Alto Ingredients Inc (ALTO) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol, Inc. first quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the call over to your host for today Ms. Becky Herrick, of LHA. Ma'am, you may begin.

Thank you, Ben, and thank you all for joining us today for the Pacific Ethanol first quarter 2015 results conference call. On the call today are Neil Koehler, President and CEO, and Bryon McGregor, CFO. Neil will begin with a review of business highlights, Brian will preside provide a summary of the financial and operating results, and then Neil will return to discuss specific Pacific Ethanol's outlook and open the call for questions.

Pacific Ethanol issued a press release yesterday providing details of the Company's quarterly results. The Company also prepared a presentation for today's call that is available on the Company's website at PacificEthanol.com. If you have any questions, please call LHA at 415-433-3777.

A telephone replay of today's call will be available through May 19, the details of which are included in yesterday's press release. A webcast replay will also be available at Pacific Ethanol's website. Please note that information in this call speaks only as of today, May 12. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay.

Please refer to the Company's Safe Harbor statement on slide 2 of the presentation available online, which says that some of the comments in this presentation constitute forward-looking statements and considerations that involve a number of risks and uncertainties. The actual future results of Pacific Ethanol could differ materially from those statements. Factors that could cause or contribute to such differences include, but are not limited to, events, risk and other factors, previously and from time to time disclosed in Pacific Ethanol's filings with the SEC. Except as required by applicable law, the Company assumes no obligation to update any forward-looking statements.

Also, please note that the Company uses financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to monitor the financial performance of operations. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the reported financial results as determined in accordance with GAAP.

The Company defines adjusted EBITDA as unaudited earnings before interest, income taxes, depreciation, and amortization, and fair value adjustments. To support the company's review of non-GAAP information later in this call, a reconciling table is included in yesterday's press release.

It is now my pleasure to introduce Neil Koehler, President and CEO. Neil?

Thanks, Becky, and thank you all for joining us this morning. For the first quarter of 2015, the Company had a net loss of $4.7 million, which is attributable to supply and demand swings of the ethanol industry and volatility in the energy markets.

During the first quarter, the industry was negatively impacted by higher ethanol inventory levels, seasonally lower transportation fuel demand, and resulting compressed production margins. Over the past few years, our efforts to diversify our revenue streams, improve plant efficiencies and strengthen our balance sheet have helped mitigate the negative impacts from seasonal downturns. In 2014, we began producing corn oil in Magic Valley and Stockton, which contributed operating income of over $0.05 per gallon. We are now producing corn oil at our Madera facility and are close to initiating production at our Columbia plant, which will further diversify revenues and contribute to overall margins.

On the efficiency front, we have been improving corn yield over time by investing in mechanical technology such as fine grinding, as well as by optimizing enzyme and chemical treatments. We have many additional projects in various phases of development. We believe there is still significant potential to reduce our production costs, lower the carbon intensity of the ethanol we produce, and generate additional revenue opportunities at each of our facilities, positioning the plants to be even more competitive.

We are already seeing the markets improve over the last quarter. So far in the second quarter, transportation fuel demand has increased sequentially and year-over-year. Ethanol co-product exports remain strong and we are seeing improved production margins.

Looking forward in 2015, we are optimistic about the financial performance of the Company and the industry.

We also remain on track to close the merger with Aventine late in the second quarter. Aventine is a Midwest-based ethanol production company with an operating capacity of 315 million gallons per year. This transaction will support and extend Pacific Ethanol's production and marketing position in the ethanol industry. We view the merger as a great benefit for both companies. It strengthens our unique production and marketing advantages.

By connecting both origin and destination markets, we expect to benefit from more efficient supply chains which will enable us to take advantage of price dislocations common in these markets. It diversifies our geography, technology, and product platforms to include a wet mill, an array of valuable co-products, and strategic access to new national and international markets and customers. It more than doubles our annual production capacity to 515 million gallons, and marketing volume to over 800 million gallons, and establishes the Company as the fifth-largest producer and marketer of ethanol in the United States.

It also broadens our scale, allowing us to realize efficiencies through the combining of shared functions and resources and benefit from expected returns by making investments in plant and logistical assets. And finally, we expect our combined company to benefit from a stronger financial foundation from which the enhanced gas cash flow and liquidity will improve our ability to withstand cyclical downturns.

We remain confident in the growing long-term demand for ethanol, as it remains the cheapest for source of octane and oxygenate on the planet and it provides consumers with a better value option at the pump.

Also supporting strong ethanol demand are exports. According to the RFA, year to date exports through March totaled 234 million gallons. In addition, we continue to see strong co-product values. In 2014 alone, total industry exports of distillers grain were 11.3 million metric tons, representing approximately one-third of domestic production.

When China eased import restrictions for distillers grain, it reopened a very lucrative market for this co-product.

Corn oil also adds approximately $0.05 a gallon of incremental operating income. The continued strength of our co-product markets proves to be an ongoing and increasingly valuable contributor to the Company.

With that, I would like to turn the call over to Bryon to review the financials. Bryon?

Thank you, Neil. During the first quarter of 2015, we reported net sales of $206.2 million compared to $254.5 million in the first quarter of 2014. The decrease in net sales was attributable to a lower average sales price per gallon of ethanol, partially offset by an increase in total gallons sold.

Gross loss was $1 million compared to a gross profit of $38.5 million in the first quarter of last year. This decline in gross profit was driven by significantly reduced production margins compared to the prior year.

SG&A expenses were $4.9 million and included approximately $1 million in merger related costs. This compares to SG&A of $3.7 million in the first quarter of 2014.

Operating loss was $5.9 million compared to operating income of $34.9 million in the first quarter of last year. Fair value adjustments were $200,000 compared to $35.8 million in the first quarter of 2014.

Interest expense net was $1 million compared to $4.4 million for the [first] quarter of 2014. The lower interest expense is related to a reduction in our average outstanding debt balances.

Provision for income taxes for the first quarter of 2015 was a tax benefit of $2.7 million compared to an expense of $3.3 million for the first quarter of 2014. Net loss available to common stockholders was $4.7 million compared to a net loss of $11.1 million in the first quarter of last year.

Adjusted EBITDA was negative $2.7 million compared to a positive adjusted EBITDA of $35.4 million recorded in the first quarter of 2014.

Turning to our balance sheet, cash and cash equivalents were $42.3 million at March 31, 2015, compared to $62.1 million at December 31, 2014. The reduction in cash reflects a debt payment of $17.5 million and capital expenditures of (technical difficulty) [million dollars], partially offset by cash flows from operations of $7.3 million. Going forward, we will continue to balance our debt and cash balances as we look to reduce our overall borrowing costs, while exploring options to consolidate and refinance our total debt position after closing the Aventine merger.

Our Form S-4 related to the Aventine merger has been declared effective, with a shareholder meeting scheduled for June 11. Prior to closing, we need to complete certain closing conditions including obtaining approval from Pacific Ethanol and Aventine shareholders. We are excited to be nearing the close of this transformative merger.

With that, I would like to return the call to Neil.

Thanks, Bryon. Over the past several quarters, we have established a strong foundation that has allowed us to pursue opportunities to significantly grow the business, as reflected by the planned Aventine merger. The combination of our two companies will expand our production and marketing capabilities, diversify our geographies and technologies, broaden our co-product mix, and establish Pacific Ethanol as the fifth-largest producer and marketer of ethanol in the United States.

In addition, we are seeing ethanol supply and demand in better balance with transportation, fuel demand increasing, resulting in improving margins and enabling us to further benefit from the strong foundation we have established. For 2015, our goals are to close the Aventine merger and successfully integrate our businesses, and continue reinvesting in our production business through initiatives focused on improving efficiencies, lowering the carbon intensity of ethanol produced, creating new revenue streams, and furthering our advanced biofuels initiatives.

With that, operator, I would like to now open the call up for questions.

(Operator Instructions) Eric Stine, Craig-Hallum.

Maybe just starting on ethanol pricing -- and I know it is tough to predict. But, just from a high level, I know RBOB has increased since early April; ethanol prices have improved some; haven't completely followed suit. I am just wondering, do you think summer driving season -- is that something that gets the market to more fully value the octane of ethanol? Or how do you see prices unfolding here? I know they are improved in second quarter, but maybe going forward.

Sure. Directionally, the driving season helps and can help fairly significantly. I mean, you do see almost a 10% increase in demand on a gasoline basis. Summer demand is expected to be up 3% to 4% year-over-year. That puts it -- the summer run rate in that 142 billion, 143 billion gallons. That is 14.2 billion, 14.3 billion gallon rate -- annualized rate on the ethanol, plus the exports, which will continue in the summer as well.

That would suggest that we will see a draw on inventory and an opportunity to incrementally even expand production to keep up with that demand. So the softness in ethanol pricing, certainly there has been some impact on energy prices. But it has really been more a function of excess production levels late last year that carried over into the beginning of the year levels that were in excess of the seasonally lower demand, even with strong exports.

And we have seen the production moderate rather materially and we are starting to see some incremental decreases in the inventory levels. So we are seeing a tighter supply/demand balance. We are seeing it in production margins, which are solidly positive now, and we are anticipating further improvements this summer.

Okay. Thanks for that. Maybe just turning to basis, I mean, that was probably -- well, that was one of the highlights of the quarter. I think that looks to be the best number since late 2012. I am curious what you are seeing here in Q2 and maybe you can talk to -- is that something that you can lock in? And, if so, for how long?

Sure. We can lock in basis. We do lock in basis. We have not done a lot of that right now because what you see is there were opportunities to lock it late in the year and early this, and we did some of that, and that contributed to our lower overall basis.

The spot corn basis is a bit higher than that. It is a little over $1 a bushel right now. It is interesting because there is a lot of corn out there, and it looks to be a very good crop that has just been planted or is being finished in the planting now, and very good weather conditions.

So we are, at this point, anticipating another very good crop and you have a lot of corn in storage. And you would expect to see the basis starting to break. It hasn't. The farmers don't really like these prices. They have been busy in the field planting, and have not been terribly motivated to sell.

Farmers, different than a few years back, control a lot more of the storage. And right now they are taking a position of holding on to the crop -- the old crop. Certainly, when we get closer to new crop, it will need to move. So we are being fairly patient on basis because we actually believe that there is a good opportunity it could break pretty well in the June-July timeframe. And we are watching a very closely, and it is something that we actively manage.

And my phone maybe broke up there and I missed just the very first part. So it sounds like the second quarter maybe you think that your all-in basis number is a little bit higher than that $0.93, but that you would expect then maybe some improvement back half of the year?

Yes. Fair.

Okay.

That is a fair assessment.

Okay. Good. Then maybe last one for me, just co-product return, that was also a nice number. And I know that a lot of that is just based on pricing and what is going on in China. But is this -- is mid-30s a level? And I know this is prior to Aventine, because Aventine -- it probably means it is a higher number. But, for your business, mid-30s, is that a good way to think about it?

That certainly has been the market. And, as you mentioned, China can have a really very large impact on that. And when they opened their market back up last year and this, it has really contributed to that. The fact remains that on a protein basis, distillers grain is the most competitively priced product in the market. So we feel very good about its value.

The only other countervailing factor there would be that this is the time of year in summer when you'd seasonally see a little bit of pressure on those co-product values. So there are a lot of variables that go into that. Certainly, we saw strong co-product values through most of last year. They softened when the Chinese pulled out of the market later in the year and it has come back.

We do think that in and around that 30%, 35%, is still a very fair value and we would hope to be able to maintain those values.

Okay.

Craig Irwin, ROTH Capital Partners.

Congratulations on the progress towards closing the merger.

Thank you, Craig.

First thing I wanted to ask about, on the existing platform, can you update us on the debottlenecking activities, the progress you have made in the last quarter, and the timeline for some of the incremental capacity to come online?

Sure. We have made a fair amount of progress on what could be debottlenecking capacity. Also, in today's environment, we have viewed more as efficiency improvements. So we have not been -- in the first quarter, we ran the platform at about 90%. We are slightly higher than that today.

We have been focusing more on the margin than volume. And a number of these projects that we have done, debottlenecking our evaporators, putting in some additional chilling capacities, improving the grind, can -- in a very good market where the demand is there to increase incremental capacity, can be that. But, today, they have been more focused on improving -- lowering our costs and improving our margins. So progress is good and continues.

Great. Thank you for that. So, one of the things you press released in the quarter was Madera, the corn oil production coming online. Obviously, you have got your last plant to come there. But, can you share with us whether or not you have seen any improvement in the financial yield from corn oil? I didn't hear an exact number or see the number in the Q, if you might be able to share that with us.

Sure. We are just starting up the corn oil in Madera, so it hasn't made a contribution yet, just beginning in this quarter. But, for each plant, what we have guided is that we see a minimum of a $0.05 per gallon increase in operating income at those plants that have the corn oil. It was actually higher than that last quarter for the two plants that had corn oil. Our yields were good. Pricing was good.

We -- industrywide, with the softer corn price, we have seen softer oil prices, but it is relative. And it continues to be a very strong contributor to our bottom line.

Great. And then, last question, if I may. There is a lot of interest in terminals these days, given a competitor is doing something that I guess we don't have all the details on yet. But, your location in Stockton is particularly interesting, given the future anticipated demand out of Asia.

Can you discuss with us whether or not you have the opportunity to maybe expand your terminaling capacity there, and what your thoughts on about whether or not you want to own your terminals over the longer run or if you would be willing to maybe roll them into some other potential market structure?

Sure. Taking that last part first, it is certainly -- it has been interesting to see what Green Plains is up to and we will watch that. And that does create a potential opportunity, nothing that we are moving on at this time.

We have always said that we see our own production assets as terminals in these destination markets. You mentioned Stockton. That is a very good example. We already terminal quite a bit of railed ethanol from the Midwest through that plant to supply the market in Northern California, where we have a market share that is well in excess of the combined production of our plants and the two other plants in California that we market for.

We have looked at projects and certainly have identified a project that would allow us to greatly expand that facility, add tankage, and, as you mentioned, access the market -- the Asian market. We do believe that when China opens up as an ethanol market, that exports off the West Coast will be an important part of continuing to grow the exports of ethanol in the United States.

Our own ethanol that we produce, given its very low carbon intensity, we believe will always have a higher value in that California and the West Coast market with that regional carbon market leading the world. But the opportunity to use our assets to distribute other ethanol off the West Coast, we do see as a future opportunity.

Great.

Katja Jancic, Sidoti & Company.

First question, going back to the corn basis, you mentioned right now they're slightly above $1, and going into the summer we could see this come down. How low could they potentially go?

Well, that is a good question. Probably better asked to the farmers in the Midwest to see how motivated they are to sell the corn. Basis can be very volatile, as was pointed out earlier. It is now -- in the first quarter that was the lowest we had seen since 2012, certainly reflective of a corn market that is very well supplied, and we believe will continue to be not only well supplied, but even better supplied if the crop turns out the way it is starting to look with the planting and the very good weather conditions and soil moisture, et cetera.

So, you typically in markets where corn is plentiful will see basis levels in the Midwest which have been at or even above the board, drop well below the board. So -- and if we have in freight $1.10, $1.20 a bushel, and if you drop to 40, 50 under, which is -- we haven't seen in many years, but we could see, then that would suggest a basis sits well below $1.

Back in, I think 2011, it might have been, we were buying delivered basis that was in the 60s and 70s. I do think that given the demand for corn, both here in the US and export, and given its very attractive value on a per bushel basis, that that will certainly put some floor on basis because we will see corn find a home both here domestically and export. So we would not expect to see basis levels that get as low as they have been back in that 2011 timeframe, but levels at certainly are below $1 we think are very achievable.

Now, my second question, Neil, can you talk a little bit about the California low carbon fuel standard program? Because recently, I think it was mentioned that there are plans to accelerate the program.

Yes. They are in the stages of -- final stages of reauthorizing the program. It has always been a 10% reduction in carbon intensity by 2020. That program was basically frozen over the past 2 1/2 years due to lawsuits that tied that up. It didn't stop the program, but it froze the compliance curve, which is a very aggressive curve, that 10%. Today, we are at 1% and we have been frozen at that level for the last two years.

What carbon is doing is getting back on track. And that will accelerate, because rather than extend that compliance curve out beyond the 2020, which many anticipated they would, they said, no; we are not going to do that. We're going to get back on track. And so that compliance curve becomes even steeper when the program takes off again in 2016. I believe it goes to 2%, which is a big jump, and then accelerates from there to get to that 10% reduction by 2020.

The other interesting fact is that the state is doubling down on its carbon policies. So there is a lot of talk now of going beyond 2030 -- beyond 2020 to 2030, and some additional reductions in that timeframe. There has been no specific rulemaking, but there has been a tremendous amount of messaging from the governor's office as well as the California Air Resources Board to suggest that that program will be extended, and that we would see a rulemaking occur over the next year or so to lay that out.

So we continue to be very optimistic that that program will continue to provide a lot of value to Pacific Ethanol and its shareholders. In the process of the program being reauthorized and the uncertainty, we have seen carbon values at relatively low levels. It is about a $0.02 a gallon premium for us. The price of the carbon per metric ton is $20 or so.

We anticipate that as we get closer to 2016 and certainly beyond that that carbon price is going to increase very significantly and provide additional value to us, which is why we are working very hard and spending capital to even further reduce our carbon intensity from something that is the lowest commercially available ethanol in the United States today, something will be even lower than that.

So, if this plan continues or it accelerates, it will be very tough for the Midwestern producer to compete on the West Coast.

I would -- it certainly is tough. It is frankly tough for all of us to maintain relevance over the out years of this program. What we have seen is that there have been a number of producers in the Midwest that certainly the Western-facing, with the California market being the largest ethanol market in the United States, have also made investments and have lowered their carbon intensity.

We have advantages by being able to sell 100% of our distillers grain wet, the ability to implement some of these other technologies, our very clean source of electricity, projects like cogeneration, methane digestion that we are looking at. We have the ability, being very close to this market and having some unique attributes and advantages, to maintain a competitive advantage. But certainly, we do expect that there will be an element of Midwest production that will continue to be an important part of the California program.

Okay.

Moses Sutton, Cowen and Company.

It's Moses Sutton on for Jeff Osborne. What was the cause of the decrease in the ethanol premium per gallon? Is it expected to be variable with production or overall pricing trends, or should the long run rate continue to be above $0.30?

Well, the ethanol premium I believe you're referring to is Chicago versus the West Coast, which on a cash basis was $0.20 in the first quarter if you look at cash Chicago versus cash L.A. It was less when you compare it to CBOT, that that is more of a view of the future market. So, on a cash basis, that was $0.20.

$0.20 is in and around, if not even a slight premium, to what we would consider the balance spread between the Midwest and the West Coast. Last year, which was an extraordinary year for the industry and an extra extraordinary year for us, we saw that at closer to the $0.30 -- in fact, over $0.30 a gallon.

We believe that the trend is certainly more towards a higher premium, but we would not expect it to be $0.30. That was caused certainly by not only a very tight supply/demand, but logistical constraints on getting ethanol to the West Coast. We have seen a lot of those constraints resolved, although, if you look at the new rail rules that will be phased in over the next number of years on new cars and retrofits, things could tighten back up, plus the very immediate impact of having to slow the trains down, which happens this year, that we could see that have an impact.

So the premium is good. If you look at it historically, back before 2014, it was in the teens. And every year it has come up. $0.20 is a good number. We are very comfortable with that. It maintains our very strong competitive position and, if anything, we see opportunities for that to flex above.

Great. Thanks. That's very helpful. And with regards to the Kinergy marketed gallons, it seems like you reached a new high, above $90 million above this quarter. Is this due to new market expansion? Is it new customers -- repeat customers? And how do you see this once -- post the Aventine merger, where do you see it hitting in 2016 and beyond?

Our incremental increase in sales has been largely in our Western market, so we do have the largest market share out West. It's due to our very unique position of production and low carbon production and a very strong distribution system and very strong customer relationships. And we have been able to incrementally expand our sales in that market.

We have also seen some incremental expansion in the Midwest. We have terminals in the Magellan system and in advance of Aventine merger, that has given us the opportunity to continue to tow into those markets. So we do anticipate that our third-party volumes will continue to expand and the access to Midwest, Eastern, and international markets that this merger will give us, will just further improve that opportunity.

Great. Do you see that sort of in the above 100 million-gallon range eventually or is it a much slower process?

Oh, we don't really offer any specific guidance on that. And I think that the way we are looking at this merger and the new gallons that come with Aventine is that we would be placing those in new markets, existing markets for those gallons today, which tend not to be in our markets. So that is a lot of new gallons to swallow, the 315 million gallons. And today, if we maintain our current pace of third-party volume with some small incremental growth, I think that would be a success.

Great, that's very helpful.

(Operator Instructions) Matt Farwell, Imperial Capital.

Some information was published through the SEC filings about Aventine and the financials. And just by my calculations, the SG&A after backing out the restricted stock units, it is about $0.10 per gallon. And that compares with your SG&A, which is roughly the similar. Have you been able to identify any synergies?

Some of the competitors are in the [lower than] $0.03 to $0.04 per gallon range. I know you have other businesses, but do you think that your overall SG&A, now that you have seen the numbers, could head lower?

Sure. I mean, that is something that we will address once the merger is complete. But certainly that is something that we have been looking at, we will continue to look at very closely. And that is part of the advantages of increasing your scale is that you should be able to find some cost efficiencies at all levels, including SG&A.

When you talked about the potential refinancing that you would pursue, assuming that the merger is closed, would you need to see a number of months or quarters of integration before you can go out to prospective lenders? What is your thinking on how to approach the integration and the refinancing plan?

Yes, Matt, it's Bryon. I think not necessarily. I think that there is enough operating history and improvements and changes that you have seen, both at Pacific Ethanol and Aventine, that give you a foundation to be able to build on and establish credibility with, with the lending markets.

At this point, it is really more just determining what would be the best fit for us and how we should approach that, the amount of leverage that we want to input on the Company. Certainly our inclination to not want to, and we will certainly not be over-leveraging this Company. There is an appropriate amount of leverage that makes sense, and it certainly makes sense to refinance the debt that is currently on -- the residual legacy debt that sits on our balance sheet and, certainly the debt that is on Aventine's -- the term debt that is on Aventine's balance sheet.

The primary focus would be, first, with regards to our revolving lines of credit and making sure that we have the necessary liquidity to help facilitate the financing and receivables inventory and the like. And that would be -- if you were to prioritize, that would be the first priority for us and is the area of focus. But, as well, that would go hand in glove with as well how you would be financing the term debt. And there is more to come on that as we move closer and then post merger.

Could a prospect of working capital line provide some sort of credit support to that subsidiary?

I think we the way we are thinking about it now, Matt, is keeping it a fairly simple structure where we have the revolving and liquidity facilities at the -- if you will, at the more of the corporate level structure, and that the term debt would be situated under the -- against the fixed assets. -- and that we wouldn't need to do, nor would we want to, have really any revolving capacity down at the -- against the fixed asset level to avoid double leverage.

And, again, I don't think it is necessary. I think we have more than adequate liquidity and cash. And at least with regards to our capital plan, it will be more than sufficient to be able to address those needs through that kind of a structure.

Okay. And then, just logistically or procedurally, you're looking at a June 11 shareholder meeting or vote. Are there any other steps that we should be thinking about?

Material steps? I mean, outside of those conditions, that are required to be met under and established under outlined under the S-4, no. So we would expect that were we to receive a favorable approval from both sets of shareholders, that we should be able to move quickly to closing, barring any material changes or issues with regards to the remaining closing conditions.

Got it. And then, just one last question on the market. Are there any issues with seasonality that may differ from some of the Midwest producers that you may experience this summer?

Actually, the demand out in our market is a lot more stable than the Midwest. There is less seasonality, certainly, in California. All seasons are driving seasons in California. So the impacts on the market were more trends in the Midwest on that seasonality that -- it being a national and international market impacted us.

So our demand continues to be strong. We did actually have a record amount of sales of gallons in the quarter. But certainly with the overall supply/demand challenges, the whole industry saw that margin compression. But it is looking good. Margins are very strong right now and we are optimistic about the forward months in curve.

Sounds good. Good luck.

Craig Irwin, ROTH Capital Partners.

Neil, I wanted to ask a little bit about the potential for hedging post Aventine. So historically, you obviously set up your operations ideally for spot exposure, where you could minimize your costs and maximize your profitability. But, it looks like the structure of the Aventine operations when you bring them in, as it is described in your SEC filings, there could be a benefit from hedging out some of the volatility of those operations.

Can you talk about any preparations you might be undertaking to facilitate that, or if this is something that you are seriously considering as an option to maximize return on those assets following the completion of the transaction?

Sure. We have hedging accounts at numbers of brokerages. We manage our risk on a daily basis. As you point out, that has largely been managing it to the spot. But with the Aventine merger, where more gallons are sold against Chicago, which has a much deeper derivative market, where we can put some financial hedges in place, that is something we are evaluating and expect that we will do more of that.

I would also point out that, really, the merger itself, we see as a natural hedge. While last year we saw some great benefits from the large premium spread to the West Coast, there are times when that can contract. So the ability to have access to all markets, both on the fuel and the feed, new feed products that help de-risk the volatility on the ethanol, export markets that help manage domestic exposure, all of that gives us a much more natural hedge against the volatility of all these commodities.

But, certainly, with the scale and with the new opportunities that the merger brings, we do anticipate that we will be looking very closely at the opportunity to put on some additional financial hedges as well.

Great. And then, my next question, I guess I am not certain you are able to answer it, but it is not specifically about Aventine, so it is possible. And this is the only forum.

But, historically, there has been litigation between the Aurora Co-op and your future assets, [should expect to make the transition] to close. And it has been a pretty acrimonious situation where, to Mark Beemer's credit, he has been able to find a workaround and find a way to bring those assets up and online. But, in the current structure that he has developed, there would most likely be reasonable size CapEx over the next year or two. But that would render a large chunk of the assets owned by the co-op completely useless. They would have to basically mark them down to nothing.

Have you been able to engage in discussions with the co-op about their position on a potential future relationship with Pacific Ethanol? And have you found that to be an acrimonious relationship or a more constructive dialogue than has been publicly reported between the parties with the historic relationship?

Craig, unfortunately, I really cannot comment on that lawsuit. Anything that we can say about it has been disclosed in the filings. And I need to leave it at that.

We are very comfortable with the position that Aventine has taken on those lawsuits and, as you mentioned, would have been publicly recognized as well that they have created a workaround, in your words, from that situation. And we are optimistic that we will be able to manage that situation and do it in a positive fashion as possible.

Fantastic. Well, we look forward to you closing the transaction.

And that does conclude our question and answer period. I would like to turn the conference over back to Mr. Neil Koehler for any closing remarks.

We really appreciate everybody joining us on the call today, and appreciate your interest in the Company and your support, and we look forward to speaking with you again soon. Have a great day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.