Alto Ingredients Inc (ALTO) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Pacific Ethanol, Inc.

earnings conference call.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host, Mr.

Gregory Pettit of Hill & Knowlton.

Good morning and welcome to the Pacific Ethanol third-quarter conference call.

Before we get started, I'd like to point out that slides to accompany this call are available in PDF format on the Company's home page, at www.pacificethanol.net.

Audio and audio Webcast replays of this call will be available beginning two hours after this call and continuing for the next two weeks.

I will now briefly go over some Safe Harbor language and we'll proceed.

With the exception of historical information, the matters discussed in this call are forward-looking statements that involve a number of risks and uncertainties.

The actual future results of Pacific Ethanol could differ from those statements.

Factors that could cause or contribute to such differences include, but are not limited to, the ability of Pacific Ethanol to successfully and timely complete in a cost-effective manner construction of its ethanol plants under construction, the ability of Pacific Ethanol to obtain all necessary financing to complete the construction of its other planned ethanol production facilities, the ability of Pacific Ethanol to timely complete its ethanol plant buildout program and to successfully capitalize on its internal growth initiatives, the ability of Pacific Ethanol to operate its plants at their planned production capacities, the price of ethanol relative to the price of gasoline, the effect of federal and state governmental regulations on the demand for ethanol, and the factors contained in the risk factors section of Pacific Ethanol's Form 10-K filed with the Securities and Exchange Commission on March 12, 2007.

With that I'll now turn the call over to the Company's President and CEO, Neil Koehler.

Thank you, Gregory.

Welcome, everyone, to Pacific Ethanol's investor call to discuss our 2007 third-quarter financial results.

I'd like to begin on a global note.

At this time, oil prices are at a historic high, approaching $100 per barrel.

Tensions in Iraq, Pakistan and Iran are at heightened levels, pushing oil markets ever higher, and the demand for transportation fuels continues to outpace available fuel supplies.

The fuels market feels market is desperate for alternatives to an ever-growing and dangerous dependence on oil, and for fuels that reduce climate change emissions.

Ethanol stands today as the only commercially viable alternative to gasoline in the internal combustion engine that can accomplish the twin objectives of reducing dependence on oil and reducing CO2 emissions.

For these reasons, despite a recent and, we believe, temporary challenging margin environment, the importance of ethanol in the transportation fuel supply has never been greater.

Today we are pleased to report record sales of $118 million on a record volume of 50 million gallons of ethanol sold in the third quarter.

We are not so pleased to report that we incurred a net loss of $4.8 million.

A combination of falling ethanol prices and high corn costs, along with inventory and derivative adjustments, contributed to the negative net income.

Both our sales and gallons sold have nearly doubled over the prior-year periods.

This growth has outpaced the rapid growth of the ethanol industry overall, which we believe is a strong endorsement of our business strategy.

Our gross profit for the third quarter was a positive $4.8 million.

Cash flow contributed from operations totaled $21 million through the first nine months of 2007.

John will be providing greater details on these results in a few moments.

We continue to successfully execute on our differentiated business strategy to be the leader in destination ethanol production and marketing.

This strategy allows for low-cost, low-carbon ethanol production, and high-value ethanol and co-product feed marketing.

In the quarter we successfully started up our Boardman, Oregon ethanol plant.

I am thankful to the dedicated effort of our operations group that concluded a remarkably smooth start-up.

Less than one month after start-up, we certified the Boardman facility at a 40 million gallon annual operating rate, which triggered the Oregon 10% ethanol mandate to begin in January 2008.

The announcement of the start date for the Oregon renewable fuel standard was made by Oregon's Governor Kulongoski at our Boardman plant dedication on October 5th.

Our wholly-owned Madera ethanol facility and minority-owned Windsor, Colorado plant continue to operate above design basis, and construction is continuing on schedule at our Burley, Idaho, Stockton, California and Calipatria, California sites.

Operating costs were reduced on a per-gallon basis at our operating facilities compared to the second quarter.

We remain on track to achieve our stated goals of 220 million gallons of annual production capacity in 2008 and 420 million gallons in 2010.

We continue to evaluate new opportunities to grow both the production and marketing operations of our business.

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

Q3, as Neil summarized, was one where we made very good progress on our game plan, despite encountering a difficult market environment.

And again, to reiterate, our strategy consists of growing our market share and keeping our total sales well ahead of our production volume.

Then we add low-cost production capacity in locations where we believe we have a sustainable economic advantage.

I will refer back to those two themes to show the progress we achieved during the quarter as some of the important Q3 numbers are presented.

Slide 2 has a list of the items we will cover.

On slide 3, we summarize the income statement.

As you can see, our net sales increased to $118.1 million in Q3 '07 from $61.1 million in Q3 '06, a 93% year-over-year increase.

Going to slide 4, we show our net sales and gallons sold.

We sold 50 million gallons of ethanol in Q3 '07, up 120% from 22.7 million gallons in Q3 '06, and also up 14% over the prior quarter.

We have continued to show a steady increase in sales volume over the last two years, up 70 million gallons during the first nine months of this year compared to the same period last year.

Our third-party purchases accounted for 40% of this growth.

This is evidence of the ongoing success of our marketing activities to continue to grow our market out ahead of our production capacity.

And again, going back to our objectives to increase sales volumes and market share, we view Q3 as a step in the right direction during a difficult market period.

Going to slide 5, we generated a positive gross profit of $4.8 million for the quarter, a decrease from $7.4 million in Q3 '06, due to a volatile commodity environment of declining ethanol prices and higher corn costs.

Going back to slide 3, I'd like to point out some of the special items included in our income statement for the quarter.

Our gross profit was impacted by adjustments related to inventory valuation and derivative instruments.

In regard to the inventory valuation adjustment, at the end of the quarter we wrote down ethanol inventory by $1.2 million, or $0.03 per share, in accordance with GAAP to reflect the marketplace pricing at that point.

In regard to derivative activity, as we have pointed out in previous calls, our commodity risk management program seeks to reduce our exposure to market volatility.

During the quarter, our gross profit was impacted by charges of $1.6 million, of which $0.1 million is related to activities to be settled in future periods.

On a year-to-date basis, we have recorded derivative activity charges of $4.5 million in our cost of goods sold, and of that, about $1.2 million, or $0.03 per share, will settle in future periods.

We also recorded a $1.5 million charge, or $0.04 per share, for derivative positions related to interest rate hedges on our construction debt, the full amount of which is related to future periods.

This is reflected in the other income line.

The interest rate hedge is in place for the life of the loan, so there will be adjustments each quarter as interest rates rise and fall.

Shifting to SG&A expenses, we continue to stay on track for reducing our SG&A as a percentage of sales.

Continuing on down the income statement, we had a loss from operations of $1.2 million for the quarter, and income from operations of $7.5 million year-to-date.

As in previous quarters, to calculate our income before taxes, we deduct our consolidated results of the -- results of the 58% of Front Range Energy that we do not own.

We continue to project our tax rate to be zero.

So, our net loss for the quarter is $4.8 million, and we are just about breakeven on a year-to-date basis.

Moving to slide 6, EBITDA was -$1.2 million for the quarter and +$7.1 million year-to-date.

EBITDA was impacted by the compressed commodity margins during the quarter, and includes the impact of the inventory valuation and commodity and interest rate derivative adjustments just discussed.

On slide 7 we lay out our commodity price performance.

Noteworthy is the increase of sales volumes and the mix of third-party activity and production sales.

Our average selling price of ethanol was $2.11 during the quarter, down from $2.46 in the same quarter a year ago, and down from $2.32 in the second quarter of this year.

During Q3, our delivered cost of corn was $4.54 per bushel, up 7% from our Q2 delivered cost of $4.23.

Our corn basis averaged $0.67, giving us a CBOT equivalent corn cost of $3.87 per bushel, compared to the average CBOT market price of $3.35 during the quarter.

This quarter, our corn cost was higher than CBOT due to forward priced contracts that were put in place earlier in the year.

Despite our higher corn cost in Q3, our year-to-date CBOT equivalent price of corn of $3.55 per bushel compares favorably to an average CBOT market price of $3.69 during the same period.

Our co-product return for the quarter declined slightly to 25.3% from 26.5% in the second quarter.

This is due to our higher corn cost during the quarter.

We continue to maintain an active risk management program to manage our commodity price exposure.

At the end of the quarter, we had forward fixed-price ethanol sales contracts with a dollar value of $40.6 million, as well as 64.9 million gallons of forward index-based ethanol sales.

Our forward corn purchase commitments consist of $7.4 million of fixed-price contracts, as well as 5.2 million bushels of forward index-based purchase contracts.

Additional details of our purchase and sales commitments will be available in the 10-Q later today.

Referring to the balance sheet on slide 8, from an overall standpoint, we continue to invest our equity and cash available from our construction loan facility in our buildout program.

As the buildout is completed and the plants generate cash flow, we expect to see cash balances begin to rise in the second half of 2008.

At this point in our construction program, we have contributed a total of $203 million in equity and drawn a total of $51 million of debt.

Our existing equity, along with proceeds from our [debt] facilities, are sufficient to complete the buildout of 220 million gallons per year of production capacity.

That said, it is also important to note that as we assess the volatility in the ethanol markets, we are continually evaluating the buildout program with an eye to make any adjustments necessary to match our capital resources availability.

These adjustments could include the modification of construction schedules and the evaluation of additional sources of liquidity.

As Neil pointed out in his comments, we believe the long-term fundamentals of the business remain sound.

We remain vigilant in making certain we have options available as we continue to evaluate market conditions.

That concludes the summary of the financial performance for Q3.

Before we go back to Neil for further comments and the Q&A, I'd like to go to slides 9 and 10 and recap the growth in our asset base.

As we are putting capital and resources into this asset base, it is important to note that our strategy is that these assets are there to support customer bases developed in the course of our marketing activities.

In other words, the plants are located in regions where our marketing activities play a strong role.

Slide 9 shows our operating facilities, consisting of Madera, Boardman, and our 42% ownership in Front Range Energy.

Both Madera and Front Range ran well during the quarter, exceeding design basis.

In addition, Boardman began operating in September and operated very well, exceeding design basis in its first month of operation.

Overall, the plants produced at a rate of about 10% over design.

We are very pleased with the operating performance of our plants, as well as the continued focus on safety, health and environmental programs at each site.

In these critical first months and years of operation, the culture, policies and practices will set the tone for years to come.

Slide 10 shows the plants under construction and the targeted completion dates as of this point.

Over the last two years, the Company has made strong and consistent progress on its goals.

Over that two-year period, as Neil pointed out, the importance of ethanol in the transportation fuel supply has grown, and our company has increased market share.

During that time we have built a strong team that has implemented our marketing and plant buildout strategies.

With our people and capital resources in place, we are well-positioned in the important and growing renewable fuel business.

Now back to Neil for further comments before the Q&A.

Thanks, John.

There's been a great deal of commentary lately about a surplus of ethanol.

We do not actually see this.

Looking at the most recent EIA data from August, supply and demand are balanced, with ethanol ending stocks on hand of 22 days, which is actually below average over the last two years.

Just this week the EIA reported that discretionary ethanol blending is up 58% year-to-date.

Demand is keeping up with supply, and the market today is actually experiencing some supply tightness as new demand is being created by the need for incremental supplies of transportation fuel, combined with the very compelling economics of ethanol blending.

Ethanol prices have increased about $0.30 per gallon in the last six weeks.

Then why did we see such a precipitous fall in ethanol prices in August and September, when gasoline prices were rising?

We believe that a slower-than-expected move to ethanol blending in the Southeast, and continued ethanol imports from earlier transacted business, created a short-term supply link, and a perception that as new plants came online, that this link would grow relative to demand.

Current market conditions have shown this to be in fact more perception than reality.

Imports have dwindled to a trickle, and new incremental ethanol blending in the Southeast and elsewhere are beginning in earnest as specification and infrastructure issues are being addressed.

We also remain confident that elevated levels of ethanol blending in California will begin in 2008.

As it relates to infrastructure and market development, we believe it is important for ethanol companies to be active participants.

Our business model is to build strategically located production facilities, invest in distribution assets, and to focus on new market development by working collaboratively with our customers.

Our Boardman ethanol facility is a good example of this.

We built a facility that has significant ethanol storage and has the logistical ability to ship out by barge, truck or rail.

In addition, we have downstream storage at three terminals in Oregon.

We are proud of the fact that the majority of ethanol shipped from our Boardman facility is supporting new ethanol blending in a local market that did not exist before we built the plant, delivering real value to our oil company customers, gasoline consumers, and the regional economy.

We continue to believe that the economic and environmental imperatives will drive new demand of ethanol steadily towards 10% ethanol volume in all US gasoline over the next several years.

We were also encouraged by recent comments from Energy Secretary Bodman that the country needs to move towards higher-level blends between 12 and 20% by volume to help address the severe energy challenges ahead.

As I said on the last quarterly call, we stand behind our moniker that we are in a business that will be driven by new demand for decades to come.

Operator, at this time John and I would be happy to answer any questions.

(OPERATOR INSTRUCTIONS).

Mike Judd, Greenwich Consultants.

A question about your capacity, and the production numbers that you gave us for the September quarter.

I believe you said that you started up the new plant -- was that the beginning of September?

Yes.

Okay.

I guess what I'm trying to get a sense for is what the overall -- if you include your 40% -- 42% of Front Range Energy, what was sort of the -- in the third quarter, what was the blended operating rate for basically the three assets that you're involved in right now?

If what you're asking is coming out of the quarter into the fourth quarter, we are --

Actually I was just trying to figure out what the actual operating rate on an average basis was for the third quarter, given the percentages that you own of Front Range, and also the two other plants.

As we reported, the volume was 15.4 million gallons of sales of production, and the plants were running at a rate that was about 110% of design capacity.

I guess I've got a problem with my math, because if I basically put your capacity -- take your annualized capacity and put it on a quarterized basis, I come up with around 18.6 million gallons.

And basically, producing 15.4 only gets me an 83% operating rate.

So I was hoping you could help me reconcile that, please.

I think the math can be reconciled without doing it here myself, but the Boardman plant was only running for one month.

That's all I have it in there.

But anyway, okay.

In terms of the current industry conditions in the December quarter, do you still plan to run the plants at above nameplate capacity, or do you think that you might be backing off a little bit here?

[What are the plans]?

We have no plans at present to run the plants any slower than we are.

Thanks for the help.

Eitan Bernstein, FBR.

Real quick, first off, to follow-up on the previous question -- did production and sales equal, or did you build some inventories?

We did build some inventories, so that actually might have helped address the last question of Mike's.

I guess what I'm wondering is -- is that sort of a view that ethanol prices will get better, so you held off on some sales, or was it just more difficult to move the product?

It was a combination.

We were in start-up mode in Boardman.

So to make sure that we were making deliveries actually out by barge, we did collect some inventory in Oregon.

So that was a combination.

We also did feel that the pricing was lower than it should be.

And in retrospect that's turned out to be the case.

Out of curiosity, are you seeing -- obviously, we had some production increases out of the Midwest.

Are you seeing them come into the West Coast, or are they predominately staying in the Midwest from what you can tell?

I'm sorry; the imports?

Not the imports, although that is a good question.

Production in the Midwest, as it's been ramping up over the past few months, are you seeing more volumes come into your markets?

Our market share has grown.

So, relative to the overall growth in the market, our share is growing.

Obviously, the incremental growth that we're seeing nationally is primarily on the coast.

We are seeing some new blending in the Midwest, so that product is going wherever that new demand is being created.

And that's really throughout the country.

Okay.

Last one, if I can.

You were talking about imports in August.

It looked like they were about 64 million gallons, below comparable year-ago levels, but higher than what we saw earlier this year.

Any thoughts or outlook on what's going on currently?

That's a very dynamic situation.

From the best of our knowledge, the imports have slowed down quite a bit through the balance of the year.

It's the (inaudible) for imports, given current market pricing, has been relatively shut.

There have been -- when we talk about plants that are slowing down or shutting down, we have in fact seen that in the CBI; a number of facilities have stopped producing.

And the word out of Brazil is that not a lot of ethanol is being exported from there in this current market as well.

Do you have any thoughts on where the number may go sort of in the normalized basis, or is that a little too speculative?

That's a little too speculative, because it really is -- it depends a lot on, obviously, all sorts of international market conditions.

But under the current market, we are seeing very little in the way of imports.

Okay.

Great.

I think that's it for me.

Obviously, would love any additional sort of outlooks on fourth quarter, but I think that's all the questions I've got.

Thank you much.

I'd like to go back quickly to Mike's question, and partly addressing Eitan as well.

The numbers that we report are sales.

And so, if you look at our actual production in the quarter, it was about 2 million gallons higher than the 15.4.

Ron Oster, Broadpoint Capital.

I had a question on your corn basis differentials.

They were a bit higher than we had expected, and I noticed they've trended up over the last three quarters.

I was just wondering if you could kind of comment on what we should expect going forward if this upward trend is going to continue in terms of modeling that into the next several quarters.

What we have seen generally is that the tariff rates for moving corn and moving ethanol from the Midwest to our market have increased.

Our whole model is based upon a spread analysis between those various commodities, and I can tell you that the rates for moving ethanol have increased at a rate that is faster than moving the corn.

So, that is one factor.

Another is that the overall basis in the Midwest has gone up.

So rather than significant discounts to CBOT for Midwest locations, we've actually seen that basis come up closer to the Chicago numbers.

So that, obviously, would impact our delivered basis as well.

So, I think, the freight surcharges, fuel surcharges, on top of tariff rates, are also contributing to the higher freight rates, which impacts basis.

I guess to summarize, we should expect the basis to increase but to be offset by higher realized ethanol prices versus the benchmark?

Correct, and higher co-product values as well.

My second had to do with your construction plans.

You mentioned you're proceeding at this time.

I was just kind of curious, should you decide to curtail or suspend construction, can you comment -- well, first of all, how much costs are remaining?

And secondly, how much of those costs are recoverable?

In other words, how much of that is going to be a sunk cost if you were to curtail construction?

The project that we would look at would be the Imperial project in Southern California.

The costs related to suspension of construction there would not be significant.

We have purchased all the equipment.

That equipment still has good value.

So we wouldn't expect that there would be any significant write-down on that project.

We believe that that project is well-located, and eventually we would go ahead and build it.

So I think suspending it for a quarter or two quarters would not cause us to take a write-down on the project at this point in time.

I see.

Can you quantify how much savings you would have in terms of your capital spending should you suspend that indefinitely?

I don't know that we would go to an indefinite suspension on it, but we would -- the spend rate on that project, we've got probably 20 -- about a third of the money spent on the project in terms of equipment, so we have about two-thirds of it to go.

That would give us a savings of perhaps 50 or $60 million over whatever timeframe we decided to suspend the activities on the project.

Last one.

I know you don't break out a lot of the cost of goods sold numbers, but can you just comment in general on how per-gallon transportation costs or natural gas costs are shaking out, if you're seeing any movement there?

Per gallon transportation costs -- our transportation costs are relatively low; that's part of our model.

You see the bulk of our transportation costs contained in moving the corn to our facilities.

We have local distribution of all products.

We actually sell all of our co-products [FOB] our plant.

So there's no freight cost there.

We have relatively minimal single-digits per-gallon freight costs to move our ethanol, natural gas that, as a basis and a regional difference, we haven't really seen the actual transportation costs of the natural gas move much at all.

And overall conversion costs remain pretty steady?

Actually have reduced, gone down, as we've become more efficient operators, as we've gotten more comfortable with our facilities.

Thank you.

I'd like to just add to John's comment on (inaudible) the Calipatria plant.

We do have options if we were to see a sustained period of margin compression, and that's one example of what we could do.

But I want to make it clear that at this point, we have made no plans to be suspending any of our projects.

[Yin Min Lu], [Ador Capital].

My question is -- first one is what's the yield of ethanol per bushel of corn?

We do not break that out specifically, but I can tell you that our yield is better than industry standard.

Okay.

[That answers] for that.

My next question is related to your corn costs.

From the 3Q '07 (inaudible) corn cost is well below 350, then -- but -- and -- but in early quarter in 2Q '07, that spot price was way above 350.

Then why the costs for your corn cost increased significantly in 3Q '07?

That has to do with our risk management.

So, given what you just described is what was an extremely volatile corn environment, it was not clear to us what direction -- whether corn would correct significantly downward or would continue to be high and going higher.

So we did lock in a fair amount of corn that, in retrospect, were at numbers that ended up to be higher than what the average market price was.

So that explains it, having to do with the forward positions that we took.

I think it's important to look at our overall corn performance in a longer period of time, and that's what we laid out here in some of our prepared remarks, that if you look at it on an annualized basis, we continue to perform at a corn cost that is lower than if we had been taking market price on a daily basis.

Okay.

Can you -- my last question is can you look beyond 2008?

Are you going to still build out your own plants, or are you going to acquire more ethanol plants?

That is an area that is subject to constant evaluation and comparison.

We have a very bullish view over the growth of the ethanol business from the roughly 7-plus billion annualized rate of production today, to 15 to 30 to 60 billion gallons of production over the next 10, 20 years.

So, there is a lot of growth in this business.

We intend to be one of the leading producers and marketers.

So we will be involved in either the construction or the acquisition of assets, and we would assume that over a longer period of time it will be both.

Certainly we've seen, given the current margin environment, the opportunities to buy assets come in a lot closer and, in some cases, below the cost of new construction.

So we are certainly evaluating those opportunities.

Thanks.

Ian Horowitz, Soleil Securities.

I've got to say that the ethanol price this quarter seems to be extremely strong relative to what we were seeing at the rack level.

And kind of -- albeit a short history, but your history with the premium to rack, was this just an issue of timing or customer demand?

How do you -- how do you kind of quantify this really good price?

The really good price of our third quarter, or what you're seeing the spot market today, to clarify?

The 211 a gallon.

It looks like West Coast rack didn't even come close to that throughout the quarter.

You guys have done about a $0.05 premium to average quarterly rack prices.

But this was a lot higher than that.

Hats off to our expert marketing team.

But in seriousness, Ian, it was a combination of contracts that were transacted before the prices fell off, so we had some fixed prices that ended up higher than market.

We also -- with the rapid run in gasoline, we had some gas-related numbers that helped that as well.

And I would say that we were pretty disciplined, and that's part of why we did build some inventory.

We really were rather shocked at how far prices did come off, and didn't think it was a fair reflection of the actual market dynamics.

And then, your non-equity production in the slide presentation is 34.6 million gallons for the quarter.

How much of that was just spot transactions?

I can take that off-line in terms of the actual number, but it was -- there is the amount that we market for the plants that is certainly about half of that, if not a little over.

The rest comes from other third-party purchases.

Most of those gallons, whether they were from our marketing partners or from the third parties that we were buying from, were contracted, and that did cause us some issues in the quarter.

If you look at our numbers, I think, it's fair to say, while we don't break out marketing versus production, that when a market price is falling, we carry inventory to make sure that we have just-in-time inventory, and very responsive to our customers' needs.

So we very definitely, just as we took the write-down at the end of the quarter, did take a hit on selling our third-party ethanol in the quarter with inventory chasing a falling price.

So your Kinergy volume hasn't increased, right?

The delta was on kind of third-party spot transactions.

Kinergy markets all of the ethanol, whether it be produced by Pacific Ethanol or [our] contracted partners or the open market.

But if you strip out our equity production, the amount that we marketed outside actually did increase quarter-over-quarter.

And then, can you give us a little bit of an update on Front Range?

Local papers are talking about some labor issues.

We had a resignation from your board from one of the co-founders.

If you could just give us kind of an update on where that plant is in this situation.

We cannot comment on the activities of Front Range in regard to those items.

In terms of the board resignation, Dan Sanders filled the role very well and very capably for a year.

His own interests are extensive.

And he asked to resign and did, so that's the reason for that.

But the ongoing activities with regard to the labor situation in Front Range we cannot comment on at this point.

But are you comfortable with keeping -- having volumes from that facility over the fourth quarter, or is there a risk to that, to those volumes?

No risk whatsoever.

That plant is an excellent plant, performs exceedingly well, much better than industry standard in terms of efficiencies, and we have a great and growing relationship with the primary owners of the Front Range facility.

One last question and I'll get back in queue.

CapEx for fourth quarter or for 2008?

CapEx in terms of the projects, or in terms of the operating projects, or in terms of the overall build program?

Which one are you thinking about?

I guess I'd take both.

But the build --

We think about it in the two buckets.

In terms of the operating plants, since they are all new, there is relatively little CapEx that is aimed at those facilities.

In terms of the buildout program, about 200, 250 million will be spent over the next year to 18 months.

No breakout beyond that?

No breakout beyond that.

Other than to say we're about 50% of the way through the buildout program.

I'll get back in queue.

Thanks.

Richard Dearnley, Longport Partners.

Just so I understand, you'd said that the $203 million of equity contribution was enough to get you to the 220 million gallons by the end of '08.

And you have $51 million of debt drawn, and you have to spend 200 to $250 million over the next 12 to 18 months.

Does that then tell me that to finish the 220 million gallons you're going to increase your debt by 200 or$250 million?

Basically that is right.

The remaining funds will come from our debt facility.

Delayed draw debt facility; it's all in place, and we spend the equity first and the debt follows in behind.

Okay.

Thank you.

Mike Judd, Greenwich Consultants.

A question on the freight.

What's been going on with the freight of shipping corn from the Midwest out into California?

If you could just talk about some of the recent changes in pricing.

And also, what's your forecast looking out, perhaps, into next year?

As I think I alluded to earlier, the freight increases we're seeing across the board, whether it be ethanol, distillers grain or corn.

But what we have seen is that the rates -- and this has really been a trend since we initiated our business, and it was one that we anticipated, and it's why we feel very good about our overall business model -- is that the rates for the shuttle movement of corn continues to increase at a rate that is slower than the movement of ethanol and distillers grain.

So it's all a relative basis analysis, and we feel that we're in a very advantageous position.

Thanks a lot.

(OPERATOR INSTRUCTIONS).

[Ajay Mira], Third Eye Investment.

This is actually [Carl Pambar].

I'm not sure if I missed this; I was just curious if you could give a little more color on this $2.7 million loss.

It's not been showing interest in, I assume, it's the Front Range JV?

That is not so much -- that is not a loss; that is where we deduct the piece of the business that we do not own.

So we consolidate the results of Front Range, and then deduct out the 58% that we do not own.

Okay.

I'm wondering if you could talk a little bit about the restricted cash line item.

I think I understand what that's related to, but if you could just tell me how -- why exactly that's restricted, and kind of the dynamics of how you have access to that, or if you don't.

Are you talking about the restricted cash (multiple speakers) 42 million?

(multiple speakers) the longer-term.

42 million?

Correct.

That 42 million is proceeds from our construction loan that's dedicated to the plant construction activities.

And you have access to that as needed?

No.

We have to complete -- we have to complete the plants, and then, as Neil pointed out, run the test on the plants, which we did at Boardman, and then draw against the construction loan.

Okay.

And it goes into that restricted account, and then we use that for buildout on the -- for cash for the buildout of the subsequent plants.

Okay.

Thanks.

Ian Horowitz, Soleil Securities.

Two quick questions, Neil.

I haven't fed a cow for -- in a very long time.

Is there any difficulty with wet distillers at the Boardman plant through the wintertime?

Or is that -- I'm thinking about freezing and everything like that.

Is that not really an issue?

That is not really an issue.

It comes off very warm from the process and moves fairly quickly out to the dairies and the feedlots.

It is a preferred feed compared to the dry products.

So, no; that is not an issue.

Wet distillers grain is also fed locally in the Midwest without difficulty, where it's much colder than Boardman, Oregon.

Great.

You have a better look than any of us into this -- into the ethanol business in general.

And it looks like you're fine from a cash flow standpoint in your balance sheet.

But when you look across at your competitors, or even your marketing alliance businesses, how does it look on these smaller plants?

What are you seeing in terms of the difficulties and the cash constraints that some of these people may be having?

I don't want to comment on competitors, because we don't have that much visibility.

I would say on an aggregate basis, there are some plants that are more marginal than others, and, just like in any commodity business, if we were to continue to see a very low or negative margin environment, that at some point something would have to give.

There would be some plants that would either slow down or shut down for a period of time.

We're a little more optimistic about the, as I said in my prepared remarks, on the growing demand for the fuel.

So we don't really see the situation where there's no homes for the ethanol.

We do see the possibility that margins could be pretty choppy over the next years as the new plants are coming online.

So, a little hard to anticipate exactly what would happen.

But we do see that one, we think, fairly inevitable result is that we will see some continued consolidation, both of the production and the marketing.

Have you seen any increase in properties for sale, or have you seen any kind of fire-sale asking prices yet?

Or do you think that's [still to come]?

I would say no, we haven't.

We certainly have -- I would say there are more operators out there that are interested in considering selling and being part of a larger network.

And relative to asking prices a year ago, they certainly have come down.

But that's about all I can say to that.

Do you think the [bid/ask] spread is still wide enough to really not facilitate many transactions?

Clearly, that is the case today.

We've seen a few transactions, but not many.

Ron Oster, Broadpoint Capital.

I just had one quick follow-up on your co-product returns.

I think you've recaptured 25% of your corn cost this quarter, which has been trending down.

Is that due in part to the start-up of the new facility maybe not having quite as -- quite the advantage of the others, or is that more market pricing conditions that kind of caused that trend downward?

I would say that it's -- there's a couple points there.

We have with a lot of new plants -- I think relative to corn costs overall across the industry, we have seen distillers grain slip in value.

That has been a trend.

We actually of late have seen that trend reversing itself.

As soybean and other sources of protein have gotten very expensive, distillers grain, relative to those and relative to corn, has actually been coming back in price.

And that's very encouraging to us.

The other factor is that given our risk management on corn, and where in the quarter we ended up with higher corn cost relative to market, yet distillers grain is really more tracking those market numbers, that that in part explains why our own co-product percentage slipped a bit, was because we were -- it's a basis against our actual corn cost, which was higher than market in the quarter.

[Barry Lou], [Nuso Corporate Bank].

Could you go over real quick -- summarize real quickly -- hello?

Can you summarize real quickly how Madera performed in the third quarter?

We don't break out the plants on an individual basis.

The plants, as I said, overall, operated at about 10% above the nameplate capacity.

We don't give individual performance numbers out.

What we did say was that all of our assets collectively performed at about 10% over design rate.

You also mentioned that in the third quarter, the average ethanol price was $2.11.

With the plants that are ethanol plants -- the plants that are in -- that are in commercial operations and the plants that are going into commercial operation next year, can you go over what are the ethanol prices based on?

Is it based on the spot price, or is it based upon the hedge contracts, or a combination of both?

It's a combination of both.

Is there any -- if it's based on a spot price, is it any premium above the stop price, or is it just simply built on -- based on the spot price?

That's a pretty general question.

But, our markets tend to be spot in the Midwest plus freight; that's a balanced market.

And then we also -- given our strategic location of our facilities where we are delivering product to areas that competing ethanol has to come in through large rail hubs and then be redistributed out, and there's cost to terminal it and transport it, we end up with higher realized prices because of our strategic advantage in being closer to these more remote locations.

Do you know approximately what the premium (multiple speakers) premium, what that is (multiple speakers)

No, we don't.

Again, you just need to look at our overall numbers and come to your own conclusions on that analysis.

Would you be able to disclose what the average ethanol price was for Madera in the third quarter?

No.

We don't do that.

If I may talk a little bit about the plants under construction, I understand that the next plant that is expected to be completed is in Burley, Idaho.

Can you talk about the source of the funding that's available to -- available for the borrower to meet the required equity contribution for Burley?

Would that depend on internal sources?

Burley is being built.

The bank facility is put in place with the idea that we put in a certain amount of equity and then begin drawing construction funding for each of the projects.

And we are in that process right now.

We have the equity nearly in on that project, and we are -- will begin drawing the construction funding shortly.

Great.

Thank you very much.

(OPERATOR INSTRUCTIONS).

[Taylor Roche], [CISC].

I was just interested in thinking about the blender situation and the blender buildout around the Boardman facility, if you see that as sort of keeping up with the pace of construction around the area, or if that's going to be a cause for depressed prices in the future.

No.

And as I said earlier, we spend a lot of time and effort working with our customers to develop markets in advance of bringing our plants into operation, and Boardman was a great example of that.

We had built the market so that the majority of the plant was sold to new incremental blending opportunities in the local market in advance of production.

In fact, I can tell you that we're selling more ethanol in the Oregon and the Pacific Northwest than Boardman is supplying.

So it's -- and that's even before the mandate kicks in in January, 10% mandate.

To put that in a context for you, it's equivalent to about 165 million gallons of annual demand that will be required in Oregon starting in January of '08, and our 40 million gallon plant, obviously, is only providing a portion of that.

So, opportunity to build additional assets in the area, and opportunity now for us to market volumes from outside of our Boardman plant to satisfy that market, which is what we're doing today.

Do you see sort of independent sort of blenders coming into the market, or do you see sort of larger players?

We see both, and it's been really a strategic direction of ours from the beginning to work with both major oil companies and the independent oil marketers.

We are a very valuable source of supply to both.

That's great.

I just want to go back real quickly to slide 7 about the corn prices.

Do you typically see this 67 (inaudible) -- that's the sort of transportation increase over CBOT prices (inaudible) the average basis you're seeing?

That's your transportation?

Correct (multiple speakers) basis.

Yes.

So this was -- the 387 that you saw, that was just sort of the volatility in the corn market, so you just locked in those future trades that ended up not working in your favor, correct?

Right.

You can say it that way.

We say that it was our efforts to balance our corn purchases and our ethanol sales in an effort to mitigate volatility.

So that will not always mean that we have the lowest priced corn, but it does mean that we are trying to manage volatility and manage risk, which is all about managing margins.

Would you have not locked into some of those contracts if you weren't able to get such favorable prices on ethanol?

That -- we evaluate both individually and collectively, and have a very sophisticated risk management program to evaluate that on a daily basis with formal weekly meetings where we make our best decisions on how to proceed.

Clearly, hindsight is 20/20; you can look back and say we may have done that differently, or we may have -- we think that was a great decision.

So that's -- we then try to calibrate our future decisions accordingly.

Just sort of quickly, on wet distillers grains, sort of spot prices in the area in California and Oregon -- I was just sort of wondering what the spot prices you see for those are.

We've seen them trend up with the -- not only the higher price of corn, but the higher price of protein generally.

So we are seeing dry distillers grain prices come up into our region $150, $160 a ton.

Wet distillers grain largely tracks at on a dry weight basis parity with dry distillers grain.

So that would be in the range of $50 a ton for wet distillers grains.

This concludes our question-and-answer session.

I'll now turn the call back over to Mr.

Neil Koehler for closing remarks.

Thank you, operator, and thank you all for participating in our investor call.

We appreciate the questions, appreciate the support of our shareholders and investors, and look forward to speaking to you next quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.