Green Brick Partners Inc (GRBK) 2008 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to BioFuel Energy third-quarter results conference call. During the presentation all lines will be in a listen only mode. A question-and-answer session will follow the presentation and instructions for asking questions will be given at that time. Thank you for your attention. I would now like to turn the conference over to your host, Mr. Thomas J. Edelman, the Company's Chairman.

Thank you operator and good morning ladies and gentlemen. Thank you for joining us. I'm joined on the call this morning from our Denver headquarters by Scott Pearce, our President and CEO; Dan Simon, our Executive VP and COO; and Kelly Maguire, our Chief Financial Officer who will help me with various parts of the presentation.

As you may or may not be able to hear it in my voice, I have managed to get a fairly extraordinary cold. So if I lose my voice I will count on my friends in Denver to jump in and support me. But for the moment I'm sitting here with a large cup of tea.

In any case, what I would like to do is go through the results that we reported last evening for the third quarter, have Scott bring you up-to-date on the actual operating results of the Company and his view of the plants and their completion, Dan Simon for a more hands-on view of his operating teams and the final steps of construction at the sites and then we will come back to discuss overall industry conditions before opening this up your questions and/or comments.

In terms of the quarter itself I guess the most notable fact was that it was the first real quarter of operations by the Company. As we indicated in the press release, our plants which had been turned on late in June operated during the third quarter at an average of about 62% of their nameplate capacity.

As you will remember, they're [150] million gallons a year facilities and obviously it is quite inefficient to run them at a 62% level in every respect from energy to enzymes on down. Worse yet, when you are averaging 62% and you are in startup mode as Dan and Scott may allude to in their comments, you are going up and down between shutdown, repairs starting back up. So it's actually more challenging than if you were just running at a steady but reduced rate.

In any case, it was gratifying that the plants worked on a fairly steady although still disappointing versus our expectations basis during the quarter. We recorded $90 million of revenues including as mentioned in the release $77 million of ethanol sales and roughly $13 million from sales of distillers grain.

The result of that was an operating loss during the quarter of $17 million as laid out in the press release. It is very simple. An excess of operating cost and inputs over the revenues and much of that difference -- and obviously it changes day-to-day based on the commodity prices -- but much of that difference simply being that we were not operating on an efficient basis at high-capacity, meaning that operating loss probably would've been at or very close to a breakeven if we had been running at capacity.

The only other peculiarity other than the hedging losses which we will turn to in a moment, was during the quarter we did write off the final $1.1 million of site development costs that had been accumulated on the other sites that in more favorable conditions we contemplated building additional plants on. Obviously in the current climate that is not a realistic expectation and so we wrote off that $1.1 million.

Everything else I think was fairly straightforward. Obviously the draconian impact in the quarter was -- the hedging fiasco is probably its best description. Based on input from our friends at Cargill and some of our larger shareholders we became convinced as we already described in our press release and conference call in August that the corn market was running away as it was in the spring just as we were getting ready to start the plants up.

We moved to try and protect ourselves from what was considered the greatest threat to the Company's viability by acquiring corn contracts that I think in aggregate covered about 38, 39% of our needs for the first year of operation and then everything went as wrong as we previously said as it could. It is not an excuse. It is simply a fact that the corn market went from almost $8.00 to currently I guess about $3.60, the deepest drop in history in the corn markets just as we had acquired this position in corn; couldn't cover the margin calls. The position was sold out by Cargill and it left us between the actual loss during the third quarter of roughly $40 million and reversal of the $10 million gain that we reported because of the corn price.

Very briefly at June 30 roughly $10 million with a total loss on futures of $50 million in the quarter and I will come back to in the concluding remarks here the status of those losses. There's still $17.5 million due at parent company to Cargill on those losses. The rest of them have been paid and settled in cash and we're trying to resolve that matter with Cargill going forward.

In terms of the plants themselves as Scott and Dan will talk to in greater detail, we did manage to reach 75% of capacity in October. Average run rates have improved I'm told but as we speak both plants are operating at marginally above 90% but we're continuing to struggle to bring these plants and the final problems with them to completion although we do believe and hope that we will have these running at full capacity by calendar year-end.

In terms of the financial side of the Company, at quarter-end we spent a total of $320 million on the construction of the two facilities excluding capitalized interest. Of that 272, the great majority had been incurred under our turnkey contracts with TIC who despite some struggles has continued to do a terrific job in trying to bring these plants which we think will be exceptional once they are shaken down, to successful conclusion.

In addition, $48 million has been spent by the Company directly in terms of our part of the construction and we are still doing a modest amount of work on the sites as my partners will discuss. The final piece of this is that $13.5 million or 5% of the total expenditure on the TIC contract is being held as retainage until the plants are successfully completed.

In any event it's moving fast but subsequent to September 30, we estimate that between 6 and $8 million will need to be expended in final loose ends with TIC and on final construction that we're doing. But we would expect all or the overwhelming majority of that to be done and behind us by year-end at which point we will fund the working capital reserve, pay whatever the amount of retainage is over and be off and running on a fully completed basis.

That leaves us as we noted in the release with borrowings gradually approaching the $210 million which will be fully drawn by the time we have finished this construction, funded the debt service reserve and paid the retainage. And we had drawn as of quarter-end I guess about $10 million under our working capital facility, $20 million facility. I think as we speak it's probably about $17 million.

But there's more than adequate liquidity particularly given prices have come down at the operating subs. The only real financial challenge we face -- we're not in a comfortable position certain certainly given those hedging losses. But the only real challenges we face financially at the moment is some resolution of the amounts due to Cargill.

But the operating subs, where that claim is up in the parent company, the operating subs seem to us to be more than adequately funded given current market conditions for the moment. With that, if I could, I would like to turn this over to Scott to give you a review on our operations and bringing the Company to full functioning form.

Thanks Tom. Since we last spoke we've made a lot of progress in stabilizing our operations and completing the plants. As Tom noted, none of this has gone as quickly as we would like, but we have successfully made the transition from essentially running a construction company to full operation.

If you were to visit either of our plants, you would see a much different environment with a steady flow of trucks delivering corn, a plant that is live with the various emissions and outbound shipments of ethanol and distillers grain. There is still about 30 TIC personnel on-site working beside our operational teams to finish the plants and I will talk about that in a minute. What I want to cover are just some key events of the quarter, share the things that are still not going well, and then touch on our current risk management program and how things are working with Cargill.

During the quarter TIC as you will recall, our turnkey construction contractor, was able to complete the first of three major performance tests, provisional acceptance. This is a seven-day test where the facility was required to run at continuous 100% design capacity over a seven-day period although it was not required to meet all the efficiency guarantees on that first test.

Tom hit on a couple of the production statistics but we ran at an average of 62.5% during during the quarter. This in part was due to several extended shutdowns where we allowed or in fact TIC still had control of the plants and they were completing repairs on the facility.

During that time we produced 37 million gallons of ethanol and approximately 160 tons of wet and dry distillers grain. We after the first test based on the contract, we took control and from mid-September to now and will continue in the future, our operators are running the plants. We have since that time put a major focus on operational reliability and also as noted previously been able to demonstrate progress in obtaining sustained production especially with the 75% average in October.

While this was still less than expected, we had a number of unplanned shutdowns caused mostly by mechanical failures and some operational issues which I will walk through now. The main areas that kept us from producing at a 100% on a sustained basis include the dryer and related systems which I'll talk about in more detail in a second and several areas of bottleneck relating to heat exchangers at the plant.

The dryers were made a big area focus. This is a system that we have a major supplier [barozene] that is part of a large German engineering conglomerate. They probably have about one-third of the [dry mill] ethanol plants in the US.

These are large engineered systems and it's not just the dryer that's been a challenge for us, but the centrifuge and conveyor systems that actually feed the wet distillers grain to the dryers to be dried and then as well on the outlet there's thermal oxidizers that regulate the emissions. Getting these systems to work well together that we had not yet achieved the success we had hoped and specifically TIC has not been able to yet accomplish that.

As for what is going well, the front end of the plants fermentation and despite some challenges with distillation operationally, we feel like both of these major systems are pretty well lined out at this point. All of the major infrastructure and utilities work that we did -- this included electric, water, natural gas, rail -- all complete and running well.

Our boilers are also running pretty well and have been lined out. Finally we have demonstrated environmental compliance with our main air permits. However there are still some state certifications that remain that will be closed out through the end of the year.

As we look to the balance of the year, we are focused on finishing the plants as Tom noted. TIC is largely complete with construction and in fact the only thing they're doing are repairs at this point.

We have at each site small projects ongoing though neither are directly related to plant reliability. We expect that TIC will be able to pass its performance test during this remainder of the year and as noted will be able to realize design capacity on a regular basis in 2009.

It's not going to be an easy challenge to accomplish and TIC and ourselves both need to execute very well. I've already covered the areas that we're having the most challenges with respect to the overall dryer system and a couple of these bottleneck areas.

The fact is that TIC has done an exceptional job with their technology partner Delta-T at working hard to get these plants to the finish line. They still have the final performance test ahead where the plants have another seven days at 100% with the dryers running continuously and meeting all efficiency targets. But the fact is and I think Dan will touch on this, they're out there with the people they have working very aggressively to get to the finish line.

As to the balance of our operations, we have been focused on getting our logistics, risk management and accounting systems in full operation and integrated between Denver, the plants and Cargill's headquarters. So you can understand the magnitude. The corn alone we had 25,000 trucks that have delivered corn during the quarter and through which we've managed all of those receipts and invoices etc. We have been able to manage our working capital well during the time, keeping ethanol and distillers receivables flowing in a timely manner and consistent with the -- at least an in an industry form pretty favorable payment terms under our Cargill agreements.

Finally also as reported during the quarter or previously we were able to complete an amendment to our bank facility at the -- right at the end of August and gave us sole access to our $20 million of working capital. We also closed out all of our prior hedging arrangements. We have updated our risk management program and for the time being are staying very close to home, not taking any long positions on corn and are carefully monitoring the ethanol and distillers sales with Cargill's help.

Finally with respect to Cargill, they're performing well under service agreements and during times like this, we believe it's a distinct benefit to have them as a counterparty for both our corn purchases plus our ethanol and distillers sales. We are optimistic that the benefits we have previously articulated about working with them will show through in our results as we get our plants into steady and reliable operations.

Against all of this, many of you are I am sure very aware we are in a very challenging industry environment for the ethanol market against the overall challenges of our financial system and Tom, I'll turn it back to you unless you want Dan to make a comment first.

Sure, why don't we do this? I think that is a good overall look because it is so critical in the next 45 days really to wrap up this construction phase and have the reliable facilities that are essential. If I could, Dan, if you could just give us a couple of minutes on what is happening day-to-day at the plants as you shuttle back and forth between Denver, Fairmont and Wood River.

Thanks Tom and Scott. I think Scott gave a lot of good detail there. So really all I would say is from an action standpoint for our construction, we have gone from 3500 punch list items at both sites; we are down to about 20 at both sites right now. So between June and now we have been able to work through hand in hand with TIC as well as other subcontractors on-site through thousands of (inaudible) items that some are I'd consider standard and the 20 left proving to be the most difficult.

They are related to the dryer and the conveyors. We will work through the reliability issues we think within the next two months. Everybody is confident. We're making progress every day. We're working 24 hours a day on it.

The only other item I would add for the Wood River site is we're doubling our -- the size of our wet cake pad. The wet cake market in Wood River is turning out to be better than we had expected. So we've doubled the size of that and that is also in process.

On a production side, we have got everybody working, about 55 people at each site working 12 our shifts. And it's becoming pretty routine there at this point except for as we said the dryer and the conveyor reliability items.

Beyond that, all I can say is people are laser focused on getting us through the final punch list items and we're going to be at 100% reliable production by the end of the year. And if you were to ask anybody on-site whether it be TIC, BioFuel Energy from a production or construction side, everybody is on the same focused effort.

Thank you Dan; appreciate it. As Dan said, this is not without its challenges. At least the scope of what is being addressed is narrowing down and there's still some hard weeks ahead but we think we're in sight of the finish line.

It is hard to remember given what happened to the overall ethanol industry as well as what happened to us in the hedging fiasco of the third quarter, that our original objective was to build and operate the most cost-effective plants in the ethanol business. We still think that we have a good chance to achieve that once we get these plants up and running up and we're past shakedown mode and could be working each day and month to improve the efficiency in terms of yield, use of energy, use of enzymes and other ingredients here. We haven't had the luxury of focusing on that but that is what we hope and expect to be focusing on come the first quarter when these plants are done and behind us and it seems like at least we're close to that objective.

As I mentioned, the Company is in a relatively strong financial position given what's going on and given the hedging fiasco that took place. We have the peculiarity or maybe the good fortune perhaps that the liability to Cargill through their error as well ours is in the parent companies whereas the functioning of these plants, the buying and selling of corn and ethanol is in the operating subs where all of these final pieces are coming together and those operating subs have more than adequate certainly in current market conditions although it could change fast, to finish out their work and job and make the purchases of corn, natural gas etc. that they need.

So subject to working out a mutually satisfactory arrangement with Cargill which we continue to discuss, we think we all have a vested interest in this Company being successful, having started it with their aid and assistance. We're confident that we will be successful but we certainly have nothing that we can announce on the subject at this point in time.

Putting that aside for a moment and taking the liberty of jumping ahead to year-end and the assumption that Dan and his operating guys and TIC will bring this to successful conclusion on time at year-end for this construction project, we will be in relatively good position within the industry. We will have approximately $0.91 per gallon of operating capacity in senior debt.

If you include the working capital debt and the $20 million of subordinated debt outstanding, we will have about $1.09 in total of debt per gallon. It is certainly not a comfortable position in terms of our working capital or even our debt to equity ratios, nothing like what we would've hoped or aspired to when we started this or went to public fifteen months ago, but one of the better positions in the business.

Now the business itself is a lot tougher question. As most of you will recall when we started this project roughly three years ago today, the margins in the ethanol business were such that these plants on an unleveraged basis had exceptional rates of return. We thought we were forecasting conservatively by jumping corn from roughly I think a $2.20 a bushel price to a conservative case of $3.00 corn as I mentioned earlier. We managed to jump to almost $8.00 in June. We're now back down to about a $3.60 Chicago price as we speak but the ethanol price is up as well.

What has happened however is that the movement -- lots of erratic steps along the way. But the movement of the commodity prices has at the present time basically taken the margin of these and virtually all the ethanol plants in the country to or very close to zero. Based on the spot price movements on any given day, a modern ethanol plant running a capacity such as the ones we own and are completing is somewhere in the range of a negative $0.05 or $0.06 a gallon to a positive a $0.05 or $0.06 a gallon and literally that changes day to day. It is averaging right around a breakeven point.

Now the good news from our perspective is if we can get to full completion by year-end. If the commodity markets become at least no more unfavorable, they don't deteriorate further, and we can begin to get enhancements to efficiency and costs, we should at least be able to begin chipping away at this debt burden while we work and hope for a better day in terms of margins in the ethanol business.

Obviously it could go the other way and the commodity spread between the corn and the ethanol could widen to the negative. In that case, we along with the rest of the industry if it lasts for a considerable period of time are in serious trouble. But there at least for the first time as we approach completion looking at the market, there is a reasonable shot that sometime in the first half of 2009 that we can be running these plants and the Company in a sufficiently cash flow positive method to be chipping away as I said at our debt.

So it's is certainly too early to be optimistic. It certainly is an unfriendly climate as illustrated by the bankruptcy filing of VeraSun. I don't think anyone in industry is enjoying it in the present.

But in some ways, the prospect looks at least marginally better to me as we look forward and very rapidly approach full completion. Thank you. At this point, operator, let's open this up for questions.

(Operator Instructions) David Driscoll, Citi Investment Research.

Could you guys just walk me through the sources and uses of cash here on a consolidated basis? I think you made the comment, Tom, that on the operating subsidiaries that you saw that the cash positions were sufficient to continue to fund those operations. But I want to understand the fully consolidated basis when we look at where all the positions net out here.

And I also -- please correct me if I'm wrong on this -- but upon completion of these plants you'll have additional access to working capital lines that's not currently available. I believe it's something you had mentioned on the last call. But again could you guys just start off with the macro here on the fully consolidated basis, sources and uses. What's going to happen over time here? Do we have enough liquidity to keep this thing running properly?

Well I think the difficulty is you can't look at it on a fully consolidated basis. The fully consolidated basis is what is sitting in front of you in terms of the 10-Q and the press release, David.

The peculiarity is that we are under as you know very complicated project finance barring arrangements under which these plants were financed and built. And when in the second quarter of this year we had not yet started production of the plants but were being urged strongly by certain of our shareholders and Cargill to protect ourselves on the corn price, there was no ability to enter into any contracts yet because we weren't operational at the operating subs.

As a result, all the hedging that was done with Cargill was done at the parent company level. And that parent company at the time because of proceeds remaining from the public offering, was perfectly able to do that and only as a result of the $50 million in losses did it run out of the ability to cover first its margin calls and then ultimately once the contracts were closed out, the amount due to Cargill relating to those contracts.

So the net result is that as we speak at the parent company, there is $17.5 million of unsatisfied claims relating to the hedging due to Cargill. There is about $5 million of cash that we consider close to at least a comfortable amount to be sitting in that company and then there's some restricted cash relating to the natural gas and other utility LCs and guarantees that have been put up.

So the parent company cannot either with regard to Cargill or with regard to the sub debt, cannot currently cover its full obligations and we need to resolve that problem. At the subsidiary level, the operating subs where the bank debt is and where the corn is bought and the ethanol is sold now that we're operational, we have and Kelly help me here but we now I believe have access to our full $20 million working capital line.

Correct.

We have asked for it to be expanded but I don't think the banks really want to talk to us about it until we're finished construction. But we have got access to the full 20 we originally planned.

And I think at least based on current corn and ethanol prices, which have shrunk the need from that earlier peak for working capital back, our feeling is unless there are material ongoing losses which obviously could happen if these commodity markets move the wrong way, at these prices that we have more than adequate liquidity to run the business at the operating company level.

Is that a fair statement, Kelly, and am I leaving something out?

No, that's a fair assessment, Tom.

What is the cash position in both the operating subs and the undrawn combination of cash and undrawn amounts under the working capital line at present excluding money in the holding company?

The cash amount at present in the operating subs is $17.5 million and the undrawn working capital is $3 million.

So there's $20 million of available liquidity there and I think there's working capital in those subs which includes a corn on-site, ethanol and distillers grain waiting to be sold. And then including this cash already drawn, what is total working capital in those subs at the current time Kelly?

The total working capital in those subs at the current time is around $12 million.

After all the receivables and payables, there's roughly $12 million in those subs plus the availability for draw. So look -- it's not wildly comfortable but based on everything we see, we can finish up these plants if we do it on time and based on current margins run at roughly a breakeven level.

We do need a resolution with Cargill and the parent company. Is that sort of on point what you were looking for? It you want a more detailed cash flow, we may need to do it offline with you talking to Kelly directly.

I probably will take you up on that. If I could just maybe try it one more time I think with (multiple speakers) lines. I think you said you owe $13.5 million to TIC. You've got $8 million more that you have to pay to complete the plants and then you owe Cargill $17.5 million. That is something like $39 million. If I look on the consolidated balance sheet I see cash (multiple speakers)

It won't, you can't do it that way. David, I apologize. You're heading for a point where the numbers won't solve because the amount we owe to TIC and the amount for the working capital reserve is set aside in borrowing the rest of the construction loan]. You have to stay down at the operating subs first.

Those will be paid with draws under our construction loan, both of those amounts. And there will be a bit more along with some of the cash to finish up the loose ends of the construction beyond those two pieces. So that will all be taken care of in the operating subs, nothing to do with the parent.

All right, so the only numbers then that are comparable are the $17.5 million, then you look at that relative to the cash number and that's why you're saying that (multiple speakers)

That's the problem that we need to address with Cargill. We have no -- normally the source of cash for the holding company would be profits from the operating subs. One, we don't have them fully operating yet; and two, in current market conditions although there's hope for the future, there's no current expectation based on existing prices of profits.

So we need to work out something with Cargill that stabilizes this situation and at least in part satisfies their plans. We have no such resolution. I don't want to promise you one , but logic suggests we will find one.

(Operator Instructions) Alan Walton, private investor.

I have -- I own a lot of the stock on the Company. I got into it in the beginning and I've been watching things as they have transpired and my interest is in this Cargill thing.

I don't quite understand it in terms of the fact -- what is in the best interest of Cargill or why is it in their interest for BioFuel not to work this out? Do they have any interest on their part and perhaps getting involved in it as the parent company in it producing if you will ethanol on their on their own?

Sure, well I want to be careful and be sure you understand, I am neither entitled nor capable of speaking for Cargill. So all I can do is give you my judgment. We are in this business because Cargill did not wish to directly own these plants. They certainly could have on their adjacent sites built these plants if they had chosen to and at least based on my understanding and Scott please correct me if you have any different understanding, they have no desire that has ever been indicated in any way to us to own these plants. So we have no reason to believe they would like to move in and own these things.

Two, we have pretty extensive commercial relationships with Cargill. They have some very profitable contracts with this Company in terms of leasing us their silos and sites, in terms of supplying us corn and in terms of marketing our ethanol and distillers grain.

At least to my knowledge, we have every reason to believe and they have as much as said so that they might very much want to continue those commercial relationships which is not to say that they have any desire to lose money any more than anyone else does. So our feeling is that all logic suggests that we will need to find a mutually acceptable solution to BioFuel and its shareholders and Cargill on the other hand but I can't tell you we have done do yet.

Tom, let me just ask a basic question here. I remember when I listened in when they had the conference call, I believe it was either in May or June. Why has it taken such a long time for Cargill to work out a resolution on this thing?

This has been going on for two or three months. They're cognizant of what is going on. They're bright people. I don't know what their cash position is but it would seem to me that in order to stabilize all the things that you guys are doing, they could very quickly do that by coming to some kind of an agreement with you on this debt.

I don't think any of it (inaudible) assume that there's any cash issue with Cargill. I can't remember what the numbers was but they announced the highest profits in their history I believe in the third quarter in the billions of dollars. So I don't think that this is any type of a threat to Cargill by any stretch of the imagination.

The difficulty with all of this in my opinion and again be careful that you understand I can't speak for Cargill, I can simply give you my impressions. All of us I think got caught by wild surprise at the total collapse in the corn market. There really was a consensus. I don't particularly have a view on corn markets up or down but there seemed to be a pretty strong consensus among Cargill, the big brokerage firms, hedge funds etc. that this corn was sort of heading to the moon and there was going to be food riots around the world etc. as of last June.

It melted down very fast in about a 25-day period these losses we're talking about were incurred. And in the process we and Cargill and our banks were all caught completely by surprise, not just by the market losses. We were certainly surprised by those but we were surprised by this arbitrage that none of us had frankly fully thought through between having the operating subs that had not been up and running when we entered into the hedges.

If they had been up and running, the hedges would have been at the operating company level and all of this might have been painful but I think would have probably worked out. As it was, the banks had full control of all assets and cash flows, access to debt at the operating sub level and Cargill and we were left with these contract obligations and an inability to fund them and pay them in the parent company. We have had a number of meetings and discussions on the subject since August.

There is plan for a next discussion next week. Could they resolve this if they wanted? Absolutely in about an hour. And we're not nearly as flexible as them because we don't have the same degree of resources but as I say, I think it will get resolved. I will tell that from both our and their point of view as much as we would like it resolved, it would be a hell of a lot easier to resolve if our plants were finished, up, running, the bank debt was fully drawn, everyone was just focused on efficiency as opposed to construction and retainage, and TIC and the 500 parts of this that are in constant motion although we're getting close to the end.

So on the one hand I would love it settled. On the other hand, this whole Company will be a hell of a lot easier to run and to finance and arrange things by January 1. So I hope it is done very quickly but it should be getting easier to resolve, not harder with the passage of time.

I hear you Tom. Unfortunate for you guys and I know that what you have been through, it is just mind-boggling to someone on the outside of this thing looking at a company like Cargill where $17 million is pretty cash to someone like that and their size. It's just amazing to me that this thing continues not to be made easier by them looking at the long-term.

Well I am hoping they will. This is a very good, rich, brilliantly run company. I think mistakes were made by probably everyone involved here along the way. We all got caught at the perfect wrong moment in this commodity and financial storm.

I think it will get resolved. I don't think any of us are going to walk away smiling or doing high-fives but I do think this'll be successfully resolved. There's some very smart people around the table and there's no reason to bring this house down.

I appreciate it, Tom. Thank you for your answers.

David Driscoll, Citi Investment Research.

Thanks for taking the follow-up guys. Tom, can you tell me a little bit here about fourth quarter? Did I hear you correct in that there are no -- all the hedges, everything related to the $50 million that you've acknowledged, that is the conclusion of that event, there is no carryover into the fourth quarter? Is that correct?

Kelly, Scott, please given this topic, if you think there's even a [centilla] of doubt, jump in and correct me instantly. We closed out -- in fact Cargill closed out under their contracts the last of those agreements in September. Now understand you can never be 100% insulated from the market but there is no futures position, meaning that there is corn as Scott mentioned being dropped off this afternoon at the plant.

I believe it is priced -- and Scott jump in here and help me. I believe it is priced when that truck sits on the scales. Let's take a silly example, but he crosses the scales and corn is $3.60 a bushel and the next morning it drops to $2.00.

We can lose money on corn because the corn is in our possession, being ground, running through the plant. It's not all instantaneous in and out. But we have no futures position. Conversely if corn gets delivered at $3.60 and it goes to $4.00, we can have a gain on corn. But there is no futures position of any magnitude at this point in time open. Is that correct Kelly?

That's correct.

That's right Tom.

Okay so then if I just follow-up on this, the logic then for the fourth quarter will be that your average corn cost will be simply the average of the spot prices on a daily basis throughout the fourth quarter and current prices are as good as any for a proxy on what that number would be. Would you agree with that?

Well I would if markets weren't moving 5% a day. So do I think it is as good a proxy as you and I know as we speak today? Yes, but given what we have all been through in the last 100 days, could corn be $7 or $2 tomorrow? Unfortunately, it could.

Okay on the ethanol price realization in the quarter, I think you guys said in the press release it was $2.20. When I look at the New York Harbor average price over the third quarter, I come up with a value of about $2.50. And I'm just trying to understand what is the nature of the Delta here? Because of the low utilizations, did you guys sell a lot of this material much closer in the Midwest i.e. and that would result in lower prices than what we see on New York Harbor?

Scott, help me here. I think to move ethanol on an average day -- and I'm not sure that these commodity markets have many average days at least recently. But on an average day I think our cost to move to New York Harbor was about $0.17?

It's more than that Tom. It's probably closer $0.23 to $0.25.

I think that is in rough terms the arbitrage meaning our ethanol is really not ending up in New York Harbor. Our ethanol is being sold all over the Midwest and to some degrees being shipped out West or to the Eastern Midwest. It's not going to New York Harbor.

But I think the price relationships come off the Chicago Board but the trading is so thin David, it is hard for me at least to follow this with any published number; meaning you will get an announcement at the end of the day that ethanol barges traded at x and you receive $0.10 or $0.12, sometimes more sometimes less, on the exact same day. It's just a very thin market still. It's not efficient but I think basically the arbitrage is the transportation cost to New York Harbor and/or LA.

One final question. In the release you indicated that you did not pay your scheduled interest payment on the subordinated debt. I don't often see this so tell me what is the effect of this to you guys? What happens when you fail to pay? You indicated that there was an increase in the interest rate.

The interest rate went from an obscene 15 to a slightly more obscene 17. Other than that at least so far nothing. As you probably know our subordinated debt are held by our two largest stockholders, Greenlight Capital and Third Point Partners. Again I need to be careful. I cannot speak for them.

But I think it's in everyone's interest that this along with the Cargill situation gets resolved. At least my opinion was that while we are working out -- since that is in the same entity that while we were working out or trying to work out an arrangement with Cargill, that it was prudent for no material amount of monies to be blowing in or out of that entity until we had a meeting of the minds. That's all it is. I hope it is just a temporary situation but it really is part and parcel of the resolution at the parent company with Cargill.

Understood, good luck with completing the plants. Thank you.

Cameron Wright, Jay A. Fishman, Ltd.

Just a question on your business. You can't control your input costs and you can't really control the price that you sell you product at. So what needs to happen for you guys to have sustainable profitability in this business? Or is that something that you may never get?

Well never is a long time. Again I guess I'm limited given where we are in this process to giving you my opinion. The view that Scott and I and Dan and Cargill along with our investors all had back when we started this was really quite simple and straightforward which was that ethanol represented a fully domestic, farm friendly, environmentally friendly source of vehicle fuel for the United States. Never was going to replace gasoline but it should rise to provide on average 10% of the amount of gasoline we needed and that between the cost to produce it and the tax credit benefit that there should be a profit per gallon of between $0.30 and $0.60 a gallon on ethanol which would make building and owning these plants a very valuable proposition.

Well a series of things have changed since that happened. One as you know there was at least for a while the question as to whether corn was going to run short and whether the ethanol producers were a principal cause for a food crisis around the world. I think it was a red herring but there was at least the assertion.

The second is we now have gasoline demand for the first time I believe in my lifetime heading downward in the United States. And finally there were ethanol plants, not just ours but others, coming onstream at a rate faster than the infrastructure could distribute it around the United States. For a long time there was a problem getting any of it into the whole Southeastern quadrant of the United States. That's now been broken through but it took a long time to happen.

So you had a simple supply and demand problem -- too much supply, too little demand. All the margin transferred over to the refiners. They were making, Scott, I think $1 a gallon for a while (multiple speakers) on ethanol and they were leaving none for the ethanol producers which because of supply and demand they were able to do.

Longer-term, when is a tougher question. Longer-term I still believe in most if not all of that thesis. I still believe we ought to produce if humanly possible at least 10% of our domestic vehicle fuel in the form of ethanol. Like everyone else in the world I would much prefer to produce it with cellulosic waste or scruffy crops than I would with corn that has other uses for animal feed. It's really not human food for most of the world. Only Americans really eat corn in corn form.

But I think what we have done is we collectively very expensively so far mind you, but we collectively have built an industry that can make and distribute and blend with gasoline, very large quantities; 15 billion gallons by the time this thing is finished a year of ethanol and I believe that at some point, hopefully including our plants, at some point we will make this partially or largely from substances other than food.

And we have left land to do that. Are we going to make money in the short-term cooking corn and making ethanol? It doesn't look it. It looks like if you freeze today's spot prices, we in the best case will be running these plants at roughly breakeven and I mean breakeven after all interest and overhead and maybe a little bit of debt service; but certainly nothing good in terms of profitability. I think the margins overturn and I think the industry is going to work out. But I cannot for life of me find a reason it is going to happen tomorrow.

Do you think the tax credit is going to find its way back to the producers or is it going to stay at the blenders?

I think it's supply and demand. Look, the blenders had the power in the sense that there wasn't enough final demand. They had to get every gallon of ethanol and they made the ethanol producers fight with each other in effect in a Dutch auction until they took them to breakeven. So they were able to capture 100% of it.

If next year -- and obviously it would be a lot better if the economy was not shrinking and gasoline demand was at least flat so that you didn't have that fighting against you -- if these plants stop coming onstream, which is definitely going to happen within the next six to nine months. There's no new ones anyone is crazy enough to think about. New ones stop coming on and that demand gradually rises.

Eventually supply and demand will change the negotiating posture between the blenders and the producers. In fact you look at the numbers today, it's already happened a little bit as the oil prices collapsed. Their blending margins have shrunk. Now it hasn't so far gone to us but they're no longer getting the dollar. So I'm not sure that's a good solution to the problem from a business perspective but I think it's going to right itself, I just don't know when.

Okay, just want one final question. Do you -- in retrospect do you regret getting into the business or (multiple speakers)

Oh my God. As much as anything in my life I've never taken a set of public shareholders -- forget my own money. I'm the largest individual investor in this thing and I am perfectly prepared to lose money but I really hate losing other people's money and to take the public into a company that along with the rest of this industry has now lost between I believe at the best 87% and at the worst I guess in the case of VeraSun's 100% of our investors money?

I've never been more disgusted with myself or disappointed. We were dead wrong. We had a lot of company but we were dead wrong in about four or five different material ways and I regret every minute of it.

Mr. Edelman, it appears there are no questions at this time.

All right, well thank you all for joining us. I wish it was happier news. It was obviously a revolting third quarter. The fourth will certainly be better although not in this market good and hopefully by the first quarter we will simply be facing the challenges of efficiently running and operating business still in a tough market but without some of this horror show that we have all faced together over the last 12 months. My thanks for your time.

This concludes today's conference call. All participants may now disconnect.