**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

# ** **

# **FORM 10-Q**

 
| **x**      | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly  period ended September 30, 2007**                                                                                                                                                                                       |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                            |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                            |
| **o**      | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition  period from                    to                 .** |

 

**COMMISSION FILE NUMBER 001-32922**

 

 

**AVENTINE RENEWABLE ENERGY HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **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, includingArea Code)

 

Indicate by checkmark whether the registrant (1) has filed all reportsrequired to be 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 to suchfiling requirements for the past 90 days.

 

YES  x       NO  o

 

Indicate by checkmark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one): 

Large acceleratedfiler  o             Acceleratedfiler  o             Non-acceleratedfiler  x

 

Indicate by checkmark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). YES  o     NO  x

 

Indicate the number of shares outstanding ofeach class of Common Stock, as of the latest practicable date

 

| **Class**                       | ** ** | **Outstanding as of November 5,  2007** |
|---------------------------------|------------|-----------------------------------------|
| Common Stock, $0.001 Par  Value |       | 41,982,538 Shares                       |

 

----

 

# **FORM10-Q**

 

**QUARTERLY REPORT**

** **

**TABLE OF CONTENTS**

**                                                                                                                                                                                                               **

###### ** **

 
|         |   |                                                                                                                               |   | **Page No.** |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|
|         |   | **PART  I**                                                                                                                        |   |         |
|         |   |                                                                                                                               |   |         |
| Item 1.      |   | Financial Statements                                                                                                               |   |         |
|         |   |                                                                                                                               |   |         |
|         |   | Condensed Consolidated Statements of Operations  (Unaudited) — Three and nine month periods ended September 30, 2007 and 2006 |   | 1            |
|         |   |                                                                                                                               |   |         |
|         |   | Condensed  Consolidated Balance Sheets — September 30, 2007 (Unaudited) and December 31,  2006                                |   | 2            |
|         |   |                                                                                                                               |   |         |
|         |   | Condensed  Consolidated Statements of Cash Flows (Unaudited) — Nine months ended  September 30, 2007 and 2006                 |   | 3            |
|         |   |                                                                                                                               |   |         |
|         |   | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                    |   | 4            |
|         |   |                                                                                                                               |   |         |
|         |   |                                                                                                                               |   |         |
| Item  2.     |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                        |   | 17           |
|         |   |                                                                                                                               |   |         |
| Item 3.      |   | Quantitative and Qualitative Disclosures About Market  Risk                                                                        |   | 30           |
|         |   |                                                                                                                               |   |         |
| Item  4.     |   | Internal  Control Over Financial Reporting                                                                                         |   | 32           |
|         |   |                                                                                                                               |   |         |
| Item  4T.    |   | Internal  Control Over Financial Reporting                                                                                         |   | 32           |
|         |   |                                                                                                                               |   |         |
| **PART  II** |
|         |   |                                                                                                                               |   |         |
| Item 1.      |   | Legal Proceedings                                                                                                                  |   | 33           |
|         |   |                                                                                                                               |   |         |
| Item 1A.     |   | Risk Factors                                                                                                                       |   | 33           |
|         |   |                                                                                                                               |   |         |
| Item 2.      |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                       |   | 33           |
|         |   |                                                                                                                               |   |         |
| Item 3.      |   | Default Upon  Senior Securities                                                                                                    |   | 33           |
|         |   |                                                                                                                               |   |         |
| Item 4.      |   | Submission of  Matters to a Vote of Security Holders                                                                               |   | 33           |
|         |   |                                                                                                                               |   |         |
| Item 5.      |   | Other Information                                                                                                                  |   | 33           |
|         |   |                                                                                                                               |   |         |
| Item 6.      |   | Exhibits                                                                                                                           |   | 34           |

 

----

 

**PART I.                 FINANCIAL INFORMATION**

**Item 1.                    Financial Statements**

 

 

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

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                              | ** ** | **Three months ended** |         | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|--------------|-----------------------|------------|
| ** **                                                              | ** ** | **September 30,**      |         | **September 30,**     | ** ** |
| **(In thousands except per share  amounts)**                            | ** ** | **2007**               | ** **   | **2006**              |       | **2007** | ** ** | **2006** | ** ** |
| * *                                                                | * *   | * *               | *** *** | * *              | * *   | * * | *** *** | * * | * * |
| Net sales                                                               | ** ** | **$**                  | **360,674**  | ** **            | $          | 407,053 |   | **$** | **1,192,250** | ** ** | $ | 1,163,478 |   |
| Cost of goods sold                                                      | ** ** | **362,401**            | ** **   | 379,708               |       | **1,138,133** | ** ** | 1,055,330 |   |
| Gross profit (loss)                                                     | ** ** | **(1,727**             | **)**        | 27,345                |       | **54,117** | ** ** | 108,148 |   |
| Selling, general and administrative expenses                            | ** ** | **9,384**              | ** **   | 7,385                 |       | **27,761** | ** ** | 21,023 |   |
| Other (income)                                                          | ** ** | **(169**               | **)**        | (616                  | )          | **(847** | **)** | (1,223 | ) |
| Operating income (loss)                                                 | ** ** | **(10,942**            | **)**        | 20,576                |       | **27,203** | ** ** | 88,348 |   |
| Other income (expense):                                                 |       |                   | ** **   |                  |       |   | ** ** |   |   |
| Interest income                                                         | ** ** | **3,576**              | ** **   | 1,449                 |       | **9,111** | ** ** | 3,333 |   |
| Interest expense                                                        | ** ** | **(5,359**             | **)**        | (747                  | )          | **(12,716** | **)** | (9,348 | ) |
| Loss on early extinguishment of debt                                    | ** ** | **—**             | ** **   | (14,448               | )          | **—** | ** ** | (14,448 | ) |
| Other non-operating income (loss)                                       | ** ** | **(953**               | **)**        | 2,348                 |       | **5,055** | ** ** | 4,802 |   |
| Minority interest                                                       | ** ** | **(103**               | **)**        | (876                  | )          | **(1,346** | **)** | (3,793 | ) |
| Income (loss) before income taxes                                       | ** ** | **(13,781**            | **)**        | 8,302                 |       | **27,307** | ** ** | 68,894 |   |
| Income tax expense (benefit)                                            | ** ** | **(16,776**            | **)**        | 3,015                 |       | **(3,235** | **)** | 26,766 |   |
| Net income                                                              | ** ** | **$**                  | **2,995**    | ** **            | $          | 5,287 |   | **30,542** | ** ** | $ | 42,128 |   |
|                                                                    |       |                   | ** **   |                  |       |   | ** ** |   |   |
| **Per share data:**                                                     | * *   | * *               | *** *** | * *              | * *   | * * | *** *** | * * | * * |
| Income per common share — basic:                                   | ** ** | **$**                  | **0.07**     | ** **            | $          | 0.13 |   | **$** | **0.73** | ** ** | $ | 1.13 |   |
| Basic weighted average number of common shares                          | ** ** | **41,949**             | ** **   | 41,541                |       | **41,891** | ** ** | 37,279 |   |
| * *                                                                | * *   | * *               | *** *** | * *              | * *   | * * | *** *** | * * | * * |
| Income per common share — diluted:                                 | ** ** | **$**                  | **0.07**     | ** **            | $          | 0.12 |   | **$** | **0.72** | ** ** | $ | 1.09 |   |
| Diluted weighted average number of common and common  equivalent shares | ** ** | **42,385**             | ** **   | 42,691                |       | **42,497** | ** ** | 38,581 |   |

 

*The accompanying notes are an integral part ofthese condensed consolidated financial statements.*

* *

 

1

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** **

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

**Condensed Consolidated BalanceSheets**

 
| **(In thousands except share  amounts)**                                                                                                                                                                                                                                                                                             | *** *** | **September 30,  2007  (Unaudited)** | ** **  | **December 31,   2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------------------------|-------------|-------------------------|------------|
|                                                                                                                                                                                                                                                                                                                                 | ** **   | ** **                           | ** **  | ** **              | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                           | ** **   | ** **                           | ** **  | ** **              | ** ** |
| Current assets                                                                                                                                                                                                                                                                                                                       |         |                                 |        |                    |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                            | ** **   | **$**                                | **39,424**  |                    | $          | 29,791 |   |
| Short-term investments                                                                                                                                                                                                                                                                                                               | ** **   | **282,868**                          |        | 98,925                  |       |
| Accounts receivable                                                                                                                                                                                                                                                                                                                  | ** **   | **47,800**                           |        | 79,729                  |       |
| Inventories                                                                                                                                                                                                                                                                                                                          | ** **   | **60,787**                           |        | 67,051                  |       |
| Income tax receivable                                                                                                                                                                                                                                                                                                                | ** **   | **14,186**                           |        | 6,446                   |       |
| Prepaid expenses and other                                                                                                                                                                                                                                                                                                           | ** **   | **5,795**                            |        | 4,549                   |       |
| Total current assets                                                                                                                                                                                                                                                                                                                 | ** **   | **450,860**                          |        | 286,491                 |       |
|                                                                                                                                                                                                                                                                                                                                 |         |                                 |        |                    |       |
| Property, plant and equipment, net                                                                                                                                                                                                                                                                                                   | ** **   | **111,602**                          |        | 40,962                  |       |
| Construction in process                                                                                                                                                                                                                                                                                                              | ** **   | **144,634**                          |        | 74,683                  |       |
| Net deferred tax asset                                                                                                                                                                                                                                                                                                               | ** **   | **2,109**                            |        | **—**              |       |
| Other assets                                                                                                                                                                                                                                                                                                                         | ** **   | **13,762**                           |        | 6,000                   |       |
| Total assets                                                                                                                                                                                                                                                                                                                         | ** **   | **$**                                | **722,967** |                    | $          | 408,136 |   |
|                                                                                                                                                                                                                                                                                                                                 | ** **   | ** **                           |        |                    |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                        | ** **   | ** **                           | ** **  | ** **              | ** ** |
| Current liabilities                                                                                                                                                                                                                                                                                                                  |         |                                 |        |                    |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                     | ** **   | **$**                                | **48,207**  |                    | $          | 77,442 |   |
| Accrued liabilities                                                                                                                                                                                                                                                                                                                  | ** **   | **3,952**                            |        | 3,679                   |       |
| Accrued interest payable                                                                                                                                                                                                                                                                                                             | ** **   | **15,333**                           |        | **—**              |       |
| Other current liabilities                                                                                                                                                                                                                                                                                                            | ** **   | **1,771**                            |        | 2,123                   |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                            | ** **   | **69,263**                           |        | 83,244                  |       |
|                                                                                                                                                                                                                                                                                                                                 |         |                                 |        |                    |       |
| Senior unsecured 10% notes due April 2017                                                                                                                                                                                                                                                                                            | ** **   | **300,000**                          | ** **  | **—**              | ** ** |
| Minority interest                                                                                                                                                                                                                                                                                                                    | ** **   | **9,840**                            |        | 10,221                  |       |
| Net deferred tax liability                                                                                                                                                                                                                                                                                                           | ** **   | **—**                           |        | 6,104                   |       |
| Other long-term liabilities                                                                                                                                                                                                                                                                                                          | ** **   | **3,971**                            |        | 4,404                   |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                    | ** **   | **383,074**                          |        | 103,973                 |       |
|                                                                                                                                                                                                                                                                                                                                 |         |                                 |        |                    |       |
| Stockholders’ equity                                                                                                                                                                                                                                                                                                            |         |                                 |        |                    |       |
| Common stock, par value $0.001 per share; 185,000,000  shares authorized; 41,972,538 and 41,782,276 shares issued and outstanding as  of September 30, 2007 and December 31, 2006, respectively, net of 21,300,325  shares held in treasury as of September 30, 2007 and 21,229,025 shares held  in treasury as of December 31, 2006 | ** **   | **42**                               |        | 42                      |       |
| Preferred stock, 50,000,000 shares authorized, no  shares issued or outstanding                                                                                                                                                                                                                                                      | ** **   | **—**                           | ** **  | **—**              | ** ** |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                           | ** **   | **279,222**                          |        | 274,307                 |       |
| Retained earnings                                                                                                                                                                                                                                                                                                                    | ** **   | **61,678**                           |        | 30,888                  |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                 | ** **   | **(1,049**                           | )           | (1,074                  | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                                      | ** **   | **339,893**                          |        | 304,163                 |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                      | ** **   | **$**                                | **722,967** |                    | $          | 408,136 |   |

 

*The accompanying notes are an integral part ofthese condensed consolidated financial statements.*

 

 

2

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

**Condensed Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(In thousands)**                                                                 | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | ** **                          | ** ** | ** ** | ** ** |
| **Operating Activities**                                                           | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Net income                                                                         | ** ** | **$**                               | **30,542** |   | $ | 42,128 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                      | ** ** | **9,765**                           |       | 3,529 |   |
| Lower of cost or market adjustment related to  inventory                           | ** ** | **1,600**                           | ** ** | **—** | ** ** |
| Loss on early extinguishment of debt                                               | ** ** | **—**                          |       | 14,448 |   |
| Minority interest                                                                  | ** ** | **1,346**                           |       | 3,793 |   |
| Stock-based compensation expense                                                   | ** ** | **5,258**                           |       | 5,669 |   |
| Deferred income tax                                                                | ** ** | **(7,939**                          | )          | (359 | ) |
| Other                                                                              | ** ** | **—**                          |       | 838 |   |
| Changes in operating assets and liabilities:                                       |       |                                |       |   |   |
| Accounts receivable, net                                                           | ** ** | **31,929**                          |       | (10,082 | ) |
| Inventories                                                                        | ** ** | **4,664**                           |       | (36,669 | ) |
| Accounts payable                                                                   | ** ** | **(29,235**                         | )          | 6,663 |   |
| Other changes in operating assets and liabilities                                  | ** ** | **5,835**                           |       | (8,275 | ) |
| Net cash provided by operating activities                                          | ** ** | **53,765**                          |       | 21,683 |   |
|                                                                               | ** ** | ** **                          |       |   |   |
| **Investing Activities**                                                           | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Additions to property, plant and equipment, net                                    | ** ** | **(149,898**                        | )          | (51,981 | ) |
| Investment in short-term securities                                                | ** ** | **(183,943**                        | )          | (90,925 | ) |
| Increase in restricted cash for investing activities                               | ** ** | **—**                          |       | (1,257 | ) |
| Release of restricted cash                                                         | ** ** | **—**                          |       | 29,762 |   |
| Use of restricted cash for plant expansion                                         | ** ** | **—**                          |       | 31,857 |   |
| Net cash used for investing activities                                             | ** ** | **(333,841**                        | )          | (82,544 | ) |
|                                                                               | ** ** | ** **                          |       |   |   |
| **Financing Activities**                                                           | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Proceeds from issuance of senior unsecured notes                                   | ** ** | **300,000**                         | ** ** | **—** | ** ** |
| Purchase of treasury stock                                                         | ** ** | **(991**                            | **)**      | ** ** | ** ** |
| Payment of debt issuance costs                                                     | ** ** | **(8,220**                          | **)**      | **—** | ** ** |
| Proceeds from stock option exercises                                               | ** ** | **508**                             |       | 221 |   |
| Tax benefit of stock option exercises                                              | ** ** | **139**                             |       | 4,034 |   |
| Repayment of senior secured notes, including premium                               | ** ** | **—**                          |       | (163,618 | ) |
| Net proceeds from the sale of common stock                                         | ** ** | **—**                          |       | 260,915 |   |
| Net repayments on revolving credit facilities                                      | ** ** | **—**                          |       | (1,514 | ) |
| Distributions to minority shareholders                                             | ** ** | **(1,727**                          | )          | (2,590 | ) |
| Net cash provided by financing activities                                          | ** ** | **289,709**                         |       | 97,448 |   |
| Net increase in cash and cash equivalents                                          | ** ** | **9,633**                           |       | 36,587 |   |
| Cash and cash equivalents at beginning of period                                   | ** ** | **29,791**                          |       | 3,750 |   |
| Cash and cash equivalents at end of period                                         | ** ** | **$**                               | **39,424** |   | $ | 40,337 |   |

 

*The accompanying notes are an integral part ofthese condensed consolidated financial statements.*

 

 

3

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**Aventine Renewable EnergyHoldings, Inc. and Subsidiaries**

**Notesto Unaudited Condensed Consolidated Financial Statements**

 

 

**(1)           Basis of Reporting for Interim Financial Statements**

 

The accompanying unauditedcondensed consolidated financial statements include the accounts of AventineRenewable Energy Holdings, Inc. and its subsidiaries, which are collectivelyreferred to as “Aventine”,  the “Company”,“we”, “our” or “us”, unless the context otherwise requires.  All significant intercompany transactionshave been eliminated in consolidation.

 

We have prepared the unaudited condensedconsolidated financial statements included herein pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in statements prepared in accordance with generally acceptedaccounting principles have been omitted pursuant to such rules and regulations,although we believe that the disclosures are adequate to make the informationpresented not misleading.  Thesefinancial statements should be read in conjunction with the financialstatements and notes thereto included in our Annual Report on Form 10-K for theyear ended December 31, 2006.

 

The accompanying condensedconsolidated financial statements presented herewith reflect all adjustments(consisting of only normal and recurring adjustments) which, in the opinion ofmanagement, are necessary for a fair presentation of the results of operationsfor the three and nine month periods ended September 30, 2007 and 2006.  The results of operations for interim periodsare not necessarily indicative of results to be expected for an entire year.

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ materially fromthose estimates.

 

As of September 30, 2007, the Company’s Summary ofCritical Accounting Policies for the year ended December 31, 2006, which aredetailed in the Company’s Annual Report on Form 10-K, have not changed fromDecember 31, 2006, except for the adoption of Financial Accounting StandardsBoard (“FASB”) Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*. See Note 12 for additional information regarding the adoption of FIN 48by the Company.

 

**(2)           Recent Accounting Pronouncements**

 

In September 2006, the FASBissued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), *Fair Value Measurements*. SFAS 157 defines fair value, establishes a framework for measuring fairvalue, and expands disclosure about fair value measurements.  The statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The Company is currently evaluating theeffect that the adoption of SFAS 157 will have, if any, on its consolidatedresults of operations, financial position and related disclosures.

 

In February 2007, The FASBissued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), *The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115*.  SFAS No. 159 permits a company to chooseto measure many financial instruments and other items at fair value that arenot currently required to be measured at fair value.  The objective is to improve financialreporting by providing a company with the opportunity to 

 

 

 

4

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mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting provisions. A company shall report unrealized gains and losses on items for whichthe fair value option has been elected in earnings at each subsequent reportingdate.  SFAS No. 159 will be effectivefor fiscal years that begin after November 15, 2007.  We are currently assessing the impact SFASNo. 159 will have on our consolidated financial statements.

 

                In June 2007, the FASB ratifiedthe consensus on Emerging Issues Task Force (“EITF”) Issue No. 06-11, *Accounting for Income Tax Benefits of Dividends on Share-Based PaymentAwards* (“EITF 06-11”).  EITF06-11 requires companies to recognize the income tax benefit realized fromdividends or dividend equivalents that are charged to retained earnings andpaid to employees for non-vested equity-classified employee share-based paymentawards as an increase to additional paid-in capital.  EITF 06-11 is effective for fiscal yearsbeginning after September 15, 2007. While we are currently evaluating the provisions of EITF 06-11, theadoption is not expected to have any significant effect on our consolidatedfinancial position or results of operations.

 

**(3)****                                ****Short-TermSecurities**

 

Wefrom time to time invest a portion of our cash in tax-free municipal auctionrate certificates which generally have contractual maturities of greater than20 years.  We consider these certificatesas held for sale.  These certificates arewidely traded in the public markets and may be sold as needed.  The interest rates on these certificatesreprice every 35 days to the then current market rate.  Generally, the carrying value of thesesecurities approximates the market value, and there is no gain or loss expectedfrom changes in market value.

 

**(4)           Inventories**

 

Inventories are as follows:

 
| **(In thousands)** | ** ** | **September 30,  2007** | ** ** | **December 31,   2006** | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------|------------|
| Finished products  | ** ** | **$**                   | **53,967** |                    | $          | 61,775 |   |
| Work-in-process    | ** ** | **2,228**               |       | 1,106                   |       |
| Raw materials      | ** ** | **2,572**               |       | 2,070                   |       |
| Supplies           | ** ** | **2,020**               |       | 2,100                   |       |
| Totals             | ** ** | **$**                   | **60,787** |                    | $          | 67,051 |   |
|                    |            |                         |            |                         |            |  |  |  |  |

 

**               **In the thirdquarter of 2007, we reduced the value of our inventory for finished ethanol by$1.6 million to reflect a lower of cost or market adjustment.

 

**(5)           Prepaid Expenses and Other**

 

Prepaid expenses and otherare as follows:

 
| **(In thousands)**                   | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Fair value of derivative instruments | ** ** | **$**                   | **2,248**  |                        | $          | 1,503 |   |
| Prepaid insurance                    | ** ** | **1,850**               |       | 1,280                       |       |
| Deferred income taxes current        | ** ** | **1,025**               |       | 1,064                       |       |
| Other prepaid expenses               | ** ** | **672**                 |       | 702                         |       |
| Totals                               | ** ** | **$**                   | **5,795**  |                        | $          | 4,549 |   |

 

 

5

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**(6)           Other Assets**

 

Other assets are as follows:

 
| **(In thousands)**                | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------------------|------------|
| Deferred debt issuance costs      | ** ** | **$**                   | **7,762**  |                   | $          | — |   |
| Investment in marketing alliances | ** ** | **6,000**               |       | 6,000                  |       |
| Totals                            | ** ** | **$**                   | **13,762** |                   | $          | 6,000 |   |
|                                   |            |                         |            |                        |            |  |  |  |  |

 

**(7)           Debt**

 

The following table summarizes long-termdebt:
| **(In thousands)**                        | ** ** | **September 30,   2007** | ** **  | **December 31,   2006** | ** ** |
|-------------------------------------------|------------|--------------------------|-------------|-------------------------|------------|
| Senior unsecured 10% notes due April 2017 | ** ** | **$**                    | **300,000** |                    | $          | — |   |
| Secured revolving credit facility         | ** ** | —                   |        | —                  |       |
|                                      | ** ** | **300,000**              |        | —                  |       |
| Less short-term borrowings                | ** ** | —                   |        | —                  |       |
| Total                                     | ** ** | **$**                    | **300,000** |                    | $          | — |   |
|                                           |            |                          |             |                         |            |  |  |  |  |

 

 

*Liquidity Facility*

 

In March 2007, we enteredinto a new secured revolving credit facility with JPMorgan Chase Bank, N.A. ofup to $200 million, subject to collateral availability, which, under certaincircumstances, can be increased up to $300 million.  Collateral availability is determined via aborrowing base, which includes a percentage of eligible receivables andinventory, and $50 million of property, plant and equipment.  We had no borrowings outstanding under oursecured revolving credit facility at September 30, 2007, and $1.5 million ofstandby letters of credit outstanding, thereby leaving approximately $116.2million in additional borrowing availability under our secured revolving creditfacility as of that date.  A fixed assetcomponent in the amount of $50 million was added to the borrowing base duringthe quarter ended September 30, 2007.

 

*Senior Notes*

 

In March 2007, we issued$300 million aggregate principal amount of senior unsecured 10% fixed-rate notesdue April 2017 (“Notes”).  Our Notes wereissued pursuant to an indenture, dated as of March 27, 2007, between us andWells Fargo Bank, N.A., as trustee.  TheNotes are general unsecured obligations of the Company and certain of itsguarantor subsidiaries, initially limited to $300 million aggregate principalamount.  We may, subject to the covenantsand applicable law, issue additional notes under the indenture.  Any additional notes would be treated as asingle class with the previously issued Notes for all purposes under theindenture.

 

The Notes have interestpayments due semi-annually on April 1 and October 1 of each year, and areredeemable after the dates and at prices (expressed in percentages of principalamount on the redemption date), as set forth below:

 

 

6

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| **Year**                     | ** ** | **Percentage** | ** ** |
|------------------------------|------------|----------------|------------|
| April 1, 2012                |       | 105.000        | %          |
| April 1, 2013                |       | 103.330        | %          |
| April 1, 2014                |       | 101.667        | %          |
| April 1, 2015 and thereafter |       | 100.000        | %          |

 

In addition, at any timeprior to April 1, 2010, we may redeem up to 35% of the principal amount of theNotes from time to time originally issued with the net cash proceeds of one ormore sales of qualifying capital stock of the Company at a redemption price of100% of the principal amount, together with accrued and unpaid interest to theredemption date, provided that at least 65% of the aggregate principal amountof the Notes originally issued remains outstanding immediately after suchredemption and notice of any such redemption is mailed within 60 days of eachsuch sale of capital stock.

 

On August 10, 2007, weexchanged all of the outstanding Notes for an issue of registered unsecuredsenior notes, with terms identical to the Notes.

 

**(8)           Other Long-Term Liabilities**

 

Other long-term liabilitiesare as follows:

 
| **(In thousands)**                 | ** ** | **September 30,   2007** | ** ** | **December 31,   2006** | ** ** |
|------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Accrued pension and postretirement | ** ** | **$**                    | **2,311**  |                    | $          | 2,427 |   |
| Unearned commissions               | ** ** | **1,660**                |       | 1,977                   |       |
| Totals                             | ** ** | **$**                    | **3,971**  |                    | $          | 4,404 |   |

 

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

 

The Company values its share-basedpayment awards using a form of the Black-Scholes option-pricing model (the “Option-PricingModel”).  The determination of fair valueof share-based payment awards on the date of grant using this Option-PricingModel is affected by our stock price as well as the input of other subjectiveassumptions.  The Option-Pricing Modelrequires a number of assumptions, of which the most significant are, expectedstock price volatility, the expected pre-vesting forfeiture rate and theexpected option term (the amount of time from the grant date until the optionsare exercised or expire).  Expectedvolatility is normally calculated based upon actual historical stock pricemovements over the expected option term. Since we have no long-term history of stock price volatility as a publiccompany, we calculate volatility by considering, among other things, theexpected volatilities of public companies engaged in similar industries.  Pre-vesting forfeitures are estimated using a3% forfeiture rate.  The expected optionterm is calculated using the “simplified” method permitted by Staff AccountingBulletin No. 107.  Our options havecharacteristics significantly different from those of traded options, andchanges in the assumptions can materially affect the fair value estimates.

 

Beginning in 2007, theCompany commenced an ongoing long-term incentive program under the AventineRenewable Energy Holdings, Inc. 2003 Stock Incentive Plan, as amended (the “Plan”).  It is anticipated that this program willprovide regular annual grants of performance shares.  Performance shares are stock units that willbe converted to common shares, to the extent earned, at the end of a three-yearperformance cycle.  The first performancecycle began on January 1, 2007, and will end on December 31, 2009.  Under the performance share program, eachparticipant is given a target award expressed as a number of shares, with apayout opportunity ranging from 0% to 150% of the target, depending on theperformance relative to pre-determined goals. The performance goals for the January 

 

 

7

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1, 2007 to December 31, 2009 performancecycle relate to the growth of the Company as measured by actual equity gallonsproduced.  On May 25, 2007, the Companyissued 94,500 performance shares at the target award level to variousparticipants under the Plan.  Under FAS123R, an accounting estimate of the number of these shares that are expected tovest has been made and are being expensed utilizing the grant-date fair valueof the shares from the date of grant through the end of the performance cycleperiod.  Any future changes to theestimate will be reflected in stock-based compensation expense in the periodthe estimate change is made.

 

Pre-tax stock-basedcompensation expense for the three month period ended September 30, 2007 was$1.9 million, of which $0.1 million was charged to cost of goods sold and $1.8million was charged to selling, general and administrative expense.  This expense reduced earnings per share by$0.03 per basic and diluted share for the quarter ended September 30,2007.  For the three month period endedSeptember 30, 2006, pre-tax stock-based compensation expense was $2.6 million,of which $0.1 million was charged to cost of goods sold and $2.5 million wascharged to selling, general and administrative expense.  This expense reduced earnings per share by$0.04 per basic and diluted share for the quarter ended September 30, 2006.  For the nine month period ended September 30,2007, pre-tax stock-based compensation expense was $5.3 million, of which $0.1million was charged to cost of goods sold and $5.2 million was charged toselling, general and administrative expense. This expense reduced earnings per share for the nine month period endedSeptember 30, 2007 by $0.08 per basic and diluted share.   For the nine month period ended September30, 2006, pre-tax stock-based compensation expense was $5.7 million, of which$0.1 million was charged to cost of goods sold and $5.6 million was charged toselling, general and administrative expense. This expense reduced earnings per share for the nine month period endedSeptember 30, 2006 by $0.09 per basic and diluted share.  The Company recognized a tax benefit on itscondensed consolidated statement of income from stock-based compensationexpense in the amount of $0.7 million and $1.0 million for the three monthperiods ended September 30, 2007 and 2006, respectively, and in the amount of$2.1 million and $2.2 million for the nine month periods ended September 30,2007 and 2006, respectively.  The Companyrecorded pre-tax stock-based compensation expense for the three and nine monthperiods ended September 30, 2007 and 2006 as follows:

 
| ** **                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                 | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock-based compensation expense: |       |                                  |       |                                 |       |   |   |   |   |
| Non-qualified stock options       | ** ** | **$**                                 | **1.7**    |                                 | $          | 2.6 | ** ** | **$** | **4.8** |   | $ | 5.6 |   |
| Restricted stock                  | ** ** | **0.1**                               |       | —                               | ** ** | **0.3** |   | 0.1 |   |
| Restricted stock units            | ** ** | —                                |       | —                               | ** ** | **0.1** |   | — |   |
| Long-term incentive stock plan    | ** ** | **0.1**                               |       | —                               | ** ** | **0.1** |   | — |   |
|                                   |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

As of September 30, 2007 and2006, the Company had not yet recognized compensation expense on the followingnon-vested awards:

 
| ** **                     | ** ** | **2007**                         | ** **     | **2006**                                                   | ** ** |
|--------------------------------|------------|----------------------------------|----------------|------------------------------------------------------------|------------|
| **(in millions)**              | ** ** | **Non-recognized  Compensation** | ** **     | **Weighted Average Remaining  Recognition Period (years)** | ** ** | **Non-recognized  Compensation** | ** ** | **Weighted Average  Remaining Recognition  Period (years)** | ** ** |
| Non-qualified options          | ** ** | **$**                            | **19.6**       | ** **                                                 | **2.4**    |   | $ | 21.7 |   | 3.1 |   |
| Restricted stock               | ** ** | **1.1**                          | ** **     | **4.1**                                                    |       | 0.2 |   | 2.6 |   |
| Restricted stock units         | ** ** | **0.2**                          | ** **     | **1.0**                                                    |       | — |   | — |   |
| Long-term incentive stock plan | ** ** | **1.4**                          | ** **     | **1.7**                                                    |       | — |   | — |   |
| Total                          | ** ** | **$**                            | ** 22.3** | ** **                                                 | **2.4**    |   | $ |  21.9 |   | 3.1 |   |

 

 

8

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The Company granted stockoptions during the quarters ended September 30, 2007 and 2006.  The determination of the fair value of thestock option awards, using the Option-Pricing Model, incorporated theassumptions in the following table for stock options granted during the threemonth periods ended September 30, 2007 and 2006.  The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of grant over the expected term.  Expected volatility is calculated byconsidering, among other things, the expected volatilities of public companiesengaged in similar industries.  Theexpected option term is calculated using the “simplified” method permitted bySAB 107.  Assumptions for options grantedin the three month period ending September 30, 2007 and 2006 are as follows:

 
| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Expected stock price volatility | ** ** | **58.0** | %          | 58.0     | %          |
| Expected life (in years)        | ** ** | **6.5**  |       | 6.5      |       |
| Risk-free interest rate         | ** ** | **4.92** | %          | 5.2      | %          |
| Expected dividend yield         | ** ** | **0.0**  | %          | 0.0      | %          |
| Weighted average fair value     | ** ** | **$**    | **9.97**   |     | $          | 26.47 |   |
|                                 |            |          |            |          |            |  |  |

 

The following tablesummarizes stock options outstanding and changes during the nine month periodended September 30, 2007:

 
| ** **                                    | ** ** | **Shares  (in thousands)** | ** ** | **Weighted   Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life****(years)** | ** ** | **Aggregate   Intrinsic Value****(in thousands)** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| Options outstanding — January 1, 2007    |       | 3,265                      |       | $                                       | 6.57       |                                              | 8.1        |                                              | $          | — |   |
| Granted                                       |       | 480                        |       | 16.00                                   |       | 9.6                                               |       | —                                            |       |
| Exercised                                     |       | (191                       | )          | 2.66                                    |       | —                                            |       | —                                            |       |
| Cancelled or expired                          |       | (28                        | )          | 4.35                                    |       | —                                            |       | —                                            |       |
| Options outstanding — September 30, 2007 |       | 3,526                      |       | $                                       | 8.08       |                                              | 7.6        |                                              | $          | 8,780 |   |
| Options exercisable — September 30, 2007 |       | 1,138                      |       | $                                       | 3.58       |                                              | 6.6        |                                              | $          | 7,955 |   |

 

The range of exercise pricesof the exercisable options and outstanding options at September 30, 2007 are asfollows:

 
| **Weighted Average Exercise Price** | ** ** | **Number of   Exercisable   Options****(in  thousands)** | ** ** | **Number of   Outstanding   Options****(in  thousands)** | ** ** | **Weighted   Average   Remaining   Life****(years)** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| $0.23                               |       | 696                                                      |       | 1,016                                                    |       | 5.8                                                  |       |
| $2.36 - $2.92                       |       | 285                                                      |       | 744                                                      |       | 7.7                                                  |       |
| $4.35                               |       | 31                                                       |       | 616                                                      |       | 8.0                                                  |       |
| $15.26 - $17.29                     |       | —                                                   |       | 480                                                      |       | 9.6                                                  |       |
| $22.15 - $22.50                     |       | 118                                                      |       | 630                                                      |       | 8.5                                                  |       |
| $43.00                              |       | 8                                                        |       | 40                                                       |       | 8.8                                                  |       |
| Totals                              |       | 1,138                                                    |       | 3,526                                                    |       | 7.6                                                  |       |

 

Restricted stock awardactivity for the nine months ended September 30, 2007 is summarized below:

 

 

9

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| ** **                                                  | ** ** | **Shares  (in thousands)** | ** ** | **Weighted   Average Grant   Date Fair   Value per   Award** | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|--------------------------------------------------------------|------------|
| Unvested restricted stock awards — January 1, 2007     |       | 8.1                        |       | $                                                            | 27.92      |   |
| Granted                                                     |       | 74.7                       |       | 15.54                                                        |       |
| Vested                                                      |       | 2.7                        |       | 27.92                                                        |       |
| Cancelled or expired                                        |       | —                     |       | —                                                       |       |
| Unvested restricted stock awards — September 30,  2007 |       | 80.1                       |       | $                                                            | 16.74      |   |

 

**               **Restrictedstock units represent the right to receive a share of stock in the future,provided that the restrictions and conditions designated have beensatisfied.  Restricted stock unit awardactivity for the nine months ended September 30, 2007 is summarized below:

 
| ** **                                                    | ** ** | **Shares  (in thousands)** | ** ** | **Weighted   Average Grant   Date Fair   Value per   Award** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|--------------------------------------------------------------|------------|
| Unvested Restricted stock unit awards — January 1,  2007 |       | —                     |       | $                                                            | —     |   |
| Granted                                                       |       | 18.0                       |       | $                                                            | 15.85      |   |
| Vested                                                        |       | —                     |       | —                                                       |       |
| Cancelled or expired                                          |       | —                     |       | —                                                       |       |
| Restricted stock unit awards — September 30, 2007        |       | 18.0                       |       | $                                                            | 15.85      |   |

 

** (10)        InterestExpense**

 

The following tablesummarizes interest expense:

 
| ** **                                   | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                           | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest expense                             | ** ** | **$**                                 | **7,500**  |                                 | $          | 989 | ** ** | **$** | **15,336** |   | $ | 10,351 |   |
| Amortization of deferred debt issuance costs | ** ** | **229**                               |       | —                               | ** ** | **458** |   | — |   |
| Capitalized interest                         | ** ** | **(2,370**                            | )          | (242                                 | **)**      | **(3,078** | ) | (1,003 | ) |
| Interest expense, net                        | ** ** | **$**                                 | **5,359**  |                                 | $          | 747 | ** ** | **$** | **12,716** |   | $ | 9,348 |   |

 

**(11)         Pension Expense**

###  

*Defined Contribution Plans*

 

We have 401(k) planscovering substantially all of our employees. We recorded expense with respect to these plans for the three monthperiods ended September 30, 2007 and 2006 of $0.2 million and $0.3 million,respectively, and expense of $0.9 million for the nine month periods endedSeptember 30, 2007 and 2006. Contributions made under our defined contribution plans include a match,at the Company’s discretion, of employee contributions to the plans.

 

 

10

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*Qualified Retirement Plan*

 

The Company provides anon-contributory qualified defined benefit pension plan for its unionizedemployees at our Pekin, IL production facilities.  The following table summarizes the componentsof net periodic pension cost for the qualified pension plan:

 
| ** **                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(In thousands)**                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                        | ** ** | **$**                                 | **88**     |                                 | $          | 71 | ** ** | **$** | **264** |   | $ | 214 |   |
| Interest cost                       | ** ** | **124**                               |       | 107                                  | ** ** | **372** |   | 322 |   |
| Expected return on plan assets      | ** ** | **(180**                              | **)**      | (128                                 | **)**      | **(540** | ) | (384 | ) |
| Amortization of prior service costs | ** ** | **11**                                |       | —                               | ** ** | **33** |   | — |   |
| Amortization of net actuarial loss  | ** ** | **6**                                 |       | 12                                   | ** ** | **18** |   | 36 |   |
| Net periodic pension cost           | ** ** | **$**                                 | **49**     |                                 | $          | 62 | ** ** | **$** | **147** |   | $ | 188 |   |

* *

*Postretirement Benefit Obligation*

 

We sponsor a healthcare planthat provides postretirement medical benefits to certain “grandfathered”unionized employees.  The plan iscontributory, with contributions required at the same rate as activeemployees.  Benefit eligibility under theplan terminates at age 65.

 

The following tablesummarizes the components of the net periodic costs for postretirementbenefits:

 
| ** **                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(In thousands)**                 | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                       | ** ** | **$**                                 | **38**     |                                 | $          | 38 | ** ** | **$** | **114** |   | $ | 114 |   |
| Interest cost                      | ** ** | **34**                                |       | 30                                   | ** ** | **102** |   | 91 |   |
| Amortization of prior service cost |       | —                                |       | 3                                    |       | — |   | 8 |   |
| Net periodic postretirement cost   | ** ** | **$**                                 | **72**     |                                 | $          | 71 | ** ** | **$** | **216** |   | $ | 213 |   |

 

 

**(12)        ****Income Taxes**

 

Our federal income tax returnscovering fiscal years 2004 and 2005 had been under audit by the InternalRevenue Service (“IRS”).  The audit wascompleted in September 2007.  As aresult, the Company was able to finalize positions relating to certain taxmatters which previously required liability recognition under FIN 48 asdiscussed below.  The Company recognizedin the third quarter of 2007 a previously unrecorded favorable tax benefit of$9.6 million, which includes its previously recorded liability for uncertaintax benefits, the related interest and the release of code section 382valuation allowances.

 

In July 2006, the FASBissued FIN 48.  This interpretationclarified the accounting for uncertainty in income taxes recognized in thefinancial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*. FIN 48 prescribes a recognition threshold and measurement of a taxposition taken or expected to be taken in a tax return.  This interpretation also provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, and disclosure.

 

 

11

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We adopted the provisions ofFIN 48 on January 1, 2007.  As a resultof the adoption, we recognized a $0.7 million decrease in our reserves foruncertain tax positions and a $0.5 million increase in accrued interest onuncertain tax positions, resulting in a net $0.2 million increase in retainedearnings.  We also reclassified $8.1million between deferred income taxes and other long-term liabilities toconform to the balance sheet presentation requirements of FIN 48.  As of January 1, 2007, we had $8.5 million ofuncertain tax benefits.  As of September30, 2007, the Company has no uncertain tax positions outstanding.

 

Weincluded the interest expense or income, as well as potential penalties onunrecognized tax benefits, as components of income tax expense in the condensedconsolidated statement of operations. The total amount of accrued interest related to uncertain tax positionsat January 1, 2007 was $0.5 million, net of the deferred tax benefit,and was previously included in other long-term liabilities.  As of September 30, 2007, because we had nouncertain tax positions outstanding, we also had no liability for accruedinterest on unrecognized tax benefits.

 

The Company’s estimatedannual tax rate for 2007, exclusive of the FIN 48 adjustment discussed abovewhich resulted from concluding the recent IRS examination, is 23.4%. Thedifference between the Company's estimated annual tax rate of 23.4% and thestatutory rate is primarily the result of significant amounts of tax-exemptinterest income.

 

**(13)         Earningsper Share**

 

                Basic earnings per share arecomputed by dividing net income by the weighted average number of common sharesoutstanding during each period.  Dilutedearnings per share are calculated using the treasury stock method in accordancewith SFAS 128, and includes the effect of all dilutive securities, includingnon-qualified stock options and restricted stock units (“RSU’s”).

 

The following table setsforth the computation of basic and diluted earnings per share:

 
| ** **                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(In thousands, except per share  data)**                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                  | ** ** | **$**                                 | **2,995**  |                                 | $          | 5,287 | ** ** | **$** | **30,542** |   | $ | 42,128 |   |
|                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average shares and share equivalents  outstanding: |       |                                  |       |                                 |       |   |   |   |   |
| Basic shares                                                | ** ** | **41,949**                            |       | 41,541                               | ** ** | **41,891** |   | 37,279 |   |
| Dilutive non-qualified stock options and RSU’s         | ** ** | **436**                               |       | 1,150                                | ** ** | **606** |   | 1,302 |   |
| Diluted weighted average shares and share  equivalents      | ** ** | **42,385**                            |       | 42,691                               | ** ** | **42,497** |   | 38,581 |   |
|                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income per common share — basic:                       | ** ** | **$**                                 | **0.07**   |                                 | $          | 0.13 | ** ** | **$** | **0.73** |   | $ | 1.13 |   |
| Income per common share — diluted:                     | ** ** | **$**                                 | **0.07**   |                                 | $          | 0.12 | ** ** | **$** | **0.72** |   | $ | 1.09 |   |

 

Wehad additional potential dilutive securities outstanding representing 1.2million common shares that were not included in the computation of potentiallydilutive securities for the quarter ended September 30, 2007 because theoptions’ exercise prices were greater than the average market price of thecommon shares.

 

**(14)         Industry Segment**

 

                TheCompany operates in one reportable business segment, the manufacture andmarketing of biofuels.

 

 

12

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**(15)         Litigation**

 

We are from time to time involved in various legalproceedings, including legal proceedings relating to the extensiveenvironmental laws and regulations that apply to our facilities andoperations.  We are not involved in anylegal proceedings that we believe could have a material adverse effect upon ourbusiness, operating results or financial condition.

 

**(16)         Condensed Consolidating FinancialInformation**

 

The following tables present condensedconsolidating financial information for: (a) Aventine Renewable Energy Holdings,Inc. (the “Parent”) on a stand-alone basis; (b) on a combined basis, theguarantors of the 10% senior unsecured Notes (“Subsidiary Guarantors”), whichinclude Aventine Renewable Energy, LLC; Aventine Renewable Energy, Inc.;Aventine Power, LLC; Aventine Renewable Energy — Aurora West, LLC; and AventineRenewable Energy — Mt. Vernon, LLC; and (c) the Non-Guarantor Subsidiary,Nebraska Energy, LLC.  Each SubsidiaryGuarantor is wholly-owned by Aventine Renewable Energy Holdings, Inc.  The guarantees of each of the SubsidiaryGuarantors are full, unconditional, joint and several.  Accordingly, separate financial statements ofthe wholly-owned Subsidiary Guarantors are not presented because the SubsidiaryGuarantors are jointly, severally and unconditionally liable under theguarantees, and the Company believes that separate financial statements andother disclosures regarding the Subsidiary Guarantors are not material toinvestors.  Furthermore, there are nosignificant legal restrictions on the Parent’s ability to obtain funds from itssubsidiaries by dividend or loan.

 

 

**AventineRenewable Energy Holdings, Inc. and SubsidiariesCondensed Consolidating Statements of OperationsFor the Three Months Ended September 30, 2007(Unaudited)**

 
| **(In thousands)**                           | ** ** | **Parent** | ** ** | **Subsidiary Guarantors** | ** ** | **Non-Guarantor Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|---------------------------|------------|------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                    |       | $          | —     |                      | $          | 353,879                      |       | $                | 20,475     |             | $          | (13,680 | ) | $ | 360,674 |   |
| Cost of goods sold                           |       | —     |       | 357,065                   |       | 18,863                       |       | (13,527          | )          | 362,401          |       |
| Gross profit/(loss)                          |       | —     |       | (3,186                    | )          | 1,612                        |       | (153             | )          | (1,727           | )          |
| Selling, general and administrative expenses |       | 35         |       | 8,906                     |       | 596                          |       | (153             | )          | 9,384            |       |
| Other expense (income)                       |       | —     |       | (168                      | )          | (1                           | )          | —           |       | (169             | )          |
| Operating income/(loss)                      |       | (35        | )          | (11,924                   | )          | 1,017                        |       | —           |       | (10,942          | )          |
| Other income (expense):                      |       |       |       |                      |       |                         |       |             |       |             |       |
| Interest income                              |       | —     |       | 3,546                     |       | 30                           |       | —           |       | 3,576            |       |
| Interest expense                             |       | (5,310     | )          | (49                       | )          | —                       |       | —           |       | (5,359           | )          |
| Investment in subsidiaries                   |       | (8,436     | )          | 944                       |       | —                       |       | 7,492            |       | —           |       |
| Other non-operating income (expense)         |       | —     |       | (953                      | )          | —                       |       | —           |       | (953             | )          |
| Minority interest                            |       | —     |       | —                    |       | —                       |       | (103             | )          | (103             | )          |
| Income/(loss) before income taxes            |       | (13,781    | )          | (8,436                    | )          | 1,047                        |       | 7,389            |       | (13,781          | )          |
| Income tax expense/(benefit)                 |       | (16,776    | )          | (14,591                   | )          | —                       |       | 14,591           |       | (16,776          | )          |
| Net income                                   |       | $          | 2,995      |                      | $          | 6,155                        |       | $                | 1,047      |             | $          | (7,202 | ) | $ | 2,995 |   |

 

 

13

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**Aventine Renewable EnergyHoldings, Inc. and SubsidiariesCondensed Consolidating Statements of OperationsFor the Nine Months Ended September 30, 2007(Unaudited)**

 

 
| **(In thousands)**                           | ** ** | **Parent** | ** ** | **Subsidiary Guarantors** | ** ** | **Non-Guarantor Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|---------------------------|------------|------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                    |       | $          | —     |                      | $          | 1,185,834                    |       | $                | 69,044     |             | $          | (62,628 | ) | $ | 1,192,250 |   |
| Cost of goods sold                           |       | —     |       | 1,140,836                 |       | 59,272                       |       | (61,975          | )          | 1,138,133        |       |
| Gross profit                                 |       | —     |       | 44,998                    |       | 9,772                        |       | (653             | )          | 54,117           |       |
| Selling, general and administrative expenses |       | 271        |       | 26,073                    |       | 2,070                        |       | (653             | )          | 27,761           |       |
| Other expense (income)                       |       | —     |       | (842                      | )          | (5                           | )          | —           |       | (847             | )          |
| Operating income (loss)                      |       | (271       | )          | 19,767                    |       | 7,707                        |       | —           |       | 27,203           |       |
| Other income (expense):                      |       |       |       |                      |       |                         |       |             |       |             |       |
| Interest income                              |       | —     |       | 9,024                     |       | 87                           |       | —           |       | 9,111            |       |
| Interest expense                             |       | (12,618    | )          | (98                       | )          | —                       |       | —           |       | (12,716          | )          |
| Investment in subsidiaries                   |       | 40,196     |       | 6,589                     |       | —                       |       | (46,785          | )          | —           |       |
| Other non-operating income (expense)         |       | —     |       | 4,914                     |       | 141                          |       | —           |       | 5,055            |       |
| Minority interest                            |       | —     |       | —                    |       | —                       |       | (1,346           | )          | (1,346           | )          |
| Income before income taxes                   |       | 27,307     |       | 40,196                    |       | 7,935                        |       | (48,131          | )          | 27,307           |       |
| Income tax expense/(benefit)                 |       | (3,235     | )          | 1,214                     |       | —                       |       | (1,214           | )          | (3,235           | )          |
| Net income                                   |       | $          | 30,542     |                      | $          | 38,982                       |       | $                | 7,935      |             | $          | (46,917 | ) | $ | 30,542 |   |

 

 

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**Aventine Renewable Energy Holdings,Inc. and SubsidiariesCondensed Consolidating Balance SheetSeptember 30, 2007(Unaudited)**

 

 
| **(In thousands)**                              | ** ** | **Parent** | ** ** | **Subsidiary Guarantors** | ** ** | **Non-Guarantor Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|---------------------------|------------|------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                      | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets                                  |       |       |       |                      |       |                         |       |             |       |             |       |
| Cash and cash equivalents                       |       | $          | —     |                      | $          | 35,543                       |       | $                | 3,881      |             | $          |   |   | $ | 39,424 |   |
| Short-term investments                          |       | —     |       | 282,868                   |       | —                       |       |             |       | 282,868          |       |
| Accounts receivable, net                        |       | —     |       | 47,364                    |       | 436                          |       |             |       | 47,800           |       |
| Inventories                                     |       | —     |       | 59,241                    |       | 1,546                        |       |             |       | 60,787           |       |
| Income tax receivable                           |       | —     |       | 14,186                    |       | —                       |       |             |       | 14,186           |       |
| Intercompany receivable                         |       | 331,465    |       | —                    |       | 527                          |       | (331,992         | )          | —           |       |
| Other assets                                    |       | 6          |       | 5,554                     |       | 235                          |       |             |       | 5,795            |       |
| Total current assets                            |       | 331,471    |       | 444,756                   |       | 6,625                        |       | (331,992         | )          | 450,860          |       |
|                                            |       |       |       |                      |       |                         |       |             |       |             |       |
| Property, plant and equipment, net              |       | —     |       | 236,545                   |       | 19,691                       |       |             |       | 256,236          |       |
| Investment in subsidiaries                      |       | 316,845    |       | 43,814                    |       | —                       |       | (360,659         | )          | —           |       |
| Net deferred tax assets                         |       | —     |       | 2,109                     |       | —                       |       |             |       | 2,109            |       |
| Other assets                                    |       | 6,910      |       | 6,852                     |       | —                       |       |             |       | 13,762           |       |
| Total assets                                    |       | $          | 655,226    |                      | $          | 734,076                      |       | $                | 26,316     |             | $          | (692,651 | ) | $ | 722,967 |   |
| ** **                                      | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Liabilities and Stockholders’ Equity**   | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current liabilities                             |       |       |       |                      |       |                         |       |             |       |             |       |
| Accounts payable                                |       | $          | —     |                      | $          | 44,201                       |       | $                | 4,006      |             | $          | — |   | $ | 48,207 |   |
| Accrued liabilities                             |       | —     |       | 3,590                     |       | 362                          |       | —           |       | 3,952            |       |
| Other current liabilities                       |       | 15,333     |       | 1,689                     |       | 82                           |       | —           |       | 17,104           |       |
| Intercompany payable                            |       | —     |       | 331,992                   |       | —                       |       | (331,992         | )          | —           |       |
| Total current liabilities                       |       | 15,333     |       | 381,472                   |       | 4,450                        |       | (331,992         | )          | 69,263           |       |
|                                            |       |       |       |                      |       |                         |       |             |       |             |       |
| Long-term debt                                  |       | 300,000    |       | —                    |       | —                       |       |             |       | 300,000          |       |
| Minority interest                               |       | —     |       | —                    |       | —                       |       | 9,840            |       | 9,840            |       |
| Other long-term liabilities                     |       | —     |       | 3,971                     |       | —                       |       |             |       | 3,971            |       |
| Total liabilities                               |       | 315,333    |       | 385,443                   |       | 4,450                        |       | (322,152         | )          | 383,074          |       |
| Stockholders’ equity                       |       | 339,893    |       | 348,633                   |       | 21,866                       |       | (370,499         | )          | 339,893          |       |
| Total liabilities and stockholders’ equity |       | $          | 655,226    |                      | $          | 734,076                      |       | $                | 26,316     |             | $          | (692,651 | ) | $ | 722,967 |   |
|                                                 |            |            |            |                           |            |                              |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |

** **

 

15

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** **

** **

**Aventine Renewable EnergyHoldings, Inc. and SubsidiariesCondensed Consolidating Statements of Cash FlowsFor the Nine Months Ended September 30, 2007(Unaudited)**

 
| **(In thousands)**                                   | ** ** | **Parent** | ** ** | **Subsidiary Guarantors** | ** ** | **Non-Guarantor Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|---------------------------|------------|------------------------------|------------|------------------|------------|------------------|------------|
| **Operating Activities**                             | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net cash provided by (used for) operating activities |       | $          | (291,436   | )                         | $          | 334,823                      |       | $                | 10,378     |             | $          | — |   | $ | 53,765 |   |
|                                                 |       |       |       |                      |       |                         |       | —           |       |             |       |
| **Investing Activities**                             |       | —     |       |                      |       |                         |       |             |       |             |       |
| Additions to property, plant and equipment           |       | —     |       | (148,023                  | )          | (1,875                       | )          | —           |       | (149,898         | )          |
| Investment in short-term securities                  |       | —     |       | (183,943                  | )          | —                       |       | —           |       | (183,943         | )          |
| Net cash used for investing activities               |       | —     |       | (331,966                  | )          | (1,875                       | )          | —           |       | (333,841         | )          |
| ** **                                           | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Financing Activities**                             | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** |
| Proceeds from issuance of senior unsecured notes     |       | 300,000    |       | —                    |       | —                       |       | —           |       | 300,000          |       |
| Payment of debt issuance costs                       |       | (8,220     | )          | —                    |       | —                       |       | —           |       | (8,220           | )          |
| Repurchase of common stock                           |       | (991       | )          |                      |       |                         |       |             |       | (991             | )          |
| Proceeds from stock option exercises                 |       | 508        |       | —                    |       | —                       |       | —           |       | 508              |       |
| Tax benefit of stock option exercises                |       | 139        |       | —                    |       | —                       |       | —           |       | 139              |       |
| Distribution to minority stockholders                |       | —     |       | 6,273                     |       | (8,000                       | )          | —           |       | (1,727           | )          |
| Net cash provided by (used for) financing activities |       | 291,436    |       | 6,273                     |       | (8,000                       | )          | —           |       | 289,709          |       |
| Net increase/(decrease) in cash and cash equivalents |       | —     |       | 9,130                     |       | 503                          |       | —           |       | 9,633            |       |
| Cash and cash equivalents at beginning of period     |       | —     |       | 26,413                    |       | 3,378                        |       | —           |       | 29,791           |       |
| Cash and cash equivalents at end of period           |       | $          | —     |                      | $          | 35,543                       |       | $                | 3,881      |             | $          | — |   | $ | 39,424 |   |

 

 

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**Item 2.****                                                          ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*Thisreport contains forward-looking statements made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include allstatements that do not relate solely to current or historical fact, but addressevents or developments that we anticipate will occur in the future.  Forward-looking statements include statementsregarding our goals, beliefs, plans or current expectations, taking intoaccount the information currently available to our management.  When we use words such as “anticipate,” “intend,”“expect,” “believe,” “plan,” “may,” “should” or “would” or other words thatconvey uncertainty of future events or outcome, we are making forward-lookingstatements.  Statements relating tofuture sales, earnings, operating performance, plant expansions, capitalexpenditures and sources and uses of cash, for example, are forward-lookingstatements.*

 

*Theseforward-looking statements are subject to various risks and uncertainties whichcould cause actual results to differ materially from those stated or implied bysuch forward-looking statements.  Weundertake no obligation to publicly release any revision of any forward-lookingstatements contained herein to reflect events and circumstances occurring afterthe date hereof, or to reflect the occurrence of unanticipated events.  Information concerning risk factors is containedunder Item “1A - Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2006.  You shouldcarefully consider all of the risks and all other information contained in orincorporated by reference in this report and in our filings with the SEC.  These risks are not the only ones weface.   Additional risks anduncertainties not presently known to us, or which we currently considerimmaterial, also may adversely affect us. If any of these risks actually occur, our business, financial conditionand results of operations could be materially and adversely affected.*

 

**Company Overview**

 

Aventine is a leadingproducer and marketer of ethanol. Through our own production facilities, marketing alliances with otherethanol producers and our purchase/resale operations, we market and distributeethanol to many of the leading energy companies in the U.S.  We have a comprehensive national distributionnetwork utilizing trucks, a leased railcar and barge fleet and a terminalnetwork at critical points on the nation’s transportation grid where ourethanol is blended with our customers’ gasoline.  Aventine is also a marketer and distributorof biodiesel.  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.

 

**Results of Operations**

 

The following discussion summarizes the significantfactors affecting the consolidated operating results of the Company for thethree and nine month periods ended September 30, 2007 and 2006.  This discussion should be read in conjunctionwith the unaudited condensed consolidated financial statements and notes to theunaudited condensed consolidated financial statements contained in Item 1above, and the consolidated financial statements and related notes for the yearended December 31, 2006 included in the Company’s Annual Report on Form 10-K.

 

Our revenues are principally derived from the saleof biofuels and from the sale of co-products (corn gluten feed and meal, corngerm, condensed corn distillers solubles, DDGS, WDGS, carbon dioxide, andbrewers’ yeast) that we produce as by-products during the production of ethanolat our plants, which we refer to as co-product revenues.  We sell biofuels obtained from the followingsources:

 

 

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•                  Ethanol whichwe manufacture at our plants;

•                  Ethanol whichwe purchase from our marketing alliance partners; and

•                  Ethanol andbio-diesel that we purchase from other producers and marketers.

 

We market and sell ethanolwithout regard to whether we produced it, are marketing it for our marketingalliance partners or purchased it for resale from other producers ormarketers.  In addition to ethanol, wealso purchase and market biodiesel.

 

*Executive Summary*

 

We generated net income****of $3.0 million, or $0.07 per diluted share in the thirdquarter of 2007, as compared to net income of $5.3 million, or $0.12 perdiluted share, in the third quarter of 2006. Net income decreased primarily as a result of significantly lowerethanol revenue per gallon sold, along with higher corn costs, partially offsetby $9.6 million of previously unrecognized income tax benefits.  In addition, higher selling, general andadministrative expenses, including costs associated with being a public companyand from the expansion and growth of our business, also attributed to the declinein net earnings.  Revenue in the thirdquarter of 2007 was $360.7 million, a decrease of $46.4 million, or 11.4%, fromthird quarter 2006 revenue of $407.1 million. The decrease is mainly the result of a decrease in the average price pergallon of ethanol sold.  The averagesales price per gallon of ethanol in the third quarter of 2007 was $2.01 pergallon, down from $2.37 per gallon in the same quarter in 2006.

 

**Gallonsof ethanol sold in the third quarter of 2007 were flat compared to the thirdquarter of 2006.  Gallons sold in thethird quarter of 2007 totaled 162.0 million gallons, as compared to 163.3million gallons in the third quarter of 2006. Higher equity production related to the new Pekin dry mill was offset bya reduction in marketing alliance gallons purchased.  Ethanol purchased from other producers andmarketers was also higher in the third quarter of 2007 versus 2006.  Ethanol production in the quarter totaled46.8 million gallons, up from 32.1 million gallons in the third quarter of 2006.**

 

Gross profit was a negative$1.7 million in the third quarter of 2007, a decrease of $29.0 million from thethird quarter of 2006.  The decline ingross profit was principally the result of a significantly lower commodityspread (defined as the gross ethanol selling price per gallon of ethanol lessnet corn cost per gallon) caused by lower ethanol prices and, to a lesserextent, higher corn prices.  Every 1 centdecline in ethanol prices requires a 4 cent decline in corn prices to maintainthe same spread.  Our corn costsduring the third quarter of 2007 averaged $3.81 per bushel, significantlyhigher than our third quarter 2006 cost of $2.31 per bushel.

 

The average inventory costof $1.61 per gallon at the end of the the third quarter of 2007 versus $1.98 atthe end of the second quarter of 2007 reflects the sharp decline in ethanolprices during the quarter using our weighted average FIFO approach tocalculating inventory.  The economic impact of selling gallons that werepreviously held in inventory at the end of the second quarter of 2007 during aperiod of declining prices, was $9.0 million. Such decline in value was further affected by a $1.6 million non-cashlower of cost or market adjustment.  Theeconomic impact of this same issue in the third quarter of 2006 was a negative$10.5 million, as the third quarter of 2006 average cost of inventory was $1.94per gallon as compared to $2.19 per gallon at the end of the second quarter of2006.  Our inventory is valued based upon a weighted averageprice we pay for ethanol that we purchase from our marketing alliance partnersand our purchase/resale transactions, along with our own cost to produceethanol.  Changes, either upward or downward, in our purchased cost ofethanol or our own production costs, will cause the inventory value to fluctuatefrom period to period, perhaps significantly.  These changes in 

 

18

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value flow through our statement of operations as theinventory is sold and can significantly increase or decrease our profitability.

 

Other non-operating expensefor the third quarter of 2007 includes $1.0 million of realized and unrealizedgains on corn derivative contracts and realized and unrealized losses on thesale of forward gasoline contracts.  Allof our derivative hedge positions have been marked to market, and we havealready recorded income or loss with respect to these positions as of September30, 2007.  Increases in prices for openderivative contracts above the closing price at September 30, 2007 will resultin mark to market losses on these positions in future periods, while priceslower than those at September 30, 2007 will allow for additional hedge gains.

 

*For the Three Months EndedSeptember 30, 2007 Compared to the Three Months Ended September 30, 2006*

 

Total gallons of ethanolsold in the third quarter of 2007 were flat at 162.0 million gallons, versus163.3 million gallons sold in the third quarter of 2006.  Gallons of ethanol were sourced as follows:

 

| ** **                                  | ** ** | **For the Three Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|
| **(In thousands, except for  percentages)** | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
| Equity production                           | ** ** | **46,824**                                    |       | 32,099 |   | 14,725 |   | 45.9 | % |
| Marketing alliance purchases                | ** ** | **84,638**                                    |       | 124,382 |   | (39,744 | ) | (32.0 | %) |
| Purchase/resale                             | ** ** | **28,821**                                    |       | 18,314 |   | 10,507 |   | 57.4 | % |
| Decrease/(increase) in inventory            | ** ** | **1,746**                                     |       | (11,454 | ) | 13,200 |   | N.M. | *  |
| Total                                       | ** ** | **162,029**                                   |       | 163,341 |   | (1,312 | ) | (0.8 | %) |

 

*  Notmeaningful

 

Net sales in the thirdquarter of 2007 decreased 11.4% from the third quarter of 2006.  Net sales were $360.7 million in the thirdquarter of 2007 versus $407.1 million in the third quarter of 2006.  Overall, the decrease in net sales was theresult of a decrease in the average sales price of ethanol sold.  Ethanol prices averaged $2.01 per gallon inthe third quarter of 2007 versus $2.37 in the third quarter of 2006.

 

Co-product revenue for thethird quarter of 2007 totaled $24.0 million, an increase of $10.3 million or75.2%, from the third quarter 2006 total of $13.7 million.  Co-product revenue increased during the thirdquarter of 2007 as a result of a combination of increased co-product tonnagesold as a result of the DDGS produced from the new Pekin dry mill productionand higher average selling prices for germ, meal and yeast.  In the third quarter of 2007, we sold 284.8 thousandtons, versus 233.1 thousand tons in the third quarter of 2006.  Co-product revenues, as a percentage of corncosts, were 35.8% during the third quarter of 2007, versus 47.1% in the thirdquarter of 2006.  Co-product revenues, asa percentage of corn costs, decreased in the third quarter of 2007 as comparedto 2006 as the result of the mix of co-products produced.  Due to the addition of the new dry mill inPekin, the increase in DDGS production increased the percentage of the lowervalue DDGS to the overall mix of available co-products.

 

Cost of goods sold for thequarter ended September 30, 2007 was $362.4 million, compared to $379.7 millionfor the quarter ended September 30, 2006, a decrease of $17.3 million or4.6%.  Cost of goods sold consists of thecost to produce ethanol at our own facilities, the cost of purchasing ethanolfrom our marketing alliance partners and the cost of purchasing ethanol andbiodiesel from other producers and marketers, freight and logistics costs toship ethanol, bio-diesel and co-products, and the 

 

19

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cost of motor fuel taxeswhich have been billed to customers.  Thedecrease in cost of goods sold is principally the result of the reduced numberof ethanol gallons purchased from marketing alliance partners, offset by highercorn and production costs.

 

Purchased ethanol in thethird quarter of 2007 totaled $214.8 million, versus $315.3 million in thethird quarter of 2006.  The decrease inpurchased ethanol results from both a decrease in the number of gallons ofethanol purchased, and by decreases in the cost per gallon of ethanolpurchased.  In the third quarter of 2007,we purchased 113.5 million gallons of ethanol at an average cost of $1.89 pergallon as compared to 142.7 million gallons of ethanol at an average cost of$2.21 in the third quarter of 2006.

 

Production costs includecorn costs, conversion costs (defined as the cost of converting the corn intoethanol, and includes production salaries, wages and stock compensation costs,fringe benefits, utilities (including coal and natural gas), maintenance,denaturant, insurance, materials and supplies and other miscellaneousproduction costs) and depreciation and amortization.  Corn costs in the third quarter of 2007 totaled$67.1 million or $3.81 per bushel, versus $29.1 million, or $2.31 per bushel inthe third quarter of 2006.  The increasein corn costs is due to a combination of the increased bushels of corn consumedby the new Pekin dry mill which came on-line in January 2007, along withincreased demand in the marketplace as a result of expected new ethanolproduction facilities being built and increased demand for grains on a globalbasis.

 

Conversion costs for thethird quarter of 2007 increased to $29.4 million from $21.5 million for thethird quarter of 2006.  The total dollarsspent on conversion costs increased year over year as a result of the new Pekindry mill production, and higher denaturant costs.  However, the conversion cost per gallondeclined year over year to $0.63 per gallon in the third quarter of 2007 versus$0.67 per gallon in the third quarter of 2006. Conversion costs per gallon in the third quarter of 2007 were negativelyaffected by lower production caused by a planned maintenance outage at ourPekin wet mill facility. Other than the planned outage at our Pekin wet mill,our facilities ran at approximately 94% of their theoretical capacity, assumingmaximum denaturant blending, during the third quarter of 2007.  Conversion costs per gallon in the thirdquarter of 2006 were negatively affected by lower production caused maintenanceoutages at both production facilities.

 

Depreciation in the thirdquarter of 2007 totaled $3.3 million, versus $0.6 million in the third quarterof 2006.  The increase in depreciationexpense is the result of the new Pekin dry mill beginning production.  Motor fuel taxes were $2.3 million in thethird quarter of 2007 versus $4.8 million in the third quarter of 2006.  The cost of motor fuel taxes are recoveredthrough billings to customers.

 

Freight/logistics costs in the third quarter of 2007increased to $31.0 million, or approximately $0.19 per gallon, from $24.5million, or $0.15 per gallon in the third quarter of 2006.  Freight/logistics cost per gallon is calculatedby taking total freight/logistics costs incurred and dividing by the totalethanol gallons sold.  Totalfreight/logistics costs also include costs to ship co-products.  The increase in freight costs was primarily due to higher general freightand barge expenses.  Fuel surcharges continue to impact generalfreight rates.

 

The average inventory costof $1.61 per gallon at the end of the third quarter of 2007 versus $1.98 at theend of the second quarter of 2007 reflects the sharp decline in ethanol pricesduring the quarter using our weighted average FIFO approach to calculatinginventory.  The economic impact of selling gallons that were previouslyheld in inventory at the end of the second quarter of 2007 during a period ofdeclining prices was $9.0 million.  Suchdecline in value was further affected by a $1.6 million non-cash lower of costor market adjustment.  In 2006, theaverage cost of inventory was $1.94 at the end of the third quarter as comparedto $2.19 at the end of the second quarter of 2006.  The economic impact of this same issue in thethird quarter of 2006 was approximately $10.5 million.

 

 

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Selling, generaland administrative expenses (“SG&A”) expenses were $9.4 million in thethird quarter of 2007, compared to $7.4 million in the third quarter of2006.  Year over year increases reflectincreased expenditures for legal and other professional fees associated withbeing a public company, including the costs of complying with Section 404 ofSarbanes-Oxley Act of 2002 and increased IT costs.  Increased legal fees related to our capacityexpansion efforts also increased SG&A expenses.

 

Interestincome in the third quarter of 2007 was $3.6 million, versus $1.4 million inthe third quarter of 2006.  The increasein interest income is due to a combination of a higher average level of fundsavailable to invest as a result of our recent note offering and funds from lastyear’s initial public offering, combined with higher short-term investmentrates due to increases in interest rates in general.

 

Interestexpense in the third quarter of 2007 was $5.4 million, as compared to $0.7million in the third quarter of 2006. Interest expense in the third quarter of 2007 increased due to theissuance in March 2007 of $300 million aggregate principal amount of 10.0%senior unsecured notes, offset by capitalized interest.  In the third quarter of 2006, we had $5 millionremaining outstanding from a previous issue of $160 million aggregate principalamount of floating rate senior secured notes.

 

The minority interest forthe quarter ended September 30, 2007 was a $0.1 million charge to incomecompared to $0.9 million charge to income for the quarter ended September 30,2006.  This decrease reflects the reducedoperating performance of our Nebraska subsidiary caused primarily by the yearover year significant increase in corn costs and the lower average pricereceived per gallon in the third quarter of 2007 from the sale of ethanol.

 

Othernon-operating loss for the third quarter of 2007 includes $1.0 million ofrealized and unrealized gains on corn derivative contracts and realized andunrealized losses on the sale of forward gasoline contracts.  These include the effect of marking to marketthese contracts at quarter end.  For thethird quarter of 2007, net realized and unrealized losses of $0.2 million wererecorded on corn derivative contracts, and net realized and unrealized lossesof $0.8 million were recorded on the sale of forward gasoline contracts.  Other non-operating income is impacted by theCBOT prices for derivative contracts.

 

Our federal income taxreturns covering fiscal years 2004 and 2005 had been under audit by theInternal Revenue Service (“IRS”).  Theaudit was completed in September 2007. As a result, the Company was able to finalize positions relating tocertain tax matters which required liability recognition under FIN 48.  The Company recognized in the third quarterof 2007 a previously unrecorded favorable tax benefit of $9.6 million, whichincludes its previously recorded liability for uncertain tax benefits, therelated interest and the release of code section 382 valuation allowances.

 

The Company's estimatedannual tax rate for the third quarter of 2007, exclusive of the FIN 48adjustment discussed above which resulted from concluding the recent IRSexamination, is 23.4%.  The differencebetween the Company's estimated annual tax rate and the statutory rate isprimarily the result of significant amounts of tax-exempt interest income.

 

*For the Nine Months EndedSeptember 30, 2007 Compared to the Nine Months Ended September 30, 2006*

 

Total gallons sold in thefirst nine months of 2007 were 513.9 million gallons, versus 504.5 milliongallons sold in the first nine months of 2006, an increase of 9.4 milliongallons or 1.9%.  Ethanol gallons sourcedwere as follows:

 

21

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| ** **                                  | ** ** | **For the Nine Months Ended September  30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------|------------|
| **(In thousands, except for  percentages)** | ** ** | **2007**                                     | ** ** | **2006** | ** ** | **Increase/****(Decrease)** | ** ** | **% Increase/****(Decrease)** | ** ** |
| Equity production                           | ** ** | **146,410**                                  |       | 97,677 |   | 48,733 |   | 49.9 | % |
| Marketing alliance purchases                | ** ** | **294,452**                                  |       | 365,150 |   | (70,698 | ) | (19.4 | %) |
| Purchase/resale                             | ** ** | **72,434**                                   |       | 49,439 |   | 22,995 |   | 46.5 | % |
| Decrease/(increase) in inventory            | ** ** | **652**                                      |       | (7,805 | ) | 8,457 |   | N.M. | *  |
| Total                                       | ** ** | **513,948**                                  |       | 504,461 |   | 9,487 |   | 1.9 | % |

 

*  Notmeaningful

 

Net sales in the first ninemonths of 2007 were flat as compared to first nine months of 2006, at $1.2billion for each nine month period. Overall, an increase in gallons sold was offset by a decline in theaverage sales price of ethanol.  Gallonssold in the first nine months of 2007 increased as a result of a higher equityproduction from our new Pekin dry mill and a higher number of gallons purchasedfrom other producers, offset by the lower number of gallons that were purchasedfrom marketing alliance partners.  Theaverage gross selling price of ethanol in the nine months of 2007 decreased to$2.13 per gallon, from the $2.20 received in the first nine months of 2006.

 

Co-product revenue for thefirst nine months of 2007 totaled $70.3 million, an increase of $30.1 millionor 74.9%, from the first nine month 2006 total of $40.2 million.  Co-product revenue increased during the firstnine months of 2007 versus 2006 principally from an increase in co-producttonnage sold as a result of the DDGS produced from the new dry mill production,along with higher average selling prices. In the first nine months of 2007, we sold 848.9 thousand tons, versus681.9 thousand tons in the first nine months of 2006.  Co-product revenues, as a percentage of corncosts, were 34.0% during the first nine months of 2007, versus 48.1% in thefirst nine months of 2006.  Co-productreturns, as a percentage of corn costs, decreased in the first nine months of2007 as compared to 2006 as the result of increases in the price of corncontinuing to outpace the increase in co-product pricing, and from the mix ofco-products produced.  Due to theaddition of the new dry mill in Pekin, the increase in DDGS productionincreased the percentage of the lower value DDGS to the overall mix ofavailable co-products.

 

Cost of goods sold for thefirst nine months of 2007 versus the first nine months of 2006 was flat at $1.1billion.  Cost of goods sold consists ofthe cost to produce ethanol at our own facilities, the cost of purchasingethanol from our marketing alliance partners, the cost of purchasing ethanoland biodiesel from other producers and marketers, freight and logistics costsand the cost of motor fuel taxes which have been billed to customers.

 

Purchased ethanol in thefirst nine months of 2007 totaled $722.3 million, versus $851.5 million in thefirst nine months of 2006.  The decreasein purchased ethanol results from a decrease in the number of gallons ofethanol purchased, along with a decrease in the cost per gallon of ethanolpurchased.  In the first nine months of2007, we purchased 366.9 million gallons of ethanol at an average cost of $1.97per gallon as compared to 414.6 million gallons of ethanol at an average costof $2.05 in the first nine months of 2006.

 

Production costs includecorn costs, conversion costs (defined as the cost of converting the corn intoethanol, and includes production salaries, wages and stock compensation costs,fringe benefits, utilities (including coal and natural gas), maintenance,denaturant, insurance, materials and supplies and other miscellaneousproduction costs) and depreciation and amortization.  Corn costs in the first nine months of 2007totaled $206.5 million or $3.79 per bushel, versus $83.6 million, or $2.23 perbushel in the first nine months of 2006. The increase in corn costs is due to a combination increased bushels ofcorn consumed by the new Pekin dry mill which came on-line in January 2007,along with increased 

 

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demand in the marketplace asa result of expected new ethanol production facilities being built andincreased demand for grains on a global basis.

 

Conversion costs for thefirst nine months of 2007 increased to $87.4 million from $65.0 million for thefirst nine months of 2006.  The totaldollars spent on conversion costs increased year over year principally as a resultof the new Pekin dry mill production. However, the conversion cost per gallon declined year over year to $0.60per gallon in the first nine months of 2007 versus $0.67 per gallon in thefirst nine months of 2006.  Other thanthe planned outage at our Pekin wet mill taken during the third quarter of2007, our facilities for the first nine months of 2007 ran at approximately 95%of their theoretical capacity, assuming maximum denaturant blending.  Conversion costs per gallon in the first ninemonths of 2006 were negatively affected by lower production caused bymaintenance outages at both production facilities.

 

Depreciation in the firstnine months of 2007 totaled $9.3 million, versus $2.7 million in the first ninemonths of 2006.  The increase in depreciationexpense is the result of the new Pekin dry mill beginning production.  Motor fuel taxes were $12.8 million in thefirst nine months of 2007 versus $10.4 million in the first nine months of2006.  The cost of motor fuel taxes arerecovered through billings to customers.

 

Freight/logistics costs in the first nine months of2007 increased to $89.2 million, or approximately $0.17 per gallon, from $76.5million, or $0.14 per gallon in the first nine months of 2006.  Freight/logistics cost per gallon is calculatedby taking total freight/logistics costs incurred and dividing by the totalethanol gallons sold.  Totalfreight/logistics costs also include costs to ship co-products.  The increase in freight/logistics cost isprincipally from the expansion of our distribution system footprint, along withhighergeneral freight and barge expenses.  Fuel surcharges continue to impact general freightrates.

 

The average cost ofinventory was $1.61 at the end of the third quarter of 2007 as compared to$1.91 at the end of the 2006 reflects the decline in ethanol prices using ourweighted average FIFO approach to calculating inventory.  The economicimpact of selling gallons that were previously held in inventory in at the endof 2006 during a period of declining prices, was $7.0 million.  Such decline in value was further affected bya $1.6 million lower of cost or market adjustment.  The average cost of inventory was $1.94 atthe end of the third quarter of 2006 as compared to $1.50 at the end of 2005.The economic impact of the same issue the first nine months of 2006 was $18.5million.

 

SG&Aexpenses were $27.8 million in the first nine months of 2007, compared to $21.0million in the first nine months of 2006. SG&A expenses increased as a result of increased costs related tobeing a public company, and from costs associated with the expansion and growthof our business.  Year over yearincreases reflect increased expenditures for legal and other professional feesassociated with our being a public company including the costs of complyingwith Section 404 of Sarbanes-Oxley Act of 2002 and increased IT costs.  Increased legal fees related to our capacityexpansion efforts also increased SG&A expenses.

 

Interestincome in the first nine months of 2007 was $9.1 million, versus $3.3 millionin the first nine months of 2006.  Theincrease in interest income is due to a combination of a higher average levelof funds available to invest as a result of our March 2007 note offering and fundsfrom last year’s initial public offering, combined with higher short-terminvestment rates due to increases in interest rates in general.

 

Interestexpense in the first nine months of 2007 was $12.7 million, as compared to $9.3million in the first nine months of 2006. Interest expense in the first nine months of 2007 reflects interestincurred from March 2007 through September 2007 on our $300 million aggregateprincipal amount of 

 

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10.0% senior unsecurednotes.  In the first nine of 2006, we hadoutstanding a previous issue of $160 million aggregate principal amount offloating rate senior secured notes through July 2006, the majority of which wasrepurchased in July 2006.

 

The minority interest forthe first nine months of 2007 was a $1.3 million charge to income compared to$3.8 million charge to income for the first nine months of 2006.  This decrease reflects the reduced operatingperformance of our Nebraska subsidiary caused primarily by the year over yearsignificant increase in corn costs along with a lower average price receivedper gallon in the first nine months of 2007 as compared to 2006 from the saleof ethanol.

 

Othernon-operating income for the first nine months of 2007, we recorded $5.1million of realized and unrealized gains on corn derivative contracts andrealized and unrealized losses on the sale of forward gasoline contracts.  These include the effect of marking to marketthese contracts at September 30, 2007. Net gains on corn derivatives totaling $5.9 million were offset by netlosses on short gasoline forward contracts totaling $0.8 million.  For the first nine months of 2006, werecognized $4.8 million of net realized and unrealized gains on corn derivativecontracts.  Other non-operating income isimpacted by the CBOT prices for derivative contracts.

 

Our federal income taxreturns covering fiscal years 2004 and 2005 had been under audit by theInternal Revenue Service (“IRS”).  Theaudit was completed in September 2007. As a result, the Company was able to finalize positions relating tocertain tax matters which required liability recognition under FIN 48.  The Company recognized in the third quarterof 2007 a previously unrecorded favorable tax benefit of $9.6 million, whichincludes its previously recorded liability for uncertain tax benefits, therelated interest and the release of Section 382 valuation allowances.

 

The Company's estimatedannual tax rate for the first nine months of 2007, exclusive of the FIN 48adjustment discussed above which resulted from concluding the recent IRSexamination, is 23.4%.  The differencebetween the Company's estimated annual tax rate and the statutory rate isprimarily the result of significant amounts of tax exempt interest income.

 

**Trends and Factors that MayAffect Future Operating Results**

 

*Ethanol Pricing*

 

Ethanol prices fellsignificantly during the third quarter of 2007. For example, the average price we received for ethanol sold in thesecond quarter was $2.29 per gallon as compared to $2.01 in the third quarterof 2007.  The negative effect of lowerethanol prices significantly affected our gross profit during the third quarterof 2007.  The decline in ethanol pricesis the result of a supply/demand imbalance of ethanol relative to mandatedethanol usage.  Ethanol was being sold atthe end of the third quarter of 2007 at a significant discount to wholesalegasoline.  This, combined with the $0.51per gallon tax credit available to blenders, provides significant arbitrageopportunities to blenders to increase the amount of ethanol they areblending.  However, we are unable topredict how long this supply/demand imbalance may last or how far ethanolprices may fall until the supply/demand equation becomes re-balanced.

 

As of September 30, 2007, wehad contracts for delivery of ethanol totaling 191.6 million gallons fordelivery through September 2008.  Thesecommitments were for 29.4 million gallons at an average fixed price of $1.80,32.2 million gallons at an average spread to wholesale gasoline of negative$0.06 (based upon the NYMEX, Chicago and NY harbor indices), and 130.0 milliongallons at spot prices (using various Platt, OPIS and AXXIS indices).  For the fourth quarter of 2007, we havecontracts for delivery of ethanol totaling 100.7 million gallons for deliverythrough December 2007.  These commitmentswere for 8.4 million gallons at an average fixed price of $2.07, 25.7 million gallons at an 

 

24

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average positive spread towholesale gasoline of $0.03 (based upon the NYMEX, Chicago and NY harborindices), and 66.6 million gallons at spot prices (using various Platt, OPISand AXXIS indices).  At the end of thethird quarter of 2007, we also had short gasoline positions outstanding usingswap agreements where we sold 16.0 million gallons of gasoline at an averagefixed price of $2.01 per gallon for delivery from October 2007 through December2008.  We did this to hedge some of ourgas plus contracts from potentially falling gasoline prices.  The mark to market value of these positionsat September 30, 2007 was a loss of approximately $1.0 million.

 

*Corn*

 

Corn prices have risensignificantly since the second quarter of 2006. While corn prices have subsided from the highs seen in early 2007, theyremain high compared to historical averages. Corn prices are likely to remain above historical levels for theforeseeable future.

 

We continuously purchasecorn for physical delivery from suppliers using forward purchase contracts inorder to assure supply.  As we do this,we also typically short a like amount of CBOT corn futures with similar datesto lock in the basis differential.  Atthe end of the third quarter of 2007, we had forward physical delivery purchasecontracts covering 8.2 million bushels through December 2009 at an averageprice of $3.72 per bushel.  Approximately4.8 million bushels of these positions are for the fourth quarter of 2007.  Our forward physical delivery contracts arenot marked to market and have been offset by the sale of CBOT futures positionscovering 7.5 million bushels of corn with an average price of $3.82 perbushel.  These short positions are markedto market each period, with corresponding gains and losses recorded in othernon-operating income at the end of each period.

 

Our corn purchases typicallyrange from 18.0 to 19.0 million bushels per quarter.  Given our relatively small percentage offorward purchases, we are, for all intents and purposes, in the local spotmarket for corn.

 

*Marketing Alliance*

 

Our marketing allianceannualized volume at the end of the third quarter of 2007 remained at 361million gallons.  We expect to increaseour marketing alliance volumes during the fourth quarter of 2007 by 100 milliongallons on an annualized basis.  Ourexpectation is based on the start-up of, an expansion by Glacial Lakes Ethanol,of Watertown, SD and a new plant called E Energy Adams, LLC, in Adams, NE, bothwith an annual nameplate capacity of 50 million gallons.  When these new plant/expansions becomes operational,and including our own recent Pekin dry mill, we will be marketing 668 milliongallons of ethanol in the U.S. annually, nearly matching the total at the endof 2006.  In addition, we have signedmarketing agreements with another 17 plants with nameplate production capacityof 1.5 billion gallons, with 301 million gallons currently under constructionand 1.2 billion gallons for projects that have been announced.  Construction of these proposed projects hasnot commenced, and there can be no assurances that these projects will becommenced or completed on a timely basis, or at all.

 

*Supply and Demand*

 

It is expected that annualethanol production capacity in the U.S. will total in excess of 7.5 billiongallons annually by the end of 2007, which is the amount required by theexisting renewable fuel standard for 2012. Ethanol produced in the United States competes with sugar-based ethanolproduced in Brazil.  This additionalcapacity, 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 governmental mandates at either the federal 

 

25

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or state level, the excess supply may causeethanol prices to remain depressed or decrease further, perhaps substantially.

 

*Expansion*

 

We have identified opportunities to increase our equity production capacitythrough the development of new production facilities and are continuallyexploring acquisition opportunities.  Inaddition to the 57 million gallon dry mill expansion of our Pekin, Illinoisfacility which was completed in early 2007, we have begun building 113 milliongallon annualized capacity ethanol production facilities at both Mt. Vernon,Indiana and Aurora, Nebraska which we intend to substantially complete by theend of 2008.

 

We also intend to add an additional 113 million gallons of capacity throughphase II expansions at both Mt. Vernon, Indiana and Aurora, Nebraska, alongwith potentially expanding our existing Pekin, Illinois campus.  The timing of the remaining expansions willbe based upon, among other factors, market conditions and the availability offinancing on attractive terms.

 

On September 20, 2007, we received an air quality construction permit fromthe Indiana Department of Environmental Management.  On September 27, 2007, we received an airquality construction permit from the Nebraska Department of EnvironmentalQuality.  Each permit allows us to buildethanol production facilities that are capable of producing up to 226 milliongallons of fuel-grade denatured ethanol. Kiewit Energy Company is the contractor for these projects, and Delta-TCorporation is the technology provider and a sub-contractor.  We are still awaiting other permits, such aswaste water discharge permits, that will be necessary in order to operate theplants (although other permit applications have been filed).  Accordingly, we cannot give assurance thatthese expansion projects will be completed on a timely basis or at all or thatwe will realize the benefits we anticipate. In addition, while we expect to raise additional funds for the phase IIfacility additions, we cannot be sure that we will be able to obtain suchadditional funding for these phase II transactions on attractive terms or atall.  In addition, we may have to paypenalties or damages under certain contracts related to such capacityexpansions.

 

*Bio-Diesel*

 

During the third quarter of2007, we sold 3.1 million gallons of biodiesel. Although this program is still in its early stages, we are addingadditional resources toward its growth.

 

**Liquidity and Capital Resources**

 

*Overview and Outlook*

 

The following table setsforth selected information concerning our financial condition:

 

| **(In thousands)**        | ** ** | **September 30,   2007** | ** ** | **December 31,   2006** | ** ** |
|---------------------------|------------|--------------------------|------------|-------------------------|------------|
| * *                  | * *   | **(Unaudited)**          | * *   | * *                | * *   |
| * *                  | * *   | ** **               | * *   | * *                | * *   |
| Cash and cash equivalents | ** ** | **$**                    | **39,424** |                    | $          | 29,791 |   |
| Short-term investments    | ** ** | **282,868**              |       | 98,925                  |       |
| Working capital           | ** ** | **381,597**              |       | 203,247                 |       |
| Total debt                | ** ** | **300,000**              |       | —                  |       |
| Current ratio             | ** ** | **6.50**                 |       | 3.44                    |       |
|                           |            |                          |            |                         |            |  |  |

 

On May 31, 2007, we entered engineering, construction and procurementcontracts (“EPC”) contracts to build two initial 113 million gallon ethanolproduction facilities in Mount Vernon, Indiana and Aurora, Nebraska.   These EPC contracts call for payments toKiewit in the amount of $462.5 

 

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million.  Certain owner project costs are excluded fromthe EPC contracts.  These include, butare not limited to, the cost of land, as well as the cost of bringing power,water sewer and natural gas service to the sites.  Each of the EPC contracts also allows forcredits against the contract total for amounts paid for materials and servicesunder each of an advance work agreement entered into with Delta-T Corporationin March 2007 and a pre-EPC agreement entered into with Kiewit in March2007.  The EPC contracts also call forKiewit to provide certain additional materials and services to prepare eachsite for a phase II expansion.  A phaseII expansion would double the capacity of each of the above plants.  The Company has received the necessary airquality construction permits for the full 226 million gallons of annualproduction capacity at each site.  Whilewe expect to raise additional funds for the Aurora West and Mt. Vernon phase IIfacility additions as well as the Pekin III facility, we cannot be sure that wewill be able to obtain such additional funding for these transactions onattractive terms or at all.

 

**We are contractuallyobligated, subject to certain conditions, including obtaining necessarypermits, to develop both a 113 million gallon plant adjacent to our Nebraskafacility and a 226 million gallon plant in Mount Vernon, Indiana.  If we do not meet certain specifiedmilestones, we will be subject to penalties. The contract to complete the expansion adjacent to our Nebraska facilityprovides for liquidated damages not exceeding $5 million if specifiedmilestones are not met or we do not construct a facility with a capacity of atleast 110 million gallons.  If suchpenalties are not paid, the counterparty to the contract has the right to repurchasethe property at cost (subject to adjustment for any expenses, which we havepaid with respect to infrastructure construction).  In certain cases, the counterparty can agreeto an extension and limited cure rights for payments.  The contract for completion of the 226million gallon plant in Mount Vernon, Indiana provides that, if we do not meetcertain milestones, subject to specified extension rights and cure periods, wewill be in default under our lease with the Indiana Port Commission.  The State of Indiana may completeconstruction of the plant at our expense if we fail to do so.  The contract does not provide for liquidateddamages as an alternative.  In addition,we would also be subject to certain other penalties provided for in the lease**.

 

With our current cashbalances, amounts available under our secured revolving credit facility andanticipated cash flow from operations, we believe that we will be able tosatisfy existing anticipated working capital needs, debt service obligations,capital expenditure and other anticipated cash requirements for the remainderof the year.  If the commodity spreadwhich existed at the end of the third quarter of 2007 continues or worsens, wemay need to either delay our expansion plans or raise additional capital.

 

*Sources of Liquidity*

 

Our principal sources ofliquidity are cash, short-term investments, cash provided by operations, andcash available under our secured revolving credit facility.

 

*Cash and short-terminvestments.*  For thefirst nine months of 2007, cash and short-term investments increased by $193.6million.  Cash and short-term investmentsas of September 30, 2007 and December 31, 2006 were $322.3 million and $128.7million, respectively.   The increase incash and short-term investments is principally the result of cash received fromthe private placement of $300 million aggregate principal amount of seniorunsecured 10% fixed rate notes, net of fees, along with cash provided byoperations, offset by expenditures related to our plant expansions.

 

C*ash providedby operations.*  Net cash providedby operating activities in the first nine months of 2007 was $53.8****million, as compared to cash provided by operatingactivities of $21.7 million for the first nine months of 2006.  The increase in cash provided by operationsin 2007 versus 2006 is primarily the result of decreased working capitalrequirements caused by lower ethanol prices. Cash on our 

 

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balance sheet, the cash received from theissuance of the $300 million of 10% senior unsecured notes and these reductionsin working capital requirements has significantly helped our working capitalposition.

 

*Cash available under ourliquidity facility*.  Ourliquidity facility consists of a five-year $200 million senior securedrevolving credit facility that may, under certain circumstances, increase inamount up to $300 million.  Collateralavailability is determined via a borrowing base which, includes a portion ofreceivables and inventory, and $50 million of property, plant andequipment.  We had no borrowingsoutstanding under our secured revolving credit facility at September 30, 2007and $1.5 million of standby letters of credit outstanding, leavingapproximately $116.2 million in additional borrowing availability thereunder asof that date.  In October 2007, we issuedadditional letters of credit totaling $15.3 million in conjunction with ourcurrent plant expansions.  These lettersof credit further reduced the availability under our liquidity facility by$15.3 million.  In the third quarter of2007, we added $50 million in additional availability to our liquidityfacility.  Such additional availabilitywas secured by $50 million of property, plant and equipment.  As of December 31, 2006, we had no borrowingsoutstanding under our previous secured revolving credit facility and $4.0million of standby letters of credit outstanding, leaving approximately $26.0million in additional borrowing availability under the previous securedrevolving credit facility as of that date.

 

*Uses of Liquidity*

 

Our principal uses ofliquidity are capital expenditures, payments related to our outstanding debtand liquidity facility, and the repurchase of shares of our common stock.

 

*Capital expenditures.*  In the first nine months of 2007, capitalexpenditures (excluding expansion related expenditures) totaled $11.6 millionversus $5.1 million in the first nine months of 2006.  Capital expenditures include assetreplacement, environmental and safety compliance and cost reduction andproductivity improvement items.  Ourcapital spending plan for all of 2007, excluding our expansion projects, isforecasted to be approximately $14 million.

 

Capital expenditures relatedto our announced expansion projects totaled $138.3 million in the first ninemonths of 2007.  Expenditures for capitalexpansion projects in 2007 include $64.5 million on Mt. Vernon, $69.1 millionon Aurora West, and $4.7 million on our new Pekin dry mill facility.  Our total capital expenditures on capacityexpansion projects is now expected to total approximately $250 million for2007.

 

*Payments related to ouroutstanding debt and liquidity facility.*  In the first nine months of 2007, we did notmake any interest payments on our debt or our liquidity facility.   In the first nine months of 2006, we paid $10.2million in interest payments on our debt and liquidity facility.

 

*Repurchase of shares ofcommon stock.*  In the thirdquarter and for the nine months ended September 30, 2007, we repurchased 71,300shares of our common stock on the open market at a total cost of $1.0million.  The share repurchase programallows the repurchase of up to $50 million of our outstanding common stock,although there are no minimum share purchase requirements.  There is approximately $47.8 millionavailable to be repurchased under this program.

 

**Environmental Matters**

 

We are subject to extensivefederal, state and local environmental laws, regulations and permit conditions(and interpretations thereof), including those relating to the discharge ofmaterials into the air, water and ground, the generation, storage, handling,use, transportation and disposal of hazardous materials, and the health andsafety of our employees.  These laws,regulations, and permits require us to 

 

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incur significant capital and other costs,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 fines, naturalresource damages, criminal sanctions, permit revocations and/or facilityshutdowns.  In addition, environmentallaws and regulations (and interpretations thereof) change over time, and anysuch changes, more vigorous enforcement policies or the discovery of currentlyunknown conditions may require substantial additional environmentalexpenditures.

 

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.  From time to time, hazardous material spills haveoccurred at our facilities or properties, which we investigate and remediate asnecessary.  Also, soil and groundwatercontamination has been identified in the past at our Pekin, Illinoiscampus.  If significant contamination isidentified at our properties in the future, costs to investigate and remediatethis contamination as well as any costs to investigate or remediate associatednatural resource damages could be significant. If any of these sites are subject to investigation and/or remediationrequirements, we may be responsible under CERCLA or other environmental lawsfor all or part of the costs of such investigation and/or remediation, and fordamages to natural resources.  We mayalso be subject to related claims by private parties alleging property damage orpersonal injury due to exposure to hazardous or other materials at or from suchproperties.  We have not accrued anyamounts for environmental matters as of September 30, 2007.  The ultimate costs of any liabilities thatmay be identified or the discovery of additional contaminants could adverselyimpact our results of operation or financial condition.

 

In addition, the hazards andrisks associated with producing and transporting our products (such as fires,natural disasters, explosions, abnormal pressures and spills) may result inspills or releases of hazardous substances, and may result in claims fromgovernmental authorities or third parties relating to actual or allegedpersonal injury, property damage, or damages to natural resources.  We maintain insurance coverage against some,but not all, potential losses caused by our operations. Our coverage includes,but is not limited to, physical damage to assets, employer’s liability,comprehensive general liability, automobile liability and workers’compensation.  We do not carryenvironmental insurance.  We believe thatour insurance is adequate for our industry, but losses could occur foruninsurable or uninsured risks or in amounts in excess of existing insurancecoverage.  The occurrence of events whichresult 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 for any expansion of existing facilities or anynew facilities.  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 ouroperating flexibility.  These costs couldhave a material adverse affect 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 with other U.S. ethanol producers.  However, because ethanol is produced andtraded internationally, these costs could adversely affect us in our efforts tocompete with foreign producers not subject to such stringent requirements.

 

Federal and stateenvironmental authorities have been investigating alleged excess VOC emissionsand other air emissions from many U.S. ethanol plants, including our Illinoisand Nebraska 

 

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facilities. The matter relating to our Illinois wet mill facility is still pending,and we could be required to install costly additional air pollution controlequipment or take other measures to control air pollutant emissions at thatfacility.  In addition, if theauthorities determine our emissions were in violation of applicable law, wewould likely be required to pay fines that could be material.

 

We have made, and expect to continue making,significant capital expenditures on an ongoing basis to comply withincreasingly stringent environmental laws, regulations and permits.  So far in 2007, we have spent approximately$2.6 million on these matters.  We expectto have to eventually make significant capital expenditures to comply with theEPA’s final National Emissions Standard for Hazardous Air Pollutants, orNESHAP, under the federal Clean Air Act for industrial, commercial andinstitutional boilers and process heaters. This NESHAP requires us to implement maximum achievable control technologyat our Illinois wet mill facility to reduce hazardous air pollutant emissionsfrom certain of our boilers and process heaters.  We have been granted an extension untilSeptember 12, 2008 to complete work under this NESHAP.  Based on engineering conducted to date andcurrently available information, we expect to eventually spend a total of $7.4million to comply with this NESHAP.  Ifwe do not meet this September 2008 deadline, fines and penalties could beimposed on us, which could be substantial.

 

We currently generaterevenue from the sale of carbon dioxide, which is a co-product of the ethanolproduction process at each of our facilities. New laws or regulations relating to the production, disposal oremissions of carbon dioxide may require us to incur significant additionalcosts and may also adversely affect our ability to continue generating revenuefrom carbon dioxide sales.

 

 

**Item 3.                    Quantitative and QualitativeDisclosures About Market Risk**

 

We are exposed to variousmarket risks, including changes in commodity prices and interest rates.  Market risk is the potential loss arisingfrom 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 and interest rates.  We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.

 

***Commodity Price Risks***

 

We are subject to marketrisk with respect to the price and availability of corn, the principal rawmaterial we use to produce ethanol and ethanol by-products.  In general, rising corn prices result inlower profit margins and, therefore, represent unfavorable market conditions.  This is especially true when marketconditions do not allow us to pass along increased corn costs to ourcustomers.  The availability and price ofcorn is subject to wide fluctuations due to unpredictable factors such asweather conditions, farmer planting decisions, governmental policies withrespect to agriculture and international trade and global demand andsupply.  Our weighted average gross corncosts for the three months ended September 30, 2007 and 2006 was $3.81 and$2.31 per bushel, respectively.  For thenine month periods ended September 30, 2007 and 2006, our weighted average corncosts were $3.79 and $2.23 per bushel, respectively.

 

We have firm-price purchasecommitments with some of our corn suppliers under which we agree to buy corn ata price set in advance of the actual delivery of that corn to us.  At September 30, 2007, we had commitments topurchase approximately 8.1 million bushels of corn through December 2009 at anaverage price of $3.72 per bushel from these corn suppliers.  Under these arrangements, we assume the riskof a price decrease in the market price of corn between the time this price isfixed and the time the corn is delivered. In order to reduce our market exposure to price decreases, at the timewe enter 

 

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into a firm-price purchase commitment, wealso often enter into commodity forward contracts to sell a like amount of cornat the then-current price for delivery to the counterparty at a laterdate.  We account for these transactionsunder Statement of Financial Accounting Standard No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended byStatement of Financial Accounting Standard No. 138, *Accountingfor Certain Derivative Instruments and Certain Hedging Activities*,and by Statement of Financial Accounting Standard No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*,(hereinafter collectively referred to as “SFAS 133”).  These forward contracts are not designated ashedges and, therefore, are marked to market each period, with correspondinggains and losses recorded in other non-operating income.  The fair value of these derivative assets isrecognized in other current assets in the Condensed Consolidated Balance Sheet,net of any cash received from the brokers. Information on this type of derivative transaction is as follows:

 
| **(In millions)**                                           | ** ** | **September 30,****2007** | ** ** |
|-------------------------------------------------------------|------------|---------------------------|------------|
|                                                        |       |                      |       |
| Realized and unrealized gains included in earnings  in 2007 | ** ** | **$**                     | **4.8**    | ** ** |
|                                                             |            |                           |            |  |

 
| **(In millions)**                                                                                             | ** ** | **September 30,   2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
|                                                                                                          |       |                     |       |
| Net bushels sold                                                                                              | ** ** | **6.8**                  | ** ** |
| Aggregate notional value of derivatives outstanding                                                           | ** ** | **$**                    | **28.6**   | ** ** |
| Period through which derivative positions currently  exist                                                    | ** ** | **December 2009**        | ** ** |
| Unrealized gain on the fair value of outstanding  derivative positions                                        | ** ** | **$**                    | **(0.3**   | **)** |
| The change in fair value due to the effect of a 10%  adverse change in commodity prices to current fair value | ** ** | **$**                    | **(2.9**   | **)** |

 

We are also subject tomarket risk with respect to ethanol pricing. Our ethanol sales are priced using contracts that can either be fixed;based upon the price of wholesale gasoline plus or minus a fixed amount; orbased 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, 2007, we had fixed contractsto sell approximately 29.4 million gallons of ethanol at an average fixed priceof $1.80 per gallon through September 2008. These normal purchase/sale transactions are not marked to market.

 

We also sell forward ethanolusing contracts where the price is determined at a point in the future basedupon an index plus or minus a fixed amount. At September 30, 2007, we had sold forward approximately 32.2 milliongallons of ethanol using wholesale gasoline as an index plus a fixed spreadthat averaged a negative $0.06 per gallon. Under these arrangements, we assume the risk of a price decrease in themarket price of gasoline.  In order toreduce our market exposure to price decreases, at the time we enter into a firmsales commitment, we may also enter into commodity forward contracts to sell alike amount of gasoline at the then-current price for delivery to thecounterparty at a later date.  We accountfor these transactions under SFAS 133. These forward 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 liabilities is recognized in other currentliabilities in the Condensed Consolidated Balance Sheet, net of any cash paidto brokers.  Information on this type ofderivative transaction is as follows:

 
| **(In millions)**                                 | ** ** | **September 30,****2007** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|
|                                              |       |                      |       |
| Realized and unrealized loss included in earnings | ** ** | **$**                     | **(0.8**   | **)** |
|                                                   |            |                           |            |  |

 

 

31

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| **(In millions)**                                                                                             | ** ** | **September 30,   2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
|                                                                                                          |       |                     |       |
| Gallons sold                                                                                                  | ** ** | **16.0**                 | ** ** |
| Aggregate notional value of derivatives outstanding                                                           | ** ** | **$**                    | **32.2**   | ** ** |
| Period through which derivative positions currently  exist                                                    | ** ** | **December 2008**        | ** ** |
| Unrealized loss on the fair value of outstanding derivative  positions                                        | ** ** | **$**                    | **(1.0**   | **)** |
| The change in fair value due to the effect of a 10%  adverse change in commodity prices to current fair value | ** ** | **$**                    | **(3.3**   | **)** |

 

***MaterialLimitations***

 

The disclosures with respectto the above noted risks do not take into account the underlying commitments oranticipated transactions.  If theunderlying items were included in the analysis, the gains or losses on thefutures contracts may be offset.  Actualresults will be determined by a number of factors that are not generally underour control and could vary significantly from those factors disclosed.

 

We are exposed to creditlosses in the event of nonperformance by counterparties on the aboveinstruments, as well as credit or performance risk with respect to our hedgedcommitments. Although nonperformance is possible, we do not anticipatenonperformance by any of these parties.

 

 

**Item 4and Item 4T.             Internal ControlOver Financial Reporting**

 

**Evaluation of Disclosure Controlsand Procedures**

 

Under the supervision of,and with the participation of management, including our Chief ExecutiveOfficer, Ronald H. Miller, and our Chief Financial Officer, Ajay Sabherwal, theCompany carried out an evaluation of the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based upon that evaluation, Messrs. Miller and Sabherwal haveconcluded that, as of the end of the period covered by this report, the Company’sdisclosure controls and procedures have been designed and are effective toprovide reasonable assurance that information required to be disclosed in thereports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.  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. Miller and Sabherwal, as appropriate to allow timely decisionsregarding the required disclosure.  Thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events. There can be no assurance that any design will succeed in achieving itsstated goal under all potential future conditions, regardless of how remote.

 

**Changes in Internal Control overFinancial Reporting**

 

Based upon evaluation by ourmanagement, which was conducted with the participation of Messrs. Millerand Sabherwal, there has been no change in our internal control over financialreporting during the period covered by this report that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

32

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

 

**Item 1.                    LegalProceedings**

 

We are from time to time involved in various legalproceedings, including legal proceedings relating to the extensiveenvironmental laws and regulations that apply to our facilities andoperations.  We are not involved in anylegal proceedings that we believe could have a material adverse effect upon ourbusiness, operating results or financial condition.

 

** **

**Item1A.                 Risk Factors**

** **

TheCompany has included in its Annual Report on Form 10-K as of December 31, 2006a description of certain risks and uncertainties that could affect the Company’sbusiness, future performance or financial condition (“Risk Factors”).  Those Risk Factors are hereby incorporated inPart II, Item 1A of this Form 10-Q.

 

 

**Item 2.                    Unregistered Sales of EquitySecurities and Use of Proceeds**

 

The following table presents information with respect to repurchases of Common Stock made by the Company during the quarter ended September 30, 2007.  All of the repurchased shares were purchased on the open market under a share repurchase plan approved by the Board of Directors.

 
| ****Period****         | ** ** | **Total Number of Shares  Purchased** | ** ** | **Average Price Paid Per Share  (1)** | ** ** | **Total Number of Shares  Purchased as Part of Publicly Announced Plans or Programs** | ** ** | **Approximate Dollar Value that  May Yet Be Purchased Under the Plans or Programs** | ** ** |
|------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| 7/01/07 — 7/31/07 |       | —                                |       | $                                     | —     |                                                                                  | —     |                                                                                | $          | — |   |
| 8/01/07 — 8/31/07 |       | 71,300                                |       | 13.93                                 |       | 121,300                                                                               |       | 47,855,000                                                                          |       |
| 9/01/07 — 9/30/07 |       | —                                |       | —                                |       | —                                                                                |       | —                                                                              |       |
| Total                  |       | 71,300                                |       | $                                     | 13.93      |                                                                                  | 121,300    |                                                                                | $          | 47,855,000 |   |
|                   |       |                                  |       |                                  |       |                                                                                  |       |                                                                                |       |   |   |

----

(1)  Average price paid per share reflects the average share pricepaid for Aventine Common Stock on the business day the shares were repurchasedon the open market.

 

 

**Item 3.                    Defaults Upon SeniorSecurities**

 

**                                None**

 

 

**Item 4.                    Submission of Matters to aVote of Security Holders**

 

**                                None**

 

 

**Item 5.   **                **Other Information**

 

**                                None**

 

33

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

 
| (a)    | Exhibits |
|--------|----------|
|   |     |   |   |
|   | 31.1     |   | Certification  of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley  Act of 2002. |
|   |     |   |   |
|   | 31.2     |   | Certification  of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|   |     |   |   |
|   | 32.1     |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |     |   |   |
|   | 32.2     |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

# ** **

 

 

# **SIGNATURE**

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereto duly authorized.

 
|                    | AVENTINE RENEWABLE ENERGY HOLDINGS, INC. |
|-------------------------|------------------------------------------|
|                    |                                     |
|                    |                                     |   |
| Dated: November 7, 2007 | By:                                      | /s/ William J. Brennan |
|                    | Name:                                    | William J. Brennan |
|                    | Title:                                   | Principal Accounting Officer |

 

 

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