Alto Ingredients Inc (ALTO) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter fiscal year 2007 Pacific Ethanol, Incorporated, earnings conference call.

My name is Shawn, and I will be your coordinator.

At this time all participants are in a listen only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Mr.

Gregory Pettit --

Thank you, Shawn.

Good morning.

Before we begin I would like to point out there are Power Point slides that accompany our prepared remarks today, and they are available for download on the company's home page, www.pacificethanol.net.

Within two hours or so after this call, audio replay will also be available for the next two weeks.

The link and dial-in numbers for these replays are also available on the company's website.

Comments on this call may contain forward-looking statements, including statements concerning: future conditions in the ethanol market and production industries, and concerning the company's future business, financial condition, operating strategies, and operational and legal risks.

The company uses words like: believe, expect, may, will, could, seek, estimate, continue, anticipate, intend, goal, future, plan, or variations of those terms and other similar expressions, including their use of the negative to identify forward-looking statements.

Prospective investors should not place undue reliance on these forward-looking statements which speak only as to the company's expectations as of the date of this call.

These forward-looking statements are subject to a number of risks and uncertainties, including those identified under risk factors in the most recently filed of the company's annual report on Form 10K or registration statement as filed with the SEC.

Although the company believes that the expectations reflected in these forward-looking statements are reasonable, actual conditions in the ethanol marketing and production industries and actual conditions and results in the company's business could differ materially from those expressed in these forward-looking statements.

In addition, none of the events anticipated in the forward-looking statements may actually occur.

Any of these different outcomes could cause the value of the securities, including the price of the company's common stock to decline substantially.

Except as required by law, the company undertakes no duty to update any forward-looking statement after the date of these materials, either to conform any statement or reflect the actual results or to reflect the occurrence of unanticipated events.

With that I would like to turn the call over to CEO and President, Neil Koehler.

Thank you, Gregory.

And welcome, everyone, to Pacific Ethanol's investor call to discuss our 2007 fiscal year and fourth quarter financial results.

I am joined today by Joe Hansen, our Chief Financial Officer, and John Miller, our Chief Operating Officer.

I will make a few opening remarks, followed by Joe walking us through the financial results.

After a closing comment or two on the market environment, Joe, John, and I will be available for some Q&A.

In 2007 we made significant progress in implementing our strategy of being the largest producer and marketer of renewable fuels in the western United States.

We continue to believe that this differentiated strategy makes us both a low-cost producer and high-value marketer of ethanol and feed coproducts in the market that we serve.

We began production in our second wholly-owned ethanol plant in Boardman, Oregon, in September 2007, and together with our Madera, California, facility and 42% ownership of the Front Range Energy facility in Windsor, Colorado, we ended the year with ownership of an annual operating capacity of over 100 million gallons.

In 2007 we sold a record 190.6 million gallons, an 87% increase from 2006.

For the fourth quarter 2007, we sold a record 58 million gallons, an increase of 82% over the fourth quarter of 2006.

Our sales of third-party ethanol continue to grow alongside the growth of our equity production as we expand our customer base and distribution network.

We achieved record sales in 2007 of over $461 million, and a gross profit of $32.9 million.

We recorded a net loss for the year of $14.4 million, and after dividend payments on preferred shares, the loss for the year equaled $0.47 per share.

Most of this loss was incurred in the fourth quarter and included special items that Joe will discuss in more detail.

In general, lower commodity margins, losses, some losses in our ethanol marketing business, and derivative impacts all contributed to our fourth quarter results.

It is important to note that as production margins have compressed in the ethanol industry, our gross profit has not been sufficient to cover our overhead expenses.

Since we are still in the building phase of our company, we have SG&A expenses per gallon that are significantly higher than they will be once we have completed construction of our 220 million gallon of annual operating capacity which will occur in 2008.

In 2007, our equity ethanol production totaled 65 million gallons.

In 2008, our equity production will be more than double this amount.

Our objective for 2008 is to at least hold our SG&A expenses constant or even reduce total SG&A cost over 2007, which will result in a significant decrease in SG&A per gallon produced and marketed.

Other key objectives in 2008 are to: successfully complete our current build program, improve operating efficiencies at our plants, diversify and expand our sales of both fuel and feed, and pursue the development of new technology to produce ethanol from new feedstocks at our existing facilities.

This week we will begin grinding corn at our Burley, Idaho, facility, and we are on track to complete construction at our Stockton, California, facility in the third quarter this year.

We were pleased to be awarded a $24 million grant from the Department of Energy in February to develop a commercial cellulose ethanol demonstration facility integrated with our Boardman plant.

To strengthen our balance sheet and to help achieve our objective we closed on a new equity investment of $40 million last week from Lyles United.

With that, I would like to now turn it over to Joe to run through the financial and operating details of our 2007 fiscal year and fourth quarter results.

Thank you, Neil, and good morning, everyone.

As Neil pointed out, we continue to make good progress in building our production capacity to support our growing marketing activities.

As that capacity is being completed, Pacific Ethanol is continuing its transition from constructing -- from the constructing of its plants to that of becoming an operator.

As of the end of Q4, two plants were operating and two were under construction.

In addition, we held a 42% interest in an operating plant in Colorado.

Kinergy continues to market the ethanol produced by all three plants as well as ethanol purchased from third-party producers.

The current operating results reflect the continued transition into operations and a very challenging operating environment in Q4.

Slide two has a list of the subjects we will cover.

Going to slide three, we summarize the income statement.

Our net sales increased to $130.4 million in Q4 '07 from $80.6 million in Q4 '06, a 62% year-over-year net sales increase.

Looking at slide four, we show our net sales and gallons sold.

We have shown solid increase in sales volume over the last three years.

We sold 57.8 million gallons of ethanol in Q4 '07, up 82% from 31.7 million gallons in Q4 '06, and also up 16% over the prior quarter.

In 2007, we sold 190.6 million gallons, up 88.9 million gallons, or 87% over 2006.

Our third-party purchases and marketing activity represented about two-thirds of our sales in 2007.

This provides us a well established market base as we ramp up our production volume.

Our objective is to grow our presence and our destination markets, so that our third-party marketing activities continue to represent a meaningful portion of our total sales.

Moving on to slide five, we continue to see significant downward pressure on gross profit in the fourth quarter due to poor commodity margins that extended from the third quarter.

Our gross profit dollars grew to $32.9 million in 2007, up from $24.8 million in 2006.

However, our gross profit as a percentage of sales decreased to 7.1% on the year from 11% in 2006.

This increase was primarily due to a lower average sales price of ethanol, significantly higher corn prices, and derivative losses relating to future periods.

Returning to slide three, our SG&A expenses decreased to 6.7% of net sales in 2007, down from 10.9% of net sales in 2006.

SG&A expenses in Q4 '07 were down from the same period a year ago in absolute dollars, but essentially remain steady.

Please recall that our Q4 '06 results included one-time noncash compensation charges.

We expect our SG&A expenses to continue to decrease on a per-gallon, as well as a percentage basis relative to sales.

Our net loss for the quarter was $14.7 million which includes $5.5 million or $0.14 per share of special items.

During the quarter, we recorded a charge of $4.4 million to reflect the decrease in fair value of interest rate hedges against our senior debt facility.

We also recorded a charge of approximately $2 million to write down financing fees related to our suspended imperial project.

However, there were no write-downs related to physical assets.

These charges were partially offset by a mark-to-market gain of $.9 million relating to commodity derivative positions that will settle in future periods.

As indicated, we recorded a $4.4 million noncash charge relating to the fair value of interest rate hedges.

We expect noncash mark-to-market adjustments to fair values to continue as interest rates fluctuate and if debt amounts fluctuate.

For the year, we had a net loss of $14.4 million, which reflects -- excuse me, which includes $13.3 million, or $0.33 per share of special items.

This includes $5.4 million related to interest rate hedges and the $2 million write-down just mentioned on the imperial project.

In addition, we had a $2.9 million one-time charge of amortization of intangibles related to our acquisition of Front Range Energy.

The year also included a mark-to-market loss of $3 million relating to commodity derivative positions that will settle in future periods.

Our net loss for the fourth quarter and for the year are net of the 58% noncontrolling interest in Front Range Energy.

Turning to slide six, EBITDA was negative $4.5 million for the quarter, primarily due to compressed commodity margins.

For the year, we maintained a positive EBITDA of $2.4 million.

The special items discussed earlier, with the exception of the commodity derivative impacts, are already added back into these EBITDA figures.

On slide seven, we summarize our commodity price performance.

As pointed out earlier, we grew both our production and third-party sales gallons.

Our average selling price was $1.97 during the quarter compared to $2.26 per gallon in the same quarter a year ago, and down from $2.11 per gallon in the third quarter of this year.

During the fourth quarter, our delivered cost of corn was $4.45 per bushel, down 2% from our Q3 delivered cost of $4.54.

Our corn basis averaged $0.65, giving us a CBOT equivalent corn cost of $3.80 per bushel compared to the average CBOT market price of $3.88 during the quarter.

For the year, our CBOT equivalent price of corn of $3.61 per bushel was slightly under the average CBOT market price of $3.74 during the year.

We had a disappointing coproduct return of 23.7% during the quarter, due to fixed price sales contracts for distillers grain, contracted when market prices for corn were lower.

As corn rose in the fourth quarter, the coproduct return decreased.

For the year, our coproduct return was 24.8%.

Some of the fixed price contracts we had in the fourth quarter continue into 2008, but they will represent a smaller percentage of our total coproduct sales volume.

In addition, we are making efforts to achieve a better mix of contract pricing to allow for more indexing to corn or dried distiller's grain.

The net impact of ethanol, corn, and coproduct metrics just discussed resulted in a production commodity margin of $0.75 per gallon in the fourth quarter and $0.95 per gallon for the year.

At year end, we had forward fixed price ethanol sales contracts with a dollar value of $57.8 million, as well as 40.6 million gallons of forward index-based ethanol sales.

Our forward corn purchase commitments consist of $4.4 million of fixed price contracts as well as 2.4 million bushels of forward index-based purchase contracts.

Additional details of our purchase and sales commitments are available in the 10K in the commitments footnotes to the financial statements.

Referring to the balance sheet on slide eight, the net loss in the quarter and continued investment in our build-out program reduced our cash balance.

We experienced higher than anticipated construction costs at the Burley and Stockton facilities.

These overruns had to be funded from equity and also delayed the availability of construction loan proceeds.

Due to the -- excuse me, due to these increased capital requirements and volatile commodity environment, we felt it was important to bring new equity into the balance sheet.

To this end, last week we completed a $40 million preferred equity offering.

Based on this new equity deal, we have adequate working capital and financing for 2008.

In our construction program, we have contributed a total of $227 million in equity and drawn a total of $102 million of debt as of year end 2007.

Our total construction loan facility is now sized at approximately $251 million after suspension of the imperial project, leaving total availability of $149 million.

In 2008, we expect a total cash outflow of approximately $161 million related to completing construction at the Burley and Stockton facilities.

Of this amount, $125 million will come from availability under a senior debt facility, and the balance of $36 million will be contributed from equity.

Upon completion of the Stockton plant and required performance testing, we expect to make a final draw of up to $24 million from the construction loan facility, which essentially rebates most of the $36 million equity investment.

So at the completion of the construction program, we will have invested approximately $239 million of net equity and will have $251 million of senior debt, including working capital lines of credit, for an aggregate capital cost of $490 million.

That concludes the summary of the financial results for Q4 and 2007.

Before we go back to Neil for further comments and Q&A, I would like to briefly go to slides nine and 10 to summarize the status of our operating assets and plants under construction.

Slide nine.

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

Overall, our operating plants produced at a rate of about 8% over design basis during 2007.

Slide 10 shows the plants under construction.

Our plant in Burley, Idaho, is currently in the start-up phase with corn grinding to begin in a few days.

We are pleased to be bringing this project on-line at the early part of our Q2 start-up time frame.

In regard to Stockton, we continue to project a target completion date in the third quarter.

That concludes my remarks.

I now turn it over to Neil for further discussion before opening the lines up for questions.

Thank you, Joe.

To conclude, we are encouraged by ethanol market developments with the high price of oil, limited and expense of opportunities to expand oil production in a robust renewable fuel standard, we do believe the domestic ethanol industry will continue a rapid expansion.

At this time, our customers are aggressively increasing their use of ethanol, and we are there to help them.

In 2007, the U.S.

ethanol industry produced approximately 6.5 billion gallons of ethanol.

In 2008 the industry will produce an estimated 9.7 billion gallons to meet a renewable fuel standard requirement of nine billion gallons, which grows to 10.5 billion gallons in 2009 for conventional biofuels.

Historically, the required use of ethanol has represented less than half of total ethanol used.

The compelling economics of ethanol blending should continue to keep ethanol demand well ahead of mandated use.

We believe ethanol production margins will need to be sufficient to encourage reinvestment in new capacity to meet growing future demands.

In fact, we are seeing production margins in the first quarter of 2008 that are on average better than in the fourth quarter of 2007.

By 2022, 36 billion gallons of renewable fuels will be the minimum requirement in U.S.

transportation fuel supplies which represents approximately 20% of all gasoline and diesel fuel supply today.

We are encouraged by testing and discussions with automobile companies and regulators to move the allowable amount of ethanol in gasoline up to 15% or 20% in conventional vehicles.

Corn supply can support the rapidly expanding production of ethanol, and when it can't, the technology to convert cellulose to ethanol will be commercially viable.

Increases in corn yields, substitution of corn for feed by distiller's grains and feed product and the capacity of the world farmer should support significant growth in ethanol production.

The successful corn ethanol producers are best positioned to commercialize cellulose ethanol technology.

We believe that our business strategy has positioned Pacific Ethanol to be a leader in the now and future ethanol industry.

And, Shawn, at this time please open up the lines for questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Arjun Murti with Goldman Sachs.

Please proceed.

Thank you.

Apologies if I missed it in your prepared remarks, but what was your 2008 capital spending outlook?

The 2008 capital spending outlook is $161 million.

That would be funded essentially from around $125 million in debt and $36 million in equity.

And as I indicated during the prepared remarks, we expect to get $24 million of that back from the top-off at Stockton, and that would give us a net $12 million equity.

Got you.

And the $125 million of debt, that is something you plan on doing, raising new debt?

No, that is not.

That's from our existing debt facility.

Your existing debt facility.

Got you.

I guess the bigger question is, I appreciate you have a fairly optimistic view of long-term ethanol margins, and that could certainly very well play out.

I guess I've struggled with, as probably all of the independent producers, but including yourself, the decision to continue to aggressively move forward with the expansion plans, given how challenged the current cash flows are and the balance sheet capacities are.

Why not slow down development?

I realize there's a big mandate out there, but it seems like you have a pretty challenged financial position.

Well, Arjun, that's a fair question.

I will point out that we have moderated our growth plans.

We did put our imperial project on hold last fall.

So we did respond to market signals and looked at a facility where we had purchased a fair amount of equipment, had prepared all of the ground, but had not actually laid any concrete.

So on that particular case we did say we should pull back, and as market dynamics improve, then we can reinitiate that project.

Our Burley plant is finished.

As I said, we're grinding corn.

It is supporting new market development that we and others have been helping develop in the western United States, very comfortable with the profile of that facility, and the Stockton plant as well.

We are expecting a migration towards higher level blending, some of our customers are already moving in that direction this summer in California, our Stockton facility is still ideally located for distribution in the west.

So we're very comfortable with bringing these plants that we currently have, either in operation or construction, online, and we do have a macro view is as you mentioned that margins will be sufficient on a go-forward basis to support not only these plants but additional plants.

That being said we recognize that 2008 can be a very volatile environment.

We have a cash forecast that looks at the lower end of margins.

That was a key reason why we went out and raised $40 million, to make sure that we we had adequate amount of cash on our balance sheet to withstand even a low-margin environment in 2008.

That's very helpful.

Thank you, Neil.

One of the age-old questions is sort of buy versus build.

And is it just you have a strong desire to have newly built plants versus what I think would be a challenging environment for everyone could make some of the acquisition opportunities more attractive than new builds?

I guess, why be so singly focused on building versus potentially buying if others reach distressed environments?

Well and we certainly -- a public company with access to capital, we certainly are always open to looking at acquisitions and our team will continue to be open to that.

I think it's -- in some part, it's specific to our model where we are building ethanol plants with this model to build outside of the midwest, and essential locate these facilities in the heart of the fuel and feed markets, where really historically there have not been ethanol plants.

That certainly has given us somewhat of a focus on building new facilities because we are building plants where there really are very limited acquisition opportunities.

And we feel that that model -- we pioneered that model, we feel that it's the right model that combined with very good assets in the midwest that it creates a national industry that can truly meet the growing demand for fuel now and in the future.

Neil, one final quick one.

The timing for California moving from 5.7% to a 10% blend, is that still sort of '09 to 2010, or do you have an updated view on that?

The 2010, certainly, with the new regulations implemented, becomes an inevitability for higher level blends, whether it's 10%, we're hearing 8%, 9%, being a sweet spot for some of the refiners, so that plays out between now and 2010.

There is a -- the update is there's a regulation in the comment period right now that is a transition program that would allow refiners, if they can produce a gasoline that could be blended with higher levels of ethanol at their refinery, they essential can have a fungible product, which they don't have today where they can produce that product, put it into the pipeline system, and pull it out anywhere else in the system to be able to blend with the higher level of ethanol.

And to date, given the very strict lack of fungibility, you had to blend the exact molecule of gasoline with the corresponding amount of ethanol that meet the specification.

This new flexibility that is working through the system right now and should be available to refiners this summer we believe that will include higher levels of ethanol blending this summer on the part of some refiners.

Sounds like it might give them a little more flexibility is what you're saying.

A little more flexibility.

So -- and our view has always been and still is, this program will aid this, that it's really between now and 2010, just as we saw, about a two-year transition from MTB to ethanol, that we'll see a two-year transition starting this summer from the 5.7% blend levels to something closer to 10%.

That's really helpful.

Thank you very much.

Thank you.

Your next question comes from the line of Ian Horowitz with Soleil Securities.

Please proceed.

Good morning.

Can we talk about where the balance sheet stands kind of as of today after the financing?

Well, $40 million of equity added to the balance sheet.

So current assets -- liquid assets are where now?

Our liquid assets currently are at -- as of 12/31 were at roughly $82 million.

Right.

But you've had cash burn from 12/31 to last week that caused to you go out and search for equity.

We're just -- we don't issue forward-looking statements, or comment on the first quarter, but the $40 million was based on our future needs.

I think it the's also fair to say, Ian, that we continue to have cash contributed from operations in first quarter.

So it's not going to be dramatically different from taking the 12/31 and adding the $40 million.

Can you go over again what the total cost of Burley and Stockton are, or expected to be?

Aggregated numbers that we can provide that Joe can reiterate.

Yes.

The -- what we have left for Burley and Stockton and Burley is just about finished, is we intend to draw down on our debt facility $161 million -- excuse me, the total cost will be $161 million.

The debt portion will be $125 million, and we'll have to contribute $36 million worth of equity.

Right.

When we receive the top-off, we will get $24 million of that million back.

So our net equity contribution will be $12 million.

Right.

That's what's remaining.

I'm trying to get an all-in cost for these two facilities, like what you've spent so far.

Well, if you look at the -- $490 million for --

-- all four plants.

Okay.

And I'm trying to look and see -- I'm looking at the hedging stuff, and you've got $57.8 million fixed.

I mean, are you going to give some indication on where you're seeing is ethanol pricing for the first quarter and where you're seeing corn pricing for the first quarter?

We've seen corn move significantly since the end of '07.

The -- we don't give specific guidance in terms of our contracts and the mix other than to say that, it's pretty clear as is true of the market and our situation as well that the bulk of our contracts are indexed to various market measures.

And generally what we have taken in our position on hedging is that if you look at the forward curves on corn and ethanol, it is not a very attractive opportunity to go out and hedge forward positions.

Plus the market is not offering a tremendous amount of fixed price out beyond a month at a time.

So we have, from a risk management, taken the active decision to bring that in much shorter term, so that we are buying corn and selling ethanol more in the near market and in the first quarter that has been a strategy that has been the best strategy for managing margins.

If we had gone out and hedged our corn at the end of the year and taken the fixed prices that were offered in the first quarter, we would have had a margin that is less than the margin, the operating margin that we're seeing today.

So that is our strategy, is to look at it more on a near-term basis, and until we see some developments in the market, whether it be opportunities to get better pricing on fixed ethanol out in time, or see some moderation in forward corn prices, we will continue to operate the business that way.

Can you talk a little bit about what your gross margin or EBITDA margin is on your equity gallons versus on your kind of nonthird-party marketed business?

No, Ian, we cannot.

I will say, though, because we do not break out the marketing and the production or talk about at specific plants, but I did mention in my opening remarks, and I think it's -- we've always talked about the marketing business as being nominally a 1% business.

We did incur some losses close to $3 million in the fourth quarter of 2007 on the marketing business.

We had some positions that were indexed to gasoline and some fixed-price contracts that were not matched in the quarter that actually was more atypical, and because of that we felt it was important to identify that as a part of the issue in 2007, where we did have some issues in the marketing business and inventory drops and with the radical disconnect between ethanol and the ethanol prices and gas prices there was that impact in the fourth quarter.

That has corrected itself in the first quarter.

Okay.

I will get back in queue.

Thanks, guys.

Operator?

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Eitan Bernstein with FBR.

Please proceed.

Good morning, gentlemen.

Ian went through some of the questions I had.

Just one more maintenance or clarification.

Is 23 million gallons of production volume sold, first off, I'm assuming that nets out your interest in Front Range Energy.

Correct -- our 58%, and it is sales.

And even with that, it looks a little bit lower than what I would have expected with operating capacity of about 25 million barrels.

Did you build inventories in the quarter?

We did build some inventories.

Okay.

Also, Eitan, which has been typical of the industry, lower denaturing levels, we were at the 2% for the quarter, so that would have an impact.

Okay.

And then -- I guess -- and Ian already asked, but obviously anything you could give us in terms of guidance, whether just general outlook or detail on either production economics or the fixed -- or the indexed contracts would obviously be very, very helpful.

But that's all I've got.

Thank you.

All right, thank you, Eitan.

The -- I will say, and I mentioned in my opening remarks, too, that we are continuing to work on improving the efficiency of our plants.

On average we ran about a 108% of name plate for the year.

Those numbers were actually slightly less in the fourth quarter due to a couple of maintenance issues that have been resolved.

We are endeavoring in 2008 to have numbers that are certainly 110% and greater of name place capacity.

So obviously every gallon of production that you can squeeze out of these plants in a profitable way is important, and we are very focused on improving the efficiencies of our plants as we move into 2008 and bring on new facilities.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [John Ming Liu] with [Otter] Capital.

Please proceed.

Good morning.

I have one specific question about the transportation costs.

I note that transportation costs year-over-year increased from $0.51 per bushel of corn to $0.65.

Should we expect higher transportation costs in 2008?

Yes, the bulk of our transportation costs, and this is sort of unique to our model, is the transportation cost of the corn to our plants.

We have relatively minimal transportation costs from our plants to markets, because we are producing in the middle of the market.

So what we've seen generally is increase in transportation costs across all products, and so what you see in our case is the freight of moving corn from the midwest, higher fuel surcharges, higher tariff rates.

What we have found at the same time, which really is a further endorsement of our strategy, is that if you look at the rates for moving ethanol and moving distiller's grain from the midwest compared to moving corn from the midwest, and essentially that is the freight arbitrage that we employ to lower our cost, that the increases in corn freight have been significantly less than the increase in ethanol and distiller's grain.

So our freight spread, if you will, has increased in the last year to our advantage.

But according to my calculation, per bushel corn, you guys are spend account about $0.24 -- actually, based on per gallon of ethanol, the transportation cost pay for the corn you guys was about $0.23 per gallon, where as [Bears] had claimed they can ship their ethanol to the coastal areas at about $0.18 per gallon.

Right.

That's an apple and orange, because you're talking about ethanol versus corn, and the corn that we're bringing out includes the ethanol and the distiller's grain.

So to make that an apple and apple comparison you would have to take the ethanol freight plus on a per gallon equivalent basis look at the freight to take distiller's grain to the market because where corn -- midwest plus freight on the distiller's grain and the ethanol.

And when you did that calculation you would see that the -- bringing products to the coast in unit trains of corn is less expensive than bringing the finished products, both ethanol and distiller's grain, to the coast.

Okay.

Thanks.

Yes.

Your next question comes from the line of Pavel Molchanov with Raymond James.

Please proceed.

Good morning, guys.

Can you comment on the -- what you're seeing in current ethanol pricing in California relative to the CBOT?

We are seeing actually some strengthening of that.

We're -- the ethanol prices in California are roughly $2.60 today versus CBOT at $2.45, and CBOT typically is FOB midwest plants is -- would be at least $0.05 less than that.

So we are seeing spreads that in a balanced market you would expect to see spreads that are essentially midwest plus freight, and that is essentially what we're seeing today.

Okay, got it.

And just a quick follow-up on that.

Are you specifically on the west coast are you seeing any increases in blending capacity, either by the integrated (inaudible) or by independent refiners or blenders?

Absolutely.

So we have seen probably the largest growth in our market has been the Pacific northwest.

There was virtually -- well, maybe 20% or less of the market was blending the Pacific northwest a year ago.

Today, and as of April 15th, when the requirement kicks in, in the southern part of the state in Oregon, 100% of Oregon will be blending 10% ethanol.

That is moving into the state of Washington in the month of April, we're seeing new blending happening in Pasco, Washington, Vancouver, Washington, Spokane, Washington.

As I mentioned earlier, we are seeing increases in California that we expect to start happening this summer.

We're working with folks in Idaho.

There's no ethanol blended there today.

Actually, one small independent that blends, but we're helping bring some infrastructure and blending to the state of Idaho.

We're seeing more year-round blending in Nevada and Arizona.

So really in all of our markets, and this is -- we hear a lot about the southeast, and certainly from a national basis that's the biggest new market that we're seeing develop this spring and summer, but we're really seeing throughout the United States incremental new blending, new infrastructure being implemented everywhere.

Got it.

Thanks very much.

Your next question comes from the line of [Tyler Cristo] with Mountain Vista Capital.

Please proceed.

Hi, gentlemen.

Good morning.

Can you talk about your strategy as it relates to the low carbon fuel standard in California?

Absolutely.

We are -- part of our strategy has been to make sure that we are ahead of these events, and certainly very involved in the development of those policies, and we're very involved in the development and the initiation of the low carbon fuel standard in California.

Our business strategy is to use 30% less fossil fuel than is typical in the midwest when you're drawing your distiller's grain.

Since all of our distiller's grain and all of our first round of plants, all of the product is wet.

We use 30% less natural gas.

So we come out of the blocks as a lower carbon fuel producer than our competitors in the midwest.

We think that ethanol is the quickest way -- particularly low-carbon ethanol, is the quickest way to achieve significant implementation of the low carbon fuel standard in California.

We expect that there will be a differentiation of ethanol types as that rule is implemented, so that our ethanol will achieve greater credits for meeting -- that the standard that will be implemented, and we're very involved in the workshops and the regulatory hearings over the next year to implement that.

But we think that the low carbon fuel standard in California and then spreading to other parts of the country and the world is going to be a very significant driver for future ethanol growth.

You have a follow-up question from the line of Ian Horowitz.

Please proceed.

Yes.

Question on this cellulosic grant.

Is this similar to the previous fuel grants where it has to be a dollar-for-dollar match in order to draw down on the funds?

That is correct.

We are in negotiations with the DOE as we speak in terms of timing and how we play out the project.

I will point out that in-kind contributions will be contributed, and for 2008, it is our assumption that most of what we contribute as part of our match will be in-kind contributions in the roll out of that program.

Okay.

And will Burley and Stockton both be 100% wet, or are they going to be doing some dry as well?

Both of them are 100% wet.

So nothing kind of in the near future to be indicating kind of a dry market?

That is correct.

We are looking at ways to add more value to the wet product by, in some areas, combining it with dry product to create a value-added specialty feed product as opposed to just a wet distiller's grain commodity product.

But we have -- certainly Central Valley of California has such a high concentration of dairy cows, Magic Valley in Burley, Idaho, area also a very high concentration of dairy cows, so we're very comfortable.

In fact, have sold out the wet distiller's grain in Burley, Idaho, before we begin production.

And will you take the assets that are at Calipatria, will those move to the Stockton facility, or are those assets kind of earmarked for any kind of construction that would go on at Imperial Valley?

At this point, I arrangements we are holding them.

Fair to say that we've taken a few pieces as back-up equipment for some of the other plants, that we've needed quickly, some assistance, some of the other construction project.

But for the most part right now we are holding that equipment as complete set of processing equipment for that facility until we were to make a decision to when we are going to resume production, or if we at some point decided we were not, then we could always take those to another site.

But right now we still after lot of confidence that in project and feel that it's a great location and our intention is to resume construction there.

Okay.

And lastly, we haven't really talked much about this, but a lot of tissues regarding the credit lines back -- the events that got you into default have to do a lot with internal controls in your K and some -- you've made some mention of it.

But kind of where do we stand in terms of correcting those controls?

Have -- the revenue sweeps, have they been adjusted for already?

Have those things been kind of rectified so that, A, what happened has been answered, and we won't have this kind of going forward?

Ian, this is Joe.

They have been corrected.

A couple of things that we've done here -- well, first of all, let me add that none of this related to the weaknesses that were identified in 2006.

Those all were fully remediated.

In general terms, what we've done is we're adding accounting personnel that both add depth and expertise to the department.

We're bringing in functions that have been in the past performed by outside or independent contractors.

We're bringing them back into the company to bring back that expertise and the knowledge into the company.

And then we're revisiting our SOX controls in general, and with the goal of both increasing their strength and effectiveness.

And we're doing that not only with our own staff, but we're using outside parties to adds us in that project.

With respect to the revenue sweep, as you probably know, the amendment, or excuse me, the consent and waiver agreement that was executed contained an amendment provision, and we are now complying with the revenue sweep as it's reflected in the consent and waiver agreement.

Okay.

Thanks.

Your next question comes from the line of Peter [Hammock] with Lehman Brothers.

Please proceed.

Good morning.

Thanks for taking my call.

Could you speak a little bit about the purchase agreement that you just signed and what limitations on new business it provides?

There's a sentence in there about restricting new projects with investments of over $1 million.

I'm curious if that impacts the cellulosic project or other things like that.

Thanks.

No, we don't expect that it's going to impact any of the capital projects that we've outlined for 2008.

In general, the concept behind the various rights that were granted in that purchase agreement were modeled on the cascade, the preferred A purchase agreement of a couple years back.

So that's essentially where we came up with the rights and the consensus, was to model it after the series A.

Okay.

But -- so help me understand what you're attempting to do with that limitation, because -- what is, in fact, limited?

Well, we have a plan that involves what we've talked about here, which is completing the construction of our facilities.

We have some modest capital projects at the plants to improve efficiencies.

And what essentially -- which was something that we've imposed upon ourselves, is that until we have some additional -- or to raise additional capital, we are going to restrict our capital expenditures to that which we have planned for 2008.

So it's really just reinforcing our own plan which is to not be looking at whether it be building a new plant or going out and using cash to buy other companies, or whatever it might be, is that we at this point are going to conserve cash for our current program as outlined in our capital budgets for 2008.

Okay.

And when are you budgeting the cellulosic -- I guess it is a dollar-for-dollar match, when would you imagine contributions or other capital requirements for that sort of project?

2009, as I mentioned, we will in the third, but certainly the fourth quarter, be moving into the implementation of that program more actively, and our expectations is that any contributions that we make will be in kind as opposed to cash.

And the purchase agreement would not limit that?

That's correct.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Santiago [Riberall] with Deutsche Bank.

Please proceed.

Good morning, gentlemen.

I'm just trying to understand a balance sheet account, this construction-related liabilities.

On the third quarter balance sheet you can see that there's a restricted cash account offsetting that, basically of the same magnitude.

So now given that that account is now at zero, do the -- does the $161 million of expected capital expenditures for '07 contemplate this $55 million, or is this a cash outflow that we could expect in addition to that?

Yes, the $161 million includes the AP balance.

Okay.

Thank you.

That's my only question.

That concludes the Q&A session for today.

I would like to turn it over to management for closing remarks.

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

We appreciate the support of the analyst community, our shareholders, our lenders, and the public.

So we will be talking to you next quarter.

Thank you.

Thank you for your participation.

This concludes the conference.

You may now disconnect.

Good day.