Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

# **FORM 10-Q**

# ** **

**x****      Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934 for the quarterly period ended September 30, 2008**

 

**OR**

 

**o****       Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934 for the transition period from                to                 .**

 

**COMMISSIONFILE NUMBER 001-32922**

 

**AVENTINERENEWABLE ENERGY HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**(309) 347-9200**

(Registrant’s Telephone 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   x   NO   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  o |
|--------------------------------------|--------|--------------------------------|--------|-----------------------------------------------|--------|----------------------------------------|
|                                 |   |                           |   |                                          |   |                                   |
|                                 |   |                           |   | (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 November 5, 2008** |
|--------------------------------|------------|----------------------------------------------|
| Common Stock, $0.001 Par Value |       | 42,970,988 Shares                            |

 

 

 

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# **FORM 10-Q**

# ** **

**QUARTERLY REPORT**

 

**TABLE OF CONTENTS**

** **
| ** ** | ** **                                                                                                                                 | **Page No.** |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------|-------------------|
|       |                                                                                                                                       |              |
| ** ** | **PART I**                                                                                                                            | ** **        |
| ** ** | ** **                                                                                                                                 | ** **        |
| Item 1.    | Financial Statements                                                                                                                       |              |
|       | Condensed Consolidated  Statements of Operations (Unaudited) -  Three-month and nine-month periods ended September 30, 2008 and  2007 | 1                 |
|       | Condensed Consolidated  Balance Sheets – September 30, 2008   (Unaudited) and December 31, 2007                             | 2                 |
|       | Condensed Consolidated  Statements of Cash Flows (Unaudited) -   Nine-month periods ended September 30, 2008 and 2007                 | 3                 |
|       | Notes to  Unaudited Condensed Consolidated Financial Statements                                                                            | 4                 |
|       |                                                                                                                                       |              |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                | 22                |
|       |                                                                                                                                       |              |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                                                | 37                |
|       |                                                                                                                                       |              |
| Item 4.    | Controls and  Procedures                                                                                                                   | 40                |
|       |                                                                                                                                       |              |
| ** ** | **PART II**                                                                                                                           | ** **        |
| ** ** | ** **                                                                                                                                 | ** **        |
| Item 1.    | Legal Proceedings                                                                                                                          | 41                |
|       |                                                                                                                                       |              |
| Item 1A.   | Risk Factors                                                                                                                               | 41                |
|       |                                                                                                                                       |              |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                               | 42                |
|       |                                                                                                                                       |              |
| Item 3.    | Defaults  Upon Senior Securities                                                                                                           | 42                |
|       |                                                                                                                                       |              |
| Item 4.    | Submission  of Matters to a Vote of Security Holders                                                                                       | 42                |
|       |                                                                                                                                       |              |
| Item 5.    | Other Information                                                                                                                          | 42                |
|       |                                                                                                                                       |              |
| Item 6.    | Exhibits                                                                                                                                   | 42                |

 

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**PART I.            FINANCIAL INFORMATION**

 

**Item 1.               FinancialStatements**

 

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

**Condensed Consolidated Statements of Operations**

(Unaudited)

* *
| ** **                                                              | ** ** | **Three months ended   September 30,** | ** **  | **Nine months ended   September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------------|-------------|-----------------------------------------------------------|------------|
| **(In thousands except per share amounts)**    | ** ** | **2008**                                                   | ** **  | **2007**                                                  |       | **2008** | ** ** | **2007** | ** ** |
| ** **                                                              | ** ** | ** **                                                 | ** **  | ** **                                                |       | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                               | ** ** | **$**                                                      | **599,520** | ** **                                                | $          | 360,674 |   | **$** | **1,711,059** | ** ** | $ | 1,192,250 |   |
| Cost of goods  sold                                                     | ** ** | **605,990**                                                | ** **  | 362,401                                                   |       | **1,660,586** | ** ** | 1,138,133 |   |
| Gross profit  (loss)                                                    | ** ** | **(6,470**                                                 | **)**       | (1,727                                                    | )          | **50,473** | ** ** | 54,117 |   |
| Selling, general  and administrative expenses                           | ** ** | **8,763**                                                  | ** **  | 9,384                                                     |       | **27,771** | ** ** | 27,761 |   |
| Loss related to  auction rate securities                                | ** ** | **—**                                                 | ** **  | —                                                    |       | **31,601** | ** ** | — |   |
| Other (income)                                                          | ** ** | **(405**                                                   | **)**       | (169                                                      | )          | **(2,799** | **)** | (847 | ) |
| Operating income  (loss)                                                | ** ** | **(14,828**                                                | **)**       | (10,942                                                   | )          | **(6,100** | **)** | 27,203 |   |
| Other income  (expense):                                                |       |                                                       | ** **  |                                                      |       |   | ** ** |   |   |
| Interest income                                                         | ** ** | **254**                                                    | ** **  | 3,576                                                     |       | **2,999** | ** ** | 9,111 |   |
| Interest expense                                                        | ** ** | **(235**                                                   | **)**       | (5,359                                                    | )          | **(3,751** | **)** | (12,716 | ) |
| Other  non-operating income (loss)                                      | ** ** | **18,367**                                                 | ** **  | (953                                                      | )          | **6,114** | ** ** | 5,055 |   |
| Minority  interest                                                      | ** ** | **725**                                                    | ** **  | (103                                                      | )          | **1,230** | ** ** | (1,346 | ) |
| Income (loss)  before income taxes                                      | ** ** | **4,283**                                                  | ** **  | (13,781                                                   | )          | **492** | ** ** | 27,307 |   |
| Income tax  expense (benefit)                                           | ** ** | **1,797**                                                  | ** **  | (16,776                                                   | )          | **10,719** | ** ** | (3,235 | ) |
| Net income  (loss)                                                      | ** ** | **$**                                                      | **2,486**   | ** **                                                | $          | 2,995 |   | **$** | **(10,227** | **)** | $ | 30,542 |   |
|                                                                    |       |                                                       | ** **  |                                                      |       |   | ** ** |   |   |
| *Per  share data:*                                                      |       |                                                       | ** **  |                                                      |       |   | ** ** |   |   |
| Income (loss)  per common share – basic:                           | ** ** | **$**                                                      | **0.06**    | ** **                                                | $          | 0.07 |   | **$** | **(0.24** | **)** | $ | 0.73 |   |
| Basic weighted  average number of common shares                         | ** ** | **41,971**                                                 | ** **  | 41,949                                                    |       | **41,927** | ** ** | 41,891 |   |
|                                                                    |       |                                                       | ** **  |                                                      |       |   | ** ** |   |   |
| Income (loss)  per common share – diluted:                         | ** ** | **$**                                                      | **0.06**    | ** **                                                | $          | 0.07 |   | **$** | **(0.24** | **)** | $ | 0.72 |   |
| Diluted weighted  average number of common and common equivalent shares | ** ** | **42,010**                                                 | ** **  | 42,385                                                    |       | **41,958** | ** ** | 42,497 |   |

 

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

 

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

**Condensed Consolidated Balance Sheets**

 
| **(In thousands except share amounts)**                                                                                                                                                                                                                                                     | ** ** | **September 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                      |       | **(Unaudited)**              | ** **  |                        |       |
| **Assets**                                                                                                                                                                                                                                                                                                      |       |                         | ** **  |                        |       |
| Current assets                                                                                                                                                                                                                                                                                                  |       |                         | ** **  |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                      | ** ** | **$**                        | **36,255**  | ** **                  | $          | 17,171 |   |
| Short-term  investments                                                                                                                                                                                                                                                                                         | ** ** | **—**                   | ** **  | 211,500                     |       |
| Accounts  receivable                                                                                                                                                                                                                                                                                            | ** ** | **77,491**                   | ** **  | 73,058                      |       |
| Inventories                                                                                                                                                                                                                                                                                                     | ** ** | **119,644**                  | ** **  | 81,488                      |       |
| Income tax  receivable                                                                                                                                                                                                                                                                                          | ** ** | **1,850**                    | ** **  | 11,962                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                                                      | ** ** | **9,756**                    | ** **  | 12,816                      |       |
| Total current  assets                                                                                                                                                                                                                                                                                           | ** ** | **244,996**                  | ** **  | 407,995                     |       |
| Property, plant  and equipment, net                                                                                                                                                                                                                                                                             | ** ** | **102,821**                  | ** **  | 111,867                     |       |
| Construction in  process                                                                                                                                                                                                                                                                                        | ** ** | **444,683**                  | ** **  | 226,410                     |       |
| Net deferred tax  assets                                                                                                                                                                                                                                                                                        | ** ** | **—**                   | ** **  | 1,196                       |       |
| Other assets                                                                                                                                                                                                                                                                                                    | ** ** | **14,851**                   | ** **  | 14,717                      |       |
| Total assets                                                                                                                                                                                                                                                                                                    | ** ** | **$**                        | **807,351** | ** **                  | $          | 762,185 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                                                  |       |                         | ** **  |                        |       |
| Current  liabilities                                                                                                                                                                                                                                                                                            |       |                         | ** **  |                        |       |
| Accounts payable                                                                                                                                                                                                                                                                                                | ** ** | **$**                        | **124,929** | ** **                  | $          | 91,871 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                | ** ** | **15,000**                   | ** **  | 7,500                       |       |
| Accrued  liabilities                                                                                                                                                                                                                                                                                            | ** ** | **4,184**                    | ** **  | 3,625                       |       |
| Other current  liabilities                                                                                                                                                                                                                                                                                      | ** ** | **10,449**                   | ** **  | 1,622                       |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                      | ** ** | **154,562**                  | ** **  | 104,618                     |       |
| Senior unsecured  10% notes due April 2017                                                                                                                                                                                                                                                                 | ** ** | **300,000**                  | ** **  | 300,000                     |       |
| Minority  interest                                                                                                                                                                                                                                                                                              | ** ** | **8,601**                    | ** **  | 9,832                       |       |
| Net deferred tax  liabilities                                                                                                                                                                                                                                                                                   | ** ** | **1,048**                    | ** **  | —                      |       |
| Other long-term  liabilities                                                                                                                                                                                                                                                                                    | ** ** | **3,577**                    | ** **  | 3,864                       |       |
| Total  liabilities                                                                                                                                                                                                                                                                                              | ** ** | **467,788**                  | ** **  | 418,314                     |       |
| Stockholders’  equity                                                                                                                                                                                                                                                                                      |       |                         | ** **  |                        |       |
| Common stock,  par value $0.001 per share; 185,000,000 shares authorized; 41,970,988 and  41,734,223 shares issued and outstanding as of September 30, 2008 and  December 31, 2007, respectively, net of 21,548,640 shares held in  treasury as of September 30, 2008 and December 31, 2007 | ** ** | **42**                       | ** **  | 42                          |       |
| Preferred stock,  50,000,000 shares authorized, no shares issued or outstanding                                                                                                                                                                                                                                 | ** ** | **—**                   | ** **  | —                      |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                     | ** ** | **285,123**                  | ** **  | 279,218                     |       |
| Retained  earnings                                                                                                                                                                                                                                                                                              | ** ** | **54,708**                   | ** **  | 64,935                      |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                           | ** ** | **(310**                     | **)**       | (324                        | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                | ** ** | **339,563**                  | ** **  | 343,871                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                                | ** ** | **$**                        | **807,351** | ** **                  | $          | 762,185 |   |

 

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

 

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

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                                | ** ** | **Nine Months Ended September 30,** | ** **  |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|
| **(In thousands)**                                                                   | ** ** | **2008**                                                | ** **  | **2007** | ** ** |
|                                                                                      |       |                                                    |        |   |   |
| **Operating  Activities**                                                                 |       |                                                    | ** **  |   |   |
| Net income  (loss)                                                                        | ** ** | **$**                                                   | **(10,227** | **)** | $ | 30,542 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                                    | ** **  |   |   |
| Loss related to  auction rate securities                                                  | ** ** | **31,601**                                              | ** **  | — |   |
| Depreciation and  amortization                                                            | ** ** | **10,726**                                              | ** **  | 9,765 |   |
| Lower of cost or  market adjustment related to inventory                                  | ** ** | **4,538**                                               | ** **  | 1,600 |   |
| Minority  interest                                                                        | ** ** | **(1,230**                                              | **)**       | 1,346 |   |
| Stock-based  compensation expense                                                         | ** ** | **4,510**                                               | ** **  | 5,258 |   |
| Deferred income  tax                                                                      | ** ** | **2,244**                                               | ** **  | (7,939 | ) |
| Other                                                                                     | ** ** | **(376**                                                | **)**       | 139 |   |
| Changes in  operating assets and liabilities:                                             |       |                                                    | ** **  |   |   |
| Accounts  receivable, net                                                                 | ** ** | **(4,433**                                              | **)**       | 31,929 |   |
| Inventories                                                                               | ** ** | **(42,694**                                             | **)**       | 4,664 |   |
| Accounts payable  and other liabilities                                                   | ** ** | **49,944**                                              | ** **  | (29,235 | ) |
| Other changes in  operating assets and liabilities                                        | ** ** | **12,009**                                              | ** **  | 5,835 |   |
| Net cash  provided by operating activities                                                | ** ** | **56,612**                                              | ** **  | 53,904 |   |
| ** **                                                                                |       |                                                    | ** **  |   |   |
| **Investing  Activities**                                                                 |       |                                                    | ** **  |   |   |
| Additions to  property, plant and equipment, net                                          | ** ** | **(221,980**                                            | **)**       | (149,898 | ) |
| Investment in  short-term securities                                                      | ** ** | **—**                                              | ** **  | (183,943 | ) |
| Sale of  short-term securities                                                            | ** ** | **179,899**                                             | ** **  | — |   |
| Indemnification  proceeds                                                                 | ** ** | **3,039**                                               | ** **  | — |   |
| Proceeds from  the sale of property, plant and equipment                                  | ** ** | **14**                                                  | ** **  | — |   |
| Net cash (used  for) investing activities                                                 | ** ** | **(39,028**                                             | **)**       | (333,841 | ) |
|                                                                                      |       |                                                    | ** **  |   |   |
| **Financing  Activities**                                                                 |       |                                                    | ** **  |   |   |
| Proceeds from  issuance of senior unsecured notes                                         | ** ** | **—**                                              | ** **  | 300,000 |   |
| Purchase of  treasury stock                                                               | ** ** | **—**                                              | ** **  | (991 | ) |
| Payment of debt  issuance costs                                                           | ** ** | **—**                                              | ** **  | (8,220 | ) |
| Proceeds from  stock option exercises                                                     | ** ** | **—**                                              | ** **  | 508 |   |
| Proceeds from the  issuance of common stock                                               | ** ** | **1,500**                                               | ** **  | — |   |
| Distributions to  minority shareholders                                                   | ** ** | **—**                                              | ** **  | (1,727 | ) |
| Net cash  provided by financing activities                                                | ** ** | **1,500**                                               | ** **  | 289,570 |   |
| Net increase in  cash and cash equivalents                                                | ** ** | **19,084**                                              | ** **  | 9,633 |   |
| Cash and cash  equivalents at beginning of period                                         | ** ** | **17,171**                                              | ** **  | 29,791 |   |
| Cash and cash  equivalents at end of period                                               | ** ** | **$**                                                   | **36,255**  | ** ** | $ | 39,424 |   |

 

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

 

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

**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”, unlessthe context otherwise requires.  Allsignificant intercompany transactions have been eliminated in consolidation.

 

We have prepared theunaudited condensed consolidated financial statements included herein pursuantto the rules and regulations of the Securities and 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 for the year ended December 31, 2007.

 

Theaccompanying unaudited condensed consolidated financial statements presentedherewith reflect all adjustments (consisting of only normal and recurringadjustments) which, in the opinion of management, are necessary for a fairpresentation of the results of operations for the three and nine month periodsended September 30, 2008 and 2007. The results of operations for interim periods are not necessarilyindicative 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 coulddiffer materially from those estimates.

 

As of September 30,2008, the Company’s Summary of Critical Accounting Policies for the year ended December 31,2007, which are detailed in the Company’s Annual Report on Form 10-K, havenot changed.

 

The Company adoptedFinancial Accounting Standards Board (“FASB”) Statement of Financial AccountingStandards No. 157 (“SFAS 157”), *Fair Value Measurements,*andFASB Statement of Financial Accounting Standards No. 159 (“SFAS 159”), *The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115*, effective on January 1,2008.  See Note 9 for additionalinformation regarding the adoption of SFAS 157 and SFAS 159 by the Company.

 

**(2)****          ****Recent Accounting Pronouncements**

 

In June 2008, the FASB issued FASBStaff Position (FSP) EITF Issue No. 03-6-1 (“FSP EITF 03-6-1”), *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities*.  FSP EITF 03-6-1 requires that unvestedshare-based payment awards that contain rights to receive non-forfeitabledividends or dividend equivalents to be included in the two-class method ofcomputing earnings per share as described in SFAS No. 128, *Earnings per Share*. This FSP is effective for financial statements issued for fiscal yearsbeginning after Dec. 15, 2008, and interim 

 

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periodswithin those years.  Accordingly, we willadopt FSP EITF 03-6-1 in fiscal year 2009. We are currently evaluating the impact of FSP EITF 03-6-1 on theconsolidated financial statements.

 

In March 2008,the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS161”), *Disclosures about Derivative Instruments andHedging Activities – An Amendment of FASB Statement No. 133*.  SFAS 161 requires entities to provide greater transparency inderivative disclosures by requiring qualitative disclosure about objectives andstrategies for using derivatives and quantitative disclosures about fair valueamounts of and gains and losses on derivative instruments. SFAS 161 iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008. The Company is currently evaluating SFAS 161, but doesnot expect it will have a material impact on the Company’s financial positionor results of operations.

 

**(3)****          ****Inventories**

 

Inventoriesare as follows:

 
| **(In thousands)** | ** **   | **September 30,  2008** | ** **   | **December 31,  2007** | ** **   |
|-------------------------|--------------|------------------------------|--------------|-----------------------------|--------------|
| *** ***            | *** *** | *** ***                 | *** *** | *** ***                | *** *** |
| Finished  products      | ** **   | **$**                        | **109,092**  |                        | $            | 73,530 |   |
| Work-in-process         | ** **   | **3,904**                    |         | 2,035                       |         |
| Raw materials           | ** **   | **3,785**                    |         | 2,757                       |         |
| Supplies                | ** **   | **2,863**                    |         | 3,166                       |         |
| Totals                  | ** **   | **$**                        | **119,644**  |                        | $            | 81,488 |   |

 

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

 

Prepaidexpenses and other current assets are as follows:

 
| **(In thousands)**                    | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| * *                                   | * *   | * *                     | * *   | * *                    | * *   |
| Prepaid motor  fuel taxes                  | ** ** | **$**                        | **1,041**  |                        | $          | 5,061 |   |
| Margin deposits  on derivative instruments | ** ** | **3,952**                    |       | 4,013                       |       |
| Prepaid  insurance                         | ** ** | **2,292**                    |       | 1,107                       |       |
| Prepaid ethanol                            | ** ** | **281**                      |       | 1,050                       |       |
| Current portion  of deferred income taxes  | ** ** | **827**                      |       | 854                         |       |
| Other prepaid  expenses                    | ** ** | **1,363**                    |       | 731                         |       |
| Totals                                     | ** ** | **$**                        | **9,756**  |                        | $          | 12,816 |   |

 

**(5)****          ****Other Assets**

 

Otherassets are as follows:

 
| **(In thousands)**             | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| * *                            | * *   | * *                     | * *   | * *                    | * *   |
| Deferred debt  issuance costs       | ** ** | **$**                        | **6,902**  |                        | $          | 7,533 |   |
| Investments in  marketing alliances | ** ** | **6,000**                    |       | 6,000                       |       |
| Funded status of  pension plan      | ** ** | **1,949**                    |       | 1,184                       |       |
| Totals                              | ** ** | **$**                        | **14,851** |                        | $          | 14,717 |   |

 

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Deferreddebt issuance costs are subject to amortization.  Original deferred debt issuance coststotaling $7.2 million relating to our 10% senior unsecured notes are beingamortized utilizing a method which approximates the effective interest methodover the life of the notes of 10 years, resulting in amortization expense of$0.7 million in 2008 and each year thereafter. Original deferred debt issuance costs totaling $0.9 million relating toour secured revolving credit facility are being amortized utilizing a methodwhich approximates the effective interest method over the five year life of thefacility, resulting in amortization expense of $0.2 million in 2008 and eachyear thereafter.

 

**(6)****          ****Debt**

 

Thefollowing table summarizes the Company’s long-term debt:

 
| **(In thousands)**                         | ** ** | **September 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
|                                            | ** ** | ** **                   |        |                        |       |
| Senior unsecured  10% notes due April 2017 | ** ** | **$**                        | **300,000** |                        | $          | 300,000 |   |
| Secured  revolving credit facility              | ** ** | **—**                   |        | —                      |       |
| ** **                                      |       | **300,000**                  |        | 300,000                     |       |
| Less short-term  borrowings                     | ** ** | **—**                   |        | —                      |       |
| Total long-term  debt                           | ** ** | **$**                        | **300,000** |                        | $          | 300,000 |   |

 

*SecuredRevolving Credit Facility*

 

Ourliquidity facility consists of a five year secured revolving credit facilitywith JPMorgan Chase Bank, N.A., as administrative agent and a lender, of up to$200 million, subject to collateral availability, which, under certaincircumstances, can be increased up to $300 million.  Our secured revolving credit facilityincludes a $25 million sub-limit for letters of credit.  The credit facility expires in March 2012,and, at September 30, 2008, was secured by substantially all of theCompany’s assets, with the exception of the assets of Nebraska Energy, LLC.

 

Collateralavailability is determined via a borrowing base, which includes a percentage ofeligible receivables and inventory, and no more than $50 million of property,plant and equipment.  The amount ofproperty, plant and equipment which can be included in the borrowing basereduces at a rate of $1.8 million each quarter beginning with the quarterending December 31, 2007.  At September 30,2008, the amount of property, plant and equipment which was eligible forinclusion in the calculation of the borrowing base was $42.9 million.

 

Borrowingsgenerally bear interest, at our option, at the following rates (i) theEurodollar rate plus a margin between 1.25% to 1.75%, depending on the averageavailability, or (ii) the greater of the prime rate or the federal fundsrate plus 0.50%, plus a margin between 0.00% to 0.50%, depending on the averageavailability.  Accrued interest ispayable monthly on outstanding principal amounts, provided that accruedinterest on Eurodollar loans is payable at the end of each interest period, butin no event less frequently than quarterly. In addition, fees and expenses are payable based on unused borrowingavailability (0.25% to 0.375% per annum, depending on the averageavailability), outstanding letters of credit (1.375% to 1.875%, depending onthe average availability) and administrative and legal costs.

 

Availabilityunder our secured revolving credit facility is subject to customary conditions,including the accuracy of representations and warranties, the absence of anymaterial adverse change and compliance with certain covenants, which, amongother things, may limit our ability to incur additional indebtedness and liens;enter into transactions with affiliates; make acquisitions; pay dividends;redeem or repurchase capital stock or senior notes; make investments or loans;consolidate, merge or effect asset sales; or change the nature of our business.  In addition, if availability under thefacility falls below $50 

 

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million, we must maintain a fixed chargecoverage ratio of EBITDA (as defined under the agreement) less non-financedcapital expenditures and taxes to fixed charges (scheduled payments ofprincipal, interest expense and certain types of dividend and other payments)of at least 1.1 to 1.

 

Thesecured revolving credit facility contains customary events of default forcredit facilities of this size and type, and includes, without limitation,payment defaults; defaults in performance of covenants or other agreementscontained in the transaction documents; inaccuracies in representations andwarranties; certain defaults, termination events or similar events; certaindefaults with respect to any other Company indebtedness in excess of$5.0 million; certain bankruptcy or insolvency events; the rendering ofcertain judgments in excess of $5.0 million; certain ERISA events; certainchange in control events and the defectiveness of any liens under the securedrevolving credit facility.  Obligationsunder the secured revolving credit facility may be accelerated upon theoccurrence of an event of default.

 

As of September 30,2008, we were in compliance with all covenants under our secured revolvingcredit facility, including the fixed charge coverage ratio.  If we continue with our building expansion onour current timetable and within the expected cost and given our expectationsfor future EBITDA, we would not expect to be in compliance with the fixedcharge coverage ratio covenant before the end of 2009 at the earliest and,therefore, would not have access to the last $50 million of availability.  Failing to satisfy the fixed charge ratio does not constitute an event ofdefault nor does it affect our ability to borrow amounts under the facilityother than the last $50 million of commitments. We had no borrowingsoutstanding under our secured revolving credit facility at September 30,2008, and $22.2 million of standby letters of credit outstanding, therebyleaving approximately $132.9 million in borrowing availability under oursecured revolving credit facility as of that date (including the $50 millionwhich we have said we do not expect to be able to access).

 

*SeniorNotes*

 

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

 

TheNotes have interest payments due semi-annually on April 1 and October 1of each year, and are redeemable after the dates and at prices (expressed inpercentages of principal amount on the redemption date), as set forth below:

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

 

Inaddition, at any time prior to April 1, 2010, we may redeem up to 35% ofthe principal amount of the Notes from time to time originally issued with thenet cash proceeds of one or more sales of qualifying capital stock of theCompany at a redemption price of 100% of the principal amount, together withaccrued and unpaid interest to the redemption date, provided that at least 65%of the aggregate principal amount of the Notes originally issued remainsoutstanding immediately after such redemption and notice of any such redemptionis mailed within 60 days of each such sale of capital stock.  The terms 

 

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of the Notes also contain restrictivecovenants that limit our ability to, among other things, incur additional debt,sell or transfer assets, make certain investments or guarantees, enter intotransactions with shareholders and affiliates, and pay future dividends.

 

OnAugust 10, 2007, we exchanged all of the outstanding Notes for an issue ofregistered unsecured senior notes, with terms identical to the Notes.

 

**(7)****          ****Other Current Liabilities**

 

Othercurrent liabilities are as follows:

 
| **(In thousands)**                   | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| * *                                  | * *   | * *                     | * *   | * *                    | * *   |
| Income taxes  payable                     | ** ** | **$**                        | **2,454**  |                        | $          | — |   |
| Deferred revenue                          | ** ** | **6,400**                    |       | —                      |       |
| Accrued property  taxes                   | ** ** | **441**                      |       | 578                         |       |
| Current portion  of unearned commissions  | ** ** | **424**                      |       | 424                         |       |
| Accrued sales  tax                        | ** ** | **52**                       |       | 184                         |       |
| Current portion  of deferred income taxes | ** ** | **556**                      |       | 379                         |       |
| Other accrued  operating expenses         | ** ** | **122**                      |       | 57                          |       |
| Totals                                    | ** ** | **$**                        | **10,449** |                        | $          | 1,622 |   |

 

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

 

Otherlong-term liabilities are as follows:

 
| **(In thousands)**             | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| * *                            | * *   | * *                     | * *   | * *                    | * *   |
| Accrued  postretirement obligations | ** ** | **$**                        | **2,341**  |                        | 2,310      |   |
| Unearned  commissions               | ** ** | **1,236**                    |       | 1,554                       |       |
| Totals                              | ** ** | **$**                        | **3,577**  |                        | $          | 3,864 |   |
|                                     |            |                              |            |                             |            |  |  |

 

**(9)****          ****Fair Value Measurements**

 

*SFAS157*

 

The Company adopted SFAS 157 effective January 1,2008 for financial assets and liabilities measured at fair value on a recurringbasis.  SFAS 157 applies to all financialassets and financial liabilities that are being measured and reported on a fairvalue basis.  There was no impact ofadoption of SFAS 157 to the consolidated financial statements.  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:

 
| · | Level 1: Unadjusted quoted prices in active  markets that are accessible at the measurement date for identical,  unrestricted assets or liabilities;                                      |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Level 2: Quoted prices in markets that are not  active, or inputs which are observable, either directly or indirectly, for  substantially the full term of the asset or liability;        |
| · | Level 3: Prices or valuation techniques that  require inputs that are both significant to the fair value measurement and  unobservable (i.e., supported by little or no market activity). |

 

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In October 2008, the FASB issued FSP 157-3(“FSP 157-3”), *Determining the Fair Value of a FinancialAsset When the Market for That Asset Is Not Active*.  FSP 157-3 clarifies the application of SFAS No. 157in a market that is not active, and addresses application issues such as theuse of internal assumptions when relevant observable data does not exist, theuse of observable market information when the market is not active, and the useof market quotes when assessing the relevance of observable and unobservabledata.  FSP 157-3 is effective for allperiods presented in accordance with SFAS No. 157.  There was no impact upon the adoption of FSP157-3 to the consolidated financial statements or the fair values of ourfinancial assets and liabilities.

 

The following table summarizes thevaluation of our financial instruments which are carried at fair value by theabove SFAS 157 pricing levels as of September 30, 2008:

 
| ** **                   | ** ** | ** **                                              | ** ** | **Fair Value Measurements at the Reporting Date Using**                                | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Fair Value  at   September 30,  2008** | ** ** | **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   |       | $                                                       | 36,255     |                                                                                                                      | $          | 36,255 |   | — |   | — |   |
| Commodity  futures contracts |       | $                                                       | 2,865      |                                                                                                                      | $          | 2,865 |   | — |   | — |   |

 

Thefollowing table represents a reconciliation of the change in assets measured atfair value on a recurring basis using significant unobservable inputs (Level 3)during the nine months ended September 30, 2008.

 
| ** **                                               | ** ** | **Fair Value Measurements  Using   Significant Unobservable   Inputs  (Level 3)** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| Balance at  December 31, 2007                       |       | $                                                                                                               | —     |   |
| Net transfers to  Level 3 category from Level 1 category |       | 127,200                                                                                                         |       |
| Sales of Level 3  category assets                        |       | 97,099                                                                                                          |       |
| Total realized  losses recognized in net income          |       | (30,101                                                                                                         | )          |
| Balance at  September 30, 2008                      |       | $                                                                                                               | —     |   |

 

In 2008, the Company recorded losses fromLevel 3 assets (auction rate securities) of $30.1 million.  In addition, the Company also sold auctionrate securities prior to these assets being classified as Level 3 assetsincurring a loss of $1.5 million.  Thetotal losses incurred by the Company in 2008 related to auction rate securitieswere $31.6 million.  This loss isincluded in “loss related to auction rate securities” in the unauditedCondensed Consolidated Statement of Operations. The Company holds no auction rate securities as of September 30,2008.

 

The fair value of our derivativecontracts are primarily measured based on closing market prices for commoditiesas quoted on the Chicago Board of Option Trading (“CBOT”) or the New YorkMercantile Exchange (“NYMEX”).

 

The Company recorded net gains of $18.4million and $6.1 million, respectively, for the three and nine month periodsended September 30, 2008 and net losses of $1.0 million for the threemonth period ended September 30, 2007 and net gains of $5.1 million forthe nine month period ended 

 

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September 30,2007 under “other non-operating income” in the unaudited Condensed ConsolidatedStatements of Operations for the changes in the fair value of its derivativefinancial instrument positions.

 

*SFAS 159*

 

The Company adopted SFAS 159 effective January 1,2008.  We have not elected the fair valueoption for any of our financial assets or liabilities.

 

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 September 30, 2008 and December 31, 2007.

 
| ** **           | ** ** | **As of September 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|----------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **           | ** ** | **Carrying Value**                          | ** ** | **Fair Value**                             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Investments at  cost |       | 6,000                                            |       | n/a                                             |       | 6,000 |   | n/a |   |
| Long-term debt       |       | 300,000                                          |       | 159,000                                         |       | 300,000 |   | 274,500 |   |

 

The Company’s investments accounted forunder the cost method consist of minority positions in equity securities ofother ethanol operating companies.  Theseequity investments are recorded at cost, and it is not practical to estimate afair value for these non-publicly traded companies.  The Company monitors its investments forimpairment by considering current factors, including the economic environment,market conditions, operational performance and other specific factors relatingto the business underlying the investment, and records reductions in carryingvalues when necessary.  Any impairmentloss is reported under “Other income (expense)” in the consolidated statementof operations.

 

The fair value of our senior securedfloating rate notes are based upon quoted closing market prices at the end ofthe period.

 

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

 

TheCompany values its share-based payment awards using a form of the Black-Scholesoption-pricing model (the “option pricing model”).  The determination of fair value ofshare-based payment awards on the date of grant using 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 options areexercised or expire).  Expectedvolatility is normally calculated based upon actual historical stock pricemovements over the expected option term. Since we have a short-term history of stock price volatility as a publiccompany, we calculate volatility by considering, among other things, theexpected volatilities of public companies engaged in similar industries.  Pre-vesting forfeitures had previously beenestimated using a 3% forfeiture rate. However, beginning in the quarter ended September 30, 2008, werevised our estimated forfeiture rate to 6.4%, reflecting a higher actualexperience rate since becoming a public company in 2006.  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-taxstock-based compensation expense for the three month periods ended September 30,2008 and 2007 was approximately $0.6 million and $1.9 million,respectively.  For the three month periodended September 30, 2008, the $0.6 million expense was charged to SG&Aexpense.  For the

 

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three month period ended September 30,2007, $1.8 million was charged to selling, general and administrative expenseand $0.1 million was charged to cost of goods sold.  Stock-based compensation expense was reducedin the three month period ended September 30, 2008 by approximately $1.2million as a result of updating our expected forfeiture rate and the number ofperformance shares expected to vest.  Theadjustment made to stock-based compensation expense increased earnings pershare by $0.02 per basic and fully diluted share for the three month periodended September 30, 2008. Stock-based compensation expense reduced earnings per share by $0.01 perbasic and diluted share and by $0.03 per basic and diluted share for the threemonth periods ended September 30, 2008 and 2007, respectively.  Pre-tax stock-based compensation expense forthe nine month periods ended September 30, 2008 and 2007 was approximately$4.5 million and $5.3 million, respectively. For the nine month period ended September 30, 2008, $4.3 millionwas charged to SG&A expense and $0.2 million was charged to cost of goodssold.  For the nine month period ended September 30,2007, $5.2 million was charged to selling, general and administrative expenseand $0.1 million was charged to cost of goods sold.  Stock-based compensation expense reducedearnings per share by $0.07 per basic and fully diluted share for the ninemonth period ended September 30, 2008 and by $0.08 per basic and fullydiluted share for the nine month period ended September 30, 2007.  The Company recognized a tax benefit on itscondensed consolidated statement of operations from stock-based compensationexpense in the amount of $0.2 million and $0.7 million for the three monthperiods ended September 30, 2008 and 2007, respectively.  For the nine month period ended September 30,2008 and 2007, the Company recognized a tax benefit on its condensedconsolidated statement of operations from stock-based compensation expense inthe amount of $1.7 million and $2.1 million, respectively.  The Company recorded pre-tax stock-basedcompensation expense for the three and nine month periods ended September 30,2008 and 2007 as follows:

 
| ** **                         | ** ** | **Three months ended   September 30,** | ** ** | **Nine months ended   September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(in millions)**             | ** ** | **2008**                                                   | ** ** | **2007**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|                               |       |                                                       |       |                                                      |       |   |   |   |   |
| Stock-based  compensation expense: |       |                                                       |       |                                                      |       |   |   |   |   |
| Non-qualified  stock options       | ** ** | **$**                                                      | **0.8**    |                                                      | $          | 1.7 | ** ** | **$** | **4.1** |   | $ | 4.8 |   |
| Restricted stock                   | ** ** | **0.1**                                                    |       | 0.1                                                       | ** ** | **0.3** |   | 0.3 |   |
| Restricted stock  units            | ** ** | **0.1**                                                    |       | —                                                    | ** ** | **0.1** |   | 0.1 |   |
| Long-term  incentive stock plan    | ** ** | **(0.4**                                                   | **)**      | 0.1                                                       | ** ** | — |   | 0.1 |   |
| Totals                             | ** ** | **$**                                                      | **0.6**    |                                                      | $          | 1.9 | ** ** | **$** | **4.5** |   | $ | 5.3 |   |

 

Asof September 30, 2008 and 2007, the Company had not yet recognizedcompensation expense on the following non-vested awards:

 
| ** **                      | ** ** | **2008**                           | ** ** | **2007**                                                               | ** ** |
|---------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in millions)**          | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** |
|                            |       |                               |       |                                                                   |       |   |   |   |   |
| Non-qualified  options          | ** ** | **$**                              | **13.1**   | ** **                                                             | **2.5**    |   | $ | 19.6 |   | 2.4 |   |
| Restricted stock                | ** ** | **0.8**                            | ** ** | **3.3**                                                                |       | 1.1 |   | 4.1 |   |
| Restricted stock  units         | ** ** | **0.3**                            | ** ** | **1.6**                                                                |       | 0.2 |   | 1.0 |   |
| Long-term  incentive stock plan | ** ** | **0.4**                            | ** ** | **1.3**                                                                |       | 1.4 |   | 1.7 |   |
| Total                           | ** ** | **$**                              | **14.6**   | ** **                                                             | **2.5**    |   | $ | 22.3 |   | 2.4 |   |

 

Thedetermination of the fair value of the stock option awards, using the optionpricing model, incorporated the assumptions in the following table for stockoptions granted during the quarter ended 

 

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September 30, 2007.  The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of grant over the expectedterm.  Expected volatility is calculatedby considering, among other things, the expected volatilities of publiccompanies engaged in similar industries. The expected option term is calculated using the “simplified” methodpermitted by SAB 107.  The Company didnot grant any stock options during the quarter ended September 30,2008.  Assumptions for options granted inthe quarter ended September 30, 2007 are as follows:

 
| ** **                       | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|
| Expected stock  price volatility |       | 58.0     | %          |
| Expected life  (in years)        |       | 6.5      |       |
| Risk-free  interest rate         |       | 4.92     | %          |
| Expected  dividend yield         |       | 0.0      | %          |
| Weighted average  fair value     |       | $        | 9.97       |   |
|                                  |            |          |            |  |

 

Thefollowing table summarizes stock options outstanding and changes during thenine month period ended September 30, 2008:

 
| ** **                                          | ** ** | **Shares**              | ** ** | **Weighted   Average   Exercise  Price** | ** ** | **Weighted   Average   Remaining   Life** | ** ** | **Aggregate   Intrinsic Value** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------|------------|
|                                                |       | **(in thousands)** |       |                                               |       | **(years)**                                              |       | **(in thousands)**                   |       |
|                                                |       |                    |       |                                               |       |                                                     |       |                                      |       |
| Options  outstanding – January 1, 2008    |       | 3,516                   |       | $                                                  | 8.10       |                                                     | 7.4        |                                      | $          | — |   |
| Granted                                             |       | 568                     |       | 6.85                                               |       | 10.0                                                     |       | —                                    |       |
| Exercised                                           |       | —                  |       | —                                             |       | —                                                   |       | —                                    |       |
| Cancelled or  expired                               |       | 190                     |       | 14.31                                              |       | —                                                   |       | —                                    |       |
| Options  outstanding – September 30, 2008 |       | 3,894                   |       | $                                                  | 7.62       |                                                     | 6.9        |                                      | $          | — |   |
| Options  exercisable – September 30, 2008 |       | 1,988                   |       | $                                                  | 4.83       |                                                     | 5.9        |                                      | $          | — |   |

 

Therange of exercise prices of the exercisable options and outstanding options at September 30,2008 are as follows:

 
| **Weighted Average Exercise Price** | ** ** | **Number of  Exercisable   Options** | ** ** | **Number of   Outstanding   Options** | ** ** | **Weighted   Average   Remaining   Life** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                         | ** ** | **(in thousands)**                        | ** ** | **(in thousands)**                              | ** ** | **(years)**                                              | ** ** |
| ** **                                         | ** ** | ** **                                     | ** ** | ** **                                           | ** ** | ** **                                               | ** ** |
| $0.23                                              |       | 992                                            |       | 1,006                                                |       | 4.8                                                      |       |
| $2.36 - $4.80                                      |       | 670                                            |       | 1,410                                                |       | 6.9                                                      |       |
| $7.05                                              |       | —                                         |       | 478                                                  |       | 9.4                                                      |       |
| $15.26 - $17.29                                    |       | 66                                             |       | 330                                                  |       | 8.5                                                      |       |
| $22.15 - $22.50                                    |       | 244                                            |       | 630                                                  |       | 7.5                                                      |       |
| $43.00                                             |       | 16                                             |       | 40                                                   |       | 7.8                                                      |       |
| Totals                                             |       | 1,988                                          |       | 3,894                                                |       | 6.9                                                      |       |

 

Restrictedstock award activity for the nine months ended September 30, 2008 issummarized below:

 

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| ** **                                                       | ** ** | **Shares**              | ** ** | **Weighted   Average   Grant Date   Fair Value   per Award** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
|                                                             |       | **(in thousands)** |       |                                                                                            |       |
|                                                             |       |                    |       |                                                                                            |       |
| Unvested  restricted stock awards – January 1, 2008    |       | 76                      |       | $                                                                                               | 16.29      |   |
| Granted                                                          |       | —                  |       | —                                                                                          |       |
| Vested                                                           |       | 17                      |       | 17.41                                                                                           |       |
| Cancelled or  expired                                            |       | —                  |       | —                                                                                          |       |
| Unvested  restricted stock awards – September 30, 2008 |       | 59                      |       | $                                                                                               | 15.97      |   |

 

Restricted stock unit awardactivity for the nine months ended September 30, 2008 is summarized below:

 
| ** **                                                           | ** ** | **Shares**              | ** ** | **Weighted   Average   Grant Date   Fair Value   per Award** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
|                                                                 |       | **(in thousands)** |       |                                                                                            |       |
|                                                                 |       |                    |       |                                                                                            |       |
| Unvested  Restricted stock unit awards –January 1, 2008    |       | 18                      |       | $                                                                                               | 15.85      |   |
| Granted                                                              |       | 46                      |       | 6.88                                                                                            |       |
| Vested                                                               |       | 15                      |       | 15.85                                                                                           |       |
| Cancelled or  expired                                                |       | —                  |       | —                                                                                          |       |
| Unvested  restricted stock unit awards –September 30, 2008 |       | 49                      |       | $                                                                                               | 7.79       |   |

 

**(11)****        ****Interest Expense**

 

Thefollowing table summarizes interest expense:

** **
| ** **                                    | ** **   | **Three months ended   September 30,** | ** **   | **Nine months ended   September 30,** | ** **   |
|-----------------------------------------------|--------------|------------------------------------------------------------|--------------|-----------------------------------------------------------|--------------|
| **(in thousands)**                       | ** **   | **2008**                                                   | ** **   | **2007**                                                  | ** **   | **2008** | ** ** | **2007** | ** ** |
| *** ***                                  | *** *** | *** ***                                               | *** *** | *** ***                                              | *** *** | *** *** | *** *** | *** *** | *** *** |
| Interest expense                              | ** **   | **$**                                                      | **7,502**    |                                                      | $            | 7,500 | ** ** | **$** | **22,534** |   | $ | 15,336 |   |
| Amortization of  deferred debt issuance costs | ** **   | **233**                                                    |         | 229                                                       | ** **   | **710** |   | 458 |   |
| Capitalized  interest                         | ** **   | **(7,500**                                                 | **)**        | (2,370                                                    | )            | **(19,493** | **)** | (3,078 | ) |
| Interest  expense, net                        | ** **   | **$**                                                      | **235**      |                                                      | $            | 5,359 | ** ** | **$** | **3,751** |   | $ | 12,716 |   |

 

**(12)****        ****Pension Expense**

 

*DefinedContribution Plans*

 

Wehave 401(k) plans covering substantially all of our employees.  We recognized expense with respect to theseplans of $0.3 million and $0.2 million for the three month periods ended September 30,2008 and 2007, respectively, and expense of $0.9 million for the nine monthperiods ended September 30, 2008 and 2007. Contributions made under our defined contribution plans include a match,at the Company’s discretion, of employee salaries contributed to the plans.

 

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### *Qualified Retirement Plan*

 

The Company provides anon-contributory qualified defined benefit pension plan for its unionizedemployees at our Pekin, IL production facilities.  The following table summarizes the componentsof net periodic pension cost for the qualified pension plan:

 
| ** **                           | ** **   | **Three months ended   September 30,** | ** **   | **Nine months ended   September 30,** | ** **   |
|--------------------------------------|--------------|------------------------------------------------------------|--------------|-----------------------------------------------------------|--------------|
| **(In thousands)**              | ** **   | **2008**                                                   | ** **   | **2007**                                                  | ** **   | **2008** | ** ** | **2007** | ** ** |
| *** ***                         | *** *** | *** ***                                               | *** *** | *** ***                                              | *** *** | *** *** | *** *** | *** *** | *** *** |
| Service cost                         | ** **   | **$**                                                      | **67**       |                                                      | $            | 88 | ** ** | **$** | **221** |   | $ | 264 |   |
| Interest cost                        | ** **   | **124**                                                    |         | 124                                                       | ** **   | **372** |   | 372 |   |
| Expected return  on plan assets      | ** **   | **(179**                                                   | **)**        | (180                                                      | )            | **(538** | **)** | (540 | ) |
| Amortization of  prior service costs | ** **   | **10**                                                     |         | 11                                                        | ** **   | **32** |   | 33 |   |
| Amortization of  net actuarial loss  | ** **   | **0**                                                      |         | 6                                                         | ** **   | — |   | 18 |   |
| Net periodic  pension cost           | ** **   | **$**                                                      | **22**       |                                                      | $            | 49 | ** ** | **$** | **87** |   | $ | 147 |   |

###  

### *Postretirement Benefit Obligation*

###  

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

 

Thefollowing table summarizes the components of the net periodic costs for postretirementbenefits:

 
| ** **                        | ** **   | **Three months ended   September 30,** | ** **   | **Nine months ended   September 30,** | ** **   |
|-----------------------------------|--------------|------------------------------------------------------------|--------------|-----------------------------------------------------------|--------------|
| **(In thousands)**           | ** **   | **2008**                                                   | ** **   | **2007**                                                  | ** **   | **2008** | ** ** | **2007** | ** ** |
| *** ***                      | *** *** | *** ***                                               | *** *** | *** ***                                              | *** *** | *** *** | *** *** | *** *** | *** *** |
| Service cost                      | ** **   | **$**                                                      | **38**       |                                                      | $            | 38 | ** ** | **$** | **114** |   | $ | 114 |   |
| Interest cost                     | ** **   | **34**                                                     |         | 34                                                        | ** **   | **102** |   | 102 |   |
| Net periodic  postretirement cost | ** **   | **$**                                                      | **72**       |                                                      | $            | 72 | ** ** | **$** | **216** |   | $ | 216 |   |

 

**(13)****        ****IncomeTaxes**

 

Asof September 30, 2008, the Company has no uncertain tax positionsoutstanding.  We include the interestexpense or income, as well as potential penalties on unrecognized tax benefits,as components of income tax expense in the Condensed Consolidated Statement ofOperations.  As of September 30,2008, because we had no uncertain tax positions outstanding, we also had noliability for accrued interest on unrecognized tax benefits.

 

Ourfederal income tax returns for 2006 and 2007 are open for examination under thefederal statute of limitations.  We filein numerous state and foreign jurisdictions with varying statutes oflimitations open from 2003 to 2006.

 

Wehave accrued a deferred income tax benefit of $12.3 million related to the$31.6 million realized loss on the sale of auction rate securities for the ninemonth period ended September 30, 2008. Because we do not expect to have sufficient capital gains to offset the$31.6 million capital loss, we have also recorded a valuation allowance for thefull amount of the income tax benefit accrued.

 

14

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**(14)****         Earnings (Loss) Per Share**

 

Basic earnings (loss) per share are computed bydividing net income by the weighted average number of common shares outstandingduring each period.  Diluted earnings(loss) per share are calculated using the treasury stock method in accordancewith SFAS 128, and includes the effect of all dilutive securities, includingnon-qualified stock options and restricted stock units awards (“RSU’s”).

 

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

 
| ** **                                                         | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine months ended   September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | **2008**                                                   | ** ** | **2007**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                               |       |                                                       |       |                                                      |       |   |   |   |   |
| Net income  (loss)                                                 | ** ** | **$**                                                      | **2,486**  |                                                      | $          | 2,995 | ** ** | **$** | **(10,227** | **)** | $ | 30,542 |   |
|                                                               |       |                                                       |       |                                                      |       |   | ** ** |   |   |
| Weighted average  shares and share equivalents outstanding:        |       |                                                       |       |                                                      |       |   | ** ** |   |   |
| Basic shares                                                       | ** ** | **41,971**                                                 |       | 41,949                                                    | ** ** | **41,927** | ** ** | 41,891 |   |
| Dilutive  non-qualified stock options and RSU’s               | ** ** | **39**                                                     |       | 436                                                       | ** ** | **31** | ** ** | 606 |   |
| Diluted weighted  average shares and share equivalents             | ** ** | **42,010**                                                 |       | 42,385                                                    | ** ** | **41,958** | ** ** | 42,497 |   |
|                                                               |       |                                                       |       |                                                      |       |   | ** ** |   |   |
| Income (loss)  per common share - basic:                           | ** ** | **$**                                                      | **0.06**   |                                                      | $          | 0.07 | ** ** | **$** | **(0.24** | **)** | $ | 0.73 |   |
| Income (loss)  per common share - diluted:                         | ** ** | **$**                                                      | **0.06**   |                                                      | $          | 0.07 | ** ** | **$** | **(0.24** | **)** | $ | 0.72 |   |

 

## ***We had additional potentially dilutivesecurities outstanding representing options on 3.9 million common shares at September 30,2008 that were not included in the computation of potentially dilutivesecurities because the options exercise prices were greater than the averagemarket price of the common shares or because the options were anti-dilutive,and were excluded from the calculation of diluted earnings per share inaccordance with SFAS 128.***

## *** ***

**(15)****        ****Industry Segment**

 

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

 

**(16)****        ****Litigation**

 

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

 

OnNovember 6, 2008, the Company commenced an action against JP Morgan Securities,Inc. and JP Morgan Chase Bank, N.A. (hereinafter collectively referred to as“JP Morgan’’) in the Tenth Judicial Circuit in Tazewell County, Illinois. TheCompany’s complaint relates to losses incurred in excess of $31 million as aresult of investments in Student Loan Auction Rate Securities purchased throughJP Morgan.

** **

**(17)****        ****Unaudited Condensed Consolidating Financial Information**

 

Thefollowing tables present unaudited condensed consolidating financial informationfor: (a) Aventine Renewable Energy Holdings, Inc. (the “Parent”) on astand-alone basis; (b) on a combined basis, the guarantors of the 10%senior unsecured Notes (“Subsidiary Guarantors”), which include AventineRenewable Energy, LLC; Aventine Renewable Energy, Inc.; Aventine Power,LLC; Aventine Renewable Energy – Aurora West, LLC; and Aventine RenewableEnergy – Mt. Vernon, LLC; and (c) the Non-Guarantor Subsidiary, NebraskaEnergy, LLC.  Each Subsidiary Guarantoris wholly-owned by Aventine Renewable Energy Holdings, Inc.  The guarantees of each of the SubsidiaryGuarantors are full, unconditional, joint and several.  Accordingly, separate financial statements ofthe wholly-owned

 

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Subsidiary Guarantors are not presentedbecause the Subsidiary Guarantors are jointly, severally and unconditionallyliable under the guarantees, and the Company believes that separate financialstatements and other disclosures regarding the Subsidiary Guarantors are notmaterial to investors.  Furthermore,there are no significant legal restrictions on the Parent’s ability to obtainfunds from its subsidiaries by dividend or loan.

 

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

**Condensed Consolidating Statements of Operations**

**For the Three Months Ended September 30, 2008**

(Unaudited)

 
| **(In thousands)**                                     | ** ** | **Parent** | ** ** | **Subsidiary   Guarantors** | ** ** | **Non-  Guarantor   Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                              | ** ** | **$**      | **—** | ** **                       | **$**      | **671,525**                           | ** ** | **$**            | **30,581** | ** **       | **$**      | **(102,586** | **)** | **$** | **599,520** | ** ** |
| Cost of goods  sold                                    | ** ** | **—** | ** ** | **675,663**                      | ** ** | **32,615**                            | ** ** | **(102,288**     | **)**      | **605,990**      | ** ** |
| Gross profit  (loss)                                   | ** ** | **—** | ** ** | **(4,138**                       | **)**      | **(2,034**                            | **)**      | **(298**         | **)**      | **(6,470**       | **)**      |
| Selling, general  and administrative expenses          | ** ** | **33**     | ** ** | **8,338**                        | ** ** | **690**                               | ** ** | **(298**         | **)**      | **8,763**        | ** ** |
| Other (income)  expense                                | ** ** | **—** | ** ** | **(409**                         | **)**      | **4**                                 | ** ** | **—**       | ** ** | **(405**         | **)**      |
| Operating income  (loss)                               | ** ** | **(33**    | **)**      | **(12,067**                      | **)**      | **(2,728**                            | **)**      | **—**       | ** ** | **(14,828**      | **)**      |
| Other income  (expense):                               | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| Interest income                                        | ** ** | **—** | ** ** | **251**                          | ** ** | **3**                                 | ** ** | **—**       | ** ** | **254**          | ** ** |
| Interest expense                                       | ** ** | **(182**   | **)**      | **(53**                          | **)**      | **—**                            | ** ** | **—**       | ** ** | **(235**         | **)**      |
| Equity in  undistributed (income) loss of subsidiaries | ** ** | **4,498**  | ** ** | **(2,000**                       | **)**      | **—**                            | ** ** | **(2,498**       | **)**      | **—**       | ** ** |
| Other  non-operating income (expense)                  | ** ** | **—** | ** ** | **18,367**                       | ** ** | **—**                            | ** ** | **—**       | ** ** | **18,367**       | ** ** |
| Minority  interest                                     | ** ** | **—** | ** ** | **—**                       | ** ** | **—**                            | ** ** | **725**          | ** ** | **725**          | ** ** |
| Income (loss)  before income taxes                     | ** ** | **4,283**  | ** ** | **4,498**                        | ** ** | **(2,725**                            | **)**      | **(1,773**       | **)**      | **4,283**        | ** ** |
| Income tax  expense (benefit)                          | ** ** | **1,797**  | ** ** | **1,462**                        | ** ** | **—**                            | ** ** | **(1,462**       | **)**      | **1,797**        | ** ** |
| Net income  (loss)                                     | ** ** | **$**      | **2,486**  | ** **                       | **$**      | **3,036**                             | ** ** | **$**            | **(2,725** | **)**            | **$**      | **(311** | **)** | **$** | **2,486** | ** ** |

 

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

**Condensed Consolidating Statements of Operations**

**For the Three Months Ended September 30, 2007**

(Unaudited)

 
| **(In thousands)**                                     | ** ** | **Parent** | ** ** | **Subsidiary   Guarantors** | ** ** | **Non-  Guarantor   Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                              |       | $          | —     |                             | $          | 353,879                               |       | $                | 20,475     |             | $          | (13,680 | ) | $ | 360,674 |   |
| Cost of goods  sold                                    |       | —     |       | 357,065                          |       | 18,863                                |       | (13,527          | )          | 362,401          |       |
| Gross profit  (loss)                                   |       | —     |       | (3,186                           | )          | 1,612                                 |       | (153             | )          | (1,727           | )          |
| Selling, general  and administrative expenses          |       | 35         |       | 8,906                            |       | 596                                   |       | (153             | )          | 9,384            |       |
| Other (income)  expense                                |       | —     |       | (168                             | )          | (1                                    | )          | —           |       | (169             | )          |
| Operating income  (loss)                               |       | (35        | )          | (11,924                          | )          | 1,017                                 |       | —           |       | (10,942          | )          |
| Other income  (expense):                               |       |       |       |                             |       |                                  |       |             |       |             |       |
| Interest income                                        |       | —     |       | 3,546                            |       | 30                                    |       | —           |       | 3,576            |       |
| Interest expense                                       |       | (5,310     | )          | (49                              | )          | —                                |       | —           |       | (5,359           | )          |
| Equity in  undistributed (income) loss of subsidiaries |       | (8,436     | )          | 944                              |       | —                                |       | 7,492            |       | —           |       |
| Other  non-operating income (expense)                  |       | —     |       | (953                             | )          | —                                |       | —           |       | (953             | )          |
| Minority  interest                                     |       | —     |       | —                           |       | —                                |       | (103             | )          | (103             | )          |
| Income before  income taxes                            |       | (13,781    | )          | (8,436                           | )          | 1,047                                 |       | 7,389            |       | (13,781          | )          |
| Income tax  expense (benefit)                          |       | (16,776    | )          | (14,591                          | )          | —                                |       | 14,591           |       | (16,776          | )          |
| Net income                                             |       | $          | 2,995      |                             | $          | 6,155                                 |       | $                | 1,047      |             | $          | (7,202 | ) | $ | 2,995 |   |

 

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

**Condensed Consolidating Statements of Operations**

**For the Nine Months Ended September 30, 2008**

(Unaudited)

 
| **(In thousands)**                                       | ** ** | **Parent** | ** **  | **Subsidiary   Guarantors** | ** ** | **Non-  Guarantor   Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|-------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                                | ** ** | **$**      | **—**  | ** **                       | **$**      | **1,821,514**                         | ** ** | **$**            | **79,895** | ** **       | **$**      | **(190,350** | **)** | **$** | **1,711,059** | ** ** |
| Cost of goods  sold                                      | ** ** | **—** | ** **  | **1,768,508**                    | ** ** | **81,671**                            | ** ** | **(189,593**     | **)**      | **1,660,586**    | ** ** |
| Gross profit                                             | ** ** | **—** | ** **  | **53,006**                       | ** ** | **(1,776**                            | **)**      | **(757**         | **)**      | **50,473**       | ** ** |
| Selling, general  and administrative expenses            | ** ** | **132**    | ** **  | **26,363**                       | ** ** | **2,033**                             | ** ** | **(757**         | **)**      | **27,771**       | ** ** |
| Loss on the sale  of securities                          | ** ** | **—** | ** **  | **31,601**                       | ** ** | **—**                            | ** ** | **—**       | ** ** | **31,601**       | ** ** |
| Other income                                             | ** ** | **—** | ** **  | **(2,835**                       | **)**      | **36**                                | ** ** | **—**       | ** ** | **(2,799**       | **)**      |
| Operating income  (loss)                                 | ** ** | **(132**   | **)**       | **(2,123**                       | **)**      | **(3,845**                            | **)**      | **—**       | ** ** | **(6,100**       | **)**      |
| Other income  (expense):                                 | ** ** | ** ** | ** **  | ** **                       | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| Interest income                                          | ** ** | **—** | ** **  | **2,981**                        | ** ** | **18**                                | ** ** | **—**       | ** ** | **2,999**        | ** ** |
| Interest expense                                         | ** ** | **(3,553** | **)**       | **(198**                         | **)**      | **—**                            | ** ** | **—**       | ** ** | **(3,751**       | **)**      |
| Equity in  undistributed loss (earnings) of subsidiaries | ** ** | **4,177**  | ** **  | **(2,597**                       | **)**      | **—**                            | ** ** | **(1,580**       | **)**      | **—**       | ** ** |
| Other  non-operating income (expense)                    | ** ** | **—** | ** **  | **6,114**                        | ** ** | **—**                            | ** ** | **—**       | ** ** | **6,114**        | ** ** |
| Minority  interest                                       | ** ** | **—** | ** **  | **—**                       | ** ** | **—**                            | ** ** | **1,230**        | ** ** | **1,230**        | ** ** |
| Income (loss)  before income taxes                       | ** ** | **492**    | ** **  | **4,177**                        | ** ** | **(3,827**                            | **)**      | **(350**         | **)**      | **492**          | ** ** |
| Income tax  expense (benefit)                            | ** ** | **10,719** | ** **  | **1,358**                        | ** ** | **—**                            | ** ** | **(1,358**       | **)**      | **10,719**       | ** ** |
| Net income  (loss)                                       | ** ** | **$**      | **(10,227** | **)**                            | **$**      | **2,819**                             | ** ** | **$**            | **(3,827** | **)**            | **$**      | **1,008** | ** ** | **$** | **(10,227** | **)** |

 

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

**Condensed Consolidating Statements of Operations**

**For the Nine Months Ended September 30, 2007**

(Unaudited)

 
| **(In thousands)**                                       | ** ** | **Parent** | ** ** | **Subsidiary   Guarantors** | ** ** | **Non-  Guarantor   Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                                |       | $          | —     |                             | $          | 1,185,834                             |       | $                | 69,044     |             | $          | (62,628 | ) | $ | 1,192,250 |   |
| Cost of goods  sold                                      |       | —     |       | 1,140,836                        |       | 59,272                                |       | (61,975          | )          | 1,138,133        |       |
| Gross profit                                             |       | —     |       | 44,998                           |       | 9,772                                 |       | (653             | )          | 54,117           |       |
| Selling, general  and administrative expenses            |       | 271        |       | 26,073                           |       | 2,070                                 |       | (653             | )          | 27,761           |       |
| Other income                                             |       | —     |       | (842                             | )          | (5                                    | )          | —           |       | (847             | )          |
| Operating loss                                           |       | (271       | )          | 19,767                           |       | 7,707                                 |       | —           |       | 27,203           |       |
| Other income  (expense):                                 |       |       |       |                             |       |                                  |       |             |       |             |       |
| Interest income                                          |       | —     |       | 9,024                            |       | 87                                    |       | —           |       | 9,111            |       |
| Interest expense                                         |       | (12,618    | )          | (98                              | )          | —                                |       | —           |       | (12,716          | )          |
| Equity in  undistributed loss (earnings) of subsidiaries |       | 40,196     |       | 6,589                            |       | —                                |       | (46,785          | )          | —           |       |
| Other  non-operating income (expense)                    |       | —     |       | 4,914                            |       | 141                                   |       | —           |       | 5,055            |       |
| Minority  interest                                       |       | —     |       | —                           |       | —                                |       | (1,346           | )          | (1,346           | )          |
| Income (loss) before  income taxes                       |       | 27,307     |       | 40,196                           |       | 7,935                                 |       | (48,131          | )          | 27,307           |       |
| Income tax  expense (benefit)                            |       | (3,235     | )          | 1,214                            |       | —                                |       | (1,214           | )          | (3,235           | )          |
| Net income  (loss)                                       |       | $          | 30,542     |                             | $          | 38,982                                |       | $                | 7,935      |             | $          | (46,917 | ) | $ | 30,542 |   |

 

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

**Condensed Consolidating Balance Sheets**

**September 30, 2008**

(Unaudited)

 
| **(In thousands)**                          | ** ** | **Parent**  | ** **  | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor   Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|-------------|-------------|----------------------------|------------|---------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                       |       |        |        |                       |       |                                  |       |             |       |             |       |
| **Assets**                                       |       |        |        |                       |       |                                  |       |             |       |             |       |
| Current assets                                   |       |        |        |                       |       |                                  |       |             |       |             |       |
| Cash and cash  equivalents                       | ** ** | **$**       | **—**  | ** **                 | **$**      | **34,640**                            | ** ** | **$**            | **1,615**  | ** **       | **$**      | **—** | ** ** | **$** | **36,255** | ** ** |
| Accounts  receivable, net                        | ** ** | **—**  | ** **  | **76,954**                 | ** ** | **537**                               | ** ** | **—**       | ** ** | **77,491**       | ** ** |
| Inventories                                      | ** ** | **—**  | ** **  | **116,948**                | ** ** | **2,696**                             | ** ** | **—**       | ** ** | **119,644**      | ** ** |
| Intercompany  receivable                         | ** ** | **317,832** | ** **  | **—**                 | ** ** | **—**                            | ** ** | **(317,832**     | **)**      | **—**       | ** ** |
| Income tax  receivable                           | ** ** | **—**  | ** **  | **1,850**                  | ** ** | **—**                            | ** ** | **—**       | ** ** | **1,850**        | ** ** |
| Prepaid expenses  and other assets               | ** ** | **6**       | ** **  | **9,213**                  | ** ** | **537**                               | ** ** | **—**       | ** ** | **9,756**        | ** ** |
| Total current  assets                            | ** ** | **317,838** | ** **  | **239,605**                | ** ** | **5,385**                             | ** ** | **(317,832**     | **)**      | **244,996**      | ** ** |
|                                             | ** ** | ** **  | ** **  | ** **                 | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| Property, plant  and equipment, net              | ** ** | **—**  | ** **  | **85,723**                 | ** ** | **17,098**                            | ** ** | **—**       | ** ** | **102,821**      | ** ** |
| Construction in  process                         | ** ** | **—**  | ** **  | **442,896**                | ** ** | **1,787**                             | ** ** | **—**       | ** ** | **444,683**      | ** ** |
| Investments in  subsidiaries                     | ** ** | **330,542** | ** **  | **41,750**                 | ** ** | **—**                            | ** ** | **(372,292**     | **)**      | **—**       | ** ** |
| Other assets                                     | ** ** | **6,183**   | ** **  | **8,668**                  | ** ** | **—**                            | ** ** | **—**       | ** ** | **14,851**       | ** ** |
| Total assets                                     | ** ** | **$**       | **654,563** | ** **                 | **$**      | **818,642**                           | ** ** | **$**            | **24,270** | ** **       | **$**      | **(690,124** | **)** | **$** | **807,351** | ** ** |
|                                             | ** ** | ** **  | ** **  | ** **                 | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Liabilities  and Stockholders’ Equity**   |       |        |        |                       |       |                                  |       |             |       |             |       |
| Current  liabilities                             |       |        |        |                       |       |                                  |       |             |       |             |       |
| Accounts payable                                 | ** ** | **$**       | **—**  | ** **                 | **$**      | **117,605**                           | ** ** | **$**            | **7,324**  | ** **       | **$**      | **—** | ** ** | **$** | **124,929** | ** ** |
| Accrued interest                                 | ** ** | **15,000**  | ** **  | **—**                 | ** ** | **—**                            | ** ** | **—**       | ** ** | **15,000**       | ** ** |
| Accrued  liabilities                             | ** ** | **—**  | ** **  | **3,781**                  | ** ** | **403**                               | ** ** | **—**       | ** ** | **4,184**        | ** ** |
| Other current  liabilities                       | ** ** | **—**  | ** **  | **10,219**                 | ** ** | **230**                               | ** ** | **—**       | ** ** | **10,449**       | ** ** |
| Intercompany  payable                            | ** ** | **—**  | ** **  | **317,717**                | ** ** | **115**                               | ** ** | **(317,832**     | **)**      | **—**       | ** ** |
| Total current  liabilities                       | ** ** | **15,000**  | ** **  | **449,322**                | ** ** | **8,072**                             | ** ** | **(317,832**     | **)**      | **154,562**      | ** ** |
|                                             | ** ** | ** **  | ** **  | ** **                 | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| Long-term debt                                   | ** ** | **300,000** | ** **  | **—**                 | ** ** | **—**                            | ** ** | **—**       | ** ** | **300,000**      | ** ** |
| Minority  interest                               | ** ** | **—**  | ** **  | **—**                 | ** ** | **—**                            | ** ** | **8,601**        | ** ** | **8,601**        | ** ** |
| Net deferred tax  liabilities                    | ** ** | **—**  | ** **  | **1,048**                  | ** ** | **—**                            | ** ** | **—**       | ** ** | **1,048**        | ** ** |
| Other long-term  liabilities                     | ** ** | **—**  | ** **  | **3,577**                  | ** ** | **—**                            | ** ** | **—**       | ** ** | **3,577**        | ** ** |
| Total  liabilities                               | ** ** | **315,000** | ** **  | **453,947**                | ** ** | **8,072**                             | ** ** | **(309,231**     | **)**      | **467,788**      | ** ** |
| Stockholders’  equity                       | ** ** | **339,563** | ** **  | **364,695**                | ** ** | **16,198**                            | ** ** | **(380,893**     | **)**      | **339,563**      | ** ** |
| Total  liabilities and stockholders’ equity | ** ** | **$**       | **654,563** | ** **                 | **$**      | **818,642**                           | ** ** | **$**            | **24,270** | ** **       | **$**      | **(690,124** | **)** | **$** | **807,351** | ** ** |

 

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

**Condensed ConsolidatingBalance Sheet**

**December 31, 2007**

 
| **(In thousands)**                          | ** ** | **Parent** | ** ** | **Subsidiary   Guarantors** | ** ** | **Non-Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                       |       |       |       |                             |       |                          |       |             |       |             |       |
| Current assets                                   |       |       |       |                             |       |                          |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $          | —     |                             | $          | 13,640                        |       | $                | 3,531      |             | $          | — |   | $ | 17,171 |   |
| Short-term  investments                          |       | —     |       | 211,500                          |       | —                        |       | —           |       | 211,500          |       |
| Accounts  receivable, net                        |       | —     |       | 72,695                           |       | 363                           |       | —           |       | 73,058           |       |
| Inventories                                      |       | —     |       | 80,909                           |       | 1,705                         |       | (1,126           | )          | 81,488           |       |
| Income tax  receivable                           |       | —     |       | 11,962                           |       | —                        |       | —           |       | 11,962           |       |
| Intercompany  receivable                         |       | 318,272    |       | —                           |       | 1,361                         |       | (319,633         | )          | —           |       |
| Prepaid expenses  and other assets               |       | 6          |       | 12,642                           |       | 168                           |       | —           |       | 12,816           |       |
| Total current  assets                            |       | 318,278    |       | 403,348                          |       | 7,128                         |       | (320,759         | )          | 407,995          |       |
|                                             |       |       |       |                             |       |                          |       |             |       |             |       |
| Property, plant  and equipment, net              |       | —     |       | 93,001                           |       | 18,866                        |       | —           |       | 111,867          |       |
| Construction in  process                         |       |       |       | 225,122                          |       | 1,288                         |       | —           |       | 226,410          |       |
| Investments in  subsidiaries                     |       | 326,365    |       | 44,347                           |       | —                        |       | (370,712         | )          | —           |       |
| Net deferred tax  assets                         |       | —     |       | 1,196                            |       | —                        |       | —           |       | 1,196            |       |
| Other assets                                     |       | 6,728      |       | 7,989                            |       | —                        |       | —           |       | 14,717           |       |
| Total assets                                     |       | $          | 651,371    |                             | $          | 775,003                       |       | $                | 27,282     |             | $          | (691,471 | ) | $ | 762,185 |   |
|                                             |       |       |       |                             |       |                          |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity**   |       |       |       |                             |       |                          |       |             |       |             |       |
| Current  liabilities                             |       |       |       |                             |       |                          |       |             |       |             |       |
| Accounts payable                                 |       | $          | —     |                             | $          | 88,675                        |       | $                | 4,322      |             | $          | (1,126 | ) | $ | 91,871 |   |
| Accrued interest                                 |       | 7,500      |       | —                           |       | —                        |       | —           |       | 7,500            |       |
| Accrued  liabilities                             |       | —     |       | 3,361                            |       | 264                           |       | —           |       | 3,625            |       |
| Other current  liabilities                       |       | —     |       | 1,317                            |       | 305                           |       | —           |       | 1,622            |       |
| Intercompany  payable                            |       | —     |       | 319,633                          |       | —                        |       | (319,633         | )          | —           |       |
| Total current  liabilities                       |       | 7,500      |       | 412,986                          |       | 4,891                         |       | (320,759         | )          | 104,618          |       |
|                                             |       |       |       |                             |       |                          |       |             |       |             |       |
| Long-term debt                                   |       | 300,000    |       | —                           |       | —                        |       | —           |       | 300,000          |       |
| Minority  interest                               |       | —     |       | —                           |       | —                        |       | 9,832            |       | 9,832            |       |
| Other long-term  liabilities                     |       | —     |       | 3,864                            |       | —                        |       | —           |       | 3,864            |       |
| Total  liabilities                               |       | 307,500    |       | 416,850                          |       | 4,891                         |       | (310,927         | )          | 418,314          |       |
| Stockholders’  equity                       |       | 343,871    |       | 358,153                          |       | 22,391                        |       | (380,544         | )          | 343,871          |       |
| Total  liabilities and stockholders’ equity |       | $          | 651,371    |                             | $          | 775,003                       |       | $                | 27,282     |             | $          | (691,471 | ) | $ | 762,185 |   |

 

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

**Condensed Consolidating Statement of Cash Flows**

**For the Nine Months Ended September 30, 2008**

(Unaudited)

 
| **(In thousands)**                               | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor   Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            |       |       |       |                       |       |                                  |       |             |       |             |       |
| **Operating  Activities**                             |       |       |       |                       |       |                                  |       |             |       |             |       |
| Net cash  provided by (used for) operating activities | ** ** | **$**      | **(1,500** | **)**                      | **$**      | **57,480**                            | ** ** | **$**            | **632**    | ** **       | **$**      | **—** | ** ** | **$** | **56,612** | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Investing  Activities**                             | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to  property, plant and equipment           | ** ** | **—** | ** ** | **(219,419**               | **)**      | **(2,562**                            | **)**      | **—**       | ** ** | **(221,981**     | **)**      |
| Sale of  investment securities                        | ** ** | **—** | ** ** | **179,900**                | ** ** | **—**                            | ** ** | ** **       | ** ** | **179,900**      | ** ** |
| Indemnification  proceeds                             | ** ** | **—** | ** ** | **3,039**                  | ** ** | **—**                            | ** ** | ** **       | ** ** | **3,039**        | ** ** |
| Proceeds from  the sale of fixed asset                | ** ** | **—** | ** ** | **—**                 | ** ** | **14**                                | ** ** | ** **       | ** ** | **14**           | ** ** |
| Net cash  provided by (used for) investing activities | ** ** | **—** | ** ** | **(36,480**                | **)**      | **(2,548**                            | **)**      | **—**       | ** ** | **(39,028**      | **)**      |
| ** **                                            | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Financing  Activities**                             | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| Proceeds from  issuance of common stock               | ** ** | **1,500**  | ** ** | **—**                 | ** ** | **—**                            | ** ** | **—**       | ** ** | **1,500**        | ** ** |
| Net cash  provided by financing activities            | ** ** | **1,500**  | ** ** | **—**                 | ** ** | **—**                            | ** ** | **—**       | ** ** | **1,500**        | ** ** |
| Net increase  (decrease) in cash and cash equivalents | ** ** | **—** | ** ** | **21,000**                 | ** ** | **(1,916**                            | **)**      | **—**       | ** ** | **19,084**       | ** ** |
| Cash and cash  equivalents at beginning of period     | ** ** | **—** | ** ** | **13,640**                 | ** ** | **3,531**                             | ** ** | **—**       | ** ** | **17,171**       | ** ** |
| Cash and cash  equivalents at end of period           | ** ** | **$**      | **—** | ** **                 | **$**      | **34,640**                            | ** ** | **$**            | **1,615**  | ** **       | **$**      | **—** | ** ** | **$** | **36,255** | ** ** |

 

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

**Condensed Consolidating Statement of Cash Flows**

**For the Nine Months Ended September 30, 2007**

(Unaudited)

 
| **(In thousands)**                               | ** ** | **Parent** | ** ** | **Subsidiary   Guarantors** | ** ** | **Non-  Guarantor   Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|------------------|------------|
| * *                                              | * *   | * *   | * *   | * *                         | * *   | * *                              | * *   | * *         | * *   | * *         | * *   |
| **Operating  Activities**                             |       |       |       |                             |       |                                  |       |             |       |             |       |
| Net cash  provided by (used for) operating activities |       | $          | (291,297   | )                                | $          | 334,823                               |       | $                | 10,378     |             | $          | — |   | $ | 53,904 |   |
|                                                  |       |       |       |                             |       |                                  |       |             |       |             |       |
| **Investing  Activities**                             |       |       |       |                             |       |                                  |       |             |       |             |       |
| Additions to  property, plant and equipment           |       | —     |       | (148,023                         | )          | (1,875                                | )          | —           |       | (149,898         | )          |
| Investment in  short-term securities                  |       | —     |       | (183,943                         | )          | —                                |       | —           |       | (183,943         | )          |
| Net cash used  for investing activities               |       | —     |       | (331,966                         | )          | (1,875                                | )          | —           |       | (333,841         | )          |
| ** **                                            |       |       |       |                             |       |                                  |       |             |       |             |       |
| **Financing  Activities**                             |       |       |       |                             |       |                                  |       |             |       |             |       |
| Proceeds from  issuance of senior unsecured notes     |       | 300,000    |       | —                           |       | —                                |       | —           |       | 300,000          |       |
| Payment of debt  issuance costs                       |       | (8,220     | )          | —                           |       | —                                |       | —           |       | (8,220           | )          |
| Proceeds from  stock option exercises                 |       | 508        |       | —                           |       | —                                |       | —           |       | 508              |       |
| Purchase of  Treasury stock                           |       | (991       | )          | —                           |       | —                                |       | —           |       | (991             | )          |
| Distribution to  minority stockholders                |       | —     |       | 6,273                            |       | (8,000                                | )          | —           |       | (1,727           | )          |
| Net cash  provided by (used for) financing activities |       | 291,297    |       | 6,273                            |       | (8,000                                | )          | —           |       | 289,570          |       |
| Net increase in  cash and cash equivalents            |       | —     |       | 9,130                            |       | 503                                   |       | —           |       | 9,633            |       |
| Cash and cash  equivalents at beginning of period     |       | —     |       | 26,413                           |       | 3,378                                 |       | —           |       | 29,791           |       |
| Cash and cash  equivalents at end of period           |       | $          | —     |                             | $          | 35,543                                |       | $                | 3,881      |             | $          | — |   | $ | 39,424 |   |

 

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**(18)****        ****Subsequent Event**

 

On October 13, 2008, the Company completed itspurchase of the 21.58% of Nebraska Energy, LLC (“NELLC”) that it did notalready own from Nebraska Energy Cooperative, Inc.  The Company issued 1 million shares of itscommon stock, with an estimated value of approximately $6.6 million, inexchange for the 21.58% interest.  Theaggregate value of $6.6 million, or $6.62 per share, was based on the averageof Aventine’s closing stock price for the four trading days immediately beforethe acquisition announcement date, the acquisition announcement date and the fourtrading days immediately after the acquisition announcement date on July 31,2008.   The purchasewill be accounted for under the purchase method of accounting in accordancewith the provisions of Statement of Financial Accounting Standards No. 141,“Business Combinations”.

 

As a result of our acquisition of the remaininginterest in NELLC, NELLC became a guarantor under our secured revolving creditfacility and senior unsecured bond indenture on October 22, 2008.  As of this same date, all of the assets ofNELLC are now collateral under our secured revolving credit facility.

 

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

 

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

 

*These forward-looking statements are subject to variousrisks and uncertainties which could cause actual results to differ materiallyfrom those stated or implied by such forward-looking statements.  We undertake no obligation to publiclyrelease any revision of any forward-looking statements contained herein toreflect events and circumstances occurring after the date hereof, or to reflectthe occurrence of unanticipated events. Information concerning risk factors is contained under Item “1A - RiskFactors” in our Annual Report on Form 10-K for the fiscal year ended December 31,2007 and under Part II, Item 1A of this Quarterly Report on Form 10-Q.  You should carefully consider all of therisks and all other information contained in or incorporated by reference inthis report and in our filings with the SEC. These risks are not the only ones we face.   Additional risks and uncertainties not presentlyknown to us, or which we currently consider immaterial, also may adverselyaffect us.  If any of these risksactually occur, our business, financial condition and results of operationscould be materially and adversely affected.*

 

**CompanyOverview**

 

Aventineis a leading producer and marketer of ethanol. Through our own production facilities, marketing alliances with otherethanol producers and our purchase/resale operations, we market and distributeethanol to many of the leading energy companies in the U.S.  We have a comprehensive national distributionnetwork utilizing trucks, a leased railcar and barge fleet and a terminalnetwork at critical points on the nation’s transportation grid where ourethanol is blended with our customers’ gasoline.  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.

 

**Resultsof Operations**

 

The following discussionsummarizes the significant factors affecting the consolidated operating resultsof the Company for the three and nine month periods ended September 30,2008 and 2007.  This discussion should beread in conjunction with the unaudited condensed consolidated financialstatements and notes to the unaudited condensed consolidated financialstatements contained in Item 1 above, and the consolidated financial statementsand related notes for the year ended December 31, 2007 included in theCompany’s Annual Report on Form 10-K.

 

Our revenues are principallyderived from the sale of ethanol and from the sale of co-products (corn glutenfeed and meal, corn germ, condensed corn distillers solubles, DDGS, WDGS,carbon dioxide, and brewers’ yeast) that we produce as by-products during theproduction of ethanol at our plants, which we refer to as co-productrevenues.  We sell ethanol obtained fromthe following sources:

 

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·                  Ethanol which we manufacture at our plants;

·                  Ethanol which we purchase from our marketingalliance partners; and

·                  Ethanol which we purchase from otherproducers and marketers.

 

We market and sell ethanolwithout regard to whether we produced it, are marketing it for our marketingalliance partners or purchased it for resale from other producers or marketers.

 

*Executive Summary*

 

Netincome was $2.5 million, or $0.06 per diluted share in the third quarter of2008, as compared to net income of $3.0 million, or $0.07 per diluted share, inthe third quarter of 2007.  Net income inthe current quarter decreased primarily as a result of lower commodity spreadsand higher conversion costs, offset significantly by realized and unrealizednet gains on derivative positions, lower selling, general and administrativecosts and larger capitalized interest amounts. Commodity spread, defined as gross ethanol selling price per gallon lessnet corn cost per gallon, declined from $1.09 per gallon in the third quarterof 2007 to $0.98 per gallon in the third quarter of 2008.  The average sales price per gallon of ethanolincreased in the third quarter of 2008 to $2.47 per gallon from the $2.01average received in the third quarter of 2007. However, corn costs during the third quarter of 2008 averaged $5.78 perbushel, significantly higher than our third quarter 2007 cost of $3.81 perbushel.  Conversion cost in the thirdquarter of 2008 was $0.77 per gallon as compared to $0.63 per gallon in thethird quarter of 2007.

 

Gallonsof ethanol sold in the third quarter of 2008 increased to a record 226.6million gallons, as compared to 162.0 million gallons in the third quarter of2007.  The increase resulted from thecontinued growth of ethanol usage across the country.  Ethanol prices significantly below the costof conventional gasoline provided economic incentives to blenders, in additionto the blenders’ credit, to blend more ethanol.   We were able to source and sell additionalgallons of ethanol primarily as a result of an increase in the number ofgallons available to sell from marketing alliance partners and purchase/resaletransactions.  Gallons produced duringthe quarter increased to 47.4 million gallons from 46.8 million gallons in thethird quarter of 2007.

 

Theeconomic impact of selling gallons held in inventory at the end of the secondquarter of 2008 with a $2.28 per gallon value as prices decreased during thethird quarter of 2008 was a negative impact to cost of goods sold ofapproximately $7.3 million (including a $4.7 million lower of cost or marketadjustment).  The average inventory costof $2.08 per gallon at the end of the third quarter of 2008 versus $2.28 at theend of the second quarter of 2008 reflects the decrease in ethanol pricesduring the quarter using our weighted average FIFO approach to calculatinginventory.  Similarly, declining prices throughout the third quarter of 2007had a negative economic impact on cost of goods sold of $10.6 million.

 

Our inventory isvalued based upon a weighted average price we pay for ethanol that we purchasefrom our marketing alliance partners and our purchase/resale transactions,along with our own cost to produce ethanol.  Changes, either upward ordownward, in our purchased cost of ethanol or our own production costs, willcause the inventory value to fluctuate from period to period, perhapssignificantly.  These changes in value flow through our statement ofoperations as the inventory is sold and can significantly increase or decreaseour profitability.

 

Othernon-operating income (loss) for the third quarter of 2008 includes $18.4million of realized and unrealized net gains on derivative contracts, includingthe effect of marking to market derivative contracts, versus net losses in thethird quarter of 2007 of $1.0 million. Derivative gains and losses for Q3’08 are composed of net realized gainson CBOT corn positions of $0.3 million, net realized losses on 

 

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short gasoline futurepositions of $4.8 million, net unrealized gains on CBOT corn positions of $12.3million and net unrealized gains on short gasoline positions of $10.6million.  All of our derivative positionsrequire cash settlement on a daily basis. Without such cash settlement on the derivative contracts, cash flowsfrom operations would have been significantly lower.  Offsetting our short gasoline positions, areforward ethanol sales contracts that are indexed to gasoline.  Suchcontracts are not marked to market.  Also not marked to market are forwardcontracts to purchase corn that are either stand alone, or are taken againstshort futures positions.

 

*For theThree Months Ended September 30, 2008 Compared to the Three Months Ended September 30,2007*

 

Totalgallons of ethanol sold in the third quarter of 2008 increased to 226.6 milliongallons, versus 162.0 million gallons sold in the third quarter of 2007.  Gallons of ethanol were sourced as follows:

 
| ** **                                                     | ** ** | **For the Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **(In thousands, except for percentages)** | ** ** | **2008**                                                                   | ** ** | **2007** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
| Equity  production                                             | ** ** | **47,381**                                                                 |       | 46,824 |   | 557 |   | 1.2 | % |
| Marketing  alliance purchases                                  | ** ** | **130,278**                                                                | ** ** | 84,638 |   | 45,640 |   | 53.9 | % |
| Purchase/resale                                                | ** ** | **54,495**                                                                 | ** ** | 28,821 |   | 25,674 |   | 89.1 | % |
| Decrease  (increase) in inventory                              | ** ** | **(5,584**                                                                 | **)**      | 1,746 |   | (7,330 | ) | N.M. | * |
| Total                                                          | ** ** | **226,570**                                                                |       | 162,029 |   | 64,541 |   | 39.8 | % |

 

----

*  Not meaningful

 

Netsales in the third quarter of 2008 increased 66.2% from the third quarter of2007.  Net sales were $599.5 million inthe third quarter of 2008 versus $360.7 million in the third quarter of 2007.  Overall, the increase in net sales was theresult of the increase in the number of gallons of ethanol sold and an increasein the average sales price of ethanol sold. Ethanol prices averaged $2.47 per gallon in the third quarter of 2008versus $2.01 in the third quarter of 2007.

 

Co-product revenues for the third quarter of 2008 totaled $33.7million, an increase of $9.7 million or 40.4%, from the third quarter 2007total of $24.0 million.  Co-productrevenues increased during the third quarter of 2008 as a result of higherco-product pricing, principally germ, meal, yeast and DDGS caused by thesignificant increase in corn prices.  Inthe third quarter of 2008, we sold 284.1 thousand tons, versus 284.8 thousandtons in the third quarter of 2007. Co-product revenues, as a percentage of corn costs, were 32.3% duringthe third quarter of 2008, versus 35.8% in the third quarter of 2007.  Co-product revenues, as a percentage of corncosts, decreased in the third quarter of 2008 as compared to 2007 as the resultof selling co-products into the spot market in a declining corn environmentwhere we had previously fixed the price on about 63% of our corn in the thirdquarter.

 

Costof goods sold for the quarter ended September 30, 2008 was $606.0 million,compared to $362.4 million for the quarter ended September 30, 2007, anincrease of $243.6 million or 67.2%.  Asa percentage of net sales, cost of goods sold increased to 101.1% from100.5%.  Cost of goods sold consists ofthe cost to produce ethanol at our own facilities, the cost of purchasingethanol from our marketing alliance partners and the cost of purchasing ethanolfrom other producers and marketers, freight and logistics costs to ship ethanoland co-products, and the cost of motor fuel taxes which have been billed tocustomers.  The increase in cost of goodssold is principally the result of increased corn costs, increased conversioncosts, and higher prices paid for purchased ethanol.

 

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Purchasedethanol in the third quarter of 2008 totaled $419.8 million, versus $214.8million in the third quarter of 2007. The increase in purchased ethanol resulted from both the increase in thenumber of gallons of ethanol purchased and from an increase in the cost pergallon of ethanol purchased.  In thethird quarter of 2008, we purchased 184.8 million gallons of ethanol at anaverage cost of $2.27 per gallon as compared to 113.5 million gallons ofethanol at an average cost of $1.89 in the third quarter of 2007.

 

Productioncosts include corn costs, conversion costs (defined as the cost of convertingthe corn into ethanol, and includes production salaries, wages and stock-basedcompensation costs, fringe benefits, utilities (including coal and naturalgas), maintenance, denaturant, insurance, materials and supplies and othermiscellaneous production costs) and depreciation.  Corn costs in the third quarter of 2008totaled $104.2 million or $5.78 per bushel, versus $67.1 million, or $3.81 perbushel in the third quarter of 2007.  Ouraverage corn costs in the third quarter of 2008 were lower than the CBOTaverage price during the same period. The increase in corn costs is due to higher corn prices as a result ofhigher input costs, including oil, seed and fertilizer prices, commodityspeculation and from increased demand for grains on a global basis, includinghigher expected demand created by new ethanol production facilities beingbuilt.

 

Conversioncosts for the third quarter of 2008 increased to $36.7 million from $29.4million for the third quarter of 2007. The total dollars spent on conversion costs increased year over yearprincipally as a result of higher utility costs, higher denaturant costs, andhigher maintenance costs.  The conversioncost per gallon increased year over year to $0.77 per gallon in the thirdquarter of 2008 versus $0.63 per gallon in the third quarter of 2007.

 

Depreciationin the third quarter of 2008 totaled $3.4 million, versus $3.3 million in thethird quarter of 2007.  Motor fuel taxeswere $3.8 million in the third quarter of 2008 versus $2.3 million in the thirdquarter of 2007.  The cost of motor fueltaxes are recovered through billings to customers.

 

Freight/logisticscosts were flat year over year on a per gallon basis.  Freight/logistics costs in both the thirdquarter of 2008 and the third quarter of 2007 averaged $0.19 per gallon.  Freight/logistics dollars spent increased inthe third quarter of 2008 to $44.0 million from $31.0 million in the thirdquarter of 2007 as a result of more gallons shipped.  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.  Although fuel surcharges have begun to ease,freight costs continued to be negatively impacted by such surcharges, and from general freight increases associated withmoving product along longer supply lines to emerging new markets in theSoutheast.

 

The average inventory costof $2.08 per gallon at the end of the third quarter of 2008 versus $2.28 at theend of the second quarter of 2008, using our weighted-average FIFO approach tocalculating inventory, reflects declining ethanol prices during thequarter.  The economic impact of selling gallons held in inventory at theend of the second quarter of 2008 with a $2.28 per gallon value as pricesdecreased during the third quarter of 2008 was a negative impact to cost of goodssold of approximately $7.3 million (including a $4.7 million non-cash lower ofcost or market adjustment).  Similarly,declining prices throughout the third quarter of 2007 negatively impacted costof goods sold by $10.6 million.

 

Selling,general & administrative expenses (“SG&A”) were $8.8 million inthe third quarter of 2008 as compared to $9.4 million in the third quarter of2007.  The lower expense in the thirdquarter of 2008 primarily relates to reductions in stock-based compensation expenseas a result of changes in forfeiture estimates and the number of performanceshares expected to vest totaling $1.2 million. In addition, legal and other outside service fees decreased by $0.6million.

 

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Interest income in the thirdquarter of 2008 was $0.3 million, versus $3.6 million in the third quarter of2007.  The decrease in interest income isdue to a lower level of funds available to invest.

 

Interestexpense in the third quarter of 2008 was $0.2 million, as compared to $5.4million in the third quarter of 2007. Interest expense in the third quarter of 2008 was lower than in the sameperiod in 2007 due to a greater amount of interest being capitalized on ourexpansion projects during the third quarter of 2008.  Interest expense in the third quarter of 2008included $7.5 million in interest on our $300 million aggregate principal 10.0%senior unsecured notes issued March 27, 2007 and $0.2 million ofamortization of deferred financing fees, reduced by capitalized interest of$7.5 million.  Interest expense in thethird quarter of 2007 included $7.5 million in interest on our $300 millionaggregate principal 10.0% senior unsecured notes issued March 27, 2007 and$0.2 million of amortization of deferred financing fees, reduced by capitalizedinterest of $2.3 million.

 

Othernon-operating income (loss) for the third quarter of 2008 includes $18.4million of realized and unrealized net gains on derivative contracts, includingthe effect of marking to market derivative contracts, versus net losses in thethird quarter of 2007 of $1.0 million. Derivative gains and losses for the third quarter of 2008 are composedof net realized gains on CBOT corn positions of $0.3 million, net realizedlosses on short gasoline future positions of $4.8 million, net unrealized gainson CBOT corn positions of $12.3 million and net unrealized gains on shortgasoline positions of $10.6 million.  Allof our derivative positions require cash settlement on a daily basis.  Without such cash settlement on thederivative contracts, cash flows from operations would have been significantlylower.  Economically offsetting some ofour short gasoline positions are forward ethanol sales contracts that areindexed to gasoline.  Such contracts are not marked to market.  Alsonot marked to market are below market forward contracts to purchase corn thatare either stand-alone, or are economically taken against short futurespositions.

 

Theminority interest for the quarter ended September 30, 2008 was a reductionof expense of $0.7 million, compared to a charge to income of $0.1 million forthe quarter ended September 30, 2007. This change reflects the reduced operating performance of our Nebraskasubsidiary caused primarily by the year over year significant increase in corncosts, and the lower average price received from selling wet distillers grains.

 

Incometax expense in the third quarter of 2008 totaled $1.8 million.  The effective income tax rate in the thirdquarter of 2008 was 42% of pre-tax income, versus an adjusted income tax rateof approximately 23% in the third quarter of 2007 due to certain FIN 48adjustments.  In 2007, our effectiveincome tax rate was also lower due to the amount of tax free interest receivedon our investment portfolio.

 

*For theNine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30,2007*

 

Totalgallons of ethanol sold in the first nine months of 2008 increased to 658.1million gallons, versus 513.9 million gallons sold in the first nine months of2007.  Gallons of ethanol were sourced asfollows:

 

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| ** **                                                     | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(In thousands, except for percentages)** | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** | **Increase/  (Decrease)** | ** ** | **% Increase/  (Decrease)** | ** ** |
| Equity  production                                             | ** ** | **140,706**                                                               |       | 146,410 |   | (5,704 | ) | (3.9 | )% |
| Marketing alliance  purchases                                  | ** ** | **380,392**                                                               |       | 294,452 |   | 85,940 |   | 29.2 | % |
| Purchase/resale                                                | ** ** | **142,603**                                                               |       | 72,434 |   | 70,169 |   | 96.9 | % |
| Decrease  (increase) in inventory                              | ** ** | **(5,625**                                                                | **)**      | 652 |   | (6,277 | ) | N.M. | * |
| Total                                                          | ** ** | **658,076**                                                               |       | 513,948 |   | 144,128 |   | 28.0 | % |

 

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*  Not meaningful

 

Netsales in the first nine months of 2008 increased 43.5% from the same period in2007.  Net sales were $1,711.1 million inthe first nine months of 2008 versus $1,192.3 million in the first nine monthsof 2007.  Overall, the increase in netsales was the result of the increase in the number of gallons of ethanol soldand an increase in the average sales price of ethanol sold.  Ethanol prices averaged $2.40 per gallon inthe first nine months of 2008 versus $2.13 in the first nine months of 2007.

 

Co-productrevenues for the first nine months of 2008 totaled $104.0 million, an increaseof $33.7 million or 47.9%, from the first nine months of 2007 total of $70.3million.  Co-product revenues increasedduring the first nine months of 2008 as a result of higher co-product pricing,principally germ, meal, yeast and DDGS caused by the significant rise in cornprices.  In the first nine months of2008, we sold 829.3 thousand tons, versus 848.9 thousand tons in the first ninemonths of 2007.  Co-product revenues, asa percentage of corn costs, were 37.6% during the first nine months of 2008,versus 34.0% in the first nine months of 2007. Co-product revenues, as a percentage of corn costs, increased in thefirst nine months of 2008 as compared to 2007 as the result of increases in co-productpricing outpacing our corn costs in 2008 versus 2007.  For the first nine months of 2008, ouraverage purchase price per bushel of corn was lower than the CBOT price ineffect during the same period.

 

Costof goods sold for the first nine months of 2008 was $1,660.6 million, comparedto $1,138.1 million for the first nine months of 2007, an increase of $522.5million or 45.9%.  As a percentage of netsales, cost of goods sold increased from 95.5% to 97.1%.  Cost of goods sold consists of the cost toproduce ethanol at our own facilities, the cost of purchasing ethanol from ourmarketing alliance partners and the cost of purchasing ethanol from otherproducers and marketers, freight and logistics costs to ship ethanol andco-products, and the cost of motor fuel taxes which have been billed tocustomers.  The increase in cost of goodssold is principally the result of increased corn costs, increased conversioncosts, and higher prices paid for purchased ethanol.

 

Purchasedethanol in the first nine months of 2008 totaled $1,155.4 million, versus$722.3 million in the first nine months of 2007.  The increase in purchased ethanol resultsfrom both the increase in the number of gallons of ethanol purchased and froman increase in the cost per gallon of ethanol purchased.  In the first nine months of 2008, wepurchased 523.0 million gallons of ethanol at an average cost of $2.21 pergallon as compared to 366.9 million gallons of ethanol at an average cost of$1.97 in the first nine months of 2007.

 

Productioncosts include corn costs, conversion costs (defined as the cost of convertingthe corn into ethanol, and includes production salaries, wages and stockcompensation costs, fringe benefits, utilities (including coal and naturalgas), maintenance, denaturant, insurance, materials and supplies and othermiscellaneous production costs) and depreciation.  Corn costs in the first nine months of 2008totaled $277.1 million or $5.22 per bushel, versus $206.5 million, or $3.79 perbushel in the first nine months of 2007. The increase in corn costs is due to higher corn prices as a result ofhigher input costs, including oil, seed and fertilizer prices, commodityspeculation and from increased demand for grains on 

 

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a global basis, including higher expecteddemand created by new ethanol production facilities being built.

 

Conversioncosts for the first nine months of 2008 increased to $99.5 million from $87.4million for the first nine months of 2007. The total dollars spent on conversion costs increased year over yearprincipally as a result of higher utility costs, higher denaturant costs, andhigher maintenance costs.  The conversioncost per gallon increased year over year to $0.71 per gallon in the first ninemonths of 2008 versus $0.60 per gallon in the first nine months of 2007.  Conversion costs per gallon in the first ninemonths of 2008 were also negatively affected by the lower number of gallonsproduced as a result of lowering the denaturant blending levels to 1.96% from4.76%.

 

Depreciationin the first nine months of 2008 totaled $10.0 million, versus $9.3 million inthe first nine months of 2007.  Motorfuel taxes were $11.7 million in the first nine months of 2008 versus $12.8million in the first nine months of 2007. The cost of motor fuel taxes are recovered through billings tocustomers.

 

Freight/logisticscosts in the first nine months of 2008 increased to $130.5 million, orapproximately $0.20 per gallon, from $89.2 million, or $0.17 per gallon in thefirst nine months of 2007. Freight/logistics cost per gallon is calculated by taking totalfreight/logistics costs incurred (including costs to ship co-products) anddividing by the total ethanol gallons sold. The increase in freight costs was primarilydue to fuel surcharges resulting from record high oil prices during most of2008, which negatively impacted general freight rates, and from general freight increasesassociated with moving product along longer supply lines to emerging newmarkets in the Southeast.  Freightsurcharges have now begun to moderate beginning in the third quarter of 2008.

 

The average inventory costof $2.08 per gallon at the end of the first nine months of 2008 versus $1.80 atthe end of 2007 reflects the increase in ethanol prices using our weightedaverage FIFO approach to calculating inventory.  The economic impact ofselling gallons that were previously held in inventory at the end of 2007during a period of generally rising prices was $10.2 million (this is net of a$4.7 million non-cash lower of cost or market adjustment taken during the thirdquarter of 2008).  Similarly, decliningprices throughout the first nine months of 2007 had a negative economic impacton cost of goods sold of $8.6 million.

 

Selling,general and administrative (“SG&A”) expenses were basically flat year overyear at $27.8 million for both the first nine months of 2008 and 2007.  Lower stock compensation expense was offsetby higher fees for legal and other outside services.

 

In the first nine months of2008, the Company incurred losses totaling $31.6 million related to the sale ofits portfolio of auction rate securities. The Company holds no auction rate securities as of September 30,2008.

 

Interestincome in the first nine months of 2008 was $3.0 million, versus $9.1 millionin the first nine months of 2007.  Thedecrease in interest income is due to a lower level of funds available toinvest, combined with lower interest rates received on the auction ratesecurities we previously held, many of which reset to zero for most of 2008during the time period in which they were held.

 

Interestexpense in the first nine months of 2008 was $3.8 million, as compared to $12.7million in the first nine months of 2007. Interest expense in the first nine months of 2008 was lower than in thesame period in 2007 due to a greater amount of interest being capitalized onour expansion projects during 2008. Interest expense in the first nine months of 2008 included $22.5 millionin interest on our $300 million aggregate principal 10.0% senior unsecurednotes issued March 27, 2007 and $0.8 million

 

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ofamortization of deferred financing fees, reduced by capitalized interest of$19.5 million.  Interest expense in thefirst nine months of 2007 included $15.3 million in interest on our $300million aggregate principal 10.0% senior unsecured notes issued March 27,2007 and $0.5 million of amortization of deferred financing fees, reduced bycapitalized interest of $3.1 million.

 

Othernon-operating income for the first nine months of 2008 includes $6.1 million ofrealized and unrealized net gains on derivative contracts, including the effectof marking to market derivative contracts, versus net gains in the first ninemonths of 2007 of $5.1 million. Derivative gains and losses for the first nine months of 2008 arecomposed of net realized gains on CBOT corn positions of $7.9 million, netrealized losses on short gasoline future positions of $9.3 million, netunrealized gains on CBOT corn positions of $3.9 million and net unrealizedgains on short gasoline positions of $3.6 million.  All of our derivative positions require cashsettlement on a daily basis. Economically offsetting our short gasoline positions are forward ethanolsales contracts that are indexed to gasoline.  Such contracts are notmarked to market.  Also not marked to market are below market forwardcontracts to purchase corn that are either stand-alone, or are economicallytaken against short futures positions.

 

Theminority interest for the first nine months of 2008 was a reduction of expenseof $1.2 million, compared to a charge to income of $1.3 million for the firstnine months of 2007.  This changereflects the reduced operating performance of our Nebraska subsidiary causedprimarily by the year over year significant increase in corn costs, and thelower average price received from selling wet distillers grains.

 

Incometax expense in the first nine months of 2008 totaled $10.7 million.  The Company does not expect to receive anincome tax benefit related to the losses incurred on the sale of auction ratesecurities as it does not expect to have sufficient capital gains to offset the$31.6 million capital loss.  As a result,the Company recorded a valuation allowance equal to the amount of the incometax benefit it recorded resulting from the loss on the sale of auction ratesecurities.  Excluding the effects of theloss on the sale of auction rate securities, the effective income tax rate inthe first nine months of 2008 was 33% of pre-tax income, versus an adjustedincome tax rate of 23% in the first nine months of 2007.  The Company in 2007 recognized a previouslyunrecognized favorable tax benefit of $9.6 million.

 

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

 

*Ethanol Pricing*

 

While ethanol pricing increased year to date in 2008versus 2007, ethanol pricing in the third quarter of 2008 began to declinesignificantly along with falling oil and other commodity prices, includingcorn.  This decline in ethanol pricesduring the third quarter of 2008, however, outpaced the decline in corn pricesduring the same period, thereby producing lower gross margins than had beenexperienced earlier in 2008.  As thesupply of ethanol from plants which are currently under construction begins tomake its way into the marketplace, we expect ethanol pricing to remain soft,and gross margins to remain near breakeven.

 

Asof September 30, 2008, we had contracts for delivery of ethanol totaling143.1 million gallons through September 2009.  These contracts are shared for the benefit ofthe marketing alliance pool as a whole, of which Aventine is a part, and arenot solely applicable to Aventine.  Thesecommitments were for 14.9 million gallons at an average fixed price of $2.26per gallon, 17.2 million gallons at an average spread to wholesale gasoline ofa negative 42 cents per gallon (based upon the NYMEX, Chicago and NY harborindices), and 111.0 million gallons at spot prices (using various Platt, OPISand AXXIS indices).

 

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For the fourth quarter of 2008, we have contracts for delivery ofethanol totaling 137.9 million gallons. These commitments are for 14.9 milliongallons at an average fixed price of $2.26, 13.6 million gallons at an averagespread to wholesale gasoline of a negative 39 cents (based upon the NYMEX, Chicagoand NY harbor indices), and 109.4 million gallons at spot prices (using variousPlatt, OPIS and AXXIS indices).

 

At the end of the third quarter of 2008, we also had short gasolinepositions outstanding using swap agreements where we sold 3.9 million gallonsof gasoline at an average fixed price of $2.06 per gallon for delivery through December 2008.We did this to hedge a portion of our gasoline indexed contracts frompotentially falling gasoline prices. The fair value of these positions at September 30,2008 was a loss of approximately $1.5 million.

 

*Corn*

 

Corn prices have risen significantly since 2006 and reached recordlevels during the second quarter of 2008. Beginning in the third quarter of2008, corn prices, along with most other commodities, began to decline in value.We believe that this is in response to larger than expected corn productionduring 2008, along with concerns of global recession and reductions in globaldemand. However, we continue to believe that corn prices are likely to remainabove historical levels for the foreseeable future.

 

We continuously purchase corn for physical delivery from suppliersusing forward purchase contracts in order to assure supply. As we do this, wehave in the past often shorted a like amount of CBOT corn futures with similardates to lock in the basis differential. We also occasionally use CBOT futurescontracts to lock in the price of corn by taking long positions in CBOTcontracts in order to reduce our risk of price increases. Exchange tradedforward contracts for commodities are marked to market each period. Our forwardphysical purchases of corn are not marked to market.

 

At September 30, 2008, we had fixed the price of 9.3 millionbushels of corn through December 2008 at an average of $5.25 per bushel,representing approximately 39% percent of our corn requirements for theremainder of 2008.

 

*Marketing Alliance*

 

Ourmarketing alliance annualized volume at the end of the third quarter of 2008was 639 million gallons. With our own equity production, our marketing alliancepartner volumes, and purchase/resale volumes, we distributed approximately 900million gallons of ethanol on an annualized basis in the third quarter of 2008.Our expectation for the remainder 2008 is that another 215 million gallons ofannualized marketing alliance partner production will come online in the fourthquarter. Offsetting this increase in volumes in the fourth quarter will bedisruptions in supply from marketing alliance partners as a result of poorindustry economics. We have, in the fourth quarter, already seen reductions inproduction levels and gallons available for distribution from marketingalliance partners and may see additional supply disruptions in the future.

 

In additionto curtailments in supply from lower production volumes caused by currentindustry economics, a few existing marketing alliance partners have indicatedthat they are exploring alternative marketing arrangements. To this end, wehave received termination notices from some of our marketing alliance partnersfor our services.

 

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*Supply and Demand*

 

According to the Renewable Fuels Association, the annual ethanolproduction capacity in the U.S. of plants currently in operation and thoseunder construction is almost 13.8 billion gallons annually. This volume ofethanol production exceeds the mandate for renewable biofuel consumptionrequired in 2012. Ethanol produced in the United States competes withsugar-based ethanol produced in Brazil. This domestic production capacity,along with imports, may cause supply to exceed demand. If additional demand forethanol 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 prices to decrease, perhaps substantially.

 

*Expansion*

 

We haveidentified opportunities to increase our equity production capacity through thedevelopment of new production facilities. We are currently building 113 milliongallon annualized capacity ethanol production facilities at both Mt. Vernon,Indiana and Aurora, Nebraska. We expect the Mt. Vernon facility to beginramping up ethanol production in the first quarter of 2009 and the Aurora,Nebraska facility to begin ramping up ethanol in the second quarter of 2009. Inaddition, we areobligated to add an additional 113 million gallons of capacity through a phaseII expansion in Mt. Vernon, Indiana, and would be subject to material penaltiesif we do not. We also intend to add an additional 113 million gallons ofcapacity through a phase II expansion at Aurora, Nebraska, along withpotentially expanding our existing Pekin, Illinois campus. The timing of theseexpansions will be based upon, among other factors, market conditions and theavailability of financing on attractive terms. We anticipate that the aggregatecapital expenditures to build our phase I expansion at each of Mt. Vernon andAurora, excluding capitalized interest, will be approximately $250 million perplant, which includes approximately $15 million of additional infrastructure ateach plant to facilitate the construction of the phase II expansions. We havenot yet entered into agreements for any of our additional expansions. The costto build these additional expansions will depend on market conditions at thetime construction is commenced and may be higher or lower than the cost of thephase I expansions. There can be no assurance that we can raise additionalfunds to complete these projects.

 

We may be subject to material penalties if we do not timely completephase I of the Aurora expansion or either phase of the Mt. Vernon expansion. Ifphase I of the Aurora plant is not completed and fully operational by July 1,2009 we will be responsible for liquidated damages to the Aurora Cooperative of$138,889 per month (up to a maximum of $5 million) until the plant is fullyoperational. If we do not pay these damages, the counterparty has the right torepurchase the property at cost (subject to adjustment for any expenses whichwe have paid with respect to infrastructure construction). Our lease with theIndiana Port Commission requires substantial completion of phase I of the Mt.Vernon expansion (an initial 110 million gallons of capacity) by March 1,2009 and substantial completion of phase II of the Mt. Vernon expansion (anadditional 110 million gallons of capacity) by January 1, 2011, subject inthe case of phase II of the Mt. Vernon expansion to specified extension rights.If we do not achieve these milestones, the State of Indiana may, subject tospecified cure rights, take over construction and complete the facility at ourexpense. In addition, if we fail to achieve these milestones we will, subjectto specified cure rights or our ability to negotiate an extension, be indefault under our lease and the State of Indiana may also, at its election, (i) withoutterminating the lease re-let the premises to a third party and charge us forany necessary repairs and alterations, (ii) without terminating the lease,require us to pay all amounts we are obligated to pay under the lease as theybecome payable, less any amount received from any re-letting of the premises or(iii) terminate the lease. If the State of Indiana terminates the lease itcan require that we pay liquidated damages in the amount by which the leasepayments we are obligated to make under the lease exceed the fair andreasonable rental value of the premises, each 

 

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discounted to present value (but in no eventbeing less than two years of basic rent and minimum guaranteed wharfage underthe lease). In addition, upon any termination or expiration of the lease, theState does not have to pay us for the value of the plant or any otherimprovements that we made to the premises and can require us to restore the leasedpremises to their original condition at our cost and expense. In addition,under the design build agreements for the initial 113 million gallon capacityexpansion at each of Mt Vernon and Aurora, we have the ability to delayconstruction by up to 180 days. If we do so, we will be responsible for certainincreased costs and foregone profit of the contractor (potentially including anearly completion bonus). If we were to delay construction beyond 180 days thecontractor would be entitled to treat the delay as a termination by us forconvenience and we would be responsible for certain costs and expenses of thecontractor in connection with such termination.

 

**Liquidityand Capital Resources**

 

*Overviewand Outlook*

 

The following table sets forth selected information concerning ourfinancial condition:

 
| **(In thousands)**   | ** **   | **September 30,  2008** | ** **   | **December 31,  2007** | ** **   |
|---------------------------|--------------|------------------------------|--------------|-----------------------------|--------------|
| ** **                | ** **   | **(Unaudited)**              | ** **   | ** **                  | ** **   |
| *** ***              | *** *** | ** **                   | *** *** | *** ***                | *** *** |
| Cash and cash equivalents | ** **   | **$**                        | **36,255**   |                        | $            | 17,171 |   |
| Short-term investments    | ** **   | **—**                   |         | 211,500                     |         |
| Working capital           | ** **   | **90,434**                   |         | 303,377                     |         |
| Total debt                | ** **   | **300,000**                  |         | 300,000                     |         |
| Current ratio             | ** **   | **1.59**                     |         | 3.90                        |         |
|                           |              |                              |              |                             |              |  |  |

 

TheCompany has made commitments for the construction of new ethanol facilities. Webegan construction on the initial phase I expansions in Mt. Vernon, Indiana andAurora, Nebraska in 2007. It is expected that each phase I project will costapproximately $250 million. Through September 30, 2008, approximately$391.6 million has been spent on these two projects. We expect to spend anadditional $109.9 million to complete these projects, excluding capitalizedinterest.

 

During the third quarter, the Company amended itsengineering, procurement and construction contract for the ethanolfacility currently under construction in Aurora, Nebraska. The amendmentextends the construction and payment schedules for the ethanol facility. These changes should allow Aventine’s other ethanol facility currently underconstruction in Mt. Vernon, Indiana to begin producing ethanol and operatingcash flows before the Aurora West facility begins production.

 

Also during the third quarter, we amended our existingfive-year secured revolving credit facility to clarify certain ambiguitiesrelating to the treatment of capital expenditures in the calculation of thefixed charge coverage ratio included therein. The amendment changed thedefinition of “Non-Financed Capital Expenditures” contained in Section 1.01of facility, which is used in the calculation of the fixed charge coverageratio. If availability under the facility falls below $50 million, we mustmaintain a fixed charge coverage ratio of at least 1.1 to 1. At September 30,2008, we were in compliance with the fixed charge coverage ratio covenant. Basedon our current expectations regarding EBITDA and planned capital expenditures,we do not expect to satisfy the fixed charge coverage ratio before the end of2009 at the earliest and as a result do not expect to be able to access thelast $50 million of commitments under the facility. Failing to satisfy thefixed charge ratio does not constitute an event of default nor does it affectour ability to borrow amounts under the facility other than the last $50million of commitments.

 

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Total liquidity atSeptember 30, 2008 was $119.2 million, comprised of $36.3 million in cashand cash equivalents and $82.9 million (which is net of the last $50 millionwhich we do not expect to be able to access) under our existing securedrevolving credit facility. Inearly October, we drew down $60 million on our secured revolving creditfacility. We have invested these funds in cash equivalents until needed. Proformacash on hand at September 30, 2008 would have been $96.3 million,including this $60 million borrowing.

 

We believe that, under current industry conditions,our existing sources of liquidity will be sufficient to enable us to completeand start-up our phase I expansions at Aurora, Nebraska and Mt. Vernon, Indiana.We also expect that our existing sources of liquidity, includingcash flows from operations, will be sufficient to allow us to satisfy existinganticipated working capital needs, debt service obligations, capitalexpenditures and other anticipated cash requirements for 2008. However, we donot expect to have a meaningfulamount of excess liquidity to withstand unanticipated liquidity needs. Inparticular, our inventory, accounts receivable and accounts payable levels canvary materially as a result of changes in commodity prices, particularly cornand ethanol prices, as well as the number of gallons in inventory, the numberof gallons of ethanol purchased in purchase resale transactions or frommarketing alliance partners and days’ sales outstanding of receivables.

 

In addition to extending the construction period andpushing out the start-up date for our ethanol facility expansion in Aurora,Nebraska as previously announced, we continue to evaluate a number of otheractions designed to increase the amount of liquidity available to us,including; reducing inventory levels, seeking additional debt and equityfinancing, potentially delaying construction or start-up of our Mt. Vernon,Indiana expansion and other strategic initiatives. We cannot assure you thatany of these initiatives will generate additional liquidity for us onacceptable terms or at all.

 

On October 26, 2006, Aventine’s Board of Directors approved acommon stock share buyback program of up to $50 million. Under the repurchaseprogram, the Company may buy back shares from time to time on the open market. Theprogram has no minimum share repurchase amounts, and there is no fixed timeperiod under which any share repurchases must take place. This share repurchaseprogram is not expected to impact the Company’s expansion plans. From programinception through the end of the third quarter of 2008, the Company hasrepurchased a total of 369,615 shares of its common stock. The amount remainingunder the authorization to repurchase stock is approximately $45.9 million. Theamounts the Company may repurchase under this program in the future may beaffected by cash required to complete current facility expansions, as well ascash provided by operations.

 

*Sourcesof Liquidity*

 

Our principal sources of liquidity are cash, cash equivalents,short-term investments, cash provided by operations, and cash available underour secured revolving credit facility.

 

*Cash, cash equivalents and short-term investments.*For the first nine months of 2008, cash, cashequivalents and short-term investments as a whole decreased by $192.4 million. Cash,cash equivalents and short-term investments as of September 30, 2008 and December 31,2007 were $36.3 million and $228.7 million, respectively. The decrease in cash,cash equivalents and short-term investments is principally the result ofexpenditures related to our on-going plant expansion program and lossesincurred on the sale of our auction rate security portfolio, all offset by cashprovided by our operations.

 

C*ash provided by operations.*Net cash providedby operating activities in the first nine months of 2008 was $56.6****million, as compared to cash provided by operatingactivities of $53.9 million for the first nine months of 2007. Cash provided byoperations in 2008 was reduced by a regularly scheduled $15 million semi-annualinterest payment made in the second quarter of 2008 on our 10% senior 

 

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unsecured bonds. We issued these bonds in March 2007.As a result, no interest payment on these bonds was required until October 2007.

 

*Cash available under our liquidity facility*. In March 2007, we established a newfive year secured revolving credit facility with JPMorgan Chase Bank, N.A., asadministrative agent and a lender, of up to $200 million, subject to collateralavailability, which, under certain circumstances, can be increased to $300million. See “Item 2 — Management’s Discussion and Analysis of FinancialCondition and Results of Operation - Secured Revolving Credit Facility” belowfor more information about our secured revolving credit facility.

 

We had no borrowings outstanding under our secured revolving creditfacility at September 30, 2008, and $22.2 million of standby letters ofcredit outstanding, thereby leaving approximately $132.9 million in borrowingavailability under our secured revolving credit facility as of that date(including the $50 million which we have said we do not expect to be able toaccess).

 

In early October 2008, we drew down $60 million on our securedrevolving credit facility. We have invested these funds in cash equivalentsuntil needed.

 

*Uses ofLiquidity*

 

Our principal usesof liquidity are capital expenditures, payments related to our outstanding debtand liquidity facility and working capital.

 

*Capital expenditures.*During the first nine months of 2008, we spent approximately $202.3million, exclusive of capitalized interest of $19.5 million, on capitalprojects. Of this amount, $9.0 million was spent on maintenance andenvironmental projects, while $193.3 million was spent on capacity expansionprojects. The amount we expect to spend to complete our two new ethanolproduction facilities through the second quarter of 2009 is approximately$109.9 million, exclusive of capitalized interest. Expected capitalexpenditures on non-expansion related maintenance and environmental itemsshould be approximately $1.5 million for the remainder of 2008.

 

*Payments related to our outstanding debt and liquidity facility.*In the first nine months of 2008, we made aregularly scheduled $15 million semi-annual payment on our 10% senior unsecuredbonds on April 1. Interest payments of $15 million on our 10% seniorunsecured notes are due on April 1 and October 1.

 

*Working capital.*Our working capital declined from $303.4 million at December 31,2007 to $90.4 million at September 30, 2008 as we used current assets tofund our capital expenditures.

 

**SecuredRevolving Credit Facility**

 

Our liquidity facility consists of a five year secured revolving creditfacility with JPMorgan Chase Bank, N.A., as administrative agent and a lender,of up to $200 million, subject to collateral availability, which, under certaincircumstances, can be increased up to $300 million. Our secured revolvingcredit facility includes a $25 million sub-limit for letters of credit. Thecredit facility expires in March 2012, and, at September 30, 2008, issecured by substantially all of the Company’s assets, with the exception of theassets of Nebraska Energy, LLC.

 

Collateral availability is determined via a borrowing base, whichincludes a percentage of eligible receivables and inventory, and no more than$50 million of property, plant and equipment. The amount of property, plant andequipment which can be included in the borrowing base reduces at a rate 

 

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of $1.8 million each quarter beginning withthe quarter ended December 31, 2007. At September 30, 2008, theamount of property, plant and equipment which was eligible for inclusion in thecalculation of the borrowing base was $42.9 million.

 

Borrowings generally bear interest, at our option, at the followingrates (i) the Eurodollar rate plus a margin between 1.25% to 1.75%,depending on the average availability, or (ii) the greater of the primerate or the federal funds rate plus 0.50%, plus a margin between 0.00% to0.50%, depending on the average availability. Accrued interest is payablemonthly on outstanding principal amounts, provided that accrued interest onEurodollar loans is payable at the end of each interest period, but in no eventless frequently than quarterly. In addition, fees and expenses are payablebased on unused borrowing availability (0.25% to 0.375% per annum, depending onthe average availability), outstanding letters of credit (1.375% to 1.875%,depending on the average availability) and administrative and legal costs.

 

Availability under our secured revolving credit facility is subject tocustomary conditions, including the accuracy of representations and warranties,the absence of any material adverse change and compliance with certaincovenants, which, among other things, may limit our ability to incur additionalindebtedness and liens; enter into transactions with affiliates; makeacquisitions; pay dividends; redeem or repurchase capital stock or seniornotes; make investments or loans; consolidate, merge or effect asset sales; orchange the nature of our business. In addition, if availability under thefacility falls below $50 million, we must maintain a fixed charge coverageratio of EBITDA (as defined under the agreement) less non-financed capitalexpenditures and taxes to fixed charges (scheduled payments of principal,interest expense  and certain types ofdividend and other payments) of at least 1.1 to 1.

 

The secured revolving credit facility contains customary events ofdefault for credit facilities of this size and type, and includes, withoutlimitation, payment defaults; defaults in performance of covenants or otheragreements contained in the transaction documents; inaccuracies inrepresentations and warranties; certain defaults, termination events or similarevents; certain defaults with respect to any other Company indebtedness inexcess of $5.0 million; certain bankruptcy or insolvency events; therendering of certain judgments in excess of $5.0 million; certain ERISAevents; certain change in control events and the defectiveness of any liensunder the secured revolving credit facility. Obligations under the securedrevolving credit facility may be accelerated upon the occurrence of an event ofdefault.

 

As of September 30, 2008, we are in compliance with all covenantsunder our secured revolving credit facility, including the fixed chargecoverage ratio. If we continue with our building expansion on our currenttimetable and within the expected cost and given our expectations for futureEBITDA, we do not expect to be in compliance with the fixed charge coverageratio covenant before the end of 2009 at the earliest and, therefore, would nothave access to the last $50 million of availability. Failing to satisfy the fixed charge ratio doesnot constitute an event of default nor does it affect our ability to borrowamounts under the facility other than the last $50 million of commitments. We had no borrowings outstanding under oursecured revolving credit facility at September 30, 2008, and $22.2 millionof standby letters of credit outstanding, thereby leaving approximately $132.9million in borrowing availability under our secured revolving credit facilityas of that date (including the $50 million which we have said we do not expectto be able to access).

 

**EnvironmentalMatters**

 

We are subject to extensive federal, state and local environmentallaws, regulations and permit conditions (and interpretations thereof),including those relating to the discharge of materials into the air, water andground, the generation, storage, handling, use, transportation and disposal ofhazardous materials, and the health and safety of our employees. These laws,regulations, and permits require us to incur significant capital and othercosts, including costs to obtain and maintain expensive pollution 

 

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control equipment. They may also require usto make operational changes to limit actual or potential impacts to theenvironment. A violation of these laws, regulations or permit conditions canresult in substantial fines, natural resource damages, criminal sanctions,permit revocations and/or facility shutdowns. In addition, environmental lawsand regulations (and interpretations thereof) change over time, and any suchchanges, more vigorous enforcement policies or the discovery of currentlyunknown conditions may require substantial additional environmentalexpenditures.

 

Weare also subject to potential liability for the investigation and cleanup ofenvironmental contamination at each of the properties that we own or operateand at off-site locations where we arranged for the disposal of hazardouswastes. For instance, soil and groundwater contamination has been identified inthe 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 torelated claims by private parties alleging property damage or personal injurydue to exposure to hazardous or other materials at or from such properties. Whilecosts to address contamination or related third-party claims could besignificant, based upon currently available information, we are not aware ofany material liability relating to contamination or such third party claims. Wehave not accrued any amounts for environmental matters as of September 30,2008. The ultimate costs of any liabilities that may be identified or thediscovery of additional contaminants could adversely impact our results ofoperation or financial condition.

 

In addition, the hazards and risks associated withproducing and transporting our products (such as fires, natural disasters,explosions, abnormal pressures and spills) may result in spills or releases ofhazardous substances, and may result in claims from governmental authorities orthird parties relating to actual or alleged personal injury, property damage,or damages to natural resources. We maintain insurance coverage against some,but not all, potential losses caused by our operations. Our coverage includes,but is not limited to, physical damage to assets, employer’s liability,comprehensive general liability, automobile liability and workers’ compensation.We do not carry environmental insurance. We believe that our insurance isadequate for our industry, but losses could occur for uninsurable or uninsuredrisks or in amounts in excess of existing insurance coverage. The occurrence ofevents which result in significant personal injury or damage to our property,natural resources or third parties that is not covered by insurance could havea material adverse impact on our results of operations and financial condition.

 

Our air emissions are subject to the federal Clean Air Act, as amended,and similar state laws which generally require us to obtain and maintain airemission permits for our ongoing operations as well as for any expansion ofexisting facilities or any new facilities. Obtaining and maintaining thosepermits requires us to incur costs, and any future more stringent standards mayresult in increased costs and may limit or interfere with our operatingflexibility. In addition, the permits ultimately issued may impose conditionswhich are more costly to implement than we had anticipated. These costs couldhave a material adverse effect on our financial condition and results ofoperations. Because other ethanol manufacturers in the U.S. are and willcontinue to be subject to similar laws and restrictions, we do not currentlybelieve that our costs to comply with current or future environmental laws andregulations will adversely affect our competitive 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 authorities have been investigatingalleged excess VOC emissions and other air emissions from many U.S. ethanolplants, including our Illinois and Nebraska facilities. The matter relating toour Illinois wet mill facility is still pending, and we could be required to 

 

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install additional air pollution controlequipment or take other measures to control air pollutant emissions at thatfacility. If authorities require us to install controls, we would anticipatethat costs would be higher than the approximately $3.4 million we incurred forthis matter at our Nebraska facility due to the larger size of the Illinois wetmill facility. In addition, if the authorities determine our emissions were inviolation of applicable law, we would likely be required to pay fines thatcould be material. In February 2008, we received an indemnificationpayment from the former owner of our Nebraska facility relating to the cost ofinstalling environmental controls at that facility in connection with an April 2005consent decree with state authorities.

 

Wehave made, and expect to continue making, significant capital expenditures onan ongoing basis to comply with increasingly stringent environmental laws,regulations and permits, including compliance with the U.S. EnvironmentalProtection Agency’s (“EPA”) National Emissions Standard for Hazardous AirPollutants, or NESHAP, for industrial, commercial and institutional boilers andprocess heaters. This NESHAP was issued, but subsequently vacated. The vacatedversion of the rule required us to implement maximum achievable controltechnology at our Illinois wet mill facility to reduce hazardous air pollutantemissions from our boilers. We expect the EPA will revise the rule toimpose more stringent requirements than were contained in the vacated version. Inthe absence of a final EPA NESHAP for industrial, commercial and institutionalboilers and process heaters, we are working with state authorities to determinewhat technology will be required at our Illinois wet mill facility and whensuch technology must be installed. We currently cannot estimate the amount thatwill be needed to comply with any future federal or state technologyrequirement regarding air emissions from our boilers.

 

We currently generate revenue from the sale ofcarbon dioxide, which is a co-product of the ethanol production process at eachof our Illinois and Nebraska facilities. New laws or regulations relating tothe production, 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, Illinoisand five other Midwestern States have entered into the Midwestern GreenhouseGas Reduction Accord, a program which directs participating states to develop amulti-sector cap-and-trade mechanism to help achieve reductions in greenhousegases, including carbon dioxide. It is possible this program could requirecarbon dioxide emissions reductions from our Pekin, Illinois plants, whichcould result in significant costs. In addition, it is possible that otherstates in which we conduct or plan to conduct business, including Nebraska andIndiana, could join this accord or that federal, state or local regulatorscould require other costly carbon dioxide emissions reductions or offsets.

 

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

 

We are exposed to various market risks, including changes in commodityprices. Market risk is the potential loss arising from adverse changes inmarket rates and prices. In the ordinary course of business, we enter intovarious types of transactions involving financial instruments to manage andreduce the impact of changes in commodity prices. We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

***Commodity Price Risks***

 

We are subject to market risk with respect to the price andavailability of corn, the principal raw material we use to produce ethanol andethanol by-products. In general, rising corn prices result in lower profitmargins and, therefore, represent unfavorable market conditions. This isespecially true when market conditions do not allow us to pass along increasedcorn costs to our customers. The availability and price of corn is subject towide fluctuations due to unpredictable factors such as weather conditions,farmer planting decisions, governmental policies with respect to agricultureand international trade and 

 

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global demand and supply. Our weightedaverage gross corn costs for the three months ended September 30, 2008 and2007 was $5.78 and $3.81 per bushel, respectively. For the nine months ended September 30,2008 and 2007, our weighted average corn costs were $5.22 and $3.79,respectively.

 

We have firm-price purchase commitments with some of our corn suppliersunder which we agree to buy corn at a price set in advance of the actualdelivery of that corn to us. At September 30, 2008, we had commitments topurchase approximately 14.7 million bushels of corn through December 2009at an average price of $5.47 per bushel from these corn suppliers. Under thesearrangements, we assume the risk of a price decrease in the market price ofcorn between the time this price is fixed and the time the corn is delivered. Inorder to reduce our market exposure to price decreases, at the time we enterinto a firm-price purchase commitment, we also often enter into commodity forwardcontracts to sell a certain amount of corn at the then-current price fordelivery to the counterparty at a later date. We account for these commodityforward transactions under Statement of Financial Accounting Standard No. 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended by Statement of Financial Accounting StandardNo. 138, *Accounting for Certain DerivativeInstruments and Certain Hedging Activities*, and by Statement ofFinancial Accounting Standard No. 149, *Amendment of Statement 133on Derivative Instruments and Hedging Activities*, (hereinaftercollectively referred to as “SFAS 133”). These forward contracts are notdesignated as hedges and, therefore, are marked to market each period, withcorresponding gains and losses recorded in other non-operating income. The fairvalue of these derivative assets is recognized in other current assets in theCondensed Consolidated Balance Sheet, net of any cash received from the brokers.Information on this type of derivative transaction is as follows:

 
| **(In millions)**                                     | ** ** | **September 30,  2008** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|
|                                                       |       |                         |       |
| Realized and unrealized gain included in earnings in  2008 |       | $                            | 3.8        |   |
|                                                            |            |                              |            |  |

 
| **(In millions)**                                                                                        | ** ** | **September 30,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
|                                                                                                          |       |                         |       |
| Net bushels sold                                                                                              |       | 5.9                          |       |
| Aggregate notional value of derivatives outstanding                                                           |       | $                            | 34.7       |   |
| Period through which derivative positions currently  exist                                                    |       | December 2009           |       |
| Unrealized gain on the fair value of outstanding  derivative positions                                        |       | $                            | 5.0        |   |
| The change in fair value due to the effect of a 10%  adverse change in commodity prices to current fair value |       | $                            | (3.0       | ) |

 

We have also entered into commodity futures contracts in connectionwith the purchase of corn to reduce our risk of future price increases. Weaccount for these transactions under SFAS 133. These futures contracts are notdesignated as hedges and, therefore, are marked to market each period, withcorresponding gains and losses recorded in other non-operating income. The fairvalue of these derivative contracts are recognized in other current assets inthe Condensed Consolidated Balance Sheet, net of any cash received from thebrokers. Information on this type of derivative transaction is as follows:

 
| ** **                                                     | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|
| **(In millions)**                                         | ** ** | **2008**               | ** ** |
|                                                           |       |                   |       |
| Realized and unrealized net gain included in  earnings in 2008 |       | $                      | 8.0        |   |
|                                                                |            |                        |            |  |

 

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| ** **                                                                                                    | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| **(In millions)**                                                                                        | ** ** | **2008**               | ** ** |
|                                                                                                          |       |                   |       |
| Net bushels bought                                                                                            |       | 0.1                    |       |
| Aggregate notional value of derivatives outstanding                                                           |       | $                      | 0.4        |   |
| Period through which derivative positions currently  exist                                                    |       | December 2008          |       |
| Unrealized gain on fair value of derivatives                                                                  |       | $                      | —     |   |
| The change in fair value due to the effect of a 10%  adverse change in commodity prices to current fair value |       | $                      | —     |   |

 

Weare also subject to market risk with respect 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. These ethanol contracts are for the benefit ofour marketing alliance pool. We sometimes fix the price at which we sellethanol using fixed price physical delivery contracts. These fixed priceethanol contracts are shared with our marketing alliance pool, and are notapplicable only to our equity gallons. At September 30, 2008, we had fixedcontracts to sell approximately 14.9 million gallons of ethanol at an averagefixed price of $2.26 per gallon through December 2008. These normal saletransactions are not marked to market.

 

Wealso sell forward ethanol using contracts where the price is determined at apoint in the future based upon an index plus or minus a fixed amount. AtSeptember 30, 2008, we had sold forward approximately 17.2 million gallons ofethanol using wholesale gasoline as an index plus a fixed spread that averageda negative $0.42 per gallon. Under these arrangements, we assume the risk of aprice decrease in the market price of gasoline. In order to reduce our marketexposure to price decreases, at the time we enter into a firm sales commitment,we may also enter into commodity forward contracts to sell a like amount ofgasoline at the then-current price for delivery to the counterparty at a laterdate. These contracts are entered into only to protect the value of our ownequity gallons, and are not shared with our marketing alliance. We account forthese transactions under SFAS 133. These forward contracts are not designatedas hedges and, therefore, are marked to market each period, with correspondinggains and losses recorded in other non-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. Informationon this type of derivative transaction is as follows:

 
| **(In millions)**                            | ** ** | **September 30,  2008** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | ** **                   | ** ** |
| Realized and unrealized loss included in earnings |       | $                            | 5.7        |   |
|                                                   |            |                              |            |  |

 
| **(In millions)**                                                                                        | ** ** | **September 30,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                    | ** ** | ** **                   | ** ** |
| Gallons sold                                                                                                  |       | 3.9                          |       |
| Aggregate notional value of derivatives outstanding                                                           |       | $                            | 8.0        |   |
| Period through which derivative positions currently  exist                                                    |       | December 2008                |       |
| Unrealized loss on the fair value of outstanding  derivative positions                                        |       | $                            | (1.5       | ) |
| The change in fair value due to the effect of a 10%  adverse change in commodity prices to current fair value |       | $                            | (1.0       | ) |

 

***MaterialLimitations***

 

Thedisclosures with respect to the above noted risks do not take into account theunderlying commitments or anticipated transactions. If the underlying itemswere included in the analysis, the gains or losses on the futures contracts maybe offset. Actual results will be determined by a number of factors that arenot generally under our control and could vary significantly from those factorsdisclosed.

 

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

 

**Subsequent Event**

 

OnOctober 13, 2008, the Company completed its purchase of the 21.58% of NebraskaEnergy, LLC (“NELLC”) that it did not already own from Nebraska EnergyCooperative, Inc. The Company issued 1 million shares of its common stock, withan estimated value of approximately $6.6 million, in exchange for the 21.58%interest. The aggregate value of $6.6 million, or $6.62 per share, was based onthe average of Aventine’s closing stock price for the four trading daysimmediately before the acquisition announcement date, the acquisitionannouncement date and the four trading days immediately after the acquisitionannouncement date on July 31, 2008.   The purchase will be accounted for under thepurchase method of accounting in accordance with the provisions of Statement ofFinancial Accounting Standards No. 141, “Business Combinations”.

 

Asa result of our acquisition of the remaining interest in NELLC, NELLC became aguarantor under our secured revolving credit facility and senior unsecured bondindenture on October 22, 2008. As of this same date, all of the assets of NELLCare now collateral under our secured revolving credit facility.

 

**Item 4.               Controls andProcedures**

 

**Evaluation of DisclosureControls and Procedures**

 

Underthe supervision of and with the participation of management, including ourChief Executive Officer, Ronald H. Miller, and our Chief Financial Officer,Ajay Sabherwal, the Company carried out an evaluation of the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report. Based upon thatevaluation, Messrs. Miller and Sabherwal have concluded that, as of theend of the period covered by this report, the Company’s disclosure controls andprocedures have been designed and are effective to provide reasonable assurancethat information required to be disclosed in the reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the Securities andExchange Commission. These disclosure controls and procedures include, withoutlimitation, controls and procedures designed to provide reasonable assurancethat information required to be disclosed in such reports is accumulated andcommunicated to our management, including Messrs. Miller and Sabherwal, asappropriate to allow timely decisions regarding the required disclosure. Thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events. There can be no assurance that any designwill succeed in achieving its stated goal under all potential futureconditions, regardless of how remote.

 

**Changes in InternalControl over Financial Reporting**

 

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

 

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

 

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

 

We are from time totime involved in various legal proceedings, including legal proceedingsrelating to the extensive environmental laws and regulations that apply to ourfacilities and operations. We are not involved in any legal proceedings that webelieve could have a material adverse effect upon our business, operatingresults or financial condition.

 

On November 6, 2008,the Company commenced an action against JP Morgan Securities, Inc. and JP Morgan Chase Bank, N.A. (hereinaftercollectively referred to as “JP Morgan”) in the Tenth Judicial Circuit inTazewell County, Illinois. The Company’s complaint relates to losses incurredin excess of $31 million as a result of investments in Student Loan AuctionRate Securities purchased through JP Morgan.

 

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

 

TheCompany included in its Annual Report on Form 10-K as of December 31, 2007 adescription of certain risks and uncertainties that could affect the Company’sbusiness, future performance or financial condition (“Risk Factors”). The RiskFactors as included in our Form 10-K as of December 31, 2007 are updated byadditional risk factors as described below:

 

*Waivers or repeal of the renewablefuels standard (“RFS”) minimum levels of renewable fuels included in gasolinecould have a material adverse effect on Aventine’s results of operations.*

 

Subsequent to thepassage of the Energy Independence and Security Act of 2007 in December 2007increasing the mandated required usage of renewable biofuels, there have beenseveral efforts by various parties to repeal or reduce the RFS through newlegislation and/or requested waivers of the current legislation. To date,none of these efforts have been successful. However, any repeal or waiver fromthe RFS may adversely affect demand for ethanol and could have a materialadverse effect on Aventine’s results of operations and financial condition.

 

*Our ability to complete our ethanol plantexpansion projects in a timely manner and at the expected cost is highlydependant upon third parties, including our engineering, procurement andconstruction (“EPC”) contractor and their sub-contractors.*

 

We are highlydependant on third parties, including our EPC contractor and theirsub-contractors, for the timely completion of our new ethanol productionfacilities at the expected costs. Delays in the projects, whether the resultweather, regulatory issues or other issues related to the EPC contractor orsub-contractor, may affect our results of operations and financial condition.

 

*A reduction in the Volumetric Ethanol ExciseTax Credit (“VEETC”) may reduce the attractiveness of ethanol blended fuelsabove mandated amounts. Any reduction in the amount of discretionary blendingas a result of a reduction in the VEETC may have a material adverse effect onour results of operations and financial condition.*

 

The amount ofethanol production capacity in the U.S. as of September 30, 2008 isapproximately 10.5 billion gallons. This amount exceeds the 2008 mandated usageof renewable biofuels of 9 billion gallons. Ethanol consumption above mandatedamounts is primarily based upon the economic benefit derived by blenders,including benefits received from the VEETC. The 2008 Farm 

 

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Bill enacted into law reduces the VEETC from itscurrent 51 cents per gallon to 45 cents per gallon beginning in the first yearfollowing ethanol production reaching 7.5 billion gallons (which we believewill happen in 2008). Any reduction in discretionary blending as a result ofthe lower VEETC may affect the demand for ethanol above mandated amounts,thereby having a negative effect on our operations, results of operations andour financial condition.

 

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

 

**None**

 

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

 

**None**

 

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

 

**None**

 

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

 

**None**

 

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

 

(a)          Exhibits

 

10.1    Amendment to Engineering, Procurement andConstruction Services Fixed Price Contract, dated as of October 6, 2008.

 

10.2    Letter Agreementdated September 4, 2008 amending the Credit Agreement, dated as ofMarch 23, 2007, by and among Aventine Renewable Energy, Inc.,Aventine Renewable Energy—Mt Vernon, LLC and Aventine RenewableEnergy—Aurora West, LLC, the other Loan Parties thereto, the lendersthereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated byreference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed onSeptember 17, 2008)

 

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

 

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

 

32.1    Certification of the Chief Executive Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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32.2                           Certification of the Chief Financial Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

# **SIGNATURE**

# ** **

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

 
|                     | AVENTINE RENEWABLE ENERGY  HOLDINGS, INC. |
|--------------------------|-------------------------------------------|
|                     |                                      |
|                     |                                      |
| Dated:  November 7, 2008 | 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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