Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

# **FORM 10-Q**

# ** **

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

 

**for thetransition period from                 to                 .**

 

**COMMISSIONFILE NUMBER 001-32922**

 

**AVENTINE RENEWABLE ENERGY HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**(309)347-9200**

(Registrant’sTelephone Number, including Area Code)

 

Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES xNO o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files.) YES oNO o

 

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

 

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

 

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

 

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

 
| **Class**                      | ** ** | **Outstanding as of August 7, 2009** |
|--------------------------------|------------|-------------------------------------------|
| Common Stock, $0.001 Par Value |       | 42,963,158  Shares                        |

 

 

 

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# **FORM 10-Q**

# ** **

**QUARTERLY REPORT**

 

**TABLE OF CONTENTS**

** **
| ** **   | ** **                                                                                                                          | **Page No.** |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------|-------------------|
|         |                                                                                                                                |              |
| PART I  |
|         |                                                                                                                                |              |
| Item 1.      | Financial Statements                                                                                                                |              |
|         |                                                                                                                                |              |
|         | Condensed Consolidated Statements of Operations  (Unaudited) - Three-month and  six-month periods ended June 30, 2009 and 2008 | 1                 |
|         |                                                                                                                                |              |
|         | Condensed Consolidated Balance Sheets — June 30,  2009 (Unaudited) and  December 31, 2008                            | 2                 |
|         |                                                                                                                                |              |
|         | Condensed Consolidated Statements of Cash Flows  (Unaudited) - Six-month  periods ended June 30, 2009 and 2008                 | 3                 |
|         |                                                                                                                                |              |
|         | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                     | 4                 |
|         |                                                                                                                                |              |
| Item 2.      | Management’s Discussion and Analysis of  Financial Condition and  Results of Operations                                        | 25                |
|         |                                                                                                                                |              |
| Item 3.      | Quantitative and Qualitative  Disclosures About Market Risk                                                                         | 42                |
|         |                                                                                                                                |              |
| Item 4.      | Controls and Procedures                                                                                                             | 43                |
|         |                                                                                                                                |              |
| PART II |
|         |                                                                                                                                |              |
| Item 1.      | Legal Proceedings                                                                                                                   | 44                |
|         |                                                                                                                                |              |
| Item 1A.     | Risk Factors                                                                                                                        | 44                |
|         |                                                                                                                                |              |
| Item 2.      | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                        | 45                |
|         |                                                                                                                                |              |
| Item 3.      | Defaults Upon Senior Securities                                                                                                     | 45                |
|         |                                                                                                                                |              |
| Item 4.      | Submission of Matters to a Vote of  Security Holders                                                                                | 45                |
|         |                                                                                                                                |              |
| Item 5.      | Other Information                                                                                                                   | 45                |
|         |                                                                                                                                |              |
| Item 6.      | Exhibits                                                                                                                            | 45                |

 

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

 

**Item 1.****                    FinancialStatements**

 

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

**(Debtor-in-Possession)**

**Condensed Consolidated Statements of Operations**

(Unaudited)

* *
| ** **                                                                                                                                              | ** ** | **Three months ended June 30,** | ** **  | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|-------------|------------------------------------|------------|
| **(In thousands except per share  amounts)**                                                                                                            | ** ** | **2009**                             | ** **  | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| * *                                                                                                                                                | ** ** | ** **                           |        |                               | ** ** | ** ** |   |   |   |
| Net  sales                                                                                                                                              | ** ** | **$**                                | **118,121** |                               | $          | 601,591 | ** ** | **$** | **354,657** |   | $ | 1,111,539 |   |
| Cost  of goods sold                                                                                                                                     | ** ** | **118,016**                          |        | 568,731                            | ** ** | **375,980** |   | 1,054,596 |   |
| Gross  profit (loss)                                                                                                                                    | ** ** | **105**                              |        | 32,860                             | ** ** | **(21,323** | **)** | 56,943 |   |
| Selling,  general and administrative expenses                                                                                                           | ** ** | **(6,950**                           | **)**       | (10,139                            | )          | **(16,691** | **)** | (19,008 | ) |
| Other  income                                                                                                                                           | ** ** | **3**                                |        | 1,617                              | ** ** | **173** |   | 2,394 |   |
| Operating  income (loss)                                                                                                                                | ** ** | **(6,842**                           | **)**       | 24,338                             | ** ** | **(37,841** | **)** | 40,329 |   |
| Other  income (expense):                                                                                                                                | ** ** | ** **                           |        |                               | ** ** | ** ** |   |   |   |
| Income  from termination of marketing agreements                                                                                                        | ** ** | **—**                           |        | —                             | ** ** | **10,176** |   | — |   |
| Loss  on sale of auction rate securities                                                                                                                | ** ** | **—**                           |        | (8,476                             | )          | **—** |   | (31,601 | ) |
| Interest  income                                                                                                                                        | ** ** | **—**                           |        | 506                                | ** ** | **11** |   | 2,745 |   |
| Interest  expense (contractual interest expense was $9.2 million and $17.9 million for  the three and six months ended June 30, 2009, respectively | ** ** | **(2,281**                           | **)**       | (1,125                             | )          | **(11,002** | **)** | (3,516 | ) |
| Other  non-operating income (loss)                                                                                                                      | ** ** | **30**                               |        | (14,121                            | )          | **1,218** |   | (12,253 | ) |
| Income  (loss) before reorganization items and income taxes                                                                                             | ** ** | **(9,093**                           | **)**       | 1,122                              | ** ** | **(37,438** | **)** | (4,296 | ) |
| Reorganization  items                                                                                                                                   | ** ** | **(42,749**                          | **)**       | —                             | ** ** | **(42,749** | **)** | — |   |
| Income  (loss) before income taxes                                                                                                                      | ** ** | **(51,842**                          | **)**       | 1,122                              | ** ** | **(80,187** | **)** | (4,296 | ) |
| Income  tax expense (benefit)                                                                                                                           | ** ** | **(2,907**                           | **)**       | 3,354                              | ** ** | **(6,685** | **)** | 8,922 |   |
| Net  loss                                                                                                                                               | ** ** | **(48,935**                          | **)**       | (2,232                             | )          | **(73,502** | **)** | (13,218 | ) |
| Net  loss attributable to noncontrolling interest                                                                                                       | ** ** | **—**                           |        | (314                               | )          | **—** |   | (505 | ) |
| Net  loss attributable to controlling interest                                                                                                          | ** ** | **$**                                | **(48,935** | **)**                              | $          | (1,918 | ) | **$** | **(73,502** | **)** | $ | (12,713 | ) |
|                                                                                                                                                    | ** ** | ** **                           |        |                               | ** ** | ** ** |   |   |   |
| *Per share data:*                                                                                                                                       | ** ** | ** **                           |        |                               | ** ** | ** ** |   |   |   |
| Loss  per common share — basic:                                                                                                                    | ** ** | **$**                                | **(1.14**   | **)**                              | $          | (0.05 | ) | **$** | **(1.71** | **)** | $ | (0.30 | ) |
| Basic  weighted average number of common shares                                                                                                         | ** ** | **42,966**                           |        | 41,971                             | ** ** | **42,968** |   | 41,905 |   |
| * *                                                                                                                                                | ** ** | ** **                           |        |                               | ** ** | ** ** |   |   |   |
| Loss  per common share — diluted:                                                                                                                  | ** ** | **$**                                | **(1.14**   | **)**                              | $          | (0.05 | ) | **$** | **(1.71** | **)** | $ | (0.30 | ) |
| Diluted  weighted average number of common and common equivalent shares                                                                                 | ** ** | **42,966**                           |        | 41,971                             | ** ** | **42,968** |   | 41,905 |   |

 

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

 

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** **

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

**(Debtor-in-Possession)**

**Condensed Consolidated Balance Sheets**

 
| **(In thousands except share  amounts)**                                                                                                                                                                                                                                                              | ** ** | **June 30,  2009  (Unaudited*)*** | ** **  | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                            | ** ** | ** **                             |        |                        |       |
| **Assets**                                                                                                                                                                                                                                                                                            | ** ** | ** **                             |        |                        |       |
| Current  assets                                                                                                                                                                                                                                                                                       | ** ** | ** **                             |        |                        |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                            | ** ** | **$**                                  | **27,238**  |                        | $          | 23,339 |   |
| Accounts  receivable                                                                                                                                                                                                                                                                                  | ** ** | **14,617**                             |        | 55,888                      |       |
| Inventories                                                                                                                                                                                                                                                                                           | ** ** | **27,278**                             |        | 85,421                      |       |
| Income  tax receivable                                                                                                                                                                                                                                                                                | ** ** | **15,092**                             |        | 15,135                      |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                                                                                            | ** ** | **6,609**                              |        | 10,198                      |       |
| Total  current assets                                                                                                                                                                                                                                                                                 | ** ** | **90,834**                             |        | 189,981                     |       |
| Property,  plant and equipment, net                                                                                                                                                                                                                                                                   | ** ** | **102,394**                            |        | 107,168                     |       |
| Construction  in process                                                                                                                                                                                                                                                                              | ** ** | **492,701**                            |        | 493,969                     |       |
| Available  for sale securities                                                                                                                                                                                                                                                                        | ** ** | **2,397**                              |        | 673                         |       |
| Other  assets                                                                                                                                                                                                                                                                                         | ** ** | **10,950**                             |        | 7,668                       |       |
| Total  assets                                                                                                                                                                                                                                                                                         | ** ** | **$**                                  | **699,276** |                        | $          | 799,459 |   |
| ** **                                                                                                                                                                                                                                                                                            |       |                                   |        |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                         |       |                                   |        |                        |       |
| Current  liabilities                                                                                                                                                                                                                                                                                  |       |                                   |        |                        |       |
| Senior  unsecured 10% fixed-rate notes                                                                                                                                                                                                                                                                | ** ** | **$**                                  | **—**  |                        | $          | 300,000 |   |
| Secured  revolving credit facility                                                                                                                                                                                                                                                                    | ** ** | **27,765**                             |        | 52,200                      |       |
| Debtor-in-possession  debt facility                                                                                                                                                                                                                                                                   | ** ** | **15,000**                             |        | —                      |       |
| Accounts  payable                                                                                                                                                                                                                                                                                     | ** ** | **10,698**                             |        | 110,903                     |       |
| Accrued  interest                                                                                                                                                                                                                                                                                     | ** ** | **240**                                |        | 7,500                       |       |
| Accrued  liabilities                                                                                                                                                                                                                                                                                  | ** ** | **3,325**                              |        | 3,517                       |       |
| Other  current liabilities                                                                                                                                                                                                                                                                            | ** ** | **6,754**                              |        | 9,900                       |       |
| Total  current liabilities                                                                                                                                                                                                                                                                            | ** ** | **63,782**                             |        | 484,020                     |       |
| Pre-petition  liabilities subject to compromise                                                                                                                                                                                                                                                       | ** ** | **390,256**                            |        | —                      |       |
| Net  deferred tax liabilities                                                                                                                                                                                                                                                                         | ** ** | **4,094**                              |        | 2,444                       |       |
| Other  long-term liabilities                                                                                                                                                                                                                                                                          | ** ** | **3,479**                              |        | 4,199                       |       |
| Total  liabilities                                                                                                                                                                                                                                                                                    | ** ** | **461,611**                            |        | 490,663                     |       |
| Stockholders’  equity                                                                                                                                                                                                                                                                            |       |                                   |        |                        |       |
| Common  stock, par value $0.001 per share; 185,000,000 shares authorized; 42,963,158  and 42,970,988 shares issued and outstanding as of June 30, 2009 and  December 31, 2008, respectively, net of 21,548,640 shares held in  treasury as of June 30, 2009 and December 31, 2008 | ** ** | **43**                                 |        | 43                          |       |
| Preferred  stock, 50,000,000 shares authorized, no shares issued or outstanding                                                                                                                                                                                                                       | ** ** | **—**                             |        | —                      |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                           | ** ** | **293,575**                            |        | 292,984                     |       |
| Retained  earnings                                                                                                                                                                                                                                                                                    | ** ** | **(55,663**                            | **)**       | 17,839                      |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                 | ** ** | **(290**                               | **)**       | (2,070                      | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                      | ** ** | **237,665**                            |        | 308,796                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                      | ** ** | **$**                                  | **699,276** |                        | $          | 799,459 |   |

 

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

 

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

**(Debtor-in-Possession)**

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                       | ** ** | **Six Months Ended June 30,** | ** **  |
|----------------------------------------------------------------------------------|------------|------------------------------------|-------------|
| **(In thousands)**                                                               | ** ** | **2009**                           | ** **  | **2008** | ** ** |
|                                                                             | ** ** | ** **                         |        |   |   |
| **Operating Activities**                                                         | ** ** | ** **                         |        |   |   |
| Net  loss                                                                        | ** ** | **$**                              | **(73,502** | **)** | $ | (13,218 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: | ** ** | ** **                         |        |   |   |
| Provision  for rejected executory contracts and leases                           | ** ** | **39,684**                         |        | — |   |
| Pre-petition  accounts payable                                                   | ** ** | **40,793**                         |        |   |   |
| Pre-petition  accrued interest                                                   | ** ** | **8,083**                          |        |   |   |
| Loss  on sale of auction rate securities                                         | ** ** | **—**                         |        | 31,601 |   |
| Depreciation  and amortization                                                   | ** ** | **8,348**                          |        | 7,124 |   |
| Stock-based  compensation expense                                                | ** ** | **1,589**                          |        | 3,881 |   |
| Deferred  income tax                                                             | ** ** | **651**                            |        | 2,567 |   |
| Gain  on the sale of alliance investments                                        | ** ** | **(1,000**                         | **)**       | — |   |
| Other                                                                            | ** ** | **—**                         |        | (352 | ) |
| Changes  in operating assets and liabilities:                                    | ** ** | ** **                         |        |   |   |
| Accounts  receivable, net                                                        | ** ** | **41,271**                         |        | (11,100 | ) |
| Inventories                                                                      | ** ** | **58,143**                         |        | (19,463 | ) |
| Accounts  payable                                                                | ** ** | **(100,205**                       | **)**       | 29,685 |   |
| Other  changes in operating assets and liabilities                               | ** ** | **(9,744**                         | **)**       | 11,561 |   |
| Net  cash provided by operating activities                                       | ** ** | **14,111**                         |        | 42,286 |   |
|                                                                             | ** ** | ** **                         |        |   |   |
| **Investing Activities**                                                         | ** ** | ** **                         |        |   |   |
| Additions  to property, plant and equipment, net                                 | ** ** | **(901**                           | **)**       | (129,555 | ) |
| Proceeds  from the sale of marketing alliance investment                         | ** ** | **2,000**                          |        | — |   |
| Sale  of short-term securities                                                   | ** ** | **—**                         |        | 179,899 |   |
| Indemnification  proceeds                                                        | ** ** | **—**                         |        | 3,039 |   |
| Proceeds  from the sale of property, plant and equipment                         | ** ** | **—**                         |        | 14 |   |
| Net  cash provided by investing activities                                       | ** ** | **1,099**                          |        | 53,397 |   |
|                                                                             | ** ** | ** **                         |        |   |   |
| **Financing Activities**                                                         | ** ** | ** **                         |        |   |   |
| Net  repayments on pre-petition secured revolving credit facilities              | ** ** | **(24,435**                        | **)**       | — |   |
| Borrowing  on debtor-in-possession facility                                      | ** ** | **15,000**                         |        | — |   |
| Debt  issuance costs                                                             | ** ** | **(1,876**                         | **)**       | — |   |
| Proceeds  from the issuance of common stock                                      | ** ** | **—**                         |        | 1,500 |   |
| Net  cash provided by (used for) financing activities                            | ** ** | **(11,311**                        | **)**       | 1,500 |   |
| Net  increase in cash and cash equivalents                                       | ** ** | **3,899**                          |        | 97,183 |   |
| Cash  and cash equivalents at beginning of period                                | ** ** | **23,339**                         |        | 17,171 |   |
| Cash  and cash equivalents at end of period                                      | ** ** | **$**                              | **27,238**  |   | $ | 114,354 |   |

 

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

 

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

**(Debtor-in-Possession)**

**Notes to UnauditedCondensed Consolidated Financial Statements**

 

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

 

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

 

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

 

Theaccompanying unaudited condensed consolidated financial statements presentedherewith reflect all adjustments (consisting of only normal and recurringadjustments unless otherwise disclosed) which, in the opinion of management,are necessary for a fair presentation of the results of operations for thethree and six month periods ended June 30, 2009 and 2008.  The results of operations for interim periodsare not necessarily indicative of results to be expected for an entire year.

 

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

 

As of June 30, 2009,the Company’s Summary of Critical Accounting Policies for the year ended December 31,2008, which are detailed in the Company’s Annual Report on Form 10-K, havenot changed, except for the application of American Institute of CertifiedPublic Accountants’ Statement of Position (“SOP”) 90-7, *Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code*, in preparing the consolidated financialstatements as a result of our bankruptcy filing (See Note 2).

 

InMay 2009, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“SFAS”) No. 165, *Subsequent Events* (“SFAS 165”).  SFAS 165 establishes general standards ofaccounting for disclosing events that occur after the balance sheet date butbefore financial statements are issued or are available to be issued.  It requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis forselecting that date, that is, whether that date represents the date thefinancial statements were issued or were available to be issued.  SFAS 165 is effective for interim or annualfinancial periods ending after June 15, 2009.  We adopted FAS No. 165 in the secondquarter of 2009.  The adoption of FAS No. 165did not have a material impact on our financial statements.

 

InApril 2009, the FASB issued FASB Staff Position (“FSP”) No. FAS 107-1and APB 28-1 (“FSP No. 107-1 and APB 28-1”), *InterimDisclosures about Fair Value of Financial Instruments*, whichrequires disclosures about fair value of financial instruments for interimreporting periods.  This guidance 

 

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iseffective for interim or annual reporting periods ending after June 15,2009.  We adopted FAS No. 107-1 andAPB 28-1 in the second quarter of 2009. The adoption of FAS No. 107-1 and APB 28-1 did not have a materialimpact on our financial statements.

 

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 loss.

 

**(2)****                                ****Chapter 11 Bankruptcy Proceedings**

 

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 for relief (collectively, the “Bankruptcy Filing”)under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”)with the United States Bankruptcy Court for the District of Delaware (the “BankruptcyCourt”).  The Chapter 11 cases are beingjointly administered by the Bankruptcy Court as Case No. 09-11214 (KG)(collectively, the “Bankruptcy Cases”). The Debtors specifically are (i) Aventine Renewable Energy Holdings, Inc.;(ii) Aventine Renewable Energy, LLC, a Delaware limited liability company;(iii) Aventine Renewable Energy, Inc., a Delaware corporation; (iv) AventineRenewable Energy — Mt. Vernon, LLC, a Delaware limited liability company; (v) AventineRenewable Energy — Aurora West, LLC, a Delaware limited liability company; (vi) AventinePower, LLC, a Delaware limited liability company, and (vii) NebraskaEnergy, LLC, a Kansas limited liability company.

 

Subjectto certain specific exceptions under the Bankruptcy Code, the Bankruptcy Filingautomatically enjoined, or stayed, the continuation of any judicial or administrativeproceedings or other actions against the Debtors or their property to recoveron, collect or secure a claim arising prior to the Petition Date.  Thus, for example, most creditor actions toobtain possession of property from the Debtors, or to create, perfect orenforce any lien against the property of the Debtors, or to collect on orotherwise exercise rights or remedies with respect to a pre-petition claim areenjoined unless and until the Bankruptcy Court lifts the automatic stay.

 

TheBankruptcy Filing constituted an event of default under both the Company’ssecured revolving credit facility and its 10% senior unsecured notes due 2017(see Note 7), and those debt obligations became automatically and immediatelydue and payable, subject to an automatic stay of any action to collect, assert,or recover a claim against the Company and the application of applicablebankruptcy law.  As a result, theaccompanying Condensed Consolidated Balance Sheet as of June 30, 2009includes reclassifications of $315.6 million to reflect as “pre-petitionliabilities subject to compromise” amounts owed to holders of our 10% seniorunsecured notes due 2017 (“Notes”), including pre-petition accrued interest,that, absent the stay, would have become automatically and immediately due andpayable.  The Company classifies “pre-petitionliabilities subject to compromise” as a long-term liability because managementdoes not believe the Company will use existing current assets or createadditional current liabilities to fund these obligations.  Amounts owed under the Debtors’ pre-petitionsecured revolving credit facility have not been included in “pre-petitionliabilities subject to compromise” as the secured debt is adequatelycollateralized.

 

**Chapter11 Process**

 

TheDebtors are currently operating as “debtors-in-possession” under thejurisdiction of the Bankruptcy Court, and in accordance with the applicableprovisions of the Bankruptcy Code and orders of the Bankruptcy Court.  In general, as debtors-in-possession, theDebtors are authorized under the Bankruptcy Code to continue to operate as anongoing business, but may not engage in transactions outside of the ordinarycourse of business without the approval of the Bankruptcy Court.

 

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On April 7, 2009,certain of the Company’s bondholders (the “DIP Lenders”) entered into a termsheet (the “DIP Term Sheet”) for a $30 million Debtor-in-Possession CreditFacility with the Debtors.  The DIP TermSheet provides, subject to certain conditions as described in the Debtor in PossessionCredit Facility Term Sheet filed as Exhibit 10.1 to our Form 8-Kfiled on April 13, 2009 fora first priority debtor-in-possession financing (the “DIP Facility”) comprisedof a term loan facility made available to certain of Aventine’s subsidiaries ina maximum aggregate principal amount of up to $30 million.  Proceeds of the DIP Facility are being usedto, among other things, (i) fund the working capital and general corporateneeds of the Debtors and the costs of the Bankruptcy Cases in accordance withan approved budget, and (ii) provide adequate protection, in accordancewith the terms of the DIP Facility, to the pre-petition agent and pre-petitionlenders under the Company’s existing credit facilities.  TheDIP Facility bears interest at 16.5% per annum. The maturity date of the DIP Facility is April 6, 2010, or upon theoccurrence of certain pre-defined events. The DIP Facility is secured by a super-priority administrative claim onour assets.  On May 5, 2009, theBankruptcy Court overruled objections from the Debtors’ pre-petition securedlenders and approved the DIP Facility on a final basis.

 

Ata hearing held on April 9, 2009, the Bankruptcy Court granted the Debtors’“First Day Motions”.  The relief grantedby the Bankruptcy Court through the First Day Motions was designed to stabilizethe Company’s operations and business relationships with vendors, lenders,employees and others, minimize the effects of the commencement of theBankruptcy Cases and preserve the value of the Debtors’ assets.   The First Day Motions allowed, among otherthings, the payment of vendors and other providers in the ordinary course forgoods and services ordered pre-petition but received on or after the PetitionDate and other business-related payments necessary to maintain the operation ofour businesses.  The First Day Motionsalso included the payment of pre-petition employee wages, salaries andbenefits.  The Debtors have retained,with Bankruptcy Court approval, legal and financial professionals to advise theDebtors on the bankruptcy proceedings and certain other “ordinary course”professionals.  From time to time, theDebtors may seek Bankruptcy Court approval for the retention of additionalprofessionals.

 

Onor about April 29, 2009, the Debtors caused notice of the commencement ofthe Bankruptcy Cases to be served on all known or potential creditors and otherparties in interest.  Vendors are beingpaid for goods furnished and services provided after the Petition Date in theordinary course of business.

 

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

 

UnderSection 365 of the Bankruptcy Code, the Debtors may assume, assume andassign, or reject executory contracts and unexpired leases, including realproperty, railcars and equipment leases, subject to the approval of theBankruptcy Court and certain other conditions. Rejection constitutes a court-authorized breach of the lease or contractin question and, subject to certain exceptions, relieves the Debtors of futureobligations under such lease or contract, but creates a pre-petition claim fordamages caused by such breach or rejection, subject to the Debtors’ right toreview and contest such claim.  Partieswhose contracts or leases are rejected may file claims against the Debtors fordamages.  Generally, the assumption of anexecutory contract or unexpired lease requires the Debtors to cure all priordefaults under such executory contract or unexpired lease, including allpre-petition arrearages, and to provide adequate assurance of futureperformance.  In this regard, the Debtors’financial statements

 

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includeamounts classified as “pre-petition liabilities subject to compromise” that theDebtors believe that the Bankruptcy Court will allow as claim amounts as aresult of the Debtors’ rejection of various executory contracts and unexpiredleases.  Additional amounts may beincluded in “pre-petition liabilities subject to compromise” in future periodsif additional executory contracts and unexpired leases are rejected.  Conversely, the Debtors would expect that theassumption of certain executory contracts and unexpired leases may convertcertain liabilities shown in future financial statements as subject tocompromise to post-petition liabilities. Due to the uncertain nature of many of the potential claims, the Debtorsare unable to project the magnitude of such claims with any degree ofcertainty.

 

TheBankruptcy Court has established September 8, 2009 at 4:00 p.m.eastern time as the deadline for the filing of proofs of claim, therebyrequiring the Debtors’ creditors to submit claims for alleged liabilities notpaid and/or damages incurred arising from or related to periods prior to thePetition Date.  There may be differencesbetween the amounts at which any such liabilities are recorded in the Company’sfinancial statements and the amount claimed by Aventine’s creditors.  Significant litigation may be required toresolve any such disputes or discrepancies.

 

In order to successfullyexit Chapter 11, the Debtors will need to propose, and obtain confirmation bythe Bankruptcy Court of, a plan of reorganization that satisfies therequirements of the Bankruptcy Code.  Aplan of reorganization could, among other things, resolve the Debtors’pre-petition obligations, set forth the revised capital structure of the newlyreorganized entity and provide for corporate governance subsequent to exit frombankruptcy.  As provided in theBankruptcy Code, the Debtors have the exclusive right for 120 days after thePetition Date to file a plan of reorganization and 60 additional days tosolicit and obtain necessary acceptances. Such periods may be extended by the Bankruptcy Court for cause to up to18 months and 20 months, respectively, after the Petition Date.  If the Debtors’ exclusivity period lapses,any party in interest may file a plan of reorganization for Aventine.  The Debtors, prior to expiration of theexclusive deadline to file a plan of reorganization, have filed a motion withthe Bankruptcy Court requesting an extension of the exclusive filing andsolicitation deadlines for 60 days and 61 days, respectively.  This request is subject to approval by theBankruptcy Court at a hearing currently scheduled for August 20, 2009.

 

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

 

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seniority of the claims or equity interests,in the rejecting class — i.e., secured claims or unsecured claims, subordinatedor senior claims, or common stock.

 

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

 

Althoughthe Debtors expect to file a Chapter 11 plan that provides for emergence fromChapter 11 some time in the future, there can be no assurance that a Chapter 11plan will be proposed by the Debtors or confirmed by the Bankruptcy Court, orthat any such plan will be consummated. In order to successfully emerge from bankruptcy, the Debtors will needto, among other things, obtain alternative financing to replace the DIPFacility.

 

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

 

*Noticeand Sell-Down Procedures for Trading Equity Securities*

 

TheBankruptcy Court entered a final order (the “Final Trading Restriction Order”)on May 4, 2009 granting a motion of the Debtors to require beneficialowners of substantial amounts of the Company’s common stock to provide noticeof their holdings and restrict, in specified circumstances and subject tospecified terms and conditions, acquisitions or dispositions of the Company’scommon stock by Substantial Equityholders (as defined below) (the “Common StockNotice and Transfer Requirements”).

 

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

 

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ofthe notice of entry of the Final Trading Restriction Order or (b) ten daysafter becoming a Substantial Equityholder.

 

**GoingConcern Matters**

 

Theability of the Company to continue as a going concern is dependent upon, amongother things, (i) the Company’s ability to comply with the terms andconditions of its DIP financing; (ii) the ability of the Company tomaintain adequate cash on hand; (iii) the ability of the Company togenerate cash from operations; (iv) the ability of the Company to obtainconfirmation of and to consummate a plan of reorganization under the BankruptcyCode; (v) the ability of the Company to complete its unfinished ethanolplants; (vi) the cost and outcome of the reorganization process; (vii) theCompany’s ability to obtain alternative financing; and (viii) the Company’sability to achieve profitability. Uncertainty as to the outcome of these factors raises substantial doubtabout the Company’s ability to continue as a going concern.  The Company is currently evaluating variouscourses of action to address the issues the Company is facing.  There can be no assurance that any of theseefforts will be successful.

 

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

 

Inaccordance with accounting principles generally accepted in the United States (“GAAP”),we have applied American Institute of Certified Public Accountants’ Statementof Position (“SOP”) 90-7, *FinancialReporting by Entities in Reorganization under the Bankruptcy Code*,in preparing the consolidated financial statements.  SOP 90-7 requires that the financialstatements, for periods subsequent to the Chapter 11 filing, distinguishtransactions and events that are directly associated with the reorganizationfrom the ongoing operations of the business. Accordingly, certain expenses (including professional fees), realizedgains and losses and provisions for losses that are realized or incurred in thebankruptcy proceedings are recorded in reorganization items on the accompanyingCondensed Consolidated Statements of Operations.  In addition, pre-petition obligations thatmay be impacted by the bankruptcy reorganization process have been classifiedon the Condensed Consolidated Balance Sheet at June 30, 2009 in “pre-petitionliabilities subject to compromise*”*. These liabilities are reported at the amounts expected to be allowed bythe Bankruptcy Court, even if they may be settled for lesser amounts.  For information on the bankruptcyreorganization process, see Note 2 - *Chapter 11 BankruptcyProceedings*.

 

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

 

Thepotential adverse publicity associated with the Bankruptcy Filing and theresulting uncertainty regarding the Company’s future prospects may hinder theCompany’s ongoing business 

 

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activitiesand its ability to operate, fund and execute its business plan by impairingrelations with existing and potential customers; negatively impacting theability of the Company to attract, retain and compensate key executives andemployees and to retain employees generally; limiting the Company’s ability toobtain trade credit; and impairing present and future relationships withvendors and service providers.

 

**(3)****          ****Recent Accounting Pronouncements**

 

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

 

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

 

Inventoriesare as follows:

 
| **(In thousands)** | ** **   | **June 30,  2009** | ** **   | **December 31,  2008** | ** **   |
|--------------------|--------------|-------------------------|--------------|-----------------------------|--------------|
| *** ***       | *** *** | *** ***            | *** *** | *** ***                | *** *** |
| Finished  products | ** **   | **$**                   | **18,864**   |                        | $            | 76,968 |   |
| Work-in-process    | ** **   | **2,243**               |         | 2,568                       |         |
| Raw  materials     | ** **   | **3,559**               |         | 3,600                       |         |
| Supplies           | ** **   | **2,612**               |         | 2,285                       |         |
| Totals             | ** **   | **$**                   | **27,278**   |                        | $            | 85,421 |   |

 

**(5)****          ****Prepaid Expenses and OtherCurrent Assets**

 

Prepaidexpenses and other current assets are as follows:

 
| **(In thousands)**                        | ** ** | **June  30, 2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------------|------------|
| * *                                  | * *   | * *           | * *   | * *                    | * *   |
| Prepaid  motor fuel taxes                 | ** ** | **$**              | **343**    |                        | $          | 3,667 |   |
| Prepaid  insurance                        | ** ** | **2,243**          |       | 1,435                       |       |
| Prepaid  supplies and materials           | ** ** | **1,356**          |       | —                      |       |
| Fair  value of derivative instruments     | ** ** | **—**         |       | 1,521                       |       |
| Prepaid  ethanol                          | ** ** | **—**         |       | 512                         |       |
| Current  portion of deferred income taxes | ** ** | **—**         |       | 1,593                       |       |
| Prepaid  benefits                         | ** ** | **—**         |       | 364                         |       |
| Other  prepaid expenses                   | ** ** | **2,667**          |       | 1,106                       |       |
| Totals                                    | ** ** | **$**              | **6,609**  |                        | $          | 10,198 |   |

 

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**(6)****                                ****Other Assets**

 

Otherassets are as follows:

 
| **(In thousands)**                                      | ** ** | **June  30, 2009** | ** ** | **December 31,**

**2008** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|---------------------------------|------------|
| * *                                                | * *   | * *           | * *   | * *                        | * *   |
| Prepaid  utility costs associated with plant expansions | ** ** | **$**              | **9,000**  |                            | $          | — |   |
| Deferred  debt issuance costs                           | ** ** | **1,334**          |       | 6,668                           |       |
| Utility  deposits                                       | ** ** | **616**            |       | —                          |       |
| Investment  in marketing alliance partners, at cost     | ** ** | **—**         |       | 1,000                           |       |
| Totals                                                  | ** ** | **$**              | **10,950** |                            | $          | 7,668 |   |

 

Deferreddebt issuance costs are subject to amortization.  In connection with amending our securedrevolving credit facility in March 2009, we paid debt issuance coststotaling $0.9 million, which will be amortized utilizing a method whichapproximates the effective interest method through February 28, 2010 whichis the remaining life of the amended secured revolving credit facility.  In connection with our debtor-in-possessiondebt facility, we paid debt issuance costs totaling $1.0 million in April 2009,which will be amortized utilizing a method which approximates the effectiveinterest method through March 2010 which is the estimated remaining lifeof the debtor-in-possession credit facility.

 

Inconjunction with the construction of our new ethanol plant at Mt. Vernon,Indiana, the Company was required (beginning in 2007) to extend an existingnatural gas pipeline to the new Mt. Vernon facility.  To secure repayment of the construction costsof pipeline, the Company, under its secured revolving credit facility, issued aletter of credit to the natural gas utility pipeline company in the amount of$9 million.  We will be able to offsetfuture natural gas transportation charges of up to $9 million assuming the Mt.Vernon facility begins operations.  As aresult of our suspending construction and our Bankruptcy Filing, the naturalgas pipeline company drew the full amount of the letter of credit.  We have recorded a $9 million long-term assetto reflect this event and increased the amount owed under our secured revolvingcredit facility accordingly.  We expectthat this asset will provide a benefit in terms of reduced cash outlays fornatural gas transportation to us or a potential buyer once the Mt. Vernonfacility has been completed and is operational. Should the Mt. Vernon facility not be completed, we may be unable torecover any amounts and would be required to reduce the value of this asset tozero.

 

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

 

Thefollowing table summarizes the Company’s outstanding debt:

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

 

*SecuredRevolving Credit Facility*

 

Asof June 30, 2009, $9.6 million in letters of credit and $27.8 million inrevolving loans were outstanding under our pre-petition amended securedrevolving credit facility.  As a resultof our Bankruptcy Filing, all the commitments under the Company’s pre-petitionsecured revolving credit facility with JP Morgan Chase Bank, N.A., asadministrative agent and a lender, automatically terminated, and the principalof the loans and the reimbursement obligations then outstanding, together

 

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with accrued interest thereon and any unpaid fees and all otherobligations of the borrowers accrued under the applicable loans documents,became immediately due and payable, subject to the automatic stay provisions ofSection 362 of the Bankruptcy Code. As a result, there is no longer any liquidity available to us under thisfacility.  Amounts owed under the Company’spre-petition secured revolving credit facility have not been included in “pre-petitionliabilities subject to compromise” as the secured debt is adequatelycollateralized.

 

*Debtor-in-possession Debt Facility*

 

As of June 30, 2009, the Company has drawn $15 million of its $30million DIP Facility.  The DIP Facilityprovides for a first priority term loan in a maximum aggregate principal amountof up to $30 million.  Proceeds of theDIP Facility can be used, among other things, to (i) fund the workingcapital and general corporate needs of the Debtors and the costs of theBankruptcy Cases in accordance with an approved budget, and (ii) provideadequate protection, in accordance with the terms of the DIP Facility, to thepre-petition agent and pre-petition lenders under the Company’s existing creditfacilities.  The DIP Facility bearsinterest at 16.5%.  The maturity date ofthe DIP Facility is April 6, 2010, or upon the occurrence of certainpre-defined events.  The DIP Facility issecured by a super-priority administrative expense claim on our assets.  As of June 30, 2009, the Debtors are incompliance with the terms of its DIP Facility.

 

*Senior Notes*

 

At June 30, 2009, the Company hadoutstanding $300 million aggregate principal amount of Notes.  The Notes were issued pursuant to anindenture between us and Wells Fargo Bank, N.A., as trustee and weresubsequently exchanged for registered notes with the same terms.  The Notes are general unsecured obligationsof the Company and certain of its guarantor subsidiaries.  In April 2009, Deutsche Bank National TrustCompany replaced Wells Fargo Bank as Successor Indenture Trustee.  As a result of the Bankruptcy Filing, theoutstanding principal amount of, and accrued interest thereon, under theCompany’s indenture governing the Notes became immediately due and payable, andthe Notes have been reclassified to “pre-petition liabilities subject tocompromise” (See Note 12).

 

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

 

Other current liabilities are as follows:

 
| **(In thousands)**                                         | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| * *                                                   | * *   | * *                | * *   | * *                    | * *   |
| Deferred revenue                                           | ** ** | **$**                   | **3,324**  |                        | $          | 8,425 |   |
| Accrued property taxes                                     | ** ** | **484**                 |       | 575                         |       |
| Accrued sales tax                                          | ** ** | **8**                   |       | 339                         |       |
| Current portion of deferred income taxes                   | ** ** | **—**              |       | 507                         |       |
| Reserve for uncertain tax positions (See Note 18)          | ** ** | **2,753**               |       | —                      |       |
| Accrued interest on uncertain tax positions (see  Note 18) | ** ** | **124**                 |       | —                      |       |
| Other accrued operating expenses                           | ** ** | **61**                  |       | 54                          |       |
| Totals                                                     | ** ** | **$**                   | **6,754**  |                        | $          | 9,900 |   |

 

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

 

Other long-term liabilities are as follows:

 
| **(In thousands)**                                         | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| * *                                                   | * *   | * *                | * *   | * *                    | * *   |
| Unfunded postretirement benefit obligations                | ** ** | **$**                   | **1,927**  |                        | 1,834      |   |
| Unfunded pension liability                                 | ** ** | **1,552**               |       | 1,491                       |       |
| Reserve for uncertain tax positions (See Note 18)          | ** ** | **—**              |       | 848                         |       |
| Accrued interest on uncertain tax positions (see  Note 18) | ** ** | **—**              |       | 26                          |       |
| Totals                                                     | ** ** | **$**                   | **3,479**  |                        | $          | 4,199 |   |
|                                                            |            |                         |            |                             |            |  |  |

 

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

 

*SFAS 157*

 

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

 

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

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

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

 

The following table summarizes thevaluation of our financial instruments which are carried at fair value by theabove SFAS 157 pricing levels as of June 30, 2009:

 
| ** **                    | ** ** | ** **                              | ** ** | **Fair Value Measurements at the Reporting Date Using**                  | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Fair Value  at  June 30,  2009** | ** ** | **Quoted Prices in  Active Markets  Using Identical  Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                          |       |                                    |       |                                                                     |       |   |   |   |   |
| Cash and cash equivalents     |       | $                                       | 27,238     |                                                                     | $          | 27,238 |   | — |   | — |   |
| Available for sale securities |       | $                                       | 2,397      |                                                                     | $          | 2,397 |   | — |   | — |   |

 

The Company did not hold any financial assetsrequiring the use of Level 2 or Level 3 inputs at June 30, 2009.

 

The Company held no outstandingderivative positions as of June 30, 2009. The Company recorded net gains of $1.2 million for the six month periodended June 30, 2009 and net losses of $14.1 million and $12.3 million,respectively, for the three and six month periods ended June 30, 2008,under “other non-operating income (loss)” in the unaudited CondensedConsolidated Statements of Operations for the changes in the fair value of itsderivative financial instrument positions it held during the respective threeand six month periods.

 

The Company recorded gains of $1.3 millionand $1.7 million, respectively, for the three and six month periods ended June 30,2009 under “other accumulated comprehensive loss” in the unaudited CondensedConsolidated Balance Sheet for the changes in the fair value of its availablefor sale securities.  The totalcumulative gains recorded on available for sale securities as of June 30,2009 was $1.7 million.  The Company didnot hold any available for sale securities in the second quarter of 2008.

 

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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 June 30, 2009 and December 31, 2008.

 
| ** **                                     | ** ** | **As of June 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **Carrying Value**           | ** ** | **Fair Value**                   | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Investment in other ethanol producers, at cost |       | —                       |       | —                           |       | 1,000 |   | n/a |   |
| Commodity margin deposits                      |       | —                       |       | —                           |       | 1,521 |   | 1,521 |   |
| 10% senior unsecured notes due 2017            |       | (300,000                     | )          | (102,000                         | )          | (300,000 | ) | (49,500 | ) |
| Secured revolving credit facility              |       | (27,765                      | )          | (27,765                          | )          | (52,200 | ) | (52,200 | ) |
| Debtor-in-possession debt facility             |       | (15,000                      | )          | (15,000                          | )          | — |   | — |   |

 

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

 

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

 

SOP 90-7 requires separate disclosure ofreorganization items such as realized gains and losses from the settlement ofpre-petition liabilities, provisions for losses resulting from thereorganization and restructuring of the business, as well as professional feesdirectly related to the process of reorganizing the Debtors under Chapter11.  The Debtors’ reorganization itemsfor the three and six months ended June 30, 2009 consist of the following:

 
| ** **                                                | ** ** | **Three months  ended** | ** ** | **Six months  ended** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **June 30,**       | ** ** |
| **(in thousands)**                                   | ** ** | **2009**                | ** ** | **2009**              | ** ** |
|                                                      | ** ** | ** **              | ** ** | ** **            | ** ** |
| Provision for rejected executory contracts and  leases    | ** ** | **$**                   | **39,684** | ** **            | **$**      | **39,684** | ** ** |
| Professional fees directly related to reorganization  (a) | ** ** | **3,118**               | ** ** | **3,118**             | ** ** |
| Other (b)                                                 | ** ** | **(53**                 | **)**      | **(53**               | **)**      |
| Total reorganization items                                | ** ** | **$**                   | **42,749** | ** **            | **$**      | **42,749** | ** ** |

 

----

(a)           Professionalfees directly related to the reorganization include post—petition feesassociated with advisors to the Debtors, the statutory committee of unsecuredcreditors and certain secured creditors. Professional fees are estimated by theDebtors and will be reconciled to actual invoices when received.

 

(b)           Otherincludes gains on the settlement of pre—petition critical vendor claims forless than amounts owed.

 

**(12)****        ****Pre-petition L****iabilities Subject ToCompromise**

 

Pre-petition liabilities subject tocompromise refers to unsecured obligations that will be accounted for under aplan of reorganization.  Generally,actions to enforce or otherwise effect payment of pre-Chapter 11 liabilitiesare stayed.  SOP 90-7 requires pre-petitionliabilities that are subject to

 

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compromise to be reported at the amounts expected to be allowed, evenif they may be settled for lesser amounts. These liabilities represent the estimated amount expected to be allowedon known or potential claims to be resolved through the Chapter 11 process, andremain subject to future adjustments arising from negotiated settlements,actions of the Bankruptcy Court, rejection of executory contracts and unexpiredleases, the determination as to the value of any potential collateral securingthe claims, proofs of claim, or other events. Pre-petition liabilities subject to compromise also include certain itemsthat may be assumed under the plan of reorganization, and as such, may besubsequently reclassified to liabilities not subject to compromise.  At hearings held in April 2009, theCourt granted final approval of many of the Debtors’ First Day Motionscovering, among other things, human capital obligations, supplier relations,insurance, customer relations, business operations, certain tax matters, cashmanagement, utilities, case management and retention of professionals.  Obligations associated with these matters arenot classified as pre-petition liabilities subject to compromise.

 

In accordance with SOP 90-7, debt issuancecosts associated with borrowing classified as pre-petition liabilities subjectto compromise should be viewed as valuation adjustments to the relateddebt.  When the debt has become anallowed claim and the allowed claim differs from the net carrying amount of thedebt, the recorded amount should be adjusted to the amount of the allowed claim(thereby adjusting existing debt issuance costs to the extent necessary toreport the debt at this allowed amount). Through June 30, 2009, the Bankruptcy Court had not classified anyof the Debtors’ outstanding debt as allowed claims. Therefore, the Company hasclassified the Debtors’ Notes as “pre-petition liabilities subject to compromise*”*on the Condensed Consolidated Balance Sheet. The Company has not adjusted debt issuance costs, totaling $5.8 millionat June 30, 2009, related to the Debtors’ Notes, but has classified thesecosts as “pre-petition liabilities subject to compromise”.  The Company may be required to expense theseamounts or a portion thereof upon determination of the allowed claim by theBankruptcy Court.

 

The Debtors have rejected certainpre-petition executory contracts and unexpired leases with respect to theDebtors’ operations with the approval of the Bankruptcy Court and may rejectadditional agreements in the future. Damages resulting from rejection of executory contracts and unexpiredleases are generally treated as general unsecured claims and will be classifiedas “pre-petition liabilities subject to compromise”.  Holders of pre-petition claims (excludinggovernmental claims) are required to file proofs of claims by the “general bardate”, which is September 8, 2009. A bar date is the date by which certain claims against the Debtors mustbe filed if the claimants wish to receive any distribution in the Chapter 11cases.  Creditors have been notified ofthe general bar date and the requirement to file a proof of claim with theBankruptcy Court.  Differences betweenliability amounts estimated by the Debtors and claims filed by creditors willbe investigated and, if necessary, the Bankruptcy Court will make a finaldetermination of the allowable claim. The determination of how liabilities will ultimately be treated cannotbe made until the Bankruptcy Court approves a Chapter 11 plan ofreorganization.  Accordingly, theultimate amount or treatment of such liabilities is not determinable at thistime.

 

Pre-petition liabilities subject tocompromise consist of the following:

 
| **(In thousands)**                                        | ** ** | **June 30,  2009** | ** **  |
|-----------------------------------------------------------|------------|-------------------------|-------------|
|                                                      | ** ** | ** **              | ** **  |
| 10% senior unsecured notes due 2017                       | ** ** | **$**                   | **300,000** | ** ** |
| Provision for rejected executory contracts and  leases    | ** ** | **39,684**              | ** **  |
| Pre-petition accounts payable                             | ** ** | **40,793**              | ** **  |
| Accrued interest on Notes                                 | ** ** | **15,583**              | ** **  |
| Unamortized issuance costs of 10% senior unsecured  notes | ** ** | **(5,804**              | **)**       |
| Total pre-petition liabilities subject to compromise      | ** ** | **$**                   | **390,256** | ** ** |

 

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Pre-petition liabilities subject tocompromise include trade accounts payable related to pre-petitionpurchases.  As a result, the Company’scash flows from operations were favorably affected by the stay of paymentrelated to these accounts payable.  Accruedinterest represents amounts due on the Notes as of the Petition Date.  No interest has been accrued on the Notessubsequent to the Petition Date because such amounts are not expected to becomepart of an allowed claim.

 

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

 

The Company values its share-based payment awardsusing a form of the Black-Scholes option-pricing model (the “option pricingmodel”).  The determination of fair valueof share-based payment awards on the date of grant using the option pricing modelis affected by our stock price as well as the input of other subjectiveassumptions.  The option-pricing modelrequires a number of assumptions, of which the most significant are expectedstock price volatility, the expected pre-vesting forfeiture rate and theexpected option term (the amount of time from the grant date until the optionsare exercised or expire).  Expectedvolatility is normally calculated based upon actual historical stock pricemovements over the expected option term. Since we have a very short-term history of stock price volatility as apublic company, we calculate volatility by considering, among other things, theexpected volatilities of public companies engaged in similar industries.  Pre-vesting forfeitures are currentlyestimated using an approximate 11% forfeiture rate.  The expected option term is calculated usingthe “simplified” method permitted by SAB 107. Our options have characteristics significantly different from those oftraded options, and changes in the assumptions can materially affect the fairvalue estimates.

 

Pre-tax stock-based compensation expense forthe three month periods ended June 30, 2009 and 2008 was approximately$0.3 million and $2.0 million, respectively. For the three month period ended June 30, 2009, $0.2 million wascharged to selling, general and administrative (“SG&A”) expense and $0.1million was charged to cost of goods sold. For the three month period ended June 30, 2008, $1.9 million wascharged to SG&A expense and $0.1 million was charged to cost of goodssold.  Stock-based compensation expensereduced earnings per share by less than $0.01 per basic and fully diluted sharefor the three month period ended June 30, 2009 and reduced earnings pershare by $0.03 per basic and fully diluted share for the three month periodsended June 30, 2008.  Pre-taxstock-based compensation expense for the six month periods ended June 30,2009 and 2008 was approximately $1.6 million and $3.9 million,respectively.  For the six month periodended June 30, 2009, $1.4 million was charged to SG&A expense and $0.2million was charged to cost of goods sold. For the six month period ended June 30, 2008, $3.7 million wascharged to SG&A expense and $0.2 million was charged to cost of goodssold.  Stock-based compensation expensereduced earnings per share by $0.02 per basic and fully diluted share for thesix month period ended June 30, 2009 and by $0.06 per basic and fullydiluted share for the six month period ended June 30, 2008.  The Company recognized a tax benefit on itscondensed consolidated statement of income from stock-based compensationexpense in the amount of $0.1 million and $0.7 million for the three monthperiods ended June 30, 2009 and 2008, respectively, all of which wasoffset by establishing valuation allowances equaling the amount of the taxbenefit recognized.  For the six monthperiod ended June 30, 2009 and 2008, the Company recognized a tax benefiton its condensed consolidated statement of income from stock-based compensationexpense in the amount of $0.5 million and $1.5 million, respectively.  The Company recorded pre-tax stock-basedcompensation expense for the three and six month periods ended June 30,2009 and 2008 as follows:

 

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| ** **                        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                 | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                              | ** ** | ** **                            |       |                                | ** ** | ** ** |   |   |   |
| Stock-based compensation expense: | ** ** | ** **                            |       |                                | ** ** | ** ** |   |   |   |
| Non-qualified stock options       | ** ** | **$**                                 | **0.2**    |                                | $          | 1.7 | ** ** | **$** | **1.4** |   | $ | 3.3 |   |
| Restricted stock                  | ** ** | **0.1**                               |       | 0.1                                 | ** ** | **0.2** |   | 0.2 |   |
| Restricted stock units            | ** ** | **—**                            |       | —                              | ** ** | **—** |   | 0.1 |   |
| Long-term incentive stock plan    | ** ** | **—**                            |       | 0.2                                 | ** ** | **—** |   | 0.3 |   |
| Totals                            | ** ** | **$**                                 | **0.3**    |                                | $          | 2.0 | ** ** | **$** | **1.6** |   | $ | 3.9 |   |

 

As of June 30, 2009 and 2008, theCompany had not yet recognized compensation expense on the following non-vestedawards:

 
| ** **                     | ** ** | **2009**                           | ** ** | **2008**                                                     | ** ** |
|--------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------|------------|
| **(in millions)**              | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** |
|                           | ** ** | ** **                         | ** ** | ** **                                                   |       |   |   |   |   |
| Non-qualified options          | ** ** | **$**                              | **6.5**    | ** **                                                   | **1.5**    |   | $ | 16.6 |   | 2.8 |   |
| Restricted stock               | ** ** | **.5**                             | ** ** | **0.3**                                                      |       | 0.9 |   | 3.6 |   |
| Restricted stock units         | ** ** | **.1**                             | ** ** | **0.1**                                                      |       | 0.1 |   | 0.7 |   |
| Long-term incentive stock plan | ** ** | **—**                         | ** ** | **—**                                                   |       | 1.6 |   | 1.8 |   |
| Total                          | ** ** | **$**                              | **7.1**    | ** **                                                   | **1.4**    |   | $ | 19.2 |   | 2.8 |   |

 

The Company did not grant any stock optionsduring the quarters ended June 30, 2009 and 2008.

 

The following table summarizes stock optionsoutstanding and changes during the six month period ended June 30, 2009:

 
| ** **                                      | ** ** | **Shares****(in  thousands)** | ** ** | **Weighted  Average   Exercise   Price** | ** ** | **Weighted  Average   Remaining   Life****(years)** | ** ** | **Aggregate  Intrinsic Value****(in  thousands)** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
|                                            |       |                          |       |                                     |       |                                                |       |                                              |       |
| Options outstanding – January 1, 2009 |       | 3,894                         |       | $                                        | 7.62       |                                                | 6.7        |                                              | $          | 422 |   |
| Granted                                         |       | 50                            |       | 0.18                                     |       | 10.0                                                |       | —                                            |       |
| Exercised                                       |       | —                        |       | —                                   |       | —                                              |       | —                                            |       |
| Cancelled or expired                            |       | (620                          | )          | 10.24                                    |       | —                                              |       | —                                            |       |
| Options outstanding – June 30, 2009   |       | 3,323                         |       | $                                        | 7.01       |                                                | 5.8        |                                              | $          | — |   |
| Options exercisable – June 30, 2009   |       | 2,197                         |       | $                                        | 5.52       |                                                | 5.1        |                                              | $          | — |   |

 

The range of exercise prices of theexercisable options and outstanding options at June 30, 2009 are asfollows:

 

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| **Weighted Average  Exercise Price** | ** ** | **Number of  Exercisable  Options****(in  thousands)** | ** ** | **Number of  Outstanding  Options****(in  thousands)** | ** ** | **Weighted  Average  Remaining  Life****(years)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------|------------|
| $0.18 - $0.23                        |       | 1,006                                                  |       | 1,056                                                  |       | 3.7                                               |       |
| $2.36 - $4.80                        |       | 689                                                    |       | 1,085                                                  |       | 6.1                                               |       |
| $7.05                                |       | 76                                                     |       | 376                                                    |       | 8.6                                               |       |
| $15.26 - $17.29                      |       | 116                                                    |       | 309                                                    |       | 7.7                                               |       |
| $22.15 - $22.50                      |       | 286                                                    |       | 458                                                    |       | 6.1                                               |       |
| $43.00                               |       | 24                                                     |       | 40                                                     |       | 7.0                                               |       |
| Totals                               |       | 2,197                                                  |       | 3,323                                                  |       | 5.8                                               |       |

 

Restricted stock award activity for the sixmonths ended June 30, 2009 is summarized below:

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

 

Restricted stock unit award activity for thesix months ended June 30, 2009 is summarized below:

 
| ** **                                                         | ** ** | **Shares****(in  thousands)** | ** ** | **Weighted  Average Grant Date Fair  Value per   Award** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------------------------------------|------------|
|                                                               |       |                          |       |                                                     |       |
| Unvested Restricted stock unit awards –  January 1, 2009 |       | 49                            |       | $                                                        | 7.50       |   |
| Granted                                                            |       | —                        |       | —                                                   |       |
| Vested                                                             |       | (11                           | )          | 13.71                                                    |       |
| Cancelled or expired                                               |       | —                        |       | —                                                   |       |
| Unvested restricted stock unit awards –  June 30, 2009   |       | 38                            |       | $                                                        | 5.76       |   |

 

**(14)****        ****Interest Expense**

 

The following table summarizes interestexpense:

** **
| ** **                                   | ** **   | **Three months ended  June 30,** | ** **   | **Six months ended  June 30,** | ** **   |
|----------------------------------------------|--------------|---------------------------------------|--------------|-------------------------------------|--------------|
| **(in thousands)**                           | ** **   | **2009**                              | ** **   | **2008**                            | ** **   | **2009** | ** ** | **2008** | ** ** |
| *** ***                                 | *** *** | *** ***                          | *** *** | *** ***                        | *** *** | *** *** | *** *** | *** *** | *** *** |
| Interest expense                             | ** **   | **$**                                 | **1,798**    |                                | $            | 7,500 | ** ** | **$** | **9,597** |   | $ | 15,008 |   |
| Amortization of deferred debt issuance costs | ** **   | **483**                               |         | 259                                 | ** **   | **1,405** |   | 501 |   |
| Capitalized interest                         | ** **   | **—**                            |         | (6,634                              | )            | **—** |   | (11,993 | ) |
| Interest expense, net                        | ** **   | **$**                                 | **2,281**    |                                | $            | 1,125 | ** ** | **$** | **11,002** |   | $ | 3,516 |   |

 

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Interest expense in 2009 includes interest on oursecured revolving credit facility for both pre-petition and post-petitionperiods, interest incurred on our DIP Facility, and interest on our Notes up tothe date of our Bankruptcy Filing. Because we do not believe that interest on our Notes will be allowed asa claim past the Petition Date, we discontinued recognizing interest expense onour Notes as of that date.   Contractualinterest amounts disclosed in our Condensed Consolidated Statement ofOperations reflects the cost of borrowings without regard to what theBankruptcy Court may allow as a claim.

 

**(15)****     ****Pension Expense**

 

*Defined Contribution Plans*

 

We have 401(k) plans covering substantially allof our employees.  We recorded expensewith respect to these plans for the three month periods ended June 30,2009 and 2008 of $0.2 million and $0.3 million, respectively, and expense of$0.5 million and $0.6 million, respectively, for the six month periods ended June 30,2009 and 2008.  Contributions made underour defined contribution plans include a match, at the Company’s discretion, ofemployee salaries contributed to the plans.

 

### *Qualified Retirement Plan*

###  

The Company provides a non-contributory qualifieddefined benefit pension plan for its unionized employees at our Pekin, ILproduction facilities.  The followingtable summarizes the components of net periodic pension cost for the qualifiedpension plan:

 
| ** **                          | ** **   | **Three months ended  June 30,** | ** **   | **Six months ended  June 30,** | ** **   |
|-------------------------------------|--------------|---------------------------------------|--------------|-------------------------------------|--------------|
| **(In thousands)**                  | ** **   | **2009**                              | ** **   | **2008**                            | ** **   | **2009** | ** ** | **2008** | ** ** |
|                                | *** *** | *** ***                          | *** *** | *** ***                        | *** *** | *** *** | *** *** | *** *** | *** *** |
| Service cost                        | ** **   | **$**                                 | **98**       |                                | $            | 67 | ** ** | **$** | **170** |   | $ | 154 |   |
| Interest cost                       | ** **   | **130**                               |         | 124                                 | ** **   | **254** |   | 248 |   |
| Expected return on plan assets      | ** **   | **(102**                              | **)**        | (179                                | )            | **(281** | **)** | (359 | ) |
| Amortization of prior service costs | ** **   | **10**                                |         | 11                                  | ** **   | **21** |   | 22 |   |
| Amortization of net actuarial loss  | ** **   | **89**                                |         | (7                                  | )            | **89** |   | — |   |
| Net periodic pension cost           | ** **   | **$**                                 | **225**      |                                | $            | 16 | ** ** | **$** | **253** |   | $ | 65 |   |

###  

### *Postretirement BenefitObligation*

###  

We sponsor a healthcare plan that providespostretirement medical benefits to certain “grandfathered” unionizedemployees.  The plan is contributory,with contributions required at the same rate as active employees.  Benefit eligibility under the plan terminatesat age 65.

 

The following table summarizes the components of thenet periodic costs for postretirement benefits:

 

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| ** **                         | ** **   | **Three months ended  June 30,** | ** **   | **Six months ended  June 30,** | ** **   |
|------------------------------------|--------------|---------------------------------------|--------------|-------------------------------------|--------------|
| **(In thousands)**                 | ** **   | **2009**                              | ** **   | **2008**                            | ** **   | **2009** | ** ** | **2008** | ** ** |
| *** ***                       | *** *** | *** ***                          | *** *** | *** ***                        | *** *** | *** *** | *** *** | *** *** | *** *** |
| Service cost                       | ** **   | **$**                                 | **19**       |                                | $            | 38 | ** ** | **$** | **38** |   | $ | 76 |   |
| Interest cost                      | ** **   | **29**                                |         | 34                                  | ** **   | **55** |   | 68 |   |
| Amortization of net actuarial gain | ** **   | **(9**                                | **)**        | —                              | ** **   | **(18** | **)** | — |   |
| Net periodic postretirement cost   | ** **   | **$**                                 | **39**       |                                | $            | 72 | ** ** | **$** | **75** |   | $ | 144 |   |

 

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

 

We adopted the provisions of SFAS 160 (“SFAS160”), *Noncontrolling Interests inConsolidated Financial Statements — An Amendment of ARB No. 51*on January 1, 2009.  Prior to October 2008,we owned 78.42% of Nebraska Energy, LLC (“NELLC”), a 50 million gallon dry millethanol plant.  In October 2008, wepurchased the remaining 21.58% of NELLC we did not previously own.  As a result of purchasing the remaininginterest in NELLC, we did not have any noncontrolling interest on ourconsolidated balance sheets as of June 30, 2009 and December 31,2008.  In accordance with SFAS 160, weclassified noncontrolling interests separately on our condensed consolidatedstatements of operations for the quarter and six months ended June 30,2008.  Prior year amounts were previouslyincluded in our consolidated balance sheets as a separate line item called “minorityinterest” under long-term liabilities and in our consolidated statement ofoperations as a separate line item called “Minority interest” under other income(expense).

 

Net loss attributable to Aventine during the quarterand six months ended June 30, 2008 was as follows:

 
| ** **                                       | ** ** | **Three months ended** | ** ** | **Six months ended**   | ** ** |
|--------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **(in thousands)**                               | ** ** | **June 30, 2008** | ** ** | **June 30, 2008** | ** ** |
|                                             |       |                   |       |                   |       |
| Net loss                                         |       | $                      | (2,232     | )                      | $          | (13,218 | ) |
| Net loss attributable to noncontrolling interest |       | (314                   | )          | (505                   | )          |
| Net loss attributable to Aventine                |       | $                      | (1,918     | )                      | $          | (12,713 | ) |

 

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

 

On January 1, 2009, we adopted the provisionsof SFAS No. 161, which requires entities to provide greater transparencyin interim and annual financial statements about how and why the entity usesderivative instruments, how the instruments and related hedged items areaccounted for under SFAS No. 133, and how the instruments and relatedhedged items affect the financial position, results of operations, and cashflows of the entity.

 

We are exposed to certain risks related to ourongoing business operations.  The primaryrisks related to our business are price risk on anticipated purchases of corn,natural gas and the sale of ethanol.  Wehave historically used forward or derivative instruments to manage theserisks.  We are not currently usingforward or derivative instruments, and are primarily in the spot markets forcommodity pricing.

 

We are subject to market risk with respect to theprice and availability of corn, the principal raw material we use to produceethanol and ethanol by-products.  Ingeneral, rising corn prices result in lower profit margins and, therefore,represent unfavorable market conditions. This is especially true when market conditions do not allow us to passalong increased corn costs to our customers. The availability and price of corn is subject to wide fluctuations dueto unpredictable factors such as weather conditions,

 

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farmerplanting decisions, governmental policies with respect to agriculture andinternational trade and global demand and supply.

 

We have firm-price purchase commitments with some ofour corn suppliers under which we agree to buy corn at a price set in advanceof the actual delivery of that corn to us. Under these arrangements, we assume the risk of a price decrease in themarket price of corn between the time this price is fixed and the time the cornis delivered.  At June 30, 2009, wehad commitments to purchase 1.5 million bushels of corn through December 2009at an average fixed price of $3.95 per bushel. We have elected to account for these transactions as normal purchasesunder SFAS 133, and accordingly, have not marked these transactions to market.

 

We sometimes enter into firm-price purchasecommitments with some of our natural gas suppliers under which we agree to buynatural gas at a price set in advance of the actual delivery of that naturalgas to us.  Under these arrangements, weassume the risk of a price decrease in the market price of natural gas betweenthe time this price is fixed and the time the natural gas is delivered.  At June 30, 2009, we did not have anycommitments to purchase natural gas in advance at prices other than atmarket.  We account for thesetransactions as normal purchases under SFAS 133, and accordingly, do not markthese transactions to market.

 

In order to reduce our market exposure to pricedecreases in corn, we have in the past, at the time we enter into a firm-pricepurchase commitment, often entered into commodity forward contracts to sell alike amount of corn at the then-current price for delivery to the counterpartyat a later date.  Such forward contractswere not designated as hedges and, therefore, were marked to market eachperiod.

 

We have also, in the past, entered into commodityfutures contracts in connection with the purchase of corn to reduce our risk offuture price increases.  These futurescontracts were not designated as hedges and, therefore, were marked to marketeach period.

 

We are also subject to market risk with respect toethanol pricing.  Our ethanol sales arepriced using contracts that can either be fixed; based upon the price ofwholesale gasoline plus or minus a fixed amount; or based upon a market priceat the time of shipment.  We sometimesfix the price at which we sell ethanol using fixed price physical deliverycontracts.  We have elected to accountfor these transactions as normal sales transactions under SFAS 133, andaccordingly, have not marked these transactions to market.

 

We also sell forward ethanol using contracts wherethe price is determined at a point in the future based upon an index togasoline price plus or minus a fixed amount. Under these arrangements, we assume the risk of a price decrease in themarket price of gasoline.  In order toreduce our market exposure to price decreases, at the time we enter into a firmsales commitment, we may also enter into commodity forward contracts to sell alike amount of gasoline at the then-current price for delivery to thecounterparty at a later date.  Theseforward contracts are not designated as hedges and, therefore, are marked tomarket each period.

 

We did not have any derivative instrumentsoutstanding at June 30, 2009. Derivatives not designated as hedging instruments under SFAS 133 at December 31,2008 were as follows:

 

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

 

The realized and unrealized effect on our condensedconsolidated statement of operations for derivatives not designated as hedginginstruments under SFAS 133 at June 30, 2009 and 2008 are as follows:

 
| ** **             | ** ** | ** **                                                | ** ** | **Fair Value  (in thousands)** | ** ** |
|------------------------|------------|-----------------------------------------------------------|------------|--------------------------------|------------|
| ** **             | ** ** | ** **                                                | ** ** | **Three months ended**         | ** ** | **Six months ended** | ** ** |
| ** **             | ** ** | ** **                                                | ** ** | **June 30,**              | ** ** |
| **Position Type** | ** ** | **Statement of Operations Classification** | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
|                   |       |                                                      |       |                           |       |   |   |   |   |   |   |
| Short corn             |       | Other  non-operating income/(expense)                     |       | $                              | —     |   | $ | (7,250 | ) | $ | 1,188 |   | $ | (11,210 | ) |
| Long corn              |       | Other  non-operating income/(expense)                     |       | 30                             |       | 4,607 |   | 30 |   | 10,419 |   |
| Short gasoline         |       | Other  non-operating income/(expense)                     |       | —                         |       | $ | (11,478 | ) | — |   | (11,462 | ) |
| Totals                 |       |                                                      |       | $                              | 30         |   | $ | (14,121 | ) | $ | 1,218 |   | $ | (12,253 | ) |

 

Any outstanding derivative position requires cashsettlement on a daily basis.  Withoutsuch cash settlement on derivative contracts, cash flows from operations wouldhave been lower.

 

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

 

The Company recorded an income tax benefit of $2.9million in the second quarter of 2009, which consists of a $3.0 million taxbenefit and $0.1 million of FIN 48 interest expense.  The difference between the tax benefit rateaccrued and the statutory benefit rate is principally due to the establishmentof valuation allowances totaling $12.3 million as we expect to be unable torecognize net operating loss carryforward amounts.

 

As of June 30, 2009, we had $2.8 million ofuncertain tax benefits.  All of ourunrecognized tax benefits, if recognized in future periods, would not impactthe Company’s effective tax rate.  Duringthe three and six month periods ended June 30, 2009, our liability forunrecognized tax benefits increased by $0.4 million and $1.9 million,respectively, as a result of the examination of our federal income tax returnsfor the tax years 2006 and 2007.  At June 30,2009 our liability for unrecognized tax benefits is included in other currentliabilities on the condensed consolidated balance sheet.

 

We include interest expenseor income, as well as potential penalties on unrecognized tax benefits, as acomponent of income tax expense in the condensed consolidated statement ofoperations.  The total amount of accruedinterest related to uncertain tax positions at June 30, 2009 was$0.1 million, net of the deferred tax benefit, and is included in othercurrent liabilities.  We did not increaseour accrual for interest related to uncertain tax positions for the three monthperiod ended June 30, 2009.  Weincreased our accrual for interest related to uncertain tax positions for thesix month period ended June 30, 2009 by $0.1 million, net of the deferredtax benefit.  The total amount ofunrecognized tax benefit decreased by $2.8 million in July 2009 as theInternal Revenue Service withheld these amounts from our 2006 and 2007 incometax refund which was received in July 2009.

 

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Our federal income tax return for 2008 is availablefor examination under the federal statute of limitations.  We file in numerous state and foreignjurisdictions with varying statutes of limitations open from 2005 to 2008.

 

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

 

Basicloss per share is computed by dividing net loss by the weighted average numberof common shares outstanding during each period.  Diluted loss per share is calculated usingthe treasury stock method in accordance with SFAS 128, and includes the effectof all dilutive securities, including non-qualified stock options and restrictedstock units awards (“RSU’s”).

 

The following table sets forth the computation ofbasic and diluted loss per share:

 
| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** **  | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|-------------|-------------------------------------|------------|
| **(In thousands, except per share  data)**                  | ** ** | **2009**                              | ** **  | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                        | ** ** | ** **                            |        |                                |       |   |   |   |   |
| Net loss attributable to controlling interest               | ** ** | **$**                                 | **(48,935** | **)**                               | $          | (1,918 | ) | **$** | **(73,502** | **)** | $ | (12,713 | ) |
|                                                        | ** ** | ** **                            |        |                                | ** ** | ** ** |   |   |   |
| Weighted average shares and share equivalents  outstanding: | ** ** | ** **                            |        |                                | ** ** | ** ** |   |   |   |
| Basic shares                                                | ** ** | **42,966**                            |        | 41,971                              | ** ** | **42,968** |   | 41,905 |   |
| Dilutive non-qualified stock options and RSU’s         | ** ** | **—**                            |        | —                              | ** ** | **—** |   | — |   |
| Diluted weighted average shares and share  equivalents      | ** ** | **42,966**                            |        | 41,971                              | ** ** | **42,968** |   | 41,905 |   |
|                                                        | ** ** | ** **                            |        |                                | ** ** | ** ** |   |   |   |
| Loss per common share - basic:                              | ** ** | **$**                                 | **(1.14**   | **)**                               | $          | (0.05 | ) | **$** | **(1.71** | **)** | $ | (0.30 | ) |
| Loss per common share - diluted:                            | ** ** | **$**                                 | **(1.14**   | **)**                               | $          | (0.05 | ) | **$** | **(1.71** | **)** | $ | (0.30 | ) |

 

## ***We had potentially dilutivesecurities outstanding representing options on 3.3 million and 4.1 millioncommon shares at June 30, 2009 and 2008, respectively, that were notincluded 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 SFAS 128.***

## *** ***

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

 

The following table summarizes comprehensive loss:

 
| ** **                                                      | ** **   | **Three months ended  June 30,** | ** **   | **Six months ended  June 30,** | ** **   |
|-----------------------------------------------------------------|--------------|---------------------------------------|--------------|-------------------------------------|--------------|
| **(In thousands)**                                              | ** **   | **2009**                              | ** **   | **2008**                            | ** **   | **2009** | ** ** | **2008** | ** ** |
| ** **                                                      | *** *** | *** ***                          | *** *** | *** ***                        | *** *** | *** *** | *** *** | *** *** | *** *** |
| Net loss attributable to controlling interest                   | ** **   | **$**                                 | **(48,935**  | **)**                               | $            | (1,918 | ) | $ | (73,502 | ) | $ | (12,713 | ) |
| Unrealized gain on available for sale securities                | ** **   | **1,273**                             |         | —                              |         | 1,724 |   | — |   |
| Unrecogized pension and postretirement liabilities,  net of tax | ** **   | **56**                                |         | (9                                  | )            | 56 |   | 18 |   |
| Comprehensive loss                                              | ** **   | **$**                                 | **(47,606**  | **)**                               | $            | (1,927 | ) | $ | (71,722 | ) | $ | (12,695 | ) |

 

**(21)****       ****Industry Segment**

 

The Company operates in one reportable businesssegment, the manufacture and marketing of fuel-grade ethanol.

 

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

 

On April 7,2009, the Company and all of its direct and indirect subsidiaries filedvoluntary petitions for relief under Chapter 11 of the Bankruptcy Code with theBankruptcy Court.  The Bankruptcy Casesare being jointly administered under Case Number 09-11214 (KG).  Aventine intends to continue to operate itsbusiness as debtor-in-possession under the jurisdiction of the Bankruptcy Courtand in accordance with the applicable provisions of the Bankruptcy Code andorders of the Bankruptcy Court.  As aresult of the commencement of the Bankruptcy Cases, attempts to collect,secure, or enforce remedies with respect to pre-petition claims againstAventine are subject to the automatic stay provisions of Section 362 ofthe Bankruptcy Code.  The BankruptcyCases are discussed in greater detail in Note 2.

 

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

 

We are from time to time involved in various legalproceedings, including legal proceedings relating to the extensiveenvironmental laws and regulations that apply to our facilities andoperations.  We are not involved in anylegal proceedings, other than those described herein, that we believe couldhave a material adverse effect upon our business, operating results orfinancial condition.

 

**(23)********                       ****Subsequent Events**

 

The Company has evaluated subsequent events throughthe date of filing the financial statements which is August 10, 2009, andno events have occurred from the balance sheet date through that date thatwould impact the consolidated financial statements.

 

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Item 2.                    Management’s Discussion andAnalysis 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.*

 

*Theseforward-looking statements are subject to various risks and uncertainties whichcould cause actual results to differ materially from those stated or implied bysuch forward-looking statements.  Weundertake no obligation to publicly release any revision of any forward-lookingstatements contained herein to reflect events and circumstances occurring afterthe date hereof, or to reflect the occurrence of unanticipated events.  Information concerning risk factors iscontained under Item “1A - Risk Factors” in our Annual Report on Form 10-Kor Form 10-K/A for the fiscal year ended December 31, 2008 and under Part II,Item 1A of our Quarterly Report on Form 10-Q for the three month periodended March 31, 2009.  You shouldcarefully consider all of the risks and all other information contained in orincorporated by reference in this report and in our filings with the SEC.  These risks are not the only ones weface.   Additional risks anduncertainties not presently known to us, or which we currently considerimmaterial, also may adversely affect us. If any of these risks actually occur, our business, financial conditionand results of operations could be materially and adversely affected.*

 

**Company Overview**

 

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

 

**Chapter 11 Bankruptcy Proceedings**

 

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

 

Subject to certain specific exceptions under the Bankruptcy Code, theBankruptcy Filing automatically enjoined, or stayed, the continuation of anyjudicial or administrative proceedings or other actions against the Debtors ortheir property to recover on, collect or secure a claim arising prior to the

 

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

 

The Bankruptcy Filing constituted an event ofdefault under both the Company’s secured revolving credit facility and its 10%senior unsecured notes due 2017 (see Note 7), and those debt obligations becameautomatically and immediately due and payable, subject to an automatic stay ofany action to collect, assert, or recover a claim against the Company and theapplication of applicable bankruptcy law. As a result, the accompanying Condensed Consolidated Balance Sheet as ofJune 30, 2009 includes reclassifications of $315.6 million to reflectas “pre-petition liabilities subject to compromise” amounts owed to holders ofour 10% senior unsecured notes due 2017 (“Notes”), including pre-petitionaccrued interest, that, absent the stay, would have become automatically andimmediately due and payable.  The Companyclassifies “pre-petition liabilities subject to compromise” as a long-termliability because management does not believe the Company will use existingcurrent assets or create additional current liabilities to fund theseobligations.  Amounts owed under theCompany’s pre-petition secured revolving credit facility have not been includedin “pre-petition liabilities subject to compromise” as the secured debt isadequately collateralized.

 

**Chapter 11 Process**

 

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

 

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

 

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

 

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the Debtors on the bankruptcy proceedings and certain other ordinarycourse professionals.  From time to time,the Debtors may seek Bankruptcy Court approval for the retention of additionalprofessionals.

 

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

 

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

 

Under Section 365 of the BankruptcyCode, the Debtors may assume, assume and assign, or reject executory contractsand unexpired leases, including real property, railcars and equipment leases,subject to the approval of the Bankruptcy Court and certain otherconditions.  Rejection constitutes acourt-authorized breach of the lease or contract in question and, subject tocertain exceptions, relieves the Debtors of future obligations under such leaseor contract, but creates a pre-petition claim for damages caused by such breachor rejection, subject to the Debtors’ right to review and contest suchclaim.  Parties whose contracts or leasesare rejected may file claims against the Debtors for damages.  Generally, the assumption of an executorycontract or unexpired lease requires the Debtors to cure all prior defaultsunder such executory contract or unexpired lease, including all pre-petitionarrearages, and to provide adequate assurance of future performance.  In this regard, the Debtors’ financial statementsinclude amounts classified as “pre-petition liabilities subject to compromise”that the Debtors believe that the Bankruptcy Court will allow as claim amountsas a result of the Debtors’ rejection of various executory contracts andunexpired leases.  Additional amounts maybe included in “pre-petition liabilities subject to compromise” in futureperiods if additional executory contracts and unexpired leases arerejected.  Conversely, the Debtors wouldexpect that the assumption of certain executory contracts and unexpired leasesmay convert certain liabilities shown in future financial statements as subjectto compromise to post-petition liabilities. Due to the uncertain nature of many of the potential claims, the Debtorsare unable to project the magnitude of such claims with any degree ofcertainty.

 

The Bankruptcy Court has established September 8,2009 at 4:00 p.m. eastern time as the deadline for the filing of proofs ofclaim and thereby requiring the Debtors’ creditors to submit claims for allegedliabilities not paid and/or damages incurred arising from or related to periodsprior to the Petition Date.  There may bedifferences between the amounts at which any such liabilities are recorded inthe Company’s financial statements and the amount claimed by Aventine’screditors.  Significant litigation may berequired to resolve any such disputes or discrepancies.

 

In order to successfullyexit Chapter 11, the Debtors will need to propose, and obtain confirmation bythe Bankruptcy Court of, a plan of reorganization that satisfies therequirements of the Bankruptcy Code.  Aplan of reorganization could, among other things, resolve the Debtors’pre-petition obligations, set forth the revised capital structure of the newlyreorganized entity and provide for corporate governance subsequent to exit frombankruptcy.  As provided in theBankruptcy Code, the Debtors have the exclusive right for 120 days after thePetition Date to file a plan of reorganization and 60 additional days tosolicit and obtain necessary acceptances. Such periods may be extended by the Bankruptcy Court for cause to up to18 months and 20 months, respectively, after the Petition Date.  If the Debtors’ exclusivity period lapses,any party in interest may file a plan of reorganization for

 

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Aventine. The Debtors, prior to expiration of the exclusive deadline to file aplan of reorganization, have filed a motion with the Bankruptcy Courtrequesting an extension of the exclusive filing and solicitation deadlines for60 days and 61 days, respectively.  Thisrequest is subject to approval by the Bankruptcy Court at a hearing currentlyscheduled for August 20, 2009.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**Going Concern Matters**

 

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

 

The accompanying consolidated financialstatements do not purport to reflect or provide for the consequences of ourChapter 11 proceedings.  Inparticular, the financial statements do not purport to show (i) as toassets, their realizable value on a liquidation basis or their availability tosatisfy liabilities; (ii) as to pre-petition liabilities, the amounts thatmay be allowed for claims or contingencies, or the status and priority thereof;(iii) as to shareowners’ equity accounts, the effect of any changes thatmay be made in our capitalization; or (iv) as to operations, the effect ofany changes that may be made to our business.

 

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In accordance with accounting principlesgenerally accepted in the United States (“GAAP”), we have applied AmericanInstitute of Certified Public Accountants’ Statement of Position (“SOP”)90-7, *Financial Reporting by Entities inReorganization under the Bankruptcy Code*, in preparing theconsolidated financial statements. SOP 90-7 requires that the financial statements, for periodssubsequent to the Chapter 11 filing, distinguish transactions and eventsthat are directly associated with the reorganization from the ongoingoperations of the business.  Accordingly,certain expenses (including professional fees), realized gains and losses andprovisions for losses that are realized or incurred in the bankruptcyproceedings are recorded in reorganization items on the accompanying CondensedConsolidated Statements of Operations. In addition, pre-petition obligations that may be impacted by thebankruptcy reorganization process have been classified on the CondensedConsolidated Balance Sheet at June 30, 2009 in “pre-petition liabilities subject to compromise*”*. These liabilities are reported at the amounts expected to be allowed bythe Bankruptcy Court, even if they may be settled for lesser amounts.  For information on the bankruptcyreorganization process, see Note 2 - *Chapter 11 BankruptcyProceedings*.

 

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

 

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

 

**Results of Operations**

 

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

 

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

 

*ExecutiveSummary of Financial Results*

 

The net loss attributable to controllinginterest for the second quarter of 2009 was $48.9 million, or $1.14 per dilutedshare, as compared to a net loss of $1.9 million, or $0.05 per diluted share,in the

 

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second quarter of 2008.  The netloss in the second quarter of 2009 was primarily the result of expenses relatedto the bankruptcy process, significantly lower commodity spreads and a $1.2million increase in bad debt reserves, offset somewhat by lower conversioncosts, lower freight costs and lower SG&A costs.  2008 second quarter results weresignificantly impacted by losses on the sale of auction rate securities andfrom losses incurred on hedging transactions. Commodity spread, defined as gross ethanol selling price per gallon lessnet corn cost per gallon, declined from $1.29 per gallon in the second quarterof 2008 to $0.72 per gallon in the second quarter of 2009.  The average sales price per gallon of ethanoldecreased in the second quarter of 2009 to $1.70 per gallon from the $2.50average received in the second quarter of 2008. Corn costs during the second quarter of 2009 averaged $4.10 per bushel,as compared to $5.38 per bushel in the second quarter of 2008.  Conversion cost in the second quarter of 2009was $0.42 per gallon as compared to $0.73 per gallon in the second quarter of2008.

 

Gallons of ethanol sold in the second quarterof 2009 decreased to 52.8 million gallons, as compared to 220.3 million gallonsin the second quarter of 2008.  Thedecrease resulted from the termination of our marketing alliance program inearly 2009 and significantly scaling back our purchase resale operations.  Gallons produced during the second quarter of2009 increased to 52.7 million gallons from 45.6 million gallons in the secondquarter of 2008.

 

Second quarter 2009 results include $42.7 million inreorganization costs related to the bankruptcy process.

 

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

 

Total gallons of ethanol sold in the secondquarter of 2009 decreased to 52.8 million gallons, versus 220.3 million gallonssold in the second quarter of 2008. Gallons of ethanol were sourced as follows:

 

For the ThreeMonths Ended June 30,

 
| **(In thousands of gallons, except for  percentages)** | ** ** | **2009**   | ** ** | **2008** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|---------------------------|------------|-----------------------------|------------|
| Equity production                                      | ** ** | **52,658** |       | 45,590   |       | 7,068                     |       | 15.5                        | %          |
| Marketing alliance purchases                           | ** ** | **—** |       | 120,225  |       | (120,225                  | )          | (100                        | )%         |
| Purchase/resale                                        | ** ** | **247**    |       | 49,144   |       | (48,897                   | )          | (99.5                       | )%         |
| Decrease (increase) in inventory                       | ** ** | **(104**   | **)**      | 5,305    |       | (5,409                    | )          | N.M.                        | *          |
| Total                                                  | ** ** | **52,801** |       | 220,264  |       | (167,463                  | )          | (76.0                       | )%         |

 

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*  Not meaningful

 

Net sales in the second quarter of 2009decreased 80.4% from the second quarter of 2008.  Net sales were $118.1 million in the secondquarter of 2009 versus $601.6 million in the second quarter of 2008.  Overall, the decrease in net sales was theresult of less supply available as we terminated our marketing alliance andsignificantly reduced purchase/resale supply operations along with lowerethanol pricing.  Ethanol prices averaged$1.70 per gallon in the second quarter of 2009 versus $2.50 in the secondquarter of 2008.

 

Co-product revenues for thesecond quarter of 2009 totaled $26.6 million, a decrease of $10.4 million or28.1%, from the second quarter 2008 total of $37.0 million.  Co-product revenues decreased during thesecond quarter of 2009 as a result of significantly lower co-product pricingfor corn germ and DDGS, partially offset by slightly higher DDGS volumes andhigher yeast pricing.  In the secondquarter of 2009, we sold 290.9 thousand tons, versus 272.8 thousand tons in thesecond quarter of 2008.  Co-productrevenues, as a percentage of corn costs, fell to 34.1% during the secondquarter of 2009, versus 40.2% in the second quarter of 2008.  In 2008, we were selling co-products into thespot market during a 

 

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period of time in which our corn costs werelower than the CBOT average.  In 2009,co-products and corn costs were at market prices.

 

Cost of goods sold for the quarter ended June 30,2009 was $118.0 million, compared to $568.7 million for the quarter ended June 30,2008, a decrease of $450.7 million or 79.3%. As a percentage of net sales, cost of goods sold increased to 100.0% ofsales from 94.5% of sales in the second quarter of 2008.  Cost of goods sold consists of the cost toproduce ethanol, freight and logistics costs to ship ethanol and co-products,the cost of ethanol sold out of inventory, the cost of motor fuel taxes whichhave been billed to customers and, in the second quarter of 2008, the cost ofpurchased ethanol.  The decrease in totalcost of goods sold is principally the result of lower volumes of ethanolshipped as a result of the termination of our marketing alliance andsignificantly reduced purchase/resale program, lower corn costs and lowerconversion costs.  In the second quarterof 2008, purchased ethanol costs were $393.6 million.

 

Production costs include corn costs,conversion costs (defined as the cost of converting the corn into ethanol, andincludes production salaries, wages and stock-based compensation costs, fringebenefits, utilities (including coal and natural gas), maintenance, denaturant,insurance, materials and supplies and other miscellaneous production costs) anddepreciation.  Corn costs in the secondquarter of 2009 totaled $77.9 million or $4.10 per bushel, versus $92.1million, or $5.38 per bushel in the second quarter of 2008.  Our average corn costs in the second quarterof 2009 were slightly higher than the $4.06 average CBOT price during the sameperiod.  The decrease in corn costs isprincipally due to lower corn prices.

 

Conversion costs for the second quarter of2009 decreased to $21.9 million from $33.1 million for the second quarter of2008.  The total dollars spent onconversion costs decreased year over year principally as a result ofsignificantly lower costs for utilities, chemicals and other supplies whichhave decreased as a result of significantly lower petroleum prices.  The conversion cost per gallon decreased yearover year to $0.42 per gallon in the second quarter of 2009 versus $0.73 pergallon in the second quarter of 2008. Conversion cost per gallon is affected by both dollars spent onconversion of corn to ethanol and also on the number of gallons of ethanolproduced.

 

Freight/logistics costs were down 20% on aper gallon basis in the second quarter of 2009 from the second quarter of2008.  Freight/logistics costs in thesecond quarter of 2009 were $0.16 per gallon as compared to $0.20 per gallon inthe second quarter of 2008. Freight/logistics dollars spent decreased in the second quarter of 2009to $8.5 million from $44.3 million in the second quarter of 2008 as a result oflower volumes shipped and the elimination of the majority of our fixed terminalnetwork structure.  Freight/logisticscost per gallon is calculated by taking total freight/logistics costs incurred(including costs to ship co-products) and dividing by the total ethanol gallonssold.

 

Depreciation in the second quarter of 2009totaled $3.5 million, versus $3.3 million in the second quarter of 2008.  Other cost of goods sold, including motorfuel taxes and the cost of ethanol sold from inventory, were $6.2 million inthe second quarter of 2009, versus $2.3 million in the second quarter of 2008.  The cost of motor fuel taxes are recoveredthrough billings to customers.

 

Selling, general &administrative expenses (“SG&A”) were $7.0 million in the second quarter of2009 as compared to $10.1 million in the second quarter of 2008.  The lower expense in the second quarter of2009 primarily relates to significantly lower salaries and wages as a result ofa reduction in staff, including stock-based compensation expense, significantlylower expenditures on non-reorganization professional fees, all partiallyoffset by a $1.2 million addition to bad debt reserves.

 

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Interest expense in the second quarter of2009 was $2.3 million, as compared to $1.1 million in the second quarter of2008.  The accrual of interest expense onour Notes was discontinued after April 7, 2009, the date of our BankruptcyFiling in accordance with SOP 90-7. Interest expense in the second quarter of 2009 is comprised of $0.6million related to our Notes (compared to contractual interest of $7.5 million),$0.7 million related to our pre-petition secured revolving credit facility,$0.5 million related to our DIP Facility and $0.5 million of amortization ofdeferred debt issuance fees.  Interestexpense in the second quarter of 2008 included $7.5 million in interest on our$300 million aggregate principal amount of our Notes and $0.3 million ofamortization of deferred financing fees, reduced by capitalized interest of$6.6 million.

 

Realized gains in othernon-operating income was $30 thousand in the second quarter of 2009 andrealized and unrealized net losses on corn and gasoline derivative contractswas $14.1 million in the second quarter of 2008.  We did not have any open derivative positionsat the end of the second quarter of 2009. We do not mark to market forward physical contracts to purchase corn.

 

We recorded expense of $42.7million in the second quarter of 2009 relating to our Bankruptcy Cases.  This expense primarily consists of $3.1million in professional fees incurred and $39.7 million recorded provisions forrejected executory contracts and leases.

 

The income tax benefitaccrued in the second quarter of 2009 totaled $2.9 million versus an income taxexpense in the second quarter of 2008 of $3.4 million.  The difference between the tax benefit rateaccrued and the statutory benefit rate is principally due to the establishmentof valuation allowances as we expect to be unable to recognize net operatingloss carryforward amounts.  During the second quarter of 2009, the Companyincreased the recorded valuation allowance by $12.3 million, to $36.7 millionat June 30, 2009 on its deferred tax assets to reduce the deferred taxassets to the amount that the Company believes is more likely than not to berealized.

 

*For the Six Months Ended June 30, 2009 Compared to the Six MonthsEnded June 30, 2008*

 

Total gallons of ethanol sold in the firsthalf of 2009 decreased to 173.6 million gallons, versus 431.5 million gallonssold in the first half of 2008.  Gallonsof ethanol were sourced as follows:

 

For the Six MonthsEnded June 30,

 
| **(In thousands of gallons, except for  percentages)** | ** ** | **2009**    | ** ** | **2008** | ** ** | **Increase/  (Decrease)** | ** ** | **%  Increase/  (Decrease)** | ** ** |
|--------------------------------------------------------|------------|-------------|------------|----------|------------|---------------------------|------------|-----------------------------------|------------|
| Equity production                                      | ** ** | **99,152**  |       | 93,325   |       | 5,827                     |       | 6.2                               | %          |
| Marketing alliance purchases                           | ** ** | **12,898**  |       | 250,114  |       | (237,216                  | )          | (94.8                             | )%         |
| Purchase/resale                                        | ** ** | **29,780**  |       | 88,108   |       | (58,328                   | )          | (66.2                             | )%         |
| Decrease (increase) in inventory                       | ** ** | **31,793**  |       | (41      | )          | 31,834                    |       | N.M.                              | *          |
| Total                                                  | ** ** | **173,623** |       | 431,506  |       | (257,883                  | )          | (59.8                             | )%         |

 

----

*  Not meaningful

 

Net sales in the first half of 2009 decreased68.1% from the first half of 2008.  Netsales were $354.7 million in the first six months of 2009 versus $1.1 billionin the first six months of 2008. Overall, the decrease in net sales was the result of less supplyavailable as we terminated our marketing alliance and significantly reducedpurchase/resale supply operations and from a decrease in the average salesprice of ethanol sold.  Ethanol pricesaveraged $1.69 per gallon in the first half of 2009 versus $2.36 in the firsthalf of 2008.

 

Co-product revenues for thefirst half of 2009 totaled $49.0 million, a decrease of $21.3 million or 30.3%,from the first half 2008 total of $70.3 million.  Co-product revenues decreased during thefirst

 

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half of 2009 principally as a result ofsignificantly lower co-product pricing. In the first half of 2009, we sold 555.1 thousand tons, versus 545.2thousand tons in the first half of 2008. Co-product revenues, as a percentage of corn costs, fell to 31.9% duringthe first half of 2009, versus 40.7% in the first half of 2008.  In 2008, we were selling co-products into thespot market during a period of time in which our corn costs were lower than theCBOT average.  In 2009, both co-productsand corn costs were at market prices.

 

Cost of goods sold for the first six monthsended June 30, 2009 was $376.0 million, compared to $1.1 billion for thesix months ended June 30, 2008, a decrease of $678.6 million or64.3%.  As a percentage of net sales,cost of goods sold increased to 106.0% of sales from 94.9% of sales in thefirst half of 2008.  Cost of goods soldconsists of the cost to produce ethanol at our own facilities, the cost offreight and logistics to ship ethanol and co-products, the cost of ethanol soldfrom inventory, the cost of motor fuel taxes which have been billed tocustomers and, prior to the second quarter of 2009, the cost of purchasedethanol.  The decrease in total cost ofgoods sold is principally the result of lower volumes of ethanol purchased as aresult of the termination of our marketing alliance and significantly reducedpurchase/resale program, lower corn costs and lower conversion costs.

 

Purchased ethanol in the first half of 2009totaled $78.3 million, versus $735.5 million in the first half of 2008.  The decrease in purchased ethanol resultedfrom the termination of our marketing alliance and scaled back ourpurchase/resale programs along with a decrease in the cost per gallon ofethanol purchased.

 

Production costs include corn costs,conversion costs (defined as the cost of converting the corn into ethanol, andincludes production salaries, wages and stock-based compensation costs, fringebenefits, utilities (including coal and natural gas), maintenance, denaturant,insurance, materials and supplies and other miscellaneous production costs) anddepreciation.  Corn costs in the firstsix months of 2009 totaled $153.8 million or $4.17 per bushel, versus $172.9million, or $4.93 per bushel in the first six months of 2008.  Our average corn costs in the first half of2009 were higher than the CBOT average price of $3.92 during the sameperiod.  The decrease in corn costs isprincipally due to lower corn prices.

 

Conversion costs for the first half of 2009decreased to $49.0 million from $62.9 million for the first half of 2008.  The total dollars spent on conversion costsdecreased year over year principally as a result of significantly lower costsfor utilities, chemicals and other supplies which have decreased as a result ofsignificantly lower petroleum prices. The conversion cost per gallon decreased year over year to $0.50 pergallon in the first half of 2009 versus $0.67 per gallon in the first half of2008.  Conversion cost per gallon isaffected by both dollars spent on conversion of corn to ethanol and also on thenumber of gallons of ethanol produced.

 

Freight/logistics costs were down slightly ona per gallon basis in the first half of 2009 from the first half of 2008.  Freight/logistics costs in the first half of2009 were $0.19 per gallon as compared to $0.20 per gallon in the first half of2008.  Freight/logistics dollars spentdecreased in the first six months of 2009 to $33.3 million from $86.5 millionin the first six months of 2008 as a result of lower volumes shipped and thetermination of fixed price terminal obligations.  Freight/logistics cost per gallon iscalculated by taking total freight/logistics costs incurred (including costs toship co-products) and dividing by the total ethanol gallons sold.

 

Depreciation in the first half of 2009totaled $6.9 million, versus $6.6 million in the first half of 2008.  Other cost of goods sold, including motorfuel taxes and the cost of ethanol sold from inventory, were $55.5 million inthe first six months of 2009, versus a reduction to cost of good sold of $9.8million in the first six months of 2008. The cost of motor fuel taxes are recovered through billings tocustomers.

 

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Selling, general &administrative expenses (“SG&A”) were $16.7 million in the first six monthsof 2009 as compared to $19.0 million in the first six months of 2008.  The lower expense in the first half of 2009primarily relates to significant reductions in wages and benefits as a resultof a reduction in staff at the end of the first quarter of 2009, includingsignificantly reduced stock-based compensation expense, partially offset by anincrease in professional fees (excluding reorganization costs) and a $1.2million increase in bad debt expense.

 

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

 

Interest income in the first half of 2009 was$11 thousand, versus interest income of $2.7 million in the first half of2008.  The significant decrease ininterest income is due to a decrease in excess cash and cash equivalents.

 

Interest expense in thefirst half of 2009 was $11.0 million, as compared to $3.5 million in the firsthalf of 2008.  Interest expense in thefirst half of 2009 was higher than in the same period in 2008 due to suspensionof interest expense capitalization in conjunction with the halting of ourexpansion projects, offset by the cessation of accruing interest on our Notesas of the Petition Date.  Interestexpense in the first half of 2009 included $8.1 million of interest expenserelated to our Notes (compared to contractual interest of $15 million),pre-petition secured revolving credit facility interest expense of $1.0million, interest expense on our DIP Facility of $0.5 million, and $1.4 millionfor amortization of deferred financing fees. Interest expense in the first half of 2008 included $15.0 million in intereston our Notes and $0.5 million of amortization of deferred financing fees,reduced by capitalized interest of $12.0 million.

 

Other non-operating incomefor the first half of 2009 includes $1.2 million of realized net gains on cornderivative contracts versus net realized and unrealized losses in the firsthalf of 2008 of $12.3 million.  We didnot have any open derivative positions at the end of June 2009.  We do not mark to market forward physicalcontracts to purchase corn.

 

The income tax benefitrecorded in the first half of 2009 totaled $6.7 million.  The difference between the tax benefit rateaccrued and the statutory benefit rate is principally due to the establishmentof valuation allowances as we expect to be unable to recognize net operatingloss carryforward amounts.  For the first six months of 2009, the Companyincreased its valuation allowance by $19.4 million, to $36.7 million at June 30,2009 on its deferred tax assets to reduce the deferred tax assets to the amountthat the Company believes is more likely than not to be realized.

 

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

 

*Forward Commodity Transactions*

 

We are exposed to certain risks related toour ongoing business operations.  Theprimary risks related to our business are price risk on anticipated purchasesof corn, natural gas and the sale of ethanol. We have historically used forward or derivative instruments to managethese risks.  We are not currently usingforward or derivative instruments, and are primarily in the spot markets forcommodity pricing.

 

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*Ethanol Pricing*

 

Ethanol prices continued tobe at or near the spot cost to produce ethanol during the second quarter of2009, making the cash spot margins near break-even.  As the supply of ethanol from plants whichare currently under construction begins to make its way into the marketplace orplants that are currently shut-in begin to produce ethanol again, ethanolpricing may remain soft, and gross margins may remain near break-even.

 

As of June 30, 2009, wehad contracts for delivery of ethanol totaling 27.4 million gallons through September 2009.  All of these commitments were at spot prices(using various Platt, OPIS and AXXIS indices). We did not have any commitments to sell ethanol past the third quarterof 2009.

 

*Corn*

 

Corn prices rosesignificantly from 2006 to 2008 and reached record levels during 2008.  Since 2008, corn prices have declined withthe economic conditions in general, along with most other commodities.  We believe that this is due in part to lowerthan expected consumption, including for ethanol and livestock feeding amidconcerns of global recession.  However,we continue to believe that corn prices are likely to remain above historicallevels for the foreseeable future.

 

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

 

At June 30, 2009, wehad fixed the price of 1.5 million bushels of corn through December 2009at an average of $3.95 per bushel.

 

*Marketing Alliance*

 

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

 

*Supply and Demand*

 

According to the Renewable Fuels Association,the annual ethanol production capacity in the U.S. of plants currently inoperation, those currently not producing, and those under construction isalmost 14.5 billion gallons annually. Presently this volume qualifies as renewable biofuels but not asadvanced biofuels.  In 2014 the mandatefor renewable biofuels is 14.4 billion gallons and for advanced biofuels isanother 3.75 billion gallons (including 1.75 billion gallons of cellulosicbiofuels) for a total Renewable Fuels Standard of 18.15 billion gallons.Ethanol produced in the United States competes with sugar-based ethanolproduced in Brazil, which currently qualifies as advanced biofuels.  While we cannot be certain as to industryoperating rates or completion of plants under construction, this domestic

 

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production capacity, along with imports, may cause supply to exceedmandated demand.  If additional demandfor ethanol is not created, either through additions to discretionary blending(through increased penetration rates in areas that blend ethanol today orthrough the establishment of new markets where little or no ethanol is blendedtoday), or through additional state level mandates, the excess supply may causeethanol gross margins to decrease, perhaps substantially.

 

*Bankruptcy*

 

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

 

In order to successfully exit Chapter 11bankruptcy, Aventine will need to propose, and obtain confirmation by theBankruptcy Court of a plan of reorganization that satisfies the requirements ofthe Bankruptcy Code.  A plan ofreorganization could, among other things, resolve Aventine’s pre-petitionobligations, set forth the revised capital structure of the newly reorganizedentity and provide for corporate governance subsequent to exit frombankruptcy.  Although Aventine expects tofile a reorganization plan that provides for emergence from Chapter 11 bankruptcysome time in the future, there can be no assurance that a reorganization planwill be proposed by Aventine or confirmed by the Bankruptcy Court, or that anysuch plan will be consummated.

 

The Company has incurred and will continue toincur significant costs associated with the reorganization.  The amount of these costs, which are beingexpensed as incurred, are expected to significantly affect the Company’sresults of operations.

 

**Liquidity and Capital Resources**

 

*Overview and Outlook*

 

The following table sets forth selectedinformation concerning our financial condition:

 
| **(In thousands)**                   | ** **   | **June 30,  2009  (Unaudited)** | ** **   | **December 31,  2008** | ** **   |
|--------------------------------------|--------------|--------------------------------------|--------------|-----------------------------|--------------|
| *** ***                         | *** *** | *** ***                         | *** *** | *** ***                | *** *** |
| Cash and cash equivalents            | ** **   | **$**                                | **27,238**   |                        | $            | 23,339 |   |
| Working capital                      | ** **   | **27,052**                           |         | (294,039                    | )            |
| Total debt not subject to compromise | ** **   | **42,765**                           |         | 352,200                     |         |
| Current ratio                        | ** **   | **1.42**                             |         | 0.39                        |         |
|                                      |              |                                      |              |                             |              |  |  |

 

As a result of our Bankruptcy Filing and thecircumstances leading to our Bankruptcy Filing as described elsewhere in thisreport, we face uncertainty regarding the adequacy of our liquidity and capitalresources and have limited access to financing. The Bankruptcy Filing constituted an event of default under ourpre-petition secured revolving credit facility and the indenture governing ourNotes, and the debt obligations under those agreements became automatically andimmediately due and payable, subject to the automatic stay provisions of Section 362of the Bankruptcy Code.

 

During the pendency of the Bankruptcy Cases,we expect that our primary sources of liquidity will be cash flows from operationsand borrowings under our DIP Facility. In addition to the cash

 

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requirements necessary to fund ongoing operations, we have incurredsignificant professional fees and other costs in connection with the BankruptcyFiling and expect that we will continue to incur significant professional feesand costs.  We cannot assure you that theamounts of cash available from operations, together with our DIP Facility, willbe sufficient to fund our operations, including operations during the perioduntil such time as we are able to propose a plan of reorganization that willreceive the requisite acceptance by creditors and be confirmed by theBankruptcy Court.  Our long-termliquidity requirements and the adequacy of our capital resources are difficultto predict at this time and ultimately cannot be determined until a plan ofreorganization has been developed and is confirmed by the Bankruptcy Court.

 

Funds available under our DIP Facility,together with cash generated from operations, are expected to be sufficient tofund operations of our business through the end of 2009.  However, funds available under our DIP Facilitycannot be used for capital expenditures beyond those permitted in our DIPFacility budget, absent consent from the post-petition lenders and modificationof the DIP Facility budget. Consequently, we do not currently expect to continue construction of ourAurora, Nebraska or Mt. Vernon, Indiana expansion projects in the near-term.

 

*Sources of Liquidity*

 

Our current principal sources of liquidityare cash, cash equivalents, cash provided by our DIP Facility, and cashprovided by operations.

 

*Cash and cash equivalents.*  For the first six months of 2009, cash andcash equivalents increased by $3.9 million as compared to the first six monthsof 2008.  Cash and cash equivalents as ofJune 30, 2009 and December 31, 2008 were $27.2 million and $23.3million, respectively.

 

C*ash provided byoperations.*  Net cash providedby operating activities in the first six months of 2009 was $14.1****million, as compared to cash provided by operatingactivities of $42.3 million for the first six months of 2008.  Cash provided by operations in 2009 wasreduced by significant operating losses incurred in the first half of2009.  In the first half of 2009, weoffset these large operating losses principally with the liquidation ofaccounts receivables and inventory, along with the receipt of alliancetermination payments, offset somewhat by large reductions in accountspayable.  As a result of our BankruptcyFiling, we did not pay pre-petition accounts payable as they came due, whichprovided cash from operations.

 

*Cash available under our DIP facility*.  As of June 30, 2009, the Company hasdrawn $15 million of the DIP Facility. The DIP Facility provides for a first priority term loan in a maximumaggregate principal amount of up to $30 million.  Proceeds of the DIP Facility can be used, amongother things, to (i) fund the working capital and general corporate needsof the Debtors and the costs of the Bankruptcy Cases in accordance with anapproved budget, and (ii) provide adequate protection, in accordance withthe terms of the DIP Facility, to the pre-petition agent and pre-petitionlenders under the Company’s existing credit facilities.

 

*Cash available under ourpre-petition secured revolving credit facility*.  As a result of the Bankruptcy Filing, all thecommitments under the Company’s pre-petition secured revolving credit facilitywith JP Morgan Chase Bank, N.A., as administrative agent and a lender,automatically terminated, and the principal of the loans and the reimbursementobligations then outstanding, together with accrued interest thereon and anyunpaid fees and all other obligations of the borrowers accrued under theapplicable loan documents, became immediately due and payable, subject to theautomatic stay provisions of Section 362 of the Bankruptcy Code.  As a result, there is no longer any liquidityavailable to us under this facility.

 

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*Uses of Liquidity*

 

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

 

*Payments related to ourpre-petition secured revolving credit facility and our DIP Facility.*  During the first half of 2009, we used a net$24.4 million of cash to make required principal reductions on our pre-petitionsecured revolving credit facility.  Wedid not make the $15 million interest payment due April 1, 2009 as requiredunder our Notes.  As a result of theBankruptcy Filing, the outstanding principal amount and accrued interest underour Notes became immediately due and payable, subject to the automatic stayprovisions of Section 362 of the Bankruptcy Code.  We also used $1.3 million of cash to payinterest on our pre-petition secured revolving credit facility and our DIPfacility.

 

*Working capital.*  Our networking capital position increased by $13.6 million during the first half of2009 principally as a result of not paying pre-petitionaccounts payable.

 

*Capital expenditures.*  During the first half of 2009, we spentapproximately $0.9 million on capital projects. Of this amount, $0.6 million was spent on maintenance and environmentalprojects, while $0.3 million was spent on our suspended capacity expansionprojects.

 

**Secured Revolving Credit Facility**

 

As a result of the Bankruptcy Filing, all thecommitments under the Company’s 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 loansdocuments, became immediately due and payable, subject to the Company’sdefenses and rights under the facility and the automatic stay provisions of Section 362of the Bankruptcy Code.

 

**Debtor-in-Possession Debt Facility**

 

Aventine Renewable Energy, Inc., Aventine Renewable Energy — Mt.Vernon, LLC and Aventine Renewable Energy — Aurora West, LLC (together the “Borrowers”),all indirect subsidiaries of the Company, together with the Company and all ofthe Company’s other direct or indirect subsidiaries, (together hereinaftercalled the “Guarantors”), entered into a DIP Facility among the Borrowers, theGuarantors, the lenders thereto, and Whitebox Advisors, as both the agent and alender, on April 7, 2009.  The DIPFacility provides for a first priority debtor-in-possession financing composedof a term loan facility made available to the Borrowers in a maximum aggregateprincipal amount of up to $30 million. Proceeds of the DIP Facility will be used, among other things, to (i) fundthe working capital and general corporate needs of the Debtors and the costs ofthe Bankruptcy Cases in accordance with an approved budget, and (ii) provideadequate protection, in accordance with the terms of the DIP Facility, to thepre-petition agent for the benefit of itself and the pre-petition lenders.  As of June 30, 2009, the Debtors havedrawn $15 million under the DIP Facility, which was the minimum amount requiredto be drawn.

 

The description of our DIP Facility below isqualified in its entirety by the full text of the DIP Agreement as described inthe Debtor in Possession Credit Facility Term Sheet filed as Exhibit 10.1to our Form 8-K filed on April 13, 2009.

 

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

 

As of June 30, 2009, the Debtors are in compliance with the termsof the DIP Facility.

 

**Environmental Matters**

 

We are subject to extensive federal, stateand local environmental laws, regulations and permit conditions (andinterpretations 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 facility shutdowns.  In addition, environmental laws andregulations (and interpretations thereof) change over time, and any suchchanges, 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 tocontamination or such third party claims. We have not accrued any amounts for environmental matters as of June 30,2009.  The ultimate costs of anyliabilities that may be identified or the discovery of additional contaminantscould adversely impact our results of operation or financial condition.

 

Inaddition, the hazards and risks associated with producing and transporting ourproducts (such as fires, natural disasters, explosions, abnormal pressures andspills) may result in spills or releases of hazardous substances, and mayresult in claims from governmental authorities or third parties relating toactual or alleged personal injury, property damage, or damages to naturalresources.  We maintain insurancecoverage against some, but not all, potential losses caused by our operations.Our coverage includes, but is not limited to, physical damage to assets,employer’s liability, comprehensive general liability, automobile liability andworkers’ compensation.  We do not carry environmentalinsurance.  We believe that our insuranceis adequate for our industry, but losses could occur for uninsurable oruninsured risks or in amounts in excess of existing insurance coverage.  The occurrence of events which

 

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resultin significant personal injury or damage to our property, natural resources orthird parties that is not covered by insurance could have a material adverseimpact on our results of operations and financial condition.

 

Our air emissions are subject to the federalClean Air Act, as amended, and similar state laws which generally require us toobtain and maintain air emission permits for our ongoing operations as well asfor any expansion of existing facilities or any new facilities.  Obtaining and maintaining those permitsrequires us to incur costs, and any future more stringent standards may resultin increased costs and may limit or interfere with our operatingflexibility.  In addition, the permitsultimately issued may impose conditions which are more costly to implement thanwe had anticipated.  These costs couldhave a material adverse effect on our financial condition and results ofoperations.  Because other ethanolmanufacturers in the U.S. are and will continue to be subject to similar lawsand restrictions, we do not currently believe that our costs to comply withcurrent or future environmental laws and regulations will adversely affect ourcompetitive position.  However, becauseethanol is produced and traded internationally, these costs could adverselyaffect us in our efforts to compete with foreign producers not subject to suchstringent requirements.

 

Federal and state environmental authoritieshave been investigating alleged excess VOC emissions and other air emissionsfrom many U.S. ethanol plants, including our Illinois and Nebraskafacilities.  The matter relating to ourIllinois wet mill facility is still pending, and we could be required toinstall additional air pollution control equipment or take other measures tocontrol 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 in violationof applicable law, we would likely be required to pay fines that could bematerial.

 

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.

 

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.  New laws or regulations relating to theproduction, disposal or emissions of carbon dioxide may require us to incursignificant additional costs and may also adversely affect our ability tocontinue generating revenue from carbon dioxide sales.  In particular,Illinois and five other Midwestern States have entered into the MidwesternGreenhouse Gas Reduction Accord, a program which directs participating statesto develop a multi-sector cap-and-trade mechanism to help achieve reductions ingreenhouse gases, including carbon dioxide. It is possible this program could require carbon dioxide emissionsreductions from our Pekin, Illinois plants, which could result in significantcosts.  In addition, it is possible thatother states in which we conduct or plan to conduct business, includingNebraska and Indiana, could join this accord or that federal, state or localregulators could require other costly carbon dioxide emissions reductions oroffsets.

 

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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**

 

We are exposed to various market risks,including changes in commodity prices. Market risk is the potential loss arising from adverse changes in marketrates and prices.  In the ordinary courseof business, we enter into various types of transactions involving financialinstruments to manage and reduce the impact of changes in commodity prices,including price risk on anticipated purchases of corn, natural gas and the saleof ethanol.  We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

***Commodity Price Risks***

 

We are exposed to certain risks related toour ongoing business operations.  Theprimary risks related to our business are price risk on anticipated purchasesof corn, natural gas and the sale of ethanol. We have historically used forward or derivative instruments to managethese risks.  We are not currently usingforward or derivative instruments, and are primarily in the spot markets forcommodity pricing.

 

We are subject to market risk with respect tothe price and availability of corn, the principal raw material we use toproduce ethanol and ethanol by-products. In general, rising corn prices result in lower profit 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.  The availability and price ofcorn is subject to wide fluctuations due to unpredictable factors such asweather 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 June 30, 2009 and 2008 was $4.10 and $5.38per bushel, respectively.  For the sixmonths ended June 30, 2009 and 2008, our weighted average gross corn costwas $4.17 and $4.93 per bushel, respectively.

 

We have firm-price purchase commitments withsome of our corn suppliers under which we agree to buy corn at a price set inadvance of the actual delivery of that corn to us.  At June 30, 2009, we had commitments topurchase approximately 1.5 million bushels of corn through December 2009at an average price of $3.95 per bushel from these corn suppliers.  Under these arrangements, we assume the riskof a price decrease in the market price of corn between the time this price isfixed and the time the corn is delivered. In order to reduce our market exposure to price decreases, we have inthe past, at the time we enter into a firm-price purchase commitment, oftenentered into commodity forward contracts to sell a certain amount of corn atthe then-current price for delivery to the counterparty at a later date.  We account for these commodity forwardtransactions under Statement of Financial Accounting Standard No. 133, *Accounting for Derivative Instruments and Hedging Activities*,as amended by Statement of Financial Accounting Standard No. 138, *Accounting for Certain Derivative Instruments and Certain HedgingActivities*, by Statement of Financial Accounting Standard No. 149,*Amendment of Statement 133 on DerivativeInstruments and Hedging Activities*, and by Statement of FinancialAccounting Standards No. 161,  *Disclosures about Derivative Instruments and HedgingActivities* — *An Amendment of FASBStatement No. 133*(hereinafter collectively referred to as “SFAS133”).  Such forward contracts are notdesignated as hedges and, therefore, are marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of these derivative assets, ifany, is recognized in other current assets in the Condensed ConsolidatedBalance Sheet, net of any cash received from the brokers.  We did not have any of this type ofderivative positions at June 30, 2009.

 

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We have also, in the past, entered intocommodity futures contracts in connection with the purchase of corn to reduceour risk of future price increases.  Weaccounted for these transactions under SFAS 133.  These futures contracts were not designatedas hedges and, therefore, were marked to market each period, with correspondinggains and losses recorded in other non-operating income.  The fair value of these derivative contractswould be recognized in other current assets in the Condensed ConsolidatedBalance Sheet, net of any cash received from the brokers.  We did not have any of this type ofderivative positions at June 30, 2009.

 

We sometimes enter into firm-price purchasecommitments with some of our natural gas suppliers under which we agree to buynatural gas at a price set in advance of the actual delivery of that naturalgas to us.  Under these arrangements, weassume the risk of a price decrease in the market price of natural gas betweenthe time this price is fixed and the time the natural gas is delivered.  At June 30, 2009, we did not have anycommitments to purchase natural gas in advance at prices other than atmarket.  We account for thesetransactions as normal purchases under SFAS 133, and accordingly, do not markthese transactions to market.

 

We are also subject to market risk withrespect to ethanol pricing.  Our ethanolsales are priced using contracts that can either be fixed; based upon the priceof wholesale gasoline plus or minus a fixed amount; or based upon a marketprice at the time of shipment.  Wesometimes fix the price at which we sell ethanol using fixed price physicaldelivery contracts.  At June 30,2009, we had no outstanding contracts to sell ethanol at fixed prices.  These normal sale transactions would not bemarked to market.

 

We also sell forward ethanol using contractswhere the price is determined at a point in the future based upon an index plusor minus a fixed amount.  At June 30,2009, we had no contracts for the sale of ethanol using wholesale gasoline asan index plus a fixed spread.  Underthese arrangements, we assume the risk of a price decrease in the market priceof gasoline.  In order to reduce ourmarket exposure to price decreases, at the time we enter into a firm salescommitment, we may also enter into commodity forward contracts to sell a likeamount of gasoline at the then-current price for delivery to the counterpartyat a later date.  We account for thesetransactions under SFAS 133.  Theseforward 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 ofthese derivative liabilities is recognized in other current liabilities in theCondensed Consolidated Balance Sheet, net of any cash paid to brokers.  We did not have any of this type ofderivative positions at June 30, 2009.

 

**Item 4.                    Controlsand Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Under the supervision of and with theparticipation of management, including our Chief Executive Officer, Ronald H.Miller, and our Interim Chief Financial Officer, George T. Henning, Jr.,the Company carried out an evaluation of the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based upon that evaluation, Messrs. Miller and Henning haveconcluded that, as of the end of the period covered by this report, the Company’sdisclosure controls and procedures have been designed and are effective toprovide reasonable assurance that information required to be disclosed in thereports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.  These disclosure controls and proceduresinclude, without limitation, controls and procedures designed to providereasonable assurance that

 

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information required to be disclosed in such reports is accumulated andcommunicated to our management, including Messrs. Miller and Henning, asappropriate to allow timely decisions regarding the required disclosure.  The design of any system of controls is basedin part upon certain assumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goal under all potential future conditions,regardless of how remote.

 

**Changes in Internal Control over Financial Reporting**

 

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

 

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

 

**Item 1.            LegalProceedings**

 

On April 7, 2009, the Company and all of its direct and indirectsubsidiaries filed voluntary petitions for relief under Chapter 11 of theBankruptcy Code with the United States Bankruptcy Court for the District ofDelaware.  The Company’s subsidiariesthat are part of the Bankruptcy Filing include Aventine Renewable Energy, LLC,a Delaware limited liability company; Aventine Renewable Energy, Inc., aDelaware corporation; Aventine Renewable Energy — Mt. Vernon, LLC, a Delawarelimited liability company; Aventine Renewable Energy — Aurora West, LLC, aDelaware limited liability company; and Nebraska Energy, LLC, a Kansas limitedliability company.  The Bankruptcy Casesare being jointly administered by the Bankruptcy Court under Case Number 09-11214 (KG). Aventine intends to continue to operate its business asdebtor-in-possession under the jurisdiction of the Bankruptcy Court and inaccordance with the applicable provisions of the Bankruptcy Code and orders ofthe Bankruptcy Court.  As a result of thefiling, attempts to collect, secure, or enforce remedies with respect topre-petition claims against Aventine are subject to the automatic stayprovisions of Section 362 of the Bankruptcy Code.  The Bankruptcy Cases are discussed in greaterdetail in Note 2 to the accompanying condensed consolidated financialstatements.

 

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

 

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

 

**Item 1A.         RiskFactors**

 

The Company included in its Annual Report on Form 10-Kas of December 31, 2008 and in its Quarterly Report on Form 10-Q forthe three months ended March 31, 2009 a description of certain risks anduncertainties that could affect the Company’s business, future performance orfinancial condition (“Risk Factors”). There have been no material changes to the risk factors previouslydisclosed.

 

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| **Item 2.**                                                                                                                                                                                                                                                                                                                                                                  | **Unregistered Sales of Equity Securities and Use  of Proceeds** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |
|                                                                                                                                                                                                                                                                                                                                                                         | **None**                                                         |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |
| **Item 3.**                                                                                                                                                                                                                                                                                                                                                                  | **Defaults  Upon Senior Securities**                             |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |
| Our Bankruptcy Filing  constituted an event of default under the Company’s secured revolving credit  facility and the Company’s indenture governing its 10% senior unsecured notes  due 2017.  The Company included a description of these events of  default in its Quarterly Report on Form 10-Q for the three months ended  March 31, 2009. |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |
| **Item 4.**                                                                                                                                                                                                                                                                                                                                                                  | **Submission of Matters to a Vote of Security  Holders**         |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |
|                                                                                                                                                                                                                                                                                                                                                                         | **None**                                                         |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |
| **Item 5.**                                                                                                                                                                                                                                                                                                                                                                  | **Other Information**                                            |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |
|                                                                                                                                                                                                                                                                                                                                                                         | **None**                                                         |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |
| **Item 6.**                                                                                                                                                                                                                                                                                                                                                                  | **Exhibits**                                                     |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |
| (a)                                                                                                                                                                                                                                                                                                                                                                          | Exhibits                                                         |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |   |
|                                                                                                                                                                                                                                                                                                                                                                         | 10.1                                                             | Seventh Amendment to Mt. Vernon Lease Agreement, dated as of  April 23, 2009. |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |   |
|                                                                                                                                                                                                                                                                                                                                                                         | 31.1                                                             | Certification of the Chief Executive Officer pursuant to  Section 302 of the Sarbanes- Oxley Act of 2002. |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |   |
|                                                                                                                                                                                                                                                                                                                                                                         | 31.2                                                             | Certification of the Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |   |
|                                                                                                                                                                                                                                                                                                                                                                         | 32.1                                                             | Certification of the Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|                                                                                                                                                                                                                                                                                                                                                                         |                                                             |   |
|                                                                                                                                                                                                                                                                                                                                                                         | 32.2                                                             | Certification of the Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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# **SIGNATURE**

# ** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereto duly authorized.

 
|                        |   | AVENTINE RENEWABLE ENERGY HOLDINGS, INC. |
|-----------------------------|--------|------------------------------------------|
|                        |   |                                     |   |
|                        |   |                                     |   |
| Dated: August 10, 2009 |   | By:                                      | /s/ William J. Brennan |
|                        |   | Name:                                    | William J. Brennan |
|                        |   | Title:                                   | Chief Accounting and Compliance  Officer (duly authorized officer and  principal accounting officer) |

 

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