Alto Ingredients Inc (ALTO) 2008 Q1 法說會逐字稿

Good day, Ladies and Gentlemen, and welcome to the first quarter 2008 Pacific Ethanol Incorporated earnings conference call.

My name is Cerita, and I will be your coordinator for today.

At this time all participants are in 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, Hill & Knowlton.

You may proceed.

Good morning, and welcome to Pacific Ethanol's first quarter conference call.

First I would like to point out that there is a PowerPoint presentation to accompany this call on the Company's Investor page, so click through to the Investor page and scroll down to the bottom, and you will find a presentation to download.

Furthermore, this call can be accessed through dial-up and web-based replay for the next two weeks.

You can check our website for details on that.

For some Safe Harbor language, this conference call may include forward-looking statements, including statements concerning future conditions in the ethanol marketing and production industries, and concerning the companies 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 the use of the negative, to identify forward-looking statements.

Perspective investors should not place undue reliance on these forward-looking statements, which speak only as to the companies expectations as to the date of these materials.

These forward-looking statements are subject to a number of risks and uncertainties, including those identified under the Risk Factors in the most recently filed Company's Annual Report on Form 10-K or registration statement, including any related final prospectus or prospectus supplement as filed with the Commission.

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 anticipate 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 to reflect actual results, or to reflect the occurrence of unanticipated events.

And with that, I would like to turn the call over this morning to CEO and President, Neil Koehler.

Thank you, Gregory, and welcome everyone to Pacific Ethanol's investor call to discuss our 2008 first quarter financial results.

I am joined today by Joe Hansen, our Chief Financial Officer.

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

After a closing comment or two on the market environment, Joe and I will be available for questions and answers.

We are pleased to report a strong operating quarter.

We achieved record sales of $161.5 million, an increase of 63%, compared to $99.2 million in the first quarter of 2007.

In the first quarter of 2008 we sold a record 59.2 million gallons, a 58% increase compared to the 37.5 million gallons in the first quarter of 2007.

We reported a net loss for the quarter after dividend payments of $36.3 million, or $0.90 per share, $0.96 per share of this loss was due to a non-cash goodwill impairment net of non-controlling interest.

Without this charge, we would have reported positive net income of $0.06 per share.

Our gross profit was $15.7 million, compared to $15.3 million in the first quarter of 2007, and EBITDA grew 159% to $12.4 million, compared to $4.8 million in the first quarter of 2007.

Of our 59.2 million gallons sold in the quarter, 23.2 million were from equity production, with the balance of 36 million gallons from third parties.

Our equity production will increase significantly in the second quarter, as we successfully started up our Magic Valley plant in Burley, Idaho in April.

I am pleased to announce that last week we completed a seven-day bank test verifying a 60-million gallon operating capacity for our Idaho plant, subject to confirmation from our independent engineer.

We remain on-track to finish our Stockton, California ethanol plant in the third quarter of 2008, and will enter the fourth quarter with an annual operating capacity of 220 million gallons.

In the quarter our plants achieved production levels that were 107% of design capacity.

We are very focused on improving our operating efficiencies at all of our plants, and in developing the next generation of ethanol production processes.

We are working with our technology partner PDX of the U.K.

to install and operate proprietary equipment at the front end of our Oregon facility, to increase ethanol yields per bushel of corn input.

We are working with our cellulose technology partner BioGasol of Denmark, and the Department of Energy, in developing a specific work plan for building our 2.7 million gallon commercial cellulose demonstration plant also at our Oregon facility, and we will begin construction in 2009, with commercial production expected in 2010.

With that, I would like to now turn it over to Joe, to run through the financial details of our first quarter 2008 results.

Thank you, Neil, and good morning, everyone.

The first quarter results included both a goodwill impairment charge and positive income on an operating basis.

The following discussion should assist you in understanding the elements affecting both.

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

On Slide three, we summarized the Income Statement.

Our net sales increased to $161 million in Q1 '08, from $99.2 million in Q1 '07, a 63% year-over-year increase.

Going to Slide four we show our net sales in gallons sold.

We sold 59.2 million gallons of ethanol in Q1 '08, up 58% from 37.5 million gallons in Q1 '07, and also up 2% over the prior quarter.

Our third party purchases and marketing activity represented 61% of our gallons sold in the first quarter.

Going to Slide five, we saw a strong rebound in gross profit margin in Q1 '08 from rapidly rising ethanol prices, and advantageous corn positions benefiting our production margin.

Our gross profit was $15.7 million, or 9.7% as a percentage of sales in Q1 '08, compared to gross profit of $15.3, million or 15.4% as a percentage of sales in Q1 '07.

Going back to Slide three our SG&A expenses as a percentage of sales decreased to 6.1% in Q1 '08, down from 9.6% in Q1 '07.

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

The goodwill on our balance sheet was primarily related to the acquisition of our interest in Front Range Energy, LLC.

Following our annual goodwill impairment test as of March 31, 2008, we recorded a non-cash charge for goodwill impairment of $87 million.

Keep in mind that our financials reflect Front Range's data on a fully consolidated basis, and of the full impairment amount, $48.4 million relates to the non-controlling interest, resulting in a net impairment charge of $38.6 million.

Changing equity and industry market factors since the time of our acquisition, such as stock price decrease, the compression of production margins, and decrease in valuation of ethanol firms in general, indicated impairment of goodwill.

After the net impact of the goodwill impairment, we recorded a net loss of $35.1 million, compared to $3 million of net income recorded in Q1 '07.

Excluding the charge for goodwill, our operations generated net income of $3.5 million for Q1 '08.

The quarter also includes other special items totaling $0.5 million of expense.

During the quarter, we recorded a non-cash charge of $5 million, to reflect the decrease in fair value of interest rate hedges against our construction debt facility.

As mentioned in prior periods, this is to record the change in fair value of our interest rate hedges in a declining interest rate environment.

This charge was partially offset by $4.5 million of income from Oregon Business Energy tax credits, related to our Boardman ethanol plant.

We also recorded a net commodity derivative gain of $2.2 million for the quarter.

This figure is comprised of derivative gains of $900,000, related to hedge positions that settled during the quarter, and $1.3 million of unrealized mark-to-market gains on open positions that will settle in future periods.

After deducting preferred stock dividends of $1.1 million, our net loss available to common shareholders is $36.3 million, or $0.90 per share, of which $0.96 is related to the net impairment for goodwill.

Moving to Slide six, EBITDA was $12.4 million for the quarter, up from $4.8 million in Q1 '07, resulting from improved performance in our marketing and production activities, and reduced SG&A expenses assay percentage of net sales.

Please keep in mind that 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 summarized our commodity price performance.

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

Our average selling price of ethanol was $2.30 during the quarter, down slightly from $2.34 in the same quarter a year ago, but up from $1.97 in Q4 '07.

During the first quarter, our delivered cost of corn was $5.33 per bushel, up about 20% from our delivered Q4 '07 delivered cost of $4.45.

Our corn basis averaged $0.77, giving us a CBOT equivalent corn cost of $4.56 per bushel, compared to the average CBOT market price of $5.17 during the quarter.

Corn basis was up from $0.59 a year ago, and $0.65 in the prior quarter, due to rising mileage base rail fuel surcharges, and increases in tariff freight rates.

Our $0.61 per bushel corn cost advantage over CBOT helped improve our co-product return to 26.4% for the quarter, up from 23.7% in Q4 '07, but still down from the 30.9% co-product return in the same quarter last year.

As indicated in our previous call, we have fixed price sales contracts for a portion of our co-products that continue through the third quarter of 2008, which have acted to dampen the co-product return.

As CBOT corn prices have continued to rise into the second quarter, our co-product return may remain under pressure.

The net impact of the ethanol, corn, and co-product metrics just discussed, resulted in a production commodity margin of $0.91 per gallon for the quarter.

While the production margin is down versus Q1 '07 due to higher corn cost, it was up from the $0.75 per gallon recorded in the previous quarter.

At quarter end, we had forward fixed price ethanol sales contracts with a dollar value of $47.3 million, as well as 15.7 million gallons of forward index-based ethanol sales.

Our forward corn purchase commitments consist of $1.4 million of fixed price contracts, as well as 7.6 million bushels of forward index-based purchase contracts.

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

Referring to the balance sheet on Slide eight, we improved our cash position, as a result of the $40 million preferred equity offering completed near the end of the first quarter.

However, we recently entered into a forbearance agreement with Comerica, whereby our credit was reduced from 25 million to 17.5 million as a result of non-compliance with certain financial covenants.

The forbearance agreement gives us time to seek alternative financing, but at the same time has the effect of reducing our use credit facility funds for general source or purposes.

The coupled with elevated commodity prices has increased our need for working capital.

To solve this problem, we are seeking to secure additional working capital credit lines and equity, part of which is expected to improve $5 million in near term capital infusion, as to which negotiations are ongoing.

We are also seeking a replacement for the Comerica line of credit with less restrictive terms.

Finally, it should be noted that our Stockton facility will require an additional $6 million, and these funds will be used to satisfy most of that need.

Later today when our Q is filed, you will see a more detailed discussion of these matters in the liquidity section of our MD&A.

In our construction program, we have contributed a total of $241 million in equity and drawn a total of $142.4 million of debt as of the end of the first quarter.

Our construction loan facility has remaining availability of $108 million.

For the balance of the year, April 1st forward we expect a total cash outflow of approximately $106 million related to completing construction of the Stockton facility, and to a lesser degree finishing up expenditures at the Burley facility.

Of this remaining amount, $83 million is expected to come from availability under our construction debt facility, and the balance of $23 million is expected to be contributed from equity.

As we previously described, 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 facility, which would essentially be a return of our equity.

That concludes the summary of the financial results for Q1.

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

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

Our plant in Magic Valley has completed the start-up phase, and is operating well within bank performance tests nearly complete.

Slide ten shows the plants under construction.

We continue to project a target completion date for Stockton in the third quarter.

That concludes my remarks.

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

Thank you, Joe.

Let me just take a moment to share our current view of ethanol market dynamics.

As oil prices reach record highs almost on a daily basis, the value of ethanol and the transportation fuel supply has never been greater.

Supply and demand remain balanced, as new demand is staying ahead of new supply.

Ethanol is now supplying 6% of all gasoline demand, and will reach 8% by the end of the year.

The clear need for new fuel supply given limited new supply to gasoline, combined with very compelling ethanol blend economics, and increasing renewable fuel standard requirements is pushing new ethanol demand.

As a Company, we continue to develop new markets around our new plants.

Our Magic Valley plant is the most recent example.

There has been almost no ethanol blend in the State of Idaho, but with our new production, new infrastructure is now being built in the state, and starting next month, significant new ethanol blending will begin in Idaho.

Our Magic Valley plant produces enough ethanol to support 10 % ethanol blending in the entire state.

As we move through 2008 in to 2009, new plant openings are slowing in the industry, while ethanol demand will continue to accelerate.

We believe that production margins will improve, as this will be necessary to initiate a new round of production expansion needed to meet future demand.

There has also been a tremendous onslaught of misinformation about the role of ethanol in rising food prices.

Two important observations, first, the corn used in ethanol production is a feed variety, and is not converted into food for human consumption, except in a small percentage of this process into high fructose corn syrup.

Second, the feed value of the corn used in ethanol production is processed into a high value protein feed distillers grains.

Ethanol producers are both fuel and feed producers.

With recent reports that the Grocery Manufacturers Association has engaged in a well-funded campaign to discredit ethanol, it is clear to us that these attacks are in large part fabricated by interests that are trying to deflect attention from the real root causes of of food inflation, of which dramatic increases in energy prices are near the top of the list.

Ethanol producers by supplying both critically needed new supplies of transportation fuel, and high quality feed products, are clearly part of the solution, not the problem.

It is encouraging to see over the last couple of weeks a swing in public media reporting to a more balanced view of this issue.

We as a Company, together with our industry partners and other stakeholders, will continue to work hard at setting the record straight, as to the the very positive contribution that ethanol producers are making to address both the world's food and fuel challenges.

Operator, at this time, please open up the line for questions.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS).

The first question is from Ron Oster, Broadpoint Capital.

Good morning.

I was wondering if you could expand for your cellulosic facility, maybe the potential cost of the demo plant, and then any additional future plans, with regards to a commercial scale facility down the road, and also how you might fund this facility in 2009?

Sure, Ron.

Happy to do so.

We are very excited about our program with Biogasol and the Department of Energy.

The project that we received a $24 million matching grant from the Department of Energy, so the total projected cost of this project is $48 million.

We are in the process as I mentioned in the prepared remarks of putting the plan together, and do expect to begin construction of that in 2009.

It is designed as a commercial demonstration that we can show as integrated into our existing corn ethanol platform, as sharing much of the infrastructure and facilities.

It is our plan to look at cellulose as a bolt-on opportunity essentially to our existing fleet of corn ethanol plants, as well as look down the road at new facilities we would be building that would be dedicated exclusively to that technology.

It is also designed to scale up from there, after we bring this online and project in 2010, expect that we would scale it up from there, to a 10X to roughly a 30 million gallon size, either do that at Boardman, or we could do it at one of our other facilities, that is yet to be determined.

In terms of the funding, that is a capital requirement we will have to fund together with our partner BioGasol, I will point out that in-kind contributions do qualify under this, and just as we have shown the ability to internalize a tremendous amount of the expertise in our current business model, there is a fair amount of that which we will be able to provide in-kind, as opposed to going out and having to contract for the services.

But there is no question that there will be additional capital required in 2009, and we are exploring different avenues for raising those funds and feel that right now, there is a tremendous amount of interest on the part of the investment community in supporting this development, and we are confident that we will be able to raise the funds to keep that project on schedule.

Okay, great.

Thanks for the detail there.

Yes.

And then also you mentioned your basis differential for corn costs had risen.

I am just wondering if with that in mind, along with the improvement with some of the unit train capabilities on the West Coast, if there are any concerns about the validity of your destination business model, with regards to your transportation discrepancy there might narrow, thereby compromising your competitive cost position?

Ron, we are still very confident of that.

Yes, rates have gone up on bringing our corn in, but again if you look at the rates of the shuttle trains on corn, versus the rates of single cars of ethanol and distillers grain, and even shuttle trains of ethanol, the rate increases have been more rapid on the ethanol and the distillers grain, both singles and unit trains, and have not risen as quickly on the shuttle trains of corn, so that spread differential while it certainly narrows a bit with unit trains of ethanol, it is still very much intact.

We continue to minimize our transportation costs for moving our product from our facilities.

It is very important to note that we have single-handedly and according to our plan, and single-handedly of our ethanol and distillers grains out of our facilities, and with the unit trains of ethanol to the West Coast, and I am not sure what you are referring to in improvements, there is still only one facility in the entire West Coast in Carson, California that can receive unit trains.

We are seeing more of that development on the East Coast, but even with those facilities which are important, and we support, to improve the logistics of moving ethanol to the market, as we rapidly expand, there is double handling and a fair amount of cost once these unit trains are received, they need to be handled and moved back out to market.

So the double handling cannot be avoided in those.

We avoid that, and that is a very important part of our cost advantage.

So we still are very comfortable and confident of our model and transportation savings along with energy savings, are the two critical elements of that advantage.

Okay, thank you.

And lastly, can you disclose what your co-product returns might be, without the contracts that were in place through third quarter that you mentioned?

No.

We don't provide that information, and so you know, these contracts extend through 2008, but quite frankly, we don't disclose that information.

Ron, what I would just add to that is that if you look at it just generically in the markets, that our West [distillers] grain has a value on the spot market basis, that is going to be roughly equivalent to delivered price of distillers grain and again, double handling, the distillers grain, the price that we are competing with is delivered to dairies, where distillers grains come to our markets, have to be double handled into trucks to be delivered to dairies, that don't receive by rail, and we compete on a delivered basis on a moisture adjusted basis with dry distillers grain.

We are moving quickly actually to not having that be the case.

We are working with, in our feed division we are developing a proprietary product that is really an analog to corn, as opposed to distillers grain.

and it is priced against corn rather than distillers grain, and giving us a better hedge on corn prices, so we are seeing our overall values as we move forward to increase, and would expect our co-product returns to evidence that as we move forward.

Okay, great.

Thank you.

And your next question comes from the line of Eitan Bernstein.

You may proceed.

Hello?

Hi.

Can you hear me?

Yes, hi, Eitan.

Hi, Neil.

Last quarter, last conference call, you gave us perspective on marketing segment results.

Can you provide some color on the first quarter earnings in that area?

Sure, I can in a general way like we did last quarter.

So last quarter when we reported a loss, we did indicate that the marketing business, due to the falling market and other dynamics on some fixed price contracts had experienced a loss.

I would say that it is reasonable to conclude that there was a swing with the market going up, and a more advantageous position that we swung the other direction, and to the extent that we had below budgeted expectations or below budgeted realizations in the fourth quarter, we had above realized projection, results in the first quarter, Eitan.

Okay, excellent.

And then the $106 million projected to complete the two plants, does that allocate for additional working capital, and if not, can you give us some perspective on the amount of working capital required to get these two plants up and running, just in terms of obviously corn inventories and such?

It does include some working capital.

Working capital as we have talked about before has been under funded.

It would be our debt facility agreement with West LB, however we are working right now to secure additional working capital for both of those plants and our two existing plants.

Just a little additional color on that because it is all in our, the details on our credit facility, is that they provide $5 million of working capital per facility, so the 106 would include that 5, but it is clearly the case that at nearly $6 corn, that the working capital requirements per plant is at least double that.

So that is very much a part of our current constraints on working capital that we are addressing with the banks, to make sure that we have adequate working capital, to make sure that we are efficiently operating the plants, and maintaining adequate inventories of corn, so that is a real focus for this quarter is to improve the working capital position, and that would include some additional total debt.

Okay.

Doing the math, can we assume basically that for the 106, or round about CapEx spend, and the financing, 83 million from the credit facility, 25 from equity, can we assume that basically you just need the equity by the end, so that can be back loaded, or is there something in the development of it where you would need the equity sooner in the process rather than later?

A portion of the equity roughly 5 to $6 million is needed to bring to begin construction of the Stockton facility.

The remaining equity will probably come from the top-off from the Burley, once Burley is totally completed.

Okay, excellent, and then just one more, if I could.

If you guys could address just some of the issues around the credit covenants and financial controls, basically following the forbearance agreement with Comerica, to the extent that you guys have gone through your terms and covenants and can provide investors with comfort, that there is not going to be some other announcement in future quarters where there is some sort of covenant issue, that would be very much appreciated.

Yes, the Comerica agreement was negotiated in 2007 and established then and we first began to realize, well when we received the results of a separate audit of our Kinergy subsidiary, which is the party under the Comerica agreement, we received the results of that audit on April 29.

At that point, we became aware that we were out of compliance with a net worth requirement.

The forbearance agreement itself reduced the credit limit, the $25 million credit limit down to $17.5 million, which is the $7.5 million reduction.

It also reduced our eligible inventory down by $6.4 million to $7.6 million.

This has had somewhat of a limited effect on us in some respects, because of the fact that our historical, under our historical borrowing practices, we have never drawn more than $17.5 million under that particular facility to begin with.

So the reduction down to the $17.5 million is not having a dramatic effect.

It also has limited our ability to use cash at the corporate level for general corporate purposes.

We are in the process right now of of talking with other lenders, and negotiating a more suitable agreement for the Company in general.

That would also hopefully expand and allow us to grow the Kinergy operations.

Eitan, to address your comfort issue, Joe is being a little too humble, he should be tooting his horn, but as our new CFO has done a tremendous job of really reforming our internal controls, and making it sure that we are addressing these issues to be going through all of these agreements.

These are very complicated agreements.

We have been, if you will, a new user of these sorts of agreements, and we are under staffed and have had issues with not having someone with Joe's caliber in the past.

These issues that on covenants in this case, it was a technical financial covenant on the net worth, we discovered these issues just as in the West LP, we were the ones to discover these, and to self-report, and have taken tremendous steps to make sure that we are in compliance on a go-forward basis.

So we are confident that we have is addressed these issues and that we will not have to be reporting these sorts of issues in future quarters.

They are very helpful, very, very helpful, Neil.

Just one last if I might, basically, and any guidance at all, and I know these things are often difficult to pin down, but any guidance at all on when we may get the sort of the next update on financing?

No, no forward projections on that, but I think you can see from what we have discussed that it is an ongoing effort and that we do expect to have other developments this quarter.

Perfect.

Thank you very much.

And your next question comes from the line of Jinming Liu, Ardour Capital.

You may proceed.

Good morning.

Good morning.

I have a question about your co-product sales.

I know your Company is the trading corn.

How much of that 25 million co-product sales are from the sale of corn?

Virtually none.

We actually, given the current dynamics in that market, we in the quarter sold, we can get back to you on the exact numbers, but virtually no corn.

It would have been an imperceptible impact on total sales and margins.

Okay.

Another thing is I noticed that your equity of production is below your main play capacity.

What is happened there?

It is actually above our design capacity.

It is important to look at the design capacities, and the operating capacity.

It is below design capacities, above design capacities by 107%.

It is slightly below the operating capacity that we expect, and that in the quarter was largely due to some issues we had at our Madera ethanol plant.

Some problems that we were having in the facility that we required us to take the plant down for a number of days, and we made improvements in the process, and I can tell you that the Madera plant, which really of all of our facilities was the one that was lagging the most is now leading the pack, in terms of exceeding both design and operating capacity, so we do feel that we have positioned ourself very well as we move through the second quarter here, to achieve better operating results at our plants.

That together with our efficiency improvements on yield and energy, will continue to show strength at the processing level.

Going back to the co-product sales, should we expect that trend to continue in the future, the increase?

That is hard to project because it depends a lot on corn prices, and how co-product sales track corn prices.

There is often a lag as they go up, and they go down.

For instance, if corn prices were to suddenly pop up, then you could see quite a lag there.

If they were, which is the indication now is that corn prices may be beginning to moderate, then we could see some improvements, particularly given that through the third quarter we do have some of these contracts that are a fixed price, and that has a disproportion at impact on that co-product return.

If we were to see corn prices drop, again see fixed price contracts in our co-product would continue to see some improvement.

That really is going to be a function of the average corn price in the third quarter.

Okay, all right thanks a lot.

You are welcome.

Your next question comes from the line of Joe Gomes of Oppenheimer.

You may proceed.

Good morning.

Good morning, Joe.

I was wondering if you could give us a little more detail on the PDX, how that is performing, what you expect to get out of that test, when you think you will see some results from that.

In terms of expectations, Joe, we are very optimistic.

We try not to make too many projections on things that we don't know, and haven't seen the results for.

I can update you to the extent that we have installed the equipment at our facility in Boardman.

We have PDX people on site as we speak, over the next couple of weeks we are establishing the baseline from which over the next 4 to 6 weeks we will be running the test and certainly by this time next quarter in our conference call if not before, we will have some update on that.

Every percent increase in yield obviously on a bushel is going to be significant, and we are very optimistic that we are going to see some improvements.

Great.

I look forward to hearing that.

Also, any new or proposed legislation on the West Coast, that would continue to help fuel the use of ethanol?

Yes, there are a couple of initiatives.

Certainly we have seen with the mandate in Oregon, that whole state now is blending 10% ethanol.

It was a very seamless transition, and have very successfully been implemented.

The State of Washington at the end of this year, begins with a 2% requirement, that then with various triggers being met, will move to a 10% mandate.

With Oregon already blending, with much of the gas co-mingled, with refiners wanting to optimize the blending of ethanol, and produce a sub-octane product coming down the Olympic Pipeline from the refineries up in the North end of the state of Washington, that we are seeing a movement in Washington, to ethanol blending really to co-mingle the gasoline streams between the two states, and also in anticipation of Washington's requirements, so really all of southern Washington right now, is moving quickly to 10% ethanol.

There is blending that is just beginning in Tacoma, Washington.

We expect by the end of the year to see Seattle.

So it is our expectation that over the next 12 months most of the state of Washington, partly by way of their legislation, partly by way of the impact of the region to be moving to 10% blends.

In California, right now, we have been working very hard as we have talked about in prior calls, to move the State to a 10% requirement.

There are new rules that take effect in 2010, that will in effect move the entire stream to 10% ethanol to meet the new fuel specifications.

We have been working with the State and stakeholders to provide a transition opportunity for refiners, to move to the higher level blends in advance of that.

There is a rule that is currently in the Office of Administrative Law.

It is just the final step of approval that we expect out in one to two weeks, that will then finalize an opportunity, for refiners to use the new models earlier, to gain some additional flexibility to produce the gasoline that could be blended with higher levels of ethanol, without combining that same molecule of gasoline with ethanol, which is required under today's very inflexible regulations.

And we do in conversations with our customers expect that yet this year in 2008 we will see elevated ethanol blending on the part of some customers, and that we expect to see a gradual transition between now and 2010 to 10% blends in the entire State.

Thanks, Neil, appreciate it.

Yes.

(OPERATOR INSTRUCTIONS) At this time, we have no further questions in queue.

Great.

All right, everyone.

Thank you very much for participating on our call, and we will continue to work hard for all shareholders, and look forward to updating you next quarter.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.