Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

# **FORM 10-Q**

# ** **

| **x** | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the quarterly period  ended September 30, 2009** |
|-------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**OR**

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

 

**COMMISSIONFILE NUMBER 001-32922**

 

**AVENTINERENEWABLE ENERGY HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**(309)347-9200**

(Registrant’sTelephone Number, including Area Code)

 

Indicate by checkmark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  YES   x   NO   o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§ 232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files.)   YES   o   NO   o

 

Indicate by checkmark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  See definitionsof “large accelerated filer”, “accelerated filer” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act.  (Check one):

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

 

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

 

Indicate the number ofshares outstanding of each class of Common Stock, as of the latest practicabledate

 
| **Class**                       | ** ** | **Outstanding as of November 9, 2009** |
|---------------------------------|------------|---------------------------------------------|
| Common Stock,  $0.001 Par Value |       | 42,963,158  Shares                          |

 

 

 

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# **FORM 10-Q**

# ** **

**QUARTERLY REPORT**

 

**TABLE OF CONTENTS**

** **
| ** **   | ** **                                                                                                                                | **Page No.** |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------|-------------------|
|         |                                                                                                                                      |              |
| PART I  |
|         |                                                                                                                                      |              |
| Item 1.      | Financial Statements                                                                                                                      |              |
|         | Condensed  Consolidated Statements of Operations (Unaudited) - Three-month and  nine-month periods ended September 30, 2009 and 2008 | 1                 |
|         | Condensed  Consolidated Balance Sheets – September 30, 2009 (Unaudited) and December 31, 2008                              | 2                 |
|         | Condensed  Consolidated Statements of Cash Flows (Unaudited) - Nine-month periods ended  September 30, 2009 and 2008                 | 3                 |
|         | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                           | 4                 |
|         |                                                                                                                                      |              |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               | 27                |
|         |                                                                                                                                      |              |
| Item  3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                                               | 44                |
|         |                                                                                                                                      |              |
| Item 4.      | Controls  and Procedures                                                                                                                  | 45                |
|         |                                                                                                                                      |              |
| PART II |
|         |                                                                                                                                      |              |
| Item 1.      | Legal  Proceedings                                                                                                                        | 47                |
|         |                                                                                                                                      |              |
| Item 1A.     | Risk Factors                                                                                                                              | 47                |
|         |                                                                                                                                      |              |
| Item  2.     | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                              | 47                |
|         |                                                                                                                                      |              |
| Item  3.     | Defaults  Upon Senior Securities                                                                                                          | 47                |
|         |                                                                                                                                      |              |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                                                                      | 48                |
|         |                                                                                                                                      |              |
| Item 5.      | Other  Information                                                                                                                        | 48                |
|         |                                                                                                                                      |              |
| Item 6.      | Exhibits                                                                                                                                  | 48                |

 

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

 

**Item 1.                    FinancialStatements**

 

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

**(Debtor-in-Possession)**

**Condensed Consolidated Statements of Operations**

(Unaudited)

* *
| ** **                                                                                                                                                     | ** ** | **Three months ended  September 30,** | ** **  | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|-------------------------------------------|------------|
| **(In thousands except per  share amounts)**                                                                                                                   | ** ** | **2009**                                   | ** **  | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| * *                                                                                                                                                       | ** ** | ** **                                 |        |                                      | ** ** | ** ** |   |   |   |
| Net sales                                                                                                                                                      | ** ** | **$**                                      | **118,116** |                                      | $          | 599,520 | ** ** | **$** | **472,773** |   | $ | 1,711,059 |   |
| Cost of goods sold                                                                                                                                             | ** ** | **110,281**                                |        | 605,990                                   | ** ** | **486,261** |   | 1,660,586 |   |
| Gross profit (loss)                                                                                                                                            | ** ** | **7,835**                                  |        | (6,470                                    | )          | **(13,488** | **)** | 50,473 |   |
| Selling, general and administrative expenses                                                                                                                   | ** ** | **5,152**                                  |        | 8,763                                     | ** ** | **21,843** |   | 27,771 |   |
| Other income (loss)                                                                                                                                            | ** ** | **(206**                                   | **)**       | 405                                       | ** ** | **(33** | **)** | 2,799 |   |
| Operating income (loss)                                                                                                                                        | ** ** | **2,477**                                  |        | (14,828                                   | )          | **(35,364** | **)** | 25,501 |   |
| Other income (expense):                                                                                                                                        | ** ** | ** **                                 |        |                                      | ** ** | ** ** |   |   |   |
| Income from termination of marketing agreements                                                                                                                | ** ** | **—**                                 |        | —                                    | ** ** | **10,176** |   | — |   |
| Loss on sale of auction rate securities                                                                                                                        | ** ** | **—**                                 |        | —                                    | ** ** | **—** |   | (31,601 | ) |
| Interest income                                                                                                                                                | ** ** | **—**                                 |        | 254                                       | ** ** | **11** |   | 2,999 |   |
| Interest expense (contractual interest expense was  $9.3 million and $27.3 million for the three and nine months ended  September 30, 2009, respectively) | ** ** | **(1,838**                                 | **)**       | (235                                      | )          | **(12,840** | **)** | (3,751 | ) |
| Other non-operating income                                                                                                                                     | ** ** | **1**                                      |        | 18,367                                    | ** ** | **1,219** |   | 6,114 |   |
| Income (loss) before reorganization items and income  taxes                                                                                                    | ** ** | **640**                                    |        | 3,558                                     | ** ** | **(36,798** | **)** | (738 | ) |
| Reorganization items                                                                                                                                           | ** ** | **12,640**                                 |        | —                                    | ** ** | **(30,109** | **)** | — |   |
| Income (loss) before income taxes                                                                                                                              | ** ** | **13,280**                                 |        | 3,558                                     | ** ** | **(66,907** | **)** | (738 | ) |
| Income tax expense (benefit)                                                                                                                                   | ** ** | **(606**                                   | **)**       | 1,797                                     | ** ** | **(7,291** | **)** | 10,719 |   |
| Net income (loss)                                                                                                                                              | ** ** | **$**                                      | **13,886**  |                                      | $          | 1,761 | ** ** | **$** | **(59,616** | **)** | $ | (11,457 | ) |
| Net loss attributable to non-controlling interest                                                                                                              | ** ** | **—**                                 |        | (725                                      | )          | **—** |   | (1,230 | ) |
| Net income (loss) attributable to controlling  interest                                                                                                        | ** ** | **$**                                      | **13,886**  |                                      | $          | 2,486 | ** ** | **$** | **(59,616** | **)** | $ | (10,227 | ) |
|                                                                                                                                                           | ** ** | ** **                                 |        |                                      | ** ** | ** ** |   |   |   |
| *Per share data:*                                                                                                                                              | ** ** | ** **                                 |        |                                      | ** ** | ** ** |   |   |   |
| Income (loss) per common share – basic:                                                                                                                   | ** ** | **$**                                      | **0.32**    |                                      | $          | 0.06 | ** ** | **$** | **(1.39** | **)** | $ | (0.24 | ) |
| Basic weighted average number of common shares                                                                                                                 | ** ** | **42,963**                                 |        | 41,971                                    | ** ** | **42,967** |   | 41,927 |   |
| * *                                                                                                                                                       | ** ** | ** **                                 |        |                                      | ** ** | ** ** |   |   |   |
| Income (loss) per common share – diluted:                                                                                                                 | ** ** | **$**                                      | **0.32**    |                                      | $          | 0.06 | ** ** | **$** | **(1.39** | **)** | $ | (0.24 | ) |
| Diluted weighted average number of common and common  equivalent shares                                                                                        | ** ** | **43,028**                                 |        | 42,010                                    | ** ** | **42,967** |   | 41,927 |   |

 

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

 

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

**(Debtor-in-Possession)**

**Condensed Consolidated Balance Sheets**

 
| **(In thousands except  share amounts)**                                                                                                                                                                                                                                                                        | ** ** | **September 30,  2009  (Unaudited)** | ** **  | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                |        |                        |       |
| Current assets                                                                                                                                                                                                                                                                                                  | ** ** | ** **                                |        |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                       | ** ** | **$**                                     | **35,772**  |                        | $          | 23,339 |   |
| Accounts receivable                                                                                                                                                                                                                                                                                             | ** ** | **11,037**                                |        | 55,888                      |       |
| Inventories                                                                                                                                                                                                                                                                                                     | ** ** | **21,285**                                |        | 85,421                      |       |
| Income tax receivable                                                                                                                                                                                                                                                                                           | ** ** | **8,149**                                 |        | 15,135                      |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                       | ** ** | **7,026**                                 |        | 10,198                      |       |
| Total current assets                                                                                                                                                                                                                                                                                            | ** ** | **83,269**                                |        | 189,981                     |       |
| Property, plant and equipment, net                                                                                                                                                                                                                                                                              | ** ** | **99,139**                                |        | 107,168                     |       |
| Construction in process                                                                                                                                                                                                                                                                                         | ** ** | **493,007**                               |        | 493,969                     |       |
| Available for sale securities                                                                                                                                                                                                                                                                                   | ** ** | **2,598**                                 |        | 673                         |       |
| Other assets                                                                                                                                                                                                                                                                                                    | ** ** | **19,377**                                |        | 7,668                       |       |
| Total assets                                                                                                                                                                                                                                                                                                    | ** ** | **$**                                     | **697,390** |                        | $          | 799,459 |   |
| ** **                                                                                                                                                                                                                                                                                                      |       |                                      |        |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                   |       |                                      |        |                        |       |
| Current liabilities                                                                                                                                                                                                                                                                                             |       |                                      |        |                        |       |
| Senior unsecured 10% fixed-rate notes                                                                                                                                                                                                                                                                           | ** ** | **$**                                     | **—**  |                        | $          | 300,000 |   |
| Secured revolving credit facility                                                                                                                                                                                                                                                                               | ** ** | **27,765**                                |        | 52,200                      |       |
| Debtor-in-possession debt facility                                                                                                                                                                                                                                                                              | ** ** | **15,000**                                |        | —                      |       |
| Accounts payable                                                                                                                                                                                                                                                                                                | ** ** | **9,561**                                 |        | 110,903                     |       |
| Accrued interest                                                                                                                                                                                                                                                                                                | ** ** | **240**                                   |        | 7,500                       |       |
| Accrued liabilities                                                                                                                                                                                                                                                                                             | ** ** | **2,221**                                 |        | 3,517                       |       |
| Other current liabilities                                                                                                                                                                                                                                                                                       | ** ** | **4,752**                                 |        | 9,900                       |       |
| Total current liabilities                                                                                                                                                                                                                                                                                       | ** ** | **59,539**                                |        | 484,020                     |       |
| Pre-petition liabilities subject to compromise                                                                                                                                                                                                                                                                  | ** ** | **366,121**                               |        | —                      |       |
| Net deferred tax liabilities                                                                                                                                                                                                                                                                                    | ** ** | **4,094**                                 |        | 2,444                       |       |
| Other long-term liabilities                                                                                                                                                                                                                                                                                     | ** ** | **15,034**                                |        | 4,199                       |       |
| Total liabilities                                                                                                                                                                                                                                                                                               | ** ** | **444,788**                               |        | 490,663                     |       |
| Stockholders’ equity                                                                                                                                                                                                                                                                                       |       |                                      |        |                        |       |
| Common stock, par value $0.001 per share;  185,000,000 shares authorized; 42,963,158 and 42,970,988 shares issued and  outstanding as of September 30, 2009 and December 31, 2008,  respectively, net of 21,548,640 shares held in treasury as of  September 30, 2009 and December 31, 2008 | ** ** | **43**                                    |        | 43                          |       |
| Preferred stock, 50,000,000 shares authorized, no  shares issued or outstanding                                                                                                                                                                                                                                 | ** ** | **—**                                |        | —                      |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                      | ** ** | **294,397**                               |        | 292,984                     |       |
| Retained earnings (accumulated deficit)                                                                                                                                                                                                                                                                         | ** ** | **(41,777**                               | **)**       | 17,839                      |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                            | ** ** | **(61**                                   | **)**       | (2,070                      | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                 | ** ** | **252,602**                               |        | 308,796                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                 | ** ** | **$**                                     | **697,390** |                        | $          | 799,459 |   |

 

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

 

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

**(Debtor-in-Possession)**

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** **  |
|----------------------------------------------------------------------------------|------------|------------------------------------------|-------------|
| **(In thousands)**                                                               | ** ** | **2009**                                 | ** **  | **2008** | ** ** |
|                                                                             | ** ** | ** **                               |        |   |   |
| **Operating Activities**                                                         | ** ** | ** **                               |        |   |   |
| Net loss                                                                         | ** ** | **$**                                    | **(59,616** | **)** | $ | (11,457 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: | ** ** | ** **                               |        | — |   |
| Provision for rejected executory contracts and  leases                           | ** ** | **26,117**                               |        | — |   |
| Loss on sale of auction rate securities                                          | ** ** | **—**                               |        | 31,601 |   |
| Depreciation and amortization                                                    | ** ** | **12,299**                               |        | 10,726 |   |
| Lower of cost or market adjustment related to  inventory                         | ** ** | **—**                               |        | 4,538 |   |
| Stock-based compensation expense                                                 | ** ** | **2,655**                                |        | 4,510 |   |
| Deferred income tax                                                              | ** ** | **407**                                  |        | 2,244 |   |
| Gain on the sale of alliance investments                                         | ** ** | **(1,000**                               | **)**       | — |   |
| Other                                                                            | ** ** | **—**                               |        | (376 | ) |
| Changes in operating assets and liabilities:                                     | ** ** | ** **                               |        |   |   |
| Accounts receivable, net                                                         | ** ** | **44,850**                               |        | (4,433 | ) |
| Inventories                                                                      | ** ** | **64,136**                               |        | (42,694 | ) |
| Other assets                                                                     | ** ** | **(18,512**                              | **)**       | — |   |
| Accounts payable                                                                 | ** ** | **(53,408**                              | **)**       | 49,944 |   |
| Other changes in operating assets and liabilities                                | ** ** | **5,250**                                |        | 12,009 |   |
| Net cash provided by operating activities                                        | ** ** | **23,178**                               |        | 56,612 |   |
|                                                                             | ** ** | ** **                               |        |   |   |
| **Investing Activities**                                                         | ** ** | ** **                               |        |   |   |
| Additions to property, plant and equipment, net                                  | ** ** | **(1,434**                               | **)**       | (221,980 | ) |
| Proceeds from the sale of marketing alliance  investment                         | ** ** | **2,000**                                |        | — |   |
| Sale of short-term securities                                                    | ** ** | **—**                               |        | 179,899 |   |
| Indemnification proceeds                                                         | ** ** | **—**                               |        | 3,039 |   |
| Proceeds from the sale of property, plant and  equipment                         | ** ** | **—**                               |        | 14 |   |
| Net cash provided by (used for) investing activities                             | ** ** | **566**                                  |        | (39,028 | ) |
|                                                                             | ** ** | ** **                               |        |   |   |
| **Financing Activities**                                                         | ** ** | ** **                               |        |   |   |
| Net repayments on pre-petition secured revolving  credit facilities              | ** ** | **(24,435**                              | **)**       | — |   |
| Borrowing on debtor-in-possession facility                                       | ** ** | **15,000**                               |        | — |   |
| Debt issuance costs                                                              | ** ** | **(1,876**                               | **)**       | — |   |
| Proceeds from the issuance of common stock                                       | ** ** | **—**                               |        | 1,500 |   |
| Net cash provided by (used for) financing activities                             | ** ** | **(11,311**                              | **)**       | 1,500 |   |
| Net increase in cash and cash equivalents                                        | ** ** | **12,433**                               |        | 19,084 |   |
| Cash and cash equivalents at beginning of period                                 | ** ** | **23,339**                               |        | 17,171 |   |
| Cash and cash equivalents at end of period                                       | ** ** | **$**                                    | **35,772**  |   | $ | 36,255 |   |

 

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

 

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

**(Debtor-in-Possession)**

**Notes to UnauditedCondensed Consolidated Financial Statements**

 

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

 

The accompanying unauditedcondensed consolidated financial statements include the accounts of AventineRenewable Energy Holdings, Inc. and its subsidiaries, which arecollectively referred to as “Aventine”, the “Company”, “we”, “our” or “us”,unless the context otherwise requires. All significant intercompany transactions have been eliminated inconsolidation.

 

We have prepared the unaudited condensed consolidated financialstatements included herein pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnote disclosures normally included instatements prepared in accordance with generally accepted accounting principleshave been omitted pursuant to such rules and regulations, although webelieve that the disclosures are adequate to make the information presented notmisleading.  These financial statementsshould be read in conjunction with the financial statements and notes theretoincluded in our Annual Report on Form 10-K and Form 10-K/A for theyear ended December 31, 2008.

 

The accompanying unauditedcondensed consolidated financial statements presented herewith reflect alladjustments (consisting of only normal and recurring adjustments unlessotherwise disclosed) which, in the opinion of management, are necessary for afair presentation of the results of operations for the three and nine monthperiods ended September 30, 2009 and 2008. The results of operations for interim periods are not necessarilyindicative of results to be expected for an entire year.

 

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

 

As of September 30, 2009, the Company’s Summary of CriticalAccounting Policies for the year ended December 31, 2008, which aredetailed in the Company’s Annual Report on Form 10-K, have not changed,except for the application of authoritative guidance on *Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code*, in preparing the consolidated financialstatements as a result of our bankruptcy filing (See Note 2).

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued the Accounting StandardsCodification (“ASC” or collectively “the Codification”) effective July 1,2009 as the official single source of authoritative U.S. generally acceptedaccounting principles (“GAAP”).  TheCodification reorganizes current U. S. GAAP into a topical format thateliminates the previous U. S. GAAP hierarchy and establishes two levels of U.S. GAAP - authoritative and non-authoritative. The Codification superseded all existing non-SEC accounting andreporting standards upon its effective date. Rules and interpretive releases of the SEC under the authority offederal securities laws continue to be sources of authoritative GAAP for SECregistrants..  All other accountingguidance not included in the Codification will be considered non-authoritative.

 

Aventine adopted the Codification at the beginning of its 2009 thirdquarter.  The adoption of theCodification did not have a significant effect on the Company’s CondensedConsolidated Financial 

 

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Statements.  References to prior accounting standards havebeen modified to reflect their Codification references.

 

In May 2009, the FASBissued authoritative guidance on *Subsequent Events,*which**establishes general standards of accounting for disclosureof events that occur after the balance sheet date but before financialstatements are issued or are available to be issued.  It requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis forselecting that date, that is, whether that date represents the date thefinancial statements were issued or were available to be issued.  Our adoption of this guidance in the secondquarter of 2009 did not have a material impact on our financial statements.

 

In April 2009, the FASBissued authoritative guidance on *Interim Disclosures aboutFair Value of Financial Instruments*, which requires disclosuresabout fair value of financial instruments for interim reporting periods.  Our adoption of this guidance  in the second quarter of 2009 did not have amaterial impact on our financial statements.

 

The accompanyingconsolidated financial statements for the prior period contain certainreclassifications to conform to the presentation used in the currentperiod.  The reclassifications had noimpact on stockholders’ equity, working capital, gross profit or net income(loss).

 

**(2)****                               ****Chapter11 Bankruptcy Proceedings**

 

On April 7, 2009 (the “PetitionDate”), Aventine Renewable Energy Holdings, Inc. and all of its direct andindirect subsidiaries (collectively, the “Debtors”) filed voluntary petitionsfor relief (collectively, the “Bankruptcy Filing”) under Chapter 11 of Title 11of the United States Code (the “Bankruptcy Code”) with the United StatesBankruptcy Court for the District of Delaware (the “Bankruptcy Court”).  The Chapter 11 cases are being jointlyadministered by the Bankruptcy Court as Case No. 09-11214 (KG)(collectively, the “Bankruptcy Cases”). The Debtors specifically are (i) Aventine Renewable Energy Holdings, Inc.;(ii) Aventine Renewable Energy, LLC, a Delaware limited liability company;(iii) Aventine Renewable Energy, Inc., a Delaware corporation; (iv) AventineRenewable Energy — Mt. Vernon, LLC, a Delaware limited liability company; (v) AventineRenewable Energy — Aurora West, LLC, a Delaware limited liability company; (vi) AventinePower, LLC, a Delaware limited liability company, and (vii) NebraskaEnergy, LLC, a Kansas limited liability company.

 

Subject to certain specificexceptions under the Bankruptcy Code, the Bankruptcy Filing automaticallyenjoined, or stayed, the continuation of any judicial or administrativeproceedings or other actions against the Debtors or their property to recoveron, collect or secure a claim arising prior to the Petition Date.  Thus, for example, most creditor actions toobtain possession of property from the Debtors, or to create, perfect or enforceany lien against the property of the Debtors, or to collect on or otherwiseexercise rights or remedies with respect to a pre-petition claim are enjoinedunless and until the Bankruptcy Court lifts the automatic stay.

 

The Bankruptcy Filingconstituted an event of default under both the Company’s secured revolvingcredit facility and its 10% senior unsecured notes due 2017 (“the Notes”) (seeNote 7), and those debt obligations became automatically and immediately dueand payable, subject to an automatic stay of any action to collect, assert, orrecover a claim against the Company and the application of applicablebankruptcy law.  As a result, theaccompanying Condensed Consolidated Balance Sheet as of September 30, 2009includes reclassifications of $309.7 million to reflect as “pre-petition liabilitiessubject to compromise” amounts owed to holders of the Notes, includingpre-petition accrued interest, net of the unamortized debt issuance costs onthe Notes.  The Company classifies “pre-petitionliabilities subject to compromise” as a long-term liability because managementdoes not believe the Company will use existing current assets or createadditional current liabilities to fund these obligations.  Amounts 

 

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owed under the Company’s pre-petition secured revolving credit facilityand certain other collateralized obligations have not been included in “pre-petitionliabilities subject to compromise” as they are adequately collateralized.

 

**Chapter 11 Process**

 

The Debtors are currentlyoperating as “debtors-in-possession” under the jurisdiction of the BankruptcyCourt, and in accordance with the applicable provisions of the Bankruptcy Codeand orders of the Bankruptcy Court.  Ingeneral, as debtors-in-possession, the Debtors are authorized under theBankruptcy Code to continue to operate as an ongoing business, but may notengage in transactions outside of the ordinary course of business without theapproval of the Bankruptcy Court.

 

On April 7, 2009, certain of the Company’s bondholders (the “DIPLenders”) entered into a term sheet (the “DIP Term Sheet”) for a $30 millionDebtor-in-Possession Credit Facility with the Debtors.  The DIP Term Sheet provides, subject tocertain conditions as described in the Debtor-in-Possession CreditFacility Term Sheet filed as Exhibit 10.1 to our Form 8-K filed on April 13,2009 for a first priority debtor-in-possession financing (the “DIP Facility”)comprised of a term loan facility made available to certain of Aventine’ssubsidiaries in a maximum aggregate principal amount of up to $30 million.  Proceeds of the DIP Facility are availableto, among other things, (i) fund the working capital and general corporateneeds of the Debtors and the costs of the Bankruptcy Cases in accordance withan approved budget, and (ii) provide adequate protection, in accordancewith the terms of the DIP Facility, to the pre-petition agent and pre-petitionlenders under the Company’s existing credit facilities.  The DIP Facility bearsinterest at 16.5% per annum.  Thematurity date of the DIP Facility is April 6, 2010, or upon the occurrenceof certain pre-defined events.  The DIPFacility is secured by a super-priority administrative claim on ourassets.  On May 5, 2009, theBankruptcy Court overruled objections from the Debtors’ pre-petition securedlenders and approved the DIP Facility on a final basis.

 

At a hearing held on April 9,2009, the Bankruptcy Court granted the Debtors’ “First Day Motions”.  The relief granted by the Bankruptcy Courtthrough the First Day Motions was designed to stabilize the Company’soperations and business relationships with vendors, lenders, employees andothers, minimize the effects of the commencement of the Bankruptcy Cases andpreserve the value of the Debtors’ assets. The First Day Motions allowed, among other things, the payment ofvendors and other providers in the ordinary course for goods and servicesordered pre-petition but received on or after the Petition Date and otherbusiness-related payments necessary to maintain the operation of ourbusinesses.  The First Day Motions alsoincluded the payment of pre-petition employee wages, salaries and benefits.  The Debtors have retained, with BankruptcyCourt approval, legal and financial professionals to advise the Debtors on thebankruptcy proceedings and certain other “ordinary course” professionals.  From time to time, the Debtors may seekBankruptcy Court approval for the retention of additional professionals.

 

On or about April 29,2009, the Debtors caused notice of the commencement of the Bankruptcy Cases tobe served on all known or potential creditors and other parties ininterest.  Vendors are being paid forgoods furnished and services provided after the Petition Date in the ordinarycourse of business.

 

As required by theBankruptcy Code, the United States Trustee for Delaware (the “US Trustee”)appointed an official committee of unsecured creditors (the “Creditors’Committee”). The Creditors’ Committee and its legal representatives have aright to be heard on all matters that come before the Bankruptcy Court withrespect to the Debtors.  There can be no assurance that the Creditors’Committee will support the Debtors’ positions on matters to be presented to theBankruptcy Court in the future or on any plan of reorganization.  Disagreements between the Debtors and theCreditors’ Committee could protract the Bankruptcy Cases, negatively impact theDebtors’ ability to operate, and delay the Debtors’ emergence from the Chapter11 proceedings.

 

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Under Section 365 ofthe Bankruptcy Code, the Debtors may assume, assume and assign, or rejectexecutory contracts and unexpired leases, including real property, railcars andequipment leases, subject to the approval of the Bankruptcy Court and certainother conditions.  Rejection constitutesa court-authorized breach of the lease or contract in question and, subject tocertain exceptions, relieves the Debtors of future obligations under such leaseor contract, but creates a pre-petition claim for damages caused by such breachor rejection, subject to the Debtors’ right to review and contest suchclaim.  Parties whose contracts or leasesare rejected may file claims against the Debtors for damages.  Generally, the assumption of an executorycontract or unexpired lease requires the Debtors to cure all prior defaultsunder such executory contract or unexpired lease, including all pre-petitionarrearages, and to provide adequate assurance of future performance.  In this regard, the Debtors’ financialstatements include amounts classified as “pre-petition liabilities subject tocompromise” that the Debtors believe that the Bankruptcy Court will allow asclaim amounts as a result of the Debtors’ rejection of various executorycontracts and unexpired leases. Additional amounts may be included in “pre-petition liabilities subjectto compromise” in future periods if additional executory contracts andunexpired leases are rejected. Conversely, the Debtors would expect that the assumption of certainexecutory contracts and unexpired leases may convert certain liabilities shownin future financial statements as subject to compromise to post-petitionliabilities.  Due to the uncertain natureof many of the potential claims, the Debtors are unable to project themagnitude of such claims with any degree of certainty.

 

The Bankruptcy Court establishedSeptember 8, 2009 at 4:00 p.m. eastern time as the deadline for thefiling of proofs of claim, thereby requiring the Debtors’ creditors to submitclaims for alleged liabilities not paid and/or damages incurred arising from orrelated to periods prior to the Petition Date. In certain cases, differences exist between the amounts at which theCompany has recorded liabilities for rejected contracts and other pre-petitionliabilities in the Company’s financial statements and the amount claimed byAventine’s creditors based on the Company’s estimate of the magnitude of claimto be allowed by the Bankruptcy Court. Significant litigation may be required to resolve any such disputes ordiscrepancies.  The Company recorded areduction in its estimate of liabilities subject to compromise in the threemonths ended September 30, 2009, for claims previously expected to befiled by creditors but which were not filed prior to September 8, 2009.

 

In order to successfullyexit Chapter 11, the Debtors will need to propose, and obtain confirmation bythe Bankruptcy Court of, a plan of reorganization that satisfies therequirements of the Bankruptcy Code.  Aplan of reorganization could, among other things, resolve the Debtors’pre-petition obligations, set forth the revised capital structure of the newlyreorganized entity and provide for corporate governance subsequent to exit frombankruptcy.  As provided in theBankruptcy Code, the Debtors have the exclusive right for 120 days after thePetition Date to file a plan of reorganization and 60 additional days tosolicit and obtain necessary acceptances. Such periods may be extended by the Bankruptcy Court for cause to up to18 months and 20 months, respectively, after the Petition Date.  If the Debtors’ exclusivity period lapses,any party in interest may file a plan of reorganization for Aventine.  The Debtors have filed two motions with theBankruptcy Court requesting extension of the exclusive filing and solicitationdeadlines under section 1121 of the Bankruptcy Code.  The first motion, approved by the BankruptcyCourt by order dated August 18, 2009, extended the exclusive deadline tofile a plan of reorganization to October 5, 2009 and the solicitation ofthe necessary acceptances to December 3, 2009.  Aventine filed a second motion on October 2,2009.  The second motion, approved by theBankruptcy Court by order dated October 27, 2009 further extended theexclusive deadline to file a plan of reorganization through and including December 4,2009 and the exclusive solicitation period through and including February 1,2010.

 

Chapter 11 of the BankruptcyCode provides that unless the terms of section 1129(b) of the BankruptcyCode are satisfied, for a bankruptcy court to confirm a Chapter 11 plan as aconsensual plan, 

 

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the holders of impairedclaims against a debtor in each class of impaired claims must accept such planby the requisite majorities set forth in the Bankruptcy Code.  An impaired class of claims shall haveaccepted a chapter 11 plan if (a) the holders of at least two-thirds inamount of the claims in such class actually voting on a plan have voted toaccept it, and (b) more than one-half in number of the holders in suchclass actually voting on the plan have voted to accept it.  Pursuant to the provisions of the BankruptcyCode, only holders of allowed claims or equity interests in classes of claimsor equity interests that are impaired and that are not deemed to have rejecteda Chapter 11 plan are entitled to vote to accept or reject such proposedplan.  Generally, a claim or interest isimpaired under a plan if the holder’s legal, equitable or contractual rightsare altered under such plan.  Classes ofclaims or equity interests under a chapter 11 plan in which the holders ofclaims or equity interests are unimpaired are deemed to have accepted such planand are not entitled to vote to accept or reject the proposed plan.  In addition, classes of claims or equityinterests in which the holders of claims or equity interests will not receiveor retain any property on account of their claims or equity interests aredeemed to have rejected the plan and are not entitled to vote to accept orreject the plan.  Under circumstancesspecified in the so-called “cramdown” provisions of Section 1129(b) ofthe Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such planhas not been accepted by all impaired classes. The precise requirements and evidentiary showing for confirming aChapter 11 plan notwithstanding its rejection by one or more impaired classesof claims or equity interests depends upon a number of factors, including thestatus and seniority of the claims or equity interests, in the rejecting class —i.e., secured claims or unsecured claims, subordinated or senior claims, orcommon stock.

 

Under the priority schemeestablished by the Bankruptcy Code, unless creditors agree otherwise,post-petition liabilities and pre-petition liabilities must be satisfied infull before stockholders of the Debtors are entitled to receive anydistribution or retain any property under a plan of reorganization.  The ultimate recovery, if any, to creditorsand stockholders of the Debtors will not be determined until confirmation andconsummation of a plan of reorganization. No assurance can be given as to what values, if any, will be ascribed inthe Bankruptcy Cases to each of these constituencies or what types or amountsof distributions, if any, they would receive. Accordingly, the Debtors urge that appropriate caution be exercised withrespect to existing and future investments in any of the Company’s common stockor any of the Company’s liabilities.

 

Although the Debtors expectto file a Chapter 11 plan that provides for emergence from Chapter 11 some timein the future, there can be no assurance that a Chapter 11 plan will beproposed by the Debtors or confirmed by the Bankruptcy Court, or that any suchplan will be consummated.  In order tosuccessfully emerge from bankruptcy, the Debtors will need to, among otherthings, obtain alternative financing to replace the DIP Facility.

 

The Debtors have incurredand will continue to incur significant costs associated with the reorganization.  The amount of these costs, which are beingexpensed as incurred, are expected to significantly affect the Debtors’ resultsof operations.

 

*Notice and Sell-Down Procedures for Trading Equity Securities*

 

The Bankruptcy Court entereda final order (the “Final Trading Restriction Order”) on May 4, 2009granting a motion of the Debtors to require beneficial owners of substantialamounts of the Company’s common stock to provide notice of their holdings andrestrict, in specified circumstances and subject to specified terms andconditions, acquisitions or dispositions of the Company’s common stock bySubstantial Equityholders (as defined below) (the “Common Stock Notice andTransfer Requirements”).

 

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Under the Common StockNotice and Transfer Requirements, all “Substantial Equityholders” must providethe Debtors, the Debtors’ counsel and the Bankruptcy Court advance notice oftheir intent to buy or sell the Company’s common stock (including options toacquire common stock, as further specified in the Final Trading RestrictionOrder) prior to effectuating any such purchase or sale.  A “Substantial Equityholder” under the FinalTrading Restriction Order is a person or entity that beneficially owns or, as aresult of a transaction, would beneficially own, at least 2.04 million shares(including options to acquire shares, as further specified in the Final TradingRestriction Order) of the Company’s common stock, representing approximately4.75% of all issued and outstanding shares of the Company’s common stock.  The Common Stock Notice and TransferRequirements were requested by the Debtors to identify and, where necessary,restrict potential trades of the Company’s common stock that could negativelyimpact the Debtors’ ability to preserve maximum availability of their accruednet operating losses and other tax attributes under Section 382 of theCode.  Pursuant to the Final TradingRestriction Order, the Debtors have 15 calendar days after notification of atransfer by a Substantial Equityholder to file any objections with theBankruptcy Court and serve notice on such Substantial Equityholder.  If the Debtors file any objections, thetransfer would not become effective unless approved by a final andnon-appealable order of the Bankruptcy Court. In addition, a person or entity that is or becomes a SubstantialEquityholder must file with the Bankruptcy Court, and provide the Debtors andtheir counsel with, notification of such status on or before the later of (a) 15days after the effective date of the notice of entry of the Final TradingRestriction Order or (b) ten days after becoming a SubstantialEquityholder.

 

**Going Concern Matters**

 

The ability of the Companyto continue as a going concern is dependent upon, among other things, (i) theCompany’s ability to comply with the terms and conditions of the DIP facility; (ii) theability of the Company to maintain adequate cash on hand; (iii) theability of the Company to generate cash from operations; (iv) the abilityof the Company to obtain confirmation of and to consummate a plan ofreorganization under the Bankruptcy Code; (v) the cost and outcome of thereorganization process; (vi) the Company’s ability to obtain alternativefinancing; and (vii) the Company’s ability to achieve profitability.  Uncertainty as to the outcome of thesefactors raises substantial doubt about the Company’s ability to continue as agoing concern.  The Company is currentlyevaluating various courses of action to address the issues the Company isfacing.  There can be no assurance thatany of these efforts will be successful.

 

The accompanyingconsolidated financial statements do not purport to reflect or provide for theconsequences of our Chapter 11 proceedings.  In particular, the financial statements donot purport to show (i) as to assets, their realizable value on aliquidation basis or their availability to satisfy liabilities; (ii) as topre-petition liabilities, the amounts that may be allowed for claims orcontingencies, or the status and priority thereof; (iii) as to shareowners’equity accounts, the effect of any changes that may be made in ourcapitalization; or (iv) as to operations, the effect of any changes thatmay be made to our business.

 

In accordance withaccounting principles generally accepted in the United States (“GAAP”), we haveapplied authoritative guidance on *FinancialReporting by Entities in Reorganization under the Bankruptcy Code*,in preparing the consolidated financial statements.  This guidance requires that the financialstatements, for periods subsequent to the Chapter 11 filing, distinguishtransactions and events that are directly associated with the reorganizationfrom the ongoing operations of the business. Accordingly, certain expenses (including professional fees), realizedgains and losses and provisions for losses that are realized or incurred in thebankruptcy proceedings are recorded in reorganization items on the accompanyingCondensed Consolidated Statements of Operations.  In addition, pre-petition obligations thatmay be impacted by the bankruptcy reorganization process have been classifiedon the 

 

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Condensed Consolidated Balance Sheet at September 30, 2009 in “pre-petitionliabilities subject to compromise*”*. These liabilities are reported at the amounts expected to be allowed bythe Bankruptcy Court, even if they may be settled for lesser amounts.  For information on the bankruptcyreorganization process, see *Chapter 11 BankruptcyProceedings*above.

 

As a result of theBankruptcy Filing, realization of assets and liquidation of liabilities aresubject to uncertainty.  While operatingas a debtor-in-possession under the protection of Chapter 11, and subject toBankruptcy Court approval or otherwise as permitted in the normal course of business,the Debtors may sell or otherwise dispose of assets and liquidate or settleliabilities for amounts other than those reflected in the condensedconsolidated financial statements. Further, a plan of reorganization could materially change the amountsand classifications reported in our consolidated financial statements.  Our historical consolidated financialstatements do not give effect to any adjustments to the carrying value ofassets or amounts of liabilities that might be necessary as a consequence ofconfirmation of a plan of reorganization.

 

The potential adversepublicity associated with the Bankruptcy Filing and the resulting uncertaintyregarding the Company’s future prospects may hinder the Company’s ongoingbusiness activities and its ability to operate, fund and execute its businessplan by impairing relations with existing and potential customers; negativelyimpact the ability of the Company to attract, retain and compensate keyexecutives and employees and to retain employees generally; limit the Company’sability to obtain trade credit; and impair present and future relationshipswith vendors and service providers.

 

**(3)****                               ****PendingAccounting Pronouncements**

 

In December 2008, theFASB issued authoritative guidance on an *Employers’ Disclosuresabout Postretirement Benefit Plan Assets*.  This guidance requires additional disclosuresabout assets held in an employer’s defined benefit pension or otherpostretirement plan, primarily related to categories and fair valuemeasurements of plan assets.  This guidance is effective for us as of December 31,2009.  Because this guidance applies onlyto financial statement disclosures, the adoption is not expected to have amaterial effect on our consolidated financial statements.

 

In August 2009, theFASB updated authoritative guidance on *Fair Value Measurementsand Disclosures*.  This updateprovides amendments to reduce potential ambiguity in financial reporting whenmeasuring the fair value of liabilities. Among other provisions, this update provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the valuation techniques described in ASC Update2009-05.  ASC Update 2009-05 will becomeeffective for our annual financial statements for the year ended December 31,2009. We have not yet determined the impact that this update may have on ourfinancial statements.

 

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

 

Inventories are as follows:

 
| **(In thousands)** | ** ** | **September 30, 2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Finished products  | ** ** | **$**                       | **14,645** |                        | $          | 76,968 |   |
| Work-in-process    | ** ** | **2,040**                   |       | 2,568                       |       |
| Raw materials      | ** ** | **3,150**                   |       | 3,600                       |       |
| Supplies           | ** ** | **1,450**                   |       | 2,285                       |       |
| Totals             | ** ** | **$**                       | **21,285** |                        | $          | 85,421 |   |

 

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

 

Prepaid expenses and othercurrent assets are as follows:

 
| **(In thousands)**                       | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Prepaid motor fuel taxes                 | ** ** | **$**                        | **—** |                        | $          | 3,667 |   |
| Prepaid insurance                        | ** ** | **4,355**                    |       | 1,435                       |       |
| Prepaid supplies and materials           | ** ** | **729**                      |       | —                      |       |
| Fair value of derivative instruments     | ** ** | **—**                   |       | 1,521                       |       |
| Prepaid ethanol                          | ** ** | **124**                      |       | 512                         |       |
| Current portion of deferred income taxes | ** ** | **—**                   |       | 1,593                       |       |
| Prepaid benefits                         | ** ** | **—**                   |       | 364                         |       |
| Other prepaid expenses                   | ** ** | **1,818**                    |       | 1,106                       |       |
| Totals                                   | ** ** | **$**                        | **7,026**  |                        | $          | 10,198 |   |

 

**(6)****                               ****OtherAssets**

 

Other assets are as follows:

 
| **(In thousands)**                                 | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Deferred debt issuance costs                       | ** ** | **$**                        | **865**    |                        | $          | 6,668 |   |
| Prepaid utility costs and deposits                 | ** ** | **11,064**                   |       | —                      |       |
| Restricted cash                                    | ** ** | **7,448**                    |       | —                      |       |
| Investment in marketing alliance partners, at cost | ** ** | **—**                   |       | 1,000                       |       |
| Totals                                             | ** ** | **$**                        | **19,377** |                        | $          | 7,668 |   |

 

Deferred debt issuance costsare subject to amortization.  Inconnection with amending our secured revolving credit facility in March 2009,we paid debt issuance costs totaling $0.9 million, which will be amortizedutilizing a method which approximates the effective interest method through February 28,2010 which is the remaining life of the amended secured revolving creditfacility.  In connection with ourdebtor-in-possession debt facility, we paid debt issuance costs totaling $1.0million in April 2009, which will be amortized utilizing a method whichapproximates the effective interest method through March 2010 which is theestimated remaining life of the debtor-in-possession credit facility.

 

In conjunction with theconstruction of our new ethanol plant at Mt. Vernon, Indiana, the Companynegotiated with certain utility providers to extend an existing natural gaspipeline to supply power for and construct electrical infrastructure for thenew Mt. Vernon facility.  In order toprovide 

 

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adequate assurance for the construction costs of the pipeline andelectrical infrastructure, the Company, under its secured revolving creditfacility, issued letters of credit to the utility providers in the aggregateamount of $15.3 million.  As a result ofour suspending construction and our Bankruptcy Filing, one of the utilityproviders noted above has drawn $9.0 million on its respective letter ofcredit.  A second utility provider hasfiled a claim under the Company’s bankruptcy proceedings and also filed amechanic’s lien on the Company’s Mt. Vernon facility, which is partiallycollateralized by a letter of credit. The Company expects this $8.2 million claim and related mechanic’s lienwill be allowed to stand unabated through its bankruptcy confirmation proceedings.  Accordingly, the Company has reflectedprepaid utility costs and deposits equal to its obligations to utilityproviders under drawn letters of credit and secured liens, excluding cashfunded letters of credit described below. We expect the prepaid utility costs and deposits to reduce cash outlaysfor future utility demand charges to the Company or a potential buyer once theMt. Vernon facility has been completed and is operational.  Should the Mt. Vernon facility not becompleted, we may be unable to recover any amounts and would be required toreduce the value of this asset to zero.

 

Restricted cash of $7.4million represents cash held in segregated bank accounts of the Company, whichis set aside as collateral to fund certain letters of credit and utilitydeposits.

 

**(7)****                               ****Debt**

 

The following table summarizes the Company’s outstanding debt:

 
| **(In thousands)**                                                        | ** ** | **September 30,  2009** | ** **  | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| Senior unsecured 10% notes due April 2017                            | ** ** | **$**                        | **300,000** |                        | $          | 300,000 |   |
| Secured revolving credit facility                                         | ** ** | **27,765**                   |        | 52,200                      |       |
| Debtor-in-possession debt facility                                        | ** ** | **15,000**                   |        | —                      |       |
|                                                                      | ** ** | **342,765**                  |        | 352,200                     |       |
| Less: reclassification to pre-petition liabilities  subject to compromise | ** ** | **(300,000**                 | **)**       | —                      |       |
| Less: short-term borrowings                                               | ** ** | **(42,765**                  | **)**       | (352,200                    | )          |
| Total long-term debt                                                      | ** ** | **$**                        | **—**  |                        | $          | — |   |

 

*Senior Unsecured Notes*

 

As of September 30,2009, the Company had outstanding $300 million aggregate principal amount ofSenior Unsecured Notes.  The Notes wereissued pursuant to an indenture between the Company and Wells Fargo Bank, N.A.,as trustee and were subsequently exchanged for registered notes with the sameterms.  The Notes are general unsecuredobligations of the Company and certain of its guarantor subsidiaries.  In April 2009, Deutsche Bank NationalTrust Company replaced Wells Fargo Bank as Successor Indenture Trustee.  As a result of the Bankruptcy Filing, theoutstanding principal amount of the Notes and accrued interest thereon becameimmediately due and payable, and the Notes have been reclassified to “pre-petitionliabilities subject to compromise” (see Note 12).  The Company discontinued the accrual ofinterest on these Notes beyond the petition date of April 7, 2009.  Contractual interest expense not recordedfrom April 8, 2009 through September 30, 2009 would have totaled$14.4 million.

 

*Secured Revolving Credit Facility*

 

As of September 30,2009, $9.6 million in letters of credit and $27.8 million in revolving loanswere outstanding under our pre-petition amended secured revolving creditfacility with J P Morgan Chase Bank, N.A., as administrative agent and alender.  As a result of our BankruptcyFiling, all the 

 

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commitments under the Company’s pre-petition secured revolving creditfacility automatically terminated, and the principal of the loans and thereimbursement obligations then outstanding, together with accrued interestthereon and any unpaid fees and all other obligations of the borrowers accruedunder the applicable loans documents, became immediately due and payable,subject to the automatic stay provisions of Section 362 of the BankruptcyCode.  As a result, there is no longerany liquidity available to us under this facility.  Amounts owed under the Company’s pre-petitionsecured revolving credit facility have not been included in “pre-petitionliabilities subject to compromise” as the secured debt is adequatelycollateralized.  The Company continues toaccrue and pay interest on this credit facility in accordance with theBankruptcy Court’s final debtor-in-possession financing order.  As of September 30, 2009, the Companyholds a restricted cash account totaling $7.0 million providing collateralprotection to the pre-petition lenders for certain outstanding letters ofcredit issued under this facility as provided for in a stipulation agreementamong the Company, its pre-petition secured lenders, and the DIP lenders.

 

*Debtor-in-possession Debt Facility*

 

As of September 30, 2009, the Company has drawn $15 million of its$30 million DIP Facility.  The DIPFacility provides for a first priority term loan in a maximum aggregateprincipal amount of up to $30 million. Proceeds of the DIP Facility can be used, among other things, to (i) fundthe working capital and general corporate needs of the Debtors and the costs ofthe Bankruptcy Cases in accordance with an approved budget, and (ii) provideadequate protection, in accordance with the terms of the DIP Facility, to thepre-petition agent and pre-petition lenders under the Company’s existing creditfacilities.  The DIP Facility bearsinterest at 16.5%.  The maturity date ofthe DIP Facility is April 6, 2010, or upon the occurrence of certainpre-defined events.  The DIP Facility issecured by a super-priority administrative expense claim on our assets.  As of September 30, 2009, the Debtorsare in compliance with the terms of its DIP Facility.  The Company accrues and pays interest expenseon this DIP Facility in accordance with the Bankruptcy Court’s final orderapproving the DIP Facility.

 

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**(8)****                                ****Other Current Liabilities**

 

Other current liabilitiesare as follows:

 
| **(In thousands)**                                         | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| * *                                                   | * *   | * *                     | * *   | * *                    | * *   |
| Deferred revenue                                           | ** ** | **$**                        | **3,579**  |                        | $          | 8,425 |   |
| Accrued property taxes                                     | ** ** | **501**                      |       | 575                         |       |
| Accrued sales tax                                          | ** ** | **10**                       |       | 339                         |       |
| Current portion of deferred income taxes                   | ** ** | **—**                   |       | 507                         |       |
| Reserve for uncertain tax positions (see Note 18)          | ** ** | **576**                      |       | —                      |       |
| Accrued interest on uncertain tax positions (see  Note 18) | ** ** | **42**                       |       | —                      |       |
| Other accrued operating expenses                           | ** ** | **44**                       |       | 54                          |       |
| Totals                                                     | ** ** | **$**                        | **4,752**  |                        | $          | 9,900 |   |

 

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

 

Other long-term liabilitiesare as follows:

 
| **(In thousands)**                                         | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| * *                                                   | * *   | * *                     | * *   | * *                    | * *   |
| Unfunded postretirement benefit obligations                | ** ** | **$**                        | **1,974**  |                        | $          | 1,834 |   |
| Unfunded pension liability                                 | ** ** | **1,541**                    |       | 1,491                       |       |
| Pre-petition liabilities not compromised                   | ** ** | **11,519**                   |       | —                      |       |
| Reserve for uncertain tax positions (see Note 18)          | ** ** | **—**                   |       | 848                         |       |
| Accrued interest on uncertain tax positions (see  Note 18) | ** ** | **—**                   |       | 26                          |       |
| Totals                                                     | ** ** | **$**                        | **15,034** |                        | $          | 4,199 |   |

 

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

 

ASC 820, *Fair Value Measurements and Disclosures* establishes aframework for measuring fair value and expands disclosure about fair valuemeasurements.  The statement requiresthat fair value measurements be classified and disclosed in one of thefollowing three categories:

 

·                  Level 1: Unadjusted quoted prices inactive markets that are accessible at the measurement date for identical,unrestricted assets or liabilities;

·                  Level 2: Quoted prices in markets thatare not active, or inputs which are observable, either directly or indirectly,for substantially the full term of the asset or liability;

·                  Level 3: Prices or valuation techniquesthat require inputs that are both significant to the fair value measurement andunobservable (i.e., supported by little or no market activity).

 

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The following tablesummarizes the valuation of our financial instruments which are carried at fairvalue by the ASC 820 pricing levels as of September 30, 2009:

 
| ** **                    | ** ** | ** **                                  | ** ** | **Fair Value Measurements at the Reporting Date Using**                  | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Fair Value  at  September 30, 2009** | ** ** | **Quoted Prices in  Active Markets  Using Identical  Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                          |       |                                        |       |                                                                     |       |   |   |   |   |
| Cash and cash equivalents     |       | $                                           | 35,772     |                                                                     | $          | 35,772 |   | — |   | — |   |
| Available for sale securities |       | 2,598                                       |       | 2,598                                                                    |       | — |   | — |   |
|                               |            |                                             |            |                                                                          |            |  |  |  |  |  |  |

 

The Company did not hold anyfinancial assets requiring the use of Level 2 or Level 3 inputs at September 30,2009.

 

The Company held nooutstanding derivative positions as of September 30, 2009.  The Company recorded net gains of $1.2million for the nine month period ended September 30, 2009 and net gainsof $18.4 million and $6.1 million, respectively, for the three and nine monthperiods ended September 30, 2008 in the fair value of its derivativefinancial instrument positions.  Thesegains are reflected in  “othernon-operating income” in the unaudited Condensed Consolidated Statements ofOperations.

 

The Company recorded gainsof $0.2 million and $1.9 million, respectively, for the three and nine monthperiods ended September 30, 2009 under “accumulated other comprehensiveloss” in the unaudited Condensed Consolidated Balance Sheet for the changes inthe fair value of its available for sale securities.  The total cumulative gains recorded onavailable for sale securities as of September 30, 2009 was $1.9million.  The Company did not hold anyavailable for sale securities in the third quarter of 2008.

 

The carrying value ofother financial instruments, including cash, accounts receivable and accountspayable and accrued liabilities approximate fair value due to their shortmaturities or variable-rate nature of the respective balances.  The following table presents the otherfinancial instruments that are not carried at fair value but which require fairvalue disclosure as of September 30, 2009 and December 31, 2008.

 
| ** **                                     | ** ** | **As of September 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **Carrying Value**                | ** ** | **Fair Value**                   | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Investment in other ethanol producers, at cost |       | —                            |       | —                           |       | 1,000 |   | n/a |   |
| Commodity margin deposits                      |       | —                            |       | —                           |       | 1,521 |   | 1,521 |   |
| 10% senior unsecured notes due 2017            |       | (300,000                          | )          | (153,000                         | )          | (300,000 | ) | (49,500 | ) |
| Secured revolving credit facility              |       | (27,765                           | )          | (27,765                          | )          | (52,200 | ) | (52,200 | ) |
| Debtor-in-possession debt facility             |       | (15,000                           | )          | (15,000                          | )          | — |   | — |   |

 

The Company’sinvestments at December 31, 2008 accounted for under the cost methodconsisted of minority positions in equity securities of other ethanol operatingcompanies.  These equity investments wererecorded at cost, and it was not practical to estimate a fair value for thesenon-publicly traded companies.  TheCompany redeemed all of its cost investments during the first quarter of 2009.

 

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**(11)****                         ****Reorganization Items**

 

Authoritative guidance on *Financial Reporting by Entities in Reorganizations under the BankruptcyCode* requires separate disclosure of reorganization items such asrealized gains and losses from the settlement of pre-petition liabilities,provisions for losses resulting from the reorganization and restructuring of thebusiness, as well as professional fees directly related to the process ofreorganizing the Debtors under Chapter 11. The Debtors’ reorganization items for the three and nine months ended September 30,2009 consist of the following:

 
| **(in thousands)**                                         | ** ** | **Three months  ended  September  30, 2009** | ** **  | **Nine months  ended  September 30,  2009** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|-------------|--------------------------------------------------|------------|
| * *                                                   | ** ** | ** **                                   | ** **  | ** **                                       | ** ** |
| Provision for rejected executory contracts and  leases (a) | ** ** | **$**                                        | **(13,567** | **)**                                            | **$**      | **26,117** | ** ** |
| Professional fees directly related to reorganization  (b)  | ** ** | **2,185**                                    | ** **  | **5,304**                                        | ** ** |
| Other (c)                                                  | ** ** | **(1,258**                                   | **)**       | **(1,312**                                       | **)**      |
| Total reorganization items                                 | ** ** | **$**                                        | **(12,640** | **)**                                            | **$**      | **30,109** | ** ** |

 

----

| (a) |   | The Company has  re-evaluated its estimates of allowable claims included in liabilities  subject to compromise resulting in a favorable change in estimate of $13.6  million recorded as a reorganization item in the third quarter of 2009.                                                                           |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | Professional  fees directly related to the reorganization include post-petition fees  associated with advisors to the Debtors, the statutory committee of unsecured  creditors and certain secured creditors. Professional fees are estimated by  the Debtors and will be reconciled to actual invoices when received. |
| (c) |   | Other includes  gains on the settlement of pre-petition critical vendor claims for less than  amounts owed and other adjustments.                                                                                                                                                                                      |

 

**(12)****                         ****Pre-Petition Liabilities Subject to Compromise**

 

Pre-petition liabilitiessubject to compromise refers to unsecured obligations that will be accountedfor under a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-Chapter11 liabilities are stayed.  Authoritativeguidance on *Financial Reporting by Entities in Reorganizationsunder the Bankruptcy Code* requires pre-petition liabilities that aresubject to compromise to be reported at the amounts expected to be allowed,even if they may be settled for lesser amounts. These liabilities represent the estimated amount expected to be allowedon known or potential claims to be resolved through the Chapter 11 process, andremain subject to future adjustments arising from negotiated settlements,actions of the Bankruptcy Court, rejection of executory contracts and unexpiredleases, the determination as to the value of any potential collateral securingthe claims, proofs of claim, or other events. Pre-petition liabilities subject to compromise also include certainitems that may be assumed under the plan of reorganization, and as such, may besubsequently reclassified to liabilities not subject to compromise.  At hearings held in April 2009, theCourt granted final approval of many of the Debtors’ First Day Motionscovering, among other things, human capital obligations, supplier relations,insurance, customer relations, business operations, certain tax matters, cashmanagement, utilities, case management and retention of professionals.  Obligations associated with these matters arenot classified as pre-petition liabilities subject to compromise.

 

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In accordance with theauthoritative guidance, debt issuance costs associated with borrowingclassified as pre-petition liabilities subject to compromise should be viewedas valuation adjustments to the related debt. When the debt has become an allowed claim and the allowed claim differsfrom the net carrying amount of the debt, the recorded amount should beadjusted to the amount of the allowed claim (thereby adjusting existing debtissuance costs to the extent necessary to report the debt at this allowed amount).  Through September 30, 2009, theBankruptcy Court had not classified any of the Debtors’ outstanding debt asallowed claims. The Company has classified the Debtors’ Notes as “pre-petitionliabilities subject to compromise*”* on the Condensed ConsolidatedBalance Sheet.  The Company has notadjusted debt issuance costs, totaling $5.8 million at September 30, 2009,related to the Debtors’ Notes, but has classified these costs as “pre-petitionliabilities subject to compromise”.  TheCompany may be required to expense these amounts or a portion thereof upondetermination of the allowed claim by the Bankruptcy Court.

 

The Debtors have rejectedcertain pre-petition executory contracts and unexpired leases with respect tothe Debtors’ operations with the approval of the Bankruptcy Court and mayreject additional agreements in the future. Damages resulting from rejection of executory contracts and unexpiredleases are generally treated as general unsecured claims and will be classifiedas “pre-petition liabilities subject to compromise”.  Holders of pre-petition claims (excludinggovernmental entities holding governmental claims) were required to file proofsof claims by the “general bar date”, which was September 8, 2009.  A bar date is the date by which certainclaims against the Debtors must be filed if the claimants wish to receive anydistribution in the Chapter 11 cases on account of such claims.  Creditors were notified of the general bardate and the requirement to file a proof of claim with the BankruptcyCourt.  Differences between liabilityamounts estimated by the Debtors and claims filed by creditors are beinginvestigated and, if necessary, the Bankruptcy Court will make a finaldetermination of the allowable claim. The determination of how liabilities will ultimately be treated cannotbe made until the Bankruptcy Court approves a Chapter 11 plan ofreorganization.  Accordingly, theultimate amount or treatment of such liabilities is not determinable at thistime.  Following the bar date, the Companyre-evaluated its estimate of allowable claims included in liabilities subjectto compromise resulting in a favorable change in estimate of $13.6 millionrecorded as a reorganization item in the third quarter of 2009.

 

Pre-petition liabilitiessubject to compromise consist of the following:

 
| **(In thousands)**                                             | ** ** | **September 30, 2009** | ** **  |
|----------------------------------------------------------------|------------|-----------------------------|-------------|
|                                                           | ** ** | ** **                  | ** **  |
| 10% senior unsecured notes due 2017                            | ** ** | **$**                       | **300,000** | ** ** |
| Provision for rejected executory contracts and other  accruals | ** ** | **26,117**                  | ** **  |
| Pre-petition accounts payable                                  | ** ** | **30,309**                  | ** **  |
| Accrued interest on Notes                                      | ** ** | **15,500**                  | ** **  |
| Unamortized issuance costs of 10% senior unsecured  notes      | ** ** | **(5,805**                  | **)**       |
| Total pre-petition liabilities subject to compromise           | ** ** | **$**                       | **366,121** | ** ** |

 

Pre-petition liabilitiessubject to compromise include trade accounts payable related to pre-petitionpurchases.  As a result, the Company’scash flows from operations were favorably affected by the stay of paymentrelated to these accounts payable. Accrued interest represents amounts due on the Notes as of the PetitionDate.  No interest has been accrued onthe Notes subsequent to the Petition Date because such amounts are not expectedto become part of an allowed claim.

 

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**(13)****                         ****Stock-BasedCompensation Plans**

 

The Company values its share-based payment awards using a form of theBlack-Scholes option-pricing model (the “option pricing model”).  The determination of fair value ofshare-based payment awards on the date of grant using the option pricing modelis affected by our stock price as well as the input of other subjectiveassumptions.  The option-pricing modelrequires a number of assumptions, of which the most significant are expectedstock price volatility, the expected pre-vesting forfeiture rate and theexpected option term (the amount of time from the grant date until the optionsare exercised or expire).  Expectedvolatility is normally calculated based upon actual historical stock pricemovements over the expected option term. Since we have a very short-term history of stock price volatility as apublic company, we calculate volatility by considering, among other things, theexpected volatilities of public companies engaged in similar industries.  Pre-vesting forfeitures are currentlyestimated using an approximate 15% forfeiture rate.  The expected option term is calculated usingthe “simplified” method permitted by authoritative guidance.  Our options have characteristicssignificantly different from those of traded options, and changes in theassumptions can materially affect the fair value estimates.

 

Pre-tax stock-basedcompensation expense for the three month periods ended September 30, 2009and 2008 was approximately $1.1 million and $0.6 million, respectively.  For the three month period ended September 30,2009, $1.0 million was charged to selling, general and administrative (“SG&A”)expense and $0.1 million was charged to cost of goods sold.  For the three month period ended September 30,2008, $0.6 million was charged to SG&A expense.  Stock-based compensation expense reducedearnings per share by less than $0.02 per basic and fully diluted share for thethree month period ended September 30, 2009 and reduced earnings per shareby $0.01 per basic and fully diluted share for the three month period ended September 30,2008.  Pre-tax stock-based compensationexpense for the nine month periods ended September 30, 2009 and 2008 wasapproximately $2.7 million and $4.5 million, respectively.  For the nine month period ended September 30,2009, $2.4 million was charged to SG&A expense and $0.3 million was chargedto cost of goods sold.  For the ninemonth period ended September 30, 2008, $4.3 million was charged toSG&A expense and $0.2 million was charged to cost of goods sold.  Stock-based compensation expense reducedearnings per share by $.04 per basic and fully diluted share for the nine monthperiod ended September 30, 2009 and by $0.07 per basic and fully dilutedshare for the nine month period ended September 30, 2008.  The Company recognized a tax benefit on itscondensed consolidated statement of income from stock-based compensationexpense in the amount of $0.3 million and $0.2 million for the three monthperiods ended September 30, 2009 and 2008, respectively, all of which wasoffset by establishing valuation allowances equaling the amount of the taxbenefit recognized.  For the nine monthperiod ended September 30, 2009 and 2008, the Company recognized a taxbenefit on its condensed consolidated statement of income from stock-basedcompensation expense in the amount of $0.6 million and $1.7 million,respectively.  The Company recordedpre-tax stock-based compensation expense for the three and nine month periodsended September 30, 2009 and 2008 as follows:

 
| ** **                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                 | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                              | ** ** | ** **                                 |       |                                      | ** ** | ** ** |   |   |   |
| Stock-based compensation expense: | ** ** | ** **                                 |       |                                      | ** ** | ** ** |   |   |   |
| Non-qualified stock options       | ** ** | **$**                                      | **1.0**    |                                      | $          | 0.8 | ** ** | **$** | **2.4** |   | $ | 4.1 |   |
| Restricted stock                  | ** ** | **—**                                 |       | 0.1                                       | ** ** | **0.2** |   | 0.3 |   |
| Restricted stock units            | ** ** | **0.1**                                    |       | 0.1                                       | ** ** | **0.1** |   | 0.1 |   |
| Long-term incentive stock plan    | ** ** | **—**                                 |       | (0.4                                      | )          | **—** |   | — |   |
| Totals                            | ** ** | **$**                                      | **1.1**    |                                      | $          | 0.6 | ** ** | **$** | **2.7** |   | $ | 4.5 |   |

 

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As of September 30,2009 and 2008, the Company had not yet recognized compensation expense on thefollowing non-vested awards:

 
| ** **                     | ** ** | **2009**                           | ** ** | **2008**                                                     | ** ** |
|--------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------|------------|
| **(in millions)**              | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** |
|                           | ** ** | ** **                         | ** ** | ** **                                                   |       |   |   |   |   |
| Non-qualified options          | ** ** | **$**                              | **4.4**    | ** **                                                   | **1.3**    |   | $ | 13.1 |   | 2.5 |   |
| Restricted stock               | ** ** | **0.4**                            | ** ** | **0.3**                                                      |       | 0.8 |   | 3.3 |   |
| Restricted stock units         | ** ** | **0.1**                            | ** ** | **0.1**                                                      |       | 0.3 |   | 1.6 |   |
| Long-term incentive stock plan | ** ** | **—**                         | ** ** | **0.0**                                                      |       | 0.4 |   | 1.3 |   |
| Total                          | ** ** | **$**                              | **4.9**    | ** **                                                   | **1.2**    |   | $ | 14.6 |   | 2.5 |   |

 

The Company did not grantany stock options during the quarters ended September 30, 2009 and 2008.

 

The following tablesummarizes stock options outstanding and changes during the nine month periodended September 30, 2009:

 
| ** **                                         | ** ** | **Shares****(in  thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life****(years)** | ** ** | **Aggregate  Intrinsic Value****(in  thousands)** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                               |       |                          |       |                                   |       |                                              |       |                                                   |       |
| Options outstanding – January 1, 2009    |       | 3,894                         |       | $                                      | 7.62       |                                              | 6.7        |                                                   | $          | 422 |   |
| Granted                                            |       | 50                            |       | 0.18                                   |       | 10.0                                              |       | —                                                 |       |
| Exercised                                          |       | —                        |       | —                                 |       | —                                            |       | —                                                 |       |
| Cancelled or expired                               |       | (855                          | )          | 12.19                                  |       | —                                            |       | —                                                 |       |
| Options outstanding – September 30, 2009 |       | 3,089                         |       | $                                      | 6.23       |                                              | 5.3        |                                                   | —     |   |
| Options exercisable – September 30, 2009 |       | 2,102                         |       | $                                      | 5.25       |                                              | 4.6        |                                                   | —     |   |
|                                                    |            |                               |            |                                        |            |                                                   |            |                                                        |            |  |  |

 

The range of exercise pricesof the exercisable options and outstanding options at September 30, 2009are as follows:

 
| **Weighted Average  Exercise Price** | ** ** | **Number of  Exercisable  Options****(in  thousands)** | ** ** | **Number of  Outstanding  Options****(in  thousands)** | ** ** | **Weighted  Average  Remaining  Life****(years)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------|------------|
| $0.18 - $0.23                        |       | 964                                                    |       | 1,014                                                  |       | 3.6                                               |       |
| $2.36 - $4.80                        |       | 689                                                    |       | 1,085                                                  |       | 5.9                                               |       |
| $7.05                                |       | 75                                                     |       | 342                                                    |       | 8.2                                               |       |
| $15.26 - $17.29                      |       | 112                                                    |       | 290                                                    |       | 7.3                                               |       |
| $22.15 - $22.50                      |       | 238                                                    |       | 334                                                    |       | 4.4                                               |       |
| $43.00                               |       | 24                                                     |       | 24                                                     |       | 0.2                                               |       |
| Totals                               |       | 2,102                                                  |       | 3,089                                                  |       | 5.3                                               |       |

 

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Restricted stock awardactivity for the nine months ended September 30, 2009 is summarized below:

 
| ** **                                                       | ** ** | **Shares****(in  thousands)** | ** ** | **Weighted  Average Grant  Date Fair  Value per  Award** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------------------------------------|------------|
|                                                             |       |                          |       |                                                     |       |
| Unvested restricted stock awards – January 1,  2009    |       | 59                            |       | $                                                        | 15.97      |   |
| Granted                                                          |       | —                        |       | —                                                   |       |
| Vested                                                           |       | (17                           | )          | 17.41                                                    |       |
| Cancelled or expired                                             |       | (3                            | )          | 17.29                                                    |       |
| Unvested restricted stock awards –  September 30, 2009 |       | 39                            |       | 15.26                                                    |       |
|                                                                  |            |                               |            |                                                          |            |  |

 

Restricted stock unit awardactivity for the nine months ended September 30, 2009 is summarized below:

 
| ** **                                                            | ** ** | **Shares****(in  thousands)** | ** ** | **Weighted  Average Grant  Date Fair  Value per  Award** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------------------------------------|------------|
|                                                                  |       |                          |       |                                                     |       |
| Unvested Restricted stock unit awards –  January 1, 2009    |       | 49                            |       | $                                                        | 7.50       |   |
| Granted                                                               |       | —                        |       | —                                                   |       |
| Vested                                                                |       | (17                           | )          | 10.10                                                    |       |
| Cancelled or expired                                                  |       | —                        |       | —                                                   |       |
| Unvested restricted stock unit awards –  September 30, 2009 |       | 32                            |       | $                                                        | 6.80       |   |

 

**(14)****                         ****InterestExpense**

 

The following tablesummarizes interest expense:

** **
| ** **                                   | ** **   | **Three months ended  September 30,** | ** **   | **Nine months ended  September 30,** | ** **   |
|----------------------------------------------|--------------|--------------------------------------------|--------------|-------------------------------------------|--------------|
| **(in thousands)**                           | ** **   | **2009**                                   | ** **   | **2008**                                  | ** **   | **2009** | ** ** | **2008** | ** ** |
| *** ***                                 | *** *** | *** ***                               | *** *** | *** ***                              | *** *** | *** *** | *** *** | *** *** | *** *** |
| Interest expense                             | ** **   | **$**                                      | **1,369**    |                                      | $            | 7,502 | ** ** | **$** | **10,966** |   | $ | 22,534 |   |
| Amortization of deferred debt issuance costs | ** **   | **469**                                    |         | 233                                       | ** **   | **1,874** |   | 710 |   |
| Capitalized interest                         | ** **   | **—**                                 |         | (7,500                                    | )            | **—** |   | (19,493 | ) |
| Interest expense, net                        | ** **   | **$**                                      | **1,838**    |                                      | $            | 235 | ** ** | **$** | **12,840** |   | $ | 3,751 |   |

 

Interest expense in 2009includes interest on our secured revolving credit facility for bothpre-petition and post-petition periods, interest incurred on our DIP Facility,and interest on our Notes up to the date of our Bankruptcy Filing.  Because we do not believe that interest onour Notes will be allowed as a claim past the Petition Date, we discontinuedrecognizing interest expense on our Notes as of that date.   Contractual interest amounts disclosed inour Condensed Consolidated Statement of Operations reflect the cost ofborrowings without regard to what the Bankruptcy Court may allow as a claim.

 

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**(15)****                         ****PensionExpense**

 

*Defined Contribution Plans*

 

We have 401(k) planscovering substantially all of our employees. We recorded expense with respect to these plans for the three monthperiods ended September 30, 2009 and 2008 of $0.2 million and $0.3million, respectively, and expense of $0.6 million and $0.9 million,respectively, for the nine month periods ended September 30, 2009 and2008.  Contributions made under ourdefined contribution plans include a match, at the Company’s discretion, ofemployee salaries contributed to the plans.

 

### *Qualified Retirement Plan*

###  

The Company provides anon-contributory qualified defined benefit pension plan for its unionized employeesat our Pekin, IL production facilities. The following table summarizes the components of net periodic pensioncost for the qualified pension plan:

 
| ** **                          | ** **   | **Three months ended  September 30,** | ** **   | **Nine months ended  September 30,** | ** **   |
|-------------------------------------|--------------|--------------------------------------------|--------------|-------------------------------------------|--------------|
| **(In thousands)**                  | ** **   | **2009**                                   | ** **   | **2008**                                  | ** **   | **2009** | ** ** | **2008** | ** ** |
|                                | *** *** | *** ***                               | *** *** | *** ***                              | *** *** | *** *** | *** *** | *** *** | *** *** |
| Service cost                        | ** **   | **$**                                      | **84**       |                                      | $            | 67 | ** ** | **$** | **254** |   | $ | 221 |   |
| Interest cost                       | ** **   | **127**                                    |         | 124                                       | ** **   | **381** |   | 372 |   |
| Expected return on plan assets      | ** **   | **(140**                                   | **)**        | (179                                      | )            | **(421** | **)** | (538 | ) |
| Amortization of prior service costs | ** **   | **11**                                     |         | 10                                        | ** **   | **32** |   | 32 |   |
| Amortization of net actuarial loss  | ** **   | **45**                                     |         | —                                    | ** **   | **134** |   | — |   |
| Net periodic pension cost           | ** **   | **$**                                      | **127**      |                                      | $            | 22 | ** ** | **$** | **380** |   | $ | 87 |   |

###  

### *Postretirement BenefitObligation*

###  

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

 

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

 
| ** **                         | ** **   | **Three months ended  September 30,** | ** **   | **Nine months ended  September 30,** | ** **   |
|------------------------------------|--------------|--------------------------------------------|--------------|-------------------------------------------|--------------|
| **(In thousands)**                 | ** **   | **2009**                                   | ** **   | **2008**                                  | ** **   | **2009** | ** ** | **2008** | ** ** |
| *** ***                       | *** *** | *** ***                               | *** *** | *** ***                              | *** *** | *** *** | *** *** | *** *** | *** *** |
| Service cost                       | ** **   | **$**                                      | **19**       |                                      | $            | 38 | ** ** | **$** | **57** |   | $ | 114 |   |
| Interest cost                      | ** **   | **28**                                     |         | 34                                        | ** **   | **83** |   | 102 |   |
| Amortization of net actuarial gain | ** **   | **(9**                                     | **)**        | —                                    | ** **   | **(27** | **)** | — |   |
| Net periodic postretirement cost   | ** **   | **$**                                      | **38**       |                                      | $            | 72 | ** ** | **$** | **113** |   | $ | 216 |   |

 

**(16)****                         ****Noncontrolling Interest**

 

We adopted theauthoritative guidance on *NoncontrollingInterests in Consolidated Financial Statements* on January 1,2009.  Prior to October 2008, weowned 78.42% of Nebraska Energy, LLC (“NELLC”), a 50 million gallon dry millethanol plant.  In October 2008, wepurchased the remaining

 

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21.58% of NELLC we did not previously own.  As a result of purchasing the remaininginterest in NELLC, we did not have any noncontrolling interest on ourconsolidated balance sheets as of September 30, 2009 and December 31,2008.  In accordance with this guidance,we classified noncontrolling interests separately on our condensed consolidatedstatements of operations for the quarter and nine months ended September 30,2008.  Prior year amounts were previouslyincluded in our consolidated balance sheets as a separate line item called “minorityinterest” under long-term liabilities and in our consolidated statement ofoperations as a separate line item called “Minority interest” under otherincome (expense).

 

Net Income (Loss)attributable to Aventine during the quarter and nine months ended September 30,2008 was as follows:

 
| ** **                                       | ** ** | **Three months ended**      | ** ** | **Nine months ended**       | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(in thousands)**                               | ** ** | **September 30, 2008** | ** ** | **September 30, 2008** | ** ** |
|                                             |       |                        |       |                        |       |
| Net Income (Loss)                                |       | $                           | 1,761      |                        | $          | (11,457 | ) |
| Net loss attributable to noncontrolling interest |       | (725                        | )          | (1,230                      | )          |
| Net Income (Loss) attributable to Aventine       |       | $                           | 2,486      |                        | $          | (10,227 | ) |

 

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

 

On January 1, 2009, weadopted the provisions of ASC 815, *Derivatives and Hedging*,which requires entities to provide greater transparency in interim and annualfinancial statements about how and why the entity uses derivative instruments,how the instruments and related hedged items are accounted for underauthoritative guidance, and how the instruments and related hedged items affectthe financial position, results of operations, and cash flows of the entity.

 

We are exposed to certainrisks related to our ongoing business operations.  The primary risks related to our business areprice risk on anticipated purchases of corn, natural gas and the sale ofethanol.  We have historically usedforward or derivative instruments to manage these risks.  We are not currently using forward orderivative instruments, and are primarily in the spot markets for commoditypricing.

 

We are subject to marketrisk with respect to the price and availability of corn, the principal rawmaterial we use to produce ethanol and ethanol by-products.  In general, rising corn prices result inlower profit margins and, therefore, represent unfavorable marketconditions.  This is especially true whenmarket conditions do not allow us to pass along increased corn costs to ourcustomers.  The availability and price ofcorn is subject to wide fluctuations due to unpredictable factors such as weatherconditions, farmer planting decisions, governmental policies with respect toagriculture and international trade and global demand and supply.

 

We have firm-price purchasecommitments with some of our corn suppliers under which we agree to buy corn ata price set in advance of the actual delivery of that corn to us.  Under these arrangements, we assume the riskof a price decrease in the market price of corn between the time this price isfixed and the time the corn is delivered. At September 30, 2009, we had commitments to purchase 1.3 millionbushels of corn through December 2009 at an average fixed price of $3.35per bushel.  We have elected to accountfor these transactions as normal purchases under authoritative guidance, andaccordingly, have not marked these transactions to market.

 

We sometimes enter intofirm-price purchase commitments with some of our natural gas suppliers underwhich we agree to buy natural gas at a price set in advance of the actualdelivery of that natural gas to us.  Underthese arrangements, we assume the risk of a price decrease in the market price 

 

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of natural gas between the time this price is fixed and the time thenatural gas is delivered.  At September 30,2009, we did not have any commitments to purchase natural gas in advance atprices other than at market.  We accountfor these transactions as normal purchases under authoritative guidance, andaccordingly, do not mark these transactions to market.

 

In order to reduce ourmarket exposure to price decreases in corn, we have in the past, at the time weenter into a firm-price purchase commitment, often entered into commodityforward contracts to sell a like amount of corn at the then-current price fordelivery to the counterparty at a later date. Such forward contracts were not designated as hedges and, therefore,were marked to market each period.

 

We have also, in the past,entered into commodity futures contracts in connection with the purchase ofcorn to reduce our risk of future price increases.  These futures contracts were not designatedas hedges and, therefore, were marked to market each period.

 

We are also subject tomarket risk with respect to ethanol pricing. Our ethanol sales are priced using contracts that can either be fixed;based upon the price of wholesale gasoline plus or minus a fixed amount; orbased upon a market price at the time of shipment.  We sometimes fix the price at which we sellethanol using fixed price physical delivery contracts.  We have elected to account for thesetransactions as normal sales transactions under authoritative guidance, andaccordingly, have not marked these transactions to market.

 

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

 

We did not have anyderivative instruments outstanding at September 30, 2009.  Derivatives not designated as hedginginstruments under authoritative guidance at December 31, 2008 were asfollows:

 
| ** **           | ** ** | ** **                       | ** ** | **Fair Value****(in  thousands)** | ** ** |
|----------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| **Type**             | ** ** | **Balance Sheet Classification** | ** ** | **September  30, 2009**           | ** ** | **December  31, 2008** | ** ** |
|                 |       |                             |       |                              |       |   |   |
| Short corn positions |       | Other current  assets            |       | $                                 | —     |   | $ | 5,988 |   |
|                      |            |                                  |            |                                   |            |  |  |  |  |

 

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The realized and unrealizedeffect on our condensed consolidated statement of operations for derivativesnot designated as hedging instruments under authoritative guidance at September 30,2009 and 2008 are as follows:

 
| ** **        | ** ** | ** **                                 | ** ** | **Fair Value****(in  thousands)** | ** ** |
|-------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|
| ** **        | ** ** | ** **                                 | ** ** | **Three months ended**            | ** ** | **Nine months ended** | ** ** |
| ** **        | ** ** | ** **                                 | ** ** | **September 30,**            | ** ** |
| **Position Type** | ** ** | **Statement of Operations Classification** | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
|              |       |                                       |       |                              |       |   |   |   |   |   |   |
| Short corn        |       | Other  non-operating income/(expense)      |       | $                                 | —     |   | $ | 14,986 |   | $ | 1,188 |   | $ | 3,775 |   |
| Long corn         |       | Other non-operating  income/(expense)      |       | 1                                 |       | (2,425 | ) | 31 |   | 7,994 |   |
| Short gasoline    |       | Other non-operating  income/(expense)      |       | —                            |       | 5,806 |   | — |   | (5,655 | ) |
| Totals            |       |                                       |       | $                                 | 1          |   | $ | 18,367 |   | $ | 1,219 |   | $ | 6,114 |   |

 

Any outstanding derivativeposition requires cash settlement on a daily basis.  Without such cash settlement on derivativecontracts, cash flows from operations would have been lower.

 

**(18)****                         ****IncomeTaxes**

 

The Company recorded an incometax benefit of $0.6 million and $7.3 million for the three months and ninemonths ended September 30, 2009, respectively.  The difference between the tax benefit rateaccrued and the statutory benefit rate is principally due to the establishmentof valuation allowances totaling $31.9 million as of September 30, 2009,as we expect to be unable to realize the tax benefit of our net operating losscarryforwards and other deferred tax assets.

 

As of September 30,2009, we had $0.6 million of uncertain tax benefits.  None of our unrecognized tax benefits, ifrecognized in future periods, would impact the Company’s effective taxrate.  During the three and nine monthperiods ended September 30, 2009, our liability for unrecognized taxbenefits decreased by $2.3 million and $0.3 million, respectively, as a resultof the examination of our federal income tax returns for the tax years 2006 and2007.  At September 30, 2009, ourliability for unrecognized tax benefits is included in other currentliabilities on the condensed consolidated balance sheet.

 

We include interest expense,as well as potential penalties on unrecognized tax benefits, as a component ofincome tax expense in the condensed consolidated statement of operations.  The total amount of accrued interest relatedto uncertain tax positions at September 30, 2009 was $0.04 million, net ofthe deferred tax benefit, and is included in other current liabilities.  We did not increase our accrual for interestrelated to uncertain tax positions for the three month period ended September 30,2009.  We increased our accrual forinterest related to uncertain tax positions for the nine month period ended September 30,2009 by $0.02 million, net of the deferred tax benefit.  .

 

Our federal income taxreturn for 2008 is available for examination under the federal statute oflimitations.  We file in numerous stateand foreign jurisdictions with varying statutes of limitations open from 2005to 2008.

 

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

 

Basicearnings (loss) per share is computed by dividing net loss by the weightedaverage number of common shares outstanding during each period.  Diluted loss per share is calculated usingthe treasury

 

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stock method inaccordance with authoritative guidance, and includes the effect of all dilutivesecurities, including non-qualified stock options and restricted stock unitsawards (“RSU’s”).

 

The following table sets forth thecomputation of basic and diluted loss per share:

 
| ** **                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands, except  per share data)**                  | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                        | ** ** | ** **                                 |       |                                      |       |   |   |   |   |
| Net income (loss) attributable to controlling  interest     | ** ** | **$**                                      | **13,886** |                                      | $          | 2,486 | ** ** | **$** | **(59,616** | **)** | $ | (10,227 | ) |
|                                                        | ** ** | ** **                                 |       |                                      | ** ** | ** ** |   |   |   |
| Weighted average shares and share equivalents  outstanding: | ** ** | ** **                                 |       |                                      | ** ** | ** ** |   |   |   |
| Basic shares                                                | ** ** | **42,963**                                 |       | 41,971                                    | ** ** | **42,967** |   | 41,927 |   |
| Dilutive non-qualified stock options and RSU’s         | ** ** | **65**                                     |       | 39                                        | ** ** | **—** |   | — |   |
| Diluted weighted average shares and share  equivalents      | ** ** | **43,028**                                 |       | 42,010                                    | ** ** | **42,967** |   | 41,927 |   |
|                                                        | ** ** | ** **                                 |       |                                      | ** ** | ** ** |   |   |   |
| Income (loss) per common share - basic:                     | ** ** | **$**                                      | **0.32**   |                                      | $          | 0.06 | ** ** | **$** | **(1.39** | **)** | $ | (0.24 | ) |
| Income (loss) per common share - diluted:                   | ** ** | **$**                                      | **0.32**   |                                      | $          | 0.06 | ** ** | **$** | **(1.39** | **)** | $ | (0.24 | ) |
|                                                             |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |

 

## ***We hadpotentially dilutive securities outstanding representing options on 3.9 millioncommon shares at September 30, 2008 that were not included in thecomputation of potentially dilutive securities because the options’ exerciseprices were greater than the average market price of the common shares orbecause the options were anti-dilutive, and were excluded from the calculationof diluted earnings per share in accordance with authoritative guidance.***

## *** ***

**(20)****                         ****ComprehensiveIncome (Loss)**

 

The following table summarizescomprehensive income (loss):

 
| ** **                                                       | ** **   | **Three months ended  September 30,** | ** **   | **Nine months ended  September 30,** | ** **   |
|------------------------------------------------------------------|--------------|--------------------------------------------|--------------|-------------------------------------------|--------------|
| **(In thousands)**                                               | ** **   | **2009**                                   | ** **   | **2008**                                  | ** **   | **2009** | ** ** | **2008** | ** ** |
| ** **                                                       | *** *** | *** ***                               | *** *** | *** ***                              | *** *** | *** *** | *** *** | *** *** | *** *** |
| Net Income (Loss) attributable to controlling  interest          | ** **   | **$**                                      | **13,886**   |                                      | $            | 2,486 |   | $ | (59,616 | ) | $ | (10,227 | ) |
| Unrealized gain on available for sale securities                 | ** **   | **201**                                    |         | —                                    |         | 1,925 |   | — |   |
| Unrecognized pension and postretirement liabilities,  net of tax | ** **   | **(28**                                    | **)**        | 14                                        |         | (84 | ) | 5 |   |
| Comprehensive income (loss)                                      | ** **   | **$**                                      | **14,059**   |                                      | $            | 2,500 |   | $ | (57,775 | ) | $ | (10,222 | ) |

 

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

 

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

 

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

 

On April 7, 2009, the Company and all of itsdirect and indirect subsidiaries filed voluntary petitions for relief underChapter 11 of the Bankruptcy Code with the Bankruptcy Court.  The Bankruptcy Cases are being jointlyadministered under Case Number 09-11214 (KG). Aventine intends to continue to operate its business asdebtor-in-possession under the jurisdiction of the Bankruptcy Court 

 

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and in accordancewith the applicable provisions of the Bankruptcy Code and orders of theBankruptcy Court.  As a result of thecommencement of the Bankruptcy Cases, attempts to collect, secure, or enforceremedies with respect to pre-petition claims against Aventine are subject tothe automatic stay provisions of Section 362 of the BankruptcyCode.  The Bankruptcy Cases are discussedin greater detail in Note 2.

 

On November 6, 2008, the Company commenced anaction against JP Morgan Securities, Inc. and JP Morgan ChaseBank, N.A. (hereinafter collectively referred to as “JP Morgan”) in the TenthJudicial Circuit in Tazewell County, Illinois. The Company’s complaint relates to losses incurred in excess of $31million as a result of investments in Student Loan Auction Rate Securitiespurchased through JP Morgan.  At thistime, we cannot be certain as to the outcome of this litigation.

 

We are from time to timeinvolved in various legal proceedings, including legal proceedings relating tothe extensive environmental laws and regulations that apply to our facilitiesand operations.  We are not involved in anylegal proceedings, other than those described herein, that we believe couldhave a material adverse effect upon our business, operating results orfinancial condition.

 

**(23)****                          ****SubsequentEvents**

 

The Company has evaluatedsubsequent events through the date of filing the financial statements which is November 9,2009, and no events have occurred from the balance sheet date through that datethat would impact the consolidated financial statements.

 

On October 9, 2009, RonMiller submitted his resignation as Chief Executive Officer of AventineRenewable Energy Holdings, Inc.  Hisresignation was effective October 23, 2009.  Aventine’s Board of Directors appointedGeorge T. Henning, Jr. as Interim Chief Executive Officer and President ofthe Company effective October 24, 2009. Mr. Henning has served as our Interim Chief Financial Officer sinceMarch 16, 2009 and continues to serve the Company in that capacity.

 

The United SteelworkersInternational Union, Local 7-662 (the “Union”) represents certain of the Company’sproduction employees at the Pekin, Illinois facilities.  During recent negotiations, the Company andthe Union agreed to extend the term of the current collective bargainingagreement by one year through and including October 31, 2010 on the sameterms and conditions, subject to an option to reopen negotiations upon mutualconsent after the effective date of a confirmed Chapter 11 plan ofreorganization.

 

On November 6, 2009,the President of the United States signed The Worker, Homeownership, and BusinessAssistance Act of 2009.  Under thelegislation, qualifying businesses may elect for tax purposes to carry back NetOperating Losses (NOLs) incurred in either 2008 or 2009 (but not for bothyears) for up to five years preceding the generation of the NOLs.  These businesses are able to offset 100% oftheir taxable income with their available NOLs in the four years preceding NOLsgeneration, and 50% of their taxable income in the fifth year preceding thegeneration of the NOLs.  The Company hasgenerated NOLs in 2008 and 2009 for which utilization had been limited to twocarry-back years under prior legislation. We are currently evaluating the impact of the new law but expect to beable to recover certain taxes paid in prior years through this expanded opportunityto carry-back NOLs.

 

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Item 2.    Management’sDiscussion and Analysis of FinancialCondition and Results of Operations

 

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

 

*Theseforward-looking statements are subject to various risks and uncertainties whichcould cause actual results to differ materially from those stated or implied bysuch forward-looking statements.  Weundertake no obligation to publicly release any revision of any forward-lookingstatements contained herein to reflect events and circumstances occurring afterthe date hereof, or to reflect the occurrence of unanticipated events.  Information concerning risk factors iscontained under Item “1A - Risk Factors” in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008 and under Part II, Item1A of our Quarterly Report on Form 10-Q for the three month period ended March 31,2009.  You should carefully consider allof the risks and all other information contained in or incorporated byreference in this report and in our filings with the SEC.  These risks are not the only ones we face.   Additional risks and uncertainties notpresently known to us, or which we currently consider immaterial, also mayadversely affect us.  If any of theserisks actually occur, our business, financial condition and results ofoperations could be materially and adversely affected.*

 

**Company Overview**

 

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

 

**Chapter 11 Bankruptcy Proceedings**

 

On April 7, 2009 (the “Petition Date”),Aventine Renewable Energy Holdings, Inc. and all of its direct andindirect subsidiaries (collectively, the “Debtors”) filed voluntary petitionsfor relief (collectively, the “Bankruptcy Filing”) under Chapter 11 of Title 11of the United States Code (the “Bankruptcy Code”) with the United StatesBankruptcy Court for the District of Delaware (the “Bankruptcy Court”).  The Chapter 11 cases are being jointlyadministered by the Bankruptcy Court as Case No. 09-11214 (KG)(collectively, the “Bankruptcy Cases”). The Debtors specifically are (i) Aventine Renewable Energy Holdings, Inc.;(ii) Aventine Renewable Energy, LLC, a Delaware limited liability company;(iii) Aventine Renewable Energy, Inc., a Delaware corporation; (iv) AventineRenewable Energy – Mt. Vernon, LLC, a Delaware limited liability company; (v) AventineRenewable Energy – Aurora West, LLC, a Delaware limited liability company; (vi) AventinePower, LLC, a Delaware limited liability company, and (vii) NebraskaEnergy, LLC, a Kansas limited liability company.

 

Subject to certain specific exceptions underthe Bankruptcy Code, the Bankruptcy Filing automatically enjoined, or stayed,the continuation of any judicial or administrative proceedings or other actionsagainst the Debtors or their property to recover on, collect or secure a claimarising prior to the 

 

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Petition Date.  Thus, forexample, most creditor actions to obtain possession of property from theDebtors, or to create, perfect or enforce any lien against the property of theDebtors, or to collect on or otherwise exercise rights or remedies with respectto a pre-petition claim are enjoined unless and until the Bankruptcy Courtlifts the automatic stay.

 

The Bankruptcy Filing constituted an event ofdefault under both the Company’s secured revolving credit facility and its 10%senior unsecured notes due 2017 (“the Notes”) (see Note 7), and those debtobligations became automatically and immediately due and payable, subject to anautomatic stay of any action to collect, assert, or recover a claim against theCompany and the application of applicable bankruptcy law.  As a result, the accompanying CondensedConsolidated Balance Sheet as of September 30, 2009 includesreclassifications of $309.7 million to reflect as “pre-petitionliabilities subject to compromise” amounts owed to holders of theNotes,including pre-petition accrued interest, net of the unamortized debt issuancecosts on the Notes.  The Companyclassifies “pre-petition liabilities subject to compromise” as a long-termliability because management does not believe the Company will use existingcurrent assets or create additional current liabilities to fund theseobligations.  Amounts owed under theCompany’s pre-petition secured revolving credit facility and certain othercollateralized obligations have not been included in “pre-petition liabilitiessubject to compromise” as they are adequately collateralized.

 

**Chapter 11 Process**

 

The Debtors are currently operating as “debtors-in-possession”under the jurisdiction of the Bankruptcy Court, and in accordance with theapplicable provisions of the Bankruptcy Code and orders of the BankruptcyCourt.  In general, asdebtors-in-possession, the Debtors are authorized under the Bankruptcy Code tocontinue to operate as an ongoing business, but may not engage in transactionsoutside of the ordinary course of business without the approval of theBankruptcy Court.

 

On April 7, 2009, certain of the Company’s bondholders (the “DIPLenders”) entered into a term sheet (the “DIP Term Sheet”) for a $30 millionDebtor-in-Possession Credit Facility with the Debtors.  The DIP Term Sheet provides, subject tocertain conditions as described in the Debtor-in-Possession CreditFacility Term Sheet filed as Exhibit 10.1 to our Form 8-K filed on April 13,2009 for a first priority debtor-in-possession financing (the “DIP Facility”)comprised of a term loan facility made available to certain of Aventine’ssubsidiaries in a maximum aggregate principal amount of up to $30 million.  Proceeds of the DIP Facility are availableto, among other things, (i) fund the working capital and general corporateneeds of the Debtors and the costs of the Bankruptcy Cases in accordance withan approved budget, and (ii) provide adequate protection, in accordancewith the terms of the DIP Facility, to the pre-petition agent and pre-petitionlenders under the Company’s existing credit facilities.  The DIP Facility bearsinterest at 16.5% per annum.  Thematurity date of the DIP Facility is April 6, 2010, or upon the occurrenceof certain pre-defined events.  The DIPFacility is secured by a super-priority administrative claim on ourassets.  On May 5, 2009, theBankruptcy Court overruled objections from the Debtors’ pre-petition securedlenders and approved the DIP Facility on a final basis.

 

At a hearing held on April 9, 2009, theBankruptcy Court granted the Debtors’ “First Day Motions”.  The relief granted by the Bankruptcy Courtthrough the First Day Motions was designed to stabilize the Company’soperations and business relationships with vendors, lenders, employees andothers, minimize the effects of the commencement of the Bankruptcy Cases andpreserve the value of the Debtors’ assets.  The First Day Motions allowed, among other things, the payment ofvendors and other providers in the ordinary course for goods and servicesordered pre-petition but received on or after the Petition Date and otherbusiness-related payments necessary to maintain the operation of ourbusinesses.  The First Day Motions alsoincluded the payment of pre-petition employee wages, salaries andbenefits.  The Debtors have retained,with Bankruptcy Court approval, legal and financial professionals to advise 

 

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the Debtors on the bankruptcy proceedings and certain other “ordinarycourse” professionals.  From time totime, the Debtors may seek Bankruptcy Court approval for the retention ofadditional professionals.

 

On or about April 29, 2009, the Debtorscaused notice of the commencement of the Bankruptcy Cases to be served on allknown or potential creditors and other parties in interest.  Vendors are being paid for goods furnishedand services provided after the Petition Date in the ordinary course ofbusiness.

 

As required by the Bankruptcy Code, theUnited States Trustee for Delaware (the “US Trustee”) appointed an officialcommittee of unsecured creditors (the “Creditors’ Committee”). The Creditors’Committee and its legal representatives have a right to be heard on all mattersthat come before the Bankruptcy Court with respect to the Debtors.  Therecan be no assurance that the Creditors’ Committee will support the Debtors’positions on matters to be presented to the Bankruptcy Court in the future oron any plan of reorganization. Disagreements between the Debtors and the Creditors’ Committee couldprotract the Bankruptcy Cases, negatively impact the Debtors’ ability tooperate, and delay the Debtors’ emergence from the Chapter 11 proceedings.

 

Under Section 365 of the BankruptcyCode, the Debtors may assume, assume and assign, or reject executory contractsand unexpired leases, including real property, railcars and equipment leases,subject to the approval of the Bankruptcy Court and certain other conditions.  Rejection constitutes a court-authorizedbreach of the lease or contract in question and, subject to certain exceptions,relieves the Debtors of future obligations under such lease or contract, butcreates a pre-petition claim for damages caused by such breach or rejection,subject to the Debtors’ right to review and contest such claim.  Parties whose contracts or leases arerejected may file claims against the Debtors for damages.  Generally, the assumption of an executorycontract or unexpired lease requires the Debtors to cure all prior defaultsunder such executory contract or unexpired lease, including all pre-petitionarrearages, and to provide adequate assurance of future performance.  In this regard, the Debtors’ financialstatements include amounts classified as “pre-petition liabilities subject tocompromise” that the Debtors believe that the Bankruptcy Court will allow asclaim amounts as a result of the Debtors’ rejection of various executorycontracts and unexpired leases. Additional amounts may be included in “pre-petition liabilities subjectto compromise” in future periods if additional executory contracts andunexpired leases are rejected. Conversely, the Debtors would expect that the assumption of certainexecutory contracts and unexpired leases may convert certain liabilities shownin future financial statements as subject to compromise to post-petitionliabilities.  Due to the uncertain natureof many of the potential claims, the Debtors are unable to project themagnitude of such claims with any degree of certainty.

 

The Bankruptcy Court established September 8,2009 at 4:00 p.m. eastern time as the deadline for the filing of proofs ofclaim, thereby requiring the Debtors’ creditors to submit claims for allegedliabilities not paid and/or damages incurred arising from or related to periodsprior to the Petition Date.  In certaincases, differences exist between the amounts at which the Company has recordedliabilities for rejected contracts and other pre-petition liabilities in theCompany’s financial statements and the amount claimed by Aventine’s creditorsbased on the Company’s estimate of the magnitude of claim to be allowed by theBankruptcy Court.  Significant litigationmay be required to resolve any such disputes or discrepancies.  The Company recorded a reduction in itsestimate of liabilities subject to compromise in the three months ended September 30,2009, for claims previously expected to be filed by creditors but which werenot filed prior to September 8, 2009.

 

In order to successfullyexit Chapter 11, the Debtors will need to propose, and obtain confirmation bythe Bankruptcy Court of, a plan of reorganization that satisfies therequirements of the Bankruptcy Code.  Aplan of reorganization could, among other things, resolve the Debtors’pre-petition obligations, set forth the revised capital structure of the newlyreorganized entity and provide for corporate governance subsequent to exit frombankruptcy.  As provided in theBankruptcy Code, the 

 

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Debtors have the exclusive right for 120 daysafter the Petition Date to file a plan of reorganization and 60 additional daysto solicit and obtain necessary acceptances. Such periods may be extended by the Bankruptcy Court for cause to up to18 months and 20 months, respectively, after the Petition Date.   If the Debtors’ exclusivity period lapses,any party in interest may file a plan of reorganization for Aventine.  The Debtors have filed two motions with theBankruptcy Court requesting extension of the exclusive filing and solicitationdeadlines under section 1121 of the Bankruptcy Code.  The first motion, approved by the BankruptcyCourt by order dated August 18, 2009, extended the exclusive deadline tofile a plan of reorganization to October 5, 2009 and the solicitation ofthe necessary acceptances to December 3, 2009.  Aventine filed a second motion on October 2,2009.  The second motion, approved by theBankruptcy Court by order dated October 27, 2009 further extended theexclusive deadline to file a plan of reorganization through and including December 4,2009 and the exclusive solicitation period through and including February 1,2010.

 

Chapter 11 of the BankruptcyCode provides that unless the terms of section 1129(b) of the BankruptcyCode are satisfied, for a bankruptcy court to confirm a Chapter 11 plan as aconsensual plan, the holders of impaired claims against a debtor in each classof impaired claims must accept such plan by the requisite majorities set forthin the Bankruptcy Code.  An impairedclass of claims shall have accepted a chapter 11 plan if (a) the holdersof at least two-thirds in amount of the claims in such class actually voting ona plan have voted to accept it, and (b) more than one-half in number ofthe holders in such class actually voting on the plan have voted to acceptit.  Pursuant to the provisions of theBankruptcy Code, only holders of allowed claims or equity interests in classesof claims or equity interests that are impaired and that are not deemed to haverejected a Chapter 11 plan are entitled to vote to accept or reject suchproposed plan.  Generally, a claim orinterest is impaired under a plan if the holder’s legal, equitable orcontractual rights are altered under such plan. Classes of claims or equity interests under a chapter 11 plan in whichthe holders of claims or equity interests are unimpaired are deemed to haveaccepted such plan and are not entitled to vote to accept or reject theproposed plan.  In addition, classes ofclaims or equity interests in which the holders of claims or equity interestswill not receive or retain any property on account of their claims or equityinterests are deemed to have rejected the plan and are not entitled to vote toaccept or reject the plan.  Undercircumstances specified in the so-called “cramdown” provisions of Section 1129(b) ofthe Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such planhas not been accepted by all impaired classes. The precise requirements and evidentiary showing for confirming aChapter 11 plan notwithstanding its rejection by one or more impaired classesof claims or equity interests depends upon a number of factors, including thestatus and seniority of the claims or equity interests, in the rejecting class —i.e., secured claims or unsecured claims, subordinated or senior claims, orcommon stock.

 

Under the priority scheme established by theBankruptcy Code, unless creditors agree otherwise, post-petition liabilitiesand pre-petition liabilities must be satisfied in full before stockholders ofthe Debtors are entitled to receive any distribution or retain any propertyunder a plan of reorganization.  Theultimate recovery, if any, to creditors and stockholders of the Debtors willnot be determined until confirmation and consummation of a plan ofreorganization.  No assurance can begiven as to what values, if any, will be ascribed in the Bankruptcy Cases toeach of these constituencies or what types or amounts of distributions, if any,they would receive.  Accordingly, theDebtors urge that appropriate caution be exercised with respect to existing andfuture investments in any of the Company’s common stock or any of the Company’sliabilities.

 

Although the Debtors expect to file a Chapter11 plan that provides for emergence from Chapter 11 some time in the future,there can be no assurance that a Chapter 11 plan will be proposed by theDebtors or confirmed by the Bankruptcy Court, or that any such plan will beconsummated.  In order to successfullyemerge from bankruptcy, the Debtors will need to, among other things, obtainalternative financing to replace the DIP Facility.

 

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The Debtors have incurred and will continueto incur significant costs associated with the reorganization.  The amount of these costs, which are beingexpensed as incurred, are expected to significantly affect the Debtors’ resultsof operations.

 

*Notice and Sell-Down Procedures for Trading Equity Securities*

 

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

 

Under the Common Stock Notice and TransferRequirements, all “Substantial Equityholders” must provide the Debtors, the Debtors’counsel and the Bankruptcy Court advance notice of their intent to buy or sellthe Company’s common stock (including options to acquire common stock, asfurther specified in the Final Trading Restriction Order) prior to effectuatingany such purchase or sale.  A “SubstantialEquityholder” under the Final Trading Restriction Order is a person or entitythat beneficially owns or, as a result of a transaction, would beneficiallyown, at least 2.04 million shares (including options to acquire shares, as furtherspecified in the Final Trading Restriction Order) of the Company’s commonstock, representing approximately 4.75% of all issued and outstanding shares ofthe Company’s common stock.  The CommonStock Notice and Transfer Requirements were requested by the Debtors toidentify and, where necessary, restrict potential trades of the Company’scommon stock that could negatively impact the Debtors’ ability to preservemaximum availability of their accrued net operating losses and other taxattributes under Section 382 of the Code. Pursuant to the Final Trading Restriction Order, the Debtors have 15calendar days after notification of a transfer by a Substantial Equityholder tofile any objections with the Bankruptcy Court and serve notice on suchSubstantial Equityholder.  If the Debtorsfile any objections, the transfer would not become effective unless approved bya final and non-appealable order of the Bankruptcy Court.  In addition, a person or entity that is orbecomes a Substantial Equityholder must file with the Bankruptcy Court, andprovide the Debtors and their counsel with, notification of such status on orbefore the later of (a) 15 days after the effective date of the notice ofentry of the Final Trading Restriction Order or (b) ten days after becominga Substantial Equityholder.

 

**Going Concern Matters**

 

The ability of the Company to continue as agoing concern is dependent upon, among other things, (i) the Company’sability to comply with the terms and conditions of the DIP Facility; (ii) theability of the Company to maintain adequate cash on hand; (iii) theability of the Company to generate cash from operations; (iv) the abilityof the Company to obtain confirmation of and to consummate a plan ofreorganization under the Bankruptcy Code; (v) the cost and outcome of thereorganization process; (vi) the Company’s ability to obtain alternativefinancing; and (vii) the Company’s ability to achieve profitability.  Uncertainty as to the outcome of thesefactors raises substantial doubt about the Company’s ability to continue as agoing concern.  The Company is currentlyevaluating various courses of action to address the issues the Company isfacing.  There can be no assurance thatany of these efforts will be successful.

 

The accompanying consolidated financialstatements do not purport to reflect or provide for the consequences of ourChapter 11 proceedings.  Inparticular, the financial statements do not purport to show (i) as toassets, their realizable value on a liquidation basis or their availability tosatisfy liabilities; 

 

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(ii) as to pre-petition liabilities, the amounts that may beallowed for claims or contingencies, or the status and priority thereof; (iii) asto shareowners’ equity accounts, the effect of any changes that may be made inour capitalization; or (iv) as to operations, the effect of any changesthat may be made to our business.

 

In accordance with accounting principlesgenerally accepted in the United States (“GAAP”), we have applied authoritativeguidance on *Financial Reporting by Entitiesin Reorganization under the Bankruptcy Code*, in preparing theconsolidated financial statements.  Thisguidance requires that the financial statements, for periods subsequent to theChapter 11 filing, distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of the business.  Accordingly, certain expenses (includingprofessional fees), realized gains and losses and provisions for losses thatare realized or incurred in the bankruptcy proceedings are recorded inreorganization items on the accompanying Condensed Consolidated Statements ofOperations.  In addition, pre-petitionobligations that may be impacted by the bankruptcy reorganization process havebeen classified on the Condensed Consolidated Balance Sheet at September 30,2009 in “pre-petition liabilitiessubject to compromise*”*.  These liabilities are reported at the amountsexpected to be allowed by the Bankruptcy Court, even if they may be settled forlesser amounts.  For information on thebankruptcy reorganization process, see Note 2 - *Chapter 11Bankruptcy Proceedings*.

 

As a result of the Bankruptcy Filing,realization of assets and liquidation of liabilities are subject touncertainty.  While operating as adebtor-in-possession under the protection of Chapter 11, and subject toBankruptcy Court approval or otherwise as permitted in the normal course ofbusiness, the Debtors may sell or otherwise dispose of assets and liquidate orsettle liabilities for amounts other than those reflected in the condensedconsolidated financial statements. Further, a plan of reorganization could materially change the amountsand classifications reported in our consolidated financial statements.  Our historical consolidated financialstatements do not give effect to any adjustments to the carrying value ofassets or amounts of liabilities that might be necessary as a consequence ofconfirmation of a plan of reorganization.

 

The potential adverse publicity associatedwith the Bankruptcy Filing and the resulting uncertainty regarding the Company’sfuture prospects may hinder the Company’s ongoing business activities and itsability to operate, fund and execute its business plan by impairing relationswith existing and potential customers; negatively impact the ability of theCompany to attract, retain and compensate key executives and employees and toretain employees generally; limit the Company’s ability to obtain trade credit;and impair present and future relationships with vendors and service providers.

 

**Results of Operations**

 

The following discussion summarizes the significant factors affectingthe consolidated operating results of the Company for the three and nine monthperiods ended September 30, 2009 and 2008. This discussion should be read in conjunction with the unauditedcondensed consolidated financial statements and notes to the unaudited condensedconsolidated financial statements contained in Item 1 above, and theconsolidated financial statements and related notes for the year ended December 31,2008 included in the Company’s Annual Report on Form 10-K.

 

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

 

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*ExecutiveSummary of Financial Results*

 

The net income attributable to controllinginterest for the third quarter of 2009 was $13.9 million, or $0.32 per dilutedshare, as compared to a net income of $2.5 million, or $0.06 per diluted share,in the third quarter of 2008.  Theincrease in net income in the third quarter of 2009 was primarily the result ofthe net reorganization items.  Commodityspread, defined as gross ethanol selling price per gallon less net corn costper gallon, declined from $0.98 per gallon in the third quarter of 2008 to$0.86 per gallon in the third quarter of 2009. The average sales price per gallon of ethanol decreased in the thirdquarter of 2009 to $1.70 per gallon from the $2.47 average received in thethird quarter of 2008.  Corn costs duringthe third quarter of 2009 averaged $3.47 per bushel, as compared to $5.79 perbushel in the third quarter of 2008. Conversion cost in the third quarter of 2009 was $0.47 per gallon ascompared to $0.77 per gallon in the third quarter of 2008.

 

Gallons of ethanol sold in the third quarterof 2009 decreased to 55.5 million gallons, as compared to 226.6 million gallonsin the third quarter of 2008.  Thedecrease resulted from the termination of our marketing alliance program inearly 2009 and significantly scaling back our purchase resale operations.  Gallons produced during the third quarter of2009 increased to 49.5 million gallons from 47.4 million gallons in the thirdquarter of 2008.

 

Third quarter 2009 results include a $12.6 million netreorganization gain related to changes in estimates of allowed claimsassociated with the bankruptcy process.

 

*For the Three Months Ended September 30,2009 Compared to the Three Months Ended September 30, 2008*

 

Total gallons of ethanol sold in the thirdquarter of 2009 decreased to 55.5 million gallons, versus 226.6 million gallonssold in the third quarter of 2008. Gallons of ethanol were sourced as follows:

 

For the ThreeMonths Ended September 30,

 
| **(In thousands of gallons, except for  percentages)** | ** ** | **2009**   | ** ** | **2008** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|---------------------------|------------|-----------------------------|------------|
| Equity production                                      | ** ** | **49,519** |       | 47,381   |       | 2,138                     |       | 4.5                         | %          |
| Marketing alliance purchases                           | ** ** | **—** |       | 130,278  |       | (130,278                  | )          | (100.0                      | )%         |
| Purchase/resale                                        | ** ** | **4,857**  |       | 54,495   |       | (49,638                   | )          | (91.09                      | )%         |
| Decrease (increase) in inventory                       | ** ** | **1,123**  |       | (5,584   | )          | 6,707                     |       | N.M.                        | *          |
| Total                                                  | ** ** | **55,499** |       | 226,570  |       | (171,071                  | )          | (75.5                       | )%         |

 

----

*  Not meaningful

 

Net sales in the third quarter of 2009decreased 80.3% from the third quarter of 2008. Net sales were $118.1 million in the third quarter of 2009 versus $599.5million in the third quarter of 2008. Overall, the decrease in net sales was the result of less supplyavailable as we terminated our marketing alliance and significantly reducedpurchase/resale supply operations along with lower ethanol pricing.  Ethanol prices averaged $1.70 per gallon inthe third quarter of 2009 versus $2.47 in the third quarter of 2008.

 

Co-product revenues for thethird quarter of 2009 totaled $23.6 million, a decrease of $10.1 million or30.0%, from the third quarter 2008 total of $33.7 million.  Co-product revenues decreased during thethird quarter of 2009 as a result of significantly lower co-productpricing.  In the third quarter of 2009,we sold 272.1 thousand tons, versus 284.1 thousand tons in the third quarter of2008.  Co-product revenues, as apercentage of corn costs, increased to 36.3% during the third quarter of 2009, 

 

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versus 32.3% in the third quarter of2008.  In 2008, we were selling co-productsinto the spot market during a period of time in which our corn costs werehigher than the CBOT average.  In 2009,co-products and corn costs were at market prices.

 

Cost of goods sold for the quarter ended September 30,2009 was $110.3 million, compared to $606.0 million for the quarter ended September 30,2008, a decrease of $495.7 million or 81.8%. As a percentage of net sales, cost of goods sold decreased to 93.4% ofsales from 101.1% of sales in the third quarter of 2008.  Cost of goods sold consists of the cost toproduce ethanol, freight and logistics costs to ship ethanol and co-products,the cost of ethanol sold out of inventory, the cost of motor fuel taxes whichhave been billed to customers and, in the third quarter of 2008, the cost of purchasedethanol.  The decrease in total cost ofgoods sold is principally the result of lower volumes of ethanol shipped as aresult of the termination of our marketing alliance and significantly reducedpurchase/resale program, lower corn costs and lower conversion costs.  Purchased biofuels decreased by $402.4million during the third quarter of 2009 as compared to the third quarter of 2008.

 

Production costs include corn costs,conversion costs (defined as the cost of converting the corn into ethanol, andincludes production salaries, wages and stock-based compensation costs, fringebenefits, utilities (including coal and natural gas), maintenance, denaturant,insurance, materials and supplies and other miscellaneous production costs) anddepreciation.  Corn costs in the thirdquarter of 2009 totaled $65.0 million or $3.47 per bushel, versus $104.2million, or $5.79 per bushel in the third quarter of 2008.  Our average corn costs in the third quarterof 2009 were slightly higher than the $3.27 average CBOT price during the sameperiod.  The decrease in corn costs isprincipally due to lower corn prices.

 

Conversion costs for the third quarter of2009 decreased to $23.2 million from $36.7 million for the third quarter of2008.  The total dollars spent on conversioncosts decreased year over year principally as a result of significantly lowercosts for utilities, chemicals and other supplies, denaturant, and outsideservices which have decreased as a result of significantly lower petroleumprices.  The conversion cost per gallondecreased year over year to $0.47 per gallon in the third quarter of 2009versus $0.77 per gallon in the third quarter of 2008.  Conversion cost per gallon is affected byboth dollars spent on conversion of corn to ethanol and also on the number ofgallons of ethanol produced.

 

Freight/logistics costs were down 36.8% on aper gallon basis in the third quarter of 2009 from the third quarter of2008.  Freight/logistics costs in thethird quarter of 2009 were $0.12 per gallon as compared to $0.19 per gallon inthe third quarter of 2008. Freight/logistics dollars spent decreased in the third quarter of 2009to $6.4 million from $44.0 million in the third quarter of 2008 as a result oflower volumes shipped and the elimination of the majority of our fixed terminalnetwork structure.  Freight/logisticscost per gallon is calculated by taking total freight/logistics costs incurred(including costs to ship co-products) and dividing by the total ethanol gallonssold.

 

Depreciation in the third quarter of 2009totaled $3.5 million, versus $3.4 million in the third quarter of 2008.  Other cost of goods sold, including motorfuel taxes and the cost of ethanol sold from inventory, were $0.7 million inthe third quarter of 2009, versus $3.8 million in the third quarter of2008.  The cost of motor fuel taxes arerecovered through billings to customers.

 

Selling, general &administrative expenses (“SG&A”) were $5.2 million in the third quarter of2009 as compared to $8.8 million in the third quarter of 2008.  The lower expense in the third quarter of2009 primarily relates to significantly lower salaries and wages (includingstock-based compensation expense) as a result of a reduction in staff andsignificantly lower expenditures on non-reorganization professional fees.

 

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Interest expense in the third quarter of 2009was $1.8 million, as compared to $0.2 million in the third quarter of2008.  The accrual of interest expense onour Senior Unsecured Notes was discontinued after April 7, 2009 (the dateof our Bankruptcy Filing) in accordance with authoritative guidance.  Interest expense in the third quarter of 2009is comprised of $0.7 million related to our pre-petition secured revolvingcredit facility, $0.6 million related to our DIP Facility and $0.5 million ofamortization of deferred debt issuance fees. Interest expense in the third quarter of 2008 included $7.5 million ininterest on the $300 million aggregate principal amount of the Senior UnsecuredNotes and $0.2 million of amortization of deferred financing fees, reduced bycapitalized interest of $7.5 million.

 

Though realized gains inother non-operating income were immaterial in the third quarter of 2009,realized and unrealized net gains on corn and gasoline derivative contracts was$18.4 million in the third quarter of 2008. We did not have any open derivative positions at the end of the thirdquarter of 2009.  We do not mark tomarket forward physical contracts to purchase corn.

 

We recorded a net gain of$12.6 million in the third quarter of 2009 relating to our BankruptcyCases.  This net gain primarily consistsof gains of $13.6 million pertaining to revisions to estimated liabilitiesrelated to rejected executory contracts and leases, and gains of $1.2 millionon the settlement of pre-petition vendor claims for less than amounts owed,partially offset by $2.2 million in professional fees incurred.

 

The income tax benefitaccrued in the third quarter of 2009 totaled $0.6 million versus an income taxexpense in the third quarter of 2008 of $1.8 million.  The difference between the tax benefit rateaccrued and the statutory benefit rate is principally due to the establishmentof valuation allowances as we expect to be unable to realize the tax benefit ofour net operating loss carryforwards and other deferred tax assets.  During the third quarter of 2009, the Companydecreased the recorded valuation allowance on its deferred tax assets by $4.8million, to $31.9 million to reduce the deferred tax assets to the amount thatthe Company believes is more likely than not to be realized.

 

On November 6, 2009,the President of the United States signed The Worker, Homeownership, andBusiness Assistance Act of 2009.  Underthe legislation, qualifying businesses may elect for tax purposes to carry backNet Operating Losses (NOLs) incurred in either 2008 or 2009 (but not for both years)for up to five years preceding the generation of the NOLs.  These businesses are able to offset 100% oftheir taxable income with their available NOLs in the four years preceding NOLsgeneration, and 50% of their taxable income in the fifth year preceding thegeneration of the NOLs.  The Company hasgenerated NOLs in 2008 and 2009 for which utilization had been limited to twocarry-back years under prior legislation. We are currently evaluating the impact of the new law but expect to beable to recover certain taxes paid in prior years through this expandedopportunity to carry-back NOLs.

 

*For the Nine Months Ended September 30, 2009 Compared to the NineMonths Ended September 30, 2008*

 

Total gallons of ethanol sold in the firstnine months of 2009 decreased to 229.1 million gallons, versus 658.1 milliongallons sold in the first nine months of 2008. Gallons of ethanol were sourced as follows:

 

For the NineMonths Ended September 30,

 
| **(In thousands of gallons, except for  percentages)** | ** ** | **2009**    | ** ** | **2008** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
|--------------------------------------------------------|------------|-------------|------------|----------|------------|---------------------------|------------|-----------------------------|------------|
| Equity production                                      | ** ** | **148,017** |       | 140,706  |       | 7,311                     |       | 5.2                         | %          |
| Marketing alliance purchases                           | ** ** | **30,858**  |       | 380,392  |       | (349,534                  | )          | (91.9                       | )%         |
| Purchase/resale                                        | ** ** | **35,163**  |       | 142,603  |       | (107,440                  | )          | (75.3                       | )%         |
| Decrease (increase) in inventory                       | ** ** | **15,084**  |       | (5,625   | )          | 20,709                    |       | N.M.                        | *          |
| Total                                                  | ** ** | **229,122** |       | 658,076  |       | (428,954                  | )          | (65.2                       | )%         |

 

----

*  Not meaningful

 

Net sales in the first nine months of 2009decreased 72.4% from the first nine months of 2008.  Net sales were $472.8 million in the firstnine months of 2009 versus $1.7 billion in the first nine months of 2008.  Overall, the decrease in net sales was theresult of less supply available as we terminated our marketing alliance andsignificantly reduced purchase/resale supply operations and from a decrease inthe average sales price of ethanol sold. Ethanol prices averaged $1.69 per gallon in the first nine months of2009 versus $2.40 in the first nine months of 2008.

 

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Co-product revenues for thefirst nine months of 2009 totaled $72.5 million, a decrease of $31.5 million or30.2%, from the first nine months of 2008 total of $104.0 million.  Co-product revenues decreased during thefirst nine months of 2009 principally as a result of significantly lowerco-product pricing.  In the first ninemonths of 2009, we sold 827.2 thousand tons, versus 829.3 thousand tons in thefirst nine months of 2008.  Co-productrevenues, as a percentage of corn costs, fell to 33.2% during the first ninemonths of 2009, versus 37.6% in the first nine months of 2008.  In 2008, we were selling co-products into thespot market during a period of time in which our corn costs were lower than theCBOT average.  In 2009, both co-productsand corn costs were at market prices.

 

Cost of goods sold for the nine months ended September 30,2009 was $486.3 million, compared to $1.7 billion for the nine months ended September 30,2008, a decrease of $1.2 billion or 70.7%. As a percentage of net sales, cost of goods sold increased to 102.9% ofsales from 97.1% of sales in the first nine months of 2008.  Cost of goods sold consists of the cost toproduce ethanol at our own facilities, the cost of freight and logistics toship ethanol and co-products, the cost of ethanol sold from inventory, the costof motor fuel taxes which have been billed to customers and, prior to the thirdquarter of 2009, the cost of purchased ethanol. The decrease in total cost of goods sold is principally the result oflower volumes of ethanol purchased, lower corn costs and lower conversioncosts.

 

Purchased biofuels in the first nine monthsof 2009 totaled $87.0 million, versus $1.2 billion in the first nine months of2008.  The decrease in purchased biofuelsresulted from the termination of our marketing alliance and our scaled backpurchase/resale programs.  Furthermore,in 2009, the Company significantly sold off biofuels inventories on hand, whichprovided for $52.3 million of biofuels cost of goods sold through September 30,2009.

 

Production costs include corn costs,conversion costs (defined as the cost of converting the corn into ethanol, andincludes production salaries, wages and stock-based compensation costs, fringebenefits, utilities (including coal and natural gas), maintenance, denaturant,insurance, materials and supplies and other miscellaneous production costs) anddepreciation.  Corn costs in the firstnine months of 2009 totaled $218.7 million or $3.93 per bushel, versus $277.1million, or $5.22 per bushel in the first nine months of 2008.  Our average corn costs in the first ninemonths of 2009 were higher than the CBOT average price of $3.70 during the sameperiod.  The decrease in corn costs isprincipally due to lower corn market prices.

 

Conversion costs for the first nine months of2009 decreased to $72.2 million from $99.5 million for the first nine months of2008.  The total dollars spent onconversion costs decreased year over year principally as a result of significantlylower costs for utilities, chemicals and other supplies which have decreased asa result of significantly lower petroleum prices.  The conversion cost per gallon decreased yearover year to $0.49 per gallon in the first nine months of 2009 versus $0.71 pergallon in the first nine months of 2008. Conversion cost per gallon is affected by both dollars spent onconversion of corn to ethanol and also on the number of gallons of ethanolproduced.

 

Freight/logistics costs were reduced on a pergallon basis in the first nine months of 2009 from the first nine months of2008.  Freight/logistics costs in thefirst nine months of 2009 were $0.17 per gallon as compared to $0.20 per gallonin the first nine months of 2008. Freight/logistics dollars spent decreased in the first nine months of2009 to $39.7 million from $130.5 million in the first nine months of 2008 as aresult of lower volumes shipped and the termination of fixed price terminalobligations.  Freight/logistics cost pergallon is calculated by taking total freight/logistics costs incurred(including costs to ship co-products) and dividing by the total ethanol gallonssold.

 

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Depreciation in the first nine months of 2009totaled $10.4 million, versus $10.0 million in the first nine months of2008.  Other cost of goods sold,including motor fuel taxes and the cost of ethanol sold from inventory, were$5.3 million in the first nine months of 2009, versus $11.6 million in thefirst nine months of 2008.  The cost ofmotor fuel taxes are recovered through billings to customers.

 

Selling, general &administrative expenses (“SG&A”) were $21.8 million in the first ninemonths of 2009 as compared to $27.8 million in the first nine months of2008.  Approximately $5.5 million of thedecrease relates to significant reductions in wages and benefits (includingstock-based compensation ) as a result of a reduction in staff at the end ofthe first quarter of 2009. Additionally, we recorded a $1.1 million increase inbad debt expense during the nine months ended September 30, 2009.

 

During the first nine months of 2009, werecognized income from the termination of marketing agreements with alliancepartners totaling $10.2 million.  Duringthe first nine months of 2008, the Company incurred losses totaling $31.6million related to the valuation and ultimate sale of its portfolio of auctionrate securities.

 

Interest income in the first nine months of2009 was $11 thousand, versus interest income of $3.0 million in the first ninemonths of 2008.  The significant decreasein interest income is due to a decrease in excess cash available forinvestment.

 

Interest expense in thefirst nine months of 2009 was $12.8 million, as compared to $3.8 million in thefirst nine months of 2008.  Interestexpense in the first nine months of 2009 was higher than in the same period in2008 due to suspension of interest expense capitalization in conjunction withthe halting of our expansion projects, offset by the cessation of accruinginterest on our Notes as of the Petition Date. Interest expense in the first nine months of 2009 included $8.1 millionof interest expense related to our Notes (compared to contractual interest of$22.5 million), pre-petition secured revolving credit facility interest expenseof $1.7 million, interest expense on our DIP Facility of $1.1 million, and $1.9million for amortization of deferred financing fees.  Interest expense in the first nine months of2008 included $22.5 million in interest on our Notes and $0.8 million ofamortization of deferred financing fees, reduced by capitalized interest of$19.5 million.

 

Other non-operating incomefor the first nine months of 2009 includes $1.2 million of realized net gainson corn derivative contracts versus net realized and unrealized losses in thefirst nine months of 2008 of $6.1 million. We did not have any open derivative positions at the end of September 2009.  We do not mark to market forward physicalcontracts to purchase corn.

 

We recorded a reorganizationexpense of $30.1 million in the nine months ended September 30, 2009relating to our Bankruptcy Cases.  Thisexpense primarily consists of $5.3 million in professional fees incurred and aprovision of $26.1 million for rejected executory contracts and leases,partially offset by gains of $1.3 million on the settlement of pre-petitionvendor claims for less than amounts owed.

 

The income tax benefitrecorded in the first nine months of 2009 totaled $7.3 million.  The difference between the tax benefit rateaccrued and the statutory benefit rate is principally due to the establishmentof valuation allowances as we expect to be unable to realize the tax benefit ofour net operating loss carryforwards and other deferred tax assets.  For the first nine months of 2009, theCompany increased its valuation allowance by $14.5 million, to $31.9 million atSeptember 30, 2009 on its deferred tax assets to reduce the deferred taxassets to the amount that the Company believes is more likely than not to berealized.

 

On November 6, 2009,the President of the United States signed The Worker, Homeownership, andBusiness Assistance Act of 2009.  Underthe legislation, qualifying businesses may elect for tax purposes to carry backNet Operating Losses (NOLs) incurred in either 2008 or 2009 (but not for bothyears) for up to five years preceding the generation of the NOLs.  These businesses are able to offset 100% oftheir taxable income with their available NOLs in the four years preceding NOLsgeneration, and 50% of their taxable income in the fifth year preceding thegeneration of the NOLs.  The Company hasgenerated NOLs in 2008 and 2009 for which utilization had been limited to twocarry-back years under prior legislation. We are currently evaluating the impact of the new law but expect to beable to recover certain taxes paid in prior years through this expandedopportunity to carry-back NOLs.

 

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**Trends and Factors that May Affect Future Operating Results**

 

*Forward Commodity Transactions*

 

We are exposed to certainrisks related to our ongoing business operations.  The primary risks related to our business areprice risk on anticipated purchases of corn, natural gas and the sale ofethanol.  We have historically usedforward or derivative instruments to manage these risks.  We are not currently using forward orderivative instruments, and are primarily in the spot markets for commoditypricing.

 

*Ethanol Pricing*

 

Ethanol prices rose to beabove the spot cost to produce ethanol during the third quarter of 2009, makingthe cash spot margins positive.  As thesupply of ethanol from plants which are currently under construction begins tomake its way into the marketplace or plants that are currently shut-in begin toproduce ethanol again, ethanol pricing may remain soft, and gross margins maybe limited by changes in both ethanol pricing and production cost components.

 

As of September 30,2009, we had contracts for delivery of ethanol totaling 37.0 million gallonsthrough December 31, 2009.  All ofthese commitments were at spot prices (using various Platt, OPIS and AXXISindices).  We did not have anycommitments to sell ethanol past the fourth quarter of 2009.

 

*Corn*

 

Corn prices rosesignificantly from 2006 to 2008 and reached record levels during 2008.  Since 2008, corn prices have declined withthe economic conditions in general, along with most other commodities.  However, we continue to believe that cornprices are likely to remain above historical levels for the foreseeable future.

 

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

 

At September 30, 2009,we had fixed the price of 1.3 million bushels of corn through December 2009at an average cost of $3.35 per bushel.

 

*Marketing Alliance*

 

For the past few years, ourmarketing business was an important component of our business.  Using the gallons we sourced from thirdparties, we were able to distribute significantly more ethanol than we couldhave produced from our own equity production, thereby giving us a greatermarketing presence without having to make capital investments.  However, with severely declining margins andgeneral liquidity stress due to frozen credit markets, this marketing model nolonger worked for our alliance partners or Aventine.  Beginning in the fourth quarter of 2008, wenegotiated termination agreements with our marketing alliance partners andbegan to rationalize our distribution network to primarily focus on sales ofour equity production.  We completed the termination of our marketing allianceduring the first quarter of 2009.  Accordingly, ethanol sourced from marketingalliance partners has declined sharply in 2009.

 

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*Supply and Demand*

 

According to the RenewableFuels Association, the annual ethanol production capacity in the United Statesof plants currently in operation, those currently not producing, and thoseunder construction is almost 14 billion gallons annually.  Presently this volume qualifies as renewablebiofuels but not as advanced biofuels. In 2014 the mandate for renewable biofuels is 14.4 billion gallons andfor advanced biofuels is another 3.75 billion gallons (including 1.75 billiongallons of cellulosic biofuels) for a total Renewable Fuels Standard of 18.15billion gallons. Ethanol produced in the United States competes withsugar-based ethanol produced in Brazil, which currently qualifies as advancedbiofuels.  While we cannot be certain asto industry operating rates or completion of plants under construction, thisdomestic production capacity, along with imports, may cause supply to exceedmandated demand.  If additional demandfor ethanol is not created, either through additions to discretionary blending(through increased penetration rates in areas that blend ethanol today orthrough the establishment of new markets where little or no ethanol is blendedtoday), or through additional state level mandates, the excess supply may causeethanol gross margins to decrease, perhaps substantially.

 

*Bankruptcy*

 

As described in more detail elsewhere in this Form 10-Q,Aventine and all of its direct and indirect subsidiaries filed voluntarypetitions under Chapter 11 of the Bankruptcy Code on April 7, 2009.  No assurance can be provided as to what values, if any, will beascribed in Aventine’s bankruptcy proceedings to the pre-petition liabilities,common stock and other securities. Accordingly, caution should be exercised with respect to existing andfuture investments in any of these liabilities or securities.

 

In order to successfullyexit Chapter 11 bankruptcy, Aventine will need to propose, and obtainconfirmation by the Bankruptcy Court of a plan of reorganization that satisfiesthe requirements of the Bankruptcy Code. A plan of reorganization could, among other things, resolve Aventine’spre-petition obligations, set forth the revised capital structure of the newlyreorganized entity and provide for corporate governance subsequent to exit frombankruptcy.  Although Aventine expects tofile a reorganization plan that provides for emergence from Chapter 11bankruptcy some time in the future, there can be no assurance that areorganization plan will be proposed by Aventine or confirmed by the BankruptcyCourt, or that any such plan will be consummated.

 

The Company has incurred andwill continue to incur significant costs associated with thereorganization.  The amount of thesecosts, which are being expensed as incurred, are expected to significantlyaffect the Company’s results of operations.

 

**Liquidity and Capital Resources**

 

*Overview and Outlook*

 

The following table setsforth selected information concerning our financial condition:

 
| **(In thousands)**                   | ** **   | **September 30,  2009  (Unaudited)** | ** **   | **December 31,  2008** | ** **   |
|--------------------------------------|--------------|-------------------------------------------|--------------|-----------------------------|--------------|
| *** ***                         | *** *** | *** ***                              | *** *** | *** ***                | *** *** |
| Cash and cash equivalents            | ** **   | **$**                                     | **35,772**   |                        | $            | 23,339 |   |
| Working capital                      | ** **   | **23,730**                                |         | (294,039                    | )            |
| Total debt not subject to compromise | ** **   | **42,765**                                |         | 352,200                     |         |
| Current ratio                        | ** **   | **1.40**                                  |         | 0.39                        |         |
|                                      |              |                                           |              |                             |              |  |  |

 

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As a result of ourBankruptcy Filing and the circumstances leading to our Bankruptcy Filing asdescribed elsewhere in this report, we face uncertainty regarding the adequacyof our liquidity and capital resources and have limited access tofinancing.  The Bankruptcy Filingconstituted an event of default under our pre-petition secured revolving creditfacility and the indenture governing our Notes, and the debt obligations underthose agreements became automatically and immediately due and payable, subjectto the automatic stay provisions of Section 362 of the Bankruptcy Code.

 

During the pendency of theBankruptcy Cases, we expect that our primary sources of liquidity will be cashflows from operations and the ability to borrow under our DIP Facility.  In addition to the cash requirementsnecessary to fund ongoing operations, we have incurred significant professionalfees and other costs in connection with the Bankruptcy Filing and expect thatwe will continue to incur significant professional fees and costs.  We cannot assure you that the amounts of cashavailable from operations, together with our DIP Facility, will be sufficientto fund our operations, including operations during the period until such timeas we are able to propose a plan of reorganization that will receive therequisite acceptance by creditors and be confirmed by the BankruptcyCourt.  Our long-term liquidityrequirements and the adequacy of our capital resources are difficult to predictat this time and ultimately cannot be determined until a plan of reorganizationhas been developed and is confirmed by the Bankruptcy Court.

 

Funds available under ourDIP Facility, together with cash generated from operations, are expected to besufficient to fund operations of our business through the end of the firstquarter of 2010.  However, fundsavailable under our DIP Facility cannot be used for capital expenditures beyondthose permitted in our DIP Facility budget, absent consent from the post-petitionlenders and modification of the DIP Facility budget.  Consequently, at this time, we do notcurrently expect to complete construction of our Aurora, Nebraska or Mt.Vernon, Indiana expansion projects during bankruptcy.

 

*Sources of Liquidity*

 

Our current principalsources of liquidity are cash and cash equivalents, cash provided byoperations, and cash provided by our DIP Facility.

 

*Cash and cash equivalents.*  Forthe first nine months of 2009, cash and cash equivalents increased by $12.4million as compared to $19.1 million for the first nine months of 2008.  Cash and cash equivalents as of September 30,2009 and December 31, 2008 were $35.8 million and $23.3 million,respectively.

 

C*ash providedby operations.*  Net cashprovided by operating activities in the first nine months of 2009 was $23.2****million, as compared to cash provided by operatingactivities of $56.6 million for the first nine months of 2008.  Cash provided by operations in 2009 wasreduced by significant operating losses incurred in the first nine months of2009.  In the first nine months of 2009,we offset these large operating losses principally with the liquidation ofaccounts receivables and inventory, along with the receipt of alliancetermination payments, offset somewhat by large reductions in accounts payable.  As a result of our Bankruptcy Filing, we didnot pay pre-petition accounts payable as they came due, which provided cashfrom operations.

 

*Cash available under our DIP Facility*.  Asof September 30, 2009, the Company has drawn $15 million of the DIPFacility.  The DIP Facility provides fora first priority term loan in a maximum aggregate principal amount of up to $30million.  Proceeds of the DIP Facilitycan be used, among other things, to (i) fund the working capital andgeneral corporate needs of the Debtors and the costs of the Bankruptcy Cases inaccordance with an approved budget, and (ii) provide adequate protection,in 

 

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

 

*Uses of Liquidity*

 

Ourprincipal uses of liquidity are interest payments related to our pre-petitionsecured revolving credit facility and our DIP Facility, working capital, thefunding of operating losses, and capital expenditures.

 

*Payments related to ourpre-petition secured revolving credit facility and our DIP Facility.* During the first nine months of 2009, we used a net $24.4 million ofcash to make required principal reductions on our pre-petition securedrevolving credit facility.  We did notmake the $15 million interest payment due April 1, 2009 as required underour Notes.  As a result of the BankruptcyFiling, the outstanding principal amount and accrued interest under our Notesbecame immediately due and payable, subject to the automatic stay provisions ofSection 362 of the Bankruptcy Code. We also used $2.6 million of cash to pay interest on our pre-petitionsecured revolving credit facility and our DIP Facility.

 

*Working capital.*  Our networking capital position increased by $317.8 million during the first ninemonths of 2009.  The reclassification ofour Notes and the related accrued interest payable from current liabilities tothe long-term liability “Pre-petition liabilities subject to compromise”accounted for $307.5 million of the increase in working capital during thenine-month period ended September 30, 2009.  Excluding this reclassification, our workingcapital increased by $10.3 million during the first nine months of 2009.

 

*Capital expenditures.* During the first nine months of 2009, we spent approximately $1.4million on capital projects.  Of thisamount, $1.1 million was spent on maintenance and environmental projects, while$0.3 million was spent on our suspended capacity expansion projects.

 

**Secured Revolving Credit Facility**

 

As a result of theBankruptcy Filing, all the commitments under the Company’s secured revolvingcredit facility automatically terminated, and the principal of the loans andthe reimbursement obligations then outstanding, together with accrued interestthereon and any unpaid fees and all other obligations of the borrowers accruedunder the applicable loans documents, became immediately due and payable,subject to the Company’s defenses and rights under the facility and theautomatic stay provisions of Section 362 of the Bankruptcy Code.

 

**Debtor-in-Possession Debt Facility**

 

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

 

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Debtorshave drawn $15 million under the DIP Facility, which was the minimum amountrequired to be drawn.

 

The description of our DIPFacility below is qualified in its entirety by the full text of the DIPAgreement as described in the Debtor-in-Possession Credit Facility Term Sheetfiled as Exhibit 10.1 to our Form 8-K filed on April 13, 2009.

 

The term loan matures at theearliest of (i) one year after the commencement of the Bankruptcy Cases, (ii) theconsummation of a sale of substantially all of the assets of the Debtors, (iii) theeffective date of a plan of reorganization in the Bankruptcy Cases, (iv) thedate the loans become due and payable, whether by stated maturity, upon anevent of default or otherwise, (v) the expiration of the approved budget, (vi) theacceptance by any of the Debtors of any offer or bid for the purchase of all orsubstantially all of the assets of any of the Debtors or all or substantiallyall of the equity in any of the reorganized Debtors, or (vii) the date onwhich any of the Debtors files a motion with the Bankruptcy Court for authorityto proceed with the sale or liquidation of any of the Debtors (or any materialportion of any of the assets of the Debtors). The DIP Facility bears interest at a rate equal to 16.5% per annum,which shall be payable monthly in arrears in cash on the last day of eachmonth.

 

As of September 30, 2009, the Debtors are in compliance with theterms of the DIP Facility.

 

**Environmental Matters**

 

We are subject to extensivefederal, state and local environmental laws, regulations and permit conditions(and interpretations thereof), including those relating to the discharge ofmaterials into the air, water and ground, the generation, storage, handling,use, transportation and disposal of hazardous materials, and the health andsafety of our employees.  These laws,regulations, and permits require us to incur significant capital and othercosts, including costs to obtain and maintain expensive pollution controlequipment.  They may also require us tomake operational changes to limit actual or potential impacts to theenvironment.  A violation of these laws,regulations or permit conditions can result in substantial fines, naturalresource damages, criminal sanctions, permit revocations and/or facilityshutdowns.  In addition, environmentallaws and regulations (and interpretations thereof) change over time, and anysuch changes, more vigorous enforcement policies or the discovery of currentlyunknown conditions may require substantial additional environmentalexpenditures.

 

We are also subject topotential liability for the investigation and cleanup of environmentalcontamination at each of the properties that we own or operate and at off-sitelocations where we arranged for the disposal of hazardous wastes.  For instance, soil and groundwater contaminationhas been identified in the past at our Illinois campus.  If any of these sites are subject toinvestigation and/or remediation requirements, we may be responsible under theComprehensive Environmental Response, Compensation and Liability Act or other environmentallaws for all or part of the costs of such investigation and/or remediation, andfor damages to natural resources.  We mayalso be subject to related claims by private parties alleging property damageor personal injury due to exposure to hazardous or other materials at or fromsuch properties.  While costs to addresscontamination or related third-party claims could be significant, based uponcurrently available information, we are not aware of any material liabilityrelating to contamination or such third party claims.  We have not accrued any amounts forenvironmental matters as of September 30, 2009.  The ultimate costs of any liabilities thatmay be identified or the discovery of additional contaminants could adverselyimpact our results of operation or financial condition.

 

Inaddition, the hazards and risks associated with producing and transporting ourproducts (such as fires, natural disasters, explosions, abnormal pressures andspills) may result in spills or releases of 

 

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hazardoussubstances, and may result in claims from governmental authorities or thirdparties relating to actual or alleged personal injury, property damage, ordamages 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 byinsurance could have a material adverse impact on our results of operations andfinancial condition.

 

Our air emissions aresubject to the federal Clean Air Act, as amended, and similar state laws whichgenerally require us to obtain and maintain air emission permits for ourongoing operations as well as for any expansion of existing facilities or anynew facilities.  Obtaining andmaintaining those permits requires us to incur costs, and any future morestringent standards may result in increased costs and may limit or interferewith our operating flexibility.  Inaddition, the permits ultimately issued may impose conditions which are morecostly to implement than we had anticipated. These costs could have a material adverse effect on our financialcondition and results of operations. Because other ethanol manufacturers in the U.S. are and will continue tobe subject to similar laws and restrictions, we do not currently believe thatour costs to comply with current or future environmental laws and regulationswill adversely affect our competitive position.  However, because ethanol is produced andtraded internationally, these costs could adversely affect us in our efforts tocompete with foreign producers not subject to such stringent requirements.

 

Federal and stateenvironmental authorities have been investigating alleged excess VOC emissionsand other air emissions from many U.S. ethanol plants, including our Illinoisand Nebraska facilities.  The matterrelating to our Illinois wet mill facility is still pending, and we could berequired to install additional air pollution control equipment or take othermeasures to control air pollutant emissions at that facility.  If authorities require us to installcontrols, we would anticipate that costs would be higher than the approximately$3.4 million we incurred for this matter at our Nebraska facility due to thelarger size of the Illinois wet mill facility. In addition, if the authorities determine our emissions were inviolation of applicable law, we would likely be required to pay fines thatcould be material.

 

We have made, and expect tocontinue making, significant capital expenditures on an ongoing basis to complywith increasingly stringent environmental laws, regulations and permits,including compliance with the U.S. Environmental Protection Agency’s (“EPA”)National Emissions Standard for Hazardous Air Pollutants, or NESHAP, forindustrial, commercial and institutional boilers and process heaters.  This NESHAP was issued, but subsequentlyvacated.  The vacated version of the rule requiredus to implement maximum achievable control technology at our Illinois wet millfacility to reduce hazardous air pollutant emissions from our boilers.  We expect the EPA will revise the rule toimpose more stringent requirements than were contained in the vacated version.  In the absence of a final EPA NESHAP forindustrial, commercial and institutional boilers and process heaters, we areworking with state authorities to determine what technology will be required atour Illinois wet mill facility and when such technology must be installed.  We currently cannot estimate the amount thatwill be needed to comply with any future federal or state technologyrequirement regarding air emissions from our boilers.

 

Newlaws or regulations relating to the production, disposal or emissions of carbondioxide may require us to incur significant additional costs and may alsoadversely affect our ability to continue generating revenue from carbon dioxidesales.  In particular, Illinois and five otherMidwestern States have entered into the Midwestern Greenhouse Gas ReductionAccord, a program which directs participating states to develop a multi-sectorcap-and-trade mechanism to help achieve reductions in

 

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greenhouse gases, including carbondioxide.  It is possible this programcould require carbon dioxide emissions reductions from our Pekin, Illinoisplants, which could result in significant costs.  In addition, it is possible that other statesin which we conduct or plan to conduct business, including Nebraska andIndiana, could join this accord or that federal, state or local regulatorscould require other costly carbon dioxide emissions reductions or offsets.

 

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

 

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

 

We are exposed to variousmarket risks, including changes in commodity prices.  Market risk is the potential loss arisingfrom adverse changes in market rates and prices.  In the ordinary course of business, we periodicallyenter into various types of transactions involving financial instruments tomanage and reduce the impact of changes in commodity prices, including pricerisk on anticipated purchases of corn, natural gas and the sale of ethanol.  We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.

 

***Commodity Price Risks***

 

We are exposed to certainrisks related to our ongoing business operations.  The primary risks related to our business areprice risk on anticipated purchases of corn, natural gas and the sale ofethanol.  We have historically usedforward or derivative instruments to manage these risks.  We are not currently using forward orderivative instruments, and are primarily in the spot markets for commodity pricing.

 

We are subject to marketrisk with respect to the price and availability of corn, the principal rawmaterial we use to produce ethanol and ethanol by-products.  In general, rising corn prices result inlower profit margins and, therefore, represent unfavorable marketconditions.  This is especially true whenmarket conditions do not allow us to pass along increased corn costs to ourcustomers.  The availability and price ofcorn is subject to wide fluctuations due to unpredictable factors such as weatherconditions, farmer planting decisions, governmental policies with respect toagriculture and international trade and global demand and supply.  Our weighted average gross corn cost for thethree months ended September 30, 2009 and 2008 was $3.47 and $5.79 perbushel, respectively.  For the ninemonths ended September 30, 2009 and 2008, our weighted average gross corncost was $3.93 and $5.22 per bushel, respectively.

 

We have firm-price purchasecommitments with some of our corn suppliers under which we agree to buy corn ata price set in advance of the actual delivery of that corn to us.  At September 30, 2009, we hadcommitments to purchase approximately 1.3 million bushels of corn through December 2009at an average price of $3.35 per bushel from these corn suppliers.  Under these arrangements, we assume the riskof a price decrease in the market price of corn between the time this price isfixed and the time the corn is delivered. In order to reduce our market exposure to price decreases, we have inthe past, at the time we enter into a firm-price purchase commitment, oftenentered into commodity forward contracts to sell a certain amount of corn atthe then-current price for delivery to the counterparty at a later date.  We account for these commodity forwardtransactions under ASC 815 on *Derivative Instruments andHedging Activities.*Such 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, ifany, is recognized in other current assets in the Condensed ConsolidatedBalance Sheet, net of any cash received from the brokers.  We did not have any of this type ofderivative positions at September 30, 2009.

 

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We have also, in the past,entered into commodity futures contracts in connection with the purchase ofcorn to reduce our risk of future price increases.  We accounted for these transactions under ASC815.  These futures contracts were notdesignated as hedges and, therefore, were marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of these derivative contractswould be recognized in other current assets in the Condensed ConsolidatedBalance Sheet, net of any cash received from the brokers.  We did not have any of this type of derivativepositions at September 30, 2009.

 

We sometimes enter intofirm-price purchase commitments with some of our natural gas suppliers underwhich we agree to buy natural gas at a price set in advance of the actualdelivery of that natural gas to us.  Underthese arrangements, we assume the risk of a price decrease in the market priceof natural gas between the time this price is fixed and the time the naturalgas is delivered.  We account for thesetransactions as normal purchases under ASC 815, and accordingly, do not markthese transactions to market.  At September 30,2009, we did not have any commitments to purchase natural gas in advance atprices other than at market.

 

We are also subject tomarket risk with respect to ethanol pricing. Our ethanol sales are priced using contracts that can either be fixed;based upon the price of wholesale gasoline plus or minus a fixed amount; orbased upon a market price at the time of shipment.  We sometimes fix the price at which we sellethanol using fixed price physical delivery contracts.  These normal sale transactions would not bemarked to market.  At September 30,2009, we had no outstanding contracts to sell ethanol at fixed prices.

 

We also sell forward ethanolusing contracts where the price is determined at a point in the future basedupon an index plus or minus a fixed amount. At September 30, 2009, we had no contracts for the sale of ethanolusing wholesale gasoline as an index plus a fixed spread.  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 ASC815.  These forward contracts are notdesignated as hedges and, therefore, are marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of these derivativeliabilities is recognized in other current liabilities in the CondensedConsolidated Balance Sheet, net of any cash paid to brokers.  We did not have any of this type ofderivative position at September 30, 2009.

 

**Item 4.****                  ****Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Under the supervision of andwith the participation of management, including our Interim Chief ExecutiveOfficer, President, and Interim Chief Financial Officer,  George T. Henning, Jr., the Companycarried out an evaluation of the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based upon that evaluation, Mr. Henning has concluded that, as ofthe end of the period covered by this report, the Company’s disclosure controlsand procedures have been designed and are effective to provide reasonableassurance that information required to be disclosed in the reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission. These disclosure controls and procedures include, without limitation,controls and procedures designed to provide reasonable assurance thatinformation required to be disclosed in such reports is accumulated andcommunicated to our management, including Mr. Henning, as 

 

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appropriate to allow timely decisions regarding the required disclosure.  The design of any system of controls is basedin part upon certain assumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goal under all potential futureconditions, regardless of how remote.

 

**Changes in Internal Control over Financial Reporting**

 

Based upon evaluation by ourmanagement, which was conducted with the participation of Mr. Henning,there has been no change in our internal control over financial reportingduring the period covered by this report that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II.****              ****OTHER INFORMATION**

 

**Item 1.****                  ****Legal Proceedings**

 

On April 7, 2009, the Company and all of itsdirect and indirect subsidiaries filed voluntary petitions for relief underChapter 11 of the Bankruptcy Code with the United States Bankruptcy Court forthe District of Delaware.  The Company’ssubsidiaries that are part of the Bankruptcy Filing include Aventine RenewableEnergy, LLC, a Delaware limited liability company; Aventine Renewable Energy, Inc.,a Delaware corporation; Aventine Renewable Energy — Mt. Vernon, LLC, a Delawarelimited liability company; Aventine Renewable Energy — Aurora West, LLC, aDelaware limited liability company; and Nebraska Energy, LLC, a Kansas limitedliability company.  The Bankruptcy Casesare being jointly administered by the Bankruptcy Court under Case Number 09-11214 (KG).  Aventine intends to continue to operate itsbusiness as debtor-in-possession under the jurisdiction of the Bankruptcy Courtand in accordance with the applicable provisions of the Bankruptcy Code andorders of the Bankruptcy Court.  As aresult of the filing, attempts to collect, secure, or enforce remedies withrespect to pre-petition claims against Aventine are subject to the automaticstay provisions of Section 362 of the Bankruptcy Code.  The Bankruptcy Cases are discussed in greaterdetail in Note 2 to the accompanying condensed consolidated financialstatements.

 

On November 6, 2008, the Company commenced anaction against JP MorganSecurities, Inc. and JP Morgan Chase Bank, N.A. (hereinafter collectivelyreferred to as “JP Morgan”) in the Tenth Judicial Circuit in Tazewell County,Illinois.  The Company’s complaintrelates to losses incurred in excess of $31 million as a result of investmentsin Student Loan Auction Rate Securities purchased through JP Morgan.  At this time, we cannot be certain as to theoutcome of this litigation.

 

We are from time to time involved in various legalproceedings, including legal proceedings relating to the extensive environmentallaws and regulations that apply to our facilities and operations.  We are not involved in any legal proceedingsthat we believe could have a material adverse effect upon our business,operating results or financial condition.

 

**Item 1A.****               ****Risk Factors**

 

The Company included in itsAnnual Report on Form 10-K as of December 31, 2008 and in itsQuarterly Report on Form 10-Q for the three months ended March 31,2009 a description of certain risks and uncertainties that could affect theCompany’s business, future performance or financial condition (“Risk Factors”).  There have been no material changes to therisk factors previously disclosed.

 

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

 

**None**

 

**Item 3.****                  ****Defaults Upon Senior Securities**

 

Our Bankruptcy Filingconstituted an event of default under the Company’s secured revolving creditfacility and the Company’s indenture governing its 10% senior unsecured notesdue 2017.  The Company included a description of these events ofdefault in its Quarterly Report on Form 10-Q for the three months ended March 31,2009.

 

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**Item 4.****                  ****Submission of Matters to a Voteof Security Holders**

 

**None**

 

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

 

**None**

 

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

 

(a)   Exhibits

 

31.1        Certification of the Chief Executive Officerpursuant to Section 302 of the Sarbanes- Oxley Act of 2002.

 

31.2        Certification of the Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1        Certification of the Chief Executive Officerand Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**SIGNATURE**

 

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

 
|                         | AVENTINE RENEWABLE ENERGY HOLDINGS, INC. |
|------------------------------|------------------------------------------|
|                         |                                     |
|                         |                                     |
| Dated: November 9, 2009 | By:                                      |  /s/ William J. Brennan |
|                         | Name:                                    | William J. Brennan |
|                         | Title:                                   | Chief Accounting and Compliance  Officer (duly authorized officer and  principal accounting officer) |
|                              |                                          |  |  |

 

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