**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

 
| x      | Quarterly report pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934 for the quarterly period ended June 30,  2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| OR     |
|   |
| o      | Transition report pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934 for the transition period from                                                      to                                                      . |

 

**COMMISSIONFILE NUMBER  001-32922**

**AVENTINE RENEWABLE ENERGY HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**              | ** ** | **05-0569368**                     |
|---------------------------|------------|------------------------------------|
| (State of  Incorporation) |       | (IRS Employer  Identification No.) |

 

| **1300 South 2****nd**** Street**    | ** ** | ** ** |
|-------------------------------------------|------------|------------|
| **Pekin, Illinois**                       | ** ** | **61554**  |
| (Address of  Principal Executive Offices) |       | (Zip Code) |

 

**(309) 347-9200**

(Registrant’s Telephone Number, including Area Code)

Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

YES o  NO x

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

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

 

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

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

| Class                           | ** ** | **Outstanding as of August 7, 2006** |
|---------------------------------|------------|--------------------------------------|
| Common Stock,  $0.001 Par Value |       | 41,831,651  Shares                   |

 

 

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**FORM 10-Q**

**QUARTERLY REPORT**

**TABLE OF CONTENTS**
|          | ** ** | ** **                                                                                                               | ** ** | Page No. |
|----------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I   |
|     |       |                                                                                                                     |       |     |
| Item 1.  |       | Financial  Statements                                                                                                    |       |     |
|     |       |                                                                                                                     |       |     |
|     |       | Condensed  Consolidated Statements of Operations (Unaudited) - Three and six-month  periods ended June 30, 2006 and 2005 |       | 1        |
|     |       | Condensed  Consolidated Balance Sheets — June 30, 2006 (Unaudited) and December 31, 2005                            |       | 2        |
|     |       | Condensed  Consolidated Statements of Cash Flows (Unaudited) - Six-months ended June 30,  2006 and 2005                  |       | 3        |
|     |       | Notes to  Unaudited Condensed Consolidated Financial Statements                                                          |       | 4        |
|     |       |                                                                                                                     |       |     |
| Item 2.  |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |       | 13       |
|     |       |                                                                                                                     |       |     |
| Item 3.  |       | Quantitative and  Qualitative Disclosures About Market Risk                                                              |       | 23       |
|     |       |                                                                                                                     |       |     |
| Item 4.  |       | Controls and  Procedures                                                                                                 |       | 25       |
|     |       |                                                                                                                     |       |     |
| PART II  |
|     |       |                                                                                                                     |       |     |
| Item 1A. |       | Risk Factors                                                                                                             |       | 26       |
|     |       |                                                                                                                     |       |     |
| Item 4.  |       | Submission of  Matters to a Vote of Security Holders                                                                     |       | 26       |
|     |       |                                                                                                                     |       |     |
| Item 5.  |       | Other  Information                                                                                                       |       | 26       |
|     |       |                                                                                                                     |       |     |
| Item 6.  |       | Exhibits                                                                                                                 |       | 27       |

 

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**PART I.                 FINANCIAL INFORMATION**

**Item 1.                    Financial Statements**

**AventineRenewable Energy Holdings, Inc. and SubsidiariesCondensed Consolidated Statements of Operations**(Unaudited)
| ** **                                                              | ** ** | **Three months ended  June 30,**                      | ** **  | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------------------------|-------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                                             | ** **  | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                              | ** ** | **(In thousands except per share amounts)** | ** **  |
| Net sales                                                               | ** ** | **$**                                                                | **442,905** |                                          | $          | 190,976 | ** ** | **$** | **756,425** |   | $ | 388,006 |   |
| Cost of goods sold                                                      | ** ** | **392,697**                                                          |        | 177,071                                       | ** ** | **675,622** |   | 355,255 |   |
| Gross profit                                                            | ** ** | **50,208**                                                           |        | 13,905                                        | ** ** | **80,803** |   | 32,751 |   |
| Selling, general and  administrative expenses                           | ** ** | **7,371**                                                            |        | 4,104                                         | ** ** | **13,637** |   | 7,702 |   |
| Other expense/(income)                                                  | ** ** | **(342**                                                             | **)**       | 45                                            | ** ** | **(607** | **)** | (514 | ) |
| Operating income                                                        | ** ** | **43,179**                                                           |        | 9,756                                         | ** ** | **67,773** |   | 25,563 |   |
| Other  expenses/(income):                                               | ** ** | ** **                                                           |        |                                          | ** ** | ** ** |   |   |   |
| Interest income                                                         | ** ** | **(1,228**                                                           | **)**       | (479                                          | )          | **(1,883** | **)** | (866 | ) |
| Interest expense                                                        | ** ** | **4,236**                                                            |        | 4,095                                         | ** ** | **8,601** |   | 7,963 |   |
| Other  non-operating expense/(income)                                   | ** ** | **(1,899**                                                           | **)**       | 65                                            | ** ** | **(2,454** | **)** | 417 |   |
| Minority  interest                                                      | ** ** | **1,651**                                                            |        | 419                                           | ** ** | **2,917** |   | 1,317 |   |
| Income before income  taxes                                             | ** ** | **40,419**                                                           |        | 5,656                                         | ** ** | **60,592** |   | 16,732 |   |
| Income tax expense                                                      | ** ** | **15,765**                                                           |        | 2,263                                         | ** ** | **23,751** |   | 6,704 |   |
| Net income                                                              | ** ** | **$**                                                                | **24,654**  |                                          | $          | 3,393 | ** ** | **$** | **36,841** |   | $ | 10,028 |   |
|                                                                    | ** ** | ** **                                                           |        |                                          | ** ** | ** ** |   |   |   |
| *Per share data:*                                                       | ** ** | ** **                                                           |        |                                          | ** ** | ** ** |   |   |   |
| Income per common share  — basic:                                  | ** ** | **$**                                                                | **0.70**    |                                          | $          | 0.10 | ** ** | **$** | **1.05** |   | $ | 0.29 |   |
| Basic weighted average  number of common shares                         | ** ** | **35,152**                                                           |        | 34,684                                        | ** ** | **35,149** |   | 34,684 |   |
| * *                                                                | ** ** | ** **                                                           |        |                                          | ** ** | ** ** |   |   |   |
| Income per common share  — diluted:                                | ** ** | **$**                                                                | **0.67**    |                                          | $          | 0.09 | ** ** | **$** | **1.01** |   | $ | 0.28 |   |
| Diluted weighted average number of common and common equivalent  shares | ** ** | **36,572**                                                           |        | 35,853                                        | ** ** | **36,527** |   | 35,840 |   |

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

1

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**AventineRenewable Energy Holdings, Inc. and SubsidiariesCondensed Consolidated Balance Sheets**
| ** **                                                                                                                                                                                                                                              | ** ** | **June 30,   2006  (Unaudited)**                  | ** **  | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                              | ** ** | **(In thousands except share amounts)** | ** **  |
| **Assets**                                                                                                                                                                                                                                              | ** ** | ** **                                                  |        |                            |       |
| Current assets                                                                                                                                                                                                                                          | ** ** | ** **                                                  |        |                            |       |
| Cash and cash equivalents                                                                                                                                                                                                                               | ** ** | **$**                                                       | **38,982**  |                            | $          | 3,750 |   |
| Accounts receivable                                                                                                                                                                                                                                     | ** ** | **57,141**                                                  |        | 46,625                          |       |
| Inventories                                                                                                                                                                                                                                             | ** ** | **73,694**                                                  |        | 54,651                          |       |
| Prepaid expenses and other                                                                                                                                                                                                                              | ** ** | **3,888**                                                   |        | 5,147                           |       |
| Total current  assets                                                                                                                                                                                                                                   | ** ** | **173,705**                                                 |        | 110,173                         |       |
| Property, plant  and equipment, net                                                                                                                                                                                                                     | ** ** | **72,366**                                                  |        | 42,856                          |       |
| Restricted cash  for plant expansion                                                                                                                                                                                                                    | ** ** | **33,814**                                                  |        | 60,362                          |       |
| Other assets                                                                                                                                                                                                                                            | ** ** | **9,591**                                                   |        | 8,586                           |       |
| Total assets                                                                                                                                                                                                                                            | ** ** | **$**                                                       | **289,476** |                            | $          | 221,977 |   |
|                                                                                                                                                                                                                                                    |       |                                                        |        |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                          |       |                                                        |        |                            |       |
| Current  liabilities                                                                                                                                                                                                                                    |       |                                                        |        |                            |       |
| Accounts payable                                                                                                                                                                                                                                        | ** ** | **$**                                                       | **74,216**  |                            | $          | 51,528 |   |
| Accrued liabilities                                                                                                                                                                                                                                     | ** ** | **6,407**                                                   |        | 6,877                           |       |
| Accrued income taxes                                                                                                                                                                                                                                    | ** ** | **7,427**                                                   |        | 376                             |       |
| Short-term borrowings                                                                                                                                                                                                                                   | ** ** | **—**                                                  |        | 1,514                           |       |
| Total current  liabilities                                                                                                                                                                                                                              | ** ** | **88,050**                                                  |        | 60,295                          |       |
| Senior secured  floating rate notes                                                                                                                                                                                                                     | ** ** | **160,000**                                                 |        | 160,000                         |       |
| Deferred taxes                                                                                                                                                                                                                                          | ** ** | **6,082**                                                   |        | 6,703                           |       |
| Minority  interest                                                                                                                                                                                                                                      | ** ** | **9,865**                                                   |        | 8,675                           |       |
| Other long-term  liabilities                                                                                                                                                                                                                            | ** ** | **6,240**                                                   |        | 6,958                           |       |
| Total  liabilities                                                                                                                                                                                                                                      | ** ** | **270,237**                                                 |        | 242,631                         |       |
| Stockholders’  equity                                                                                                                                                                                                                              |       |                                                        |        |                            |       |
| Common stock, par value $0.001 per share;  185,000,000 shares authorized; 35,152,688 and 35,145,253 shares issued and  outstanding as of June 30, 2006 and December 31, 2005, respectively, net of  21,179,025 held in treasury as of December 31, 2005 | ** ** | **35**                                                      |        | 35                              |       |
| Preferred stock, 50,000,000 shares authorized, no  shares issued or outstanding                                                                                                                                                                         | ** ** | **—**                                                  |        | **—**                      |       |
| Additional paid-in capital                                                                                                                                                                                                                              | ** ** | **7,243**                                                   |        | 4,191                           |       |
| Retained earnings/(deficit)                                                                                                                                                                                                                             | ** ** | **12,828**                                                  |        | (24,013                         | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                    | ** ** | **(867**                                                    | **)**       | (867                            | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                        | ** ** | **19,239**                                                  |        | (20,654                         | )          |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                                        | ** ** | **$**                                                       | **289,476** |                            | $          | 221,977 |   |

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

2

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**AventineRenewable Energy Holdings, Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows**(Unaudited)
| ** **                                                                         | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(In thousands)**                           | ** ** |
| Operating  Activities                                                              | ** ** | ** **                                        |       |   |   |
| Net income                                                                         | ** ** | **$**                                             | **36,841** |   | $ | 10,028 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: | ** ** | ** **                                        |       |   |   |
| Depreciation and amortization                                                      | ** ** | **2,765**                                         |       | 1,809 |   |
| Minority interest                                                                  | ** ** | **2,917**                                         |       | 1,317 |   |
| Stock-based compensation expense                                                   | ** ** | **3,053**                                         |       | 54 |   |
| Other                                                                              | ** ** | **(656**                                          | **)**      | **—** |   |
| Changes in operating assets and liabilities:                                       | ** ** | ** **                                        |       |   |   |
| Accounts receivable, net                                                           | ** ** | **(10,516**                                       | **)**      | 10,059 |   |
| Inventories                                                                        | ** ** | **(19,043**                                       | **)**      | (2,842 | ) |
| Accounts payable and other liabilities                                             | ** ** | **29,269**                                        |       | 1,393 |   |
| Other                                                                              | ** ** | **(1,095**                                        | **)**      | (2,451 | ) |
| Net cash  provided by operating activities                                         | ** ** | **43,535**                                        |       | 19,367 |   |
|                                                                               | ** ** | ** **                                        |       |   |   |
| **Investing  Activities**                                                          | ** ** | ** **                                        |       |   |   |
| Additions to property,  plant and equipment                                        | ** ** | **(31,610**                                       | **)**      | (5,531 | ) |
| Increase in  restricted cash for investing activities                              | ** ** | **(1,110**                                        | **)**      | (814 | ) |
| Use of  restricted cash for plant expansion                                        | ** ** | **27,658**                                        |       | **—** |   |
| Other                                                                              | ** ** | **—**                                        |       | 1,500 |   |
| Net cash used  for investing activities                                            | ** ** | **(5,062**                                        | **)**      | (4,845 | ) |
|                                                                               | ** ** | ** **                                        | ** ** |   |   |
| **Financing  Activities**                                                          | ** ** | ** **                                        |       |   |   |
| Net repayments  on revolving credit facilities                                     | ** ** | **(1,514**                                        | **)**      | (12,791 | ) |
| Distributions to  minority shareholders                                            | ** ** | **(1,727**                                        | **)**      | (1,295 | ) |
| Net cash used  for financing activities                                            | ** ** | **(3,241**                                        | **)**      | (14,086 | ) |
| Net increase in  cash and cash equivalents                                         | ** ** | **35,232**                                        |       | 436 |   |
| Cash and cash  equivalents at beginning of period                                  | ** ** | **3,750**                                         |       | 7,151 |   |
| Cash and cash  equivalents at end of period                                        | ** ** | **$**                                             | **38,982** |   | $ | 7,587 |   |

The accompanying notesare an integral part of these condensed consolidated financial statements.

3

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**AventineRenewable Energy Holdings, Inc. and SubsidiariesNotes to Unaudited Condensed Consolidated Financial Statements**

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

The accompanyingunaudited condensed consolidated financial statements include the accounts ofAventine Renewable Energy Holdings, Inc. and its subsidiaries, which arecollectively referred to as “Aventine”, the “Company”, “we”, “our” or “us”, unless the context otherwiserequires.  All significant intercompanytransactions have been eliminated in consolidation.

We have prepared the unaudited condensed consolidatedfinancial statements included herein pursuant to the rules and regulations ofthe Securities 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 we believethat the disclosures are adequate to make the information presented notmisleading.  These financial statementsshould be read in conjunction with the financial statements and notes theretofor the year ended December 31, 2005 included in our Registration Statement onForm S-1, beginning on page F-1 (Registration No. 333-132860), originally filedwith the SEC on March 30, 2006 and subsequently amended.

The accompanyingcondensed consolidated financial statements presented herewith reflect alladjustments (consisting of only normal and recurring adjustments) which, in theopinion of management, are necessary for a fair presentation of the results ofoperations for the three and six month periods ended June 30, 2006 and2005.  The results of operations forinterim periods are not necessarily indicative of results to be expected for anentire year.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer materially from those estimates.

As of June 30, 2006, the Company’s Summary ofSignificant Accounting Policies for the year ended December 31, 2005, which aredetailed in the Company’s Registration Statement on Form S-1 beginning on pageF-9, have not changed from December 31, 2005, except for the adoption ofStatement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS123(R)”), *Share-Based Payment*and the adoption ofStatement of Financial Accounting Standards No. 151 (“SFAS 151”), *Inventory Costs, an amendment of ARB No. 43, Chapter 4*.  See Notes 2 and 4 for additional informationregarding the adoption of these Statements by the Company.

Certainreclassifications have been made to prior year amounts to conform to thecurrent year presentation with no effect on previously reported net income.

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**(2)           Inventories**

Inventories are asfollows:

|                    | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **(In thousands)**     | ** ** |
| Finished  products | ** ** | **$**                       | **69,285** |                            | $          | 50,828 |   |
| Work-in-process    | ** ** | **1,013**                   |       | 1,100                           |       |
| Raw materials      | ** ** | **2,236**                   |       | 1,343                           |       |
| Supplies           | ** ** | **1,160**                   |       | 1,380                           |       |
| Totals             | ** ** | **$**                       | **73,694** |                            | $          | 54,651 |   |

 

InNovember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS 151 to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and spoilage. SFAS 151 requires that these costs be recognized as current-periodcharges.  In addition, this Statementrequires that allocation of fixed production overheads be based on the normalcapacity of the production facilities. SFAS 151 was effective for inventory costs incurred for fiscal yearsbeginning after June 15, 2005.  TheCompany adopted SFAS 151 on January 1, 2006. The adoption of this Statement did not have a material impact on ourinterim condensed consolidated financial statements.

**(3)           Earnings Per Share**

Basic earnings per share are computed by dividing net income by theweighted average number of common shares outstanding during each period.  Diluted earnings per share are calculatedusing the treasury method in accordance with Statement of Financial AccountingStandards No. 128 (“SFAS 128”), *Earnings Per Share*,and includes the effect of all dilutive securities, including non-qualifiedstock options.

The followingtable sets forth the computation of basic and diluted earnings per share:
| ** **                                                  | ** ** | **Three months ended**                                   | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **June 30,**                                                  | ** ** | **June 30,**              | ** ** |
| ** **                                                  | ** ** | **2006**                                                           | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **(In thousands, except per share data)** | ** ** |
| Net income                                                  | ** ** | **$**                                                              | **24,654** |                           | $          | 3,393 | ** ** | **$** | **36,841** |   | $ | 10,028 |   |
|                                                        | ** ** | ** **                                                         |       |                           | ** ** | ** ** |   |   |   |
| Weighted average  shares and share equivalents outstanding: | ** ** | ** **                                                         |       |                           | ** ** | ** ** |   |   |   |
| Basic shares                                                | ** ** | **35,152**                                                         |       | 34,684                         | ** ** | **35,149** |   | 34,684 |   |
| Dilutive  non-qualified stock options                       | ** ** | **1,420**                                                          |       | 1,169                          | ** ** | **1,378** |   | 1,156 |   |
| Diluted weighted  average shares and share equivalents      | ** ** | **36,572**                                                         |       | 35,853                         | ** ** | **36,527** |   | 35,840 |   |
|                                                        | ** ** | ** **                                                         |       |                           | ** ** | ** ** |   |   |   |
| Income per  common share - basic:                           | ** ** | **$**                                                              | **0.70**   |                           | $          | 0.10 | ** ** | **$** | **1.05** |   | $ | 0.29 |   |
| Income per common share  - diluted:                         | ** ** | **$**                                                              | **0.67**   |                           | $          | 0.09 | ** ** | **$** | **1.01** |   | $ | 0.28 |   |

 

5

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

As of December 31,2005, we maintained one stock-based compensation plan, the Aventine RenewableEnergy Holdings, Inc. 2003 Stock Incentive Plan (the “Plan”).  Effective January 1, 2006, the Companyadopted SFAS 123(R) utilizing the modified prospective transition method.  SFAS 123(R) requires the measurement andrecognition of compensation expense for all share-based payment awards made toemployees and directors, including stock options and non-vested stock, based ontheir fair values at the time of grant. The Company’s financial statements for the three and six month periodsended June 30, 2006 reflect the impact of adopting SFAS 123(R).

The Plan wasadopted by the Board of Directors (the “Board”) effective May 30, 2003, and wasamended on each of September 6, 2005 and on December 12, 2005.  The Plan provides for the grant of awards inthe form of stock options, restricted shares or units, stock appreciationrights and other equity-based awards to directors, officers, employees andconsultants at the discretion of the Board or the Compensation Committee of theBoard.  Expiration of awards isdetermined by the Board or by the Compensation Committee of the Board, butcannot exceed ten years from the date of grant. The maximum number of shares of common stock that may be issued underthe plan is limited to 5,001,172, provided that no more than 750,000 shares maybe granted in the form of stock options or stock appreciation rights to any “coveredemployee” (as defined under Section 162(m) of the Internal Revenue Code) in anycalendar year.  Unless terminated sooner,the Plan will continue in effect until May 29, 2013.

In conjunctionwith an equity offering and related stock split of 805.47131 to 1 sharescompleted in December 2005, all then existing option awards were adjusted toreflect the stock split as permitted by the Plan.  The modification resulted in an increase inthe number of options outstanding in a ratio of 805.47131 to 1.  The exercise price of the options was alsoadjusted downward by this same 805.47131 to 1 ratio.  The fair value of the awards immediatelyafter the adjustment did not exceed the fair value of the awards immediatelybefore the adjustment.  Therefore, noadditional compensation expense was recognized as a result of the modification.

Upon adoption of SFAS123(R), the Company elected to value its share-based payment awards grantedbeginning in fiscal year 2006 using the Black-Scholes option-pricing model (“Black-Scholesmodel”), which was previously used in determining stock-based compensation costusing the minimum value method as outlined in Statement of Financial AccountingStandards No. 123 (“SFAS 123”), *Accounting for Stock-BasedCompensation*.  TheBlack-Scholes model was developed for use in estimating the fair value oftraded options that have no vesting restrictions and are fullytransferable.  The Black-Scholes modelrequires the input of certain assumptions. The determination of fair value of share-based payment awards on thedate of grant using the Black-Scholes model is affected by our stock price aswell as the input of other subjective assumptions.  The option-pricing model requires a number ofassumptions, of which the most significant are, expected stock pricevolatility, the expected pre-vesting forfeiture rate and the expected optionterm (the amount of time from the grant date until the options are exercised orexpire).  Expected volatility is normallycalculated based upon actual historical stock price movements over the expectedoption term.  Since we have no history ofstock price 

6

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volatility as a public company, we calculatedvolatility by considering, among other things, the expected volatilities ofpublic companies engaged in similar industries. Expected pre-vesting forfeitures are based on actual historicalpre-vesting forfeitures.  The expectedoption term is calculated using the “simplified” method permitted by SAB 107.  Our options have characteristicssignificantly different from those of traded options, and changes in theassumptions can materially affect the fair value estimates.

The adoption ofSFAS 123(R) resulted in stock-based compensation expense for the three and sixmonth periods ended June 30, 2006 of approximately $1.7 million and $3.0million, respectively, all of which was recorded to selling, general andadministrative expense.  This expensereduced earnings per share by $0.05 per basic and diluted share for the quarterended June 30, 2006 and by $0.09 per basic share and $0.08 per diluted sharefor the six months ended June 30, 2006. The Company recognized a tax benefit from stock-based compensationexpense of $0.7 million and $1.2 million for the three and six month periodsended June 30, 2006 related to stock-based compensation expense.  The Company recorded pre-tax stock-basedcompensation expense for the three and six month periods ended June 30, 2006 asfollows:

|                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| ** **                         | ** ** | **(in millions)**           | ** ** |
| Stock-based  compensation expense: |       |                             |       |                           |       |
| Unqualified stock options          |       | $                                | 1.7        |                           | $          | 3.0 |   |
| Restricted stock                   |       | —                           |       | —                         |       |
|                                    |            |                                  |            |                                |            |  |  |

 

Effective January1, 2004, the Company adopted the fair value provisions of Statement ofFinancial Accounting Standards No. 123, *Accounting for Stock-basedCompensation*, using the modified prospective method as permittedunder the provisions of Statement of Accounting Standards No. 148 (“SFAS 148”),*Accounting for Stock-Based Compensation —Transition and Disclosure*, (hereinafter called “SFAS 123”).  For the three and six months ended June 30,2005, the amount of compensation expense recognized by the Company in itscondensed consolidated statement of operations was immaterial.  The Company utilized the minimum value methodas permitted by SFAS 123 in calculating option expense.

Prior to theadoption of SFAS 123(R), the Company presented any tax benefits of deductionsresulting from the exercise of stock options within operating cash flows in thecondensed consolidated statements of cash flows.  SFAS 123(R) requires tax benefits resultingfrom tax deductions in excess of the compensation cost recognized for thoseoptions to be classified and reported as both an operating cash outflow and afinancing cash inflow upon adoption of SFAS 123(R).

As of June 30,2006, the Company had not yet recognized compensation expense on the followingnon-vested awards:

7

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|                        | ** ** | **Non-vested  Compensation** | ** ** | **Average Remaining  Recognition Period  (years)** | ** ** |
|------------------------|------------|------------------------------|------------|--------------------------------------------------------------|------------|
| ** **             | ** ** | **(in thousands)**      | ** ** |
| Non-qualified  options |       | $                            | 23,136     |                                                         | 3.4        |   |
| Restricted stock       |       | 185                          |       | 2.8                                                          |       |
| Total                  |       | $                            | 23,321     |                                                         | 3.4        |   |

 

The Companygranted new stock options during the second quarters of 2006 and 2005.  The determination of the fair value of thestock option awards, using the Black-Scholes model, incorporated theassumptions in the following table for stock options granted during the threemonth periods ended June 30, 2006 and 2005. The risk-free rate is based on the U.S. Treasury yield curve in effectat the time of grant over the expected term. Expected volatility is calculated by considering, among other things,the expected volatilities of public companies engaged in similar industries.  The expected option term is calculated using the“simplified” method permitted by SAB 107:

|                                  | ** ** | **Three Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **June 30,**                | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Expected stock  price volatility |       | 58                               | %          | .01 | % |
| Expected life  (in years)        |       | 6.5                              |       | 3 |   |
| Risk-free  interest rate         |       | 4.9                              | %          | 3.8 | % |
| Expected dividend  yield         |       | 0                                | %          | 0 | % |
| Weighted average fair  value     |       | $                                | 13.77      |   | $ | 12.51 |   |
|                                  |            |                                  |            |  |  |  |  |

 

 The following table summarizes stock optionsoutstanding and changes during the quarterly period ended June 30, 2006:

|                                           | ** ** | **Shares  (in thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life  (years)** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| Options  outstanding - March 31, 2006     |       | 2,864                           |       | $                                      | 2.05       |                                            | 7.0        |                                                     | $          | 55,705 |   |
| Granted                                   |       | 590                             |       | 22.50                                  |       | 9.8                                             |       | 9,765                                                    |       |
| Exercised                                 |       | —                          |       | —                                 |       | —                                          |       | —                                                   |       |
| Cancelled or  expired                     |       | —                          |       | —                                 |       | —                                          |       | —                                                   |       |
| Options  outstanding — June 30, 2006 |       | 3,454                           |       | $                                      | 5.52       |                                            | 8.4        |                                                     | $          | 115,813 |   |
| Options exercisable —  June 30, 2006 |       | 781                             |       | $                                      | 0.75       |                                            | 7.3        |                                                     | $          | 29,912 |   |

 

The range ofexercise prices of the exercisable options and outstanding options at June 30,2006 are as follows:

 

8

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| Weighted Average Exercise Price | ** ** | **Number of  Exercisable  Options** | ** ** | **Number of  Outstanding  Options** | ** ** | **Weighted  Average  Remaining  Life  (years)** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------|------------|
| $0.23 - $0.23                                  |       | 657,616                                  |       | 1,322,935                                |       | 7.0                                             |       |
| $2.36 - $2.92                                  |       | 51,668                                   |       | 746,200                                  |       | 8.9                                             |       |
| $4.35 - $4.35                                  |       | 71,488                                   |       | 794,194                                  |       | 9.3                                             |       |
| $22.50 - $22.50                                |       | —                                   |       | 590,000                                  |       | 9.8                                             |       |
| Totals                                         |       | 780,772                                  |       | 3,453,329                                |       | 8.4                                             |       |

 

Restricted stockaward activity for the three months ended June 30, 2006 is summarized below: 

|                                                    | *** *** | **Shares***(in thousands)* | ** ** | **Weighted  Average  Grant Date  Fair Value  per Award** | ** ** |
|----------------------------------------------------|--------------|---------------------------------|------------|-------------------------------------------------------------------------|------------|
| Unvested Restricted  stock awards - March 31, 2006 |         | —                          |       | $                                                                       | —     |   |
| Granted                                            |         | 7                               |       | 26.90                                                                   |       |
| Vested                                             |         | —                          |       | —                                                                  |       |
| Cancelled or expired                               |         | —                          |       | —                                                                  |       |
| Restricted stock awards — June 30, 2006       |         | 7                               |       | $                                                                       | 26.90      |   |

 

**(5)****                                 InterestExpense**

The followingtable summarizes interest expense:

|                       | ** ** | **Three months ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **            | ** ** | **(in thousands)**                             | ** ** |
| Interest expense      | ** ** | **$**                                               | **4,783**  |                                              | $          | 4,095 | ** ** | **$** | **9,362** |   | $ | 7,963 |   |
| Capitalized interest  | ** ** | **(547**                                            | **)**      | —                                            | ** ** | **(761** | **)** | — |   |
| Interest expense, net | ** ** | **$**                                               | **4,236**  |                                              | $          | 4,095 | ** ** | **$** | **8,601** |   | $ | 7,963 |   |

 

**(6)           Debt**

The following table summarizes long-term debt:

|                                                        | ** ** | **June 30, 2006** | ** **  | **December 31, 2005** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| ** **                                             | ** ** | **(In thousands)**     | ** **  |
| Senior secured floating  rate notes, due December 2011 | ** ** | **$**                       | **160,000** |                            | $          | 160,000 |   |
| Secured revolving  credit facility                     | ** ** | **—**                  |        | 1,514                           |       |
|                                                   | ** ** | **160,000**                 |        | 161,514                         |       |
| Less short-term  borrowings                            | ** ** | **—**                  |        | (1,514                          | )          |
| Total                                                  | ** ** | **$**                       | **160,000** |                            | $          | 160,000 |   |

 

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*Liquidity Facility*

Our liquidityfacility consists of a secured revolving credit facility with JP MorganChaseBank of up to $60 million.  Our seniorsecured floating rate notes and liquidity facility have cross defaultprovisions.  As of June 30, 2006, we werein compliance with the covenants contained in both our debt and liquidityfacilities.

We had noborrowings outstanding under our secured revolving credit facility at June 30,2006, and $2.2 million of standby letters of credit outstanding, leavingapproximately $57.8 million in additional borrowing availability under oursecured revolving credit facility as of that date.  As of December 31, 2005, we had $1.5 millionoutstanding under our secured revolving credit facility and $6.4 million ofstandby letters of credit outstanding, leaving approximately $52.1 million inadditional borrowing availability under the secured revolving credit facilityas of that date.

*Senior Secured Floating RateNotes*

In December 2004,we issued $160 million of senior secured floating rate notes (“Notes”).  Our Notes were issued pursuant to anindenture, dated as of December 17, 2004, between us and Wells Fargo Bank,N.A., as trustee.  Our Notes:

·                  haveinterest payments due quarterly on March 15, June 15, September 15 and December15 of each year beginning March 2005.

·                  areredeemable after the dates and at prices (expressed in percentages of principalamount on the redemption date), as set forth below:

| Year              | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------|------------|------------|------------|----------------|------------|
| December 16, 2006 |       | 103.0      | %          |
| December 16, 2007 |       | 102.0      | %          |
| December 16, 2008 |       | 101.0      | %          |
| December 16, 2009 |       | 100.0      | %          |

 

·                  aresecured by a priority lien on the assets of our Pekin, IL facility and therelated expansion escrow account (which funds are restricted for use solely tofund the plant expansion at Pekin, IL).

·                  areunconditionally guaranteed by Aventine Renewable Energy, LLC (a first tiersubsidiary of the Company) and all of its present and future subsidiaries(excluding our Nebraska production facility until 100% ownership is acquired).

·                  aresecured on a subordinated basis by the assets that secure our revolving creditfacility.

·                  aresubject to the terms of the indenture governing our Notes, which containscertain restrictive covenants that, among other things, limits our ability toincur additional debt, sell or transfer assets, make investments or guarantees,enter into transactions with shareholders and affiliates, and pay futuredividends.

As part of thenote offering, the Company agreed to file a registration statement to effect anexchange offer and registration relating to the Notes on or prior to June 30,2006.  The 

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Company filed thisregistration statement on April 3, 2006. In the event that such an exchange offer was not consummated by June 30,2006, the interest rate on the Notes increases by 25 basis points, up to amaximum additional 100 basis points, for each subsequent 90-day period.  Additionally, as part of the debt offering,the Company agreed to the terms of an escrow agreement, whereby $62.5 millionof the net proceeds of the debt offering was to be restricted and used only tofund expansion of the Pekin, IL ethanol facility.

The interest rateapplicable to the floating rate notes at June 30, 2006 was 11.58%.  The interest rate on the notes in effect atDecember 31, 2005 was 10.49%

**(7)           Industry Segment**

The Companyoperates in one reportable business segment, the manufacture and marketing offuel-grade ethanol.

**(8)           Pension Expense**

*Defined Contribution Plans*

We have 401(k)plans covering substantially all of our employees.  We recorded expense with respect to theseplans of $0.3 million for each of the three month periods ended June 30, 2006and 2005 and expense of $0.6 million and $0.5 million for the six month periodsended June 30, 2006 and 2005, respectively. Contributions made under our defined contribution plans include a match,at the Company’s discretion, of employee salaries contributed to the plans.

### *QualifiedRetirement Plan*

The Companyprovides a non-contributory qualified defined benefit pension plan for itsunionized employees at its Pekin, IL production facility.  The following table summarizes the componentsof net periodic pension cost for the qualified pension plan:

|                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(In thousands)**                             | ** ** |
| Service cost                        | ** ** | **$**                                               | **71**     |                                              | $          | 69 | ** ** | **$** | **142** |   | $ | 138 |   |
| Interest cost                       | ** ** | **107**                                             |       | 104                                               | ** ** | **215** |   | 208 |   |
| Expected return on plan  assets     | ** ** | **(128**                                            | **)**      | (122                                              | )          | **(256** | **)** | (244 | ) |
| Amortization of net  actuarial loss | ** ** | **12**                                              |       | —                                            | ** ** | **24** |   | 1 |   |
| Net periodic pension cost           | ** ** | **$**                                               | **62**     |                                              | $          | 51 | ** ** | **$** | **125** |   | $ | 103 |   |

###  

### *PostretirementBenefit Obligation*

The followingtable summarizes the components of the net periodic costs for postretirementbenefits:

11

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|                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(In thousands)**                             | ** ** |
| Service cost                        | ** ** | **$**                                               | **54**     |                                              | $          | 47 | ** ** | **$** | **108** |   | $ | 93 |   |
| Interest cost                       | ** ** | **44**                                              |       | 39                                                | ** ** | **88** |   | 79 |   |
| Amortization of prior  service cost | ** ** | **15**                                              |       | 13                                                | ** ** | **30** |   | 26 |   |
| Net periodic pension cost           | ** ** | **$**                                               | **113**    |                                              | $          | 99 | ** ** | **$** | **226** |   | $ | 198 |   |

 

**(9)           Litigation**

Our facilities andoperations are subject to extensive environmental laws and regulations, and weare currently involved in various proceedings relating to environmentalmatters.  We are not involved in anylegal proceedings that we believe could have a material adverse effect upon ourbusiness, operating results or financial condition.

**(10)         Subsequent Events**

Effective July 5,2006, we completed an initial public offering of 9,058,450 shares of our commonstock, $0.001 par value, at a gross per share price of $43.00 (the “initialpublic offering”).  The Company sold6,410,256 shares and received approximately $261.9 million in net proceeds fromthis initial public offering.  Existingshareholders and management also sold 2,648,194 shares of common stock duringthe initial public offering, which includes 268,707 shares issued from theexercise of outstanding options. Immediately following our initial public offering, we had 41,831,651shares of common stock issued and outstanding. There were also approximately 3.4 million potentially dilutive commonstock equivalents (“CSE”) shares outstanding. The actual number of these potentially dilutive CSE’s that would beconsidered as being dilutive on a go-forward basis (and included in dilutiveearnings per share) is dependent upon a number of factors, including the actualaverage quarterly share price and the number of shares considered as beingrepurchased under the treasury method as described in SFAS 128.

As a result of theinitial public offering, we anticipate recording a pre-tax charge of $0.3million to earnings in the quarter ended September 30, 2006.

In anticipation of our initial public offering, onJune 6, 2006, our Board gave contingent approval of the acceleration of vestingof 71,488 options held by officers and employees to be effective immediatelyprior to the consummation of the initial public offering.  The Board approved the acceleration of thevesting in order to permit certain members of management the ability to sellstock in our initial public offering. These options had a weighted-average exercise price of $4.35.  As a result of the accelerated vesting, weanticipate recording a pre-tax charge of $0.6 million to earnings in thequarter ended September 30, 2006.

On July 13, 2006,we paid $164.6 million (including premiums and accrued interest) from the fundsreceived in our initial public offering to fund the repurchase of $155.0million aggregate principal amount of our senior secured floating rate notes (“Notes”)from our cash tender offer commenced on June 14, 2006.  In conjunction with the Notes tendered, theCompany received the required consents to approve the proposed amendments tothe indenture under which the Notes were issued, and the related existingsecurity documents.  We delivered the 

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supplemental indentureand amendments to the security agreement, which were effective July 13, 2006,approved as a result of the solicitation of consents in connection with thecash tender offer.  The amendments to theindenture and existing security documents (i) substantially eliminated most ofthe restrictive covenants and certain events of default contained in the Noteindenture, and (ii) released all of the collateral securing the Notes asdetailed in the corresponding security documents.  Approximately 97% of the outstanding Noteswere tendered.

As a result of thetender of the Notes, the Company anticipates recording a pre-tax charge in thethird quarter ending September 30, 2006 of approximately $13.2 million which iscomprised of (i) the tender and consent premiums and related fees and expenses,and (ii) the write-off of unamortized debt issuance costs.

In conjunctionwith the tender of our Notes, on July 10, 2006, we terminated the interest ratecap transaction on $120 million of our Notes, resulting in a non-incomeimpacting receipt of cash totaling approximately $0.8 million in connectionwith the termination of our interest rate cap transaction.

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

*Thisreport contains forward-looking statements made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include allstatements that do not relate solely to current or historical fact, but addressevents or developments that we anticipate will occur in the future.  Forward-looking statements include statementsregarding our goals, beliefs, plans or current expectations, taking intoaccount the information currently available to our management.  When we use words such as “anticipate,” “intend,”“expect,” “believe,” “plan,” “may,” “should” or “would” or other words thatconvey uncertainty of future events or outcome, we are making forward-lookingstatements.  Statements relating tofuture sales, earnings, operating performance, restructuring strategies,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.  We undertakeno 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 the caption “Risk Factors” in our Registration Statement filedon Form S-1.  You should carefullyconsider all of the risks and all other information contained in orincorporated by reference in this report and in our filings with the SEC.  These risks are not the only ones weface.   Additional risks anduncertainties not presently known to us, or which we currently considerimmaterial, also may adversely affect us. If any of these risks actually occur, our business, financial conditionand results of operations could be materially and adversely affected.*

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**Company Overview**

Aventine is aleading producer and marketer of ethanol. Through our own production facilities, marketing alliances with otherethanol producers and our purchase and resale operations, we market anddistribute ethanol to many of the leading energy companies in the U.S.  We have a comprehensive national distributionnetwork utilizing a leased railcar fleet and a terminal network at criticalpoints on the nation’s transportation grid where our ethanol is blended withour customers’ gasoline.  In addition toproducing ethanol, our facilities also produce several co-products including:corn gluten feed and meal, corn germ, condensed corn distillers solubles, drieddistillers grain with solubles, wet distillers grain with solubles, carbondioxide and brewers’ yeast.

**Results of Operations**

The following discussion summarizes the significantfactors affecting the consolidated operating results of the Company for thethree and six month periods ended June 30, 2006 and 2005.  This discussion should be read in conjunctionwith the unaudited condensed consolidated financial statements and notes to theunaudited condensed consolidated financial statements contained in Item 1 above,and the consolidated financial statements and related notes for the year endedDecember 31, 2005 included in the Company’s Registration Statement on Form S-1.

Our revenues are derived from the sale of ethanol andfrom the sale of co-products (corn gluten feed and meal, corn germ, condensedcorn distillers solubles, carbon dioxide, DDGS (dry distillers grain withsolubles) and WDGS (wet distillers grains with solubles)) and bio-products(brewers’ yeast) that we produce as by products during the production ofethanol at our plants, which we refer to as co-product revenues.  We sell ethanol obtained from the followingsources:

·                  Ethanol wemanufacture at our plants;

·                  Ethanol wepurchase from our marketing alliance partners; and

·                  Ethanol wepurchase on the spot market.

We market and sell ethanol without regard to whetherwe produced it, are marketing it for our marketing alliance partners orpurchased it on the spot market for resale.

*Executive Summary*

We generated net income****of$24.7 million, or $0.67 per diluted share in the second quarter of 2006, ascompared to $3.4 million, or $0.09 per diluted share, in the second quarter of2005.  This 626.5% increase in net incomeand 644.4% increase in earnings per share is mainly the result of pricing gainscaused by the significant rise in the price per gallon of ethanol.  The average sales price per gallon of ethanolin the second quarter of 2006 was $2.41 per gallon, up from $1.38 per gallon inthe second quarter of 2005.

The increase inthe price of ethanol is primarily due to unprecedented demand for ethanol,created by a number of factors, including the elimination of methyltertiary-butyl ether (“MTBE”) as an oxygenate and the current price forgasoline.  Gallons of ethanol sold in the

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second quarter of 2006increased 39.7% to 176.3 million gallons, as compared to 126.2 million gallonsin the second quarter of 2005.  Theincrease in gallons sold is mainly due to additional purchases from alliancepartners, increased purchases from non-affiliated producers and marketers andfrom a 10.5 million gallon reduction of ethanol carried in inventory.  For the six months 2006 versus 2005, gallonsof ethanol sold increased 40.7%, to 341.1 million gallons.

Sales in thesecond quarter of 2006 were $442.9 million, which is a 131.9% increase over thesecond quarter of 2005.  The increase insales is mostly the result of the increased pricing and the increase in gallonssold.  The increases in price and gallonssold, along with relatively stable corn costs, helped gross profit increase to$50.2 million in the second quarter of 2006, a 261.2% increase over the sameperiod in 2005.  Gross corn costs for thesecond quarter of 2006 were $2.27 per bushel as compared to $2.11 per bushel inthe second quarter of 2005.

Cash generatedfrom operations in the first six months of 2006 was $43.5 million as comparedto $19.4 million in the same six month period in 2005.

*Expected Third Quarter Charges*

As a result of ourinitial public offering completed on July 5, 2006, we anticipate recording apre-tax charge of $0.3 million to earnings in the quarter ended September 30,2006 related to the initial public offering.

In anticipation of our initial public offering, onJune 6, 2006, our Board gave contingent approval of the acceleration of vestingof 71,488 options held by officers and employees to be effective immediatelyprior to the consummation of the initial public offering.  The Board approved the acceleration of thevesting in order to permit certain members of management the ability to sellstock in our initial public offering. These options had a weighted-average exercise price of $4.35.  As a result of the accelerated vesting, weanticipate recording a pre-tax charge of $0.6 million to earnings in thequarter ended September 30, 2006.

As a result of thetender of the Company’s senior secured floating rate notes on July 13, 2006, weanticipate recording a pre-tax charge in the third quarter ending September 30,2006 of approximately $13.2 million which is comprised of (i) the tender and consentpremiums and related fees and expenses, and (ii) the write-off of unamortizeddebt issuance costs.

*Share-based Compensation Expense*

Effective January 1,2006, we adopted, on a modified prospective transition method, SFAS 123(R),which requires measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors, including stockoptions, based on fair values.  Ourfinancial statements for the three and six month periods ended June 30, 2006reflect the impact of adopting SFAS 123(R). In accordance with the modified prospective transition method, ourfinancial statements for prior periods have not been restated to reflect, anddo not include, the impact of SFAS 123(R). Share-based compensation expense recognized is based on the value of theportion of share-based payment awards that is ultimately expected to vest.  Share-based compensation expense recognizedin our Condensed Consolidated Statements 

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of Operations for the three and six month periods endedJune 30, 2006 included compensation expense for unvested share-based paymentawards granted prior to December 31, 2005, based on the grant date fair valueestimated in accordance with the minimum value method as outlined in SFAS 123,and compensation expense for the share-based payment awards granted subsequentto December 31, 2005 based on the grant date fair value estimated in accordancewith the provisions of SFAS 123(R).  Inconjunction with the adoption of SFAS 123(R), we elected to attribute the valueof share-based compensation to expense over the periods of requisite serviceusing the straight-line method.

Upon adoption ofSFAS 123(R), we elected to value our share-based payment awards grantedbeginning in fiscal year 2006 using the Black-Scholes model, which waspreviously used to calculate stock-based compensation expense using the minimumvalue method as outlined in SFAS 123. The determination of fair value of share-based payment awards on thedate of grant using the Black-Scholes model is affected by our stock price aswell as the input of other subjective assumptions.  The Black-Scholes model requires a number ofassumptions, of which the most significant are, expected stock pricevolatility, the expected pre-vesting forfeiture rate and the expected optionterm (the amount of time from the grant date until the options are exercised orexpire).  Expected volatility is normallycalculated based upon actual historical stock price movements over the expectedoption term.  Since we have no history ofstock price volatility as a public company, we calculated volatility byconsidering, among other things, the expected volatilities of public companiesengaged in similar industries.  Expectedpre-vesting forfeitures are estimated based on actual historical pre-vestingforfeitures for the expected option term. The expected option term is calculated using the “simplified” methodpermitted by SAB 107.  Our options have characteristicssignificantly different from those of traded options, and changes in the assumptionscan materially affect the fair value estimates.

The adoption ofSFAS 123(R) reduced earnings per share by $0.05 per basic and diluted share forthe quarter ended June 30, 2006 and by $0.09 per basic share and $0.08 perdiluted share for the six months ended June 30, 2006.

*For the Three Months Ended June30, 2006 Compared to the Three Months Ended June 30, 2005*

Salesin the second quarter of 2006 increased 131.9%, to $442.9 million as comparedto $191.0 million in the second quarter of 2005.  Overall, the increase in sales is primarilythe result of the increase in the average gross selling price of ethanol andfrom an increase in gallons sold.  Theaverage gross sales price of ethanol in the second quarter of 2006 increased to$2.41 per gallon from $1.38 per gallon in the same period a year ago, anincrease of 74.6%.  The increase in theprice of ethanol is primarily due to high demand for ethanol, created by anumber of factors, including the elimination of methyl tertiary-butyl ether (“MTBE”)as an oxygenate, and the current price of gasoline.

Gallonssold in the second quarter of 2006 increased 39.7% to 176.3 million gallons, ascompared to 126.2 million gallons in the second quarter of 2005.  In the second quarter of 2006, we produced28.9 million gallons, purchased 120.2 million gallons from our marketingalliance partners, purchased 16.7 million gallons from unaffiliated producersand marketers and decreased inventory by 10.5 million gallons.  In the second quarter of 2005, we produced35.4 million 

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gallons, purchased 72.4million gallons from our marketing alliance partners, purchased 11.9 milliongallons from unaffiliated producers and marketers and decreased inventory by6.5 million gallons.  Co-product revenuefor the second quarter of 2006 totaled $11.7 million, as compared to $15.3million in the same period a year ago.

Productionof ethanol decreased in the second quarter of 2006 by 18.4% to 28.9 milliongallons, from 35.4 million gallons in the same quarter of 2005.  Equity production was constrained in thesecond quarter of 2006 due to scheduled maintenance turnarounds at both of ourethanol production facilities.  At ourAurora, NE facility, in addition to the scheduled maintenance turnarounds, wealso experienced production constraints as the result of several unplannedequipment and process issues which negatively affected output.  Having completed our scheduled maintenance atPekin, the wet mill is operating at capacity. At our dry mill in Nebraska, however, we continue to experience ongoingyield problems which we are currently addressing.  Co-product revenue in the second quarter of2006 was negatively affected by decreased production during the second quarter.

The overallincrease in gross profit is primarily attributable to improved pricing.  The increased price for ethanol in the secondquarter of 2006 resulted in a widening of the spread between ethanol prices andcorn prices.  Our gross corn cost for thequarter ended June 30, 2006 was $2.27 per bushel, as compared to $2.11 per bushelin the same period in 2005.  Gains in thespread between the average selling price of ethanol and corn costs in thesecond quarter of 2006 were offset somewhat by increased freight and utilitycosts.

Selling,general and administrative (“SG&A”) expenses were $7.4 million in thesecond quarter of 2006 versus $4.1 million in the second quarter of 2005, anincrease of $3.3 million.  The increasein SG&A expense in the second quarter of 2006 as compared to 2005 includesthe effects of stock option expensing (SFAS 123R), which increased SG&Acosts by $1.7 million in the second quarter of 2006.  The remaining increase in SG&A costs of$1.6 million mostly reflects increased fees associated with system improvements,fees associated with complying with the internal control requirements ofSection 404 of the Sarbanes-Oxley Act of 2002, increased compensation costs,legal fees and other costs associated with being a public company.

Otheroperating income increased in the second quarter of 2006 by $0.4 million, to$0.3 million.  The increase in otheroperating income is the result of increased dividends from investments innon-consolidated ethanol producers, as well as an increase in tax creditsrelated to production of E-85 ethanol.

Interestincome in the second quarter of 2006 was $1.2 million, versus $0.5 million inthe same period in 2005.  The increase ininterest income is the result of a combination of increased short terminvestment rates due to increases in interest rates in general, along with ahigher level of investable funds due to increased cash generated fromoperations.

Interestexpense in the second quarter of 2006 was $4.2 million, as compared to $4.1million in the same period in 2005, an increase of $0.1 million or 2.4%.  The increase in interest expense reflects theimpact of year over year increases in variable interest rates, offset byinterest capitalized as a result of our Pekin, IL expansion.

 

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Othernon-operating income increased to $1.9 million in the second quarter of 2006 asa result of gains recorded on marking derivative instruments to market,primarily short positions on corn forward contracts.

Minorityinterest for the second quarter of 2006 was a charge to income of $1.7 million,as compared to $0.4 in the second quarter of 2005.  The increase reflects the improved operatingresults of our Nebraska subsidiary for the quarter ended June 30, 2006.

Taxexpense for the second quarter of 2006 was $15.8 million, or approximately39.1% of taxable income, versus $2.3 million or 40.0% of taxable income in thesame period in 2005.  Tax expense in thesecond quarter of 2006 benefited from a domestic production activitiesdeduction enacted under the American Jobs Creation Act of 2004.  The act provides for an additional deductionfrom taxable income of qualified production activities subject to certainlimitations.  The amount of the benefitreceived in the second quarter of 2006 was approximately $0.4 million.  Without this additional deduction, the taxrate for the second quarter of 2006 would have been 40.0%.

*For the Six Months Ended June 30,2006 Compared to the Six Months Ended June 30, 2005*

Sales in the firstsix months of 2006 increased 95.0%, to $756.4 million as compared to $388.0million in the first six months of 2005. Overall, the increase in sales is primarily the result of the increasein the average gross selling price of ethanol and an increase in gallonssold.  The average gross sales price ofethanol in the first six months of 2006 increased to $2.11 per gallon from$1.46 per gallon in the same period a year ago, an increase of 44.5%.  The increase in the price of ethanol isprimarily due to high demand for ethanol, created by a number of factors,including the elimination of methyl tertiary-butyl ether (“MTBE”) as anoxygenate, and the current price of gasoline.

Gallons sold inthe first half of 2006 increased 40.7% to 341.1 million gallons, as compared to242.5 million gallons in the first half of 2005.  In the first six months of 2006, we produced65.6 million gallons, purchased 240.8 million gallons from our marketingalliance partners, purchased 31.1 million gallons from unaffiliated producers andmarketers and decreased inventory by 3.6 million gallons.  In the first six months of 2005, we produced71.4 million gallons, purchased 149.5 million gallons from our marketingalliance partners, purchased 26.3 million gallons from unaffiliated producersand marketers and increased inventory by 4.7 million gallons.  Co-product revenue for the first half of 2006totaled $26.5 million, as compared to $30.2 million in the same period a yearago.

Production ofethanol decreased in the first six months of 2006 by 8.1% to 65.6 milliongallons, from 71.4 million gallons in the first six months of 2005.  Equity production was constrained in thefirst half of 2006 due to scheduled maintenance turnarounds at both of ourethanol production facilities during the second quarter.  At our Aurora, NE facility, in addition tothe scheduled maintenance turnarounds, we have also experienced productionconstraints due to several unplanned equipment and process issues whichnegatively affected output.  Havingcompleted our scheduled maintenance at Pekin, the wet mill is operating atcapacity.  At our dry mill in Nebraska,however, we continue to experience ongoing yield problems which we are 

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currentlyaddressing.  Co-product revenue in thefirst half of 2006 was negatively affected by decreased production during thefirst half of 2006.

The overallincrease in gross profit is primarily attributable to improved pricing.  The increased price for ethanol in the firstsix months of 2006 resulted from a widening of the spread between ethanolprices and corn prices.  Our gross corncost in the first half of 2006 was $2.19 per bushel, as compared to $2.08 perbushel in the first half of 2005.  Gainsin the spread between the average selling price of ethanol and corn costs inthe first half of 2006 were offset somewhat by increased freight and utilitycosts.

Selling, generaland administrative (“SG&A”) expenses were $13.6 million in the first sixmonths of 2006 versus $7.7 million in the first six months of 2005, an increaseof $5.9 million.  The increase inSG&A expense in the first half of 2006 as compared to 2005 includes theeffects of stock option expensing (SFAS 123R), which increased SG&A costsby $3.0 million in the first half of 2006. The remaining increase in SG&A costs of $2.9 million mainly reflectsincreased fees associated with system improvements, fees associated withcomplying with the internal control requirements of Section 404 of theSarbanes-Oxley Act of 2002, increased compensation costs, legal fees and othercosts associated with being a public company.

Other operatingincome increased in the first six months of 2006 to $0.6 million from $0.5million in 2005.  The increase in otheroperating income is the result of increased dividends from investments innon-consolidated ethanol producers, as well as an increase tax credits relatedto production of E-85 ethanol received in 2006, offset by collection of apreviously written off receivable collected in 2005.

Interest income inthe first half of 2006 was $1.9 million, versus $0.9 million in the same periodin 2005.  The increase in interest incomeis the result of increased short term investment rates due to increases ininterest rates in general, along with a higher level of investable funds due toincreased earnings.

Interest expensein the first six months of 2006 was $8.6 million, as compared to $8.0 millionin the same period in 2005, an increase of $0.6 million or 7.5%.  The increase in interest expense reflects theimpact of year over year increases in variable interest rates, offset byinterest capitalized as a result of our Pekin, IL expansion.

Othernon-operating income increased to $2.5 million in the first half of 2006 froman expense of $0.4 million in the first half of 2005 as a result of gainsrecorded on marking derivative instruments to market.

Taxexpense for the first half of 2006 was $23.8 million, or approximately 39.3% oftaxable income, versus $6.7 million or 40.1% of taxable income in the sameperiod in 2005.  Tax expense in the firsthalf of 2006 benefited from a domestic production activities deduction enactedunder the American Jobs Creation Act of 2004. The act provides for an additional deduction from taxable income ofqualified production activities subject to certain limitations.  The amount of the benefit received in thefirst six months of 2006 was approximately $0.5 

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million.  Without this additional deduction, the taxrate for the first half of 2006 would have been 40.1%.

**Liquidity and Capital Resources**

*Overview and Outlook*

The followingtable sets forth selected information concerning our financial condition:

| (In thousands)                     | ** ** | **June 30, 2006  (Unaudited)** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|
| * *                                | * *   | * *                                 | * *   | * *                    | * *   |
| Unrestricted  cash and cash equivalents | ** ** | **$**                                    | **38,982** |                        | $          | 3,750 |   |
| Working capital                         | ** ** | **85,655**                               |       | 49,878                      |       |
| Total debt                              | ** ** | **160,000**                              |       | 161,514                     |       |
| Current ratio                           | ** ** | **1.97**                                 |       | 1.83                        |       |
|                                         |            |                                          |            |                             |            |  |  |

 

We completed ourinitial public offering at the beginning of the third quarter of 2006.  This transaction resulted in the issuance of6,410,256 new shares, and raised approximately $261.9 million in new equity forthe Company.  Consequently, our liquidityand capital position will improve significantly from that at June 30,2006.  This, together with cash generatedfrom operations during the first six months of 2006, will significantly increaseour working capital position.

On June 14, wecommenced a cash tender offer (“Tender Offer”) for all $160 million aggregateprincipal amount of our outstanding senior secured floating rate notes due 2011(“Notes”).  In connection with thisTender Offer, we solicited consents from the holders of the Notes to proposedamendments to (i) substantially eliminate most of the restrictive covenants andcertain events of default contained in the Note indenture, and (ii) release allof the collateral securing the Notes as detailed in the corresponding securitydocuments (the “Consent Solicitation”). Approximately 97% of the outstanding aggregate amount of Notes wastendered.  On July 13, 2006, we paid$164.6 million (including premiums and accrued interest) from the fundsreceived in our initial public offering to fund the repurchase of $155.0million of Notes redeemed in the Tender Offer. We expect to redeem the remaining outstanding Notes in December 2006when they become callable.  The remainderof the net proceeds received from the initial public offering will be used forproduction expansion, and other general corporate purposes.

As a result of thecompletion of the Tender Offer, cash that was classified as restricted andearmarked for the Pekin, IL plant expansion is no longer subject to the restrictionspreviously imposed by the indenture under which the Notes were issued.  While no longer required to be segregatedunder the amended indenture, the Company intends to continue using this cashsolely for the completion of its Pekin, IL facility expansion.

On July 24,2006, Standard and Poor’s Ratings Services (“S&P”) raised its rating on ouroutstanding debt to B+ from B-, with an outlook of stable.  S&P’s expectation is that the decrease inleverage has dramatically improved our ability to service debt on a go-forwardbasis.

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With our currentcash balances (including both restricted and unrestricted), amounts availableunder our secured revolving credit facility and anticipated cash flow fromoperations, we believe that we will be able to satisfy existing anticipatedworking capital needs, debt service obligations, capital expenditure and otheranticipated cash requirements for the balance of the year.

*Sources of Liquidity*

Our principalsources of liquidity are unrestricted cash and cash equivalents, restrictedcash, cash provided by operations, and cash available under our securedrevolving credit facility.

*Unrestrictedcash and cash equivalents.* For the first six months of 2006, unrestricted cash and cash equivalentsincreased by $35.2 million.  Unrestrictedcash and cash equivalents as of June 30, 2006 and December 31, 2005 were $39.0million and $3.8 million, respectively.

*Restrictedcash*.  Restricted cashat June 30, 2006 and December 31, 2005 was $33.8 million and $60.4 million,respectively.   Restricted cash is setaside to be used solely for the expansion of our Pekin, IL facility.  The restrictions in place relative to thesefunds in accordance with the bond indenture for our senior secured floatingrate notes ceased to be applicable after completion of the Tender Offer on July13, 2006.

*Cashprovided by operations.* Net cash provided by operating activities in the first six months of2006 was $43.5****million, as compared to cashprovided by operating activities of $19.4 million for the first six months of2005.  The additional $24.1 million ofcash provided in 2006 was primarily the result of a significant increase in netincome, offset by increases in accounts receivable and inventory.  The continued increase in the price anddemand for ethanol has significantly helped our working capital position.

*CashAvailable under our liquidity facility*.  We had no borrowings outstanding under oursecured revolving credit facility at June 30, 2006 and $2.2 million of standbyletters of credit outstanding, leaving approximately $57.8 million inadditional borrowing availability under our secured revolving credit facilityas of that date.  As of December 31,2005, we had $1.5 million outstanding under our secured revolving credit facilityand $6.4 million of standby letters of credit outstanding, leavingapproximately $52.1 million in additional borrowing availability under thesecured revolving credit facility as of that date.

*Uses of Liquidity*

Our principal usesof liquidity are capital expenditures, the funding of pension obligations, andpayments related to our outstanding debt and liquidity facility.

*Capitalexpenditures.*  In thefirst six months of 2006, capital expenditures (excluding the Pekin, ILfacility expansion) totaled $5.1 million versus $5.5 million in the first sixmonths of 2005.  Capital expendituresinclude asset replacement, environmental and safety compliance and costreduction and productivity improvement items. Our capital spending plan for 2006, excluding the Pekin expansion, isforecasted to be between $15 and $20 million.

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Capitalexpenditures for the expansion of our Pekin, IL facility in the first sixmonths of 2006 totaled $26.5 million. The Pekin, IL facility expansion is fully funded from the proceeds ofour 2004 bond offering.

*Fundingof pension obligations*. For the six month periods ended June 30, 2006 and 2005, we did not makeany contributions to our U.S. qualified defined benefit pension plan.  We anticipate making payments to our pensionfund totaling $2.0 million during the second half of 2006.

*Paymentsrelated to our outstanding debt and liquidity facility.*  In the first six months of 2006, we madeinterest payments on our debt and our liquidity facility totaling $8.7 million,versus payments of $7.0 million in the first six months of 2005.  The increase in interest payments from 2005to 2006 results primarily from increases in variable interest rates, partiallyoffset by reduced borrowings in 2006 as compared to 2005.

**Environmental Matters**

We are subject tovarious stringent federal, state and local environmental laws and regulations,including those relating to the discharge of materials into the air, water andground, the generation, storage, handling, use, transportation and disposal ofhazardous materials, and the health and safety of our employees.  These laws, regulations and permits can alsorequire expensive pollution control equipment or operational changes to limitactual or potential impacts to the environment. A violation of these laws and regulations or permit conditions canresult in substantial fines, natural resource damages, criminal sanctions,permit revocations and/or facility shutdowns. We cannot assure you that we have been, are or will be at all times, incomplete compliance with these laws, regulations or permits.

We do not have anyundiscounted estimated environmental remediation costs accrued as of June 30,2006, and cannot give any assurance that the resolution of the environmentalmatters described below or any other environmental matters affecting us willnot have a material adverse effect on our results of operations or financialcondition.

From time to time,we have not been in full compliance with the wastewater and air dischargepermits for our Illinois and Nebraska facilities.  In the past, we have been subject to legalactions brought by environmental, regulatory authorities, advocacy groups andother parties for actual or alleged violations of environmental laws andregulations and certain of our environmental permits.  We have made, and expect to make, significantcapital expenditures on an ongoing basis to comply with increasingly stringentenvironmental laws, regulations and permits.

In addition, ourair emissions are subject to the federal Clean Air Act, the federal Clean AirAct Amendments of 1990 and similar state laws which generally require reductionof our emissions.  In addition toincreased costs, more stringent standards may also limit our operatingflexibility.  Because other ethanolmanufacturers will have similar restrictions, however, we believe thatcompliance with more stringent environmental laws and regulations is not likelyto 

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affect our competitiveposition.  However, these costs couldadversely affect our financial condition and results of operations and suchcosts may be material.  Federal and stateenvironmental authorities have been investigating alleged excess VOC and otherair emissions from United States ethanol plants, including our Illinois and Nebraskafacilities.  In April 2005, we enteredinto a consent decree with state authorities settling their investigation ofour Nebraska facility, which required us, among other things, to secure a newair emissions permit, install additional air pollution control equipment andpay a $.04 million fine.  The fine waspaid in May 2005 and the permit issued in October 2005.  Certain of this equipment has already beeninstalled and, based on currently available information, the balance of theequipment is expected to be installed by September 2006.  While the matter relating to our Illinoisfacility is still pending, like the Nebraska facility and like other ethanolcompanies which have already resolved their VOC emission issues with therelevant authorities, we could be required to install additional air pollutioncontrol equipment, or take other measures to control air pollutant emissions atour Illinois facility.  As for ourIllinois facility, we cannot, at this time, accurately estimate the costs wewill reasonably be expected to incur.  Ifcontrols are ultimately required, however, costs could be higher than those weexpect at our Nebraska facility due to the facility’s larger size.  In addition to these possible costs, we wouldlikely be required to pay fines that could be material if the authoritiesdetermine our emissions were in violation of applicable law.

The EPA hasdrafted a final National Emissions Standard for Hazardous Air Pollutants(NESHAP) under the federal Clean Air Act for industrial, commercial andinstitutional boilers and process heaters. This NESHAP, which became effective on November 12, 2004, is expected torequire us to implement maximum achievable control technology to reducehazardous air pollutant emissions from certain of our boilers and processheaters by September 13, 2007.  We expectto incur capital and operating costs at our Illinois facility to comply withthis regulation with respect to our existing boilers and process heaters.  Based on engineering conducted to date andavailable information, we could incur capital costs of between $7.0 million and$9.0 million.

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

We are exposed tovarious market risks, including changes in commodity prices and interestrates.  Market risk is the potential lossarising from adverse changes in market rates and prices.  In the ordinary course of business, we enterinto various types of transactions involving financial instruments to manageand reduce the impact of changes in commodity prices and interest rates.  We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.

***CommodityPrice Risks***

We are subject tomarket risk with respect to the price and availability of corn, the principalraw material 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 asweather conditions, farmer planting decisions, governmental 

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policies with respect toagriculture and international trade and global demand and supply.  Our weighted average gross corn costs for thethree months ended June 30, 2006 and 2005 was $2.27 and $2.11 per bushel,respectively.  Our weighted average grosscorn costs for the six months ended June 30, 2006 and 2005 was $2.19 and $2.08per bushel, respectively.

We have firm-pricepurchase commitments with some of our corn suppliers under which we agree tobuy corn at a price set in advance of the actual delivery of that corn tous.  Under these arrangements, we assumethe risk of a price decrease in the market price of corn between the time thisprice is fixed and the time the corn is delivered.  In order to reduce our market exposure toprice decreases, at the time we enter into a firm-price purchase commitment, wealso often enter into commodity forward contracts to sell a like amount of cornat the then-current price for delivery to the counterparty at a laterdate.  We account for these transactionsunder Statement of Financial Accounting Standard No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended byStatement of Financial Accounting Standard No. 138, *Accountingfor Certain Derivative Instruments and Certain Hedging Activities*,and by Statement of Financial Accounting Standard No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*,(hereinafter collectively referred to as “SFAS 133”).  These forward contracts are not designated ashedges and, therefore, are marked to market each period, with correspondinggains and losses recorded in other non-operating income.  The fair value of these derivative assets isrecognized in other current assets in the Condensed Consolidated Balance Sheet,net of any cash received from the brokers. Information on this type of derivative transaction is as follows:

|                                   | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In millions)**            | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                              |       |                                            |       |                                          |       |   |   |   |   |
| Gain/(loss) included in  earnings | ** ** | **$**                                           | **1.9**    |                                          | $          | 0.3 | ** ** | **$** | **1.6** |   | $ | (0.3 | ) |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 
| **(In millions)**                                                                                         | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                                                           |       |                        |       |                        |       |
| Aggregate  notional value of derivatives outstanding                                                           | ** ** | **$**                       | **33.0**   | ** **                  | $          | 7.8 |   |
| Period through  which derivative positions currently exist                                                     | ** ** | **December 2008**           | ** ** | December 2005               |       |
| Gain on fair  value of derivatives                                                                             | ** ** | **$**                       | **1.4**    | ** **                  | $          | 0.1 |   |
| The change in fair  value due to the effect of a 10% adverse change in commodity prices to  current fair value | ** ** | **$**                       | **(3.2**   | **)**                       | $          | (0.7 | ) |

 

***Interest RateRisk***

In December 2004,we entered into an interest rate cap transaction on $120.0 million of oursenior secured floating rate notes.  Thesenior secured floating rate notes bear interest at the three month LIBOR rateplus a margin of 6%.  This interest ratecap limits the rate of interest we are obligated to pay on $120.0 million ofour senior secured floating rate notes to 10% (maximum LIBOR rate of 4% plus amargin of 6%).  The interest rate cap isnot designated as hedge and, therefore, is marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of this derivative asset isrecognized in other current assets in the Condensed Consolidated BalanceSheet.  Information on this type ofderivative transaction is as follows:

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|                                   | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In millions)**            | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                              |       |                                            |       |                                          |       |   |   |   |   |
| Gain/(loss) included in  earnings | ** ** | **$**                                           | **(0.1**   | **)**                                         | $          | (0.4 | ) | **$** | **-** |   | $ | (0.1 | ) |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

| (In millions)                                         | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                       |       | ** **                  |       |                        |       |
| Aggregate  notional value of derivatives outstanding       | ** ** | **$**                       | **120.0**  |                        | $          | 120.0 |   |
| Period through  which derivative positions currently exist | ** ** | **December 2008**           |       | December 2008               |       |
| Gain on fair value of  derivatives                         | ** ** | **$**                       | **0.9**    |                        | $          | 0.3 |   |

 

We terminated ourinterest rate cap on July 10, 2006 in conjunction with the tender of ouroutstanding senior secured notes due 2011.

***Material Limitations***

The disclosureswith respect to the above noted risks do not take into account the underlyingcommitments or anticipated transactions. If the underlying items were included in the analysis, the gains orlosses on the futures contracts may be offset. Actual results will be determined by a number of factors that are notgenerally under our control and could vary significantly from those factorsdisclosed.

We are exposed tocredit losses in the event of nonperformance by counterparties on the above instruments,as well as credit or performance risk with respect to our hedged customers’commitments. Although nonperformance is possible, we do not anticipatenonperformance by any of these parties.

**Item 4.                    Controls and Procedures**

**Evaluation of Disclosure Controlsand Procedures**

Under thesupervision of, and with the participation of management, including our ChiefExecutive Officer, Ronald H. Miller, and our Chief Financial Officer, AjaySabherwal, the Company carried out an evaluation of the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report.  Based upon that evaluation, Messrs. Millerand Sabherwal have concluded that, as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures have been designed andare effective to provide reasonable assurance that information required to bedisclosed in the reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in therules and forms of the Securities and Exchange Commission.  These disclosure controls and proceduresinclude, without limitation, controls and procedures designed to providereasonable assurance that information required to be disclosed in such reportsis accumulated and communicated to our management, includingMessrs. Miller and Sabherwal, as appropriate to allow timely decisionsregarding the required disclosure.  Thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of 

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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 overFinancial Reporting**

Based uponevaluation by our management, which was conducted with the participation ofMessrs. Miller and Sabherwal, there has been no change in our internalcontrol over financial reporting during the period covered by this report thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II.                OTHERINFORMATION**

**Item 1A. Risk Factors**

The Company hasincluded in its Registration Statement on Form S-1 a description of certainrisks and uncertainties that could affect the Company’s business, futureperformance or financial condition (“Risk Factors”).  Those Risk Factors are hereby incorporated inPart II, Item 1A of this Form 10-Q.

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

On June 6,2006, the Company held its Annual Meeting of Stockholders.  The matters voted on at the meeting and theresults of those votes were as follows:

*Election of Class I Directors*

|               | ** ** | **Vote for** | ** ** | **Votes Against** | ** ** | **Votes Withheld** | ** ** |
|---------------|------------|-------------------|------------|------------------------|------------|-------------------------|------------|
|          |       |              |       |                   |       |                    |       |
| Farokh Hakimi |       | 21,954,659        |       | -                      |       | 13,190,954              |       |
| Bobby Latham  |       | 21,954,659        |       | -                      |       | 13,190,594              |       |

 

Other directorswhose term of office continued after the meeting were Messrs. Richard A. Derbesand Michael C. Hoffman as Class II directors; and Messrs. Leigh J. Abramson andWayne D. Kuhn as class III directors.

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

**None**

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

(a)          Exhibits

31.1                           Certificationof the Chief Executive Officer pursuant to Section 302 of the Sarbanes- OxleyAct of 2002.

31.2                           Certificationof the Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

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

32.2                           Certificationof the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

#  

# SIGNATURE

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereto dulyauthorized.
|                         | AVENTINE RENEWABLE ENERGY HOLDINGS, INC. |
|-------------------------|------------------------------------------|
|                    |                                     |   |
|                    |                                     |   |
|                    |                                     |   |
| Dated: August 10,  2006 | By:                                      | /s/ William J. Brennan |
|                    | Name:                                    | William J. Brennan |
|                    | Title:                                   | Principal Accounting Officer |

 

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