Pacific Ethanol Inc Q1 2008 Earnings Call Transcript

| About: Pacific Ethanol, (PEIX)

Pacific Ethanol Inc (NASDAQ:PEIX)

Q1 2008 Earnings Call

May 19, 2008 10:00 am ET


Gregory Pettit – Hill & Knowlton

Neil Koehler – Chief Executive Officer, President

Joe Hansen – Chief Financial Officer


Ron Oster – Broadpoint Capital

Eitan Bernstein – Friedman, Billings, Ramsey

Jinming Liu – Ardour Capital

Joe Gomes – Oppenheimer


Good day ladies and gentlemen and welcome to the first quarter 2008 Pacific Ethanol Inc earnings conference call. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Gregory Pettit of Hill & Knowlton, you may proceed.

Gregory Pettit

Good morning and welcome to Pacific Ethanol’s first quarter conference call. First I’d like to point out that there is a PowerPoint presentation to accompany this call on the company’s investor page, so click through to the investor page and scroll down to the bottom and you’ll find a presentation to download. Furthermore, this call can be accessed through dial up and web based replay for the next two weeks, you can check our website for details on that.

For some Safe Harbor language, this conference call may includes forward-looking statements, including statements concerning future conditions in the ethanol marketing and production industries and concerning the company’s future business, financial condition, operating strategies, and operational and legal risks.

The company uses words like believe, expect, may, will, could, seek, estimate, continue, anticipate, intend, goal, future, plan, or variations of those terms and other similar expressions, including their use in the negative to identify forward-looking statements.

Prospective investors should not place undue reliance on these forward-looking statements which speak only as to the company’s expectations as of the date of these materials. These forward-looking statements are subject to a number of risks and uncertainties, including those identified under risk factors in the most recently filed of the company’s annual report on form 10-K or registration statement, including any related final prospectus or prospectus supplement as filed with the Commission.

Although the company believes that the expectations reflected in these forward-looking statements are reasonable, actual conditions in the ethanol marketing and production industries and actual conditions in results in the company’s business could differ materially from those expressed in these forward-looking statements.

In addition, none of the events anticipated in the forward-looking statements may actually occur. Any of these different outcomes could cause the value of the securities, including the price of the company’s common stock, to decline substantially.

Except as required by law the company undertakes no duty to update any forward-looking statement after the date of these materials either to conform any statement to reflect actual results or to reflect the occurrence of unanticipated events. With that I would like to turn the call over this morning to CEO and President, Neil Koehler.

Neil Koehler

Thank you Gregory and welcome everyone to Pacific Ethanol’s investor call to discuss our 2008 first quarter financial results. I am joined today by Joe Hansen our Chief Financial Officer. I’ll make a few opening remarks followed by Joe walking us through the numbers. After a closing comment or two on the market environment, Joe and I will be available for questions and answers.

We are pleased to report a strong operating quarter. We achieved record sales of $161.5 million, an increase of 63% compared to $99.2 million in the first quarter of 2007. In the first quarter of 2008 we sold a record 59.2 million gallons, a 58% increase compared to the 37.5 million gallons in the first quarter of 2007.

We reported a net loss for the quarter after dividend payments of $36.3 million, or $0.90 per share. $0.96 per share of this loss was due to a non-cash good will impairment net of non-controlling interest. Without this charge we would have reported positive net income of $0.06 per share. Our gross profit was $15.7 million compared to $15.3 million in the first quarter of 2007 and EBITDA grew 159% to $12.4 million compared to $4.8 million in the first quarter of 2007.

Of our 59.2 million gallons sold in the quarter, 23.2 million gallons were from equity production with the balance of 36 million gallons from third parties. Our equity production will increase significantly in the second quarter as we successfully started up our Magic Valley plant in Burley, Idaho in April.

I’m pleased to announce that last week we completed a seven day bank test verifying a 60 million gallon operating capacity for our Idaho plant subject to confirmation from our independent engineer. We remain on track to finish our Stockton, California ethanol plant in the third quarter of 2008 and we’ll enter the fourth quarter with an annual operating capacity of 220 million gallons.

In the quarter our plants achieved production levels that were 107% of design capacity. We are very focused on improving our operating efficiencies at all of our plants and in developing the next generation of ethanol production processes. We’re working with our technology partner, PDX of the UK to install and operate proprietary equipment at the front end of our Oregon facility to increase ethanol yields per bushel of corn input.

We’re working with our cellulose technology partner, BioGasol of Denmark and the Department of Energy in developing the specific work plan for building our 2.7 million gallon commercial cellulose demonstration plant, also at our Oregon facility and we’ll begin construction in 2009 with commercial production expected in 2010.

With that I’d like to now turn it over to Joe to run through the financial details of our first quarter 2008 results.

Joe Hansen

Thank you Neil and good morning everyone. The first quarter results included both a goodwill impairment charge and positive income on an operating basis. The following discussion should assist you in understanding the elements affecting both.

Slide 2 has a list of the items we will cover. On slide 3 we summarize the income statement. Our net sales increased to $161 million in Q1 08 from $99.2 million in Q1 07, a 63% year over year increase. Going to slide 4, our net sales and gallons sold, we sold 59.2 million gallons of ethanol in Q1 08, up 58% from 37.5 million gallons in Q1 07 and also up 2% over the prior quarter.

Our third party purchases and marketing activity represented 61% of our gallons sold in the first quarter. Going to slide 5, we saw a strong rebound in gross profit margin in Q1 08 from rapidly rising ethanol prices and advantageous corn positions benefitting our production margins.

Our gross profit was $15.7 million or 9.7% as a percentage of sales in Q1 08 compared to gross profit of $15.3 million or 15.4% as a percentage of sales in Q1 07. Going back to slide 3, our SG&A expenses as a percentage of sales decreased to 6.1% in Q1 08, down from 9.6% in Q1 07.

We expect our SG&A expenses to continue to decrease on a per gallon as well as a percentage basis relative to sales. The goodwill on our balance sheet was primarily related to the acquisition of our interest in Front Range Energy LLC. Following our annual goodwill impairment test as of March 31, 2008, we recorded a non-cash charge for goodwill impairment of $87 million.

Keep in mind that our financials reflect Front Range’s data on a fully consolidated basis and of the full impairment amount, $48.4 million relates to the non-controlling interest resulting in a net impairment charge of $38.6 million.

Changing equity and industry market factors since the time of our acquisition, such as stock price decrease, the compression of production margins and decrease in valuation of ethanol firms in general indicated impairment of goodwill. After the net impact of the goodwill impairment, we recorded a net loss of $35.1 million compared to $3 million of net income recorded in Q1 07.

Excluding the charge for goodwill, our operations generated net income of $3.5 million for Q1 08. The quarter also includes other special items totaling $0.5 million of expense. During the quarter we recorded a non-cash charge of $5 million to reflect the decrease in fair value of interest rate hedges against our construction debt facility. As mentioned in prior periods, this is to record the change in fair value of our interest rate hedges in a declining interest rate environment.

This charge was partially offset by $4.5 million of income from Oregon business energy tax credits related to our Boardman ethanol plant. We also recorded a net commodity derivative gain of $2.2 million for the quarter. This figure is comprised of derivative gains of $900,000 related to hedge positions that settled during the quarter and $1.3 million of unrealized mark to market gains on open positions that will settle in future periods.

After deducting preferred stock dividends of $1.1 million, or net loss available to common shareholders is $36.3 million or $0.90 per share of which $0.96 is related to the net impairment for goodwill. Moving to slide 6, EBITDA was $12.4 million for the quarter, up from $4.8 million in Q1 07 resulting from improved performance in our marketing and production activities and reduced SG&A expenses as a percentage of net sales.

Please keep in mind that the special items discussed earlier with the exception of the commodity derivative impacts are already added back into these EBITDA figures. On slide 7, we summarize our commodity price performance. As pointed out, we grew both our production and third party sales gallons.

Our average selling price of ethanol was $2.30 during the quarter, down slightly from $2.34 in the same quarter a year ago, but up from $1.97 in Q4 07. During the first quarter, our delivered cost of corn were $5.33 per bushel, up about 20% from our delivered Q4 07 delivered cost of $4.45.

Our corn basis averaged $0.77, giving us a CBOT equivalent corn cost of $4.56 per bushel compared to the average CBOT market price of $5.17 during the quarter. Corn basis was up from $0.59 a year ago and $0.65 in the prior quarter due to rising mileage based rail fuel surcharges and increases in tariff freight weights.

Our $0.61 per bushel corn cost advantage over CBOT helped improve our co-product return to 26.4% for the quarter up from 23.7% in Q4 07 but still down from the 30.9% co-product return in the same quarter last year. As indicated in our previous call, we have fixed price sales contracts for a portion of our co-products that continued through the third quarter of 2008 which have acted to dampen the co-product return.

As CBOT corn prices have continued to rise into the second quarter, our co-product return may remain under pressure. The net impact of the ethanol, corn and co-product metrics just discussed resulted in a production commodity margin of $0.91 per gallon for the quarter.

While the production margin is down versus Q1 07 due to higher corn costs, it was up from the $0.75 per gallon recorded in the previous quarter. At quarter end, we had forward fixed price ethanol sales contracts with a dollar value of $47.3 million as well as 15.7 million gallons of forward indexed based ethanol sales.

Our forward corn purchase commitments consist of $1.4 million of fixed price contracts as well as 7.6 million bushels of forward indexed based purchase contracts. Additional details of our purchase and sales commitments will be available later today in our 10-Q under the commitments note to the financial segments.

Referring to the balance sheet on slide 8, we improved our cash position as a result of the $40 million preferred equity offering completed near the end of the first quarter. However, we recently entered into a forbearance agreement with Comerica whereby our credit limit was reduced from $25 million to $17.5 million as a result of non-compliance with certain financial covenants.

The forbearance agreement gives us time to seek alternative financing but at the same time has the effect of restricting our use of credit facility funds for general corporate purposes. This coupled with elevated commodity prices has increased our need for working capital. To solve this problem, we are seeking to secure additional working capital credit lines and equity, part of which is expected to include $5 million in a near term capital infusion as to which negotiations are ongoing.

We are also seeking a replacement for the Comerica line of credit with less restrictive terms. Finally, it should be noted that at Stockton facility will require an additional $6 million and these funds will be used to satisfy most of that need. Later today when our Q is filed, you will see a more detailed discussion of these matters in the liquidity section of our MD&A.

In our construction program, we have contributed a total of $241 million in equity and drawn a total of $142.4 million of debt as of the end of the first quarter. Our construction loan facility has remaining availability of $108 million. For the balance of the year, April 1 forward, we expect a total cash outflow of approximately $106 million related to completing construction at the Stockton facility and to a lesser degree, finishing up expenditures at the Burley facility.

Of this remaining amount, $83 million is expected to come from availability under our construction debt facility and the balance of $23 million is expected to be contributed from equity. As we previously described, upon completion of the Stockton plant and required performance testing, we expect to make a final draw of up to $24 million from the construction facility which would essentially be a return of our equity.

That concludes the summary of the financial results for Q1. Before we go back to Neil for further comments and the Q&A, I’d like to go to slides 9 and 10 to summarize the status of our operating assets and plants under construction.

Slide 9 shows our operating facilities, consisting of Madera, Columbia, Magic Valley and our 42% ownership in Front Range Energy. Our plant in Magic Valley has completed the startup phase and is operating well within bank performance tests nearly complete. Slide 10 shows the plants under construction. We continue to project a target completion date for Stockton in the third quarter.

That concludes my remarks. I now turn it over to Neil for further discussion before opening up the lines for questions.

Neil Koehler

Thank you Joe. Let me just take a moment to share our current view of ethanol market dynamics. As oil prices reach record highs almost on a daily basis, the value of ethanol in the transportation fuel supply has never been greater. Supply and demand remain balanced as new demand is staying ahead of new supply.

Ethanol is now supplying 6% of all gasoline demand and will reach 8% by the end of the year. The clear need for new fuel supply given limited new supplies of gasoline combined with very compelling ethanol blend economics and increasing renewable fuel standard requirements is pushing new ethanol demand.

As a company, we continue to develop new markets around our new plants. Our Magic Valley plant is the most recent example. There’s been almost no ethanol blended in the State of Idaho but with our new production, new infrastructure is now being built in the state and starting next month, significant new ethanol blending will begin in Idaho.

Our Magic Valley plant produces enough ethanol to support 10% ethanol blending in the entire state. As we move through 2008 into 2009, new plant openings are slowing in the industry while ethanol demand will continue to accelerate. We believe that production margins will improve as this will be necessary to initiate a new round of production expansion needed to meet future demand.

There’s also been a tremendous onslaught of misinformation about the role of ethanol in rising food prices. Two important observations: first, the corn used in ethanol production is a feed variety and is not converted into food for human consumption except in a small percentage that is processed into high fructose corn syrup.

Second, the feed value of the corn used in ethanol production is processed into a high value protein feed distillers grains. Ethanol producers are both fuel and feed producers. With recent reports that the Grocery Manufacturers Association has engaged in a well funded campaign to discredit ethanol, it is clear to use that these attacks are in large part fabricated by interests that are trying to deflect attention from the real root causes of food inflation of which dramatic increases in energy prices are near the top of the list.

Ethanol producers by supplying both critically needed new supplies of transportation fuel and high quality feed products are clearly part of the solution, not the problem. It is encouraging to see over the last couple of weeks a swing in public media reporting to a more balanced view of this issue.

We as a company, together with our industry partners and other stakeholders will continue to work hard at setting the record straight as to the very positive contribution that ethanol producers are making to address both the world’s food and fuel challenges. Operator, at this time, please open up the lines for questions.

Question-and-Answer Session


(Operator instructions) Your first question comes from Ron Oster – Broadpoint Capital.

Ron Oster – Broadpoint Capital

I was wondering if you could expand on your plans for your cellulosic facility, maybe and the potential costs of the demo plant and then any additional future plans with regards to a commercial scale facility down the road and also how you might fund this facility in 2009.

Neil Koehler

We’re very excited about our program with BioGasol and the Department of Energy. The project that we received a $24 million matching grant from the Department of Energy, so the total projected cost of this project is $48 million. We are in the process as I mentioned in the prepared remarks of putting the plan together and do expect to be in construction of that in 2009.

It is designed as a commercial demonstration that we can show as integrated into our existing corn ethanol platform as sharing much of the infrastructure and facilities. It is our plan to look at cellulose as a bolt on opportunity essentially to our existing fleet of corn ethanol plants as well as look down the road at new facilities that we would be building that would be dedicated exclusively to that technology.

It is also designed to scale up from there after we bring this online and projected in 2010 expect that we would scale it up from there to a 10X, to a roughly 30 million gallon side, either do that at Boardman or we could do it at one of our other facilities, that is yet to be determined.

In terms of the funding, that is a capital requirement that we will have to fund together with our partner, BioGasol. I will point out that in kind contributions do qualify under this and just as we have shown the ability to internalize a tremendous amount of the expertise in our current business model, there is a fair amount of that which we will build to provide in kind as opposed to going out and having to contract for the services.

But there’s no question that there will be additional capital required in 2009 and we are exploring different avenues for raising those funds and feel that right now there is a tremendous amount of interest on the part of the investment community in supporting this development and we are confident we will be able to raise the funds to keep that project on schedule.

Ron Oster – Broadpoint Capital

Also you mentioned your basis differential for corn costs had risen, I’m just wondering if, with that in mind along with the improvement with some of the unit train capabilities on the West Coast if there’s any concerns about the validity of your destination business model with regards to your transportation discrepancy there might narrow thereby compromising your competitive cost position.

Neil Koehler

Ron, we’re still very confident of that. Yes, rates have gone up on bringing our corn in but again if you look at the rates of the shuttle trains on corn versus the rates of single cars of ethanol and distillers grain and even shuttle trains of ethanol the rate increases have been more rapid on the ethanol and the distillers grain, both singles and unit trains and have not risen as quickly on the shuttle trains of corn.

So that spread differential while it certainly narrows a bit with unit trains of ethanol, it’s still very much intact. We continue to minimize our transportation costs for moving our product form our facilities.

It is very important to note that we have single handling of corn into our plant and single handling of our ethanol and distillers grain out of our facilities and with the unit trains of ethanol to the West Coast, and I’m not sure what you’re referring to improvements, there’s still only one facility on the entire West Coast in Carson, California that can receive unit trains. We’re seeing more of that development on the East Coast.

But even with those facilities which are important and we support to improve the logistics of moving ethanol to the market as we rapidly expand, there is double handling and there’s a fair amount of cost once these unit trains are received, they need to be handled and moved back out to market.

So the double handling cannot be avoided in those, we avoid that and that is a very important part of our cost advantage. So we are still very comfortable and confident of our model and transportation savings along with energy savings are the two critical elements of that advantage.

Ron Oster – Broadpoint Capital

Can you disclose what your co-product returns might be without the contracts that were in place through the third quarter that you mentioned?

Joe Hansen

No, we don’t provide that information. And so you know, these contracts extend through 2008. But quite frankly we don’t disclose that information.

Neil Koehler

I would just add to that is that if you look at it just generically in the markets that our [webstillers] grain has a value on the spot market basis that is going to be roughly equivalent to delivered price of distillers grain and again double handling, the distillers grain, the price that we’re competing with is delivery to dairies where distillers grains comes to our markets have to be double handled into trucks to be delivered to dairies that don’t receive by rail.

And we compete on a delivered basis on a moisture adjusted basis with dry distillers grain. We are moving quickly actually to not having that be the case. We are, in our feed division, we are developing a proprietary product that is really an analogue to corn as opposed to distillers grain and is priced against corn rather than distillers grain and giving us a better hedge on corn prices.

So we are seeing our overall values as we move forward increase and would expect our co-product returns to evidence that as we move forward.


Your next question comes from Eitan Bernstein – Friedman, Billings, Ramsey.

Eitan Bernstein – Friedman, Billings, Ramsey

Last quarter, last conference call you gave us perspective on marketing segment results, can you provide some color on the first quarter earnings in that area?

Neil Koehler

Sure I can in a general way like we did last quarter. So last quarter when we reported a loss we did indicate that the marketing business due to the falling market and other dynamics on some fixed price contracts had experienced a loss.

I would say that it’s reasonable to conclude that there was a swing with the market going up and a more advantageous position that we swung the other direction. And to the extent that we had below budgeted realizations in the fourth quarter, we had above realized results in the first quarter.

Eitan Bernstein – Friedman, Billings, Ramsey

The $106 million projected to complete the two plants, does that allocate for additional working capital and if not can you give us some perspective on the amount of working capital required to get these two plants up and running just in terms of obviously corn inventories and such.

Joe Hansen

It does include some working capital. Working capital as we’ve talked about before has been underfunded. Our debt facility agreement with WestLB, however we are working right now to secure additional working capital for both of those plants and our two existing plants.

Neil Koehler

Just a little additional color on that because it’s all in the details on our credit facility is that they provide $5 million of working capital per facility so the $106 would include that $5, but it is clearly the case that at nearly $6.00 corn that the working capital requirements per plant is at least double that.

So that is very much a part of our current constraints on working capital that we are addressing with the banks to make sure that we have adequate working capital to make sure that we are efficiently operating the plants and maintaining adequate inventories of corn. So that is a real focus for this quarter is to improve the working capital position and that would include some additional total debt.

Eitan Bernstein – Friedman, Billings, Ramsey

Doing the math, can we assume basically that for the $106 or about cap ex spend and the financing, $83 million from credit facilities, $25 from equity, can we assume that basically you just need equity by the end so that can be back loaded or is there something in the development of it where you need the equity sooner in the process rather than later?

Joe Hansen

A portion of the equity, roughly $5-$6 million is needed to bring to begin construction of the Stockton facility. The remaining equity will probably come from the top off from the Burley, once Burley is totally completed.

Eitan Bernstein – Friedman, Billings, Ramsey

If you guys could address just some of the issues around the credit covenants and financial controls basically following, the forbearance agreement with Comerica, to the extent that you guys have gone through your terms and covenants and can provide investors with comfort that there’s not going to be some other announcement in future quarters where there’s another some sort of covenant issue?

Joe Hansen

The Comerica agreement was negotiated in 2007 and established then. And we first began to realize, when we received the results of a separate audit of our Kinergy subsidiary which is the party under the Comerica agreement, we received the results of that audit on April 29. At that point we became aware that we were out of compliance with a net work requirement.

The forbearance agreement itself reduced the credit limit, the $25 million credit limit down to $17.5 million which is a $7.5 million reduction, it also reduced our eligible inventory down by $6.4 million to $7.6 million. This has had somewhat of a limited affect on us in some respects because of the fact that our historical, under our historical borrowing practices we have never drawn more than $17.5 million under that particular facility to begin with.

So the reduction down to the $17.5 million is not having a dramatic effect. It also has limited our ability to use cash at the corporate level for general corporate purposes. We’re in the process right now of talking with other lenders and negotiating a more suitable agreement for the company in general. That would also hopefully expand and allow us to grow the Kinergy operation.

Neil Koehler

To address your comfort issue, Joe is being a little too humble, he should be tooting his horn but as our new CFO has done a tremendous job of really reforming our internal controls and making sure that we are addressing these issues to be going through all these agreements, these are very complicated agreements, we have been, if you will, a new user of these sorts of agreements.

And we’re under staffed and have had issues with not having someone with Joe’s caliber in the past. These issues on covenants in this case it was a technical financial covenant on the net worth, we discovered these issues just as in the WestLB, we were the ones to discover these and to self report and have taken tremendous steps to make sure that we are in compliance on a go forward basis.

So we are confident that we have addressed these issues and that we will not have to be reporting these sorts of issues in future quarters.

Eitan Bernstein – Friedman, Billings, Ramsey

Any guidance at all on when we may get the next update on financing?

Neil Koehler

No forward projections on that but I think you can see from what we’ve discussed that it’s an ongoing effort and that we do expect to have other developments this quarter.


Your next question comes from Jinming Liu – Ardour Capital.

Jinming Liu – Ardour Capital

About your co-product sales, I know your company is trading corn, how much of that $25 million co-product sales were from the sale of corn?

Neil Koehler

Virtually none, we actually given the current dynamics in that market, we in the quarter sold, get back to you on the exact numbers but virtually no corn. It would have been an imperceptible impact on the total sales and margins.

Jinming Liu – Ardour Capital

I noticed that your equity of production is below your nameplate capacity, what has happened there?

Neil Koehler

It’s actually above our design capacity, it’s important to look at the design capacities and the operating capacities. It is above design capacities by 107%, it is slightly below the operating capacity that we expect and that in the quarter was largely due to some issues we had at our Madera ethanol plant, some problems that we were having in the facility that required us to take the plant down for a number of days and we made improvements in the process.

And I can tell you that the Madera plant which really of all of our facilities was the one that was lagging the most is now leading the pack in terms of exceeding both design and operating capacity. So we do feel that we’ve positioned ourselves very well as we move through the second quarter here to achieve better operating results at our plants. That together with our efficiency improvements on yield and energy will continue to show strength at the processing level.

Jinming Liu – Ardour Capital

Going back to co-product sales, should we expect that trend to continue in the future, the increase?

Neil Koehler

That’s hard to project because it depends a lot on corn prices and how co-products sales track corn prices. There is often a lag as they go up and they go down, for instance if corn prices were to suddenly pop up then you could see quite a lag there.

If they were, which is the indications now that corn prices may be beginning to moderate, then we could see some improvements, particularly given that into the through the third quarter we do have some of these contracts that are fixed price and that has a disproportionate impact on that co-product return.

If we were to see corn prices drop against these fixed price contracts then our co product would continue to see some improvement. That really is going to be a function of the average corn price in the third quarter.


Your final question comes from Joe Gomes – Oppenheimer.

Joe Gomes – Oppenheimer

I was wondering if you could give us a little more detail on the PDX, how that’s performing, what you guys expect to get out of that test, when you think you’ll see some results from that?

Neil Koehler

In terms of expectations we’re very optimistic, we try not to make too many projections on things that we don’t know and haven’t seen the results for. I can update you to the extent that we have installed the equipment at our facility in Boardman.

We have PDX people on site as we speak over the next couple of weeks we are establishing the baseline from which over the next four to six weeks we will be running the test and certainly by this time next quarter in our conference call if not before, we will have some update on that. Every percent increase in yield obviously on a bushel is going to be significant and we are very optimistic that we’re going to see some improvements.

Joe Gomes – Oppenheimer

Any new or proposed legislation on the West Coast that would continue to help fuel the use of ethanol?

Neil Koehler

Yes there are a couple of initiatives, I mean certainly we’ve seen with the mandate in Oregon, that whole state now is blending 10% ethanol, it was a very seamless transition and very successfully been implemented. The state of Washington at the end of this year begins with a 2% requirement that then with various triggers being met will move to a 10% mandate.

With Oregon already blending much of the gas comingled with refiners wanting to optimize the blending of ethanol and produce a sub octane product coming down the Olympic pipeline from the refineries up in the north end of the State of Washington, that we are seeing a movement in Washington to ethanol blending really to comingle the gasoline streams between the two states and also in anticipation of Washington’s requirements.

So really all of southern Washington right now is moving quickly to 10% ethanol. There’s blending that’s just beginning in Tacoma, Washington, we expect by the end of the year to see Seattle. So it is our expectation that over the next 12 months, most of the state of Washington, partly by way of their legislation, party by way of the impact of the region to be moving to 10% blends.

In California, right now we’ve been working very hard as we’ve talked about in prior calls to move the state to a 10% requirement. There are new rules that take effect in 2010 that will in effect move the entire stream to 10% ethanol to meet the new fuel specifications. We’ve been working with the state and stakeholders to provide a transition opportunity for refiners to move to the higher level blends in advance of that.

There is a rule that is currently in the office of administrative law, it is just the final step of approval that we expect out in one to two weeks that will then finalize and opportunity for refiners to use the new models earlier to gain some additional flexibility to produce the gasoline that could be blended with higher levels of ethanol, without combining that same molecule of gasoline with the ethanol which is required under today’s very inflexible regulations.

And we do in conversations with our customers expect that yet this year in 2008 we will see elevated ethanol blending on the part of some customers and that we expect to see a gradual transition between now and 2010 to 10% blends in the entire state.


At this time we have no further questions in queue.

Neil Koehler

Thank you very much for participating on our call and we will continue to work hard for all shareholders and look forward to updating you next quarter. Thank you.

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