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Pacific Ethanol Inc (NASDAQ:PEIX)

Q1 2014 Earnings Conference Call

May 1, 2014 11:00 AM ET

Executives

Becky Herrick - LHA

Neil Koehler - President, CEO

Bryon McGregor - CFO

Analysts

Paul Resnik - Uncommon Equities

Katja Jancic - Sidoti & Company

Craig Irwin - Wedbush Securities

Nathan Weiss - Unit Economics

Keith Schaefer - Oil & Gas Investments

Joe Sweeney - JSRG Capital

Tom Donino - FNY Capital

Operator

Good day, ladies and gentlemen and welcome to the Pacific Ethanol First Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder this call is being recorded.

I would now like to turn the call over to Becky Herrick with LHA. The floor is yours.

Becky Herrick

Thank you, Nicholas. And thank you all for joining us today for the Pacific Ethanol first quarter 2014 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, Bryon will provide a summary of the financial and operating results and then Neil will return to discuss 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's available on the company's Web site 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 8, the details of which are included in yesterday's earnings 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 1, and, therefore, you're 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, risks 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 metrics 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. A reconciling table is included in yesterday's press release. To support the company's review of additional non-GAAP information later on this call, a reconciling table is available on the company's web site.

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

Neil Koehler

Thank you, Becky. And thank you all for joining us this morning. For the first quarter of 2014, we beat the quarterly financial records we set in the fourth quarter of 2013, as we established new records in quarterly gross profit, operating income and adjusted EBITDA.

When compared to last year's first quarter, gross profit increased by over $37 million and operating income increased by over $38 million. With the significant rise in our stock price in the quarter from approximately $5 to $15 per share, we recorded a $35 million in non-cash fair value adjustments related to our warrants, which resulted in a GAAP net loss for the quarter.

Excluding the fair value adjustment, net income would be $24.7 million. Also adjusted EBITDA which does exclude the fair value adjustments was a record $35.4 million. Bryon will walk you through the details shortly.

So far in 2014, we have retired a total of $50 million in debt. Our results for the quarter reflect our focus on running our plants efficiently and cost effectively in the continued positive operating environment of the ethanol industry.

During the quarter, we benefited in particular from a location of our production facilities in the destinations markets we serve as a logistics and weather conditions in the Midwest constraint product flow to our high demand markets. Our expectation is the strong demand for ethanol and distillers grains both domestically and for export, coupled with still relatively low ethanol inventories in the U.S. and lower corn prices when compared to past years will support continued favorable productions margins.

Yesterday, we commenced production of ethanol at our Madera plant. We are very excited to achieve this important milestone of again operating all of our production facilities, which collectively have 200 million gallons of total annual production capacity. We are pleased with the significant progress we have made in the last few years to establish a solid business foundation from which to continue the company's growth.

We expect our Madera plant to reach full capacity within the next several weeks. This shift from a plant with a net cash burns and now on operating plant with an analyzed production capacity of 40 million gallons add significant value to our entire operation at current margin levels. The additional capacity provides a valuable new supply of low carbon fuel for our customers in California.

As we add additional capacity, we also continue to further diversify our revenue and feedstock. We are producing corn oil at our Magic Valley and Stockton facilities at expected volumes in yields. We are planning to implement corn oil separation technology at the Madera and Columbia plants to benefit from the strong markets for this product and the operating income corn oil provides to the company.

We are operating with advanced graining technology at our Stockton plant and expect to begin doing so at our Magic Valley plant in the second quarter of 2014. The advanced grinding technology increases corn oil production and ethanol yields and also serves as a platform for the potential future production of advanced biofuels.

Our strategy to diversify our feedstock lowers our material costs and improves operating margins. During the first quarter we ramped up our use of the 270 million pounds of surplus beet sugar, which we procured last fall via the U.S. Department of Agriculture's Feedstock Flexibility Program, at a significant discount to the current and expected cost of delivered corn.

We are blending the sugar out our Magic Valley and Columbia facilities at levels approximating 15% of total feedstock and we expect the blending to continue over the course of 2014. Through the use of beet sugar, we saved approximately $1.4 million in material cost during the quarter.

We continue our efforts to develop a multi-stage and incremental approach to producing advanced and lower carbon biofuels out our production facilities. We are using waste beverage products as feedstock at our Stockton and Boardman plants. We are working with Edeniq to covert corn fiber to fuel and we expect the EPA to designate that process as an advanced biofuels pathway.

We are working with grain sorghum suppliers to diversify our feedstock, which when combined with other plant specific technologies can qualify resulting ethanol as an advanced biofuel. We continue our work with Sweetwater in support of constructing a facility from which we would purchase their industrial sugars to produce cellulosic ethanol. And we are engaged in engineering and integration plans on a number of initiatives that would lower the carbon intensity of our ethanol and enable us to produce ethanol from a variety of feedstocks, including cellulosic feedstocks for conversion to ethanol.

Due to our location in the western United States, we continue to benefit from sourcing feedstock from a variety of regions, including near our plants and from Midwest suppliers. Further, through corn consignment contracts with Midwest grain companies, we price the corn as we sell our ethanol and distillers grains closely linking our largest input cost with the prices we obtained for our ethanol and distillers grain. This reduces our working capital needs and diminishes our overall price risk.

The low carbon fuel standard continues to drive efforts to address climate change by setting important carbon reduction goals for the state. As Pacific Ethanol produces among the lowest carbon rated ethanol commercially produced in the United States, we receive a low carbon premium for ethanol produced and sold into the California marketplace. British Columbia already has a low carbon fuel standard and Oregon and Washington are poised to join California as states with low carbon fuel standards, creating an integrated market that we expect to drive new investment and economic development opportunities within the region.

I will now turn the call over to our CFO, Bryon McGregor to review the numbers. Bryon?

Bryon McGregor

Thank you, Neil. During the first quarter of 2014, we reported net sales of $254.5 million, up 13% compared to $225.5 million in the first quarter of 2013. Gross profit from the first quarter of 2014 was a record $38.5 million compared to $846,000 in the first quarter of 2013.

SG&A expenses were in line with expectations at $3.7 million, which compares to $4 million in the first quarter of 2013. Operating income was a record $34.9 million, a $38 million improvement over an operating loss of $3.2 million in the first quarter of 2013, and up 102% from the fourth quarter of 2013.Interest expense was $4.4 million, compared to $3.5 million in the first quarter of 2013. The comparative increase is attributable to acceleration of unamortized debt discount associated with the prepayment of our senior unsecured notes.

Going forward, we expect our interest expense not to exceed $2 million a quarter based on current debt balances. We incurred a loss on fair value adjustments for the first quarter of 2014, up $35.8 million compared to a loss of $692,000 a year ago. This non-cash expense reflects higher warrant valuations due to our higher stock price in the first quarter compared to the end of the fourth quarter. These warrants with an average exercise price of $7.27 a share, went from being out the money at December 31, 2013 to significantly in the money during the first quarter of 2014 impacting their fair values.

We expect fair value adjustments to continue until all our warrants are exercised or expired. These adjustments will positively impact our GAAP results if our share price declines quarter-over-quarter and negatively impact our GAAP results if our share price increases quarter-over-quarter. As these fair value adjustments are not tax deductible, we generated taxable income for the quarter. We did not however incur a tax liability, but instead reported a $3.3 million tax expense from the use of a portion of our net tax assets.

Consolidated net loss was $8.8 million compared to $6.6 million for the first quarter of 2013. Net loss available to common stockholders was $11.1 million or $0.69 per share, compared to a net loss of $5.8 million or $0.57 per share in the first quarter of 2013. Again, the $11.1 million loss includes the $35.8 million non-cash fair value warrant adjustments or $1.94 loss per share.

For the first quarter of 2014, adjusted EBITDA was a record $35.4 million, a $35 million improvement over the $355,000 recorded in the first quarter of 2013 and 94% increase from the record set in the fourth quarter of 2013.

Now, turning to our balance sheet. Cash and cash equivalents were $7.8 million at March 31, 2014 compared to $5.2 million at December 31, 2013. After our recent equity financing, our consolidated cash balance yesterday was at $35 million. In addition, our working capital increased to approximately $64.1 million from $51.2 million at December 31, 2013, attributable largely to the increase in accounts receivable by 45% over 12/31/2013 balances and partially offset by an equal percent increase in payables.

Both increases are related primarily to the rise in price of ethanol or from $2.60 per gallon [indiscernible] LA (ph) price at yearend to a $4 per gallon price at the end of Q1. Since the beginning of 2014 through April 25, we retired a total of $50 million in parent company and plant debt. We prepaid the remainder of our $22.2 million original principal amount as senior unsecured notes, thereby eliminating all remaining parent company term debt.

In addition, we repaid our entire $35 million in plant revolving debt from plant operating cash flows, which is now available for future working capital purposes if required. This currently leaves us with only a term debt balance of approximately $39 million at the plants. We intend to refinance or repay remaining plant term debt as soon as reasonably possible. However, the majority of the residual obligation is ready to make whole provisions that would make prepayment of the debt costly.

We therefore continue to work with our lenders and others to achieve our goals of lowering the company's overall cost of borrowing and providing management with the ability to more efficiently manage cash resources without restriction. Our objective is to have a balance sheet with a relatively small amount of low cost term debt. Our line of credit secured by receivables and inventory size sufficiently to accommodate our growth plans, and sufficient cash to provide for additional liquidity and working capital needs.

With that, I'd like to return the call to Neil.

Neil Koehler

Thanks, Bryon. We have made tremendous progress in last several quarters to build our business and maximize the value of our assets. Our significant reduction in total debt strengthens our balance sheet and provides us with a very strong foundation from which to build our market share in this growing market.

With the restart of the Madera Plant, we are now operating all of our production assets. Our efforts are supported by a strong operating environment for ethanol with production margins remaining at favorable levels and our position as an efficient producer of low carbon fuel and higher value feed in market with strong sustainable demand.

To build shareholder value, we are focused on the following goals, further lowering our cost of capital and reducing debt, continuing to install corn oil separation and yield enhancement technologies at our plants, increasing our overall ethanol market share and evaluating opportunities to produce advanced biofuels and further lower the carbon intensity of all the ethanol we produced in market.

With that, Nicholas I'd like to open the call up for any questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) And our first question comes from the line of Paul Resnik with Uncommon Equities. Your line is now open. Please proceed with your question.

Paul Resnik - Uncommon Equities

Thank you. First of all, congratulations on the quarter. And with the distortion of the non-cash charges, a little tricky pulling everything out, but on my calculation -- just taking that out would result in about $24.7 million net income and that was about 25% better than I was looking for, so well done.

Neil Koehler

Thank you.

Paul Resnik - Uncommon Equities

Now, with all these earnings, in addition to the problems you obviously had, which is the rising stock price, which increased the non-cash charge. You had another development which is taxes. And with that regard, I have two questions regarding taxes. One, do you have any additional loss carry-forwards at this time?

Bryon McGregor

Yes.

Paul Resnik - Uncommon Equities

You do.

Bryon McGregor

We do. We're -- there will be some additional information that comes out in our Q.

Paul Resnik - Uncommon Equities

Okay.

Bryon McGregor

But then there will be -- we expect to continue to do further refinement. I know there's been a lot of change in -- given the number of financings and other things that we have done. We're going to refining some of our calculations and should be able to provide you greater detail at the end of our second quarter results.

Paul Resnik - Uncommon Equities

Great. And I guess the second part of that is, and you may have answered it in a way already, do you have any idea that or are you in a position to provide -- better a question, are you in position to provide any guidance for what percentage your tax provisions may be in future quarters?

Bryon McGregor

It's difficult, Paul, this time to provide that number.

Paul Resnik - Uncommon Equities

Okay.

Bryon McGregor

Clearly, we made a provision for the first quarter. And again I think -- I'd like to defer and again as you noted, it's a good problem to have. And it's certainly something that we want to manage as effectively as possible and will use what we can from our NOLs and we'll give you further clarity as the year progresses.

Paul Resnik - Uncommon Equities

Great. The co-product return as a percentage of the cost of corn was really eye-catching 34.6% into the first quarter. I mean that came clearly because of corn oil, but it also came because it looks like distillers grains held up better than the cost of the corn. Do you have any -- could you provide any guidance about what that percent might be going forward?

Neil Koehler

At this point, we would say we hold in and around these levels. As you correctly pointed out, corn oil helps that. As we add corn oil to the other plants, that will continue to improve it. We are continuing to see a very strong market for distillers grains, partly due to very robust exports that continue, partly due to -- out in our areas, a lack of feedstock. With some of the dry weather, some of the feeds that normally get grown out here or not being and so we're finding our wet distillers grains to even be in a higher demand than normal. The logistics of moving competing dry distillers grain down to this market with the rail issues that we all know about is also raising values out in our market. So, we actually see that situation continuing certainly through the summer, if not beyond.

Paul Resnik - Uncommon Equities

Okay, great. The last number I had for the premium that you get because of the carbon value benefit was $0.04 per gallon. Do you have any updated number on that?

Neil Koehler

Yes, it's closer to about half of that today -- what we've seen is with the uncertainty in the low carbon fuel standard around CARB essentially reauthorizing it which they were required to do as part of one of the lawsuits that does require CARB to essentially readdress some of the rationale behind that program, is that it has resulted in the carbon intensity curve being frozen at current levels until they finish that process. And what CARB has said is that, they will not have that process done until sometime in 2015.

So, where we anticipate it the increasing carbon intensity numbers in this year or next now it's been held at current levels. So that has had somewhat of a dampening impact on the carbon premium, the price per metric ton. I would say that it's our very firmly held belief of ours and others that California still remains very committed to this program. They have been very explicit in their messaging, which is they will get this program back on track and that the 10% reduction by 2020, they will stick with it, in fact are now talking about a 15% or 20% reduction in the tenures subsequent to that. So, what we are going to see is that in that [indiscernible] the back four years of this program is a very, very steep curve on carbon intensity compliance requirement. So our expectations are that as the obligated parties recognize that and recognize the clarity around the changes in low carbon fuel standard that we will see, relatively soon a pick up again in the value of the carbon.

Paul Resnik - Uncommon Equities

Great. And I want to pass along the series of questions regarding your relationship with CHS and providing corn to Madera.

Neil Koehler

Okay.

Paul Resnik - Uncommon Equities

Okay. I'm just going to read the questions that I received. Does CHS pay Pacific Ethanol for the use of the elevators?

Neil Koehler

The arrangement really is where they own the corn and we do this with JEH at two of our other plants, CHS too. And we open up the bins for their use and then at market rates they provide us the corn. So, in effect it's an arrangement for them to essentially have that free storage in exchange for carrying the working capital on that corn and allowing us to price at market when we choose, either on the day we grind it, or taking futures positions as we match it to future sales of our ethanol and feed. It's been a very, very working relationship with both JEH and CHS on this arrangement.

Bryon McGregor

Paul, any product that they would otherwise sell, so they can -- they have the ability to sell product from those bins, we would make a fee.

Paul Resnik - Uncommon Equities

Great. And their relationship is at Madera and where else?

Neil Koehler

Yes, up at our Columbia plant.

Paul Resnik - Uncommon Equities

Okay, very good. One last question, it's a small item but it's kind of a fun one. Could you explain how the waste beverage product in feedstock works? How you get it? What it is?

Neil Koehler

Sure. It's like any processing industry, there is a certain amount of product that's not fit for sale and that's true in the wine industry. So, we receive about it, it's not a huge volume. But it's something we think will grow, about a truck a day wine that is not fit for sale, very fine ethanol. And we then convert that into fuel grade ethanol. And that actually because of its waste derivation qualifies as advanced biofuel. So, we are an advanced biofuel producer with that product, and we generated D5 RIN, advanced biofuel RIN with the production of that material.

Paul Resnik - Uncommon Equities

My hunch is that there are some out there that would contest the question, whether there is ever any wine not fit for sale. However, thanks a lot and again congratulations on the quarter.

Neil Koehler

Thank you very much, Paul.

Operator

Our next question comes from the line of Katja Jancic with Sidoti & Company. Your line is now open, please proceed with your question.

Katja Jancic - Sidoti & Company

Hi, guys. Thank you for taking my call.

Neil Koehler

Thank you.

Katja Jancic - Sidoti & Company

Now that the Madera facility has been restarted, how quickly do you expect it to be fully operational at full capacity?

Neil Koehler

As we mentioned in our prepared remarks, we expect that process to take several week. So, it's -- we have quite a bit of experience of starting, stopping and restarting plants, and we've got a pretty good track record for having that fairly quick process. The markets are there, and it's just a matter of lining out the plant and getting it up to that efficient at or near capacity level, and that as I said that should take several weeks.

Katja Jancic - Sidoti & Company

Now with installation of the corn oil separation to the remaining two facilities, is that -- I know this was one of the plants in 2014. Do you have any more specific timeline as to when this could occur?

Neil Koehler

We don't at this time. We're working, we're turning our attention very directly to that now and should be able to give you an update later, but it clearly on both those plants, it's a 2014 objective.

Katja Jancic - Sidoti & Company

Yes. And one of the objectives was also to increase your ethanol market share. Is this just including the Madera facility or are you planning to increase maybe by adding more from the third party?

Neil Koehler

Yes, both. So I mean -- if you look at what we've done over the last few quarters, you've seen incremental growth in our overall sales and consequently market share given that we have a fairly static market in U.S. today until we resolve the '15 issues. So, we do have out West a very unique system of production and distribution assets that we feel gives us the ability to not only have the largest market share today in the west of United States, but to further increase that. We are also looking at opportunities to expand our marketing outside of the Midwest. We do have ethanol at some of Jones terminals in the Midwest today and are looking to incrementally expand our presence there as well.

Katja Jancic - Sidoti & Company

Okay. Thank you for taking my questions.

Neil Koehler

You're welcome.

Operator

Our next question comes from the line Craig Irwin with Wedbush Securities. Your line is now open.

Craig Irwin - Wedbush Securities

Good morning and congratulations on the strong quarter. Neil, I was hoping you could give us an update on corn oil, if you could remind us which plants already do have corn oil production. And if you might be able to share with us an approximate timeline for bringing online corn oil production at your other facilities and what that might cost you?

Neil Koehler

Sure. We have corn oil installed at our Magic Valley plant in Idaho and our plant in Stockton, California. And those projects are operational, running at expected volumes. We have said before and it's still true that it adds approximately $0.05 a gallon of operating income, so it's very significant. The two other plants that I just mentioned to Katja, we are working on that plant today and hope to have more details on when in 2014 those facilities will be installed. So I think it's really, probably looking on a 2015, where it has a material contribution to our operating results. The cost of those corn oil systems has actually come down a bit, as it's become more competitive out there and we feel that between $3 million and $4 million per plant installed is the cost. So again, a very quick pay back and something that we're very motivated to move on with.

Craig Irwin - Wedbush Securities

Great, thank you for that. Then the last thing I wanted to ask about was your use of our beet sugar. You mentioned in your prepared remarks $1.4 million in savings. Can you maybe discuss with us what the approximate portion of your feedstock was made up by beet sugar in the quarter? And then how you handle the byproduct, the equivalent of distillers grains there? Is that something that can be sold to animal feed industry and anything else that you might be able to share with us to understand the economics if you could please help a little with that?

Neil Koehler

Sure. So we are -- that sugar most of it is held in warehouses in Idaho within 8 miles of our plant in Idaho. So it's a very good logistical fit there. It's also not too far off the road to take it to our plant in Oregon. So we are currently using it at those two facilities and it represents a 15% of our input feedstock at those two facilities. And given the 270 million pounds and how that math works out, we would expect for most of 2014 to continue to do it that way and that will take us through that product. In terms of its co-product, it really is just pure refined sugar that ended up being surplus, very efficiently turns into ethanol, and there is very little co-product that is left. Any of the residual quantities of little bit of unfermented sugar will just go out with our wet distillers grains having really no impact on the make-up of that product. So there is no separate stream that we have to deal with.

Craig Irwin - Wedbush Securities

Thank you. Then my final question if I may, if you could discuss how you handle your corn purchasing, something that's pretty important for us that are running models is to try and get the approximate corn price in a quarter correct. Would we be correct in sort of time shifting things back by about a month? Say, assuming that this quarter, the last purchases for the actual -- the June quarter would be made right around this time. So that instead of an average price closer to $5 level, we would have something quite a bit lower given the dynamic of corn appreciation in the past few weeks and how should we be looking at that?

Neil Koehler

Well so -- as we also mentioned in the prepared remarks, this is the system that we have on our consignment program with our corn suppliers is that when we started this business, we would do kind of what you were describing, we would price corn in Midwest. We take ownership. We put it on unit trains. We would incur huge quantities of working capital to do that. We have moved to a system that is much lighter in terms of its working capital requirements, as well as much more closely match to our sales of products. So, we have this corn in our bands, we actually don't take title to it, until we run it through the grinders and the plants, so there really is not a lag time. Our corn purchases are relatively mashed with the production and the sales of our ethanol and feed and we price it at the time that we are selling those products. We do have a limited amount of forward sales of ethanol and distillers grains on those cases, we actually price the corn forward. But the general practice is that we price the corn on the day we grind it.

Craig Irwin - Wedbush Securities

Great. Thank you for that.

Neil Koehler

Sure.

Operator

Thank you. The next question comes from the line of Nathan Weiss with Unit Economics. Your line is now open.

Nathan Weiss - Unit Economics

Good morning and great quarter.

Neil Koehler

Thanks Nathan.

Nathan Weiss - Unit Economics

Couple of questions -- just to try to understand your balance sheet as it stands today; you said during the conference call remarks, you have $39 million of term debt with the plants; estimates net of the debt that you're on a parent level?

Bryon McGregor

That's correct.

Nathan Weiss - Unit Economics

And then the revolving and other debt is completely paid off at this point?

Bryon McGregor

It's fully repaid, yeah, that's correct.

Nathan Weiss - Unit Economics

Okay. And so with the $35 million cash balance you have today, I mean you are basically net debt free or a whisper away from debt free?

Bryon McGregor

Right, so just not to -- we have the working capital line of credit that we use for the receivables and inventory and that's just -- it's adjusted on a daily basis based on availability and outstanding receivables inventory, but that's at the Kinergy level or the marketing companies. And then really then the only term that we have is the plant debt and that's 39 million. You'll see that increase 7 million over the quarter. That was to fund the start up of the Madera facility and that's it. So, we have the 35 million in availability under the revolving line of the plant, but that is -- that's been fully repaid.

Nathan Weiss - Unit Economics

Okay. But an adjusted net debt, net of the current cash should be roughly $5-ish million. I guess plus the 7 for Madera restart?

Neil Koehler

Nathan, that's correct. The one thing that, I think we -- Bryon did refer to in his prepared remarks, there is a make whole provision on $31 million of that term debt, making a whole on the interest between, if we were to pay at early between now and whenever we paid it off and the maturation of that debt which is in June of 2016. So, that would also need to be factored in this whether that can be resolved, negotiated, paid-off, but that is -- that is a variable that needs to be considered.

Nathan Weiss - Unit Economics

Okay. And then just looking forward in terms of capital structure, especially given that you have a fair amount of working capital receivables and inventory that can be financed quite inexpensively and you've now got a strong cash balance. What's your thought on the right capital structure for the company, and kind of along that line what do you think about doing with your excess cash?

Bryon McGregor

Well, as I mentioned, we would expect our goal would be to continue to work with our lenders. Our hope is to be able to refinance at a significantly lower cost and then currently -- then we currently carry that out. So, ultimately I would expect somewhere limited amount of term debt, I think there is some leverage that's appropriate for these assets, and then the working capital line of credit making sure that there is sufficient availability to continue to support our growth strategy. And then we also think it's important to have a healthy amount of cash, certainly don't want to be held bring a hole in our pocket, but at the same time as you know, it's a volatile business and we are working in a commodity environment. And so we also need the flexibility to be able to address those needs. And as an example to be able to take advantage of opportunities as they come along. So, as an example when we purchase the sugar last fall, it was good to have that and we've been able to reach some of the benefits from that purchase.

Neil Koehler

And Nathan, as you look at our initiatives on advanced biofuels, corn oil, expansion of market, which can involve distribution assets, opportunities as this industry continues to rationalize to consolidate on the M&A front, those are all areas where we will stay open to providing the best value for our shareholders and we intend to continue on development both with our existing assets and future assets to grow the company.

Nathan Weiss - Unit Economics

I definitely look forward to that. Thank you.

Neil Koehler

Thank you.

Operator

Our next question comes from the line of Keith Schaefer with Oil & Gas Investments. Your line is now open, please proceed with your question.

Keith Schaefer - Oil & Gas Investments

Thank you. Neil, on the wet distillers grain, you've been breaking out of that; is that actually a needle mover or is that just really incremental?

Neil Koehler

On the pricing of that, well -- I mean if you look at it, then this is not unique to our company. We generally have seen distillers grains priced at a better value against corn than it has been historically normal. And that has been a needle mover for going from a 26%, 27% co-product return to a 34%; that's actually a pretty big shift. In terms of future valuation, if we can hold it in and around these levels, we feel very good about that, and that's essentially, our view is that over the next foreseeable period of time we should continue to see strong values for distillers grains. And as we add corn oil, then it obviously contributes further to that.

Keith Schaefer - Oil & Gas Investments

In terms of like making anything more than like [10,10] in EPS jump. Is it that big of a difference or not?

Neil Koehler

It's -- I mean if you are talking five, just taking corn oil alone added it to a 40 million gallon plant and on a $0.05 operating income and here we've got two plants left to do that too. So that's $4 million of operating income potential, so that can put it in perspective for you.

Keith Schaefer - Oil & Gas Investments

Okay. And if all the cash on hand is here [indiscernible]. You guys can't really hedge, because the LA market just isn't a liquid enough market and you have to hedge Midwest, is that right?

Neil Koehler

Yes.

Keith Schaefer - Oil & Gas Investments

Right now, it makes sense to be in the spot market, but in the event of a turnaround in a year or two if something happens in the corn market or whatever. Do you guys have the ability to hedge at all because your West Coast [indiscernible] just take that out grain completely?

Neil Koehler

Well, it doesn't take it out completely, but you have these proxies and it is limited. We do have some of our sales against Chicago contracts. Those are more hedgeable and we do some amount of forward hedging with that, but your point is well taken. It's fairly limited. The bulk of our sales are tied to West Coast indices where there are no swap contracts on the financial markets against those. Clearly it's benefited us to run very efficiently and to be in the spot market. We always do look for opportunities to manage that risk on a go-forward basis. And clearly having the additional liquidity gives us tools to do that.

Keith Schaefer - Oil & Gas Investments

Last question, grain storage -- where does that sit in priority list for the extra cash you've got?

Neil Koehler

Well, we have adequate grain storage at our facilities, and given the arrangements on how we procure corn we think that we have a very efficient arrangement. I would point out that the Madera plant is the facility that was actually a grain facility before it was an ethanol plant. It has 40,000 tons of grain storage. So, by bringing that plant back into operation, we actually have added quite a bit of grain storage to our operating platform.

Keith Schaefer - Oil & Gas Investments

Thank you.

Operator

Thank you. Our next question comes from the line of Joe Sweeney with JSRG Capital. Your line is now open.

Joe Sweeney - JSRG Capital

Hi, Neil and Brian, congratulations and well done. A very nice quarter.

Neil Koehler

Thank you.

Joe Sweeney - JSRG Capital

I just had two questions and then I'll just kind of take them off here and macro questions. One, can you talk a little bit about the -- just your perception with the regulatory environment going forward, just in front of the EPA, you are likely to say in the next month or so. And then you've had a great export market. May be just talk a little bit about dynamics and position of the export buyers, who are purchasing ethanol without the requirements in RFS?

Neil Koehler

Sure. The EPA has indicated that by June, they will come out with their final rule for the 2014 requirements under the mineral fuel standard. And we expect that there will be small upward adjustments, that's kind of the current thinking on what we are seeing. What's clearly been the case given the very cost competitive nature of ethanol as a transportation fuel that we have been able to move any ethanol that's not placed in United States for the export markets, which gets to the second part of your question. But before I get to that, we do believe that what's important is that the EPA and they're getting a lot of input from stakeholders and Congress that this is a very successful energy and environmental program. And we need to stand behind the RFS and that will result in significant increases in bottled fuel inclusion rates in the United States. So, we do over the next year or two anticipate that there will be a migration in some markets with 15% ethanol and we will again start to see some fairly significant growth in the domestic market and that's the intent of the RFS and that's what's in the best interest of the country. So, we are very optimistic on that on a longer term basis.

Again, in the midterm, as long as we have $100 corn and $100 oil and in and around $5 corn, the economics of ethanol are so compelling that any excess ethanol that we produce in United States will be sold into the export market. And that has clearly been the case thus far this year. We saw with a very high spike in spot ethanol prices, we've seen some drop off in the export interest. But now that the prices are coming back down and again are at very -- on a forward curve basis that are at levels that are as much as $1 a gallon under the price of gasoline, that interest is picking up again. And while we are not directly involved in export market, because we have, a highest value market for us is, what we call the export market of the U.S. which is the Western United States. So we are not a direct exporter at this time, but we're clearly seeing indications that as pricing has come back in line relative to world markets that we are going to see continued exports. Our anticipation would be somewhere between 750 million and 1 billion gallons and U.S. ethanol will be exported in 2014. And that will be a significant factor in keeping the supply demand balances relatively tight.

Joe Sweeney - JSRG Capital

Thank you.

Neil Koehler

Thank you.

Operator

Our next question in the queue comes from the line of Tom Donino with FNY Capital. Your line is now open.

Tom Donino - FNY Capital

Thank you. Congratulations on the quarter. Two questions. One, what is the remaining balance of the warrants that are outstanding? I see some more exercise this quarter.

Bryon McGregor

It's about 5.5 million.

Tom Donino - FNY Capital

Warrants or dollars?

Bryon McGregor

Warrants.

Tom Donino - FNY Capital

5.5 million warrants. I'm sorry, what was the expiration date on those warrants? Did it say June of '16?

Bryon McGregor

They vary, I think they're weighted.

Tom Donino - FNY Capital

Okay.

Bryon McGregor

Basically 2015 to 2018, right.

Tom Donino - FNY Capital

Okay. Second question -- in terms of analyst coverage, I mean I think one of the reasons the stock is down today is the disparate new service pickups of what they expected for you guys to report today. I mean, some of the numbers were as high as $3 a share for the quarter, which is a little moronic in my opinion. What is the plan on getting analyst coverage into the stock, so that you can generate some type of institutional base of the ownership, because right now the stock has become dominated by high frequency traders.

Neil Koehler

Tom, that's a very good point. And we're working very hard on that. We do have Paul Resnik who is on the call from Uncommon Equities and Katja from Sidoti are covering the stock. And we are very focused on increasing that base and increasing as you say our institutional investor base. In May and June, we're going to be at about five investor conferences. So, that is a very clear focus of the company. Year ago, it was a somewhat of confusing story from a balance sheet perspective. Now that that is clarified and the industry is clarified, it is an incredible story. We're very excited about where we are in the future and it's very important that we get that kind of coverage and attention, because you are right, I mean, what people should be focusing on is our operating income results which were outstanding and instead the noise around warrant adjustments seems to be, I guess, commanding some of the headlines today. But we think that when people actually look at the numbers and see the facts, they'll recognize it for the phenomenal quarter that it was.

Tom Donino - FNY Capital

Okay. Not to be taken at some as negative, I read Paul's report. Paul's report was good, I think that's fine. But I'm talking more about a reasonable, maybe a second tier Wall Street type firm. I know you just did the secondary with Lazard and Cowen. I'm assuming that at some point they're going to pick up coverage on the stock.

Neil Koehler

Well, stay tuned. Again, we're very focused on trying to get that coverage and we hope to be delivering on that.

Tom Donino - FNY Capital

Okay. I would hope that that's the primary focus considering the massive PE differential between yourself and the other dedicated ethanol companies that are out in the marketplace. I mean, you're trading at almost a 70% PE discount to those two companies.

Neil Koehler

Yes, agreed.

Tom Donino - FNY Capital

Okay. That was it from my questions.

Neil Koehler

Thank you.

Tom Donino - FNY Capital

Thank you.

Operator

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back over to Neil for any closing remarks.

Neil Koehler

Thank you and thank you all for participating today. Again, we're very excited about this quarter and the results, and look forward to building on this success into the future. And we'll be speaking to you again soon. Thanks and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a nice day everyone.

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Source: Pacific Ethanol's (PEIX) CEO Neil Koehler on Q1 2014 Results - Earnings Call Transcript
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