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

 

**COMMISSIONFILE NUMBER 001-32922**

**AVENTINE RENEWABLE ENERGYHOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

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

 

(309)347-9200

(Registrant’s Telephone Number, including Area Code)

Indicate by checkmark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

YES  x     NO  o

Indicate by checkmarkwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one): 

|  Large accelerated  filer  o |   | Accelerated  filer  o |   | Non-accelerated  filer  x |
|---------------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

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 August 3, 2007 |
|---------------------------------|--------|-----------------------------------|
| Common Stock,  $0.001 Par Value |   | 41,931,370  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 and six month  periods ended June 30, 2007 and 2006 |   | 1 |
|       |       | Condensed Consolidated Balance Sheets — June 30, 2007  (Unaudited) and December 31, 2006                                 |   | 2 |
|       |       | Condensed Consolidated Statements of Cash Flows  (Unaudited) — Six months ended June 30, 2007 and 2006                   |   | 3 |
|       |       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                               |   | 4 |
|       |       |                                                                                                                          |   |   |
| Item 2.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                   |   | 17 |
|       |       |                                                                                                                          |   |   |
| Item 3.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                   |   | 30 |
|       |       |                                                                                                                          |   |   |
| Item 4.    |       | Controls and  Procedures                                                                                                      |   | 32 |
| ** ** |       |                                                                                                                          |   |   |
|       |       | PART II                                                                                                                       |   |   |
|       |       |                                                                                                                          |   |   |
| Item 1.    |       | Legal Proceedings                                                                                                             |   | 32 |
|       |       |                                                                                                                          |   |   |
| Item  1A.  |       | Risk  Factors                                                                                                                 |   | 32 |
|       |       |                                                                                                                          |   |   |
| Item 2.    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                  |   | 33 |
|       |       |                                                                                                                          |   |   |
| Item 3.    |       | Default Upon  Senior Securities                                                                                               |   | 33 |
|       |       |                                                                                                                          |   |   |
| Item 4.    |       | Submission of  Matters to a Vote of Security Holders                                                                          |   | 33 |
|       |       |                                                                                                                          |   |   |
| Item 5.    |       | Other Information                                                                                                             |   | 33 |
|       |       |                                                                                                                          |   |   |
| Item  6.   |       | Exhibits                                                                                                                      |   | 34 |

 

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**PART I.                 FINANCIAL INFORMATION**

**Item 1.                    FinancialStatements**

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

**Condensed Consolidated Statements of Operations**

(Unaudited)
| ** **                                                              | ** ** | **Three months ended June 30,** | ** **  | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|---------------------------------------------------|------------|
| ***(In thousands except per share amounts)***  | ** ** | **2007**                                            | ** **  | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                    | ** ** | ** **                                          |        |                                              | ** ** | ** ** |   |   |   |
| Net sales                                                               | ** ** | **$**                                               | **394,914** |                                              | $          | 442,905 | ** ** | **$** | **831,576** |   | $ | 756,425 |   |
| Cost of goods sold                                                      | ** ** | **367,485**                                         |        | 392,697                                           | ** ** | **775,732** |   | 675,622 |   |
| Gross profit                                                            | ** ** | **27,429**                                          |        | 50,208                                            | ** ** | **55,844** |   | 80,803 |   |
| Selling, general and  administrative expenses                           | ** ** | **8,779**                                           |        | 7,371                                             | ** ** | **18,377** |   | 13,637 |   |
| Other (income)                                                          | ** ** | **(514**                                            | **)**       | (342                                              | )          | **(678** | **)** | (607 | ) |
| Operating income                                                        | ** ** | **19,164**                                          |        | 43,179                                            | ** ** | **38,145** |   | 67,773 |   |
| Other income (expense):                                                 | ** ** | ** **                                          |        |                                              | ** ** | ** ** |   |   |   |
| Interest income                                                         | ** ** | **4,167**                                           |        | 1,228                                             | ** ** | **5,535** |   | 1,883 |   |
| Interest expense                                                        | ** ** | **(7,021**                                          | **)**       | (4,236                                            | )          | **(7,357** | **)** | (8,601 | ) |
| Other  non-operating income                                             | ** ** | **2,139**                                           |        | 1,899                                             | ** ** | **6,008** |   | 2,454 |   |
| Minority  interest                                                      | ** ** | **(725**                                            | **)**       | (1,651                                            | )          | **(1,243** | **)** | (2,917 | ) |
| Income before income  taxes                                             | ** ** | **17,724**                                          |        | 40,419                                            | ** ** | **41,088** |   | 60,592 |   |
| Income tax expense                                                      | ** ** | **5,117**                                           |        | 15,765                                            | ** ** | **13,541** |   | 23,751 |   |
| Net income                                                              | ** ** | **$**                                               | **12,607**  |                                              | $          | 24,654 | ** ** | **27,547** |   | $ | 36,841 |   |
|                                                                    | ** ** | ** **                                          |        |                                              | ** ** | ** ** |   |   |   |
| *Per share data:*                                                       | ** ** | ** **                                          |        |                                              | ** ** | ** ** |   |   |   |
| Income per common share  — basic:                                  | ** ** | **$**                                               | **0.30**    |                                              | $          | 0.70 | ** ** | **$** | **0.66** |   | $ | 1.05 |   |
| Basic weighted average  number of common shares                         | ** ** | **41,912**                                          |        | 35,152                                            | ** ** | **41,861** |   | 35,149 |   |
| * *                                                                | ** ** | ** **                                          |        |                                              | ** ** | ** ** |   |   |   |
| Income per common share  — diluted:                                | ** ** | **$**                                               | **0.30**    |                                              | $          | 0.67 | ** ** | **$** | **0.65** |   | $ | 1.01 |   |
| Diluted weighted average number of common and common equivalent  shares | ** ** | **42,649**                                          |        | 36,572                                            | ** ** | **42,554** |   | 36,527 |   |

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

1

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

**CondensedConsolidated Balance Sheets**
| ***(In thousands except share amounts)***                                                                                                                                                                                                                    | ** ** | **June 30,  2007**(Unaudited) | ** **  | **December 31,   2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|-------------|-----------------------------------|------------|
|                                                                                                                                                                                                                                                                             | ** ** | ** **                         |        |                              |       |
| **Assets**                                                                                                                                                                                                                                                                       | ** ** | ** **                         |        |                              |       |
| Current assets                                                                                                                                                                                                                                                                   | ** ** | ** **                         |        |                              |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                        | ** ** | **$**                              | **44,059**  |                              | $          | 29,791 |   |
| Short-term investments                                                                                                                                                                                                                                                           | ** ** | **341,773**                        |        | 98,925                            |       |
| Accounts receivable                                                                                                                                                                                                                                                              | ** ** | **48,897**                         |        | 79,729                            |       |
| Inventories                                                                                                                                                                                                                                                                      | ** ** | **74,923**                         |        | 67,051                            |       |
| Income tax receivable                                                                                                                                                                                                                                                            | ** ** | **5,220**                          |        | 6,446                             |       |
| Prepaid expenses and other                                                                                                                                                                                                                                                       | ** ** | **5,821**                          |        | 4,549                             |       |
| Total current  assets                                                                                                                                                                                                                                                            | ** ** | **520,693**                        |        | 286,491                           |       |
|                                                                                                                                                                                                                                                                             | ** ** | ** **                         |        |                              |       |
| Property, plant  and equipment, net                                                                                                                                                                                                                                              | ** ** | **188,023**                        |        | 115,645                           |       |
| Net deferred tax  assets                                                                                                                                                                                                                                                         | ** ** | **2,345**                          |        | —                            |       |
| Other assets                                                                                                                                                                                                                                                                     | ** ** | **13,991**                         |        | 6,000                             |       |
| Total assets                                                                                                                                                                                                                                                                     | ** ** | **$**                              | **725,052** |                              | $          | 408,136 |   |
|                                                                                                                                                                                                                                                                             |       |                               |        |                              |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                   |       |                               |        |                              |       |
| Current  liabilities                                                                                                                                                                                                                                                             |       |                               |        |                              |       |
| Accounts payable                                                                                                                                                                                                                                                                 | ** ** | **$**                              | **50,655**  |                              | $          | 77,442 |   |
| Accrued liabilities                                                                                                                                                                                                                                                              | ** ** | **4,156**                          |        | 3,679                             |       |
| Accrued interest payable                                                                                                                                                                                                                                                         | ** ** | **7,833**                          |        | —                            |       |
| Other current liabilities                                                                                                                                                                                                                                                        | ** ** | **3,281**                          |        | 2,123                             |       |
| Total current  liabilities                                                                                                                                                                                                                                                       | ** ** | **65,925**                         |        | 83,244                            |       |
|                                                                                                                                                                                                                                                                             | ** ** | ** **                         |        |                              |       |
| Senior unsecured  10% notes due April 2017                                                                                                                                                                                                                                       | ** ** | **300,000**                        |        | —                            |       |
| Minority  interest                                                                                                                                                                                                                                                               | ** ** | **9,953**                          |        | 10,221                            |       |
| Net deferred  taxes liabilities                                                                                                                                                                                                                                                  | ** ** | **—**                         |        | 6,104                             |       |
| Other long-term  liabilities                                                                                                                                                                                                                                                     | ** ** | **13,639**                         |        | 4,404                             |       |
| Total  liabilities                                                                                                                                                                                                                                                               | ** ** | **389,517**                        |        | 103,973                           |       |
|                                                                                                                                                                                                                                                                             |       |                               |        |                              |       |
| Stockholders’  equity                                                                                                                                                                                                                                                       |       |                               |        |                              |       |
| Common stock, par value $0.001 per share;  185,000,000 shares authorized; 41,921,370 and 41,782,276 shares issued and  outstanding as of June 30, 2007 and December 31, 2006, respectively, net of  21,229,025 shares held in treasury as of June 30, 2007 and December 31, 2006 | ** ** | **42**                             |        | 42                                |       |
| Preferred stock, 50,000,000 shares authorized, no  shares issued or outstanding                                                                                                                                                                                                  | ** ** | **—**                         |        | —                            |       |
| Additional paid-in capital                                                                                                                                                                                                                                                       | ** ** | **277,869**                        |        | 274,307                           |       |
| Retained earnings                                                                                                                                                                                                                                                                | ** ** | **58,683**                         |        | 30,888                            |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                             | ** ** | **(1,059**                         | **)**       | (1,074                            | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                 | ** ** | **335,535**                        |        | 304,163                           |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                                                                 | ** ** | **$**                              | **725,052** |                              | $          | 408,136 |   |

 

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

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

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)
| ** **                                                                         | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ***(In thousands)***                                                          | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
|                                                                               | ** ** | ** **                                        |       |   |   |
| **Operating  Activities**                                                          | ** ** | ** **                                        |       |   |   |
| Net income                                                                         | ** ** | **$**                                             | **27,547** |   | $ | 36,841 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: | ** ** | ** **                                        |       |   |   |
| Depreciation and amortization                                                      | ** ** | **6,205**                                         |       | 2,765 |   |
| Minority interest                                                                  | ** ** | **1,243**                                         |       | 2,917 |   |
| Stock-based compensation expense                                                   | ** ** | **3,345**                                         |       | 3,053 |   |
| Deferred income tax                                                                | ** ** | **1,373**                                         |       | (620 | ) |
| Other                                                                              | ** ** | **248**                                           |       | (36 | ) |
| Changes in operating assets and liabilities:                                       | ** ** | ** **                                        |       |   |   |
| Accounts receivable, net                                                           | ** ** | **30,832**                                        |       | (10,516 | ) |
| Inventories                                                                        | ** ** | **(7,872**                                        | **)**      | (19,043 | ) |
| Accounts payable                                                                   | ** ** | **(26,787**                                       | **)**      | 25,914 |   |
| Other changes in operating assets and liabilities                                  | ** ** | **8,851**                                         |       | 2,260 |   |
| Net cash  provided by operating activities                                         | ** ** | **44,985**                                        |       | 43,535 |   |
|                                                                               | ** ** | ** **                                        |       |   |   |
| **Investing  Activities**                                                          | ** ** | ** **                                        |       |   |   |
| Additions to  property, plant and equipment, net                                   | ** ** | **(78,354**                                       | **)**      | (31,610 | ) |
| Investment in  short-term securities                                               | ** ** | **(242,848**                                      | **)**      | — |   |
| Increase in  restricted cash for investing activities                              | ** ** | **—**                                        |       | (1,110 | ) |
| Use of  restricted cash for plant expansion                                        | ** ** | **—**                                        |       | 27,658 |   |
| Net cash used  for investing activities                                            | ** ** | **(321,202**                                      | **)**      | (5,062 | ) |
| ** **                                                                         | ** ** | ** **                                        |       |   |   |
| **Financing  Activities**                                                          | ** ** | ** **                                        |       |   |   |
| Proceeds from  issuance of senior unsecured notes                                  | ** ** | **300,000**                                       |       | — |   |
| Payment of debt  issuance costs                                                    | ** ** | **(8,221**                                        | **)**      | — |   |
| Proceeds from  stock option exercises                                              | ** ** | **200**                                           |       | — |   |
| Tax benefit of  stock option exercises                                             | ** ** | **17**                                            |       | — |   |
| Net repayments  on revolving credit facilities                                     | ** ** | **—**                                        |       | (1,514 | ) |
| Distributions to  minority shareholders                                            | ** ** | **(1,511**                                        | **)**      | (1,727 | ) |
| Net cash  provided by (used for) financing activities                              | ** ** | **290,485**                                       |       | (3,241 | ) |
| Net increase in  cash and cash equivalents                                         | ** ** | **14,268**                                        |       | 35,232 |   |
| Cash and cash  equivalents at beginning of period                                  | ** ** | **29,791**                                        |       | 3,750 |   |
| Cash and cash  equivalents at end of period                                        | ** ** | **$**                                             | **44,059** |   | $ | 38,982 |   |

 

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

3

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**AventineRenewable Energy Holdings, Inc. and Subsidiaries**

**Notes to UnauditedCondensed Consolidated Financial Statements**

**(1)           Basis of Reporting for InterimFinancial Statements**

The accompanying unaudited condensed consolidated financial statementsinclude the accounts of Aventine Renewable Energy Holdings, Inc. and itssubsidiaries, which are collectively referred to as “Aventine”,  the “Company”, “we”, “our” or “us”, unlessthe context otherwise requires.  Allsignificant intercompany transactions have been eliminated in consolidation.

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

The accompanying 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 and six month periodsended June 30, 2007 and 2006.  Theresults of operations for interim periods are not necessarily indicative ofresults to be expected for an entire year.

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ materially from those estimates.

As of June 30, 2007, theCompany’s Summary of Critical Accounting Policies for the year ended December31, 2006, which are detailed in the Company’s Annual Report on Form 10-K, havenot changed from December 31, 2006, except for the adoption of FinancialAccounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes*.  See Note 12 for additional informationregarding the adoption of FIN 48 by the Company.

**(2)           Recent Accounting Pronouncements**

In September 2006, the FASB issued Statement of Financial AccountingStandards No. 157 (“SFAS 157”), *Fair Value Measurements*.  SFAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosure about fair valuemeasurements.  The statement is effectivefor financial statements issued for fiscal years beginning afterNovember 15, 2007.  The Company iscurrently evaluating the effect that the adoption of SFAS 157 will have, ifany, on its consolidated results of operations, financial position and relateddisclosures.

In February 2007, The FASB issued Statement of Financial AccountingStandards No. 159 (“SFAS 159”), *The Fair Value Option forFinancial Assets and Financial Liabilities Including an amendment of FASBStatement No. 115*.  SFASNo. 159 permits a company to choose to measure many financial instrumentsand other items at fair value that are not currently required to be measured atfair value.  The objective is to improvefinancial reporting by providing a company with the opportunity to 

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mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  A company shall reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date.  SFAS No. 159 will be effective forfiscal years that begin after November 15, 2007.  We are currently assessing the impact SFASNo. 159 will have on our consolidated financial statements.

**(3)****                                ****Short-Term Securities**

We from time to time invest a portion of our cash intax-free municipal auction rate certificates which generally have contractualmaturities of greater than 20 years.  Weconsider these certificates as held for sale. These certificates are widely traded in the public markets and may besold as needed.  The interest rates onthese certificates reprice every 35 days to the then current market rate.  Generally, the carrying value of thesesecurities approximates the market value, and there is no gain or loss expectedfrom changes in market value.

**(4)           Inventories**

Inventories are as follows:

| *(In thousands)* | ** **   | **June 30,  2007** | ** **   | **December 31,  2006** | ** **   |
|-----------------------|--------------|-------------------------|--------------|-----------------------------|--------------|
| * *              | *** *** | *** ***            | *** *** | *** ***                | *** *** |
| Finished  products    | ** **   | **$**                   | **67,228**   |                        | $            | 61,775 |   |
| Work-in-process       | ** **   | **2,408**               |         | 1,106                       |         |
| Raw materials         | ** **   | **3,093**               |         | 2,070                       |         |
| Supplies              | ** **   | **2,194**               |         | 2,100                       |         |
| Totals                | ** **   | **$**                   | **74,923**   |                        | $            | 67,051 |   |

 

**(5)           Prepaid Expenses and Other**

Prepaid expenses and other are as follows:

| *(In thousands)*                 | ** ** | **June 30,  2007** | ** ** | **December 31,   2006** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| * *                              | * *   | * *                | * *   | * *                          | * *   |
| Fair value of  derivative instruments | ** ** | **$**                   | **2,521**  |                              | $          | 1,503 |   |
| Prepaid  insurance                    | ** ** | **1,537**               |       | 1,280                             |       |
| Deferred income  taxes current        | ** ** | **981**                 |       | 1,064                             |       |
| Other prepaid  expenses               | ** ** | **782**                 |       | 702                               |       |
| Totals                                | ** ** | **$**                   | **5,821**  |                              | $          | 4,549 |   |

 

**(6)           Other Assets**

Other assets are as follows:

| *(In thousands)*              | ** ** | **June 30,   2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| * *                           | * *   | * *                      | * *   | * *                    | * *   |
| Deferred debt  issuance costs      | ** ** | **$**                         | **7,991**  |                        | $          | — |   |
| Investment in  marketing alliances | ** ** | **6,000**                     |       | 6,000                       |       |
| Totals                             | ** ** | **$**                         | **13,991** |                        | $          | 6,000 |   |

 

5

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Deferred debt issuance costs are subject to amortization.  Remaining deferred debt issuance costs of$7.1 million related to our 10% senior unsecured notes will be amortizedutilizing a method which approximates the effective interest method over theremaining life of 10 years, resulting in amortization expense of $0.4 millionover the remaining six months of 2007, and $0.7 million yearly thereafter.  Remaining deferred debt issuance costs of$0.9 million related to our secured revolving credit facility will be amortizedutilizing a method which approximates the effective interest method over thefive year remaining life, resulting in amortization expense of $0.1 millionover the remaining six months of 2007, and $0.2 million in each of the nextfour succeeding years beginning in 2008.

**(7)           Debt**

Thefollowing table summarizes long-term debt:

| *(In thousands)*                      | ** ** | **June 30,   2007** | ** **  | **December 31,  2006** | ** ** |
|--------------------------------------------|------------|-------------------------------|-------------|-----------------------------|------------|
| Senior unsecured  10% notes due April 2017 | ** ** | **$**                         | **300,000** |                        | $          | — |   |
| Secured  revolving credit facility         | ** ** | **—**                    |        | —                      |       |
|                                       | ** ** | **300,000**                   |        | —                      |       |
| Less short-term  borrowings                | ** ** | **—**                    |        | —                      |       |
| Total                                      | ** ** | **$**                         | **300,000** |                        | $          | — |   |

 

*LiquidityFacility*

In March 2007, we entered into a new secured revolving credit facilitywith JPMorgan Chase Bank, N.A. of up to $200 million, subject to collateralavailability, which, under certain circumstances, can be increased up to $300million.  We had no borrowingsoutstanding under our secured revolving credit facility at June 30, 2007, and$1.2 million of standby letters of credit outstanding, leaving approximately$70.8 million in additional borrowing availability under our secured revolvingcredit facility as of that date.  As ofDecember 31, 2006, we had no borrowings outstanding under our previous securedrevolving credit facility and $4.0 million of standby letters of creditoutstanding, leaving approximately $26.0 million in additional borrowingavailability under the previous secured revolving credit facility as of thatdate.

A fixed asset component in an amount of $50 million may be added to theborrowing base on or prior to December 31, 2007 upon the satisfaction ofcertain requirements.  We are in theprocess of satisfying the requirements necessary in order to take advantage ofthis fixed asset component.

*SeniorNotes*

In March 2007, we issued $300 million aggregate principal amount ofsenior unsecured 10% fixed-rate notes due April 2017 (“Notes”).  Our Notes were issued pursuant to anindenture, dated as of March 27, 2007, between us and Wells Fargo Bank, N.A.,as trustee.  The Notes are generalunsecured obligations of the Company and certain of its guarantor subsidiaries,initially limited to $300 million aggregate principal amount.  We may, subject to the covenants andapplicable law, issue additional notes under the indenture.  Any additional Notes would be treated as asingle class with the previously issued Notes for all purposes under theindenture.

Our Notes have interest payments due semi-annually on April 1 andOctober 1 of each year, and are redeemable after the dates and at prices(expressed in percentages of principal amount on the redemption date), as setforth below:

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

 

In addition, at any time prior to April 1, 2010, we may redeem up to35% of the principal amount of the Notes from time to time originally issuedwith the net cash proceeds of one or more sales of qualifying capital stock ofthe Company at a redemption price of 100% of the principal amount, togetherwith accrued and unpaid interest to the redemption date, provided that at least65% of the aggregate principal amount of the Notes originally issued remainsoutstanding immediately after such redemption and notice of any such redemptionis mailed within 60 days of each such sale of capital stock.

We have registered the Notes through a shelf registration statement inaccordance with a registration rights agreement.  The shelf registration statement was declaredeffective on July 12, 2007.  We arecurrently conducting an exchange offer to exchange the Notes for an issue ofregistered unsecured senior notes, with terms identical to the Notes.  If by October 23, 2007 we have notconsummated a registered exchange offer for the Notes, the annual interest rateon the Notes will increase by 0.25% and by 0.25% for each subsequent 90 dayperiod, up to a maximum 1.00% over the stated fixed rate of the Notes.

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

Other long-term liabilities are as follows:

| *(In thousands)*                                      | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| * *                                                   | * *   | * *                | * *   | * *                    | * *   |
| Reserve for  uncertain tax positions (See Note 12)         | ** ** | **$**                   | **8,991**  |                        | $          | — |   |
| Accrued interest  on Uncertain tax positions (See Note 12) | ** ** | **701**                 |       | —                      |       |
| Accrued pension  and postretirement                        | ** ** | **2,181**               |       | 2,427                       |       |
| Unearned  commissions                                      | ** ** | **1,766**               |       | 1,977                       |       |
| Totals                                                     | ** ** | **$**                   | **13,639** |                        | $          | 4,404 |   |

 

**(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 this 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 no long-term history of stock price volatility as a publiccompany, we calculate volatility by considering, among other things, theexpected volatilities of public companies engaged in similar industries.  Pre-vesting forfeitures are estimated using a3% forfeiture rate.  The expected optionterm is calculated using the “simplified” method permitted by SAB 107.  Our options have characteristicssignificantly different from those of traded options, and changes in theassumptions can materially affect the fair value estimates.

7

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Beginning in 2007, the Company commenced an ongoing long-term incentiveprogram under the Aventine Renewable Energy Holdings, Inc. 2003 Stock IncentivePlan, as amended (the “Plan”).  It isanticipated that this program will provide regular annual grants of performanceshares.  Performance shares are stockunits that will be converted to common shares, to the extent earned, at the endof a three-year performance cycle.  Thefirst performance cycle began on January 1, 2007, and will end on December 31,2009.  Under the performance shareprogram, each participant is given a target award expressed as a number ofshares, with a payout opportunity ranging from 0% to 150% of the target,depending on the performance relative to pre-determined goals.  The performance goals for the January 1, 2007to December 31, 2009 performance cycle relate to the growth of the Company asmeasured by actual equity gallons produced. On May 25, 2007, the Company issued 94,500 performance shares at thetarget award level to various participants under the Plan.  Under FAS 123R, an accounting estimate of thenumber of these shares that are expected to vest has been made and are beingexpensed utilizing the grant-date fair value of the shares from the date ofgrant through the end of the performance cycle period.  Any future changes to the estimate will bereflected in stock-based compensation expense in the period the estimate changeis made.

Pre-tax stock-based compensation expense for the three month periodended June 30, 2007 was $1.8 million, of which $0.1 million was charged to costof goods sold and $1.7 million was charged to selling, general andadministrative expense.  This expensereduced earnings per share by $0.03 per basic and diluted share for the quarterended June 30, 2007.  For the three monthperiod ended June 30, 2006, pre-tax stock-based compensation expense was $1.7million, all of which was charged to selling, general and administrativeexpense.  This expense reduced earningsper share by $0.05 per basic and diluted share for the quarter ended June 30,2006.  For the six month period endedJune 30, 2007, pre-tax stock-based compensation expense was $3.4 million, ofwhich $0.1 million was charged to cost of goods sold and $3.3 million wascharged to selling, general and administrative expense.  This expense reduced earnings per share forthe six month period ended June 30, 2007 by $0.05 per basic and dilutedshare.   For the six month period endedJune 30, 2006, pre-tax stock-based compensation expense was $3.0 million, allof which was charged to selling, general and administrative expense.  This expense reduced earnings per share forthe six month period ended June 30, 2006 by $0.09 per basic share and $0.08 perdiluted share.  The Company recognized atax benefit on its condensed consolidated statement of income from stock-basedcompensation expense in the amount of $0.5 million and $0.7 million for the threemonth periods ended June 30, 2007 and 2006, respectively, and in the amount of$1.0 million and $1.2 million for the six month periods ended June 30, 2007 and2006, respectively.  The Company recordedpre-tax stock-based compensation expense for the three and six month periodsended June 30, 2007 and 2006 as follows:

 
| ** **                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(in millions)***                | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Stock-based  compensation expense: | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Non-qualified stock options        | ** ** | **$**                                           | **1.5**    |                                          | $          | 1.7 | ** ** | **$** | **3.0** |   | $ | 3.0 |   |
| Restricted stock                   | ** ** | **$**                                           | **0.1**    |                                          | $          | — | ** ** | **$** | **0.2** |   | $ | — |   |
| Restricted stock units             | ** ** | **$**                                           | **0.1**    |                                          | $          | — | ** ** | **$** | **0.1** |   | $ | — |   |
| Long-term  incentive stock plan    | ** ** | **$**                                           | **0.1**    |                                          | $          | — | ** ** | **$** | **0.1** |   | $ | — |   |

 

As of June 30, 2007 and 2006, the Company had not yet recognizedcompensation expense on the following non-vested awards:

8

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| ** **                      | ** ** | **2007**                           | ** ** | **2006**                                                                                 | ** ** |
|---------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ***(in millions)***        | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average   Remaining   Recognition   Period (years)** | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining   Recognition  Period (years)** | ** ** |
|                            | ** ** | ** **                         |       |                                                                                     |       |   |   |   |   |
| Non-qualified options           | ** ** | **$**                              | **19.1**   | ** **                                                                               | **7.6**    |   | $ | 23.1 |   | 3.4 |   |
| Restricted stock                | ** ** | **1.2**                            | ** ** | **4.4**                                                                                  |       | 0.2 |   | 2.8 |   |
| Restricted stock units          | ** ** | **0.1**                            | ** ** | **1.4**                                                                                  |       | — |   | — |   |
| Long-term incentive  stock plan | ** ** | **1.6**                            | ** ** | **2.5**                                                                                  |       | — |   | — |   |
| Total                           | ** ** | **$**                              | **22.0**   | ** **                                                                               | **7.0**    |   | $ | 23.3 |   | 3.4 |   |

 

The Company granted stock options during the quarters ended June 30,2007 and 2006.  The determination of thefair value of the stock option awards, using the option-pricing model,incorporated the assumptions in the following table for stock options grantedduring the three month periods ended June 30, 2007 and 2006.  The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of grant over the expectedterm.  Expected volatility is calculatedby considering, among other things, the expected volatilities of publiccompanies engaged in similar industries. The expected option term is calculated using the “simplified” methodpermitted by SAB 107.  Assumptions foroptions granted in the three month period ending June 30, 2007 and 2006 are asfollows:

|                                  | ** ** | **2007**   | ** ** | **2006** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|
|                             | ** ** | ** ** |       |     |       |
| Expected stock price  volatility | ** ** | **58.0**   | **%**      | 58.0     | %          |
| Expected life (in  years)        | ** ** | **6.5**    |       | 6.5      |       |
| Risk-free interest rate          | ** ** | **4.9**    | **%**      | 4.9      | %          |
| Expected dividend yield          | ** ** | **0.0**    | **%**      | 0.0      | %          |
| Weighted average fair value      | ** ** | **$**      | **10.57**  |     | $          | 13.77 |   |
|                                  |            |            |            |          |            |  |  |

 

The following table summarizes stock options outstanding and changesduring the six month period ended June 30, 2007:
| ** **                                  | *** *** | **Shares*(in thousands)*** | ** ** | **Weighted  Average   Exercise   Price** | ** ** | **Weighted  Average  Remaining   Life**(years) | ** ** | **Aggregate   Intrinsic Value**(in thousands) | ** ** |
|---------------------------------------------|--------------|---------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|
|                                        |         |                            |       |                                               |       |                                                |       |                                                         |       |
| Options outstanding —  January 1, 2007 |         | 3,265                           |       | $                                                  | 6.57       |                                                | 8.1        |                                                         | $          | — |   |
| Granted                                     |         | 265                             |       | 15.76                                              |       | 9.9                                                 |       | —                                                       |       |
| Exercised                                   |         | 69                              |       | 2.92                                               |       | —                                              |       | —                                                       |       |
| Cancelled or expired                        |         | 28                              |       | 4.35                                               |       | —                                              |       | —                                                       |       |
| Options outstanding —  June 30, 2007   |         | 3,433                           |       | $                                                  | 7.37       |                                                | 7.7        |                                                         | $          | 32,957 |   |
| Options exercisable — June 30, 2007    |         | 1,174                           |       | $                                                  | 3.52       |                                                | 6.8        |                                                         | $          | 15,790 |   |

 

The range of exercise prices of the exercisable options and outstandingoptions at June 30, 2007 are as follows:

9

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| Weighted Average Exercise Price | *** *** | **Number of  Exercisable  Options***(in thousands)* | ** ** | **Number of  Outstanding   Options***(in thousands)* | ** ** | **Weighted   Average   Remaining   Life***(years)* | ** ** |
|------------------------------------------------|--------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| $0.23                                          |         | 750                                                           |       | 1,070                                                               |       | 6.0                                                               |       |
| $2.36 - $2.92                                  |         | 199                                                           |       | 744                                                                 |       | 7.9                                                               |       |
| $4.35                                          |         | 99                                                            |       | 684                                                                 |       | 8.3                                                               |       |
| $15.26 - $17.29                                |         | —                                                        |       | 265                                                                 |       | 9.7                                                               |       |
| $22.15 - $22.50                                |         | 118                                                           |       | 630                                                                 |       | 8.8                                                               |       |
| $43.00                                         |         | 8                                                             |       | 40                                                                  |       | 9.0                                                               |       |
| Totals                                         |         | 1,174                                                         |       | 3,433                                                               |       | 7.7                                                               |       |

 

Restricted stock award activity for the six months ended June 30, 2007is summarized below:

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

 

Restricted stock units represent the right to receive a share of stockin the future, provided that the restrictions and conditions designated havebeen satisfied.  Restricted stock unitaward activity for the six months ended June 30, 2007 is summarized below:

|                                                               | *** *** | **Shares***(in thousands)* | ** ** | **Weighted   Average Grant   Date Fair   Value per   Award** | ** ** |
|---------------------------------------------------------------|--------------|---------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
|                                                          |         |                            |       |                                                                                            |       |
| Unvested Restricted  stock unit awards — January 1, 2007 |         | —                          |       | $                                                                                               | —     |   |
| Granted                                                       |         | 10.6                            |       | 16.90                                                                                           |       |
| Vested                                                        |         | —                          |       | —                                                                                          |       |
| Cancelled or expired                                          |         | —                          |       | —                                                                                          |       |
| Restricted stock unit awards — June 30, 2007             |         | 10.6                            |       | $                                                                                               | 16.90      |   |

 

** (10)        InterestExpense**

The following table summarizes interest expense:

|                                               | ** **   | **Three months ended  June 30,** | ** **   | **Six months ended  June 30,** | ** **   |
|-----------------------------------------------|--------------|-------------------------------------------------|--------------|-----------------------------------------------|--------------|
| ***(in thousands)***                     | ** **   | **2007**                                        | ** **   | **2006**                                      | ** **   | **2007** | ** ** | **2006** | ** ** |
|                                          | *** *** | *** ***                                    | *** *** | *** ***                                  | *** *** | *** *** | *** *** | *** *** | *** *** |
| Interest expense                              | ** **   | **$**                                           | **7,500**    |                                          | $            | 4,450 | ** ** | **$** | **7,836** |   | $ | 8,695 |   |
| Amortization of  deferred debt issuance costs | ** **   | **229**                                         |         | 333                                           | ** **   | **229** |   | 667 |   |
| Capitalized  interest                         | ** **   | **(708**                                        | **)**        | (547                                          | )            | **(708** | **)** | (761 | ) |
| Interest expense, net                         | ** **   | **$**                                           | **7,021**    |                                          | $            | 4,236 | ** ** | **$** | **7,357** |   | $ | 8,601 |   |

 

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**(11)         Pension Expense**

*DefinedContribution Plans*

We have 401(k) plans covering substantially all of our employees.  We recorded expense with respect to theseplans for the three month periods ended June 30, 2007 and 2006 of $0.3 millionand $0.3 million, respectively, and expense of $0.7 million and $0.6 millionfor the six month periods ended June 30, 2007 and 2006, respectively.  Contributions made under our definedcontribution plans include a match, at the Company’s discretion, of employeecontributions to the plans.

### *Qualified Retirement Plan*

The Company provides a non-contributory qualified defined benefitpension plan for its unionized employees at our Pekin, IL productionfacilities.  The following tablesummarizes the components of net periodic pension cost for the qualifiedpension plan:

|                                      | ** **   | **Three months ended  June 30,** | ** **   | **Six months ended  June 30,** | ** **   |
|--------------------------------------|--------------|-------------------------------------------------|--------------|-----------------------------------------------|--------------|
| ***(In thousands)***            | ** **   | **2007**                                        | ** **   | **2006**                                      | ** **   | **2007** | ** ** | **2006** | ** ** |
|                                 | *** *** | *** ***                                    | *** *** | *** ***                                  | *** *** | *** *** | *** *** | *** *** | *** *** |
| Service cost                         | ** **   | **$**                                           | **88**       |                                          | $            | 71 |   | $ | 176 |   | $ | 142 |   |
| Interest cost                        | ** **   | **124**                                         |         | 107                                           |         | 248 |   | 215 |   |
| Expected return  on plan assets      | ** **   | **(180**                                        | **)**        | (128                                          | )            | (360 | ) | (256 | ) |
| Amortization of  prior service costs | ** **   | **11**                                          |         | —                                        |         | 22 |   | — |   |
| Amortization of  net actuarial loss  | ** **   | **6**                                           |         | 12                                            |         | 12 |   | 24 |   |
| Net periodic pension  cost           | ** **   | **$**                                           | **49**       |                                          | $            | 62 |   | $ | 98 |   | $ | 125 |   |

 

### *Postretirement BenefitObligation*

We sponsor a healthcare plan that provides postretirement medicalbenefits to certain “grandfathered” unionized employees.  The plan is contributory, with contributionsrequired at the same rate as active employees. Benefit eligibility under the plan terminates at age 65.

The following table summarizes the components of the net periodic costsfor postretirement benefits:

|                                     | ** **   | **Three months ended  June 30,** | ** **   | **Six months ended  June 30,** | ** **   |
|-------------------------------------|--------------|-------------------------------------------------|--------------|-----------------------------------------------|--------------|
| ***(In thousands)***           | ** **   | **2007**                                        | ** **   | **2006**                                      | ** **   | **2007** | ** ** | **2006** | ** ** |
|                                | *** *** | *** ***                                    | *** *** | *** ***                                  | *** *** | *** *** | *** *** | *** *** | *** *** |
| Service cost                        | ** **   | **$**                                           | **38**       |                                          | $            | 54 | ** ** | **$** | **76** |   | $ | 108 |   |
| Interest cost                       | ** **   | **34**                                          |         | 44                                            | ** **   | **68** |   | 88 |   |
| Amortization of  prior service cost | ** **   | **—**                                      |         | 15                                            | ** **   | **—** |   | 30 |   |
| Net periodic  postretirement cost   | ** **   | **$**                                           | **72**       |                                          | $            | 113 | ** ** | **$** | **144** |   | $ | 226 |   |

 

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

The Company lowered its estimated annual tax rate for 2007 during thesecond quarter to adjust its income tax rate for the six month period endingJune 30, 2007 to 32.5%, which is the rate we now estimate we will incur for2007.  This was done to reflect both ahigher level of tax exempt interest 

11

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incomefrom investments and from a lower level of pre-tax income as compared to ourfirst quarter of 2007 estimate.  Thisyear to date true-up reduced the second quarter 2007 income tax expense by $0.6million.  This change in estimateincreased second quarter 2007 basic and diluted earnings per share by $0.02 pershare.

In July 2006, the FASB issued FIN 48. This interpretation clarified the accounting for uncertainty in incometaxes recognized in the financial statements in accordance with FASB StatementNo. 109, *Accounting for Income Taxes*.  FIN 48 prescribes a recognition threshold andmeasurement of a tax position taken or expected to be taken in a taxreturn.  This interpretation alsoprovides guidance on de-recognition, classification, interest and penalties,accounting in interim periods, and disclosure.

We adopted the provisions of FIN 48 on January 1,2007.  As a result of the adoption, werecognized a $0.7 million decrease in our reserves for uncertain tax positionsand a $0.5 million increase in accrued interest on uncertain tax positions,resulting in a net $0.2 million increase in retained earnings.  We also reclassified $8.1 million betweendeferred income taxes and other long-term liabilities to conform to the balancesheet presentation requirements of FIN 48.

As of January 1, 2007, we had $8.5 million of uncertain taxbenefits.  All of our unrecognized taxbenefits, if recognized in future periods, would impact the Company’s effectivetax rate.  During the three and six monthperiods ended June 30, 2007, our liability for unrecognized tax benefitsincreased by $0.5 million and $0.9 million, respectively.  At June 30, 2007, our liability forunrecognized tax benefits was $9.5 million, and is included in other long-termliabilities on the condensed consolidated balance sheet.

We include interest expense or income, as well aspotential penalties on unrecognized tax benefits, as a component of income taxexpense in the condensed consolidated statement of operations.  The total amount of accrued interest relatedto uncertain tax positions at January 1, 2007 was $0.5 million, netof the deferred tax benefit, and is included in other long-termliabilities.  We increased our accrualfor interest related to uncertain tax positions by $0.1 million and $0.2million, respectively, net of the deferred tax benefit, for the three and sixmonth periods ended June 30, 2007.  Ourliability for accrued interest on unrecognized tax benefits at June 30, 2007was $0.7 million, net of the deferred tax benefit, and is included in otherlong-term liabilities on the condensed consolidated balance sheet.

Our federal income tax returns for 2003 to 2006 are open taxyears.  We file in numerous statejurisdictions with varying statutes of limitation open from 2002 through 2006depending on each jurisdiction’s statute of limitation.  In 2006, the IRS commenced an examination ofour U.S. income tax return.  The Companyexpects this examination to be concluded and settled within the next 12months.  Based on the outcome of thisexamination, or as a result of the expiration of statute of limitations forspecific jurisdictions, our unrecognized tax benefits for tax positions takenon previously filed tax returns possibly will materially change from theunrecognized tax benefits recorded as other long-term liabilities in ourfinancial statements at January 1, 2007. In addition, the outcome of these examinations may impact the valuationof certain deferred tax assets in future periods.  As a result, based on the status of theseexaminations, and the protocol of finalizing audits by the relevant taxauthorities, which could include formal legal proceedings, it is not possibleto estimate the impact of any amount of such changes, if any, to previouslyrecorded uncertain tax positions. 

**(13)         EarningsPer Share**

Basic earnings per shareare computed by dividing net income by the weighted average number of commonshares outstanding during each period. Diluted earnings per share are calculated using the 

12

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treasury stock method in accordance with SFAS 128,and includes the effect of all dilutive securities, including non-qualifiedstock options and restricted stock units (“RSU’s”).

The following table sets forth the computation of basic and dilutedearnings per share:

|                                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(In thousands, except per share data)*** | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Net income                                                           | ** ** | **$**                                           | **12,607** |                                          | $          | 24,654 |   | $ | 27,547 |   | $ | 36,841 |   |
|                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average  shares and share equivalents outstanding:          |       |                                            |       |                                          |       |   |   |   |   |
| Basic shares                                                         | ** ** | **41,912**                                      |       | 35,152                                        |       | 41,861 |   | 35,149 |   |
| Dilutive  non-qualified stock options and RSU’s                 | ** ** | **737**                                         |       | 1,420                                         |       | 693 |   | 1,378 |   |
| Diluted weighted  average shares and share equivalents               | ** ** | **42,649**                                      |       | 36,572                                        |       | 42,554 |   | 36,527 |   |
|                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Income per  common share - basic:                                    | ** ** | **$**                                           | **0.30**   |                                          | $          | 0.70 |   | $ | 0.66 |   | $ | 1.05 |   |
| Income per common share  - diluted:                                  | ** ** | **$**                                           | **0.30**   |                                          | $          | 0.67 |   | $ | 0.65 |   | $ | 1.01 |   |

 

We had additional potential dilutivesecurities outstanding representing 530,000 common shares for the three monthperiod ended June 30, 2007 that were not included in the computation ofpotentially dilutive securities because the options’ exercise prices weregreater than the average market price of the common shares.

**(14)         Industry Segment**

The Company operates in one reportable business segment, themanufacture and marketing of fuel-grade ethanol.

**(15)         Litigation**

We are from time to time involved in various legal proceedings,including legal proceedings relating to the extensive environmental laws andregulations that apply to our facilities and operations. We are not involved inany legal proceedings that we believe could have a material adverse effect uponour business, operating results or financial condition.

**(16)         Condensed Consolidating FinancialInformation**

Thefollowing tables present condensed consolidating financial information for: (a)Aventine Renewable Energy Holdings, Inc. (the “Parent”) on a stand-alone basis;(b) on a combined basis, the guarantors of the 10% senior unsecured Notes (“SubsidiaryGuarantors”), which include Aventine Renewable Energy, LLC; Aventine RenewableEnergy, Inc.; Aventine Power, LLC; Aventine Renewable Energy — Aurora West,LLC; and Aventine Renewable Energy — Mt. Vernon, LLC; and (c) the Non-GuarantorSubsidiary, Nebraska Energy, LLC.  EachSubsidiary Guarantor is wholly-owned by Aventine Renewable Energy Holdings,Inc.  The guarantees of each of theSubsidiary Guarantors are full, unconditional, joint and several.  Accordingly, separate financial statements ofthe wholly-owned Subsidiary Guarantors are not presented because the SubsidiaryGuarantors are jointly, severally and unconditionally liable under theguarantees, and the Company believes that separate financial statements andother disclosures regarding the Subsidiary Guarantors are not material toinvestors.  Furthermore, 

13

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there are no significant legal restrictions on theParent’s ability to obtain funds from its subsidiaries by dividend or loan.

**AventineRenewable Energy Holdings, Inc. and SubsidiariesCondensed Consolidating Statements of OperationsFor the Three Months Ended June 30, 2007(Unaudited)**
| ***(In thousands)***                     | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                     |       | $          | —     |                       | $          | 392,579                       |       | $                | 26,646     |             | $          | (24,311 | ) | $ | 394,914 |   |
| Cost of goods sold                            |       | —     |       | 369,835                    |       | 21,711                        |       | (24,061          | )          | 367,485          |       |
| Gross profit                                  |       | —     |       | 22,744                     |       | 4,935                         |       | (250             | )          | 27,429           |       |
| Selling, general and  administrative expenses |       | 73         |       | 8,248                      |       | 708                           |       | (250             | )          | 8,779            |       |
| Other expense (income)                        |       | —     |       | (510                       | )          | (4                            | )          | —           |       | (514             | )          |
| Operating income (loss)                       |       | (73        | )          | 15,006                     |       | 4,231                         |       | —           |       | 19,164           |       |
| Other income (expense):                       |       |       |       |                       |       |                          |       |             |       |             |       |
| Interest income                               |       | —     |       | 4,135                      |       | 32                            |       | —           |       | 4,167            |       |
| Interest expense                              |       | (6,972     | )          | (49                        | )          | —                        |       | —           |       | (7,021           | )          |
| Investment in  subsidiaries                   |       | 24,769     |       | 3,415                      |       | —                        |       | (28,184          | )          | —           |       |
| Other  non-operating income (expense)         |       | —     |       | 2,478                      |       | (339                          | )          | —           |       | 2,139            |       |
| Minority  interest                            |       | —     |       | —                     |       | —                        |       | (725             | )          | (725             | )          |
| Income before income  taxes                   |       | 17,724     |       | 24,985                     |       | 3,924                         |       | (28,909          | )          | 17,724           |       |
| Income tax expense                            |       | 5,117      |       | 6,346                      |       | —                        |       | (6,346           | )          | 5,117            |       |
| Net income                                    |       | $          | 12,607     |                       | $          | 18,639                        |       | $                | 3,924      |             | $          | (22,563 | ) | $ | 12,607 |   |

 

**AventineRenewable Energy Holdings, Inc. and SubsidiariesCondensed Consolidating Statements of OperationsFor the Six Months Ended June 30, 2007(Unaudited)**
| ***(In thousands)***                     | ** ** | **Parent** | ** ** | **Subsidiary   Guarantors** | ** ** | **Non-Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                     |       | $          | —     |                             | $          | 831,955                       |       | $                | 48,569     |             | $          | (48,948 | ) | $ | 831,576 |   |
| Cost of goods sold                            |       | —     |       | 783,771                          |       | 40,409                        |       | (48,448          | )          | 775,732          |       |
| Gross profit                                  |       | —     |       | 48,184                           |       | 8,160                         |       | (500             | )          | 55,844           |       |
| Selling, general and  administrative expenses |       | 236        |       | 17,167                           |       | 1,474                         |       | (500             | )          | 18,377           |       |
| Other expense (income)                        |       | —     |       | (674                             | )          | (4                            | )          | —           |       | (678             | )          |
| Operating income (loss)                       |       | (236       | )          | 31,691                           |       | 6,690                         |       | —           |       | 38,145           |       |
| Other income (expense):                       |       |       |       |                             |       |                          |       |             |       |             |       |
| Interest income                               |       | —     |       | 5,477                            |       | 58                            |       | —           |       | 5,535            |       |
| Interest expense                              |       | (7,308     | )          | (49                              | )          | —                        |       | —           |       | (7,357           | )          |
| Investment in  subsidiaries                   |       | 48,632     |       | 5,646                            |       | —                        |       | (54,278          | )          | —           |       |
| Other  non-operating income (expense)         |       | —     |       | 5,867                            |       | 141                           |       | —           |       | 6,008            |       |
| Minority  interest                            |       | —     |       | —                           |       | —                        |       | (1,243           | )          | (1,243           | )          |
| Income before income  taxes                   |       | 41,088     |       | 48,632                           |       | 6,889                         |       | (55,521          | )          | 41,088           |       |
| Income tax expense                            |       | 13,541     |       | 15,805                           |       | —                        |       | (15,805          | )          | 13,541           |       |
| Net income                                    |       | $          | 27,547     |                             | $          | 32,827                        |       | $                | 6,889      |             | $          | (39,716 | ) | $ | 27,547 |   |

 

 

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**Aventine Renewable Energy Holdings, Inc. andSubsidiariesCondensed Consolidating Balance SheetJune 30, 2007(Unaudited)**
| *****(In thousands)*                       | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                      |       |       |       |                       |       |                          |       |             |       |             |       |
| Current assets                                  |       |       |       |                       |       |                          |       |             |       |             |       |
| Cash and cash  equivalents                      |       | $          | —     |                       | $          | 39,699                        |       | $                | 4,360      |             | $          |   |   | $ | 44,059 |   |
| Short-term  investments                         |       | —     |       | 341,773                    |       | —                        |       |             |       | 341,773          |       |
| Accounts  receivable, net                       |       | —     |       | 48,668                     |       | 229                           |       |             |       | 48,897           |       |
| Inventories                                     |       | —     |       | 73,175                     |       | 1,748                         |       |             |       | 74,923           |       |
| Income tax  receivable                          |       | —     |       | 5,220                      |       | —                        |       |             |       | 5,220            |       |
| Intercompany  receivable                        |       | 310,989    |       | —                     |       | 920                           |       | (311,909         | )          | —           |       |
| Other assets                                    |       | 6          |       | 5,556                      |       | 259                           |       |             |       | 5,821            |       |
| Total current assets                            |       | 310,995    |       | 514,091                    |       | 7,516                         |       | (311,909         | )          | 520,693          |       |
|                                            |       |       |       |                       |       |                          |       |             |       |             |       |
| Property, plant and  equipment, net             |       | —     |       | 169,058                    |       | 18,965                        |       |             |       | 188,023          |       |
| Investment in  subsidiaries                     |       | 325,281    |       | 42,871                     |       | —                        |       | (368,152         | )          | —           |       |
| Net deferred tax assets                         |       | —     |       | 2,345                      |       | —                        |       |             |       | 2,345            |       |
| Other assets                                    |       | 7,092      |       | 6,899                      |       | —                        |       |             |       | 13,991           |       |
| Total assets                                    |       | $          | 643,368    |                       | $          | 735,264                       |       | $                | 26,481     |             | $          | (680,061 | ) | $ | 725,052 |   |
| ** **                                      |       |       |       |                       |       |                          |       |             |       |             |       |
| **Liabilities and Stockholders’  Equity**  |       |       |       |                       |       |                          |       |             |       |             |       |
| Current liabilities                             |       |       |       |                       |       |                          |       |             |       |             |       |
| Accounts payable                                |       | $          | —     |                       | $          | 46,405                        |       | $                | 4,250      |             | $          | — |   | $ | 50,655 |   |
| Accrued  liabilities                            |       | —     |       | 3,883                      |       | 273                           |       | —           |       | 4,156            |       |
| Other current  liabilities                      |       | 7,833      |       | 3,144                      |       | 137                           |       | —           |       | 11,114           |       |
| Intercompany  payable                           |       | —     |       | 311,909                    |       | —                        |       | (311,909         | )          | —           |       |
| Total current  liabilities                      |       | 7,833      |       | 365,341                    |       | 4,660                         |       | (311,909         | )          | 65,925           |       |
|                                            |       |       |       |                       |       |                          |       |             |       |             |       |
| Long-term debt                                  |       | 300,000    |       | —                     |       | —                        |       |             |       | 300,000          |       |
| Minority interest                               |       | —     |       | —                     |       | —                        |       | 9,953            |       | 9,953            |       |
| Other long-term  liabilities                    |       | —     |       | 13,639                     |       | —                        |       |             |       | 13,639           |       |
| Total liabilities                               |       | 307,833    |       | 378,980                    |       | 4,660                         |       | (301,956         | )          | 389,517          |       |
| Stockholders’ equity                       |       | 335,535    |       | 356,284                    |       | 21,821                        |       | (378,105         | )          | 335,535          |       |
| Total liabilities and stockholders’ equity |       | $          | 643,368    |                       | $          | 735,264                       |       | $                | 26,481     |             | $          | (680,061 | ) | $ | 725,052 |   |

 

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**Aventine Renewable Energy Holdings, Inc. andSubsidiariesCondensed Consolidating Statements of Cash FlowsFor the Six Months Ended June 30, 2007(Unaudited)**
| ***(In thousands)***                             | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| **Operating  Activities**                             |       |       |       |                       |       |                          |       |             |       |             |       |
| Net cash  provided by (used for) operating activities |       | $          | (291,996   | )                          | $          | 328,319                       |       | $                | 8,662      |             | $          | — |   | $ | 44,985 |   |
|                                                  |       |       |       |                       |       |                          |       | —           |       |             |       |
| **Investing  Activities**                             |       |       |       |                       |       |                          |       | —           |       |             |       |
| Additions to  property, plant and equipment           |       | —     |       | (77,674                    | )          | (680                          | )          | —           |       | (78,354          | )          |
| Investment in short-term  securities                  |       | —     |       | (242,848                   | )          | —                        |       | —           |       | (242,848         | )          |
| Net cash used  for investing activities               |       | —     |       | (320,522                   | )          | (680                          | )          | —           |       | (321,202         | )          |
| ** **                                            |       |       |       |                       |       |                          |       |             |       |             |       |
| **Financing  Activities**                             |       |       |       |                       |       |                          |       |             |       |             |       |
| Proceeds from  issuance of senior unsecured notes     |       | 300,000    |       | —                     |       | —                        |       | —           |       | 300,000          |       |
| Payment of debt  issuance costs                       |       | (8,221     | )          | —                     |       | —                        |       | —           |       | (8,221           | )          |
| Proceeds from  stock option exercises                 |       | 200        |       | —                     |       | —                        |       | —           |       | 200              |       |
| Tax benefit of  stock option exercises                |       | 17         |       | —                     |       | —                        |       | —           |       | 17               |       |
| Distribution to  minority stockholders                |       | —     |       | 5,489                      |       | (7,000                        | )          | —           |       | (1,511           | )          |
| Net cash provided  by (used for) financing activities |       | 291,996    |       | 5,489                      |       | (7,000                        | )          | —           |       | 290,485          |       |
| Net  increase/(decrease) in cash and cash equivalents |       | —     |       | 13,286                     |       | 982                           |       | —           |       | 14,268           |       |
| Cash and cash  equivalents at beginning of period     |       | —     |       | 26,413                     |       | 3,378                         |       | —           |       | 29,791           |       |
| Cash and cash equivalents  at end of period           |       | $          | —     |                       | $          | 39,699                        |       | $                | 4,360      |             | $          | — |   | $ | 44,059 |   |

 

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**Item2.**                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations

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

*These forward-looking statements are subject tovarious risks and uncertainties which could cause actual results to differmaterially from those stated or implied by such forward-lookingstatements.  We undertake no obligationto publicly release any revision of any forward-looking statements containedherein to reflect events and circumstances occurring after the date hereof, orto reflect the occurrence of unanticipated events.  Information concerning risk factors iscontained under Item “1A - Risk Factors” in our Annual Report on Form 10-K forthe year ended December 31, 2006.  Youshould carefully consider all of the risks and all other information containedin or incorporated by reference in this report and in our filings with theSEC.  These risks are not the only oneswe face.   Additional risks anduncertainties not presently known to us, or which we currently considerimmaterial, also may adversely affect us. If any of these risks actually occur, our business, financial conditionand results of operations could be materially and adversely affected.*

**CompanyOverview**

Aventine is a leading producer and marketer of ethanol.  Through our own production facilities,marketing alliances with other ethanol producers and our purchase/resaleoperations, we market and distribute ethanol to many of the leading energycompanies in the U.S.  We have acomprehensive national distribution network utilizing trucks, a leased railcarand barge fleet and a terminal network at critical points on the nation’stransportation grid where our ethanol is blended with our customers’gasoline.  Aventine is also a marketerand distributor of biodiesel.  Inaddition to producing ethanol, our facilities also produce several co-productsincluding: corn gluten feed and meal, corn germ, condensed corn distillerssolubles, dried distillers grain with solubles (“DDGS”), wet distillers grainwith solubles (“WDGS”), carbon dioxide and brewers’ yeast.

**Resultsof Operations**

The following discussionsummarizes the significant factors affecting the consolidated operating resultsof the Company for the three and six month periods ended June 30, 2007 and2006.  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, 2006 included in the Company’s Annual Report onForm 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-productrevenues.  We sell ethanol obtained fromthe following sources:

17

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·                  Ethanolwe manufacture at our plants;

·                  Ethanolwe purchase from our marketing alliance partners; and

·                  Ethanol we purchase on the spot market.

Wemarket and sell ethanol without regard to whether we produced it, are marketingit for our marketing alliance partners or purchased it on the spot market forresale.  In addition to ethanol, we alsopurchase and market biodiesel.

*Executive Summary*

We generated net income****of $12.6million, or $0.30 per diluted share in the second quarter of 2007, as comparedto net income of $24.7 million, or $0.67 per diluted share, in the secondquarter of 2006.  Net income decreasedprimarily as a result of significantly higher corn costs combined with lowerethanol revenue per gallon sold.  Secondquarter 2006 results benefited from the sale of 10.5 million gallons of ethanolfrom inventory at prices significantly higher than their first quarter 2006weighted average cost of $1.58 per gallon, increasing gross profit in thesecond quarter of 2006 by approximately $18.6 million.  In addition, higher selling, general and administrativeexpenses, including costs associated with being a public company and from theexpansion and growth of our business, also attributed to the decline in netearnings.  Revenue in the second quarterof 2007 was $394.9 million, a decrease of $48.0 million, or 10.8%, over secondquarter 2006 revenue of $442.9 million. The decrease is mainly the result of a decrease in gallons sold, asVeraSun Energy Corporation was no longer part of our marketing alliance, alongwith a reduction in the average price per gallon of ethanol sold.  The average sales price per gallon of ethanolin the second quarter of 2007 was $2.29 per gallon, down from $2.41 per gallonin the same quarter in 2006.

Gallons of ethanol sold in the second quarter of 2007 decreased 10.0%to 158.7 million gallons, as compared to 176.3 million gallons in the secondquarter of 2006.  Ethanol sales for thequarter decreased as a result of lower marketing alliance purchases due to aformer alliance member leaving our marketing alliance on April 1, 2007.  The lower number of marketing alliancegallons purchased was offset somewhat by increased equity production.  Ethanol production in the quarter totaled50.7 million gallons, up from 28.9 million gallons in the second quarter of2006.  This record production wasachieved despite some operational issues at the Aurora facility.

Gross profit totaled $27.4 million in the second quarter of 2007, adecrease of $22.8 million, or 45.4%, from the second quarter of 2006.  The decline in gross profit was principallythe result of a significantly lower commodity spread caused by higher cornprices and lower ethanol prices.  Ourcorn costs during the second quarter of 2007 averaged $3.99 per bushel,significantly higher than our second quarter 2006 cost of $2.27 per bushel.

The average cost of inventory was $1.98 at the end of the secondquarter of 2007 as compared to $1.91 at the end of the first quarter of2007.  The average cost per gallon ofethanol purchased in the second quarter of 2007 was higher than in the firstquarter of 2007.  This means that thelower per gallon value of ethanol in inventory at the end of the first quarterof 2007 positively impacted gross margin during the second quarter by $2.1million.  This compares with the sameissue positively impacting gross margin in the second quarter of 2006 by approximately$18.6 million, as the second quarter 2006 average

18

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costof inventory was $2.19 per gallon as compared to $1.58 per gallon at the end ofthe first quarter of 2006.  Our inventory is valued based upon a weighted averageprice we pay for ethanol that we purchase from our marketing alliance partnersand our purchase/resale transactions, along with our own cost to produceethanol.  Changes, either upward or downward, in our purchased cost ofethanol or our own production costs, will cause the inventory value tofluctuate from period to period, perhaps significantly.  These changes invalue flow through our statement of operations as the inventory is sold and cansignificantly increase or decrease our profitability.

Other non-operating income for the second quarter of 2007 includes $2.1million of realized and unrealized gains on corn derivative contracts and fromrealized and unrealized losses on the sale of forward gasoline contracts.  All of our derivative hedge positions havebeen marked to market, and we have already recorded income or loss with respectto these positions as of June 30, 2007. Increases in prices for open derivative contracts above the closingprice at June 30, 2007 will result in mark to market losses on these positions,while prices lower than those at June 30, 2007 will allow for additional hedgegains.

*For theThree Months Ended June 30, 2007 Compared to the Three Months Ended June 30,2006*

Total gallons sold in the second quarter of 2007 were 158.7 milliongallons, versus 176.3 million gallons sold in the second quarter of 2006, adecrease of 17.6 million gallons or 10.0%. Gallons sourced were as follows:

| For the Three Months Ended June 30, | ** ** |
|-------------------------------------------------------------------|------------|
| ***(In thousands, except for percentages)***  | ** ** | **2007** | ** ** | **2006** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
| Equity  production                                                | ** ** | **50,679** |   | 28,902 |   | 21,777 |   | 75.3 | % |
| Marketing  alliance purchases                                     | ** ** | **75,105** |   | 120,156 |   | (45,051 | ) | (37.5 | )% |
| Purchase/resale                                                   | ** ** | **22,085** |   | 16,701 |   | 5,384 |   | 32.2 | % |
| Decrease/(increase)  in inventory                                 | ** ** | **10,862** |   | 10,508 |   | 354 |   | N.M.* |   |
| Total                                                             | ** ** | **158,731** |   | 176,267 |   | (17,536 | ) | (9.9 | )% |

----

*  Not meaningful

Net sales in the second quarter of 2007 decreased 10.8% from the secondquarter of 2006.  Net sales were $394.9million in the second quarter of 2007 versus $442.9 million in the secondquarter of 2006.  Overall, the decreasein net sales was a combination of a decrease in the number of gallons sold anda decrease in the average sales price of ethanol.  Gallons sold in the second quarter of 2007declined as a result of a lower number of gallons that were purchased from marketingalliance partners as a result of the departure of a marketing alliance partnerfrom our alliance on April 1, 2007.  Theaverage gross selling price of ethanol in the second quarter of 2007 was $2.29per gallon, down from the $2.41 received in the second quarter of 2006.

Co-product revenue for the second quarter of 2007 totaled $23.2million, an increase of $11.5 million or 98.3%, from the second quarter 2006total of $11.7 million.  Co-productrevenue increased during the second quarter of 2007 principally from anincrease in co-product tonnage sold as a result of the DDGS produced from thenew Pekin dry mill production, along with higher average selling prices.  In the second quarter of 2007, we sold 297.1thousand tons, versus 200.4 thousand tons in the second quarter of 2006.  Co-product returns, as a percentage of theprice of corn, were 31.1% during the second quarter of 2007, versus 46.2% inthe second quarter of 2006.  Co-productreturns, as a percentage of the price of corn, decreased in the second quarterof 2007 as compared to 2006 as the result of the mix of co-products produced,with the addition of the new Pekin dry mill, and as a result of co-productpricing not keeping pace with the year over year increase in the price of corn.  Due to the addition of the new dry 

19

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millin Pekin, the increase in DDGS production increased the percentage of the lowervalue DDGS to the overall mix of available co-products.

Cost of goods sold for the quarter ended June 30, 2007 was $367.5million, compared to $392.7 million for the quarter ended June 30, 2006, adecrease of $25.2 million or 6.4%.  Costof goods sold consists of the cost to produce ethanol at our own facilities,the cost of purchasing ethanol from our marketing alliance partners and fromunaffiliated producers and marketers, freight and logistics costs and the costof motor fuel taxes which have been billed to customers.  The decrease in cost of goods sold isprincipally the result of the reduced number of ethanol gallons purchased frommarketing alliance partners, offset by higher purchased ethanol costs, andhigher corn and production costs.

Purchased ethanol in the second quarter of 2007 totaled $207.9 million,versus $314.5 million in the second quarter of 2006.  The decrease in purchased ethanol resultsfrom both a decrease in the number of gallons of ethanol purchased, and bydecreases in the cost per gallon of ethanol purchased.  In the second quarter of 2007, we purchased97.2 million gallons of ethanol at an average cost of $2.14 per gallon ascompared to 136.9 million gallons of ethanol at an average cost of $2.30 in thesecond quarter of 2006.

Production costs include corn costs, conversion costs (defined as thecost of converting the corn into ethanol, and includes production salaries,wages and stock compensation costs, fringe benefits, utilities (including coaland natural gas), maintenance, denaturant, insurance, materials and suppliesand other miscellaneous production costs) and depreciation and amortization.  Corn costs in the second quarter of 2007totaled $74.7 million or $3.99 per bushel, versus $25.3 million, or $2.27 perbushel in the second quarter of 2006. The increase in corn costs is principally the result of a perceivedincreased demand by the marketplace as a result of expected new ethanolproduction facilities being built. Conversion costs for the second quarter of 2007 increased to $30.9million from $22.9 million for the second quarter of 2006.  The total dollars spent on conversion costsincreased year over year as a result of the new Pekin dry mill production.  However, the conversion cost per gallondeclined year over year to $0.61 per gallon in the second quarter of 2007versus $0.79 per gallon in the second quarter of 2006.  Conversion costs per gallon in the secondquarter of 2006 were negatively affected by lower production caused bymaintenance outages at both production facilities along with production issuesat the Aurora, Nebraska facility.

Depreciation in the second quarter of 2007 totaled $3.0 million, versus$1.1 million in the second quarter of 2006. The increase in depreciation expense is the result of the new Pekin drymill beginning production.  Motor fueltaxes were $4.3 million in the second quarter of 2007 versus $4.0 million inthe second quarter of 2006.  The cost ofmotor fuel taxes are recovered through billings to customers.

Freight/logistics costs in the second quarter of 2007 decreased to$28.0 million, or approximately $0.18 per gallon, from $29.6 million, or $0.17per gallon in the second quarter of 2006. Freight/logistics cost per gallon is calculated by taking totalfreight/logistics costs incurred and dividing by the total ethanol gallonssold.  Total freight/logistics costs mayalso include costs to ship co-products. The increase in freight/logistics cost per gallon is principally theresult of a reduced number of gallon shipped over which to spread fixed costs,and from the expansion of our distribution system footprint.

The average cost of inventory was $1.98 at the endof the second quarter of 2007 as compared to $1.91 at the end of the firstquarter of 2007. The average cost per gallon of ethanol purchased in the secondquarter was higher than in the first quarter. This means that the lower per gallon value of ethanol in inventory atthe end of the first quarter positively impacted gross margin during the secondquarter by $2.1 million.  In 2006, theaverage cost of inventory was $2.19 at the end of the second quarter ascompared to $1.58 at the end of the first quarter of 2006.  Because the average cost per gallon ofethanol 

20

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purchasedin the second quarter of 2006 was higher than in the first quarter of 2006, thelower per gallon value of ethanol in inventory at the end of the first quarterpositively impacted gross margin during the second quarter by approximately$18.6 million.

Selling, general and administrative expenses(“SG&A”) expenses were $8.8 million in the second quarter of 2007, comparedto $7.4 million in the second quarter of 2006. The increase in SG&A expenses include increased costs related tobeing a public company, and from costs associated with the expansion and growthof our business.  Year over yearincreases reflect increased expenditures for legal and other professional feesassociated with our being a public company, including increased legal feesrelated to our capacity expansion efforts, the costs of complying with Section404 of Sarbanes-Oxley Act of 2002, higher insurance costs related to directorsand officers insurance, and increased IT costs.

Interest income in the second quarter of 2007 was$4.2 million, versus $1.2 million in the second quarter of 2006.  The increase in interest income is due to acombination of a higher average level of funds available to invest as a resultof our recent note offering and funds from last year’s initial public offering,combined with higher short-term investment rates due to increases in interestrates in general.

Interest expense in the second quarter of 2007 was$7.0 million, as compared to $4.2 million in the second quarter of 2006.  Interest expense in the second quarter of2007 increased due to the issuance in March 2007 of $300 million aggregateprincipal amount of 10.0% senior unsecured notes.  In the second quarter of 2006, we hadoutstanding a previous issue of $160 million aggregate principal amount offloating rate senior secured notes, the majority of which was repurchased inJuly 2006.

The minority interest for the quarter ended June 30, 2007 was a $0.7million charge to income compared to $1.7 million charge to income for thequarter ended June 30, 2006.  Thisdecrease reflects the reduced operating performance of our Nebraska subsidiarycaused primarily by the year over year significant increase in corn costs andthe lower average price received per gallon in the second quarter of 2007 fromthe sale of ethanol.

Other non-operating income for the second quarter of2007 includes $2.1 million of realized and unrealized gains on corn derivativecontracts and from realized and unrealized losses on the sale of forwardgasoline contracts.  These include theeffect of marking to market these contracts at quarter end.  For the second quarter of 2006, net realizedand unrealized gains of $1.9 million were recorded on corn derivativecontracts.  Other non-operating income isimpacted by the CBOT prices for derivative contracts.

The income tax rate for the second quarter of 2007was 28.9% versus a rate of 39.1% in the second quarter of 2006.  The lower rate in the second quarter of 2007resulted from lower state rates now being accrued as compared to the secondquarter of 2006, along with adjusting our estimated tax provision for thesecond quarter of 2007 to reflect both a higher level of tax exempt interestincome from investments and from a lower level of pre-tax income as compared toour first quarter of 2007 estimate.  Thetrue-up in the second quarter of 2007 adjusts our year to date 2007 rate to32.5%, which is what we now estimate we will incur for 2007.  Income tax expense for the second quarter of2007 also includes a component for interest expense related to uncertain taxpositions in accordance with FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109*.

*For theSix Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006*

Totalgallons sold in the first six months of 2007 were 351.9 million gallons, versus341.1 million gallons sold in the first six months of 2006, an increase of 10.8million gallons or 3.2%.  Gallons sourcedwere as follows:

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| For the Six Months Ended June 30,  | ** ** |
|------------------------------------------------------------------|------------|
| ***(In thousands, except for percentages)*** | ** ** | **2007** | ** ** | **2006** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
| Equity production                                                | ** ** | **99,586** |   | 65,578 |   | 34,008 |   | 51.9 | % |
| Marketing alliance  purchases                                    | ** ** | **209,814** |   | 240,768 |   | (30,954 | ) | (12.9 | )% |
| Purchase/resale                                                  | ** ** | **43,613** |   | 31,125 |   | 12,488 |   | 40.1 | % |
| Decrease/(increase) in  inventory                                | ** ** | **(1,094** | **)** | 3,649 |   | 4,743 |   | N.M.* |   |
| Total                                                            | ** ** | **351,919** |   | 341,120 |   | 20,285 |   | 5.9 | % |

----

*  Not meaningful

Net sales in the first half of 2007 increased 9.9% from the first halfof 2006.  Net sales were $831.6 millionin the first half of 2007 versus $756.4 million in the first half of 2006.  Overall, the increase in net sales was acombination of the increase in the number of gallons sold and the increase inthe average sales price of ethanol. Gallons sold in the first six months of 2007 increased as a result of ahigher equity production and a higher number of gallons purchased fromnon-affiliated producers offset by the lower number of gallons that werepurchased from marketing alliance partners as a result of a marketing alliancepartner who left our marketing alliance as of April 1, 2007.  The average gross selling price of ethanol inthe first half of 2007 increased to $2.18 per gallon, from the $2.11 receivedin the first half of 2006.

Co-product revenue for the first six months of 2007 totaled $46.3million, an increase of $19.8 million or 74.7%, from the first six month 2006total of $26.5 million.  Co-productrevenue increased during the first six months of 2007 versus 2006 principallyfrom an increase in co-product tonnage sold as a result of the DDGS producedfrom the new dry mill production and production issues in 2006, along withhigher average selling prices.  In thefirst six months of 2007, we sold 564.1 thousand tons, versus 448.8 thousandtons in the first six months of 2006. Co-product returns, as a percentage of the price of corn, were 33.2%during the first half of 2007, versus 48.1% in the first half of 2006.  Co-product returns, as a percentage of theprice of corn, decreased in the first half of 2007 as compared to 2006 as theresult of increases in the price of corn continuing to outpace the increase inco-product pricing, and from the mix of co-products produced.  Due to the addition of the new dry mill inPekin, the increase in DDGS production increased the percentage of the lowervalue DDGS to the overall mix of available co-products.

Cost of goods sold for the first six months of 2007 was $775.7 million,compared to $675.6 million for the first six months of 2006, an increase of$100.1 million or 14.8%.  Cost of goodssold consists of the cost to produce ethanol at our own facilities, the cost ofpurchasing ethanol from our marketing alliance partners and from unaffiliatedproducers and marketers, freight and logistics costs and the cost of motor fueltaxes which have been billed to customers. The increase in cost of goods sold is principally the result of theincreased number of ethanol gallons purchased from non-affiliated producers andmarketers, and from higher purchased ethanol costs and higher corn andproduction costs.

Purchased ethanol in the first half of 2007 totaled $508.7 million,versus $536.2 million in the first six months of 2006.  The decrease in purchased ethanol resultsfrom a decrease in the number of gallons of ethanol purchased, offset by anincrease in the cost per gallon of ethanol purchased.  In the first half of 2007, we purchased 253.4million gallons of ethanol at an average cost of $2.01 per gallon as comparedto 271.9 million gallons of ethanol at an average cost of $1.97 in the firsthalf of 2006.

Production costs include corn costs, conversion costs (defined as thecost of converting the corn into ethanol, and includes production salaries,wages and stock compensation costs, fringe benefits, utilities (including coaland natural gas), maintenance, denaturant, insurance, materials and suppliesand 

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othermiscellaneous production costs) and depreciation and amortization.  Corn costs in the first half of 2007 totaled $139.4million or $3.79 per bushel, versus $54.5 million, or $2.19 per bushel in thefirst half of 2006.  The increase in corncosts is principally the result of a perceived increased demand by themarketplace as a result of expected new ethanol production facilities beingbuilt.  Conversion costs for the firsthalf of 2007 increased to $57.9 million from $43.5 million for the first halfof 2006.  The total dollars spent onconversion costs increased year over year as a result of the new Pekin dry millproduction.  However, the conversion costper gallon declined year over year to $0.58 per gallon in the first half of2007 versus $0.66 per gallon in the first half of 2006.  Conversion costs per gallon in the first halfof 2006 were negatively affected by lower production caused by maintenanceoutages at both production facilities along with production issues at theAurora, Nebraska facility.

Depreciation in the first half of 2007 totaled $6.0 million, versus$2.1 million in the first half of 2006. The increase in depreciation expense is the result of the new Pekin drymill beginning production.  Motor fueltaxes were $10.5 million in the first half of 2007 versus $5.6 million in thefirst half of 2006.  The cost of motorfuel taxes are recovered through billings to customers.

Freight/logistics costs in the first half of 2007 increased to $58.2million, or approximately $0.17 per gallon, from $52.0 million, or $0.15 pergallon in the first half of 2006.  Theincrease in freight/logistics cost is principally the result of a reducednumber of gallons shipped over which to spread fixed costs, and from theexpansion of our distribution system footprint.

The average cost of inventory was $2.19 at the endof the second quarter of 2006 as compared to $1.58 at the end of the firstquarter of 2006. The average cost per gallon of ethanol purchased in the secondquarter was higher than in the first quarter. This means that the lower per gallon value of ethanol in inventory atthe end of the first quarter positively impacted gross margin during the secondquarter by approximately $18.6 million.

SG&A expenses were $18.4 million in the firsthalf of 2007, compared to $13.6 million in the first half of 2006.  SG&A expenses increased as a result ofincreased costs related to being a public company, and from costs associatedwith the expansion and growth of our business. Year over year increases in SG&A costs are primarily due toincreased costs related to legal and other professional fees associated withour being a public company, including increased legal fees related to ourcapacity expansion efforts, the costs of complying with Section 404 ofSarbanes-Oxley Act of 2002, higher insurance costs related to directors andofficers insurance, and increased IT costs.

Interest income in the first half of 2007 was $5.5million, versus $1.9 million in the first half of 2006.  The increase in interest income is due to acombination of a higher average level of funds available to invest as a result ofour March 2007 note offering and funds from last year’s initial publicoffering, combined with higher short-term investment rates due to increases ininterest rates in general.

Interest expense in the first half of 2007 was $7.4million, as compared to $8.6 million in the first half of 2006.  Interest expense in the first half of 2007reflects only interest incurred from March 2007 through June 2007 on our $300million aggregate principal amount of 10.0% senior unsecured notes.  In the first half of 2006, we had outstandinga previous issue of $160 million aggregate principal amount of floating ratesenior secured notes for the entire first half of 2006, the majority of whichwas repurchased in July 2006.

The minority interest for the first half of 2007 was a $1.2 millioncharge to income compared to $2.9 million charge to income for the first halfof 2006.  This decrease reflects thereduced operating performance of our Nebraska subsidiary caused primarily bythe year over year significant increase in 

23

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corncosts offset somewhat by the higher average price received per gallon in thefirst half of 2007 as compared to 2006 from the sale of ethanol.

Other non-operating income for the first half of2007 of $6.0 million reflects realized and unrealized gains on corn derivativecontracts and from realized and unrealized losses on the sale of forwardgasoline contracts.  These include theeffect of marking to market these contracts at June 30, 2007.  For the first half of 2006, we recognized$2.5 million of net realized and unrealized gains on corn derivativecontracts.  Other non-operating income isimpacted by the CBOT prices for derivative contracts.

Income taxes for the first half of 2007 were accruedat a rate of 32.5% versus a rate of 39.3% in the first half of 2006.  The lower rate in the first half of 2007results from lower state rates being accrued as compared to the first half of2006, along with a higher level of tax exempt interest income from investmentsand a lower level of pre-tax income as compared to our 2006 estimate.  We expect our estimated tax rate for 2007 tobe approximately 32.5%.  Income taxexpense for the first six months of 2007 also includes a component for interestexpense related to uncertain tax positions in accordance with FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes- aninterpretation of FASB Statement No. 109*.

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

*Ethanol Pricing*

As of June 30, 2007, we hadcontracts for delivery of ethanol totaling 161.7 million gallons for deliverythroughout the remainder of 2007, which represents approximately 57% of ourexpected ethanol shipments for the remainder of the year.  These commitments were for 20.7 milliongallons at an average  fixed price of$2.05, 49.7 million gallons at an average positive spread to wholesale gasolineof $0.03 (based upon the NYMEX, Chicago and NY harbor indices), and 91.3million gallons at spot prices (using various Platt, OPIS and AXXISindices).  Although these contracts arefor delivery throughout 2007, they are heavily weighted towards the thirdquarter of 2007.  In the second quarterof 2007, we also took short gasoline positions through swap agreements where wesold 15.2 million gallons of gasoline at a fixed price of $1.96 per gallon fordelivery from August 2007 through January 2008. We did this to hedge some of our gas plus contracts from potentiallyfalling gasoline prices.  The mark tomarket value of these positions at June 30, 2007 was a loss of approximately$1.5 million.

*Corn Pricing*

Based on our current hedges and current market conditions, we estimateour corn costs for the third quarter of 2007 will be in the $3.75 to $3.85 perbushel range, and our fourth quarter 2007 corn costs will be in the $3.40 to$3.50 per bushel range, excluding any effects of mark to market adjustments onour hedge positions.  All of our cornhedge positions have been marked to market, and we have already recorded incomeor loss with respect to these positions as of June 30, 2007.  Increases in prices for open derivativecontracts above the closing price at June 30, 2007 will result in mark tomarket losses on these positions, while prices lower than those at June 30,2007 will allow for additional hedge gains.

*Marketing Alliance*

As of April 1, 2007, VeraSunEnergy Corporation was no longer part of our marketing alliance.  During the second quarter, two new marketingalliance partner projects began ethanol production.  E3 Biofuels, with production capacity of 24million gallons of ethanol annually, and Redfield Energy, LLC, with productioncapacity of 50 million gallons of ethanol annually, both began shipping productduring 

24

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the second quarter.  As of June 30, 2007, our marketing alliancepartners have nameplate capacity to produce 361 million gallons of ethanolannually.   We expect one more new plantwith annual capacity of 50 million gallons to come online in 2007, along withthe expansion of one existing plant to also add 50 million gallons of annualcapacity.  We have also signed contractsto market an additional 1.4 billion gallons of ethanol from existing and newmarketing alliance partners who have projects currently under construction, andfor projects which have been proposed.  301 million gallons of this amountis currently under construction.  We believe these plants currently underconstruction will be completed and we expect to market these additionalgallons.  These plants are expected to come online between October 2007and December 2008.  In addition, we have also signed marketing agreementsfor another 1.1 billion gallons of annual capacity for proposed projects. Construction of these proposed projects has not commenced, and there can be noassurances that these projects will be commenced or completed on a timelybasis, or at all.

*Supply and Demand*

It is expected that annual ethanol production capacity in the U.S. willtotal in excess of 7.5 billion gallons annually by the end of 2007, which isthe amount required by the existing renewable fuel standard for 2012.  Ethanol produced in the United Statescompetes with sugar-based ethanol produced in Brazil.  This additional capacity, along with imports,may cause supply to exceed demand.  Ifadditional demand for ethanol is not created, either through additions todiscretionary blending (through increased penetration rates in areas that blendethanol today or through the establishment of new markets where little or noethanol is blended today), or through additional governmental mandates ateither the federal or state level, the excess supply may cause ethanol pricesto decrease, perhaps substantially.

*Expansion*

We have identified opportunities to increase ourequity production capacity through the development of new production facilitiesand are continually exploring acquisition opportunities.  In addition to the 57 million gallon dry millexpansion of our Pekin, Illinois facility which was completed in early 2007, wehave committed to build new ethanol production facilities at Mt. Vernon,Indiana and Aurora, Nebraska, and are exploring adding additional capacity atour existing Pekin, Illinois campus.

We intend to substantially complete 226 milliongallons of capacity expansions by the end of 2008.  The timing of the remaining expansions willbe based upon, among other factors, market conditions and the availability offinancing on attractive terms.   On May31, 2007, we entered into separate but substantially identical EPC contractswith a construction firm, Kiewit Energy Company (“Kiewit”), to build twoinitial 113 million gallon ethanol production facilities in Mount Vernon,Indiana and Aurora, Nebraska.  Delta-TCorporation is the technology provider and is a sub-contractor to Kiewit underthe EPC contracts.  Under the terms ofeach of the EPC contracts, Kiewit will provide certain EPC materials andservices necessary to build ethanol production facilities at each site capableof initially producing 113 million gallons of denatured ethanol annually as theprimary product.  In addition, the EPCcontracts also call for Kiewit to provide certain additional materials andservices to prepare each site for a phase II expansion.  A phase II expansion would double thecapacity of each of the plants, and the Company is currently seeking permitsfor the full 226 million gallons of annual production capacity for each siteupfront.  The EPC contracts call forpayments to Kiewit in the amount of $462.5 million.  Certain owner project costs are excluded fromthe EPC contracts.  These include, butare not limited to, the cost of land, as well as the cost of bringing power,water sewer and natural gas service to the sites.  These costs are the responsibility ofAventine.

Each of the EPC contracts also allows for creditsagainst the contract total for amounts paid for materials and services undereach of an advance work agreement entered into with Delta-T Corporation 

25

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in March 2007 and a pre-EPC agreement entered intowith Kiewit in March 2007.  Our timetableto begin and complete these projects is subject to numerous factors beyond ourcontrol.  In particular, we have not yetreceived any environmental or other permits with respect to these expansions(although construction and certain other permit applications have beenfiled).  Accordingly, we cannot giveassurance that these expansion projects will be completed on a timely basis orat all or that we will realize the benefits we anticipate.  In addition, while we expect to raiseadditional funds for the phase II facility additions, we cannot be sure that wewill be able to obtain such additional funding for these phase II transactionson attractive terms or at all.  Inaddition, we may have to pay penalties or damages under certain contractsrelated to such capacity expansions.

*Bio-Diesel*

During the second quarter of2007, we announced the addition of a major new biodiesel producer to ourbiodiesel marketing effort.  In thesecond quarter of 2007, we sold 1.9 million gallons of biodiesel.  Although this program is still in itsinfancy, we are adding additional resources toward its growth.

**Liquidityand Capital Resources**

*Overviewand Outlook*

The following table sets forth selected information concerning ourfinancial condition:

| *(In thousands)*      | ** **   | **June 30, 2007   (Unaudited)** | ** **   | **December 31,   2006** | ** **   |
|----------------------------|--------------|------------------------------------------------|--------------|-----------------------------------|--------------|
| * *                   | *** *** | *** ***                                   | *** *** | *** ***                      | *** *** |
| Cash and cash  equivalents | ** **   | **$**                                          | **44,059**   |                              | $            | 29,791 |   |
| Short-term investments     | ** **   | **341,773**                                    |         | 98,925                            |         |
| Working capital            | ** **   | **454,768**                                    |         | 203,247                           |         |
| Total debt                 | ** **   | **300,000**                                    |         | —                            |         |
| Current ratio              | ** **   | **7.90**                                       |         | 3.44                              |         |
|                            |              |                                                |              |                                   |              |  |  |

 

On May 31, 2007, we entered EPC contracts to build twoinitial 113 million gallon ethanol production facilities in Mount Vernon,Indiana and Aurora, Nebraska.   These EPCcontracts call for payments to Kiewit in the amount of $462.5 million.  Certain owner project costs are excluded fromthe EPC contracts.  These include, butare not limited to, the cost of land, as well as the cost of bringing power,water sewer and natural gas service to the sites.  These costs are the responsibility ofAventine.  Each of the EPC contracts alsoallows for credits against the contract total for amounts paid for materialsand services under each of an advance work agreement entered into with Delta-TCorporation in March 2007 and a pre-EPC agreement entered into with Kiewit inMarch 2007.  The EPC contracts also callfor Kiewit to provide certain additional materials and services to prepare eachsite for a phase II expansion.  A phaseII expansion would double the capacity of each of the plants, and the Companyis currently seeking permits for the full 226 million gallons of annualproduction capacity for each site upfront. While we expect to raise additional funds for the Aurora West and Mt.Vernon phase II facility additions as well as the Pekin III facility, we cannotbe sure that we will be able to obtain such additional funding for thesetransactions on attractive terms or at all.

**We are contractuallyobligated, subject to certain conditions, including obtaining necessarypermits, to develop both a 113 million gallon plant adjacent to our Nebraskafacility (using commercially reasonable best efforts to obtain a permit for 226million gallon capacity) and a 226 million gallon plant in Mount Vernon,Indiana.  If we do not meet certainspecified milestones, we will be subject to penalties.  The contract to complete the 226 milliongallon expansion adjacent to our Nebraska facility provides for liquidateddamages not exceeding $5 million if specified milestones are not met or we do**

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**not construct a facility with a capacity of at least 110million gallons.  If such penalties arenot paid, the counterparty to the contract has the right to repurchase theproperty at cost (subject to adjustment for any expenses, which we have paidwith respect to infrastructure construction). In certain cases, the counterparty can agree to an extension and limitedcure rights for payments.  The contractfor completion of the 226 million gallon plant in Mount Vernon, Indianaprovides that, if we do not meet certain milestones, subject to specifiedextension rights and cure periods, we will be in default under our lease withthe Indiana Port Commission.  The Stateof Indiana may complete construction of the plant at our expense if we fail todo so.  The contract does not provide forliquidated damages as an alternative.  Inaddition, we would also be subject to certain other penalties provided for inthe lease**.  Notwithstanding the above, if, despite our diligentefforts, we are unable to obtain permits for the Mt. Vernon facility bySeptember 1, 2007, we have agreed to negotiate in good faith a waiver of thecompliance date and establish a new date for compliance.  If we do not reach an agreement, either theMount Vernon lessor or we can terminate the Mount Vernon lease.  Accordingly, we cannot estimatethe amount of damages we could be liable for.

With our current cash balances, amounts available under our securedrevolving credit facility and anticipated cash flow from operations, we believethat we will be able to satisfy existing anticipated working capital needs,debt service obligations, capital expenditure and other anticipated cashrequirements for the remainder of the year.

*Sourcesof Liquidity*

Our principal sources of liquidity are cash, short-term investments,cash provided by operations, and cash available under our secured revolvingcredit facility.

*Cash and short-term investments.*  Forthe first six months of 2007, cash and short-term investments increased by$257.1 million.  Cash and short-terminvestments as of June 30, 2007 and December 31, 2006 were $385.8 million and$128.7 million, respectively.   Theincrease in cash and short-term investments is principally the result of cashreceived from the private placement of $300 million aggregate principal amountof senior unsecured 10% fixed rate notes, net of fees, cash received from ourinitial public offering completed in the third quarter of 2006, and from cashprovided by operations.

C*ash provided by operations.*  Net cash provided by operating activities inthe first six months of 2007 was $45.0****million, ascompared to cash provided by operating activities of $43.5 million for thefirst six months of 2006.  The increasein cash provided by operations in 2007 versus 2006 is primarily the result ofaccounts receivable decreasing at a faster rate than our accounts payable, dueto the lower working capital requirements necessary to support ethanolpurchases from the marketing alliance partner who left our marketing allianceon April 1, 2007.  Cash on our balancesheet, along with the cash received from the issuance of the $300 million of10% senior unsecured notes, along with continued strong pricing and demand forethanol, has significantly helped our working capital position.

*Cash available under our liquidity facility*.  Ourliquidity facility consists of a five-year $200 million senior securedrevolving credit facility that may, under certain circumstances, increase inamount up to $300 million.  We had noborrowings outstanding under our secured revolving credit facility at June 30,2007 and $1.2 million of standby letters of credit outstanding, leavingapproximately $70.8 million in additional borrowing availability thereunder asof that date.  As of December 31, 2006,we had no borrowings outstanding under our previous secured revolving creditfacility and $4.0 million of standby letters of credit outstanding, leavingapproximately $26.0 million in additional borrowing availability under theprevious secured revolving credit facility as of that date.  A fixed asset component in an amount of $50million may be added to the borrowing base under our new senior securedrevolving liquidity facility on or prior to December 31, 2007 upon thesatisfaction of certain requirements.  Weare 

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inthe process of satisfying the requirements necessary in order to take advantageof this fixed asset component.

*Uses ofLiquidity*

Our principal uses of liquidity are capital expenditures, paymentsrelated to our outstanding debt and liquidity facility, and the repurchase ofshares of our common stock.

*Capital expenditures.*  In the first six months of2007, capital expenditures (excluding expansion related expenditures) totaled$8.7 million versus $5.1 million in the first six months of 2006.  Capital expenditures include assetreplacement, environmental and safety compliance and cost reduction andproductivity improvement items.  Ourcapital spending plan for all of 2007, excluding our expansion projects, isforecasted to be between $20 and $22 million.

Capital expenditures relatedto our announced expansion projects totaled $69.7 million in the first sixmonths of 2007.  Amounts spent on theAurora West and Mt. Vernon include the pre-purchasing of long lead-timeequipment and stainless steel material, licensing fees and site preparationwork in anticipation of receiving environmental permits.  We expect to spend approximately $250 millionin total during 2007 on capacity related expenditures.

*Payments related to our outstanding debt and liquidity facility.*  Inthe first six months of 2007, we did not make any interest payments on our debtor our liquidity facility.   In the firstsix months of 2006, we paid $8.7 million in interest payments on our debt andliquidity facility.

*Repurchase of shares of common stock.*  Inthe first six months of 2007, we did not repurchase any shares of our commonstock under the share repurchase program approved by our Board of Directors.  The share repurchase program allows therepurchase of up to $50 million of our outstanding common stock, although thereare no minimum share purchase requirements. There is approximately $48.8 million available to be repurchased underthis program.

**EnvironmentalMatters**

We are subject to extensive federal, state and local environmentallaws, regulations and permit conditions (and interpretations thereof),including those relating to the discharge of materials into the air, water andground, 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 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 to potential liability for the investigation andcleanup of environmental contamination at each of the properties that we own oroperate and at off-site locations where we arranged for the disposal ofhazardous wastes.  From time to time, hazardous material spills haveoccurred at our facilities or properties, which we investigate and remediate asnecessary.  Also, soil and groundwatercontamination has been identified in the past at our Pekin, Illinoiscampus.  If significant contamination isidentified at our properties in the future, costs to investigate and remediatethis contamination as well as any costs to investigate or remediate associatednatural resource damages could 

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besignificant.  If any of these sites are subject toinvestigation and/or remediation requirements, we may be responsible underCERCLA or other environmental laws for all or part of the costs of suchinvestigation and/or remediation, 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.  We have not accrued any amounts forenvironmental matters as of June 30, 2007. The ultimate costs of any liabilities that may be identified or thediscovery of additional contaminants could adversely impact our results ofoperation or financial condition.

In addition, the hazards and risks associated withproducing and transporting our products (such as fires, natural disasters,explosions, abnormal pressures and spills) may result in spills or releases ofhazardous substances, and may result in claims from governmental authorities orthird parties relating to actual or alleged personal injury, property damage,or damages to natural resources.  Wemaintain insurance coverage against some, but not all, potential losses causedby our operations. Our coverage includes, but is not limited to, physicaldamage to assets, employer’s liability, comprehensive general liability,automobile liability and workers’ compensation. We do not carry environmental insurance. We believe that our insurance is adequate for our industry, but lossescould occur for uninsurable or uninsured risks or in amounts in excess ofexisting insurance coverage.  Theoccurrence of events which result in significant personal injury or damage toour property, natural resources or third parties that is not covered by insurancecould have a material adverse impact on our results of operations and financialcondition.

Our air emissions are subject to the federal Clean Air Act, as amended,and similar state laws which generally require us to obtain and maintain airemission permits for our ongoing operations as well as for any expansion ofexisting facilities 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 adverseaffect 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 futureenvironmental laws and regulations will adversely affect our competitiveposition with other U.S. ethanol producers. However, because ethanol is produced and traded internationally, thesecosts could adversely affect us in our efforts to compete with foreignproducers not subject to such stringent requirements.

Federal and state environmental authorities have been investigatingalleged excess VOC emissions and other air emissions from many U.S. ethanolplants, including our Illinois and Nebraska facilities.  The matter relating to our Illinois wet millfacility is still pending, and we could be required to install costly additionalair pollution control equipment or take other measures to control air pollutantemissions at that facility.  In addition,if the authorities determine our emissions were in violation of applicable law,we would likely be required to pay fines that could be material.

We have made, and expect to continue making,significant capital expenditures on an ongoing basis to comply withincreasingly stringent environmental laws, regulations and permits.  We have included in our capital budget for2007 approximately $10.8 million for projects relating to environmental, healthand safety matters, including for the installation of air pollution controlequipment and for wastewater discharge improvements at our Illinois wet millfacility.  As of June 30, 2007, we havespent approximately $2.1 million of this amount.  The majority of the 2007 environmentalcapital budget relates to compliance with the EPA’s final National EmissionsStandard for Hazardous Air 

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Pollutants, or NESHAP, under the federal Clean Air Act for industrial,commercial and institutional boilers and process heaters.  This NESHAP requires us to implement maximumachievable control technology at our Illinois wet mill facility to reducehazardous air pollutant emissions from certain of our boilers and processheaters.  We have been granted anextension until June 12, 2008 to complete work under this NESHAP.  Based on engineering conducted to date and currentlyavailable information, we have budgeted $7.4 million to comply with this NESHAPin 2007.  If we do not meet this June2008 deadline, fines and penalties could be imposed on us, which could besubstantial.

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

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

We are exposed to various market risks, including changes in commodityprices and interest rates.  Market riskis the potential loss arising from adverse changes in market rates andprices.  In the ordinary course ofbusiness, we enter into various types of transactions involving financialinstruments to manage and reduce the impact of changes in commodity prices andinterest rates.  We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

***Commodity Price Risks***

We are subject to market risk with respect to the price andavailability of corn, the principal raw material we use to produce ethanol andethanol by products.  In general, risingcorn prices result in lower profit margins and, therefore, representunfavorable market conditions.  This isespecially true when market conditions do not allow us to pass along increasedcorn costs to our customers.  Theavailability and price of corn is subject to wide fluctuations due tounpredictable factors such as weather conditions, farmer planting decisions,governmental policies with respect to agriculture and international trade andglobal demand and supply.  Our weightedaverage gross corn costs for the three months ended June 30, 2007 and 2006 was$3.99 and $2.27 per bushel, respectively. For the six month periods ended June 30, 2007 and 2006, our weightedaverage corn costs were $3.79 and $2.19 per bushel, respectively.

We have firm-price purchase commitments with some of our corn suppliersunder which we agree to buy corn at a price set in advance of the actualdelivery of that corn to us.  At June 30,2007, we had commitments to purchase approximately 18.0 million bushels of cornthrough December 2009 at an average price of $3.98 per bushel from these cornsuppliers.  Under these arrangements, weassume the risk of a price decrease in the market price of corn between thetime this price is fixed and the time the corn is delivered.  In order to reduce our market exposure toprice decreases, at the time we enter into a firm-price purchase commitment, wealso often enter into commodity forward contracts to sell a like amount of cornat the then-current price for delivery to the counterparty at a laterdate.  We account for these transactionsunder Statement of Financial Accounting Standard No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended byStatement of Financial Accounting Standard No. 138, *Accountingfor Certain Derivative Instruments and Certain Hedging Activities*,and by Statement of Financial Accounting Standard No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*,(hereinafter collectively referred to as “SFAS 133”).  These forward contracts are not designated ashedges and, therefore, are marked to market each period, with correspondinggains and losses recorded in other non-operating income.  The fair value of these derivative assets isrecognized in 

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othercurrent assets in the Condensed Consolidated Balance Sheet, net of any cashreceived from the brokers.  Informationon this type of derivative transaction is as follows:

| *(In millions)*                                | ** ** | **June 30, 2007** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|
|                                                | ** ** | ** **                  | ** ** |
| Realized and unrealized  gains included in earnings | ** ** | **$**                       | **3.7**    | ** ** |
|                                                     |            |                             |            |  |

 

| *(In millions)*                                                                                           | ** ** | **June 30, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
|                                                                                                           |       |                        |       |
| Net bushels sold                                                                                               | ** ** | **12.5**                    | ** ** |
| Aggregate  notional value of derivatives outstanding                                                           | ** ** | **$**                       | **48.6**   | ** ** |
| Period through  which derivative positions currently exist                                                     | ** ** | **December 2009**           | ** ** |
| Unrealized gain  on the fair value of outstanding derivative positions                                         | ** ** | **$**                       | **4.7**    | ** ** |
| The change in fair  value due to the effect of a 10% adverse change in commodity prices to  current fair value | ** ** | **$**                       | **(4.4**   | **)** |

 

We are also subject to market risk with respect to ethanolpricing.  Our ethanol sales are pricedusing contracts that can either be fixed; based upon the price of wholesalegasoline plus or minus a fixed amount; or based upon a market price at the timeof shipment.  We sometimes fix the priceat which we sell ethanol using fixed price physical delivery contracts.  At June 30, 2007, we had fixed contracts tosell approximately 20.7 million gallons of ethanol at an average fixed price of$2.05 per gallon.  These normalpurchase/sale transactions are not marked to market.

We also sell forward ethanol using contracts where the price isdetermined at a point in the future based upon an index plus or minus a fixedamount.  At June 30, 2007, we had soldforward approximately 49.7 million gallons of ethanol using wholesale gasolineas an index plus a fixed spread that averaged $0.03 per gallon.  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.  We account for these transactions under SFAS133.  These forward contracts are notdesignated as hedges and, therefore, are marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of these derivative assets isrecognized in other current assets in the Condensed Consolidated Balance Sheet,net of any cash received from the brokers. Information on this type of derivative transaction is as follows:

| *(In millions)*                               | ** ** | **June 30, 2007** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
|                                               | ** ** | ** **                  | ** ** |
| Realized and unrealized  loss included in earnings | ** ** | **$**                       | **(1.5**   | **)** |
|                                                    |            |                             |            |  |

 

| *(In millions)*                                                                                           | ** ** | **June 30, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
|                                                                                                           |       |                        |       |
| Gallons sold                                                                                                   | ** ** | **15.2**                    | ** ** |
| Aggregate  notional value of derivatives outstanding                                                           | ** ** | **$**                       | **29.8**   | ** ** |
| Period through  which derivative positions currently exist                                                     | ** ** | **January 2008**            | ** ** |
| Unrealized loss  on the fair value of outstanding derivative positions                                         | ** ** | **$**                       | **(1.5**   | **)** |
| The change in fair  value due to the effect of a 10% adverse change in commodity prices to  current fair value | ** ** | **$**                       | **(3.1**   | **)** |

 

***Material Limitations***

The disclosures with respect to the above noted risks do not take intoaccount the underlying commitments or anticipated transactions.  If the underlying items were included in theanalysis, the gains 

31

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orlosses on the futures contracts may be offset. Actual results will be determined by a number of factors that are notgenerally under our control and could vary significantly from those factorsdisclosed.

We are 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

**Evaluationof Disclosure Controls and Procedures**

Under the supervision of, and with the participation of management,including our Chief Executive Officer, Ronald H. Miller, and our ChiefFinancial Officer, Ajay Sabherwal, the Company carried out an evaluation of theeffectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,as amended (the “Exchange Act”)) as of the end of the period covered by thisreport.  Based upon that evaluation,Messrs. Miller and Sabherwal have concluded that, as of the end of theperiod covered by this report, the Company’s disclosure controls and procedureshave been designed and are effective to provide reasonable assurance thatinformation required to be disclosed in the reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the Securities and ExchangeCommission.  These disclosure controlsand procedures include, without limitation, controls and procedures designed toprovide reasonable assurance that information required to be disclosed in suchreports is accumulated and communicated to our management, includingMessrs. Miller and Sabherwal, as appropriate to allow timely decisionsregarding the required disclosure.  Thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events. There can be no assurance that any design will succeed in achieving itsstated goal under all potential future conditions, regardless of how remote.

**Changesin Internal Control over Financial Reporting**

Based upon evaluation by our management, which was conducted with theparticipation of Messrs. Miller and Sabherwal, there has been no change inour internal control over financial reporting during the period covered by thisreport that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**PARTII.****                OTHERINFORMATION**

**Item 1. **                    Legal Proceedings

We are from time to time involved in various legal proceedings,including legal proceedings relating to the extensive environmental laws andregulations that apply to our facilities and operations. We are not involved inany legal proceedings that we believe could have a material adverse effect uponour business, operating results or financial condition.

**Item 1A.**                 Risk Factors

 The Company has included in its Annual Reporton Form 10-K as of December 31, 2006 a description of certain risks anduncertainties that could affect the Company’s business, future performance orfinancial condition (“Risk Factors”). Those Risk Factors are hereby incorporated in Part II, Item 1Aof this Form 10-Q.

 

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

**None**

**Item 3. **                    Defaults Upon Senior Securities

**None**

**Item 4. **                    Submission of Matters to a Vote ofSecurity Holders

On May 9, 2007, the Company held its Annual Meeting ofStockholders.  The matters voted on atthe meeting and the results of those votes were as follows:

(1) Election of Class II Directors:

|                    | ** ** | **Vote for** | ** ** | **Votes against** | ** ** | **Votes withheld and   non-votes** | ** ** |
|--------------------|------------|-------------------|------------|------------------------|------------|---------------------------------------------------|------------|
|               |       |              |       |                   |       |                                              |       |
| Richard A. Derbes  |       | 33,589,889        |       | 1,168,669              |       | 7,142,186                                         |       |
| Michael C. Hoffman |       | 35,016,650        |       | 294,444                |       | 6,589,650                                         |       |
| Arnold M. Nemirow  |       | 35,023,330        |       | 287,613                |       | 6,589,801                                         |       |

 

Other directors whose term of office continued after the meeting wereMessrs. Bobby L. Latham as Class I directors; and Messrs. Leigh J. Abramson,Wayne D. Kuhn and Ronald H. Miller as class III directors.

(2)  Ratification of the AventineRenewable Energy Holdings, Inc. 2003 Stock Incentive Plan (Amended and Restatedas of March 22, 2007):

| Vote for | ** ** | **Votes against** | ** ** | **Votes withheld   and non-votes** | ** ** |
|---------------|------------|------------------------|------------|---------------------------------------------------|------------|
|          |       |                   |       |                                              |       |
| 25,832,900    |       | 4,357,951              |       | 11,709,893                                        |       |

 

(3)  Ratification of theappointment of Ernst and Young LLP as the Company’s independent registeredpublic accounting firm for the fiscal year ending December 31, 2007:

| Vote for | ** ** | **Votes against** | ** ** | **Votes withheld  and non-votes** | ** ** |
|---------------|------------|------------------------|------------|---------------------------------------------|------------|
|          |       |                   |       |                                        |       |
| 35,274,398    |       | 43,762                 |       | 6,582,584                                   |       |

 

**Item 5.**                                     Other Information

**None**

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**Item 6.**                                     Exhibits

(a)          Exhibits
|   | 10.1   |   | Form of Aventine Renewable Energy Holdings, Inc. 2003 Stock Incentive  Plan (Amended and Restated as of April 16, 2007) (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  on April 16, 2007). |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                            |
|   | 10.2   |   | Engineering, Procurement and Construction Services Fixed Price Contract,  dated as of May 31, 2007, between Aventine Renewable Energy-Aurora West, LLC  and Kiewit Energy Company.*                                                             |
|   |   |   |                                                                                                                                                                                                                                            |
|   | 10.3   |   | Engineering, Procurement and Construction Services Fixed Price Contract,  dated as of May 31, 2007, between Aventine Renewable Energy-Mt. Vernon, LLC  and Kiewit Energy Company.*                                                              |
|   |   |   |                                                                                                                                                                                                                                            |
|   | 10.4   |   | Parent Guaranty Agreement, dated as of August 6, 2007, between the  Company and Kiewit Energy Company.                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                            |
|   | 10.5   |   | Parent Guaranty Agreement, dated as of August 6, 2007, between the  Company and Kiewit Energy Company.                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                            |
|   | 31.1   |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.                                                                                                                                       |
|   |   |   |                                                                                                                                                                                                                                            |
|   | 31.2   |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                            |
|   | 32.1   |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                        |
|   |   |   |                                                                                                                                                                                                                                            |
|   | 32.2   |   | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                        |

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*                    Portionsof the exhibit have been redacted and are subject to a confidential treatmentrequest filed with the Secretary of the Securities and Exchange Commissionpursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

# **SIGNATURE**

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereto duly authorized.
|                        | AVENTINE RENEWABLE ENERGY HOLDINGS, INC. |                                     |
|------------------------|------------------------------------------|------------------------------------------|
|                   |                                     |                                     |
|                   |                                     |                                     |
| Dated: August 10, 2007 | By:                                      |  /s/ William  J. Brennan            |
|                   | Name:                                    |   William J. Brennan           |
|                   | Title:                                   |   Principal Accounting Officer |
|                        |                                          |                                          |  |  |  |

 

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