Alto Ingredients Inc (ALTO) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Pacific Ethanol year-end earnings call. Today's conference is being recorded. For opening remarks, I would like to turn the call over to Mr. Gregory Pettit of Hill and Knowlton, Pacific Ethanol's Investor Relations representative. Please go ahead, sir.

Thank you. Good morning and thank you for joining us today for Pacific Ethanol's conference call discussing the Company's fourth quarter and full-year results. With me today are Neil Koehler, President and Chief Executive Officer, and John Miller, Chief Operating Officer and Acting Chief Financial Officer.

Before we highlight and discuss the Company's performance, I need to remind you that a large proportion of our discussion will involve forward-looking statements, including areas of future development, future financial performance, future financial strength and commodity markets. These forward-looking statements are subject to a number of risks and uncertainties, including general market conditions, government regulations, demand for our product, technology used in our industry and general economic conditions that may cause actual results to differ materially from those stated or implied on this call.

We refer you to our press release issued after market yesterday, which contains a bit more detailed description of our forward-looking statements, which should be applied to the call we're about to have.

Financial details included in the press release and discussed on this call are available on our website at www.PacificEthanol.net. This conference call is also being webcast and as such is open to the general public and the media. Webcast links and access to the accompanying visuals are also available on the Company's website. Beginning approximately one hour after the conclusion of this call, a replay of this call will be available through the Company's website for one week. The call in numbers and access codes are provided on the website and in the text of our earnings release.

We will start the call with some prepared remarks and end with a brief question and answer session. I would now like to turn the call over to Neil Koehler.

Thank you, Gregory, and good morning to all of you on the call and welcome to Pacific Ethanol's first investor conference call to discuss our fourth quarter and full-year 2006 financial results.

We are very pleased to report record results for our Company. In the fourth quarter we posted record quarterly sales of over $80 million on sales volume of nearly 32 million gallons. For the fiscal year 2006, we posted record annual sales of over $226 million on sales volume of over 100 million gallons. Our gross profit margin for the quarter was nearly 15% and over 10% for the full year.

Our adjusted EBITDA was $2.7 million in the fourth quarter and $5.4 million for fiscal year 2006. On a net income basis we had a near breakeven year, even when considering large non-cash and nonrecurring expenses. These results exceeded our own internal expectations.

John will be providing more detail on these numbers, but before he does that, I'd like to highlight our major accomplishments of 2006.

We successfully started up our first ethanol production facility in Madera, California. We commenced production in Madera in November and I am pleased to announce that this facility is now running at over the nameplate capacity of 35 million gallons per year.

In the middle of 2006, we broke ground on our second facility, a 35 million-gallon per year production plant in Boardman, Oregon. We are on-track to commence production at Boardman in the middle of this year.

We have now broken ground on our third facility, a 50 million-gallon per year plant in Burley, Idaho and we'll be breaking ground on two additional 50 million-gallon per year facilities in California over the next several weeks.

Our development and construction team has done a remarkable job at initiating these projects and keeping them on schedule in an environment where project delays and even project cancellations are now common.

With these first five greenfield biorefineries, we are on track to achieve our previously stated goal of 220 million gallons of annual ethanol production by the middle of 2008. With our development pipeline of additional projects, we are also on track to achieve our previously stated goal of 420 million gallons of annual production by the end of 2010.

Also in 2006, we demonstrated our ability to move on the M&A front by acquiring a 42% interest in Front Range Energy, a 40 million gallons per year production facility in Windsor, Colorado. This plant operates consistently above nameplate capacity, is a very efficient and well-run operation and expands our production and marketing presence in the West.

We are achieving these objectives by building a very strong balance sheet. In 2006, we raised $222 million of equity and just this week closed on a $325 million debt facility.

Finally, I would like to identify the four competitive strengths that we believe differentiate us in the marketplace and position Pacific Ethanol for strong and profitable growth in 2007 and for many years to come.

The first would be a strong and growing market position in the Western United States. Through our marketing company, Kinergy and predecessor companies, we have been marketing ethanol in the West for over 20 years. We have established long-standing relationships with both ethanol suppliers and major and independent oil company customers that have allowed us to build this market position. We continue to expand our marketing infrastructure and customer base. We differentiate our company in the marketplace by providing full-service ethanol delivery that includes complete logistics management and inventory control.

Our second competitive strength is our strategic production locations. We have very carefully chosen our production sites at the intersection of large markets for both the fuel and the feed that we produce. This destination production and marketing model generates significant transportation and energy cost savings that lead to a sustainable low-cost production advantage.

Our third competitive strength is our experienced management team. We have assembled a dream team of professionals with many years of experience in all the important disciplines affecting our business, including construction, operation, finance, marketing, risk management and legal. A key business strategy of ours is to internalize all of this expertise on our team, rather than contract on the outside for these services.

Our fourth competitive strength is our focus on advanced technology. We employ state of the art design at our production facilities to achieve significant operational efficiencies. Our owner-construct model has afforded us the opportunity to utilize our internal expertise to modify off the shelf technology designs to improve our plant performance. We are exploring means to further drive down the cost of production and diversify into other raw materials and processes for ethanol production.

With that, I'd like to now turn it over to John to run through the financial and operating details of our fourth quarter and fiscal year results.

Thank you, Neil. If you're following along with our slides, starting on the slide 1 summary this morning, I'd like to cover some of our financial highlights for the quarter and for the year, starting with the income statement and then the balance sheet.

Then I'd like to discuss briefly some of the non-operating and non-cash items that have impacted our results for the quarter and for the year. I will talk about our capital spending over the past year and our plans for the coming year. Then I would like to make a couple of comments from my COO perspective to talk about our operations and highlight some areas where we are performing well and some that need attention.

On slide 2, we have data from the income statement, which for 2006, continued to be dominated by our marketing operations. If you look first at the quarterly comparisons, the impact of our entry into ethanol production, even for less than the full quarter, had an immediate impact on our revenues, volumes and margins.

Net sales for the fourth quarter were a record for the Company at over $80 million, 123% greater than our net sales for the same quarter in 2005. Of that $80 million, $25.9 million came from the sale of ethanol and co-products at Madera and our share of the Front Range results. Our ethanol sales volume rose over 65% to 31 million gallons. Gross margin for the quarter rose to 14.6% compared to 3.7% last year and total gross profit amounted to 11.7 million.

Due to an unusually high SG&A line and some non-cash compensation costs I will address in just a moment, the Company posted a net loss of $3.1 million and loss available to common stock holders of $4.1 million or $0.11 per common share.

For the year as a whole, net sales were $226.3 million, up over 158% from sales in 2005. Sales volumes for the Company were about 102 million gallons of ethanol, nearly double the volume of 2005. Net loss for the year was just below breakeven at $142,000 compared with a net loss in 2005 of $9.9 million. Net loss for the year included $6.2 million of non-cash compensation expenses.

The Company posted a loss available to common stockholders of $87.1 million or $2.50 per share, of which $84 million represents the non-cash deemed dividend in respect of preferred stock acquired by Cascade in the second quarter of 2006.

Looking at slide 3, adjusted EBITDA for the year was $5.4 million of which $2.7 million was posted in the fourth quarter. This illustrates the positive impact ethanol production will have on our operating profitability going forward.

Slide 4 shows our commodity price performance. During the quarter, the Company's average ethanol price increased year-over-year to $2.26 a gallon, 19.5% higher than the $1.89 per gallon we averaged in the fourth quarter of 2005.

Our average corn price, the delivered cost of corn for the time we were in production during Q4, was $2.95 per bushel. Our average basis was $0.51, which translates to a CBOT equivalent of $2.44 per bushel, which compares very favorably to an average CBOT market price during the period of $3.42.

Our co-product return was 33.4%. For the year, we achieved an average ethanol price of $2.28 per gallon, 36.5% higher than the average of $1.67 we got in 2005.

I mentioned our SG&A earlier. It grew to $24.6 million on the year, from $12.6 million in 2005. The growth is attributable to a number of factors, including a $6.2 million in non-cash compensation and a big effort to install business processes and our SOx compliance activities.

Moving on to slide 6 and the balance sheet, it is obviously a lot stronger than it was at the end of 2005, with over $109 million in cash, restricted cash and marketable securities. Without summarizing our cash flow statement, which you will be able to study in a couple of days in our 10-K, this strong balance sheet comes after a year in which we made substantial investments in construction and startup at Madera and the ongoing construction at the Boardman plant and the investment made in Front Range.

Our sources of funds included $82.5 million from Cascade and $138 million netted from our pipe offering. As many of you will have noted, we announced earlier this week that we concluded our previously announced secured credit agreement for $300 million for project construction and $25 million for working capital. This agreement replaces the $34 million debt deal we announced last spring. This new credit facility, along with the positive cash flow from our existing production, should satisfy all of our CapEx needs for the coming year.

In regard to the debt facility, I'd like to highlight an important aspect about it. The credit facility enables us to act as our own general contractors, which gives us greater design flexibility, a shorter time to market and lower cost for the plants that are under construction at Boardman and Burley and also for the two yet to be announced California plants. We believe this arrangement is an important element in our drive to be the low-cost producer.

Addressing some of our operating activities, I'd like to start by mentioning an area where we've got some shortcomings. You will recall that Neil had some strong words at the time of our third quarter announcement, that our financial and accounting capabilities has not kept pace with the growth of the rest of the Company and that this situation was unacceptable and would be made a top priority of Management.

We have made good progress on some of the material weaknesses mentioned in our last 10-Q. While we still have some material weaknesses that will be outlined in our 10-K, we have made considerable progress in organizing and directing our resources and completing the installation of processes needed to make us not only SOx compliant, but most importantly, to preserve our low-cost profile. We have invested a good bit of time and resources on the effort and it remains ongoing. But our progress is evident in that we are reporting our financial results in a timely fashion today for both the quarter and the year.

In addition, the Board, the Audit Committee and the Management team have been working to identify candidates for several key positions, including that of the CFO. We are confident we have narrowed a list of several highly qualified candidates for the CFO post and after the current earnings season we expect to be able to hire and announce the person who will occupy this chair at the next conference call.

We would also expect to have several other key positions filled by that time to ensure during the coming year that our financial reporting and controls are operating at the same excellent level as the rest of the Company.

As for other areas of operation, we continue our efforts to promote greater acceptance and demand for ethanol in our target markets in the West. We have expanded our public affairs and lobbying activities and have developed working and conversant relationships with State governments across the Western US. Our marketing operations continue to perform very well, as evidenced by our results last year. To achieve those results, we made good progress in growing our customer base and expanded in to two new states.

In the area of co-products, we successfully built an organization to market WCG from the Front Range facility. Our risk management programs are run by professionals who have continued to show great talent and expertise during theses volatile times. We can say we have a very active hedging and risk management program and policy. However, we regard the details of our risk management activities as proprietary and so we will not discuss any of those details now or in the future.

Our development team is working on an exciting pipeline of projects and opportunities with the strategic criteria of looking for greenfield sites and production assets where we can sustain a long-term economic and competitive advantage consistent with our destination models.

Our construction activities remain on schedule and on budget. If you look at our last slides, you can see some pictures, also available on our website, which show our completed Madera plant, our Boardman, Oregon plant, currently under construction, and the groundbreaking ceremony that took place in early February for our Burley, Idaho plant.

We are pleased with the startup and current operations at our Madera plant, which made first ethanol on November 1st of last year. In this month we expect to test successfully at a run rate of 40 million gallons a year, 14% above its nameplate capacity.

On that note, I'll turn the call back to Neil before we start taking questions.

Thank you, John. I'd like to conclude our prepared remarks by saying that we're very pleased with our progress launching this Company over the last two years. We're excited about the growth opportunities ahead of us and are very committed to building growing and lasting shareholder values.

With that, I'd like to turn it over to the operator to open the line for questions.

[OPERATOR INSTRUCTIONS] Mike Judd of Greenwich Consultants.

A few questions here. Why don't we start off with something simple. The tax rate's been running around 0% here. What is your outlook for '07, in terms of what sort of tax rate we should be using, excluding special items?

We have a number of net operating losses that are coming forward. We have not completed our tax planning for the next year or two. We are in the process of doing that right now. But we expect that those net operating losses will continue to protect our income at this point.

Right, but I'm just talking about from a reported EPS perspective. I understand with the NOLs you probably don't pay any cash taxes, but in terms of the clean numbers that would end up on First Call and Thompson, excluding special items, is there a tax rate that we should be using?

For 2007 it would be 0.

Okay. And could you provide a little bit more detail about the increase in the SG&A? You said there was an additional $6.2 million that was included in 2006, right? And can you help us understand what would be an ongoing run rate on a quarterly basis for SG&A, maybe the next quarter or two? I realize that you're in the process of building out your strategic plans.

The $6.2 in 2006 was a one-time event, designed to attract and motivate and retain a key group of employees. Going forward, we expect that the overall compensation plan for base, short-term and long-term incentive will meet the market standards. So I think you can look at what the typical kinds of costs are and we will be at those numbers.

Okay, but just to dig into that a little bit more, do you have a target in terms of SG&A as a percentage of revenues? For instance, if we even look at the December quarter, $11.3 million in SG&A, is that sort of the right run rate going forward?

I would say that we feel that we have developed an organization here and built a Company that is really geared up to be $1 billion or higher. So, our expectation is that if you look at our annualized SG&A that it should be no higher in '07. In fact, we think it's possible that we could even reduce that to some degree.

Annualized SG&A, meaning that the absolute number for SG&A should be the same?

Correct. That is our current objective.

Okay. And then just a little bit more on the fundamentals side, could you talk about some of the hedges that you have in place, please?

As John mentioned, we consider our corn position to be proprietary. I think if you look at it on a go-forward basis. But we take risk management extremely seriously. We have a risk management team that meets literally on a daily basis, with regular meetings on a weekly basis. We have policies that have been set in place, approved by the Board, that regulate our activities around our commodity exposure. And I think that if you look at the performance in the fourth quarter, you can see that we've done a very good job of managing our commodity risk and we'll continue to do so on a go-forward basis.

Okay. So, unlike perhaps some of the other players in the industry, VeraSun and Aventine, which has actually been quite open with the investment community in terms of what they're doing, your position is that you would just prefer not to share that information?

That is correct. We take more the view that ADM did in their business strategy and conference calls, that we consider that to be very proprietary.

Ian Horowitz of Soleil Securities.

Can you give me a little bit of gallons breakdown between Madera and the Front Range? Even if you just give me what Front Range was running at and I can back into it.

The nameplate capacities on these are well known and we're not breaking out any of the information by unit. As you know, we have a number of plants coming on line. We look at this on a pool basis and we're not reporting individual results.

I guess all I'm trying to do is figure out how the pool moves versus how you move from the equity [specialties], the breakdown between the two.

You have the total gallons that were sold and Front Range did run at above 40 million gallons per year rate and as we did say, that the Madera plant is now operating above nameplate as well. There was some ramp into the end of the year, but for the full month of December it actually ran at nameplate.

And so, can I say that the pool was flat sequentially in terms of volumes?

Yes, that would be a fair statement.

Okay. So then I can just back into that number. The other thing, can you talk a little bit, Neil, about co-products and are you going to give a tonnage sold or an average selling price for your co-products?

We've disclosed what our return was, which was pretty standard industry on the 33% on a net corn basis and we think that's pretty good for coming into the market with a new product. We think there's opportunity to improve upon that.

As you know, it's a key part of our strategy, the local distribution of wet distiller's grain, which we think is a very premium product from a protein standpoint and fed to premium users of the product, the dairy sheds that we operate in. So it's a very very important part of our strategy and we have a team that is well equipped to make sure that we're extracting the highest value possible in that market.

Neil, I've been asking this to everyone and would love to hear your opinion. We saw, in the fourth quarter, a little bit of a price disconnect between the corn and the co-products, primarily on the dry side. First quarter we've seen a rebound in that.

When you look out from a macro level--and you've always been pretty good at doing this macro stuff--when you look out and see the amount of this national capacity coming on line and the amount of cold products, when you look out at the corn price, do you see the correlations continuing to de-link or do you think that that marries back up as corn comes back into some sort of normalized pricing level?

I think it's a very good question. I would say actually that the two have remained fairly well linked, that just as in the ethanol market where you have a product tied to the price of gasoline and you see some volatility around that, but that has remained relatively steady. I think the same is true with distiller's grain related corn. So we have seen what has in the last two years been a doubling of ethanol volumes, yet we still see very strong distiller's grain pricing.

We've heard it discussed by many that there's opportunity to use distiller's grain. It's underutilized, frankly, even in the dairy industry, where it has a very high value application. We're also seeing additional opportunities in swine and poultry. The export market is very underdeveloped.

At a certain point, if distiller's grain were to be depressed, these markets have a way of working things out. There's a minimum energy value distiller's grain has. We saw when there was a disconnect last year at one point, that some distiller's grain was even being used as a source of fuel. We're working out ways to add value, to extract some additional products, such as the corn oil, from the distiller's grain, as well as use the wet distiller's grain as the carrier for other feed commodities.

So, we're very active in our own business to manage that risk, because it is a risk. And we feel confident that will continue to be a very valuable part of our product mix.

Can I read that by saying your first quarter correlations are kind of becoming a little bit more normalized?

Well, Ian, I think they were quite normal in the fourth quarter.

Okay, so the 30% range is a good number for the wet to corn?

Our assumption has always been that on a dry matter basis, the wet distiller's grain would sell at least at parity. We do think over time there's an opportunity to enhance that value. But that's our operating assumption, is that wet distiller's grain maintains the same value, relative to corn in the dried distiller's grain and that 30-35% is pretty typical in the industry.

Okay. Neil, can you just talk a little bit about the environment in California? There's been a lot of talk between the Governor and the Governor's Coalition and the [carb] predictive model, questions that are out right now. I don't think the predictive model situation has been settled, has it?

No, it has not, but it's a very active process with all the stakeholders. And what I would say is that in all the years I've been in this business, we have built the largest single market for ethanol in the world here in California, in spite of State government.

And what we have now is a State government with the leadership of Governor Schwarzenegger, that is extremely positive and proactive in trying to increase the amount of ethanol that is used. There are some very aggressive policies related to CO2, related to economic development, related to petroleum independence, that have really coalesced with a series of policy moves, both at the Governor level, at the regulatory level and at the legislative level.

And it is our expectation that that will result in this 1 billion-gallon per year market migrating to a 1.7 to 2 billion. In fact, the Governor himself has talked about over the next 5 to 10 years that the market for renewable fuels in the State of California should be between 3 and 4 billion gallons.

But as it relates to the next 12 to 18 months, we do expect that possibly as early as the end of this year, that we will see a migration from the current 6% blends in California, to 10% blends.

And one last question and then I'll get back in queue. We've seen some states that albeit are at much higher development rates, kind of start backing off in terms of permitting new construction. How is the municipal and local appetite for California development right now?

I'd say it's very positive. If you look at where we build these plants in California and other states--we're doing it in rural regions that are desperate for economic development. Our plants have a very small footprint in terms of their overall environmental impacts. We've gone to great lengths to minimize energy inputs, minimize water inputs and be a good local citizen in these communities that we are serving.

So many thought you couldn't permit plants in California, we obviously have shown that you can. We're uniquely qualified to continue to bring these plants into operation out here in California and other Western states. The local climate, we think is very positive.

To your point on some of the other locales and backing off, I think there is an overall rationalization in the growth of this industry to make sure that the rate of construction and growth of this industry is moderated in such a way that we can make sure to maintain reasonable supply/demand balances.

Okay. How's the buy versus bill going in your mind? You did the Front Range transaction. Are you seeing opportunities still out there in terms of a purchase [that you feel]?

We're seeing opportunities. We did move on the Front Range. We're always open to opportunities. It has certainly been that our first round of emphasis has been on building. By definition, if you look at where we're building plants, it's where there really are no plants.

So the acquisition opportunities in our core markets are relatively limited, but as we expand our scope and look at other areas and other opportunities where we can sustain a low-cost advantage, certainly the opportunity acquires something that we are looking at.

Eitan Bernstein of Friedman, Billings & Ramsey.

Congratulations on this first conference call. Neil, I understand your position on corn price hedges, but can you provide us with any general directional commentary on either ethanol price realizations or corn price costs for the next quarter or two?

I really can't at this time. We're taking the position, Eitan, that that is proprietary, but again, I can point to the fact that you look at our fourth quarter performance, I think we stack up very nicely in terms of relative to the market price for corn. We've always taken a view that it's important to hedge our positions on both the ethanol sales side and the corn side and that continues.

Okay. One clarifying question on the SG&A. So we should expect all-in SG&A for '07 to be comparable to '06, or should we net out some of that $6.2 million incremental?

I think with the growth that we're expecting this year, that using the same number is probably going to be in the right ballpark.

Okay, great. The Cascade convertible preferreds, I think they're not in the current diluted share count. Should we expect them to be for first quarter of '07?

They would be out of that. So no, they would not be included.

Okay. Any guidance on why they wouldn't or when they might be included in that share count?

Hang on just one second and we'll get an answer to that. They are antidilutive, so they would not be included.

But for 2007, assuming profitability, would those incremental shares come in?

It's possible, Eitan, but at this point, Cascade has a very long view of their investment, and so it really hasn't even been addressed as an issue in terms of what that impact might be.

Okay. And one last question, if I could. The Dutch financing facility, are there going to be associated costs as far as administrative and agency costs with that and would they be capitalized or expensed?

There will be. Some will be capitalized as part of the cost of the plant.

Mark Manley of Ardour Capital.

I think you've broken out specific revenues in the past. Might you be doing that?

I'm not aware that we did, but we certainly have no plans to do it in the future.

And maybe just some more general comments. Neil, I think in the past I think you might have mentioned that your view on corn prices is that in order to support the demand, but that prices do need to be in the--couldn't say at what price, but fairly high. Any thoughts on, is that still true? To get farmers to grow corn, do we still need high prices?

Clearly, until we see the planning intentions and the report at the end of March out of USCA, I will note that I think we're already seeing that response. We've seen estimates that were starting out in the 6 to 7 million-acre range of new corn acres. We're now hearing estimates that are drifting closer to the 10 and even higher. In fact, USCA this morning came out with a new number, where they're projecting 9 million. That's up from their own number of 7.5 acres just a few weeks back.

So, I think we are seeing exactly what we have expected to see and what markets do is for price signals to send that very strong indication to farmers that this is product that they should be growing. And so, if you look at all of the demand figures, and it's not just ethanol, it's feed, it's export. I mean, we do have a very strong demand for corn, both here domestically and internationally. We're not of the view that corn is necessarily going to drop right back down to $2.00 a bushel. We have built a business and have a focus on low-cost production so that we can make sure that we're able to absorb higher prices.

I would also point out the fact that one of the promises of the whole ethanol industry is that we could raise the price of corn to the farmer, so it's not all bad that we're putting more income into the pockets of the American farmer and that we're actually saving the federal government money in dollars that they're not paying out as direct payments to farmers.

So you disagree with some of your competitors [thinking the price may go down]--?

I do believe that if you look at the technicals, it's reasonable to argue that we possibly have peaked and that we should see some moderation on price, but I think that until we really see what those acres are that have been planted and we get past the concerns about weather, that this is a very volatile situation.

I think there is more upside. I think there certainly is downside. Once we see that that 10-11 million acres, if that really is the number, we would expect that corn prices would moderate.

Great. Just a little more clarity on how you guys look at Front Range. Are Front Range sales reflected in your net sales since Kinergy markets their ethanol?

Yes, it is. We consolidate Front Range into our results and then back out the interest that's owned by others. So that from a global standpoint, that's the way to look at it.

Okay, even though it's only 42%?

Even though it's only 42%, it's been deemed a variable interest entity, so we consolidate it entirely and then back out in the P&L and the balance sheet, the portion that we do not own.

That helps. Did you sell all your wet distiller grain in the quarter?

Yes, we did. In fact, we typically have both the Front Range plant, where we market all the wet distiller's grain, as well at our plant in Madera, the pad is nearly empty every day.

Great. And then just trying to back out kind of an implied yield that you guys are getting, gallons per bushel. It looks a little lower than the industry 2.8. Any comment on that?

I think what you're seeing is the impact of the startup last year there. In our most recent performance test that we're conducting right now, we're where we want it to be.

Which is?

Which is in and around the industry standard, 2.8.

Preeti Dubey of Thomas Weisel Partners.

My question relates to Front Range Energy and I see on the balance sheet that good will have gone up by a significant amount and also the property planting equipment is up quite a bit. Also, in addition I see another line item on the liability side non-controlling interests and variables of interest equity. Can you just explain to me why these numbers are so high and is there any significance that we should attach to these numbers?

Again, the way to look at that is that after the purchase, of course the purchase price was reflected in our balance sheet, so the goodwill that came with the company was recorded on our balance sheet. And then we turn around and take out of our balance sheet the 58% that we don't own. So those are the numbers that you're seeing.

All right. And can you tell me what was the CapEx in the quarter?

The CapEx for the last quarter. I don't have that right at hand. It mainly consists of the completing the construction of Madera and the ongoing construction at Boardman.

Can you tell me the amount, what it was?

I don't have that right here with me.

Just to give you a sense of capital expenditures on a general basis, which would help for any analysis or modeling purpose, the cost of construction in these facilities are in or around $2.00 per annual gallon of capacity. What we've done, and this really was very important in allowing us to leverage a very strong debt facility, was that we prefunded debt with equity. So if you look at the Madera and the Boardman plants, we funded all of the construction to date with equity. And we now, with this debt facility, are going back and levering these plants up to something that we think is a prudent, not an excessive amount of debt, but in and around between 50 to 60% of the overall capitalization will be debt with the balance being equity.

That's helpful. And one clarification that I needed. You mentioned in your press release that revenues from Madera and Front Range Energy were $25.9 million. I just want to get a clarification, does that $25.9 million include 42% of the revenues of Front Range or 100% of the revenue from Front Range?

That includes 100% of the Front Range activity.

Pavel Molchanov of Raymond James.

A question about some potential M&A activity. Obviously following the Front Range deal, would you perhaps look to increase your interest in that plant if possible? And then secondly, would you look at similar types of transactions with privately held companies in the future?

As I said before, yes, we certainly look at the whole calculation between build versus buy and evaluate that and are open to all opportunities. So that is one that certainly can't prejudge at this point in time, but it is something that our team is focused on.

Jonathon Lichter of Sidoti & Company.

Question, it looks like the Kinergy gallons sold was up only marginally sequentially. Is there any reason that might have slowed a little bit, the growth there?

You're looking at what?

If you back out some of the other numbers there.

We were in a contract period, so there was growth in the gallons. I don't have the exact percentage in front of me right now, but we definitely did continue to grow the gallons fourth quarter over third quarter.

It wasn't an issue because you became the producer of that?

There is going to be a--you can't just, when we come on line with 5 million gallons, part of our whole program is to develop the market and now we're also building in the production. So, we will continue to expand our overall market. We will continue for as far out, if we project the net buyer of ethanol from both our alliance partners and other facilities that we have longstanding relationships with, so we do expect that to continue to be a very important part of the business is to sell significantly more ethanol than we produce.

But if you look in the fourth quarter when we came on line, both at the Front Range facility and with our Madera facility, the outside gallons, it's not unexpected to see that those sales were relatively flat.

Okay. And what are your thoughts on when the company might be able to be producing cellulose?

That's a very good question. We are focused on that. We do not define ourselves as a technology company. But we are talking to everybody in that space to figure out what sorts of partnerships and development efforts make sense. There are, whether it's a material handling or the actual conversion process, the capital cost, the economics, there are very significant hurdles that still need to be cleared before cellulose ethanol is going to be cost competitive with corn ethanol.

I think we have a view that is similar to many, which is in the 20-plus years I've been in this business, there's always been the technology that was five years off. I think now we truly are within that five-year timeframe and with some of the concerted effort on the part of both public and private entities to accelerate that, we may see that timeframe contract. Certainly the higher price of ethanol and the higher cost of corn also figures into helping to accelerate that development.

Paul Resnik of Dutton Associates.

Two questions. One, as you have been a general contractor, that $2.00 a gallon construction cost, does that go in the target for new plants are you trying to do a little better than that?

Of course, we hope to do a little better than that, but I think that's a good number to use going ahead. There are other benefits that we see, other than price, which of course are very important. But the ability to move quickly into these projects and cut the overall time to market down by as much as 6 months, we think is one of the main features of this and the ability to design the plants in a way that we can make changes during the process as we move through the operating scenarios at one plant, we can design them into subsequent plants a lot easier. So those are features. But using the $2.00 number for right now, given the volatility in several of the markets that impact us generally in construction costs, is a good number to use.

Paul, I would add to that that what we are seeing with the costs, whether it's land, whether it's permitting, whether it's steel, whether it's concrete, we don't think that we see in the end increases in overall construction costs in ethanol and that I would agree with John that we think that we can hold in that construction number of in and around $2.00 per annual gallon capacity and that's really in part, our owner construct model helping us moderate what we still see as increasing cost.

[Inaudible] Secondly, I don't think California will ever be confused with the Corn Belt. On the other hand, corn prices are pretty high. Do you see any potential for increasing corn production in your market?

We absolutely do see that. We are literally talking to California farmers on a daily basis about the opportunity for them to grow corn. I will say that California agriculture is the most capable, resourceful agricultural system in the world and if the price were right, California farmers could grow 100% of the corn we needed.

The options to California have always been such that the other higher-value commodities, the nuts and the fruits and the cotton and those sorts of things have always given a better net back to the farmer and that's why the whole corn system in California has been a Midwest dominated supply chain.

But with these sorts of prices and with some of the net-backs on the other commodities, in some cases declining year-over-year, it's a different look. So we do feel that where California historically has provided about 10% of its own demand, 10 to 15% of its demand for corn, that that number could increase. And if you look historically, in 1996, after the last significant run up in corn prices, California farmers doubled the amount of corn they grew in the next year.

So we see that as an opportunity. We think that's just one more of the options that gives us a competitive advantage. We also potentially see an opportunity to even bring corn from other countries and the ability to import it, again, if the price sustains itself at these sorts of levels. I think you might see all sorts of innovations in terms of bringing corn to the marketplace.

[Ronan Wolfsdorf] of Cowen & Company.

Further questions about the E10 that you mentioned in California, that sounded very interesting. Could you elaborate on that?

Absolutely. California is a net short state and very extremely, in terms of its ability to produce and even import the gasoline and the additives that are necessary to meet California's very strict environmental and technical specifications for gasoline.

Ethanol as a very clean volume, high-octane component, provides very significant value to California refiners. The reason that California aggregated around a 6% was a number of factors, but as much as anything it was that there was a concern given how large the California market was at 16 billion gallons per year, that there was not adequate supply of ethanol to blend what is a more efficient use of the product at 10%.

That picture has changed dramatically, as we've seen the increase in production, both here in California and elsewhere in the country and it's also now been underlined by the fact that every year with a 2 to 3% growth in demand and no new refinery having been built in California since 1969, California needs incremental supplies of fuel. So from a refiner's perspective, ethanol is a very attractive way to meet the demand.

Also, from the environmental perspective with what now is the world's first ever low-carbon fuel standards, the Governor is implementing through his Executive Order, there is to its [chi], the 10% reduction in CO2 emission by 2012, which the Governor has outlined. Not only do we need to move to 10% ethanol, we need to do more looking at higher level blends at 12%-13%-20% E85 and look at other ways of using fuel more efficiently.

So we think that the quickest way to meet the growing demand for gasoline in the State of California and the quickest way to meet these very ambitious environmental goals is to increase the amount of ethanol that is used here in the State of California and we feel that the refiners are agreeing with us on that, as well as the regulators and policy makers.

Thanks. And just a quick follow-up. What level of interest are you seeing as far as other market participants pursuing permitting and plant in California itself? From what I've looked at, there has not been a lot of activity there.

There's not been a lot of activity. I'd like to say that it has something to do with the fact that we blanket the State pretty well and there is a real first mover advantage. It is about that local integration into market. And whereas in the Midwest it's a little more viable for plants to be literally across the street from one another when products are being shipped out on the market, in our model and to be a low-cost producer and to be able to compete successfully, it's all about that local market integration. So once we've built a plant in an area, it's very difficult for another facility to be financed.

That being said, we do see some other one-off plants being developed in the state and we welcome that. This is an industry that's large enough to support other participants in California and other Western states.

Eric Brown of Banc of America.

Can you talk about your marketing margins during Q4, especially as they compare to Q3, and where do you expect those marketing gross margins to be, going forward?

Eric, again, we're not breaking that out right now and we're not talking about our marketing margin specifically. You certainly saw the performance of the Company when we were not a producer and saw that our margins were very strong. We did take some positions in the marketplace that benefited us.

On a go-forward basis, the way we look at it, we have these marketing agreements and as we continue to work with other plants and signup other contracts that are more in and around that 1% gross profit margin that is typical in the industry, we think that certainly is a reasonable target. But we've been able to trade in and around and take positions that, if anything, allow us to lever that up.

But looking at it from a conservative point of view, we look at the marketing business and say it's there to support the growing market, support our production and that a 1% type number is reasonable.

Okay. Then you listed the basis for your corn at $0.51 and I assume that is a blended average of the Madera and Front Range. Can you talk a little bit about how that broke down between the two facilities?

No. You're right. It is a blended average and no, we look at all of this, as Neil just pointed out, on a pool basis and that's how we intend to report it. We do not break those out separately.

But Eric, I would say that it is all pretty transparent. You can look at the tariff rates on bringing corn from--we look at Nebraska Group, too. That's essentially the pool. We pull from other places, but day in, day out, that's a very good place for us to be pulling corn from and you can look at the tariff rates on both the UP and the BM website for shuttle service and you can ascertain what the cost to transport corn from the Midwest to Windsor and to California is. And so obviously it's higher.

We can buy below the basis and then we pay more to get it to California than we do to Colorado and that's why, you know, if you look at historically in California, the basis probably is in that $0.51 if you look at what a reasonable basis is today, to California with the higher rates on corn, it's closer to $0.70 to $0.75 to California. And again, that all can be determined by looking at these websites and it's obviously less to go to Colorado.

So that is why that basis number is certainly lower than you would expect for California deliveries, because it's blended.

Mark Manley of Ardour Capital.

Just wondering if you might breakout what percent of your cost of goods sold was offset by hedges?

Again, if you look at the performance, I think that's fully addressed by if we had not hedged, it was reasonable to expect that we would pay that on the normalized CBOT number that we had in the chart, we would have been paying $1.00 more per bushel.

So it is reasonable to answer that question by saying we would have paid $1.00 more per bushel.

That's the best way to get a view of where we're going, is to probably look at our results. That's hopefully where you can have people directed. If you continue to look at that, you'll have some idea of where we might be, going forward.

We have time for about one more question.

Can I just make one quick follow-up? Your competitors were alluding recently that the destination model is less favorable and I wonder how you might respond to that?

Mark, we obviously feel very confident that we have a model here that will make us a low-cost producer and a very valuable supplier to the marketplace. So, we've laid down presentations on why we think that's the case and quantified that from a generic model standpoint and we stand behind that.

We don't think it's a matter of if it's better to do it in the destination or better to do it in the origin. This is an industry where we think we should have ethanol plants in every county--every county and every state in the United States. There's room for ethanol plants everywhere.

We think that there's room to build more ethanol plants in the Midwest. We certainly think there's tremendous opportunity to build ethanol plants at the destination and that is our business model, to be the leader in the destination ethanol production in the marketing model.

Howard Norowitz of Bear Stearns.

Just a quick question on the other side of the transportation equation. Delivering the ethanol to the market itself, are you finding any difficulties in getting that delivered? Has the pricing gone up? Do you have the infrastructure and the availability of transportation resources to get it to market?

Yes, we absolutely do and it's been a focus of ours for many years, to build the terminal network, the trucking network, the logistic support to make sure that we are a supplier. We are the only supplier in California that within 24-hour notice we can deliver ethanol to any terminal in the State of California and that is a signature part of our business and our reputation.

So we're very focused on that and have definitely been bulking up that part of our business to make sure that we're there.

On the rail side, we do bring in ethanol by rail from our partners and we've seen the rates of that go up. We do see issues with the rail logistics, but when you balance that with our ability to produce locally and if we don't have railcars show up, we have the inventory in California to make sure that we're still there as a reliable supplier.

So, we think that service element is an absolutely critical part of who we are and where we'll be.

Okay. Can you give us some idea in terms of pricing per delivery?

If you're talking about our local delivery, and it's a very good point, because it really is part of the whole competitive advantage is that even though ethanol can be shipped in some places--there's one facility in California that can receive unit trains, none of the ethanol that's shipped in the unit train facilities is typically blended with the gasoline and it has to be redistributed by truck to the blending terminal that typically don't receive ethanol by rail. And so, as the cost of trucking goes up, as the cost of rail goes up, that affects the whole market.

What we do is try to position our plants in areas where we can sell all the ethanol, particularly in California, within a 50-mile radius. So it's anywhere from $0.015 to as much as $0.05-$0.06 a gallon typically to get it to our market, our end-user. But if you consider that on average, the in-state trucking cost for Midwest ethanol to ship to California is actually higher than that, when you consider the cost of [terminaling] plus the cost of truck transportation to get it to those same terminals.

So we have not only what we call our national transportation advantage if you look at the moving corn, our finished products as corn and shuttle trains, compared to moving finished products, we also then are closer in a cents per gallon basis to the end-user than that Midwest ethanol as well.

John Roy of Hambrecht.

Just one final question. On the non-controlling interest and variable entities, is that going to be something we're going to probably see every quarter from now on?

It's something that we're going to look at on an annual basis, but for the next few quarters I think you can plan on it being there. But it is something that we will be looking at on an annual basis.

Due to time constraints, that will conclude today's question and answer session. I'd like to turn the conference back over to Mr. Neil Koehler for any additional or closing remarks.

Again, thank you very much, all of you, for participating in our first investor conference call. We are looking forward to the growth of this company and look forward to providing additional input to the market and additional conference calls in the future. Thank you very much for your time today.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.