productioncapacity.  For a more detaileddiscussion, see “**Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**”below.

 

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**Recent Developments.**

 

Thefinancial crisis of 2009 was a challenging time for our company.  However, our conservative business model, ourfocus upon continuous operational improvements, and our lack of debt combinedto result in positive returns to our investors. At a time of negative returns on investment experienced throughout largesectors of the U.S. economy, we continued to provide distributions to ourmembers.

 

Thecontinued increase in production capacity in the ethanol industry during fiscal2008 had a significant impact on our business. Many ethanol producers completed construction of new plants or expansionof production capacity at existing plants. We believe the increased production capacity helped drive grain priceshigher and ethanol prices lower.  Recordproduction capacity in the industry contributed to increasing the supply ofethanol to an amount approximately equal to anticipated demand in the market.  During most of fiscal year 2008, we continuedto experience record-high grain prices and lower ethanol prices compared toprior years. These metrics adversely affected the entire ethanol industryduring the second half of calendar 2007 and into the first part of 2008.

 

Theethanol industry also continued to undergo demographic changes during the lastfiscal year.  In addition to dramaticgrowth in the number of operating and proposed ethanol plants which are locallyowned and operated, the industry also continued to experience a trend towardconsolidation.  A few large ethanolproducers expanded 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 structure to allowtheir equity to be publicly traded on national securities exchanges.  Some examples of these companies are AventineRenewable Energy Holdings, Inc. and US BioEnergy Corporation.

 

U.S.financial markets experienced a severe downturn in 2009, the full impact ofwhich is still being realized. Businesses across many sectors experienced a lack of access to creditcausing a series of liquidity crises.  Acontraction in the local, national and global economies resulted from thisdownturn.  This situation, coupled withincreased production capacity in our industry, caused a wide array ofbusinesses, including some of our competitors, suppliers and customers, toexperience difficulty in continuing operations. In addition, in connection withthe market downturn, commodities prices, including corn, ethanol and petroleumgasoline, have decreased dramatically, which will likely affect our fiscal 2010operations.

 

Althoughthe markets seem to be stabilizing following the financial crisis of 2009, thedemand for fuels on a global scale remains repressed.  The ethanol industry appears to havestabilized and moderate profitability has returned to the industry ingeneral.  However, the uncertainty aroundany recovery in the financial system and its lasting effects requires us totake a conservative view of the market place moving forward.

 

**Our Competitive Strengths.**

 

*Plant technology and efficiency*.  At September 30, 2009, our plant wasproducing ethanol at or above nameplate capacity, primarily due to capitalimprovements we made in addition to our plant expansion.  We have continued to focus on finding ways toimprove the production process and will upgrade equipment as necessary in orderto achieve maximum production goals.  Webelieve we will continue to compete as a low-cost producer of ethanol in thefuture, due to the improved efficiency from our equipment upgrades.We continueto focus upon per gallon improvements to costs on all inputs, resulting inlarger gross operating margins.

 

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Duringfiscal 2009 and 2008, we worked with a prominent seed company to identifypotential benefits in utilizing a new corn variety to introduce enzymes intothe ethanol production process through the feed stock.  We believe this technology holds a great dealof promise for our operating efficiencies. We are currently working toward an agreement with this company toutilize this technology commercially for production of ethanol if the UnitedStates Department of Agriculture, which we refer to as the USDA, determines toderegulate its use.

 

*Absence of significant debt*.  In June 2006, we paid off theoutstanding balance on our term loan with our principal lender.  While we do maintain a revolving line ofcredit, the absence of term debt positions us favorably *vis-a-vis* other competitors who havelong-term debt and who are required to service that debt from operations.  As a result of our reduced leverage, we maybe less sensitive to fluctuations in revenue as a result of changes in theprice of ethanol or the costs of our raw materials as compared tosimilarly-situated ethanol plants that are required to make payments underlong-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 expansion included, among other things, a750,000 gallon beer well, expansion of our existing cooling towers by one cell,a new cooling pump, a new style burner and a new centrifuge.  The expansion was built on our existing plantsite and did not require the acquisition of any additional property.  Our expansion was placed into service duringthe second quarter of fiscal 2005.  In2006 and 2007, we also increased our grain storage capacity approximately 1.5million bushels by purchasing the grain elevator adjacent to our plant andconstructing two 250,000 bushel grain bins. We believe our increase inproduction and storage capacity positions us favorably in the marketplace andprovides increased operating flexibility.** **We have recently entered into acontract with ICM Inc. to build an additional fermenter at our plant.  This addition is not intended to increasenameplate capacity but rather increase the operating efficiency of the existingfermenters by lengthening the amount of residence time per fermenter.

 

*Proximity to grain*.  The proximity of our plant to producers ofthe grain we utilize to produce ethanol favors us over some of ourcompetitors.  Local growers generallyproduce more than enough grain to meet our requirements, and the closeproximity for delivery can result in competitively favorable prices forus.  Additionally, many local grainproducers are members of our company who supply us at competitive prices.

 

**Our Products and Their Markets.**

 

*Ethanol.*  We produce ethanol to be used as a fuelcomponent that serves as:

 

·                  An octane enhancer in fuels;

·                  An oxygenated fuel additivethat can reduce carbon monoxide vehicle emissions; and

·                  A non-petroleum-basedgasoline 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 70% of all gasoline soldin the U.S. is blended with ethanol. Most of the ethanol is blended as E10, amixture of 10% ethanol and 90% petroleum gasoline. This fuel is covered bywarranty for use in all makes and models of vehicles. Some ethanol is blendedas E85, a mixture of 85% ethanol and 15% gasoline. This mixture is used inflexible fuel vehicles (“FFVs”), which are increasingly becoming available toconsumers as auto companies produce more FFV models.  Additional studies using a blend of 20%ethanol are currently 

 

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

 

Currentlythe EPA is reviewing a waiver request to allow ethanol to be blended up to 15%into gasoline (E15).  If this request isapproved, we anticipate a slight increase in the demand for ethanol, as E15theoretically would replace E10 in the market place.** **Blenders are also becoming morewilling to continue to blend ethanol permissively, even at lower margins.

 

Theprincipal purchasers of ethanol are generally the refined and wholesalegasoline marketer or blender.  Theprincipal end markets for our ethanol are petroleum terminals on the east andwest coasts of the U.S.  During our 2009fiscal year, 79% of our net revenue was derived from the sale of ethanol, andwe expect the sale of ethanol to comprise a substantial majority of our revenuein 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 ethanolproduction process is distillers grains, which is a high-protein, high-energyanimal feed supplement primarily marketed to 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 areprocessed grain mash and condensed solubles that contain approximately 65%moisture.  It has a shelf life slightlylonger than three days and is sold to markets in proximity to our plant.  DDGS are mash that has been dried to 10%moisture.  It has an almost indefiniteshelf life and is sold and shipped via truck or railcar to many marketsregardless of their vicinity to our ethanol plant.  During the 2009 fiscal year, approximately21% of our net revenue was derived from the sale of distillers grains, and weexpect the sale of distillers grains to continue to comprise a minority of ourrevenue in the future as compared to our revenue from ethanol. ** **An overall reductionin the demand for meat products during the prior year reduced the number ofanimals being maintained on feed. As a result, demand for distillers grainsdecreased in 2009.  In recent months,demand has slowly risen as the effects of the financial crisis of 2009 havesomewhat stabilized.

 

**Raw Materials.**

 

*Grain Procurement.*  Ethanol in the U.S. is made primarily fromgrain, principally corn.  We have theadvantage of having access to and the ability to utilize sorghum or milo, thelatter of which we often can obtain at a lower price than corn.  During the 2009 fiscal year, we usedapproximately 17.9 million bushels of corn and milo to produce ethanol. Weobtained a majority of this grain from producers in western Kansas, where ourplant is located.  We believe that grainproducers in proximity to our plant will produce sufficient grain for our needsfor the foreseeable future.  In the eventsuch producers are unable to fulfill our requirements, we believe an adequatesupply is available from producers in other states, such as Nebraska andColorado.

 

Theincrease in the number of ethanol plants in the nation that was adverselyaffecting the availability and price of corn, milo and other grain productsduring fiscal 2008 stabilized during fiscal 2009.  As a result, the pressure on local grainmarkets was greatly reduced which allowed for a greater supply of grains in thelocal market.  According to the RenewableFuels Association (“RFA”), between January 2004 and January 2009, thenumber of ethanol plants producing fuel grade ethanol in the U.S. increasedfrom 72 to 170 and an additional 20 ethanol plants are currently underconstruction.  However, these numbers donot account for plants where production has been temporarily idled.  Some of these plants are located in Kansas,eastern Colorado and southwestern Nebraska and they may compete with us forprocurement of local grain.  On anational level, the emergence of new ethanol plants will increase competitionfor our grain requirements and we may be forced to satisfy our requirementsfrom other parts of the country.

 

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Weenter into hedging transactions in an effort to stabilize the price that we payfor grain.  Hedging involves theacquisition of option and futures contracts, designed as hedges of specificvolumes of grain expected to be used in our production process. We also usederivative financial instruments to manage the exposure to price risk relatedto grain purchases. At September 30, 2009, we had open long and shortpositions in option contracts, which positions were recorded in our financialstatements at fair value. As a result, we recorded $1,058,866 of unrealizedgains for the year ended September 30, 2009 with respect to option andfuture contracts.

 

Productionprocesses using feed stocks other than grain to make ethanol are continuallybeing developed.  We expect to continueto focus our production using grain for the foreseeable future.  However, we are monitoring the developmentsin the industry regarding the economic viability of alternative feedstocks andmay consider converting from grain-based ethanol at some future date.

 

Theprice and availability of corn and milo are subject to significant fluctuationsdepending upon a number of factors which affect grain commodity prices ingeneral, including crop conditions, pestilence, weather, supply and demand,speculation, government programs and foreign purchases. Because the marketprice of ethanol is not related to grain prices, ethanol producers aregenerally not able to compensate for increases in the cost of grain throughadjustments and prices charged for ethanol. In contrast, the price for distillers grains tends to track with cornprices, and generally we are able to increase the price we charge for ourdistillers grains concurrent with increased corn prices.

 

Wecontinued to experience volatility in grain prices during the 2009 fiscal yearas the price of corn trended lower than in 2008.  For a more detailed discussion, please see “**Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**” below.

 

Theability to purchase and store large quantities of grain helps us manage ourgrain costs.  We completed an expansionof our storage facilities in 2007 and the new storage capacity enables us totake advantage of lower grain prices by allowing us to acquire a significantportion of our requirements during times when prices are favorable. Inaddition, we completed our fourth grain receiving pit and related conveyanceequipment to enhance our grain receiving ability from the local farmers duringthe corn and milo harvests.  Constructionof the receiving pit was completed in mid-October, just prior to the start ofthe fall harvest**.**

 

Droughtand other environmental occurrences could adversely affect the production andavailability of corn, milo and other grain products in the future.  Because of its relative aridity, the westernUnited States is more susceptible to drought than certain other areas of thecountry.  The drought experienced in thewestern United States during 2002 was partially mitigated between 2003 and2006, but there is no assurance that the conditions during 2002 will notrepeat.  In that event, we anticipatethat our grain requirements could be satisfied from other parts of the country,although transportation costs would be significantly higher.

 

Allof the corn and milo we purchase is tested and must meet high quality controlstandards to ensure the efficient operation and quality production of ourplant.  We use the United StatesDepartment of Agriculture’s grade requirements for U.S. Number Two Corn andU.S. Number Two Grain Sorghum. From time to time, we also accept grain thatdoes not meet the criteria for U.S. Number Two Corn or U.S. Number Two GrainSorghum or is otherwise substandard. When we do, we discount the price or makeother allowances to account for the lesser grade quality or condition atdelivery.

 

*Other Raw Materials.*  The other critical raw materials for theproduction of ethanol are water and natural gas. Water is mixed with theprocessed grain to begin the fermentation process. Natural gas is used to heatthe resulting mixture in conjunction with the fermentation process.

 

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Anadequate supply of water is important to our ethanol business.  We currently have water wells to the northand east of our plant site from which we pipe water to our facility.  There are two additional wells located on ourproperty which are not currently permitted for industrial use. We believe thatwe have sufficient water to operate our plant. However, should we require more water, we believe that we can obtain itfrom the existing wells on our property. See “**Item2. Properties**.”  We have receivedall necessary permits to obtain water and believe that we currently areoperating in compliance with all regulations of the Kansas Department ofAgriculture, Division of Water Resources.

 

Inorder to be assured of a steady source of natural gas, we entered into aNatural Gas Service Agreement with Midwest Energy, Inc. (“Midwest”) in September 2003pursuant to which they deliver natural gas to our plant.  We purchase the gas from another third party.This agreement supplements a previous agreement with Kinder Morgan EnergyPartners and Kinder Morgan Interstate Gas Transmission LLC to deliver the gasto Midwest.  In exchange for ouragreement not to bypass its local gas distribution system, Midwest agreed toinstall and maintain a gas main directly to our property in Gove County,Kansas.  We pay a monthly charge based onthe amount of gas utilized each month. The rates were fixed through December 31, 2008, and are subject tochange thereafter based on increases or decreases applicable to distribution servicesgenerally and subject to review by the Kansas Corporation Commission. Ourcontract with Midwest has been extended through December 31, 2013.

 

Wealso contract with Post Rock Gas, LLC (“PRG”) to acquire the gas that istransported by 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 gas during the 2009 fiscal year was determined byreference to a published “spot” price. We believe our agreements with PRG,Kinder Morgan and Midwest will provide an ample supply of natural gas for theforeseeable future.

 

Ouragreement with PRG helps us manage our risk from natural gas pricefluctuations.  Due to uncertainty in gasprices, we periodically evaluate our gas requirements and expectations offuture prices and may purchase forward contracts and implement derivativeinstruments on a portion of our requirements to allow us to benefit in theevent natural gas prices decline.  Afterdeclining from the increased levels set by hurricane-related shortages in late2005 and early 2006, natural gas prices had been relatively stable.  However, prices were subject to extremevolatility in fiscal 2008, increasing nearly 100% as compared to prior periodsduring the summer months of 2008 before decreasing again proximate to ourfiscal year end.  In fiscal 2009, pricestrended lower through the year.  As aresult we showed realized losses on natural gas hedges of $843,965 for fiscal2009.  We currently have contracts inplace to supply approximately 20% of our natural gas for the first quarter,none for the second quarter, and 20% for each of the remaining quarters offiscal 2010.

 

Wehave entered into an agreement with U.S. Energy Service, Inc. under whichU.S. Energy Service provides consulting services to us to help us manage ourenergy use and costs.  The agreement waseffective through August 31, 2009 and automatically renewed through August 31,2010.  The agreement will renew foradditional one-year terms unless terminated by either party with 30 daysadvance notice.

 

**Customers.**

 

Wesell essentially all of our products to two marketing firms, which in turn sellto other purchasers.  We have executed anexclusive marketing agreement to market the ethanol produced at our plant withEthanol Products LLC d/b/a POET Ethanol Products (“POET-Ethanol Products”) ofWichita, Kansas.  Under the terms of theagreement which commenced February 1, 2009, POET-Ethanol Products hasagreed to purchase all of the ethanol that is produced at our plant and issolely responsible for determining the price and terms at which the ethanolacquired from our plant is sold and to whom it will be sold.  The 

 

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administrativefee paid to POET-Ethanol Products will equal 1% of the net-back sales price pergallon of ethanol sold.  The agreement isfor a five-year term and is automatically renewable for subsequent five-yearterms unless terminated by either party prior to expiration.  In the event that our relationship withPOET-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.

 

Wehave also executed an exclusive agreement to market all of our distillersgrains with United Bio Energy Ingredients, LLC (“UBE”), which was previously anaffiliate of ICM, Inc.**** ICM was the general contractor for our ethanolplant.  Under the terms of thatagreement, we receive the gross selling price of all distillers grains sold byUBE, less applicable transportation costs and a fee of 2-2 1/2 % of the grossselling price depending on whether we sell DDGS or WDGS.  The agreement with UBE expires September 30,2010 and is automatically renewed each year unless the agreement is terminatedby either party following 90 days advance written notice.  As with the marketing arrangement withPOET-Ethanol Products, any interruption in our relationship with UBE couldtemporarily affect our business, although we believe that we could find anotherentity to market our grains.

 

**Transportation and Delivery.**

 

Thegrain that we receive is delivered by trucks. Due to our proximity toInterstate 70, transportation to and from the plant is efficient.  Distillers grains are transported exclusivelyby semitruck. UBE, as our exclusive purchaser of distillers grains, selects thecarrier.

 

Ourplant was designed with a rail spur and connection to the Union Pacific railwaysystem, which facilitates transporting our ethanol to national markets.  Our plant is also located adjacent toInterstate 70.  We ship our ethanol byrail and by truck, determined with reference to a review and analysis of thegeographic destination, current market conditions, transportation costs andapplicable environmental regulations. The target for rail-transported ethanolincludes the State of California, the southwest and eastern United States.  Ethanol targeted for more proximate marketsis transported by truck.

 

**Legislation and Federal and State Supports orSubsidies.**

 

*Legislation.*  Existing federal legislation will likely maintainor enhance the use of ethanol as a fuel additive for the foreseeablefuture.  The Energy Policy Act enacted in2005 established the first ever Renewable Fuel Standard (“RFS”) in federal lawwhich mandated certain levels of usage of biofuels in the domestic fuel supplybeginning in 2006 and continuing through 2012. In December 2007, the Energy Independence and Security Act of 2007(“EISA”) was enacted.  This legislationfurther increased the amount of mandated biofuel usage to a maximum of 36billion gallons a year by 2022.  Forillustration purposes, the U.S. domestically produced approximately 9 billiongallons of fuel ethanol in 2008. Pursuant to the Energy Policy Act and EISA, the United StatesEnvironmental Protection Agency (“EPA”) has promulgated rules requiringrefineries, blenders, distributors and importers to introduce or sell volumesof biofuels, including corn-based ethanol and biodiesel fuel, into commerce inaccordance with the annual RFS. The following table describes minimum biofuel usemandated for years 2009 through 2015:

 
| **Year** | ** ** | **Biofuel usage  (in billions of gallons)** | ** ** |
|----------|------------|---------------------------------------------|------------|
| 2009     |       | 11.10                                       |       |
| 2010     |       | 12.95                                       |       |
| 2011     |       | 13.95                                       |       |
| 2012     |       | 15.20                                       |       |
| 2013     |       | 16.55                                       |       |
| 2014     |       | 18.15                                       |       |
| 2015     |       | 20.50                                       |       |

 

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Underthe RFS as modified by EISA, the mandate for corn-based ethanol is capped at 15billion gallons in 2015 and continues at that level through 2022.  The remaining amount of biofuel required bythe RFS must be derived from non-corn-based ethanol.

 

TheEPA is currently reviewing a request to allow for blending of up to 15% ethanolinto gasoline for normal use.  Ifgranted, this waiver could have a positive impact upon demand as E15 mayreplace E10 as the base blend of ethanol in the nation’s fuel supply.  Additionally, the EPA is in the process ofpromulgating rules in connection with the implementation of EISA.

 

TheAmerican Jobs Creation Act of 2004 contained the Volumetric Ethanol Excise TaxCredit (“VEETC”).  This law amended thefederal gasoline excise tax structure effective January 1, 2005.  As amended, the law creates a new volumetricethanol excise tax credit of $0.51 per gallon of ethanol blended at 10%.  The credit provided by VEETC replaced anexemption which allowed ethanol blended fuel to be taxed at a lower rate thanregular gasoline.  The use of ethanol asa fuel additive is enhanced by the availability of a credit from the federalgasoline excise tax. The credit is scheduled to expire at the end of 2010.

 

Inaddition to the legislation discussed above, ethanol sales have been favorablyaffected by other legislation, including the Clear 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 has increased due to asecond Clean Air Act program, the Reformulated Gasoline Program.  This program became effective January 1,1995, and requires the sale of reformulated gasoline in certain major urbanareas to reduce pollutants, including those that contribute to ground levelozone, better known as smog.

 

Theuse of ethanol as an oxygenate to blend with fuel to comply with federalmandates also has been aided by federal tax policy. The Energy Tax Act of 1978exempted ethanol blended gasoline from the federal gas tax as a means ofstimulating the development of a domestic ethanol industry and mitigating theUnited State’s dependence on foreign oil. As amended, the federal gasoline taxcredit currently allows the market price of ethanol to compete with the priceof domestic gasoline. Although the federal tax credit is not directly availableto us, it allows us to sell our ethanol at prices that are competitive withother less expensive additives and gasoline.

 

Fuelgrade ethanol prices traditionally have varied directly with the wholesaleprice of gasoline. However, in some states, fuel grade ethanol typically sellsfor a higher price per gallon than wholesale gasoline because of theaforementioned federal gasoline tax credit. Historically, fuel grade ethanolprices also have reflected a premium due to the oxygenate and octane enhancingproperties of this motor fuel additive.

 

*Federal Ethanol Supports.*  A federal tax credit for small ethanolproducers is generally available to our company and its members.  Eligibility to receive the credit is basedupon plant capacity.  The Energy PolicyAct increased the capacity limit from 30 million to 60 million gallons ofproduction.  Ethanol producers thatqualify for the credit can deduct from their federal income tax $0.10 pergallon on the first 15 million gallons produced annually. We also qualify for anew federal subsidy available to biofuel producers known as the AdvancedBiofuel Payment Program.  The program wasinstituted during 2009 and provides a total of $25,000,000 for allocation amongU.S. biofuel producers.  We qualify forthe 

 

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programas a result of our use of milo as our feedstock from time to time. **  **Weestimate that our prorated share of the available funds for fiscal 2009 isapproximately $700,000, which has been accrued as revenue for the year.

 

Dueto the pass-through nature of our partnership taxation structure, we expect thetax 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 and the biofuel productionpayments may foster additional growth in ethanol plants of a larger size andincrease competition in this particular plant size category.

 

*State Ethanol Supports.*  The State of Kansas provides an incentivepayment to ethanol producers. The production incentive available to Kansasethanol producers that commence production after July 1, 2001 and sell atleast 5 million gallons consists of a direct payment of $0.075 per gallon forup to 15 million gallons per year. Accordingly, the maximum amount a Kansas ethanol producer can currentlyreceive in a year is $1,125,000.  Theseincentive payments are available for the first seven years of production.  The available statewide funding for theseincentive payments is $3.5 million per year for 2005-2011 plus any excessbalance carried over from the prior year’s current production account.  Any shortfall in the available funds willresult in a pro rata decrease in the incentives paid to the individual ethanolproducers.  Because the number of ethanolplants participating in the program increased, the maximum amount available tous during fiscal 2009 and 2008 was subject to proration.  During the 2009 and 2008 fiscal years, wewere entitled to $131,601 and $731,174, respectively.  We received payments of $503,520 in August 2009,of which $371,919 was accrued and recorded as revenue for fiscal 2008.

 

Weare unable to predict what effect, if any, expiration or termination of federaland state subsidies will have on the market or price for our ethanol in thefuture.  However, either event mayadversely affect our business. See “**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**” for further information relating to supports andsubsidies.

 

**Environmental Matters.**

 

Theconstruction and expansion of our plant required various state and localpermits to comply with existing governmental regulations designed to protectthe environment and worker safety. While we are also subject to regulations onemissions by the EPA, current EPA rules did not require us to obtain anypermits or approvals in connection with the construction of our plant oroperation of our business.  Additionalexpenditures which may be required to achieve or maintain compliance withfuture laws and more stringent standards for environmental matters may alsolimit our operating flexibility.

 

Ourethanol production requires us to emit a significant amount of carbon dioxideinto the air. Current Kansas law regulating emissions does not restrict orprevent us from emitting carbon dioxide gas into the air, but this could changein the future.  However, the EPA haspromulgated 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 is authorized to emithazardous air pollutants above the threshold level, then we are required tocomply with NESHAP for our manufacturing process and would be required to comeinto compliance with another NESHAP standard applicable to boilers and processheaters.  We could also be subject toenvironmental or nuisance claims from adjacent property owners or residents inthe area based on foul smells or other air or water discharges from the plant.

 

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Weobtained what we believe are all the necessary air and water permits to operateour plant before we commenced operations, including a permit to dischargewastewater from our plant. Under normal conditions, our plant utilizes a closedsystem and will not discharge process wastewater, but we obtained a permit todischarge wastewater in case of emergency failure of our wastewater treatmentequipment. We also obtained a permit to discharge water used in our coolingtower and boiler.

 

Inaddition to the foregoing regulations affecting air and water quality, we aresubject to regulation for our fuel storage tanks. If we are found to haveviolated federal, state or local environmental regulations in the future, wecould incur liability for clean-up costs, damage claims from third parties andcivil or criminal penalties that could adversely affect our business.

 

**Competition.**

 

Weare in direct competition with numerous other ethanol producers, many of whichhave greater resources than we do. According to the Kansas Association ofEthanol Processors, 12 producers in the State of Kansas have the capacity toproduce approximately 519.5 million gallons of fuel grade ethanol annually andadditional ethanol production facilities are currently under construction.  Nationally, fuel grade ethanol plantsproduced approximately 9 billion gallons of ethanol in 2008, a 38% increasefrom 2007 and 220% increase since 2003 according to the RFA.  We also expect that additional ethanolproducers 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.

 

Severallarge ethanol producers are structured as corporations and have securitieswhich are publicly traded on a national securities exchange.  These producers may have an advantage over uswith respect to access to capital, as it is typically easier to obtainadditional financing as a publicly traded company.  While we are required to file reports withthe SEC, our securities are presently not traded on an exchange, thus we mayhave more limited access to capital markets.

 

Thelargest ethanol producers include Abengoa Bioenergy Corp., Archer DanielsMidland Company, Aventine Renewable Energy, LLC, Cargill, Inc., HawkeyeRenewables, LLC, and New Energy Corporation, all of which are capable of producingmore ethanol than we produce.  Producersof this size may have an advantage over us from economies of scale andnegotiating 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.

 

Inaddition, new plants are under construction and plans to expand existing plantshave been announced, which would increase the ethanol production capacity ofour competitors. We are unable to determine the number and production capacityof plants that ultimately may be constructed, or the timing of suchconstruction; however it appears that the effect of resulting productionincreases over the past year has lowered the price received for our ethanol.

 

Technologicaladvances in and government initiatives for using biomass in lieu of grain toproduce ethanol, known as cellulosic ethanol production, will create additionalcompetitors to our business in the future unless we were to convert ouroperations from traditional grain based production to cellulosicproduction.  Across the U.S.,construction of several new production facilities is underway to take advantageof the rapidly commercializing technologies that utilize alternative feedstocksto produce ethanol.  The forms of feedstock for cellulosic ethanol production include algae, wood chips, switch grassand various plant wastes.

 

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Wemay also compete with international ethanol producers from countries such asBrazil, who may have lower production costs and comparable transportation coststo coastal markets and countries like Costa Rica and El Salvador and otherssubject to favorable tariff treatment by the U.S. under the Caribbean BasinInitiative.

 

Wealso compete with non-ethanol oxygenates which may cost less to produce thanethanol.  Alternative fuels, gasolineoxygenates and ethanol production methods are continually under development byethanol and oil companies with far greater resources than we have.  Development of new products and methods of ethanolproduction by larger and financially more viable competitors could provide themwith significant competitive advantages over us and thus could harm ourbusiness.  These companies, some of whichare publicly traded on national securities exchanges, generally have access tolarger capital and financing markets and thus may be able to obtain financingeasier and at more favorable terms than us.

 

**Research and Development.**

 

Duringthe 2009 fiscal year, we participated in research and development programssponsored by our suppliers. This research was focused primarily on energyreduction and other issues related to plant operation and production methods todevelop more efficient methods of producing ethanol.  A primary focus in 2009 was delivery ofenzymes into the production process through the grain.  This process is in the final stages ofdevelopment.  It is anticipated that uponderegulation of its use by the U.S.D.A., we will contract directly with localgrowers to grow the quantities of the grain required for use by the company.

 

**Employees.**

 

Asof the date of filing this report, we have 37 full-time employees. Theseinclude a chief executive officer, chief accounting officer, plant manager whooversees plant operations and production, a commodities manager to overseegrain acquisition and risk management, a safety director, a lab manager, amaintenance manager, and an administrative assistant. The remainder of ouremployees includes administrative, production and maintenance supportpersonnel. None of our employees are the subject of collective bargaining bylabor unions, and we believe that we enjoy excellent relations with ouremployees.

 

Fromtime to time, we also retain the services of outside consultants to supplementthe services provided by our employees. These include engineering, construction,legal, accounting and financial advisors. We believe that we can obtain theservices of all personnel necessary to operate our business.

 

**Item 1A.  RiskFactors.**

 

*You should carefully read and consider the risks anduncertainties below and the other information contained in this report.  The risks and uncertainties below are not theonly 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.***  We commencedproduction of ethanol at our plant in January 2004.  Accordingly, we have a limited operatinghistory from which you can evaluate our business and prospects.  Our operating results have fluctuatedsignificantly in the past and could fluctuate significantly in the future as aresult of a variety of factors, including those discussed throughout thisreport.  Many of these factors areoutside our control.  As a result ofthese factors, our operating results 

 

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maynot be indicative of future operating results and you should not rely on themas indications of our future performance. In addition, our prospects must be considered in light of the risks anduncertainties encountered by an early-stage company and in rapidly growing industries,such as the ethanol industry, where supply and demand may change substantiallyin a short 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 political factors adverselyaffect the market for ethanol, the company has no other line of business torely on if the ethanol business declines. Our business would also besignificantly harmed if our ethanol plant could not operate at full capacityfor any extended period of time.

 

***Our financial performance issignificantly dependent on grain and natural gas prices.***  Our results of operations and financialcondition are significantly affected by the cost and supply of grain andnatural gas.  If our region becomessaturated by ethanol plants, the grain required for ethanol could consume asignificant portion of the total grain production in our region, which wouldlikely drive up local prices.    If morecorn-based ethanol plants are constructed or existing plants expand theircapacity, the increase in demand for local corn and natural gas may drive upthe prices of those commodities. Generally, we cannot pass on increases in input prices to ourcustomers.  Changes in the price andsupply of grain and natural gas are subject to and determined by market forcesover which we have no control.

 

Graincosts significantly impact our cost of goods sold.  Our gross margins are principally dependentupon the spread between ethanol and grain prices, which has fluctuatedsignificantly in 2009 and may continue to do so in the future due to volatilecommodity prices.  Any reduction in thespread between ethanol and grain prices, whether as a result of an increase incorn prices or a reduction in ethanol prices, would adversely affect ourresults of operations and financial condition.

 

***Corn, as with most other crops, isaffected by weather, disease and other environmental conditions.***  The price of corn is also influenced bygeneral economic, market and government factors.  These factors include weather conditions,farmer planting decisions, domestic and foreign government farm programs andpolicies, global demand and supply and quality. Changes in the price of corn can significantly affect our business.  The annualized price of corn decreasedapproximately 25% in fiscal 2009 when compared to fiscal 2008.  Corn prices as reflected on the Chicago Boardof Trade began increasing at the beginning of fiscal 2010 and have increasedapproximately 15.5% during the first quarter of fiscal 2010 from their levelsat the end of September. If a period of high corn prices is sustained for sometime, such pricing may reduce our ability to generate profits because of thehigher cost of operating and may make ethanol uneconomical to use in fuelmarkets.  We cannot offer any assurancethat we will be able to offset any increase in the price of corn by increasingthe price of our products.  If we cannotoffset increases in the price of corn, our financial performance may bematerially and adversely affected and we may be forced to curtail production.

 

***The price of natural gas is also affectedby market and environmental conditions and other factors beyond our control.***  The prices for and availability of naturalgas are subject to volatile market conditions, including supply shortages andinfrastructure incapacities.  Seasonalchanges tend to affect the price of natural gas and increases during coldermonths tend to increase our costs of production.  Significant disruptions in the supply ofnatural gas could impair our ability to manufacture ethanol for ourcustomers.  Furthermore, increases innatural gas prices or changes in our natural gas costs relative to natural gascosts paid by competitors may adversely affect our results of operations andfinancial condition.

 

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***Our revenues will be greatlyaffected by the price at which we can sell our ethanol and distillers grains.*** The prices ofethanol and distillers grains can be volatile as a result of a number offactors. These factors include the overall supply and demand, the price ofgasoline, level of government support, and the availability and price ofcompeting products. For instance, the price of ethanol tends to increase as theprice of gasoline increases, and the price of ethanol tends to decrease as theprice of gasoline decreases.  The recentsignificant decrease in gasoline prices may also affect our operations bydecreasing the demand for our ethanol for permissive blending which will reducerevenues.

 

***We sell all of the ethanol weproduce to POET-Ethanol Products under our ethanol marketing agreement.*** POET-EthanolProducts is the sole marketer of all of our ethanol, and we rely heavily on itsmarketing efforts to sell our product. Because POET-Ethanol Products sells ethanol for a number of otherproducers, we have limited control over its sales efforts.  Our financial performance is dependent uponthe financial health of POET-Ethanol Products, as a significant portion of ouraccounts receivable are attributable to customers of POET-EthanolProducts.  If POET-Ethanol Productsbreaches the ethanol marketing agreement or is not in the financial position tomarket all of the ethanol we produce, we could experience a material loss andwe may not have any readily available means to sell our ethanol, and ourfinancial performance will be adversely and materially affected.  If our agreement with POET-Ethanol Productsterminates, we may seek other arrangements to sell our ethanol, includingselling our own product, but we give no assurance that our sales efforts wouldachieve results comparable to those achieved by POET-Ethanol Products.

 

Asa result of federal regulations related to the RFS and under the terms of thenew marketing agreement with POET-Ethanol Products, title to our ethanol willpass to POET-Ethanol Products when it leaves our plant.  However, we do not receive payment until theethanol reaches the end customer.  As aresult, we bear a risk of loss during the transporting of our product to ourcustomers.  We have attempted to mitigatethis risk by requiring POET-Ethanol Products to include us as an additionalinsured, however we have no assurance we will be sufficiently compensated forany lost product we may suffer during transport.

 

***We sell all of the distillers grainswe 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 grains for a number of other producers, wehave 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 due fromUBE.  If UBE breaches the distillersgrains marketing agreement or is not in the financial position to purchase andmarket all of the distillers grains we produce, we could experience a materialloss and we may not have any readily available means to sell our distillersgrains, and our financial performance will be adversely and materiallyaffected.  If our agreement with UBEterminates, we may seek other arrangements to sell our distillers grains,including selling our own product, but there is no assurance that our salesefforts 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 commodityprice risk results from our dependence on corn and natural gas in the ethanolproduction process.  We seek to minimizethe risks from fluctuations in the prices of corn and natural gas through theuse of hedging instruments.  Theeffectiveness of our hedging strategies is dependent in part upon the cost ofcorn and natural gas and our ability to sell sufficient products to use all ofthe corn and natural gas for which we have futures contracts.  There is no assurance that our hedgingactivities will successfully reduce the risk caused by price fluctuation whichmay leave us vulnerable to high corn and natural prices. Alternatively, we maychoose not to engage in hedging transactions in the future.  As a result, our results of operations andfinancial conditions may also be adversely affected during periods in whichcorn and/or natural gas prices increase.

 

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***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 several variables that could affectthe extent to which our derivative instruments are impacted by pricefluctuations in the cost of corn or natural gas.  However, it is likely that current commoditycash prices will have the greatest impact on those derivative instruments withthe nearest maturity dates.  If cashprices are significantly different than our contracted prices, we may incurcosts related to hedging activities 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 make the ethanol production technologyinstalled in our plant less desirable or obsolete.  These advances could also allow ourcompetitors to produce ethanol at a lower cost than us.  If we are unable to adopt or incorporatetechnological advances, our ethanol production methods and processes could beless efficient than our competitors, which could cause our plant to becomeuncompetitive or completely obsolete.  Ifour competitors develop, obtain or license technology that is superior to oursor that makes our technology obsolete, we may be required to incur significantcosts to enhance or acquire new technology so that our ethanol productionremains competitive.  Alternatively, wemay be required to seek third-party licenses, which could also result insignificant expenditures.  We cannotassure you that third-party licenses will be available or, once obtained, willcontinue to be available on commercially reasonable terms, if at all.  These costs could negatively impact ourfinancial performance by increasing our operating costs and reducing our netincome.

 

**Risks Related to Ethanol Industry**

 

***Decreasing gasoline prices willnegatively impact our business.***  A significant portion of the demand forethanol results from what is known as “permissive blending” bywholesalers.  Historically, ethanol hasenjoyed a price advantage compared to gasoline, thus encouraging wholesalers toblend gasoline with ethanol.   Asgasoline prices have recently decreased significantly to levels lower than thatof ethanol prices, it is likely that these permissive blenders will find it lessattractive to blend gasoline with ethanol. As a result, the demand for ethanol may decrease, which will increasethe available market supply and make it more difficult to sell all of ourethanol.

 

***Increase in supply from new plantsor decreases in the demand for ethanol may result in excess production capacitywhich may lead to lower ethanol prices.***  The supply of domestically produced ethanolis at an all-time high. Domestic fuel grade ethanol production was 9 billiongallons in 2008 and the RFA estimates that ethanol production capacity incalendar 2009 will reach a record 12.4 billion gallons.  If the industry maximized productioncapacity, it would likely surpass the anticipated domestic demand for ethanolfor 2010.  There are at least 150production facilities currently operating in the United States with more underconstruction or planned for construction in the foreseeable future.  Excluding our facility, Kansas currently hasat least 10 ethanol plants operating or under currently under construction.

 

Excesscapacity in the ethanol industry would have an adverse impact on our results ofoperations, cash flows and general financial condition.  If the demand for ethanol does not grow atthe same pace as increases in supply, we would expect the price for ethanol todecline.  Ethanol prices could decline toa level that is inadequate to generate sufficient cash flow to cover our costs.

 

Theincreased production of ethanol could have other adverse effects. For example,the increased production could lead to increased supplies of co-products fromthe production of ethanol, such as distillers grains. Those increased suppliescould outpace demand, which would lead to lower prices for 

 

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thoseby-products. There can be no assurance as to the price of ethanol or distillersgrains in the future. Any decrease in the price of ethanol and/or distillersgrains may result in less income which would decrease our revenue andprofitability.

 

***We operate in a competitive industryand 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 UnitedStates.  The number of ethanol plantsbeing developed and constructed in the United States continues to increase. Thepassage of the Energy Policy Act of 2005 and EISA included a renewable fuelsmandate that we expect will further increase the number of domestic ethanolproduction facilities.  The largestethanol producers include Abengoa Bioenergy Corp., Archer Daniels MidlandCompany, Aventine Renewable Energy, LLC, Cargill, Inc., HawkeyeRenewables, LLC, and New Energy Corp., each of which are capable of producingmore ethanol than we expect to produce. Larger, better financed ethanol producers may be able to expand theirproduction capacity and adapt to new technologies easier than us.  Archer Daniels Midland is currently thelargest ethanol producer in the U.S. and controls a significant portion of theethanol market.  If the demand forethanol does not grow at the same pace as increases in supply, we expect thatlower prices for ethanol will result which may adversely affect our ability togenerate profits and our financial condition.

 

***We compete with other gasolineadditives.***  Our ethanolplant also competes with producers of other gasoline additives made from rawmaterials other than corn having similar octane and oxygenate values asethanol, including but not limited to methyl tertiary butyl ether (“MTBE”).  Alternative fuels, gasoline oxygenates andalternative ethanol production methods are also continually under development.The major oil companies have significantly greater resources than we have tomarket MTBE, to develop alternative products, and to influence legislation andpublic perception of MTBE and ethanol. These companies also have significantresources to begin production of ethanol should they choose to do so.

 

***Competition from the advancement ofalternative fuels and hybrid vehicles 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 worldwide energy costs, the long-term availabilityof petroleum reserves and environmental concerns. Fuel cells have emerged as apotential alternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions. If the fuel cell and hydrogen industries continue toexpand and gain broad acceptance, and hydrogen becomes readily available toconsumers for motor vehicle use, we may not be able to compete effectively.This additional competition could reduce the demand for ethanol, resulting inlower ethanol prices that might adversely affect our results of operations andfinancial condition.

 

Inaddition, hybrid vehicles are growing in popularity amongst U.S.consumers.  These vehicles significantlyreduce the amount of gasoline required to operate the vehicles by relying inpart on electricity to power the vehicle. As hybrid vehicles become more prevalent, it is likely the demand forgasoline, including gasoline blended with ethanol, will decrease.  This may result in a corresponding decreasein the demand for ethanol, which may in turn affect our results of operations.

 

***Corn-based ethanol may compete withcellulose-based ethanol in the future.***  Especially in the Midwestern U.S., mostethanol is currently produced from corn and other raw grains, such as milo orsorghum. The current trend in ethanol production research is to develop anefficient method of producing ethanol from cellulose-based biomass, such asagricultural waste, forest residue, municipal solid waste, 

 

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andenergy crops. This trend is driven by the fact that cellulose-based biomass isgenerally cheaper than corn, and producing ethanol from cellulose-based biomasswould create opportunities to produce ethanol in areas which are unable to growcorn.  The Energy Policy Act of 2005 andEISA included incentives designed to boost production of cellulose-basedethanol.  Although current cellulosetechnology is not sufficiently efficient to be competitive, new conversiontechnologies may be developed in the future and one of our competitors recentlyannounced it was beginning construction of a facility slated to becellulose-based.  If an efficient methodof producing ethanol from cellulose-based biomass is developed, we may not beable to compete effectively. We do not believe it will be cost-effective toconvert our ethanol plant into a plant which will use cellulose-based biomassto produce ethanol. 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 our ethanol.***  Ethanol produced or processed in certaincountries in Central America and the Caribbean region is eligible for tariffreduction or elimination upon importation to the United States under a programknown as the Caribbean Basin Initiative. Large ethanol producers, such as Cargill, have expressed interest inbuilding dehydration plants in participating Caribbean Basin countries, such asEl Salvador, which would convert ethanol into fuel-grade ethanol for shipmentto the United States. Ethanol imported from Caribbean Basin countries may be aless expensive alternative to domestically produced ethanol. Competition fromethanol imported from Caribbean Basin countries may affect our ability to sellour ethanol profitably, adversely affect our results of operations andfinancial condition.

 

Brazilis currently the world’s largest exporter of ethanol. In Brazil, ethanol isproduced primarily from sugarcane, which is also used to produce food-gradesugar.  Ethanol imported from Brazil maybe a less expensive alternative to domestically produced ethanol, which isprimarily made from corn. Tariffs presently protecting U.S. ethanol producersmay be reduced or eliminated. Competition from ethanol imported from Brazil mayaffect our ability to sell our ethanol profitably and our financial condition.

 

***Consumer beliefs may affect thedemand for ethanol.***  Webelieve that certain consumers perceive the use of ethanol to have a negativeimpact on gasoline prices at the pump. Some consumers also believe that ethanoladds to air pollution and harms car and truck engines. Still other consumersbelieve that the process of producing ethanol actually uses more fossil energy,such as oil and natural gas, than the amount of ethanol that is produced. Theseconsumer beliefs could potentially be widespread. If consumers choose not tobuy ethanol, it would affect the demand for the ethanol we produce which couldlower demand for our product and negatively affect our profitability andfinancial condition.

 

**Risks Related to Regulation and Governmental Action**

 

***Proposed rules in California may severely limit theamount of ethanol we may be able to sell in that state.***  Through our marketer, we sell a majority ofthe ethanol we produce in California, which has recently proposed newregulations aimed at reducing the carbon content of fuel sold within that statethrough implementation of a low-carbon fuel standard (LCFS).  Beginning January 1, 2011, California fuelrefiners and marketers will be required to meet the standard, under which theallowable amount of carbon content in fuel available for sale willprogressively decrease. Under California’s program, different types of fuel areassigned a “carbon value” based upon the perceived amount of carbon emittedduring the production, transportation, and consumption of the fuel inCalifornia.  We believe that grain-basedethanol produced in the Midwestern United States will be assigned a highercarbon value than grain-based ethanol produced in California, ethanol importedfrom countries such as Brazil, and other fuels such as gasoline.  Because of the higher carbon value assignedto our product, fuel refiners and marketers in California will have a moredifficult time meeting the LCFS if they use our ethanol instead of otherethanol with a lower carbon value.   As aresult, the sale of our ethanol to refiners and marketers in California maydecrease.  In that event, we would beforced to find alternative consumers for our ethanol, and if unsuccessful wemay have to curtail production.

 

***A change in government policiesfavorable to ethanol may cause demand for ethanol to decline.***  Growth in demand for ethanol may be drivenprimarily by federal and state government policies, such as state laws banningMTBE and the national renewable fuels standard. The continuation of thesepolicies is uncertain, which means that demand for ethanol may decline if thesepolicies change or are discontinued. A decline in the demand for ethanol islikely to cause lower ethanol prices which in turn will negatively affect ourresults 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.  Additionally, we presently qualify for aportion of an annual incentive payment offered by the State of Kansas, which isprorated based on the number of producers. We have no assurance any of these tax credits or subsidies will continueto be offered in the future, and one federal support, known as the VEETC, isscheduled to expire at the end of 2010. The elimination or reduction of tax incentives to the ethanol 

 

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industrycould reduce the market for ethanol, which could reduce prices and our revenuesby making it more costly or difficult for us to produce and sell ethanol.

 

Mostlikely to have the greatest impact on the ethanol industry is the creation ofthe RFS in the Energy Policy Act, which was subsequently increased byEISA.  Biofuel usage mandates began with4 billion gallons in 2006 and increase to 36 billion gallons by 2022.  However, a new Congressional delegation andpresidential administration will likely affect the nation’s energy policy.  While we have no present indication thatthere are plans to revise the RFS in the future, we have no assurance the RFSwill remain as presently drafted.  Additionally,the State of Kansas may pass state legislation setting its own renewable fuelstandard in the foreseeable future.  TheRFS helps support a market for ethanol that might disappear without thisincentive.  If the federal incentives areeliminated or sharply curtailed, we believe that a decreased demand for ethanolwill result, which could negatively affect our profitability and financialcondition.

 

***Changes in environmental regulationsor 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 laws require our plant to operate under anumber of environmental permits. These laws, regulations and permits can oftenrequire expensive pollution control equipment or operating changes to limitactual or potential impacts to the environment. A violation of these laws and regulations or permit conditions canresult in substantial fines, damages, criminal sanctions, permit revocationsand/or plant shutdowns.  We cannot assureyou that we have been, are or will be at all times in complete compliance withthese laws, regulations or permits or that we have had or have all permitsrequired to operate our business.  Wecannot 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 in environmentallaws and regulations, both at the federal and state level, could require us toinvest or spend considerable resources in order to comply with futureenvironmental regulations. The expense of compliance could be significantenough to reduce our profitability and negatively affect our financialcondition. ** **Congressand the EPA continue to discuss possible regulations of carbon dioxide.  Regulations that are unfavorable to ourbusiness operations or that call for implementation on a short timetable maycause difficulty for us to come into compliance.  This may result in potential negative consequencesto our company, such as fines or other sanctions.

 

**Item 1B. Unresolved Staff Comments.**

 

None.

 

**Item 2. Properties.**

 

Wecurrently own 411 acres of real property in the state of Kansas, most of whichis currently undeveloped.  In October 2003,we completed an industrial revenue bond financing with Gove County thatprovides and will provide us with property tax savings on our plant site until2014. As part of the financing, title to our plant site and all of ourfacilities have been transferred to Gove County as security for the repaymentof the bonds. We are leasing back the site for an amount that is equal to theamount of the principal and interest that is payable on the bonds. The term ofthe lease is 30 years or as long as the bonds are outstanding. Also under theterms of the lease, we can repurchase the site for a nominal amount uponrepayment of the bonds.

 

Weinitially acquired a 53.5 acre parcel of partially developed land in GoveCounty for the purpose of constructing our plant.  Our plant was developed on approximately 20acres of the 53.5 acre parcel.  In February 2002,we acquired a 137 acre parcel approximately one and a half miles east of theparcel where our plant is located.  In December 2004,we acquired a 141 acre parcel of land immediately to the east of 

 

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ourplant site.  In December 2005, weacquired an 80 acre parcel which had previously separated the land surroundingour plant site from the 137 acre parcel acquired in 2002.  We now own a contiguous parcel of property inGove County.

 

Weacquired water appropriation rights for two wells when we purchased the 137acre parcel and one well when we purchased the 80 acre parcel.  We applied to the Kansas Department ofAgriculture, Division of Water Resources to change the type of water use fromagricultural irrigation use to industrial use for the well on the 80 acreparcel and constructed an irrigation system for delivery of water from thatwell to our plant.  We anticipate thesame undertaking if we decide to utilize the wells on the 137 acre parcel,which would be likely to occur in the event we further expand our plantcapacity.  We have agreed to lease the137 acre property back to one of the sellers for a period of five years withthe amount of rent based on the portion of the land that is dry land acres andthe portion that is irrigated acres, with the seller expressly recognizing thatthe water available for irrigation may be dramatically reduced, and possiblyeliminated, if we use the water from this property in our ethanol plantoperations. On February 6, 2007, we purchased 340 acre feet of waterrights on property adjacent to one of our parcels for $340,308. We have filedwith the State of Kansas to convert the classification of these water rightsfrom agriculture to industrial use. Pursuant to Kansas water laws, weanticipate a reduction in allowable withdrawal of approximately 25% if ourapplication is approved.

 

Inaddition to our ethanol plant, we also own an administrative building adjacentto the plant. The administrative building consists of approximately 3,000finished square feet (including a partially finished basement) and providesoffices for our administrative staff. We believe our existing facilities aresufficient for the foreseeable future.

 

InOctober 2006, we acquired a grain elevator located on a neighboring parcelwhich we utilize for grain storage.  Theunderlying land is owned by Union Pacific Railroad and we assumed the priorowner’s lease with the railroad.  Tofurther increase our storage capacity for grain, we constructed 500,000 bushelsof additional storage bins near our ethanol plant including two hammer mills andnecessary infrastructure for the conveyance of the grain. In addition, duringthe last quarter of fiscal 2009, we added another grain receiving pit with thenecessary infrastructure enhancing the number of trucks we can receive duringharvest. This project was fully operational in October 2009.

 

Wehave contracted with ICM Inc. to construct an additional fermenter.  The new fermenter is not intended to increaseour overall nameplate capacity.  Instead,it is anticipated to increase our overall operating efficiencies by increasingthe total fermentation time of the process. We believe this additional fermentation time may increase ethanol yieldduring production.

 

**Item 3.  Legal Proceedings.**

 

Fromtime to time we may be subject to litigation that is incidental to ourbusiness.  However, we are not currentlya party to any pending legal proceedings that are not routine litigationincidental to our business.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

 

None.

 

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**PART II**

 

**Item5.  Market for Our Common Equity, RelatedStockholder 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.

 

Duringthe 2008 fiscal year, we implemented a private matching service for ourmembers, also called an alternative trading system (“ATS”), which is operatedand maintained by a third party.  The ATSoffers an online electronic bulletin board that provides information toprospective sellers and buyers of our capital units.  Trading on the ATSin fiscal 2009 and 2008 was extremely limited.

 

Inaddition to sales between willing buyers and sellers facilitated through theATS, the holders of our capital units who locate a purchaser or receive anoffer to purchase can sell the capital units to the purchaser subject to theapproval of the Board of Managers.  OurOperating Agreement also allows transfer of the capital units by:

 

·      Gift;

·      Last will or the laws ofdescent;

·      Transfers between members ofa 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.

 

OnMarch 10, 2008 we implemented a seven (7) for one (1) forwardsplit of all of our outstanding Class A, B and C capital units.  The information contained in this reportreflects the result of that split.

 

**Capital Unit Holders**

 

Asof December 28, 2009, therewere 16,002 Class A capital units, 12,068 Class B capital units and350 Class C capital units outstanding, owned by a total of approximately629 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.

 

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Duringthe 2009 fiscal year, we made distributions to our members three times for atotal of $4,973,500 in cash paid to our members.  During the 2008 fiscal year, we distributed atotal of $4,882,000 in cash to our members. Future distributions may be subject to restrictions that materially limitour ability to pay such distributions, such as our credit facilities if we havean 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 EquityCompensation Plans**

 

Wecurrently have no equity compensation plan.

 

**Item 6. Selected Financial Data.**

 

Thefollowing selected financial data sets forth our summary historical financialdata as of and for the years ended September 30, 2009, 2008, 2007, 2006and 2005. This information was derived from our audited financial statementsfor each period. Our selected historical financial data is qualified in its entiretyby, and should be read in conjunction with, “**Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**” and the financial statements and the notes theretoincluded elsewhere in this report. For additional information relating to ouroperations, see “**Item 1. Business**”and “**Item 2. Properties**.”

 
| ** **                                  | ** ** | **Year  Ended**

**September  30,** | ** **       |
|---------------------------------------------|------------|-------------------------------------|------------------|
| ** **                                  | ** ** | **2009**                            | ** **       | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Income Statement data:**                  |       |                                |             |   |   |   |   |   |   |   |   |
| Net sales                                   |       | $                                   |  92,268,505 |   | $ | 119,228,676 |   | $ | 108,761,200 |   | $ | 108,044,168 |   | $ |  61,730,872 |   |
| Net Income                                  |       | 2,698,430                           |             | 3,670,407 |   | 16,656,276 |   | 45,895,967 |   | 13,009,369 |   |
| Earnings per capital unit(1)                |       | 95                                  |             | 129 |   | 583 |   | 1,607 |   | 456 |   |
| Cash distributions paid per capital unit(1) |       | 175                                 |             | 171 |   | 1,000 |   | 1,000 |   | 301 |   |
| Book value per capital unit(2)              |       | 1,053                               |             | 1,096 |   | 1,180 |   | 1,675 |   | 1,070 |   |
|                                             |            |                                     |                  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **September  30,** | ** **       |
|----------------------------------------|------------|--------------------|------------------|
| ** **                             | ** ** | **2009**           | ** **       | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Balance Sheet data:**                |       |               |             |   |   |   |   |   |   |   |   |
| Total assets                           |       | $                  |  65,531,651 |   | $ |  69,264,582 |   | $ |  69,786,878 |   | $ |  82,304,265 |   | $ |  70,731,153 |   |
| Total debt (current and long term) (3) |       | 32,000,000         |             | 32,008,119 |   | 32,943,846 |   | 32,077,769 |   | 38,181,000 |   |
| Members’ equity                   |       | 29,919,179         |             | 31,135,382 |   | 33,705,018 |   | 47,845,419 |   | 30,572,933 |   |
|                                        |            |                    |                  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) — Adjusted to reflect seven-for-one forwardsplit effective March 10, 2008.

(2) — Members’ equity divided by membershipunits outstanding as of the end of the period.

(3) — 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.

 

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**Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

***Except for the historicalinformation, the following discussion contains forward-looking statements thatare subject to risks and uncertainties. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report.  Our actual results or actions may differmaterially from these forward-looking statements for many reasons, includingthe risks described in “Risk Factors” and elsewhere in this annual report.  Our discussion and analysis of our financialcondition and results of operations should be read in conjunction with thefinancial statements and related notes and with the understanding that ouractual future results may be materially different from what we currentlyexpect.***

 

**Introduction**

 

The following discussionanalyzes our operating results for the three fiscal years ended September 30,2009 and our financial condition at September 30, 2009 and 2008, with aparticular emphasis on the year ended September 30, 2009.

 

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 YearEnded September 30, 2009 compared to September 30, 2008**

 

*Overview*.  Table 1 below highlights certain of ouroperating results for the years ended September 30, 2009, 2008 and 2007:

 

**Table 1**

 
| ** **                                 | ** ** | **Fiscal Year Ended September 30,** | ** **       |
|--------------------------------------------|------------|-------------------------------------|------------------|
| ** **                                 | ** ** | **2009**                            | ** **       | **2008** | ** ** | **2007** | ** ** |
| Revenue                                    |       | $                                   |  92,268,505 |   | $ | 119,228,676 |   | $ | 108,761,200 |   |
| Cost of sales                              |       | 81,722,233                          |             | 107,404,082 |   | 84,457,974 |   |
| Gross profit                               |       | 10,546,272                          |             | 11,824,594 |   | 24,303,226 |   |
| General & administrative expenses |       | 2,315,556                           |             | 2,443,180 |   | 2,835,635 |   |
| Income from operations                     |       | 1,803,674                           |             | 3,015,988 |   | 15,568,216 |   |
| Other income                               |       | 894,756                             |             | 654,419 |   | 1,088,060 |   |
| Interest expense                           |       | 20,158                              |             | 115,879 |   | 110,092 |   |
| Net income                                 |       | 2,698,430                           |             | 3,670,407 |   | 16,656,276 |   |
| Net income per unit(1)                     |       | 95                                  |             | 129 |   | 583 |   |
|                                            |            |                                     |                  |  |  |  |  |  |  |  |

 

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(1) — Adjusted to reflect seven-for-one forwardsplit effective March 10, 2008.

 

Table2 sets forth information regarding our ethanol production and raw materialusage and the average price we received for our ethanol and paid for our rawmaterials for the years ended September 30, 2009, 2008 and 2007:

 

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**Table 2**

 
| ** **                          | ** ** | **Fiscal Year Ended September 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gallons of ethanol sold             |       | 48,766,384                          |       | 48,313,577 |   | 45,877,856 |   |
| Average price per gallon ethanol    |       | $                                   | 1.49       |   | $ | 2.11 |   | $ | 1.98 |   |
| DDGS sold (tons)                    |       | 14,255                              |       | 3,661 |   | 65 |   |
| Average price DDGS per ton          |       | $                                   | 111.12     |   | $ | 158.00 |   | $ | 96.56 |   |
| WDGS sold (tons)                    |       | 393,409                             |       | 428,634 |   | 395,773 |   |
| Average price WDGS per ton          |       | $                                   | 46.65      |   | $ | 45.94 |   | $ | 45.76 |   |
| Bushels grain used in production    |       | 17,965,374                          |       | 17,667,175 |   | 16,775,696 |   |
| Average price per bushel grain      |       | $                                   | 3.74       |   | $ | 4.99 |   | $ | 4.04 |   |
| Natural gas used MMBTU              |       | 976,104                             |       | 955,422 |   | 969,954 |   |
| Average price per MMBTU natural gas |       | $                                   | 4.69       |   | $ | 8.16 |   | $ | 7.31 |   |

 

Asshown in Table 1, our operating results continued to decline from 2008 to2009.  This is primarily attributable tolower ethanol prices in fiscal 2009 compared to 2008, as shown in Table 2.  Although the demand for fuel grade ethanolremained constant during the calendar year 2009, the industry had expanded at arapid rate during the previous two years and we saw some of our fellowproducers shut-in some production capacity in the first half of fiscal2009.  During the last quarter of fiscal2009, virtually all of this shut-in capacity has come back on-line due to thestrengthening of production margins across the industry.  However, we anticipate that U.S. ethanolproducers will likely produce ethanol in excess of demand in the coming fiscalyear, which will continue to exert price pressure on ethanol.

 

*Net Income*.  Net income decreased $971,977, orapproximately 26.5%, in 2009 from 2008. We attribute this decrease to lower average prices received for ethanol,which was tempered somewhat by a lower cost of grains used to produce ethanol.

 

Operatingincome for the 2009 fiscal year decreased by $1,212,314, or approximately40.2%, from 2008.  This decrease resultsfrom the substantial decrease in the price of ethanol experienced during fiscal2009.  Operating income excludes theeffect of other income or expense, which primarily includes government grantsand subsidies.

 

*Revenue*.  Revenue for the 2009 fiscal year decreased$26,960,171, or approximately 22.6%, from 2008. Production volume increased during fiscal 2009 by 614,775 gallons ofethanol, reflecting certain improvements in our production process we refinedduring fiscal 2009.  As shown in Table 2,the average price we received for sale of ethanol was $0.62 per gallon lower infiscal 2009, or 29.4%, while the sales volume increased by 452,807 gallons, orapproximately 1%.  The decrease in theprice of ethanol more than offset the increase in sales volume, resulting inthe significant decrease in revenue during fiscal 2009.  Revenue consisted of approximately 79% inethanol sales and 21% from the sale of distillers grains, which is a slightincrease in distillers grains ratio to ethanol as compared with fiscal2008.  Total revenue derived from thesale of ethanol decreased $26,207,524, or approximately 26.5%, from fiscal2008, while revenue derived from the sale of distillers grains decreased$752,646, or approximately 3.7%, from fiscal 2008.  Ethanol prices began to increase during thefourth quarter of fiscal 2009 and the first quarter of fiscal 2010, and weexpect the prices to remain favorable for the near future compared to the prioryear.  The increase in ethanol prices islikely being supported by higher energy prices during the end of fiscal 2009and beginning of fiscal 2010.  Distillersgrain prices will likely follow grain prices in fiscal 2010.

 

*Costs of Goods Sold*.  Our cost of goods sold for the 2009 fiscalyear equaled 88.6% of revenue, resulting in a gross profit margin of 11.4%.This represents a slight increase in gross profit margin from 10% in 2008. Weattribute the increase to several factors including:

 

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·                  A decrease in the price of grain used;

·                  A decrease in the R & D expenses;and

·                  A decrease innatural gas costs.

 

Grainprices, which represent the significant majority of our cost of goods sold,decreased dramatically in 2009. Favorable growing conditions and a decrease in export demand putdownward pressure on grain markets.  Asshown in Table 2, the average price we paid for grain decreased approximately25% in 2009 as compared to 2008. Although the 2009 corn crop was estimated to be one of the largestharvested in recent history, adverse weather conditions has delayed thecompletion of the harvest which has negatively affected the projected size ofthe crop. In addition, the weakening of the U.S. dollar has stimulated exportdemand. These factors have caused the price of corn to increase during thefirst quarter of fiscal 2010.

 

Ourincreased grain storage capacity helps us manage our grain costs by enabling usto purchase grain when costs are lower. As costs rise, we anticipate we will reduce grain inventory and try toavoid purchasing grain at market prices higher than the price paid for thegrain in storage.

 

Duringfiscal 2008 we undertook efforts to improve our plant process, which effortswere completed in the first quarter of fiscal 2009.  Most of the costs associated with theseactivities were expensed during fiscal 2008, which decreased our research anddevelopment expense in fiscal 2009 by approximately 95% from fiscal 2008.

 

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 and increased costsfor necessary chemicals) continue to decrease.

 

Energycosts, representing the second largest component of our costs of goods sold,saw a steady decrease during our 2009 fiscal year.  Our energy costs for fiscal 2009 decreased$3,314,870, or approximately 36.5%. This reduction in cost was primarily theresult of dramatic reduction in natural gas prices in 2009.  Natural gas, as with virtually allcommodities, experienced high levels of liquidation of speculative contracts asa direct result of the financial downturn in 2009.  Additionally, the financial downturn hasresulted in a drop in demand for natural gas. Currently, natural gas levels in storage are at all time highs,contributing to further downward price pressure on natural gas.

 

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 2009 fiscal year, we realized$1,000,260 in losses relating to grain futures contracts and $843,965 inrealized losses from natural gas futures contracts, which amounts are includedin costs of goods sold.  In addition, werecorded an unrealized gain on grain hedging contracts of $1,058,866 at September 30,2009.

 

*General and Administrative Expenses*.  During fiscal 2009, general andadministrative expenses decreased $127,623 or approximately 5.2% from fiscal2008. Significant components of these expenses include salaries, professionalfees, property taxes, and insurance. Salaries increased approximately 5% during 2009, primarily due to aincrease in health insurance costs and increase in bonuses paid during theyear.  Professional fees decreased 5.7%from 2008 to 2009 primarily due to a reduction in legal services required.  Property taxes decreased approximately 8.8%reflecting a lower assessed value in fiscal 2009 than in fiscal 2008, whilegeneral insurance expense decreased 11.6% for fiscal 2009 as compared to fiscal2008.

 

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* *

*Depreciation and Amortization.*  Amortization remained constant during the2009 fiscal year from 2008.  During thattime, depreciation expenses increased approximately 1%.  This increase is primarily attributable tothe additional depreciation related to the new grain bins, hammer mill, andconveyor systems completed and placed in service during fiscal 2008, and a neweconomizer to our thermo-oxidizer in the energy center completed in fiscal2009.

 

*Other Income.*  Other income for the 2009 fiscal yearincreased $240,337, or approximately 36.7%, from the year ended September 30,2008.  A significant portion of thatincrease was interest expense which decreased by $95,721 or approximately82.6%, and interest income that increased by $47,194 or approximately181.8%.  Interest expense decreased dueto the absence of credit needed, and interest income increased due to a largercash balance in interest bearing accounts during fiscal 2009, as compared tofiscal 2008.  We also recorded $831,601or an increase of approximately 13.7% income from subsidies received from thestate and federal government.  The amountwe received in grants and subsidies increased as a result of a new programinitiated by the USDA Rural Development which is designed to encourageproduction of renewable energy using feedstock other than corn.  We qualified for this program because a largeportion of feedstock used in production of our ethanol and distillers grain ismilo, which under the current guidelines qualifies for the program.  Although we did not receive any cash paymentsrelated to this program during fiscal 2009, we did accrue $700,000 for fiscal2009 in anticipation of receiving the initial payment by the end of December 2009.On December 28, 2009, we received a payment of $848,999.

 

**Results of Operations for the Year Ended September 30,2008 compared to September 30, 2007**

 

*Overview*.  Our operating results declined dramaticallyfrom 2007 to 2008.  The results areprimarily attributable to average grain prices being higher during fiscal 2008,as compared to fiscal 2007.  While demandfor fuel grade ethanol generally remained steady and the average priceincreased slightly during 2008, the average cost of our feedstock wasapproximately 23.5% higher as compared to 2007. The increase in grain prices during fiscal 2008 negatively affected ourprofitability in 2008 as compared to 2007.

 

*Net Income*.  Net income for the 2008 fiscal year decreased$12,985,869, or approximately 78%, from fiscal 2007.  We attribute this decrease primarily to aincrease in cost of goods sold as a result of at-or-near 10-year high grainprices experienced during fiscal 2008.

 

*Revenue*.  Revenue for the 2008 fiscal year increased$10,467,476, or approximately 9.6% from fiscal 2007. This increase was due toan increase in volume of ethanol and distillers grain sales which was a directresult of an increase in production. We sold 5.3% more ethanol and 11.3% moredistillers grain during fiscal 2008 than in fiscal 2007. The revenue wegenerated was comprised of approximately 83% ethanol sales and 17% distillersgrains sales for both fiscal 2008 and 2007.

 

Theaverage price that we received for our ethanol increased by approximately 6.6%,while distillers grain remained relatively the same during fiscal 2008 comparedto 2007, accounting for the modest increase in revenue.  We produced significantly more DDGS in 2008as compared to 2007, due to a seasonal reduction in demand for WDGS whichoccurred during the summer months of fiscal 2008.

 

*Costs of Goods Sold*.  Our cost of goods sold for the 2008 fiscalyear totaled 90.1% of revenue, resulting in a gross profit margin of 9.9%.  This represents a substantial decline from2007, when our profit margin was 22.3%. The dramatic increase in the cost of grain was the major factorcontributing to this decrease.

 

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Grainprices, which represent the significant majority of our cost of goods sold,remained near 10 year highs during a portion of fiscal 2008.  Our cost of grain per gallon produced, net ofhedging activity, increased approximately 24.5% in fiscal 2008 as compared tofiscal 2007.

 

Whileenergy costs were decreasing during fiscal 2007, that trend reversed to asteady increase during the second half of fiscal 2008. Our average cost ofnatural gas per MMBTU increased approximately 35.8%, net of hedging activity,for fiscal 2008 as compared to fiscal 2007. We believe this was due primarily to the dramatic increase in naturalgas in the spring of 2008.

 

Forthe 2008 fiscal year, we realized $1,989,689 in losses to operations relatingto grain and natural gas futures contracts as compared to $2,970,781 for fiscal2007, which amounts are included in cost of goods sold.  In addition, we recorded unrealized losses ongrain and natural gas hedging contracts of $658,043 at September 30, 2008as compared to $2,236,677 at September 30, 2007.

 

*General and Administrative Expenses.*  General and administrative expenses for the2008 fiscal year decreased $392,455, or approximately 13.8% from 2007.  Significant components of these expensesinclude salaries, professional fees, property taxes, and insurance.  We attribute a portion of the decrease inadministrative expenses to a 25.7% decrease in salaries due to a decrease inbonuses paid, and a 57.5% decrease in professional fees related to a potentialstrategic transaction we explored during fiscal 2007.

 

*Depreciation and Amortization.*  Amortization remained constant from thefiscal year ended September 30, 2007 through the 2008 fiscal year.  Depreciation expenses increased approximately8%. We attribute this increase to the purchase and construction of theadditional grain handling equipment and storage.

 

*Other Income.*  Other income for the 2008 fiscal yeardecreased by $433,641 from 2007, or approximately 39.9%.  That decrease is attributable to a decreasein state government subsidy income, which decreased by $393,826, orapproximately 35%, and a decrease in interest income of $31,526, or 54.9%. Thelargest factor contributing to the decrease in grants and subsidies was theproration of the State of Kansas Ethanol Production Incentive due to theincreased number of plants participating in the program.  We were awarded the maximum amount of$1,125,000 from the State of Kansas as part of its state ethanol supportprogram in 2007 and a prorated $731,174 in 2008. Interest income decreased dueto lower average cash balances on deposit and interest expense increasedslightly.

 

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

 

*Prices for Ethanol. *Demand for and the price of ethanol can vary significantly over timeand a decrease in the price of ethanol will adversely affect ourprofitability.  The price of ethanoltends to fluctuate with the price of petroleum gasoline and corn prices.

 

Atthe time of filing of this report,****ethanol istrading at price levels similar to petroleum gasoline which means that usingethanol for blending with petroleum has become only marginally economical,particularly where blending is permissive rather than mandatory.  We believe this may decrease the demand for ethanolwhich in turn will continue to put downward pressure on ethanol prices.  Another factor that may affect the price ofethanol is the increased supply anticipated as a result of the expansion ofpresent plants, construction of new plants coming on-line, and the reopening ofplants formerly in financial difficulty; however, we believe this trend may beless noticeable in 2010 as excess capacity is leveling off due to decreaseddemand and/or delays in plant start-ups scheduled 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.

 

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Duringthe fourth quarter of fiscal 2009 and continuing into the first quarter offiscal 2010, we have experienced a steady increase in the price of ethanolwhich has had a favorable effect on our margins. The price of corn has alsoincreased somewhat: however, we were able to partially mitigate the effect ofthis increase by purchasing local grain at harvest.

 

*Supply and price of grain.*  Prices for grain reflected on CBOT have risenin the first quarter of 2010, however, local cash values have remained weak,primarily due to the large size of the crop this year.  To the extent local supply remains in largeexcess of local demand, we believe local cash values will continue to widen fromfutures prices.  The grain market is dependentupon 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.  In addition, the recent rise in the stockmarket, increasing prices for oil and decreasing value of the U.S. dollar hasput upward pressure on the grain market. Grain supplies and the resultant prices are also affected by weather,governmental policy, disease and other conditions.  Grain markets were relatively volatile during2008 as well as 2007; however we believe our cost of grain will be relativelyflat in fiscal 2010 as compared to fiscal 2009.

 

*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 “**Item 1.****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 enactment of the Energy Independenceand Security Act of 2007.  While the RFSmay not have an immediate impact on the ethanol market since current nationalethanol production capacity exceeds the 2008 RFS requirement of 9 billiongallons, it is likely that the newly increased RFS requirement of 36 billiongallons of renewable fuel by 2022 will continue to support the ethanol industryin the long-term.  It is also possiblethat cessation of supports and incentives may adversely affect price anddemand.

 

*Production of ethanol.*  As noted above, with the new ethanol plantsand plant expansions currently under construction along with new constructionexpected in the near future, and the reentry into the market of plantspreviously shut-in during fiscal 2009, the nationwide production capacity forethanol is expected to increase in the near term. 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 and the increased use mandated under the RFS, capacity inexcess of the allowable 10% fuel blend and the fact that petroleum pricesremain relatively low compared to the previous two fiscal years, will causedownward price pressure for ethanol in fiscal 2009.  If the production of ethanol exceeds eitherthe demand for ethanol or the petroleum industry’s ability to economicallyblend ethanol with gasoline, then the price of ethanol would be expected tofall, and the decrease in ethanol prices could be significant.  In that case, our revenues would decreaseaccordingly.  However, we believe thatour lack of significant long-term debt positions us favorably to weather lowerethanol prices compared to some of our competitors.

 

**Liquidity and Capital Resources**

 

*Overview*.  The following table highlights certaininformation relating to our liquidity and capital resources at September 30,2009 and 2008:

 
| ** **           | ** ** | **September 30** | ** **       |
|----------------------|------------|-----------------------|------------------|
| ** **           | ** ** | **2009**              | ** **       | **2008** | ** ** |
| Working Capital      |       | $                     |  13,723,893 |   | $ |  9,624,680 |   |
| Current Assets       |       | 17,336,366            |             | 15,753,880 |   |
| Current Liabilities  |       | 3,612,473             |             | 6,129,200 |   |
| Long-term Debt       |       | —                |             | — |   |
| Members’ Equity |       | 29,919,179            |             | 31,135,382 |   |
|                      |            |                       |                  |  |  |  |  |

 

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Ourworking capital at September 30, 2009 increased by $4,099,212, orapproximately 42.6%, from September 30, 2008.  Current assets increased $1,582,486, orapproximately 10%, while current liabilities decreased $2,516,726, orapproximately 41.1%.  We attribute theincrease in current assets and working capital to several factors.  Available cash increased as a result ofreduced investment in property, plant and equipment, a decrease in net margincalls for commodity contracts, a decrease in accounts receivable and areduction in inventory during fiscal 2009. In addition, we purchased 140 units from a member during fiscal 2008,which did not repeat in fiscal 2009. These were partially offset by a reductionin net income, an increase in prepaid expenses, a decrease in investments incommodities futures and a decrease in accounts payable at September 30,2009 as compared to September 30, 2008. Working capital was reducedsubsequent to the fiscal year end as the result of a cash distribution paid toour members in the amount of $7,105,000. However, we believe we have sufficient liquidity and capital for theforeseeable 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.  Distributions to members increased slightlyduring fiscal 2009, as our margins remained tight.

 

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 30,2009, 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 cash generated during the 2009 fiscalyear was $5,851,536, compared to net cash generated of $1,875,847 in fiscal2008.  The biggest factors causing theincrease in cash flow in 2009 was net reduction in our commodities tradingaccount and margin calls, decrease in purchases of plant and equipment,decrease in payments on notes during fiscal 2009 and the acquisition ofmembership units in 2008 did not reoccur in 2009.

 

Cashprovided by operations decreased by $415,635 in fiscal 2009 compared to thesame period in fiscal 2008. The decrease reflects the decrease in accountspayable, increased pre-paid expenses and lower net income compared to the prioryear. The change in grain hedging contracts and decrease in accounts receivabletempered the reduction in cash from operations. Our accounts payable balancewas significantly lower at September 30, 2009 primarily due to the lateharvest which decreased our commodity payable. Our natural gas providersinitiated a prepayment requirement during fiscal 2009 to all ethanol plantswhich caused increased prepaid expense at September 30, 2009.

 

Thecash provided by our investing activities during fiscal 2009 increased by$2,855,218 from fiscal 2008.  We invested$1,101,519 in property, plant and equipment in fiscal 2009 compared to$1,575,358 in fiscal 2008.  We withdrew,net of margin calls, $2,237,443 from our commodity trading accounts duringfiscal 2009, compared to net margin calls of $143,936 for fiscal 2008.

 

Cashused in financing activities decreased by $1,536,108 in fiscal 2009 compared to2008.  The decrease primarily reflectsthe reduction of payments on notes payable during fiscal 2009, and theacquisition of membership units during fiscal 2008 which was not repeatedduring fiscal 2009. These factors were offset marginally by a slight increasein distributions paid to members during fiscal 2009.

 

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*Equity Financing.*  Our members have contributed $19,801,035 inequity financing since inception, primarily from our initial public offeringcompleted in 2003.  We do not anticipatethat any additional equity financing will be necessary in the foreseeablefuture.

 

*Debt Financing.*  Under our arrangement with AgCountry, ourprincipal lender, we borrowed $22,000,000 under a construction loan in2003.  The proceeds of that loan wereused 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 was effective May 2, 2007, the amount available on the line ofcredit was increased to $8,000,000 with variable interest at LIBOR plus 2.0%.There is no balance outstanding on this line of credit at September 30,2009.

 

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 |   |
| Construction contract       |       | 454,693   |             | 454,693                |       | —          |       | —          |                            | —                  |       |
| Total                       |       | $         |  32,454,693 |                   | $          |  454,693   |       | $               |      — |                    | $          |      — |   | $ |  32,000,000 |   |

 

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(1)              Includes a$32,000,000 lease obligation related to our sale and leaseback transaction withGove County.   We sold our property andfacilities to Gove County in exchange for industrial revenue bonds.  The amount of our lease obligation is offsetby the amount of interest we receive on the bonds.  It is anticipated that the lease obligationwill be paid in full by surrender of the bonds on or before maturity.

 

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;

 

·                  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;

 

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·                  We can distribute up to 75% of our net incometo our members.  If we maintain a leverageratio of 0.60:1.00 and working capital greater than $5 million (each asreported in audited year-end financial statements prepared in accordance withgenerally accepted accounting principles), we can distribute 100% of our netincome 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$2,500,000 during any fiscal year without AgCountry’s prior written approval.

 

AtSeptember 30, 2009, we believe we satisfied all of the covenants under theloan agreement.

 

**Off-BalanceSheet Arrangements**

 

At September 30, 2009, we had no off-balance sheet arrangements.

 

**Critical Accounting Policies and Estimates**

 

*Use of Estimates*.  Preparation of our financial statementsnecessarily requires estimates and judgments to be made that affect the amountsof assets, liabilities, revenues and expenses reported. Such decisions includethe selection of the appropriate accounting principles to be applied and theassumptions on which to base accounting estimates. Our management continuallyevaluates these estimates based on assumptions it believes to be reasonableunder 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 recordedwhen loaded out of our facility. Interest income is recognized asearned.  Income from government grantprograms is recognized 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. *We account for derivativesin accordance with Accounting Standards Codification (“ASC”) 815-10, “Accountingfor Derivative Instruments and Hedging Activities.”  ASC 815-10 requires the recognition ofderivatives 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 designated, documented and assessed for hedgerelationships, which mostly resulted in cash flow hedges that require us torecord the derivative assets and liabilities at their fair value on the balancesheet with an offset in other comprehensive income. Amounts are removed from othercomprehensive income as the underlying transactions occur and realized gains orlosses are recorded.   We have includedin its cost of sales an

 

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aggregateof $1,874,225 of losses on completed contracts related to its hedgingactivities for corn and natural gas and have recorded an aggregate of$1,058,867 of unrealized gains for the year ended September 30, 2009, as acharge to comprehensive income as compared to $1,989,689 losses on contractsand $658,043 of unrealized losses for the year ended September 30,2008.  At September 30, 2009, thecommodities trading account-futures and options contracts amounted to $94,771,as compared to $2,332,214 at September 30, 2008, representing the lower ofthe cost or fair market value of the futures and options contracts recorded onthe 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.

 

**Recently Adopted Accounting Standards**

 

Weevaluate the pronouncements of various authoritative accounting organizations,primarily the Financial Accounting Standards Board (“FASB”), the SEC, and theEmerging Issues Task Force (“EITF”), to determine the impact of newpronouncements on US GAAP and the impact on our company.  We have adopted the following new accountingstandards during 2009:

 

*The FASB Accounting Standard Codification and the Hierarchy ofGenerally Accepted Accounting Principles*— FASB ASC TOPIC 105 —**InJune 2009, the FASB issued Topic 105, which became the source ofauthoritative GAAP recognized by the FASB to be applied by nongovernmentalentities. Rules and interpretive releases of the SEC under authority offederal securities laws are also sources of authoritative GAAP for SEC registrants.On the effective date of this topic, the codification will supersede allthen-existing non-SEC accounting and reporting standards. All other non-SECaccounting literature not included in the codification will becomenon-authoritative. This topic identifies the sources of accounting principlesand the framework for selecting the principles used in preparing the financialstatements of nongovernmental entities that are presented in conformity withGAAP and arranged these sources of GAAP in a hierarchy for users to applyaccordingly. This topic is effective for financial statements issued forinterim and annual periods ending after September 15, 2009. The adoptionof this topic did not have a material impact on our disclosure of the financialstatements.

 

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*Business Combinations* — FASB ASC TOPIC 805 — The objective of this topic is to enhance theinformation that an entity provides in its financial reports about a businesscombination and its effects. The topic mandates: (i) how the acquirerrecognizes and measures the assets acquired, liabilities assumed and anynon-controlling interest in the acquiree; (ii) what information todisclose in its financial reports and; (iii) recognition and measurementcriteria for goodwill acquired. This topic is effective for any acquisitionsmade on or after December 15, 2008. The adoption of this topic did nothave a material impact on our financial statements and disclosures.

 

*Noncontrolling Interests* — FASB ASC TOPIC 810 — The objective of this topic is to improve therelevance, comparability, and transparency of the financial information that areporting entity provides in its consolidated financial statements byestablishing accounting and reporting standards that require: (i) theownership interests in subsidiaries held by parties other than the parent beclearly identified, labeled, and presented in the consolidated statement offinancial position within equity, but separate from the parent’s equity; (ii) theamount of consolidated net income attributable to the parent and to thenoncontrolling interest be clearly identified and presented on the face of theconsolidated statement of income; (iii) changes in a parent’s ownership interestwhile the parent retains its controlling financial interest in its subsidiarybe accounted for consistently; (iv) when a subsidiary is deconsolidated,any retained noncontrolling equity investment in the former subsidiary beinitially measured at fair value. The gain or loss on the deconsolidation ofthe subsidiary is measured using the fair value of any noncontrolling equityinvestment rather than the carrying amount of that retained investment and; (v) entitiesprovide sufficient disclosures that clearly identify and distinguish betweenthe interests of the parent and the interests of the non-controlling owners.This topic is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited. The adoptionof this topic is not expected to have a material impact on our financialstatements and disclosures.

 

*Derivatives and Hedging* — FASB ASC TOPIC 815 — The use and complexity of derivativeinstruments and hedging activities have increased significantly over the pastseveral years. This topic requires enhanced disclosures about an entity’sderivative and hedging activities and thereby improves the transparency offinancial reporting. This topic is effective for financial statements issuedfor fiscal years and interim periods beginning after November 15, 2008,with early application encouraged.  Theadoption of this topic is not expected to have a material impact on ourfinancial statements and disclosures.

 

*Financial Services—Insurance*— FASB ASC TOPIC 944 — Diversity exists in practice in accountingfor financial guarantee insurance contracts by insurance enterprises. Thatdiversity results in inconsistencies in the recognition and measurement ofclaim liabilities because of differing views about when a loss has beenincurred. This topic requires that an insurance enterprise recognize a claimliability prior to an event of default (insured event) when there is evidencethat credit deterioration has occurred in an insured financial obligation. Thistopic is effective for financial statements issued for fiscal years beginningafter December 15, 2008, and all interim periods within those fiscalyears, except for some disclosures about the insurance enterprise’srisk-management activities. The adoption of this topic is not expected to havea material impact on our financial statements and disclosures.

 

*Subsequent Events*— FASB ASC TOPIC 855 — In May 2009, the FASB issued Topic 855,which establish general standards of accounting and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued. In particular, this topic sets forth : (i) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements, (ii) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements, and (iii) thedisclosures that an entity should make about 

 

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eventsor transactions that occurred after the balance sheet date. This topic shouldbe applied to the accounting and disclosure of subsequent events. This topicdoes not apply to subsequent events or transactions that are within the scopeof other applicable accounting standards that provide different guidance on theaccounting treatment for subsequent events or transactions. This topic waseffective for interim and annual periods ending after June 15, 2009. Theadoption of this topic did not have a material impact on our financialstatements and disclosures.

 

*Recognition and Presentation of Other-Than-Temporary Imparimentss*— FASB ASC TOPIC 320 — In April 2009,the FASB issued Topic 320, which amends the other-than-temporary impairmentguidance in GAAP for debt securities, to make the guidance more operational andto improve the presentation and disclosure of other-than-temporary impairmentson debt and equity securities in the financial statements. This topic does notamend existing recognition and measurement guidance related toother-than-temporary impairments of equity securities. The topic is effectivefor interim and annual reporting periods ending after June 15, 2009, withearly adoption permitted for periods ending after March 15, 2009.  Earlier adoption for periods ending before March 15,2009, is not permitted.  This topic doesnot require disclosures for earlier periods presented for comparative purposesat initial adoption. In periods after initial adoption, this topic requirescomparative disclosures only for periods ending after initial adoption. Theadoption of this topic did not have a material impact on our financialstatements and disclosures.

 

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*Income Taxes, an Accounting Standard Update*— FASB ASC TOPIC 740 — In September 2009,the FASB issued this update to address the need for additional implementationguidance on accounting for uncertainty in income taxes.  For entities that are currently applying thestandards for accounting for uncertainty in income taxes, the guidance anddisclosure amendments are effective for financial statements issued for interimand annual periods ending after September 15, 2009.  The adoption of this update did not have amaterial impact on our financial statements and disclosures.

 

**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 thebenefits that we expect will result from our business activities and certaintransactions that we have completed, such as increased revenues, decreasedexpenses and avoided expenses and expenditures; and

 

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

 

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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.  Quantitativeand Qualitative 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 changes to the commodity prices of corn and natural gas. Wedo not enter into these derivative financial instruments for trading orspeculative purposes, nor do we designate these contracts as hedges foraccounting purposes pursuant to the requirements of ASC TOPIC 815,*Derivatives and Hedging*.

 

**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 30,2009 there was no outstanding balance on this note.  We are subject to interest at the rate ofLIBOR 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 positions

 

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changes,the gains and losses are immediately recognized in our cost of goods sold.  For example, it is likely and we wouldgenerally expect that a 10% increase in the cash price of grain and natural gaswould produce an increase in the fair value of our derivative instruments equalto approximately $9,477 based on our positions at September 30, 2009.

 

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, 2009,the fair value of our derivative instruments for grain is an asset in theamount of $94,771.  We recorded a gain inthe amount of $1,058,866 for the fiscal year ended September 30,2009.  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 with deliverydates 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 18 million bushels peryear for the production of 49 million gallons of ethanol.  We have no price protection in place for ourexpected grain usage for fiscal year ending September 30, 2010.  If we determine that obtaining priceprotection would be beneficial as we go further into 2010, we would likely doso using CBOT futures and options and over the counter option contracts.  As grain prices move in reaction to markettrends and information, our income statement may be affected depending on theimpact such market movements have on the value of our derivativeinstruments.  Depending on marketmovements, crop prospects and weather, price protection positions may causeimmediate adverse effects, but are expected to produce long-term positivegrowth 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 13% of our total natural gas needs forfiscal 2010. We expect to acquire additional fiscal 2010 contracts for gasduring August 2010 which is historically the month when the lowest annualprices 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 prices declined.  Energy sector prices have increased andnatural gas, as a portion of the total energy market, has responded with higherprices to be cost competitive with its alternatives. In the future, we may notbe able to secure natural gas for prices less than current market price and wemay not recover high costs of production resulting from high natural gasprices, 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, 2009 and September 30, 2008 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:

 

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| **Period Ended**        | ** ** | **Fair Value** | ** ** | **Effect of********Hypothetical Adverse********Change - Market Risk** | ** ** |
|-------------------------|------------|----------------|------------|-----------------------------------------------------------------------|------------|
| September 30, 2009 |       | $              | 94,771     |                                                                  | $          | 9,477 |   |
| September 30, 2008 |       | 2,332,214      |       | 233,221                                                               |       |
|                         |            |                |            |                                                                       |            |  |  |

 

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 95% of our anticipated ethanolproduction through the first three months of fiscal 2010.  We have not contracted for any of ouranticipated production through the second and third quarter of fiscal 2010,respectively.  We will continue to advancecontract for ethanol sales in fiscal 2010 to attempt to further reduce our riskrelated to price decreases. While this strategy minimizes the risk associatedwith downward price fluctuations of ethanol, it may also prevent us fromrealizing the full benefit of upward price movements. Although using pricedcontracts makes our revenue more predictable, we cannot predict the extent towhich other factors such as inflation, government regulation or changing pricesmay affect our financial performance.

 

**Item 8.  FinancialStatements and Supplementary Data.**

 

Ourfinancial statements and supplementary data are included on pages F-1 toF-· of thisreport.

 

**Item 9.****          ****Changes inand Disagreements 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(T). Controls and Procedures.**

 

(a)                                  Our managementsupervised and participated in an evaluation of the effectiveness of the designand operation of our disclosure controls and procedures as of September 30,2009.  Based on that evaluation, ourmanagement, including our principal executive officer and principal financialofficer, concluded that our disclosure controls and procedures were effectiveto ensure that information required to be disclosed in the reports filed orsubmitted by the company under the Securities Exchange Act of 1934, as amended,is recorded, processed, summarized and communicated to our management,including our principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosure within thetime periods specified in the SEC’s rules and forms.

 

Thisreport does not include an attestation report of our independent registeredpublic accounting firm regarding internal control over financialreporting.  Management’s report, which isincluded in Item 8 above, was not subject to attestation by our registeredpublic accounting firm pursuant to temporary rules of the SEC that permitus to provide only management’s report in this annual report.

 

(b)                                 There were nochanges in our internal control over financial reporting during the quarterended September 30, 2009 that materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

**Item 9B.  OtherInformation.**

 

None.

 

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**PART III**

 

Pursuant to General Instruction G 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, 2010.

 

**PART IV**

 

**Item 15. Exhibits, Financial Statement Schedules.**

 

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

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned thereunto duly authorized in Oakley, Kansas on December 28, 2009.

 
|   |   | 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, 2009 |
| Steven  R. McNinch     |       |                              |       |               |
|                   |       |                              |       |               |
| /s/  Curt V. Sheldon   |       | Chief  Accounting Officer         |       | December  28, 2009 |
| Curt  V. Sheldon       |       |                              |       |               |
|                   |       |                              |       |               |
| /s/  Scott Foote       |       | Chief  Financial Officer, Manager |       | December  28, 2009 |
| Scott  Foote           |       |                              |       |               |
|                   |       |                              |       |               |
| /s/  Jeff Torluemke    |       | President,  Manager               |       | December  28, 2009 |
| Jeff  Torluemke        |       |                              |       |               |
|                   |       |                              |       |               |
| /s/  Brian Baalman     |       | Manager                           |       | December  28, 2009 |
| Brian  Baalman         |       |                              |       |               |
|                   |       |                              |       |               |
| /s/  Ben Dickman       |       | Manager                           |       | December  28, 2009 |
| Ben  Dickman           |       |                              |       |               |
|                   |       |                              |       |               |
| /s/  David Mann        |       | Manager                           |       | December  28, 2009 |
| David  Mann            |       |                              |       |               |
|                   |       |                              |       |               |
| /s/  Richard Sterrett  |       | Manager                           |       | December  28, 2009 |
| Richard  Sterrett      |       |                              |       |               |
|                   |       |                              |       |               |
| /s/  Gary Johnson      |       | Manager                           |       | December  28, 2009 |
| Gary  Johnson          |       |                              |       |               |

 

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**** ****

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

 

****Index to Financial Statements****

 
| Management’s  Report on Internal Controls Over Financial Reporting                                              | F-1    |
|----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                 |   |
| Report  of Independent Registered Public Accounting Firm                                                             | F-2    |
|                                                                                                                 |   |
| Balance  Sheets at September 30, 2009 and 2008                                                                  | F-3    |
|                                                                                                                 |   |
| Statements  of Income for the Fiscal Years Ended September 30, 2009, 2008 and 2007                         | F-4    |
|                                                                                                                 |   |
| Statement of Changes in Members’ Equity for the Fiscal  Years Ended September 30, 2009, 2008 and 2007 | F-5    |
|                                                                                                                 |   |
| Statements  of Cash Flows for the Fiscal Years Ended September 30, 2009,  2008 and 2007                    | F-6    |
|                                                                                                                 |   |
| Notes  to Financial Statements                                                                                       | F-7    |

 

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** **

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

 

**MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting.

 

TheSecurities Exchange Act of 1934 defines internal control over financialreporting in Rules 13a-15(f) and 15d-15(f) as a process designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles and includes thosepolicies and procedures that:

 

·                  Pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddisposition of assets;

 

·                  Provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statementsin accordance with generally accepted accounting principles, and that ourreceipts and expenditures are being made only in accordance with authorizationsof management and our directors; and

 

·                  Provide reasonable assurance regardingprevention and timely detection of unauthorized acquisition, use or dispositionof our assets that could have a material effect on our financial statements.

 

Internalcontrol systems, no matter how well designed, have inherent limitations.  Therefore, even those systems that aredetermined to be effective provide only reasonable assurance with respect tofinancial statement preparation and presentation.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Managementassessed the effectiveness of our internal control over financial reportingbased on criteria for effective internal control over financial reportingdescribed in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission.

 

Basedon its assessment, management concluded that we maintained effective internalcontrol over financial reporting as of September 30, 2009.

 

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

Membersand Board of Managers

WesternPlains Energy, L.L.C.

 

We have audited the accompanying balance sheets of Western PlainsEnergy, L.L.C. as of September 30, 2009 and 2008, and the relatedstatements of income, changes in members’ equity, and cash flows for the yearsended September 30, 2009, 2008, and 2007. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Western Plains Energy, L.L.C. asof September 30, 2009 and 2008, and the results of its operations and itscash flows for the years ended September 30, 2009, 2008, and 2007 inconformity with accounting principles generally accepted in the United Statesof America.

 

 
| /s/ Stark Winter Schenkein & Co., LLP |   |
|------------------------------------------------|--------|
|                                           |   |
| Denver,  Colorado                              |   |
| December 12,  2009                        |   |

 

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

**BALANCE SHEETS**

**SEPTEMBER30, 2009 AND 2008**

 
| ** **                                                  | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                  |       |        |       |        |       |
|                                                        |       |        |       |        |       |
| **CURRENT ASSETS**                                          |       |        |       |        |       |
| Cash                                                        |       | $           | 8,352,894  |        | $          | 2,501,358 |   |
| Accounts receivable                                         |       | 4,852,593   |       | 6,143,322   |       |
| Accounts receivable - government subsidies                  |       | 700,000     |       | 371,919     |       |
| Inventory                                                   |       | 2,899,434   |       | 4,197,096   |       |
| Prepaid expense                                             |       | 436,674     |       | 207,971     |       |
| Commodities trading account- futures and options  contracts |       | 94,771      |       | 2,332,214   |       |
| **Total current assets**                                    |       | 17,336,366  |       | 15,753,880  |       |
|                                                        |       |        |       |        |       |
| **PROPERTY AND EQUIPMENT**                                  |       |        |       |        |       |
| Land                                                        |       | 701,872     |       | 701,872     |       |
| Land improvements                                           |       | 1,220,677   |       | 1,148,567   |       |
| Manufacturing equipment                                     |       | 39,029,728  |       | 38,811,073  |       |
| Buildings                                                   |       | 3,011,442   |       | 2,960,664   |       |
| Vehicles                                                    |       | 550,480     |       | 490,599     |       |
| Grain handling and other equipment                          |       | 3,742,557   |       | 3,742,557   |       |
| Office equipment, furniture and fixtures                    |       | 184,188     |       | 178,640     |       |
| Construction-in-progress                                    |       | 679,828     |       | —      |       |
| Spare parts                                                 |       | 727,145     |       | 712,425     |       |
|                                                        |       | 49,847,917  |       | 48,746,397  |       |
| Less: Accumulated depreciation                              |       | (34,414,342 | )          | (28,037,845 | )          |
|                                                        |       | 15,433,575  |       | 20,708,552  |       |
|                                                        |       |        |       |        |       |
| **OTHER ASSETS**                                            |       |        |       |        |       |
| Investment in industrial development revenue bonds          |       | 32,000,000  |       | 32,000,000  |       |
| Water rights                                                |       | 340,408     |       | 340,408     |       |
| Loan origination fees, net                                  |       | 162,947     |       | 196,655     |       |
| Financing fees, net                                         |       | 160,521     |       | 167,253     |       |
| Deposits                                                    |       | 97,834      |       | 97,834      |       |
|                                                        |       | 32,761,710  |       | 32,802,150  |       |
|                                                        |       |        |       |        |       |
| **TOTAL ASSETS**                                            |       | $           | 65,531,651 |        | $          | 69,264,582 |   |
|                                                        |       |        |       |        |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                    |       |        |       |        |       |
|                                                        |       |        |       |        |       |
| **CURRENT LIABILITIES**                                     |       |        |       |        |       |
| Accounts payable and accrued expenses                       |       | $           | 3,607,417  |        | $          | 6,116,316 |   |
| Accrued interest                                            |       | 5,056       |       | 4,765       |       |
| Notes payable                                               |       | —      |       | 8,119       |       |
| **Total current liabilities**                               |       | 3,612,473   |       | 6,129,200   |       |
|                                                        |       |        |       |        |       |
| **LEASE OBLIGATION**                                        |       | 32,000,000  |       | 32,000,000  |       |
|                                                        |       |        |       |        |       |
| **COMMITMENTS AND CONTINGENCIES**                           |       |        |       |        |       |
|                                                        |       |        |       |        |       |
| **MEMBERS’ EQUITY**                                    |       |        |       |        |       |
| Class A Capital Units, 16,002 issued                   |       | 10,910,140  |       | 10,910,140  |       |
| Class B Capital Units, 12,068 issued                   |       | 7,940,895   |       | 7,940,895   |       |
| Class C Capital Units, 350 issued                      |       | 250,000     |       | 250,000     |       |
| Membership distributions                                    |       | (75,584,300 | )          | (70,610,800 | )          |
| Accumulated comprehensive (loss)                            |       | (1,931,146  | )          | (2,990,013  | )          |
| Retained earnings                                           |       | 88,333,590  |       | 85,635,160  |       |
| **Total members’ equity**                              |       | 29,919,179  |       | 31,135,382  |       |
|                                                        |       |        |       |        |       |
| **TOTAL LIABILITIES AND MEMBERS’  EQUITY**             |       | $           | 65,531,651 |        | $          | 69,264,582 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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

**STATEMENTS OF  INCOME**

**FOR THEFISCAL YEARS ENDED SEPTEMBER 30, 2009, 2008, AND 2007**

 
| ** **                                         | ** ** | **2009**   | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|----------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
|                                               |       |       |       |        |       |        |       |
| **REVENUE**                                        |       | $          | 92,268,505 |        | $          | 119,228,676 |       | $ | 108,761,200 |   |
| **COST OF SALES**                                  |       | 81,722,233 |       | 107,404,082 |       | 84,457,974  |       |
| **GROSS PROFIT**                                   |       | 10,546,272 |       | 11,824,594  |       | 24,303,226  |       |
|                                               |       |       |       |        |       |        |       |
| **EXPENSES**                                       |       |       |       |        |       |        |       |
| General and administrative expenses                |       | 2,315,556  |       | 2,443,180   |       | 2,835,635   |       |
| Depreciation expense                               |       | 6,386,602  |       | 6,324,986   |       | 5,858,935   |       |
| Amortization expense                               |       | 40,440     |       | 40,440      |       | 40,440      |       |
| **Total expenses**                                 |       | 8,742,598  |       | 8,808,606   |       | 8,735,010   |       |
|                                               |       |       |       |        |       |        |       |
| **Income from operations**                         |       | 1,803,674  |       | 3,015,988   |       | 15,568,216  |       |
|                                               |       |       |       |        |       |        |       |
| **Other income (expense)**                         |       |       |       |        |       |        |       |
| Interest expense                                   |       | (20,158    | )          | (115,879    | )          | (110,092    | )          |
| Interest income                                    |       | 73,148     |       | 25,954      |       | 57,480      |       |
| 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                           |       | 831,601    |       | 731,174     |       | 1,125,000   |       |
| Other income                                       |       | 10,165     |       | 13,170      |       | 15,672      |       |
|                                               |       |       |       |        |       |        |       |
| **Total other income**                             |       | 894,756    |       | 654,419     |       | 1,088,060   |       |
|                                               |       |       |       |        |       |        |       |
| **NET INCOME**                                     |       | 2,698,430  |       | 3,670,407   |       | 16,656,276  |       |
|                                               |       |       |       |        |       |        |       |
| **Unrealized gains (losses) on  grain contracts**  |       | 1,058,867  |       | (658,043    | )          | (2,236,677  | )          |
|                                               |       |       |       |        |       |        |       |
| **COMPREHENSIVE INCOME**                           |       | $          | 3,757,297  |        | $          | 3,012,365   |       | $ | 14,419,599 |   |
|                                               |       |       |       |        |       |        |       |
| **NET INCOME PER UNIT**                            |       |       |       |        |       |        |       |
| **BASIC AND DILUTED**                              |       | $          | 94.95      |        | $          | 129.15      |       | $ | 583.20 |   |
|                                               |       |       |       |        |       |        |       |
| **DISTRIBUTIONS PER UNIT**                         |       | $          | 175.00     |        | $          | 171.43      |       | $ | 1,000.00 |   |
| **WEIGHTED AVERAGE UNITS  OUTSTANDING**            |       |       |       |        |       |        |       |
| **BASIC AND DILUTED**                              |       | 28,420     |       | 28,420      |       | 28,560      |       |

 

Theaccompanying notes are an integral part of these financial statements.

 

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

**STATEMENTS OF CHANGES IN MEMBERS’EQUITY**

**FORTHE FISCAL YEARS ENDED SEPTEMBER 30, 2007, 2008 and 2009**

 
| ** **                       | ** ** | **Class A** | ** ** | **Class B** | ** ** | **Class C** | ** ** | **Membership** | ** ** | **Retained** | ** ** | **Accumulated** | ** ** | ** **        | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|----------------|------------|--------------|------------|-----------------|------------|-------------------|------------|
| ** **                       | ** ** | **Units**        | ** ** | **Amount**       | ** ** | **Units**        | ** ** | **Amount**     | ** ** | **Units**    | ** ** | **Amount**      | ** ** | **Distributions** | ** ** | **Earnings** | ** ** | **Comprehensive (loss)** | ** ** | **Total** | ** ** |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Balance  September 30, 2006 |       | 16,002           |       | $                | 10,910,140 |             | 12,208     |           | $          | 8,640,895    |       | 350             |       | $                 | 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 |       | 16,002           |       | 10,910,140       |       | 12,208           |       | 8,640,895      |       | 350          |       | 250,000         |       | (65,728,800       | )          | 81,964,753 |   | (2,331,970 | ) | 33,705,018 |   |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Distributions  to members        |       | —           |       | —           |       | —           |       | —         |       | —       |       | —          |       | (4,882,000        | )          | — |   | — |   | (4,882,000 | ) |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Redemption  of 140 units class B |       | —           |       | —           |       | (140             | )          | (700,000       | )          | —       |       | —          |       | —            |       | — |   | — |   | (700,000 | ) |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Change  in grain hedge contracts |       | —           |       | —           |       | —           |       | —         |       | —       |       | —          |       | —            |       | — |   | (658,043 | ) | (658,043 | ) |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Net  income                      |       | —           |       | —           |       | —           |       | —         |       | —       |       | —          |       | —            |       | 3,670,407 |   | — |   | 3,670,407 |   |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Balance  September 30, 2008 |       | 16,002           |       | 10,910,140       |       | 12,068           |       | 7,940,895      |       | 350          |       | 250,000         |       | (70,610,800       | )          | 85,635,160 |   | (2,990,013 | ) | 31,135,382 |   |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Distributions  to members        |       | —           |       | —           |       | —           |       | —         |       | —       |       | —          |       | (4,973,500        | )          | — |   | — |   | (4,973,500 | ) |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Change  in grain hedge contracts |       | —           |       | —           |       | —           |       | —         |       | —       |       | —          |       | —            |       | — |   | 1,058,867 |   | 1,058,867 |   |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Net  income                      |       | —           |       | —           |       | —           |       | —         |       | —       |       | —          |       | —            |       | 2,698,430 |   | — |   | 2,698,430 |   |
|                             |       |             |       |             |       |             |       |           |       |         |       |            |       |              |       |   |   |   |   |   |   |
| Balance  September 30, 2009 |       | 16,002           |       | $                | 10,910,140 |             | 12,068     |           | $          | 7,940,895    |       | 350             |       | $                 | 250,000    |   | $ | (75,584,300 | ) | $ | 88,333,590 |   | $ | (1,931,146 | ) | $ | 29,919,179 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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

**STATEMENTS OF CASH FLOWS**

**FOR THEFISCAL YEARS ENDED SEPTEMBER 30, 2009, 2008, AND 2007**

 
| ** **                                               | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|----------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                     |       |        |       |        |       |        |       |
| **OPERATING ACTIVITIES**                                 |       |        |       |        |       |        |       |
| Net income                                               |       | $           | 2,698,430  |        | $          | 3,670,407   |       | $ | 16,656,276 |   |
| Depreciation                                             |       | 6,386,602   |       | 6,324,986   |       | 5,858,935   |       |
| Amortization                                             |       | 40,440      |       | 40,440      |       | 40,440      |       |
| Gain (loss) on disposal of equipment                     |       | —      |       | —      |       | (5,473      | )          |
| Change in unrealized losses on grain hedging contracts   |       | 1,058,867   |       | (658,043    | )          | (2,236,677  | )          |
| Changes in assets and liabilities                        |       |        |       |        |       |        |       |
| Accounts receivable                                      |       | 1,290,729   |       | (2,924,244  | )          | 2,405,541   |       |
| Accounts receivable - Government Subsidies               |       | (328,081    | )          | (125,030    | )          | (24,825     | )          |
| Inventory                                                |       | 1,297,662   |       | 806,041     |       | (3,546,673  | )          |
| Prepaid expenses                                         |       | (228,703    | )          | (4,756      | )          | (155,211    | )          |
| Accounts payable and accrued expenses                    |       | (2,519,004  | )          | 2,986,883   |       | 750,717     |       |
| Accrued interest                                         |       | 291         |       | (3,817      | )          | 6,219       |       |
| **NET CASH PROVIDED BY OPERATING  ACTIVITIES**           |       | 9,697,233   |       | 10,112,868  |       | 19,749,270  |       |
|                                                     |       |        |       |        |       |        |       |
| **INVESTING ACTIVITIES**                                 |       |        |       |        |       |        |       |
| Purchase of property, plant and equipment                |       | (1,101,521  | )          | (1,575,358  | )          | (4,433,862  | )          |
| Investment in commodity trading accounts                 |       | (17,278,556 | )          | (27,830,037 | )          | (21,319,616 | )          |
| Withdrawals from commodity trading accounts              |       | 19,515,999  |       | 27,686,101  |       | 19,333,404  |       |
| **NET CASH PROVIDED BY (USED IN)  INVESTING ACTIVITIES** |       | 1,135,922   |       | (1,719,294  | )          | (6,420,074  | )          |
|                                                     |       |        |       |        |       |        |       |
| **FINANCING ACTIVITIES**                                 |       |        |       |        |       |        |       |
| Distributions to members                                 |       | (4,973,500  | )          | (4,882,000  | )          | (28,560,000 | )          |
| Proceeds from notes payable                              |       | —      |       | 20,000,000  |       | 20,850,000  |       |
| Payment of notes payable                                 |       | (8,119      | )          | (20,935,727 | )          | (19,983,923 | )          |
| Acquisition of membership units                          |       | —      |       | (700,000    | )          | —      |       |
| **NET CASH (USED IN) FINANCING  ACTIVITIES**             |       | (4,981,619  | )          | (6,517,727  | )          | (27,693,923 | )          |
|                                                     |       |        |       |        |       |        |       |
| **NET INCREASE (DECREASE) IN CASH**                      |       | 5,851,536   |       | 1,875,847   |       | (14,364,727 | )          |
|                                                     |       |        |       |        |       |        |       |
| **CASH - BEGINNING OF PERIOD**                           |       | 2,501,358   |       | 625,511     |       | 14,990,238  |       |
|                                                     |       |        |       |        |       |        |       |
| **CASH - END OF PERIOD**                                 |       | $           | 8,352,894  |        | $          | 2,501,358   |       | $ | 625,511 |   |
|                                                     |       |        |       |        |       |        |       |
| **SUPPLEMENTAL CASH FLOW  INFORMATION**                  |       |        |       |        |       |        |       |
|                                                     |       |        |       |        |       |        |       |
| Cash paid for income taxes                               |       | $           | —     |        | $          | —      |       | $ | — |   |
| Cash paid for interest                                   |       | $           | 19,868     |        | $          | 119,696     |       | $ | 103,872 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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** **

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

**NOTES TOFINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

**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 gallonnameplate capacity ethanol plant. Western Plains Energy, L.L.C. (the “Company”)was organized on July 10, 2001.  TheCompany began its principal operations in January 2004.

 

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

 

*Revenue Recognition*

 

Revenue from the production of ethanol and related products is recordedwhen the product is loaded on the common carrier FOB “shipping point,” whentitle passes to customer. The distillers grain products are subject to aPurchase and Sales Agreement, and revenue is recognized upon delivery, FOB “Shippingpoint.” 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 ASC 815-10, “Accounting forDerivative Instruments and Hedging Activities”. ASC 815-10 requires therecognition of derivatives in the balance sheet and the measurement of theseinstruments at fair value. Changes in the fair value of derivatives arerecorded as a component of Cost of Sales unless the normal purchase or saleexception applies or hedge accounting is elected.

 

TheCompany enters into derivative instruments including future contracts, swapagreements and options to fix prices for a portion of future raw materialrequirements. The Company has designated, documented and assessed for hedgerelationships, which mostly resulted 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 cost of sales an aggregate of $3,833,914of losses on completed contracts related to its hedging activities and hasrecorded an aggregate of $1,058,867 of unrealized gains as a credit tocomprehensive income for the year ended September 30, 2009.  This compares to losses on contracts of$1,989,689 and $1,311,604, and unrealized losses of $658,043 and $2,236,677 forthe years ended September 30, 2008 and 2007, respectively.  At September 30, 2009, the commoditiestrading account-futures and options contracts amounted to

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

$94,771,compared to $2,332,214 at September 30, 2008, which represents the lowerof 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                                     |   | 7 years        |   |
| Office equipment, and furniture and fixtures |   | 7 years        |   |

 

Depreciationexpense for the years ended September 30, 2009 and 2008 amounted to$6,386,602 and $6,324,986, respectively. For the year ended September 30,2007, depreciation expense amounted to $5,858,935.

 

*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 estimated future cash flows isless than the carrying amount of the asset. The amount of the loss isdetermined by comparing the estimated fair market value of the asset to thecarrying amount of the asset. Such assessments did not result in any adjustmentto the value of non-current assets.

 

*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.

 

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** **

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

*Concentration of Credit Risk*

* *

TheCompany’s cash balances are maintained in bank depositories and periodicallyexceed federally insured limits.  At September 30,2009, the Company’s balances exceeded insured limits by $6,306,447.

 

*Fair Value of Financial Instruments*

 

Fairvalue estimates discussed herein are based upon certain market assumptions andpertinent information available to management as of September 30, 2009.The respective carrying value of certain on-balance-sheet financial instrumentsapproximated their fair values. These financial instruments include cash,accounts receivable, accounts payable, and accrued liabilities. Fair valueswere assumed to approximate carrying values for these financial instrumentsbecause they are short term in nature and their carrying amounts approximatefair values.

 

*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.

 

*Earnings Per Capital Unit*

 

Forpurposes of calculating basic earnings per capital unit, capital unitssubscribed for and issued by the Company are considered outstanding on theeffective date of issuance.  The Companyhas no potentially dilutive securities outstanding.

 

*Segment Information*

 

TheCompany follows ASC 220-10, “Disclosures about Segments of an Enterprise andRelated Information”. Certain information is disclosed, per ASC 220-10, basedon the 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.

 

*Comprehensive Income*

 

The Company reports comprehensive income in accordance with ASC 280-10,“Reporting Comprehensive Income,” which requires the reporting of all changesin equity during a period, except those resulting from investment by owners anddistribution to owners, in a financial statement for the period in which theyare recognized.  This encompasses unrealized gains and losses fromavailable-for-sale securities held. The Company recorded comprehensive incomeof $1,058,867 and comprehensive losses of $658,043 for the fiscal years ended September 30,2009 and September 30, 2008, respectively, and a $2,236,677 comprehensiveloss for the year ended

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

September 30, 2007, which recognized a decrease in the fair valueof unfulfilled future purchase contracts for raw materials at those dates.

 

*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’scurrent 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, 2009 or 2008.

 

*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 30,2009 and 2008 consist of the following:

 
| ** **      | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|-----------------|------------|-----------|------------|-----------|------------|
| Raw materials   |       | $         | 1,543,721  |      | $          | 2,115,341 |   |
| Work-in-process |       | 1,007,129 |       | 1,502,208 |       |
| Finished goods  |       | 348,584   |       | 579,547   |       |
| Total           |       | $         | 2,899,434  |      | $          | 4,197,096 |   |

 

*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.

 

*Recent Accounting Pronouncements*

* *

**FASB ASC TOPIC 805** — “Business Combinations.”The objective of this topic is to enhance the information that an entityprovides in its financial reports about a business combination and its effects.The topic mandates: (i) how the acquirer recognizes and measures theassets acquired, liabilities assumed and any non-controlling interest in theacquiree; (ii) what information to disclose in its financial reports and; (iii) recognitionand measurement criteria for goodwill acquired. This topic is effective for anyacquisitions made on or after December 15, 2008. The

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

adoptionof this topic did not have a material impact on the Company’s financial statementsand disclosures.

 

**FASB ASC TOPIC 810** — “NoncontrollingInterests.” The objective of this topic is to improve the relevance,comparability, and transparency of the financial information that a reportingentity provides in its consolidated financial statements by establishingaccounting and reporting standards that require: (i) the ownershipinterests in subsidiaries held by parties other than the parent be clearlyidentified, labeled, and presented in the consolidated statement of financialposition within equity, but separate from the parent’s equity; (ii) theamount of consolidated net income attributable to the parent and to thenoncontrolling interest be clearly identified and presented on the face of theconsolidated statement of income; (iii) changes in a parent’s ownershipinterest while the parent retains its controlling financial interest in itssubsidiary be accounted for consistently; (iv) when a subsidiary isdeconsolidated, any retained noncontrolling equity investment in the formersubsidiary be initially measured at fair value. The gain or loss on thedeconsolidation of the subsidiary is measured using the fair value of anynoncontrolling equity investment rather than the carrying amount of thatretained investment and; (v) entities provide sufficient disclosures thatclearly identify and distinguish between the interests of the parent and theinterests of the non-controlling owners. This topic is effective for fiscalyears, and interim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. The adoption of this topic is notexpected to have a material impact on the Company’s financial statements anddisclosures.

 

**FASB ASC TOPIC 815** — “Derivatives and Hedging.”The use and complexity of derivative instruments and hedging activities haveincreased significantly over the past several years. This topic requiresenhanced disclosures about an entity’s derivative and hedging activities andthereby improves the transparency of financial reporting. This topic iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008, with early application encouraged. Theadoption of this topic is not expected to have a material impact on the Company’sfinancial statements and disclosures.

 

**FASB ASC TOPIC 944** — “Financial Services —Insurance.” Diversity exists in practice in accounting for financial guaranteeinsurance contracts by insurance enterprises. That diversity results ininconsistencies in the recognition and measurement of claim liabilities becauseof differing views about when a loss has been incurred. This topic requiresthat an insurance enterprise recognize a claim liability prior to an event ofdefault (insured event) when there is evidence that credit deterioration hasoccurred in an insured financial obligation. This topic is effective forfinancial statements issued for fiscal years beginning after December 15,2008, and all interim periods within those fiscal years, except for somedisclosures about the insurance enterprise’s risk-management activities. Theadoption of this topic is not expected to have a material impact on the Company’sfinancial statements and disclosures.

 

**FASB ASC TOPIC 855** - “Subsequent Events*.”* In May 2009, the FASB issued topic855, which establish general standards of accounting and disclosure of eventsthat occur after the

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

balancesheet date but before financial statements are issued or are available to beissued. In particular, this topic sets forth : (i) the period after thebalance sheet date during which management of a reporting entity shouldevaluate events or transactions that may occur for potential recognition ordisclosure in the financial statements, (ii) the circumstances under whichan entity should recognize events or transactions occurring after the balancesheet date in its financial statements, and (iii) the disclosures that anentity should make about events or transactions that occurred after the balancesheet date. This topic should be applied to the accounting and disclosure ofsubsequent events. This topic does not apply to subsequent events ortransactions that are within the scope of other applicable accounting standardsthat provide different guidance on the accounting treatment for subsequentevents or transactions. This topic was effective for interim and annual periodsending after June 15, 2009, which was September 30, 2009 for theCompany. The adoption of this topic did not have a material impact on theCompany’s financial statements and disclosures.

 

**FASB ASC TOPIC 105** - “The FASB AccountingStandard Codification and the Hierarchy of Generally Accepted AccountingPrinciples.”**In June 2009,the FASB issued Topic 105, which became the source of authoritative GAAPrecognized by the FASB to be applied by nongovernmental entities. Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants. On the effective dateof this topic, the Codification will supersede all then-existing non-SEC accountingand reporting standards. All other non-SEC accounting literature not includedin the Codification will become non-authoritative. This topic identifies thesources of accounting principles and the framework for selecting the principlesused in preparing the financial statements of nongovernmental entities that arepresented in conformity with GAAP and arranged these sources of GAAP in ahierarchy for users to apply accordingly. This topic is effective for financialstatements issued for interim and annual periods ending after September 15,2009. The adoption of this topic did not have a material impact on the Company’sdisclosure of the financial statements.

 

**FASB ASC TOPIC 320** - “Recognition andPresentation of Other-Than-Temporary Impairments.”**In April 2009, the FASB issued Topic 320, which amendsthe other-than-temporary impairment guidance in GAAP for debt securities, tomake the guidance more operational and to improve the presentation anddisclosure of other-than-temporary impairments on debt and equity securities inthe financial statements. This topic does not amend existing recognition andmeasurement guidance related to other-than-temporary impairments of equitysecurities. The topic is effective for interim and annual reporting periods endingafter June 15, 2009, with early adoption permitted for periods endingafter March 15, 2009. Earlier adoption for periods ending before March 15,2009, is not permitted. This topic does not require disclosures for earlierperiods presented for comparative purposes at initial adoption. In periodsafter initial adoption, this topic requires comparative disclosures only forperiods ending after initial adoption. The adoption of this topic did not havea material impact on the Company’s financial statements and disclosures.

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

**FASB ASC TOPIC 860** - “Accounting for theTransfer of Financial Assets and Extinguishment of Liabilities.” In June 2009,the FASB issued additional guidance under Topic 860 which improves therelevance, representational faithfulness, and comparability of the informationthat a reporting entity provides in its financial statements about a transferof financial assets; the effects of a transfer on its financial position,financial performance, and cash flows; and a transferor’s continuinginvolvement, if any, in transferred financial assets. This additional guidancerequires that a transferor recognize and initially measure at fair value allassets obtained (including a transferor’s beneficial interest) and liabilitiesincurred as a result of a transfer of financial assets accounted for as a sale.Enhanced disclosures are required to provide financial statement users withgreater transparency about transfers of financial assets and a transferor’scontinuing involvement with transferred financial assets. This additionalguidance must be applied as of the beginning of each reporting entity’s firstannual reporting period that begins after November 15, 2009, for interimperiods within that first annual reporting period and for interim and annualreporting periods thereafter. Earlier application is prohibited. Thisadditional guidance must be applied to transfers occurring on or after theeffective date. The adoption of this topic is not expected to have a materialimpact on the Company’s financial statements and disclosures.

 

**FASB ASC TOPIC 810** - “Consolidation ofVariable Interest and Special Purpose Entities.” In June 2009, the FASBissued Topic 810, which requires an enterprise to perform an analysis todetermine whether the enterprise’s variable interest or interests give it acontrolling financial interest in a variable interest entity. This analysisidentifies the primary beneficiary of a variable interest entity as theenterprise that has both of the following characteristics: (i) The powerto direct the activities of a variable interest entity that most significantlyimpact the entity’s economic performance and (ii) The obligation to absorblosses of the entity that could potentially be significant to the variableinterest entity or the right to receive benefits from the entity that couldpotentially be significant to the variable interest entity. Additionally, anenterprise is required to assess whether it has an implicit financialresponsibility to ensure that a variable interest entity operates as designedwhen determining whether it has the power to direct the activities of thevariable interest entity that most significantly impact the entity’s economicperformance. This topic requires ongoing reassessments of whether an enterpriseis the primary beneficiary of a variable interest entity and eliminate thequantitative approach previously required for determining the primarybeneficiary of a variable interest entity, which was based on determining whichenterprise absorbs the majority of the entity’s expected losses, receives amajority of the entity’s expected residual returns, or both. This topic iseffective as of the beginning of each reporting entity’s first annual reportingperiod that begins after November 15, 2009, for interim periods withinthat first annual reporting period, and for interim and annual reportingperiods thereafter. Earlier application is prohibited. The adoption of thistopic is not expected to have a material impact on the Company’s financialstatements and disclosures.

 

**FASB ASC TOPIC 820** - “Fair Value Measurementand Disclosures”, an Accounting Standard Update. In September 2009, theFASB issued this update to amendments to Subtopic 82010, “*Fair Value Measurements and Disclosures—Overall*” for the fair value measurement ofinvestments in certain entities that calculates net asset value per share (orits equivalent).  The

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

amendmentsin this update permit, as a practical expedient, a reporting entity to measurethe fair value of an investment that is within the scope of the amendments inthis update on the basis of the net asset value per share of the investment (orits equivalent) if the net asset value of the investment (or its equivalent) iscalculated in a manner consistent with the measurement principles of Topic 946as of the reporting entity’s measurement date, including measurement of all orsubstantially all of the underlying investments of the investee in accordancewith Topic 820. The amendments in this update also require disclosures by majorcategory of investment about the attributes of investments within the scope ofthese amendments, such as the nature of any restrictions on the investor’sability to redeem its investments at the measurement date, any unfundedcommitment, and the investment strategies of the investees. The major categoryof investment is required to be determined on the basis of the nature and risksof the investment in a manner consistent with the guidance for major securitytypes in GAAP on investments in debt and equity securities in paragraph320-10-50-lB. The disclosures are required for all investments within the scopeof the amendments in this update regardless of whether the fair value of theinvestment is measured using the practical expedient. The amendments in thisupdate apply to all reporting entities that hold an investment that is requiredor permitted to be measured or disclosed at fair value on a recurring or nonrecurring basis and, as of the reporting entity’s measurement date, if theinvestment meets certain criteria The amendments in this update are effectivefor the interim and annual periods ending after December 15, 2009. Earlyapplication is permitted in financial statements for earlier interim and annualperiods that have not been issued. The adoption of this update is not expectedto have a material impact on the Company’s financial statements anddisclosures.

 

**FASB ASC TOPIC 740** - “Income Taxes”, anAccounting Standard Update. In September 2009, the FASB issued this updateto address the need for additional implementation guidance on accounting foruncertainty in income taxes. For entities that are currently applying thestandards for accounting for uncertainty in income taxes, the guidance anddisclosure amendments are effective for financial statements issued for interimand annual periods ending after September 15, 2009. The adoption of thisupdate did not have a material impact on the Company’s financial statements anddisclosures.

 

**NOTE 3 — MEMBERS’ EQUITY**

 

OnFebruary 29, 2008, the Board of Managers announced that effective March 10,2008 our units of membership interest would be split on a seven to one (7:1)basis.  Unless otherwise noted, all unitsand per unit disclosures reflect the effect of the 7:1 split.  Subsequent to the split, the Companypurchased 140 Class B units from a member. The resulting outstanding units at September 30, 2009 are asfollows:

 
| Class A units |   | 16,002 |   |
|--------------------|--------|--------|--------|
| Class B units |   | 12,068 |   |
| Class C units |   | 350    |   |
| Total units        |   | 28,420 |   |

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

Historically,the Company has four classes of membership capital units: Class A, B, Cand D. Capital units of each class were issued in denominations of $5,000(pre-split).

 

Class Aand Class B capital units were offered for sale in the publicoffering.  A total of 27,769 Class A and B capital units were offeredat a price of $714.29 per unit (adjusted to reflect the split) pursuant to aregistration statement filed with the Securities and Exchange Commission, witha minimum of $15,735,000 and a maximum of $19,835,000 proceeds from suchoffering of units.

 

TheCompany’s Class A capital units were offered only to producers of agriculturalproducts, with a minimum purchase of two (2) Class A Capital Unitsper investor.  The Company also offered to sell Class B capital unitswith a minimum purchase of seven (7) Class B capital units perinvestor.

 

TheOffering was completed in 2003 with 14,840 Class A and 12,208 Class Bunits sold for gross proceeds of $19,330,000.

 

ForClass C capital units subscribed in a private placement prior to thepublic offering, 10% of the offering price was due upon subscription with theremaining amount executed as a promissory note due at the call of the Board ofManagers.  In 2003, the Company closedthe sale of 350 Class C Units, totaling $250,000, to a single purchaser.

 

Class Dcapital units were issued and converted prior to the 7:1 split.  The units were offered for sale prior to thepublic offering at a price of $5,000 per unit to the members of the Board ofManagers and certain others.  Totalequity raised from the sale of Class D units was $415,000 during the yearended December 31, 2001.  Uponcompletion of the public offering, which occurred in March 2003, 581 Class Dunits automatically converted into 1,162 Class A capital units.  The Company must approve all transfers orother dispositions of capital units.

 

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.

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

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$4,973,500 during the fiscal year ended September 30, 2009. In the fiscalyears ended September 30, 2008 and 2007, distributions paid totaled  $4,882,000 and $28,560,000 respectively.

 

**NOTE 4 -**** ****FINANCING ARRANGEMENTS**

 

*Construction and permanent financing*

 

DuringJuly 2003, the Company entered into a credit agreement (“Credit Agreement”)with Ag Country Farm Credit Services, FLCA (“AgCountry”) that established a$22,000,000 (or 55% of construction costs, whichever is less) multiple-advance,non-revolving construction loan for construction of the ethanol plant. Theconstruction note expired August 1, 2004, with the amount outstanding convertedinto a permanent term loan to be amortized over a 10 year period. This loan waspaid in 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.During the construction period, interest-only payments equal to the LondonInterbank Offered Rate (LIBOR) plus 4% were due monthly.

 

DuringAugust 2004, the Company converted the construction loan into a term loan,which was repaid in quarterly principal payments of $425,000 plus accruedinterest based on the 30 day LIBOR indexed rate of LIBOR plus 4.00%, and a$5,000,000 credit line (the “Revolving Loan”). The Revolving Loan was paid infull during September 2004. In addition, the Company entered into anagreement with Ag Country in October 2004 that established a $3,500,000expansion loan to fund a portion of a plant expansion to increase ethanolproduction to 40,000,000 gallons per year nameplate capacity. This note waspaid in full prior to September 30, 2005.

 

Theterm loan was 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 in August 2004. Of that amount, $40,440was amortized and expensed in each of the years ended September 30, 2009,2008 and 2007. The annual administrative fee is amortized over 12 months.

 

The Third Amendment to the Credit Agreement wasexecuted on March 7, 2006, which increased allowable dividends to up to75% of net income with distributions up to 100% of net income, so long as theCompany maintains working capital that exceeds $5,000,000 and a

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

defined leverage ratio of 0.60:1. The Amendment alsowaived certain compliance requirements for dividends paid in prior periods.

 

The Fourth Amendment to the Credit Agreement wasentered into on October 2, 2006, which reduced the variable interest rateapplicable to the Revolving Loan to LIBOR plus 2.50%. In addition, the annualadministration fee was suspended and the quarterly “unused commitment fee” wasreduced from 0.5% to 0.25% of the unused Revolving Loan balance during thequarter. The Capital Expenditure section was deleted and replaced with arequirement for pre-approval of capital expenditures in excess of $2,500,000for any fiscal year. Written approval is required for capital expenditureswhich exceed this limit.

 

The Fifth Amendment to the Credit Agreement wasentered into on May 2, 2007, which increased the Revolving Loan limit to$8,000,000 and reduced the variable interest rate from LIBOR plus 2.50% toLIBOR plus 2.00%.

 

There was no outstanding balance on the RevolvingLoan at September 30, 2009.

 

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

 

TheCompany purchased a new vehicle on June 30, 2006. The purchase wasfinanced partially by the value of a vehicle traded-in ($11,133), and thebalance of $34,825 was financed by an offer from GMAC financing for a term of36 months with no interest. The monthly payment was $902 and the final paymentwas made June 1, 2009.

 

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 was paid in January 2008plus accrued interest at the rate of 6.0% per annum.

 

**NOTE 5 - COMMITMENTS, CONTINGENCIES AND AGREEMENTS**

 

TheCompany has entered into various agreements regarding its formation, operationand management. Significant agreements are as follows:

 

*Employee401(k) Plan*

 

TheCompany established a 401(k) retirement plan on November 1, 2004 forits employees. The Company matches employee contributions to the plan up to 5%of each eligible employee’s gross compensation. The amount contributed by theCompany is vested 25% per year on behalf

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

ofthe employee. The Company contributed $75,526, $64,924, and $99,033 for fiscalyears ended September 30, 2009, 2008 and 2007, 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 31,2009, and again through August 31, 2010.

 

*Sales Service Agreement*

 

TheCompany has entered into an agreement with United Bio Energy, LLC (“UBE”) (seeNotes 7 and 10) for the sale of the bulk feed grade products (distillersgrains) produced from the plant.  The agreement expired September 30,2009, and was automatically renewed for a one-year term pursuant to the termsof the agreement.  Under the terms of the agreement, UBE purchases allproducts at a price equal to 98% or 97.5% of the selling price depending onwhether it is wet or dry grains, less applicable freight.  If the productis sold to members of the Company, UBE will pay an additional 0.5% to themembers, less applicable freight.  UBE is responsible for billing andaccount servicing of the product sales and for losses related to non-paymentunless such non-payment relates to substandard products.

 

*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 start of ethanol production,with a fee of $0.01 per gallon of ethanol produced.  On November 24,2008, the Company entered into a new five (5) year marketing agreementwith Ethanol Products, LLC d/b/a/ POET Ethanol Products. The commencement dateof the new agreement will be February 1, 2009 for a five (5) yearterm, and will automatically renew for an additional five (5) year periodunless terminated by either party ninety (90) days prior to the end of the term.The Marketing and Service Fee rendered by the marketer shall be one percent(1%) of the net-back sales price per gallon of our ethanol sold.

 

*GrainHandling Addition*

 

TheCompany contracted with Habco, Inc. to have a fifth grain receiving pitand related equipment installed at the grain elevator facility which wascompleted and in operation in October 2009. The total cost of the project,including change orders, was $1,101,512. All invoices were paid prior to filingthis document.

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

**NOTE 6 - RELATED PARTY TRANSACTIONS**

 

TheCompany has reimbursed members of the Board of Managers for certain expensesincurred by the Company and paid by the members of the Board of Managersincluding attending Board meetings. Expense reimbursements for the years ended September 30,2009, 2008, and 2007, totaled $48,831, $53,796 and $43,035, respectively.

 

###### **NOTE7 — INCENTIVE PAYMENTS**

###### ** **

Duringthe fiscal years ended September 30, 2009, 2008, and 2007 the Companyreceived no federal incentive payments for its ethanol production. This programwas terminated by the U.S.D.A. on June 30, 2006. The United StatesDepartment of Agriculture Rural Development instituted the “Advanced BiofuelPayment Program” during fiscal year 2009, which allocated up to $25,000,000 tobe paid to producers who qualify for advanced biofuel feedstocks used toproduce renewable energy. The Company has applied for this program and has beenaccepted as a qualified participant pursuant to the use of milo as afeedstock.  The Company’s prorated shareof funds for fiscal 2009 accrued was $700,000. Additionally, the Company alsoqualifies for production incentive payments under a State of Kansasprogram.  The Kansas program is limitedto an amount of $1,125,000 per year for each producer in excess of five milliongallons per year at the rate of $0.075 per gallon. During the fiscal year endedSeptember 30, 2009, the Company recorded revenue of $131,601 and receivedan aggregate of $503,520, of which $371,919 was recorded as revenue in fiscal2008. The Company recorded $731,174 and $1,125,000 income during the fiscalyears ended September 30, 2008, and 2007 respectively. The reduction inrecorded income for the fiscal years ended September 30, 2009 and 2008 isdue to additional ethanol plants qualifying for the program which caused aproration of payments received by all participants in the program.

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

**NOTE 8 — SALE / LEASEBACK TRANSACTION**

 

OnOctober 3, 2003, the Company completed an industrial revenue bondfinancing with Gove County, Kansas that will provide property tax savings for10 years on the plant site.  As part of the financing, title to the plantsite and improvements have been transferred to Gove County, as security for therepayment of the bonds, and the Company is leasing back the site for an amountthat is equal to the amount of interest to be paid on the Gove Countybonds.  AgCountry consented to this transaction, and the bonds have beenpledged to AgCountry as security for any obligations under the AgCountry CreditAgreement.  As part of the financing, the Company paid the bond underwriter,W.R. Taylor, $160,000 and agreed to pay an additional $40,000 only if the bondsare converted to a variable rate and remarketed by W.R. Taylor.  Themaximum principal amount of the bonds is $32,000,000.

 

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 the30-year life of the bonds. A total of $6,732 of amortization expense wasrecognized during each of the years ended September 30, 2009, 2008 and2007.

 

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 offset bythe 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 periodsended September 30, 2009, 2008 and 2007 were $1,120,000 per year. Thisamount is equal to the lease expense of the plant in each respective period.

 

**NOTE 9 — CONCENTRATION OF CUSTOMERS**

 

TheCompany sells essentially all of its products to two marketers, which in turnsell to other purchasers.  The Companyhas executed an exclusive marketing agreement with Ethanol Products LLC (“EthanolProducts”) of Wichita, Kansas (see Notes 6 and 7) to market the ethanolproduced at its plant.  The agreement iseffective for an initial term of five years beginning January 2004.  A new agreement with Ethanol Products willcommence effective February 1, 2009 and is automatically renewable forsubsequent five-year terms unless terminated by either party prior toexpiration.  Ethanol Products has agreedto purchase all of the ethanol that is produced at the plant.  Ethanol Products is solely responsible fordetermining the price and terms at which the ethanol acquired from the plant issold and to whom it is sold.

 

TheCompany also has executed an exclusive agreement with UBE to market all of thedistillers grains produced at the plant. The initial term of the agreement with UBE expired September 30,2006 and has automatically renewed for successive one-year terms.  The agreement is automatically renewed eachyear unless terminated by the Company or UBE following 90 days advance writtennotice.

 

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

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2009 AND 2008**

 

**NOTE 10- 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.

 

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 11— SUPPLEMENTARY QUARTERLY INFORMATION (UNAUDITED)**

 

Thefollowing table summarizes unaudited quarterly financial information for thefiscal years ended September 30, 2009, 2008, and 2007:

 

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

**NOTESTO FINANCIAL STATEMENTS**

**SEPTEMBER30, 2009 AND 2008**

 
| ** **                                           | ** ** | **Fiscal Year 2009**        | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **Three Months Ended**      | ** ** |
| ** **                                           | ** ** | **December 31**        | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Revenue                                              |       | $                           | 24,500,388 |   | $ | 22,545,319 |   | $ | 23,021,707 |   | $ | 22,201,091 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Net income (loss)                                    |       | (1,635,697                  | )          | 1,227,399 |   | 1,227,397 |   | 1,879,331 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Net income per unit basic and diluted                |       | (57.56                      | )          | 43.19 |   | 43.19 |   | 66.13 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Distribution per unit                                |       | 50.00                       |       | 50.00 |   | 75.00 |   | — |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Weighted average units outstanding basic and diluted |       | 28,420                      |       | 28,420 |   | 28,420 |   | 28,420 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| ** **                                           | ** ** | **Fiscal Year 2008**        | ** ** |
| ** **                                           | ** ** | **Three Months Ended**      | ** ** |
| ** **                                           | ** ** | **December 31**        | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Revenue                                              |       | $                           | 23,253,045 |   | $ | 28,344,119 |   | $ | 33,824,907 |   | $ | 33,806,605 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Net income (loss)                                    |       | 538,405                     |       | 2,182,146 |   | 1,656,658 |   | (706,802 | ) |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Net income (loss) per unit basic and diluted         |       | 18.86                       |       | 76.79 |   | 58.29 |   | (24.87 | ) |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Distribution per unit                                |       | 71.43                       |       | 50.00 |   | — |   | 50.00 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Weighted average units outstanding basic and diluted |       | 28,560                      |       | 28,420 |   | 28,420 |   | 28,420 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| ** **                                           | ** ** | **Fiscal Year 2007**        | ** ** |
| ** **                                           | ** ** | **Three Months Ended**      | ** ** |
| ** **                                           | ** ** | **December 31,  2006** | ** ** | **March 31, 2007** | ** ** | **June 30, 2007** | ** ** | **September 30,  2007** | ** ** |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Revenue                                              |       | $                           | 27,311,254 |   | $ | 28,927,544 |   | $ | 28,550,934 |   | $ | 23,971,468 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Net income                                           |       | 5,996,452                   |       | 6,197,151 |   | 4,203,180 |   | 259,493 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Net income per unit basic and diluted                |       | 209.96                      |       | 216.99 |   | 147.17 |   | 9.08 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Distribution per unit                                |       | 571.43                      |       | 142.86 |   | 142.86 |   | 142.86 |   |
|                                                 |       |                        |       |   |   |   |   |   |   |
| Weighted average units outstanding basic and diluted |       | 28,560                      |       | 28,560 |   | 28,560 |   | 28,560 |   |

 

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

**NOTESTO FINANCIAL STATEMENTS**

**SEPTEMBER30, 2009 AND 2008**

 

**NOTE 12 - SUBSEQUENT EVENTS**

 

Based on the Company’s financial condition at September 30,2009, the Board of Managers declared a distribution to members equal to $250per unit totaling $7,105,000. This distribution was paid November 16,2009.

 

OnDecember 7, 2009, the Company signed a contract with ICM, Inc. to adda 535,000 gallon fermenter to be integrated into the existing process of ourplant. The contract price is $2,236,131, of which 40% was paid upon executionof the contract. The project is estimated to be completed near the end of thesecond quarter of fiscal 2010.

 

OnDecember 28, 2009, the Company received a payment of $848,999 from the USDARural Development Program, of which $700,000 was accrued as income duringfiscal 2009.

 

TheCompany evaluated all events subsequent to the balance sheet date of September 30,2009, through the date of issuance of these financial statements and hasdetermined that, except as set forth above, there are no further subsequentevents that require disclosure.

 

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**EXHIBITINDEX**

 
| **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)                            |

 

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| 10.7   |   | Agreement  between the Company and ICM, Inc. dated August 26, 2004 for  expansion of our plant |   | Exhibit 10.7  to our Annual Report on Form 10-KSB for the fiscal year ended  September 30, 2004 (File No. 0-50714)       |
|--------|--------|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                     |   |                                                                                                                                    |
| 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                          |   | Exhibit 10.12  to our Annual Report on Form 10-K for the fiscal year ended  September 30, 2007 (File No. 0-50714)   |
|   |   |                                                                                                     |   |                                                                                                                                    |
| 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)          |
|   |   |                                                                                                     |   |                                                                                                                                    |
| 10.15  |   | Ethanol  Marketing Agreement with Ethanol Products, L.L.C. d/b/a POET Ethanol                            |   | Exhibit 10.1  to our Report on Form 8-K dated November 24, 2008 (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) |

 

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| 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       |   |   |
|   |   |                                                                                                                                |   |   |
| 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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