Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 March 31, 2009**

 

**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 ENERGYHOLDINGS, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

**(309) 347-9200**

(Registrant’s Telephone Number, including Area Code)

 

Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES x  NO o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files.)  YES o  NO o

 

Indicate by checkmarkwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.  (Check one):

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

 

Indicate by checkmarkwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  YES o  NO x

 

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

 
| **Class**                      | ** ** | **Outstanding as of May 8, 2009** |
|--------------------------------|------------|------------------------------------------------------------|
| Common Stock, $0.001 Par Value |       | 42,970,988 Shares                                          |

 

 

 

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**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**TABLE OF CONTENTS**

** **
| ** ** | ** **                                                                                                            | **Page No.** |
|------------|-----------------------------------------------------------------------------------------------------------------------|-------------------|
| ** ** | **PART I**                                                                                                       | ** **        |
| ** ** | ** **                                                                                                            | ** **        |
| Item  1.   | Financial Statements                                                                                                  |              |
|       | Condensed Consolidated Statements of Operations  (Unaudited) - Three-month periods ended March 31, 2009 and 2008 | 1                 |
|       | Condensed Consolidated  Balance Sheets – March 31, 2009 (Unaudited) and December 31, 2008              | 2                 |
|       | Condensed Consolidated Statements of Cash Flows  (Unaudited) - Three-month periods ended March 31, 2009 and 2008 | 3                 |
|       | Notes to  Unaudited Condensed Consolidated Financial Statements                                                       | 4                 |
|       |                                                                                                                  |              |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           | 23                |
|       |                                                                                                                  |              |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                           | 37                |
|       |                                                                                                                  |              |
| Item 4.    | Controls and  Procedures                                                                                              | 39                |
|       |                                                                                                                  |              |
| ** ** | **PART II**                                                                                                      | ** **        |
| ** ** | ** **                                                                                                            | ** **        |
| Item 1.    | Legal Proceedings                                                                                                     | 40                |
|       |                                                                                                                  |              |
| Item 1A.   | Risk Factors                                                                                                          | 40                |
|       |                                                                                                                  |              |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                          | 46                |
|       |                                                                                                                  |              |
| Item 3.    | Defaults  Upon Senior Securities                                                                                      | 46                |
|       |                                                                                                                  |              |
| Item 4.    | Submission  of Matters to a Vote of Security Holders                                                                  | 47                |
|       |                                                                                                                  |              |
| Item 5.    | Other Information                                                                                                     | 47                |
|       |                                                                                                                  |              |
| Item 6.    | Exhibits                                                                                                              | 47                |

 

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**PART I.****                ****FINANCIAL INFORMATION**

 

**Item 1.****                   ****Financial Statements**

 

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

**Condensed Consolidated Statementsof Operations**

(Unaudited)

* *
| ** **                                                              | ** ** | **Three months ended March 31,** | ** **  |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| **(In thousands except per share amounts)**    | ** ** | **2009**                                             | ** **  | **2008** | ** ** |
| ** **                                                              | ** ** | ** **                                           | ** **  | ** ** | ** ** |
| Net sales                                                               | ** ** | **$**                                                | **236,536** | ** ** | $ | 509,948 |   |
| Cost of goods sold                                                      | ** ** | **(257,964**                                         | **)**       | (485,865 | ) |
| Gross profit (loss)                                                     | ** ** | **(21,428**                                          | **)**       | 24,083 |   |
| Selling, general and administrative expenses                            | ** ** | **(9,741**                                           | **)**       | (8,869 | ) |
| Other operating income                                                  | ** ** | **170**                                              | ** **  | 777 |   |
| Operating income (loss)                                                 | ** ** | **(30,999**                                          | **)**       | 15,991 |   |
| Other income (expense):                                                 |       |                                                 | ** **  |   |   |
| Income from termination of marketing agreements                         | ** ** | **10,176**                                           | ** **  | — |   |
| Non-cash loss on available for sale securities                          | ** ** | **—**                                           | ** **  | (21,625 | ) |
| Loss on sale of auction rate securities                                 | ** ** | **—**                                           | ** **  | (1,500 | ) |
| Interest income                                                         | ** ** | **11**                                               | ** **  | 2,239 |   |
| Interest expense                                                        | ** ** | **(8,721**                                           | **)**       | (2,391 | ) |
| Other non-operating income                                              | ** ** | **1,188**                                            | ** **  | 1,868 |   |
| Loss before income taxes                                                | ** ** | **(28,345**                                          | **)**       | (5,418 | ) |
| Income tax expense (benefit)                                            | ** ** | **(3,778**                                           | **)**       | 5,568 |   |
| Net loss                                                                | ** ** | **(24,567**                                          | **)**       | (10,986 | ) |
| Net loss attributable to noncontrolling interest                        | ** ** | **—**                                           | ** **  | 191 |   |
| Net loss attributable to controlling interest                           | ** ** | **$**                                                | **(24,567** | **)** | $ | (10,795 | ) |
|                                                                    |       |                                                 | ** **  |   |   |
| *Per share data:*                                                       |       |                                                 | ** **  |   |   |
| Loss per common share – basic:                                     | ** ** | **$**                                                | **(0.57**   | **)** | $ | (0.26 | ) |
| Basic weighted average number of common shares                          | ** ** | **42,971**                                           | ** **  | 41,838 |   |
|                                                                    |       |                                                 | ** **  |   |   |
| Loss per common share – diluted:                                   | ** ** | **$**                                                | **(0.57**   | **)** | $ | (0.26 | ) |
| Diluted weighted average number of common and common  equivalent shares | ** ** | **42,971**                                           | ** **  | 41,838 |   |

 

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

 

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

**CondensedConsolidated Balance Sheets**

 
| **(In thousands except share amounts)**                                                                                                                                                                                                          | ** ** | **March 31,  2009** | ** **  | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
|                                                                                                                                                                                                                                                                 |       | **(Unaudited)**          |        |                        |       |
| **Assets**                                                                                                                                                                                                                                                           |       |                     | ** **  |                        |       |
| Current assets                                                                                                                                                                                                                                                       |       |                     | ** **  |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                            | ** ** | **$**                    | **2**       | ** **                  | $          | 23,339 |   |
| Accounts receivable                                                                                                                                                                                                                                                  | ** ** | **21,921**               | ** **  | 55,888                      |       |
| Inventories                                                                                                                                                                                                                                                          | ** ** | **29,378**               | ** **  | 85,421                      |       |
| Income tax receivable                                                                                                                                                                                                                                                | ** ** | **12,725**               | ** **  | 15,135                      |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                            | ** ** | **6,288**                | ** **  | 10,198                      |       |
| Total current assets                                                                                                                                                                                                                                                 | ** ** | **70,314**               | ** **  | 189,981                     |       |
| Property, plant and equipment, net                                                                                                                                                                                                                                   | ** ** | **103,759**              | ** **  | 107,168                     |       |
| Construction in process                                                                                                                                                                                                                                              | ** ** | **494,656**              | ** **  | 493,969                     |       |
| Available for sale securities                                                                                                                                                                                                                                        | ** ** | **1,124**                | ** **  | 673                         |       |
| Other assets                                                                                                                                                                                                                                                         | ** ** | **6,622**                | ** **  | 7,668                       |       |
| Total assets                                                                                                                                                                                                                                                         | ** ** | **$**                    | **676,475** | ** **                  | $          | 799,459 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                        |       |                     | ** **  |                        |       |
| Current liabilities                                                                                                                                                                                                                                                  |       |                     | ** **  |                        |       |
| Accounts payable                                                                                                                                                                                                                                                     | ** ** | **$**                    | **46,991**  | ** **                  | $          | 110,903 |   |
| Senior unsecured 10% fixed-rate notes                                                                                                                                                                                                                                | ** ** | **300,000**              | ** **  | 300,000                     |       |
| Secured revolving credit facility                                                                                                                                                                                                                                    | ** ** | **14,422**               | ** **  | 52,200                      |       |
| Accrued interest                                                                                                                                                                                                                                                     | ** ** | **15,000**               | ** **  | 7,500                       |       |
| Accrued liabilities                                                                                                                                                                                                                                                  | ** ** | **3,186**                | ** **  | 3,517                       |       |
| Other current liabilities                                                                                                                                                                                                                                            | ** ** | **3,875**                | ** **  | 9,900                       |       |
| Total current liabilities                                                                                                                                                                                                                                            | ** ** | **383,474**              | ** **  | 484,020                     |       |
| Net deferred tax liabilities                                                                                                                                                                                                                                         | ** ** | **4,254**                | ** **  | 2,444                       |       |
| Other long-term liabilities                                                                                                                                                                                                                                          | ** ** | **3,387**                | ** **  | 4,199                       |       |
| Total liabilities                                                                                                                                                                                                                                                    | ** ** | **391,115**              | ** **  | 490,663                     |       |
| Stockholders’ equity                                                                                                                                                                                                                                            |       |                     | ** **  |                        |       |
| Common stock, par value $0.001 per share; 185,000,000  shares authorized; 42,970,988 shares issued and outstanding as of  March 31, 2009 and December 31, 2008, net of 21,548,640 shares held  in treasury as of March 31, 2009 and December 31, 2008 | ** ** | **43**                   | ** **  | 43                          |       |
| Preferred stock, 50,000,000 shares authorized, no  shares issued or outstanding                                                                                                                                                                                      | ** ** | **—**               | ** **  | —                      |       |
| Additional paid-in capital                                                                                                                                                                                                                                           | ** ** | **293,664**              | ** **  | 292,984                     |       |
| Retained earnings (deficit)                                                                                                                                                                                                                                          | ** ** | **(6,728**               | **)**       | 17,839                      |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                 | ** ** | **(1,619**               | **)**       | (2,070                      | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                      | ** ** | **285,360**              | ** **  | 308,796                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                      | ** ** | **$**                    | **676,475** | ** **                  | $          | 799,459 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements.*

 

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

**CondensedConsolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** **  |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| **(In thousands)**                                                          | ** ** | **2009**                                             | ** **  | **2008** | ** ** |
|                                                                             |       |                                                 |        |   |   |
| **Operating Activities**                                                         |       |                                                 | ** **  |   |   |
| Net loss                                                                         | ** ** | **$**                                                | **(24,567** | **)** | $ | (10,986 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                                                 | ** **  |   |   |
| Non-cash loss on available for sale securities                                   | ** ** | **—**                                           | ** **  | 21,625 |   |
| Loss on the sale of securities                                                   | ** ** | **—**                                           | ** **  | 1,500 |   |
| Depreciation and amortization                                                    | ** ** | **4,380**                                            | ** **  | 3,573 |   |
| Stock-based compensation expense                                                 | ** ** | **1,304**                                            | ** **  | 1,873 |   |
| Deferred income tax                                                              | ** ** | **4,368**                                            | ** **  | 3,709 |   |
| Gain on the sale of marketing alliance investments                               | ** ** | **(1,000**                                           | **)**       | — |   |
| Other                                                                            | ** ** | **—**                                           | ** **  | (542 | ) |
| Changes in operating assets and liabilities:                                     |       |                                                 | ** **  |   |   |
| Accounts receivable, net                                                         | ** ** | **33,967**                                           | ** **  | 5,716 |   |
| Inventories                                                                      | ** ** | **56,043**                                           | ** **  | (18,921 | ) |
| Accounts payable                                                                 | ** ** | **(63,912**                                          | **)**       | 18,326 |   |
| Other changes in operating assets and liabilities                                | ** ** | **3,470**                                            | ** **  | 3,517 |   |
| Net cash provided by operating activities                                        | ** ** | **14,053**                                           | ** **  | 29,390 |   |
|                                                                             | ** ** | ** **                                           | ** **  |   |   |
| **Investing Activities**                                                         |       |                                                 | ** **  |   |   |
| Additions to property, plant and equipment, net                                  | ** ** | **(736**                                             | **)**       | (59,946 | ) |
| Proceeds from the sale of marketing alliance  investments                        | ** ** | **2,000**                                            | ** **  |   |   |
| Sale of short-term securities                                                    | ** ** | **—**                                           | ** **  | 82,800 |   |
| Indemnification proceeds                                                         | ** ** | **—**                                           | ** **  | 3,039 |   |
| Net cash provided by investing activities                                        | ** ** | **1,264**                                            | ** **  | 25,893 |   |
|                                                                             | ** ** | ** **                                           | ** **  |   |   |
| **Financing Activities**                                                         |       |                                                 | ** **  |   |   |
| Net repayments on revolving credit facilities                                    | ** ** | **(37,778**                                          | **)**       | — |   |
| Debt issuance costs                                                              | ** ** | **(876**                                             | **)**       | — |   |
| Proceeds from the issuance of common stock                                       | ** ** | **—**                                           | ** **  | 1,500 |   |
| Net cash provided by (used for) financing activities                             | ** ** | **(38,654**                                          | **)**       | 1,500 |   |
| Net increase (decrease) in cash and cash equivalents                             | ** ** | **(23,337**                                          | **)**       | 56,783 |   |
| Cash and cash equivalents at beginning of period                                 | ** ** | **23,339**                                           | ** **  | 17,171 |   |
| Cash and cash equivalents at end of period                                       | ** ** | **$**                                                | **2**       | ** ** | $ | 73,954 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements.*

 

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

**Notes to Unaudited Condensed Consolidated Financial Statements**

 

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

 

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

 

We have prepared theunaudited condensed consolidated financial statements included herein pursuantto the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in statements prepared in accordancewith generally accepted accounting principles have been omitted pursuant tosuch rules and regulations, although we believe that the disclosures areadequate to make the information presented not misleading.  These financial statements should be read inconjunction with the financial statements and notes thereto included in ourAnnual Report on Form 10-K for the year ended December 31, 2008.

 

Theaccompanying unaudited condensed consolidated financial statements presentedherewith reflect all adjustments (consisting of only normal and recurringadjustments) which, in the opinion of management, are necessary for a fairpresentation of the results of operations for the three month periods ended March 31,2009 and 2008.  The results of operationsfor interim periods are not necessarily indicative of results to be expectedfor an entire year.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer materially from those estimates.

 

As of March 31, 2009,the Company’s Summary of Critical Accounting Policies for the year ended December 31,2008, which are detailed in the Company’s Annual Report on Form 10-K, havenot changed.

 

OnJanuary 1, 2009, we adopted the provisions of Statement of FinancialAccounting Standard (“SFAS”) No. 141 (revised 2007) (“SFAS 141R”), *Business Combinations*.  SFAS 141R requires the acquiring entity in abusiness combination to recognize the full fair value of assets acquired andliabilities assumed in the transaction whether full or partial acquisition,establishes the acquisition-date fair value as the measurement objective forall assets acquired and liabilities assumed, requires expensing of mosttransaction and restructuring costs, and requires the acquirer to disclose allinformation needed to evaluate and understand the nature and financial effectof the business combination.  SFAS 141Rapplies to all transactions or other events in which an entity obtains controlof one or more businesses, including combinations achieved without the transferof consideration, for example, by contract alone or through the lapse ofminority veto rights.  The adoption ofthese provisions did not impact our unaudited condensed consolidated financialstatements, but will have an impact on the accounting for future businesscombinations.

 

OnJanuary 1, 2009, we adopted the provisions of SFAS No. 160 (“SFAS 160”),*Noncontrolling Interests in ConsolidatedFinancial Statements — An Amendment of ARB No. 51*.  SFAS 160 requires reporting entities topresent noncontrolling (minority) interests as equity instead of as a liabilityor 

 

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mezzanine equity and income attributable tononcontrolling interest separate from net income, and provides guidance on theaccounting for transactions between an entity and noncontrollinginterests.  SFAS 160 appliesprospectively as of the beginning of the fiscal year SFAS 160 is initially applied,except for the presentation and disclosure requirements which are appliedretrospectively for all periods presented subsequent to adoption.  See Note 12 - Noncontrolling Interest forfurther disclosure.

 

OnJanuary 1, 2009, we adopted the provisions of SFAS No. 161 (“SFAS 161”),*Disclosures about Derivative Instruments andHedging Activities* — *An Amendmentof FASB Statement No. 133*(“SFAS 133”).  SFAS 161requires enhanced disclosures about an entity’s derivative and hedgingactivities and thereby improves the transparency of financial reporting.  Entities are required to provide enhanceddisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations, and (c) how derivative instrumentsand related hedged items affect an entity’s financial position, financialperformance, and cash flows.  See Note 13- *Derivative Instruments and Hedging*for our disclosures required under SFAS 161.

 

OnApril 7, 2009 (the “Petition Date”), we and all of our direct and indirectsubsidiaries, filed voluntary petitions for relief (collectively, the “BankruptcyFiling”) under Chapter 11 of Title 11 of the United States Code (the “BankruptcyCode”) with the United States Bankruptcy Court for the District of Delaware(the “Bankruptcy Court”).  We intend tocontinue operating our business as a debtor-in-possession under thejurisdiction of the Bankruptcy Court and in accordance with the applicableprovisions of the Bankruptcy Code and orders of the Bankruptcy Court.  See Note 18 - *SubsequentEvents* for details regarding the Bankruptcy Filing and theChapter 11 cases.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared assuming we will continue as a going concern, which assumes continuityof operations and realization of assets and satisfaction of liabilities in theordinary course of business.  Our abilityto continue as a going concern is dependent upon, among other things, (i) ourability to comply with the terms and conditions of our debtor-in-possessionfinancing; (ii) our ability to maintain adequate cash on hand; (iii) ourability to generate cash from operations; (iv) our ability to obtainconfirmation of and to consummate a plan of reorganization under the BankruptcyCode; (v) the cost and outcome of the reorganization process; and (vi) ourability to achieve profitability. Uncertainty as to the outcome of these factors raises substantial doubtabout the Company’s ability to continue as a going concern.  We are currently evaluating various coursesof action to address the operational and liquidity issues the Company isfacing, and formulating plans for improving operations.  There can be no assurance that any of theseefforts will be successful.  The accompanyingunaudited condensed consolidated financial statements do not include anyadjustments that might result should we be unable to continue as a goingconcern.

 

AmericanInstitute of Certified Public Accountants Statement of Position 90-7, *Financial Reporting by Entities in Reorganization under the BankruptcyCode* (“SOP 90-7”), which is applicable to companies in Chapter 11,generally does not change the manner in which financial statements areprepared.  However, SOP 90-7 does requirethat the financial statements for periods subsequent to the filing of theChapter 11 petition distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of thebusiness.  Revenues, expenses (includingprofessional fees), realized gains and losses, and provisions for losses thatcan be directly associated with the reorganization and restructuring of thebusiness must be reported separately as reorganization items in theconsolidated statements of operations beginning in the quarter ending June 30,2009.  The consolidated balance sheetmust distinguish pre-petition liabilities subject to compromise from both thosepre-petition liabilities that are not subject to compromise and frompost-petition liabilities.  Liabilitiesthat may be affected by the plan must be reported at the amounts expected to beallowed, even if they may be settled for lesser amounts.  In addition, cash provided by reorganizationitems must be disclosed 

 

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separately in the condensed consolidatedstatement of cash flows.  SOP 90-7 becameeffective for Aventine on April 7, 2009 and Aventine will segregate thoseitems as outlined above for all reporting periods subsequent to such date.

 

The accompanying consolidated financialstatements for the prior period contain certain reclassifications to conform tothe presentation used in the current period. The reclassifications had no impact on stockholders’ equity, workingcapital, gross profit or net income.

 

**(2)****          ****RecentAccounting Pronouncements**

 

InApril 2009, the FASB issued FASB Staff Position (“FSP”) No. FAS 107-1and APB 28-1 (“FSP No. 107-1 and APB 28-1”), *InterimDisclosures about Fair Value of Financial Instruments*, whichrequires disclosures about fair value of financial instruments for interimreporting periods.  This guidance iseffective for interim reporting periods ending after June 15, 2009 andwill apply to our disclosures beginning with our second fiscal quarter of2009.  We are in the process ofdetermining the effect that the adoption of this guidance will have on ourcondensed consolidated financial statements and disclosures.

 

InApril 2009, the FASB also issued FSP No. FAS 157-4 (“FSP No. 157-4”),*Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly*, which providesadditional guidance for estimating fair value when the volume and level ofactivity for the asset or liability have significantly decreased.  This guidance is effective for interimreporting periods ending after June 15, 2009 and will apply to ourdisclosures beginning with our second fiscal quarter of 2009.  We are in the process of determining theeffect that the adoption of this guidance will have on our condensedconsolidated financial statements and disclosures.

 

InDecember 2008, the FASB issued FSP No. FAS 132(R)-1 (“FSP No. 132(R)-1”),*Employers’ Disclosures about Postretirement BenefitPlan Assets*, which requires enhanced disclosures about plan assetsin an employer’s defined benefit pension or other postretirement plan.  These disclosures are intended to provideusers of financial statements with a greater understanding of how investmentallocation decisions are made, the major categories of plan assets, the inputsand valuation techniques used to measure the fair value of plan assets andsignificant concentrations of risk within plan assets.  FSP No. 132(R)-1 will apply to our planasset disclosures beginning with our fiscal year ending December 31,2009.  We are in the process ofdetermining the effect that the adoption of this guidance will have on ourcondensed consolidated financial statements and disclosures.

 

**(3)****          ****Inventories**

 

Inventoriesare as follows:

 
| **(In thousands)** | ** **   | **March 31,  2009** | ** **   | **December 31,  2008** | ** **   |
|-------------------------|--------------|--------------------------|--------------|-----------------------------|--------------|
| *** ***            | *** *** | *** ***             | *** *** | *** ***                | *** *** |
| Finished products       | ** **   | **$**                    | **21,529**   |                        | $            | 76,968 |   |
| Work-in-process         | ** **   | **3,142**                |         | 2,568                       |         |
| Raw materials           | ** **   | **3,154**                |         | 3,600                       |         |
| Supplies                | ** **   | **1,553**                |         | 2,285                       |         |
| Totals                  | ** **   | **$**                    | **29,378**   |                        | $            | 85,421 |   |

 

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

 

Prepaidexpenses and other current assets are as follows:

 
| **(In thousands)**                  | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| * *                                 | * *   | * *                 | * *   | * *                    | * *   |
| Prepaid supplies and materials           | ** ** | **$**                    | **2,872**  |                        | $          | — |   |
| Prepaid motor fuel taxes                 | ** ** | **1,266**                |       | 3,667                       |       |
| Fair value of derivative instruments     | ** ** | **—**               |       | 1,521                       |       |
| Prepaid insurance                        | ** ** | **897**                  |       | 1,435                       |       |
| Prepaid ethanol                          | ** ** | **—**               |       | 512                         |       |
| Current portion of deferred income taxes | ** ** | **—**               |       | 1,593                       |       |
| Prepaid benefits                         | ** ** | **—**               |       | 364                         |       |
| Other prepaid expenses                   | ** ** | **1,253**                |       | 1,106                       |       |
| Totals                                   | ** ** | **$**                    | **6,288**  |                        | $          | 10,198 |   |

 

**(5)****          ****Debt**

 

The following table summarizesthe Company’s long-term debt:

 
| **(In thousands)**                        | ** ** | **March 31,  2008** | ** **  | **December 31,  2008** | ** ** |
|------------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
|                                           | ** ** | ** **               |        |                        |       |
| Senior unsecured 10% notes due April 2017 | ** ** | **$**                    | **300,000** | ** **                  | $          | 300,000 |   |
| Secured revolving credit facility              | ** ** | **14,422**               | ** **  | 52,200                      |       |
| ** **                                     |       | **314,422**              | ** **  | 352,200                     |       |
| Less short-term borrowings                     | ** ** | **(314,422**             | **)**       | (352,200                    | )          |
| Total long-term debt                           | ** ** | **$**                    | **—**  | ** **                  | $          | — |   |

 

*Secured Revolving CreditFacility*

 

OnMarch 10, 2009, we amended our existing secured revolving creditfacility.  The amended liquidity facilityconsists of a secured revolving credit facility with JPMorgan Chase Bank, N.A.,as administrative agent and a lender. The revolving commitment under the amended facility was initially $75million, and reduced to $60 million on April 1, 2009 and $50 million on May 1,2009 and thereafter (subject to collateral availability).  The amended liquidity facility included a $25million sub-limit for letters of credit. The facility is secured by substantially all of the Company’s assets.

 

OnMarch 30, 2009, the Company notified the administrative agent for its amendedsecured revolving credit facility that the Company would not have entered into,by March 31, 2009, formal written agreements with the holders of at least80% in principal amount of its 10% senior unsecured notes due 2017 committingto binding terms of an exchange offer, as required under the amended securedrevolving credit facility.  Failure bythe Company to receive such formal written commitments by March 31, 2009would have constituted an event of default under our amended secured revolvingcredit facility.  In addition, on March 30,2009, the Company notified the administrative agent that the Company did notintend to make a scheduled payment of interest on the Company’s 10% seniorunsecured notes due 2017 which was due on April 1, 2009.  Failure to make the interest payment wouldalso have constituted an event of default under our amended secured revolvingcredit facility.  On March 30, 2009,the Company and the lenders under its amended secured revolving credit facilityexecuted a letter agreement to waive certain events of default until April 8,2009, including the potential effects of default discussed in the precedingsentences. 

 

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Asof March 31, 2009, $22.0 million in letters of credit and $14.4 million inrevolving loans were outstanding under the amended secured revolving creditfacility.  As a result of the BankruptcyFiling, all the commitments under the Company’s amended secured revolvingcredit facility with JP Morgan Chase Bank, N.A., as administrative agent and alender, automatically terminated, and the principal of the loans and thereimbursement obligations then outstanding, together with accrued interestthereon and any unpaid fees and all other obligations of the borrowers accruedunder the applicable loans documents, became immediately due and payable,subject to the automatic stay provision of Section 362 of the Bankruptcy Code.  As a result, there is no longer any liquidityavailable to us under this facility.

 

*Senior Notes*

 

AtMarch 31, 2009, the Company had outstanding $300 million aggregateprincipal amount of 10% senior unsecured fixed-rate notes due April 2017 (“Notes”). The Notes were issued pursuant to anindenture between us and Wells Fargo Bank, N.A., as trustee, and weresubsequently exchanged for registered notes with the same terms.  The Notes are general unsecured obligationsof the Company and certain of its guarantor subsidiaries.  As a result of the Bankruptcy Filing, theoutstanding principal amount of, and accrued interest thereon, under theCompany’s indenture governing the Notes became immediately due and payable,subject to the automatic stay provision of Section 362 of the Bankruptcy Code.

 

*Deferred Debt IssuanceCosts*

 

Deferreddebt issuance costs are subject to amortization.  Original deferred debt issuance coststotaling $7.2 million relating to our Notes are being amortized utilizing amethod which approximates the effective interest method over the life of thenotes of 10 years, resulting in amortization expense of $0.7 million in 2009and each year thereafter.  As a result ofthe amendment of our secured revolving credit facility completed in March 2009,we expensed the remaining original unamortized debt issuance costs related toour secured revolving credit facility totaling $0.6 million during the firstquarter of 2009.  In connection withamending our secured revolving credit facility in March 2009, we paid debtissuance costs totaling $0.9 million, which will be amortized through February 28,2010, which is the remaining life of the amended secured revolving creditfacility.

 

**(6)****          ****OtherCurrent Liabilities**

 

Othercurrent liabilities are as follows:

 
| **(In thousands)**                                    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| * *                                                   | * *   | * *                 | * *   | * *                    | * *   |
| Deferred revenue                                           | ** ** | **$**                    | **—** |                        | $          | 8,425 |   |
| Accrued property taxes                                     | ** ** | **744**                  |       | 575                         |       |
| Accrued sales tax                                          | ** ** | **14**                   |       | 339                         |       |
| Reserve for uncertain tax positions (See Note 14)          | ** ** | **2,364**                |       | —                      |       |
| Accrued interest on uncertain tax positions (see  Note 14) | ** ** | **99**                   |       | —                      |       |
| Current portion of deferred income taxes                   | ** ** | **508**                  |       | 507                         |       |
| Other accrued operating expenses                           | ** ** | **146**                  |       | 54                          |       |
| Totals                                                     | ** ** | **$**                    | **3,875**  |                        | $          | 9,900 |   |

 

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

 

Otherlong-term liabilities are as follows:

 
| **(In thousands)**                                    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| * *                                                   | * *   | * *                 | * *   | * *                    | * *   |
| Unfunded postretirement benefit obligations                | ** ** | **$**                    | **1,879**  |                        | 1,834      |   |
| Unfunded pension liability                                 | ** ** | **1,508**                |       | 1,491                       |       |
| Reserve for uncertain tax positions (See Note 14)          | ** ** | **—**               |       | 848                         |       |
| Accrued interest on uncertain tax positions (see  Note 14) | ** ** | **—**               |       | 26                          |       |
| Totals                                                     | ** ** | **$**                    | **3,387**  |                        | $          | 4,199 |   |
|                                                            |            |                          |            |                             |            |  |  |

 

**(8)****                                ****Fair Value Measurements**

 

*SFAS 157*

 

SFAS 157 establishes a framework formeasuring fair value and expands disclosure about fair value measurements.  The statement requires that fair valuemeasurements be classified and disclosed in one of the following three categories:

 

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

 

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

 

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

 

The following table summarizes thevaluation of our financial instruments which are carried at fair value by theabove SFAS 157 pricing levels as of March 31, 2009:

 
| ** **                    | ** ** | **Fair Value Measurements at the Reporting Date Using** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **(in thousands)**       | ** ** | **Fair Value  at  March 31,  2009**                                              | ** ** | **Quoted Prices in  Active Markets  Using Identical  Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                          |       |                                                                                       |       |   |   |   |   |   |   |
| Cash and cash equivalents     |       | $                                                                                          | 2          |   | $ | 2 |   | — |   | — |   |
| Available for sale securities |       | $                                                                                          | 1,124      |   | $ | 1,124 |   | — |   | — |   |

 

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

 

Although the Company held no outstandingderivative positions as of March 31, 2009, it recorded net gains of $1.2million and $1.9 million, respectively, for the three month periods ended March 31,2009 and 2008, under “other non-operating income” in the unaudited CondensedConsolidated Statements of Operations for the changes in the fair value of itsderivative financial instrument positions it held during the respectivethree-month periods.

 

The Company recorded gainsof $451 thousand for the three month period ended March 31, 2009 underother accumulated comprehensive loss in the unaudited Condensed ConsolidatedBalance Sheet for 

 

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the changes in the fairvalue of its available for sale securities. The Company did not hold any available for sale securities in the firstquarter of 2008.

 

The carrying value of other financialinstruments, including cash, accounts receivable and accounts payable andaccrued liabilities approximate fair value due to their short maturities orvariable-rate nature of the respective balances.  The following table presents the otherfinancial instruments that are not carried at fair value but which require fairvalue disclosure as of March 31, 2009 and December 31, 2008.

 
| ** **                                     | ** ** | **As of March 31, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **Carrying Value**                      | ** ** | **Fair Value**                             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Investment in other ethanol producers, at cost |       | —                                       |       | —                                          |       | 1,000 |   | n/a |   |
| Commodity margin deposits                      |       | —                                       |       | —                                          |       | 1,521 |   | 1,521 |   |
| Long-term debt                                 |       | (300,000                                     | )          | (51,000                                         | )          | (300,000 | ) | (49,500 | ) |

 

The Company’s investments at December 31,2008 accounted for under the cost method consisted of minority positions inequity securities of other ethanol operating companies.  These equity investments were recorded atcost, and it was not practical to estimate a fair value for these non-publiclytraded companies.  The Company hadredeemed all of its cost investments in the three months ended March 31,2009.

 

The fair value of our senior securedfloating rate notes are based upon quoted closing market prices at the end ofthe period.

 

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

 

TheCompany values its share-based payment awards using a form of the Black-Scholesoption-pricing model (the “option pricing model”).  The determination of fair value ofshare-based payment awards on the date of grant using the option pricing modelis 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 a short-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 had previously beenestimated using a 3% forfeiture rate. However, beginning in the quarter ended September 30, 2008, werevised our estimated forfeiture rate to 6.4%, reflecting a higher actualexperience rate since becoming a public company in 2006.  The expected option term is calculated usingthe “simplified” method permitted by SAB 107. Our options have characteristics significantly different from those oftraded options, and changes in the assumptions can materially affect the fairvalue estimates.

 

Pre-taxstock-based compensation expense for the three month periods ended March 31,2009 and 2008 was approximately $1.3 million and $1.9 million,respectively.  For the three month periodended March 31, 2009, the $1.3 million expense was charged to selling,general and administrative (SG&A) expense. For the three month period ended March 31, 2008, $1.8 million wascharged to SG&A expense and $0.1 million was charged to cost of goodssold.  Stock-based compensation expensereduced earnings per share by $0.02 per basic and fully diluted share for thethree month period ended March 31, 2009 and by $0.03 per basic and dilutedshare for the three month period ended March 31, 2008.  The Company recognized a tax benefit on itscondensed consolidated statement of operations from stock-based 

 

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compensation expense in theamount of $0.3 million and $0.7 million for the three month periods ended March 31,2009 and 2008, respectively.  The Companyrecorded pre-tax stock-based compensation expense for the three month periodsended March 31, 2009 and 2008 as follows:

 
| ** **                        | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**            | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                              |       |                                             |       |   |   |
| Stock-based compensation expense: |       |                                             |       |   |   |
| Non-qualified stock options       | ** ** | **$**                                            | **1.2**    |   | $ | 1.6 |   |
| Restricted stock                  | ** ** | **0.1**                                          |       | 0.1 |   |
| Restricted stock units            | ** ** | **—**                                       |       | 0.1 |   |
| Long-term incentive stock plan    | ** ** | **—**                                       |       | 0.1 |   |
| Totals                            | ** ** | **$**                                            | **1.3**    |   | $ | 1.9 |   |

 

Asof March 31, 2009 and 2008, the Company had not yet recognizedcompensation expense on the following non-vested awards:

 
| ** **                     | ** ** | **2009**                           | ** ** | **2008**                                                               | ** ** |
|--------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in millions)**         | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** |
|                           |       |                               |       |                                                                   |       |   |   |   |   |
| Non-qualified options          | ** ** | **$**                              | **8.0**    | ** **                                                             | **1.8**    |   | $ | 18.6 |   | 3.2 |   |
| Restricted stock               | ** ** | **0.6**                            | ** ** | **0.6**                                                                |       | 0.9 |   | 1.7 |   |
| Restricted stock units         | ** ** | **0.1**                            | ** ** | **0.2**                                                                |       | 0.2 |   | 0.5 |   |
| Long-term incentive stock plan | ** ** | **—**                         | ** ** | **—**                                                             |       | 2.1 |   | 2.1 |   |
| Total                          | ** ** | **$**                              | **8.7**    | ** **                                                             | **1.7**    |   | $ | 21.8 |   | 3.0 |   |

 

TheCompany granted stock options during the quarters ended March 31, 2009 and2008.  The determination of the fairvalue of the stock option awards, using the option pricing model, incorporatedthe assumptions in the following table for stock options granted during thequarters ended March 31, 2009 and 2008. The risk-free rate is based on the U.S. Treasury yield curve in effectat the time of grant over the expected term. Expected volatility is calculated by considering, among other things,the expected volatilities of public companies engaged in similarindustries.  The expected option term iscalculated using the “simplified” method permitted by SAB 107.  Assumptions for options granted in thequarters ended March 31, 2009 and 2008 are as follows:

 
| ** **                      | ** ** | **2009** | ** ** | **2008**   | ** ** |
|---------------------------------|------------|----------|------------|------------|------------|
| Expected stock price volatility | ** ** | **58.0** | **%**      | 58.0       | %          |
| Expected life (in years)        | ** ** | **6.5**  | ** ** | 6.5        |       |
| Risk-free interest rate         | ** ** | **2.17** | **%**      | 4.5        | %          |
| Expected dividend yield         | ** ** | **0.0**  | **%**      | 0.0        | %          |
| Weighted average fair value     | ** ** | **$**    | **0.10**   | ** ** | $          | 6.85 |   |
|                                 |            |          |            |            |            |  |  |

 

Thefollowing table summarizes stock options outstanding and changes during thethree month period ended March 31, 2009:

 

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| ** **                                      | ** ** | **Shares  (in thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life****(years)** | ** ** | **Aggregate  Intrinsic Value****(in thousands)** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                            |       |                            |       |                                   |       |                                              |       |                                                       |       |
| Options outstanding — January 1, 2009 |       | 3,894                           |       | $                                      | 7.62       |                                              | 6.7        |                                                       | $          | 422 |   |
| Granted                                         |       | 50                              |       | 0.18                                   |       | 10.0                                              |       | —                                                     |       |
| Exercised                                       |       | —                          |       | —                                 |       | —                                            |       | —                                                     |       |
| Cancelled or expired                            |       | (389                            | )          | 9.17                                   |       | —                                            |       | —                                                     |       |
| Options outstanding — March 31, 2009  |       | 3,555                           |       | $                                      | 7.34       |                                              | 5.9        |                                                       | $          | — |   |
| Options exercisable — March 31, 2009  |       | 2,274                           |       | $                                      | 5.04       |                                              | 5.1        |                                                       | $          | — |   |

 

Therange of exercise prices of the exercisable options and outstanding options at March 31,2009 are as follows:

 
| **Weighted Average Exercise Price** | ** ** | **Number of  Exercisable  Options****(in thousands)** | ** ** | **Number of  Outstanding  Options****(in thousands)** | ** ** | **Weighted**

**Average  Remaining  Life**

**(years)** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| $0.18 - $0.23                                      |       | 1,006                                                           |       | 1,056                                                           |       | 4.1                                                     |       |
| $2.36 - $4.80                                      |       | 798                                                             |       | 1,194                                                           |       | 5.8                                                     |       |
| $7.05                                              |       | 96                                                              |       | 401                                                             |       | 8.9                                                     |       |
| $15.26 - $17.29                                    |       | 106                                                             |       | 318                                                             |       | 7.9                                                     |       |
| $22.15 - $22.50                                    |       | 252                                                             |       | 546                                                             |       | 6.4                                                     |       |
| $43.00                                             |       | 16                                                              |       | 40                                                              |       | 7.3                                                     |       |
| Totals                                             |       | 2,274                                                           |       | 3,555                                                           |       | 5.9                                                     |       |

 

Restrictedstock award activity for the three months ended March 31, 2009 issummarized below:

 
| ** **                                                    | ** ** | **Shares  (in thousands)** | ** ** | **Weighted  Average  Grant Date  Fair Value  per Award** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                          |       |                            |       |                                                                    |       |
| Unvested restricted stock awards — January 1,  2009 |       | 59                              |       | $                                                                       | 15.97      |   |
| Granted                                                       |       | —                          |       | —                                                                  |       |
| Vested                                                        |       | (13                             | )          | 15.26                                                                   |       |
| Cancelled or expired                                          |       | —                          |       | —                                                                  |       |
| Unvested restricted stock awards — March 31,  2009  |       | 46                              |       | $                                                                       | 16.18      |   |

 

Restricted stock unit awardactivity for the three months ended March 31, 2009 is summarized below:

 

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| ** **                                                         | ** ** | **Shares  (in thousands)** | ** ** | **Weighted  Average  Grant Date  Fair Value  per Award** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                               |       |                            |       |                                                                    |       |
| Unvested Restricted stock unit awards —  January 1, 2009 |       | 47                              |       | $                                                                       | 6.88       |   |
| Granted                                                            |       | —                          |       | —                                                                  |       |
| Vested                                                             |       | (9                              | )          | 13.08                                                                   |       |
| Cancelled or expired                                               |       | —                          |       | —                                                                  |       |
| Unvested restricted stock unit awards —  March 31, 2009  |       | 38                              |       | $                                                                       | 6.74       |   |

 

**(10)****                         ****Interest Expense**

 

Thefollowing table summarizes interest expense:

** **
| ** **                                   | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                      | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                         |       |                                             |       |   |   |
| Interest expense                             | ** ** | **$**                                            | **7,799**  |   | $ | 7,508 |   |
| Amortization of deferred debt issuance costs | ** ** | **922**                                          |       | 242 |   |
| Capitalized interest                         | ** ** | **—**                                       |       | (5,359 | ) |
| Interest expense                             | ** ** | **$**                                            | **8,721**  |   | $ | 2,391 |   |

 

**(11)****                         ****Retirement and Pension Expense**

 

*Defined Contribution Plans*

 

Wehave 401(k) plans covering substantially all of our employees.  We recognized expense with respect to theseplans of $0.3 million for the three month periods ended March 31, 2009 and2008.  Contributions made under ourdefined contribution plans include a match, at the Company’s discretion, of anemployee’s contribution to the plans.  OnMarch 13, 2009, we terminated 25 employees a part of a planned reductionin force.  As a result of theseterminations, we accelerated the vesting of the Company’s matching portion ofthese employee’s previously unvested contributions.  As a result of this accelerated vesting,there was no additional expense to the Company.

 

### *Qualified Retirement Plan*

###  

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

 

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| ** **                          | ** **   | **Three months ended  March 31,** | ** **   |
|-------------------------------------|--------------|--------------------------------------------------|--------------|
| **(In thousands)**             | ** **   | **2009**                                         | ** **   | **2008** | ** ** |
| *** ***                        | *** *** | *** ***                                     | *** *** | *** *** | *** *** |
| Service cost                        | ** **   | **$**                                            | **72**       | ** ** | $ | 88 |   |
| Interest cost                       | ** **   | **124**                                          | ** **   | 124 |   |
| Expected return on plan assets      | ** **   | **(179**                                         | **)**        | (180 | ) |
| Amortization of prior service costs | ** **   | **11**                                           | ** **   | 11 |   |
| Amortization of net actuarial loss  | ** **   | **—**                                       | ** **   | 6 |   |
| Net periodic pension cost           | ** **   | **$**                                            | **28**       | ** ** | $ | 49 |   |

###  

### *Postretirement Benefit Obligation*

###  

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

 

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

 
| ** **                          | ** **   | **Three months ended  March 31,** | ** **   |
|-------------------------------------|--------------|--------------------------------------------------|--------------|
| **(In thousands)**             | ** **   | **2009**                                         | ** **   | **2008** | ** ** |
| *** ***                        | *** *** | *** ***                                     | *** *** | *** *** | *** *** |
| Service cost                        | ** **   | **$**                                            | **19**       |   | $ | 38 |   |
| Interest cost                       | ** **   | **26**                                           |         | 34 |   |
| Amortization of prior service costs | ** **   | **(9**                                           | **)**        | — |   |
| Net periodic postretirement cost    | ** **   | **$**                                            | **36**       |   | $ | 72 |   |

 

**(12)****                         ****Noncontrolling Interest**

 

Asdiscussed in Note 1, weadopted SFAS 160 on January 1, 2009. Prior to October 2008, we owned 78.42% of Nebraska Energy, LLC (“NELLC”),a 50 million gallon dry mill ethanol plant. In October 2008, we purchased the remaining 21.58% of NELLC we didnot previously own.  As a result ofpurchasing the remaining interest in NELLC, we did not have any noncontrollinginterest on our consolidated balance sheets as of March 31, 2009 and December 31,2008.  In accordance with SFAS 160, weclassified noncontrolling interests separately on our condensed consolidatedstatements of operations for the quarter ended March 31, 2008.  Prior year amounts were previously includedin our consolidated balance sheets as a separate line item called “minorityinterest” under long-term liabilities and in our consolidated statement ofoperations as a separate line item called “Minority interest” under otherincome (expense).

 

Netloss attributable to Aventine during the quarter ended March 31, 2008 wasas follows:

 
| **(in thousands)**                          | ** ** | **2008** | ** ** |
|--------------------------------------------------|------------|----------|------------|
|                                             |       |     |       |
| Net loss                                         |       | $        | (10,986    | ) |
| Net loss attributable to noncontrolling interest |       | 191      |       |
| Net loss attributable to Aventine                |       | $        | (10,795    | ) |

 

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**(13)****                         ****Derivative Instruments andHedging**

 

OnJanuary 1, 2009, we adopted the provisions of SFAS No. 161, whichrequires entities to provide greater transparency in interim and annualfinancial statements about how and why the entity uses derivative instruments,how the instruments and related hedged items are accounted for under SFAS No. 133,and how the instruments and related hedged items affect the financial position,results of operations, and cash flows of the entity.

 

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

 

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

 

Wehave firm-price purchase commitments with some of our corn suppliers underwhich we agree to buy corn at a price set in advance of the actual delivery ofthat corn to us.  Under thesearrangements, we assume the risk of a price decrease in the market price ofcorn between the time this price is fixed and the time the corn is delivered.  At March 31, 2009, we had commitments topurchase 1.5 million bushels of corn through December 2009 at an averagefixed price of $5.23 per bushel.  We haveelected to account for these transactions as normal purchases under SFAS 133,and accordingly, have not marked these transactions to market.

 

Wesometimes enter into firm-price purchase commitments with some of our naturalgas suppliers under which we agree to buy natural gas at a price set in advanceof the actual delivery of that natural gas to us.  Under these arrangements, we assume the riskof a price decrease in the market price of natural gas between the time thisprice is fixed and the time the natural gas is delivered.  At March 31, 2009, we did not have anycommitments to purchase natural gas in advance at prices other than atmarket.  We account for thesetransactions as normal purchases under SFAS 133, and accordingly, do not markthese transactions to market.

 

Inorder to reduce our market exposure to price decreases in corn, we have in the past,at the time we enter into a firm-price purchase commitment, often entered intocommodity forward contracts to sell a like amount of corn at the then-currentprice for delivery to the counterparty at a later date.  Such forward contracts are not designated ashedges and, therefore, are marked to market each period.

 

Wehave also, in the past, entered into commodity futures contracts in connectionwith the purchase of corn to reduce our risk of future price increases.  These futures contracts were not designatedas hedges and, therefore, were marked to market each period.

 

Weare also subject to market risk with respect to ethanol pricing.  Our ethanol sales are priced using contractsthat can either be fixed; based upon the price of wholesale gasoline plus orminus a fixed amount; or based upon a market price at the time ofshipment.  We sometimes fix the price atwhich we sell ethanol using fixed price physical delivery contracts.  We have elected to account for thesetransactions as normal sales transactions under SFAS 133, and accordingly, havenot marked these transactions to market.

 

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Wealso sell forward ethanol using contracts where the price is determined at apoint in the future based upon an index plus or minus a fixed amount.  Under these arrangements, we assume the riskof a price decrease in the market price of gasoline.  In order to reduce our market exposure toprice decreases, at the time we enter into a firm sales commitment, we may alsoenter into commodity forward contracts to sell a like amount of gasoline at thethen-current price for delivery to the counterparty at a later date.  These forward contracts are not designated ashedges and, therefore, are marked to market each period.

 

Wedid not have any derivative instruments outstanding at March 31,2009.  Derivatives not designated ashedging instruments under SFAS 133 at March 31, 2009 and December 31,2008 were as follows:

 
| ** **           | ** ** | ** **                                 | ** ** | **Fair Value  (in thousands)** | ** ** |
|----------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| **Type**             | ** ** | **Balance Sheet Classification** | ** ** | **March 31,  2009**                 | ** ** | **December  31, 2008** | ** ** |
|                 |       |                                       |       |                                     |       |   |   |
| Short corn positions |       | Other current assets                       |       | $                                        | —     |   | $ | 5,988 |   |
|                      |            |                                            |            |                                          |            |  |  |  |  |

 

Therealized and unrealized effect on our condensed consolidated statement ofoperations for derivatives not designated as hedging instruments under SFAS 133at March 31, 2009 and 2008 are as follows:

 
| ** **               | ** ** | ** **                                                | ** ** | **Fair Value  (in thousands)** | ** ** |
|--------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | ** **                                                | ** ** | **March 31,**                       | ** ** |
| **Type**                 | ** ** | **Statement of Operations Classification** | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
|                     |       |                                                      |       |                                     |       |   |   |
| Short corn positions     |       | Other non-operating income/(expense)                      |       | $                                        | 1,188      |   | $ | (3,960 | ) |
| Long corn positions      |       | Other non-operating income/(expense)                      |       | —                                   |       | 5,812 |   |
| Short gasoline positions |       | Other non-operating income/(expense)                      |       | —                                   |       | 16 |   |
| Totals                   |       |                                                      |       | $                                        | 1,188      |   | $ | 1,868 |   |

 

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

 

**(14)****                         ****Income Taxes**

 

TheCompany’s income tax benefit for the first quarter of 2009 was 13.3% of pre-taxincome.  The difference between thebenefit rate accrued and the statutory benefit rate is principally due to theestablishment of a valuation allowance because we expect to be unable torecognize net operating loss carryforward amounts and certain other deferredtax assets.

 

Asof March 31, 2009, we had $2.4 million of uncertain tax benefits.  All of our unrecognized tax benefits, ifrecognized in future periods, would impact the Company’s effective taxrate.  During the three month periodended March 31, 2009, our liability for unrecognized tax benefitsincreased by $1.5 million as a result of the examination of our federal incometax returns for the tax years 2006 and 2007. At March 31, 2009 our liability for unrecognized tax benefits isincluded in other current liabilities on the condensed consolidated balancesheet.

 

We include interest expense or income, as well as potential penaltieson unrecognized tax benefits, as a component of income tax expense in thecondensed consolidated statement of operations. 

 

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Thetotal amount of accrued interest related to uncertain tax positions at March 31,2009 was $0.1 million, net of the deferred tax benefit, and is included inother current liabilities.  We increasedour accrual for interest related to uncertain tax positions by $0.1 million,net of the deferred tax benefit, for the three month period ended March 31,2009.  It is reasonably possible that thetotal amount of unrecognized tax benefit will decrease by $2.4 million with thesettlement of the Company’s federal income tax audits for the tax years 2006and 2007.

 

Ourfederal income tax returns for 2006 and 2007 are open for examination under thefederal statute of limitations.  We filein numerous state and foreign jurisdictions with varying statutes oflimitations open from 2004 to 2007.

 

**(15)****                         ****Earnings (Loss) Per Share**

 

Basic earnings (loss) per share are computed bydividing net income/(loss) by the weighted average number of common sharesoutstanding during each period.  Dilutedearnings (loss) per share are calculated using the treasury stock method inaccordance with SFAS 128, and includes the effect of all dilutive securities,including non-qualified stock options and restricted stock units awards (“RSU’s”).

 

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

 
| ** **                                                         | ** ** | **Three Months Ended  March 31,** | ** **  |
|--------------------------------------------------------------------|------------|--------------------------------------------------|-------------|
| **(In thousands, except per share data)** | ** ** | **2009**                                         | ** **  | **2008** | ** ** |
|                                                               |       |                                             | ** **  |   |   |
| Net loss attributable to controlling interest                      | ** ** | **$**                                            | **(24,567** | **)** | $ | (10,795 | ) |
|                                                               |       |                                             | ** **  |   |   |
| Weighted average shares and share equivalents  outstanding:        |       |                                             | ** **  |   |   |
| Basic shares                                                       | ** ** | **42,971**                                       | ** **  | 41,838 |   |
| Dilutive non-qualified stock options and RSU’s                | ** ** | **—**                                       | ** **  | — |   |
| Diluted weighted average shares and share  equivalents             | ** ** | **42,971**                                       | ** **  | 41,838 |   |
|                                                               |       |                                             | ** **  |   |   |
| Income (loss) per common share - basic:                            | ** ** | **$**                                            | **(0.57**   | **)** | $ | (0.26 | ) |
| Income (loss) per common share - diluted:                          | ** ** | **$**                                            | **(0.57**   | **)** | $ | (0.26 | ) |

 

## ***We had additional potentially dilutive securitiesoutstanding representing options on 3.6 million and 4.1 million common sharesat March 31, 2009 and 2008 respectively, that were not included in thecomputation of potentially dilutive securities because the options exerciseprices were greater than the average market price of the common shares orbecause the options were anti-dilutive, and were excluded from the calculationof diluted earnings per share in accordance with SFAS 128.***

## *** ***

**(16)****                         ****Industry Segment**

 

The Company operates in onereportable business segment, the manufacture and marketing of fuel-gradeethanol.

 

**(17)****                         ****Litigation**

 

On April 7, 2009,the Company and all of its direct and indirect subsidiaries filed voluntarypetitions for relief under Chapter 11 of the Bankruptcy Code with theBankruptcy Court.  The Bankruptcy Casesare being jointly administered under Case Number 09-11214 (KG).  Aventine intends to continue to operate itsbusiness as a debtor-in-possession under the jurisdiction of the BankruptcyCourt 

 

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and in accordance with the applicable provisions ofthe Bankruptcy Code and orders of the Bankruptcy Court.  As a result of the commencement of theBankruptcy Cases, attempts to collect, secure, or enforce remedies with respectto pre-petition claims against Aventine are subject to the automatic stayprovisions of Section 362 of the Bankruptcy Code.  The Bankruptcy Cases are discussed in greaterdetail in Note 18 – Subsequent Events.

 

On November 6,2008, the Company commenced an action against JP Morgan Securities, Inc. and JP MorganChase Bank, N.A. (hereinafter collectively referred to as “JP Morgan”) in theTenth Judicial Circuit in Tazewell County, Illinois.  The Company’s complaint relates to lossesincurred in excess of $31 million as a result of investments in Student LoanAuction Rate Securities purchased through JP Morgan.  At this time, we cannot be certain as to theoutcome of this litigation.

 

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

 

**(18)****                         ****Subsequent Events**

 

OnApril 7, 2009, the Company and all of its direct and indirect subsidiariesfiled voluntary petitions for relief under Chapter 11 of the Bankruptcy Codewith the Bankruptcy Court.  The Companyintends to continue operating its business as a debtor-in-possession under thejurisdiction of the Bankruptcy Court and in accordance with the applicableprovisions of the Bankruptcy Code and orders of the Bankruptcy Court.  Aventine’s Chapter 11 cases are being jointlyadministered by the Bankruptcy Court as Case No. 09-11214 (KG)(collectively, the “Bankruptcy Cases”). In general, as debtors-in-possession, Aventine and its subsidiaries thatare part of the Bankruptcy Filing (collectively, the “Debtors”) are authorizedunder the Bankruptcy Code to continue to operate as an ongoing business, butmay not engage in transactions outside of the ordinary course of businesswithout the approval of the Bankruptcy Court. The Debtors specifically are (i) Aventine Renewable Energy Holdings, Inc.;(ii) Aventine Renewable Energy, LLC, a Delaware limited liability company;(iii) Aventine Renewable Energy, Inc. a Delaware corporation; (iv) AventineRenewable Energy — Mt. Vernon, LLC, a Delaware limited liability company; (v) AventineRenewable Energy — Aurora West, LLC, a Delaware limited liability company; (vi) AventinePower, LLC, a Delaware limited liability company, and (vii) NebraskaEnergy, LLC, a Kansas limited liability company.

 

Noassurance can be provided as to what values, if any, will be ascribed in theDebtors’ bankruptcy proceedings to the Debtors’ pre-petition liabilities,common stock and other securities. Accordingly, caution should be exercisedwith respect to existing and future investments in any of these liabilities orsecurities.

 

Ata hearing held on April 9, 2009, the Bankruptcy Court granted the Debtors’“First Day Motions”.  The relief grantedby the Bankruptcy Court through the First Day Motions was designed to stabilizethe Company’s operations and business relationships with vendors, lenders,employees and others, minimize the effects of the commencement of theBankruptcy Cases and preserve the value of the Debtors’ assets.

 

Onor about April 29, 2009, the Debtors caused notice of the commencement ofthe Bankruptcy Cases to be served on all known or potential creditors and otherparties in interest.  The BankruptcyFiling constituted an event of default under both the Company’s securedrevolving credit facility and its 10% senior unsecured notes due 2017 (see Note5).  Subject to certain exceptions underthe Bankruptcy Code, the Bankruptcy Filing automatically enjoined, or stayed,the continuation of any judicial or

 

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administrative proceedings or other actionsagainst the Debtors or their property to recover on, collect or secure a claimarising prior to the Petition Date.  Thus,for example, creditor actions to obtain possession of property from Aventine,or to create, perfect or enforce any lien against the property of Aventine, orto collect on or otherwise exercise rights or remedies with respect to apre-petition claim are enjoined unless and until the Bankruptcy Court lifts theautomatic stay.

 

Inorder to successfully exit Chapter 11, Aventine will need to propose, andobtain confirmation by the Bankruptcy Court of, a plan of reorganization thatsatisfies the requirements of the Bankruptcy Code.  A plan of reorganization could, among otherthings, resolve the Debtors’ pre-petition obligations, set forth the revisedcapital structure of the newly reorganized entity and provide for corporategovernance subsequent to exit from bankruptcy. Aventine has the exclusive right for 120 days after the Petition Date tofile a plan of reorganization and 60 additional days to solicit and obtainnecessary acceptances.  Such periods maybe extended by the Bankruptcy Court for cause to up to 18 months and 20 months,respectively, after the Petition Date. If Aventine’s exclusivity period lapses, any party in interest may filea plan of reorganization for Aventine. In addition to the need for BankruptcyCourt confirmation and satisfaction of Bankruptcy Code requirements, a plan ofreorganization must be accepted as described below by holders of impairedclaims and equity interests in order to become effective.  An Aventine Chapter 11 plan of reorganizationwill have been accepted by holders of claims against and equity interests inAventine if (i) at least one-half in number and two-thirds in dollaramount of claims actually voting in each impaired class of claims have voted toaccept the plan and (ii) at least two-thirds in amount of equity interestsactually voting in each impaired class of equity interests has voted to acceptthe plan. Under circumstances specified in the so-called “cramdown” provisionsof Section 1129(b) of the Bankruptcy Code, the Bankruptcy Court mayconfirm a plan even if such plan has not been accepted by all impaired classesof claims and equity interests.  A classof claims or equity  interests that doesnot receive or retain any property under the plan on account of such claims orinterests is deemed to have voted to reject the plan.  The precise requirements and evidentiaryshowing for confirming a Chapter 11 plan notwithstanding its rejection by oneor more impaired classes of claims or equity interests depends upon a number offactors, including the status and seniority of the claims or equity interestsin the rejecting class — i.e., secured claims or unsecured claims, subordinatedor senior claims, preferred or common stock.

 

UnderSection 365 of the Bankruptcy Code, Aventine may assume, assume andassign, or reject executory contracts and unexpired leases, including realproperty, railcars and equipment leases, subject to the approval of theBankruptcy Court and certain other conditions. Rejection constitutes a court-authorized breach of the lease or contractin question and, subject to certain exceptions, relieves Aventine of its futureobligations under such lease or contract but creates a pre-petition claim fordamages caused by such breach or rejection, subject to Aventine’s right toreview and contest such claim.  Partieswhose contracts or leases are rejected may file claims against Aventine fordamages.  Generally, the assumption of anexecutory contract or unexpired lease requires Aventine to cure all priordefaults under such executory contract or unexpired lease, including allpre-petition arrearages, and to provide adequate assurance of futureperformance.  In this regard, the Companyexpects that liabilities subject to compromise and resolution in the BankruptcyCases will arise in the future as a result of damage claims created by Aventine’srejection of various executory contracts and unexpired leases.  Conversely, the Company would expect that theassumption of certain executory contracts and unexpired leases may convertliabilities shown in future financial statements as subject to compromise topost-petition liabilities.  Due to theuncertain nature of many of the potential claims, the Company is unable toproject the magnitude of such claims with any degree of certainty.

 

TheBankruptcy Court will establish a deadline for the filing of proofs of claimand thereby require Aventine’s creditors to submit claims for allegedliabilities not paid and/or damages incurred arising from or related to periodsprior to the Petition Date.  There may bedifferences between the 

 

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amounts at which any such liabilities arerecorded in the Company’s financial statements and the amount claimed byAventine’s creditors.  Significantlitigation may be required to resolve any such disputes or discrepancies.

 

AlthoughAventine expects to file a Chapter 11 plan that provides for emergence fromChapter 11 some time in the future, there can be no assurance that a Chapter 11plan will be proposed by Aventine or confirmed by the Bankruptcy Court, or thatany such plan will be consummated.

 

TheCompany has incurred and will continue to incur significant costs associatedwith the reorganization.  The amount ofthese costs, which are being expensed as incurred, are expected tosignificantly affect the Company’s results of operations.

 

Asof the Petition Date, Aventine had approximately $2.7 million in cash and cashequivalents.  On April 7, 2009,prior to the commencement of the Bankruptcy Cases, Aventine obtained agreementsfrom certain holders of the notes, subject to specified conditions, fordebtor-in-possession (“DIP”) financing of up to $30 million (as described inthe Debtor in Possession Credit Facility Term Sheet filed as Exhibit 10.1to our Form 8-K filed on April 13, 2009 and incorporated herein byreference) to provide liquidity during the reorganization process.  At a hearing held before the Bankruptcy Courton May 5, 2009, the Bankruptcy Court overruled objections from the Debtors’pre-petition secured lenders and approved DIP financing on a final basis.  The ability of the Company to continue as agoing concern is dependent upon, among other things, (i) the Company’sability to comply with the terms and conditions of any DIP financing; (ii) theability of the Company to maintain adequate cash on hand; (iii) theability of the Company to generate cash from operations; (iv) the abilityof the Company to obtain confirmation of and to consummate a plan ofreorganization under the Bankruptcy Code; (v) the cost and outcome of thereorganization process; and (vi) the Company’s ability to achieveprofitability.  Uncertainty as to theoutcome of these factors raises substantial doubt about the Company’s abilityto continue as a going concern.  We arecurrently evaluating various courses of action to address the operational andliquidity issues the Company is facing and formulating plans for improvingoperations.  There can be no assurancethat any of these efforts will be successful. The accompanying unaudited condensed consolidated financial statementsdo not include any adjustments that might result should the Company be unableto continue as a going concern. Preparing the accompanying unaudited condensed consolidated financialstatements on a going concern basis contemplates the realization of assets andthe discharge of liabilities in the normal course of business for theforeseeable future.

 

Asa result of the Bankruptcy Filing, realization of assets and liquidation ofliabilities are subject to uncertainty. While operating as a debtor-in-possession under the protection ofChapter 11, and subject to Bankruptcy Court approval or otherwise as permittedin the normal course of business, Aventine may sell or otherwise dispose ofassets and liquidate or settle liabilities for amounts other than thosereflected in the condensed consolidated financial statements.  Further, a plan of reorganization could materiallychange the amounts and classifications reported in our consolidated financialstatements.  Our historical consolidatedfinancial statements do not give effect to any adjustments to the carryingvalue of assets or amounts of liabilities that might be necessary as aconsequence of confirmation of a plan of reorganization.

 

Thepotential adverse publicity associated with the Bankruptcy Filing and theresulting uncertainty regarding the Company’s future prospects may hinder theCompany’s ongoing business activities and its ability to operate, fund andexecute its business plan by impairing relations with existing and potentialcustomers; negatively impacting the ability of the Company to attract, retainand compensate key executives and employees and to retain employees generally;limiting the Company’s ability to obtain trade credit; and impairing presentand future relationships with vendors and service providers.

 

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Underthe priority scheme established by the Bankruptcy Code, unless creditors agreeotherwise, post-petition liabilities and pre-petition liabilities must besatisfied in full before stockholders of Aventine are entitled to receive anydistribution or retain any property under a plan of reorganization.  The ultimate recovery, if any, to creditorsand stockholders of Aventine will not be determined until confirmation andconsummation of a plan of reorganization. No assurance can be given as to what values, if any, will be ascribed inthe Bankruptcy Cases to each of these constituencies or what types or amountsof distributions, if any, they would receive. Accordingly, the Company urges that appropriate caution be exercisedwith respect to existing and future investments in any of the Company’s commonstock or any of the Company’s liabilities.

 

*Notice and Sell-DownProcedures for Trading Equity Securities*

 

TheBankruptcy Court entered an interim order on April 9, 2009 and a finalorder (the “Final Trading Restriction Order”) on May 4, 2009 granting themotion of the Debtors to require beneficial owners of substantial amounts ofthe Company’s common stock to provide notice of their holdings and restrict, inspecified circumstances and subject to specified terms and conditions,acquisitions or dispositions of the Company’s common stock by SubstantialEquityholders (as defined below) (the “Common Stock Notice and TransferRequirements”).

 

Underthe Common Stock Notice and Transfer Requirements, all “SubstantialEquityholders” must provide the Debtors, the Debtors’ counsel and theBankruptcy Court advance notice of their intent to buy or sell the Company’scommon stock (including options to acquire common stock, as further specifiedin the Final Trading Restriction Order) prior to effectuating any such purchaseor sale. A “Substantial Equityholder” under the Final Trading Restriction Orderis a person or entity that beneficially owns or, as a result of a transaction,would beneficially own, at least 2.04 million shares (including options toacquire shares, as further specified in the Final Trading Restriction Order) ofthe Company’s common stock, representing approximately 4.75% of all issued andoutstanding shares of the Company’s common stock.  The Common Stock Notice and TransferRequirements were requested by the Debtors to identify and, where necessary,restrict potential trades of the Company’s common stock that could negativelyimpact the Debtors’ ability to preserve maximum availability of their accruednet operating losses and other tax attributes under Section 382 of theCode.  Pursuant to the Final TradingRestriction Order, the Debtors have 15 calendar days after notification of atransfer by a Substantial Equityholder to file any objections with theBankruptcy Court and serve notice on such Substantial Equityholder.  If the Debtors file any objections, thetransfer would not become effective unless approved by a final andnon-appealable order of the Bankruptcy Court. In addition, a person or entity that is or becomes a SubstantialEquityholder must file with the Bankruptcy Court, and provide the Debtors andtheir counsel with, notification of such status on or before the later of (a) 15days after the effective date of the notice of entry of the Final TradingRestriction Order or (b) ten days after becoming a SubstantialEquityholder.

 

*Debtor-In-PossessionFinancing*

 

On April 7, 2009,certain of the Company’s bondholders (the “DIP Lenders”) entered into a termsheet (the “DIP Term Sheet”) for a $30 million Debtor-in-Possession CreditFacility with the Debtors.  The DIP TermSheet provides, subject to certain conditions as described in the Debtorin Possession Credit Facility Term Sheet filed as Exhibit 10.1 to our Form 8-Kfiled on April 13, 2009 and incorporated herein by reference, for a firstpriority debtor-in-possession financing (the “DIP Facility”) composed of a termloan facility made available to certain of Aventine’s subsidiaries in a maximumaggregate principal amount of up to $30 million.  Proceeds of the DIP Facility will be used,among other things, to (i) fund the working capital and general corporateneeds of the Debtors and the costs of the Bankruptcy Cases in accordance withan approved budget, and (ii) provide adequate protection, in 

 

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accordancewith the terms of the DIP Facility, to the pre-petition agent and pre-petitionlenders under the Company’s existing credit facilities.

 

OnApril 14, 2009, the Bankruptcy Court entered an interim order approvingthe DIP Facility and on May 5, 2009, entered an order approving the DIPFacility on a final basis.

 

Inaddition to the DIP Facility final order, the Bankruptcy Court on April 9,2009 entered an order authorizing the Company to use the cash collateral of itscreditors to fund specified operations and pay specified expenses of theBankruptcy Cases to allow the Debtors to operate pending the Bankruptcy Court’sconsideration of the approval of the DIP Facility.  These cash collateral orders includeauthorization of the use of cash collateral of the lenders under the Company’spre-petition secured revolving credit facility with the lenders therein.

 

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Item 2.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

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

 

*These forward-looking statements are subject to variousrisks and uncertainties which could cause actual results to differ materiallyfrom those stated or implied by such forward-looking statements.  We undertake no obligation to publiclyrelease any revision of any forward-looking statements contained herein toreflect events and circumstances occurring after the date hereof, or to reflectthe occurrence of unanticipated events. Information concerning risk factors is contained under Item “1A - RiskFactors” in our Annual Report on Form 10-K for the fiscal year ended December 31,2008 and under Part II, Item 1A of this Quarterly Report on Form 10-Q.  You should carefully consider all of therisks and all other information contained in or incorporated by reference inthis report and in our filings with the SEC. These risks are not the only ones we face.   Additional risks and uncertainties notpresently known to us, or which we currently consider immaterial, also mayadversely affect us.  If any of theserisks actually occur, our business, financial condition and results ofoperations could be materially and adversely affected.*

 

**Company Overview**

 

Aventineis a leading producer of ethanol. Through our production facilities, we market and distribute ethanol tomany of the leading energy companies in the U.S.  In addition to producing ethanol, ourfacilities also produce several co-products including: corn gluten feed andmeal, corn germ, condensed corn distillers solubles, dried distillers grainwith solubles (“DDGS”), wet distillers grain with solubles (“WDGS”), carbondioxide and brewers’ yeast.

 

**Results of Operations**

 

The following discussionsummarizes the significant factors affecting the consolidated operating resultsof the Company for the three month periods ended March 31, 2009 and2008.  This discussion should be read inconjunction with the unaudited condensed consolidated financial statements andnotes to the unaudited condensed consolidated financial statements contained inItem 1 above, and the consolidated financial statements and related notes forthe year ended December 31, 2008 included in the Company’s Annual Reporton Form 10-K.

 

Our revenues are principallyderived from the sale of ethanol and from the sale of co-products (corn glutenfeed and meal, corn germ, condensed corn distillers solubles, DDGS, WDGS,carbon dioxide, and brewers’ yeast) that we produce as by-products during theproduction of ethanol at our plants, which we refer to as co-product revenues.

 

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*Recent Events*

 

OnApril 7, 2009, the Company and all of its direct and indirectsubsidiaries, filed voluntary petitions for relief under Chapter 11 of theBankruptcy Code with the Bankruptcy Court. The Company intends to continue operating its business as adebtor-in-possession under the jurisdiction of the Bankruptcy Court and inaccordance with the applicable provisions of the Bankruptcy Code and orders ofthe Bankruptcy Court.  Aventine’sBankruptcy Cases are being jointly administered by the Bankruptcy Court underCase No. 09-11214 (KG).  In general,as debtors-in-possession, the Debtors are authorized under the Bankruptcy Codeto continue to operate as an ongoing business, but may not engage intransactions outside of the ordinary course of business without the approval ofthe Bankruptcy Court.  The Debtorsspecifically are (i) Aventine Renewable Energy Holdings, Inc.; (ii) AventineRenewable Energy, LLC, a Delaware limited liability company; (iii) AventineRenewable Energy, Inc. a Delaware corporation; (iv) AventineRenewable Energy — Mt. Vernon, LLC, a Delaware limited liability company; (v) AventineRenewable Energy — Aurora West, LLC, a Delaware limited liability company; (vi) AventinePower, LLC, a Delaware limited liability company, and (vii) NebraskaEnergy, LLC, a Kansas limited liability company.

 

Noassurance can be provided as to what values, if any, will be ascribed in theDebtors’ bankruptcy proceedings to the Debtors’ pre-petition liabilities,common stock and other securities. Accordingly, caution should be exercisedwith respect to existing and future investments in any of these liabilities orsecurities.

 

Ata hearing held on April 9, 2009, the Bankruptcy Court granted the Debtors’“First Day Motions”.  The relief grantedby the Bankruptcy Court through the First Day Motions was designed to stabilizethe Company’s operations and business relationships with vendors, lenders,employees and others, minimize the effects of the commencement of theBankruptcy Cases and preserve the value of the Debtors’ assets.

 

Onor about April 29, 2009, the Debtors caused notice of the commencement ofthe Bankruptcy Cases to be served on all known or potential creditors and otherparties in interest.  The BankruptcyFiling constituted an event of default under the Company’s secured revolvingcredit facility and its 10% senior unsecured notes due 2017 (see Note 5 in theaccompanying unaudited condensed consolidated financial statements).  Subject to certain exceptions under theBankruptcy Code, the Bankruptcy Filing automatically enjoined, or stayed, thecontinuation of any judicial or administrative proceedings or other actionsagainst the Debtors or their property to recover on, collect or secure a claimarising prior to the Petition Date. Thus, for example, creditor actions to obtain possession of propertyfrom Aventine, or to create, perfect or enforce any lien against the propertyof Aventine, or to collect on or otherwise exercise rights or remedies withrespect to a pre-petition claim are enjoined unless and until the BankruptcyCourt lifts the automatic stay.

 

Inorder to successfully exit Chapter 11, Aventine will need to propose, andobtain confirmation by the Bankruptcy Court of, a plan of reorganization thatsatisfies the requirements of the Bankruptcy Code.  A plan of reorganization could, among otherthings, resolve the Debtors’ pre-petition obligations, set forth the revisedcapital structure of the newly reorganized entity and provide for corporategovernance subsequent to exit from bankruptcy. Aventine has the exclusive right for 120 days after the Petition Date tofile a plan of reorganization and 60 additional days to solicit and obtainnecessary acceptances.  Such periods maybe extended by the Bankruptcy Court for cause to up to 18 months and 20 months,respectively, after the Petition Date. If Aventine’s exclusivity period lapses, any party in interest may filea plan of reorganization for Aventine. In addition to the need for BankruptcyCourt confirmation and satisfaction of Bankruptcy Code requirements, a plan ofreorganization must be accepted as described below by holders of impairedclaims and equity interests in order to become 

 

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effective. An Aventine Chapter 11 plan of reorganization will have been accepted byholders of claims against and equity interests in Aventine if (i) at leastone-half in number and two-thirds in dollar amount of claims actually voting ineach impaired class of claims have voted to accept the plan and (ii) atleast two-thirds in amount of equity interests actually voting in each impairedclass of equity interests has voted to accept the plan. Under circumstancesspecified in the so-called “cramdown” provisions of Section 1129(b) ofthe Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such planhas not been accepted by all impaired classes of claims and equityinterests.  A class of claims orequity  interests that does not receiveor retain any property under the plan on account of such claims or interests isdeemed to have voted to reject the plan. The precise requirements and evidentiary showing for confirming aChapter 11 plan notwithstanding its rejection by one or more impaired classesof claims or equity interests depends upon a number of factors, including thestatus and seniority of the claims or equity interests in the rejecting class —i.e., secured claims or unsecured claims, subordinated or senior claims,preferred or common stock.

 

UnderSection 365 of the Bankruptcy Code, Aventine may assume, assume andassign, or reject executory contracts and unexpired leases, including realproperty, railcars and equipment leases, subject to the approval of theBankruptcy Court and certain other conditions. Rejection constitutes a court-authorized breach of the lease or contractin question and, subject to certain exceptions, relieves Aventine of its futureobligations under such lease or contract but creates a pre-petition claim fordamages caused by such breach or rejection, subject to Aventine’s right toreview and contest such claim.  Partieswhose contracts or leases are rejected may file claims against Aventine fordamages.  Generally, the assumption of anexecutory contract or unexpired lease requires Aventine to cure all priordefaults under such executory contract or unexpired lease, including allpre-petition arrearages, and to provide adequate assurance of future performance.  In this regard, the Company expects thatliabilities subject to compromise and resolution in the Bankruptcy Cases willarise in the future as a result of damage claims created by Aventine’srejection of various executory contracts and unexpired leases.  Conversely, the Company would expect that theassumption of certain executory contracts and unexpired leases may convertliabilities shown in future financial statements as subject to compromise topost-petition liabilities.  Due to theuncertain nature of many of the potential claims, the Company is unable toproject the magnitude of such claims with any degree of certainty.

 

TheBankruptcy Court will establish a deadline for the filing of proofs of claimand thereby require Aventine’s creditors to submit claims for allegedliabilities not paid and/or damages incurred arising from or related to periodsprior to the Petition Date.  There may bedifferences between the amounts at which any such liabilities are recorded inthe Company’s financial statements and the amount claimed by Aventine’screditors.  Significant litigation may berequired to resolve any such disputes or discrepancies.

 

AlthoughAventine expects to file a Chapter 11 plan that provides for emergence fromChapter 11 some time in the future, there can be no assurance that a Chapter 11plan will be proposed by Aventine or confirmed by the Bankruptcy Court, or thatany such plan will be consummated.

 

TheCompany has incurred and will continue to incur significant costs associatedwith the reorganization.  The amount ofthese costs, which are being expensed as incurred, are expected tosignificantly affect the Company’s results of operations.

 

Asof the Petition Date, Aventine had approximately $2.7 million in cash and cashequivalents.  On April 7, 2009,prior to the commencement of the Bankruptcy Cases, Aventine obtained agreementsfrom certain holders of the notes, subject to specified conditions, for DIPFinancing of up to $30 million (as described in the Debtor in Possession CreditFacility Term Sheet filed as Exhibit 10.1 to our Form 8-K filed on April 13,2009 and incorporated herein by reference) to provide liquidity during the 

 

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reorganization process.  At a hearing held before the Bankruptcy Courton May 5, 2009, the Bankruptcy Court overruled objections from the Debtors’pre-petition secured lenders and approved DIP financing on a final basis.  The ability of the Company to continue as agoing concern is dependent upon, among other things, (i) the Company’sability to comply with the terms and conditions of any DIP financing; (ii) theability of the Company to maintain adequate cash on hand; (iii) theability of the Company to generate cash from operations; (iv) the abilityof the Company to obtain confirmation of and to consummate a plan ofreorganization under the Bankruptcy Code; (v) the cost and outcome of thereorganization process; and (vi) the Company’s ability to achieveprofitability.  Uncertainty as to theoutcome of these factors raises substantial doubt about the Company’s abilityto continue as a going concern.  We arecurrently evaluating various courses of action to address the operational andliquidity issues the Company is facing and formulating plans for improvingoperations.  There can be no assurancethat any of these efforts will be successful. The accompanying unaudited condensed consolidated financial statementsdo not include any adjustments that might result should the Company be unableto continue as a going concern. Preparing the accompanying unaudited condensed consolidated financialstatements on a going concern basis contemplates the realization of assets andthe discharge of liabilities in the normal course of business for theforeseeable future.

 

Asa result of the Bankruptcy Filing, realization of assets and liquidation ofliabilities are subject to uncertainty. While operating as a debtor-in-possession under the protection ofChapter 11, and subject to Bankruptcy Court approval or otherwise as permittedin the normal course of business, Aventine may sell or otherwise dispose ofassets and liquidate or settle liabilities for amounts other than thosereflected in the condensed consolidated financial statements.  Further, a plan of reorganization couldmaterially change the amounts and classifications reported in our consolidatedfinancial statements.  Our historicalconsolidated financial statements do not give effect to any adjustments to thecarrying value of assets or amounts of liabilities that might be necessary as aconsequence of confirmation of a plan of reorganization.

 

Thepotential adverse publicity associated with the Bankruptcy Filing and theresulting uncertainty regarding the Company’s future prospects may hinder theCompany’s ongoing business activities and its ability to operate, fund andexecute its business plan by impairing relations with existing and potentialcustomers; negatively impacting the ability of the Company to attract, retainand compensate key executives and employees and to retain employees generally;limiting the Company’s ability to obtain trade credit; and impairing presentand future relationships with vendors and service providers.

 

Underthe priority scheme established by the Bankruptcy Code, unless creditors agreeotherwise, post-petition liabilities and pre-petition liabilities must besatisfied in full before stockholders of Aventine are entitled to receive anydistribution or retain any property under a plan of reorganization.  The ultimate recovery, if any, to creditorsand stockholders of Aventine will not be determined until confirmation andconsummation of a plan of reorganization. No assurance can be given as to what values, if any, will be ascribed inthe Bankruptcy Cases to each of these constituencies or what types or amountsof distributions, if any, they would receive. Accordingly, the Company urges that appropriate caution be exercisedwith respect to existing and future investments in the Company’s common stockor any of the Company’s liabilities or securities.

 

*Notice and Sell-DownProcedures for Trading Equity Securities*

 

TheBankruptcy Court entered an interim order on April 9, 2009 and a finalorder (the “Final Trading Restriction Order”) on May 4, 2009 granting themotion of the Debtors to require beneficial owners of substantial amounts ofthe Company’s common stock to provide notice of their holdings and restrict, inspecified circumstances and subject to specified terms and conditions,acquisitions or 

 

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dispositions of the Company’s common stock bySubstantial Equityholders (as defined below) (the “Common Stock Notice andTransfer Requirements”).

 

Underthe Common Stock Notice and Transfer Requirements, all “SubstantialEquityholders” must provide the Debtors, the Debtors’ counsel and theBankruptcy Court advance notice of their intent to buy or sell the Company’scommon stock (including options to acquire common stock, as further specifiedin the Final Trading Restriction Order) prior to effectuating any such purchaseor sale. A “Substantial Equityholder” under the Final Trading Restriction Orderis a person or entity that beneficially owns or, as a result of a transaction,would beneficially own, at least 2.04 million shares (including options toacquire shares, as further specified in the Final Trading Restriction Order) ofthe Company’s common stock, representing approximately 4.75% of all issued andoutstanding shares of the Company’s common stock.  The Common Stock Notice and TransferRequirements were requested by the Debtors to identify and, where necessary,restrict potential trades of the Company’s common stock that could negativelyimpact the Debtors’ ability to preserve maximum availability of their accruednet operating losses and other tax attributes under Section 382 of theCode.  Pursuant to the Final Trading RestrictionOrder, the Debtors have 15 calendar days after notification of a transfer by aSubstantial Equityholder to file any objections with the Bankruptcy Court andserve notice on such Substantial Equityholder. If the Debtors file any objections, the transfer would not becomeeffective unless approved by a final and non-appealable order of the BankruptcyCourt.  In addition, a person or entitythat is or becomes a Substantial Equityholder must file with the BankruptcyCourt, and provide the Debtors and their counsel with, notification of suchstatus on or before the later of (a) 15 days after the effective date ofthe notice of entry of the Final Trading Restriction Order or (b) ten daysafter becoming a Substantial Equityholder.

 

*Debtor-In-Possession Financing*

 

On April 7, 2009, theDIP Lenders entered into the DIP Term Sheet for a $30 millionDebtor-in-Possession Credit Facility with the Debtors.  The DIP Term Sheet provides, subject tocertain conditions as described in the Debtor in Possession CreditFacility Term Sheet filed as Exhibit 10.1 to our Form 8-K filed on April 13,2009 and incorporated herein by reference, for a first prioritydebtor-in-possession financing composed of a term loan facility made availableto certain of Aventine’s subsidiaries in a maximum aggregate principal amountof up to $30 million.  Proceeds of theDIP Facility will be used, among other things, to (i) fund the workingcapital and general corporate needs of the Debtors and the costs of theBankruptcy Cases in accordance with an approved budget, and (ii) provideadequate protection, in accordance with the terms of the DIP Facility, to thepre-petition agent and pre-petition lenders under the Company’s existing creditfacilities.

 

OnApril 14, 2009, the Bankruptcy Court entered an interim order approvingthe DIP Facility and on May 5, 2009, entered an order approving the DIPFacility on a final basis.

 

In addition to the DIPFacility final order, the Bankruptcy Court entered on April 9, 2009 anorder authorizing the Company to use the cash collateral of its creditors tofund specified operations and pay specified expenses of the Bankruptcy Cases toallow the Debtors to operate pending the Bankruptcy Court’s consideration ofthe approval of the DIP Facility.  Thesecash collateral orders include authorization of the use of cash collateral ofthe lenders under the Company.

 

*Executive Summary of Financial Results*

 

Thenet loss attributable to controlling interest for the first quarter of 2009 was$24.6 million, or $0.57 per diluted share, as compared to a net loss of $10.8million, or $0.26 per diluted share, in the first quarter of 2008.  The net loss in the first quarter of 2009resulted primarily from lower commodity spreads and higher selling, general andadministrative costs, offset somewhat by lower 

 

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conversion costs and income received fromtermination of marketing alliance agreements. Commodity spread, defined as gross ethanol selling price per gallon lessnet corn cost per gallon, declined from $1.21 per gallon in the first quarterof 2008 to $0.53 per gallon in the first quarter of 2009.  The average sales price per gallon of ethanoldecreased in the first quarter of 2009 to $1.69 per gallon from the $2.21average received in the first quarter of 2008. Corn costs during the first quarter of 2009 averaged $4.25 per bushel,as compared to $4.50 per bushel in the first quarter of 2008.  Conversion cost in the first quarter of 2009was $0.59 per gallon as compared to $0.62 per gallon in the first quarter of2008.

 

Gallonsof ethanol sold in the first quarter of 2009 decreased to 120.8 milliongallons, as compared to 211.2 million gallons in the first quarter of2008.  The decrease resulted from thewinding-down of our marketing alliance and purchase resale operations.  Gallons produced during the first quarter of2009 decreased to 46.4 million gallons from 47.7 million gallons in the firstquarter of 2008.

 

Theeconomic impact of selling gallons held in inventory at the end of the fourthquarter of 2008 with a $1.54 per gallon value as prices decreased during thefirst quarter of 2009 was a negative impact to cost of goods sold of approximately$3.0 million (including a $1.1 million lower of cost or market adjustment at March 31,2009).  The average inventory cost of$1.47 per gallon at the end of the first quarter of 2009 versus $1.54 at theend of the fourth quarter of 2008 reflects the decrease in ethanol pricesduring the quarter using our weighted average FIFO approach to calculatinginventory.  Conversely, increasing prices throughout the first quarter of2008 had a positive economic impact on cost of goods sold of $5.5 million.

 

Our inventory isvalued based upon a weighted average price we pay for ethanol that wepreviously purchased from our marketing alliance partners and ourpurchase/resale transactions, along with our own cost to produce ethanol. Changes, either upward or downward, in our purchased cost of ethanol or our ownproduction costs, will cause the inventory value to fluctuate from period toperiod, perhaps significantly.  These changes in value flow through ourstatement of operations as the inventory is sold and can significantly increaseor decrease our profitability.

 

Duringthe first quarter of 2009, we recognized income from the termination ofmarketing agreements with alliance partners totaling $10.2 million.

 

Othernon-operating income for the first quarter of 2009 includes $1.2 million ofrealized net gains on corn derivative contracts, versus realized and unrealizednet gains on derivative contracts in the first quarter of 2008 of $1.9million.  We did not have any openderivative positions at the end of the first quarter of 2009.  We do not mark to market forward physicalcontracts to purchase corn.

 

*For the Three Months EndedMarch 31, 2009 Compared to the Three Months Ended March 31, 2008*

 

Totalgallons of ethanol sold in the first quarter of 2009 decreased to 120.8 milliongallons, versus 211.2 million gallons sold in the first quarter of 2008.  Gallons of ethanol were sourced as follows:

 
| For the Three Months Ended March 31,                      |
|----------------------------------------------------------------|
| **(In thousands, except for percentages)** | ** ** | **2009** | ** ** | **2008** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
| Equity production                                              | ** ** | **46,354** |   | 47,735 |   | (1,381 | ) | (2.9 | )% |
| Marketing alliance purchases                                   | ** ** | **12,898** |   | 129,889 |   | (116,991 | ) | (90.1 | )% |
| Purchase/resale                                                | ** ** | **29,673** |   | 38,964 |   | (9,291 | ) | (23.8 | )% |
| Decrease (increase) in inventory                               | ** ** | **31,897** |   | (5,346 | ) | 37,243 |   | N.M. | * |
| Total                                                          | ** ** | **120,822** |   | 211,242 |   | (90,420 | ) | (42.8 | )% |

 

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*  Not meaningful

 

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Netsales in the first quarter of 2009 decreased 53.6% from the first quarter of2008.  Net sales were $236.5 million inthe first quarter of 2009 versus $509.9 million in the first quarter of2008.  Overall, the decrease in net saleswas the result of less supply available as we terminated our marketing allianceand purchase/resale supply operations and from a decrease in the average salesprice of ethanol sold.  Ethanol pricesaveraged $1.69 per gallon in the first quarter of 2009 versus $2.21 in thefirst quarter of 2008.

 

Co-product revenues for the first quarter of 2009 totaled $22.4million, a decrease of $10.9 million or 32.7%, from the first quarter 2008 totalof $33.3 million.  Co-product revenuesdecreased during the first quarter of 2009 as a result of significantly lowerco-product pricing and volumes for corn germ and DDGS, offset by slightlyhigher yeast volumes and pricing.  In thefirst quarter of 2009, we sold 264.2 thousand tons, versus 272.4 thousand tonsin the first quarter of 2008.  Co-productrevenues, as a percentage of corn costs, fell to 29.5% during the first quarterof 2009, versus 41.2% in the first quarter of 2008.  Co-product revenues, as a percentage of corncosts, decreased in the first quarter of 2009 as compared to 2008 as the resultof selling co-products into the spot market during a period of time in whichour corn costs were significantly higher than the CBOT average.

 

Costof goods sold for the quarter ended March 31, 2009 was $258.0 million,compared to $485.9 million for the quarter ended March 31, 2008, adecrease of $227.9 million or 46.9%.  Asa percentage of net sales, cost of goods sold increased to 109.1% of sales from95.3% of sales in the first quarter of 2008. Cost of goods sold consists of the cost to produce ethanol at our ownfacilities, the cost of purchasing ethanol from our marketing alliance partnersand the cost of purchasing ethanol from other producers and marketers, freightand logistics costs to ship ethanol and co-products, and the cost of motor fueltaxes which have been billed to customers. The decrease in cost of goods sold is principally the result of lowervolumes of ethanol purchased, lower corn costs and lower conversion costs.

 

Purchasedethanol in the first quarter of 2009 totaled $73.7 million, versus $341.9million in the first quarter of 2008. The decrease in purchased ethanol resulted from both the decrease in thenumber of gallons of ethanol purchased and from a decrease in the cost pergallon of ethanol purchased.  In thefirst quarter of 2009, we purchased 42.6 million gallons of ethanol at anaverage cost of $1.73 per gallon as compared to 168.9 million gallons ofethanol at an average cost of $2.02 in the first quarter of 2008.

 

Productioncosts include corn costs, conversion costs (defined as the cost of convertingthe corn into ethanol, and includes production salaries, wages and stock-basedcompensation costs, fringe benefits, utilities (including coal and naturalgas), maintenance, denaturant, insurance, materials and supplies and othermiscellaneous production costs) and depreciation.  Corn costs in the first quarter of 2009totaled $75.9 million or $4.25 per bushel, versus $80.8 million, or $4.50 perbushel in the first quarter of 2008.  Ouraverage corn costs in the first quarter of 2009 were higher than the CBOTaverage price during the same period. The decrease in corn costs is due to lower corn prices.

 

Conversioncosts for the first quarter of 2009 decreased to $27.2 million from $29.8million for the first quarter of 2008. The total dollars spent on conversion costs decreased year over yearprincipally as a result of lower costs for utilities, chemicals and othersupplies which have decreased as a result of significantly lower petroleumprices.  The conversion cost per gallondecreased year over year to $0.59 per gallon in the first quarter of 2009versus $0.62 per gallon in the first quarter of 2008.

 

Depreciationin the first quarter of 2009 totaled $3.5 million, versus $3.3 million in thefirst quarter of 2008.  Motor fuel taxeswere $4.4 million in the first quarter of 2009 versus $3.4 million in the firstquarter of 2008.  The cost of motor fueltaxes are recovered through billings to customers.

 

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Freight/logisticscosts were up slightly on a per gallon basis in the first quarter of 2009 overthe first quarter of 2008. Freight/logistics costs in the first quarter of 2009 were $0.21 pergallon as compared to $0.20 per gallon in the first quarter of 2008.  Freight/logistics dollars spent decreased inthe first quarter of 2009 to $24.8 million from $42.2 million in the firstquarter of 2008 as a result of lower volumes shipped.  Freight/logistics cost per gallon iscalculated by taking total freight/logistics costs incurred (including costs toship co-products) and dividing by the total ethanol gallons sold.

 

The average inventory costof $1.47 per gallon at the end of the first quarter of 2009 versus $1.54 at theend of the fourth quarter of 2008, using our weighted-average FIFO approach tocalculating inventory, reflects declining ethanol prices during thequarter.  The economic impact of selling gallons held in inventory at theend of the fourth quarter of 2008 with a $1.54 per gallon value as pricesdecreased during the first quarter of 2009 was a negative impact to cost ofgoods sold of approximately $3.0 million (including a $1.1 million non-cashlower of cost or market adjustment at March 31, 2009).  Conversely, rising prices throughout thefirst quarter of 2008 positively impacted cost of goods sold by $5.5 million inthat period.

 

Selling,general & administrative expenses (“SG&A”) were $9.7 million inthe first quarter of 2009 as compared to $8.9 million in the first quarter of2008.  The higher expense in the firstquarter of 2009 primarily relates to an increase in spending, primarilyprofessional fees, surrounding our liquidity issues.  These increased professional fees werepartially offset by reduced personnel and stock-based compensation costs.

 

Interest income in the firstquarter of 2009 was $11 thousand, versus interest income of $2.2 million in thefirst quarter of 2008.  The significantdecrease in interest income is due to a decrease in excess liquidity.

 

Interestexpense in the first quarter of 2009 was $8.7 million, as compared to $2.4million in the first quarter of 2008. Interest expense in the first quarter of 2009 was higher than in thesame period in 2008 due to suspension of interest expense capitalization inconjunction with the halting of our expansion projects.  Interest expense in the first quarter of 2009included $7.8 million in interest on our $300 million aggregate principal 10.0%senior unsecured notes issued March 27, 2007 and our secured revolvingcredit facility and $0.9 million of amortization of deferred financingfees.  Interest expense in the first quarterof 2008 included $7.5 million in interest on our $300 million aggregateprincipal amount of 10.0% senior unsecured notes issued March 27, 2007 and$0.3 million of amortization of deferred financing fees, reduced by capitalizedinterest of $5.4 million.

 

Othernon-operating income for the first quarter of 2009 includes $1.2 million ofrealized net gains on corn derivative contracts versus net realized andunrealized gains in the first quarter of 2008 of $1.9 million.  We did not have any open derivative positionsat the end of the first quarter of 2009. We do not mark to market forward physical contracts to purchase corn.

 

Incometax benefit in the first quarter of 2008 totaled $3.8 million.  The effective income tax benefit rate in thefirst quarter of 2009 was 13.3% of pre-tax income.  The difference between the benefit rateaccrued and the statutory benefit rate is principally due to the establishmentof a valuation allowance because we expect to be unable to recognize netoperating loss carryforward amounts and certain other deferred taxassets.  As of March 31, 2009 the Company had recorded valuationallowance totaling $24.4 million on its deferred tax assets to reduce thedeferred tax assets to the amount that the Company believes is more likely thannot to be realized.

 

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**Trends and Factors that May AffectFuture Operating Results**

 

*EthanolPricing*

 

Ethanolprices continued to be at or near the spot cost to produce ethanol during thefirst quarter of 2009, making the cash spot margins near break-even.  As the supply of ethanol from plants whichare currently under construction begins to make its way into the marketplace orplants that are currently shut-in begin to produce ethanol again, ethanolpricing may remain soft, and gross margins may remain near break-even.

 

Asof March 31, 2009, we had contracts for delivery of ethanol totaling 67.5million gallons through December 2009. These commitments were for 67.5 million gallons at spot prices (usingvarious Platt, OPIS and AXXIS indices).

 

Forthe second quarter of 2009, we have contracts for delivery of ethanol totaling32.7 million gallons.  These commitmentsare for 32.7 million gallons at spot prices (using various Platt, OPIS andAXXIS indices).

 

*Corn*

 

Cornprices rose significantly from 2006 to 2008 and reached record levels during2008.  Since 2008, corn prices havedeclined with the economic conditions in general, along with most othercommodities.  We believe that this is duein part to lower than expected consumption, including for ethanol and forexport as a result of concerns of global recession and reductions in globaldemand.  However, we continue to believethat corn prices are likely to remain above historical levels for theforeseeable future.

 

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

 

AtMarch 31, 2009, we had fixed the price of 1.5 million bushels of corn throughDecember 2009 at an average of $5.23 per bushel, representingapproximately 3% percent of our corn requirements for the remainder of 2009.

 

*MarketingAlliance*

 

Forthe past few years, our marketing business has been an important component ofour business.  Using the gallons wesourced from third parties, we were able to distribute significantly moreethanol than we could have produced from our own equity production, therebygiving us a greater marketing presence without having to make capital investments.  However, with severely declining margins andgeneral liquidity stress due to frozen credit markets, this model no longerworked for our alliance partners or Aventine. Beginning in the fourth quarter of 2008, we negotiated terminationagreements with our marketing alliance partners and began to rationalize ourdistribution network to primarily focus on sales of our equity production.  We completed the disbanding of our marketing allianceduring the first quarter of 2009.  Accordingly, we expect ethanol sourced frommarketing alliance partners to decline sharply in 2009.

 

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*Supply andDemand*

 

Accordingto the Renewable Fuels Association, the annual ethanol production capacity inthe U.S. of plants currently in operation, those currently not producing, andthose under construction is almost 14.4 billion gallons annually.  This volume of ethanol production exceeds themandate for renewable biofuel consumption required in 2014.  Ethanol produced in the United Statescompetes with sugar-based ethanol produced in Brazil.  This domestic production capacity, along withimports, may cause supply to exceed demand. If additional demand for ethanol is not created, either throughadditions to discretionary blending (through increased penetration rates inareas that blend ethanol today or through the establishment of new marketswhere little or no ethanol is blended today), or through additional state levelmandates, the excess supply may cause ethanol gross margins to decrease,perhaps substantially.

 

*Bankruptcy*

 

As described inmore detail elsewhere in this Form 10-Q, Aventine and all of its directand indirect subsidiaries filed voluntary petitions under Chapter 11 of theBankruptcy Code on April 7, 2009.  No assurancecan be provided as to what values, if any, will be ascribed in Aventine’sbankruptcy proceedings to the pre-petition liabilities, common stock and othersecurities.  Accordingly, caution shouldbe exercised with respect to existing and future investments in any of theseliabilities or securities.

 

Inorder to successfully exit Chapter 11 bankruptcy, Aventine will need topropose, and obtain confirmation by the Bankruptcy Court of, a plan ofreorganization that satisfies the requirements of the Bankruptcy Code.  A plan of reorganization could, among otherthings, resolve Aventine’s pre-petition obligations, set forth the revisedcapital structure of the newly reorganized entity and provide for corporategovernance subsequent to exit from bankruptcy. Although Aventine expects to file a reorganization plan that providesfor emergence from Chapter 11 bankruptcy some time in the future, there can beno assurance that a reorganization plan will be proposed by Aventine orconfirmed by the Bankruptcy Court, or that any such plan will be consummated.

 

TheCompany has incurred and will continue to incur significant costs associatedwith the reorganization.  The amount of thesecosts, which are being expensed as incurred, are expected to significantlyaffect the Company’s results of operations.

 

**Liquidity and CapitalResources**

 

*Overview and Outlook*

 

Thefollowing table sets forth selected information concerning our financialcondition:

 
| **(In thousands)**   | ** **   | **March 31,  2009** | ** **   | **December 31,  2008** | ** **   |
|---------------------------|--------------|--------------------------|--------------|-----------------------------|--------------|
| *** ***              | *** *** | **(Unaudited)**          | *** *** | *** ***                | *** *** |
| Cash and cash equivalents | ** **   | **$**                    | **2**        | ** **                  | $            | 23,339 |   |
| Working capital           | ** **   | **(313,160**             | **)**        | (294,039                    | )            |
| Total debt                | ** **   | **314,422**              | ** **   | 352,200                     |         |
| Current ratio             | ** **   | **0.18**                 | ** **   | 0.39                        |         |
|                           |              |                          |              |                             |              |  |  |

 

Asa result of our Bankruptcy Filing and the circumstances leading to ourBankruptcy Filing as described elsewhere in this report, we face uncertaintyregarding the adequacy of our liquidity and capital resources and have limitedaccess to financing.  The BankruptcyFiling constituted an event of default 

 

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under our secured revolving credit facilityand the indenture governing our 10% senior unsecured notes due 2017, and thedebt obligations under those agreements became automatically and immediatelydue and payable, subject to the automatic stay provisions of Section 362of the Bankruptcy Code.  As of thePetition Date, the amount of outstanding borrowings and letters of credit underthe secured revolving credit facility totaled approximately $18.4 million and$22.0 million, respectively, and the aggregate principal amount outstanding onour 10% senior unsecured notes due 2017 was $300 million.

 

Duringthe pendency of the Bankruptcy Cases, we expect that our primary sources ofliquidity will be cash flows from operations and borrowings under our DIPFinancing.  In addition to the cashrequirements necessary to fund ongoing operations, we have incurred significantprofessional fees and other costs in connection with the Bankruptcy Cases andexpect that we will continue to incur significant professional fees andcosts.  We cannot assure you that the amountsof cash available from operations, together with our DIP Financing, will besufficient to fund our operations, including operations during the period untilsuch time as we are able to propose a plan of reorganization that will receivethe requisite acceptance by creditors and be confirmed by the BankruptcyCourt.  Our long-term liquidityrequirements and the adequacy of our capital resources are difficult to predictat this time and ultimately cannot be determined until a plan of reorganizationhas been developed and is confirmed by the Bankruptcy Court.

 

OnApril 7, 2009, the date of the Bankruptcy Filing, we had approximately$2.7 million in cash and cash equivalents on hand.  On April 7, 2009, Aventine obtainedagreements from certain noteholders, subject to specified conditions, for DIP Financingof up to $30 million, as described in the Debtor in Possession Credit FacilityTerm Sheet document filed as Exhibit 10.1 to our Form 8-K filed on April 13,2009 and incorporated herein by reference, to provide liquidity during thereorganization process.

 

Inaddition to the $30 million of DIP Financing, the orders entered by theBankruptcy Court approving the DIP Financing authorize Aventine to use the cashcollateral of our pre-petition secured revolving credit facility lenders tofund specified operations and pay specified expenses of the Bankruptcy Cases.

 

Fundsavailable under our DIP Financing, together with cash generated fromoperations, are expected to be sufficient to fund operations of our businessuntil the end of 2009.  However, funds availableunder our DIP Financing cannot be used for capital expenditures beyond thosepermitted in our DIP budget, which DIP budget may be amended in accordance withthe terms of the final order approving the DIP Facility.  Consequently, we do not expect to continue inthe near-term construction of our Aurora, Nebraska or Mt. Vernon, Indianaexpansion projects.

 

*Sources of Liquidity*

 

Ourprincipal sources of liquidity are cash, cash equivalents, cash provided by ourborrowing facilities (including our DIP Facility), and cash provided byoperations.

 

*Cash,cash equivalents.*  For thefirst three months of 2009, cash and cash equivalents decreased by $23.3million as compared to the first three months of 2008.  Cash and cash equivalents as of March 31,2009 and December 31, 2008 were $2 thousand and $23.3 million,respectively.  The significant decreasein cash and cash equivalents is principally the result of required reductionsin balances outstanding on our secured revolving credit facility, offsetsomewhat by cash provided by our operations.

 

C*ash provided by operations.* Net cash provided by operating activities in the first three months of2009 was $14.1****million, as compared to cashprovided by operating activities of $29.4 million for the first three months of2008.  Cash provided by operations in2009 was reduced by significant operating 

 

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losses incurred in the first quarter of2009.  In the first quarter of 2009, weoffset these large operating losses by generating significant amounts of cashfrom the liquidation of receivables and inventory and payments received fromalliance terminations, offset partially by reductions in accounts payable.

 

*Cashavailable under our liquidity facility*.  As a result of the Bankruptcy Filing, all thecommitments under the Company’s secured revolving credit facility with JPMorgan Chase Bank, N.A., as administrative agent and a lender, automaticallyterminated, and the principal of the loans and the reimbursement obligationsthen outstanding, together with accrued interest thereon and any unpaid feesand all other obligations of the borrowers accrued under the applicable loansdocuments, became immediately due and payable, subject to the automatic stayprovisions of Section 362 of the Bankruptcy Code.  As a result, there is no longer any liquidityavailable to us under this facility.

 

*Cashavailable under our DIP facility*.  Aventine Renewable Energy, Inc.,Aventine Renewable Energy — Mt. Vernon, LLC and Aventine Renewable Energy —Aurora West, LLC (together the “Borrowers”), all indirect subsidiaries of theCompany, together with the Company and all of the Company’s other direct or indirectsubsidiaries, (together hereinafter called the “Guarantors”), entered into aDIP Facility among the Borrowers’, the Guarantors, the lenders thereto, andWhitebox Advisors, as both the agent  anda lender on April 7, 2009.  The DIPFacility provides for a first priority debtor-in-possession financing composedof a term loan facility made available to the Borrowers in a maximum aggregateprincipal amount of up to $30 million. Proceeds of the DIP Facility will be used, among other things, to (i) fundthe working capital and general corporate needs of the Debtors and the costs ofthe Chapter 11 Cases in accordance with an approved budget, and (ii) provideadequate protection, in accordance with the terms of the DIP Facility, to thepre-petition agent for the benefit of itself and the pre-petition lenders.

 

Pursuantto the interim order entered by the Bankruptcy Court, the initial draw-down ofthe term loan was limited to $15 million. As the entry of the final order approving the DIP financing, the Debtors’will have access to the remaining $15 million of availability.

 

Theterm loan matures at the earliest of (i) one year after the commencementof the Chapter 11 Cases, (ii) the consummation of a sale of substantiallyall of the assets of the Debtors, (iii) the effective date of a plan ofreorganization in the Chapter 11 Cases, (iv) the date the loans become dueand payable, whether by stated maturity, upon an event of default or otherwise,(v) the expiration of the approved budget, (vi) the acceptance by anyof the Debtors of any offer or bid for the purchase of all or substantially allof the assets of any of the Debtors or all or substantially all of the equityin any of the reorganized Debtors, or (vii) the date on which any of theDebtors files a motion with the Bankruptcy Court for authority to proceed withthe sale or liquidation of any of the Debtors (or any material portion of anyof the assets of the Debtors).  The DIPFacility bears interest at a rate equal to 16.5% per annum, which shall bepayable monthly in arrears in cash on the last day of each month.

 

Thisdescription of our DIP Facility is qualified in its entirety by the full textof the DIP Agreement as described in the Debtor in Possession Credit FacilityTerm Sheet filed as Exhibit 10.1 to our Form 8-K filed on April 13,2009.

 

*Uses of Liquidity*

 

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

 

*Paymentsrelated to our outstanding debt and liquidity facility.*  During the first quarter of 2009, we used$37.8 million of cash to make required reductions in borrowings on our securedrevolving credit 

 

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facility. We did not make the $15 million interest payment due April 1, 2009as required under our 10% senior unsecured notes due 2017.

 

*Working capital.*  Our networking capital position declined by $19.1 million during the first quarter of2009 as we used current assets to fund required repayments of our securedrevolving credit facility and to fund operating losses.

 

*Capitalexpenditures.*  During thefirst three months of 2009, we spent approximately $0.7 million on capitalprojects.  Of this amount, $0.5 millionwas spent on maintenance and environmental projects, while $0.2 million wasspent on our suspended capacity expansion projects.

 

**Secured Revolving CreditFacility**

 

OnMarch 10, 2009, we amended our existing secured revolving creditfacility.  The amended liquidity facilityconsists of a secured revolving credit facility with JPMorgan Chase Bank, N.A.,as administrative agent and a lender. The revolving commitment under the amended facility was initially $75million, and reduced to $60 million on April 1, 2009 and $50 million on May 1,2009 and thereafter (subject to collateral availability).  The amended liquidity facility included a $25million sub-limit for letters of credit. The facility is secured by substantially all of the Company’s assets.

 

OnMarch 30, 2009, the Company notified the administrative agent for its amendedsecured revolving credit facility that the Company would not have entered into,by March 31, 2009, formal written agreements with the holders of at least80% in principal amount of its 10% senior unsecured notes due 2017 committingto binding terms of an exchange offer, as required under the amended securedrevolving credit facility.  Failure bythe Company to receive such formal written commitments by March 31, 2009would have constituted an event of default under our amended secured revolvingcredit facility.  In addition, on March 30,2009, the Company notified the administrative agent that the Company did notintend to make a scheduled payment of interest on the Company’s 10% seniorunsecured notes due 2017 which was due on April 1, 2009.  Failure to make the interest payment wouldalso have constituted an event of default under our secured revolving creditfacility.  On March 30, 2009, theCompany and the lenders under its secured revolving credit facility executed aletter agreement to waive certain events of default until April 8, 2009including the potential effects of default discussed in the proceeding sentence.

 

Asa result of the Bankruptcy Filing, all the commitments under the Company’ssecured revolving credit facility automatically terminated, and the principalof the loans and the reimbursement obligations then outstanding, together with accruedinterest thereon and any unpaid fees and all other obligations of the borrowersaccrued under the applicable loans documents, became immediately due andpayable.

 

**Environmental Matters**

 

Weare subject to extensive federal, state and local environmental laws,regulations and permit conditions (and interpretations thereof), includingthose relating to the discharge of materials into the air, water and ground,the generation, storage, handling, use, transportation and disposal ofhazardous materials, and the health and safety of our employees.  These laws, regulations, and permits requireus to incur significant capital and other costs, including costs to obtain andmaintain expensive pollution control equipment. They may also require us to make operational changes to limit actual orpotential impacts to the environment.  Aviolation of these laws, regulations or permit conditions can result insubstantial fines, natural resource damages, criminal sanctions, permitrevocations and/or facility 

 

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shutdowns. In addition, environmental laws and regulations (and interpretationsthereof) change over time, and any such changes, more vigorous enforcementpolicies or the discovery of currently unknown conditions may requiresubstantial additional environmental expenditures.

 

We are also subject topotential liability for the investigation and cleanup of environmental contaminationat each of the properties that we own or operate and at off-site locationswhere we arranged for the disposal of hazardous wastes.  For instance, soil and groundwatercontamination has been identified in the past at our Illinois campus.  If any of these sites are subject toinvestigation and/or remediation requirements, we may be responsible under theComprehensive Environmental Response, Compensation and Liability Act or otherenvironmental laws for all or part of the costs of such investigation and/orremediation, and for damages to natural resources.  We may also be subject to related claims byprivate parties alleging property damage or personal injury due to exposure tohazardous or other materials at or from such properties.  While costs to address contamination orrelated third-party claims could be significant, based upon currently availableinformation, we are not aware of any material liability relating tocontamination or such third party claims. We have not accrued any amounts for environmental matters as of March 31,2009.  The ultimate costs of anyliabilities that may be identified or the discovery of additional contaminantscould adversely impact our results of operation or financial condition.

 

Inaddition, the hazards and risks associated with producing and transporting ourproducts (such as fires, natural disasters, explosions, abnormal pressures andspills) may result in spills or releases of hazardous substances, and mayresult in claims from governmental authorities or third parties relating toactual or alleged personal injury, property damage, or damages to naturalresources.  We maintain insurancecoverage 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 andworkers’ compensation.  We do not carryenvironmental insurance.  We believe thatour insurance is adequate for our industry, but losses could occur for uninsurableor uninsured risks or in amounts in excess of existing insurance coverage.  The occurrence of events which result insignificant personal injury or damage to our property, natural resources orthird parties that is not covered by insurance could have a material adverseimpact on our results of operations and financial condition.

 

Ourair emissions are subject to the federal Clean Air Act, as amended, and similarstate laws which generally require us to obtain and maintain air emissionpermits for our ongoing operations as well as for any expansion of existingfacilities or any new facilities. Obtaining and maintaining those permits requires us to incur costs, andany future more stringent standards may result in increased costs and may limitor interfere with our operating flexibility. In addition, the permits ultimately issued may impose conditions whichare more costly to implement than we had anticipated.  These costs could have a material adverseeffect on our financial condition and results of operations.  Because other ethanol manufacturers in theU.S. are and will continue to be subject to similar laws and restrictions, wedo not currently believe that our costs to comply with current or future environmentallaws and regulations will adversely affect our competitive position.  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.

 

Federaland state environmental authorities have been investigating alleged excess VOCemissions and other air emissions from many U.S. ethanol plants, including ourIllinois and Nebraska facilities.  Thematter relating to our Illinois wet mill facility is still pending, and wecould be required to install additional air pollution control equipment or takeother measures to control air pollutant emissions at that facility.  If authorities require us to installcontrols, we would anticipate that costs would be higher than the approximately$3.4 million we incurred for this matter at our Nebraska facility due to thelarger 

 

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size of the Illinois wet mill facility.  In addition, if the authorities determine ouremissions were in violation of applicable law, we would likely be required topay fines that could be material.  In February 2008,we received an indemnification payment from the former owner of our Nebraskafacility relating to the cost of installing environmental controls at thatfacility in connection with an April 2005 consent decree with stateauthorities.

 

We have made, and expect tocontinue making, significant capital expenditures on an ongoing basis to complywith increasingly stringent environmental laws, regulations and permits,including compliance with the U.S. Environmental Protection Agency’s (“EPA”)National Emissions Standard for Hazardous Air Pollutants, or NESHAP, forindustrial, commercial and institutional boilers and process heaters.  This NESHAP was issued, but subsequentlyvacated.  The vacated version of the rule requiredus to implement maximum achievable control technology at our Illinois wet millfacility to reduce hazardous air pollutant emissions from our boilers.  We expect the EPA will revise the rule toimpose more stringent requirements than were contained in the vacatedversion.  In the absence of a final EPANESHAP for industrial, commercial and institutional boilers and processheaters, we are working with state authorities to determine what technologywill be required at our Illinois wet mill facility and when such technologymust be installed.  We currently cannotestimate the amount that will be needed to comply with any future federal orstate technology requirement regarding air emissions from our boilers.

 

We currently generaterevenue from the sale of carbon dioxide, which is a co-product of the ethanolproduction process at each of our Illinois and Nebraska facilities.  New laws or regulations relating to theproduction, disposal or emissions of carbon dioxide may require us to incursignificant additional costs and may also adversely affect our ability tocontinue generating revenue from carbon dioxide sales.  In particular, Illinois and five otherMidwestern States have entered into the Midwestern Greenhouse Gas ReductionAccord, a program which directs participating states to develop a multi-sectorcap-and-trade mechanism to help achieve reductions in greenhouse gases,including carbon dioxide.  It is possiblethis program could require carbon dioxide emissions reductions from our Pekin,Illinois plants, which could result in significant costs.  In addition, it is possible that other statesin which we conduct or plan to conduct business, including Nebraska andIndiana, could join this accord or that federal, state or local regulatorscould require other costly carbon dioxide emissions reductions or offsets.

 

Weare currently reviewing proposed and recently adopted regulations relating togreenhouse gases and the carbon lifecycle from renewable fuel production todetermine what impact they may have on our business.

 

**Item 3.                    Quantitativeand Qualitative Disclosures About Market Risk**

 

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

 

***Commodity Price Risks***

 

Weare subject to market risk with respect to the price and availability of corn,the principal raw material we use to produce ethanol and ethanolby-products.  In general, rising cornprices result in lower profit margins and, therefore, represent unfavorablemarket conditions.  This is especiallytrue when market conditions do not allow us to pass along increased corn coststo our customers.  The availability 

 

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and price of corn is subject to widefluctuations due to unpredictable factors such as weather conditions, farmerplanting decisions, governmental policies with respect to agriculture andinternational trade and global demand and supply.  Our weighted average gross corn cost for thethree months ended March 31, 2009 and 2008 was $4.25 and $4.50 per bushel,respectively.

 

Wehave firm-price purchase commitments with some of our corn suppliers underwhich we agree to buy corn at a price set in advance of the actual delivery ofthat corn to us.  At March 31, 2009,we had commitments to purchase approximately 1.5 million bushels of cornthrough December 2009 at an average price of $5.23 per bushel from thesecorn suppliers.  Under thesearrangements, we assume the risk of a price decrease in the market price ofcorn between the time this price is fixed and the time the corn is delivered.  In order to reduce our market exposure toprice decreases, we have in the past, at the time we enter into a firm-pricepurchase commitment, often entered into commodity forward contracts to sell acertain amount of corn at the then-current price for delivery to thecounterparty at a later date.  We accountfor these commodity forward transactions under Statement of FinancialAccounting Standard No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended by Statement ofFinancial Accounting Standard No. 138, *Accounting for CertainDerivative Instruments and Certain Hedging Activities*, by Statementof Financial Accounting Standard No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*, andby Statement of Financial Accounting Standards No. 161,  *Disclosuresabout Derivative Instruments and Hedging Activities* — *An Amendment of FASB Statement No. 133*(hereinaftercollectively referred to as “SFAS 133”). Such 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 assets, if any, is recognized in other current assetsin the Condensed Consolidated Balance Sheet, net of any cash received from thebrokers.  We did not have any of thistype of derivative positions at March 31, 2009.

 

Wehave also, in the past, entered into commodity futures contracts in connectionwith the purchase of corn to reduce our risk of future price increases.  We accounted for these transactions underSFAS 133.  These futures contracts werenot designated as hedges and, therefore, were marked to market each period,with corresponding gains and losses recorded in other non-operating income.  The fair value of these derivative contractswould be recognized in other current assets in the Condensed ConsolidatedBalance Sheet, net of any cash received from the brokers.  We did not have any of this type ofderivative positions at March 31, 2009.

 

Wesometimes enter into firm-price purchase commitments with some of our naturalgas suppliers under which we agree to buy natural gas at a price set in advanceof the actual delivery of that natural gas to us.  Under these arrangements, we assume the riskof a price decrease in the market price of natural gas between the time thisprice is fixed and the time the natural gas is delivered.  At March 31, 2009, we did not have anycommitments to purchase natural gas in advance at prices other than atmarket.  We account for thesetransactions as normal purchases under SFAS 133, and accordingly, do not markthese transactions to market.

 

Weare also subject to market risk with respect to ethanol pricing.  Our ethanol sales are priced using contractsthat can either be fixed; based upon the price of wholesale gasoline plus orminus a fixed amount; or based upon a market price at the time ofshipment.  We sometimes fix the price atwhich we sell ethanol using fixed price physical delivery contracts.  At March 31, 2009, we had no outstandingcontracts to sell ethanol at fixed prices. These normal sale transactions would not be marked to market.

 

Wealso sell forward ethanol using contracts where the price is determined at apoint in the future based upon an index plus or minus a fixed amount.  At March 31, 2009, we had no contractsfor the sale of ethanol using wholesale gasoline as an index plus a fixedspread.  Under these arrangements, we

 

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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.  We did not have any of thistype of derivative positions at March 31, 2009.

 

***MaterialLimitations***

 

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

 

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

 

**Item 4.****                   ****Controlsand Procedures**

 

**Evaluation of DisclosureControls and Procedures**

 

Underthe supervision of and with the participation of management, including ourChief Executive Officer, Ronald H. Miller, and our Interim Chief FinancialOfficer, George T. Henning, Jr., the Company carried out an evaluation ofthe effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report.  Based upon that evaluation, Messrs. Millerand Henning have concluded that, as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures have been designed andare effective to provide reasonable assurance that information required to bedisclosed in the reports 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, including Messrs. Millerand Henning, as appropriate to allow timely decisions regarding the requireddisclosure.  The design of any system ofcontrols is based in part upon certain assumptions about the likelihood offuture events.  There can be no assurancethat any design will succeed in achieving its stated goal under all potentialfuture conditions, regardless of how remote.

 

**Changes in InternalControl over Financial Reporting**

 

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

 

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

 

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

 

On April 7, 2009,the Company and all of its direct and indirect subsidiaries filed voluntarypetitions for relief under Chapter 11 of the Bankruptcy Code with the UnitedStates Bankruptcy Court for the District of Delaware.  The Company’s subsidiaries that are part ofthe Bankruptcy Filing include Aventine Renewable Energy, LLC, a Delawarelimited liability company,; Aventine Renewable Energy, Inc., a Delawarecorporation; Aventine Renewable Energy — Mt. Vernon, LLC, a Delaware limitedliability company; Aventine Renewable Energy — Aurora West, LLC, a Delawarelimited liability company; and Nebraska Energy, LLC, a Kansas limited liabilitycompany.  The Bankruptcy Cases are beingjointly administered by the Bankruptcy Court under Case Number 09-11214 (KG). Aventine intends to continue to operate its business as adebtor-in-possession under the jurisdiction of the Bankruptcy Court and inaccordance with the applicable provisions of the Bankruptcy Code and orders ofthe Bankruptcy Court.  As a result of thefiling, attempts to collect, secure, or enforce remedies with respect topre-petition claims against Aventine are subject to the automatic stay provisionsof Section 362 of the Bankruptcy Code.  The Bankruptcy Cases are discussed in greaterdetail in Note 18 to the accompanying condensed consolidated financialstatements.

 

On November 6,2008, the Company commenced an action against JP Morgan Securities, Inc.and JP Morgan Chase Bank, N.A. (hereinafter collectively referred to as “JPMorgan”) in the Tenth Judicial Circuit in Tazewell County, Illinois.  The Company’s complaint relates to lossesincurred in excess of $31 million as a result of investments in Student LoanAuction Rate Securities purchased through JP Morgan.  At this time, we cannot be certain as to theoutcome of this litigation.

 

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

 

**Item1A.********RiskFactors**

 

TheCompany included in its Annual Report on Form 10-K as of December 31,2008 a description of certain risks and uncertainties that could affect theCompany’s business, future performance or financial condition (“Risk Factors”).  The Risk Factors as included in our Form 10-Kas of December 31, 2008 are updated by additional risk factors asdescribed below:

 

*The Company filed forreorganization under Chapter 11 on April 7, 2009 and is subject to therisks and uncertainties associated with the Bankruptcy Cases.*

 

Forthe duration of the Bankruptcy Cases, our operations and our ability to executeour business strategy will be subject to the risks and uncertainties associatedwith bankruptcy. These risks include:

 

·              our ability to continue as agoing concern;

·              our ability to operate withinthe restrictions and the liquidity limitations of our DIP Facility approved bythe Bankruptcy Court in connection with the Bankruptcy Cases;

·              our ability to obtainBankruptcy Court approval with respect to motions filed in the Bankruptcy Casesfrom time to time;

 

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·              our ability to develop,confirm and consummate a plan of reorganization with respect to the Chapter 11proceedings;

·              the ability of third partiesto seek and obtain court approval to terminate or shorten the exclusivityperiod for us to propose and confirm a plan of reorganization, to appoint aChapter 11 trustee or to convert the Bankruptcy Cases to Chapter 7 cases;

·              our ability to maintaincontracts that are critical to our operations;

·              our ability to obtain andmaintain normal payment and other terms with customers, vendors and serviceproviders;

·              our ability to attract,motivate and retain key employees;

·              our ability to attract andretain customers; and

·              our ability to fund andexecute our business plan.

 

*We will also be subject torisks and uncertainties with respect to the actions and decisions of ourcreditors and other third parties who have interests in the Bankruptcy Casesthat may be inconsistent with our plans.*

 

Theserisks and uncertainties could affect our business and operations in variousways.  For example, negative events orpublicity associated with the Bankruptcy Cases could adversely affect ourrelationships with our vendors and employees, as well as with customers, whichin turn could adversely affect our operations and financial condition.  Also, pursuant to the Bankruptcy Code, we needBankruptcy Court approval for transactions outside the ordinary course ofbusiness, which may limit our ability to respond timely to events or takeadvantage of opportunities.  Because ofthe risks and uncertainties associated with the Bankruptcy Cases, we cannotpredict or quantify the ultimate impact that events occurring during theChapter 11 reorganization process may have on our business, financial conditionand results of operations, and there is no certainty as to our ability tocontinue as a going concern.

 

*As a result of theBankruptcy Cases, realization of assets and liquidation of liabilities aresubject to uncertainty.*

 

Whileoperating under the protection of the Bankruptcy Code, and subject toBankruptcy Court approval or otherwise as permitted in the normal course ofbusiness, we may sell or otherwise dispose of assets and liquidate or settleliabilities for amounts other than those reflected in our consolidatedfinancial statements.  Further, a plan ofreorganization could materially change the amounts and classifications reportedin our consolidated historical financial statements, which do not give effectto any adjustments to the carrying value of assets or amounts of liabilitiesthat might be necessary as a consequence of confirmation of a plan ofreorganization.

 

*A long period of operatingunder Chapter 11 could harm our business.*

 

Along period of operating under Chapter 11 could adversely affect our businessand operations.  So long as theBankruptcy Cases continue, our senior management will be required to spend asignificant amount of time and effort dealing with the Bankruptcy Cases insteadof focusing exclusively on business operations. A prolonged period of operating under Chapter 11 may also make it moredifficult to attract and retain management and other key personnel necessary tothe success and growth of our business. In addition, the longer the Bankruptcy Cases continue, the more likelyit is that our vendors will lose confidence in our ability to successfullyreorganize our business, and they may seek to establish alternativearrangements for providing us with goods and services, including alternativepayment arrangements, which in turn could have an adverse effect on ourliquidity and/or results of operations.

 

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Ourhaving sought bankruptcy protection may also adversely affect our ability tonegotiate favorable terms from suppliers, landlords, contract or tradingcounterparties and others and to attract and retain customers andcounterparties.  The failure to obtainsuch favorable terms and to attract and retain customers and other contract ortrading counterparties could adversely affect our financial performance.

 

*We may not be able toobtain confirmation of our Chapter 11 plan, and our emergence from Chapter 11proceedings is not assured.*

 

Ourplan of reorganization has not yet been formulated or submitted to theBankruptcy Court.  In order tosuccessfully emerge from Chapter 11 bankruptcy protection, we believe that wemust develop, and obtain requisite court and creditor approval of, a viableChapter 11 plan of reorganization.  Thisprocess requires us to meet statutory requirements with respect to adequacy ofdisclosure with respect to a plan, soliciting and obtaining creditor acceptanceof a plan, and fulfilling other statutory conditions for planconfirmation.  We may not receive therequisite acceptances to confirm a plan. Even if the requisite acceptances of a plan are received, the BankruptcyCourt may not confirm it.

 

*If a plan is not confirmedby the Bankruptcy Court, it is unclear whether we would be able to reorganizeour business and what, if any, distributions holders of claims against us wouldultimately receive with respect to their claims.*

 

Ifa reorganization cannot be agreed upon, it is possible that we would have toliquidate our assets, in which case it is likely that holders of claims wouldreceive substantially less favorable treatment than they would receive if wewere to emerge as a viable, reorganized entity. While we expect to emerge from Chapter 11 proceedings in the future,there can be no assurance as to whether we will successfully reorganize andemerge from Chapter 11 proceedings or, if we do successfully reorganize, as towhen we would emerge from Chapter 11 proceedings.

 

*We have substantialliquidity needs and may be required to seek additional financing.*

 

Ourprincipal sources of liquidity have historically consisted of cash provided byoperations, cash and cash equivalents on hand and available borrowings underour credit agreements.  Our liquidityposition is significantly influenced by our operating results, which in turnare substantially dependent on commodity prices, especially prices for corn,ethanol, natural gas and unleaded gasoline. As a result, adverse commodity price movements adversely impact ourliquidity.

 

Weface uncertainty regarding the adequacy of our liquidity and capital resourcesand have limited access to additional financing.  In addition to the cash requirementsnecessary to fund ongoing operations, we have incurred significant professionalfees and other costs in connection with the Bankruptcy Cases and expect that wewill continue to incur significant professional fees and costs.  We cannot assure you that the amounts of cashavailable from operations, together with our DIP Financing, will be sufficientto fund our operations, including operations during the period until such timeas we are able to propose a plan of reorganization that will receive therequisite acceptance by creditors and be confirmed by the Bankruptcy Court.

 

Ourliquidity and our ability to continue as a going concern, including our abilityto meet our ongoing operational obligations, is dependent upon, among otherthings: (i) our ability to comply with the terms and conditions of our DIPFinancing; (ii) our ability to maintain adequate cash on hand; (iii) ourability to generate cash from operations; (iv) our ability to obtainconfirmation of and to consummate a plan of reorganization under the BankruptcyCode; (v) the cost and outcome of the reorganization process; and (vi) ourability to achieve profitability.  Ourability to maintain adequate liquidity depends in part upon industry conditionsand general economic, financial, competitive, 

 

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regulatory and other factors beyond ourcontrol.  Accordingly, there can be noassurance as to the success of our efforts. In the event that cash flows and borrowings under our interim DIPFinancing are not sufficient to meet our cash requirements, we may be requiredto seek additional financing.  We canprovide no assurance that additional financing would be available or, ifavailable, offered to us on acceptable terms. Our access to additional financing is, and for the foreseeable futurewill likely continue to be, very limited. Our long-term liquidity requirements and the adequacy of our capitalresources are difficult to predict at this time and ultimately cannot bedetermined until a plan of reorganization has been developed and is confirmedby the Bankruptcy Court.

 

*We may be unable to secureadditional financing*.

 

Ourability to arrange, in addition to our DIP Financing, financing (including anyextension or refinancing) and the cost of the financing are dependent uponnumerous factors.  Access to capital(including any extension or refinancing) for participants in the biofuelsindustry, including for us, has been significantly restricted for the lastseveral months and may, as a result of the Bankruptcy Filing, be furtherrestricted in the future. Other factors affecting our access to financinginclude:

 

·      general economic and capitalmarket conditions;

·      conditions in biofuelsmarkets;

·      regulatory developments;

·      credit availability frombanks or other lenders for us and our industry peers, as well as the economy ingeneral;

·      investor confidence in thebiofuels industry and in us;

·      the continued reliableoperation of our ethanol production facilities; and

·      provisions of tax andsecurities laws that are conducive to raising capital.

 

*We may not have sufficientcash to service our indebtedness and other liquidity requirements.*

 

Ourability to service our DIP Financing indebtedness and successfully consummate aplan of reorganization will depend, in part, on our ability to generatecash.  We cannot be certain that cash on hand together with cash fromoperations will by itself be sufficient to meet our cash and liquidityneeds.  If we are unable to generate enough cash to meet our liquidityneeds, we could be forced to discontinue some or all of our operations.

 

*Our DIP Financing couldimpose significant operating and financial restrictions on us, compliance ornon-compliance with which could have a material adverse effect on our liquidityand operations.*

 

Restrictionsimposed by the terms of our DIP Financing could adversely affect us by limitingour ability to plan for or react to market conditions or to meet our capitalneeds and could result in an event of default under the DIP Financing.  These restrictions will limit our ability,subject to certain exceptions, to, among other things:

 

·      incur additionalindebtedness and issue stock;

·      make prepayments on orpurchase indebtedness in whole or in part;

·      pay dividends and otherdistributions with respect to our capital stock or repurchase our capital stockor make other restricted payments;

·      make investments;

·      enter into transactions withaffiliates on other than arm’s-length terms;

·      create or incur liens tosecure debt;

·      consolidate or merge withanother entity, or allow one of our subsidiaries to do so;

 

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·      lease, transfer or sellassets and use proceeds of permitted asset leases, transfers or sales;

·      incur dividend or otherpayment restrictions affecting subsidiaries;

·      make capital expendituresbeyond specified limits;

·      engage in specified businessactivities; and

·      acquire facilities or otherbusinesses.

 

These limitations could havea material adverse effect on our liquidity and operations.  If we fail to comply with the restrictionsunder our DIP Financing and are unable to obtain a waiver or amendment or adefault exists and is continuing under the DIP Financing, the lenders coulddeclare outstanding borrowings and other obligations under the DIP Financingimmediately due and payable.  Our abilityto comply with these restrictions may be affected by events beyond our control,and any material deviations from our forecasts could require us to seek waiversor amendments of covenants or alternative sources of financing or to reduceexpenditures.  We cannot assure you thatsuch waivers, amendments or alternative financing could be obtained, or ifobtained, would be on terms acceptable to us. If we are unable to comply with the terms of the DIP Financing, or if wefail to generate sufficient cash flow from operations, or, if it becamenecessary, to obtain such waivers, amendments or alternative financing, itcould adversely impact the timing of, and our ultimate ability to successfullyimplement, a plan of reorganization.

 

*The prices of our debt andequity securities are volatile, and, in connection with our reorganization,holders of our securities may receive no payment or payment that is less thanthe face value or purchase price of such securities.*

 

Priorto the Bankruptcy Filing, the market price for our common stock was volatileand, following our Bankruptcy Filing, the price of our common stock hasgenerally been less than $0.08 per share. Prices for our debt securities are also volatile, and prices for suchsecurities have generally been substantially below par following our BankruptcyFiling.  In addition, our common stockwas delisted from the New York Stock Exchange prior to the Bankruptcy Filingand currently trades over the counter. Accordingly, trading in the securitiesof the Company may be limited, and holders of such securities may not be ableto resell their securities for their purchase price or at all.  We can make no assurance that the price ofour securities will not fluctuate substantially in the future.

 

Itis possible that, in connection with our reorganization, all of the outstandingshares of common stock could be cancelled, and holders of our common stock maynot be entitled to any payment in respect of their shares.  In addition, new shares of our common stockmay be issued.  It is also possible thatour obligations to holders of debt may be satisfied by payments to such holdersthat are less than both the par value of such securities and the price at whichholders purchased such securities, or that shares of our common stock may beissued to certain of such holders in satisfaction of their claims.  The value of any common stock so issued maybe less than the par value or purchase price of such holders’ securities, andthe price of any such common shares may be volatile.

 

Accordingly,trading in our securities during the pendency of the Bankruptcy Cases is highlyspeculative and poses substantial risks to purchasers of such securities, asholders may not be able to resell such securities or, in connection with ourreorganization, may receive no payment, or a payment or other considerationthat is less than the par value or the purchase price of such securities.

 

*We may be subject toclaims that will not be discharged in the Bankruptcy Cases, which could have amaterial adverse effect on our results of operations and profitability.*

 

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TheBankruptcy Code provides that the confirmation of a plan of reorganizationdischarges a debtor from substantially all debts arising prior to confirmationand specified debts arising afterwards. With few exceptions, all claims that arose prior to the Petition Dateand before confirmation of the plan of reorganization (i) would be subjectto compromise and/or treatment under the plan of reorganization or (ii) wouldbe discharged in accordance with the Bankruptcy Code and the terms of the planof reorganization.  Any claims notultimately discharged by the Bankruptcy Court could have an adverse effect onour results of operations and profitability.

 

*Bankruptcy laws may limitour secured creditors’ ability to realize value from their collateral.*

 

Uponthe commencement of a case for relief under Chapter 11, a secured creditor isprohibited from repossessing its security from a debtor in a Chapter 11 case,or from disposing of security repossessed from such debtor, without bankruptcycourt approval.  Moreover, the BankruptcyCode generally permits the debtor to continue to retain and use collateral eventhough the debtor is in default under the applicable debt instruments, providedthat the secured creditor is given “adequate protection.”  The meaning of the term “adequate protection”may vary according to circumstance, but it is intended in general to protectthe value of the secured creditor’s interest in the collateral and may includecash payments or the granting of additional security if and at such times asthe Bankruptcy Court in its discretion determines that the value of the securedcreditor’s interest in the collateral is declining during the pendency of theChapter 11 proceedings.  The BankruptcyCourt may determine that a secured creditor may not require compensation for adiminution in the value of its collateral if the value of the collateralexceeds the debt it secures.

 

In view of the lack of aprecise definition of the term “adequate protection” and the broaddiscretionary power of the Bankruptcy Court, we cannot reliably predict:

 

·      how long payments under oursecured debt could be delayed as a result of the Chapter 11 proceedings;

·      whether or when securedcreditors (or their applicable agents) could repossess or dispose ofcollateral;

·      the value of the collateral;or

·      whether or to what extentsecured creditors would be compensated for any delay in payment or loss ofvalue of the collateral through the requirement of “adequate protection.”

 

Furthermore, if theBankruptcy Court determines that the value of the collateral is not sufficientto repay all amounts due on applicable secured indebtedness, the holders ofsuch indebtedness would hold a secured claim only to the extent of the value oftheir collateral and would otherwise hold unsecured claims with respect to anyshortfall.  The Bankruptcy Code generallypermits the payment and accrual of post-petition interest, costs and attorneys’fees to a secured creditor during a debtor’s Chapter 11 proceedings only to theextent the value of its collateral is determined by the Bankruptcy Court toexceed the aggregate outstanding principal amount of the obligations secured bythe collateral.

 

*Our financial results maybe volatile and may not reflect historical trends.*

 

Whilein bankruptcy, we expect our financial results to continue to be volatile asasset impairments, asset dispositions, restructuring activities, contractterminations and rejections, and claims assessments may significantly impactour consolidated financial statements. As a result, our historical financial performance is likely notindicative of our financial performance after the date of the BankruptcyFiling.  In addition, if we emerge frombankruptcy, the amounts reported in subsequent consolidated financialstatements may materially change relative to historical consolidated financial 

 

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statements, including as a result ofrevisions to our operating plans pursuant to a plan of reorganization.  In addition, if we emerge from bankruptcy, wemay be required to adopt fresh start accounting.  If fresh start accounting is applicable, ourassets and liabilities will be recorded at fair value as of the fresh startreporting date.  The fair value of ourassets and liabilities may differ materially from the recorded values of assetsand liabilities on our consolidated balance sheets.  In addition, if fresh start accounting isrequired, our financial results after the application of fresh start accountingmay be different from historical trends.

 

*Conducting a successfulChapter 11 reorganization will depend significantly on our ability to retainand motivate management and key employees.*

 

Oursuccess depends significantly on the skills, experience and efforts of ourpersonnel.  We do not maintain “keyperson” life insurance for any of our officers. The loss of any of our officers could have a material adverse effectupon our results of operations and our financial position and could delay orprevent the achievement of our business objectives.  Our ability to develop and successfullyconsummate a plan of reorganization will be highly dependent upon the skills,experience and effort of our senior management and other personnel.  Our ability to attract, motivate and retainkey employees is restricted, however, by provisions of the Bankruptcy Code,which limit or prevent our ability to implement a retention program or take othermeasures intended to motivate key employees to remain with the Company duringthe pendency of the Chapter 11 proceedings. In addition, we may be required to obtain Bankruptcy Court approval ofemployment contracts and other employee compensation programs.  The loss of the services of one or moremembers of our senior management or certain employees with critical skills, ora diminution in our ability to attract talented, committed individuals to fillvacant positions when needs arise, could have a material adverse effect on ourability to successfully reorganize and emerge from bankruptcy.

 

*Transfers of our equity,or issuances of equity in connection with our restructuring, may impair ourability to utilize our federal income tax net operating loss carryforwards inthe future.*

 

Underfederal income tax law, a corporation is generally permitted to deduct fromtaxable income in any year net operating losses carried forward from prioryears.  We had net operating losscarryforwards of approximately $0.5 million as of December 31, 2008.  Our ability to deduct net operating losscarryforwards could be subject to a significant limitation if we were toundergo an “ownership change” for purposes of Section 382 of the Codeduring or as a result of the Bankruptcy Cases. During the pendency of the bankruptcy proceedings, the Bankruptcy Courthas entered an interim order that places limitations on trading in our commonstock, including options to acquire common stock, as further specified in theorder.  However, we can provide noassurances that these limitations will prevent an “ownership change” or thatour ability to utilize our net operating loss carryforwards may not besignificantly limited as a result of our reorganization.

 

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

 

**None**

 

**Item 3.****                   ****DefaultsUpon Senior Securities**

 

TheBankruptcy Filing constituted an event of default under the Company’s securedrevolving credit facility.  As a result,all the lenders commitments under our secured revolving credit facilityautomatically terminated, and the principal of the loans and the reimbursementobligations then 

 

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outstanding, together with accrued interestthereon and any unpaid fees and all other obligations of the borrowers accruedunder the applicable loan documents, became immediately due and payable.  As of the Petition Date, the outstandingborrowings and letters of credit under the secured revolving credit facilitytotaled approximately $18.4 million and $22.0 million, respectively.

 

TheBankruptcy Filing also constituted an event of default under the Company’sindenture governing its 10% senior unsecured notes due 2017.  As a result, the outstanding principal amountof the notes, and accrued interest theron, became immediately due andpayable.  As of the Petition Date, theaggregate principal amount of our outstanding 10% senior unsecured notes due2017 was $300 million.

 

**Item 4.****                   ****Submissionof Matters to a Vote of Security Holders**

 

**None**

 

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

 

**None**

 

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

 

(a)   Exhibits

 

10.1         LetterAgreement, dated March 30, 2009, between the Company, Aventine RenewableEnergy — Mt. Vernon, LLC, Aventine Renewable Energy — Aurora West, LLC, JPMorgan Chase Bank, N.A (as administrative agent and a lender), and the otherslenders to its Credit Agreement, dated as of March 23, 2007 (as amended)(incorporated by reference to Exhibit 10.1 of Aventine’s Current Report onForm 8-K filed on April 3, 2009).

 

10.2         Debtor in Possession Credit Facility TermSheet, dated as of April 7, 2009, by and among Brigade Leveraged CapitalStructures Fund, Ltd., Nomura Corporate Research & Asset Management, Inc.,as Investment Manager for and on behalf of certain lenders, Whitebox HedgedHigh Yield Partners, L.P., Pandora Select Partners, L.P. (as lenders), AventineRenewable Energy, Inc., Aventine Renewable Energy — Mt. Vernon, LLC, andAventine Renewable Energy — Aurora West LLC on a joint and several basis asdebtors in possession under chapter 11 of the United States Bankruptcy Code injointly administered cases in the United States Bankruptcy Court for theDistrict of Delaware and the Guarantors named therein (incorporatedby reference to Exhibit 10.1 of Aventine’s Current Report on Form 8-Kfiled on April 13, 2009).

 

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

 

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

 

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

 

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

 

# **SIGNATURE**

# ** **

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

 
|                      | AVENTINE RENEWABLE ENERGY  HOLDINGS, INC. |
|---------------------------|-------------------------------------------|
|                      |                                      |
|                      |                                      |
| Dated:  May 11, 2009 | By:                                       | /s/  William J. Brennan |
|                      | Name:                                     | William  J. Brennan |
|                      | Title:                                    | Chief Accounting and  Compliance Officer (duly authorized officer and principal accounting officer) |

 

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