Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

** **

**x****      Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**for the quarterly period ended September 30, 2010**

 

**OR**

 

**o****         Transition reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**for the transition periodfrom              to             .**

 

**COMMISSION FILE NUMBER 001-32922**

 

**AVENTINE RENEWABLE ENERGY HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **05-0569368**                    |
|------------------------------------------|------------|-----------------------------------|
| (State of Incorporation)                 |       | (IRS Employer Identification No.) |
|                                     |       |                              |
| **120 North Parkway**                    |       |                              |
| **Pekin, Illinois**                 | ** ** | **61554**                         |
| (Address of Principal Executive Offices) |       | (Zip Code)                        |

 

**(309) 347-9200**

(Registrant’s Telephone Number, including Area Code)

 

Indicateby checkmark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  YES x  NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post suchfiles.)  YES o NO o

 

Indicateby checkmark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.  (Check one):

 

| Large accelerated filer o                |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby checkmark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). YES o NO x

 

Indicateby checkmark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by the court. YES x NO o

 

Indicatethe number of shares outstanding of each class of Common Stock, as of thelatest practicable date

 

| **Class**                      | ** ** | **Outstanding as of  November 1 , 2010** |
|--------------------------------|------------|---------------------------------------------------------|
| Common Stock, $0.001 Par Value |       | 7,408,404 Shares                                        |

 

 

 

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Tableof Contents

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**TABLE OF CONTENTS**

** **
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                           | ** ** | **Page No.** |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| ** ** | PART I                                                                                                                                                                                                                                                                                                                                          | ** ** | ** **        |
| ** ** |                                                                                                                                                                                                                                                                                                                                                 |       | ** **        |
| Item 1.    | Financial Statements                                                                                                                                                                                                                                                                                                                                 |       |              |
|       | Condensed Consolidated Statements of Operations  (Unaudited) - Three-month periods ended September 30, 2010 (Successor)  and 2009 (Predecessor), Seven-month period ended September 30, 2010  (Successor), two-month period ended February 28, 2010 (Predecessor), and  nine-month period ended September 30, 2009 (Predecessor) |       | 2                 |
|       | Condensed Consolidated Balance Sheets —  September 30, 2010 (Successor -Unaudited) and December 31, 2009  (Predecessor)                                                                                                                                                                                                               |       | 3                 |
|       | Condensed Consolidated Statements of Cash Flows  (Unaudited) - Seven-month period ended September 30, 2010 (Successor),  two-month period ended February 28, 2010 (Predecessor), and nine-month  period ended September 30, 2009 (Predecessor)                                                                                        |       | 4                 |
|       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                                                                                                                                                                                                                                      |       | 5                 |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                          |       | 30                |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                                                          |       | 45                |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| Item 4T.   | Controls and  Procedures                                                                                                                                                                                                                                                                                                                             |       | 46                |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| ** ** | PART II                                                                                                                                                                                                                                                                                                                                         | ** ** | ** **        |
|       | ** **                                                                                                                                                                                                                                                                                                                                           | ** ** | ** **        |
| Item 1.    | Legal Proceedings                                                                                                                                                                                                                                                                                                                                    |       | 47                |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| Item 1A.   | Risk Factors                                                                                                                                                                                                                                                                                                                                         |       | 47                |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                                                         |       | 47                |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| Item 3.    | Defaults  Upon Senior Securities                                                                                                                                                                                                                                                                                                                     |       | 47                |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| Item 4.    | Removed and Reserved                                                                                                                                                                                                                                                                                                                                 |       | 47                |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| Item 5.    | Other Information                                                                                                                                                                                                                                                                                                                                    |       | 47                |
|       |                                                                                                                                                                                                                                                                                                                                                 |       |              |
| Item 6.    | Exhibits                                                                                                                                                                                                                                                                                                                                             |       | 48                |

 

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**PART I.****                                                   ****FINANCIALINFORMATION**

 

**Item 1.****                                                          ****FinancialStatements**

 

**Aventine Renewable Energy Holdings, Inc. andSubsidiaries**

**ConsolidatedStatements of Operations (Unaudited)**

 
| ** **                                                              | ** ** | **Successor**                                    | ** ** | **Predecessor**                              | ** ** | **Successor**                                    | ** ** | **Predecessor**                               | ** ** | **Predecessor**                             | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                              | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September  30,** | ** ** | **Seven Months  Ended September  30,** | ** ** | **Two Months  Ended February  28,** | ** ** | **Nine Months  Ended  September  30,** | ** ** |
| **(In thousands except per share  amounts)**                            | ** ** | **2010**                                         | ** ** | **2009**                                     | ** ** | **2010**                                         | ** ** | **2010**                                      | ** ** | **2009**                                    | ** ** |
| Net Sales                                                               |       | $                                                | 97,460     |                                         | $          | 118,116                                          |       | $                                             | 231,338    |                                        | $          | 77,675 |   | $ | 472,773 |   |
| Cost of goods sold                                                      |       | (90,438                                          | )          | (110,281                                     | )          | (223,204                                         | )          | (66,686                                       | )          | (486,261                                    | )          |
| Gross Profit                                                            |       | 7,022                                            |       | 7,835                                        |       | 8,134                                            |       | 10,989                                        |       | (13,488                                     | )          |
| Selling, general and administrative expenses                            |       | (9,056                                           | )          | (5,152                                       | )          | (23,342                                          |       | (4,608                                        | )          | (21,843                                     | )          |
| Start-up activities                                                     |       | (175                                             | )          | —                                       |       | (175                                             | )          | —                                        |       | —                                      |       |
| Other income (expense)                                                  |       | 399                                              |       | (206                                         | )          | (1,260                                           | )          | (515                                          | )          | (33                                         | )          |
| Operating income (loss)                                                 |       | (1,810                                           | )          | 2,477                                        |       | (16,643                                          | )          | 5,866                                         |       | (35,364                                     | )          |
| Other income (expense)                                                  |       |                                             |       |                                         |       |                                             |       |                                          |       |                                        |       |
| Income from termination of marketing agreements                         |       | —                                           |       | —                                       |       | —                                           |       | —                                        |       | 10,176                                      |       |
| Interest income                                                         |       | 52                                               |       | —                                       |       | 67                                               |       | —                                        |       | 11                                          |       |
| Interest expense                                                        |       | (2,051                                           | )          | (1,838                                       | )          | (5,151                                           | )          | (1,422                                        | )          | (12,840                                     | )          |
| Gain (loss) on derivative transactions                                  |       | (233                                             | )          | 1                                            |       | 206                                              |       | —                                        |       | 1,219                                       |       |
| Loss on available-for-sale securities                                   |       | (1,753                                           | )          | —                                       |       | (1,753                                           | )          | —                                        |       | —                                      |       |
| Other non-operating income                                              |       | 35                                               |       | —                                       |       | 245                                              |       | —                                        |       | —                                      |       |
| Income (loss) before reorganization items and income  taxes             |       | (5,760                                           | )          | 640                                          |       | (23,029                                          | )          | 4,444                                         |       | (36,798                                     | )          |
| Reorganization items                                                    |       | —                                           |       | 12,640                                       |       | —                                           |       | (20,282                                       | )          | (30,109                                     | )          |
| Gain due to plan effects                                                |       | —                                           |       | —                                       |       | —                                           |       | 136,574                                       |       | —                                      |       |
| Loss due to fresh start accounting adjustments                          |       | —                                           |       | —                                       |       | —                                           |       | (387,655                                      | )          | —                                      |       |
| Income (loss) before income taxes                                       |       | (5,760                                           | )          | 13,280                                       |       | (23,029                                          | )          | (266,919                                      | )          | (66,907                                     | )          |
| Income tax expense (benefit)                                            |       | 881                                              |       | (606                                         | )          | (29                                              | )          | (626                                          | )          | (7,291                                      | )          |
| Net income (loss)                                                       |       | $                                                | (6,641     | )                                            | $          | 13,886                                           |       | $                                             | (23,000    | )                                           | $          | (266,293 | ) | $ | (59,616 | ) |
|                                                                    |       |                                             |       |                                         |       |                                             |       |                                          |       |                                        |       |
| Income (loss) per common share — basic                             |       | $                                                | (0.76      | )                                            | $          | 0.32                                             |       | $                                             | (2.63      | )                                           | $          | (6.14 | ) | $ | (1.39 | ) |
| Basic weighted-average number of shares                                 |       | 8,585                                            |       | 42,963                                       |       | 8,583                                            |       | 43,401                                        |       | 42,967                                      |       |
|                                                                    |       |                                             |       |                                         |       |                                             |       |                                          |       |                                        |       |
| Income (loss) per common share — diluted                           |       | $                                                | (0.76      | )                                            | $          | 0.32                                             |       | $                                             | (2.63      | )                                           | $          | (6.14 | ) | $ | (1.39 | ) |
| Diluted weighted-average number of common and  common equivalent shares |       | 8,585                                            |       | 43,028                                       |       | 8,583                                            |       | 43,401                                        |       | 42,967                                      |       |

 

*The accompanying notes are an integral part of theconsolidated financial statements.*

 

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A**ventine Renewable Energy Holdings, Inc.and Subsidiaries**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Successor**          | ** **  | **Predecessor**       | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                     | ** ** | **September 30,** | ** **  | ** **            | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                     | ** ** | **2010**               | ** **  | **December 31,** | ** ** |
| **(In thousands except share and per share amounts)**                                                                                                                                                                                                                                                                       | ** ** | **(Unaudited)**        | ** **  | **2009**              | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **             | ** **  | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **             | ** **  | ** **            | ** ** |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                      | ** ** | **$**                  | **41,855**  |                  | $          | 52,585 |   |
| Accounts receivable                                                                                                                                                                                                                                                                                                                                            | ** ** | **7,372**              |        | 10,947                |       |
| Inventories                                                                                                                                                                                                                                                                                                                                                    | ** ** | **22,819**             |        | 24,237                |       |
| Income taxes receivable                                                                                                                                                                                                                                                                                                                                        | ** ** | **1,024**              |        | 5,796                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                      | ** ** | **7,690**              |        | 7,323                 |       |
| Total current assets                                                                                                                                                                                                                                                                                                                                           | ** ** | **80,760**             |        | 100,888               |       |
| Property, plant and equipment, net                                                                                                                                                                                                                                                                                                                             | ** ** | **272,218**            |        | 589,049               |       |
| Restricted cash                                                                                                                                                                                                                                                                                                                                                | ** ** | **19,067**             |        | 7,451                 |       |
| Available for sale securities                                                                                                                                                                                                                                                                                                                                  | ** ** | **4,454**              |        | 5,442                 |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                   | ** ** | **10,567**             |        | 9,866                 |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                   | ** ** | **$**                  | **387,066** |                  | $          | 712,696 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                                                                                                                                                                 | ** ** | ** **             |        |                  |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                           | ** ** | ** **             |        |                  |       |
| Short-term borrowings                                                                                                                                                                                                                                                                                                                                          | ** ** | **$**                  | **—**  |                  | $          | 42,765 |   |
| Current maturities of long-term debt                                                                                                                                                                                                                                                                                                                           | ** ** | **225**                |        | —                |       |
| Current obligations under capital leases                                                                                                                                                                                                                                                                                                                       | ** ** | **783**                |        | —                |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                               | ** ** | **13,457**             |        | 11,164                |       |
| Accrued payroll and benefits                                                                                                                                                                                                                                                                                                                                   | ** ** | **5,048**              |        | 2,242                 |       |
| Accrued interest                                                                                                                                                                                                                                                                                                                                               | ** ** | **896**                |        | 302                   |       |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                      | ** ** | **5,411**              |        | 6,279                 |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                      | ** ** | **25,820**             |        | 62,752                |       |
|                                                                                                                                                                                                                                                                                                                                                           |       |                   |        |                  |       |
| Pre-petition liabilities subject to compromise                                                                                                                                                                                                                                                                                                                 | ** ** | **—**             |        | 365,549               |       |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                 | ** ** | **155,842**            |        | —                |       |
| Obligations under capital leases                                                                                                                                                                                                                                                                                                                               | ** ** | **471**                |        | —                |       |
| Deferred tax liabilities                                                                                                                                                                                                                                                                                                                                       | ** ** | **2,026**              |        | 2,936                 |       |
| Other long-term liabilities                                                                                                                                                                                                                                                                                                                                    | ** ** | **2,186**              |        | 13,927                |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                                              | ** ** | **186,345**            |        | 445,164               |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **             |        |                  |       |
| Common stock, par value $0.001 per share;  15,000,000 and 185,000,000 shares authorized as of September 30, 2010  and December 31, 2009, respectively; 7,408,404 and 43,048,158 shares  outstanding as of September 30, 2010 and December 31, 2009,  respectively, net of 21,548,640 shares held in treasury as of December 31,  2009 | ** ** | **8**                  |        | 44                    |       |
| Preferred stock, 5,000,000 and 50,000,000 shares  authorized as of September 30, 2010 and December 31, 2009,  respectively; no shares issued or outstanding                                                                                                                                                                                          | ** ** | **—**             |        | —                |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                     | ** ** | **223,711**            |        | 294,297               |       |
| Retained deficit                                                                                                                                                                                                                                                                                                                                               | ** ** | **(23,000**            | **)**       | (28,421               | )          |
| Accumulated other comprehensive income (loss), net                                                                                                                                                                                                                                                                                                             | ** ** | **2**                  |        | 1,612                 |       |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                                                                | ** ** | **200,721**            |        | 267,532               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                | ** ** | **$**                  | **387,066** |                  | $          | 712,696 |   |

 

*The accompanying notes are an integral part of the consolidatedfinancial statements.*

 

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**Aventine Renewable Energy Holdings, Inc. and Subsidiaries**

**Condensed ConsolidatedStatements of Cash Flows**

(Unaudited)

 
| ** **                                                                                  | ** ** | **Successor**                                    | ** **  | **Predecessor**                                   | ** ** | **Predecessor**                                 | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------|-------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Seven months  ended September  30,** | ** **  | **Two months ended  February 28,** | ** ** | **Nine months  ended  September 30,** | ** ** |
| **(In thousands)**                                                                     | ** ** | **2010**                                         | ** **  | **2010**                                          | ** ** | **2009**                                        | ** ** |
|                                                                                        | ** ** | ** **                                       |        |                                              |       |                                            |       |
| **Operating Activities**                                                                    |       |                                             | ** **  | ** **                                        |       |                                            |       |
| Net loss                                                                                    | ** ** | **$**                                            | **(23,000** | **)**                                             | **$**      | **(266,293**                                    | **)**      | $ | (59,616 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used for) operating activities: | ** ** | ** **                                       | ** **  | ** **                                        |       |                                            |       |
| Provision for rejected executory contracts and  leases                                      | ** ** | **—**                                       | ** **  | **9,590**                                         |       | 26,117                                          |       |
| Pre-petition accounts payable                                                               | ** ** | **—**                                       | ** **  | **—**                                        |       | 39,934                                          |       |
| Pre-petition accrued interest                                                               | ** ** | **—**                                       | ** **  | **—**                                        |       | 8,000                                           |       |
| Non-cash gain due to Plan effects                                                           | ** ** | **—**                                       | ** **  | **(136,574**                                      | **)**      | —                                          |       |
| Non-cash loss due to fresh start accounting  adjustments                                    | ** ** | **—**                                       | ** **  | **387,655**                                       |       | —                                          |       |
| Non-cash loss on available-for-sale securities                                              | ** ** | **1,753**                                        | ** **  | **—**                                        |       | —                                          |       |
| Depreciation and amortization                                                               | ** ** | **6,411**                                        | ** **  | **2,795**                                         |       | 12,299                                          |       |
| Stock-based compensation expense                                                            | ** ** | **4,144**                                        | ** **  | **277**                                           |       | 2,655                                           |       |
| Deferred income tax                                                                         | ** ** | **(910**                                         | **)**       | —                                            |       | 407                                             |       |
| Gain on the sale of marketing alliance investments                                          |       | —                                           |        | —                                            |       | (1,000                                          | )          |
| Changes in operating assets and liabilities:                                                |       |                                             |        |                                              |       |                                            |       |
| Accounts receivable, net                                                                    | ** ** | **(209**                                         | **)**       | **2,560**                                         |       | 44,850                                          |       |
| Inventories                                                                                 | ** ** | **2,164**                                        | ** **  | **1,543**                                         |       | 64,136                                          |       |
| Other current assets                                                                        | ** ** | **1,713**                                        | ** **  | **1,339**                                         |       | 10,159                                          |       |
| Restricted cash                                                                             | ** ** | **(3,783**                                       | **)**       | **(7,833**                                        | **)**      | (7,448                                          | )          |
| Other assets                                                                                | ** ** | **(2,517**                                       | **)**       | **—**                                        |       | (11,064                                         | )          |
| Accounts payable                                                                            | ** ** | **(6,049**                                       | **)**       | **7,061**                                         |       | (101,342                                        | )          |
| Other current liabilities                                                                   | ** ** | **2,191**                                        | ** **  | **341**                                           |       | (6,204                                          | )          |
| Other long-term liabilities                                                                 | ** ** | **(337**                                         | **)**       | **(21,981**                                       | **)**      | 1,295                                           |       |
| Net cash provided by (used for) operating  activities                                       | ** ** | **(18,429**                                      | **)**       | **(19,520**                                       | **)**      | 23,178                                          |       |
| ** **                                                                                  | ** ** | ** **                                       |        |                                              |       |                                            |       |
| **Investing Activities**                                                                    | ** ** | ** **                                       | ** **  | ** **                                        |       |                                            |       |
| Additions to property, plant and equipment, net                                             | ** ** | **(50,537**                                      | **)**       | **(2,086**                                        | **)**      | (1,434                                          | )          |
| Canton, Illinois facility acquisition                                                  | ** ** | **(18,613**                                      | **)**       | **—**                                        |       | —                                          |       |
| Proceeds from the sale of marketing alliance  investments                                   | ** ** | **—**                                       | ** **  | **—**                                        |       | 2,000                                           |       |
| Net cash provided by (used for) investing  activities                                       | ** ** | **(69,150**                                      | **)**       | **(2,086**                                        | **)**      | 566                                             |       |
| ** **                                                                                  | ** ** | ** **                                       |        |                                              |       |                                            |       |
| **Financing Activities**                                                                    | ** ** | ** **                                       | ** **  | ** **                                        |       |                                            |       |
| Net repayments on revolving credit facilities                                               | ** ** | **—**                                       | ** **  | **(27,765**                                       | **)**      | (24,435                                         | )          |
| Borrowing on debtor-in-possession debt facility                                             | ** ** | **—**                                       | ** **  | **—**                                        |       | 15,000                                          |       |
| Repayment of debtor-in-possession debt facility                                             | ** ** | **—**                                       | ** **  | **(15,000**                                       | **)**      | —                                          |       |
| Proceeds from issuance of senior secured notes                                              | ** ** | **50 ,750**                                      | ** **  | **98,119**                                        |       | —                                          |       |
| Repayment of short-term note payable                                                        | ** ** | **(5,252**                                       | **)**       | **—**                                        |       | —                                          |       |
| Payments on long-term liabilities                                                           | ** ** | **(153**                                         | **)**       | **—**                                        |       | —                                          |       |
| Repurchase of treasury shares                                                               | ** ** | **(355**                                         | **)**       | **—**                                        |       | —                                          |       |
| Proceeds from warrants exercised                                                            | ** ** | **6**                                            | ** **  | **—**                                        |       | —                                          |       |
| Long-term liabilities assumed on Canton  acquisition                                        | ** ** | **1,745**                                        | ** **  | **—**                                        |       | —                                          |       |
| Debt issuance costs                                                                         | ** ** | **(2,546**                                       | **)**       | **(1,190**                                        | **)**      | (1,876                                          | )          |
| Proceeds from stock option exercises                                                        | ** ** | **—**                                       | ** **  | **96**                                            |       | —                                          |       |
| Net cash provided by (used for) financing  activities                                       | ** ** | **44,195**                                       | ** **  | **54,260**                                        |       | (11,311                                         | )          |
| Net increase (decrease) in cash and cash  equivalents                                       | ** ** | **(43,384**                                      | **)**       | **32,654**                                        |       | 12,433                                          |       |
| Cash and cash equivalents at beginning of period                                            | ** ** | **85,239**                                       | ** **  | **52,585**                                        |       | 23,339                                          |       |
| Cash and cash equivalents at end of period                                                  | ** ** | **$**                                            | **41,855**  | ** **                                        | **$**      | **85,239**                                      |       | $ | 35,772 |   |

 

*The accompanying notes are an integral part of these condensedconsolidated financial statements.*

 

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**Aventine Renewable Energy Holdings, Inc. and Subsidiaries**

**Notes to UnauditedCondensed Consolidated Financial Statements**

 

**(1)****          ****Basisof Reporting for Interim Financial Statements**

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of Aventine Renewable Energy Holdings, Inc. and its subsidiaries,which are collectively referred to as “Aventine”, the “Company”, “we”, “our” or“us” unless the context otherwise requires. All significant intercompany transactions have been eliminated inconsolidation.

 

We have prepared theunaudited condensed consolidated financial statements included herein pursuantto the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in statements prepared in accordance with accountingprinciples generally accepted in the United States (“GAAP”) have been omittedpursuant to such rules and regulations, although we believe that thedisclosures are adequate to make the information presented not misleading.  These financial statements should be read inconjunction with the financial statements and notes thereto included in our AnnualReport on Form 10-K for the year ended December 31, 2009.  As of September 30, 2010, the Company’sSummary of Critical Accounting Policies for the year ended December 31,2009, which are detailed in the Company’s Annual Report on Form 10-K, havenot changed except for the application of fresh start accounting as describedin the following paragraph.

 

On February 28, 2010,the Company applied fresh start accounting which requires assets andliabilities to be reflected at fair value. The financial information set forthin this report, unless otherwise expressly set forth or as the contextotherwise indicates, reflects the consolidated results of operations andfinancial condition of Aventine and its subsidiaries on a fresh start basis forthe period following February 28, 2010 (“Successor”), and of Aventine andits subsidiaries on a historical basis for the periods through February 28,2010 (“Predecessor”).

 

The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Areas involving significant judgments andestimates include depreciation, income taxes, fresh start accounting, and fairvalue measurements.  Actual results could differ from thoseestimates.

 

The accompanying consolidatedfinancial statements for the prior period contain certain reclassifications toconform to the presentation used in the current period.  The reclassifications had no impact onstockholders’ equity, working capital, gross profit or net income.

 

Theaccompanying unaudited condensed consolidated financial statements presentedherewith reflect all adjustments (consisting of only normal and recurringadjustments unless otherwise disclosed) which, in the opinion of management,are necessary for a fair presentation of the results of operations for the three-monthperiods ended September 30, 2010 and 2009, seven-month period ended September 30,2010, two-month period ended February 28, 2010, and the nine-month periodended September 30, 2009.  Theresults of operations for interim periods are not necessarily indicative ofresults to be expected for an entire year.

 

**(2)****          ****Emergence from Reorganization Proceedings and Related Events**

 

OnApril 7, 2009 (the “Petition Date”), Aventine Renewable EnergyHoldings, Inc. and all of its direct and indirect subsidiaries(collectively, the “Debtors”), filed voluntary petitions with the United StatesBankruptcy Court for the District of Delaware (the “Bankruptcy Court”) toreorganize under Chapter 11 of the United States Code (the “Bankruptcy Code”).  On January 13, 2010, the Debtors filedthe First Amended Joint Plan of Reorganization under Chapter 11 of theBankruptcy Code dated as of January 13, 2010 (as modified, the “Plan”).  The Plan was confirmed by order entered bythe Bankruptcy Court on February 24, 2010 (the “Confirmation Date”) andbecame effective on March 15, 2010 (the “Effective Date”), the date onwhich the Company emerged from protection under Chapter 11 of the BankruptcyCode.

 

AccountingStandards Codification (“ASC”) Section 852, *Reorganizations,*which is applicable to companies in Chapter 11, generally does not change themanner in which financial statements are prepared while the 

 

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companyremains in Chapter 11.  However, ASC 852does require that the financial statements for periods subsequent to the filingof a Chapter 11 petition and prior to the Effective Date distinguishtransactions and events that are directly associated with the reorganizationfrom the ongoing operations of the business. Revenues, expenses (including professional fees), realized gains andlosses, and provisions for losses that can be directly associated with thereorganization and restructuring of the business must be reported separately asreorganization items in the consolidated statements of operations.  The consolidated balance sheet mustdistinguish pre-petition liabilities subject to compromise from both thosepre-petition liabilities that are not subject to compromise and frompost-petition liabilities.  Liabilitiesthat may be affected by the Plan must be reported at the amounts expected to beallowed, even if they may be settled for lesser amounts.  In addition, cash provided by reorganizationitems must be disclosed separately in the condensed consolidated statement ofcash flows.  ASC 852 became effective forAventine on April 7, 2009, and Aventine segregated those items as outlinedabove for all applicable reporting periods subsequent to such date through theEffective Date.

 

*Fresh Start Accounting and Selection of Convenience Date*

 

TheCompany emerged from bankruptcy on March 15, 2010. In accordance with ASC852, *Reorganizations*, the Company adoptedfresh start accounting and adjusted the historical carrying value of its assetsand liabilities to their respective fair values at the Effective Date.Simultaneously, the Company determined the fair value of its equity at theEffective Date. The Company selected an accounting convenience date proximateto the Effective Date for purposes of making the aforementioned adjustments tohistorical carrying values (the “Convenience Date”), because the activitybetween the Effective Date and the Convenience Date does not result in amaterial difference in the results. The Company selected a Convenience Date of February 28,2010. As a result, the Company recorded fresh start accounting adjustments tohistorical carrying values of assets and liabilities as of February 28,2010 using market prices, discounted cash flow methodologies based primarily onobservable market information and, to a lesser extent, on unobservable marketinformation, and other techniques. The fresh start accounting adjustments arereflected in the balance sheet at February 28, 2010 and in the statementof operations for the two months ended February 28, 2010.  The Statements of Operations for thethree-month and seven-month periods ended September 30, 2010 reflect theresults of successor operations.

 

TheCompany’s adoption of fresh start accounting results in the Company becoming anew entity as of the Effective Date, with a new capital structure, a newaccounting basis in the identifiable assets and liabilities assumed and noretained earnings or accumulated losses. The consolidated financial statementson or after March 1, 2010 are not comparable to the consolidated financialstatements prior to that date. The financial statements for the periods endedprior to February 28, 2010 do not include the effect of any changes in ourcapital structure or changes in the fair value of assets and liabilities as aresult of fresh start accounting.

 

Freshstart accounting provides, among other things, for a determination of the valueto be assigned to the equity of the emerging company as of the Effective Date.Reorganization equity value represents the Company’s estimate of the amount awilling buyer would pay for the Company’s net assets immediately after thereorganization.  This amount(approximately $219.9 million) was determined by Company management withassistance from an independent financial advisor, who developed the enterprisevalue using a combination of the following three measurement methodologies: 1)comparable public company analysis, 2) discounted cash flow analysis, and 3)precedent transactions analysis.  Thisamount was determined based, in part, on economic, competitive, and generalbusiness conditions prevailing at the time. As noted above, enterprise value, including the assumptions referred tobelow, was in turn used to determine the equity value of the Company at theEffective Date.  The enterprise value ofthe Company was estimated between $220.0 million and $260.0 million, andassumed total net debt of $28.9 million (including $105.0 million aggregateprincipal amount of Notes (as defined below) outstanding, no balanceoutstanding under the Revolving Credit Agreement (as defined below) as of theEffective Date, $5.3 million outstanding under the Kiewit Note (as definedbelow) and $81.4 million cash on hand at the Effective Date.  The equity value of the Company was, as aresult, estimated between $191.1 million and $231.1 million, with a midpointequity value of $211.1 million.

 

Uponemergence there were 8.55 million shares of new equity issued with a mid-pointvalue of $24.69 per share.  Of the 8.55million shares 1.71 million were issued to the subscribers to the $105 millionaggregate principal amount of Notes, while 6.84 million shares were reservedspecifically for distribution to holders of general 

 

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unsecuredclaims (including the holders of our pre-petition $300 million of unsecurednotes) in settlement of their claims.  AtSeptember 30, 2010, approximately 1.2 shares remain to be distributed toholders of general unsecured claims.

 

Inestimating the range of enterprise value and equity value of the Company at thetime of emergence management and its financial advisors considered:

 

·      historicalfinancial information of the Debtors for recent years and interim periods;

·      internalfinancial and operating data of the Company, including financial projectionsprepared by management relating to the Company’s business and prospects;

·      interviews withsenior management;

·      publiclyavailable financial data and market value of comparable public companies ourfinancial advisor deemed generally comparable to the operating business of theCompany;

·      relevantprecedent transactions in the ethanol industry — for purposes of this analysismanagement and its financial advisor analyzed all sale transactions of ethanolfacilities occurring from January 1, 2009 through November 15, 2009for which purchase prices were publicly disclosed and were not subject toextraordinary forces making them not relevant to this valuation (i.e., coldidled facilities sold for scrap value);

·      competitivebids received from various third parties in connection with the Company’sfinancial advisors marketing efforts;

·      certaineconomic and industry information relevant to the operating business; and

·      such otherstudies, analyses, inquiries, and investigations as it deemed appropriate.

 

Estimatesof enterprise and equity value in a bankruptcy proceeding do not purport to beappraisals or necessarily reflect the values that may be realized if assets aresold as a going concern, in liquidation or otherwise.  The estimates were developed solely forpurposes of formulation and negotiation of our Plan and the analysis of theimplied relative recoveries to creditors under our Plan.

 

Theanalysis and estimation of enterprise value require assumptions related to manyforward-looking economic, market, industry and company specific factors at aspecific point in time and, which are subject to change over time as factorsaffecting the economy and industry change. In addition, unanticipated events and circumstances occurring subsequentto the preparation of the financial projections employed in these analyses mayhave a significant impact on actual results achieved.  The financial projections included in theseanalyses include:

 

·      availabilityand prices of commodity inputs;

·      operations ofthe Company’s facilities;

·      timing, costand extent of completion of the Mt. Vernon and Aurora-West plants underconstruction;

·      employment andlabor matters;

·      demand forgasoline on ethanol sales;

·      future supplyand demand of ethanol;

·      effect ofhedging, derivative and fixed pricing strategies;

·      regulatoryenvironment, taxes and tariffs, blending limits;

·      health, safetyand environmental laws;

·      competitiveenvironment; and

·      financing availabilityand cost.

 

Descriptionsof the different valuation methodologies (comparable public company analysis,discounted cash flow analysis and precedent transaction analysis)  are as provided below.

 

Comparable Public CompanyAnalysis

 

A comparable public companyanalysis estimates value based on a comparison of the target company’sfinancial statistics with the financial statistics of public companies that aresimilar to the target company. It establishes a benchmark for asset valuationby deriving the value of “comparable” assets, standardized using a commonvariable such as revenues, earnings, cash flows and operating capacity.  The analysis includes a detailed 

 

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multi-year financialcomparison of each company’s income statement, balance sheet, cash flowstatement and operating capacity.  Inaddition, each company’s performance, profitability, margins, leverage andbusiness trends are also examined.  Basedon these analyses, a number of financial multiples and ratios are calculated togauge each company’s relative performance and valuation.  Under this methodology, the enterprise valueranged from $240 million to $280 million (with a mid-point of $260 million).

 

Precedent TransactionsAnalysis

 

Precedent transactionsanalysis estimates value by examining publicly announced merger and acquisitiontransactions. An analysis of the disclosed purchase price as a multiple ofvarious operating statistics (particularly total annual production capacity inthe case of the ethanol industry) reveals industry acquisition multiples forcompanies in similar lines of businesses to the Company. These transactionmultiples are calculated based on the purchase price (including any debtassumed) paid to acquire companies that are comparable to the Debtors. Thesemultiples are then applied to the Debtors’ annual production capacity todetermine the total enterprise value or value to a potential buyer.

 

Thetransactions selected were based on the following criteria:

 

·      deals announcedsince September 2008 for targets in the United States and Canada;

·      deal was closedprior to November 2009;

·      majority stakeacquired;

·      target companyis an ethanol producer;

·      transactionswith extraordinary circumstances regarding the plants were excluded;

implied enterprise value / capacity could bedetermined.

 

Basedon the analysis of precedent transactions in the industry, the financialadvisors calculated an enterprise value of the Debtors from $200 million to$240 million.

 

Discounted Cash FlowApproach

 

The discounted cash flow (“DCF”)valuation methodology relates the value of an asset or business to the presentvalue of expected future cash flows to be generated by that asset or business.The DCF methodology is a “forward looking” approach that discounts the expectedfuture cash flows by a theoretical or observed discount rate determined bycalculating the weighted average cost of debt and equity capital (“WACC”) forpublicly traded companies that are similar to the Debtors. The expected futurecash flows have two components: the present value of the projected unleveredafter-tax free cash flows for a determined period and the present value of theterminal value of cash flows (representing firm value beyond the time horizonof the financial projections).  Theprojected cash flows were discounted from the financial projections using theDebtors’ estimated WACC, and the terminal value of the Debtors was calculatedusing a per gallon multiple of operating capacity as is consistent withindustry practice.

 

Inits efforts to value the Debtors, the financial advisor conducted a DCF underthe following assumptions:

 

·      Company-providedEBITDAR levels;

·      WACC of 20%based on an analysis of the Notes term sheet, required private equity returnsin similar companies and required returns of other publicly traded ethanolproducers;

·      Exit multipleof $1.00 per gallon of operating capacity plus consideration for workingcapital (projected working capital balance as of December 31, 2014,discounted at the Debtors’ WACC) as is consistent with industry practice;

·      Corporate taxrate of 40%;

·      The twouncompleted facilities (Aurora West and Mount Vernon) are completed by the endof 2011.

 

Underthis set of assumptions, the financial advisor placed an enterprise value ofthe Company ranging from approximately $220 million to $260 million.

 

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In performing the ComparablePublic Company Analysis, it was determined that only one publicly availableethanol company is generally comparable to the Company.  Several ethanol producers were deemed notcomparable or not usable for the purposes of the valuation because (i) theirequity is privately held; (ii) ethanol production makes up less than 10%of sales and/or (iii) the companies are distressed.  For this reason, it was determined that the DCFanalysis and precedent transactions analysis were the most pertinent valuationmethodologies for the purpose of valuing the Company.  Accordingly, the DCF analysis and theprecedent transactions analysis were each weighted at 40% and the comparablecompanies’ analysis was weighted at 20% in estimating the Company’s enterprisevalue.

 

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Thebalance sheet reorganization adjustments presented below summarize the impactof the Plan and the adoption of fresh start accounting as of February 28,2010.

 

**AVENTINE RENEWABLE ENERGY HOLDINGS, INC. ANDSUBSIDIARIES**

**REORGANIZED CONDENSED CONSOLIDATED BALANCE SHEET**

 
| ** **                                      | ** ** | **February 28, 2010** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | ** **                      | ** ** | **Reorganization** | ** ** | **Fresh Start** | ** ** | ** ** | ** ** |
| **(In thousands)**                         | ** ** | **Predecessor**                 | ** ** | **Adjustments**** (1)** | ** ** | **Adjustments** | ** ** | **Successor** | ** ** |
| **ASSETS**                                      |       |                            |       |   |   |   |   |   |   |
| Current assets:                                 |       |                            |       |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                               | 66,866     |   | $ | 18,373 | (2) | $ | — |   | $ | 85,239 |   |
| Accounts receivable                             |       | 8,163                           |       | (1,000 | )(3) | — |   | 7,163 |   |
| Inventories                                     |       | 22,694                          |       | — |   | 2,526 | (12) | 25,220 |   |
| Income taxes receivable                         |       | 5,975                           |       | — |   | — |   | 5,975 |   |
| Prepaid expenses and other current assets       |       | 5,423                           |       | (1,210 | )(4) | — |   | 4,213 |   |
| Total current assets                            |       | 109,121                         |       | 16,163 |   | 2,526 |   | 127,810 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| Property, plant and equipment, net              |       | 587,103                         |       | 1,700 | (2) | (379,970 | )(12) | 208,833 |   |
| Restricted cash                                 |       | 7,452                           |       | 7,832 | (2) | — |   | 15,284 |   |
| Available for sale securities                   |       | 6,207                           |       | — |   | — |   | 6,207 |   |
| Other assets                                    |       | 9,860                           |       | 734 | (5) | (4,423 | )(12) | 6,171 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| Total assets                                    |       | $                               | 719,743    |   | $ | 26,429 |   | $ | (381,867 | ) | $ | 364,305 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |                            |       |   |   |   |   |   |   |
| CURRENT LIABILITIES:                            |       |                            |       |   |   |   |   |   |   |
| Short-term borrowings                           |       | $                               | 42,765     |   | $ | (37,513 | )(2),(6) | $ | — |   | $ | 5,252 |   |
| Accounts payable                                |       | 16,588                          |       | 1,637 | (7) | 1,281 | (12) | 19,506 |   |
| Accrued liabilities                             |       | 2,327                           |       | — |   | — |   | 2,327 |   |
| Other current liabilities                       |       | 6,837                           |       | — |   | — |   | 6,837 |   |
| Total current liabilities                       |       | 68,517                          |       | (35,876 | ) | 1,281 |   | 33,922 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| Pre-petition liabilities subject to compromise  |       | 358,790                         |       | (358,790 | )(9) | — |   | — |   |
| Long-term debt                                  |       | —                          |       | 98,119 | (2) | 6,881 | (12) | 105,000 |   |
| Deferred tax liabilities                        |       | 2,936                           |       | — |   | — |   | 2,936 |   |
| Other long-term liabilities                     |       | 31,069                          |       | (28,545 | )(10) | — |   | 2,524 |   |
| Total liabilities                               |       | 461,312                         |       | (325,092 | ) | 8,162 |   | 144,382 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| STOCKHOLDERS’ EQUITY                       |       |                            |       |   |   |   |   |   |   |
| Common stock                                    |       | 44                              |       | (37 | )(11) | — |   | 7 |   |
| Additional paid-in capital                      |       | 294,670                         |       | (74,754 | )(11) | — |   | 219,916 |   |
| Retained earnings (deficit)                     |       | (38,657                         | )          | 426,312 | (11) | (387,655 | )(13) | — |   |
| Accumulated other comprehensive income          |       | 2,374                           |       | — |   | (2,374 | )(13) | — |   |
| Total shareholders’ equity (deficit)       |       | 258,431                         |       | 351,521 |   | (390,029 | ) | 219,923 | (8) |
|                                            |       |                            |       |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity |       | $                               | 719,743    |   | $ | 26,429 |   | $ | (381,867 | ) | $ | 364,305 |   |

 

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ExplanatoryNotes

 

(1) Represents amounts recorded on the Effective Date for the implementation of thePlan, including the settlement of liabilities subject to compromise and relatedpayments, the issuance of new debt and repayment of old debt, distributions ofcash and new shares of common stock, and the cancellation of Predecessor’scommon stock.

 

(2) Cash effects of the Plan:

 
| Proceeds from Issuance of senior secured notes                                                                                                                                                                                                                            |   | $       | 98,119 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|
| Payment of principal on secured revolving credit  facility                                                                                                                                                                                                                |   | (27,765 | )      |
| Payment of interest and fees on secured revolving  credit facility                                                                                                                                                                                                        |   | (206    | )      |
| Payment of principal on debtor-in-possession debt  facility                                                                                                                                                                                                               |   | (15,000 | )      |
| Payment of interest on debtor-in-possession debt  facility                                                                                                                                                                                                                |   | (96     | )      |
| Payment of secured claims to Kiewit Energy Company  on expansion projects at Aurora, Nebraska and Mt. Vernon, Indiana                                                                                                                                                |   | (17,931 | )      |
| Represents payment to Applied Process Technology  International LLC for license agreements which provide the Company with all  of the rights to the Delta-T Technology necessary to construct and operate  the ethanol expansion facilities at Aurora West and Mt. Vernon |   | (1,700  | )      |
| Fund additional restricted cash                                                                                                                                                                                                                                           |   | (7,832  | )      |
| Payments of priority and other secured claims and  cure amounts                                                                                                                                                                                                           |   | (4,876  | )      |
| Payment of professional fees                                                                                                                                                                                                                                              |   | (4,340  | )      |
|                                                                                                                                                                                                                                                                      |   |    |   |
| Net change in cash and cash equivalents                                                                                                                                                                                                                                   |   | $       | 18,373 |   |

 

Thisentry records the proceeds from the issuance of senior secured notes and thepayment of certain bankruptcy obligations in accordance with thePlan.  Cash of $7.8 million reclassified to restricted cashrepresents amounts held in escrow accounts pending final resolution from theBankruptcy Court.

 

(3) The Company set-off $1.0 million of receivables from a certain customer against$1.7 million of payables due to the same counterparty, resulting in a netpayout of $0.7 million to the customer/vendor, also discussed in footnote (7) below.

 

(4) Represents the write-off of the prepaid directors and officers insurancebalance for the predecessor company of $1.6 million, plus $0.3 millionreclassification of debt issuance costs related to the issuance of the seniorsecured notes and the new secured revolving credit facility to Other Assets,offset by the addition of a deposit on title insurance pertaining to the AuroraWest expansion facility of $0.7 million

 

(5) Represents the $0.7 million of debt issuance costs pertaining to the seniorsecured notes and the new secured revolving credit facility, of which $0.3million was reclassified from Prepaid Expenses and Other Current Assets.

 

(6) As noted above in explanatory note (2), the Company paid in full the $27.8million pre-petition secured revolving credit facility and the $15.0 milliondebtor-in-possession loan, along with $0.3 million representing all respectiveaccrued interest on said loans, in accordance with the Plan. Offsetting thesereductions in debt, the Company issued a $5.3 million note payable due toKiewit Energy as partial satisfaction of Kiewit Energy’s secured claim on theAurora West ethanol expansion facility.

 

(7) The increase consisted of $1.6 million of accrued priority, secured, and cureamounts not yet paid to claimants, $0.7 million of accrued Class 7convenience claims also not yet paid to claimants, the $1.0 million accruedprofessional fee payable to a court-appointed financial advisor, all of whichwas offset by a $1.7 million reduction in payable due to a certainvendor/customer as discussed in footnote (3) above.

 

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(8) Reconciliation of enterprise value to determination of equity:

 
| Total enterprise value                                      |   | $        | 240,000 |   |
|-------------------------------------------------------------|--------|----------|---------|--------|
| Successor company cash balance at  February 28, 2010   |   | 85,239   |    |
| Accrued plan effects payments                               |   | (5,348   | )       |
| Kiewit note                                                 |   | (5,252   | )       |
| Restricted cash available upon emergence                    |   | 10,284   |    |
| Fair value of senior secured notes due  March 15, 2015 |   | (105,000 | )       |
|                                                        |   |     |    |
| Total shareholder’s equity                             |   | $        | 219,923 |   |

 

(9) Representsthe disposition of liabilities subject to compromise:

 
| Liabilities subject to compromise discharged at  emergence:                              |   |    |    |
|------------------------------------------------------------------------------------------|--------|---------|---------|
| Accrued interest                                                                         |   | $       | 6,134   |   |
| 10% senior unsecured notes due 2017                                                      |   | 117,897 |    |
| Class 6 General Unsecured Claims                                                    |   | 18,637  |    |
| Class 7 Convenience Claims                                                          |   | 1,302   |    |
|                                                                                     |   | $       | 143,970 |   |
|                                                                                     |   |    |    |
| Liabilities subject to compromise paid in cash or  settled via equity share distribution |   |    |    |
| Accrued interest on Notes (equity shares)                                                |   | $       | 9,366   |   |
| 10% senior unsecured notes due 2017 (equity  shares)                                     |   | 182,103 |    |
| Class 6 General Unsecured Claims (equity  shares)                                   |   | 28,454  |    |
| Class 7 Convenience Claims (paid or accrued  for payment)                           |   | 701     |    |
|                                                                                     |   | $       | 220,624 |   |
|                                                                                     |   |    |    |
| Unamortized issuance costs of 10% senior unsecured  note                                 |   | $       | (5,804  | ) |
|                                                                                     |   |    |    |
| Total Disposition of Liabilities Subject to  Compromise                                  |   | $       | 358,790 |   |

 

(10) Due to the payment of priority and secured claims and cure amounts inaccordance with the Plan, the Company recorded a $28.5 million reduction inother long-term liabilities under Plan Effects as follows:

 
| Changes in Other Long-Term Liabilities                                                              |   |   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                |   |   |   |
| Partial settlement of the Kiewit Aurora West  Secured Claim                                         |   | $      | 10,000 |   |
| Payment in full of Kiewit Mt. Vernon Secured Claim                                                  |   | 7,931  |   |
| Issuance of a short-term Kiewit Note as partial  settlement of the Kiewit Aurora West Secured Claim |   | 5,252  |   |
| Payment of Collateral for Public Utility Mt.  Vernon Lien                                           |   | 1,894  |   |
| Reclassification of Unpaid Priority, Secured, and  Cure Amounts to Accounts Payable                 |   | 1,582  |   |
| Payment of Employee-related Priority  Administrative Claims                                         |   | 937    |   |
| Payment of Cure Amounts for Assumed Contracts                                                       |   | 420    |   |
| Payments of Other Secured Claims                                                                    |   | 333    |   |
| Payment of Other Priority Administrative Claims  Payments                                           |   | 196    |   |
| Total                                                                                               |   | $      | 28,545 |   |

 

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(11)  Plan Effects adjustments to Stockholder’sEquity include the following:

 

·      Gain due toplan effects in the first quarter of 2010 of $136.6 million related toimplementation of the Plan consisted of $144.0 million of liabilities subjectto compromise which were discharged upon emergence less $5.8 million ofunamortized debt issuance costs on the 10% senior unsecured notes and $1.6million related to the write-off of Predecessor prepaid directors and officerinsurance.

 

·      Elimination ofpredecessor equity balances comprised of:

 

·      common stock of$44 thousand,

·      additionalpaid-in capital of $294.7 million

 

·      Issuance ofsuccessor common stock comprised of:

 

·      common stock of$7 thousand

·      additionalpaid-in capital of $219.9 million

 

·      Adjustments to retainedearnings of $426.3 million resulting from the net impact of all other planeffects.

 

(12)The significantassumptions related to adjusting our assets and liabilities to fair value inconnection with fresh start accounting include the following:

 

*Cash, Accounts Receivable,Prepaid Assets and Other Current Assets, Accrued Liabilities, and Other CurrentLiabilities* - Weevaluated the fair value of financial instruments represented in current assetsand current liabilities, including cash, accounts receivable, prepaid assetsand other current assets, accrued liabilities, and other currentliabilities.  Based upon our evaluations,we concluded that the carrying value approximates fair value of these financialinstruments due to their short maturities or variable-rate nature of therespective balances.

 

*Restricted Cash, and Other Long-TermLiabilities* - Weevaluated the fair value of restricted cash and other long-termliabilities.  The restricted cashbalances are held in interest-bearing accounts and we therefore concluded thatthe carrying value approximates fair value. The other long-term liabilities principally represent companyobligations related to pension and retiree medical costs.  Such liabilities are calculated using variousassumptions including an assumed discount rate which we believe is reasonable,and we therefore concluded that carrying value of such long-term liabilitiesapproximates fair value.

 

*Inventories* — Inventories consist primarily of agricultural andenergy-related commodities including corn, ethanol, and coal.  The fair value of these commodities wasdetermined through reference to prices that were publicly available at thetime, as adjusted for physical location.

 

*Property, plant and equipment*— Property,plant and equipment was valued at fair value of approximately $208.8 million asof February 28, 2010.  The Company determined fair value withthe assistance of an independent valuation firm.  In establishing fair value for the vastmajority of the Company’s property, plant and equipment, the cost approach wasutilized. The cost approach considers the amount required to replace an assetby constructing or purchasing a new asset with similar utility, then adjuststhe value in consideration of all forms of depreciation as of the appraisaldate as described below:

 

·      Physical depreciation — theloss in value or usefulness attributable solely to use of the asset andphysical causes such as wear and tear and exposure to the elements.

·      Functional obsolescence — aloss in value is due to factors inherent in the asset itself and due to changesin technology, design or process resulting in inadequacy, overcapacity, lack offunctional utility or excess operating costs.

·      Economic obsolescence — lossin value by unfavorable external conditions such as economics of the industryor geographic area, or change in ordinances.

 

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Thecost approach relies on management’s assumptions regarding current material andlabor costs required to rebuild and repurchase significant components of ourproperty, plant and equipment along with assumptions regarding the age andestimated useful lives of our property, plant and equipment.  After recording other assets and liabilitiesat their respective fair values, the balance of the enterprise value isallocated to the various classes of property, plant and equipment based on theindependent third party appraisal as adjusted for the factors indicated above,which resulted in a write-down of property, plant and equipment ofapproximately $380.0 million.  Factorscontributing to the significant write-off of property, plant and equipmentincluded:

 

·      Uncompletedfacilities are less marketable than operational facilities and were selling ata substantial discount to completed facilities. In their marketing efforts our financial advisor received minimalinterest in the Company’s uncompleted facilities;

·      The plantsrequired material capital contributions prior to experiencing any potentialprofits from production and it was uncertain that the facilities would becompleted if the Company did not have sufficient capital to fundcompletion.  There was also uncertaintyas to whether the costs to complete the plants could be materially greater thanestimated by management;

·      There weresignificant start-up risks because both plants under construction had sat idlethrough an entire winter and were expected to sit idle through the 2010 winterwhich could result in issues causing the equipment to fail to operate effectively.

 

*Other Assets* — Other assets include a long-term deposit forutilities against which the Company may apply certain future natural gastransportation charges.  The fair valueof this deposit was determined based upon a discounted cash flow model for whichthe significant inputs include the Company’s estimated purchase timing andamount of natural gas, and the discount rate estimated to be 13%.  If the Company had applied a discount rate of1% higher or lower, the fair value of the asset would have decreased orincreased by $168 thousand or $177 thousand, respectively.

 

*Accounts Payable* — Accounts payable include an estimated liabilityassociated with an off-market coal purchase contract which continues throughout2010.  The fair value of this contractwas determined through reference to coal prices that were publicly available atthe time, as adjusted for physical location. This liability will be amortized to income as the related coal purchasesaffect the cost of production.  For otheraccounts payable items, we evaluated such liabilities to determine fair valueand concluded that the carrying value approximates fair value of thesefinancial instruments due to their short maturities or variable-rate nature ofthe respective balances.

 

*Long-Term Debt* — Long-term debt was valuedat fair value with the assistance of an independent valuation firm based on ananalysis of market interest rates for guideline companies with similar debt andterms, interest rates for companies recently emerged from bankruptcy, and interestrates based on a synthetic debt rating. Based on this analysis, we determined that a range of market interestrate for our $105 million of senior secured notes would be from 11.5% to 14.5%.  Based on the stated rate of the seniorsecured notes of 13% combined with the option to pay a portion of the interestin kind, we deemed the fair value to be the face value of the notes of $105million.  If the interest rate was 1%higher or lower, the fair value of the debt would have increased or decreased by$1.2 million respectively.

 

Allfresh start adjustments noted above represent non-recurring fair valuemeasurements and have been treated as non-cash adjustments in the consolidatedstatement of cash flows.

 

(13)  Adjustments required in order to report assetsand liabilities at fair value under fresh start accounting resulted in apre-tax charge of $387.7 million, which we reported as a loss due to freshstart accounting adjustments in the consolidated statement of operations forthe two months ending February 28, 2010.

 

Inaddition, we eliminated the balance of accumulated other comprehensive gains(net of losses) totaling $2.4 million, which we classified as a loss withinreorganization items in the consolidated statement of operations for the twomonths ending February 28, 2010.

 

**(3)****          ****RecentAccounting Pronouncements**

 

InJanuary 2010, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2010-06, *FairValue Measurements and Disclosures*, which adds new disclosure requirementsfor transfers into and out of Levels 1 and 2 in the fair value hierarchy andadditional disclosures about purchases, sales, issuances, and settlementsrelating to Level 3 fair value measurements. This ASU also clarifies existing fair value disclosures about the levelof disaggregation about inputs and valuation techniques used to measure fairvalue. The ASU is effective for the Company as of January 1, 2010, exceptfor the requirement to provide the Level 3 activity on a gross basis, which iseffective as of January 1, 2011. As the new guidance only pertained todisclosures, it had no impact on our consolidated financial position, resultsof operations or cash flows upon adoption. See Notes 2 and 10 for further discussion of fair value measurements.

 

InFebruary 2010, the FASB issued authoritative guidance to define SEC filerwithin the FASB Accounting Standards Codification and eliminate the requirementfor a SEC filer to disclose the date through which subsequent events have beenevaluated in order to remove potential conflicts with current SECguidance.  We adopted the FASB guidanceon the date of issuance, February 24, 2010. As the new guidance onlypertained to disclosures, it 

 

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hadno impact on our consolidated financial position, results of operations or cashflows upon adoption.  See Note 24 forfurther discussion.

 

**(4)****          ****Inventories**

 

Inventoriesare as follows:

 
| ** **              | ** **   | **Successor**            | ** **   | **Predecessor**             | ** **   |
|-------------------------|--------------|--------------------------|--------------|-----------------------------|--------------|
| **(In thousands)** | ** **   | **September  30,  2010** | ** **   | **December 31,  2009** | ** **   |
| *** ***            | *** *** | *** ***             | *** *** | *** ***                | *** *** |
| Finished products       | ** **   | **$**                    | **15,116**   |                        | $            | 16,409 |   |
| Work-in-process         | ** **   | **2,470**                |         | 2,430                       |         |
| Raw materials           | ** **   | **3,508**                |         | 2,938                       |         |
| Supplies                | ** **   | **1,725**                |         | 2,460                       |         |
| Totals                  | ** **   | **$**                    | **22,819**   |                        | $            | 24,237 |   |

 

**(5)****          ****PrepaidExpenses and Other Current Assets**

 

Prepaidexpenses and other current assets are as follows:

 
| ** **                           | ** ** | **Successor**                | ** ** | **Predecessor**             | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **(In thousands)**              | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
| * *                             | * *   | * *                     | * *   | * *                    | * *   |
| Prepaid insurance                    | ** ** | **$**                        | **2,734**  |                        | $          | 3,257 |   |
| Prepaid inventory                    | ** ** | **726**                      |       | 1,197                       |       |
| Prepaid benefits                     | ** ** | **285**                      |       | 279                         |       |
| Prepaid utility deposits             | ** ** | **926**                      |       | 926                         |       |
| Other prepaid expenses               | ** ** | **1,041**                    |       | 778                         |       |
| Fair value of derivative instruments | ** ** | **473**                      |       | —                      |       |
| Purchased RIN’s                 | ** ** | **239**                      |       | —                      |       |
| Other current assets                 | ** ** | **1,266**                    |       | 886                         |       |
| Totals                               | ** ** | **$**                        | **7,690**  |                        | $          | 7,323 |   |

 

**(6)****          ****Short-termborrowings**

 

Thefollowing table summarizes the Company’s short-term borrowings:

 
| ** **                                                  | ** ** | **Successor**                | ** ** | **Predecessor**             | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                     | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|                                                        |       |                         |       |                        |       |
| Secured revolving credit facility with JPMorgan  Chase Bank | ** ** | **$**                        | —     |                        | $          | 27,765 |   |
| Debtor-in-possession debt facility                          |       | —                       |       | 15,000                      |       |
| Senior secured revolving credit facility with PNC  Bank     |       | —                       |       | —                      |       |
| Note payable — Kiewit                                  |       | —                       |       | —                      |       |
| Total short-term borrowings                                 | ** ** | **$**                        | —     |                        | $          | 42,765 |   |

 

*Secured Revolving Credit Facility with JPMorgan Chase Bank*

 

Asof December 31, 2009, $9.6 million in letters of credit and $27.8 millionin revolving loans were outstanding under our pre-petition amended securedrevolving credit facility with JPMorgan Chase Bank, N.A., as administrativeagent and a lender.  As a result of the bankruptcy proceedings, all thecommitments under the Company’s pre-petition amended secured revolving creditfacility automatically terminated, and the principal of the loans and thereimbursement obligations then outstanding, together with accrued interestthereon and any unpaid 

 

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feesand all other obligations of the borrowers accrued under the applicable loandocuments, became immediately due and payable, subject to the automatic stayprovisions of Section 362 of the Bankruptcy Code.  As a result, therewas no longer any liquidity available to us under the pre-petition amendedsecured revolving credit facility.  Amounts owed at December 31, 2009under the Company’s pre-petition amended secured revolving credit facility werenot included in “pre-petition liabilities subject to compromise” as the secureddebt was adequately collateralized.  The pre-petition amended securedrevolving credit facility was collateralized by a first security lien onessentially all of the Company’s assets, except for assets of the Mt. Vernonfacility.  The Company continued to accrue and pay interest on this creditfacility in accordance with the Bankruptcy Court’s final debtor-in-possession (“DIP”)financing order.  As of December 31, 2009, the Company held arestricted cash account totaling $7.0 million providing collateral protectionto the pre-petition lenders for certain outstanding letters of credit issuedunder this facility as provided for in a stipulation agreement among theCompany, its pre-petition secured lenders, and the lenders under the Debtors’post-petition debtor in possession credit facility (the “DIP Lenders”).

 

Priorto the Petition Date, borrowings on the pre-petition amended secured revolvingcredit facility generally bore interest, at our option, at the following rates(i) the Eurodollar rate or the LIBO rate plus a margin of 4.5%, with aLIBO rate minimum of 3%, or (ii) the greater of the prime rate or thefederal funds rate plus 0.50% (with a minimum rate of LIBOR plus 2.25%), plus amargin of 3.25%.  In addition, the following fees were also applicable: anunused commitment fee of 0.50% on unused borrowing availability, an outstandingletters of credit fee of 4.625%, and administrative and legal costs.

 

Effectivewith the Petition Date, the interest rate on the pre-petition amended securedrevolving credit facility reverted to a default rate of 10.5% per annum, whilefees for outstanding letters of credit reverted to a default rate of 6.625% perannum.  Accrued interest and other fees were paid monthly.

 

Thebalances owed on this credit facility were paid in full on the EffectiveDate.  At September 30, 2010, theCompany had $6.3 million in letters of credit outstanding as issued by thepre-petition lenders.  The $6.3 millionoutstanding letters of credit were collateralized by $7.8 million in arestricted cash account.

 

*Debtor-in-possession Credit Facility*

 

OnApril 7, 2009, the DIP Lenders entered into a DIP term sheet for a $30million Debtor-in-Possession Credit Facility (the “DIP Facility”) with theDebtors.

 

Asof December 31, 2009, the Company had drawn $15 million of its $30 millionDIP Facility.  The DIP Facility and the Final DIP Order provided for afirst priority term loan in a maximum aggregate principal amount of up to $30million.  Proceeds of the DIP Facility could be used, among other things,to (i) fund the working capital and general corporate needs of the Companyand the costs of the bankruptcy proceedings in accordance with an approvedbudget, and (ii) provide adequate protection, in accordance with the termsof the DIP Facility, to the pre-petition agent and pre-petition lenders under theCompany’s existing pre-petition amended secured revolving creditfacility.  The DIP Facility bore interest at 16.5%.  The maturitydate of the DIP Facility was April 6, 2010, or upon the occurrence ofcertain pre-defined events including emergence from bankruptcy.  The DIPFacility was secured by a super-priority administrative expense claim on ourassets.  As of December 31, 2009, the Company was in compliance withthe terms of the DIP Facility.  The Company accrued and paid interest expenseon this DIP Facility in accordance with the Bankruptcy Court’s Final DIP Order.

 

Inaccordance with the terms of the Plan, the balances owed on the DIP Facilitywere paid in full on the Effective Date.

 

*Senior Secured Revolving Credit Facility with PNC Bank*

 

Pursuantto the Plan, on the Effective Date, the Company and its subsidiaries, asborrowers, entered into a Revolving Credit and Security Agreement (the “RevolvingCredit Agreement”) with PNC Bank, National Association, as lender and as agent(“PNC”), providing for a $20 million revolving credit facility (the “RevolvingFacility”).  Amounts under the RevolvingFacility may be borrowed, repaid and reborrowed with all amounts outstandingdue and payable on March 15, 2013. The maximum amount outstanding under the Revolving Facility is 

 

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limitedby the amount of eligible receivables and eligible inventory of theborrowers.  The Revolving CreditAgreement contains mandatory prepayment requirements in certain circumstancesupon the sale of certain collateral, subject to the ability to reborrowrevolving advances.  Termination of theRevolving Facility is subject to a prepayment premium if terminated more than90 days prior to the third anniversary of the Revolving Facility.

 

Amountsoutstanding under the Revolving Facility bear interest at a floating rate equalto, at the option of the Company, the alternate base rate (approximates Fed FundsOpen Rate plus 0.5%) plus 3.00% or the Eurodollar rate plus 6.00%.  The Company will pay a commitment fee of1.00% per annum for unused committed amounts under the Revolving Facility.  Interest is due monthly in arrears withrespect to alternate base rate loans and at the end of each interest periodwith respect to Eurodollar rate loans. For Eurodollar rate loans with interest periods greater than threemonths, interest is payable every three months from the first day of suchinterest period and on the last day of such interest period.

 

Upto $17 million of the Revolving Facility may be applied to letters ofcredit.  Issued letters of credit reduceavailability under the Revolving Facility. If issued and outstanding letters of credit under the Revolving Facilityexceed the borrowing base of eligible receivables and inventory, the Companywould be required to provide additional cash collateral to cover any borrowingbase shortfall.  The Company will pay afee for issued and undrawn letters of credit at 6.00% per annum of the averagedaily face amount of each outstanding letter of credit and a per annum frontingfee of 0.25% payable quarterly.

 

TheRevolving Credit Agreement contains, and the Company and its subsidiaries willbe required to comply with, customary covenants for facilities of this type,such as (i) affirmative covenants as to maintenance of existence,compliance with laws, preservation of collateral, environmental matters,insurance, payment of taxes, access to books and records, use of proceeds,maintenance of cash management systems, priority of liens in favor of thelenders, maintenance of assets and monthly, quarterly, annual and otherreporting obligations, and (ii) negative covenants, including limitationson liens, additional indebtedness, loans, guarantees, dividends, nature ofbusiness, transactions with affiliates, investments, asset dispositions,capital expenditures, mergers and consolidations, formation of subsidiaries,accounting changes and amendments to constituent documents.

 

TheRevolving Credit Agreement includes customary events of default for facilitiesof this type, including (i) failure to pay principal, interest or otheramounts when due, (ii) breach of representations and warranties, (iii) breachof covenants, (iv) bankruptcy, (v) occurrence of a material adverseeffect, (vi) cross-default to other indebtedness, (vii) judgmentdefault, (viii) invalidity of any loan document, (ix) failure ofliens to be perfected, (x)  the occurrence of a change of ownership, (xi) lossof material licenses or permits, cessation of operations and the incurrence ofcertain ERISA liabilities.  Upon theoccurrence and continuance of an event of default, the lenders may (i) terminatetheir commitments under the Revolving Facility, (ii) accelerate therepayment of all of the Company’s obligations under the Revolving Facility, and(iii) foreclose on the collateral granted to them.

 

TheRevolving Credit Agreement grants a first priority lien (subject to certainexclusions) to PNC on the Company’s and its subsidiaries’ (i) accountsreceivable, (ii) general intangibles related to accounts receivable andinventory, (iii) intellectual property, (iv) inventory, (v) investmentproperty, (vi) instruments related to the foregoing, (vii) depositaccounts, (viii) letters of credit, (ix) money, (x) letter-of-creditrights, (xi) books and records, and (xii) all proceeds of theforegoing.

 

Inaddition to a borrowing base collateralization consisting primarily of accountsreceivable and inventories, the Revolving Facility is also collateralized by a$5.0 million restricted cash account. The Company cannot count the $5.0 million restricted cash account in itsborrowing base.

 

On August 6, 2010, weand our subsidiaries, as borrowers, entered into the First Amendment to theRevolving Credit Agreement (the “First Amendment”) with the financialinstitutions party thereto as lenders and PNC. The First Amendment amends the Revolving Credit Agreement by increasingthe letter of credit sublimit under the Revolving Credit Agreement from $12.0million to $17.0 million.  The FirstAmendment also modifies the capital expenditure limitations applicable to usand our subsidiaries under the Revolving Credit Agreement and our dailyinventory reporting requirements to permit PNC to agree not to require dailyreporting by the borrowers of in-transit inventory.

 

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Totalliquidity at September 30, 2010 was $51.3 million, comprised of $41.9million in cash and cash equivalents and $9.4 million availability under ourRevolving Facility.  As of September 30,2010, there were no amounts drawn against the Revolving Facility, and therewere $5.5 million of outstanding letters of credit issued under the RevolvingFacility.  The $5.5 million outstandingletters of credit were collateralized by $10.5 million in a restricted cashaccount.

 

*Note payable - Kiewit*

 

Pursuantto the Plan, on the Effective Date, the Company issued a note payable to KiewitEnergy Company for the principal amount of $5.3 million (the “Kiewit Note”).  The Kiewit Note bore interest at the rate of5.00% per annum, compounded semi-annually, and matured on the earlier of (a) March 17,2014 or (b) 120 days after the date on which the Company’s Aurora Westethanol facility was completed and operating at 90% of nameplate capacity.  Nameplate capacity was defined as productioncapacity of 108 million gallons per year of un-denatured ethanol.

 

OnApril 30, 2010 the Company paid the Kiewit Note payable to Kiewit EnergyCompany for $5.3 million.

 

**(7)****          ****Long-termdebt**

 

Thefollowing table summarizes the Company’s long-term debt:

 
| ** **                                                                            | ** ** | **Successor**                      | ** ** | **Predecessor**             | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                                               | ** ** | **September 30,   2010** | ** ** | **December 31,  2009** | ** ** |
|                                                                                  |       |                               |       |                        |       |
| Senior unsecured 10% notes due April 2017                                        | ** ** | **$**                              | —     |                        | $          | 300,000 |   |
| Senior secured 13% notes due March 2015  (including unamortized premium of $730) |       | 155,730                            |       | —                      |       |
| Mortgage note                                                                         |       | 337                                |       | —                      |       |
| ** **                                                                            |       | 156,067                            |       | 300,000                     |       |
| Less: reclassification to pre-petition liabilities  subject to compromise             |       | —                             |       | (300,000                    | )          |
| Less: current maturities of long-term debt                                            |       | (225                               | )          | —                      |       |
| Long-term debt, net                                                                   | ** ** | **$**                              | 155,842    |                        | $          | — |   |

 

*Senior Unsecured Notes*

 

Asof December 31, 2009, the Company had outstanding $300 million aggregateprincipal amount of senior unsecured notes.  The senior unsecured noteswere issued pursuant to an indenture dated as of March 27, 2007, betweenthe Company and Wells Fargo Bank, N.A., as trustee and were exchanged forregistered notes with the same terms on August 10, 2007.  The seniorunsecured notes are general unsecured obligations of the Company and itssubsidiaries.  In April 2009, Deutsche Bank National Trust Companyreplaced Wells Fargo Bank as Successor Indenture Trustee.  As a result ofthe bankruptcy proceedings, the outstanding principal amount of the senior unsecurednotes and accrued interest thereon became immediately due and payable, and suchnotes were reclassified to “pre-petition liabilities subject to compromise”(see Note 12).  The Company discontinued the accrual of interest on thesenior unsecured notes beyond the Petition Date.  Contractual interest expense not recordedfrom April 8, 2009 through December 31, 2009 would have totaled $21.9million.  Contractual interest expensenot recorded from January 1, 2010 through March 15, 2010 would havetotaled $6.3 million.

 

*Senior Secured Notes*

 

Pursuantto the Plan, on the Effective Date, the Company issued and sold an aggregate of$105 million principal amount of 13% senior secured notes due 2015 (the “Notes”).  In addition, on August 19, 2010, theCompany issued and sold an additional $50 million in aggregate principal amountof Notes, resulting in gross proceeds of approximately $51 million (excludingaccrued interest on the Notes through the issue date).  The Notes were issued under an indenture (the“Indenture”) dated as of the Effective Date among the Company, each of theCompany’s direct and indirect wholly-owned subsidiaries, as guarantors (the “Guarantors”),and Wilmington Trust

 

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FSB,as trustee and collateral agent in private transactions that were not subjectto the registration requirements of the Securities Act of 1933, as amended (the“Securities Act”).  The Notes accrueinterest at a rate of 13% for cash interest payments and 15% if the Companyelects paid-in-kind (“PIK”) interest payments. The Company may elect, prior to each interest payment date, to make eachinterest payment on the Notes (i) entirely in cash or (ii) 8/15 incash and 7/15 in PIK interest.  The Notesare fully and unconditionally guaranteed by the Guarantors.  The Company will pay interest on the Notesquarterly in arrears on March 15, June 15, September 15 and December 15of each year, starting on June 15, 2010. The Notes mature on March 15,2015.  The Company will use the netproceeds from the issuance of the Notes to fund payments required to be madepursuant to the Plan, and for working capital and general corporate purposes.

 

TheNotes and the guarantees of the Guarantors are secured by a first-priority lienon substantially all of the Company’s and the Guarantors’ assets (with certainexceptions) and by a second-priority lien on the Company’s and the Guarantors’assets that are subject to the first-priority lien granted under the RevolvingFacility, as described in Note 6.

 

TheIndenture contains various covenants that, subject to certain exceptions, amongother things, limit or restrict the Company’s (and, in certain cases, theGuarantors’ or the Company’s restricted subsidiaries’) ability to (i) incuror assume additional debt or provide guarantees in respect of obligations ofother persons, (ii) issue convertible stock and preferred stock, (iii) paydividends or distributions or redeem or repurchase capital stock, (iv) prepay,redeem or repurchase debt, (v) make loans and investments, (vi) incurcertain liens, (vii) impose limitations on dividends, loans or assettransfers from its subsidiaries, (viii) sell or otherwise dispose ofassets, including capital stock of its subsidiaries, (ix) consolidate ormerge with or into, or sell substantially all of its assets to, another person,(x) enter into transactions with affiliates, and (xi) impair thesecurity interest in the collateral securing the Notes.

 

Ifa change of control of the Company occurs, each holder of Notes will have theright to require the Company to repurchase all or any part (equal to $2thousand or an integral multiple of $1 thousand in excess of $2 thousand) ofthat holder’s Notes for an amount in cash equal to 101% of the aggregateprincipal amount of Notes repurchased plus accrued and unpaid interest on theNotes repurchased to the date of repurchase.

 

TheCompany must offer to repurchase the Notes at 100% of the principal amount ofthe Notes repurchased plus accrued and unpaid interest on the Notes repurchasedto the date of repurchase if the aggregate sum of proceeds received by theCompany from certain assets sales and events of loss and that are not usedpursuant to the terms of the Indenture exceeds $5 million.

 

TheCompany may redeem the Notes in whole or in part prior to their maturity datefor a premium to the outstanding principal amount, as provided in theIndenture.

 

TheIndenture also provides for customary events of default, such as (i) failureto make payments when due, (ii) noncompliance with covenants, and (iii) occurrenceof certain bankruptcy proceedings.  If anevent of default occurs and is continuing, the trustee or the holders of 25% inaggregate principal amount of the outstanding Notes may accelerate payment ofthe principal of, and any accrued interest on, the Notes.  If an event of default occurs and iscontinuing or if the Company or the Guarantors do not comply with certain oftheir obligations under the registration rights agreements, interest on theapplicable aggregate principal amount of Notes will accrue at an additional 2%per annum.

 

TheNotes and the guarantees rank equally in right of payment with all of theCompany’s and the Guarantors’ existing and future senior indebtedness,including indebtedness incurred under the Revolving Credit Agreement (see Note6), and senior to all of the Company’s and the Guarantors’ existing and futuresubordinated indebtedness.

 

*Mortgage Note*

 

Themortgage note was assumed on August 6, 2010 as part of the acquisition ofthe Canton ethanol facility from Central Illinois Energy.  This indebtedness is secured by a mortgageapplicable to the real property located in 

 

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FultonCounty, State of Illinois.  The principalamount, without interest, shall be paid in monthly installments of $4,688 onthe last day of each month until the principal balance has been paid in full onAugust 31, 2016.

 

Maturitiesof outstanding long-term debt, as of September 30, 2010, are as follows:

 
| **(In thousands)** | ** ** | **September 30** | ** **  |
|-------------------------|------------|-----------------------|-------------|
| * *                | * *   | * *              | * *    |
| 2011                    | ** ** | **$**                 | **225**     | ** ** |
| 2012                    | ** ** | **220**               | ** **  |
| 2013                    | ** ** | **220**               | ** **  |
| 2014                    | ** ** | **220**               | ** **  |
| 2015                    | ** ** | **155,131**           | ** **  |
| Thereafter              | ** ** | **51**                | ** **  |
|                    | ** ** | **$**                 | **156,067** | ** ** |

 

**(8)****          ****OtherCurrent Liabilities**

 

Othercurrent liabilities are as follows:

 
| ** **                                                 | ** ** | **Successor**                | ** ** | **Predecessor**             | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                    | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
| * *                                                   | * *   | * *                     | * *   | * *                    | * *   |
| Deferred revenue                                           | ** ** | **$**                        | **4,199**  |                        | $          | 4,513 |   |
| Accrued sales tax                                          | ** ** | **14**                       |       | 10                          |       |
| Accrued property taxes                                     | ** ** | **1,151**                    |       | 817                         |       |
| Other accrued operating expenses                           | ** ** | **47**                       |       | 65                          |       |
| Reserve for uncertain tax positions (see Note 18)          | ** ** | **—**                   |       | 855                         |       |
| Accrued interest on uncertain tax positions (see  Note 18) | ** ** | **—**                   |       | 19                          |       |
| Totals                                                     | ** ** | **$**                        | **5,411**  |                        | $          | 6,279 |   |

 

**(9)****          ****OtherLong-Term Liabilities**

 

Otherlong-term liabilities are as follows:

 
| ** **                                                 | ** ** | **Successor**                | ** ** | **Predecessor**             | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                    | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
| * *                                                   | * *   | * *                     | * *   | * *                    | * *   |
| Unfunded postretirement benefit obligations                | ** ** | **$**                        | **2,002**  |                        | 1,984      |   |
| Unfunded pension liability                                 | ** ** | **83**                       |       | 442                         |       |
| Pre-petition liabilities not compromised                   | ** ** | **—**                   |       | 11,501                      |       |
| Reserve for uncertain tax positions (see Note 18)          | ** ** | **82**                       |       | —                      |       |
| Accrued interest on uncertain tax positions (see  Note 18) | ** ** | **19**                       |       | —                      |       |
| Totals                                                     | ** ** | **$**                        | **2,186**  |                        | $          | 13,927 |   |
|                                                            |            |                              |            |                             |            |  |  |

 

**(10)****        ****FairValue Measurements**

 

ASC 820 establishes a framework formeasuring fair value and expands disclosure about fair value measurements.  The statement requires that fair valuemeasurements be classified and disclosed in one of the following threecategories:

 

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·      Level1: Unadjusted quoted prices in active markets that are accessible at themeasurement date for identical, unrestricted assets or liabilities;

·      Level2: Quoted prices in markets that are not active, or inputs which areobservable, either directly or indirectly, for substantially the full term ofthe asset or liability;

·      Level3: Prices or valuation techniques that require inputs that are both significantto the fair value measurement and unobservable (i.e., supported by little or nomarket activity).

 

The following table summarizes thevaluation of our financial instruments which are carried at fair value by theabove ASC 820 pricing levels as of September 30, 2010:

 
| ** **                    | ** ** | **Fair Value Measurements at the Reporting Date Using** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **(in thousands)**       | ** ** | **Fair Value  at  September  30, 2010**                                          | ** ** | **Quoted Prices in  Active Markets  Using Identical  Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                          |       |                                                                                       |       |   |   |   |   |   |   |
| Cash and cash equivalents     |       | $                                                                                          | 41,855     |   | $ | 41,855 |   | $ | — |   | $ | — |   |
| Available for sale securities |       | $                                                                                          | 4,454      |   | $ | 4,454 |   | $ | — |   | $ | — |   |
| Derivative contracts          |       | $                                                                                          | 473        |   | $ | 473 |   | $ | — |   | $ | — |   |

 

The following table summarizes thevaluation of our financial instruments which were carried at fair value by theabove ASC 820 pricing levels as of December 31, 2009:

 
| ** **                    | ** ** | **Fair Value Measurements at the Reporting Date Using** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **(in thousands)**       | ** ** | **Fair Value  at  December 31,  2009**                                           | ** ** | **Quoted Prices in  Active Markets  Using Identical  Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                          |       |                                                                                       |       |   |   |   |   |   |   |
| Cash and cash equivalents     |       | $                                                                                          | 52,585     |   | $ | 52,585 |   | $ | — |   | $ | — |   |
| Available for sale securities |       | $                                                                                          | 5,442      |   | $ | 5,442 |   | $ | — |   | $ | — |   |

 

TheCompany did not hold any financial assets requiring the use of Level 2 or Level3 inputs at September 30, 2010 or December 31, 2009.

 

The Company recorded a net loss of$0.2 million for the three-month period ended September 30, 2010 and netgains of $1 thousand, $0.2 million, and $1.2 million, respectively, for thethree-month period ended September 30, 2009, the seven-month period ended September 30,2010, and the nine-month period ended September 30, 2009, under “Gain(loss) on derivative transactions” in the unaudited Condensed ConsolidatedStatements of Operations for the changes in the fair value of its derivativefinancial instrument positions it held during the respective periods.

 

TheCompany recorded an other-than-temporary loss of $1.8 million on available forsale securities in the statement of operations for the three-month andseven-month periods ended September 30, 2010.  The Company had previously recorded temporarygains of $0.2 million, $0.8 million, and $1.9 million for the three-monthperiod ended September 30, 2009, two-month period ended February 28,2010 and nine-month period ended September 30, 2009, respectively, underother accumulated comprehensive loss in the Consolidated Balance Sheet for thechanges in the fair value of the available for sale securities.

 

The carrying value of otherfinancial instruments, including cash, accounts receivable and accounts payableand accrued liabilities approximate fair value due to their short maturities orvariable-rate nature of the respective balances.  The following table presents the otherfinancial instruments that are not carried at fair value but which require fairvalue disclosure as of September 30, 2010 and December 31, 2009.

 

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| ** **                     | ** ** | **Successor**                                    | ** ** | **Predecessor**                                 | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **As of September 30, 2010** | ** ** | **As of December 31, 2009** | ** ** |
| ** **                     | ** ** | **Carrying Value**                          | ** ** | **Fair Value**                             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Senior unsecured notes payable |       | $                                                | —     |                                            | —     |   | $ | (300,000 | ) | $ | (267,000 | ) |
| Senior secured notes payable   |       | $                                                | (155,000   | )                                               | (155,000   | ) | $ | — |   | $ | — |   |

 

The fair value of our seniorunsecured notes is based upon quoted closing market prices at the end of theperiod.

 

Thefair value of our senior secured fixed rate notes is based on analysis ofmarket interest rates for guideline companies with similar debt and terms,interest rates for companies recently emerged from bankruptcy, and interestrates based on a synthetic debt rating. Based on this analysis we determined that a range of market interestrates for our $155 million of Notes would be from 11.5% to 14.5%.  Based on the stated rate of the Notes of 13%combined with the option to pay a portion of the interest in kind we deemed thefair value to be the face value of the Notes at $155 million.  If the interest rate was 1% higher or lower,the fair value of the debt would have increased or decreased by $1.8 millionrespectively.

 

(**11)****        ****ReorganizationItems**

 

ASC 852, *Reorganizations,*requires separate disclosure of reorganization items such asrealized gains and losses from the settlement of pre-petition liabilities,provisions for losses resulting from the reorganization and restructuring ofthe business, as well as professional fees directly related to the process ofreorganizing the Company under Chapter 11.  The Company’s reorganizationitems for the three months ended September 30, 2009, two months ended February 28,2010, and nine months ended September 30, 2009 consisted of the following:

 
| ** **                                             | ** ** | **Predecessor**                                            | ** ** | **Predecessor**                                             | ** ** | **Predecessor**                                               | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(in thousands)**                                | ** ** | **Three months  ended September  30, 2009** | ** ** | **Two months ended  February 28, 2010** | ** ** | **Nine months ended  September 30, 2009** | ** ** |
| Provision  for rejected executory contracts and leases |       | $                                                          | (13,567    | )                                                           | $          | 9,590                                                         |       | $ | 26,117 |   |
| Professional  fees directly related to reorganization  |       | 2,185                                                      |       | 8,776                                                       |       | 5,304                                                         |       |
| Other  (a)                                             |       | (1,258                                                     | )          | 1,916                                                       |       | (1,312                                                        | )          |
| Total  reorganization items                            |       | $                                                          | (12,640    | )                                                           | $          | 20,282                                                        |       | $ | 30,109 |   |

 

----

(a)   Otherincludes new claims allowed as cure settlements and priority claims and securedclaims and other adjustments.

 

No additional reorganizationexpense will be recognized after February 28, 2010.

 

**(12)****        ****Pre-Petition Liabilities Subjectto Compromise**

 

Pre-petition liabilities subject tocompromise refers to unsecured obligations that were accounted for under thePlan.  Generally, actions to enforce or otherwise effect payment ofpre-Chapter 11 liabilities were stayed.  ASC 852, *Reorganizations*,requires pre-petition liabilities that are subject to compromise to be reportedat the amounts expected to be allowed, even if they may be settled for lesseramounts.  These liabilities represent the estimated amount expected to beallowed on known or potential claims to be resolved through the Chapter 11process, and remain subject to future adjustments arising from negotiatedsettlements, actions of the Bankruptcy Court, rejection of executory contractsand unexpired leases, the determination as to the value of any potentialcollateral securing the claims, proofs of claim, or other events. Pre-petition liabilities subject to compromise also includes certain items thatmay be assumed under the Plan, and as such, may be subsequently reclassified toliabilities not subject to compromise.  At hearings held inApril 2009, the Bankruptcy Court granted final approval of many of thedebtors first day motions covering, among other things, employee obligations, supplierrelations, insurance, customer relations, business operations, certain taxmatters, cash management, utilities, case management and retention of

 

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professionals.  Obligationsassociated with these matters were not classified as pre-petition liabilitiessubject to compromise.

 

The Company has rejected certainpre-petition executory contracts and unexpired leases with respect to theCompany’s operations with the approval of the Bankruptcy Court.  Damagesresulting from rejection of executory contracts and unexpired leases aregenerally treated as general unsecured claims and were classified as “pre-petitionliabilities subject to compromise”.  With certain specific exceptions,holders of pre-petition claims (excluding governmental entities holdinggovernmental claims) were required to file proofs of claims by the “general bardate”, which was September 8, 2009.  A bar date is the date by whichcertain claims against the Company must be filed if the claimants wish toreceive any distribution in the Chapter 11 cases on account of suchclaims.  Creditors were notified of the general bar date and the requirementto file a proof of claim with the Bankruptcy Court.  Differences betweenliability amounts estimated by the Company and claims filed by creditors arebeing investigated and, if necessary, the Bankruptcy Court will make a finaldetermination of the allowed amount and priority of the claim.  Thedetermination of how liabilities would ultimately be treated could not be madeuntil the Bankruptcy Court approved the Plan.  Accordingly, the ultimateamount or treatment of such liabilities was not determinable at December 31,2009.  Amounts recorded at December 31, 2009 were the Company’s bestestimate of the amounts the Bankruptcy Court would allow.

 

Pre-petition liabilities subject tocompromise consisted of the following as of December 31, 2009:

 
| **(In thousands)**                                        | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------|------------|
|                                                           |       |                            |       |
| 10%  senior unsecured notes due 2017                           |       | $                               | 300,000    |   |
| Provision  for rejected executory contracts and other accruals |       | 26,403                          |       |
| Pre-petition  accounts payable                                 |       | 29,451                          |       |
| Accrued  interest on senior unsecured notes                    |       | 15,500                          |       |
| Unamortized  issuance costs of 10% senior unsecured notes      |       | (5,805                          | )          |
| Total  pre-petition liabilities subject to compromise          |       | $                               | 365,549    |   |

 

Pre-petition liabilities subject tocompromise include trade accounts payable related to pre-petitionpurchases.  Accrued interest represents amountsdue on the senior unsecured notes as of the Petition Date.  No interestwas accrued on the senior unsecured notes subsequent to the Petition Datebecause such amounts were not expected to become part of an allowed claim.

 

All pre-petition liabilitiessubject to compromise have been paid, discharged, settled, or reclassified toaccounts payable as of the Effective Date.

 

**(13)****        ****Warrants**

 

Inconnection with the Plan, holders of allowed Class 9(a) EquityInterests received warrants to purchase up to an aggregate amount of 450,000shares of common stock of the successor company at an exercise price initiallyset at $40.94 subject to adjustment exercisable through the earlier of March 15,2015, or upon the occurrence of an acceleration event.  Events which would result in adjustment tothe exercise price of the warrants would include a merger of the Company intoor a consolidation of the Company with another entity, a sale of all orsubstantially all of the Company’s assets, or a merger of another entity intothe company.  Each warrant entitles theregistered owner thereof to purchase one share of common stock of the successorcompany.  As of September 30, 2010,holders of the warrants had exercised 144 of the warrants.

 

**(14)****        ****Stock-Based Compensation Plans**

 

Pre-taxstock-based compensation expense for the Successor Company for the quarterended September 30, 2010 was $1.3 million, all of which was charged toselling, general and administrative expense. The Predecessor recognized approximately $1.1 million of pre-taxstock-based compensation expense for the quarter ended September 30, 2009,of which $1.0 million was charged to selling, general and administrativeexpense and $0.1 million was charged to cost of goods sold.

 

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Pre-taxstock-based compensation expense for the Successor Company for the nine monthsended September 30, 2010 was $4.1 million, all of which was charged toselling, general and administrative expense. Pre-tax stock-based compensation expense for the nine months ended September 30,2009 was approximately $2.7 million, of which $2.4 million was charged toselling, general and administrative expense and $0.3 million was charged tocost of goods sold.

 

Stock-basedcompensation reduced earnings per share by less than $0.02 per basic and fullydiluted share for the quarter ended September 30, 2009 and by $0.09 perbasic and fully diluted share for the Successor for the quarter ended September 30,2010.

 

**(15)****        ****InterestExpense**

 

Thefollowing table summarizes interest expense:

 
| ** **                                                  | ** ** | **Successor**                                    | ** ** | **Predecessor**                                  | ** ** | **Successor**                                    | ** ** | ** **                                                     | ** ** | **Predecessor**                                 | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                  | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September 30,** | ** ** | **Seven Months  Ended  September 30,** | ** ** | **Predecessor  Two Months Ended  February 28,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| **(in thousands)**                                     | ** ** | **2010**                                         | ** ** | **2009**                                         | ** ** | **2010**                                         | ** ** | **2010**                                                       | ** ** | **2009**                                        | ** ** |
| Interest expense – senior unsecured notes              |       | $                                                | —     |                                             | $          | —                                           |       | $                                                              | —     |                                            | $          | — |   | $ | 8,083 |   |
| Interest expense – senior secured notes                |       | 4,171                                            |       | —                                           |       | 8,190                                            |       | —                                                         |       | —                                          |       |
| Interest expense – revolving credit facility           |       | —                                           |       | 735                                              |       | —                                           |       | 600                                                            |       | 1,714                                           |       |
| Interest expense – debtor in possession debt  facility |       | —                                           |       | 632                                              |       | —                                           |       | 502                                                            |       | 1,152                                           |       |
| Interest expense – note payable to Kiewit              |       | —                                           |       | —                                           |       | 34                                               |       | —                                                         |       | —                                          |       |
| Interest expense – Canton mortgage loan                |       |  5                                          |       | —                                           |       | 5                                                |       | —                                                         |       | —                                          |       |
| Amortization of deferred debt issuance costs                |       | 57                                               |       | 469                                              |       | 57                                               |       | 313                                                            |       | 1,874                                           |       |
| Other                                                       |       | —                                           |       | 2                                                |       | 69                                               |       | 7                                                              |       | 17                                              |       |
| Capitalized interest                                        |       | (2,182                                           | )          | —                                           |       | (3,204                                           | )          | —                                                         |       | —                                          |       |
| Interest Expense, net                                       |       | $                                                | 2,051      |                                             | $          | 1,838                                            |       | $                                                              | 5,151      |                                            | $          | 1,422 |   | $ | 12,840 |   |

 

**(16)****        ****Retirementand Pension Expense**

 

*DefinedContribution Plans*

 

Wehave 401(k) plans covering substantially all of our employees.  We recognized expense with respect to theseplans of $0.2 million for each of the three-month periods ended September 30,2010 and 2009, $0.2 million for the seven-month period ended September 30,2010,  $0.1million for the two-monthperiod ended February 28, 2010, and $0.5 million for the six month periodended June 30, 2009.  Contributionsmade under our defined contribution plans include a match, at the Company’sdiscretion, of an employee’s contribution to the plans.  On March 13, 2009, we terminated 25employees as part of a planned reduction in force.  As a result of these terminations, weaccelerated the vesting of the Company’s matching portion of these employee’spreviously unvested contributions.  As aresult of this accelerated vesting, there was no additional expense to theCompany.

 

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*Qualified Retirement Plan*

 

TheCompany provides a non-contributory qualified defined benefit pension plan forits unionized employees at our Pekin, Illinois production facilities.  The following table summarizes the componentsof net periodic pension cost for the qualified pension plan:

 
| ** **                           | ** ** | **Successor**                                    | ** ** | **Predecessor**                                 | ** ** | **Successor**                                    | ** ** | ** **                                                     | ** ** | **Predecessor**                                 | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                           | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September 30** | ** ** | **Seven Months  Ended  September 30,** | ** ** | **Predecessor  Two Months  Ended February 28,** | ** ** | **Nine Months  Ended September  30,** | ** ** |
| **(In thousands)**              | ** ** | **2010**                                         | ** ** | **2009**                                        | ** ** | **2010**                                         | ** ** | **2010**                                                       | ** ** | **2009**                                        | ** ** |
| Service cost                         |       | $                                                | 84         |                                            | $          | 84                                               |       | $                                                              | 196        |                                            | $          | 56 |   | $ | 254 |   |
| Interest cost                        |       | 135                                              |       | 127                                             |       | 315                                              |       | 87                                                             |       | 381                                             |       |
| Expected return on plan  assets      |       | (173                                             | )          | (140                                            | )          | (404                                             | )          | (115                                                           | )          | (421                                            | )          |
| Amortization of prior  service costs |       | —                                           |       | 11                                              |       | —                                           |       | 7                                                              |       | 32                                              |       |
| Amortization of net  actuarial loss  |       | —                                           |       | 45                                              |       | —                                           |       | 14                                                             |       | 134                                             |       |
| Net periodic pension cost            |       | $                                                | 46         |                                            | $          | 127                                              |       | $                                                              | 107        |                                            | $          | 49 |   | $ | 380 |   |

 

*Postretirement Benefit Obligation*

 

Wesponsor a healthcare plan that provides postretirement medical benefits tocertain “grandfathered” unionized employees. The plan is contributory, with contributions required at the same rateas active employees.  Benefit eligibilityunder the plan terminates at age 65.

 

Thefollowing table summarizes the components of the net periodic costs forpostretirement benefits:

 
| ** **                           | ** ** | **Successor**                                    | ** ** | **Predecessor**                                  | ** ** | **Successor**                                    | ** ** | ** **                                                     | ** ** | **Predecessor**                                 | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                           | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September 30,** | ** ** | **Seven Months  Ended  September 30,** | ** ** | **Predecessor  Two Months Ended  February 28,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| **(In thousands)**              | ** ** | **2010**                                         | ** ** | **2009**                                         | ** ** | **2010**                                         | ** ** | **2010**                                                       | ** ** | **2009**                                        | ** ** |
| Service cost                         |       | $                                                | 16         |                                             | $          | 19                                               |       | $                                                              | 38         |                                            | $          | 12 |   | $ | 57 |   |
| Interest cost                        |       | 29                                               |       | 28                                               |       | 66                                               |       | 20                                                             |       | 83                                              |       |
| Amortization of prior  service costs |       | —                                           |       | (9                                               | )          | —                                           |       | (4                                                             | )          | (27                                             | )          |
| Net periodic pension cost            |       | $                                                | 45         |                                             | $          | 38                                               |       | $                                                              | 104        |                                            | $          | 28 |   | $ | 113 |   |

 

**Patient Protection and Affordable Care Act**

 

InMarch 2010, the Patient Protection and Affordable Care Act (“PPACA”) wasenacted, potentially impacting the Company’s cost to provide healthcarebenefits to its eligible active and retired employees.  The PPACA has bothshort-term and long-term implications on benefit plan standards. Implementation of this legislation is planned to occur in phases, beginning in2010, but to a greater extent with the 2011 benefit plan year and extendingthrough 2018.

 

TheCompany is currently analyzing this legislation to determine the full extent ofthe impact of the required plan standard changes on its employee healthcareplans and the resulting costs.  While the Company anticipates that coststo provide healthcare to eligible active employees and certain retiredemployees will increase in future years, it is uncertain at this time, howsignificant the increase will be.

 

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**(17)****        ****DerivativeInstruments and Hedging**

 

Our operations and cash flows aresubject to fluctuations due to changes in commodity prices.  Historically,we have used derivative financial instruments to manage commodity prices. Derivatives used are primarily commodity futures contracts, swaps and optioncontracts.

 

We apply the provisions of ASC 815,*Derivatives and Hedging*, for theCompany’s derivatives.  The Company’s futures contracts are not designatedas hedges and, therefore, are marked to market each period, with correspondinggains and losses recorded in other non-operating income.  The fair valueof these derivative instruments is recognized in other current assets orliabilities in the Consolidated Balance Sheet, net of any cash received fromthe brokers.

 

ASC 815 requires a company toevaluate contracts to determine whether the contracts are derivatives. Certain contracts that meet the literal definition of a derivative under ASC815 may be exempted from the accounting and reporting requirements of ASC 815as normal purchases or normal sales.  Normal purchases and normal salesare contracts that provide for the purchase or sale of something other than a financialinstrument or derivative instrument that will be delivered in quantitiesexpected to be used or sold over a reasonable period in the normal course ofbusiness.** The Companyelects to designate its forward purchases of corn and natural gas and forwardsales of ethanol as normal purchases and normal sales under ASC 815. Accordingly, these contracts are not reflected in the consolidated financialstatements until execution.

 

Weare exposed to certain risks related to our ongoing business operations.  The primary risks that we manage by usingforward or derivative instruments are price risk on anticipated purchases ofcorn, natural gas and the sale of ethanol.

 

Weare subject to market risk with respect to the price and availability of corn,the principal raw material we use to produce ethanol and ethanolby-products.  In general, rising cornprices result in lower profit margins and, therefore, represent unfavorablemarket conditions.  This is especiallytrue when market conditions do not allow us to pass along increased corn coststo our customers.  The availability andprice of corn is subject to wide fluctuations due to unpredictable factors suchas weather conditions, farmer planting decisions, governmental policies withrespect to agriculture and international trade and global demand and supply.

 

Wehave firm-price purchase commitments with some of our corn suppliers underwhich we agree to buy corn at a price set in advance of the actual delivery ofthat corn to us.  Under thesearrangements, we assume the risk of a price decrease in the market price ofcorn between the time this price is fixed and the time the corn is delivered.

 

Wesometimes enter into firm-price purchase commitments with some of our naturalgas suppliers under which we agree to buy natural gas at a price set in advanceof the actual delivery of that natural gas to us.  Under these arrangements, we assume the riskof a price decrease in the market price of natural gas between the time thisprice is fixed and the time the natural gas is delivered.  At December 31, 2009 and September 30,2010, we did not have any commitments to purchase natural gas in advance atprices other than at market.  We accountfor these transactions as normal purchases under ASC 815, and accordingly, donot mark these transactions to market.

 

Weare also subject to market risk with respect to ethanol pricing.  Our ethanol sales are priced using contractsthat can either be fixed; based upon the price of wholesale gasoline plus orminus a fixed amount; or based upon a market price at the time ofshipment.  We sometimes fix the price atwhich we sell ethanol using fixed price physical delivery contracts.  We have elected to account for these transactionsas normal sales transactions under ASC 815, and accordingly, have not markedthese transactions to market.

 

Derivativeinstruments not designated as hedging instruments under ASC 815 at September 30,2010 and December 31, 2009 were as follows:

 

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| ** **                        | ** ** | ** **                                 | ** ** | **Fair Value  (in thousands)** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                        | ** ** | ** **                                 | ** ** | **September 30,  2010**             | ** ** | **December  31, 2009** | ** ** |
| **Type**                          | ** ** | **Balance Sheet Classification** | ** ** | **Successor**                            | ** ** | **Predecessor** | ** ** |
|                              |       |                                       |       |                                     |       |   |   |
| Corn and ethanol future positions |       | Other  current assets                      |       | $                                        | 473        |   | $ | — |   |
|                                   |            |                                            |            |                                          |            |  |  |  |  |

 

Therealized and unrealized effect on our condensed consolidated statement ofoperations for derivatives not designated as hedging instruments under ASC 815for the three-month periods ended September 30, 2010 and 2009, the seven-monthperiod ended September 30, 2010, the two-month period ended February 28,2010, and the nine-month period ended September 30, 2009 are as follows:

 
| ** **                        | ** ** | ** **                              | ** ** | **Fair Value  (in thousands)**           | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                        | ** ** | **Statement of Operations**   | ** ** | **Three  Months  Ended  September  30, 2010** | ** ** | **Three  Months  Ended  September  30, 2009** | ** ** | **Seven  Months  Ended  September  30, 2010** | ** ** | **Two  Months  Ended  February  28, 2010** | ** ** | **Nine  Months  Ended  September  30, 2009** | ** ** |
| **Type**                          | ** ** | **Classification**                      | ** ** | **Successor**                                      | ** ** | **Predecessor** | ** ** | **Successor** | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** |
|                              |       |                                    |       |                                               |       |   |   |   |   |   |   |   |   |
| Corn and ethanol future positions |       | Gain  (loss) on derivative transactions |       | $                                                  | (233       | ) | $ | 1 |   | $ | 206 |   | — |   | $ | 1,219 |   |
|                                   |            |                                         |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Anyoutstanding derivative position requires cash settlement on a daily basis.  Without such cash settlement on derivativecontracts, cash flows from operations would have been lower.

 

**(18)****        ****Income Taxes**

 

TheCompany recorded an income tax expense of $0.9 million for the three months andan income tax benefit of $0.0 million for the seven months ended September 30,2010, an income tax benefit of $0.6 million for the three months ended September 30,2009, an income tax benefit of $0.6 million for the two months ended February 28,2010, and an income tax benefit of $7.3 million for the nine months ended September 30,2009.  The difference between the tax benefitrate accrued and the statutory benefit rate is principally due to the impact ofstate taxes (net of federal benefit), non-includable reorganization income,non-deductible reorganization expenses, tax deductible goodwill, increases invaluation allowances, and other permanent differences between book and tax.

 

TheCompany records a valuation allowance on its deferred tax assets to reduce thedeferred tax assets to the amount that management believes is more likely thannot to be realized. In assessing the realizability of deferred tax assets,management considers whether it is more likely than not that some portion orall of the deferred tax assets will be realized. Management considered thescheduled reversal of deferred tax liabilities and tax planning strategies inmaking this assessment.  Due to the Company’s history of losses,allowances have been established for all deferred benefits except for deferredbenefits available to offset certain deferred tax liabilities that will reverseover time.

 

TheCompany expects to recognize taxable income of approximately $52 million fromcancellation of debt resulting from the Plan related to the Company’sbankruptcy reorganization that will reduce available current year tax losses,capital loss carryforwards, and the tax basis in other assets.

 

Further,the consummation of the Plan generated an “ownership change” as defined in Section 382of the Internal Revenue Code, which limits the Company’s ability to utilizecertain carryover tax attributes. The Company’s net unrealized built in lossesmay be limited by Section 382 which could potentially result in thesignificant acceleration of tax payments. The Company’s state net operatingloss carryforwards are also subject to similar, but varying, restrictions ontheir future use.

 

Asof September 30, 2010, we had $0.1 million of uncertain tax benefits.  All of our unrecognized tax benefits, ifrecognized in future periods, would impact the Company’s effective taxrate.  At September 30, 2010, ourliability for unrecognized tax benefits is included in other long-termliabilities on the condensed consolidated balance sheet.

 

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Currently,no federal income tax returns are open for examination.  We file in numerous states and one foreignjurisdiction with varying statutes of limitations open from 2005 to 2009.

 

**(19)****        ****Earnings (Loss) Per Share**

 

Basicearnings (loss) per share are computed by dividing net income (loss) by theweighted average number of common shares outstanding during each period.  Diluted earnings (loss) per share arecalculated using the treasury stock method in accordance with ASC 260, andincludes the effect of all dilutive securities, including non-qualified stockoptions and restricted stock units awards (“RSU’s”).  In accordance with ASC 260, shares issuableupon the satisfaction of certain conditions pursuant to a contingent stockagreement, such as those contemplated by the Plan, are considered outstandingcommon shares and included in the computation of basic earnings per share.  Accordingly, 1.9 million sharescontemplated by the Plan to be distributed to holders of allowed general,unsecured claims are included in the calculation of basic earnings per sharefor the three and seven months ended September 30, 2010.

 

Thefollowing table sets forth the computation of basic and diluted earnings (loss)per share:

 
| ** **                                                         | ** ** | **Successor**                                    | ** ** | **Predecessor**                                  | ** ** | **Successor**                                    | ** ** | ** **                                                     | ** ** | **Predecessor**                                 | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September 30,** | ** ** | **Seven Months  Ended  September 30,** | ** ** | **Predecessor  Two Months Ended  February 28,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| **(In thousands, except per share data)** | ** ** | **2010**                                         | ** ** | **2009**                                         | ** ** | **2010**                                         | ** ** | **2010**                                                       | ** ** | **2009**                                        | ** ** |
| Net income (loss)                                                  |       | $                                                | (6,641     | )                                                | $          | 13,886                                           |       | $                                                              | (23,000    | )                                               | $          | (266,293 | ) | $ | (59,616 | ) |
| Less net earnings (loss) allocated to  participating securities    |       | (132                                             | )          | —                                           |       | (419                                             | )          | —                                                         |       | —                                          |       |
| Net income (loss) attributable to common  shareholders             |       | (6,509                                           | )          | 13,886                                           |       | (22,581                                          | )          | (266,293                                                       | )          | (59,616                                         | )          |
|                                                               |       |                                             |       |                                             |       |                                             |       |                                                           |       |                                            |       |
| Weighted average shares and share equivalents  outstanding:        |       |                                             |       |                                             |       |                                             |       |                                                           |       |                                            |       |
| Basic shares                                                       |       | 8,585                                            |       | 42,963                                           |       | 8,583                                            |       | 43,401                                                         |       | 42,967                                          |       |
| Dilutive non-qualified stock options and RSUs                      |       | —                                           |       | 65                                               |       | —                                           |       | —                                                         |       | —                                          |       |
| Diluted weighted average shares and share equivalents              |       | 8,585                                            |       | 43,028                                           |       | 8,583                                            |       | 43,401                                                         |       | 42,967                                          |       |
|                                                               |       |                                             |       |                                             |       |                                             |       |                                                           |       |                                            |       |
| Income (loss) per common share — basic                        |       | $                                                | (0.76      | )                                                | $          | 0.32                                             |       | $                                                              | (2.63      | )                                               | $          | (6.14 | ) | $ | (1.39 | ) |
| Income (loss) per common share - Diluted                           |       | $                                                | (0.76      | )                                                | $          | 0.32                                             |       | $                                                              | (2.63      | )                                               | $          | (6.14 | ) | $ | (1.39 | ) |

 

Wehad additional potentially dilutive securities outstanding representing optionsof 180 thousand common shares at September 30, 2010 (Successor) and 3.1million common shares at September 30, 2009 (Predecessor) that were notincluded in the computation of potentially dilutive securities because theoptions exercise prices were greater than the average market price of thecommon shares or because the options were anti-dilutive, and were excluded fromthe calculation of diluted earnings per share in accordance with ASC 260.

 

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**(20)****        ****Comprehensive Income (Loss)**

 

Thefollowing table summarizes comprehensive income (loss):

 
| ** **                                                        | ** ** | **Successor**                                    | ** ** | **Predecessor**                                  | ** ** | **Successor**                                    | ** ** | **Predecessor**                               | ** ** | **Predecessor**                                 | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                        | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September 30,** | ** ** | **Seven Months  Ended  September 30,** | ** ** | **Two Months  Ended February  28,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| **(In thousands)**                                           | ** ** | **2010**                                         | ** ** | **2009**                                         | ** ** | **2010**                                         | ** ** | **2010**                                      | ** ** | **2009**                                        | ** ** |
| Net income (loss) attributable to controlling  interest           |       | $                                                | (6,641     | )                                                | $          | 13,886                                           |       | $                                             | (23,000    | )                                               | $          | (266,293 | ) | $ | (59,616 | ) |
| Unrealized gain (loss) on available for sale  securities          |       | —                                           |       | 201                                              |       | —                                           |       | 765                                           |       | 1,925                                           |       |
| Unrealized gain on purchased RIN’s                           |       | 2                                                |       | —                                           |       | 2                                                |       | —                                        |       | —                                          |       |
| Unrecognized pension and post retirement  liabilities, net of tax |       | —                                           |       | (28                                              | )          | —                                           |       | (3                                            | )          | (84                                             | )          |
| Comprehensive income (loss)                                       |       | $                                                | (6,639     | )                                                | $          | 14,059                                           |       | $                                             | (22,998    | )                                               | $          | (265,531 | ) | $ | (57,775 | ) |

 

**(21)****        ****IndustrySegment**

 

TheCompany operates in one reportable business segment, the manufacture andmarketing of fuel-grade ethanol.

 

**(22)****        ****Litigation**

 

On November 6,2008, the Company commenced an action against JP MorganSecurities, Inc. and JP Morgan Chase Bank, N.A. (hereinafter collectivelyreferred to as “JP Morgan”) in the Tenth Judicial Circuit in Tazewell County, Illinois. The Company’s complaint relates tolosses incurred of approximately $31.6 million as a result of investments inStudent Loan Auction Rate Securities purchased through JP Morgan.  At this time, we cannot be certain as to theoutcome of this litigation.

 

Weare from time to time involved in various legal proceedings, including legalproceedings relating to the extensive environmental laws and regulations thatapply to our facilities and operations. We are not involved in any legal proceedings, other than those describedherein, that we believe could have a material adverse effect upon our business,operating results or financial condition.

 

**(23)****      ****AssetPurchase Agreement**

 

OnAugust 6, 2010, the Company and New CIE Energy Opco, LLC, d/b/a RiverlandBiofuels (“Riverland”), entered into an Asset Purchase Agreement (the “PurchaseAgreement”) pursuant to which the Company acquired substantially all of theassets, and assumed specified liabilities, of Riverland for a purchase price of$16.5 million.  The purchase price was determined based on arm’s-lengthnegotiations. ** **The assets comprised a 37mgpynameplate ethanol production facility located in Canton, Illinois, andincluded real property at the plant site as well as surrounding parcels. Affiliates of certain holders of the Company’s debt and equity securities holda

 

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controllinginterest in Riverland.  The acquisition closed on August 6,2010.  The Purchase Agreement includes customary representations,warranties and indemnification provisions.

 

**(24)****        ****SubsequentEvents**

 

TheCompany evaluated subsequent events through the time of filing this documentwith the SEC, identifying no subsequent events which have accounting ordisclosure impacts, except as follows:

 

In October 2010, the Company sold all of itsavailable for sale securities (consisting of Green Plains Renewable Energy, Inc.stock) for $4.2 million after commissions, resulting in a recognized loss ofapproximately $2.0 million.

 

**Item 2.****   ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*This report contains forward-looking statements madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  Forward-lookingstatements include all statements that do not relate solely to current orhistorical fact, but address events or developments that we anticipate willoccur in the future.  Forward-lookingstatements include statements regarding our goals, beliefs, plans or currentexpectations, taking into account the information currently available to ourmanagement.  When we use words such as “anticipate,”“intend,” “expect,” “believe,” “plan,” “may,” “should” or “would” or otherwords that convey uncertainty of future events or outcome, we are makingforward-looking statements.  Statementsrelating to future sales, earnings, operating performance, restructuringstrategies, plant expansions, capital expenditures and sources and uses ofcash, for example, are forward-looking statements.*

 

*These forward-looking statements are subject to variousrisks and uncertainties which could cause actual results to differ materiallyfrom those stated or implied by such forward-looking statements.  We undertake no obligation to publiclyrelease any revision of any forward-looking statements contained herein toreflect events and circumstances occurring after the date hereof, or to reflectthe occurrence of unanticipated events. Information concerning risk factors is contained under Part II, Item1A of the Quarterly Report on Form 10-Q for the quarter ended March 31,2010.  You should carefully consider allof the risks and all other information contained in or incorporated byreference in this report and in our filings with the SEC.  These risks are not the only ones weface.  Additional risks and uncertaintiesnot presently known to us, or which we currently consider immaterial, also mayadversely affect us.  If any of theserisks actually occur, our business, financial condition and results ofoperations could be materially and adversely affected.*

 

**CompanyOverview**

 

Aventineis a leading producer of corn-based fuel-grade ethanol.  Through our production facilities, we marketand distribute ethanol to many of the leading energy and trading companies inthe U.S.  In addition to producingethanol, our facilities also produce several co-products including: corn glutenfeed and meal, corn germ, condensed corn distillers solubles, dried distillersgrain with solubles (“DDGS”), wet distillers grain with solubles (“WDGS”),carbon dioxide and brewers’ yeast.

 

**Resultsof Operations**

 

The following discussionsummarizes the significant factors affecting the consolidated operating resultsof the Company for the three and nine-month periods ended September 30,2010 and 2009.  This discussion should beread in conjunction with the unaudited condensed consolidated financialstatements and notes to the unaudited condensed consolidated financialstatements contained in Item 1 above, and the consolidated financial statementsand related notes for the year ended December 31, 2009 included in theCompany’s Annual Report on Form 10-K.

 

The Company emerged frombankruptcy on March 15, 2010.  On February 28,2010, the Company implemented fresh-start reporting in accordance with ASC852.  Thus, the consolidated financialstatements prior to March 1, 2010 reflect results based upon thehistorical cost basis of the Company while the post-emergence consolidatedfinancial statements reflect the new basis of accounting incorporating the fairvalue adjustments made in recording the effects of fresh-start reporting.  Therefore, the post-emergence periods are notcomparable to the

 

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pre-emergence periods.  As a result of the application of fresh startaccounting, our consolidated financial statements prior to and including February 28,2010 represent the operations of our pre-reorganization predecessor company andare presented separately from the consolidated financial statements of ourpost-reorganization successor company. However, for discussions on the results of operations, the Company hasoften combined the results for the two months ended February 28, 2010 andthe seven months ended September 30, 2010. The combined period has been compared to the nine months ended September 30,2009.  The Company believes that thecombined financial results provide management and investors a betterperspective of the Company’s core business and on-going operational financialperformance and trends for comparative purposes.  In addition, we believe this comparisonprovides useful information as the principal impact of the Plan was on our debtand capital structure and not on our core operations; many of the steps takento improve our core operations continued to run intact.

 

Ourrevenues are principally derived from the sale of ethanol and from the sale ofco-products (corn gluten feed and meal, corn germ, condensed corn distillerssolubles, DDGS, WDGS, carbon dioxide, and brewers’ yeast) that we produce asby-products during the production of ethanol at our plants, which we refer toas co-product revenues.

 

*Recent Events*

 

*NotesOffering. *On August 19,2010, we issued and sold $50 million in aggregate principal amount of our Notesin a transaction exempt from the registration requirements under the SecuritiesAct, resulting in gross proceeds to us of approximately $51 million.

 

*FirstAmendment to Secured Revolving Credit Facility. *On August 6, 2010, we and our subsidiaries, as borrowers, enteredinto the First Amendment with the financial institutions party thereto aslenders, and PNC.  The First Amendmentamends the Revolving Credit Agreement by increasing the letter of creditsublimit under the Revolving Credit Agreement from $12 million to $17 million. The First Amendment also modifies the capital expenditure limitationsapplicable to us and our subsidiaries under the Revolving Credit Agreement andour daily inventory reporting requirements to permit PNC to agree not torequire daily reporting by the borrowers of in-transit inventory.

 

*Acquisitionof Canton, Illinois Facility. *On August 6,2010, we and Riverland, entered into the Purchase Agreement pursuant to whichwe acquired substantially all of the assets, and assumed specified liabilities,of Riverland for a purchase price of $16.5 million.  The assets comprise the Canton facility, andinclude real property at the plant site as well as surrounding parcels.

 

*DebtCommitment Letter. *On August 2,2010, we entered into a commitment letter (the “Debt Commitment Letter”) withCitigroup Global Markets, Inc. (“Citi”), under which Citi has agreed, at asubsequent time, to use its best efforts to arrange a syndicate of lenders thatwill provide us with a term loan of $175 million (the “New Term Loan Facility”),and to act as lead arranger, bookrunner, administrative agent and collateralagent for the New Term Loan Facility, on the terms and subject to theconditions set forth in the Debt Commitment Letter.  Consummation of the debt financing is subjectto various conditions set forth in the Debt Commitment Letter, including theabsence of certain “material adverse effects” with respect to us and oursubsidiaries, taken as a whole.  We areunder no obligation to enter into any such debt financing and cannot assure youthat we will enter into any such financing transaction on terms acceptable tous, if at all.  We are continuouslyconsidering other financing opportunities based on prevailing market conditionsand other factors.

 

*Stock Distribution*.  On September 30, 2010, the Companycommenced a pro rata quarterly distribution, consisting of 43,831 shares ofcommon stock, to holders of the Company’s former 10% senior unsecured notes andto holders of allowed general unsecured claims, with 32,935 shares distributedto holders of pre-petition notes and 10,896 shares to holders of allowed generalunsecured claims.  Approximately 1.2million shares of common stock are reserved for future distributions to theseholders.

 

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*Executive Summary of FinancialResults*

 

Thenet loss for the third quarter of 2010 was $6.6 million as compared to netincome of $13.9 million in the third quarter of 2009.  A primary difference between the results forthe two quarters was the $12.6 million net reorganization gain recorded in 2009related to changes in estimates of allowed claims associated with thebankruptcy proceedings.  There were noreorganization items recorded in the third quarter of 2010 after our emergenceon March 15, 2010.

 

Inimplementing fresh-start accounting, we re-measured our asset values and statedall liabilities, other than deferred taxes at fair value or at present valuesof the amounts to be paid using appropriate market interest rates.  Our reorganization value was determined basedon consideration of numerous factors and various valuation methodologies,including discounted cash flows, believed by management and our financialadvisors to be representative of our business and industry and which was corroboratedby an appraisal by a professional third-party appraisal firm.  Information regarding the determination ofthe reorganization value and application of fresh start accounting is includedin note 2 to the Company’s consolidated financial statements for the ninemonths ended September 30, 2010.  Inaddition, under fresh start accounting, accumulated deficit and accumulatedother comprehensive income were eliminated.

 

Underfresh start accounting, our inventory, net, increased by $2.5 million and property,plant and equipment decreased by $380 million, in each case to reflect fairvalue as of our emergence from bankruptcy. Other assets, which consisted primarily of a long-term deposit forutilities against which the Company may apply certain natural gastransportation charges, decreased by $4.4 million and recorded at fair valuebased on a discounted cash flow calculation using a 13% discount rate and theCompany’s estimate of purchases of natural gas and the timing of thosepurchases.  Accounts payable increasedunder fresh start accounting to adjust an off-market coal contract to fairvalue.  We also adjusted long-term debtto its fair value of $105 million, an increase of $6.9 million,with theassistance of a professional independent third party appraiser.

 

Asa result of the $2.5 million upward adjustment to our inventory describedabove, our cost of sales for the seven-month period ended September 30,2010 includes an additional $2.5 million of costs related to the increase.  The decrease in property, plant and equipmentresulted in lower depreciation expense in the seven months ended September 30,2010 which are included in cost of goods sold. As a result of the adjustment tothe long-term deposit for utilities to fair value, we will incur additionalamortization cost related to natural gas which will increase cost-of goodssold. As a result of the adjustment of accounts payable to record theoff-market coal contract at fair value, our coal costs will be lower through December 31,2010 when the contract expires.  Theincrease in long-term debt to its fair value of $105 million will result inlower interest expense over the term of the debt.

 

Commodityspread, defined as gross ethanol selling price per gallon less net corn costper gallon, increased to $0.89 per gallon in the third quarter of 2010 from$0.86 per gallon in the third quarter of 2009. The increase in commodity spread was due to the average sales price pergallon of ethanol increasing in the third quarter of 2010 to $1.80 per gallon fromthe $1.70 average received in the third quarter of 2009 and, co-productrevenues, as a percentage of corn costs, increasing to 37.5% during the thirdquarter of 2010, versus 36.3% in the third quarter of 2009.  Corn costs during the third quarter of 2010averaged $3.83 per bushel, as compared to $3.47 per bushel in the third quarterof 2009.  Conversion cost in the thirdquarter of 2010 was $0.53 per gallon as compared to $0.47 per gallon in thethird quarter of 2009.

 

Gallonsof ethanol sold in the third quarter of 2010 decreased to 41.5 million gallons,as compared to 55.5 million gallons in the third quarter of 2009.  Gallons produced during the third quarter of2010 decreased to 41.1 million gallons from 49.5 million gallons in the thirdquarter of 2009.  The reductions ingallons sold and produced between 2010 and 2009 is primarily attributable tothe shutdown of our Nebraska plant primarily during the months of July andAugust 2010.  On June 29, 2010,Aventine temporarily shut down the dry mill plant in Aurora, Nebraska (“NELLC”)to make some mechanical improvements to the facility.  The shutdown wasextended during a period of depressed margins to accelerate a required poweroutage at both Nebraska facilities to complete some necessary electrical workfor the Aurora West facility which is currently under construction.  Westarted grinding corn at the NELLC facility again on August 14, 2010 andthe plant achieved full production on August 24, 2010.

 

Our inventory isvalued based upon a weighted average of our cost to produce ethanol and theprice we pay for ethanol that we purchase from other producers.  Wecontinue to engage in purchase/resale transactions, as needed, to fulfill oursales commitments.  Changes, eitherupward or downward, in our own production costs or our

 

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purchased cost ofethanol will cause the inventory value to fluctuate from period to period,perhaps significantly.  These changes in value flow through our statementof operations as the inventory is sold and can significantly increase ordecrease our profitability.

 

Selling, general & administrative (“SG&A”) expenses were$9.1 million in the third quarter of 2010 as compared to $5.2 million in thethird quarter of 2009.  Major variancesbetween 2010 and 2009 are a $1.3 million increase in salaries and wages, a $0.3million increase in salaried stock compensation, a $1.6 million increase in outsideservices, and a $0.5 million increase in other SG&A expenses.  Outside services include professional feesthat we continue to incur related to bankruptcy activities, which would havepreviously been included in reorganization expense.

 

Interest expense in the third quarter of 2010 was $2.1 million, ascompared to $1.8 million in the third quarter of 2009.  Interest expense in the third quarter of 2010includes $4.2 million in interest on our Notes and $0.1 million of amortizationof deferred financing fees, reduced by capitalized interest of $2.2 millionapplicable to our expansion facilities in Mt. Vernon, Indiana and Aurora,Nebraska.  We resumed construction ofthese facilities in May 2010. Interest expense in the third quarter of 2009 included $0.7 million ininterest on our secured revolving credit facility, $0.6 million in interest onour DIP Facility, and $0.5 million of amortization of deferred financingfees.  We ceased the accrual of intereston our senior unsecured notes as of the Petition Date.

 

*For theThree Months Ended September 30, 2010 Compared to the Three Months Ended September 30,2009*

 

Totalgallons of ethanol sold in the third quarter of 2010 decreased to 41.5 milliongallons, versus 55.5 million gallons sold in the third quarter of 2009.  Gallons of ethanol were sourced as follows:

 

For the Three Months EndedSeptember 30,

 
| **(In thousands, except for percentages)** | ** ** | **2010  Successor** | ** ** | **2009  Predecessor** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
|----------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------------|------------|----------------------------------|------------|
| Equity production                                              | ** ** | **41,114**          |       | 49,519                |       | (8,405                    | )          | (17.0                            | )%         |
| Purchase/resale                                                | ** ** | **420**             |       | 4,857                 |       | (4,437                    | )          | (91.4                            | )%         |
| Decrease (increase) in inventory                               | ** ** | **(25**             | **)**      | 1,123                 |       | (1,148                    | )          |                             | *          |
| Total                                                          | ** ** | **41,509**          |       | 55,499                |       | (13,990                   | )          | (25.2                            | )%         |

 

----

*  Not meaningful

 

Netsales in the third quarter of 2010 decreased 17.4% from the third quarter of2009.  Net sales were $97.5 million inthe third quarter of 2010 versus $118.1 million in the third quarter of2009.  Overall, the decrease in net saleswas primarily the result of less supply available due to lower production atour plants.  The reduction in equityproduction between 2010 and 2009 is primarily attributable to the NELLC plantshutdown primarily during the months of July and August 2010 as notedabove.  The reduction in equityproduction was partially offset by an increase in the average sales price ofethanol for the third quarter of 2010 as compared to the third quarter of2009.  Ethanol prices averaged $1.80 pergallon in the third quarter of 2010 versus $1.70 per gallon in the thirdquarter of 2009.

 

Co-productrevenues for the third quarter of 2010 totaled $22.6 million, a decrease of$1.0 million, or 4.2%, from the third quarter 2009 total of $23.6 million.  Co-product revenues decreased during thethird quarter of 2010 as a result of significantly lower sales volumes.  In the third quarter of 2010, we sold 197.5thousand tons, as compared to 272.1 thousand tons in the third quarter of 2009.The decrease in sales is primarily attributable to the NELLC plant shutdownnoted above and the elimination of carbon dioxide sales at Nebraska.  Co-product revenues, as a percentage of corncosts, increased to 37.5% during the third quarter of 2010, versus 36.3% in thethird quarter of 2009.

 

Costof goods sold for the quarter ended September 30, 2010 was $90.4 million,compared to $110.3 million for the quarter ended September 30, 2009, adecrease of $19.9 million, or 18.0%.  Asa percentage of net sales, cost of goods sold decreased to 92.8% of sales from93.4% of sales in the third quarter of 2009. Cost of goods sold consists of the cost to produce ethanol at our ownfacilities, the cost of purchasing ethanol from other producers and marketers,freight and logistics costs to ship ethanol and co-products, the cost of motorfuel taxes which have

 

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beenbilled to customers, and depreciation. The decrease in cost of goods sold is principally the result of lowervolumes of ethanol purchased as a result of the significant reduction in ourpurchase / resale operation and lower corn costs due primarily to decreasedvolumes of corn purchased as a result of the NELLC plant shutdown.

 

Productioncosts include corn costs, conversion costs (defined as the cost of convertingthe corn into ethanol, and includes production salaries, wages and stock-basedcompensation costs, fringe benefits, utilities (including coal and naturalgas), maintenance, denaturant, insurance, materials and supplies and othermiscellaneous production costs) and depreciation.  Corn costs in the third quarter of 2010totaled $60.3 million, or $3.83 per bushel, versus $65.0 million, or $3.47 perbushel, in the third quarter of 2009. Our average corn costs in the third quarter of 2010 were lower than theChicago Board of Trade (“CBOT”) average price of $4.22 during the same period.

 

Conversioncosts for the third quarter of 2010 decreased to $21.7 million from $23.2million for the third quarter of 2009. The decrease in conversion costs is primarily attributable to decreasesin insurance of $0.4 million, denaturant of $0.4 million, and salaries andsalaried stock compensation of $0.3 million. The conversion cost per gallon increased year over year to $0.53 pergallon in the third quarter of 2010 versus $0.47 per gallon in the thirdquarter of 2009 due to the decrease in volume of production gallons during thethird quarter of 2010 as compared to the same period in 2009.  Conversion cost per gallon is affected byboth dollars spent on conversion of corn to ethanol and also on the number ofgallons of ethanol produced.

 

Depreciationtotaled $2.5 million in the third quarter of 2010 compared to $3.5 million inthe third quarter of 2009.  The reductionin depreciation expense is primarily the result of the fresh start fair valuereduction to the cost of depreciable assets when we emerged frombankruptcy.  Other cost of goods sold,including motor fuel taxes and the cost of ethanol sold from inventory, were$0.2 million in the third quarter of 2010, versus $0.7 million in the thirdquarter of 2009.  The cost of motor fueltaxes is recovered through billings to customers and was $0 in the thirdquarter of 2010 because we did not do business in states requiring us to paymotor fuel taxes.

 

Freight/logisticscosts increased on a per gallon basis in the third quarter of 2010 from thethird quarter of 2009.  Freight/logisticscosts in the third quarter of 2010 were $0.15 per gallon as compared to $0.12per gallon in the third quarter of 2009. Freight/logistics dollars spent were basically flat at $6.4 million inthe third quarter.  Freight/logisticscost per gallon is calculated by taking total freight/logistics costs incurred(including costs to ship co-products) and dividing by the total ethanol gallonssold.  The increase in freight/logisticscost per gallon is primarily the result of the decreases in gallons sold andproduced during the third quarter of 2010 as compared to the same period in2009.

 

SG&A expenses were $9.1 million in the third quarter of 2010 ascompared to $5.2 million in the third quarter of 2009.  Major variances between 2010 and 2009 are a$1.3 million increase in salaries and wages, a $0.3 million increase insalaried stock compensation, a $1.6 million increase in outside services, and a$0.5 million increase in other SG&A expenses.  Outside services include professional feesthat we continue to incur related to bankruptcy activities, which would havepreviously been included in reorganization expense.

 

Other income (loss) was a gain of $0.4 million in the third quarter of2010.  The gain in the quarter includes$0.4 million of expense related to penalties owed for failure to complete theAurora West expansion facility by July 1, 2009 and $0.2 million of expenserelated to utility demand charges at our Mt. Vernon ethanol expansion facility(prior to start up of the Mt. Vernon, Indiana facility), $0.6 million ofincome from resolution of bankruptcy claims, and $0.3 million of court-orderedrefunds of professional fees.

 

Interest expense in the third quarter of 2010 was $2.1 million, ascompared to $1.8 million in the third quarter of 2009.  Interest expense in the third quarter of 2010includes $4.2 million in interest on our Notes and $0.1 million of amortizationof deferred financing fees, reduced by capitalized interest of $2.2 millionapplicable to our expansion facilities in Mt. Vernon, Indiana and Aurora,Nebraska.  We resumed construction ofthese facilities in May 2010.  Interestexpense in the third quarter of 2009 included $0.7 million in interest on oursecured revolving credit facility, $0.6 million in interest on our DIPFacility, and $0.5 million of amortization of deferred financing fees.  We ceased the accrual of interest on oursenior unsecured notes as of the Petition Date.

 

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During September 2010, the Company recorded another-than-temporary loss on its available for sale securities in Green PlainsRenewable Energy, Inc. totaling $1.8 million.

 

We recorded a net gain of $12.6 million in the third quarter of 2009related to our bankruptcy proceedings. This net gain primarily consisted of gains of $13.6 million pertainingto revisions to estimated liabilities related to rejected executory contractsand leases and gains of $1.2 million on the settlement of pre-petition vendorclaims for less than amounts owed, partially offset by $2.2 million inprofessional fees incurred.  There wereno reorganization items in the third quarter of 2010.

 

The Company’s effective tax rate differs from the statutory U.S.federal income tax rate for the quarters ended September 30, 2010 and 2009principally due to the impact of state taxes (net of federal benefit),non-includable reorganization income, non-deductible reorganization expenses,tax deductible goodwill,  increases invaluation allowances, and other permanent differences between book and tax.

 

*For theNine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30,2009*

 

Totalgallons of ethanol sold in the first nine months of 2010 decreased to 137.1million gallons, versus 229.1 million gallons sold in the first nine months of2009.  Gallons of ethanol were sourced asfollows:

 

For the Nine Months Ended September 30,

*(Inthousands of gallons, except for percentages)*

 
| ** **                       | ** ** | **Seven months  Ended Sept 30,  2010  Successor** | ** ** | **Two months  Ended Feb 28,  2010  Predecessor** | ** ** | **2009  Predecessor** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|----------------------------------|------------|
| Equity production                |       | 103,088                                                          |       | 32,040                                                          |       | 148,017               |       | (12,889                   | )          | (8.7                             | )%         |
| Marketing alliance purchases     |       | —                                                           |       | —                                                          |       | 30,858                |       | (30,858                   | )          | (100.0                           | )%         |
| Purchase/resale                  |       | 915                                                              |       | 210                                                             |       | 35,163                |       | (34,038                   | )          | (96.8                            | )%         |
| Decrease (increase) in inventory |       | 1,604                                                            |       | (772                                                            | )          | 15,084                |       | (14,252                   | )          |                             | *          |
| Total                            |       | 105,607                                                          |       | 31,478                                                          |       | 229,122               |       | (92,037                   | )          | (40.2                            | )%         |

 

----

*   Not meaningful

 

Net sales in the first nine months of 2010 decreased 34.6% from thefirst nine months of 2009.  Net saleswere $309.0 million in the first nine months of 2010 versus $472.8 million inthe first nine months of 2009.  Overall,the decrease in net sales was primarily the result of less supply available aswe terminated our marketing alliance, significantly reduced our purchase/resalesupply operations, and experienced a reduction in equity production, partiallyoffset by an increase in the average sales price of ethanol sold.  The reduction in equity production between2010 and 2009 is primarily attributable to the NELLC plant shutdown primarilyduring the months of July and August 2010 noted above.  The reduction in supply was partially offsetby an increase in the average sales price of ethanol for the first nine monthsof 2010 as compared to the first nine months of 2009.  Ethanol prices averaged $1.75 per gallon inthe first nine months of 2010 versus $1.69 in the first nine months of 2009.

 

Co-product revenues for the first nine months of 2010 totaled $69.4million, a decrease of $3.1 million or 4.3%, from the first nine months of 2009total of $72.5 million.  Co-productrevenues decreased during the first nine months of 2010 primarily as a resultof lower sales volumes.  In the firstnine months of 2010, we sold 676.2 thousand tons, versus 827.2 thousand tons inthe first nine months of 2009. Co-product revenues, as a percentage of corn costs, rose to 36.9% duringthe first nine months of 2010, versus 33.2% in the first nine months of 2009.

 

Cost of goods sold for the nine months ended September 30, 2010was $289.9 million, compared to $486.3 million for the nine months ended September 30,2009, a decrease of $196.4 million, or 40.4%. As a percentage of net sales, cost of goods sold decreased to 93.8% inthe first nine months of 2010 from 102.9% in the first nine 

 

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monthsof 2009.  Cost of goods sold consists ofthe cost to produce ethanol at our own facilities, the cost of freight andlogistics to ship ethanol and co-products, the cost of ethanol sold frominventory, the cost of motor fuel taxes which have been billed to customersand, prior to the second quarter of 2009, the cost of purchased ethanol.  The decrease in total cost of goods sold isprincipally the result of lower volumes of ethanol purchased as a result of thetermination of our marketing alliance and significantly reduced purchase/resaleprogram, and lower corn costs, freight costs, depreciation, and motor fueltaxes.  Partially offsetting the decreasein cost of goods sold was an additional increase in cost of goods sold of $2.5million related to the adjustment of ethanol inventory to fair value in February 2010 whichwas recognized in March 2010 as the product was sold.

 

Purchased ethanol in the first nine months of 2010 totaled $1.9million, versus $87.0 million in the first nine months of 2009.  The decrease in purchased ethanol resultedfrom the termination of our marketing alliance and scaled-back purchase/resaleprograms.

 

Corn costs in the first nine months of 2010 totaled $188.3 million, or$3.67 per bushel, versus $218.7 million, or $3.93 per bushel, in the first ninemonths of 2009.  Our average corn costsin the first nine months of 2010 were lower than the CBOT average price of$3.83 during the same period.  Thedecrease in corn costs is primarily due to lower volumes of corn purchased as aresult of the NELLC plant shutdown.

 

Conversion costs for the first nine months of 2010 decreased to $70.3million from $72.2 million for the first nine months of 2009.  The total dollars spent on conversion costsdecreased year over year principally as a result of lower costs for insuranceand denaturant.  The conversion cost pergallon increased year over year to $0.52 per gallon in the first nine months of2010 versus $0.49 per gallon in the first nine months of 2009.  The increase in conversion cost per gallon isthe result of the decrease in production gallons in 2010 as compared to thesame period in 2009.

 

Freight/logistics costs were down significantly on a per gallon basisin the first nine months of 2010 from the first nine months of 2009.  Freight/logistics costs in the first ninemonths of 2010 were $0.13 per gallon as compared to $0.17 per gallon in thefirst nine months of 2009. Freight/logistics dollars spent decreased in the first nine months of2010 to $17.5 million from $39.7 million in the first nine months of 2009 as aresult of lower volumes shipped, the termination of fixed price terminalobligations, and lower costs for leased railcars

 

Depreciation in the first nine months of 2010 totaled $8.1 million,versus $10.4 million in the first nine months of 2009.  The reduction in depreciation expense isprimarily the result of the fresh start fair value reduction  to the cost of depreciable assets when weemerged from bankruptcy.  Other cost ofgoods sold, including motor fuel taxes and the cost of ethanol sold frominventory, were $0.3 million in the first nine months of 2010, versus $5.3million in the first nine months of 2009. The cost of motor fuel taxes is recovered through billings to customersand was $0 in the first nine months of 2010 because we did not do business instates requiring us to pay motor fuel taxes.

 

SG&A expenses were $28.0 million in the first nine months of 2010as compared to $21.8 million in the first nine months of 2009.  The higher expense in the first nine monthsof 2010 primarily relates to increases in salaries and wages of $2.3 million,salaried stock-based compensation of $2.0 million and outside services of $1.6million. Outside services include professional fees that we continue to incurrelated to bankruptcy activities, which would have previously been included inreorganization expense.

 

Other income (loss) was a loss of $1.8 million for the nine monthsended September 30, 2010.  The lossfor the nine months includes $1.2 million of expense related to penalties owedfor failure to complete the Aurora West expansion facility by July 1,2009, $0.4 million of expense related to utility demand charges at our Mt.Vernon ethanol expansion facility (prior to start up of the Mt. Vernon, Indianafacility), $1.1 million of expense related to a contract amendment, $0.6million of income from resolution of bankruptcy claims, and $0.3 million ofcourt-ordered refunds of professional fees.

 

As a result of arm’s length negotiations in 2009 with the Company’sformer marketing alliance partners, the Company was able to obtainconsideration totaling $10.2 million from those counterparties in exchange forthe

 

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earlytermination of the marketing alliance agreements.  Marketing alliance partners were third-partyproducers who sold their ethanol production to the Company on an exclusivebasis.

 

Interest expense in the first nine months of 2010 was $6.6 million, ascompared to $12.8 million in the first nine months of 2009.  Interest expense in the first nine months of2010 included $8.2 million of interest expense related to our Notes,pre-petition amended secured revolving credit facility interest expense of $0.6million, interest expense on our DIP facility of $0.5 million, other interestexpense of $0.1 million, and $0.4 million of amortization of deferred financingfees, reduced by capitalized interest of $3.2 million.  Interest expense in the first nine months of2009 included $8.1 million of interest expense related to our pre-petitionsenior unsecured notes (compared to contractual interest of $22.5 million),pre-petition amended secured revolving credit facility interest expense of $1.7million, interest expense on our DIP facility of $1.1 million, and $1.9 millionfor amortization of deferred financing fees.

 

Gain (loss) on derivative transactions for the first nine months of2010 includes $0.2 million of realized net gains on corn and ethanol derivativecontracts versus net realized and unrealized gains in the first nine months of2009 of $1.2 million.  We do not mark tomarket forward physical contracts to purchase corn or sell ethanol as weaccount for these transactions as normal purchases and sales under ASC 815.

 

During September 2010, the Company recorded another-than-temporary loss on its available for sale securities in Green PlainsRenewable Energy, Inc. totaling $1.8 million.

 

The Company’s effective tax rate differs from the statutory U.S.federal income tax rate for the seven months ended September 30, 2010, twomonths ended February 28, 2010, and the nine months ended September 30,2009 principally due to the impact of state taxes (net of federal benefit),non-includable reorganization income, non-deductible reorganization expenses,tax deductible goodwill, increases in valuation allowances, and other permanentdifferences between book and tax.

 

**Trendsand Factors that May Affect Future Operating Results**

 

*Ethanol Pricing*

 

Ethanolprices rose during the third quarter of 2010. Margins at our Pekin facilities have declined, while margins at ourNebraska facility have risen.

 

As of September 30, 2010, we had future contracts for delivery ofethanol totaling 27.1 million gallons through May 2011 at spot prices(using various Platt, OPIS and AXXIS indices).

 

For the fourth quarter of 2010, we have future contracts for deliveryof ethanol totaling 25.7 million gallons at spot prices (using various Platt,OPIS and AXXIS indices).

 

*Corn*

 

Wecontinuously purchase corn for physical delivery from suppliers using forwardpurchase contracts in order to assure supply. As we do this, we have in the past often shorted a like amount of CBOTcorn futures with similar dates to lock in the basis differential.  We have also occasionally used CBOT futurescontracts to lock in the price of corn by taking long positions in CBOT contractsin order to reduce our risk of price increases. Exchange traded forward contracts for commodities are marked to marketeach period.  Our forward physicalpurchases of corn are not marked to market.

 

AtSeptember 30, 2010, we had fixed the price of 2.7 million bushels of cornthrough January 2011 at an average cost of $4.76 per bushel, representingapproximately 14.6% of our corn requirements for the remainder of 2010 for ourfacilities in operation at September 30, 2010.

 

*Supply and Demand*

 

Accordingto the Renewable Fuels Association (the “RFA”), the annual ethanol productioncapacity in the U.S. of plants currently in operation and those underconstruction is almost 14.0 billion gallons annually.  This

 

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volumeof ethanol production exceeds the mandate for renewable biofuel consumptionrequired in 2013 of 13.8 billion gallons. Ethanol produced in the U.S. competes with sugar-based ethanol producedin Brazil.  This domestic productioncapacity, along with imports, may cause supply to exceed demand.  If additional demand for ethanol is notcreated, either through additions to discretionary blending (through increasedpenetration rates in areas that blend ethanol today or through theestablishment of new markets where little or no ethanol is blended today), orthrough additional state level mandates, the excess supply may cause ethanolgross margins to decrease, perhaps substantially.

 

*Environmental Protection Agency (“EPA”) approved E-15 formodel year 2007 and newer cars and light trucks*

 

TheEPA on October 13, 2010 waived a limitation on selling fuel that is morethan 10% ethanol for model year 2007 and newer cars and light trucks.  Thewaiver applies to fuel that contains up to 15% ethanol—known as E-15—and onlyto model year 2007 and newer cars and light trucks.  While this represents progress towardincreased blending of ethanol in the motor fuel supply, the Company does notexpect an immediate increase in the demand for ethanol until the waiver isextended to older vehicles as well and distribution infrastructure issues areresolved.

 

**Liquidityand Capital Resources**

 

*Overviewand Outlook*

 

Thefollowing table sets forth selected information concerning our financialcondition:

 
| **(In thousands)**   | ** ** | **September  30,  2010  Successor** | ** ** | **December 31,  2009  Predecessor** | ** ** |
|---------------------------|------------|-------------------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | **(Unaudited)**                     | ** ** | ** **                               | ** ** |
| Cash and cash equivalents | ** ** | **$**                               | **41,855** |                                     | 52,585     |   |
| Working capital           | ** ** | **54,940**                          |       | 38,136                                   |       |
| Total debt (1)            | ** ** | **156,067**                         |       | 42,765                                   |       |
| Current ratio             | ** ** | **3.13**                            |       | 1.60                                     |       |
|                           |            |                                     |            |                                          |            |  |

 

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(1)  As of December 31, 2009, total debt excluded our seniorunsecured notes due in 2017 which were recorded in pre-petition liabilitiessubject to compromise.

 

Asa result of the bankruptcy proceedings and the circumstances leading to thebankruptcy proceedings as described elsewhere in this report, we faceduncertainty regarding the adequacy of our liquidity and capital resources andhad limited access to financing.  Thebankruptcy filing constituted an event of default under our secured revolvingcredit facility and the indenture governing our 10% senior unsecured notes due2017, and the debt obligations under those agreements became automatically andimmediately due and payable, subject to the automatic stay provisions ofSection 362 of the Bankruptcy Code. As of the Petition Date, the amount of outstanding borrowings andletters of credit under the secured revolving credit facility totaledapproximately $18.4 million and $22.0 million, respectively, and the aggregateprincipal amount outstanding on our 10% senior unsecured notes due 2017 was$300 million.

 

Atemergence from bankruptcy on March 15, 2010, we obtained approximately $98million of proceeds through the issuance of $105 million principal amount ofour Notes and 1,710,000 shares of common stock. Upon emergence we used these proceeds to pay $27.8 million to retire oursecured revolving credit facility, $15.0 million to retire our DIP Facility,$17.9 million to Kiewit Energy Company to repay secured claims related to ourexpansion projects at Aurora, Nebraska and Mt. Vernon, Indiana and $4.9million to pay other secured and priority claims.  Our senior unsecured notes of $300.0 millionalong with $15.5 million of accrued interest were discharged upon emergencefrom bankruptcy and participated in the distribution of 6.84 million shares ofnew equity reserved for distribution to general unsecured claimholders.  $117.9 million of the $300 million  senior unsecured notes was dischargedoutright in bankruptcy and $182.1 million of the $300 million of seniorunsecured notes, representing the noteholder’s relative share of the totalclaims participating in the distribution of new equity, was dischargedthrough  the noteholder’s right tosettlement through participation in the distribution of new equity.  As of September 30, 2010, approximately 5.66million of the 6.84 million shares have been distributed of which the holdersof our pre-petition $300 million of unsecured notes have received approximately5.54 million shares and other general unsecured claimholders have received 125thousand shares.   At September 30, 2010,approximately 1.2 million shares remain to be distributed to holders of generalunsecured claims.

 

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*Sourcesof Liquidity*

 

Our principal sources ofliquidity are cash and cash equivalents, cash provided by our borrowingfacilities, and cash provided by operations. If our future cash flow is insufficient to meet our debt obligations andcommitments, including our Notes, we may be required to undertake alternativefinancing plans, such as: (i) refinancing or restructuring our debt, (ii) sellingassets, (iii) reducing or delaying capital investments, or (iv) seekingto raise additional capital.  There canbe no assurance, however, that undertaking alternative financing plans wouldallow us to meet our debt obligations. Our inability to meet our debt obligations and commitments could lead toan event of default under either our Notes or the Revolving CreditAgreement.  If an event of default occursand is continuing under our Notes, then the Notes may become immediately dueand payable, and interest on the Notes will accrue at an additional 2% perannum.  If an event of default occurs andis continuing under the Revolving Credit Agreement, then the lenders mayterminate their commitments under the Revolving Facility, accelerate repaymentof the obligations under the Revolving Facility, or foreclose on the collateralgranted to them.  In addition, an eventof default under either the Notes or the Revolving Credit Agreement may lead toan event of default under the Revolving Credit Agreement or Notes, respectively,under certain circumstances.

 

Inaddition, our ability to execute on our growth strategy will be determined, inlarge part, by the availability of debt and equity capital, and we continuouslyevaluate our financing opportunities. Any decision regarding a financing transaction, and our ability tocomplete such a transaction, will depend on prevailing market conditions andother factors.  Our ability to meet ourliquidity requirements and execute on our growth strategy can be impacted byeconomic conditions outside of our control, such as the disruption in thecapital and credit markets that occurred in 2008 and 2009, as well as commodityprice volatility.  We may be required toseek sources of capital earlier than anticipated, although the restrictions inour Revolving Credit Agreement and Notes may impair our ability to access othersources of capital, and access to additional capital may not be available onterms acceptable to us or at all.

 

*Cash and cash equivalents.*  For the first nine months of 2010, cash andcash equivalents decreased by $10.7 million. Cash and cash equivalents as of September 30, 2010 andDecember 31, 2009 were $41.9 million and $52.6 million, respectively.

 

C*ash provided by operations.* Net cash used in operating activities in the first nine months of 2010was $37.9****million, as compared to cash providedby operating activities of $23.2 million for the first nine months of 2009.

 

*Cash available under our liquidity facility. *As described further below,pursuant to the Plan, on the Effective Date, the Company and its subsidiaries,as borrowers, entered into the Revolving Credit Agreement with PNC as lenderand as agent, providing for a $20 million Revolving Facility.  Amounts under the Revolving Facility may beborrowed, repaid and reborrowed with all amounts outstanding due and payable onMarch 15, 2013.  The maximum amountoutstanding under the Revolving Facility is limited by the amount of eligiblereceivables and eligible inventory of the borrowers.  The Revolving Credit Agreement containsmandatory prepayment requirements in certain circumstances upon the sale ofcertain collateral, subject to the ability to reborrow revolving advances.  Termination of the Revolving Facility issubject to a prepayment premium if terminated more than 90 days prior to thethird anniversary of the Revolving Facility.

 

Totalliquidity at September 30, 2010 was $51.3 million, comprised of $41.9million in cash and cash equivalents and $9.4 million availability under ourRevolving Facility.  As of September 30,2010, there were no amounts drawn against the Revolving Facility, and therewere $5.5 million of outstanding letters of credit issued under the RevolvingFacility.

 

Webelieve that we have sufficient liquidity through our cash and cashequivalents, cash from operations and borrowing capacity under our RevolvingFacility to meet our short-term and long-term normal recurring operating needs,debt service obligations, contingencies and anticipated capital expenditures.

 

*Uses ofLiquidity*

 

Our principal uses of liquidity are payments relatedto our outstanding debt and liquidity facility, working capital, funding ofoperations, and capital expenditures.

 

*Payments related to our predecessor debt and liquidity facility.*  During the first quarter of 2010, we used$42.8 million of cash to make required reductions in borrowings on our securedrevolving credit facility with JP

 

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MorganChase and our DIP Facility.  At September 30,2010, the Company had $6.3 million in letters of credit outstanding as issuedby the pre-petition lenders.  The $6.3million outstanding letters of credit were collateralized by $7.8 million in arestricted cash account.

 

*Working capital.*  Our networking capital position increased by $16.8 million during the first ninemonths of 2010.

 

*Capital expenditures.*  During the first nine months of 2010, wespent approximately $71.2 million on capital projects.  Of this amount, $2.0 million was spent onmaintenance and environmental projects, while $50.6 million (includingcapitalized interest) was spent on our capacity expansion projects in Mt.Vernon, Indiana and Aurora, Nebraska and $18.6 million was spent toacquire the Canton, Illinois facility. We expect to incur additional capital expenditures of approximately$11.0 million related to completing the Mt. Vernon, Indiana and Aurora,Nebraska facilities (excluding capitalized interest). on the facilities.  We do not expect to incur capitalexpenditures related to the Canton, Illinois facility for the balance of 2010,however, we expect to incur approximately $7.0 million of capital expendituresin 2011 to make the Canton, Illinois facility operational.  As of September 30, 2010, as noted above, nosteps have been taken toward making the Canton, Illinois facilityoperational.  However, we do expect tomake several improvements including mash fermentation improvements to include adual train mash heat exchanger allowing for a clean in process approach toreduce infections and improve yields, boiler house improvements includingreplacement of the coal feeder screw system to improve the flow of coal intothe gasifier and boiler maintenance.  Wedo not expect to make the capital expenditures related to the Canton, Illinoisfacility until we secure additional financing. We expect to expend the capital necessary to achieve these updates andbring the Canton, Illinois facility to operational status by the second quarterof 2011.  We expect to fund the remainingcapital expenditures from cash and cash equivalents on hand as well as cashprovided by operations.  However, asnoted above, prevailing market conditions and other factors may require us toseek sources of capital earlier than anticipated, which may not be available onterms acceptable to us, or at all.**Debtor-In-PossessionFinancing**

 

On April 7, 2009, theDIP Lenders entered into the DIP Term Sheet for a $30 million DIP Facility withthe Debtors.  The DIP Term Sheet providedfor a first priority DIP financing composed of a term loan facility madeavailable to certain of the Company’s subsidiaries in a maximum aggregateprincipal amount of up to $30 million.

 

Inaccordance with the terms of the Plan, the balances owed on the DIP Facility werepaid in full on the Effective Date.

 

**13% Senior Secured Notes due 2015**

 

Pursuant to the Plan andConfirmation Order, on the Effective Date, the Company issued and sold anaggregate of $105 million principal amount of the Notes.  In addition, on August 19, 2010, theCompany issued and sold an additional $50 million in aggregate principal amountof Notes, resulting in gross proceeds of approximately $51 million (excludingaccrued interest on the Notes through the issue date).  The Notes were issued under the Indenture ina private transaction that was not subject to the registration requirements ofthe Securities Act.  The Notes accrueinterest at a rate of 13% for cash interest payments and 15% if the Companyelects PIK interest payments.  TheCompany may elect, prior to each interest payment date, whether to make eachinterest payment on the Notes (i) entirely in cash or (ii) 8/15 incash and 7/15 in PIK interest.  The Notesare fully and unconditionally guaranteed by the Guarantors.  The Company will pay interest on the Notesquarterly in arrears on March 15, June 15, September 15 and December 15of each year, starting on June 15, 2010. The Notes mature on March 15, 2015.

 

TheCompany may redeem the Notes in whole or in part prior to their maturity date fora premium to the outstanding principal amount, as provided in theIndenture.  If we enter into the New TermLoan Facility, the Company intends to redeem the entire outstanding principalamount of the Notes at a redemption price of 105% of the principal amount(assuming the New Term Loan Facility is entered into before March 15,2011, at which time the redemption price under the Indenture decreases to104%), plus accrued and unpaid interest. See “—Debt Commitment Letter” below.

 

**SecuredRevolving Credit Facility**

 

Pursuantto the Plan, on the Effective Date, the Company and its subsidiaries, asborrowers, entered into the Revolving Credit Agreement with PNC, as lender andas agent, providing for a $20 million Revolving Facility.  Amounts under the Revolving Facility may beborrowed, repaid and reborrowed with all amounts outstanding due and payable onMarch 15, 2013.  The maximum amountoutstanding under the Revolving Facility is limited by the amount of eligiblereceivables and eligible inventory of the borrowers.  The Revolving Credit Agreement containsmandatory prepayment requirements in certain circumstances upon the sale ofcertain collateral, subject to the ability to reborrow revolving advances.  Termination of the Revolving Facility issubject to a prepayment premium if terminated more than 90 days prior to thethird anniversary of the Revolving Facility.

 

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On August 6, 2010, weand our subsidiaries, as borrowers, entered into the First Amendment with thefinancial institutions party thereto as lenders and PNC.  The First Amendment amends the RevolvingCredit Agreement by increasing the letter of credit sublimit under theRevolving Credit Agreement from $12.0 million to $17.0 million.  The First Amendment also modifies the capitalexpenditure limitations applicable to us and our subsidiaries under theRevolving Credit Agreement and our daily inventory reporting requirements topermit PNC to agree not to require daily reporting by the borrowers ofin-transit inventory.

 

**WarrantAgreement**

 

Pursuantto the Plan and Confirmation Order, on the Effective Date, the Company enteredinto a Warrant Agreement with American Stock Transfer & Trust Company,LLC, as warrant agent.  Pursuant to theWarrant Agreement, the Company issued warrants to purchase an aggregate of450,000 shares of common stock of the Company, subject to adjustment (the “Warrants”).  The Warrants will expire on the fifthanniversary of the Effective Date or, if earlier, in connection with theconsummation of a change of control of the Company (the “Expiration Date”);provided that the Company may accelerate the Expiration Date in certaincircumstances as set forth in the Warrant Agreement.

 

**Debt Commitment Letter**

 

OnAugust 2, 2010, the Company entered into the Debt Commitment Letter withCiti under which Citi has agreed, at a subsequent time, to use its best effortsto arrange a syndicate of lenders that will provide the Company with the NewTerm Loan Facility, and to act as lead arranger, bookrunner, administrativeagent and collateral agent for the New Term Loan Facility, on the terms andsubject to the conditions set forth in the Debt Commitment Letter.  Consummation of the debt financing is subjectto various conditions set forth in the Debt Commitment Letter, including theabsence of certain “material adverse effects” with respect to the Company andits subsidiaries, taken as a whole.

 

TheNew Term Loan Facility will mature on the fifth anniversary of the closing dateof the New Term Loan Facility. The New Term Loan Facility will require theCompany to maintain a specified minimum liquidity and a specified maximum debtto capitalization ratio.  Additionally,the New Term Loan Facility will contain other customary affirmative andnegative covenants concerning the conduct of the Company’s business operations.The New Term Loan Facility will also contain customary events of default.  Upon the occurrence of an event of default,the Company’s obligations under the New Term Loan Facility may be acceleratedand all indebtedness thereunder would become immediately due and payable.

 

In connection with the NewTerm Loan Facility, the Company intends to redeem the entire outstandingprincipal amount of the Notes at a redemption price of 105% of the principalamount (assuming the New Term Loan Facility is entered into before March 15,2011, at which time the redemption price under the Indenture decreases to104%), plus accrued and unpaid interest. However, we are under no obligation to enter into any such debtfinancing and cannot assure you that we will enter into any such financingtransaction on terms acceptable to us, if at all.  We are continuously considering otherfinancing opportunities based on prevailing market conditions and otherfactors.

 

**CriticalAccounting Estimates**

 

Asrequired by GAAP, in connection with emergence from Chapter 11 reorganizationproceedings, we adopted the fresh start accounting provisions of ASC 852effective February 28, 2010.  UnderASC 852, the reorganization value represents the fair value of the entitybefore considering liabilities and approximates the amount a willing buyerwould pay for our assets immediately after restructuring.  The reorganization value is allocated to therespective assets.  Liabilities, otherthan deferred taxes and severance benefits, are stated at present values ofamounts expected to be paid.

 

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Fairvalues of assets and liabilities represent our best estimates based on ourappraisals and valuations which incorporated industry data and trends andrelevant market rates and transactions available to us at the time.  The estimate of reorganization equity valuewas determined by Company management with assistance from an independentfinancial advisor, who developed the reorganization equity value using acombination of the following three measurement methodologies: 1) comparablepublic company analysis, 2) discounted cash flow analysis, and 3) precedenttransactions analysis.  This amount wasdetermined based, in part, on economic, competitive, and general businessconditions prevailing at the time.  Theseestimates and assumptions are inherently subject to significant uncertaintiesand contingencies beyond our reasonable control.

 

Thesignificant assumptions related to adjusting our assets and liabilities to fairvalue in connection with fresh start accounting include the following:

 

*Cash, Accounts Receivable,Prepaid Assets and Other Current Assets, Accrued Liabilities, and Other CurrentLiabilities* - Weevaluated the fair value of financial instruments represented in current assetsand current liabilities, including cash, accounts receivable, prepaid assetsand other current assets, accrued liabilities, and other current liabilities.  Based upon our evaluations, we concluded thatthe carrying value approximates fair value of these financial instruments dueto their short maturities or variable-rate nature of the respective balances.

 

*Restricted Cash, and OtherLong-Term Liabilities* -We evaluated the fair value of restricted cash and other long-termliabilities.  The restricted cashbalances are held in interest-bearing accounts and we therefore concluded thatthe carrying value approximates fair value. The other long-term liabilities principally represent companyobligations related to pension and retiree medical costs.  Such liabilities are calculated using variousassumptions including an assumed discount rate which we believe is reasonable,and we therefore concluded that carrying value of such long-term liabilitiesapproximates fair value.

 

*Inventories* — Inventories consist primarily of agricultural andenergy-related commodities including corn, ethanol, and coal.  The fair value of these commodities wasdetermined through reference to prices that were publicly available at thetime, as adjusted for physical location.

 

*Property, plant and equipment*— Property,plant and equipment was valued at fair value of approximately $208.8 million asof February 28, 2010.  The Company determined fair value withthe assistance of an independent valuation firm.  In establishing fair value for the vastmajority of the Company’s property, plant and equipment, the cost approach wasutilized. The cost approach considers the amount required to replace an assetby constructing or purchasing a new asset with similar utility, then adjuststhe value in consideration of all forms of depreciation as of the appraisaldate as described below:

 

·                  Physical depreciation — the loss in value orusefulness attributable solely to use of the asset and physical causes such aswear and tear and exposure to the elements.

·                  Functional obsolescence — a loss in value isdue to factors inherent in the asset itself and due to changes in technology,design or process resulting in inadequacy, overcapacity, lack of functionalutility or excess operating costs.

·                  Economic obsolescence — loss in value byunfavorable external conditions such as economics of the industry or geographicarea, or change in ordinances.

 

The cost approach relies on management’s assumptions regarding currentmaterial and labor costs required to rebuild and repurchase significantcomponents of our property, plant and equipment along with assumptionsregarding the age and estimated useful lives of our property, plant andequipment.

 

*Other Assets* — Other assets include a long-term deposit forutilities against which the Company may apply certain future natural gastransportation charges.  The fair valueof this deposit was determined based upon a discounted cash flow model forwhich the significant inputs include the Company’s estimated purchase timingand amount of natural gas, and the discount rate estimated to be 13%.  If the Company had applied a discount rate of1% higher or lower, the fair value of the asset would have decreased orincreased by $168 thousand or $177 thousand, respectively.

 

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*Accounts Payable* — Accounts payable include an estimatedliability associated with an off-market coal purchase contract which continuesthroughout 2010.  The fair value of thiscontract was determined through reference to coal prices that were publiclyavailable at the time, as adjusted for physical location.  This liability will be amortized to income asthe related coal purchases affect the cost of production.  For other accounts payable items, weevaluated such liabilities to determine fair value and concluded that thecarrying value approximates fair value of these financial instruments due totheir short maturities or variable-rate nature of the respective balances.

 

*Long-Term Debt* — Long-term debt was valuedat fair value with the assistance of an independent valuation firm based on ananalysis of market interest rates for guideline companies with similar debt andterms, interest rates for companies recently emerged from bankruptcy, andinterest rates based on a synthetic debt rating.  Based on this analysis, we determined that arange of market interest rate for our $155 million aggregate principal amountof Notes would be from 11.5% to 14.5%. Based on the stated rate of our Notes of 13% combined with the option topay a portion of the interest in kind, we deemed the fair value to be the facevalue of the Notes of $155 million.  Ifthe interest rate was 1% higher or lower, the fair value of the debt would haveincreased or decreased by $1.8 million respectively.

 

**EnvironmentalMatters**

 

We are subject to extensivefederal, state and local environmental, health and safety laws, regulations andpermit conditions (and interpretations thereof), including, among other things,those relating to the discharge of hazardous and other waste materials into theair, water and ground, the generation, storage, handling, use, transportationand/or disposal of hazardous materials, and the health and safety of ouremployees.  Compliance with these laws,regulations, and permits require us to incur significant capital and othercosts, including costs to obtain and maintain expensive pollution controlequipment.  They may also require us tomake operational changes to limit actual or potential impacts to theenvironment.  A violation of these laws,regulations or permit conditions can result in substantial administrative andcivil fines and penalties, criminal sanctions, imposition of clean-up and siterestoration costs and liens, suspension or revocation of necessary permits,licenses and authorizations and/or the issuance of orders enjoining or limitingour current or future operations.  Inaddition, environmental laws and regulations (and interpretations thereof)change over time, and any such changes, more vigorous enforcement policies orthe discovery of currently unknown conditions may require substantialadditional environmental expenditures.

 

We are also subject topotential liability for the investigation and cleanup of environmentalcontamination at each of the properties that we own or operate and at off-sitelocations where we arranged for the disposal of hazardous wastes. For instance,over ten years ago soil and groundwater contamination from fuel oilcontamination at a storage site was identified at our Illinois campus.  The fuel oil tanks were removed and a portionof the area has been capped, but no remediation has been performed.  If any of these sites are subject toinvestigation and/or remediation requirements, we may incur strict and/or jointand several liability under the Comprehensive Environmental Response,Compensation and Liability Act or other environmental laws which impose strictliability for all or part of the costs of such investigation, remediation, orremoval costs and for damages to natural resources whether the contaminationresulted from the conduct of others or from consequences of our own actionsthat were or were not in compliance with all applicable laws at the time thoseactions were taken.  We may also besubject to related claims by private parties alleging property damage orpersonal injury due to exposure to hazardous or other materials at or from suchproperties or other impacts of our operations. While costs to address contamination or related third-party claims couldbe significant, based upon currently available information, we are not aware ofany material liability relating to contamination or such third party claims. We have not accrued any amounts forenvironmental matters as of September 30, 2010**.**  The ultimatecosts of any liabilities that may be identified or the discovery of additionalcontaminants could adversely impact our results of operation or financialcondition.

 

In addition, the hazards andrisks associated with producing and transporting our products (such as fires,natural disasters, explosions, abnormal pressures and spills) may result inreleases of hazardous substances and other waste materials, and may result inclaims from governmental authorities or third parties relating to actual oralleged personal injury, property damage, or damages to natural resources.  We maintain insurance coverage against some,but not all, potential losses associated with our operations.  Our coverage includes, but is not limited to,physical damage to assets, employer’s liability, comprehensive generalliability, automobile liability and workers’

 

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compensation.  While we do not carry environmental insurancein Illinois and Nebraska, we do carry it in Indiana.  We believe that our insurance is adequate forour industry, but losses could occur for uninsurable or uninsured risks or inamounts in excess of existing insurance coverage. The occurrence of eventswhich result in significant personal injury or damage to our property, naturalresources or third parties that is not covered by insurance could have amaterial adverse impact on our results of operations and financial condition.

 

Our air emissions aresubject to the federal Clean Air Act, as amended, and similar state laws whichgenerally require us to obtain and maintain air emission permits for ourongoing operations, as well as pre-approval for any expansion or constructionof existing facilities or new facilities or modification of certain projects orfacilities.  Obtaining and maintainingthose permits requires us to incur costs, and any future more stringentstandards may result in increased costs and may limit or interfere with ouroperations.  In addition, the permitsultimately issued may impose conditions which are more costly to implement thanwe had anticipated.  These costs couldhave a material adverse effect on our financial condition and results ofoperations.  Because other ethanolmanufacturers in the U.S. are and will continue to be subject to similar lawsand restrictions, we do not currently believe that our costs to comply withcurrent or future environmental laws and regulations will adversely affect ourcompetitive position among domestic producers. However, because ethanol is produced and traded internationally, thesecosts could adversely affect us in our efforts to compete with foreignproducers not subject to such stringent requirements.  Our failure to comply with air emissions lawsand regulations could subject us to monetary penalties, injunctions, conditionsor restrictions on operations and, potentially, criminal enforcement actions.

 

Federal and stateenvironmental authorities have been investigating alleged excess volatileorganic compounds emissions and other air emissions from many U.S. ethanolplants, including our Illinois facilities. The investigation relating to our Illinois wet mill facility is stillpending, and we could be required to install additional air pollution controlequipment or take other measures to control air pollutant emissions at thatfacility.  If authorities require us toinstall controls, we would anticipate that costs would be****approximately$6.5 million, which would be considerably higher than the approximately$3.4 million we incurred in connection with a similar matter at our Nebraskafacility due to the larger size of the Illinois wet mill facility.  As of yet we have not established reservesfor possible costs we may incur in connection with this investigation.  In addition, if the authorities determine ouremissions were in violation of applicable law, we would likely be required topay fines that could be material.  With respect to the investigation of ourNebraska facility, we were required to pay a fine of $40,000.  Due to the larger capacity of the Illinoisfacilities, the fine could possibly be larger.

 

We have made, and expect tocontinue making, significant capital expenditures on an ongoing basis to complywith increasingly stringent environmental laws, regulations and permits,including compliance with the National Emission Standards for Hazardous AirPollutants (“NESHAP”) for industrial, commercial and institutional boilers andprocess heaters.  This NESHAP was issuedin 2004 but subsequently vacated in 2007. The vacated version of the rule required us to implement maximumachievable control technology at our Illinois wet mill facility to reducehazardous air pollutant emissions from our boilers.  The EPA is currently rewriting the NESHAP,which is expected to be more stringent than the vacated version.  In the absence of a final NESHAP forindustrial, commercial and institutional boilers and process heaters, we areworking with state authorities to determine what technology will be required atour Illinois wet mill facility and when such technology must be installed.  We currently cannot estimate the amount thatwill be needed to comply with any future federal or state technologyrequirement regarding air emissions from our boilers.

 

We currently generaterevenue from the sale of carbon dioxide, a greenhouse gas which is a co-productof the ethanol production process, at our Illinois facilities.  National greenhouse gas legislation is in theearly stages of development in the U.S., and we are currently unable todetermine the impact of potential greenhouse gas reduction requirements.  Mandatory greenhouse gas emissions reductionsmay impose increased costs on our business and could adversely impact ouroperations, including our ability to continue generating revenue from carbondioxide sales.

 

On February 3, 2010 theEPA announced final revisions to the National RFS program (commonly known asthe RFS program or RFS-2).  This Rule makeschanges to the RFS program as required by the Energy Independence and SecurityAct of 2007.  The revised statutoryrequirements establish new specific annual volume standards for cellulosicbiofuel, biomass-based diesel, advanced biofuel, and total renewable fuel thatmust be used in transportation fuel.  Therevised statutory requirements also include new definitions and criteria forboth

 

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renewable fuels and thefeedstock used to produce them, including new greenhouse gas emissionthresholds as determined by lifecycle analysis. The regulatory requirements for RFS-2 will apply to domestic and foreignproducers and importers of renewable fuel used in the U.S.

 

This final action isintended to lay the foundation for achieving significant reductions ofgreenhouse gas emissions from the use and creation of renewable fuels,reductions of imported petroleum and further development and expansion of ournation’s renewable fuels sector.

 

On May 10, 2010, theEPA published a Direct Final Rule to “amend certain of the RFS programregulations” to correct “some technical errors and areas within the final RFS-2regulations that could benefit from clarification or modification.”  As part of this Direct Final Rule, the EPArevised the RFS-2 “to require that construction of grandfathered renewable fuelproduction facility for which construction commenced prior to December 19,2007, be completed by December 19, 2010, rather than 36 months from thedate of commencement of construction.” The Direct Final Rule is effective as of July 1, 2010, exceptfor sections upon which the EPA received adverse comment or request for ahearing.  We are unaware of adversecomment or request for a hearing on the construction deadlines described above.

 

RFS-2 sets the 2010 RFSvolume standard at 12.95 billion gallons (bg). Further, for the first time, the EPA is setting volume standards forspecific categories of renewable fuels including cellulosic, biomass-baseddiesel, and total advanced renewable fuels. For 2010, the cellulosic standard is set at 6.5 million gallons (mg);and the biomass based diesel standard is set at 1.15 bg (combining the 2009 and2010 standards as proposed).

 

In order to qualify forthese new volume categories, fuels must demonstrate that they meet certainminimum greenhouse gas reduction standards, based on a lifecycle assessment, incomparison to the petroleum fuels they displace.  Generally, ethanol plants either must meetthe 20% reduction test or are grandfathered under special provisions.

 

**Item 3.                   Quantitative and Qualitative Disclosures AboutMarket Risk**

 

Weare exposed to various market risks, including changes in commodityprices.  Market risk is the potentialloss arising from adverse changes in market rates and prices.  In the ordinary course of business, we enterinto various types of transactions involving financial instruments to manageand reduce the impact of changes in commodity prices, including price risk onanticipated purchases of corn, natural gas and the sale of ethanol.  We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.

 

***Commodity Price Risks***

 

Weare subject to market risk with respect to the price and availability of corn,the principal raw material we use to produce ethanol and ethanolby-products.  In general, rising cornprices result in lower profit margins and, therefore, represent unfavorablemarket conditions.  This is especiallytrue when market conditions do not allow us to pass along increased corn coststo our customers.  The availability andprice of corn is subject to wide fluctuations due to unpredictable factors suchas weather conditions, farmer planting decisions, governmental policies withrespect to agriculture and international trade and global demand andsupply.  Our weighted average gross corncost for the three months ended September 30, 2010 and 2009 was $3.83 and$4.10 per bushel, respectively.  For thenine months ended September 30, 2010 and 2009, our weighted average grosscorn cost was $3.67 and $4.17 per bushel, respectively.

 

Wehave firm-price purchase commitments with some of our corn suppliers underwhich we agree to buy corn at a price set in advance of the actual delivery ofthat corn to us.  At September 30,2010, we had commitments to purchase approximately 2.7 million bushels of cornthrough January 2011 at an average price of $4.76 per bushel from thesecorn suppliers.  Under thesearrangements, we assume the risk of a price decrease in the market price ofcorn between the time this price is fixed and the time the corn isdelivered.  We have elected to accountfor these transactions as normal purchases under ASC 815, and accordingly, havenot marked these transactions to market.

 

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Inorder to reduce our market exposure to price decreases, we have in the past, atthe time we enter into a firm-price purchase commitment, entered into commodityfutures contracts to sell a certain amount of corn at the then-current pricefor delivery to the counterparty at a later date.  When we have these types of commodity futurescontracts, we account for them under ASC 815. Such futures contracts are not designated as hedges and, therefore, aremarked to market each period, with corresponding gains and losses recorded inother non-operating income.  The fairvalue of these derivative assets, if any, is recognized in other current assetsin the Condensed Consolidated Balance Sheet, net of any cash received from thebrokers.

 

Wehave also, in the past, entered into commodity futures contracts in connectionwith the purchase of corn to reduce our risk of future price increases.  We accounted for these transactions under ASC815.  These futures contracts were notdesignated as hedges and, therefore, were marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of these derivative contractswould be recognized in other current assets in the Condensed ConsolidatedBalance Sheet, net of any cash received from the brokers.

 

Wesometimes enter into firm-price purchase commitments with some of our naturalgas suppliers under which we agree to buy natural gas at a price set in advanceof the actual delivery of that natural gas to us.  Under these arrangements, we assume the riskof a price decrease in the market price of natural gas between the time thisprice is fixed and the time the natural gas is delivered.  At September 30, 2010, we did not haveany commitments to purchase natural gas in advance at prices other than atmarket.  We account for thesetransactions as normal purchases under ASC 815, and accordingly, do not markthese transactions to market.

 

Weare also subject to market risk with respect to ethanol pricing.  Our ethanol sales are priced using contractsthat can either be fixed, based upon the price of wholesale gasoline plus orminus a fixed amount, or based upon a market price at the time of shipment.  We sometimes fix the price at which we sellethanol using fixed price physical delivery contracts.  At September 30, 2010, we had nooutstanding contracts to sell ethanol at fixed prices.  These normal sale transactions would not bemarked to market.

 

Wemay also sell forward ethanol using contracts where the price is determined ata point in the future based upon an index plus or minus a fixed amount.  At September 30, 2010, we had nocontracts for the sale of ethanol using wholesale gasoline as an index plus afixed spread.  Under these arrangements,we assume the risk of a price decrease in the market price of gasoline.  In order to reduce our market exposure toprice decreases, at the time we enter into a firm sales commitment, we may alsoenter into commodity forward contracts to sell a like amount of gasoline at thethen-current price for delivery to the counterparty at a later date.  We account for these transactions under ASC815.  These forward contracts are notdesignated as hedges and, therefore, are marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of these derivativeliabilities is recognized in other current liabilities in the CondensedConsolidated Balance Sheet, net of any cash paid to brokers.  We did not have any of this type ofderivative positions at September 30, 2010.

 

***Material Limitations***

 

Thedisclosures with respect to the above noted risks do not take into account theunderlying commitments or anticipated transactions.  If the underlying items were included in theanalysis, the gains or losses on the futures contracts may be offset.  Actual results will be determined by a numberof factors that are not generally under our control and could varysignificantly from those factors disclosed.

 

Weare exposed to credit losses in the event of nonperformance by counterpartieson the above instruments, as well as credit or performance risk with respect toour hedged commitments. Although nonperformance is possible, we do notanticipate nonperformance by any of these parties.

 

**Item 4T.                Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Underthe supervision of and with the participation of management, including ourChief Executive Officer, Thomas Manuel, and our Chief Financial Officer, JohnCastle, the Company carried out an evaluation of the

 

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effectivenessof our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of the end of the period coveredby this report.  Based upon thatevaluation, Messrs. Manuel and Castle have concluded that, as of the endof the period covered by this report, the Company’s disclosure controls andprocedures have been properly designed and are effective to provide reasonableassurance that information required to be disclosed in the reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSEC.  These disclosure controls and proceduresinclude, without limitation, controls and procedures designed to providereasonable assurance that information required to be disclosed in such reportsis accumulated and communicated to our management, includingMessrs. Manuel and Castle, as appropriate to allow timely decisions regardingthe required disclosure.  The design ofany system of controls is based in part upon certain assumptions about thelikelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goal underall potential future conditions, regardless of how remote.

 

**Changesin Internal Control over Financial Reporting**

 

Basedupon evaluation by our management, which was conducted with the participationof Messrs. Manuel and Castle, there has been no change in our internalcontrol over financial reporting during the period covered by this report thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II.****                                            ****OTHERINFORMATION**

 

**Item 1.****                                                        ****LegalProceedings**

 

On November 6,2008, the Company commenced an action against JPMorgan in the TenthJudicial Circuit in Tazewell County, Illinois.  The Company’s complaint relates to lossesincurred of approximately $31.6 million as a result of investments in StudentLoan Auction Rate Securities purchased through JPMorgan.  At this time, we cannot be certain as to theoutcome of this litigation.

 

We are from time totime involved in various legal proceedings, including legal proceedingsrelating to the extensive environmental laws and regulations that apply to ourfacilities and operations.  We are notinvolved in any legal proceedings that we believe could have a material adverseeffect upon our business, operating results or financial condition.

 

**Item 1A.****                                               ****RiskFactors**

 

None

 

**Item 2.****                                                        ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

None

 

**Item 3.****                                                        ****Defaults Upon SeniorSecurities**

 

None

 

**Item 4.****                                                        ****Removed and Reserved**

 

None

 

**Item 5.****                                                        ****OtherInformation**

 

None

 

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**Item 6.**                                                         **Exhibits**

 

(a)         Exhibits

 

2.1                               Asset PurchaseAgreement, dated August 6, 2010, between New CIE Energy Opco, LLC andAventine Renewable Energy Holdings, Inc. (incorporated by reference to Exhibit 2.2of Aventine’s Registration Statement on Form S-1 (Reg. No. 333-169301)filed on September 10, 2010).

 

4.1                               RegistrationRights Agreement, dated as of August 19, 2010, by and among AventineRenewable Energy Holdings, Inc., Aventine Renewable Energy, Inc.,Aventine Renewable Energy—Aurora West, LLC, Nebraska Energy, L.L.C., AventineRenewable Energy—Mt. Vernon, LLC, Aventine Power, LLC, Brigade CapitalManagement, LLC and Senator Investment Group LP (incorporated by reference to Exhibit 4.5of Aventine’s Registration Statement on Form S-1 (Reg. No. 333-169301)filed on September 10, 2010).

 

10.1                        First Amendmentto Revolving Credit and Security Agreement, dated as of August 6, 2010,among Aventine Renewable Energy Holdings, Inc., Aventine RenewableEnergy—Aurora West, LLC, Aventine Renewable Energy, Inc., AventineRenewable Energy—Mt. Vernon, LLC, Aventine Power, LLC and Nebraska Energy,L.L.C., as borrowers, and PNC Bank, National Association, as lender and asagent (incorporated by reference to Exhibit 10.2 of Aventine’sRegistration Statement on Form S-1 (Reg. No. 333-169301) filed on September 10,2010).

 

10.2                        BackstopCommitment Agreement, dated August 2, 2010, among Aventine RenewableEnergy Holdings, Inc., Aventine Renewable Energy, Inc., AventineRenewable Energy—Aurora West, LLC, Aventine Renewable Energy—Mt. Vernon, LLC,Aventine Power, LLC and Nebraska Energy, L.L.C., Brigade Capital Management,LLC and Senator Investment Group LP (incorporated by reference to Exhibit 10.22of Aventine’s Registration Statement on Form S-1 (Reg. No. 333-169301)filed on September 10, 2010).

 

31.1                        Certification of the ChiefExecutive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of2002.*

 

31.2                        Certification of the ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.*

 

32.1                        Certification of the ChiefExecutive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.†

 

32.2                        Certification of the ChiefFinancial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.†

 

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*                                         Filed herewith.

†                                         Furnishedherewith.

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned theretoduly authorized.

 
|                          |   | AVENTINE  RENEWABLE ENERGY HOLDINGS, INC. |
|-------------------------------|--------|------------------------------------------------|
|                          |   |                                           |
|                          |   |                                           |
| Dated:  November 9, 2010 |   | By:                                            | /s/  William J. Brennan |
|                          |   | Name:                                          | William  J. Brennan |
|                          |   | Title:                                         | Chief  Accounting and Compliance Officer (duly authorized officer and principal  accounting officer) |

 

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