East Kansas Agri Energy 10-Q/A 2007 Q1 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

TQuarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2007

OR

£Transition report under Section 13 or 15(d) of the Exchange Act.

For the transition period from  _______   to  _________

Commission file number 0001170106

EAST KANSAS AGRI-ENERGY, LLC

(Exact name of Registrant as specified in its charter)

Kansas	48-1251578
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

P.O. Box 225, 1304 S. Main, Garnett, Kansas 66032

(Address of principal executive offices)

(785) 448-2888

(Registrant’s telephone number)

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

x  Yes          o  No

Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes          x No

Indicate the number of shares outstanding for each of the issuer’s classes of common equity as of the latest practicable date:

As of May 1, 2007, there were 21,898 membership units outstanding.

Explanatory Note Regarding Amendment No. 1

This Amendment No. 1 to the Quarterly Report on Form 10-Q/A of East Kansas Agri-Energy, LLC (“we”, “us”, “our” and “East Kansas”, the “Company”) for the fiscal quarter ended March 31, 2007, is being filed for the  purpose of amending and restating Item 1 of Part I of Form 10-Q/A to reflect the  Company’s balance sheet for the  fiscal quarter ended March 30, 2007 and for the fiscal year ended December 31, 2006.  The audited balance sheet for the fiscal year ended December 31, 2006 was inadvertently omitted from our original quarterly report for fiscal quarter ended March 31, 2007 filed on form 10-Q.  Our amended quarterly report on Form 10-Q/A includes the balance sheet in Part I — Item 1 “Financial Statements”.

In accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, the complete text of such Item, as amended, is set forth herein.  In addition to the filing of this Amendment No. 1 and pursuant to Rule 12b-15, we are including certain currently dated certifications.  The remainder of the Company’s Form 10-Q/A is unchanged.  This report speaks as of the original filing date of the Form 10-Q and has not been updated to reflect events occurring subsequent to the original reporting date.

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PART I.     FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

EAST KANSAS AGRI-ENERGY, LLC
BALANCE SHEET (UNAUDITED)
MARCH 31, 2007

	March 31, 2007
ASSETS	(Unaudited)			December 31, 2006
CURRENT ASSETS
Cash and cash equivalents	$	3,593,511		$	5,281,272
Trade accounts receivable - related party	4,082,867			3,423,118
Inventory	3,375,406			2,282,222
Investment in commodity contracts	258,628			1,345,752
Interest receivable	1,279,620			319,107
Prepaid expense	302,176			498,083
Total current assets	12,892,208			13,149,554
PROPERTY, PLANT AND EQUIPMENT
Land	580,322			580,322
Land improvements	2,179,578			2,179,578
Office equipment	270,866			270,866
Buildings	1,785,915			1,785,915
Equipment	46,675,996			46,675,432
Vehicles	22,743			22,743
Construction in progress	887,352			65,698
	52,402,772			51,580,554
Less accumulated depreciation	(5,601,935		)	(4,742,172		)
Total property, plant, and equipment	46,800,837			46,838,382
OTHER ASSETS
Investment in Industrial Revenue Bonds	47,866,117			47,866,117
Idle property	2,317,398			2,317,398
Other investment	200			200
Financing costs	615,288			615,288
Less accumulated amortization	(98,712		)	(79,298		)
Total other assets	50,700,291			50,719,705
Total assets	$	110,393,336		$	110,707,641
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES
Current portion of long-term debt	$	3,185,028		$	3,076,532
Accounts payable
Trade	295,225			595,285
Related parties	979,428			1,384,572
Accrued payroll, taxes and withholdings	131,529			136,871
Other accrued expenses	351,777			302,817
Accrued interest	1,323,350			363,742
Total current liabilities	6,266,337			5,859,819
LONG-TERM DEBT (less current maturities)	11,243,620			12,059,916
LEASE OBLIGATION	47,866,117			47,866,117
MEMBERS’ EQUITY
Capital contributions, 40,000 units authorized, 23,798 units issued of which 1,900 units are held as treasury stock	24,707,100			24,707,100
Treasury stock, at cost	(3,800,000		)	(3,800,000.00		)
Retained earnings	24,110,162			24,014,689
Total members’ equity	45,017,262			44,921,789
Total liabilities and members’ equity	$	110,393,336		$	110,707,641

See Notes to Unaudited Financial Statements

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EAST KANSAS AGRI-ENERGY, LLC
STATEMENT OF OPERATIONS (UNAUDITED)

	Three Months Ended March 31, 2007			Three Months Ended March 31, 2006
REVENUE
Related parties	$	25,605,171		$	21,015,698
Incentive funds	—			680,830
	25,605,171			21,696,528
COST OF SALES
Related parties	(14,568,676		)	(8,141,512		)
Other	(6,935,824		)	(6,499,761		)
	(21,504,500		)	(14,641,273		)
GROSS PROFIT	4,100,671			7,055,255
OPERATING EXPENSES
General, administrative and selling expenses	842,011			875,049
INCOME FROM OPERATIONS	3,258,660			6,180,206
OTHER INCOME (EXPENSE)
Interest income	993,034			977,073
Interest expense	(308,530		)	(576,182		)
Plant lease interest expense	(957,322		)	(944,208		)
Other income	167			—
	(272,651		)	(543,317		)
NET INCOME	$	2,986,009		$	5,636,889
BASIC AND DILUTED INCOME PER UNIT	$	136		$	237
WEIGHTED AVERAGE UNITS OUTSTANDING BASIC AND DILUTED	21,898			23,798

See Notes to Unaudited Financial Statements

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EAST KANSAS AGRI-ENERGY, LLC
STATEMENT OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31, 2007			Three Months Ended March 31, 2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,986,009		$	5,636,889
Adjustments to reconcile net income to net cash used in operating activities
Depreciation	859,762			752,581
Amortization	19,414			23,735
(Increase) decrease in current assets
Accounts receivable	(659,749		)	(863,946		)
Inventory	(1,093,184		)	163,045
Commodity contracts	1,087,124			(134,711		)
Prepaid expense	195,907			19,278
Interest receivable	(960,513		)	(950,299		)
Increase (decrease) in current liabilities:
Accounts payable	(366,869		)	(226,101		)
Accrued expenses	1,003,226			1,016,531
NET CASH PROVIDED BY OPERATING ACTIVITIES	3,071,127			5,437,002
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment, including construction in progress	(1,160,552		)	(962,116		)
NET CASH (USED IN) INVESTING ACTIVITIES	(1,160,552		)	(962,116		)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of financing fees	—			(3,815		)
Repayment of long-term debt	(707,800		)	(2,240,771		)
Distributions	(2,890,536		)	—
NET CASH (USED IN) FINANCING ACTIVITIES	(3,598,336		)	(2,244,586		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(1,687,761		)	2,230,300
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	5,281,272			4,569,145
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,593,511		$	6,799,445
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of capitalized interest	$	306,244		$	601,830
NON CASH INVESTING AND FINANCING ACTIVITIES
Property, plant, and equipment costs incurred	$	—		$	1,039,137

See Notes to Unaudited Financial Statements

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007

NOTE 1-                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

East Kansas Agri-Energy, LLC, (a Kansas limited liability company) located in Garnett, Kansas, was organized to own and operate a 35 million gallon ethanol plant with distribution within the United States. East Kansas Agri-Energy, LLC (the Company) was formally organized as a limited liability company as of October 16, 2001. Prior to that date the Company operated as a general partnership with no formal partnership agreement.

Basis of Accounting

The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements.  The results of operations for the three months ended March 31, 2007 and 2006, are not necessarily indicative of the results expected for a full year.

These financial statements should be read in conjunction with the financial statements and notes included in the Company’s financial statements for the year ended December 31, 2006.

Accounts Receivable

Accounts receivable are presented at face value, net of the allowance for doubtful accounts.  The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts based on historical experience and current economic conditions.  Management believes all receivables will be collected and therefore the allowance has been established to be zero at March 31, 2007.

The Company’s policy is to charge simple interest on trade receivables past due balances; accrual of interest is discontinued when management believes collection is doubtful.  Receivables are considered past due based upon payment terms set forth at the date of the related sale.  The Company has no receivables accruing interest March 31, 2007.

Financing Costs

Costs incurred related to origination of debt financing are recorded as an asset and amortized over the expected term of the debt.

Estimates

Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from the estimates used.

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007

Earnings Per Unit

Earnings per unit are calculated based on the period of time units have been issued and outstanding. For purposes of calculating diluted earnings per capital unit, units subscribed for but not issued are included in the computation of outstanding capital units.

General, administrative and selling expenses

The primary components of general and administrative expenses are management fees, insurance expense, selling expenses and payroll.

Revenue Recognition

Revenue from the production of ethanol and related products is recorded upon transfer of title to our customers.  The transfer takes place at the plant site and therefore shipping terms are FOB shipping point.  Interest income is recognized as earned.  Income from federal and state incentives are recognized when received due to uncertainty of available funds and pro-rations used by the sponsoring organizations.

Cost of Sales

The primary components of cost of sales from the production of ethanol and related products are grain expense, energy expense (natural gas and electricity), raw materials expense (chemicals and denaturant), labor and depreciation on process equipment.

Shipping and Handling

Shipping and handling costs are expensed as incurred and are included in the cost of sales.

Income Taxes

The Company is organized as a limited liability company under state law and is treated as a partnership for income tax purposes.  Under this type of organization, the Company’s earnings pass through to the partners and are taxed at the partner level.  Accordingly, no income tax provision has been calculated.  Differences between financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organizational and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes, and the difference between the recorded amounts of financial statement and tax depreciation, unrealized gains or losses on commodity contracts and incentive programs payments.

Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

The Company believes the carrying value of cash and cash equivalents approximates fair value due to the short maturity of these instruments.  The Company estimates the fair market value of the investment in Industrial Revenue Bonds to approximate cost.

The Company believes the carrying amount of long-term note payable obligations approximates fair value.  For the permanent financing, fair value approximates the carrying amount due to the variable interest rate feature of the debt.

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007

Inventory

Inventory is stated at the lower of cost, determined on a first in, first out basis, or market value.

Investment in Commodity Contracts

SFAS No. 133 requires a company to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted from SFAS No. 133 as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal are documented as normal and exempted from the accounting and reporting requirements of SFAS No. 133.

The Company enters into short-term cash grain, option and futures contracts as a means of securing grain for the ethanol plant and managing exposure to changes in commodity prices. All derivatives are designated as non-hedge derivatives. Although the contracts are effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

As part of its trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk and are exposed to risk of loss in the market value of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options. During the periods ended March 31, 2007 and 2006 this activity resulted in net losses of $1,087,124 and $489,289, respectively, which are reported in cost of sales.

Property and Equipment

Depreciation is computed over the estimated useful life of each asset using the straight-line method.  Estimated useful lives generally used in computing depreciation are:

Land improvements	15 to 20 years
Buildings	40 years
Machinery and equipment	7 to 15 years
Office equipment	5 to 10 years
Computers and software	3 to 5 years
Vehicles	5 years

The Company’s property and equipment were acquired under lease agreements pursuant to an industrial revenue bond issue.  The Company is required to make semi-annual deposits with the Trustee sufficient to service the principal maturities and interest requirements.  Title to the property will be transferred to the Company when the lease is terminated upon retirement of the bonds.  Accordingly, the bonds have been recorded as a direct obligation of the Company.  The Company is also the holder of the bonds.

The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the asset may not be recoverable.  An impairment loss is recorded if the sum of the future cash flows is less than the carrying amount of the asset.  The amount of the loss is determined by comparing the fair market value of the asset to the carrying amount of the asset.  Such assessments did not result in any adjustment to the value of the non-current assets.

Idle Property

The Company has incurred $2,317,398 of costs related to the preliminary construction of a rail spur project.  The Company does not currently have an estimate of when and if the project is going to be completed.  Accordingly, the costs have been classified as idle property.  The Company plans to continue to evaluate the status of this project in future periods.

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007

Environmental Liabilities

The Company’s operations are subject to federal, state and local environmental laws and regulations.  These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location.  Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage; and to limit the financial liability which could result from such events.  Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.

NOTE 2 -               INCENTIVE PAYMENTS

The Company qualified for the federal U.S. Department of Agriculture Bio Energy Program.  The federal program was managed by the Commodity Credit Corporation and was designed to expand the production of fuel grade ethanol by offering incentives for incremental production compared to the same quarter of the prior year.  The annually funded program ran through the state’s fiscal year 2006 and incentive payments were pro-rated if applications for incentives exceeded the annual funding.  The maximum annual incentive program payments the Company could receive was $7,500,000; individual producers were also subject to an annual limitation of 5% of the total funding.  During the period ended March 31, 2006 the Company received $225,160 in federal incentives.

The Company has been approved for the Kansas Qualified Agricultural Ethanol Producer Incentive Fund.  The incentive rate is $.075 per gallon of ethanol produced.  The Company must establish they have produced 5,000,000 gallons of ethanol before the State of Kansas will disburse the funds.  Incentive payments are limited to 15,000,000 gallons per production year.  During the periods ended March 31, 2007 and 2006, the Company received $0 and $455,671, respectively.

NOTE 3 -               INVENTORY

Inventories are summarized as follows:

	March 31,		December 31,
	2007		2006
Raw Material	$	2,112,004	$	977,820
Work in Progress	614,611		563,362
Finished Goods	648,791		741,040
	$	3,375,406	$	2,282,222

NOTE 4 -               LONG-TERM DEBT

On November 23, 2004, the Company entered into a Credit Agreement with Home Federal Savings Bank, establishing a construction loan facility for the construction of a 35 million gallon per year ethanol plant. The construction financing is in the amount of $26,000,000 consisting of a $21,000,000 conventional term loan and a $5,000,000 loan, with both loans being secured by substantially all of our assets.

During the construction phase, the Company made monthly payments of interest only at a variable interest rate equal to prime plus 1.75% with a floor of 6%. On September 20, 2005, following construction completion, the loan was segmented into two loans (1) a $5,000,000 loan (Loan A), and (2) a $21,000,000 conventional term loan (Loan B). The $5,000,000 loan has an amortization period and maturity date of ten years. The Company makes monthly

9

EAST KANSAS AGRI-ENERGY, LLC

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007

payments of principal and interest on the $5,000,000 loan at an interest rate equal to prime.  The $21,000,000 conventional loan has an amortization period of ten years but will mature at the end of five years. The Company makes monthly payments of principal and interest on the $21,000,000 loan at an interest rate equal to prime.  The effective interest rate for both loans at March 31, 2007 was 8.25%.

The Company pays a $20,000 annual administration fee related to the credit facility.  The credit facility is secured by a mortgage on our real property and a security interest in all personal and intangible assets of the Company, including assignment of all material contracts.

On May 4, 2006, the Company agreed to renegotiate terms of their bank financing.  The new terms provide for a $4,000,000 term revolving loan in addition to the existing term loans.  The interest rate on the term revolving loan is the prime rate.  The term revolving loan available credit balance is reduced by $400,000 annually beginning December 31, 2007 and matures on October 1, 2010.  At March 31, 2007, the Company has not used any amount related to the term revolving loan.

During the term of the loan, all deposit accounts related to the Company must be maintained at Home Federal Savings Bank. The Company is subject to certain financial loan covenants consisting of minimum working capital, minimum fixed charge coverage, minimum current ratio, minimum debt service, minimum net worth and maximum debt to net worth covenants during the term of the loan. The Company is also prohibited from making distributions to their members; however, the Company is allowed to distribute 50% of our net income to our members after our lender has received audited financial statements for the fiscal year. If the Company meets certain financial ratio requirements, it may distribute an additional 10% of net income.  The Company must be in compliance with all financial ratio requirements and loan covenants before and after any distributions to the members.  The lender temporarily waived, through December 31, 2007, the capital expenditure covenant.  With the waiver, the Company is in compliance with the applicable loan covenants as of March 31, 2007.

The Company is only allowed to make annual capital expenditures up to $500,000 annually without the lender’s prior approval. During the term of the loan, the Company is required to pay to the lender an annual amount equal to the greater of: 1) 75% of any Commodity Credit Corporation Bio-Energy income payments received during the year, or 2) 25% of the Company’s free cash flow for each year. Payments consisting of USDA Commodity Credit Corporation Bio-Energy income must be paid to the lender within 15 days of receipt of any such payments. These payments will continue until an aggregate sum of $7,500,000 has been received by the lender.  The Company is in compliance with the applicable loan covenants as of March 31, 2007.

The Company financed its waste water reuse facility through two bond issues by the City of Garnett.  The Utility System Revenue Bonds require annual principal payments beginning on October 1, 2006 and continue through 2015.  Interest payments on these bonds are due semi-annually, at interest rates ranging from 4.6% to 5.2%.  The first interest payment was due April 1, 2006.  The Community Development Block Grant (CDBG) Bonds require semi-annual principal and interest payments beginning on July 1, 2006 and continue through 2015.  The bonds have a fixed interest rate of 2%

Long-term obligations of the Company are summarized as follows:

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007

	March 31,			December 31,
	2007			2006
Loan B	$	10,998,987		$	11,580,282
Loan A	2,621,109			2,747,614
Utility System Revenue Bonds	485,000			485,000
CDBG Bonds	323,552			323,552
Less current portion	(3,185,028		)	(3,076,532		)
Long-term portion	$	11,243,620		$	12,059,916

The estimated maturities of long-term debt at March 31, 2007, are as follows:

12 Month Period Ending March 31,	Amount
2008	$	3,185,028
2009	3,333,310
2010	3,617,756
2011	3,638,243
2012	255,219
Thereafter	399,092
	$	14,428,648

NOTE 5 -               MEMBERS’ EQUITY

As specified in the Company’s Operating Agreement, voting rights are one vote for each voting unit registered in the name of such Member as shown on the Membership Registration maintained by the Company. No Member shall directly or indirectly own or control more than 25% of the issued and outstanding voting membership interest in the Company at any time.

Income and losses of the Company shall be allocated among the Members in proportion to each Member’s respective percentage of units when compared with the total Units issued.

The Company’s cash flow shall first be applied to the payment of the Company’s operating expenses (including debt service) and then to maintenance of adequate cash reserves as determined by the board of directors in its sole discretion, and then shall be distributed from time to time to the Members in proportion to their respective percentage units. No member has the right to demand and receive any distribution from the Company other than in cash. No distribution shall be made if, as a result thereof, the Company would be in violation of any loan agreement, and of if the Company would be in violation of any loan agreement, of if the Company’s total assets would be less than the sum of its total liabilities.

Transfer, disposition or encumbrance of Capital Units is subject to certain restrictions, including approval by the board of directors.

The board of directors approved the redemption of 1,900 units from a member.  The redemption represents the member’s entire unit balance.  On May 10, 2006, the Company purchased the member’s units for a total of $3,800,000.

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007

On March 23, 2007, the Company made a dividend distribution to its members in the amount of $132 per share, for a total payment of $2,890,536.

NOTE 6 -               CONCENTRATION OF CREDIT RISK

The Company maintains cash balances at five financial institutions in its trade area. The accounts are secured by the Federal Deposit Insurance Corporation up to $100,000. At times, the Company’s bank balance may exceed $100,000.

NOTE 7 -               COMMITMENTS AND CONTINGENCIES

On November 12, 2004, the Company entered into a Trading Agreement with United Bio Energy Trading, LLC, an affiliated related party, in which United Bio Energy Trading, LLC will provide market information and consulting services for the Company. The Company anticipates that the term of the agreement will be for at least five years and will pay a monthly fee of $6,000.

On November 12, 2004, the Company entered into a Distillers Grains Marketing Agreement with United Bio Energy Ingredients, LLC, an affiliated related party, pursuant to which United Bio Energy Ingredients, LLC will purchase all dried and wet distillers grains produced at the plant for a term of at least five years at a price of 98% of the FOB plant price United Bio Energy Ingredients, LLC charges its buyers of dried distillers grains, and 95% of the FOB plant price United Bio Energy Ingredients, LLC charges its buyers of wet distillers grains. United Bio Energy Ingredients, LLC, will use its best efforts to achieve the highest resale price available under prevailing market conditions. The Company is responsible for supplying all labor and equipment to load or unload trucks or rail cars without charge to United Bio Energy Ingredients, LLC and is required to provide storage for at least 10 days production of wet and dry distiller grains. In addition, the distiller grains must meet quality requirements so that they will meet current industry standards for primary animal feed ingredients. If the Company fails to supply distiller grains that comply with industry standards, United Bio Energy Ingredients, LLC may reject them.  The Company paid commissions of $133,308 and $78,865 for the periods ended March 31, 2007 and 2006, respectively, related to this marketing agreement.

On November 12, 2004, the Company entered into a Raw Grains Agreement with United Bio Energy Ingredients, LLC, an affiliated related party. The Raw Grains Agreement provides for the Company to purchase all raw grains necessary for ethanol production from United Bio Energy Ingredients, LLC for a period of at least five years. Pursuant to the agreement, United Bio Energy Ingredients, LLC will use its best efforts to arrange for the purchase of grain at the lowest price available under prevailing market conditions and we will supply all labor and equipment necessary to load or unload trucks or rail cars. For its service, the Company will pay United Bio Energy Ingredients, LLC the actual cash procurement price and all reasonable and necessary expenses to get the grain to the plant plus a $.02 per bushel fee. The title, risk of loss, and responsibility for the quality of grain will transfer to the Company when it unloads the grain at the plant. Prior to that time, United Bio Energy Ingredients, LLC will bear the risk of loss. All grain delivered to the plant shall meet certain quality standards and the Company will have the option to reduce the price the Company will pay or fully reject any delivery that fails to conform to these standards, depending upon the severity of the noncompliance.  For the periods ended March 31, 2007 and 2006, the Company paid $84,583 and $72,083, respectively, in brokerage fees for grain purchases made under this agreement.

On November 12, 2004, the Company also entered into an Ethanol Agreement with United Bio Energy Fuels, LLC, an affiliated related party.  United Bio Energy Fuels, LLC changed their name to Provista Renewable Fuels Marketing, LLC (Provista).  The terms of the agreement provide that Provista will market all fuel-grade ethanol produced at our plant. In exchange, the Company agrees to pay Provista a fee of $.01 for each gallon of ethanol produced at the Company’s plant during the term of the agreement. The Company expects that the term of the agreement will be at least 5 years. Provista also agreed to use its best efforts to obtain the highest price for ethanol available under prevailing market conditions.  For the periods ended March 31, 2007 and 2006, the Company paid $109,855 and $103,481, respectively, in marketing fees for ethanol marketing under this agreement.

On November 12, 2004, the Company entered into a Management Agreement with United Bio Energy Management, LLC, a related party, in which United Bio Energy Management, LLC will supervise and direct the general

12

EAST KANSAS AGRI-ENERGY, LLC

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007

operations of the plant for an anticipated period of at least five years. United Bio Energy Management, LLC will provide the services of a full-time general manager to the plant.  The Company had agreed to compensate United Bio Energy Management, LLC an annual fee of $250,000 for these services payable in monthly installments of $20,833, plus an incentive bonus based on the attainment of certain financial benchmarks. United Bio Energy Management, LLC will appoint a general manager to be based on site at our plant, and shall work exclusively for us. In the event of a dispute, the Management Agreement provides that the Company will first attempt to amicably settle any dispute or difference privately between United Bio Energy Management, LLC and the Company. If the Company cannot resolve the dispute as a result of the discussions, then the Company must submit the matter to non-binding mediation. In the event that the dispute is not settled through mediation, the matter must be resolved by non-appealable arbitration in accordance with the rules of the American Arbitration Association as applicable in the State of Kansas. The determination of the arbitrator is expected to be final and may not be appealed to any court. The prevailing party in any arbitration proceeding is entitled to recover reasonable attorneys’ fees and expenses incurred. The agreement commenced during March 2005.  For the period ended March 31, 2006, the Company incurred costs of $269,009 related to this agreement including reimbursable expenses. On December 13, 2006 the Company reached an agreement with United Bio Energy Management, LLC to terminate the above Management Agreement effective December 31, 2006.  The Company has agreed to continue participating in the UBE Plant Manager Program and Group Buying Program for a monthly fee of $10,000 for a term of one year, with the first monthly installment due and payable on January 1, 2007.

On December 1, 2006, the Company entered into an agreement with Jade Millrights, Inc. for construction of a grain bin for $905,100.  As of March 31, 2007, the Company has incurred $737,786 related to the agreement and $120,702 of additional expenses related to the project, none of which are included in accounts payable.

The following is a schedule of the annual commitments related to the above agreements.

12 months ending March 31,
2008	$	512,775
2009	404,108
2010	398,108
2011	332,108
2012	332,108
Thereafter	1,022,332
	$	3,001,539

The Company is involved in various claims arising in the normal course of business.  Management believes that any financial responsibility that may be incurred would not be material and therefore no additional accrual is deemed necessary.

NOTE 8 -               SALE / LEASEBACK TRANSACTION

On December 20, 2005, the Company completed an industrial revenue bond financing with the City of Garnett, Kansas that will provide property tax savings for 10 years on the plant site.  As part of the financing, title to the plant site and improvements have been transferred to the City of Garnett, Kansas, as security for the repayment of the bonds, and the Company is leasing back the site in an amount that is equal to the amount of the principal and interest to be paid on The City of Garnett, Kansas bonds.  Home Federal Savings Bank consented to this transaction, and the bonds have been pledged to Home Federal Savings Bank as security for any obligations under the Home Federal Savings Bank Credit Agreement.  As part of the financing, the Company paid the bond underwriter, Gilmore & Bell, P.C. $40,000.  The maximum principal amount of the bonds is $50,000,000.  The bonds were initially issued in the

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EAST KANSAS AGRI-ENERGY, LLC

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007

 principal amount of $47,866,117, which is the amount of the Company’s expenditures on the plant as of December 20, 2005.  The additional $2,133,883 is available for future capital project costs.

The $40,000 of financing fees paid to the bond underwriter and $23,656 of legal and other cost associated with the bond closing will be amortized over the approximately 10.5 year life of the bonds.  A total of $1,512 and $1,433 of amortization expense related to these costs was recognized during the periods ended March 31, 2007 and 2006, respectively.

From the proceeds of the bond, the Company purchased the bonds as an investment.  The Company, as holder of the industrial revenue bonds, is due interest at 8.0% per annum with interest payable semi-annually on June 1st and December 1st, commencing June 1, 2006.  The interest income is directly offset by the lease payments on the plant.  Both the bond and the corresponding lease have terms commencing December 20, 2005 and terminating on June 1, 2016.  The entire outstanding principal is due upon termination of the bonds.  The outstanding principal at March 31, 2007 was $47,866,117.  The lease qualifies as a capital lease.  Interest income recognized on the Industrial Revenue Bonds for the periods ended March 31, 2007 and 2006 was $957,322 and $944,208, respectively.  These amounts are equal to the lease expense of the plant for those periods.

Future debt service requirements on the Industrial Revenue Bonds at March 31, 2007 are as follows:

12 months ending	Interest
March 31,	Rate	Principal		Interest		Total
2008	8%	$	—	$	3,829,289	$	3,829,289
2009	8%	—		3,829,289		3,829,289
2010	8%	—		3,829,289		3,829,289
2011	8%	—		3,829,289		3,829,289
2012	8%	—		3,829,289		3,829,289
Thereafter	8%	47,866,117		17,231,803		65,097,920
Totals		$	47,866,117	$	36,378,248	$	84,244,365
Amount representing interest						(36,378,248		)
Long-Term Obligation						$	47,866,117

NOTE 9 -               RETIREMENT PLAN

During 2005, the Company began a SIMPLE 401(k), Savings Incentive Match Plan for Employees, retirement plan for all eligible employees.  All employees are eligible to participate in the plan.  The Company makes a matching contribution of 3% of participants’ eligible wages.  The employees are fully vested upon contribution to the plan.  The Company match for the periods ended March 31, 2007 and 2006 was $13,034 and $9,359, respectively.

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ITEM 6.  EXHIBITS.

The following exhibits are filed as part of this report.

Exhibit No.	Exhibit
31.1	Certificate Pursuant to 17 CFR 240.13(a)-14(a)
31.2	Certificate Pursuant to 17 CFR 240.13(a)-14(a)
32.1	Certificate Pursuant to 18 U.S.C. Section 1350
32.2	Certificate Pursuant to 18 U.S.C. Section 1350

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			EAST KANSAS AGRI-ENERGY, LLC
Date:		August 10, 2007	/s/ William R. Pracht
			William R. Pracht
			President (Principal Executive Officer)
Date:	August 10, 2007		/s/ Thomas D. Leitnaker
			Thomas D. Leitnaker
			Chief Financial Officer (Principal Financial & Accounting Officer)

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