Green Plains Renewable Energy Inc. Wall Street Analyst Forum's 20th Annual Institutional Investor Conference Transcript

| About: Green Plains (GPRE)

Green Plains Renewable Energy Inc. (NASDAQ:GPRE)

Wall Street Analyst Forum's 20th Annual Institutional Investor Conference Transcript

March 26, 2009 9:10 am ET


Hellen Bard – Director of Client Services, The Wall Street Analyst Forum

Todd Becker – CEO

Hellen Bard

Everybody, my name is Hellen Bard from the Wall Street Analyst Forum. I'm your host in the room for today. At the front desk, we have Sydney Bard who will be escorting people to the break out sessions immediately following the presentation. The break out rooms for this room is room B, which is right next door. I would ask, at this time, if you have any cell phones, pagers, any kind of hand held device, if you could turn it to the silent position so as not to interrupt the presentation, and in accordance with the rules here at the University Club.

The first company that we have presenting this morning is Green Plains Renewable Energy. Green Plains Renewable Energy Incorporated, based in Omaha, Nebraska, is a vertically integrated, low cost ethanol producer. Green Plains ethanol segment operates four ethanol plants in Iowa, Indiana, and Tennessee, with a combined expected operating capacity of 330 million gallons of ethanol per year. Green Plains also operate an independent third party ethanol marketing service, with marketing capacity of 305 million gallons of ethanol per year. Green Plains agro business segment operates grain storage facilities and complementary agronomy, feed, and fuel businesses. Green Plains has grain storage capacity of approximately 22 million bushels.

And presenting this morning is Todd Becker, the CEO.

Todd Becker

Thank you very much. And thanks for – thanks for coming out to see our presentation this morning. We're excited about the opportunities that exist for our company going forward. We think we're building a platform for success in an industry that has had some distress, but you'll see that we may look a little different than what you have seen in the past. And we're comfortable with the position we're in, both from building the business as well as our balance sheet.

Today we're going to have some forward-looking statements, and we will put the statement up there. You can take a look at it, read it at your leisure, and then we'll just move on.

Today, with me is Jerry Peters, our Chief Financial Officer, for any questions that anybody has after the presentation.

So who is Green Plains Renewable Energy? We are a leader in ethanol production, and marketing with a combined volume of 635 million gallons per year. That represents approximately 6% of the total US ethanol demand for this year. We have 330 million gallons of production capacity, 305 million gallons of third party marketing contracts. We continue to look to build each of our pieces of the platform, or we're going to look to expand ethanol production as well as in our marketing services.

What we're trying to do is build a vertically integrated ethanol platform that ranges all the way from the farm, where we provide agronomy services, all the way through to the blender, where we provide terminal services. And we're going to walk through each of those pieces of our platform today.

We focus on operational excellence. We have significant investment in plants. Each plant – 100-million gallon plant, has cost – has a cost of around $175 million. So you can do the math, there's over $500 million of CapEx in our platform today.

Risk management is a core competency of ours. This is a commodity processing business. It really makes up – it's really made up of two silos. One silo is commodity risk management and the other silo is operational excellence. You have to be good at both, but you have to understand that that was – that's what this business is, and you have to focus on it everyday. And we'll talk a little bit about that as it is a core competency of ours.

Finally, we have a well capitalized balance sheet with committed long term investors, and we'll talk a little about that. But that's very important in the commodity business. We have plenty of cash on hand. We have good investors with a long term view. And ethanol is not an industry that you could take a short term view on. It has had its ups and downs, it is cyclical as any other commodity businesses, and we treat it that way.

So some of the recent events that we've been through in the last six months, it's been a crazy six months. We closed the merger on October 15th, 2008 with VBV, where they brought in a 210 million gallon ethanol plant as well as an ethanol marketing business, combined with the old GPRE legacy operations, which basically went from the ethanol comp – ethanol production process back through, through the farming, and agronomy, and grain handling process. And we took it from the ethanol process forward through the blending and terminal operations, and the marketing business.

At the time of the close of the merger, the VBV shareholders invested $60 million of new equity at $10 a share. Our main shareholder, and our largest shareholder, is NTR plc, who's an international renewable energy and sustainable waste management company, with investments in wind, solar, and sustainable waste management. To take it in five to ten-year view, they're an infrastructure company and they're a great shareholder to have as one of our largest.

And then finally, we were upgraded from – to the NASDAQ global market from the NASDAQ capital market. So we're basically leaving kindergarten going to first grade, but we feel very comfortable that we're going to take the right steps to be successful.

One of our competitive advantages, we talked about some just recently, but we have a seasoned management team, which will go through operational excellence, which we'll talk about. We'll talk about our risk systems. The vertical integration is extremely important. So what we're trying to do is de-risk the center, which is our ethanol production, by having diversified income streams on both ends of the – both ends of the spectrum. We'll talk a little bit about that, our balance sheet and our investors, which we mentioned.

Our management team is really led by guys that have significant experience in commodity processing businesses, both in the agro business and the energy side. They understand the risk, they understand the processing, they understand operations, straight soup to nuts. And that's how we treat our business. We're not entrepreneurs. We're not developers. The management team is truly commercial driven, coming from – with significant experience in the industry.

We have Jerry Peters with significant experience with ONEOK and natural gas pipelines. Steve Bleyl, who has a lot of experience on the energy side, both with the refining and ethanol. Ron Gillis, who from a finance side has spent his whole career, 30 years plus, in commodity businesses. Mike Orgas, who runs our risk management systems, has 25 years plus in the commodity agri business side. And then Edgar Seward, who once runs our plants operations has the same, grew up in the wet mills of the corn processing business, and now – and now managing all of our operations. It's usually crucial when you're managing a business like this that continually has risk in it every single day that you have guys that understand how to manage it, and we think we do.

And again, this is the importance of what we do everyday. We have the – we basically manage crops margins. We have volatility in prices, but we don't – we don't really focus on that. What we focus on is the margin. We're a lot of what you heard last year, which is – which is a company has made a – made a purchase of corn at a high price, and it now dropped to a low price. We don't think about it that way.

We actually focus fully on the EBITDA, crops margin, and that's it. What's the cost of corn? Where can we sell the ethanol? What's the cost of natural gas? Or who we sell the by-product. We put that all together into our model. It tells us how much money we can make. We decide if we're going to lock it in that day.

It is a little bit unique in our industry as, in the past, the margins were much bigger. So you really didn't have to manage that tightly. But now with margins compressing – which within a typical commodity business, which goes to variable cost, with margins compressing, you have to manage that margin even more every single day. We'll talk a little bit more about that.

So what we think is we are building a best practice in risk management. Our fundamental focus is on EBITDA, margin management, taking the four main components of our process and deducting the cost, and getting to an EBITDA per gallon. We look at it a little bit differently than our peers in the industry. They were really focused on conversion margins or by-product returns, those type of things. We really go right to the commodity process and look at it, "Can we pay our debt or not?"

We have a real time price risk management system that drives immediate decisions. We have a desk in Omaha with all the experienced commodity managers and risk managers. They work together every single day. We don't have a corn guy on the second floor and an ethanol guy on the first floor. Those guys sit right next to each other, and are driving decisions real time. And so, if we see it, we jump on it, we lock the margin away, and we move to the next opportunity.

We have a comprehensive risk management policy focused on three areas of control. And obviously, that's an important point when you're managing risk in a company like that, which is control. Can you control it? Can you measure it? Can you monitor it? And our systems allow us to do that.

We have three main tenants, which are tender limits. How long can we put on our positions for and at what percentage? We have hedge percentages. We try to focus on blocking and margins for the rolling 12 months. Everyday for us is a new 12 months. And then we measure how much we have locked in for the next 12 months, and we start from there. When margins are real good, we try to lock a lot more in. And when margins are compressed, we – it doesn't give us the ability to do that so we're more in the spot market.

And then finally, we run a value at risk limits system. So we actually can measure and monitor the amount of open risk that we have everyday, which is really what happened when the ethanol industry doesn't have. So you weren't able to – a lot of people weren't able to monitor, "I have all this corn bought, but I don't have ethanol sold. So what's my financial exposure?" What we actually do is we take the corn and the ethanol, and we convert it back to a single – single structure. And then we look at that open position and then we monitor that exposure using value at risk.

We have very tight value at risk limits. So there is not a lot of room that you can get long – a long bunch of ethanol or short a bunch of – or long bunch of corn and short a bunch of ethanol without running into a risk limit. And then you have to compress that to make sure you're evenly hedged. So there's really not much room for any big losses on commodity positions using our system.

We have a risk committee comprised of senior management and outside parties that have significant experience in monitoring commodity risk exposure on an ongoing basis. Again, this is a core competency of ours. We are here to protect our shareholders' money. We're here to protect the assets that they have invested in, and they have entrusted us with that. And we are very serious about that every single day.

So what's the value chain that we're focused on? We really go all the way back to the farm through blending and distribution. We'll talk about each of those components. We start with seed, chemical, and fertilizer. We have a full service agronomy business. In our agri business operation, we have – we have a – we go right back into the field. We have spreaders. We spread fertilizer. We have seven agronomists on staff that go into the field to help the farmer make the best decisions so that we can originate that corn, and the best quality corn that we can use in our process to make ethanol.

We move to our grain storage and merchandising business. We have 20 million bushels of grain storage in Iowa, seven grain elevators – actually eight grain elevators, that really puts us in a competitive advantage when we're managing our input risk. There really isn't any other ethanol company, from a peer placed [ph] standpoint, that has that on the front end of their platform.

But it also is a for profit business. So we actually run that business separately in a subsidiary for profit. And it's a – it's a very good piece of our platform, which we'll talk about a little bit on our Q4 results.

We then move to ethanol production, and we'll talk about our plants. Third party services, we have a marketing business where we provide marketing service to other independent ethanol producers. What that does is actually gives us critical mass then to go take our production, take their production, and go to the major buyers of ethanol, and be able to package much larger volumes to them, which we think gives us a competitive advantage.

And finally, blending and distribution with the acquisition of a terminal business, which we'll talk about a little bit.

This is our strategy. We're going to create a vertically integrated platform, touching all points of the – points of the ethanol value chain. We are going to focus on expanding each of these points on the ethanol value chain over the coming years.

As I mention, the effect of corn procurement, it all starts with the corn that goes over your – in the front of your plant, so you can grind that, and make it into ethanol. Owning the grain storage gives us the advantage. With the acquisition in 2008 of the Great Lakes Cooperative, we were able to really de-risk the front end of our process, and gives us flexibility to manage price risk as well as we go right back to the farm and deal direct with the farmers who are growing the corn so that we can have the best relationship with them, and – and originate low cost into our – into our production.

This is an overview of our ethanol and grain facilities. We've got, if you look at the triangles – the red triangles, those are our ethanol plants. We've got four ethanol plants, two in Iowa, one in Indiana, and one in Tennessee. The Iowa plants are each 55 million gallon plants. The one in Indiana is 110 million gallon. The one in Tennessee is 110 million gallon plant.

As you can see, the circles that are around our ethanol plants are the grain and agronomy facilities. You can see what our strategy really is. If you look at Northern Iowa there where we have the one triangle and the seven circles. That’s basically what we’d like to duplicate across our whole platform. And as we add more grain facilities or add more ethanol plants, we’re going to try and duplicate what you see up on that map in Northern Iowa. I want to make sure that we can secure our supply at a low cost into our process.

Let’s look at our ethanol marketing and distribution business. We’re currently developing a fee based ethanol marketing and distribution platform. We’re up to $305 million gallons of contracted volume. People are entrusting us to get them the best price for their ethanol, which then tells you that – hopefully, it gives you an indication that by people trusting us to do that, that we’re getting the best price for our ethanol as well.

We market directly to retails – retailers, and blenders. And we will go everything from a single convenience store in the state of Tennessee, all the way through some of the largest oil companies like BP, Exxon, and Chevron. So we market to anybody that will buy ethanol as long as we can come up with the right terms. We expect this year to touch between 850 million and 1 billion gallons of ethanol, 635 million gallons as we outlined as well as from other marketing contracts, and our blending and distribution assets.

We’ll talk a little bit about – as we move down the value chains, so what we did is we started with grain and agronomy, with the elevators and the grain business on the front end; with the agronomy business, the feed, the fertilizer on the front of our platform. We moved to grain storage. We talked about our ethanol production. We now move to our marketing business. And now, we’re going to move to our Blendstar acquisition. Each of these provides an income stream. And that’s the most important thing about what we’re doing. We’re diversifying our company so we’re not relying on one single income stream. We’re relying on multiple income streams, which then de-risks the whole platform.

It’s really not a new concept. It’s something that ADM, Bungee, Cargill, they’ve all been doing it for years. If you look at most of our backgrounds, we come from those businesses. And most of us worked for one of those four companies, ADM, Cargill, Bungee, or Dreyfus. We all come from those backgrounds as well has been on the other side, from Coke and some of the major oil companies. And so we’re really not – we’re not reinventing the wheel here. We’re just doing what we’ve always done in our career, which is build vertically integrated platforms.

And then, that will lead us into our Blendstar acquisition. What we did is we looked down – we looked at our businesses and said, "What are we missing here?" Well, we’re not a blender. So we don’t own the gas station. And we’re not a refiner because we don’t own oil refineries, we’re not that big. But we do provide – we do blend a lot of ethanol for our customers, which we provide the ethanol, they blend it with their gasoline, and they drive, and they go off.

And so what we saw is – and we’re doing business with a company called Blendstar. And what we were able to do is acquire a 51% stake in Blendstar for $9 million on January 20th. They had already been acquired back, last year, by one of our parent companies pre-merger, and then we acquired it as a related party transaction. We've been looking at that business for a long time. They’ve got terminal locations in Louisville, Nashville, Knoxville, Little Rock, and Oklahoma City as well as rebuilding facilities in Collins, Mississippi, and Shreveport, Louisiana. What’s important here is that these are niche blending markets. What we do is we find locations that are underserved. We find advantage sites that we can go in and lay ethanol at a low cost. And from that point then, we can provide the best service and the best price to our customers without sacrificing quality.

The current capacity is over 200 million gallons per year, with commitments to build the additional two terminals. What’s important here is that this is actually a stand-alone business, people pay for services to go through these terminals. We’re a very minor customer of Blendstar from a standpoint of what we do at GPRE, and they are actually selling their services to anybody who wants to blend ethanol in any of these markets. And I think that’s important. It’s not a – we’re not supporting Blendstar with all of our gallons. It’s a stand-alone business that is profitable today.

We look at mid-sized metropolitan areas that are under utilized. We’ll look at a site that we find with an advantaged rail access, next to a refinery that doesn’t have rail access to bring their ethanol in. We’ll put our site down. A truck will pull in to the refiner, pick up – or the terminal, pick up 90% of gasoline, bring it over to a Blendstar terminal, top off with 10%, and go on their way. And it’s like a – it’s mixing as they’re driving down the road. So that’s really the model. In addition, we’ll actually – we'll actually run full loads of ethanol through their tubes if somebody wants to do their blending at their own tanks.

It's an important part of our vertical integration strategy. It gives us a lot of benefits. We’re going to continue growing that platform. We expect to have several other sites announced in 2009 to build out that platform.

And this is – this is our biotech – or this is our investment in next generation. We have a small investment in an algae production company that’s working on commercializing photobioreactor technology for continuous algae production. We have a 25.5% interest in that company.

As you look at our partners, it’s a pretty impressive list. It’s CLARCOR, which is the $1.6 billion New York Stock Exchange-listed company; bioprocessH2O, which is a filtration company partially owned by CLARCOR; and, NTR plc, which is our largest shareholder. The four of us got together. We funded the enterprise. We believe our technology has a lot of potential. And our goal is to roll out a pilot project at our Green Plains Shenandoah plant in spring 2009. So hopefully, by July – June, July of this year, we will have a working photobioreactor producing algae at an ethanol plant.

If you think about what – what it takes to grow algae, it takes CO2, it takes warm water, it takes waste, it takes heat, and it takes sunlight. And we have most of those things in our ethanol plant. Light, the sunshine, we’re okay. We have the CO2. Then we produce a very clean CO2 at the ethanol plant. The thing about ethanol, ethanol is actually a closed-loop process. The CO2 that we emit in the atmosphere is used to grow the corn, the corn is grown, and then we use the corn then to make ethanol. That's why it's considered closed-loop.

What we can do actually now is to capture that CO2 into the algae production process, run it through the bioreactor. We produce a lot of very clean, warm water in the process of ethanol. We have large water cleaning systems at our plants. So we produce a lot of very warm water. We run that through the algae. We produce a lot of waste heat. We run that through the production. And then with the sunlight and the technology that we think we have, we’ll be able to grow algae in large scale photobioreactors. So we’ll see how that goes.

Again, we’re not going to spend a lot of money on R&D. We are not an R&D company. We don’t plan on being an R&D company. But we do have a little bit of our money invested into this company. We received a grant from the state of Iowa for $2.3 million, which is a matching grant. So we’re fully funded through our startup phase here on our pilot project.

We reported our earnings yesterday for Q4, and this is our balance sheet. As of the close of December 31st, 2008, we have current assets of $192 million, current liabilities of $108 million, with working capital around $85 million. In current assets, we have $65 million of cash or equivalents. So we feel we're in a very strong, good position right now in an industry that is really under funded. So we feel like we are in a good position to sustain us through good times and bad times.

As you could see in our property and equipment, we’ve got $495 million invested. We’ve got $299 million of long term debt. Overall, we have about $320 million of debt. We have no major debt payments due that will have a negative impact to our cash going forward.

Our financial performance for the three months ending December 31st, 2008 – and I’ll give you a bit of a caveat. Because we did a reverse merger and VBV was the acquiring company, VBV was a development stage company through basically October 1st, 2008. And so with that, we only have the – for the nine months – for December 31st, 2008, we only have the nine months of VBV’s results, which most of that time, we're a development stage company that was spending cash and reporting losses until our plants came up and running.

Pre-merger legacy operations at Green Plains aren’t really taken into consideration, our reverse merger, because we were the acquiring company. So that gets actually lost in the SEC hyperspace somewhere. But we still can talk about it. And during that same period, the legacy operations are in the $1.86 a share or about $13 million in net income. But we can’t, again, include those into these results, but we can discuss it and point you to that, both in prior filings as well as our 10-K. We’ll outline those legacy operations for you.

For the quarter though, is what is really we're focused on, this is kind of current Green Plains operations. We had a net income loss of $1.8 million and $186 million of revenue. In that loss was $2.7 million of merger related costs, which most were non-cash. So with the merger and the close of the merger, obviously, we felt very comfortable that when we take the $1.8 million net back to $2.7 million, we were profitable from an operating standpoint in the quarter. And we generated about $6.5 million of EBITDA for the quarter as well.

Again, this quarter, for ethanol, was probably one of the worst that we’ve seen since ethanol has started. You’ve seen a lot of bankruptcies. You’ve seen a lot of distress in the industry. We felt we had done the right things, putting our companies together. We drove our costs. We run a very low cost platform. That’s key and crucial to running this business. When margins are very tight, you can’t have a lot of costs run on top of you. And because we know how to run commodity businesses, we can become a low cost operator. And we have done such that. We have done that.

So we’re actually very happy about the results of our quarter. It’s our first quarter. And in this quarter, we had, basically, two plants starting up and one plant coming on from the previous quarter. And plant start-ups in the ethanol industry are an interesting time because it takes a little while to get your plant lined out, get your costs right, get your efficiencies right. It takes at least a good 60 to 90 days before your plant's operating at full efficiencies. And we’ll see those results going forward for 2009.

So even with two plant start-ups during the quarter, one with the previous quarter that we’re still getting lined out, one plant operating an agri-business operation, operating without the terminal business, without any revenue from the marketing businesses during that time, we feel very confident in our results in a period of time where the industry is in significant distress, especially when you add back our non-cash performance – our non-cash expenses that are related to the merger.

So what’s going on in the industry? It was built very fast by a lot of developers, a lot of entrepreneurs, a lot of hot money got into the industry. They thought they were going to get their one-year paybacks. And as we know, that doesn’t stay around for very long. So what we have now is an industry that is a bit undercapitalized, that are running plants. High commodity prices last year didn’t help that very much. It stressed a lot of people’s working capital as well as tight margins also stressed that.

The industry still is struggling with how to effectively manage risk and what risk is, and how to define it. And while we think that’s changing as most players are getting bigger and consolidating, we think consolidation will continue. As you saw, the VeraSun, which was the largest ethanol producer in the industry, filed for bankruptcy, and Valero, which is the largest refiner in the US, took about half of that platform two weeks ago.

So now we have a lot of big oil – and big oil refiners that are making investments in ethanol production, which gives us a nice – a nice validation that ethanol is not going to go away. It’s here to stay. It’s really the only – one of the only fully operating renewable energy industries in the world. A lot of people would say, "Why would you force me to put 10% ethanol into my gas tank?" And we would answer, "Why would you force me to put 90% oil into my gas tank?"

So we’re very optimistic about the future. We think there’s a lot of opportunities in the industry. There are going to be some attractive valuation opportunities from distressed devaluations on bankrupt assets as well as companies that are in distress that need to raise money. So we’re going to continue to keep our powder dry, be very patient for the opportunities, and look at them when they come at us. We want to extend all pieces of our value chain, and then we’ll be very selective on how we do that.

Protecting cash, obviously, in this environment is extremely crucial. And we make sure that we work on that everyday. And obviously, the vertical integration and the effective risk management we think is the way that we can make it through the tough times and flourish through the good times in this industry. And we believe the good times are still ahead of us. We ought to manage our margin volatility and we got to enhance our cash flows by doing that.

So what are the opportunities for Green Plains going forward? We have a strong balance sheet. We’ve got a public currency. We are going to pursue selective acquisitions at attractive valuations. We still think having the public currency is important. There really isn’t much left out there for an ethanol company.

And we think our company – because if you take a look at the sum of our parts, it’s a little bit different than your normal pure play ethanol producer. We’ve got a grain company. We’ve got cash. We’ve got the ethanol production in the middle. We’ve got our ethanol marketing cash flows as well as we’ve got our terminal business valuation operations. So we don’t actually think the sum of the parts actually match up with the whole today. But we’re just – well we have a very long term view.

Somebody asked yesterday during our analyst call, "Why doesn’t anybody cover you? Why aren’t you talking more about it?" I said, "We’re just basically staying below the – it is a choice that we’ve made to stay below the radar screen and build up our enterprise, build up our platform, and prove that it works. And when we prove that it works, then we’ll go out, and then push our company a little bit harder.

But today, there are 24.6 or 24.8 million shares outstanding. Then the wire services haven’t picked that up yet. So if you look online, you won’t see that number. We’re going to file our K late this week, early next. And by then, hopefully, we’ll start picking up our real share counts, and you can look at our valuations.

We’ll continue to diversify our platform with upstream grain asset, downstream blending and distribution assets, and anything in between. And we think those opportunities are great for us. Just to give you an example, our agribusiness operation during the last quarter that we just reported had excellent results, a very good operating income, very good net income. And in a period of depressed ethanol margins, it really helped our business get through that period of time and get through the next – get to the next quarter.

It’s a cyclical business – or it’s a seasonal business that the fourth quarter is typically one of the better quarters and the second quarter is typically one of the better quarters. You go around planting, and fertilizer, and application, and sales of seed. And then you move to the harvest quarter, which is when you bring all your grain in and you handle grain from the farmers. So if you take a look at our report, our press release from yesterday, you’ll see that the grain and agronomy operations performed extremely well.

And then finally, we’ll continue to look at second generation bolt on technologies. Again, we are not an R&D company. But if you take a look at our ethanol plant, it really is – it is a bio-refinery. That’s how we think of our ethanol plants.

The back end of our plant is perfect for technology that wants to bolt on to the front end of our plant. Because in the end, for the most part, the technologies that are being looked at today still have to break it down to a simple sugar. And once the sugar is broken down, you then ferment it into – and make alcohol out of it. So if there’s a cellulosic technology that comes out so they can break something down into a simple sugar, we can bolt that technology on and push those sugars into our fermenters. Again, as just a – as a bolt on technology.

So we’re actually enthusiastic. In order for a second and third generation technology to succeed and flourish, first generation must continue to be built out and supported. The Agricultural Secretary made that point. The EPA has made that point. President Obama has made that point. And so, I think – I think we have good support in Washington for what we’re doing.

We didn’t run out of corn last year in the US. We didn’t starve anybody in the world that I know off because of ethanol. And so, we’re getting past some of that noise that people were trying to put onto the industry last year.

Again, we are really excited about what we’re doing. We have a strong financial position. We’ve got great shareholders. We’ve got a good platform. We’ve got great risk managers. We are just going to continue to build out our platforms, stay focused, protect our financial position, and get ready for when times are better.

When I started in the industry, and again this is not a long time ago, I’ve only been in – about two and a half years ago. It's really the – the point where this industry is starting to take off. Margins were $0.85 and $0.90 EBITDA. And so, you were basically cash flowing your plant, your equity every single year. And then now we pushed them back down to $0.05 to $0.15 EBITDA. So you could see that it’s a little harder to run these businesses and there’s not a lot of room for error. I don’t know if we’ll ever get back to the times like we saw three years ago or two and a half years ago, two years ago, but I think there’s a happy medium in between there as we see more people invest in ethanol where we’ll see the demand go up.

We’ve asked the EPA to take ethanol blending to 15% from 10%. And we’re not asking for a mandate. We’re just asking for a waiver that will allow the blending. We don’t want anymore mandates. We just want to make sure that the consumer has the right choice that he can make, or he or she can make to blend the ethanol. And we’re seeing very good progress on that. So with that said, with the 15% potential blends, with the increase in demand over the next couple of years because of the mandate, we’re actually very optimistic of last half 2009 and 2010.

I want to thank everybody for coming today, listening on the webcast. And I’ll take questions.

Question-and-Answer Sessions

Todd Becker


Unidentified Participant

What is the public currency in the (inaudible).

Todd Becker

Our public currency, we’re NASDAQ traded under GPRE. And so, when we can – we can look at – using our currency to make acquisitions from the equity side. A lot of this industry was really built on private investments. And so, there’s not a lot of liquidity out there for these ethanol plants that are basically privately owned. So what we can do is we could provide liquidity by making – doing merger with stock. But again, we’re very selective and we’re not going to dilute our – dilute our current shareholders at today’s price. Yes?

Unidentified Participant

A couple of questions. On the waiver, 15% or a little over 13%, waiver it's tied. Is there a timeline on that? Are there any expectations?

Todd Becker

It’s really between now and the end of the year. I think we have a good chance of getting that through. We have a lot of broad support in Congress for that. Obviously, they’re focused on something else right now, and ethanol waivers aren’t at the top of the list. But you continue to hear the Administration talk about renewable energy and growing renewable energy, and home grown solutions, and that’s what ethanol is today. It is a product that is available today. And I think we have a good chance between now and the end of the year. And I think they’ll phase it in. I think we’ll probably start it at 12% or 13%, and then work up to the 15% waiver. Yes?

Unidentified Participant

Speaking of timelines, any feel or progress on cellulosic ethanol? What do you see there?

Todd Becker

Well, I mean we – again, since we’re not an R&D company, we don’t track it that closely. But we are seeing a lot of progress made. But in order to get through a – to a large scale operation like we do with the corn and ethanol plant, I think we’re at least a couple of years away. And in addition, large scale will not be the same because the volume of material to make the same amount of ethanol is significantly different.

One truck of corn makes 2.7 gallons of ethanol or 2.8 gallons of ethanol, or one bushel of corn makes 2.8 gallons of ethanol, which is 1,500 bushels or 1,000 bushels on a truck. To make that same ethanol, it could take 100 trucks or 500 trucks of cellulosic material. They’ve got a long way to go to get – to get that done. But we are making progress as an industry.

Unidentified Participant

One last question. On the Valero acquisition, just taking a look at the overall fuel cost, what was the cost per gallon do you think they'd pay?

Todd Becker

Well, the reported cost per gallon for most of what they paid was in the low $0.60 per gallon. And that’s just for – that’s an asset purchase. It takes about $0.20 to $0.25 a gallon to run them. So figure, they’re going to be about $0.86 a gallon, all in, between working capital and cost of the asset. Those assets were built two years ago for the equivalent of $1.75 to $2.25 a gallon. And even VeraSun bought some of those assets at $2.50 a gallon. So you’re seeing significant distressed [ph] valuations, something that somebody paid $2.50 a gallon for, literally within the last two years. So $250 million for that plant traded at $60 million to $70 million.

Unidentified Participant

And so, are there other VeraSun plants that are sitting around?

Todd Becker

Yes. There are some other VeraSun plants that are sitting around. AgStar took most of their plants back and they’re going to piecemeal them out. They think they can do a better job than what was sold at the auction. Plus they'll de-hedged some of their plants back too. So some of those plants will come back up. Yes?

Unidentified Participant

Another question regarding the risk management. So I guess two questions, one is – is your risk management system, it's an in house risk system?

Todd Becker

Yes. Our risk management system is proprietary, in house, that we built for the ethanol industry or ethanol company, actually.

Unidentified Participant

Correct. Mainly it’s managed crops spread between –?

Todd Becker

Yes. Basically managing the crops spread is all we do all day long. We take all the four components, they continually, real time, plug into our system. And we track margins for the next 12 to 18 months. And then we make our decisions accordingly when we see – when we see something pop up on our screen.

Unidentified Participant

And also, you mentioned a hedging problem. So who do you – I don’t know what I'm (inaudible) your hedges?

Todd Becker

Well, when we hedge, sometimes when we lock in a margin, it’s going to be buying physical corns from the farmer and selling physical ethanol to a large oil major. That’s considered a – that's considered locked in, in the crops spread. Sometimes we might do that financially with counter parties using OTC and derivatives. And we’ll build them right through our brokerage. It comes with everything – all that in the middle of it. What we do though is we manage it to a point where we look at how much corn we have bought against how much ethanol we have sold. And if it doesn’t match up, using say 2.75 conversion, 2.75 gallons per bushel, how much exposure is there? And then, we have limits on that exposure.

But the counter party risk is really – it’s something we focus on everyday. Most of who we do business with are pretty large companies on the ethanol sales side. And then on the corn purchase side, the same. We buy from a lot of farmers through our own grain assets, but we also deal with a lot of good counter parties on the origination side.

Unidentified Participant

Do you hedge both on the corn and the –

Todd Becker

Corn, ethanol, natural gas, and the by-product. So we’re locking all four components to lock in our crops spread.

Unidentified Participant

The corn, ethanol –?

Todd Becker

Corn and ethanol are the main two variables. And then you take natural gas to power your plants as well as electricity. But natural gas is a pretty large piece of your cost of goods sold. And then what you have is the by-product that comes out of the process. That is a feed product that goes back into the cattle and chicken feed channels. And that’s a revenue source against your cost of goods sold.

Unidentified Participant

The DDG market right now, where we are, people says we're going to make – you’ll have an over supply. Did you find out how that market is utilizing export market as well.

Todd Becker

We’ve exported a little bit last year. The domestic DDG market is deep, and they really don’t have any problems selling all of your production. There is really not a lot of ethanol – DDG storage sitting around unsold in the US today. It is a high quality feed product. It is a substitute for corn. That’s why you’ve seen – what people are missing out on is big corn rally is whenever we said we were going to run out of corn, is that we're producing this huge, high quality feed product that was actually reducing the overall feeding demand for corn and soy meal.

And so, when you looked at it, you watch this corn rally driven up by the pensions and the hedges, and you just shook your head and said, "This is not going – this is not sustainable." But the DDG market is actually robust. It’s deep. It’s widely used. People want the product. It’s high quality. It flows nicely. And it actually provides a good feed in the animal ration. Yes?

Unidentified Participant

What percentage of that is insider market?

Todd Becker

It’s actually pretty large right now. Our largest investor is about 48%. Our public float is about 10 million shares out of the 25 million. Most of the others are owned by insiders.

Hellen Bard

All right. Does that wrap up everything else in here for (inaudible).

Todd Becker

All right. Thank you very much.

Hellen Bard

Thank you.

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