Table of Contents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

# **FORM 10-Q**

 
| **x** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**for the quarterly period ended March 31, 2010**

 

**OR**

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

 

**for the transition period from                to                .**

 

**COMMISSION FILE NUMBER 001-32922**

 

**AVENTINERENEWABLE ENERGY HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**(309) 347-9200**

(Registrant’s Telephone Number, including Area Code)

 

Indicateby checkmark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES o  NO x

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files.)  YES o  NO o

 

Indicateby checkmark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.  (Check one):

 

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

 

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

 

Indicateby checkmark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by the court.  YES x  NO o

 

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

 

| **Class**                      | ** ** | **Outstanding as of  May 17, 2010** |
|--------------------------------|------------|----------------------------------------------------|
| Common Stock, $0.001 Par Value |       | 6,721,057 Shares                                   |

 

 

 

----

Table of Contents

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**TABLEOF CONTENTS**

 
| ** ** | ** **                                                                                                                                                                                                                                            | ** ** | **Page No.** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
|       | PART I                                                                                                                                                                                                                                           |       |              |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 1.    | Financial Statements                                                                                                                                                                                                                                  |       |              |
|       | Condensed  Consolidated Statements of Operations (Unaudited) - One-month period ended  March 31, 2010 (Successor), two-month period ended February 28,  2010 (Predecessor), and three-month period ended March 31, 2009  (Predecessor) |       | 1                 |
|       | Condensed  Consolidated Balance Sheets — March 31, 2010 (Successor -Unaudited) and  December 31, 2009 (Predecessor)                                                                                                                    |       | 2                 |
|       | Condensed  Consolidated Statements of Cash Flows (Unaudited) - One-month period ended  March 31, 2010 (Successor), two-month period ended February 28,  2010 (Predecessor), and three-month period ended March 31, 2009  (Predecessor) |       | 3                 |
|       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                                                                                                                                       |       | 4                 |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                           |       | 31                |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                                                           |       | 43                |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 4.    | Controls and  Procedures                                                                                                                                                                                                                              |       | 45                |
|       |                                                                                                                                                                                                                                                  |       |              |
|       | PART II                                                                                                                                                                                                                                          |       |              |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 1.    | Legal Proceedings                                                                                                                                                                                                                                     |       | 45                |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 1A.   | Risk Factors                                                                                                                                                                                                                                          |       | 46                |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                          |       | 57                |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 3.    | Defaults  Upon Senior Securities                                                                                                                                                                                                                      |       | 57                |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 5.    | Other Information                                                                                                                                                                                                                                     |       | 57                |
|       |                                                                                                                                                                                                                                                  |       |              |
| Item 6.    | Exhibits                                                                                                                                                                                                                                              |       | 58                |

 

----

Table of Contents

 

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

 

**Item 1.                    Financial Statements**

 

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

**ConsolidatedStatements of Operations (Unaudited)**

 
| ** **                                                              | ** ** | **Successor**                                 | ** ** | **Predecessor**                                   | ** ** | **Predecessor**                                  | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | **One month  ended March 31,** | ** ** | **Two months ended  February 28,** | ** ** | **Three months  ended March 31,** | ** ** |
| **(In  thousands except per share amounts)**                            | ** ** | **2010**                                      | ** ** | **2010**                                          | ** ** | **2009**                                         | ** ** |
| Net  sales                                                              |       | $                                             | 36,974     |                                              | $          | 77,675                                           |       | $ | 236,536 |   |
| Cost  of goods sold                                                     |       | (37,315                                       | )          | (66,686                                           | )          | (257,964                                         | )          |
| Gross  profit                                                           |       | (341                                          | )          | 10,989                                            |       | (21,428                                          | )          |
| Selling,  general and administrative expenses                           |       | (5,158                                        | )          | (4,608                                            | )          | (9,741                                           | )          |
| Other  income (expense)                                                 |       | (1,064                                        | )          | (515                                              | )          | 170                                              |       |
| Operating  income (loss)                                                |       | (6,563                                        | )          | 5,866                                             |       | (30,999                                          | )          |
| Other  income (expense):                                                |       |                                          |       |                                              |       |                                             |       |
| Income  from termination of marketing agreements                        |       | —                                        |       | —                                            |       | 10,176                                           |       |
| Interest  income                                                        |       | 1                                             |       | —                                            |       | 11                                               |       |
| Interest  expense                                                       |       | (714                                          | )          | (1,422                                            | )          | (8,721                                           | )          |
| Gain  (loss) on derivative transactions                                 |       | 176                                           |       | —                                            |       | 1,188                                            |       |
| Income  (loss) before reorganization items and income taxes             |       | (7,100                                        | )          | 4,444                                             |       | (28,345                                          | )          |
| Reorganization  items                                                   |       | —                                        |       | (20,282                                           | )          | —                                           |       |
| Gain  due to plan effects                                               |       | —                                        |       | 136,574                                           |       | —                                           |       |
| Loss  due to fresh start accounting adjustments                         |       | —                                        |       | (387,655                                          | )          | —                                           |       |
| Loss  before income taxes                                               |       | (7,100                                        | )          | (266,919                                          | )          | (28,345                                          | )          |
| Income  tax benefit                                                     |       | —                                        |       | (626                                              | )          | (3,778                                           | )          |
| Net  loss                                                               |       | $                                             | (7,100     | )                                                 | $          | (266,293                                         | )          | $ | (24,567 | ) |
|                                                                    |       |                                          |       |                                              |       |                                             |       |
| Income  (loss) per common share—basic                              |       | $                                             | (0.82      | )                                                 | $          | (6.14                                            | )          | $ | (0.57 | ) |
| Basic  weighted-average number of shares                                |       | 8,662                                         |       | 43,401                                            |       | 42,971                                           |       |
|                                                                    |       |                                          |       |                                              |       |                                             |       |
| Income  (loss) per common share—diluted                            |       | $                                             | (0.82      | )                                                 | $          | (6.14                                            | )          | $ | (0.57 | ) |
| Diluted  weighted-average number of common and common equivalent shares |       | 8,662                                         |       | 43,401                                            |       | 42,971                                           |       |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

1

----

Table of Contents

 

A**ventine Renewable Energy Holdings, Inc. and Subsidiaries**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                             | ** ** | **Successor**      | ** **  | **Predecessor**       | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                             | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| **(In thousands except share and per share amounts)**                                                                                                                                                                                                                                                                                                  | ** ** | **2010**           | ** **  | **2009**              | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                             | ** ** | **(Unaudited)**    | ** **  | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                             | ** ** | ** **         | ** **  | ** **            | ** ** |
| Current  assets:                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **         | ** **  | ** **            | ** ** |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                                                                             | ** ** | **$**              | **81,933**  |                  | $          | 52,585 |   |
| Accounts  receivable                                                                                                                                                                                                                                                                                                                                   | ** ** | **5,665**          |        | 10,947                |       |
| Inventories                                                                                                                                                                                                                                                                                                                                            | ** ** | **21,527**         |        | 24,237                |       |
| Income  taxes receivable                                                                                                                                                                                                                                                                                                                               | ** ** | **5,968**          |        | 5,796                 |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                                                                                                                                             | ** ** | **5,334**          |        | 7,323                 |       |
| Total  current assets                                                                                                                                                                                                                                                                                                                                  | ** ** | **120,427**        |        | 100,888               |       |
|                                                                                                                                                                                                                                                                                                                                                   | ** ** | ** **         |        |                  |       |
| Property,  plant and equipment, net                                                                                                                                                                                                                                                                                                                    | ** ** | **208,337**        |        | 589,049               |       |
| Restricted  cash                                                                                                                                                                                                                                                                                                                                       | ** ** | **14,488**         |        | 7,451                 |       |
| Available  for sale securities                                                                                                                                                                                                                                                                                                                         | ** ** | **5,223**          |        | 5,442                 |       |
| Other  assets                                                                                                                                                                                                                                                                                                                                          | ** ** | **6,782**          |        | 9,866                 |       |
| Total  assets                                                                                                                                                                                                                                                                                                                                          | ** ** | **$**              | **355,257** |                  | $          | 712,696 |   |
| ** **                                                                                                                                                                                                                                                                                                                                             | ** ** | ** **         |        |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                          | ** ** | ** **         |        |                  |       |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                  | ** ** | ** **         |        |                  |       |
| Short-term  borrowings                                                                                                                                                                                                                                                                                                                                 | ** ** | **$**              | **5,252**   |                  | $          | 42,765 |   |
| Accounts  payable                                                                                                                                                                                                                                                                                                                                      | ** ** | **15,697**         |        | 11,164                |       |
| Accrued  payroll and benefits                                                                                                                                                                                                                                                                                                                          | ** ** | **2,680**          |        | 2,242                 |       |
| Accrued  interest                                                                                                                                                                                                                                                                                                                                      | ** ** | **645**            |        | 302                   |       |
| Other  current liabilities                                                                                                                                                                                                                                                                                                                             | ** ** | **7,370**          |        | 6,279                 |       |
| Total  current liabilities                                                                                                                                                                                                                                                                                                                             | ** ** | **31,644**         |        | 62,752                |       |
|                                                                                                                                                                                                                                                                                                                                                   | ** ** | ** **         |        |                  |       |
| Pre-petition  liabilities subject to compromise                                                                                                                                                                                                                                                                                                        |       | —             |        | 365,549               |       |
| Long-term  debt                                                                                                                                                                                                                                                                                                                                        | ** ** | **105,000**        |        | —                |       |
| Deferred  tax liabilities                                                                                                                                                                                                                                                                                                                              | ** ** | **2,491**          |        | 2,936                 |       |
| Other  long-term liabilities                                                                                                                                                                                                                                                                                                                           | ** ** | **2,554**          |        | 13,927                |       |
| Total  liabilities                                                                                                                                                                                                                                                                                                                                     | ** ** | **141,689**        |        | 445,164               |       |
|                                                                                                                                                                                                                                                                                                                                                   | ** ** | ** **         |        |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                                                                                            | ** ** | ** **         |        |                  |       |
| Common  stock, par value $0.001 per share; 15,000,000 and 185,000,000 shares  authorized as of March 31, 2010 and December 31, 2009,  respectively; 6,614,980 and 43,048,158 shares outstanding as of  March 31, 2010 and December 31, 2009, respectively, net of  21,548,640 shares held in treasury as of December 31, 2009 | ** ** | **7**              |        | 44                    |       |
| Preferred  stock, 5,000,000 and 50,000,000 shares authorized as of March 31, 2010  and December 31, 2009, respectively; no shares issued or outstanding                                                                                                                                                                                      | ** ** | **—**         |        | —                |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                            | ** ** | **221,646**        |        | 294,297               |       |
| Retained  deficit                                                                                                                                                                                                                                                                                                                                      | ** ** | **(7,100**         | **)**       | (28,421               | )          |
| Accumulated  other comprehensive income (loss), net                                                                                                                                                                                                                                                                                                    | ** ** | **(985**           | **)**       | 1,612                 |       |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                                       | ** ** | **213,568**        |        | 267,532               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                       | ** ** | **$**              | **355,257** |                  | $          | 712,696 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

2

----

Table of Contents

 

**Aventine Renewable Energy Holdings, Inc. and Subsidiaries**

**Condensed ConsolidatedStatements of Cash Flows**

(Unaudited)

 
| ** **                                                                                  | ** ** | **Successor**                                 | ** ** | **Predecessor**                                   | ** ** | **Predecessor**                                  | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **One month ended  March 31,** | ** ** | **Two months ended  February 28,** | ** ** | **Three months  ended March 31,** | ** ** |
| **(In thousands)**                                                                     | ** ** | **2010**                                      | ** ** | **2010**                                          | ** ** | **2009**                                         | ** ** |
|                                                                                        |       |                                          | ** ** | ** **                                        |       |                                             |       |
| **Operating Activities**                                                                    |       |                                          | ** ** | ** **                                        |       |                                             |       |
| Net loss                                                                                    | ** ** | **$**                                         | **(7,100** | **)**                                             | **$**      | **(266,293**                                     | **)**      | $ | (24,567 | ) |
| Adjustments to reconcile net loss to net cash provided  by (used for) operating activities: | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| Provision for rejected executory contracts and  leases                                      | ** ** | **—**                                    | ** ** | **9,590**                                         |       | —                                           |       |
| Non-cash gain due to Plan effects                                                           | ** ** | **—**                                    | ** ** | **(136,574**                                      | **)**      | —                                           |       |
| Non-cash loss due to fresh start accounting  adjustments                                    | ** ** | **—**                                    | ** ** | **387,655**                                       |       | —                                           |       |
| Depreciation and amortization                                                               | ** ** | **1,030**                                     | ** ** | **2,795**                                         |       | 4,380                                            |       |
| Stock-based compensation expense                                                            | ** ** | **1,728**                                     | ** ** | **277**                                           |       | 1,304                                            |       |
| Deferred income tax                                                                         | ** ** | **—**                                    | ** ** | **—**                                        |       | 4,368                                            |       |
|                                                                                        | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| Gain on the sale of marketing alliance investments                                          | ** ** | **—**                                    | ** ** | **—**                                        |       | (1,000                                           | )          |
| Changes in operating assets and liabilities:                                                | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| Accounts receivable, net                                                                    | ** ** | **1,498**                                     | ** ** | **2,560**                                         |       | 33,967                                           |       |
| Inventories                                                                                 | ** ** | **3,693**                                     | ** ** | **1,543**                                         |       | 56,043                                           |       |
| Other current assets                                                                        | ** ** | **(1,114**                                    | **)**      | **1,339**                                         |       | 4,727                                            |       |
| Restricted cash                                                                             | ** ** | **797**                                       | ** ** | **(7,833**                                        | **)**      | —                                           |       |
| Other assets                                                                                | ** ** | **(773**                                      | **)**      | **—**                                        |       | —                                           |       |
| Accounts payable                                                                            | ** ** | **(3,809**                                    | **)**      | **7,061**                                         |       | (63,912                                          | )          |
| Other current liabilities                                                                   | ** ** | **1,087**                                     | ** ** | **341**                                           |       | (1,319                                           | )          |
|                                                                                        | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| Other long-term liabilities                                                                 | ** ** | **31**                                        | ** ** | **(21,981**                                       | **)**      | 62                                               |       |
| Net cash provided by (used for) operating  activities                                       | ** ** | **(2,932**                                    | **)**      | **(19,520**                                       | **)**      | 14,053                                           |       |
|                                                                                        | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| **Investing Activities**                                                                    | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| ** **                                                                                  | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| Additions to property, plant and equipment, net                                             | ** ** | **(374**                                      | **)**      | **(2,086**                                        | **)**      | (736                                             | )          |
| Proceeds from the sale of marketing alliance  investments                                   | ** ** | **—**                                    | ** ** | **—**                                        |       | 2,000                                            |       |
| Net cash provided by (used for) investing  activities                                       | ** ** | **(374**                                      | **)**      | **(2,086**                                        | **)**      | 1,264                                            |       |
|                                                                                        | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| **Financing Activities**                                                                    | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| Net repayments on revolving credit facilities                                               | ** ** | **—**                                    | ** ** | **(27,765**                                       | **)**      | (37,778                                          | )          |
| Repayment of debtor-in-possession debt facility                                             | ** ** | **—**                                    | ** ** | **(15,000**                                       | **)**      | —                                           |       |
| Proceeds from issuance of senior secured notes                                              | ** ** | **—**                                    | ** ** | **98,119**                                        |       | —                                           |       |
| Debt issuance costs                                                                         | ** ** | **—**                                    | ** ** | **(1,190**                                        | **)**      | (876                                             | )          |
| Proceeds from stock option exercises                                                        | ** ** | **—**                                    | ** ** | **96**                                            |       | —                                           |       |
| Net cash provided by (used for) financing  activities                                       | ** ** | **—**                                    | ** ** | **54,260**                                        |       | (38,654                                          | )          |
|                                                                                        | ** ** | ** **                                    | ** ** | ** **                                        |       |                                             |       |
| Net increase (decrease) in cash and cash  equivalents                                       | ** ** | **(3,306**                                    | **)**      | **32,654**                                        |       | (23,337                                          | )          |
| Cash and cash equivalents at beginning of period                                            | ** ** | **85,239**                                    | ** ** | **52,585**                                        |       | 23,339                                           |       |
| Cash and cash equivalents at end of period                                                  | ** ** | **$**                                         | **81,933** | ** **                                        | **$**      | **85,239**                                       |       | $ | 2 |   |

 

*The accompanying notes are an integral part of these condensedconsolidated financial statements.*

 

3

----

Table ofContents

 

**Aventine Renewable Energy Holdings, Inc. and Subsidiaries**

**Notes to UnauditedCondensed Consolidated Financial Statements**

 

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

 

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of

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

 

We have prepared theunaudited condensed consolidated financial statements included herein pursuantto the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in statements prepared in accordancewith accounting principles generally accepted in the United States (“GAAP”)have been omitted pursuant to such rules and regulations, although webelieve that the disclosures are adequate to make the information presented notmisleading.  These financial statementsshould be read in conjunction with the financial statements and notes theretoincluded in our Annual Report on Form 10-K for the year ended December 31,2009.  As of March 31, 2010, theCompany’s Summary of Critical Accounting Policies for the year ended December 31,2009, which are detailed in the Company’s Annual Report on Form 10-K, havenot changed except for the application of fresh start accounting as describedin the following paragraph.

 

On February 28, 2010,the Company applied fresh start accounting which requires assets andliabilities to be reflected at fair value. The financial information set forthin this report, unless otherwise expressly set forth or as the contextotherwise indicates, reflects the consolidated results of operations andfinancial condition of Aventine and its subsidiaries on a fresh start basis forthe period following February 28, 2010 (“Successor”), and of Aventine andits subsidiaries on a historical basis for the periods through February 28,2010 (“Predecessor”).

 

The preparation of financialstatements in conformity with GAAP 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.  Areas involving significant judgments andestimates include depreciation, income taxes, and fresh startaccounting.  Actual results could differ from those estimates.

 

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

 

Theaccompanying unaudited condensed consolidated financial statements presentedherewith reflect all adjustments which, in the opinion of management, arenecessary for a fair presentation of the results of operations for thetwo-month period ended February 28, 2010, the one-month period ended March 31,2010, and the three- month period ended March 31, 2009.  The results of operations for interim periodsare not necessarily indicative of results to be expected for an entire year.

 

**(2) ****         ****Emergence from Reorganization********Proceedings and Related Events**

 

OnApril 7, 2009 (the “Petition Date”), Aventine Renewable Energy Holdings, Inc.and all of its direct and indirect subsidiaries (collectively, the “Debtors”),filed voluntary petitions with the United States Bankruptcy Court for theDistrict of Delaware (the “Bankruptcy Court”) to reorganize under Chapter 11 ofthe United States Code (the “Bankruptcy Code”). The Chapter 11 cases were jointly administered by the Bankruptcy Courtas Case No. 09-11214 (KG)).  On December 4,2009, the Debtors filed a joint chapter 11 plan of reorganization and a relateddisclosure statement with the Bankruptcy Court. On January 13, 2010, the Debtors filed the First Amended Joint Planof Reorganization under Chapter 11 of the Bankruptcy Code dated as of January 13,2010 (as modified, the “Plan”).  The Planwas confirmed by order entered by the Bankruptcy Court on February 24,2010 (the “Confirmation Date”) and became effective on March 15, 2010 (the“Effective Date”), the date on which the Company emerged from protection underChapter 11 of the Bankruptcy Code.

 

4

----

Table of Contents

 

AccountingStandards Codification (“ASC”) Section 852, *Reorganizations,*which is applicable to companies in Chapter 11, generally does not change themanner in which financial statements are prepared while the company remains inChapter 11.  However, ASC 852 doesrequire that the financial statements for periods subsequent to the filing of aChapter 11 petition and prior to the Effective Date distinguish transactionsand events that are directly associated with the reorganization from theongoing operations of the business. Revenues, expenses (including professional fees), realized gains andlosses, and provisions for losses that can be directly associated with thereorganization and restructuring of the business must be reported separately asreorganization items in the consolidated statements of operations.  The consolidated balance sheet mustdistinguish pre-petition liabilities subject to compromise from both thosepre-petition liabilities that are not subject to compromise and frompost-petition liabilities.  Liabilitiesthat may be affected by the Plan must be reported at the amounts expected to beallowed, even if they may be settled for lesser amounts.  In addition, cash provided by reorganizationitems must be disclosed separately in the condensed consolidated statement ofcash flows.  ASC 852 became effective forAventine on April 7, 2009, and Aventine segregated those items as outlinedabove for all applicable reporting periods subsequent to such date through theEffective Date.

 

*FreshStart Accounting and Selection of Convenience Date*

 

The Company emerged frombankruptcy on March 15, 2010. In accordance with ASC 852, *Reorganizations*, the Company adopted fresh start accountingand adjusted the historical carrying value of its assets and liabilities totheir respective fair values at the Effective Date. Simultaneously, the Companydetermined the fair value of its equity at the Effective Date. The Companyselected an accounting convenience date proximate to the Effective Date forpurposes of making the aforementioned adjustments to historical carrying values(the “Convenience Date”), because the activity between the Effective Date andthe Convenience Date does not result in a material difference in the results.The Company has selected a Convenience Date of February 28, 2010. As aresult, the Company recorded fresh start accounting adjustments to historicalcarrying values of assets and liabilities as of February 28, 2010 usingmarket prices, discounted cash flow methodologies based primarily on observablemarket information and, to a lesser extent, on unobservable market information,and other techniques. The fresh start accounting adjustments are reflected inthe balance sheet at February 28, 2010 and in the statement of operationsfor the two months ended February 28, 2010.  The Statement of Operations for the one monthended March 31, 2010 reflects the results of successor operations.

 

The Company’s adoption offresh start accounting results in the Company becoming a new entity as of theEffective Date, with a new capital structure, a new accounting basis in theidentifiable assets and liabilities assumed and no retained earnings oraccumulated losses. The consolidated financial statements on or after March 1,2010 are not comparable to the consolidated financial statements prior to thatdate. The financial statements for the periods ended prior to February 28,2010 do not include the effect of any changes in our capital structure orchanges in the fair value of assets and liabilities as a result of fresh startaccounting.

 

Fresh start accountingprovides, among other things, for a determination of the value to be assignedto the equity of the emerging company as of the Effective Date. Reorganizationequity value represents the Company’s estimate of the amount a willing buyerwould pay for the Company’s net assets immediately after thereorganization.  This amount (approximately$219.9 million) was determined by Company management with assistance from anindependent financial advisor, who developed the enterprise value using acombination of the following three measurement methodologies: 1) comparablepublic company analysis, 2) discounted cash flow analysis, and 3) precedenttransactions analysis.  This amount wasdetermined, in part, on economic, competitive and general business conditionsprevailing at the time.  Descriptions ofthe different valuation methodologies are as provided below.

 

Comparable Public Company Analysis

 

A comparable public company analysis estimates valuebased on a comparison of the target company’s financial statistics with thefinancial statistics of public companies that are similar to the target company.It establishes a benchmark for asset valuation by deriving the value of “comparable”assets, standardized using a common variable such as revenues, earnings, cashflows and operating capacity.  Theanalysis includes a detailed multi-year financial comparison of each company’sincome statement, balance sheet, cash flow statement and operatingcapacity.  In addition, each company’sperformance, profitability, margins, leverage and business trends are alsoexamined.  Based on these analyses, anumber of financial multiples and ratios are calculated to gauge each company’srelative performance and valuation.

 

5

----

Table of Contents

 

Precedent Transactions Analysis

 

Precedent transactions analysis estimates value byexamining publicly announced merger and acquisition transactions. An analysisof the disclosed purchase price as a multiple of various operating statistics(particularly total annual production capacity in the case of the ethanolindustry) reveals industry acquisition multiples for companies in similar linesof businesses to the Company. These transaction multiples are calculated basedon the purchase price (including any debt assumed) paid to acquire companiesthat are comparable to the Debtors. These multiples are then applied to theDebtors’ annual production capacity to determine the total enterprise value orvalue to a potential buyer.

 

Discounted Cash Flow Approach

 

The discounted cash flow (“DCF”) valuation methodologyrelates the value of an asset or business to the present value of expectedfuture cash flows to be generated by that asset or business. The DCFmethodology is a “forward looking” approach that discounts the expected futurecash flows by a theoretical or observed discount rate determined by calculatingthe weighted average cost of debt and equity capital (“WACC”) for publiclytraded companies that are similar to the Debtors. The expected future cashflows have two components: the present value of the projected unleveredafter-tax free cash flows for a determined period and the present value of theterminal value of cash flows (representing firm value beyond the time horizonof the financial projections).  The projectedcash flows were discounted from the financial projections using the Debtors’estimated WACC, and the terminal value of the Debtors was calculated using aper gallon multiple of operating capacity as is consistent with industrypractice.

 

In performing the Comparable Public Company Analysis,it was determined that only one publicly available ethanol company is generallycomparable to the Company.  Severalethanol producers were deemed not comparable or not usable for the purposes ofthe valuation because (i) their equity is privately held; (ii) ethanolproduction makes up less than 10% of sales and/or (iii) the companies aredistressed.  For this reason, it wasdetermined that the discounted cash flow analysis and precedent transactionsanalysis were the most pertinent valuation methodologies for the purpose ofvaluing the Company.  Accordingly, thediscounted cash flow analysis and the precedent transactions analysis were eachweighted at 40% and the comparable companies’ analysis was weighted at 20% inestimating the Company’s enterprise value.

 

6

----

Table of Contents

 

The balance sheetreorganization adjustments presented below summarize the impact of the Plan andthe adoption of fresh start accounting as of February 28, 2010.

 

**AVENTINERENEWABLE ENERGY HOLDINGS, INC. AND SUBSIDIARIES**

**REORGANIZEDCONDENSED CONSOLIDATED BALANCE SHEET**

 
| ** **                                       | ** ** | **February 28, 2010** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | ** **                      | ** ** | **Reorganization** | ** ** | **Fresh Start** | ** ** | ** ** | ** ** |
| **(In thousands)**                          | ** ** | **Predecessor**                 | ** ** | **Adjustments ****(1)** | ** ** | **Adjustments** | ** ** | **Successor** | ** ** |
| **ASSETS**                                       |       |                            |       |   |   |   |   |   |   |
| Current  assets:                                 |       |                            |       |   |   |   |   |   |   |
| Cash  and cash equivalents                       |       | $                               | 66,866     |   | $ | 18,373 | (2) | $ | — |   | $ | 85,239 |   |
| Accounts  receivable                             |       | 8,163                           |       | (1,000 | )(3) | — |   | 7,163 |   |
| Inventories                                      |       | 22,694                          |       | — |   | 2,526 | (12) | 25,220 |   |
| Income  taxes receivable                         |       | 5,975                           |       | — |   | — |   | 5,975 |   |
| Prepaid  expenses and other current assets       |       | 5,423                           |       | (1,210 | )(4) | — |   | 4,213 |   |
| Total  current assets                            |       | 109,121                         |       | 16,163 |   | 2,526 |   | 127,810 |   |
|                                             |       |                            |       |   |   |   |   |   |   |
| Property,  plant and equipment, net              |       | 587,103                         |       | 1,700 | (2) | (379,970 | )(12) | 208,833 |   |
| Restricted  cash                                 |       | 7,452                           |       | 7,832 | (2) | — |   | 15,284 |   |
| Available  for sale securities                   |       | 6,207                           |       | — |   | — |   | 6,207 |   |
| Other  assets                                    |       | 9,860                           |       | 734 | (5) | (4,423 | )(12) | 6,171 |   |
|                                             |       |                            |       |   |   |   |   |   |   |
| Total  assets                                    |       | $                               | 719,743    |   | $ | 26,429 |   | $ | (381,867 | ) | $ | 364,305 |   |
|                                             |       |                            |       |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       |                            |       |   |   |   |   |   |   |
| CURRENT  LIABILITIES:                            |       |                            |       |   |   |   |   |   |   |
| Short-term  borrowings                           |       | $                               | 42,765     |   | $ | (37,513 | )(2),(6) | $ | — |   | $ | 5,252 |   |
| Accounts  payable                                |       | 16,588                          |       | 1,637 | (7) | 1,281 | (12) | 19,506 |   |
| Accrued  liabilities                             |       | 2,327                           |       | — |   | — |   | 2,327 |   |
| Other  current liabilities                       |       | 6,837                           |       | — |   | — |   | 6,837 |   |
| Total  current liabilities                       |       | 68,517                          |       | (35,876 | ) | 1,281 |   | 33,922 |   |
|                                             |       |                            |       |   |   |   |   |   |   |
| Pre-petition  liabilities subject to compromise  |       | 358,790                         |       | (358,790 | )(9) | — |   | — |   |
| Long-term  debt                                  |       | —                          |       | 98,119 | (2) | 6,881 | (12) | 105,000 |   |
| Deferred  tax liabilities                        |       | 2,936                           |       | — |   | — |   | 2,936 |   |
| Other  long-term liabilities                     |       | 31,069                          |       | (28,545 | )(10) | — |   | 2,524 |   |
| Total  liabilities                               |       | 461,312                         |       | (325,092 | ) | 8,162 |   | 144,382 |   |
|                                             |       |                            |       |   |   |   |   |   |   |
| STOCKHOLDERS’  EQUITY                       |       |                            |       |   |   |   |   |   |   |
| Common  stock                                    |       | 44                              |       | (37 | )(11) | — |   | 7 |   |
| Additional  paid-in capital                      |       | 294,670                         |       | (74,754 | )(11) | — |   | 219,916 |   |
| Retained  earnings (deficit)                     |       | (38,657                         | )          | 426,312 | (11) | (387,655 | )(13) | — |   |
| Accumulated  other comprehensive income          |       | 2,374                           |       | — |   | (2,374 | )(13) | — |   |
| Total  shareholders’ equity (deficit)       |       | 258,431                         |       | 351,521 |   | (390,029 | ) | 219,923 |   |
|                                             |       |                            |       |   |   |   |   |   |   |
| Total  liabilities and stockholders’ equity |       | $                               | 719,743    |   | $ | 26,429 |   | $ | (381,867 | ) | $ | 364,305 |   |

 

7

----

Table of Contents

 

----

Explanatory Notes

 

(1)  Representsamounts recorded on the Effective Date for the implementation of the Plan,including the settlement of liabilities subject to compromise and relatedpayments, the issuance of new debt and repayment of old debt, distributions of cashand new shares of common stock, and the cancellation of Predecessor’s commonstock.

 

(2)  Cash effects ofthe Plan:

 
| Proceeds  from Issuance of senior secured notes                                                                                                                                                                                                                            |   | $       | 98,119 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|
| Payment  of principal on secured revolving credit facility                                                                                                                                                                                                                 |   | (27,765 | )      |
| Payment  of interest and fees on secured revolving credit facility                                                                                                                                                                                                         |   | (206    | )      |
| Payment  of principal on debtor-in-possession debt facility                                                                                                                                                                                                                |   | (15,000 | )      |
| Payment  of interest on debtor-in-possession debt facility                                                                                                                                                                                                                 |   | (96     | )      |
| Payment  of secured claims to Kiewit Energy Company on expansion projects at Aurora,  NE and Mt. Vernon, IN                                                                                                                                                                |   | (17,931 | )      |
| Represents  payment to Applied Process Technology International LLC for license  agreements which provide the Company with all of the rights to the Delta-T  Technology necessary to construct and operate the ethanol expansion  facilities at Aurora West and Mt. Vernon |   | (1,700  | )      |
| Fund  additional restricted cash                                                                                                                                                                                                                                           |   | (7,832  | )      |
| Payments  of priority and other secured claims and cure amounts                                                                                                                                                                                                            |   | (4,876  | )      |
| Payment  of professional fees                                                                                                                                                                                                                                              |   | (4,340  | )      |
|                                                                                                                                                                                                                                                                       |   |    |   |
| Net  change in cash and cash equivalents                                                                                                                                                                                                                                   |   | $       | 18,373 |   |

 

This entry records theproceeds from the issuance of senior secured notes and the payment of certainbankruptcy obligations in accordance with the Plan.  Cash of $7.8million reclassified to restricted cash represents amounts held in escrowaccounts pending final resolution from the Bankruptcy Court.

 

(3) The Company set-off $1.0 million of receivables from a certain customer against$1.7 million of payables due to the same counterparty, resulting in a net payoutof $0.7 million to the customer/vendor, as discussed further in footnote (7) below.

 

(4) Represents the write-off of the prepaiddirectors and officers insurance balance for the predecessor company of $1.6million, plus $0.3 million reclassification of debt issuance costs related tothe issuance of the senior secured notes and the new secured revolving creditfacility to Other Assets, offset by the addition of a deposit on titleinsurance pertaining to the expansion Aurora West facility of $0.7 million

 

(5)  Represents the$0.7 million of debt issuance costs pertaining to the senior secured notes andthe new secured revolving credit facility, of which $0.3 million wasreclassified from Prepaid Expenses and Other Current Assets.

 

(6)  As noted abovein explanatory note (2), the Company paid in full the $27.8 millionpre-petition secured revolving credit facility and the $15.0 million debtor-in-possessionloan, along with $0.3 million representing all respective accrued interest onsaid loans, in accordance with the Plan. Offsetting these reductions in debt,the Company issued a $5.3 million note payable due to Kiewit Energy as partialsatisfaction of Kiewit Energy’s secured claim on the Aurora West ethanolexpansion facility.

 

(7) The increase consisted of $1.6 million of accrued priority, secured, and cureamounts not yet paid to claimants, $0.7 million of accrued Class 7convenience claims also not yet paid to claimants, the $1.0 million accruedprofessional fee payable to a court-appointed financial advisor, all of whichwas offset by a $1.7 million reduction in payable due to a certainvendor/customer as discussed more thoroughly in footnote (3) above.

 

8

----

Table of Contents

 

(8) Reconciliation of enterprise value to determination of equity:

 
| Total  enterprise value                                     |   | $        | 240,000 |   |
|-------------------------------------------------------------|--------|----------|---------|--------|
| Successor  company cash balance at February 28, 2010   |   | 85,239   |    |
| Accrued  plan effects payments                              |   | (5,348   | )       |
| Kiewit  note                                                |   | (5,252   | )       |
| Restricted  cash available upon emergence                   |   | 10,284   |    |
| Fair  value of senior secured notes due March 15, 2015 |   | (105,000 | )       |
|                                                        |   |     |    |
| Total  shareholder’s equity                            |   | $        | 219,923 |   |

 

(9) Represents thedisposition of liabilities subject to compromise:

 
| Liabilities  subject to compromise discharged at emergence:                              |   |    |    |
|------------------------------------------------------------------------------------------|--------|---------|---------|
| Accrued interest                                                                         |   | $       | 6,134   |   |
| 10% senior  unsecured notes due 2017                                                     |   | 117,897 |    |
| Class 6  General Unsecured Claims                                                   |   | 18,637  |    |
| Class 7  Convenience Claims                                                         |   | 1,302   |    |
|                                                                                     |   | $       | 143,970 |   |
|                                                                                     |   |    |    |
| Liabilities  subject to compromise paid in cash or settled via equity share distribution |   |    |    |
| Accrued interest  on Notes (equity shares)                                               |   | $       | 9,366   |   |
| 10% senior  unsecured notes due 2017 (equity shares)                                     |   | 182,103 |    |
| Class 6  General Unsecured Claims (equity shares)                                   |   | 28,454  |    |
| Class 7  Convenience Claims (paid or accrued for payment)                           |   | 701     |    |
|                                                                                     |   | $       | 220,624 |   |
|                                                                                     |   |    |    |
| Unamortized  issuance costs of 10% senior unsecured note                                 |   | $       | (5,804  | ) |
|                                                                                     |   |    |    |
| Total  Disposition of Liabilities Subject to Compromise                                  |   | $       | 358,790 |   |

 

(10)  Due to the payment of priority andsecured claims and cure amounts in accordance with the Plan, the Companyrecorded a $28.5 million reduction in other long-term liabilities under PlanEffects as follows:

 
| Changes in Other Long-Term Liabilities                                                              |   |   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                |   |   |   |
| Partial settlement of the Kiewit Aurora West  Secured Claim                                         |   | $      | 10,000 |   |
| Payment in full of Kiewit Mt. Vernon Secured Claim                                                  |   | 7,931  |   |
| Issuance of a short-term Kiewit Note as partial  settlement of the Kiewit Aurora West Secured Claim |   | 5,252  |   |
| Payment of Collateral for Public Utility Mt.  Vernon Lien                                           |   | 1,894  |   |
| Reclassification of Unpaid Priority, Secured, and  Cure Amounts to Accounts Payable                 |   | 1,582  |   |
| Payment of Employee-related Priority  Administrative Claims                                         |   | 937    |   |
| Payment of Cure Amounts for Assumed Contracts                                                       |   | 420    |   |
| Payments of Other Secured Claims                                                                    |   | 333    |   |
| Payment of Other Priority Administrative Claims  Payments                                           |   | 196    |   |
| Total                                                                                               |   | $      | 28,545 |   |

 

9

----

Table of Contents

 

(11)  PlanEffects adjustments to Stockholder’s Equity include the following:

 

·      Gain due to plan effects in the firstquarter of 2010 of $136.6 million related to implementation of the plan ofreorganization consisted of $144.0 million of liabilities subject to comprisewhich were discharged upon emergence less $5.8 million of unamortized debtissuance costs on the 10% senior unsecured notes and $1.6 million related tothe write-off of Predecessor prepaid directors and officer insurance.

 

·      Elimination of predecessor equity balances comprisedof:

 

·      common stock of$0.044 million,

·      additionalpaid-in capital of $294.7 million

 

·      Issuance of successor common stock comprised of:

 

·      common stock of$7 thousand

·      additionalpaid-in capital of $219.9 million

 

·      Adjustments to retained earnings of $426.3 millionresulting from the net impact of all other plan effects.

 

(12)  The significant assumptions related toadjusting our assets and liabilities to fair value in connection with freshstart accounting include the following:

 

*Cash, AccountsReceivable, Prepaid Assets and Other Current Assets, Accrued Liabilities, andOther Current Liabilities* - We evaluated the fair value of financial instruments represented incurrent assets and current liabilities, including cash, accounts receivable,prepaid assets and other current assets, accrued liabilities, and other currentliabilities.  Based upon our evaluations,we concluded that the carrying value approximates fair value of these financialinstruments due to their short maturities or variable-rate nature of therespective balances.

 

*RestrictedCash and Other Long-Term Liabilities* - We evaluated the fair value of restricted cash andother long-term liabilities.  Therestricted cash balances are held in interest-bearing accounts and we thereforeconcluded that the carrying value approximates fair value.  The other long-term liabilities principallyrepresent company obligations related to pension and retiree medicalcosts.  Such liabilities are calculatedusing various assumptions including an assumed discount rate which we believeis reasonable, and we therefore concluded that carrying value of such long-termliabilities approximates fair value.

 

*Inventories* — Inventories consist primarily ofagricultural and energy-related commodities including corn, ethanol, andcoal.  The fair value of thesecommodities was determined through reference to prices that were publiclyavailable at the time, as adjusted for physical location.

 

*Property,plant and equipment*—Property, plant and equipment was valued at fair value of approximately $208.8million as of February 28, 2010.  The Company determined fairvalue with the assistance of an independent valuation firm.  In establishing fair value for the vastmajority of the Company’s property, plant and equipment, the cost approach wasutilized. The cost approach considers the amount required to replace an assetby constructing or purchasing a new asset with similar utility, then adjuststhe value in consideration of all forms of depreciation as of the appraisal dateas described below:

 

·      Physical depreciation — the loss in valueor usefulness attributable solely to use of the asset and physical causes suchas wear and tear and exposure to the elements.

·      Functional obsolescence — a loss in valueis due to factors inherent in the asset itself and due to changes intechnology, design or process resulting in inadequacy, overcapacity, lack offunctional utility or excess operating costs.

·      Economic obsolescence — loss in value by unfavorableexternal conditions such as economics of the industry or geographic area, orchange in ordinances.

 

The cost approach relieson management’s assumptions regarding current material and labor costs requiredto rebuild and repurchase significant components of our property, plant andequipment along with assumptions regarding the age and estimated useful livesof our property, plant and equipment.

 

*OtherAssets* — Otherassets include a long-term deposit for utilities against which the Company mayapply certain future natural gas transportation charges.  The fair value of this deposit was determinedbased upon a discounted cash flow model for which the significant inputsinclude the Company’s estimated purchase timing and amount of natural gas, andthe discount rate estimated to be 13%. If the Company had applied a discount rate of 1% higher or lower, thefair value of the asset would have decreased or increased by $168 thousand or$177 thousand, respectively.

 

*AccountsPayable* —Accounts payable include an estimated liability associated with an off-marketcoal purchase contract which continues throughout 2010.  The fair value of this contract wasdetermined through reference to coal prices that were publicly available at thetime, as adjusted for physical location. This liability will be amortized to income as the related coal purchasesaffect the cost of production.  For otheraccounts payable items, we evaluated such liabilities to determine fair valueand concluded that the carrying value approximates fair value of thesefinancial instruments due to their short maturities or variable-rate nature ofthe respective balances.

 

10

----

Table of Contents

 

*Long-TermDebt* — Long-termdebt was valued at fair value with the assistance of an independent valuationfirm based on an analysis of market interest rates for guideline companies withsimilar debt and terms, interest rates for companies recently emerged frombankruptcy, and interest rates based on a synthetic debt rating.  Based on this analysis, we determined that arange of market interest rate for our $105 million of senior secured noteswould be from 11.5% to 14.5%.  Based onthe stated rate of the senior secured notes of 13% combined with the option topay a portion of the interest in kind, we deemed the fair value to be the facevalue of the notes of $105 million.  Ifthe interest rate was 1% higher or lower, the fair value of the debt would haveincreased or decreased by $1.2 million, respectively.

 

All fresh startadjustments noted above represent non-recurring fair value measurements andhave been treated as non-cash adjustments in the consolidated statement of cashflows.

 

 

(13)  Adjustments required in order to reportassets and liabilities at fair value under fresh start accounting resulted in apre-tax charge of $387.7 million, which we reported as a loss due to freshstart accounting adjustments in the consolidated statement of operations forthe two months ending February 28, 2010.

 

In addition, weeliminated the balance of accumulated other comprehensive gains (net of losses)totaling $2.4 million, which we classified as a loss within reorganizationitems in the consolidated statement of operations for the two months ending February 28,2010.

 

**(3)****          ****RecentAccounting Pronouncements**

 

In December 2009, the FASB issuedAccounting Standards Update (“ASU”) No. 2009-17, *“Improvementsto Financial Reporting by Enterprises Involved with Variable Interest Entities”*(“ASU 2009-17”). ASU 2009-17 changes how a reporting entity determines when anentity that is insufficiently capitalized or is not controlled through voting(or similar rights) should be consolidated. The determination of whether a reporting entity is required toconsolidate another entity is based on, among other things, the other entity’spurpose and design and the reporting entity’s ability to direct the activitiesof the other entity that most significantly impact the other entity’s economicperformance.  The new standard requires anumber of new disclosures, including additional disclosures about the reportingentity’s involvement with variable interest entities and any significantchanges in risk exposure due to that involvement.  A reporting entity is required to disclosehow its involvement with a variable interest entity affects the reportingentity’s financial statements. ASU 2009-17 is effective for the Companybeginning January 1, 2010.  Based onthe Company’s evaluation of ASU 2009-17, the adoption of this statement did notimpact the Company’s consolidated financial statements because the Company doesnot hold variable interests in any variable interest entities.

 

In January 2010, theFASB issued ASU 2010-06, *Fair ValueMeasurements and Disclosures*, which adds new disclosure requirementsfor transfers into and out of Levels 1 and 2 in the fair value hierarchy andadditional disclosures about purchases, sales, issuances, and settlementsrelating to Level 3 fair value measurements. This ASU also clarifies existing fair value disclosures about the levelof disaggregation about inputs and valuation techniques used to measure fairvalue. The ASU is effective for the Company as of January 1, 2010, exceptfor the requirement to provide the Level 3 activity on a gross basis, which iseffective as of January 1, 2011. As the new guidance only pertained todisclosures, it had no impact on our consolidated financial position, results ofoperations or cash flows upon adoption. See Notes 2 and 10 for further discussion of fair value measurements.

 

In February 2010,the FASB issued authoritative guidance to define a Securities and ExchangeCommission (“SEC”) filer within the FASB Accounting Standards Codification andeliminate the requirement for a SEC filer to disclose the date through whichsubsequent events have been evaluated in order to remove potential conflictswith current SEC guidance.  We adoptedthe FASB guidance on the date of issuance, February 24, 2010. As the newguidance only pertained to disclosures, it had no impact on our consolidatedfinancial position, results of operations or cash flows upon adoption.   See Note 22 for further discussion.

 

11

----

Table of Contents

 

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

 

Inventoriesare as follows:

 
| ** **              | ** **   | **Successor**            | ** **   | **Predecessor**             | ** **   |
|-------------------------|--------------|--------------------------|--------------|-----------------------------|--------------|
| **(In thousands)** | ** **   | **March 31,  2010** | ** **   | **December 31,  2009** | ** **   |
| *** ***            | *** *** | *** ***             | *** *** | *** ***                | *** *** |
| Finished products       | ** **   | **$**                    | **15,582**   |                        | $            | 16,409 |   |
| Work-in-process         | ** **   | **1,927**                |         | 2,430                       |         |
| Raw materials           | ** **   | **2,395**                |         | 2,938                       |         |
| Supplies                | ** **   | **1,623**                |         | 2,460                       |         |
| Totals                  | ** **   | **$**                    | **21,527**   |                        | $            | 24,237 |   |

 

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

 

Prepaidexpenses and other current assets are as follows:

 
| ** **               | ** ** | **Successor**            | ** ** | **Predecessor**             | ** ** |
|--------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(In thousands)**  | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
| * *                 | * *   | * *                 | * *   | * *                    | * *   |
| Prepaid insurance        | ** ** | **$**                    | **1,099**  |                        | $          | 3,257 |   |
| Prepaid inventory        | ** ** | **541**                  |       | 1,197                       |       |
| Prepaid benefits         | ** ** | **241**                  |       | 279                         |       |
| Prepaid utility deposits | ** ** | **926**                  |       | 926                         |       |
| Other prepaid expenses   | ** ** | **1,377**                |       | 778                         |       |
| Other current assets     | ** ** | **1,150**                |       | 886                         |       |
| Totals                   | ** ** | **$**                    | **5,334**  |                        | $          | 7,323 |   |

 

**(6)****          ****Short-termborrowings**

 

The following tablesummarizes the Company’s short-term borrowings:

 
| ** **                                                  | ** ** | **Successor**            | ** ** | **Predecessor**             | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                     | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|                                                        | ** ** | ** **               |       |                        |       |
| Secured revolving credit facility with JPMorgan  Chase Bank | ** ** | **$**                    | —     |                        | $          | 27,765 |   |
| Debtor-in-possession debt facility                          |       | —                   |       | 15,000                      |       |
| Senior secured revolving credit facility with PNC  Bank     |       | —                   |       | —                      |       |
| Note payable – Kiewit                                  |       | 5,252                    |       | —                      |       |
| Total short-term borrowings                                 | ** ** | **$**                    | 5,252      |                        | $          | 42,765 |   |

 

*SecuredRevolving Credit Facility with JPMorgan Chase Bank*

 

As of December 31,2009, $9.6 million in letters of credit and $27.8 million in revolving loanswere outstanding under our pre-petition amended secured revolving creditfacility with JPMorgan Chase Bank, N.A., as administrative agent and alender.  As a result of the Bankruptcy Cases, all the commitments underthe Company’s pre-petition secured revolving credit facility automaticallyterminated, and the principal of the loans and the reimbursement obligationsthen outstanding, together with accrued interest thereon and any unpaid feesand all other obligations of the borrowers accrued under the applicable loandocuments, became immediately due and payable, subject to the automatic stayprovisions of Section 362 of the Bankruptcy Code.  As a result, therewas no longer any liquidity available to us under the pre-petition securedrevolving credit facility.  Amounts owed under the Company’s pre-petitionsecured revolving credit facility were not included in “pre-petitionliabilities subject to compromise” as the secured debt was adequatelycollateralized.  The Secured Revolving Credit Facility was collateralizedby a first security lien on essentially all of the Company’s assets, except forassets of the Mt. Vernon 

 

12

----

Table of Contents

 

facility.  TheCompany continued to accrue and pay interest on this credit facility inaccordance with the Bankruptcy Court’s final debtor-in-possession (“DIP”)financing order.  As of December 31, 2009, the Company held arestricted cash account totaling $7.0 million providing collateral protectionto the pre-petition lenders for certain outstanding letters of credit issuedunder this facility as provided for in a stipulation agreement among theCompany, its pre-petition secured lenders, and the lenders under the Debtors’post-petition debtor in possession credit facility (the “DIP Lenders”).

 

Prior to the PetitionDate, borrowings on the secured revolving facility generally bore interest, atour option, at the following rates (i) the Eurodollar rate or the LIBOrate plus a margin of 4.5%, with a LIBO rate minimum of 3%, or (ii) thegreater of the prime rate or the federal funds rate plus 0.50% (with a minimumrate of LIBOR plus 2.25%), plus a margin of 3.25%.  In addition, thefollowing fees were also applicable: an unused commitment fee of 0.50% onunused borrowing availability, an outstanding letters of credit fee of 4.625%,and administrative and legal costs.

 

Effective with thePetition Date, the interest rate on the revolving credit facility loan revertedto a default rate of 10.5% per annum, while fees for outstanding letters ofcredit reverted to a default rate of 6.625% per annum.  Accrued interestand other fees were payable monthly.

 

The balances owed on thiscredit facility were paid in full on the Effective Date.  At March 31, 2010, the Company had $8.1million in letters of credit outstanding as issued by the PrepetitionLenders.  The $8.1 million outstandingletters of credit were collateralized by $9.0 million in a restricted cashaccount.

 

*Debtor-in-possessionCredit Facility*

 

OnApril 7, 2009, the DIP Lenders entered into a DIP term sheet for a $30 millionDebtor-in-Possession Credit Facility (the “DIP Facility”) with theDebtors.  The Bankruptcy Court enteredan interim order approving the DIP Facility on April 14, 2009 and enteredan order approving the DIP Facility on a final basis on May 5, 2009 (the “FinalDIP Order”).

 

As of December 31,2009, the Company had drawn $15 million of its $30 million DIP Facility. The DIP Facility and the Final DIP Order provided for a first priority termloan in a maximum aggregate principal amount of up to $30 million. Proceeds of the DIP Facility could be used, among other things, to (i) fundthe working capital and general corporate needs of the Company and the costs ofthe Bankruptcy Cases in accordance with an approved budget, and (ii) provideadequate protection, in accordance with the terms of the DIP Facility, to thepre-petition agent and pre-petition lenders under the Company’s existingpre-petition Secured Revolving Credit Facility.  The DIP Facility boreinterest at 16.5%.  The maturity date of the DIP Facility was April 6,2010, or upon the occurrence of certain pre-defined events including emergencefrom bankruptcy.  The DIP Facility was secured by a super-priorityadministrative expense claim on our assets.  As of December 31, 2009,the Company was in compliance with the terms of the DIP Facility.  TheCompany accrued and paid interest expense on this DIP Facility in accordancewith the Bankruptcy Court’s Final DIP Order.

 

In accordance with theterms of the Plan, the balances owed on the DIP Facility were paid in full onthe Effective Date.

 

*SeniorSecured Revolving Credit Facility with PNC Bank*

 

Pursuantto the Plan, on the Effective Date, the Company and its subsidiaries, asborrowers, entered into a Revolving Credit and Security Agreement (the “RevolvingCredit Agreement”) with PNC Bank, National Association, as lender and as agent(“PNC”), providing for a $20 million revolving credit facility (the “RevolvingFacility”).  Amounts under the RevolvingFacility may be borrowed, repaid and reborrowed with all amounts outstandingdue and payable on March 14, 2013. The maximum amount outstanding under the Revolving Facility is limitedby the amount of eligible receivables and eligible inventory of theborrowers.  The Revolving CreditAgreement contains mandatory prepayment requirements in certain circumstancesupon the sale of certain collateral, subject to the ability to reborrowrevolving advances.  Termination of theRevolving Facility is subject to a prepayment premium if terminated more than90 days prior to the third anniversary of the Revolving Facility.

 

13

----

Table of Contents

 

Amountsoutstanding under the Revolving Facility bear interest at a floating rate equalto, at the option of the Company, the alternate base rate (approximates FedFunds Open Rate plus 0.5%) plus 3.00% or the Eurodollar rate plus 6.00%.  The Company will pay a commitment fee of1.00% per annum for unused committed amounts under the Revolving Facility.  Interest is due monthly in arrears withrespect to alternate base rate loans and at the end of each interest periodwith respect to Eurodollar rate loans. For Eurodollar rate loans with interest periods greater than threemonths, interest is payable every three months from the first day of suchinterest period and on the last day of such interest period.

 

Upto $12 million of the Revolving Facility may be applied to letters ofcredit.  Issued letters of credit reduceavailability under the Revolving Facility. The Company will pay a fee for issued and undrawn letters of credit at6.00% per annum of the average daily face amount of each outstanding letter ofcredit and a per annum fronting fee of 0.25% payable quarterly.

 

TheRevolving Credit Agreement contains, and the Company and its subsidiaries willbe required to comply with, customary covenants for facilities of this type,such as (i) affirmative covenants as to maintenance of existence,compliance with laws, preservation of collateral, environmental matters,insurance, payment of taxes, access to books and records, use of proceeds,maintenance of cash management systems, priority of liens in favor of thelenders, maintenance of assets and monthly, quarterly, annual and otherreporting obligations, and (ii) negative covenants, including limitationson liens, additional indebtedness, loans, guarantees, dividends, nature ofbusiness, transactions with affiliates, investments, asset dispositions,capital expenditures, mergers and consolidations, formation of subsidiaries,accounting changes and amendments to constituent documents.

 

TheRevolving Credit Agreement includes customary events of default for facilitiesof this type, including (i) failure to pay principal, interest or otheramounts when due, (ii) breach of representations and warranties, (iii) breachof covenants, (iv) bankruptcy, (v) occurrence of a material adverseeffect, (vi) cross-default to other indebtedness, (vii) judgmentdefault, (viii) invalidity of any loan document, (ix) failure ofliens to be perfected, (x)  the occurrence of a change of ownership, (xi)loss of material licenses or permits, cessation of operations and theincurrence of certain ERISA liabilities. Upon the occurrence and continuance of an event of default, the lendersmay (i) terminate their commitments under the Revolving Facility, (ii) acceleratethe repayment of all of the Company’s obligations under the Revolving Facility,and (iii) foreclose on the collateral granted to them.

 

TheRevolving Credit Agreement grants a first priority lien (subject to certainexclusions) to PNC on the Company’s and its subsidiaries’ (i) accountsreceivable, (ii) general intangibles related to accounts receivable andinventory, (iii) intellectual property, (iv) inventory, (v) investmentproperty, (vi)  instruments related to the foregoing, (vii) depositaccounts, (viii) letters of credit, (ix) money, (x)letter-of-creditrights, (xi) books and records, and (xii) all proceeds of the foregoing.

 

Inaddition to a borrowing base collateralization consisting primarily of accountsreceivable and inventories, the Revolving Facility is also collateralized by a$5.0 million restricted cash account. The Company cannot count the $5.0 million restricted cash account in itsborrowing base.

 

Totalliquidity at March 31, 2010 was $89.3 million, comprised of $81.9 millionin cash and cash equivalents and $7.4 million availability under our newRevolving Facility.  As of March 31,2010, there were no amounts drawn against the Revolving Facility, and nooutstanding letters of credit issued under our Revolving Facility.

 

*Notepayable - Kiewit*

 

Pursuantto the Plan, on the Effective Date, the Company issued a note payable to KiewitEnergy Company for the principal amount of $5.3 million (the “Kiewit Note”).  The Kiewit Note bears interest at the rate of5.00% per annum, compounded semi-annually, and matures on the earlier of (a) March 17,2014 or (b) 120 days after the date on which the Company’s Aurora Westethanol facility is completed and operating at 90% of nameplate capacity.  Nameplate capacity is defined as productioncapacity of 108 million gallons per year of un-denatured ethanol.  No fair value adjustment was made to thecarrying value of the Kiewit Note because the company intended to retire thenote in the very short-term.

 

14

----

Table of Contents

 

On April 30, 2010 the Company paid the Kiewit Note payable toKiewit Energy Company for $5.3 million reflected in short-term borrowings onthe consolidated balance sheet at March 31, 2010.

 

**(7)****          ****Long-term debt**

 

The following tablesummarizes the Company’s long-term debt:

 
| ** **                                                                | ** ** | **Successor**            | ** ** | **Predecessor**             | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                                   | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|                                                                      | ** ** | ** **               |       |                        |       |
| Senior unsecured 10% notes due April 2017                            | ** ** | **$**                    | —     |                        | $          | 300,000 |   |
| Senior secured 13% notes due March 2015                              |       | 105,000                  |       | —                      |       |
| ** **                                                                |       | 105,000                  |       | 300,000                     |       |
| Less: reclassification to pre-petition liabilities  subject to compromise |       | —                   |       | (300,000                    | )          |
| Long-term debt, net                                                       | ** ** | **$**                    | 105,000    |                        | $          | — |   |

 

*SeniorUnsecured Notes*

 

As of December 31,2009, the Company had outstanding $300 million aggregate principal amount ofsenior unsecured notes.  The senior unsecured notes were issued pursuant toan indenture dated as of March 27, 2007, between the Company and WellsFargo Bank, N.A., as trustee and were exchanged for registered notes with thesame terms on August 10, 2007.  The senior unsecured notes aregeneral unsecured obligations of the Company and its subsidiaries.  In April 2009,Deutsche Bank National Trust Company replaced Wells Fargo Bank as SuccessorIndenture Trustee.  As a result of the Bankruptcy Cases, the outstandingprincipal amount of the senior unsecured notes and accrued interest thereonbecame immediately due and payable, and such notes were reclassified to “pre-petitionliabilities subject to compromise” (see Note 12).  The Companydiscontinued the accrual of interest on the senior unsecured notes beyond thePetition Date  Contractual interest expense not recorded from April 8,2009 through December 31, 2009 would have totaled $21.9 million.  Contractual interest expense not recordedfrom January 1, 2010 through March 15, 2010 would have totaled $6.3million.

 

*SeniorSecured Notes*

 

Pursuantto the Plan, on the Effective Date, the Company issued and sold an aggregate of$105 million principal amount of 13% senior secured notes due 2015 (the “Notes”).  The Notes were issued under an indenture (the“Indenture”) dated as of the Effective Date among the Company, each of theCompany’s direct and indirect wholly-owned subsidiaries, as guarantors (the “Guarantors”),and Wilmington Trust FSB, as trustee (in such capacity, the “Trustee”) andcollateral agent (in such capacity, the “Collateral Agent”), in a privatetransaction that was not subject to the registration requirements of theSecurities Act of 1933, as amended (the “Securities Act”).  The Notes accrue interest at a rate of 13%for cash interest payments and 15% if the Company elects paid-in-kind (“PIK”)interest payments.  The Company mayelect, prior to each interest payment date, to make each interest payment onthe Notes (i) entirely in cash or (ii) 8/15 in cash and 7/15 in PIKinterest.  The Notes are fully andunconditionally guaranteed by the Guarantors. The Company will pay interest on the Notes quarterly in arrears on March 15,June 15, September 15 and December 15 of each year, starting on June 15,2010. The Notes mature on March 15, 2015. The Indenture permits the Company to issue additional Notes from time totime up to an aggregate principal amount of $50 million.  The Company will use the net proceeds fromthe issuance of the Notes to fund payments required to be made pursuant to thePlan, and for working capital and general corporate purposes.

 

TheNotes and the guarantees of the Guarantors are secured by a first-priority lienon substantially all of the Company’s and the Guarantors’ assets (with certainexceptions) and by a second-priority lien on the Company’s and the Guarantors’assets that are subject to the first-priority lien granted under the RevolvingFacility with PNC Bank, as described in Note 6.

 

TheIndenture contains various covenants that, subject to certain exceptions, amongother things, limit or restrict the Company’s (and, in certain cases, theGuarantors’ or the Company’s restricted subsidiaries’) ability to (i) 

 

15

----

Table of Contents

 

incuror assume additional debt or provide guarantees in respect of obligations ofother persons, (ii) issue convertible stock and  preferred stock, (iii) pay dividends ordistributions or redeem or repurchase capital stock, (iv) prepay, redeemor repurchase debt, (v) make loans and investments, (vi) incurcertain liens, (vii) impose limitations on dividends, loans or assettransfers from its subsidiaries, (viii) sell or otherwise dispose ofassets, including capital stock of its subsidiaries, (ix) consolidate ormerge with or into, or sell substantially all of its assets to, another person,(x) enter into transactions with affiliates, and (xi) impair the securityinterest in the collateral securing the Notes.

 

Ifa change of control of the Company occurs, each holder of Notes will have theright to require the Company to repurchase all or any part (equal to $2thousand or an integral multiple of $1 thousand in excess of $2 thousand) ofthat holder’s Notes for an amount in cash equal to 101% of the aggregateprincipal amount of Notes repurchased plus accrued and unpaid interest on theNotes repurchased to the date of repurchase.

 

TheCompany must offer to repurchase the Notes at 100% of the principal amount ofthe Notes repurchased plus accrued and unpaid interest on the Notes repurchasedto the date of repurchase if the aggregate sum of proceeds received by theCompany from certain assets sales and events of loss and that are not usedpursuant to the terms of the Indenture exceeds $5 million.

 

TheCompany may redeem the Notes in whole or in part prior to their maturity datefor a premium to the outstanding principal amount, as provided in theIndenture.

 

TheIndenture also provides for customary events of default, such as (i) failureto make payments when due, (ii) noncompliance with covenants, and (iii) occurrenceof certain bankruptcy proceedings.   Ifan event of default occurs and is continuing, the Trustee or the holders of 25%in aggregate principal amount of the outstanding Notes may accelerate paymentof the principal of, and any accrued interest on, the Notes.   If an event of default occurs and iscontinuing or if the Company or the Guarantors do not comply with certain oftheir obligations under the registration rights agreement, interest on the Noteswill accrue at an additional 2% per annum.

 

TheNotes and the guarantees rank equally in right of payment with all of theCompany’s and the Guarantors’ existing and future senior indebtedness,including indebtedness incurred under the Revolving Credit Agreement (see Note6), and senior to all of the Company’s and the Guarantors’ existing and futuresubordinated indebtedness.

 

Thefollowing is a schedule of required debt payments due during each of the nextfive years and thereafter, as of March 31, 2010:

 
| **(In thousands)**       | ** ** | **March 31,** | ** **  |
|-------------------------------|------------|--------------------|-------------|
| * *                      | * *   | * *           | * *    |
| 2011                          | ** ** | **$**              | **—**  | ** ** |
| 2012                          | ** ** | **—**         | ** **  |
| 2013                          | ** ** | **—**         | ** **  |
| 2014                          | ** ** | **—**         | ** **  |
| 2015                          | ** ** | **105,000**        | ** **  |
| Total long-term debt payments | ** ** | **$**              | **105,000** | ** ** |

 

16

----

Table of Contents

 

**(8)****          ****OtherCurrent Liabilities**

 

Othercurrent liabilities are as follows:

 
| ** **                                                 | ** ** | **Successor**            | ** ** | **Predecessor**             | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                    | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
| * *                                                   | * *   | * *                 | * *   | * *                    | * *   |
| Deferred revenue                                           | ** ** | **$**                    | **5,647**  |                        | $          | 4,513 |   |
| Accrued sales tax                                          | ** ** | **9**                    |       | 10                          |       |
| Current portion of deferred income taxes                   | ** ** | **445**                  |       | —                      |       |
| Accrued property taxes                                     | ** ** | **1,218**                |       | 817                         |       |
| Other accrued operating expenses                           | ** ** | **51**                   |       | 65                          |       |
| Reserve for uncertain tax positions (see Note 18)          | ** ** | **—**               |       | 855                         |       |
| Accrued interest on uncertain tax positions (see  Note 18) | ** ** | **—**               |       | 19                          |       |
| Totals                                                     | ** ** | **$**                    | **7,370**  |                        | $          | 6,279 |   |

 

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

 

Otherlong-term liabilities are as follows:

 
| ** **                                                 | ** ** | **Successor**            | ** ** | **Predecessor**             | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                    | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
| * *                                                   | * *   | * *                 | * *   | * *                    | * *   |
| Unfunded postretirement benefit obligations                | ** ** | **$**                    | **1,913**  |                        | 1,984      |   |
| Unfunded pension liability                                 | ** ** | **536**                  |       | 442                         |       |
| Pre-petition liabilities not compromised                   | ** ** | **—**               |       | 11,501                      |       |
| Reserve for uncertain tax positions (see Note 18)          | ** ** | **86**                   |       | —                      |       |
| Accrued interest on uncertain tax positions (see  Note 18) | ** ** | **19**                   |       | —                      |       |
| Totals                                                     | ** ** | **$**                    | **2,554**  |                        | $          | 13,927 |   |
|                                                            |            |                          |            |                             |            |  |  |

 

**(10)****        ****Fair Value Measurements**

 

ASC 820 establishes a framework formeasuring fair value and expands disclosure about fair value measurements.  The statement requires that fair valuemeasurements be classified and disclosed in one of the following threecategories:

 

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

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

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

 

17

----

Table of Contents

 

The following table summarizes thevaluation of our financial instruments which are carried at fair value by theabove ASC 820 pricing levels as of March 31, 2010:

 
| ** **                    | ** ** | **Fair Value Measurements at the Reporting Date Using** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **(in thousands)**       | ** ** | **Fair Value  at  March 31,  2010**                                              | ** ** | **Quoted Prices in  Active Markets  Using Identical  Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                          |       |                                                                                       |       |   |   |   |   |   |   |
| Cash and cash equivalents     |       | $                                                                                          | 81,933     |   | $ | 81,933 |   | $ | — |   | $ | — |   |
| Available for sale securities |       | $                                                                                          | 5,223      |   | $ | 5,223 |   | $ | — |   | $ | — |   |
| Derivative contracts          |       | $                                                                                          | 335        |   | $ | 335 |   | $ | — |   | $ | — |   |

 

TheCompany did not hold any financial assets requiring the use of Level 2 or Level3 inputs at March 31, 2010.

 

The Company recorded net gains of $0.2million, $0.0 million, and $1.2 million, respectively, for the one-month periodended March 31, 2010, the two-month period ended February 28, 2010,and the three month period ended March 31, 2009, under “other non-operating income” in the unaudited CondensedConsolidated Statements of Operations for the changes in the fair value of itsderivative financial instrument positions it held during the respectiveperiods.

 

TheCompany recorded a loss of $1.0 million for the one month ended March 31,2010, a gain of $0.8 million for the two-month period ended February 28,2010 and $451 thousand for the three month period ended March 31, 2009,respectively, under other accumulated comprehensive loss in the ConsolidatedBalance Sheet for the changes in the fair value of its available for salesecurities.

 

The carrying value of other financialinstruments, including cash, accounts receivable and accounts payable andaccrued liabilities approximate fair value due to their short maturities orvariable-rate nature of the respective balances.  The following table presents the otherfinancial instruments that are not carried at fair value but which require fairvalue disclosure as of March 31, 2010 and December 31, 2009.

 
| ** **                     | ** ** | **Successor**                                | ** ** | **Predecessor**                                 | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **As of March 31, 2010** | ** ** | **As of December 31, 2009** | ** ** |
| ** **                     | ** ** | **Carrying Value**                      | ** ** | **Fair Value**                             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Senior unsecured notes payable |       | $                                            | —     |                                            | —     |   | $ | (300,000 | )) | (267,000 | ) |
| Senior secured notes payable   |       | $                                            | (105,000   | )                                               | (105,000   | ) | $ | — |   | — |   |

 

The fair value of our senior unsecurednotes is based upon quoted closing market prices at the end of the period.

 

Thefair value of our senior secured fixed rate notes is based on analysis of market interestrates for guideline companies with similar debt and terms, interest rates forcompanies recently emerged from bankruptcy, and interest rates based on asynthetic debt rating.  Based on thisanalysis we determined that a range of market interest rate for our $105million of Notes would be from 11.5% to 14.5%. Based on the stated rate of the Notes of 13% combined with the option topay a portion of the interest in kind we deemed the fair value to be the facevalue of the Notes at $105 million.  Ifthe interest rate was 1% higher or lower, the fair value of the debt would haveincreased or decreased by $1.2 million, respectively.

 

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

 

ASC 852, *Reorganizations,*requires separate disclosure of reorganization items such asrealized gains and losses from the settlement of pre-petition liabilities,provisions for losses resulting from the reorganization and restructuring ofthe business, as well as professional fees directly related to the process of reorganizingthe Company under Chapter 11.  The Company’s reorganization items for thetwo months ended February 28, 2010 consist of the following:

 

18

----

Table of Contents

 
| ** **                                             | ** ** | **Predecessor**                                             | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **(in thousands)**                                | ** ** | **Two months ended  February 28, 2010** | ** ** |
|                                                   |       |                                                        |       |
| Provision for rejected executory contracts and  leases |       | $                                                           | 9,590      |   |
| Professional fees directly related to  reorganization  |       | 8,776                                                       |       |
| Other (a)                                              |       | 1,916                                                       |       |
| Total reorganization items                             |       | $                                                           | 20,282     |   |

 

----

(a)   Other includes new claims allowed as curesettlements and priority claims and secured claims and other adjustments.

 

No additional reorganization expense will berecognized after February 28, 2010.

 

**(12)****       ****Pre-Petition Liabilities Subjectto Compromise**

 

Pre-petition liabilities subject tocompromise refers to unsecured obligations that were accounted for under thePlan.  Generally, actions to enforce or otherwise effect payment ofpre-Chapter 11 liabilities were stayed.  ASC 852, *Reorganizations*,requires pre-petition liabilities that are subject to compromise to be reportedat the amounts expected to be allowed, even if they may be settled for lesseramounts.  These liabilities represent the estimated amount expected to beallowed on known or potential claims to be resolved through the Chapter 11process, and remain subject to future adjustments arising from negotiatedsettlements, actions of the Bankruptcy Court, rejection of executory contractsand unexpired leases, the determination as to the value of any potentialcollateral securing the claims, proofs of claim, or other events. Pre-petition liabilities subject to compromise also include certain items thatmay be assumed under the Plan, and as such, may be subsequently reclassified toliabilities not subject to compromise.  At hearings held in April 2009,the Bankruptcy Court granted final approval of many of the Debtors First DayMotions covering, among other things, employee obligations, supplier relations,insurance, customer relations, business operations, certain tax matters, cashmanagement, utilities, case management and retention of professionals. Obligations associated with these matters were not classified as pre-petitionliabilities subject to compromise.

 

The Company has rejected certainpre-petition executory contracts and unexpired leases with respect to theCompany’ operations with the approval of the Bankruptcy Court.  Damagesresulting from rejection of executory contracts and unexpired leases aregenerally treated as general unsecured claims and were classified as “pre-petitionliabilities subject to compromise”.  With certain specific exceptions,holders of pre-petition claims (excluding governmental entities holdinggovernmental claims) were required to file proofs of claims by the “general bardate”, which was September 8, 2009.  A bar date is the date by whichcertain claims against the Company must be filed if the claimants wish toreceive any distribution in the Chapter 11 cases on account of suchclaims.  Creditors were notified of the general bar date and therequirement to file a proof of claim with the Bankruptcy Court. Differences between liability amounts estimated by the Company and claims filedby creditors are being investigated and, if necessary, the Bankruptcy Courtwill make a final determination of the allowed amount and priority of theclaim.  The determination of how liabilities would ultimately be treatedcould not be made until the Bankruptcy Court approved the Plan. Accordingly, the ultimate amount or treatment of such liabilities was notdeterminable at December 31, 2009.  Amounts recorded at December 31,2009 were the Company’s best estimate of the amounts the Bankruptcy Court wouldallow.

 

19

----

Table of Contents

 

Pre-petition liabilities subject tocompromise consisted of the following as of December 31, 2009:

 
| **(In  thousands)**                                            | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|
|                                                           |       |                        |       |
| 10% senior unsecured notes due 2017                            |       | $                           | 300,000    |   |
| Provision for rejected executory contracts and  other accruals |       | 26,403                      |       |
| Pre-petition accounts payable                                  |       | 29,451                      |       |
| Accrued interest on senior unsecured notes                     |       | 15,500                      |       |
| Unamortized issuance costs of 10% senior unsecured  notes      |       | (5,805                      | )          |
| Total pre-petition liabilities subject to  compromise          |       | $                           | 365,549    |   |

 

Pre-petition liabilities subject tocompromise include trade accounts payable related to pre-petitionpurchases.  Accrued interest representsamounts due on the senior unsecured notes as of the Petition Date.  Nointerest was accrued on the senior unsecured notes subsequent to the PetitionDate because such amounts were not expected to become part of an allowed claim.

 

All pre-petition liabilities subject tocompromise have been paid, discharged, settled, or reclassified to accountspayable as of the Effective Date.

 

**(13)****        ****Warrants**

 

In connection with the Plan, holders ofallowed Class 9(a) Equity Interests received warrants to purchase upto an aggregate amount of 450,000 shares of common stock of the successorcompany at an exercise price initially set at $40.94 subject to adjustmentexercisable through the earlier of March 15, 2015, or upon the occurrenceof an acceleration event.  Each warrantentitles the registered owner thereof to purchase one share of common stock ofthe successor company.  The Company hasestimated the fair value of these warrants at $6.7 million as of the EffectiveDate using the Black-Scholes Option Pricing Model (the “Option Pricing Model”).  The fair value of the warrants has beenrecorded in Additional Paid-In Capital in the Consolidated Balance Sheet.  Key assumptions used by the Company aresummarized in the following table:

 
| Expected volatility                                              |   | 85.5 | %      |
|------------------------------------------------------------------|--------|------|--------|
| Expected dividend yield                                          |   | 0.0  | %      |
| Risk free rate over the estimated expected life of  the warrants |   | 2.42 | %      |
| Expected term (years)                                            |   | 5    |   |

 

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

 

ThePredecessor’s stock-based compensation plan, 2003 Stock Incentive Plan (the “PredecessorPlan”) was adopted by the Predecessor’s Board of Directors (the “Board”)effective May 30, 2003, and was amended on each of September 6, 2005,December 12, 2005, March 22, 2007 and April 16, 2007.  The Predecessor Plan provided for the grantof awards in the form of stock options, restricted shares or units, stockappreciation rights and other equity-based awards to directors, officers,employees and consultants at the discretion of the Board or the CompensationCommittee of the Board.  The Predecessor’sPlan was terminated by the Predecessor Board on February 23, 2010 pursuantto Article 16 of the Predecessor’s Plan. Upon emergence from Chapter 11 bankruptcy protection, the Plan resultedin the cancellation of the existing equity securities.  As of the Effective Date, 1,573 options, 65restricted stock units, and 76 restricted shares (all in thousands) werecancelled.  The Predecessor recognized$277 thousand  of stock-basedcompensation expense  during the twomonths ended February 28, 2010 and the remaining $2.4 million ofunrecognized expense was recorded as part of the Plan effects.

 

The Successor’s stock-basedcompensation plan, Aventine Renewable Energy Holdings, Inc. 2010 EquityIncentive Plan (the “Successor Plan”), was adopted by the Successor CompanyBoard on March 15, 2010.  TheSuccessor Plan provides for the grant of awards in the form of stock options,restricted stock or units, stock appreciation rights and other equity-basedawards to directors, officers, employees and consultants or advisors (andprospective directors, officers, employees and consultants or advisors) of theSuccessor Company or its affiliates at 

 

20

----

Table of Contents

 

the discretion of the Boardor the Compensation Committee of the Board. The term of awards granted under the Successor Plan is determined by theBoard or by the Compensation Committee of the Board, and cannot exceed tenyears from the date of the grant.  Themaximum number of shares of common stock that may be issued under the SuccessorPlan is limited to 855,000.  Unlessterminated sooner, the Successor Plan will continue in effect until March 15,2020.

 

TheSuccessor values its share-based payments awards using a form of the Black-ScholesOption Pricing Model.  The determinationof fair value of share-based payment awards on the date of grant using theOption Pricing Model is affected by our stock price as well as the input ofother subjective assumptions, of which the most significant are, expected stockprice volatility, the expected pre-vesting forfeiture rate and the expectedoption term (the amount of time from the grant date until the options areexercised or expire).    The Companyestimated volatility by considering, among other things, the historicalvolatilities of public companies engaged in similar industries.  Pre-vesting forfeitures are estimated to be0% due to the nature of the vesting schedules for the limited number of grantsmade to executives.  The expected optionterm is calculated using the “simplified” method permitted by SAB 107.  Our options have characteristicssignificantly different from those of traded options, and changes in theassumptions can materially affect the fair value estimates.

 

Forthe two months ended February 28, 2010, the Predecessor recognized $277thousand of pre-tax stock-based compensation expense, of which $86 thousand wascharged to cost of sales and $191 thousand was charged to selling, general andadministrative expense.  Pre-tax stock-basedcompensation expense for the Successor Company for the one month ended March 31,2010  was $1.7 million, all of which wascharged to selling, general and administrative expense.  The Predecessor recognized $1.3 million ofpre-tax stock-based compensation expense, all charged to selling, general andadministrative expense for the period ending March 31, 2009.  Stock-based compensation reduced earnings pershare by $0.02 per basic and fully diluted share for the three months ended March 31,2009 and by $0.00 per basic and $0.00 per fully diluted for the Predecessor forthe two months ended February 28, 2010 and by $0.12 per basic and fullydiluted share for the Successor for the one month ended March 31,2010.  The Company recorded pre-taxstock-based compensation expense for the three months ended 2010 and 2009 asfollows:

 
| ** **                        | ** ** | **Successor**                             | ** ** | **Predecessor**                               | ** ** | **Predecessor**                                  | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **One month  ended March  31,** | ** ** | **Two months  ended February  28,** | ** ** | **Three months ended  March 31,** | ** ** |
| **(in millions)**            | ** ** | **2010**                                  | ** ** | **2010**                                      | ** ** | **2009**                                         | ** ** |
|                              |       |                                      |       |                                          |       |                                             |       |
| Stock-based compensation expense: |       |                                      |       |                                          |       |                                             |       |
| Non-qualified stock options       | ** ** | **$**                                     | **0.5**    |                                          | $          | 0.3                                              |       | $ | 1.2 |   |
| Restricted stock                  | ** ** | **0.6**                                   | ** ** | **—**                                    |       | 0.1                                              |       |
| Restricted stock units            | ** ** | **0.6**                                   | ** ** | **—**                                    | ** ** | **—**                                       | ** ** |
| Long-term incentive stock plan    | ** ** | **—**                                | ** ** | **—**                                    | ** ** | **—**                                       | ** ** |
| Totals                            | ** ** | **$**                                     | **1.7**    |                                          | $          | 0.3                                              |       | $ | 1.3 |   |

 

21

----

Table of Contents

 

Asof March 31, 2010 and 2009, the Company had not yet recognizedcompensation expense on the following non-vested awards:

 
| ** **             | ** ** | **Successor  2010**                | ** ** | **Predecessor  2009**                                                  | ** ** |
|------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in millions)** | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** |
|                   |       |                               |       |                                                                   |       |   |   |   |   |
| Non-qualified options  | ** ** | **$**                              | **1.9**    | ** **                                                             | **1.8**    |   | $ | 8.0 |   | 1.8 |   |
| Restricted stock       | ** ** | **1.2**                            | ** ** | **1.5**                                                                |       | 0.6 |   | 0.6 |   |
| Restricted stock units | ** ** | **2.7**                            | ** ** | **1.4**                                                                |       | 0.1 |   | 0.2 |   |
| Total                  | ** ** | **$**                              | **5.8**    | ** **                                                             | **1.7**    |   | $ | 8.7 |   | 1.7 |   |

 

TheCompany granted stock options during the quarters ended March 31, 2010 and2009.  The determination of the fairvalue of the stock option awards, using the Black-Scholes Option Pricing Model,incorporated the assumptions in the following table for stock options grantedduring the quarters ended March 31, 2010 and 2009.  The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of grant over the expectedterm.  Expected volatility is calculatedby considering, among other things, the expected volatilities of publiccompanies engaged in similar industries. The expected option term is calculated using the “simplified” methodpermitted by SAB 107.  Assumptions foroptions granted in the quarters ended March 31, 2010 and 2009 are asfollows:

 
| ** **                      | ** ** | **Successor  2010** | ** ** | **Predecessor  2009** | ** ** |
|---------------------------------|------------|---------------------|------------|-----------------------|------------|
| Expected stock price volatility | ** ** | **85.5**            | **%**      | 58.0                  | %          |
| Expected life (in years)        | ** ** | **6.0**             |       | 6.5                   |       |
| Risk-free interest rate         | ** ** | **2.42**            | **%**      | 2.17                  | %          |
| Expected dividend yield         | ** ** | **0.0**             | **%**      | 0.0                   | %          |
| Weighted average fair value     | ** ** | **$**               | **15.81**  |                  | $          | 0.10 |   |
|                                 |            |                     |            |                       |            |  |  |

 

Thefollowing table summarizes stock options outstanding and changes for theSuccessor Company for the period ended March 31, 2010:

 
| ** **                                     | ** ** | **Shares  (in thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life****(years)** | ** ** | **Aggregate  Intrinsic Value****(in thousands)** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                           |       |                            |       |                                   |       |                                              |       |                                                       |       |
| Options outstanding — March 1, 2010  | ** ** | **—**                      |       | $                                      | **—** | ** **                                        | **—** |                                                       | $          | **—** |   |
| Granted                                        |       | 154                             |       | 45.60                                  |       | 10.0                                              | ** ** | **—**                                                 | ** ** |
| Exercised                                      | ** ** | **—**                      | ** ** | **—**                             | ** ** | **—**                                        | ** ** | **—**                                                 | ** ** |
| Cancelled or expired                           | ** ** | **—**                      | ** ** | **—**                             | ** ** | **—**                                        | ** ** | **—**                                                 | ** ** |
| Options outstanding — March 31, 2010 |       | 154                             |       | $                                      | 45.60      |                                              | 10.0       |                                                       | $          | **—** |   |
| Options exercisable — March 31, 2010 |       | 32                              |       | $                                      | 45.60      |                                              | 10.0       |                                                       | $          | **—** |   |

 

22

----

Table of Contents

 

Restrictedstock award activity for the Successor for the one month ended March 31,2010 is summarized below:

 
| ** **                                                   | ** ** | **Shares  (in thousands)** | ** ** | **Weighted  Average  Grant Date  Fair Value  per Award** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                         |       |                            |       |                                                                    |       |
| Unvested restricted stock awards — March 1,  2010  | ** ** | **—**                      |       | $                                                                       | **—** |   |
| Granted                                                      |       | 71                              |       | 24.94                                                                   |       |
| Vested                                                       |       | (21                             | )          | 24.94                                                                   |       |
| Cancelled or expired                                         |       | —                          |       | —                                                                  |       |
| Unvested restricted stock awards — March 31,  2010 |       | 50                              |       | $                                                                       | 24.94      |   |

 

Successorrestricted stock unit award activity for the one month ended March 31,2010 is summarized below:

 
| ** **                                                        | ** ** | **Shares  (in thousands)** | ** ** | **Weighted  Average  Grant Date  Fair Value  per Award** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                              |       |                            |       |                                                                    |       |
| Unvested Restricted stock unit awards —  March 1, 2010  | ** ** | **—**                      |       | $                                                                       | **—** |   |
| Granted                                                           |       | 133                             |       | 24.94                                                                   |       |
| Vested                                                            |       | (21                             | )          | 24.94                                                                   |       |
| Cancelled or expired                                              | ** ** | **—**                      | ** ** | **—**                                                              | ** ** |
| Unvested restricted stock unit awards —  March 31, 2010 |       | 112                             |       | $                                                                       | 24.94      |   |

 

**(15)****        ****Interest Expense**

 

Thefollowing table summarizes interest expense:

 
| ** **                                                  | ** ** | **Successor**                             | ** ** | **Predecessor**                               | ** ** | **Predecessor**                              | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                  | ** ** | **One month  ended March  31,** | ** ** | **Two months  ended February  28,** | ** ** | **Three months  ended  March 31,** | ** ** |
| **(in thousands)**                                     | ** ** | **2010**                                  | ** ** | **2010**                                      | ** ** | **2009**                                     | ** ** |
|                                                        |       |                                      |       |                                          |       |                                         |       |
| Interest expense – senior unsecured notes              | ** ** | **$**                                     | **—** | ** **                                    | **$**      | **—**                                   |       | $ | 7,500 |   |
| Interest expense – senior secured notes                | ** ** | **645**                                   | ** ** | **—**                                    |       | —                                       |       |
| Interest expense – revolving credit facility.          | ** ** | **—**                                | ** ** | **600**                                       |       | 284                                          |       |
| Interest expense – debtor in possession debt  facility | ** ** | **—**                                | ** ** | **502**                                       |       | —                                       |       |
| Amortization of deferred debt issuance costs                | ** ** | **—**                                | ** ** | **313**                                       |       | 922                                          |       |
| Other                                                       | ** ** | **69**                                    | ** ** | **7**                                         |       | 15                                           |       |
| Interest expense                                            | ** ** | **$**                                     | **714**    | ** **                                    | **$**      | **1,422**                                    |       | $ | 8,721 |   |

 

23

----

Table of Contents

 

**(16)****        ****Retirement and Pension Expense**

 

*DefinedContribution Plans*

 

Wehave 401(k) plans covering substantially all of our employees.  We recognized expense with respect to theseplans of $0.1 million for the one month period ended March 31, 2010, $0.1 forthe two-month period ended February 28, 2010, and $0.3 million for the threemonth periods ended March 31, 2010 and 2009.  Contributions made under our definedcontribution plans include a match, at the Company’s discretion, of an employee’scontribution to the plans.  On March 13,2009, we terminated 25 employees as part of a planned reduction in force.  As a result of these terminations, weaccelerated the vesting of the Company’s matching portion of these employee’spreviously unvested contributions.  As aresult of this accelerated vesting, there was no additional expense to theCompany.

 

### *Qualified Retirement Plan*

###  

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

 
| ** **                          | ** **   | **Successor**                                 | ** **   | **Predecessor**                               | ** **   | **Predecessor**                                  | ** **   |
|-------------------------------------|--------------|-----------------------------------------------|--------------|-----------------------------------------------|--------------|--------------------------------------------------|--------------|
| ** **                          | ** **   | **One month ended  March 31,** | ** **   | **Two months  ended February  28,** | ** **   | **Three months ended  March 31,** | ** **   |
| **(In thousands)**             | ** **   | **2010**                                      | ** **   | **2010**                                      | ** **   | **2009**                                         | ** **   |
| *** ***                        | *** *** | *** ***                                  | *** *** | *** ***                                  | *** *** | *** ***                                     | *** *** |
| Service cost                        | ** **   | **$**                                         | **28**       | ** **                                    | **$**        | **56**                                           |         | $ | 72 |   |
| Interest cost                       | ** **   | **45**                                        | ** **   | **87**                                        |         | 124                                              |         |
| Expected return on plan assets      | ** **   | **(58**                                       | **)**        | **(115**                                      | **)**        | (179                                             | )            |
| Amortization of prior service costs | ** **   | **—**                                    | ** **   | **7**                                         |         | 11                                               |         |
| Amortization of net actuarial loss  | ** **   | **—**                                    | ** **   | **14**                                        | ** **   | **—**                                       | ** **   |
| Net periodic pension cost           | ** **   | **$**                                         | **15**       | ** **                                    | **$**        | **49**                                           |         | $ | 28 |   |

###  

### *Postretirement Benefit Obligation*

###  

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

 

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

 
| ** **                          | ** **   | **Successor**                                 | ** **   | **Predecessor**                               | ** **   | **Predecessor**                                  | ** **   |
|-------------------------------------|--------------|-----------------------------------------------|--------------|-----------------------------------------------|--------------|--------------------------------------------------|--------------|
| ** **                          | ** **   | **One month ended  March 31,** | ** **   | **Two months  ended February  28,** | ** **   | **Three months ended  March 31,** | ** **   |
| **(In thousands)**             | ** **   | **2010**                                      | ** **   | **2010**                                      | ** **   | **2009**                                         | ** **   |
| *** ***                        | *** *** | *** ***                                  | *** *** | *** ***                                  | *** *** | *** ***                                     | *** *** |
| Service cost                        | ** **   | **$**                                         | **5**        | ** **                                    | **$**        | **12**                                           |         | $ | 19 |   |
| Interest cost                       | ** **   | **10**                                        | ** **   | **20**                                        |         | 26                                               |         |
| Amortization of prior service costs | ** **   | **—**                                    | ** **   | **(4**                                        | **)**        | (9                                               | )            |
| Net periodic pension cost           | ** **   | **$**                                         | **15**       | ** **                                    | **$**        | **28**                                           |         | $ | 36 |   |

###  

**PatientProtection and Affordable Care Act**

 

In March 2010,the Patient Protection and Affordable Care Act (“PPACA”) was enacted,potentially impacting the Company’s cost to provide healthcare benefits to itseligible active and retired employees.  The PPACA has both short-term andlong-term implications on benefit plan standards.  Implementation of thislegislation is planned to occur in phases, beginning in 2010, but to a greaterextent with the 2011 benefit plan year and extending through 2018.

 

24

----

Table of Contents

 

TheCompany is currently analyzing this legislation to determine the full extent ofthe impact of the required plan standard changes on its employee healthcareplans and the resulting costs.  While the Company anticipates that coststo provide healthcare to eligible active employees and certain retiredemployees will increase in future years, it is uncertain at this time, howsignificant the increase will be.

 

**(17)****        ****Derivative Instruments andHedging**

 

Ouroperations and cash flows are subject to fluctuations due to changes in commodityprices.  Historically, we have used derivative financial instruments tomanage commodity prices.  Derivatives used are primarily commodity futurescontracts, swaps and option contracts.

 

Weapply the provisions of ASC 815, *Derivativesand Hedging*, for the Company’s derivatives.  The Company’sfutures contracts are not designated as hedges and, therefore, are marked tomarket each period, with corresponding gains and losses recorded in othernon-operating income.  The fair value of these derivative instruments isrecognized in other current assets or liabilities in the Consolidated BalanceSheet, net of any cash received from the brokers.

 

ASC815 requires a company to evaluate contracts to determine whether the contractsare derivatives.  Certain contracts that meet the literal definition of aderivative under ASC 815 may be exempted from the accounting and reportingrequirements of ASC 815 as normal purchases or normal sales.  Normalpurchases and normal sales are contracts that provide for the purchase or saleof something other than a financial instrument or derivative instrument thatwill be delivered in quantities expected to be used or sold over a reasonableperiod in the normal course of business.** TheCompany elects to designate its forward purchases of corn and natural gas andforward sales of ethanol as normal purchases and normal sales under ASC815.  Accordingly, these contracts are not reflected in the consolidatedfinancial statements until execution.

 

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

 

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

 

Wehave firm-price purchase commitments with some of our corn suppliers underwhich we agree to buy corn at a price set in advance of the actual delivery ofthat corn to us.  Under thesearrangements, we assume the risk of a price decrease in the market price ofcorn between the time this price is fixed and the time the corn is delivered.

 

Wesometimes enter into firm-price purchase commitments with some of our naturalgas suppliers under which we agree to buy natural gas at a price set in advanceof the actual delivery of that natural gas to us.  Under these arrangements, we assume the riskof a price decrease in the market price of natural gas between the time thisprice is fixed and the time the natural gas is delivered.  At December 31, 2009 and March 31,2010, we did not have any commitments to purchase natural gas in advance atprices other than at market.  We accountfor these transactions as normal purchases under ASC 815, and accordingly, donot mark these transactions to market.

 

Weare also subject to market risk with respect to ethanol pricing.  Our ethanol sales are priced using contractsthat can either be fixed; based upon the price of wholesale gasoline plus or minusa fixed amount; or based upon a market price at the time of shipment.  We sometimes fix the price at which we sellethanol using fixed price physical delivery contracts.  We have elected to account for thesetransactions as normal sales transactions under ASC 815, and accordingly, havenot marked these transactions to market.

 

25

----

Table of Contents

 

Derivativeinstruments not designated as hedging instruments under ASC 815 at March 31,2010 and December 31, 2009 were as follows:

 
| ** **                  | ** ** | ** **                                 | ** ** | **Fair Value  (in thousands)** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| **Type**                    | ** ** | **Balance Sheet Classification** | ** ** | **March 31,  2010**                 | ** ** | **December  31, 2009** | ** ** |
| ** **                  | ** ** | ** **                                 | ** ** | **Successor**                            | ** ** | **Predecessor** | ** ** |
| Short corn future positions |       | Other  current assets                      |       | $                                        | 221        |   | $ | — |   |
|                             |            |                                            |            |                                          |            |  |  |  |  |

 

Therealized and unrealized effect on our condensed consolidated statement ofoperations for derivatives not designated as hedging instruments under ASC 815 forthe one month period ended March 31, 2010, two month period ended February28, 2010 and the three month period ended March 31, 2009 are as follows:

 
| ** **                  | ** ** | ** **                                                | ** ** | **Fair Value  (in thousands)** | ** ** |
|-----------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                  | ** ** | ** **                                                | ** ** | **March 31,**                       | ** ** | **February 28,** | ** ** | **March 31,** | ** ** |
| **Type**                    | ** ** | **Statement of Operations Classification** | ** ** | **2010**                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                  | ** ** | ** **                                                | ** ** | **Successor**                            | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** |
| Short corn future positions |       | Other  non-operating income/(expense)                     |       | $                                        | 176        |   | $ | — |   | $ | 1,188 |   |
|                             |            |                                                           |            |                                          |            |  |  |  |  |  |  |  |

 

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

 

**(18)****        ****Income Taxes**

 

For the one month ended March 31,2010, two months ended February 28, 2010 and three months ended March 31,2009, the Company recorded a provision for income taxes as shown below. The taxprovision in future periods will vary based on current and future permanent andtemporary differences, as well as future operating results.

 

Current and deferredincome tax expense (benefit) is as follows:

 
| ** **                      | ** ** | **Successor**                        | ** ** | **Predecessor**                          | ** ** |
|---------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| ** **                      | ** ** | **One Month  Ended  March 31,** | ** ** | **Two Months  Ended  February 28,** | ** ** | **Three Months  Ended  March, 31** | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2010**                                 | ** ** | **2009** | ** ** |
|                            |       |                                 |       |                                     |       |   |   |
| **Current benefit**:            |       |                                 |       |                                     |       |   |   |
| **Federal income taxes**        | ** ** | **$**                                | **—** | ** **                               | **$**      | **(562** | **)** | $ | (7,753 | ) |
| **State income taxes**          | ** ** | **—**                           | ** ** | **(64**                                  | **)**      | (895 | ) |
| ** **                      | ** ** | ** **                           | ** ** | ** **                               |       |   |   |
| **Current income tax benefit**  | ** ** | **—**                           | ** ** | **(626**                                 | **)**      | (8,648 | ) |
| ** **                      | ** ** | ** **                           | ** ** | ** **                               |       |   |   |
| **Deferred expense :**          | ** ** | ** **                           | ** ** | ** **                               |       |   |   |
| **Federal income taxes**        | ** ** | **—**                           | ** ** | **—**                               |       | 4,370 |   |
| **State income taxes**          | ** ** | **—**                           | ** ** | **—**                               |       | 500 |   |
| ** **                      | ** ** | ** **                           | ** ** | ** **                               |       |   |   |
| **Deferred income tax expense** | ** ** | **—**                           | ** ** | **—**                               |       | 4,870 |   |
| ** **                      | ** ** | ** **                           | ** ** | ** **                               |       |   |   |
| **Total income tax benefit**    | ** ** | **$**                                | **—** | ** **                               | **$**      | **(626** | **)** | $ | (3,778 | ) |

 

26

----

Table of Contents

 

The Company’s effectivetax rate differs from the statutory U.S. federal income tax rate for the onemonth ended March 31, 2010, two months ended February 28, 2010 andthe three months ended March 31, 2009 principally due to the impact ofstate and local taxes, net of federal benefit, non-includable reorganizationincome, tax deductible goodwill, increases in valuation allowances,non-deductible reorganization expenses, and other permanent differences betweenbook and tax.

 

Deferred income taxesincluded in our Consolidated Balance Sheet reflect the net tax effects oftemporary differences between the carrying amount of assets and liabilities forfinancial reporting purposes and the carrying amount for income tax returnpurposes.

 

27

----

Table of Contents

 

Significant components ofour deferred tax assets and liabilities are as follows at March 31, 2010and December 31, 2009:

 
| ** **                                       | ** ** | **Successor**                | ** **  | **Predecessor**                 | ** ** |
|--------------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| **(In thousands)**                          | ** ** | **March 31, 2010** | ** **  | **December 31, 2009** | ** ** |
|                                             |       |                         |        |                            |       |
| Current  deferred tax asset                      | ** ** | **$**                        | **3,716**   |                            | $          | 3,305 |   |
| Valuation  allowance                             | ** ** | **(3,640**                   | **)**       | (2,326                          | )          |
| Net  current deferred tax asset                  | ** ** | **$**                        | **76**      |                            | $          | 979 |   |
|                                             |       |                         |        |                            |       |
| Current  deferred tax liability                  | ** ** | **$**                        | **521**     |                            | $          | 979 |   |
|                                             |       |                         |        |                            |       |
| Long-term  deferred tax liabilities:             |       |                         |        |                            |       |
|                                             | ** ** | ** **                   |        |                            |       |
| Basis  of property, plant and equipment          | ** ** | **$**                        | —      |                            | $          | 4,759 |   |
| Benefit  obligations                             | ** ** | **33**                       |        | 61                              |       |
| Partnership  investment                          | ** ** | **4,648**                    |        | 4,744                           |       |
|                                             | ** ** | ** **                   |        |                            |       |
| Accumulated  other comprehensive income          | ** ** | **—**                   |        | 1,031                           |       |
| Available  for sale securities                   | ** ** | **1,250**                    |        | —                          |       |
| Other                                            |       | —                       |        | 207                             |       |
| Long-term  deferred tax liability                | ** ** | **$**                        | **5,931**   |                            | $          | 10,802 |   |
|                                             |       |                         |        |                            |       |
| Long-term  deferred tax assets:                  |       |                         |        |                            |       |
|                                             |       |                         |        |                            |       |
| Basis  of property, plant and equipment          |       | $                            | **141,114** |                            | $          | — |   |
| Capital  losses                                  | ** ** | **4,647**                    |        | 13,739                          |       |
| Unrealized  loss on bankruptcy                   |       | —                       |        | 9,633                           |       |
| Investment  in marketing alliances               | ** ** | **688**                      |        | 1,213                           |       |
|                                             | ** ** | ** **                   |        |                            |       |
| Accumulated  other comprehensive income          | ** ** | **830**                      |        | —                          |       |
| State  NOL’s                                | ** ** | **2,614**                    |        | 1,568                           |       |
| Stock-based  compensation                        | ** ** | **—**                   |        | 5,793                           |       |
| Debt  issuance costs and original issue discount | ** ** | **18,731**                   |        | —                          |       |
| Valuation  allowance                             | ** ** | **(165,184**                 | **)**       | (24,080                         | )          |
| Long-term  deferred tax assets                   | ** ** | **$**                        | **3,440**   |                            | $          | 7,866 |   |
|                                             |       |                         |        |                            |       |
| Net  deferred tax liability                      |       | $                            | **(2,936**  | **)**                           | $          | (2,936 | ) |

 

The Company records avaluation allowance on its deferred tax assets to reduce the deferred taxassets to the amount that management believes is more likely than not to berealized. In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will be realized. Management considered the scheduledreversal of deferred tax liabilities and tax planning strategies in making thisassessment.  Due to the Company’s history of losses, allowances have beenestablished except for deferred benefits available to offset certain deferredtax liabilities that will reverse over time. The net increase in 

 

28

----

Table of Contents

 

valuation allowance forthe three months ended March 31, 2010 is attributable to a significantincrease in our deferred tax assets related primarily to a write down in thenet book value of fixed assets as part of fresh start accounting.

 

The current andnoncurrent components of our deferred tax balances are generally based on thebalance sheet classification of the asset or liability creating the temporarydifference.  If the deferred tax asset orliability is not based on a component of a balance of our balance sheet, suchas our state net operating loss (“NOL”) carryforwards, the classification ispresented based on the expected reversal date of the temporary difference.  Our valuation allowance has been classifiedas current and noncurrent based on the percentages of current and noncurrentdeferred tax assets to total deferred tax assets.

 

A debtor is not requiredto include gain on the discharge of debt in income if the debt discharge occursin bankruptcy. However, IRC Section 108 requires that the debtor’s NOL,capital and credit carryovers first be reduced and then tax basis in assets bereduced. The Company expects to recognize approximately $52 million ofcancellation of debt income resulting from the Plan related to the Company’sbankruptcy reorganization that will reduce available current year tax losses,capital loss carryforwards, and the tax basis in other assets. Afterconsideration of this reduction, the Company expects to have no NOLcarryforwards available to offset future federal taxable income.

 

Further, theconsummation of the Plan generated an “ownership change” as defined in Section 382of the Internal Revenue Code, which limits the Company’s ability to utilizecertain carryover tax attributes. The Company’s net unrealized built in losses(“NUBIL”) may be limited by Section 382 which could potentially result inthe significant acceleration of tax payments. The Company’s state net operatingloss carryforwards are also subject to similar, but varying, restrictions ontheir future use.

 

As of March 31,2010, we had $0.1 million of uncertain tax benefits.  All of our unrecognized tax benefits, ifrecognized in future periods, would impact the Company’s effective taxrate.  At March 31, 2010 ourliability for unrecognized tax benefits is included in other currentliabilities on the condensed consolidated balance sheet.

 

Our federal income taxreturns for 2006 to 2008 are open for examination under the federal statute oflimitations.  We file in numerous stateand foreign jurisdictions with varying statutes of limitations open from 2005to 2008.

 

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

 

Basic earnings (loss) per share are computedby dividing net income (loss) by the weighted average number of common sharesoutstanding during each period.  Dilutedearnings (loss) per share are calculated using the treasury stock method inaccordance with ASC 260, and includes the effect of all dilutive securities,including non-qualified stock options and restricted stock units awards (“RSU’s”).  In accordance with ASC 260, shares issuable upon thesatisfaction of certain conditions pursuant to a contingent stock agreement,such as those contemplated by the Plan, are considered outstanding commonshares and included in the computation of basic earnings per share.  Accordingly, 1.9 million sharescontemplated by the Plan to be distributed to holders of allowed general,unsecured claims are included in the calculation of basic earnings per sharefor the three months ended March 31, 2010.

 

29

----

Table of Contents

 

Thefollowing table sets forth the computation of basic and diluted earnings (loss)per share:

 
| ** **                                                         | ** ** | **One Month  Ended March 31,** | ** **  | **Two Months  Ended February  28,** | ** ** | **Three Months  Ended March  31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------|-------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | **2010**                                      | ** **  | **2010**                                      | ** ** | **2009**                                     | ** ** |
|                                                               |       |                                          |        |                                          |       |                                         |       |
| Net income (loss)                                                  | ** ** | **$**                                         | **(7, 100** | **)**                                         | **$**      | **(266,293**                                 | **)**      | $ | (24,567 | ) |
|                                                               |       |                                          | ** **  | ** **                                    |       |                                         |       |
| Weighted average shares and share equivalents  outstanding:        |       |                                          | ** **  | ** **                                    |       |                                         |       |
| Basic shares                                                       | ** ** | **8,662**                                     | ** **  | **43,401**                                    |       | 42,971                                       |       |
| Dilutive non-qualified stock options and RSU’s                | ** ** | **—**                                    | ** **  | **—**                                    |       | —                                       |       |
| Diluted weighted average shares and share  equivalents             | ** ** | **8,662**                                     | ** **  | **43,401**                                    |       | 42,971                                       |       |
|                                                               |       |                                          | ** **  | ** **                                    |       |                                         |       |
| Income (loss) per common share - basic:                            | ** ** | **$**                                         | **(0.82**   | **)**                                         | **$**      | **(6.14**                                    | **)**      | $ | (0.57 | ) |
| Income (loss) per common share - diluted:                          | ** ** | **$**                                         | **(0.82**   | **)**                                         | **$**      | **(6.14**                                    | **)**      | $ | (0.57 | ) |

 

## ***We had additional potentially dilutive securitiesoutstanding representing options of 154 thousand common shares at March 31,2010 (Successor) and 3.6 million common shares at  March 31, 2009 (Predecessor) that werenot included in the computation of potentially dilutive securities because theoptions exercise prices were greater than the average market price of thecommon shares or because the options were anti-dilutive, and were excluded fromthe calculation of diluted earnings per share in accordance with ASC 260.***

 

**(20)****                         ****Comprehensive Income (Loss)**

 

Thefollowing table summarizes comprehensive income (loss):

 
| ** **                                                       | ** ** | **Successor**                                           | ** ** | **Successor**                                               | ** ** | **Predecessor**                                            | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(In thousands)**                                          | ** ** | **One Month Ended  March 31, 2010** | ** ** | **Two Months Ended  February 28, 2010** | ** ** | **Three Months Ended  March 31, 2009** | ** ** |
| Net  Income (Loss) attributable to controlling interest          | ** ** | **$**                                                   | **(7,100** | **)**                                                       | **$**      | **(266,923**                                               | **)**      | **$** | **(24,567** | **)** |
| Unrealized  gain (loss) on available for sale securities         | ** ** | **(985**                                                | **)**      | **765**                                                     | ** ** | **450**                                                    |       |
| Unrecognized  pension and postretirement liabilities, net of tax | ** ** | **—**                                              | ** ** | **(3**                                                      | **)**      | **1**                                                      |       |
| Comprehensive  income (loss)                                     | ** ** | **$**                                                   | **(8,085** | **)**                                                       | **$**      | **(266,161**                                               | **)**      | **$** | **(24,116** | **)** |

 

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

 

TheCompany operates in one reportable business segment, the manufacture andmarketing of fuel-grade ethanol.

 

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

 

On April 7, 2009,the Company and all of its direct and indirect subsidiaries filed voluntarypetitions for relief under Chapter 11 of the Bankruptcy Code with theBankruptcy Court.  The Company’s subsidiaries that are part of theBankruptcy Filing include Aventine Renewable Energy, LLC, a Delaware limitedliability company, Aventine Renewable Energy, Inc., a Delawarecorporation; Aventine Renewable Energy — Mt. Vernon, LLC, a Delaware limitedliability company; Aventine Renewable Energy — Aurora West, LLC, a Delawarelimited liability company; and Nebraska Energy, LLC, a Kansas limited liabilitycompany.  The Bankruptcy Cases are being jointly administered by theBankruptcy Court under Case Number 09-11214 (KG).  Aventine continued tooperate its business as a debtor-in-possession under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of theBankruptcy Code and orders of the Bankruptcy Court until it emerged frombankruptcy on March 15, 2010.  As a result of the commencement of theChapter 11 cases, attempts to collect, secure, or enforce remedies with respectto pre-petition claims against Aventine are subject to the automatic stayprovisions of Section 362 of the Bankruptcy Code.  The Companyfiled the Plan on January 13, 2010. The Plan was confirmed on the Confirmation Date and became effective onthe Effective Date.

 

On November 6,2008, the Company commenced an action against JP Morgan Securities, Inc.and JP Morgan Chase Bank, N.A. (hereinafter collectively referred to as “JPMorgan”) in the Tenth Judicial Circuit in Tazewell County, Illinois.  The Company’s complaint relates to lossesincurred of approximately $31.6 million as a result of investments in StudentLoan Auction Rate Securities purchased through JP Morgan.  At this time, we cannot be certain as to theoutcome of this litigation.

 

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

 

30

----

Table of Contents

 

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

 

The Company evaluated subsequent events through the time of filing thisdocument with the SEC, identifying no subsequent events which have accountingor disclosure impacts, except as follows:

 

The Company, through itswholly-owned subsidiaries Aventine Renewable Energy — Aurora West, LLC andAventine Renewable Energy — Mt. Vernon, LLC, entered into separate, butsubstantially identical short form contracts (the “Short Form Contracts”)with Fagen, Inc. (“Fagen”) to construct ethanol facilities in Aurora,Nebraska (the “Aurora Agreement”) and Mount Vernon, Indiana (the “Mt. VernonAgreement”) (the “Ethanol Facilities”). The Company entered into the AuroraAgreement on April 23, 2010, and the Mt. Vernon Agreement on May 4,2010.  Under the terms of the Short Form Contracts,Fagen will provide labor, construction equipment and construction consumablesnecessary to complete the Ethanol Facilities in accordance with the Company’sdesign and specifications.  The targetedcost of completion under the Aurora Agreement is approximately $25.1million.  The targeted cost of completionunder the Mt. Vernon Agreement is approximately $21.4 million.  The Company may order changes in the workdone under the Short Form Contracts, and, consequently, the contract sumsmay be adjusted accordingly.

 

The Short Form Contractswere entered into with the express intention that the contracts did not reflectthe full and final agreement of the parties. The Short Form Contracts state that if the parties are unable tocome to final terms as of May 10, 2010, with respect to the AuroraAgreement and as of May 17, 2010, with respect to the Mt. VernonAgreement, then Fagen has the right to terminate the agreements and be paid forcosts incurred to that date plus a fee in the amount of 15% of all costs.  As discussed below, with regard to the AuroraAgreement, the Company and Fagen entered into a final agreement on May 14,2010, and Fagen did not indicate its desire to require payment for costsincurred thereunder.

 

Fagen may terminate therespective Short Form Contract if work is stopped by any public authorityfor 30 days or more through no fault of Fagen or if the Company fails to payFagen any payment within 30 days after it is due, upon seven days’ writtennotice to the Company.  Fagen will beentitled to request reimbursement for costs incurred under certain agreed uponcircumstances.  If the Company wrongfullyrefuses to accept such costs within seven days of receipt of Fagen’s requests,upon seven days’ written notice to the Company, Fagen may terminate therespective Short Form Contract.  TheCompany may, upon seven days’ written notice, terminate the respective Short Form Contractif Fagen defaults in its performance of the construction or violates any of theprovisions of the respective Short Form Contract.

 

The Company, through itswholly-owned subsidiaries Aventine Renewable Energy — Aurora West, LLC andAventine Renewable Energy — Mt. Vernon, LLC, entered into separate, butsubstantially identical construction agreements (individually, the “AuroraConstruction Agreement” and the “Mt. Vernon Construction Agreement” andcollectively, the “Construction Agreements”) with Fagen, which are intended tosupersede and replace the Short Form Contracts to construct the EthanolFacilities.  The Company entered into theAurora Construction Agreement on May 14, 2010, with an effective date of April 12,2010.  The Company entered into the Mt.Vernon Construction Agreement on May 17, 2010, with an effective date of April 29,2010.  Under the terms of theConstruction Agreements, Fagen will perform all work and services in connectionwith the construction of the Ethanol Facilities, and provide all material, equipment,tools and labor necessary to complete the Ethanol Facilities (the “Work”).  The targeted cost of completion, includingFagen’s minimum completion fee, under the Aurora Construction Agreement isapproximately $25.1 million, subject to adjustments of Fagen’s completionfee.  The targeted cost of completion,including Fagen’s minimum completion fee, under the Mt. Vernon ConstructionAgreement is approximately $21.4 million, subject to adjustments of Fagen’scompletion fee.  The Company and Fagenmay agree to changes in the Work, and, consequently, the contract sums may beadjusted accordingly.

 

In addition to amobilization fee, the Company is required to make monthly progress paymentsunder the Construction Agreements.  TheConstruction Agreements provide for penalties, work suspension and negation ofwarranties if payments are not timely made.

 

Under the ConstructionAgreements, physical completion of the Work (“Mechanical Completion”) is to beachieved no later than September 1, 2010, subject to adjustment inaccordance with the Construction Agreements (the “Scheduled MechanicalCompletion Date”).  Final completion ofthe Work is to be achieved within 90 days after the earlier of the actual dateof Mechanical Completion or the Scheduled Mechanical Completion Date.

 

The Company may, uponcompliance with the cure opportunities provided in the Construction Agreements,terminate the respective Construction Agreement upon Fagen’s failure to abideby certain terms of the respective Construction Agreement.  Fagen may, upon compliance with the cureopportunities provided in the Construction Agreements, stop Work under therespective Construction Agreement for the Company’s failure to make paymentswhen due.  Fagen may, upon compliancewith the cure opportunities provided in the Construction Agreements, terminatethe respective Construction Agreement for the Company’s failure to makepayments seven days after Fagen has stopped Work or for certain Work stoppages ofdurations described in the Construction Agreements that are not the fault ofFagen.

 

There is no materialrelationship between Fagen and the Company other than as set forth above.

 

On April 30, 2010 the Company paid the Kiewit Note payable toKiewit Energy Company for $5.3 million reflected in short-term borrowings onthe consolidated balance sheet at March 31, 2010.

 

**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, plantexpansions, capital expenditures and sources and uses of cash, for example, areforward-looking statements.*

 

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

 

**CompanyOverview**

 

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

 

31

----

Table of Contents

 

**Results of Operations**

 

The following discussion summarizesthe significant factors affecting the consolidated operating results of theCompany for the three month periods ended March 31, 2010 and 2009.  This discussion should be read in conjunctionwith the unaudited condensed consolidated financial statements and notes to theunaudited condensed consolidated financial statements contained in Item 1above, and the consolidated financial statements and related notes for the yearended December 31, 2009 included in the Company’s Annual Report on Form 10-K.

 

The Company emerged frombankruptcy on March 15, 2010.   Onthe Effective Date, the Company implemented fresh-start reporting in accordancewith U.S. GAAP.  Thus, the consolidatedfinancial statements prior to March 1, 2010 reflect results based upon thehistorical cost basis of the Company while the post-emergence consolidatedfinancial statements reflect the new basis of accounting incorporating the fairvalue adjustments made in recording the effects of fresh-start reporting.  Therefore, the post-emergence periods are notcomparable to the pre-emergence periods. However, for discussions on the results of operations, the Company hascombined the results for the three months ended March 31, 2010.  The combined period has been compared to thethree months ended March 31, 2009. The Company believes that the combined financial results providemanagement and investors a better perspective of the Company’s core businessand on-going operational financial performance and trends for comparativepurposes.

 

Ourrevenues are principally derived from the sale of ethanol and from the sale ofco-products (corn gluten feed and meal, corn germ, condensed corn distillerssolubles, DDGS, WDGS, carbon dioxide, and brewers’ yeast) that we produce asby-products during the production of ethanol at our plants, which we refer toas co-product revenues.

 

*Recent Events*

 

OnApril 7, 2009, the Company and all of its direct and indirect subsidiaries(the “Company”) filed voluntary petitions for relief under Chapter 11 of theBankruptcy Code with the Bankruptcy Court. From the Petition Date through the Effective Date, the Company operatedits business as a debtor-in-possession under the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Codeand orders of the Bankruptcy Court.  TheBankruptcy Cases are being jointly administered by the Bankruptcy Court underCase No. 09-11214 (KG).  In general,as a debtor-in-possession, the Company was authorized under the Bankruptcy Codeto continue to operate as an ongoing business, but could not engage intransactions outside of the ordinary course of business without the approval ofthe Bankruptcy Court.  The companiesspecifically are (i) Aventine Renewable Energy Holdings, Inc.; (ii) AventineRenewable Energy, LLC, a Delaware limited liability company; (iii) AventineRenewable Energy, Inc. a Delaware corporation; (iv) AventineRenewable Energy — Mt. Vernon, LLC, a Delaware limited liability company; (v) AventineRenewable Energy — Aurora West, LLC, a Delaware limited liability company; (vi) AventinePower, LLC, a Delaware limited liability company, and (vii) NebraskaEnergy, LLC, a Kansas limited liability company.

 

Inorder to successfully exit Chapter 11, Aventine needed to propose, and obtain confirmationby the Bankruptcy Court of, a plan of reorganization that satisfied therequirements of the Bankruptcy Code.  Aplan of reorganization could, among other things, resolve the Company’spre-petition obligations, set forth the revised capital structure of the newlyreorganized entity and provide for corporate governance subsequent to exit frombankruptcy.  In addition to the need forBankruptcy Court confirmation and satisfaction of Bankruptcy Code requirements,a plan of reorganization had to be accepted as described below by holders ofimpaired claims and equity interests in order to become effective.  Aventine filed its Plan on January 13,2010.  The Plan was confirmed by theBankruptcy Court by entry of an order on February 24, 2010.  The Plan was declared effective on March 15,2010.  In connection with the Plan,Aventine:

 

·      appointed a new management team and six newdirectors to our Board of Directors;

·      issued and sold an aggregate of $105 millionprincipal amount of our Notes and 1,710,000 shares of common stock to holdersof our pre-petition notes that subscribed to the sale of our Notes;

·      began a pro rata distribution of shares of commonstock to holders of our pre-petition notes and to holders of allowed generalunsecured claims, with an initial distribution of 4,904,980 shares to 

 

32

----

Table of Contents

 

holders of pre-petition notes and 71,118 shares to holders of allowedgeneral unsecured claims, out of a total of 6,840,000 shares available;

·      entered into the revolving credit and securityagreement with PNC Bank, National Association, providing for a $20 millionrevolving credit facility;

·      entered into a warrant agreement with American StockTransfer & Trust Company, LLC, pursuant to which we issued warrants topurchase an aggregate of 450,000 shares of common stock to holders of equityinterests prior to our emergence from bankruptcy;

·      amended and restated our organizational documentsand those of our subsidiaries; and

·      adopted a 2010 equity incentive plan providing forthe issuance of up to 855,000 shares of common stock, subject to adjustment.

 

UnderSection 365 of the Bankruptcy Code, Aventine was able to assume, assumeand assign, or reject executory contracts and unexpired leases, including realproperty, railcars and equipment leases, subject to the approval of theBankruptcy Court and certain other conditions. Rejection constituted a court-authorized breach of the lease or contractin question and, subject to certain exceptions, relieved Aventine of its futureobligations under such lease or contract but created a pre-petition claim fordamages caused by such breach or rejection, subject to Aventine’s right toreview and contest such claim.  Partieswhose contracts or leases were rejected were allowed to file claims againstAventine for damages.  Generally, theassumption of an executory contract or unexpired lease required Aventine tocure all prior defaults under such executory contract or unexpired lease,including all pre-petition arrearages, and to provide adequate assurance offuture performance.  Due to the uncertainnature of the remaining disputed and unresolved claims, the Company is unableto project the magnitude of such claims with any degree of certainty.  There may be differences between the amount ofSuccessor Company common stock reserved by the Company for such pre-petition liabilitiescompared to the amount claimed by Aventine’s creditors.  Significant litigation may be required toresolve any such disputes or discrepancies.

 

*Executive Summary of FinancialResults*

 

Thenet loss for the first quarter of 2010 was $273.4 million as compared to a netloss of $24.6 million in the first quarter of 2009.  The primary factors in the net loss in thefirst quarter of 2010 were a $136.6 million gain due to plan effects and a$387.7 million loss due to fresh start accounting adjustments pertaining to theCompany’s Chapter 11 bankruptcy proceedings. Additionally, the Company recognized $20.3 million of reorganizationcost in 2010.  The loss beforereorganization items and income taxes for the first quarter of 2010 was $2.7million compared to $28.3 million in 2009.

 

Commodityspread, defined as gross ethanol selling price per gallon less net corn costper gallon, increased from $0.53 per gallon in the first quarter of 2009 to$0.97 per gallon in the first quarter of 2010. The average sales price per gallon of ethanol increased in the firstquarter of 2010 to $1.82 per gallon from the $1.69 average received in thefirst quarter of 2009.  Corn costs duringthe first quarter of 2010 averaged $3.67 per bushel, as compared to $4.25 perbushel in the first quarter of 2009. Conversion cost in the first quarter of 2010 was $0.52 per gallon ascompared to $0.59 per gallon in the first quarter of 2009.

 

Gallonsof ethanol sold in the first quarter of 2010 decreased to 49.0 million gallons,as compared to 120.8 million gallons in the first quarter of 2009.  The decrease resulted from the winding-downof our marketing alliance and purchase resale operations during the firstquarter of 2009.  Gallons produced duringthe first quarter of 2010 increased to 48.1 million gallons from 46.4 milliongallons in the first quarter of 2009.

 

Thenet impact of selling gallons held in inventory at the end of the fourthquarter of 2009 sold in the first quarter of 2010 offset by the increase invalue of inventory from $1.44 per gallon at December 31, 2009 compared to$1.46 per gallon at March 31, 2010 was an increase in cost of goods soldof approximately $0.8 million.  Theaverage inventory cost of $1.46 per gallon at the end of the first quarter of2010 versus $1.44 at the end of the fourth quarter of 2009 reflects the highercosts related to gallons purchased for resale partially offset by a lower ofcost or market adjustment in March. Decreasing prices throughout the first quarter of 2009 had a negativeeconomic impact on cost of goods sold of approximately $3.0 million related togallons purchased for resale (including a $1.1 million lower of cost or marketadjustment at March 31, 2009).  Anadditional increase in cost of goods sold of $2.8 million related to theadjustment of ethanol inventory to fair market value in February was recognizedin March as the product was sold.

 

33

----

Table of Contents

 

Our inventory isvalued based upon a weighted average of our cost to produce ethanol and theprice we pay for ethanol that we have purchased from other producers.  Dueto the dissolution of the marketing alliance in early 2009, we no longer makepurchases of ethanol from alliance partners but continue to engage inpurchase/resale transactions, as needed, to fulfill our sales commitments.  Changes, either upward or downward, in ourpurchased cost of ethanol or our own production costs, will cause the inventoryvalue to fluctuate from period to period, perhaps significantly.  Thesechanges in value flow through our statement of operations as the inventory issold and can significantly increase or decrease our profitability.

 

Other income (loss) was a loss of $1.6 million in the first quarter of2010 compared to $0.2 million in the first quarter of 2009.  The loss in the first quarter of 2010included $0.4 million of expense related to penalties owed for failure tocomplete the Aurora West expansion facility by July 1, 2009 and $1.1million of expense related to a contract amendment.  During the first quarter of 2009, werecognized income from the termination of marketing agreements with alliancepartners totaling $10.2 million.

 

Interest expense in the first quarter of 2010 was $2.1 million, ascompared to $8.7 million in the first quarter of 2009.  Interest expense in the first quarter of 2010was primarily lower as we ceased the accrual of interest on our $300 millionaggregate principal 10.0% senior unsecured notes issued March 27, 2007 asof the Petition Date.  Interest expensein the first quarter of 2010 includes $0.6 million in interest on our $105 millionsenior secured notes issued March 15, 2010, $0.5 million in interest onour debtor-in-possession debt facility, $0.6 million in interest on our securedrevolving credit facility, and $0.4 million of amortization of deferredfinancing fees.  Interest expense in thefirst quarter of 2009 included $7.5 million in interest on the senior unsecurednotes issued March 27, 2007, $0.3 million in interest on our securedrevolving credit facility, and $0.9 million of amortization of deferredfinancing fees.

 

We have significantly reduced our hedging activity after the firstquarter of 2009.  Our gain on derivativetransactions has decreased from $1.2 million for the first quarter of 2009 toonly $0.2 million for the first quarter of 2010.  We did not have any open derivative positionsat the end of the first quarter of 2009. We do not mark to market forward physical contracts to purchase corn asthey are considered normal purchases and normal sales transactions.

 

Reorganization items of $20.3 million in the first quarter of 2010 werecomprised primarily of professional fees directly related to the reorganizationand a provision for rejected executory contracts and leases. There were noreorganization items in the first quarter of 2009.

 

Gain due to plan effects in the first quarter of 2010 of $136.6 millionrelated to implementation of the plan of reorganization consisted of $144.0million of liabilities subject to comprise which were discharged upon emergenceless $5.8 million of unamortized debt issuance costs on the 10% seniorunsecured notes and $1.6 million related to the write-off of Predecessorprepaid directors and officer insurance.

 

Loss due to fresh start accounting adjustments of $387.7 million in thefirst quarter of 2010 consisted of adjustments required to report assets andliabilities upon emergence from bankruptcy at fair value.

 

*For theThree Months Ended March 31, 2010 Compared to the Three Months Ended March 31,2009*

 

Totalgallons of ethanol sold in the first quarter of 2010 decreased to 49.0 milliongallons, versus 120.8 million gallons sold in the first quarter of 2009.  Gallons of ethanol were sourced as follows:

 

For the Three Months Ended March 31,

 
| **(In thousands, except for percentages)** | ** ** | **2010**   | ** ** | **2009** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------------|------------|----------------------------------|------------|
| Equity production                                              | ** ** | **48,071** |       | 46,354   |       | 1,717                     |       | 3.7                              | %          |
| Marketing alliance purchases                                   | ** ** | **—** |       | 12,898   |       | (12,898                   | )          | (100.0                           | )%         |
| Purchase/resale                                                | ** ** | **420**    |       | 29,673   |       | (29,253                   | )          | (98.6                            | )%         |
| Decrease (increase) in inventory                               | ** ** | **558**    |       | 31,897   |       | (31,339                   | )          | N.M.                             |       |
| Total                                                          | ** ** | **49,049** |       | 120,822  |       | (71,773                   | )          | (59.4                            | )%         |

 

34

----

Table of Contents

 

N.M.   Not meaningful

 

Netsales in the first quarter of 2010 decreased 51.5% from the first quarter of2009.  Net sales were $114.6 million inthe first quarter of 2010 versus $236.5 million in the first quarter of2009.  Overall, the decrease in net saleswas primarily the result of less supply available.  Beginning in the fourth quarter of 2008, wenegotiated termination agreements with our marketing alliance partners andbegan to rationalize our distribution network to primarily focus on sales ofour equity production.  A significantreduction in our purchase/resale operation was also a part of thisrationalization process.  The decrease insupply of ethanol was partially offset during the first quarter of 2010 by anincrease in the average sales price of ethanol sold.  Ethanol prices averaged $1.82 per gallon inthe first quarter of 2010 versus $1.69 in the first quarter of 2009.

 

Co-product revenues for the first quarter of 2010 totaled $25.3million, an increase of $2.9 million, or 12.9%, from the first quarter 2009total of $22.4 million.  Co-productrevenues increased during the first quarter of 2010 as a result ofsignificantly higher co-product pricing. In the first quarter of 2010, we sold 243.3 thousand tons, versus 264.2thousand tons in the first quarter of 2009. Co-product revenues, as a percentage of corn costs, increased to 38.1% duringthe first quarter of 2010, versus 29.5% in the first quarter of 2009.   In 2009, the Company was committed to fixedprice corn purchases above market while selling co-products into the spotmarket.

 

Costof goods sold for the quarter ended March 31, 2010 was $104.0 million,compared to $258.0 million for the quarter ended March 31, 2009, adecrease of $154.0 million, or 59.7%.  Asa percentage of net sales, cost of goods sold decreased to 90.8% of sales from109.1% of sales in the first quarter of 2009. Cost of goods sold consists of the cost to produce ethanol at our ownfacilities, the cost of purchasing ethanol from other producers and marketers,freight and logistics costs to ship ethanol and co-products, the cost of motorfuel taxes which have been billed to customers, and depreciation.  The decrease in cost of goods sold isprincipally the result of lower volumes of ethanol purchased as a result of thetermination of our marketing alliance, lower corn costs and lower conversioncosts.

 

Purchasedethanol in the first quarter of 2010 totaled $0.8 million, versus $73.7 millionin the first quarter of 2009.  In thefirst quarter of 2010, we purchased 0.4 million gallons of ethanol at anaverage cost of $1.88 per gallon as compared to 42.6 million gallons of ethanolat an average cost of $1.73 per gallon in the first quarter of 2009.

 

Productioncosts include corn costs, conversion costs (defined as the cost of convertingthe corn into ethanol, and includes production salaries, wages and stock-basedcompensation costs, fringe benefits, utilities (including coal and naturalgas), maintenance, denaturant, insurance, materials and supplies and othermiscellaneous production costs) and depreciation.  Corn costs in the first quarter of 2010totaled $66.5 million, or $3.67 per bushel, versus $75.9 million, or $4.25 perbushel, in the first quarter of 2009. Our average corn costs in the first quarter of 2010 were slightly lowerthan the CBOT average price of $3.70 during the same period.

 

Conversioncosts for the first quarter of 2010 decreased to $24.9 million from $27.2million for the first quarter of 2009. The decrease in conversion costs is primarily attributable to reductionsin utility costs of $2.3 million and chemicals and other supplies of $0.9million, partially offset by increases in denaturant of $0.9 million, insuranceof $0.2 million, and outside services of $0.2 million.  The conversion cost per gallon decreased yearover year to $0.52 per gallon in the first quarter of 2010 versus $0.59 pergallon in the first quarter of 2009.

 

Depreciationtotaled $3.2 million in the first quarter of 2010 compared to $3.5 million for2009.  Motor fuel taxes were $0.0 millionin the first quarter of 2010 versus $4.4 million in the first quarter of 2009.  The cost of motor fuel taxes are recoveredthrough billings to customers and, was $0.0 in the first quarter of 2010because we did not do business in states requiring us to pay motor fuel taxesin the first quarter of 2010.

 

Freight/logisticscosts were significantly lower on a per gallon basis in the first quarter of2010 from the first quarter of 2009. Freight/logistics costs in the first quarter of 2010 were $0.10 pergallon as compared to $0.21 per gallon in the first quarter of 2009.  Freight/logistics dollars spent decreased inthe first quarter of 2010 to $5.0 million from $24.8 million in the firstquarter of 2009 as a result of lower volumes shipped, a reduction in the numberof terminals we sell from and a reduction in our railcar fleet.  Freight/logistics cost per gallon iscalculated 

 

35

----

Table of Contents

 

bytaking total freight/logistics costs incurred (including costs to ship co-products)and dividing by the total ethanol gallons sold.

 

Theeconomic impact of selling gallons held in inventory at the end of the fourthquarter of 2009 with a $1.44 per gallon value as prices increased during thefirst quarter of 2010 was an increase in cost of goods sold of approximately$0.8 million.  The average inventory costof $1.46 per gallon at the end of the first quarter of 2010 versus $1.44 at theend of the fourth quarter of 2009 reflects the impact on the weighted averageFIFO inventory valuation of the increase in inventory to fair value in February uponemergence from bankruptcy which was partially offset by a lower of cost ormarket adjustment in March.  Conversely, decreasing prices throughout thefirst quarter of 2009 had a negative economic impact on cost of goods sold ofapproximately $3.0 million (including a $1.1 million lower of cost or marketadjustment at March 31, 2009).  Anadditional increase in cost of goods sold of $2.8 million related to theadjustment of ethanol inventory to fair value in February was recognizedin March as the product was sold.

 

Selling, general & administrative expenses (“SG&A”) were$9.8 million in the first quarter of 2010 as compared to $9.7 million in thefirst quarter of 2009.  Major variancesbetween 2010 and 2009 are a $1.6 million decrease in outside services,partially offset by a $0.6 million increase in stock-based compensation, $0.7million increase in start up costs for the Aurora West and Mt. Vernon expansionfacilities, and a $0.4 million increase in other SG&A expenses.  The Company incurred non-recurringcompensation expense due to the impact of the change in executive managementteams post-emergence of $0.8 million for the period ending March 31, 2010,excluding stock compensation.

 

Other income (loss) was a loss of $1.6 million in the first quarter of2010 compared to $0.2 million in the first quarter of 2009.  The loss in the first quarter of 2010included $0.4 million of expense related to penalties owed for failure tocomplete the Aurora West expansion facility by July 1, 2009 and $1.1million of expense related to a contract amendment.  During the first quarter of 2009, werecognized income from the termination of marketing agreements with alliancepartners totaling $10.2 million.

 

Interest expense in the first quarter of 2010 was $2.1 million, ascompared to $8.7 million in the first quarter of 2009.  Interest expense in the first quarter of 2010was primarily lower as we ceased the accrual of interest on our $300 millionaggregate principal 10.0% senior unsecured notes issued March 27, 2007 asof the Petition Date.  Interest expensein the first quarter of 2010 includes $0.6 million in interest on our $105million senior secured notes issued March 15, 2010, $0.5 million ininterest on our debtor-in-possession debt facility, $0.6 million in interest onour secured revolving credit facility, and $0.4 million of amortization ofdeferred financing fees.   Interestexpense in the first quarter of 2009 included $7.5 million in interest on the seniorunsecured notes issued March 27, 2007, $0.3 million in interest on oursecured revolving credit facility, and $0.9 million of amortization of deferredfinancing fees.

 

We have significantly reduced our hedging activity after the firstquarter of 2009.  Our gain on derivativetransactions has decreased from $1.2 million in the first quarter of 2009 to$0.2 million for the first quarter of 2010.

 

Reorganization items of $20.3 million in the first quarter of 2010 werecomprised principally of professional fees directly related to thereorganization and a provision for rejected executory contracts and leases.There were no reorganization items in the first quarter of 2009.

 

Gain due to plan effects in the first quarter of 2010 of $136.6 millionrelated to implementation of the plan of reorganization consisted of $144.0million of liabilities subject to comprise which were discharged upon emergenceless $5.8 million of unamortized debt issuance costs on the 10% seniorunsecured notes and $1.6 million related to the write-off of Predecessorprepaid directors and officer insurance.  There were no gains due to plan effects in the first quarter of 2009.

 

Loss due to fresh start accounting adjustments of $387.7 million in thefirst quarter of 2010 consisted of adjustments required to report assets andliabilities upon emergence from bankruptcy at fair value.  There were no fresh start accounting gains orlosses in the first quarter of 2009.

 

36

----

Table of Contents

 

The Company’s effective tax rate differs from the statutory U.S.federal income tax rate for the one month ended March 31, 2010, two monthsended February 28, 2010 and the three months ended March 31, 2009principally due to the impact of state and local taxes, net of federal benefit,non-includable reorganization income, tax deductible goodwill, increases invaluation allowances, non-deductible reorganization expenses and other permanentdifferences between book and tax.  As of March 31,2010 and March 31, 2009, the Company had recorded valuation allowancestotaling $168.8 million and $24.4 million respectively on its deferred taxassets to reduce the deferred tax assets to the amount that the Companybelieves is more likely than not to be realized.

 

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

 

*Ethanol Pricing*

 

Ethanolprices continued to be at or near the spot cost to produce ethanol during thefirst quarter of 2009 and 2010, making the cash spot margins nearbreak-even.  As the supply of ethanolfrom plants which are currently under construction begins to make its way intothe marketplace or plants that are currently shut-in begin to produce ethanolagain, ethanol pricing may remain soft, and gross margins may remain nearbreak-even.

 

As of March 31, 2010, we had contracts for delivery of ethanoltotaling 40.7 million gallons through December 2010 at spot prices (usingvarious Platt, OPIS and AXXIS indices).

 

For the second quarter of 2010, we have contracts for delivery ofethanol totaling 37.5 million gallon at spot prices (using various Platt, OPISand AXXIS indices).

 

*Corn*

 

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

 

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

 

AtMarch 31, 2010, we had fixed the price of 1.4 million bushels of cornthrough May 2010 at an average cost of $3.59 per bushel, representingapproximately 2% of our corn requirements for the remainder of 2010.

 

*Supply and Demand*

 

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

 

37

----

Table of Contents

 

**Liquidityand Capital Resources**

 

*Overviewand Outlook*

 

Thefollowing table sets forth selected information concerning our financialcondition:

 
| **(In thousands)**   | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Cash and cash equivalents | ** ** | **$**                    | **81,933** |                        | $          | 52,585 |   |
| Working capital           | ** ** | **88,783**               |       | 38,136                      |       |
| Total debt (1)            | ** ** | **110,252**              |       | 42,765                      |       |
| Current ratio             | ** ** | **3.81**                 |       | 1.60                        |       |
|                           |            |                          |            |                             |            |  |  |

 

----

(1)  As of December 31, 2009, total debt excluded our seniorunsecured notes due in 2017 which were recorded in pre-petition liabilitiessubject to compromise.

 

Asa result of the Bankruptcy Cases and the circumstances leading to theBankruptcy Cases as described elsewhere in this report, we faced uncertainty regardingthe adequacy of our liquidity and capital resources and had limited access tofinancing.  The Bankruptcy Filingconstituted an event of default under our secured revolving credit facility andthe indenture governing our 10% senior unsecured notes due 2017, and the debtobligations under those agreements became automatically and immediately due andpayable, subject to the automatic stay provisions of Section 362 of theBankruptcy Code.  As of the PetitionDate, the amount of outstanding borrowings and letters of credit under thesecured revolving credit facility totaled approximately $18.4 million and $22.0million, respectively, and the aggregate principal amount outstanding on our10% senior unsecured notes due 2017 was $300 million.

 

Atemergence from bankruptcy on March 15, 2010, we obtained approximately $98million of proceeds through the issuance of $105 million principal amount ofour 13% senior secured notes due 2015 and 1,710,000 shares of commonstock.  Upon emergence we used theseproceeds to pay $27.8 million to retire our Predecessor secured revolvingcredit facility, $15.0 million to retire our debtor-in-possession debtfacility, $17.9 million to Kiewit Energy Company to repay secured claimsrelated to our expansion projects at Aurora, Nebraska and Mt Vernon, Indianaand $4.9 million to pay other secured and priority claims.  Our Predecessor senior unsecured notes of$300.0 million along with $15.5 million were discharged upon emergence frombankruptcy.

 

*Sourcesof Liquidity*

 

Ourprincipal sources of liquidity are cash and cash equivalents, cash provided byour borrowing facilities, and cash provided by operations.

 

*Cash and cash equivalents.*  For the first three months of 2010, cash andcash equivalents increased by $29.3 million. Cash and cash equivalents as of March 31, 2010 and December 31,2009 were $81.9 million and $52.6 million, respectively.  The significant increase in cash and cashequivalents is principally the result of the issuance of our Notes and commonstock offering offset by required payments upon emergence from Chapter 11 tosecured and priority claimholders.

 

C*ash provided by operations.* Net cash used in operating activities in the first three months of 2010was $22.5****million, as compared to cash providedby operating activities of $14.1 million for the first three months of2009.  Cash used by operations in 2010was negatively impacted by significant operating losses incurred in the firstquarter of 2010 and payments of secured and priority claims as we emerged frombankruptcy.  In the first quarter of2009, we offset an operating loss by generating significant amounts of cashfrom the liquidation of receivables and inventory, offset partially byreductions in accounts payable.

 

38

----

Table of Contents

 

*Cashavailable under our liquidity facility*

 

Asdescribed further below, pursuant to the Plan, on the Effective Date, theCompany and its subsidiaries, as borrowers, entered into the Revolving CreditAgreement with PNC Bank, as lender and as agent, providing for a$20 million Revolving Facility. Amounts under the Revolving Facility may be borrowed, repaid andreborrowed with all amounts outstanding due and payable on March 15,2013.  The maximum amount outstandingunder the Revolving Facility is limited by the amount of eligible receivablesand eligible inventory of the borrowers. The Revolving Credit Agreement contains mandatory prepayment requirementsin certain circumstances upon the sale of certain collateral, subject to theability to reborrow revolving advances. Termination of the Revolving Facility is subject to a prepayment premiumif terminated more than 90 days prior to the third anniversary of the RevolvingFacility.

 

Totalliquidity at March 31, 2010 was $89.3 million, comprised of $81.9 millionin cash and cash equivalents and $7.4 million availability under our newsecured revolving credit facility with PNC bank.   As of March 31, 2010, there were noamounts drawn against the Revolving Facility with PNC Bank, and no outstandingletters of credit issued under the PNC facility.

 

*Uses ofLiquidity*

 

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

 

*Payments related to our outstanding debt and liquidity facility.*  During the first quarter of 2010, we used$42.8 million of cash to make required reductions in borrowings on our securedrevolving credit facility with JPMorgan Chase and our debtor-in-possession debtfacility.   At March 31, 2010, the Company had $8.1 millionin letters of credit outstanding as issued by the Prepetition Lenders.  The $8.1 million outstanding letters of creditwere collateralized by $9.0 million in a restricted cash account.

 

*Working capital.*  Our networking capital position increased by $50.6 during the first quarter of 2010.

 

*Capitalexpenditures.*  During thefirst three months of 2010, we spent approximately $2.5 million on capitalprojects.  Of this amount, $0.5 millionwas spent on maintenance and environmental projects, while $2.0 million wasspent on our suspended capacity expansion projects.  In April 2010, we resumed constructionactivity on the suspended capacity expansion projects in Mt. Vernon, Indianaand Aurora, Nebraska and we expect to incur capital expenditures ofapproximately $80.0 million related to completing those facilities in thesecond and third quarters of 2010.

 

**Debtor-In-Possession Financing**

 

On April 7, 2009,the DIP Lenders entered into the DIP Term Sheet for a $30 millionDebtor-in-Possession Credit Facility with the Debtors.  The DIP Term Sheet provided for a firstpriority debtor-in-possession financing composed of a term loan facility madeavailable to certain of Aventine’s subsidiaries in a maximum aggregateprincipal amount of up to $30 million. Proceeds of the DIP Facility were to be used, among other things, to (i) fundthe working capital and general corporate needs of the Debtors and the costs ofthe Bankruptcy Cases in accordance with an approved budget, and (ii) provideadequate protection, in accordance with the terms of the DIP Facility, to thepre-petition agent and pre-petition lenders under the Company’s existing creditfacilities.

 

On April 14, 2009,the Bankruptcy Court entered an interim order approving the DIP Facility and onMay 5, 2009, entered an order approving the DIP Facility on a final basis.

 

In accordance with theterms of the Plan, the balances owed on the DIP facility were paid in full onthe Effective Date.

 

**13% Senior Secured Notes due 2015**

 

Pursuant to the Plan andConfirmation Order, on the Effective Date, the Company issued and sold anaggregate of $105 million principal amount of the Notes.  The Notes were issued under the Indenture ina private transaction that was not subject to the registration requirements ofthe Securities Act.  The Notes accrueinterest at a rate of 13% for cash interest payments and 15% if the Companyelects PIK interest payments.  TheCompany may elect, prior to each interest payment date, whether to make eachinterest payment on the Notes (i) entirely in cash or (ii) 8/15 incash and 7/15 in PIK interest.  The Notesare fully and unconditionally guaranteed by the Guarantors.  The Company will pay interest on the Notesquarterly in arrears on March 15, June 15, September 15 and December 15of each year, starting on June 15, 2010. The Notes mature on March 15, 2015. The Indenture permits the Company to issue additional Notes from time totime up to an aggregate principal amount of $50 million.

 

The Notes and the guaranteesof the Guarantors are secured by a first-priority lien on substantially all ofthe Company’s and the Guarantors’ assets (other than (i) the assets subjectto the first-priority lien granted under the Revolving Credit Agreementdescribed below and (ii) in the case of the Company’s facility in Aurora,Nebraska, a first-priority lien in favor of Kiewit Energy Company) and by asecond-priority lien on the Company’s and the Guarantors’ assets that aresubject to the first-priority lien granted under the Revolving Credit Agreementdescribed below.

 

39

----

Table of Contents

 

Subject to certainexceptions, the Indenture limits or restricts, among other things, the Company’s(and, in certain cases, the Guarantors’ or the Company’s restrictedsubsidiaries’) ability to (i) incur or assume additional debt or provideguarantees in respect of obligations of other persons; (ii) issueconvertible stock and preferred stock, (iii) pay dividends ordistributions or redeem or repurchase capital stock; (iii) prepay, redeemor repurchase debt; (iv) make loans and investments; (v) incurcertain liens; (vi) impose limitations on dividends, loans or assettransfers from its subsidiaries; (vii) sell or otherwise dispose ofassets, including capital stock of its subsidiaries; (viii) consolidate ormerge with or into, or sell substantially all of its assets to, another person;(ix) enter into transactions with affiliates; and (x) impair thesecurity interest in the collateral securing the Notes.

 

If certain events related toa change of control of the Company occur, each holder of Notes will have theright to require the Company to repurchase all or any part (equal to $2,000 oran integral multiple of $1,000 in excess of $2,000) of that holder’s Notes foran amount in cash equal to 101% of the aggregate principal amount of Notesrepurchased plus accrued and unpaid interest on the Notes repurchased to thedate of repurchase, pursuant to the terms set forth in the Indenture.  The Indenture also requires the Company tooffer to repurchase the Notes at 100% of the principal amount of the Notesrepurchased plus accrued and unpaid interest on the Notes repurchased to thedate of repurchase if the aggregate sum of proceeds received by the Companyfrom certain assets sales and events of loss and not otherwise used by theCompany in accordance with the terms of the Indenture exceeds $5 million.

 

The Company may redeem theNotes in whole or in part prior to their maturity date for a premium to theoutstanding principal amount, as provided in the Indenture.

 

The Indenture also providesfor customary events of default, including, among others, the failure to makepayments when due, noncompliance with covenants and the occurrence of certainbankruptcy proceedings.  If an event ofdefault occurs and is continuing, then the Trustee or the holders of not lessthan 25% in aggregate principal amount of the outstanding Notes may declare theprincipal of, and any accrued interest on, the Notes to be due and payableimmediately.  In addition, upon the occurrenceand during the continuance of an event of default or if the Company or theGuarantors do not comply with certain of their obligations under certainregistration rights agreements entered into pursuant to the Plan, interest onthe Notes will accrue at an additional 2% per annum.

 

The Notes and the guaranteesrank equally in right of payment with all of the Company’s and the Guarantors’existing and future senior indebtedness, including indebtedness incurred underthe Revolving Credit Agreement, and senior to all of the Company’s and the Guarantors’existing and future subordinated indebtedness.

 

**SecuredRevolving Credit Facility**

 

Pursuantto the Plan, on the Effective Date, the Company and its subsidiaries, asborrowers, entered into the Revolving Credit Agreement with PNC Bank, as lenderand as agent, providing for a $20 million Revolving Facility.  Amounts under the Revolving Facility may beborrowed, repaid and reborrowed with all amounts outstanding due and payable onMarch 15, 2013.  The maximum amountoutstanding under the Revolving Facility is limited by the amount of eligiblereceivables and eligible inventory of the borrowers.  The Revolving Credit Agreement containsmandatory prepayment requirements in certain circumstances upon the sale ofcertain collateral, subject to the ability to reborrow revolving advances.  Termination of the Revolving Facility issubject to a prepayment premium if terminated more than 90 days prior to thethird anniversary of the Revolving Facility.

 

Amountsoutstanding under the Revolving Facility bear interest at a floating rate equalto, at the option of the Company, the alternate base rate plus 3.00% or theEurodollar rate plus 6.00%.  The Companywill pay a commitment fee of 1.00% per annum for unused committed amounts underthe Revolving Facility.  Interest is duemonthly in arrears with respect to alternate base rate loans and at the end ofeach interest period with respect to Eurodollar rate loans.  For Eurodollar rate loans with interestperiods greater than 3 months, interest is payable every 3 months from thefirst day of such interest period and on the last day of such interest period.

 

Upto $12 million of the Revolving Facility may be applied to letters ofcredit.  Issued letters of credit reduceavailability under the Revolving Facility. The Company will pay a fee for issued and undrawn letters of credit at6.00% per annum of the average daily face amount of each outstanding letter ofcredit and a per annum fronting fee of 0.25% payable quarterly.

 

40

----

Table of Contents

 

TheRevolving Credit Agreement contains, and the Company and its subsidiaries willbe required to comply with, customary covenants for facilities of this type, suchas (i) affirmative covenants as to maintenance of existence, compliancewith laws, preservation of collateral, environmental matters, insurance,payment of taxes, access to books and records, use of proceeds, maintenance ofcash management systems, priority of liens in favor of the lenders, maintenanceof assets and monthly, quarterly, annual and other reporting obligations, and (ii) negativecovenants, including limitations on liens, additional indebtedness, loans,guarantees, dividends, nature of business, transactions with affiliates,investments, asset dispositions, capital expenditures, mergers andconsolidations, formation of subsidiaries, accounting changes and amendments toconstituent documents.

 

TheRevolving Credit Agreement includes customary events of default for facilitiesof this type, including (i) failure to pay principal, interest or otheramounts when due, (ii) breach of representations and warranties, (iii) breachof covenants, (iv) bankruptcy, (v) occurrence of a material adverseeffect, (vi) cross-default to other indebtedness, (vii) judgmentdefault, (viii) invalidity of any loan document, (ix) failure ofliens to be perfected, (x)  the occurrence of a change of ownership, (xi)loss of material licenses or permits, cessation of operations and theincurrence of certain ERISA liabilities. Upon the occurrence and continuance of an event of default, the lendersmay (i) terminate their commitments under the Revolving Facility, (ii) acceleratethe repayment of all of the Company’s obligations under the Revolving Facility,and (iii) foreclose on the collateral granted to them.

 

TheRevolving Credit Agreement grants a first priority lien (subject to certainexclusions) to PNC on the Company’s and its subsidiaries’ (i) accountsreceivable, (ii) general intangibles, (iii) intellectual property, (iv) inventory,(v) investment property, (vi)  instruments related to the foregoing, (vii) depositaccounts, (viii) letters of credit, (ix) money, (x) letter-of-creditrights, (xi) books and records, and (xii) all proceeds of the foregoing.

 

**WarrantAgreement**

 

Pursuantto the Plan and Confirmation Order, on the Effective Date, the Company enteredinto a Warrant Agreement (the “Warrant Agreement”) with American Stock Transfer &Trust Company, LLC, as warrant agent (the “Warrant Agent”).  Pursuant to the Warrant Agreement, theCompany issued warrants to purchase an aggregate of 450,000 shares of commonstock, par value $0.001 per share, of the Company (“Common Stock”), subject toadjustment for, among other things, the matters described below (the “Warrants”).  The Warrants will expire on the fifthanniversary of the Effective Date or, if earlier, in connection with theconsummation of a change of control of the Company (the “Expiration Date”);provided that the Company may accelerate the Expiration Date in certaincircumstances as set forth in the Warrant Agreement.

 

EachWarrant entitles its holder to purchase one share of Common Stock at anexercise price of $40.94 (the “Exercise Price”), subject to adjustment for,among other things, the matters described below.  Except as otherwise set forth in the WarrantAgreement, Warrants may be exercised at any time after issuance until theExpiration Date.  Holders that elect toexercise the Warrants must do so by (i) providing written notice of suchelection to the Warrant Agent prior to the Expiration Date, in the formprescribed in the Warrant Agreement, (ii) surrendering to the WarrantAgent the certificate evidencing such Warrants and (iii) (x) payingthe applicable exercise price for all Warrants being exercised or (y) if achange of control or similar transaction occurs where the Warrants would becomeexercisable for cash, in lieu of paying the Exercise Price, notify the WarrantAgent that such holder elects to receive a cash payment equal to the net amountpayable in such transaction with respect to the number of shares such Warrantsare being exercised for in excess of the Exercise Price for all such Warrants.

 

Holdersof the Warrants (solely in their capacity as a holder of Warrants) are notentitled to any rights as a stockholder of the Company, including, withoutlimitation, the right to vote, receive notice of any meeting of stockholders orreceive dividends, allotments or other distributions.  The number of shares of Common Stock forwhich a Warrant is exercisable and the Exercise Price are subject to adjustmentfrom time to time upon the occurrence of certain customary adjustment events.

 

Inaddition, upon the occurrence of certain events constituting a merger of theCompany into or a consolidation of the Company with another entity, or a saleof all or substantially all of the Company’s assets, or a merger of anotherentity into the Company, or similar event, each holder of a Warrant will havethe right to receive, upon exercise of a Warrant (if then exercisable), anamount of securities, cash or other property receivable by a 

 

41

----

Table of Contents

 

holderof the number of shares of Common Stock for which a Warrant is exercisableimmediately prior to such event.

 

**CriticalAccounting Estimates**

 

Asrequired by GAAP, in connection with emergence from Chapter 11 reorganizationproceedings, we adopted the fresh-start accounting provisions of ASC 852effective February 28, 2010.  UnderASC 852, the reorganization value represents the fair value of the entitybefore considering liabilities and approximates the amount a willing buyerwould pay for our assets immediately after restructuring.  The reorganization value is allocated to therespective assets.  Liabilities, otherthan deferred taxes and severance benefits, are stated at present values ofamounts expected to be paid.

 

Fairvalues of assets and liabilities represent our best estimates based on ourappraisals and valuations which incorporated industry data and trends andrelevant market rates and transactions available to us at the time.  The estimate of reorganization equity valuewas determined by Company management with assistance from an independentfinancial advisor, who developed the reorganization equity value using acombination of the following three measurement methodologies: 1) comparablepublic company analysis, 2) discounted cash flow analysis, and 3) precedenttransactions analysis.  This amount wasdetermined based, in part, on economic, competitive and general businessconditions prevailing at the time.  Theseestimates and assumptions are inherently subject to significant uncertaintiesand contingencies beyond our reasonable control.

 

The significantassumptions related to adjusting our assets and liabilities to fair value inconnection with fresh start accounting include the following:

 

*Cash, Accounts Receivable,Prepaid Assets and Other Current Assets, Accrued Liabilities, and Other CurrentLiabilities* - Weevaluated the fair value of financial instruments represented in current assetsand current liabilities, including cash, accounts receivable, prepaid assetsand other current assets, accrued liabilities, and other currentliabilities.  Based upon our evaluations,we concluded that the carrying value approximates fair value of these financialinstruments due to their short maturities or variable-rate nature of therespective balances.

 

*Restricted Cash, and OtherLong-Term Liabilities* - We evaluated the fair value of restricted cash and other long-termliabilities.  The restricted cashbalances are held in interest-bearing accounts and we therefore concluded thatthe carrying value approximates fair value. The other long-term liabilities principally represent companyobligations related to pension and retiree medical costs.  Such liabilities are calculated using variousassumptions including an assumed discount rate which we believe is reasonable,and we therefore concluded that carrying value of such long-term liabilitiesapproximates fair value.

 

*Inventories* — Inventories consist primarily ofagricultural and energy-related commodities including corn, ethanol, andcoal.  The fair value of thesecommodities was determined through reference to prices that were publiclyavailable at the time, as adjusted for physical location.

 

*Property, plant and equipment* — Property, plant and equipment wasvalued at fair value of approximately $208.8 million as of February 28,2010.  The Company determined fair valuewith the assistance of an independent valuation firm.  In establishing fair value for the vastmajority of the Company’s property, plant and equipment, the cost approach wasutilized. The cost approach considers the amount required to replace an assetby constructing or purchasing a new asset with similar utility, then adjuststhe value in consideration of all forms of depreciation as of the appraisaldate as described below:

 

·      Physicaldepreciation — the loss in value or usefulness attributable solely to use ofthe asset and physical causes such as wear and tear and exposure to theelements.

·      Functionalobsolescence — a loss in value is due to factors inherent in the asset itselfand due to changes in technology, design or process resulting in inadequacy,overcapacity, lack of functional utility or excess operating costs.

·      Economicobsolescence — loss in value by unfavorable external conditions such aseconomics of the industry or geographic area, or change in ordinances.

 

The cost approach relieson management’s assumptions regarding current material and labor costs requiredto rebuild and repurchase significant components of our property, plant andequipment along with assumptions regarding the age and estimated useful livesof our property, plant and equipment.

 

*Other Assets* — Other assets include a long-termdeposit for utilities against which the Company may apply certain futurenatural gas transportation charges.  Thefair value of this deposit was determined based upon a discounted cash flowmodel for which the significant inputs include the Company’s estimated purchasetiming and amount of natural gas, and the discount rate estimated to be 13%.  If the Company had applied a discount rate of1% higher or lower, the fair value of the asset would have decreased orincreased by $168 thousand or $177 thousand, respectively.

 

*Accounts Payable* — Accounts payable include an estimatedliability associated with an off-market coal purchase contract which continuesthroughout 2010.  The fair value of thiscontract was determined through reference to coal prices that were publiclyavailable at the time, as adjusted for physical location.  This liability will be amortized to income asthe related coal purchases affect the cost of production.  For other accounts payable items, weevaluated such liabilities to determine fair value and concluded that thecarrying value approximates fair value of these financial instruments due totheir short maturities or variable-rate nature of the respective balances.

 

*Long-Term Debt* — Long-term debt was valued at fairvalue with the assistance of an independent valuation firm based on an analysisof market interest rates for guideline companies with similar debt and terms,interest rates for companies recently emerged from bankruptcy, and interestrates based on a synthetic debt rating. Based on this analysis, we determined that a range of market interestrate for our $105 million of senior secured notes would be from 11.5% to14.5%.  Based on the stated rate of ourNotes of 13% combined with the option to pay a portion of the interest in kind,we deemed the fair value to be the face value of the notes of $105 million.  If the interest rate was 1% higher or lower,the fair value of the debt would have increased or decreased by $1.2 millionrespectively.

 

**EnvironmentalMatters**

 

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

 

We are also subject topotential liability for the investigation and cleanup of environmentalcontamination at each of the properties that we own or operate and at off-sitelocations where we arranged for the disposal of hazardous wastes.  For instance, soil and groundwatercontamination has been identified in the past at our Illinois campus.  If any of these sites are subject toinvestigation and/or remediation requirements, we may be responsible under theComprehensive Environmental Response, Compensation and Liability Act or otherenvironmental laws for all or part of the costs of such investigation and/orremediation, and for damages to natural resources.  We may also be subject to related claims byprivate parties alleging property damage or personal injury due to exposure tohazardous or other materials at or from such properties.  While costs to address contamination orrelated third-party claims could be significant, based upon currently availableinformation, we are not aware of any material liability relating to contaminationor such third party claims.  We have notaccrued any amounts for environmental matters as of March 31, 2010.  The ultimate costs of any liabilities thatmay be identified or the discovery of additional contaminants could adverselyimpact our results of operation or financial condition.

 

Inaddition, the hazards and risks associated with producing and transporting ourproducts may result in spills or releases of hazardous substances, and mayresult in claims from governmental authorities or third parties relating toactual or alleged personal injury, property damage, or damages to naturalresources.  We maintain insurancecoverage against some, but not all, potential losses caused by our operations.Our coverage includes, but is not limited to, physical damage to assets,employer’s liability, comprehensive general liability, automobile liability andworkers’ compensation.  We do not carryenvironmental insurance.  We believe thatour insurance is adequate for our industry, but losses could occur foruninsurable or uninsured risks or in amounts in excess of existing insurancecoverage.  The occurrence of events whichresult in significant personal injury or damage to our property, naturalresources or third parties that is not covered by insurance could have amaterial adverse impact on our results of operations and financial condition.

 

42

----

Table of Contents

 

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

 

Federaland state environmental authorities have been investigating alleged excess VOCemissions and other air emissions from many U.S. ethanol plants, including ourIllinois and Nebraska facilities.  Thematter relating to our Illinois wet mill facility is still pending, and wecould be required to install additional air pollution control equipment or takeother measures to control air pollutant emissions at that facility.  If authorities require us to installcontrols, we would anticipate that costs would be higher than the approximately$3.4 million we incurred for this matter at our Nebraska facility due to thelarger size of the Illinois wet mill facility. In addition, if the authorities determine our emissions were inviolation of applicable law, we would likely be required to pay fines thatcould be material.  In February 2008,we received an indemnification payment from the former owner of our Nebraskafacility relating to the cost of installing environmental controls at thatfacility in connection with an April 2005 consent decree with stateauthorities.

 

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

 

Wecurrently generate revenue from the sale of carbon dioxide, which is aco-product of the ethanol production process at each of our Illinois andNebraska facilities.  New laws or regulationsrelating to the production, disposal or emissions of carbon dioxide may requireus to incur significant additional costs and may also adversely affect ourability to continue generating revenue from carbon dioxide sales.

 

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

 

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

 

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

 

43

----

Table of Contents

 

***Commodity Price Risks***

 

Weare subject to market risk with respect to the price and availability of corn,the principal raw material we use to produce ethanol and ethanolby-products.  In general, rising cornprices result in lower profit margins and, therefore, represent unfavorablemarket conditions.  This is especiallytrue when market conditions do not allow us to pass along increased corn coststo our customers.  The availability andprice of corn is subject to wide fluctuations due to unpredictable factors suchas weather conditions, farmer planting decisions, governmental policies withrespect to agriculture and international trade and global demand andsupply.  Our weighted average gross corncost for the three months ended March 31, 2010 and 2009 was $3.67 and$4.50 per bushel, respectively.

 

Wehave firm-price purchase commitments with some of our corn suppliers underwhich we agree to buy corn at a price set in advance of the actual delivery ofthat corn to us.  At March 31, 2010,we had commitments to purchase approximately 1.4 million bushels of cornthrough May 2010 at an average price of $3.59 per bushel from these cornsuppliers.  Under these arrangements, weassume the risk of a price decrease in the market price of corn between thetime this price is fixed and the time the corn is delivered.  We have elected to account for thesetransactions as normal purchases under ASC 815, and accordingly, have notmarked these transactions to market.

 

Inorder to reduce our market exposure to price decreases, we have in the past, atthe time we enter into a firm-price purchase commitment, entered into commodityfutures contracts to sell a certain amount of corn at the then-current pricefor delivery to the counterparty at a later date.  When we have these types of commodity futurescontracts, we account for them under ASC 815, *Accountingfor Derivative Instruments and Hedging Activities*.  Such futures contracts are not designated ashedges and, therefore, are marked to market each period, with correspondinggains and losses recorded in other non-operating income.  The fair value of these derivative assets, ifany, is recognized in other current assets in the Condensed ConsolidatedBalance Sheet, net of any cash received from the brokers.

 

Wehave also, in the past, entered into commodity futures contracts in connectionwith the purchase of corn to reduce our risk of future price increases.  We accounted for these transactions under ASC815.  These futures contracts were notdesignated as hedges and, therefore, were marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of these derivative contractswould be recognized in other current assets in the Condensed ConsolidatedBalance Sheet, net of any cash received from the brokers.

 

Wesometimes enter into firm-price purchase commitments with some of our naturalgas suppliers under which we agree to buy natural gas at a price set in advanceof the actual delivery of that natural gas to us.  Under these arrangements, we assume the riskof a price decrease in the market price of natural gas between the time thisprice is fixed and the time the natural gas is delivered.  At March 31, 2010, we did not have anycommitments to purchase natural gas in advance at prices other than atmarket.  We account for thesetransactions as normal purchases under ASC 815, and accordingly, do not markthese transactions to market.

 

Weare also subject to market risk with respect to ethanol pricing.  Our ethanol sales are priced using contractsthat can either be fixed, based upon the price of wholesale gasoline plus orminus a fixed amount, or based upon a market price at the time ofshipment.  We sometimes fix the price atwhich we sell ethanol using fixed price physical delivery contracts.  At March 31, 2010, we had no outstandingcontracts to sell ethanol at fixed prices. These normal sale transactions would not be marked to market.

 

Wemay also sell forward ethanol using contracts where the price is determined ata point in the future based upon an index plus or minus a fixed amount.  At March 31, 2010, we had no contractsfor the sale of ethanol using wholesale gasoline as an index plus a fixedspread.  Under these arrangements, weassume the risk of a price decrease in the market price of gasoline.  In order to reduce our market exposure toprice decreases, at the time we enter into a firm sales commitment, we may alsoenter into commodity forward contracts to sell a like amount of gasoline at thethen-current price for delivery to the counterparty at a later date.  We account for these transactions under ASC815.  These forward contracts are notdesignated as hedges and, therefore, are marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of these derivativeliabilities is recognized in other current liabilities in the CondensedConsolidated Balance Sheet, net of any cash paid to brokers.  We did not have any of this type ofderivative positions at March 31, 2010.

 

44

----

Table of Contents

 

***Material Limitations***

 

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

 

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

 

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

 

**Evaluationof Disclosure Controls and Procedures**

 

Underthe supervision of and with the participation of management, including ourChief Executive Officer, Thomas Manuel, and our Chief Financial Officer, JohnCastle, 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. Manueland Castle have concluded that, as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures have been properlydesigned and are effective to provide reasonable assurance that informationrequired to be disclosed in the reports filed or submitted under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and ExchangeCommission.  These disclosure controlsand procedures include, without limitation, controls and procedures designed toprovide reasonable assurance that information required to be disclosed in suchreports is accumulated and communicated to our management, including Messrs. Manueland Castle, as appropriate to allow timely decisions regarding the requireddisclosure.  The design of any system ofcontrols is based in part upon certain assumptions about the likelihood offuture events.  There can be no assurancethat any design will succeed in achieving its stated goal under all potentialfuture conditions, regardless of how remote.

 

**Changesin Internal Control over Financial Reporting**

 

Basedupon evaluation by our management, which was conducted with the participationof Messrs. Manuel and Castle, 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 1.****                   ****LegalProceedings**

 

On April 7, 2009,the Company and all of its direct and indirect subsidiaries filed voluntarypetitions for relief under Chapter 11 of the Bankruptcy Code with the BankruptcyCourt.  The Company’s subsidiaries that were part of the Bankruptcy Filinginclude Aventine Renewable Energy, LLC, a Delaware limited liability company,;Aventine Renewable Energy, Inc., a Delaware corporation; AventineRenewable Energy — Mt. Vernon, LLC, a Delaware limited liability company;Aventine Renewable Energy — Aurora West, LLC, a Delaware limited liabilitycompany; and Nebraska Energy, LLC, a Kansas limited liability company. The Bankruptcy Cases are being jointly administered by the Bankruptcy Courtunder Case Number 09-11214 (KG).  Aventine continued to operate itsbusiness as a debtor-in-possession under the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Codeand orders of the Bankruptcy Court until it emerged from bankruptcy on March 15,2010.  As a result of the commencement ofthe Chapter 11 cases, attempts to collect, secure, or enforce remedies withrespect to pre-petition claims against Aventine were subject to the automaticstay provisions of Section 362 of the Bankruptcy Code.  TheCompany filed the Plan on 

 

45

----

Table of Contents

 

January 13,2010.  The Plan was confirmed by theBankruptcy Court by entry of an order on February 24, 2010 and becameeffective on March 15, 2010.

 

On November 6,2008, the Company commenced an action against JPMorgan in the TenthJudicial Circuit in Tazewell County, Illinois. The Company’s complaint relates to losses incurred of approximately$31.6 million as a result of investments in Student Loan Auction RateSecurities purchased through JPMorgan. At this time, we cannot be certain as to the outcome of this litigation.

 

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

 

**Item 1A.********RiskFactors**

 

The Company included in its Annual Report on Form 10-K as of December 31,2009 a description of certain risks and uncertainties that could affect theCompany’s business, future performance or financial condition (“Risk Factors”).  Several of the Risk Factors included in our Form 10-Kas of December 31, 2009 pertained to our bankruptcy filing.  An updated listing of our risk factors at March 31,2010 is as follows:

 

***We recently emerged from Chapter 11 reorganizationproceedings; because our consolidated financial statements reflect fresh-startaccounting adjustments, our future financial statements will not be comparablein many respects to our financial information from prior periods.***

 

On April 7, 2009, we filed a voluntary petition for relief underChapter 11 of the Bankruptcy Code.  OurPlan became effective on March 15, 2010. In connection with our emergence from the Chapter 11 reorganizationproceedings, we implemented fresh-start accounting in accordance with ASC 852 asof the Effective Date, which had a material effect on our consolidatedfinancial statements.  Thus, our futureconsolidated financial statements will not be comparable in many respects toour consolidated financial statements for periods prior to our adoption offresh-start accounting and prior to accounting for the effects of thereorganization proceedings.  Our pastfinancial difficulties and bankruptcy filing may have harmed, and may continueto have a negative effect on, our relationships with investors, customers andsuppliers.

 

***We have substantial liquidity needs and may berequired to seek additional financing.***

 

Our principal sources of liquidity are cash and cash equivalents onhand, cash provided by operations, and cash provided by our revolving creditfacility.  Our liquidity position issignificantly influenced by our operating results, which in turn aresubstantially dependent on commodity prices, especially prices for corn,ethanol, natural gas and unleaded gasoline. As a result, adverse commodity price movements adversely impact ourliquidity.  We cannot assure you that theamounts of cash available from operations, together with our revolving creditfacility, will be sufficient to fund our operations.  Furthermore, the construction of our Auroraand Mount Vernon plants is expected to cost approximately $80.0 million.

 

Our ability to maintain adequate liquidity depends in part uponindustry conditions and general economic, financial, competitive, regulatoryand other factors beyond our control. Accordingly, there can be no assurance as to the success of ourefforts.  In the event that cash flowsand borrowings under our revolving credit facility are not sufficient to meetour cash requirements, we may be required to seek additional financing.  We can provide no assurance that additionalfinancing would be available or, if available, offered to us on acceptableterms.

 

***We may be unable to secure additional financing.***

 

Our ability to arrange, in addition to our revolving credit facility,financing (including any extension or refinancing) and the cost of additionalfinancing are dependent upon numerous factors. Access to capital (including any extension or refinancing) forparticipants in the biofuels industry, including us, has been significantlyrestricted for the last several months and may, as a result of our voluntarypetition for relief under Chapter 11 of the 

 

46

----

Table of Contents

 

BankruptcyCode in April 2009 and recent emergence from the reorganizationproceedings on March 15, 2010, be further restricted in the future. Otherfactors affecting our access to financing include:

 

·              generaleconomic and capital market conditions;

·              conditions inbiofuels markets;

·              regulatorydevelopments;

·              credit availability from banks or other lenders forus and our industry peers, as well as the economy in general;

·              investorconfidence in the biofuels industry and in us;

·              the continuedreliable operation of our ethanol production facilities; and

·              provisions oftax and securities laws that are conducive to raising capital.

 

***We may not be able to generate enough cash flow tomeet our debt obligations.***

 

We expect our earnings and cash flow to vary significantly from year toyear due to the cyclical nature of our industry.  As a result, the amount of debt we can managein some periods may not be appropriate for us in other periods.  Additionally, our future cash flow may beinsufficient to meet our debt obligations and commitments, including ourNotes.  Any insufficiency couldnegatively impact our business.  A rangeof economic, competitive, business and industry factors will affect our futurefinancial performance, and, as a result, our ability to generate cash flow fromoperations and to pay our debt, including our Notes.  Many of these factors, such as ethanolprices, corn prices, economic and financial conditions in our industry and theglobal economy or competitive initiatives of our competitors, are beyond ourcontrol.

 

If we do not generate enough cash flow from operations to satisfy ourdebt obligations, we may have to undertake alternative financing plans, suchas:

 

·              refinancing orrestructuring our debt:

·              selling assets;

·              reducing ordelaying capital investments; or

·              seeking toraise additional capital.

 

We cannot assure you, however, that undertaking alternative financingplans, if necessary, would allow us to meet our debt obligations.  Our inability to generate sufficient cashflow to satisfy our debt obligations, including, but not limited to, ourobligations under our Notes, or to obtain alternative financing, couldmaterially and adversely affect our business, financial condition, results ofoperations and prospects.

 

***We have significant indebtedness under ourRevolving Facility and our Notes.  OurRevolving Facility and our Notes have substantial restrictions and affirmativecovenants and we may have difficulty obtaining additional credit, which couldadversely affect our operations.***

 

As of March 31, 2010, we had an aggregate of approximately $105million in debt outstanding under our Notes, and we may issue an additional $50million in aggregate principal amount of Notes under the Indenture.  In addition, we had availability under ourRevolving Facility of approximately $7.4 million as of March 31, 2010. Asa result of our indebtedness, we will use a portion of our cash flow to payinterest and principal when due, which will reduce the cash available tofinance our operations and other business activities and could limit ourflexibility in planning for or reacting to changes in our business and theindustry in which we operate.

 

Our indebtedness under our Revolving Facility and our Notes restrictsour ability to engage in certain activities. These restrictions limit our ability, subject to certain exceptions, to,among other things:

 

·              incuradditional indebtedness and issue stock;

·              makeprepayments on or purchase indebtedness in whole or in part;

·              pay dividendsand other distributions with respect to our capital stock or repurchase ourcapital stock or make other restricted payments;

·              makeinvestments;

·              enter intotransactions with affiliates;

 

47

----

Table of Contents

 

·              create or incur liens tosecure debt;

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

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

·              incur dividend or otherpayment restrictions affecting subsidiaries;

·              make capital expendituresbeyond specified limits;

·              engage in specified businessactivities; and

·              acquire facilities or otherbusinesses.

 

Wealso are required to comply with certain affirmative covenants.  Our ability to comply with these restrictionsand covenants in the future is uncertain and will be affected by the levels ofcash flow from our operations and events or circumstances beyond ourcontrol.  Our failure to comply with anyof the restrictions and covenants could result in an event of default, which,if it continues beyond any applicable cure periods, could cause all of ourexisting indebtedness to be immediately due and payable.

 

Wedepend on our revolving credit facility for future working capital needs.  If there is an event of default by us underour revolving credit facility that continues beyond any applicable cure period,we may be unable to make borrowings to fund our operations.

 

***We operate in a highly competitive industry withlow barriers to entry.***

 

Inthe U.S., we compete with other corn processors and refiners, includingArcher-Daniels-Midland Company, Green Plains Renewable Energy, Valero, BiofuelsEnergy Corporation, Hawkeye Holdings, Inc., Pacific Ethanol, Cargill, Inc.and A.E. Staley Manufacturing Company, a subsidiary of Tate & Lyle,PLC.  Some of our competitors aredivisions of larger enterprises and have greater financial resources than we do.  Although many of our competitors are largerthan we are, we also have smaller competitors. Farm cooperatives comprised of groups of individual farmers have beenable to compete successfully.  As of December 2009,the top ten domestic producers accounted for approximately 47.9% of allproduction.  If our competitorsconsolidate or otherwise grow and/or we are unable to similarly increase oursize and scope, our business and prospects may be significantly and adverselyaffected.

 

Wealso face increasing competition from international suppliers.  Although there is a tariff on foreignproduced ethanol that is slightly larger than the federal ethanol taxincentive, ethanol imports equivalent to up to 7% of total domestic productionfrom certain countries were exempted from this tariff under the CBI (TheCaribbean Basin Initiative) to spur economic development in Central America andthe Caribbean.

 

Ourcompetitors also include plants owned by farmers who earn their livelihoodthrough the sale of corn, and hence may not be as focused on obtaining optimalvalue for their produced ethanol as we are.

 

***Our business is dependent upon the availability andprice of corn.  Significant disruptionsin the supply of corn will materially affect our operating results.  In addition, since we generally cannot passon increases in corn prices to our customers, continued periods of historicallyhigh corn prices will also materially adversely affect our operating results.***

 

Theprincipal raw material we use to produce ethanol and ethanol by-products iscorn.  In 2009, we purchasedapproximately 74.2 million bushels of corn at a cost of $287.1 million, whichcomprised about 72% of our total cost of production.  In 2009, our average corn cost ranged from alow of $3.31 per bushel in September 2009 to a high of $4.48 per bushel inJanuary 2009.  Corn prices began torise significantly beginning in September 2006.  We believe a systemic shift has occurred inthe marketplace for corn, and the price of corn will remain significantlyhigher than the historical averages.  Theincrease in U.S. ethanol capacity under construction could outpace increases incorn production, which may further increase corn prices and impact ourprofitability.

 

Changesin the price of corn have had an impact on our business.  In general, higher corn prices produce lowerprofit margins and, therefore, represent unfavorable market conditions.  This is especially true when marketconditions do not allow us to pass along increased corn costs to ourcustomers.  At certain levels, cornprices may make ethanol uneconomical to use in markets and volumes above therequirements set forth in the renewable fuels standard or for which ethanol isused as an oxygenate in order to meet federal and state fuel emissionstandards.

 

48

----

Table of Contents

 

Theprice of corn is influenced by general economic, market and regulatoryfactors.  These factors include weatherconditions, farmer planting decisions, government policies and subsidies withrespect to agriculture and international trade and global demand andsupply.  The significance and relativeimpact of these factors on the price of corn is difficult to predict.  Factors such as severe weather or cropdisease could have an adverse impact on our business because we may be unableto pass on higher corn costs to our customers. Any event that tends to negatively impact the supply of corn will tendto increase prices and potentially harm our business.  The increasing ethanol capacity could boostdemand for corn and result in increased prices for corn.  We expect the price of corn to continue toremain at levels that would be considered as high when compared to historicalperiods.

 

Inan attempt to partially offset the effects of fluctuations in corn costs onoperating income, we have taken hedging positions in the corn futures marketsin the past.  However, these hedgingtransactions also involve risk to our business. See “We may engage in hedging or derivative transactions which involverisks that can harm our business.”

 

***If the expected increase in ethanol demand does notoccur, or if the demand for ethanol otherwise decreases, the excess capacity inour industry may increase further.***

 

Domesticethanol capacity has increased significantly from 1.3 billion gallons per yearin 1997 to 12.5 billion gallons per year at the end of 2008.  According to the RFA, as of January 25,2010, approximately 1.4 billion gallons per year of production capacity iscurrently under construction.  Through November 2009,U.S. ethanol demand exceeded U.S. ethanol production by 139 milliongallons.  Demand for ethanol increased by12% over 2008 through increased penetration into new markets and a governmentmandate, but the production capacity of U.S. ethanol producers continues toexceed demand.  At the end of 2009, therewas approximately 1.2 billion gallons of production capacity shut-in.  If additional demand for ethanol is notcreated, either through discretionary blending or an increase in the blendingpercentage allowed by the EPA, the excess supply may cause additional plants toshutter production or cause ethanol prices to decrease further, perhapssubstantially.

 

***Growth in the sale and distribution of ethanol isdependent on the changes in and expansion of related infrastructure, which maynot occur on a timely basis, if at all, and our operations could be adverselyaffected by infrastructure disruptions.***

 

Substantialdevelopment of infrastructure by persons and entities outside our control arerequired for our operations and the ethanol industry generally, to grow.  Areas requiring expansion include, but arenot limited to, additional rail capacity, additional storage facilities forethanol, increases in truck fleets capable of transporting ethanol withinlocalized markets, expansion of refining and blending facilities to handleethanol, growth in service stations equipped to handle ethanol fuels, andgrowth in the fleet of flexible fuel vehicles capable of using E85 fuel.  Substantial investments required for theseinfrastructure changes and expansions may not be made or they may not be madeon a timely basis.  Any delay or failurein making the changes in or expansion of infrastructure could hurt the demandor prices for our products, impede our delivery of products, impose additionalcosts on us or otherwise have a material adverse effect on our business,results of operations or financial condition. Our business is dependent on the continuing availability ofinfrastructure and any infrastructure disruptions could have a material adverseeffect on our business, results of operations and financial condition.

 

***The market for natural gas is subject to marketconditions that create uncertainty in the price and availability of the naturalgas that we utilize in our manufacturing process.***

 

Werely upon third parties for our supply of natural gas which is consumed in theproduction of ethanol.  The prices forand availability of natural gas are subject to volatile market conditions.  These market conditions often are affected byfactors beyond our control such as weather conditions, overall economicconditions and foreign and domestic governmental regulation and relations.  Significant disruptions in the supply ofnatural gas could temporarily impair our ability to produce ethanol for ourcustomers.  Further, increases in naturalgas prices or changes in our natural gas costs relative to natural gas costspaid by competitors may adversely affect our results of operations andfinancial condition.  The pricefluctuation in natural gas prices over the ten year period from 2000 through December 31,2009, based on the New York Mercantile Exchange, or NYMEX, daily futures data,has ranged from a low of $1.83 per MMBtu in September 2001 to a high of$15.38 per MMBtu in December 2005. We 

 

49

----

Table of Contents

 

currentlyuse approximately 3.4 million MMBtu’s of natural gas annually, depending uponbusiness conditions, in the manufacture of our products.  Our usage of natural gas will increase withthe planned expansion of our production facilities.

 

Inan attempt to minimize the effects of fluctuations in natural gas costs onoperating income, we have taken hedging positions in the natural gas forward orfutures markets in the past; however, these hedging transactions also involverisk to our operations.  Since naturalgas prices are volatile and we are not currently taking hedging positions, ourresults could be adversely affected by an increase in natural gas prices. See “—Wemay engage in hedging or derivative transactions which involve risks that canharm our business.”

 

***Fluctuations in the demand for gasoline may reducedemand for ethanol.***

 

Ethanolis marketed as an oxygenate to reduce vehicle emissions from gasoline, as anoctane enhancer to improve the octane rating of gasoline with which it isblended and as a fuel extender.  As aresult, ethanol demand has historically been influenced by the supply of anddemand for gasoline.  If gasoline demanddecreases, our ability to sell our product and our results of operations andfinancial condition may be materially adversely affected.

 

***Changes in ethanol prices canaffect the value of our inventory which may significantly affect ourprofitability.***

 

Our inventory isvalued based upon a weighted average of our cost to produce ethanol and theprice we pay for ethanol that we have purchased from other producers.  Dueto the dissolution of the marketing alliance in early 2009, we no longer makepurchases of ethanol from alliance partners but continue to engage inpurchase/resale transactions, as needed, to fulfill our sales commitments.  Changes, either upward or downward, in ourpurchased cost of ethanol or our own production costs, will cause the inventoryvalue to fluctuate from period to period, perhaps significantly.  Thesechanges in value flow through our statement of operations as the inventory issold and can significantly increase or decrease our profitability.

 

***The relationship between thesales price of our co-products and the price we pay for corn can fluctuatesignificantly which may affect our results of operations and profitability.***

 

Wesell co-products and bio-products that are remnants of the ethanol productionprocess in order to reduce our costs and increase profitability.  Historically, sales prices for theseco-products have tracked along with the price of corn.  However, there have been occasions when thevalue of these co-products and bio-products has lagged behind increases in cornprices.  As a result, we may occasionallygenerate less revenue from the sale of these co-products and bio-productsrelative to the price of corn.  Inaddition, several of our co-products compete with similar products made fromother plant feedstock.  The cost of theseother feedstocks may not have risen as corn prices have risen.  Consequently, the price we may receive forthese products may not rise as corn prices rise, thereby lowering our costrecovery percentage relative to corn.

 

***Fixed price and gasoline related contracts forethanol may be at a price level lower than the prevailing price.***

 

Atany given time, contract prices for ethanol may be at a price level differentfrom the current prevailing price, and such a difference could materiallyadversely affect our results of operations and financial condition.  As of March 31, 2010 and December 31,2009, we had no fixed price or gasoline related sales contracts for ethanol.

 

***Our results of operations may be adversely affectedby technological advances.***

 

Thedevelopment and implementation of new technologies may result in a significantreduction in the costs of ethanol production. We cannot predict when new technologies may become available, the rateof acceptance of new technologies by our competitors or the costs associatedwith such new technologies.  In addition,advances in the development of alternatives to ethanol, or corn ethanol in particular,could significantly reduce demand for or eliminate the need for ethanol, orcorn ethanol in particular, as a fuel oxygenate or octane enhancer.

 

50

----

Table of Contents

 

Anyadvances in technology which require significant capital expenditures for us toremain competitive or which otherwise reduce demand for ethanol will have amaterial adverse effect on our results of operations and financial condition.

 

***We are substantially dependent onour three facilities and any operational disruption could result in a reductionof our sales volumes and could cause us to incur substantial expenditures.***

 

Thesubstantial majority of our net income is derived from the sale of ethanol andthe related bio-products and co-products that we produce at our Illinoisfacilities and our Nebraska facility. Our operations may be subject to significant interruption if either ofthe Illinois facilities or Nebraska facility experiences a major accident or isdamaged by severe weather or other natural disaster.  In addition, our operations may be subject tolabor disruptions and unscheduled downtime, or other hazards inherent in ourindustry.  Some of those hazards maycause personal injury and loss of life, severe damage to or destruction ofproperty and equipment and environmental damage, and may result in suspensionor termination of operations and the imposition of civil or criminal penalties.  As protection against these hazards, wemaintain property, business interruption and casualty insurance which webelieve is in accordance with customary industry practices, but we cannotprovide any assurance that this insurance will be adequate to fully cover the potentialhazards described above or that we will be able to renew this insurance oncommercially reasonable terms or at all.

 

***Risks associated with the operation of ourproduction facilities may have a material adverse effect on our business.***

 

Ourrevenue is dependent on the continued operation of our various productionfacilities.  The operation of productionplants involves many risks including:

 

·              the breakdown, failure orsubstandard performance of equipment or processes;

·              inclement weather andnatural disasters;

·              the need tocomply with directives of, obtain and maintain all necessary permits from,governmental agencies;

·              raw material supply disruptions;

·              labor force shortages, workstoppages, or other labor difficulties; and

·              transportation disruptions.

 

Theoccurrence of material operational problems, including but not limited to theabove events, may have an adverse effect on the productivity and profitabilityof a particular facility, or to us as a whole.

 

***We may encounter unanticipated difficulties inoperating our plants under construction, which could reduce sales and cause usto incur substantial losses.***

 

The Delta-T technology to be utilized atour plants under construction is currently in use only in a small number ofethanol plants, mostly with smaller capacities than ours. We are aware ofcertain plant design issues that may impede the reliable operation of theplants and continuous operations. We are in the process of addressing these butwe have no assurance that our initiatives will be successful or can beimplemented in a timely fashion or without an extended period of interruptionto operations.

 

***We are contractually obligated to complete certaincapacity expansions in Aurora, Nebraska and Mount Vernon, Indiana.  If we fail to complete them in a timelymanner, we may be subject to material penalties.***

 

Onor about March 23, 2010, in accordance with the terms of a stipulationfiled with the Bankruptcy Court, we paid approximately $2.1 million to theAurora Co-operative (“Aurora Co-op”), representing penalties of (i) approximately$0.8 million, arising under a Master Development Agreement with the AuroraCo-op for failure to complete construction of the Aurora West facility, for theperiod of July 1, 2009 through and including December 31, 2009, and (ii) approximately$1.3 million in the event that we do not complete the Aurora West facility by September 30,2010 for each month starting from January 1, 2010 through and including September 30,2010.  The failure to commenceconstruction of the Aurora West plant by January 1, 2012 or complete thesame by July 31, 2012 will subject us to additional penalties of $138,889per month from October 1, 2010 through and including 

 

51

----

Table of Contents

 

whenthe plant is operational, but not to exceed total penalties of $5,000,000.  In addition, if we are unable to or otherwisedo not pay any additional penalty due after September 30, 2010 or fail tomeet the deadlines for commencing and completing the Aurora West facility, theAurora Co-op has the right to repurchase the property at cost (subject toadjustment for any expenses which we have paid with respect to theinfrastructure construction).  Pursuantto the Plan, various other agreements with the Aurora Co-op, as amended, wereassumed by us and should ensure that the Aurora West facility will be able tooperate once completed.  However, thereis no certainty that future disagreements between us and the Aurora Co-op willnot arise as to the terms of these agreements, which could impact constructionat the Aurora West facility.

 

Priorto confirmation of the Plan, we amended our lease with the Indiana PortsCommission to provide additional flexibility as to the timing of the completionof Phase One and the construction of the Phase Two expansion at the Mt. Vernonfacility.  This lease, as amended,requires our Mt. Vernon subsidiary to substantially complete Phase One (aninitial 110 million gallons of capacity) by December 31, 2010 and toconstruct Phase Two (an additional 110 million gallons of capacity) beforeconstructing a new facility elsewhere (other than at Aurora West).  If we are in default of these obligations,the Indiana Ports Commission may, subject to specified cure rights, take overconstruction and complete the facility at our expense (among other remedies).

 

***We depend on rail, truck and barge transportationfor delivery of corn to us and the distribution of ethanol to our customers.***

 

Wedepend on rail, truck and barge to deliver corn to us and to distribute ethanolto the terminals currently in our network. Ethanol is not currently distributed by pipeline.  Disruption to the timely supply of thesetransportation services or increases in the cost of these services for anyreason, including the availability or cost of fuel or railcars to serve ourfacilities under construction, regulations affecting the industry, or laborstoppages in the transportation industry, could have an adverse effect onour ability to supply corn to our production facilities or to distributeethanol to our terminals, and could have a material adverse effect on ourfinancial performance.

 

***Our floating rate indebtedness subjects us tointerest rate risk, which could cause our debt service obligations to increasesignificantly.***

 

Borrowingsunder the Revolving Credit Facility bear interest at floating rates and exposeus to interest rate risk.  If interestrates increase, our debt service obligations on the variable rate indebtednesswould increase even though the amount borrowed remained the same, and our netincome and cash available for servicing our indebtedness would decrease.

 

52

----

Table of Contents

 

***Consumer resistance to the use of ethanol mayaffect the demand for ethanol, which could affect our ability to market ourproduct.***

 

Mediareports in the mainstream press indicate that some consumers believe the use ofethanol will have a negative impact on retail gasoline prices or is the reasonfor increases in food prices.  Many alsobelieve that ethanol adds to air pollution and harms car and truckengines.  Still other consumers believethat the process of producing ethanol actually uses more fossil energy, such asoil and natural gas, than the amount of energy produced by ethanol.  These consumer beliefs could be wide-spreadin the future.  If consumers choose notto buy ethanol blended fuels, it would affect the demand for the ethanol weproduce which could lower demand for our product and negatively affect ourprofitability.

 

***Various studies have criticized the efficiency ofethanol, which could lead to the reduction or repeal of incentives and tariffsthat promote the use and domestic production of ethanol.***

 

Althoughmany trade groups, academics and governmental agencies have supported ethanolas a fuel additive that promotes a cleaner environment, others have criticizedethanol production as consuming considerably more energy and emitting moregreenhouse gases than other biofuels.  Inparticular, two February 2008 studies concluded the current production ofcorn-based ethanol results in more greenhouse gas emissions than conventionalfuels if both direct and indirect greenhouse gas emissions, including thoseresulting from land use changes resulting from planting crops for ethanolfeedstocks, are taken into account. Other studies have suggested that corn-based ethanol is less efficientthan ethanol produced from switch grass or wheat grain.  If these views gain acceptance, support forexisting measures promoting use and domestic production of corn-based ethanolcould decline, leading to reduction or repeal of these measures.

 

***We sell ethanol primarily to the major oilcompanies and traders and therefore we can from time to time be subject to ahigh degree of concentration of our sales and accounts receivable.***

 

Wesell ethanol to most of the major integrated oil companies and a significantnumber of large, independent refiners and petroleum wholesalers.  Our trade receivables result primarily fromour ethanol marketing operations.  As ageneral policy, collateral is not required for receivables, but customers’financial condition and creditworthiness are evaluated regularly.  Credit risk concentration related to ouraccounts receivable results from our top ten customers having generated 54.7%and 47% of our consolidated net sales for the years ended December 31,2009 and 2008, respectively.

 

In2009, Biourja Trading accounted for 10.5% and Exxon Mobil accounted for 11.1%of our net sales.  No other customers in2009 represented more than 10% of our consolidated net sales volume.  No customers in 2008 or 2007 represented morethan 10% of our consolidated net sales volume.

 

Ifwe would suddenly lose a major customer and not be able to replace the demandfor our product very quickly it could have a material impact on our sales andprofitability.

 

***Research is currently underway todevelop production of biobutanol, a product that could directly compete withethanol and may have potential advantages over ethanol.***

 

Biobutanol,an advanced biofuel produced from agricultural feedstock, is currently beingdeveloped by various parties, including a partnership between BP andDuPont.  According to the partnership,biobutanol has many advantages over ethanol. The advantages include: low vapor pressure, making it more easily addedto gasoline; energy content closer to that of gasoline, such that the decreasein fuel economy caused by the blending of biobutanol with gasoline is less thanthat of other biofuels when blended with gasoline; it can be blended at higherconcentrations than other biofuels for use in standard vehicles; it is lesssusceptible to separation when water is present than in pure ethanol-gasolineblends; and it is expected to be potentially suitable for transportation in gaspipelines, resulting in a possible cost advantage over ethanol producersrelying on rail transportation.  AlthoughBP and DuPont have not announced a timeline for producing biobutanol on a largescale, if biobutanol production comes online in the United States, biobutanolcould have a competitive advantage over ethanol and could make it moredifficult to market our ethanol, which could reduce our ability to generaterevenue and profits.

 

53

----

Table of Contents

 

***We, and some of our major customers, have unionizedemployees and could be adversely affected by labor disputes.***

 

Someof our employees and some employees of our major customers are unionized.  At December 31, 2009, approximately 55%of our employees were unionized.  Ourunionized employees are hourly workers located at our Illinois facilities.  The unionized employees are covered by acollective bargaining agreement between our subsidiary, Aventine RenewableEnergy, Inc. and the United Steelworkers International Union, Local 7-662.

 

Thecollective bargaining agreement with the Union was scheduled to expire in October 2009.  Prior to the expiration of the collectivebargaining agreement, the Company and the Union agreed to extend the term ofthe current collective bargaining agreement by one year through and including October 31,2010 on the same terms and conditions. The collective bargaining agreement may not prevent a strike or work stoppage inthe future, and any such work stoppage could have a material adverseaffect on our business, financial condition and results of operations.

 

***If we are unable to attract andretain key personnel, our ability to operate effectively may be impaired.***

 

Ourability to operate our business and implement strategies depends, in part, onthe efforts of our executive officers and other key employees.  Our management philosophy of cost-controlmeans that we operate with a limited number of corporate personnel, and ourcommitment to a less centralized organization also places greater emphasis onthe strength of local management.  Ourfuture success will depend on, among other factors, our ability to attract andretain qualified personnel, particularly executive management.  The loss of the services of any of our keyemployees or the failure to attract or retain other qualified personnel,domestically or abroad, could have a material adverse effect on our business orbusiness prospects.

 

***The use and demand for ethanol and its supply arehighly dependent on various federal and state legislation and regulation, andany changes in legislation or regulation could cause the demand for ethanol todecline or its supply to increase, which could have a material adverse effecton our business, results of operations and financial condition.***

 

Variousfederal and state laws, regulations and programs have led to increased use ofethanol in fuel.  For example, certainlaws, regulations and programs provide economic incentives to ethanol producersand users.  Among these regulations are (1) therenewable fuels standard, which requires an increasing amount of renewablefuels to be used in the U.S. each year, (2) the VEETC, which provides atax credit of $0.45 per gallon on 10% ethanol blends that is set to expire in2010**,** (3) the small ethanol producertax credit, for which we do not qualify because of the size of our ethanolplants, and (4) the federal “farm bill,” which establishes federalsubsidies for agricultural commodities including corn, our primaryfeedstock.  These laws, regulations andprograms are constantly changing. Federal and state legislators and environmental regulators could adoptor modify laws, regulations or programs that could adversely affect the use ofethanol.  Barring a change in currentregulation, requirements for the state of California will make it difficult forethanol produced from corn in many Midwestern states to be used as a fuel inCalifornia beginning in 2011.  Inaddition, certain state legislatures oppose the use of ethanol because theymust ship ethanol in from other corn-producing states, which couldsignificantly increase gasoline prices in the state.

 

***If we cannot increase the amount of non-corn basedethanol, cellulosic biofuels or bio-mass based diesel we produce, our business,results of operations and financial condition will be adversely affected.***

 

TheEnergy Independence and Security Act of 2007 established a revised renewablefuels standard, or RFS, for the years 2006 through 2022.  The RFS sets forth the minimum amount ofrenewable fuels that must be present in U.S. transportation fuels.  The law starts at 9 billion gallons in 2008and rises to 36 billion gallons by 2022. For 2015 and all subsequent years, the amount of the renewable fuelsmandate that can be satisfied by corn-based ethanol is currently capped at 15billion gallons.  The remainder of themandate is required to be obtained from cellulosic ethanol and other advancedbiofuels.  If our and our competitors’facilities cannot accept feedstocks, other than corn, or if we do not beginproducing non-corn based ethanol in the future, our business, results ofoperations and financial condition may be adversely affected.

 

54

----

Table of Contents

 

***The Renewable Fuel Standard 2 recently released bythe EPA may require us to include alternative technologies in our plants underconstruction, which may increase the cost to complete the facilities.***

 

TheEPA’s recently released Renewable Fuel Standard 2 includes the requirementsthat the lifecycle greenhouse gas (“GHG”) emissions of a qualifying renewablefuel must be less than the lifecycle GHG emissions of the 2005 baseline averagegasoline or diesel fuel that it replaces. The lifecycle GHG threshold for ethanol is 20%.  Fuels from existing capacity of currentfacilities and of facilities that commenced construction prior to December 19,2007 are exempt or grandfathered from the 20% lifecycle requirement undercertain circumstances.  Plants whoseconstruction commenced prior to December 19, 2007 must be completed withinthree years in order to be exempt or grandfathered from the 20% lifecyclerequirement.  Plants not exempt orgrandfathered must include advanced efficient technologies as defined by theregulations in order to meet the Renewable Fuel Standard 2 requirements.  If our Mt. Vernon plant and the Aurora Westplant are not completed within the required three years, the plants may not beexempt or grandfathered from the 20% lifecycle requirement and could requireadditional advanced efficient technologies to be included in the construction,which is likely to require additional capital which may be substantial.

 

***Certain countries can import ethanol into the U.S.duty free, which may undermine the ethanol industry in the U.S.***

 

Importedethanol is generally subject to a $0.54 per gallon tariff and a 2.5% ad valoremtax that was designed to offset the $0.45 per gallon ethanol subsidy currentlyavailable under the federal excise tax incentive program for refineries andblenders that mix ethanol with their gasoline. At a certain price level, imported ethanol may become profitable for salein the U.S. despite the tariff.  Thisoccurred in 2006, due to a spike in the ethanol prices and insufficientsupply.  As a result, there mayeffectively be a ceiling on U.S. ethanol prices.  This, combined with uncertainties surroundingU.S. producers’ ability to meet domestic demand, resulted in significantimports of ethanol, especially from Brazil. Furthermore, East Coast facilities are better suited to bringing inproduct by water rather than rail (the preferred path for ethanol from theMidwest).  The combination made it moreeconomic for some buyers to import ethanol with the full import duty than tobring supplies from the Midwest.  Giventhe increase in ethanol demand as a result of the new RFS and potentialtransportation bottlenecks delivering material from the Midwest, imports ofethanol could rise.

 

Thereis a special exemption from the tariff for ethanol imported from 24 countriesin Central America and the Caribbean islands which is limited to a total of 7%of U.S. production per year (with additional exemptions for ethanol producedfrom feedstock in the Caribbean region over the 7% limit).  In addition the NAFTA (The North America FreeTrade Agreement which was signed into law January 1, 1994)countries—Canada and Mexico—are exempt from duty. See “Business — LegislativeDrivers and Governmental Regulations — The federal ethanol tax incentiveprogram” in our Annual Report on Form 10-K for the year ended December 31,2009.  Imports from the exemptedcountries have increased in recent years and are expected to increase furtheras a result of new plants under development.

 

***We may be adversely affected by environmental,health and safety laws, regulations and liabilities.***

 

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

 

Weare also subject to potential liability for the investigation and cleanup ofenvironmental contamination at each of the properties that we own or operateand at off-site locations where we arranged for the disposal of hazardouswastes.  For instance, soil andgroundwater contamination has been identified in the past at our Illinois 

 

55

----

Table of Contents

 

campus.  If any of these sites are subject toinvestigation and/or remediation requirements, we may be responsible under theComprehensive Environmental Response, Compensation and Liability Act or otherenvironmental laws for all or part of the costs of such investigation and/orremediation, and for damages to natural resources.  We may also be subject to related claims byprivate parties alleging property damage or personal injury due to exposure tohazardous or other materials at or from such properties.  We have not accrued any amounts forenvironmental matters as of March 31, 2010.  The ultimate costs of any liabilities thatmay be identified or the discovery of additional contaminants could adverselyimpact our results of operation or financial condition.

 

Inaddition, the hazards and risks associated with producing and transporting ourproducts (such as fires, natural disasters, explosions, abnormal pressures andspills) may result in releases of hazardous substances, and may result inclaims from governmental authorities or third parties relating to actual oralleged personal injury, property damage, or damages to natural resources.  We maintain insurance coverage against some,but not all, potential losses caused by our operations. Our coverage includes,but is not limited to, physical damage to assets, employer’s liability,comprehensive general liability, automobile liability and workers’compensation.  We do not carryenvironmental insurance.  We believe thatour insurance is adequate for our industry, but losses could occur foruninsurable or uninsured risks or in amounts in excess of existing insurancecoverage.  The occurrence of events whichresult in significant personal injury or damage to our property, naturalresources or third parties that is not covered by insurance could have amaterial adverse impact on our results of operations and financial condition.

 

Ourair emissions are subject to the federal Clean Air Act, as amended, and similarstate laws which generally require us to obtain and maintain air emissionpermits for our ongoing operations as well as for any expansion of existingfacilities or any new facilities. Obtaining and maintaining those permits requires us to incur costs, andany future more stringent standards may result in increased costs and may limitor interfere with our operating flexibility. In addition, the permits ultimately issued may impose conditions whichare more costly to implement than we had anticipated.  These costs could have a material adverseeffect on our financial condition and results of operations, and couldadversely affect us in our efforts to compete with foreign producers notsubject to such stringent requirements.

 

Federaland state environmental authorities have been investigating alleged excess VOCSemissions and other air emissions from many U.S. ethanol plants, including ourIllinois facilities.  The investigationrelating to our Illinois wet mill facility is still pending, and we could berequired to install additional air pollution control equipment or take othermeasures to control air pollutant emissions at that facility.  If authorities require us to installcontrols, we would anticipate that costs would be higher than the approximately$3.4 million we incurred in connection with a similar matter at our Nebraskafacility due to the larger size of the Illinois wet mill facility.  In addition, if the authorities determine ouremissions were in violation of applicable law, we would likely be required topay fines that could be material.

 

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

 

Wecurrently generate revenue from the sale of carbon dioxide, which is aco-product of the ethanol production process at each of our Illinois andNebraska facilities.  New laws orregulations relating to the production, disposal or emissions of carbon dioxidemay require us to incur significant additional costs and may also adverselyaffect our ability to continue generating revenue from carbon dioxide sales.

 

56

----

Table of Contents

 

***We may engage in hedging orderivative transactions which involve risks that can harm our business.***

 

Inan attempt to minimize the effects of the volatility of the price of corn,natural gas, electricity and ethanol (“commodities”), we may take economichedging positions in the commodities. Economic hedging arrangements also expose us to the risk of financialloss in situations where the other party to the hedging contract defaults onits contract or there is a change in the expected differential between theunderlying price in the hedging agreement and the actual price of thecommodities.  Although we attempt to linkour economic hedging activities to sales plans and pricing activities,occasionally such hedging activities can themselves result in losses.  We have not been significantly involved inthese activities since February 2009. As a result, our results of operations may be adversely affected duringperiods in which corn and/or natural gas prices increase.

 

***If our internal computer networkand applications suffer disruptions or fail to operate as designed, ouroperations will be disrupted and our business may be harmed.***

 

Werely on network infrastructure and enterprise applications, and internal technologysystems for our operational, marketing support and sales, and productdevelopment activities.  The hardware andsoftware systems related to such activities are subject to damage fromearthquakes, floods, lightning, tornadoes, fire, power loss, telecommunicationfailures and other similar events.  Theyare also subject to acts such as computer viruses, physical or electronicvandalism or other similar disruptions that could cause system interruptionsand loss of critical data, and could prevent us from fulfilling our customers’orders.  We have developed disasterrecovery plans and backup systems to reduce the potentially adverse effects ofsuch events, but there are no assurances such plans and systems would besufficient.  Any event that causes failuresor interruption in our hardware or software systems could result in disruptionof our business operations, have a negative impact on our operating results,and damage our reputation.

 

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

 

None

 

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

 

None

 

**Item 5.**                    **OtherInformation**

 

**Subsequent Events**

 

The Company, through itswholly-owned subsidiaries Aventine Renewable Energy — Aurora West, LLC andAventine Renewable Energy — Mt. Vernon, LLC, entered into separate, butsubstantially identical short form contracts (the “Short Form Contracts”)with Fagen, Inc. (“Fagen”) to construct ethanol facilities in Aurora,Nebraska (the “Aurora Agreement”) and Mount Vernon, Indiana (the “Mt. VernonAgreement”) (the “Ethanol Facilities”). The Company entered into the AuroraAgreement on April 23, 2010, and the Mt. Vernon Agreement on May 4,2010.  Under the terms of the Short Form Contracts,Fagen will provide labor, construction equipment and construction consumables necessaryto complete the Ethanol Facilities in accordance with the Company’s design andspecifications.  The targeted cost ofcompletion under the Aurora Agreement is approximately $25.1 million.  The targeted cost of completion under the Mt.Vernon Agreement is approximately $21.4 million.  The Company may order changes in the workdone under the Short Form Contracts, and, consequently, the contract sumsmay be adjusted accordingly.

 

The Short Form Contractswere entered into with the express intention that the contracts did not reflectthe full and final agreement of the parties. The Short Form Contracts state that if the parties are unable tocome to final terms as of May 10, 2010, with respect to the AuroraAgreement and as of May 17, 2010, with respect to the Mt. VernonAgreement, then Fagen has the right to terminate the agreements and be paid forcosts incurred to that date plus a fee in the amount of 15% of all costs.  As discussed below, with regard to the AuroraAgreement, the Company and Fagen entered into a final agreement on May 14,2010, and Fagen did not indicate its desire to require payment for costsincurred thereunder.

 

Fagen may terminate therespective Short Form Contract if work is stopped by any public authorityfor 30 days or more through no fault of Fagen or if the Company fails to payFagen any payment within 30 days after it is due, upon seven days’ writtennotice to the Company.  Fagen will beentitled to request reimbursement for costs incurred under certain agreed uponcircumstances.  If the Company wrongfullyrefuses to accept such costs within seven days of receipt of Fagen’s requests,upon seven days’ written notice to the Company, Fagen may terminate therespective Short Form Contract.  TheCompany may, upon seven days’ written notice, terminate the respective Short Form Contractif Fagen defaults in its performance of the construction or violates any of theprovisions of the respective Short Form Contract.

 

The Company, through itswholly-owned subsidiaries Aventine Renewable Energy — Aurora West, LLC andAventine Renewable Energy — Mt. Vernon, LLC, entered into separate, butsubstantially identical construction agreements (individually, the “AuroraConstruction Agreement” and the “Mt. Vernon Construction Agreement” and collectively,the “Construction Agreements”) with Fagen, which are intended to supersede andreplace the Short Form Contracts to construct the Ethanol Facilities.  The Company entered into the AuroraConstruction Agreement on May 14, 2010, with an effective date of April 12,2010.  The Company entered into the Mt.Vernon Construction Agreement on May 17, 2010, with an effective date of April 29,2010.  Under the terms of theConstruction Agreements, Fagen will perform all work and services in connectionwith the construction of the Ethanol Facilities, and provide all material,equipment, tools and labor necessary to complete the Ethanol Facilities (the“Work”).  The targeted cost ofcompletion, including Fagen’s minimum completion fee, under the AuroraConstruction Agreement is approximately $25.1 million, subject to adjustmentsof Fagen’s completion fee.  The targetedcost of completion, including Fagen’s minimum completion fee, under the Mt.Vernon Construction Agreement is approximately $21.4 million, subject to adjustmentsof Fagen’s completion fee.  The Companyand Fagen may agree to changes in the Work, and, consequently, the contractsums may be adjusted accordingly.

 

                In addition to a mobilization fee, the Company isrequired to make monthly progress payments under the ConstructionAgreements.  The Construction Agreementsprovide for penalties, work suspension and negation of warranties if paymentsare not timely made.

 

Under the ConstructionAgreements, physical completion of the Work (“Mechanical Completion”) is to beachieved no later than September 1, 2010, subject to adjustment inaccordance with the Construction Agreements (the “Scheduled MechanicalCompletion Date”).  Final completion ofthe Work is to be achieved within 90 days after the earlier of the actual dateof Mechanical Completion or the Scheduled Mechanical Completion Date.

 

The Company may, uponcompliance with the cure opportunities provided in the Construction Agreements,terminate the respective Construction Agreement upon Fagen’s failure to abideby certain terms of the respective Construction Agreement.  Fagen may, upon compliance with the cureopportunities provided in the Construction Agreements, stop Work under therespective Construction Agreement for the Company’s failure to make paymentswhen due.  Fagen may, upon compliance withthe cure opportunities provided in the Construction Agreements, terminate therespective Construction Agreement for the Company’s failure to make paymentsseven days after Fagen has stopped Work or for certain Work stoppages ofdurations described in the Construction Agreements that are not the fault ofFagen.

 

There is no materialrelationship between Fagen and the Company other than as set forth above.

 

On April 30, 2010, the Company paid the Kiewit Note payable toKiewit Energy Company for $5.3 million reflected in short-term borrowings onthe consolidated balance sheet at March 31, 2010.

 

57

----

Table of Contents

 

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

 

(a)   Exhibits

 

2.1           Debtor’sFirst Amended Joint Plan of Reorganization Under Chapter 11 of the BankruptcyCode Dated as of January 13, 2009 (incorporated by reference to Exhibit 2.1of Aventine’s Current Report on Form 8-K filed on March 2, 2010).

 

3.1           ThirdAmended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1of Aventine’s Current Report on Form 8-K filed on March 19, 2010).

 

3.2           Amendedand Restated Bylaws (incorporated by reference to Exhibit 3.2 of Aventine’sCurrent Report on Form 8-K filed on March 19, 2010).

 

4.1           Indenture,dated as of March 15, 2010, among Aventine Renewable Energy Holdings, Inc.,the guarantors named therein and Wilmington Trust FSB, and form of note (incorporated by reference to Exhibit 4.1of Aventine’s Current Report on Form 8-K filed on March 19, 2010).

 

4.2           RegistrationRights Agreement dated as of March 15, 2010, by and among AventineRenewable Energy Holdings, Inc., Brigade Capital Management, LLC, WhiteboxAdvisors LLC and Senator Investment Group LP (incorporated by reference to Exhibit 4.2of Aventine’s Current Report on Form 8-K filed on March 19, 2010).

 

4.3           RegistrationRights Agreement dated as of March 15, 2010, by and among AventineRenewable Energy Holdings, Inc., Aventine Renewable Energy, Inc.,Aventine Renewable Energy — Aurora West, LLC, Nebraska Energy, L.L.C., AventineRenewable Energy — Mt. Vernon, LLC, Aventine Power, LLC, Brigade CapitalManagement, LLC, Whitebox Advisors LLC, and Senator Investment Group LP (incorporated by reference to Exhibit 4.3of Aventine’s Current Report on Form 8-K filed on March 19, 2010).

 

4.4           WarrantAgreement, dated as of March 15, 2010, between Aventine Renewable EnergyHoldings, Inc. and American Stock Transfer & Trust Company, LLC,as warrant agent (including the form of Warrant Certificate set forth in Exhibit Athereto) (incorporated by reference to Exhibit 4.4 of Aventine’sCurrent Report on Form 8-K filed on March 19, 2010).

 

10.1         RevolvingCredit and Security Agreement, dated as of March 15, 2010, among AventineRenewable Energy Holdings, Inc., Aventine Renewable Energy — Aurora West,LLC, Aventine Renewable Energy, Inc., Aventine Renewable Energy — Mt.Vernon, LLC, Aventine Power, LLC and Nebraska Energy, L.L.C., as borrowers, andPNC Bank, National Association, as lender and as agent (incorporated by reference to Exhibit 10.1of Aventine’s Current Report on Form 8-K filed on March 19, 2010).

 

10.2         Form ofIndemnification Agreement (incorporated by reference to Exhibit 10.2 of Aventine’sCurrent Report on Form 8-K filed on March 19, 2010).

 

10.3        AventineRenewable Energy Holdings, Inc. 2010 Equity Incentive Plan.*

 

10.4         AventineRenewable Energy Holdings, Inc. Director Compensation Plan.*

 

10.5         EmploymentAgreement, dated March 15, 2010, between Aventine Renewable EnergyHoldings, Inc. and Thomas Manuel.*

 

10.6         EmploymentAgreement, dated March 15, 2010, between Aventine Renewable EnergyHoldings, Inc. and Benjamin Borgen.*

 

58

----

Table of Contents

 

10.7         StockOption Agreement, dated March 15, 2010, between Aventine Renewable EnergyHoldings, Inc. and Thomas Manuel.*

 

10.8         Form ofStock Option Agreement, between Aventine Renewable Energy Holdings, Inc.and Benjamin Borgen.*

 

10.9         RestrictedStock Award Agreement, dated March 15, 2010, between Aventine RenewableEnergy Holdings, Inc. and Thomas Manuel.*

 

10.10       Form ofRestricted Stock Award Agreement, between Aventine Renewable Energy Holdings, Inc.and Benjamin Borgen.*

 

10.11       RestrictedStock Unit Award Agreement, dated March 15, 2010, between AventineRenewable Energy Holdings, Inc. and Thomas Manuel.*

 

10.12       Form ofRestricted Stock Unit Award Agreement for Directors.*

 

31.1         Certification of the Chief ExecutiveOfficer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.*

 

31.2         Certification of the Chief FinancialOfficer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

32.1         Certification of the Chief ExecutiveOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.†

 

32.2         Certification of the Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.†

 

----

*              Filed herewith

†              Furnished herewith

 

59

----

Table of Contents

 

# **SIGNATURE**

 

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

 
|                      |   | AVENTINE  RENEWABLE ENERGY HOLDINGS, INC. |
|---------------------------|--------|-------------------------------------------|
|                      |   |                                      |
|                      |   |                                      |
| Dated:  May 17, 2010 |   | By:                                       | /s/  William J. Brennan |
|                      |   | Name:                                     | William  J. Brennan |
|                      |   | Title:                                    | Chief  Accounting and Compliance Officer (duly authorized officer and principal  accounting officer) |

 

60

----