US BioEnergy Q3 2007 Earnings Call Transcript

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 |  About: US BioEnergy Corporation (USBE)
by: SA Transcripts

US BioEnergy Corp. (USBE) Q3 2007 Earnings Call November 13, 2007 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the USBioEnergy's Third Quarter Earnings Results Call. On the call today is GordonOmmen, US BioEnergy's CEO, and Rich Atkinson, Senior Vice President and CFO.Today's call is being recorded. If you have any objections, please disconnectat this time. After the speakers' remarks, there will be a question-and-answersession. (Operator Instructions) The Company will begin brief prepared remarks,and then we'll open it up for question-and-answer session.

Mr. Atkinson, you may now begin.

Richard Atkinson

Thank you. This is Rich Atkinson, US BioEnergy's ChiefFinancial Officer. I'm joined this morning by Gordon Ommen, our Chief ExecutiveOfficer. And I'd like to welcome all of you to our third quarter 2007 earningsconference call.

Earlier this morning, we released financial results for thequarter and nine months ended September 30. Please note that today's conferencecall is accompanied by a PowerPoint presentation that can be accessed under the"Investor Relations" sections of our corporate website, at www.usbioenergy.net.

I would like to refer you to the second slide in that deck,before getting started, and direct you to the Safe Harbor disclosures regardingforward-looking statements that we make during this call or that may becontained in our earnings release. The earnings release is available on ourwebsite, also at www.usbioenergy.net. The applicable Safe Harbor disclosuresare presented at the end of that release and in our 10-Q for the quarter endedSeptember 30, 2007, filed with the SEC.

With that, I would like to turn the call over to Gordon.

Gordon Ommen

Thanks, Rich, and good morning. The next three slides thatyou can access through the web will provide some backdrop on the informationthat I'm going to talk about in my opening comments.

The third quarter was rewarding for our company. We canreport another quarter of strong production, improved operating efficiencies,and solid earnings. Since 2004, we've been quietly building a company that isfocused on execution and results. The fruits of our labor continue to berevealed through our industry-leading operational efficiencies and bottomlineperformance.

Let's take a look at what we've accomplished. The thirdquarter was marked by the first full quarter of production at our Ord, Nebraskafacility. Ord came online on time and on budget, demonstrating the proficiencyof our engineering and operations teams. Utilizing the US Bio ProcessTechnology, this plant operated at 120% of nameplate capacity during the lastquarter.

With Ord, we now have four plants running with a combinedproduction capacity of 310 million gallons per year. During the third quarter,ethanol production from our plants increased 7% to 73.1 million gallonscompared to 68.2 million gallons during the second quarter.

Not only did we increase production, we also operated ourfour plants with greater efficiency. During the third quarter, we squeezed evenmore ethanol out of the corn we purchased. Our conversion ratio was 2.87. Thatcompares with 2.86 the previous quarter. What's especially noteworthy is ourconversion ratio was achieved, while using less denaturant. We believe thatthis is one of, if not, the best conversion ratios in the industry.

Our industry-leading conversion ratio helps drive ourbottomline profitability. One of our business goals is to build a solidfoundation for growth. We've continued to build on the foundation quarter afterquarter, with increased production, solid margins, and improving efficienciesand economies of scale. Quarter after quarter, we simply deliver results.

In late August, we completed the acquisition of MillenniumEthanol, now known as US Bio Marion. I'm happy to report that we're well on theway to getting this plant up and running in the first quarter of 2008. In fact,just yesterday, 45 new employees started orientation at US Bio Marion. Thesenew employees are now going through our proprietary in-house training program.

The last acquisition clearly demonstrates our ability todeliver on our growth strategy. Once Marion is up and running, it willcontribute an additional 110 million gallons annually to our overall ethanolproduction. In addition to Marion, we have three other plants underconstruction. Construction at all sites is progressing according to schedule.

In the 11 months, since we completed our initial publicoffering, the ethanol industry has experienced a sustained level of corn pricesin excess of $3 a bushel and, in the most recent quarter, lower ethanol prices.With the anticipation of tighter crush margins, there is considerablespeculation around the industry relative to the status of funding of futurecapacity.

I'm pleased to report that our cash on hand, together withthe liquidity under our existing credit arrangements, is sufficient to coverthe construction of our four plants as planned. And as construction continues,we're working behind the scenes to manage commodity positions, install the ITsystems and, most importantly, to train the new employees, so we can bringthese plants online in a smooth and efficient manner.

Hankinson and Dyersville are expected to start production ofethanol in the second quarter 2008. Meanwhile, our plant in Janesville,Minnesota should come online during the third quarter of 2008. These threeplants each have 110 million gallons of annual production capacity. By the endof 2008, we expect our eight plants to produce 750 million gallons of ethanolper year.

As you may expect, we don't plan to settle for 750 milliongallons of production from these facilities. Our engineering and operationsteams continue to drive forward the US Bio Process Technology and push theseinitiatives inside of these plants. When fully implemented, we expect our five110-million-gallon plants to produce a 120 million gallons of production each,bringing our total production from this portfolio of plants to 800 milliongallons per year.

We're also building in logistics infrastructure, so we canmove the ethanol more efficiently from our plants to the blenders in thehigh-value markets. All five of our 110-million-gallon plants are designed toload unit trains. This positions US BioEnergy to become one of the largestvolume shippers of ethanol in the US by the end of 2008, adding transportationefficiency to our growing list of competitive advantages.

As I mentioned a few minutes ago, since 2004, we have beenquietly building a company that is focused on execution and results. Now, letme turn it over to Rich, who will go into more detail on our financial resultsfor the quarter. Rich?

Richard Atkinson

Thank you, Gordon.

Before I go into more details on our financial performance,I'd like to remind everybody that prior to this time last year, our revenueswere derived principally from our marketing and services businesses. Since thattime, the sale of ethanol and distillers grain has become the primary source ofUS BioEnergy's revenues. As a result, our financial results for periods afterApril 30, 2006 are not comparable to results for the prior periods.

In addition, due to steep ramping of ethanol productionsince April 2006, the actual production figures for 2006 are not indicative offuture operating results. This is why many of the comparisons I discuss laterwill be to the second quarter of 2007 rather than the third quarter of 2006.

Also, one additional reminder is that our ethanol is pricedFOB the plant. And so when you look at our total revenues and look at our priceof ethanol per gallon, that does not include compensation for transportation orcommissions, which, as reported in our 10-Q, were approximately $0.17 for thethird quarter.

I would be referring to the sixth and seventh slides in thebulk of my comments here today. Looking at slide six, I'd like to talk briefly aboutthe third quarter of 2007 versus the second quarter of 2007. As Gordon hasindicated, the third quarter reflected the first full quarter of operations forour Ord, Nebraska facility, bringing our total expected production capacity to310 million gallons per year.

In spite of the increased production during the quarter,ethanol prices were lower and total revenues declined approximately 3%, or $4.4million, in the third quarter, which was more than offset by a decrease intotal cost of goods sold of approximately 10%, or $13.9 million.

The net effect of this was a 50% increase in gross marginfrom $19.2 million in the second quarter to $28.8 million and a 33% increase innet income when compared to the second quarter from $8.3 million to $11.1million. As noted in our earnings release, net income for the third quarter of2007 included a onetime impairment charge of $2.5 million related to our whollyowned subsidiary, UBE Services.

Corporate SG&A increased slightly in the quarter, from$10.2 million to $10.8 million. After adding staff at for our Ord facility,total employee headcount stabilized in a fairly tight range around 305. Weanticipate adding 45 to 50 employees for each of the four plants we arestarting up in 2008, but only modest staffing increases are expected for ourheadquarters staff.

EBITDA has increased each of the first three quarters of2007 and totaled $64.2 million for the nine months ended September 30. Onslides six and seven, we have provided fourth quarter 2006 information to facilitatea view of the growth trend for the company's capacity, production, sales,revenues and cost of goods sold.

I would just like to remind everyone we had a lot going onin the fourth quarter of last year, including completion of our IPO, thestartup of our Albert City facility, startup of our Platte Valley expansion,and specifically, with regard to the income statement, we recorded $8 millionof revenue for the sale of Fagen Inc. build slot.

And finally, as you compare our current quarter corn cost tothe fourth quarter of last year, fourth quarter last year, the corn costs were$0.57 per gallon versus $1.10 for the third quarter of 2007.

During the third quarter of 2007, the ethanol productionsales increased to approximately 73 million gallons of ethanol, a 9% increasein sales volume compared to the second quarter. Ethanol average price pergallon decreased $0.15, to $1.76 per gallon compared to $1.91 in the secondquarter. However, corn costs per gallon decreased $0.31 in the quarter, drivinga $0.20 per gallon margin improvement.

After taking hedging impacts into account, our corn costsaveraged $3.15 per bushel, or $1.10 per gallon of ethanol sold, for the thirdquarter of 2007. This compares to $3.97 per bushel, or $1.41 per gallon ofethanol sold, during the second quarter of 2007. During the quarter, werecognized gains of approximately $10.7 million related to our corn hedgingactivities.

Looking at slide eight, before concluding, I would like totalk briefly about the funding of our construction projects. Expendituresduring the third quarter 2007 totaled approximately $117 million. For the mostpart, these expenditures were related to the ongoing construction at Hankinson,Dyersville, Janesville, and Marion, South Dakota.

At the end of the third quarter, estimated constructionexpenditures required to complete these plants totaled approximately $265million. As can be seen on the slide, completion of these projects, includingstartup working capital, is fully funded through our current cash on hand andexisting credit facilities.

As we have discussed in the past, each of these projectsfinanced with 40% equity and 60% debt. The 40% equity requirement must be metprior to drawing on the construction facilities, and second quarter cash flowswere driven primarily by that requirement and, to a lesser extent, in the thirdquarter.

All the required equity is currently invested in theHankinson, Marion and Dyersville projects, and we are funding ongoingconstruction expenditures for those projects by drawing on the constructionloan facilities. We estimate that the equity investment in our Janesville,Minnesota plant will be completed by the end of the quarter. As of September30, there was approximately $15.5 million of equity remaining to be distributed.

As a final note, our reported earnings per share is based onweighted average shares outstanding of approximately 73 million. As ofSeptember 30, we had approximately 79.6 million shares actually outstanding.

With that, I'd like to turn the call back to Gordon for somefinal remarks before taking your questions.

Gordon Ommen

Thanks, Rich. I'm very pleased with the strong improvementswe've experienced in our gross and operating margins as well as the progress onour plants under construction.

I would like to conclude by saying, we believe, the worldand this country will face significant energy challenges in the upcomingdecades. We believe that biofuels represent a part of the solution and thatcorn-based ethanol will remain as a significant component of the North Americanbiofuel mix for years to come.

As we open up new blending markets for ethanol, demandcontinues to grow. In this growing sector, US BioEnergy is well positioned toextend its leadership position, and we have sufficient financial resources todo so.

Our new plants coming online, combined with US Bio ProcessTechnology, will enable us to maintain our market leadership position andcapitalize on industry opportunities. As evidenced by our proven track recordof financial and operational performance, US BioEnergy is being built for along-term growth track and to create value for our shareholders.

Operator, let's open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll pause for just a moment tocompile the Q&A roster.

Your first question comes from Kelly Dougherty with CalyonSecurities.

Kelly Dougherty - Calyon Securities

Hi, guys. Congratulations on a great quarter.

Gordon Ommen

Thank you.

Richard Atkinson

Thank you.

Kelly Dougherty - Calyon Securities

Gordon, I am just wondering, kind of following up on thecomment you just made, if you could give us some of your thoughts on these newmarkets that are opening up or that are poised to open up, particularly in theSoutheast, Florida, California, if you have any sense of timing? And then,secondly, whether Provista has terminals in these markets to serve them?

Gordon Ommen

Well, we meet with our Provista folks every day on, kind of,a morning strategy session. And we are moving some product and we are seeingsome of these markets begin to accept product at this point in time. I am notsure on the call I want to publicly announce what markets we're getting intoand how, but we are seeing some penetration.

Kelly Dougherty - Calyon Securities

Any idea on timing on the markets, whether California isgoing to hold off or if they're going to actually start up earlier than they'vesaid they will?

Gordon Ommen

We have no proprietary insights to the timing around theirmarkets, but we are seeing some movement of product into the Southeast a littlesooner than we had thought.

Kelly Dougherty - Calyon Securities

Okay. Great. And then, given your extensive acquisitionexperience, I am wondering if you can kind of comment on the impact that youbelieve the recent spread tightening has had on consolidation, whether you'reexpecting it to accelerate, and then whether you'd be any more or lessinterested in acquisitions given the current market environment?

Gordon Ommen

Well, we've said all along that we intend to be a roll-upplatform. And, of course, we closed our sixth acquisition this summer. We havean M&A team that looks at lots of projects, and we're very quantitative. Weanalyze all of the opportunities, mathematically, based on our assessment ofthe returns at the plants and how well they fit into our existing platformaround transportation efficiencies. So we're pretty disciplined, and there's someprojects we like better than others. Do we intend to continue and participatein the roll-up? We're always looking, and we think the industry will continueto consolidate.

Kelly Dougherty - Calyon Securities

Do you see, though, that sellers' prices have started torationalize a bit now that margins have come down?

Gordon Ommen

Yeah. But I think there is a little bit of a lag inrationalization around kind of the owners seeing results and dividend flows infinancials.

Kelly Dougherty - Calyon Securities

Okay. Thanks very much and congratulations, again.

Gordon Ommen

Thank you.

Operator

Your next question comes from the line of Eric Larson withPiper Jaffray.

Eric Larson - Piper Jaffray

Yeah. Good morning, everyone. Congratulations.

Gordon Ommen

Thank you.

Richard Atkinson

Thank you.

Eric Larson - Piper Jaffray

Just the first question, and I can ask this question to 10different people and I will probably get 15 different answers, can you justgive us how you view the corn outlook, the market for the next six months orso?

Gordon Ommen

You're asking us for our view of…

Eric Larson - Piper Jaffray

I mean just how are you looking at the market today? I'm notasking how you're hedging it, just what is your view in terms of how you seesort of the export market supply/demand and maybe what pricing trends might be?

Gordon Ommen

Well, our crystal ball is not very good, but let me respondin how we approach the market. One of the things that we early on is made asignificant investment in kind of the infrastructure and the discipline aroundrisk management.

So the way we manage our commodity positions and thediscipline around that management process I think is important in any market,is maybe more important in volatile markets. So we have experienced people thatwatch the markets, that take our positions in the market within the constraintsof our risk management system and disciplines.

And we are pleased with the results that we have gotten fromthat discipline and the way we have been able to execute. Which way the marketsare going to go and how corn acres may battle bean acres and all those types ofthings, we read the same news as everyone else.

Eric Larson - Piper Jaffray

In the markets where you're buying corn for your plants inyour local markets, are they all still net export markets today and so youwould enjoy a reasonable basis, positive basis on your side?

Gordon Ommen

We watch the basis and we have plants in markets that havevery attractive basis positions in them. But when you are purchasing 40 millionbushels of corn a year for a plant, there is a diversified strategy around eachplant and then there is an overall strategy for the platform of plants. Andsome of that corn is bought cash. Some is bought in synthetic positions aroundbasis, so it's really a multi-pronged approach.

Eric Larson - Piper Jaffray

Okay. So in general, what you're saying is that most of yourmarkets would be net export markets. In other words, there's plenty ofavailability?

Gordon Ommen

There is plenty of availability around the plant assets thatwe have for corn. And historically, those markets have been shuttle loadingcorn and shipping it out.

Eric Larson - Piper Jaffray

Than one and I will turn it over. I have one final questionand it's on Provista. I noticed, well, you had an equity contribution of about$1.1 million in the quarter, meaning that the total venture probably generatedabout $2.2 million of net income.

Aside from your 50% equity investment in Provista, do youpay competitive market rates for transportation, or do you also get some kindof a benefit? I know you have a long-term contract, supply contract. Is thereany sort of below-market pricing benefit that you might also enjoy with thatmarketing arrangement with CHS?

Gordon Ommen

One of the things that attracted us to CHS as a businesspartner is the fact that they have been moving grain for 100 years and theymove a lot of it in scale. Think about logistics inside of the biofuels sector.Logistics are really around rail transportation expertise.

Eric Larson - Piper Jaffray

Correct.

Gordon Ommen

Which has its history in grain. So the CHS people have a lotof experience in rail transportation logistics and we are able to leverage thatexperience in managing the logistics and rail for Provista. We believe thatprovides us with some advantage.

Eric Larson - Piper Jaffray

Okay.

Gordon Ommen

The price that we pay Provista to market our ethanol islargely the same that third-party plants pay Provista to market theirs. Ofcourse, as an owner, we get half the back through earnings.

Eric Larson - Piper Jaffray

Okay, I was just wondering if there was also then, ofcourse, their efficiency in logistics obviously means that their cost structureis lower, so there is more net income for you guys to split up.

Gordon Ommen

That is the goal.

Eric Larson - Piper Jaffray

Okay. Thank you.

Gordon Ommen

Welcome.

Operator

Your next question comes from Priyanka Menon with ThomasWeisel.

Priyanka Menon - Thomas Weisel

Good morning, Rich. Good morning, Gordon. Great quarter.Congratulations.

Gordon Ommen

Thank you.

Priyanka Menon - Thomas Weisel

Actually I was hoping to get some clarity on the interestexpense. Could you let us know what kind of interest rates have you seen thisquarter and if I understand that a part of interest expense that might beincurred on construction loans on the plants that are under construction mustbe getting capitalized, but what kind of interest expense are you looking at?

Richard Atkinson

Our credit facility, the bulk of our credit facilities havean interest rate that's a spread over LIBOR that ranges from 2.94, or 290 basispoints to 325 basis points. And then the facility that came along with ouracquisition of our Marion plant, the spread over LIBOR for that is 450 basispoints.

So they float up and down with LIBOR, but on average for thequarter, our rates were probably between 8 and 8.5% all in, particularly sinceLIBOR has come down some from where it was a few months ago.

Priyanka Menon - Thomas Weisel

Okay. And any outlook for the tax rate for 2008?

Richard Atkinson

For the tax rates?

Priyanka Menon - Thomas Weisel

Yes.

Richard Atkinson

I think that what we have been experiencing historicallywill probably be fairly representative. I think our effective tax rate is goingto be somewhere in the range around 37%.

Priyanka Menon - Thomas Weisel

Okay. Great. Thank you. Most of my questions got answered.So thanks so much, again.

Richard Atkinson

You are welcome.

Gordon Ommen

Thank you.

Operator

Your next question comes from Mark Miller with WilliamBlair.

Eric Walania - William Blair

Good morning, gentlemen. This is actually Eric Walania.

Gordon Ommen

Good morning.

Eric Walania - William Blair

A question here on the hedging, could you may be talk alittle bit, a little more detail what you did differently in the third quarterversus the second quarter, specifically on the corn, in terms of your hedging,Correct me if I am wrong, it looks like you did not put any natural gas hedgeson in the third quarter. Is that correct?

Richard Atkinson

We buy foreword. We contract forward for at least 30 daysand actually by the end of the quarter, we've gotten additional capacity to buyforward a little farther than that now. We haven't independently hedged naturalgas. That is correct. In terms of corn costs, we really didn't do anythingdifferent than our discipline has been in the past. I think we've been veryconsistent.

What didn't happen at the end of this quarter that hadhappened at the very end of both the first and second quarters was there werepositive crop reports that came out on the last business day that had putdownward pressure on the corn prices that we had to use in establishing whatour mark-to-market positions were.

So basically we've just continued to execute on thestrategy. We do not manage our commodities on quarter-to-quarter basis. We'remanaging them looking forward over each crop year as we roll through.

So I think, as I think we've said in the past, we're goingto see times when based on market conditions at the end of a quarter, we'regoing to have mark-to-market gains. Sometimes we're going to havemark-to-market losses, as we did in the first and second quarters, so we'rejust executing in a consistent manner in terms of how we're hedging.

Eric Walania - William Blair

Okay. My next question, then, is on CapEx for the fourthquarter. Is there any numbers that you can share with us on what you're expectingto spend in the fourth quarter or…

Richard Atkinson

We really haven't broken it out by quarter. We have in the10-Q what we expect to spend to complete those plants and we have not brokenout and disclosed what it will be quarter-to-quarter. The expenditures,independent of the piece of equity that still needs to go in, we're drawing onour construction facilities to reimburse ourselves for all that as we goforward.

So we've got the equity piece still to go in and that's it.And I think as we mentioned in our release, and it's on page 32 of our 10-Qwhen you get to it, total hard dollar construction expenditures required tocomplete our plants, the last one which is finished at the end of the thirdquarter, we think, for Janesville is $265 million.

Eric Walania - William Blair

Okay. Two more questions, if I may. The first one would beon transportation costs. Can you just talk how your discussions with Provista,CHS, where you think have seen transportation costs trending?

Are there just some kind of pushes and pulls in theindustry, I guess, if you have potentially slowing economy, then as moreethanol's supply comes online, your competitors, there seems to be somesee-sawing of the increases or decreases, I guess, pushes and polls of wheretransportation, specifically railroad rates, I guess.

If you could maybe comment on where you see '08 expenses interms of transportation versus where we have been in '07?

Gordon Ommen

We do not provide projections of any of our costs goingforward. What we have experienced during the calendar year this year I thinkhave been prices that have been probably in a range of $0.17, $0.18, $0.19 agallon. That's off the top of my head. I would have to go back and look at Q1and Q2, but I believe that it has been pretty consistently in that kind ofrange.

Eric Walania - William Blair

Do you have that number specifically for the third quarter?

Gordon Ommen

Yes, I do. Actually it is in our slide deck under the title,"The Operations Report Card."

Eric Walania - William Blair

Okay.

Gordon Ommen

So three, if I'm looking at the right spot, was $0.17 andthat includes commissions of about $0.01 a gallon.

Eric Walania - William Blair

Okay, great. Last question I have is can you maybe justcomment briefly the buy versus build decision on a cost per gallon basis? Iknow six months ago we were well above $2 a gallon. Given what's current in theindustry, can you maybe become comment on where you think that cost per gallonmay be today?

Richard Atkinson

I'll take that one. We look at acquisitions, Greenfieldprojects, and kind of compare and contrast them to one another as capitalallocation decisions. And we are seeing right now that the scale may have tippeda little bit towards buy. Construction costs came up fairly significantly as wemoved through 2006 and into early 2007.

Fortunately, the plants we have under construction we havecontracts in place, so I think we have embedded some pretty good value aroundthe projects we have in terms of those turnkey construction agreements. Goingforward, if the market stays with tighter margins, it may be cheaper to buythem. We will see.

Eric Walania - William Blair

Okay and do you think that cost is below $2 a gallon now?

Richard Atkinson

To buy them or build them?

Eric Walania - William Blair

Either or both.

Richard Atkinson

Build, probably a little above. Buy, depends on the asset.

Eric Walania - William Blair

Sure, okay. Great. That's all I have. Thank you.

Richard Atkinson

Welcome.

Operator

(Operator Instructions) The next question comes from IanHorowitz with Soleil Securities.

Ian Horowitz - Soleil Securities

Gordon, congratulations on a great quarter.

Gordon Ommen

Thank you.

Ian Horowitz - Soleil Securities

Just a couple of quick questions. First for Rich, I noticeda little bit over $2 million in an asset impairment $0.4 million, $0.5 million.Can you just tell me what that is?

Richard Atkinson

Yes, that's related to our UBE Services subsidiary. We haveexpected, I would say, for quite some time that as the scale of our own ethanolproduction and sales business and production and sale of distillers grains balloonedthat it would have a dampering effect, to say the least, on third parties'interest in having us provide marketing services and other services for them.

And we have seen a reduction in that business and have foundgrowth and replacement of customers to be more challenging as a result of ourmain business line. So as a result of all that, we felt we needed to take animpairment charge against that asset in the third quarter.

Ian Horowitz - Soleil Securities

Okay, and so I would assume that you see this trend kind ofcontinuing going forward as you've gained more…

Richard Atkinson

I think if we saw it differently, we wouldn't have taken animpairment charge.

Ian Horowitz - Soleil Securities

But we could expect more impairments, I guess?

Richard Atkinson

I think we have reserved all that we would need to againstthat asset.

Ian Horowitz - Soleil Securities

Okay. Great. Second question…

Richard Atkinson

It is really made up of goodwill and intangibles. There wasno real capital investment in terms of hard assets in that business.

Ian Horowitz - Soleil Securities

Right. Second question, you said in the beginning of thecall that Ord was running at about 120% of nameplate capacity. I show overallutilization kind of in the 97% range on a gallons-produced basis. Does thisimply that the other plants were kind of down time for maintenance or am I justlooking at this incorrectly?

Gordon Ommen

Well, sometimes the terms get a little bit confusing. Ord,which is a nameplate 40 million gallon plant, so when we say 120% of nameplate,what we are saying is that it has been running at 50 or little more. The slideI believe that you were referring to shows percentage of expected capacity, soI think it's doing a percentage of the 50 rather than of the 40. So one is apercentage of nameplate and the other is a percentage of expected.

Ian Horowitz - Soleil Securities

Okay. I mean all I was doing was basically taking the 73.1million gallons of production and dividing that by 75 quarter. That is kind ofthe current run rate, is that correct?

Richard Atkinson

I think that was average for the quarter. We did take alittle bit of down time at one of our facilities, so that would probably be theexplanation for that.

Ian Horowitz - Soleil Securities

So looking forward, we can be expecting utilization rateskind of at this level? I mean, I guess, another way to pose the question iswhat in your mind would cause you to kind of take a dial down of productioncapacity beyond significant negative gross margins? Or is that the only thingwhere you would actually start shutting in capacity?

Gordon Ommen

Well, inside of the operations of an ethanol plants, you cankind of move the throttle forward and back in terms of throughput within a bandif you know what you're doing in plant operations. And it's possible if marginswere really tight that people may throttle back.

When margins were tighter a couple months ago, we did seesome players throttling back. We believe that our efficiencies allow us tocontinue and operate at full capacity during those leaner times as well. So wehave not throttled our plants back.

Ian Horowitz - Soleil Securities

And one last question and I'll get back in the queue. I kindof ask you guys this every quarter. Any kind of progress on the Solomon brandor the uniformity on the distiller grain?

Gordon Ommen

Yes, we are continuing to have really good reception in themarketplace around our distillers' grain product and we talk about our US BioProcess Technology and the Lean Six Sigma way of operating plants in a verytight and efficient manner. That tightness and efficiency around operationstranslates to a very consistent distillers grain.

We have chosen to call the consistency around our distillersgrain Solomon as a way to brand that consistency. The markets like theconsistency a lot. We haven't spent a lot of marketing dollars around theSolomon brand, because a lot of the relationships with these big cattle feedersis done kind of one-on-one.

So our strategy is on track. We continue to use Solomon asour way of talking about the consistency around the distillers' product and thenutritional specing of that product. So we are pleased with that effort.

Ian Horowitz - Soleil Securities

All right, congratulations again. I'll get back in queue.

Richard Atkinson

Thanks. The one thing I would add, I am not sure we clearlyanswered your question in terms of what we're expecting from production. Wetried to be as clear as we could in our public release that we are expectingthe current plants to operate at a 310-million-gallon rate and we expect ournew plants coming on next year to operate, each of them to operate at a 110-million-gallonlevel.

Ian Horowitz - Soleil Securities

Thank you.

Richard Atkinson

Welcome.

Operator

Your next question comes from Pavel Molchanov with RaymondJames.

Pavel Molchanov - Raymond James

Hi. Good morning, guys. A follow-up to one thing you justsaid, when in your press release you talk about currently having productioncapacity of 310 and then you lay out the roadmap to get to 750, is thatnameplate or what you guys consider to be expected?

Richard Atkinson

What we are calling the plants is our kind of baselineexpected production level of the plants. And the 310 is for the four that areoperating. When we turn on the additional 410 million gallon plant that gets usto 750 as kind of a base level of production.

We do believe that when we fully deploy the US Bio ProcessTechnology at the 110-million-gallon plants, it will give us additional upsidein that production, which will push us up towards that 800 million gallon levelrate for the portfolio. The phasing in of the process technology happens overtime. The plants come up to the base levels that we describe here prettyrapidly.

Pavel Molchanov - Raymond James

Okay. So what would the numbers be just on the nameplatebasis?

Richard Atkinson

I think what we have previously referred to is nameplate wasthe warrantied level of production. And we felt we needed to be clearer aboutwhat we're actually expecting the plants to produce.

For example, Albert City. In the past, if you refer to AlbertCity's nameplate, we refer to it as a 100-million-gallon plant. But we didn'tfeel that it was representative of what our expectations are around the levelsat which it will operate, as each of these plants will operate, as they rampup.

Pavel Molchanov - Raymond James

Got it.

Richard Atkinson

Yes, okay.

Pavel Molchanov - Raymond James

So by the end of '08, nameplate is going to be 700, expectedwould be 750, with potential some upside beyond that. Is that fair?

Gordon Ommen

Well, you're getting tangled up in the definition of theterm nameplate. We are calling the plants the levels that we expect them toproduce at. Fagen really manufactures or builds one large size plant and that'sthe one that we are calling 110 because that is what they baselined up to andwe can run them at pretty consistently right out of the gate.

And then the US Bio Process Technology takes them up fromthere. The other plants, Fagen has nameplated them or guaranteed some at 40 andsome at 45. And that has moved around a little bit.

Pavel Molchanov - Raymond James

Okay. Got it. Thanks very much.

Gordon Ommen

Welcome.

Operator

Your next question comes from Eric Larson with PiperJaffray.

Eric Larson - Piper Jaffray

All right. Thanks for taking my follow-up. Just two quickfollow-up questions. Maybe this will help clarify it. When Fagen establishestheir guaranteed capacity, how many days is that plant operating a year? You'regoing to have some downtime for each plant just because you do, but what wouldbe the operating days that you would have with that?

Gordon Ommen

357.

Eric Larson - Piper Jaffray

How much?

Gordon Ommen

357.

Eric Larson - Piper Jaffray

357?

Gordon Ommen

Days.

Eric Larson - Piper Jaffray

Okay. And so you have the opportunity to improve a littlebit on that and then also on your efficiency, so that would help.

Gordon Ommen

Yes, you don't really improve on the days that much. The plantsare pretty much the same. The way you operate the plants, the way youde-bottleneck them, the addition comes from, not the size of the vessels andthose types of things, it comes from the expertise, the systems and thede-bottlenecking.

Eric Larson - Piper Jaffray

Yes. Okay. I fully understand that. Then the final quickquestion. Back to your equity line, does Provista distribute the cash on thebalance sheet? Is that – can we consider that a cash item as well in yourincome statement? How do you distribute the cash? How do you get your equityearnings back?

Richard Atkinson

They will from time to time declare a dividend, but youshouldn't assume that each quarter those earnings translate as cash coming backfrom the company.

Eric Larson - Piper Jaffray

Okay. Does there happen to be a big cash balance on Provistaright now?

Richard Atkinson

None that I am aware of, but I don't have direct access tothe books.

Eric Larson - Piper Jaffray

All right. Thank you, everyone.

Gordon Ommen

Thank you.

Operator

Your next question comes from Priyanka Menon with ThomasWeisel.

Priyanka Menon - Thomas Weisel

Yes. Hi. Just a quick follow-up question. I was hoping ifyou could give us some comments on the status of discretionary ethanol blendingin the industry either based on your talks with refiners and blenders orthrough Provista?

Gordon Ommen

Well, we see discretionary blending increasing and whenthere is a margin for the blender of $1 or more, that tends to stimulateactivity. So the blenders right now are enjoying very wide margins. If youthink of $42 a barrel for blending, that's pretty good. That tends to driveactivity and blending.

So it's opening up new markets for us. What we like is whenthese new markets open up and begin to blend, they typically continue to blend.So the current economics are doing good things in terms of opening up themarkets.

Priyanka Menon - Thomas Weisel

Okay. But looking at crude, the levels that crude is atcurrently, have you observed way more quantity of ethanol being picked up?Because we have come across reports, which talk about the refiners and theblenders, oil companies trying to depress ethanol producers.

So what are your comments on the fact whether in terms ofvolume pickups that the oil companies are doing? Are they trying to depresssome sort of margins for producers?

Gordon Ommen

Well, we do not have any insight into what the oil companiesmay or may not be doing. We do see strengthening price positions and bids forethanol deliveries. So the markets are strengthening, blending is increasing.

Priyanka Menon - Thomas Weisel

Okay. Thanks.

Gordon Ommen

Yes.

Operator

There are no further questions at this time. Mr. Ommen, doyou have any closing remarks?

Gordon Ommen

Well, we are appreciative of the questions and glad to havedelivered a great quarter. Thanks.

Operator

This concludes today's conference call. You may nowdisconnect.

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