Aventine Renewable Energy Holdings Q4 2007 Earnings Call Transcript

Aventine Renewable Energy Holdings Inc (AVR)

Q4 2007 Earnings Call

February 22, 2008 9:00 am ET

Executives

Les Nelson - Director, IR

Ron Miller - President and CEO

Ajay Sabherwal - CFO

Analysts

Heather Jones - BB&T Capital Market

Mike Judd - Greenwich Consultants

Mansi Singhal - Lehman Brothers

Arjun Murti - Goldman Sachs

Ken Zaslow - BMO Capital Markets

Ron Oster - Broadpoint Capital

Jin Ming Liu - Adore

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Aventine Renewable Energy Incorporated Fourth Quarter and Year-end Conference Call. My name is Eric. I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate the question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Les Nelson, Director, Investor Relations, Exterior Reporting. Please proceed sir.

Les Nelson

Thank you, Eric. Good morning. Thank you for joining us today. My name is Les Nelson, Director, External Reporting and Investor Relations. I would like to welcome you to Aventine's conference call discussing our results for the fourth quarter and year-end December 31, 2007.

With me today are Ron Miller, President and Chief Executive Officer, and Ajay Sabherwal, our Chief Financial Officer.

Before we summarize and discuss the company's performance, I would like to remind you that much of what will be said today involves our use of forward-looking statements, which are estimates about where we are going including projected financial results, financial position, and business development activities.

These forward-looking statements are subject to various risks and uncertainties including market conditions, governmental mandates, demand for our products, technological advances and economic conditions in general, that could cause actual results to differ materially from those stated or implied by such statements.

We refer you to our press release issued last night, which contains a more detailed description of our use of forward-looking statements, which applies to the discussion that follows.

The financial details included in the press release and discussed on this call including a reconciliation of net income to adjusted EBITDA are available on our website at www.aventinerei.com in the Investor Relations section.

I would also like to mention that this conference call is being webcast and is open to analysts.

We will start the call with some prepared remarks, and then follow with a question and answer session for analysts. We will limit this conference call to one hour. Please be mindful of others, so that everyone may have an opportunity to ask a question.

Now, I'd like to turn the call over to Ron.

Ron Miller

Thank you, Les. Good morning and welcome to Aventine's conference call, discussing our fourth quarter and full year results. We are pleased to have each of you with us today, and wish to thank our shareholders and bond holders for their continued support.

Net income for the quarter was $3.3 million or $0.08 per fully diluted share. Adjusted EBITDA for the quarter totaled $11.4 million; cash used for operations for the quarter was $6.4 million. Ethanol prices rebounded nicely during the quarter, although not enough to raise the average price received for ethanol in the fourth quarter, above that that was received in the third quarter.

The average price received for ethanol in the fourth quarter was $1.94 per gallon, versus $2.01 per gallon in the third quarter of 2007. Corn cost declined by $0.15 a bushel to $3.66 per bushel, which helped offset the decline in the average ethanol price. Our commodity spread defined as gross ethanol selling price per gallon less net corn cost per gallon also increased in the fourth quarter, because co-product returns improved to 45.3%.

For the quarter, the commodity spread increased to $1.17 per gallon, up from $1.9 per gallon in the third quarter of 2007. Freight costs per gallon decreased to $0.18 due to increased volumes as fixed cost were bale to spread over the greater number of gallons. This was done in spite of the continuing increase in fuel surcharges. The operating environment for ethanol producers remains a cautious one; however, using the experience gained from our 26 year history, we have so far been able to successfully manage our way through this difficult commodity cycle, as both income and adjusted EBITDA turned positive.

Our capacity expansion plans are moving forward, as we continue to make progress on construction of our new facilities at Aurora, Nebraska and Mt. Vernon, Indiana. Although contractual completion date is in March 2009, we expect to be ramping up ethanol production from these facilities in early Q1, 2009. We remain positive about the longer term ethanol market place, and these expansions make strategy sense for Aventine in that regard. The passage in December of a new renewable fuel standard reaffirms our views of the market place. Our unique mix of assets continues to give us an advantage in today’s tenuous operating environment.

Higher co-product recovery race from our wet mill have become more important in a difficult margin environment. Our distribution system and customer relationships are integral to our ability to attain the highest price as possible. For the year we’re on $33.8 million or $0.80 for fully diluted share. Gallons sold in 2007 were 690.2 million or just slightly less in the 695.8 million gallons sold in 2006, and this despite the loss of a major alliance partner during the year of 2007.

Cash flow from operating activities for the year totaled $47.4 million, and adjusted EBITDA was $58.3 million. We accomplished all of this despite lower ethanol prices and significantly higher corn cost. On the operation side of the business, our plants ran at 89% of capacity during the fourth quarter of 2007 and 93% of capacity for the full year 2007, as compared to 89% for the full year of 2006. Our average yield increased in 2007 to 2.67 gallons per bushel from 2.61 gallons per bushel in 2006.

Freight costs were up slightly in 2007 to $0.17 per gallon from the $0.15 per gallon that we averaged in 2006. However, the expansion of our distribution system allowed us to get higher realized prices for ethanol than would have been otherwise possible. We continue to focus on becoming a more efficient producer.

Our marketing alliance annualized volume at the end of the fourth quarter 2007 increased to 504 million gallons. During the fourth quarter, we added a net 143 million gallons of capacity to our marketing alliance volumes. Our current expectation for 2008 is that another 416 million gallons of marketing alliance partner distribution currently under construction will come online, increasing our total ethanol marketing volumes to over 1.1 billion gallons including our own equity and purchase resale gallons by the end of 2008. This number does not include our two new facilities currently under construction.

In addition, we have signed marketing agreements with another 12 plants, with announced production capacity of 1.1 billion gallons, although given current industry and financial market condition, is uncertain whether any or all of these plans will be built as scheduled or at all. We continue to believe our marketing business and unrivaled logistic infrastructure including in excess of 1,400 rail cars, 18 inland and one intercostal barge, 59 terminals, 54 of which are in operation and eight rail-to-truck offloading distribution stations provides us with a strategic advantage relative to our peers, that leased a higher net realized ethanol prices among other benefits.

Now, Ajay will provide details on the number, and afterwards I'll make some additional remarks about our business and some comments on the ethanol marketplace and expectations for 2008.

Ajay Sabherwal

Thank you Ron, and thanks to everyone for participating in this call. I'll now take you through our income statement and balance sheet, highlighting the key trends and variances. After that, I will discuss the current situation related to the option rates securities we hold and will share with you some expectations for 2008.

Sales in the fourth quarter increased primarily as a result of higher volumes, offset by lower average ethanol pricing. Gallons sold in the fourth quarter totaled 176.2 million gallons versus 162 million gallons sold in Q3. Ethanol prices in the fourth quarter average $1.94 versus $2.01 per gallon in Q3.

Co-product revenue increased 20% to $28.9 million in Q4 versus $24 million in Q3. Our co-product revenue as a percentage of gross corn cost increased to 45.3% for Q4. Higher prices for germ, meal, dried distillers grain and feed offset declines in volume.

Equity production in the fourth quarter of 07 decreased by less than 3% to 45.6 million gallons. Marketing alliance gallons purchased increased to 100.5 million gallons in the fourth quarter as compared to 84.6 million gallons in the third quarter, as a result of increased capacity from marketing alliance partners.

Purchases from other producers totaled 39 million gallons in Q4 versus 28 million gallons in Q3, as our distribution assets allowed us to take advantage of continued price differentials in the spot ethanol markets. We also increased inventory in the quarter by approximately 9 million gallons.

Gross profit increased in the fourth quarter, due primarily to a combination of higher commodity spreads and the benefits received from higher quarter end ethanol pricing. Ethanol prices in Q4, on average, were 3% lower than in Q3, but increased throughout the quarter. We were able to offset the lower realized average price in Q4 with lower corn cost and higher co-product return.

Corn cost in the quarter fell by $0.15.The average CBOT price of corn during the fourth quarter was $3.86, while we were able to achieve $3.66 per bushel.

Expressed per gallon of ethanol, ethanol prices decreased $0.07, offset by a $0.03 decline in corn cost and a $0.12 increase in co-product return. Conversion cost increased in the fourth quarter by $0.03 per gallon, primarily due to increased maintenance expenses.

Freight and distribution cost in Q4 decreased to $0.18 per gallon from $0.19 in Q3. Freight logistics cost per gallon is calculated by taking total freight expenses incurred and dividing by the total ethanol gallons sold. Total freight costs also include cost to ship co-products. The decrease in freight cost was primarily due to the increase in gallon shipped, as we were bale to spread our fixed cost over more gallons. Fuel surcharges, as Ron mentioned continued to negatively impact freight rates.

The average inventory cost of $1.80 per gallon at the end of Q4, versus $1.61 at the end of Q3, using a weighted average FIFO approach, reflects higher quarter end ethanol prices. The economic impact of selling gallons that were previously held in inventory in Q3, during a period of rising ethanol prices was a reduction to cost of goods sold of $6.9 million.

SG&A expenses decreased $800,000 or approximately 9% to $8.6 million in Q4 from $9.4 million in Q3. The decrease in SG&A expenses in Q4 compared to Q3 primarily reflects downward adjustments of estimated bonus amounts, based on our year end results.

Adjusted EBITDA increased $18.1 million from Q3 to Q4; adjusted EBITDA in Q4 was $11.4 million versus a negative $6.7 million in Q3. Adjusted EBITDA was materially affected by the higher year end inventory value per gallon and by the increase in the commodity spread. Adjusted EBITDA in both periods has been adjusted by non-cash items, such as stock compensation.

Other non-operating losses for the fourth quarter totaled $5.1 million and included both realized and unrealized net losses from derivative positions. This compares to net losses on derivative positions of $1 million in Q3. The Q4 net loss was primarily the result of two factors, realized and unrealized losses on short gasoline positions, offset by net gains on CBOT corn futures. I will provide more detailed information on our derivative positions and expectations later in the call.

Moving down the income statement, interest expense for the third quarter was $3.5 million. Interest expense includes $7.5 million in interest on our 10% senior unsecured notes, $200,000 of amortization of deferred financing fees, reduced by interest capitalized during the quarter of $4.2 million.

Our effective income tax rate in Q4 was approximately 50%. The Q4 tax rate adjust our year-to-date effective tax rate to 28.2%, which reflects the statutory rate adjusted primarily for tax exempt interest income.

Now, a look at the balance sheet at the end of the quarter. Cash and short-term investments were $228.7 million. Cash used by operations during the fourth quarter was $6.4 million. Cash flow from operations decreased in the quarter, due to increases in working capital requirements, caused primarily by higher ethanol prices and the higher inventory levels.

Non-expansion capitals spending in Q4 totaled $4.7 million. Capital spending on expansion projects totaled $76.4 million in Q4, excluding capitalized interest of $4.2 million.

For the year 2007, we have spent $227.9 million on capital projects, not including capitalized interest, of which $16.2 million was for non-expansion projects and $211.7 million was spent on capacity additions. The amount spent on expansion projects for '07 excludes $7.3 million in capitalized interest.

Our Q4 '07 expansion capital were approximately $38 million less than we had expected in our third quarter call. These expenditures have been shifted into '08. Also during the fourth quarter of '07, the company repurchased 248,315 shares of its common stock at an average price of $8.01, totaling approximately $2 million under the company's stock repurchase program approved by its Board of Directors in October '06. The amount remaining under the authorization to repurchase stock is $45.9 million.

Now further discussion on auction rate securities and liquidity. At year end '07, we had invested $211.5 million in taxable auction rate securities which I will refer to as ARS which we classified as current assets. The ARS held by the company are private placement securities with long-term stated maturities for which the interest rates are reset through a Dutch auction every 28 days

The auctions have historically provided a liquid market for these securities as investors could readily sell their investments at auction. With liquidity issues experienced in global credit and capital markets, the ARS held by the company have experienced multiple failed auctions, beginning on February 8, 2008 as the amount of securities submitted for sale has exceeded the amount of purchase orders.

Subsequent to year end, we began to exit our position in these securities. As of February 21, we had successfully liquidated $84.3 million of these securities, thereby leaving us with $127.2 million invested in ARS as of February 21. We incurred a pre-tax loss of approximately $1.5 million in connection with these liquidations.

All of these securities continue to carry AAA ratings and have not experienced any payment defaults and are backed by student loans which carry guarantees as provided for under the Federal Family Education Loan Program of the United States Department of Education. Nonetheless, if uncertainties in the credit and capital markets continue, these markets deteriorate further or there are any ratings downgrades on any ARS we hold, we may be required to recognize impairments and/or reclassify these investments from short-term to long-term investments.

In addition, these securities may not pay provide the liquidity to us as we need it, as it could take until the final maturity of the underlying notes up to 35 years to realize our investments' recorded value. Currently, there is a very limited market for any of these securities and further liquidations at this time, if possible, would likely be at a significant discount. Accordingly, we do not currently intend to attempt to liquidate any more of these securities until market conditions improve or our liquidity needs require us to do so.

Cash and cash equivalents as of year end '07 was $17.2 million. Successful ARS liquidations completed in '08 generated another $82.8 million. Also as of December 31 '07, we had availability under our secured revolving credit facility of $122.6 million.

Now against these resources, our total estimated remaining expenditures needed to complete out two new facilities at year end were estimated to be between $295 million and $305 million approximately evenly spent over the balance of the construction period through Q1 of '09.

After utilization of our current available resources, should we not be able to liquidate a substantial portion of the remaining portfolio of these ARS securities on a timely basis and on acceptable terms, we will have to either attempt to raise additional funds or slow down the construction of our new facilities, or both. In addition, delays in construction of our new facilities could expose us to material penalties.

The amount available to us under our secured revolving credit facility is calculated using a borrowing base. In addition to a component relating to inventory and receivables, there is a fixed asset component included in the borrowing base. The amount of fixed assets eligible to be included as collateral in our borrowing base at year end was $48.2 million, and decreases by $1.8 million each quarter thereafter.

Our liquidity facility is a $200 million facility, subject to collateral availability, and is expendable under certain conditions to $300 million.

Now let me provide expectations for 2008.

As at year-end, we had contracts for delivery of ethanol totaling 307.6 million gallons through December of ’08. These commitments were for 62.8 million gallons at an average fixed price of a $1.78 per gallon, 72.7 million gallons at an average spread to wholesale gasoline of a negative $0.45 per gallon based on NYMEX, Chicago and New York Harbor indices, and 172.1 million gallons at Spot prices using various Platt, OPIS and AXXIS indices. The majority of these contracts are in the first half of 2008.

For the first quarter of ‘08, we had contracts for delivery of ethanol totaling 118 million gallons. These commitments were for 25.7 million gallons at an average fixed price of $1.81, 22.6 million gallons at an average spread to wholesale gasoline of negative $0.47, and 69.7 million gallons at Spot prices. Clearly, we remain heavily weighted towards the Spot ethanol market for 2008.

At year-end, we had fixed the price of 14.8 million bushel of corn through July at an average price of $4.15 per bushel, which represents approximately 34% of our corn requirements during this period. This net number is made up and includes the following derivative positions. At the end of Q4 we had forward physical delivery purchase contracts covering 10.7 million bushel through December ’09 at an average price of 410 per bushel at our Pekin Complex. Only 400,000 bushel of these positions are for period beyond ’08.

None of these forward physical purchase contracts have been mark to market. These forward physical purchases have been partially offset by the sale of CBOT Future's positions, covering 3.9 million bushels of corn at an average of $4.28. We sometimes do this to lock in the basis differential. These short positions are mark to market each period with corresponding gains and losses recorded at another non-operating income at the end of each period.

Finally, to protect ourselves against further price increases in corn, we've also purchased long CBOT Future positions totaling 5.3 million bushels of corn at an average price of $4.20 per bushel. These long positions extend through July of '08 and also mark to market each period, with corresponding gains and losses recording in other non-operating income. We've also permitted to purchase 2.7 million bushels of corn through July at Nebraska energy plant. While the final cost of bushels purchased for our Nebraska facility will not be determined until delivery, we have fixed the CBOT portion of the price at an average cost of $4.10 minus the basis differential to be determined later. Bottom line there is that, we have fixed approximately 34% of our corn requirement through July of '08.

We also had outstandings at the end of the quarter, short gasoline positions covering 24.1 million gallons of gasoline for delivery through December of '08, at a fixed average price of $2.29 per gallon. We did this to protect some of our gas related sales contracts, for potentially falling gasoline prices. Our capital spending expectations for expansion projects is estimated to be between $295 million and $305 million, excluding capitalized interest. Our non-expansion CapEx spending is expected to range between $20 million and $25 million for '08. We expect our ongoing SG&A annualized run rate for '08 to be between $35 million and $40 million.

Now I'd like to turn the call back to Ron.

Ron Miller

Thank you, Ajay. As we move further into 2008, the markets remain nervous about ethanol stocks. However, from our perspective, the New Year brings with it an improved market outlook. While there are still uncertainties in the sector, we believe that the regulatory and political climate and support for ethanol is quite positive.

Late in 2007, the ethanol industry became the beneficiary of a vastly enlarged consumption mandate that we believe will shift the pricing environment more in favor of ethanol producers. The new RFS passed by Congress and signed by President Bush in December may give some comfort to investors that there is a floor for ethanol demand that is significantly higher than what production was at the end of 2007.

At year-end the domestic US ethanol industry was capable of producing around 7.5 billion gallons annually. The new RFS for 2008 is 9 billion gallons, although carry-over rents, renewable identification numbers that can affect the actual amount required to be purchased. We believe that the market can absorb a significant portion of the new supply coming online through the increased mandates which we believe should take some of the negative price pressures off of ethanol.

It is difficult to know for sure how much and when the new supply capacity will begin to reach the marketplace. There have been several announcements lately about delays in plans coming online. From this we try to make inferences about the market place in general. We believe we will probably see some choppiness in the market as marketplace supply-demand have balanced in 2008 with chunks of supply coming online and then this supply getting absorbed. We expect that the effect of this will probably be, rising and falling ethanol prices throughout the year.

A record corn crop will likely be needed again this year to keep prices from climbing further. Higher corn prices today are buying corn acreage for the upcoming planning season, which we believe should ethanol producers in the longer term. Also the demand for corn is spurring in science to develop higher yielding seed varieties, that over time may result in bigger crops and moderated corn prices, although USDA's initial view of 2008 is for lower acres in and higher yield.

Logistical impediments to meet the minimum use obligations under the RFS, from dedicated storage tanks, to the availability of rail terminals and other bottlenecks, which is widely been discussed as a reason for the lack of increased discretionary ethanol blending, prior to the [passage] of the RFS has now become the problem of obligated users, such as refiners and blenders to help resolve.

We believe that the ethanol industry stands ready and will work to help our customers meet their requirements under the new law. With the new higher mandate behind us, the next objective for the ethanol industry will be the introduction of higher blend levels. We believe the ethanol industry will need to begin focusing our efforts this year on a waiver from the EPA that will allow higher level ethanol blends such as E12, E15, or E20.

The big picture message, to everyone, is that we believe this country by 2015 will be blending 10% ethanol in every gallon of fuel sold. We expect to start seeing people working towards putting the infrastructure in place to accomplish this. We as a company continue to do our part in opening up new markets.

Now, Ajay and I would be happy to answer question that you might have. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Heather Jones with BB&T Capital Markets. Please proceed.

Heather Jones - BB&T Capital Market

Good morning.

Ron Miller

Good morning, Heather

Heather Jones - BB&T Capital Market

I have a couple of quick questions. One, if liquidity issues you outlined, I'm just wondering if you have an estimate of how much if you had to liquidate those today, you mentioned $1.5 million impairments so far, I mean if you had to liquidate them today do you have some kind of estimate of how much you will lose?

Ajay Sabherwal

Heather, this situation has just occurred, everyone has read about it in the journal almost on a daily basis. So, as we said, there is a significant -- if there is liquidity at all it is at a significant discount to par at this time, but this is a very volatile situation. And as we’ve said in our release, don’t believe. Now is the time for us to try and do any further liquidations at this significant discounts to par. We’ve the liquidity today, in terms of the cash and in terms of our revolver. And so, we’re going to wait till this settles down. And we believe, we have very secured AAA bonds here that should not be trading at the significant discount that they are today because of the liquidity issues. In terms of a specific quote, I would not like to do that, I mean certainly various bond desks can do this, because this is a fairly volatile and relatively illiquid situation.

Heather Jones- BB&T Capital Markets

Now you mentioned that your credit facility could be expanded to $300 million based on current conditions, what could be [explanative] based on your balance sheet today?

Ajay Sabherwal

The way it works is that it's a -- and then we have give numbers as of year end, is you take their inventory and your receivables and you put a certain percentage, I think its roughly 80% in both cases, and you get a certainly borrowing base, you add to that your $50 million of PPNE, which is amortizes quarterly for roughly seven years. So, that's your borrowing base. What that means is, say our inventory increases or the value of our inventory increases, it's not a one-for-one relationship, but it does increase the borrowing base and therefore allows us to borrow more. So, that is up to $200 million and if that inventory and receivables expands in such that the borrowing base exceeds $200 million, then subject to certain approvals, you can take this facility to $300 million as well.

Heather Jones- BB&T Capital Markets

Okay. My final question is, going back to your ethanol contracts, the spread ones, relative to gas, significant discount, that discount has narrowed and, call it, over the last few weeks, so I was wondering if you're continuing to sign the spread contracts and if you are, have you seen that discount narrow in those contracts of late?

Ron Millwe

Without giving specifics, these contracts were done earlier in 2007, when the markets were not as robust as they are today. And the way this generally works is, the spot markets goes a long way to determine what the pricing is for fixed price and gas related contracts. And the spread between ethanol and gasoline, spot ethanol and spot gasoline, has narrowed and the market would normally reflect that narrowing.

Heather Jones- BB&T Capital Markets

Okay, thank you

Operator

Your question comes from the line of Mike Judd with Greenwich Consultants. Please proceed.

Mike Judd - Greenwich Consultants

Good Morning,

Ron Millwe

Good Morning,

Mike Judd - Greenwich Consultants

I realized that, based on your comments that it doesn't look like you are going to have an issue in terms of having the adequate funds that you need to finish construction of your two plants, so what if scenario here. The material penalties that you alluded to were, it's in your release here. Just wondered if you could provide a little bit more of detail on that? Again I realize that this is hopefully a temporary issue, but just want to better understand that particular aspect of it please?

Ajay Sabherwal

Yeah. Well, as we talk about in our various prospectus etcetera, we have EPC contracts with Kiewit to build, for Peter Kiewit Sons to build these plants and these contracts have certain penalties related to termination of those contracts.

Further to that, if we delay the plants, we could be, the contractor could be entitled to cost escalation. Even beyond that, we have obligations for example in both in Nebraska and in Indiana to build our two plants there to our partners. So it's difficult to put a precise dollar amount on this, but suffice to say there could be material penalties.

Mike Judd - Greenwich Consultants

I mean is it possible to draw a box around the problem.

Ajay Sabherwal

Is it possible to there? In certain regards, it is, in others, it isn't. For example, if you delay by three, six months, yes, you could put some boxes around those. But if you don't build at all, for example, then your partners may come back to you and say those were certain obligations and those as difficult to put a box around those. So it varies in terms of what you actually end up doing.

Mike Judd - Greenwich Consultants

Okay. Just not but do this as debt, but let's say it's option A which is a three to six month away. What is sort of the box range?

Ajay Sabherwal

Again in that too, there are two components. Let me try and be helpful. There are penalties related to delays which are relatively in the single digit millions and then there are penalties related to cost escalation. Cost escalation is difficult to estimate because it depends on where steel prices etcetera are at the time that you actually built, whereas when the contractor is planning to get those box of equipment in.

Ron Miller

And, Mike I think one another issue to think about driving us is delays themselves beyond this cost us money. If we were to delay, we lose the opportunity to produce these gallons in the marketplace. If you go quickly back to the fourth quarter numbers, [commodities rose] well over a dollar a gallon or conversion costs were in the $0.60 if you just use that range, that's about $0.40 a gallon and these plants will be putting out well in excess of 500,000 gallons a day when built.

And so obviously, there is a very strong economic driver for us to complete these plants on schedule. So, any analysis that we would do on whether or not to liquidate bonds at discount or borrow against bonds or whatever we need to do, would be reflected against the opportunity cost, if we were to -- that we would lose if we were to slow these plants down.

Mike Judd - Greenwich Consultants

Okay. I won't take up too much time here, but just lastly with the ARSs, if there is some sort of resolution with the monolines, would that in your opinion help to resolve this issue?

Ajay Sabherwal

Two points there; we don't have bonds that are insured by those agencies. We have government guaranteed bonds and federal government guaranteed bonds. So, to the extent that those issues get resolved, and to the extent that it brings liquidity into the marketplace which then cascades over to the types of bonds we're, it would be helpful. But we're not directly affected by, we're not in those bonds as it were.

Mike Judd - Greenwich Consultants

Thanks for the help.

Operator

Next question comes from the line of Mansi Singhal with Lehman Brothers. Please proceed.

Mansi Singhal - Lehman Brothers

Good morning.

Ajay Sabherwal

Good morning, Mansi.

Mansi Singhal - Lehman Brothers

The question is, is there any thought around kind of what is the maximum amount would you be willing to delay these facilities versus canceling them, I mean is there a kind of that breakeven point?

Ajay Sabherwal

Mansi, we've a renewable fuel standard of 15 billion gallons, specifically related to corn-based ethanol. These plants, we've already spent over $200 million to build and we know that blenders have to got to blend ethanol and to that end we already hear about many, many plants canceling not being built and what have you.

So there comes a point in a year or two when blenders will have to pay people to build new plants. Today the plants under construction don't equal 15 billion gallons for example. So we believe it is a right thing to do to build these plants.

Now if the issue is liquidity, the point is we do have cash available plus the ARS liquidations plus the revolver which expands the working capital spend and we are generating positive EBITDA from our business. Those are our resources, we have investment in the ARS bonds that are AAA bonds and not insured by people like the monolines.

So we believe that we should be able to construct our facilities. What we have laid out are the various options if liquidity is not there, starting we are trying to liquidate these bonds, using our revolver, and potentially delaying the expansion. But there is no thought around canceling these projects.

Mansi Singhal - Lehman Brothers

Thank you, couple of modeling questions from me. What is the percentage utilization your facilities are running out right now, and what was your conversion cost in the last quarter excluding the maintenance expenditure, so what underline conversion rate should be modeling for going forward?

Ajay Sabherwal

Mansi, I think we said in Q4, our utilization based on nameplate was 89%. We have not given guidance for 2008, so you'll have to wait to see as we report our quarters. Remember the nameplate capacity is on a full denatured basis. There are roughly 5% denaturant blending, and in the past we have talked about lower denaturant blending. Capacity utilization also is a function of planned and unplanned outages and what have you. So it’s a combination of factors. Our conversion cost, I think, we said in Q4 was $0.66 per gallons and we have not broken down what maintenance is as part of this. You have good history over the course of the prior years of conversion cost, so that's modeling approach that we may wish to use.

Mansi Singhal - Lehman Brothers

So just coming back to that utilization question, do you expect kind of it to go up in the first quarter just directionally?

Ajay Sabherwal

Let me put this way. We are going to make every attempt to make that utilization percentage go up, where all our efforts are in that direction. But for example, on denaturant, denaturant trades at $0.15 to $0.20 discount to gasoline, as long as Spot ethanol is below $0.15 to $0.20, it doesn't make sense to blend 5%, you'll continue to blend 2%, otherwise you'll lose money on that additional 3%.

In terms of plant capacity, in terms of outages planned and unplanned, yes absolutely we'll make every attempt to increase that number.

Mansi Singhal - Lehman Brothers

Okay. And just a final question maybe for Ron. Can you just talk a little bit about the South East market? Are you currently taking any product there? And over the summer kind of some additional states are expected to open up regulations change and do you have enough tank cars to run a fake product there when the demand increases

Ron Miller

Yes we've had a very good result from our southeastern effort. Two of our sales have been working in that region of the county, and have brought on several customers. We do have sufficient tank cars to supply the market. We are in the process of working on terminal hubs down there that some should be up by middle part of the year. So we feel very comfortable about our position in the southeast. Also as we open our new facilities, particularly Mt. Vernon facility setting right on the Ohio River, that will help our south east efforts coming into the next year.

Mansi Singhal - Lehman Brothers

Are you taking any product currently to Georgia?

Ron Miller

Yes. Yeah we have a terminal at Atlanta that has been there since 2005 and it's become one of our more robust terminals.

Mansi Singhal - Lehman Brothers

Thank you

Operator

Your next question comes from the line of Arjun Murti with Goldman Sachs. Please proceed

Arjun Murti - Goldman Sachs

Thank you very much. I guess it sounds like, I think you used the phrase "no thought of cancelling the projects". How much confidence do you have that your bank borrowing capacity will be available to you? It seems like lot of banks are having troubles and the ethanol sector is having trouble. What confidence do you have in your availability being there?

Ajay Sabherwal

Arjun, we have a -- this is a contractual commitment, where we have an asset based loan secured by receivables and inventory, and an element of PP&E. I would expect that to be honored and that's the assumption I would base my planning upon.

Arjun Murti - Goldman Sachs

In terms of financing alternatives, would you consider issuing new equity, preferred stock or common stock or a convertible bond?

Ajay Sabherwal

Whilst we think our equity is cheap, that would be a hypothetical question. As I said, we have cash and other resources. We have a revolving credit facility. We may need to borrow additional amounts and we would assess, if that juncture were to be reached we would assess every possibility. So that’s how we would look at that, Arjun.

Ron Miller

I think it's also important Arjun to realize that this is not a problem that needs to be solved tomorrow. We have quite a bit of cash on our balance sheet, and the spend that we have on these pants is fairly ratable through the build out in the first quarter. So, at some point we would be looking at all of our alternatives, what has happened to this bond market, what's in the debt market, the equity markets? Relay all that against the opportunity cost as I mentioned of delaying these plants, that’s as another options. But, given the current market place of about $0.40 a gallon, there is an opportunity cost there if we delay these plants, but all that would have to be on the table, at the appropriate time which is really not yet today.

Arjun Murti - Goldman Sachs

I mean, I guess our numbers certainly could be too conservative and the margin outlook could be better than what we are modeling, but it does seem like it's an second half kind of issue which isn’t that far away and you haven’t spent the money yet, so it's just a little hard to understand the, the kind of we are building these plants no matter what tight [management] your taking to this?

Ajay Sabherwal

Arjun, I appreciate where you are coming from. There is an element of -- that is our strategy today, this situation with the ARS bonds has only just occurred. And I would hope that the liquidity in these bonds improves as things settle down. But today with the renewable fuel standard and with the other plans around us canceling and given how much money we have already spent, what we’ve said we think is the better judgment.

Arjun Murti - Goldman Sachs

I appreciate your perspective. Thank you very much.

Operator

Next question comes from the line of Ken Zaslow. Please proceed.

Ken Zaslow - BMO Capital Markets

Hey, good morning everyone. Can you hear me?

Ron Millwe

Good morning Ken.

Ken Zaslow - BMO Capital Markets

I guess I have two questions, one is, if you think about the CapEx spending is up $300 million for the year, you have $220 million of it already locked up in terms of having cash, so is this is a -- the liquidity issue comes to bare only in nine or so months is that a fair issue?

Ajay Sabherwal

Ken, you have a great model, we don’t have, we don’t give -- the other two components there obviously our EBITDA offset against interest, which is fairly defined and working capital. So, we don’t give guidance on those, therefore I would not rush to give you that precise number, that’s why it's not in the release. But your models are good models.

Ken Zaslow - BMO Capital Markets

Okay. The second question is in terms of the outlook. Ron you said I think in the prepared comments that the capacity coming online in '08 might exceed demand, but if you guys have any example of what's happening, it seems like, no doubt the ability to build and have the capacity to come online as quickly as everybody thinks coming online seems to be somewhat delayed is that -- I mean can you talk about that a little bit, you kind of paint a picture that there is supply capacity overrun, but yet, again, if you guys are an example, seems like capacity is not coming on nearly as quickly as maybe everybody wants to believe?

Ron Millwe

Well, within our alliances, we've seen delays from the expectation that these plants originally gave us, they run quarter behind for a variety of reasons, with the margins being where they were in the fourth quarter, there hasn't been a big rush to complete this, so, people are not working overtime. There may be various shortage of either steel or workforce to finish, there are host of reasons as to why they're being delayed. But we're seeing and perhaps some of it was optimistic. We were up due to optimistic forecast originally, because of the robustness of the marketplace back in 2006.

So, it does seem to be that there are delays, the schedules are stretching out little bit. We certainly have this big increase of demand this year. And I think one measure to watch for how the supply demand balance is coming along, are the values of this RINs, I think they're up anywhere from $0.03 to $0.05 a gallon and before the RFS change, they were virtually worthless. So, there is some concern on the obligated parties part that they need to get RINs in place in case they are not able to buy the physical ethanol, because one gallon of RINs equals one gallon of ethanol.

And there is about 800 million to 1 billion of these RINs that are available for carryover from 2007 to 2008. That’s why we forecast a choppy year, because as these plants come on, they're going to come on in very large chunks. 100 million gallon type plants, and then we'll have to work that in the market place. And then we have large groups of demand coming on, one terminal I think in Southern Carolina that indicated they were going to take the entire market to E10, because they couldn’t handle both the base gasoline and conventional gasoline. And so, we'll see probably pockets of large demand coming on as the logistics are worked out and try to balance those two is going to be a interesting process this year

Ken Zaslow - BMO Capital Markets

And again my last question is, in I'm terms of the export coming to the US that seems to have slowed considerably. Does that have any impact on your guys?

Ron Millwe

Well that’s a function of marketplace in the arbitrage, its available when ethanol prices were quite high, there was available and we saw imports flow in. Now that that arb is closed, we're seeing the lack of demand. It's one of those components that balances supply and demand. We think we'll continue to see a steady flow of product coming in from the Caribbean basin. In Brazil, they have their own issues in terms of what their crop look like, what's the price of sugar, what's the demand in Brazil. And so, probably we'll see that go up and down, but as prices go up then we tend to see the arb open and product flowing in. Right now that arbs not there, so we're not seeing the product.

Ken Zaslow - BMO Capital Markets

Great thank you.

Operator

Your next question comes from the line of Ron Oster with Broadpoint Capital. Please proceed

Ron Oster - Broadpoint Capital

Good morning, I had a question. I was wondering if you could give any details, we've talked about the amount of capacity under construction and some of that that might be delayed. Have you had any of your alliance partners that have suspended construction, and, if so, by that timeframe or what's kind of your outlook there and your experience with your alliance partners?

Ron Miller

We've not had any that's suspended construction. We've had plants that we classify as under development and we tend to be a little conservative when we look at this. Just because you turn a spate of dirt in a ground doesn't mean that you are under construction, even though some people might think that they are under construction.

So the ones that were truly started and are being built have not been suspended now, we are seeing again a few delays here and there, quarterly delay for whatever reason or that kind of stuff, but no suspension.

What we are seeing is the ones that are under development, that we classify as under development are staying underdevelopment in all likelihood, are waiting for a better margin environment before they actually start up and we can't be assured that all of them will start up/. But right now we are not seeing any activity of shifting from, what we considered the under developed category to the under construction category.

Ron Oster - Broadpoint Capital

So I guess would it be fair to say that your outlook is that the majority of the 5 billion gallons under construction will ultimately albeit subject to some delays find its way to first production to the market?

Ron Miller

I think so, I can't say with certainty that all, 100% of all that will get build because I'm just reflecting what's in our alliance. But I would say a large, a very large percentage of the plants that are under construction probably will get finished out and built, but we are not saying a new wave of construction starting.

Ron Oster - Broadpoint Capital

Great. And then also another macro question with regard to the gasoline ethanol spread; with the new RFS, it's narrowed to close to parity. And just wondering your outlook there, I would think was the immediate heightened RFS that was put into place. I would kind of expect that ethanol would trade at a discounted gasoline as we move forward in some of these capacity finds, it's way to the market, I was just wondering your thoughts there?

Ron Miller

It could, I think the real, what is couple of moving price, what's the price of gasoline and what's the price of oil, what's the price of corn. If you look at for example $5 corn, it's to get ethanol by the market place is on a cost basis is roughly $2 gallon.

And so if the oil price is $70, you are going to need a premium against gasoline, otherwise the product won't clear, people will produce it. If you are at $85 oil, you've got lower cost structure on ethanol than you do on gasoline. So yeah, you want to make margin on the business but you could have a reason for discounted gasoline.

If oils are $100 like it has been and gasoline is up over $260, then there is room for a reasonable margin for an ethanol producer and discount to the marketplace. So a lot of these factors will come into play as to what the actual spread ethanol and gasoline is and then that's going to be further influenced by the chunks of supply and the chunks of demand that come on.

If the chunk of supply comes on, then it's trying to find its way in the marketplace, it may have to discount to provide quicker incentives for all kind of its uses. If work I mean put a chunk a demand on and the supply isn't quite there, then it's going to bid the spot price up to sort of pull it in.

And keeping in mind the value of ethanol not the price of ethanol but the value of ethanol is the price of gasoline plus the tax credit plus its octane value. So we’re talking about a value of ethanol well up into the $3 and something range.

So there is no scenario I think that anybody is expecting to say that ethanol will get its full value. So there is going to be economic incentives for all companies to use ethanol as well as the mandate incentive that they got to meet.

Ron Oster - Broadpoint Capital

Great, thanks. I'm just switching gears, one last one on the liquidity issue was roughly a $100 million in cash on hand and I kind of calculate a CapEx burn rate about $75 million per Q. Would it be fair to say that you'll have to tap into, should you not be able to liquidate your existing positions, tap into your existing credit facilities in the next four months or so. Is that kind of, am I doing the math right there?

Ajay Sabherwal

Should we choose not to liquidate those in that prices for liquidation are ones that we're not we don't find acceptable, then that would be a reasonable conclusion.

Ron Oster - Broadpoint Capital

Okay, great. Thank you.

Ajay Sabherwal

Thank you, Ron.

Operator

Your next question comes from the line of [Jin Ming Liu with Adore] 1:13 30. Please proceed.

Jin Ming Liu - Adore

Good Morning

Ron Miller

Good Morning.

Jin Ming Liu - Adore

Hi, I have a couple of questions. The first one is, in terms of your marketing alliance, there is going to be a significant capacity coming online as you mentioned about 1.1 billion gallons. So are you going to spend some - how are you going build out the distribution system in terms of handle that additional production?

Ron Miller

The volume is coming on in 2008 is about 416 million gallons. It will take us to then up to about 1.1 billion gallons total for the year, but the incremental piece is about 400 million. If you were to go back and track some of our previous reports in terms of numbers of rail cars, in terms of barges, and numbers of terminals you will see that we've continually expanded our distribution assets. For example, we have 59 terminals under contract. We have 54 of those operating, five are under construction. Under construction is essentially the terminals there, but they're setting the tanks up to handle ethanol. So you can see that we've expanded by five terminals this year to take on the additional volume. Our rail car fleet is up and so we know when these plants are going to come on. We've already taken the steps to put the infrastructure in place, and are continuing to do so as we look forward into the coming years. So we are ahead of the curve on that.

Jin Ming Liu - Adore

Okay. My next follow-up question on that is do you have any clarity about one, the product capacity coming on line. They are later this year or in both case of your marketing alliance and the whole ethanol market.

Ron Miller

Well the marketing alliance numbers that we put in the press release we think they reflect our latest thinking in terms of when these plants are coming on. Again we've seen, and this is sort of an average, but we've seen about a quarter delay in the startup with these alliance plants though our numbers reflect that. We're also seeing we think the same and the market place is beginning to see about a quarter delay in a lot of these plants. So we're looking at a 9 billion gallon standard. Certainly by the end of this year we're going to be well over 9 billion gallons in terms of capacity, but for the year we are going to be surplus from the minimum mandated requirement, but we are certainly not nearly as out of balance as we would have thought six months go, looking at the supply-demand balance at that point.

Jin Ming Liu - Adore

Okay. My last question is; what was your natural gas cost in 4Q?

Ajay Sabherwal

We don't disclose our natural cost numbers. We don't break that specific information down, bit it's fairly inline with where natural gas trades on indices plus delivery cost.

Jin Ming Liu - Adore

Okay. Got that, thanks.

Les Nelson

We have now reached our one hour time limit. This concludes our conference call for today. We would like to thank you again for your participation.

Operator

Thank you for you participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.

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Comments

[Vegasjoe]

Let's see: the price for corn is increasing for them from $3.66-3.86 in 2007 to $4.20 in '08; contracts to deliver product seem stuck at $1.72 to 1.92; the company financial strength has been infected by the CDO meltdown virus in their variable aution rate securities; and while the industry is somewhat the beneficiary of political winds, the economics are still not within reach to drive sequential earnings growth of any consequence. What am I missing? The stock got hammered last week.