Aventine Renewable Energy, Inc. Q1 2008 Earnings Call Transcript

Aventine Renewable Energy, Inc. (AVR)

Q1 2008 Earnings Call

May 2, 2008 10:00 am ET

Executives

Ronald H. Miller - President & Chief Executive Officer

Ajay Sabherwal - Chief Financial Officer
Les Nelson – Director of External Reporting and Investor Relations

Analysts

Ian Horowitz - Soleil Securities

Tom Noakes – Merrill Lynch

Michael Judd - Greenwich Consultants LLC

Ken Zaslow - BMO Capital Markets

Mansi Singhal - Lehman Brothers

Heather Jones - BB&T Capital Markets

Eitan Bernstein - Friedman Billings Ramsey

Chris Shaw - UBS Investment Bank

Maryana Kushnir – Nomura Asset Management

Joseph Gomes - Oppenheimer and Co.

Pavel Molchanov - Raymond James

Judd [Nuffbaum] – Redwood Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Aventine Renewable Energy Holdings, Inc. Earnings Conference Call. My name is Stacy and I will be your moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a Question and Answer Session towards the end of the conference. [Operator Instructions]

I would now like to turn the presentation over to your host for today’s call, Mr. Les Nelson, Director of Investor Relations.

Les Nelson

Thank you, Stacy.

Good morning. Thank you for joining us today. My name is Les Nelson, Director of External Reporting and Investor Relations. I’d like to welcome you to Aventine’s conference call, discussing our results for the first quarter ended March 31, 2008. With me today are Ron Miller, our 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 subjective 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 our 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 webcasted 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. 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.

Ronald H. Miller

Thank you, Les.

Good morning and welcome to Aventine’s conference call discussing our first quarter 2008 results. We are pleased to have each of you with us today and wish to thank our shareholders and bondholders for their continued support.

The net loss for the quarter was $10.8 million or $0.26 for fully diluted share. Now this loss includes $21.6 million non-cash unrealized impairment charge related to our auction rate securities. Excluding this non-cash impairment charge, net income would have been $10.8 million and fully diluted earnings per share would have totaled $0.26.

Adjusted EBITDA for the quarter totaled $21.6 million and cash generated from operations in the quarter totaled $29.9 million. In the quarter we saw higher ethanol prices, increased demand and higher commodity spread as ethanol markets were tight. Ethanol demand was high as growth in ethanol consumption outpaced new supplies. Demand growth came not only from higher mandated levels but also because ethanol remains significantly cheaper than gasoline in today’s energy marketplace. Transportation and logistics facilities are quickly being added to handle the new supplies coming into the marketplace. Increased demand coupled with delays in new supplies allowed the absorption of new ethanol supply into the marketplace without depressing price.

Now during the quarter, the increase in ethanol pricing was more than sufficient to offset the increase in corn cost thereby increasing the commodity spread defined as gross ethanol selling price per gallon less net corn cost per gallon. For the quarter, the commodity spread increased to $1.21 per gallon, up from $1.17 per gallon in the fourth quarter of 2007. Co-product’s return at the percentage of corn cost continues to be in excess of 40%.

We executed well operational. Our more complex Pekin wet mill has significantly higher co-product returns than a dry mill. By applying these excess co-product revenues generated by our wet mill against the higher operating cost of the wet mill, the adjusted conversion cost per gallon makes us one of the most efficient, low-cost producers in the industry.

Our net revenue received per gallon defined as gross revenue per gallon less the freight and distribution cost per gallon has been one of the highest in the industry. Our distribution system and customer relationships are integral in our ability to obtain the highest prices possible.

Our marketing alliance annualized volume at the end of Q1 ’08 increased to 517 million gallons. With our own equity production, our marketing alliance volumes and purchase resell volumes redistributed approximately 845 million gallons ethanol on an annualized basis in Q1 ’08. Our expectation for 2008 is that another 416 million gallons of annualized marketing alliance partner production will come online bringing our total ethanol marketing capacity to exceed 1.2 billion gallons annually by the end of this year.

Going forward, we see many changes to our marketing alliance volumes as a result of economic pressures, which may affect the marketing alliance volumes. We continue to expect our new expansion projects in Mount Vernon, Indiana and Aurora, Nebraska to begin production in the first quarter of 2009.

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

Ajay Sabherwal

Thank you, Ron, and thanks to everyone for participating in this call. I will now take you through our income statement and balance sheet, highlighting the key trends and variances. After that, I will update you on liquidity issues surrounding our auction rate securities and we’ll, as usual, share with you some expectations for 2008.

Sales in the first quarter increased primarily as a result of higher volumes of ethanol sold along with higher ethanol prices. Gallons sold in the quarter totaled 211.2 million versus 176.2 million gallons sold in Q4. Gross ethanol prices in the first quarter averaged $2.21 per gallon versus $1.94 per gallon in Q4.

Co-product revenue increased 15.2% to $33.3 million in Q1 versus $28.9 million in Q4. Co-product returns which are defined as co-product revenue divided by gross corn cost continue to exceed 40% in Q1. Higher pricing and volumes for germ mill and dry distiller grains contributed to the increase.

Equity production in the first quarter of ’08 increased by 4.6% to 47.7 million gallons. Marketing alliance gallons purchase increased to 129.9 million gallons in the first quarter as compared to 100.5 million gallons in the fourth quarter. Purchases from other producers were flat at 39 million gallons in both Q1 and Q4. We also increased ethanol inventory during the quarter by approximately 5.4 million gallons.

Gross profit increased in the first quarter due primarily to a combination of higher ethanol pricing, increased volume of ethanol sold, higher co-product revenue, and increased commissions, all offset somewhat by higher corn cost. Ethanol prices in Q1 on average were 14% higher than in Q4. Corn cost in the quarter increased by $0.84 to $4.50 per bushel in Q1. The average CBOT price sold in comparison during the first quarter was $5.17 per bushel.

The increase in commodity spread expressed per gallon of ethanol can be broken down as follows:

Ethanol prices increased by $0.27; co-product revenue increased $0.09 that was offset by a $0.32 increase in corn cost.

Conversion cost decreased in the first quarter by $0.04 per gallon primarily from operational improvements resulting in an increase in gallons produced. Conversion cost in Q1 decreased to $0.62 per gallon from $0.66 per gallon in Q4.

Now one way of comparing our performance to other dry mills is to apply our excess wet mill co-product returns generated over and above the 30% industry expectation for a dry mill against the higher conversion cost associated with the more complex wet mill. On this basis, our adjusted conversion cost was $0.43 per gallon and that the schedule on this at the back of our press release.

Freight and distribution costs in Q1 increased to $0.20 per gallon from $0.18 per gallon in Q4. Freight logistics cost per gallon was calculated by taking freight logistics expenses incurred including cost to ship co-products and dividing by the total ethanol gallon sold. The increase in freight cost was primarily due to higher fuel surcharges caused by record high oil prices and from general freight increases associated with moving product along longer supply lines to emerging new markets in the Southeast. These additional expenses were incurred to support higher net backs on the increased volumes.

The average inventory cost of $1.95 per gallon at the end of Q1 versus $1.80 at the end of Q4 using our rated average weighted-average FIFO approach reflects the effects of higher ethanol prices during the quarter. The economic impact of selling gallons held in inventory with a $1.80 per gallon value during Q1'08 in which prices were rising was a positive impact to cost of goods sold of approximately $5.5 million.

SG&A expenses increased $300,000 at approximately 3.5% to $8.9 million. Higher personnel related costs were offset somewhat by reducing expenditures for outside services.

Now, adjusted EBITDA increased $10.2 million from Q4 to Q1. Adjusted EBITDA in Q1 was $21.6 million versus $11.4 million in Q4. Adjusted EBITDA was materially positively affected by higher volumes of ethanol sold, higher commodity spreads, and by hedge positions. Adjusted EBITDA in both periods has been adjusted by non-cash items such as stock compensation.

Moving down the income statement, interest expense for the first quarter was $2.4 million. Interest expense includes $7.5 million in interest on our bonds, $300,000 of amortization of deferred financing fees reduced by capitalized interest of $5.4 million.

Other non-operating income for the first quarter totaled $1.9 million and includes both realized and unrealized net gains from derivative positions. This compares to net losses in derivative positions of $5.1 million in Q4. The Q1 net gain was primarily the result of realized and unrealized gains on forward corn positions. The effect during Q1 from our short gasoline positions taken to protect our gas related contracts from potentially falling gasoline prices was immaterial. I will provide more detailed information on our derivative positions and expectations later in the call.

Our effective income tax rate excluding the effects of the non-cash impairment charge was approximately 34% in Q1. At this time, we do not expect to receive an income tax benefit related to the impairment charge for auction rate securities as we do not expect to have sufficient capital gains to offset the capital loss, should it become realized.

Not look at the balance sheet, cash and cash equivalence at quarter end was $74 million. Cash generated by operations during the quarter was almost $30 million. There was no interest payments scheduled on our bonds in Q1. As such we made a $15 million interest payment, which is our semi-annual payment, on April 1, 2008.

Non-expansion capital spending in Q1 totaled $3.1 million. Capital spending on expansion projects totaled $51.5 million in Q1, excluding capitalized interest of almost $5.5 million.

The company did not repurchase any stock during Q1 on the company’s stock repurchase program which is approved by its Board of Directors. The amount remaining under the authorization to repurchase stock is $45.9 million.

Now I look at the auction rate securities. As of March 31, the company continues to carry on its balance sheet due to long based auction rate securities. As we previously discussed on our Q4 call, we liquidated $84.3 million of ARS in Q1, incurring $1.5 million realized loss on the sale. We have no reason to believe that any of the underlying issuers of our ARS are presently at risk of default and we continue to receive interest payments on these securities in accordance with the stated terms. Now such stated terms produced volatile interest payments. Interest rates on most of our ARS for the current 28-day period have been reset to zero, as the ARS trusts are designed to make sure that they do not pay out more in interest than they collect from the students. We expect rates to reset whereby we will again be receiving interest income on these securities in the future. However, rates we receive on these securities are likely to remain volatile.

We do not believe that we will be able to access funds as needed from these securities until future auctions for these ARS are successful or until we sell the securities in a secondary market which is currently limited. As a result, we currently are unable to liquidate our investment in these ARS without incurring significant losses. The company may have to hold these securities until final maturity in order to redeem them without incurring any losses. For these reasons, we believe the recovery period for these investments is likely to be longer than twelve months and as a result, we have reclassified these investments as long-term as of March 31, 2008.

In conjunction with the liquidity issues surrounding these securities, the company recorded a $21.6 million non-cash unrealized charge to income in Q1 ’08 to reduce the carrying value of the ARS on its balance sheet as of March 31 to 83% of par value. Given the highly liquid market for these securities, bids for the full amount of our ARS were not available. Therefore, we reduced the carrying value of our ARS by using an internally prepared valuation model based on discounted cash flows using the best available comparable external data point and other judgmental adjustments where considered appropriate. The model of the assumptions includes a discount factor and estimated weighted average life of the securities.

We may attempt to liquidate these securities as market conditions improve or when our liquidity needs require us to do so. Now the company’s currently pursuing all available alternatives to increase liquidity, including discussions with banks on new or amended credit facilities. As of March 31, the company has available under its existing secured revolving credit facility approximately $152 million in borrowing capacity which is net of $17 million in outstanding letters of credit. No amount has been drawn on this facility to date. Total liquidity available to us at the end of Q1 was $206.1 million comprised of $74 million in cash and cash equivalence and $152.1 million available under our existing secured revolving credit facility.

In conjunction with efforts taking place to increase liquidity, we’re also evaluating several scenarios with respect to our capacity expansion projects. After utilization of current available resources, should we not be successful in our current efforts to increase liquidity 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. We expect to make progress towards resolution of this issue during the second quarter of ’08.

Now let me share with you some expectations for the remainder of ’08. As of March 31, we had contracts for delivery of ethanol totaling 276.6 million gallons through December of ’08. Now these contracts are shared for the benefit of our marketing [inaudible] as a whole, of which Aventine is a part and are not solely afflicted to Aventine.

These commitments were for 47.9 million gallons at an average fixed price of $1.94 per gallon. 57.6 million gallons at an average spread to wholesale gasoline of a negative $0.41 per gallon based on NYMEX, Chicago and New York Harbor indices. And 171.1 million gallons of spot prices using various Platt, OPIS and AXXIS indices.

For the second quarter of ’08, we had contracts for delivery of ethanol totaling 136.2 million gallons. These commitments were for $32.5 million gallons at an average fixed price of $0.92. So the 1.5 million gallon as an average spread to wholesale gasoline of negative $0.42, and 72.2 million gallons of spot prices. What all this means is that clearly, we remain heavily rated towards the spot ethanol markets for 2008.

At March 31, we had fixed the price to $21.19 million bushel of corn through December ’08 at an average of $5.11 per bushel, which represents approximately 39% of the remaining corn requirements for ’08. Now this net number includes the following derivative positions:

Forward physical delivery versus contracts outstanding covering 18.8 million bushels through December ’09 at an average price of $5.18 per bushel. Now 3 million bushels of these positions are for periods beyond ’08. None of these forward physical purchase contracts have been mark to market. So, we see the lower prices over time.

These forward physical purchases have been partially offset by the sale of CBOT future positions covering 3.5 million bushels of corn with an average price of $5.29 per bushel. We sometimes do this to lock in the basis differentials against forward purchase contracts while letting the price fluctuate. These short positions are mark to market each period with corresponding gains and losses recorded in other non-operating income at the end of each period.

Finally, to protect ourselves against further price increases and bonds, we have also purchased long CBOT future positions to $6.6 million bushels of corn with an average price for $4.97 per bushel. These long positions extend to July ’08 and are also marked to market each period with corresponding gains and losses recorded in other non-operating income at the end of each period.

We also had outstanding at the end of the quarter. Short gasoline positions totaling 18.2 million gallons of gasoline for deliver for December ’08 at a fixed average price of $2.20 per gallon. Now we did this to protect some of our gas related sales contracts from potentially falling gasoline prices. Now, these short positions have been already marked to market each period with corresponding gains and losses recorded in other non-operating income at the end of each period.

Our remaining cap ex spending expectations for Phase I of our expansion projects is estimated to be approximately $250 million excluding capitalized interest. We now expect our remaining non-expansion cap ex for ’08 to range between $10 and $15 million. We will need to expect our ongoing SG&A run rate to be between $35 and $40 million. This amount includes certain SG&A costs that are recoverable from our marketing alliance partners.

Now, I’d like to turn the call back to Mr. Miller.

Ronald H. Miller

Thank you, Ajay.

As we are now well into the second quarter of 2008, let me talk more about our view on the ethanol marketplace which is somewhat contrarian to the consensus view over the last year or so.

As I said in our fourth quarter conference call, the new year brings with it an improved market outlet. We could not have been more spot on. Ethanol demand remains strong despite continued projections to supply [gusts].

High oil prices are providing the emphatics for increased ethanol consumption. The pricing discount to gasoline continues to be very attractive for additional discretionary blending. Ethanol pricing began reflecting increased input costs and commodity spreads to widen.

Ethanol has historically been priced relative to gasoline. However, recently ethanol prices has begun tracking more with corn trends, providing some relief from the higher input costs.

The amazing misconception is that the industry is in a supply-push environment. Current spot and all supplies are tight. Construction of new ethanol facilities have slowed thereby bringing new product supplies to the marketplace at a slower more manageable pace. Increased demands both is the result of the increased mandate and more favorable economics for ethanol blending along with delays in new supply has allowed additions of new product supplies into the marketplace without depressing prices. The marketplace is quickly adding additional logistics and transportation facilities to handle the new supply.

Our business decisions are guided by our positive view of the ethanol marketplace. Our first quarter results reflect this improved marketplace. We believe that there is a fundamental change taking place in the gasoline infrastructure. Gasoline is being redefined as containing ethanol. According to OPIS, The marketplace is quickly adding additional logistics and transportation facilities to handle the new supply.

Our business decisions are guided by our positive view of the ethanol marketplace. Our first quarter results reflect this improved marketplace. We believe that there is a fundamental change taking place in the gasoline infrastructure. Gasoline is being redefined as containing ethanol. According to OPIS, larger finders such as Marathon and Exxon Mobil have now begun shifting towards providing ethanol blended fuels to their distribution outlet.

A new term is emerging in gasoline. It’s called CBOB, Conventional Blendstock for Oxygenate Blending. It’s somewhere to the reformulated markets where we see RBOB with ethanol. CBOB is essentially 84 octane which is not saleable unless you have the 10% ethanol added to it. CBOB Blendstock is now becoming more widely available and conditional gasoline is moving toward CBOB plus ethanol just as we saw in the RFG markets in 2006.

Given all this, marketing and distribution will become increasingly more important and this is where Aventine excels. Our net ethanol revenue per gallon defined as gross ethanol price less freight and logistics costs has typically been greater than our public pure play competitors. We believe that this is due to our unique distribution assets and integrated model. Looking forward, we may see pipeline movements of [inaudible] and the ethanol.

Whether the results of the increased mandate are solely for economic reasons, ethanol blending continues to make up a larger and larger percentage of the transportation fuel supply. We continue to believe that the future of ethanol looks bright. The supply and demand equation is balanced. The eventual mandate for corn based ethanol of 15 billion gallons is greater than the current production plus capacity being constructed, which means we will require higher margins to get more steel in the ground to support the $15 billion gallon target. There remain significant opportunities for increased blending with higher blend levels. E85 infrastructure continues to build out and Blender pumps are coming into existence which permits the blending of E10, E20, E30 and E85 out of the same fuel dispenser. All of these are positive developments for the industry.

Now, Ajay and I will be happy to answer any questions that you may have.

Question and Answer Session

Operator

[Operator Instructions]

Your first question comes from the line of Ian Horowitz with Soleil Securities.

Ian Horowitz - Soleil Securities

Hi. Good morning, everyone. Very good quarter.

Just a couple of quick questions. Ajay, there’s some indications on your expectations for average corn price and average ethanol price for the quarter. You didn’t seem to do that. That was intentional?

Ajay Sabherwal

Ian, to some extent that approach that we have taken is we provide that we’re in the spot markets primarily on the ethanol side and we give you some sense of the fixed obligations that we have taken on. We also say that our fixed obligations are shared with our alliance pool. So instead of giving a dollar number, we lay out the piece box that is used to calculate it. Now, when we receive some feedback that perhaps we should give a price expectation rather than the freeze spots but there’s no sinister even. For this, we just simply lay out the freeze spot that gets to that and the main message is on the ethanol side we are principally in the spot market.

On the corn side, we have said that we have been aggressive in pre-purchasing our corn and we said we’ve got 39% of our corn needs for the balance of the year locked in at around $5.15 to $5.20 a bushel. Now, the greater proportions of those are in the earlier periods and at lower prices. And we’ve also told you the various hedges, etc. and how is the make up of those hedges. What we’ve gone predicted is with the remaining percentage is going to be worth because corn prices are really volatile. Thus, we stay away from giving a precise number but we do provide the piece box.

Ian Horowitz - Soleil Securities

Okay, that 39%, by the way, that’s the gross consumption, correct? That’s not a 39% in net.

Ajay Sabherwal

Absolutely, it’s the gross consumption.

Ian Horowitz - Soleil Securities

So with your natural distiller hedge, you get to a very high percentage there?

Ajay Sabherwal

Absolutely, and I would go beyond the natural distiller hedge because the wet mill has much more than a natural distiller hedge.

Ian Horowitz - Soleil Securities

Yes, I know. Fair enough, the co-product hedge.

Ajay Sabherwal

That’s right.

Ian Horowitz - Soleil Securities

Another quick question: You saw an increase in spot in your average ethanol price for the quarter but it seems when we look back on your performance in previous quarters, it seems like you’ve drifted a little bit away from the average spot price for the quarter. And I was just wondering if there was any comments on that or was it just a timing issue on when the gallons were moving through the system?

Ronald H. Miller

Well, I think it’s primarily a result. We had a run up in spot prices during the quarter, like I said, due in part to the increase in corn price where the spot has been following. Corn, more recently, because the value of ethanol is so much higher than its price. We are going to lag in an up market and a down market due to the mixed portion of our sales and that’s exactly what happened in the first quarter. You see, we have a certain amount of fixed contracts. For example, $1.94. As these are in place, it’s going to lag our overall net average price below the spot. Over time, these will work their way up. Most of them as you see in the second quarter. So as you move on towards third quarter, we’re going to be probably even more heavily weighted towards spot. So, it’s just a matter of timing and contract issues.

Ian Horowitz - Soleil Securities

Got it. And commission rates have kind of been where they have been?

Ronald H. Miller

Yes, they’ve not changed at all and are reflective of the price, obviously, since we do our commission rates as a percentage of sales prices. So as the price go up we tend to get a little higher net, if the rate from sales have not changed.

Ian Horowitz - Soleil Securities

Okay, and then one last question and I’ll get back in queue. You did a significantly non-maintenance cap ex spend this quarter. You expect to continue with that. Can you give us just a little bit of sense? I’m assuming that’s going into the next two projects. Can you just give us a little bit of sense on where they are? I mean, are you doing dirt work? Are you putting iron up? Just kind of give us an update on where those plans are.

Ronald H. Miller

On expansion projects, we’re about halfway completed. If you saw the projects, we’ve got a lot of work but it’s mostly been underground, preparing the way for the steel. Now, you’re beginning to see steel erected and so they’re about 50% done but when you look at the site, you’re going to see a lot of improvements over the next six months as far as the steel showing up.

Fermentations are in, steel buildings are going up, distillation tires are starting to come in and so we’re about 50% done.

Ian Horowitz - Soleil Securities

Okay, great. Thanks, guys. I’ll get back in queue.

Operator

Your next question comes from the line of Tom Noakes with Merrill Lynch.

Tom Noakes – Merrill Lynch

Hi. Good morning.

Just there was an increase in accounts payables and a decrease in accounts receivables. Can you just sort of address the changes, the specific compositions of that?

Ajay Sabherwal

Again, we have a very large marketing business and sometimes some of these changes could simply be the day the quarter ended, for example, can make that kind of volume of differences. I will tell you that on the accounts receivable side, you can pay a little bit more attention and closed out on some, without anything major. I mean, most of our accounts receivables are from oil companies and they pay very promptly. But you can pay a little bit more attention to it and tighten up a few things. So there’s nothing more to read in that. And also on the accounts payables side, it’s simply a timing of when the quarter ends or what day it ends on.

Ronald H. Miller

Sort of emphasize on that, Tom, one of our largest accounts payables is to our alliance partners and we pay those out once a week at the end of the week. So what day of the week the quarter ends on can affect it.

Tom Noakes – Merrill Lynch

And then sort of along those lines, was your marketing business impacted at all by your credit rating?

Ronald H. Miller

No.

Tom Noakes – Merrill Lynch

Would it be if there were declines in the credit rating?

Ronald H. Miller

If there were declines in our credit rating, we have the volumes under contract with the alliance partners.

Tom Noakes – Merrill Lynch

Can they terminate on changes to below certain levels?

Ronald H. Miller

No, there’s no factor in there for credit rating.

Tom Noakes – Merrill Lynch

And then just sort of one last industry question, the numbers that get thrown around a lot in terms of capacity, around 13 billion gallons. I think by the end of ’09, maybe you can correct me if I’m wrong on those, but if that is right, are those numbers you tend to agree with or are you expecting less capacity coming online given difficulty procuring expansion funds and plants that have been halted, procuring funds to finish off the plan?

Ronald H. Miller

Well, I think definitely we’re seeing delays out there and whether the 13 billion gets built by the end of ’09 or out in ’10 or later, I think is open to some questions. For example, we saw Idiom announced about a year’s delay on their plants just due to difficulties getting steel in, for example. So we’re seeing that. We’re seeing that with our alliance partners as well some delays. With the expected dates now, I will tell you something. That may be because the original dates were pretty aggressive because people, at the time, they start building plants on very large margins.

So I think generally we’re seeing the marketplace a 3-6 month delay in a large numbers of these projects so that 13, while it could be built out in ’09, probably is a little bit beyond that. And we’re still evaluating. It’s hard to come up with the numbers because you take a half a billion gallons out last week, you know? And that’s a public company. When the companies are private, it’s hard to see where they’re at.

Tom Noakes – Merrill Lynch

Great. Thanks a lot.

Operator

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

Michael Judd - Greenwich Consultants LLC

Congratulations on a good quarter.

The tax rate for the rest of the year, same rate as in the first quarter, you said it was 34%?

Ajay Sabherwal

That’s right. Again, tax rate is based on expectations of income. So, there’s, again, we pay our taxes but at the same time from a cash tax perspective we take advantage of all the legitimate allowances that are there. So, the percentage you suggest is a reasonable one but that number can also move around with expectations of income.

Michael Judd - Greenwich Consultants LLC

Okay and the implications for the numbers that you gave us in terms of you have the spot versus picks for the ethanol. It sort of implies that roughly $0.20 higher sequential price for ethanol per gallon. Is that approximately right?

Ajay Sabherwal

That is what has occurred. I mean, if you look at the spot prices they have moved up in that manner and so has our average even though it’s weighted somewhat with some of the fixed prices and even those fixed prices have moved up sequentially.

Michael Judd - Greenwich Consultants LLC

And then just lastly on the volumes side, I apologize, I should probably know this but were you implying a significant pick up in gallons purchased from partners in the June quarter or how should that look sequentially?

Ronald H. Miller

You’re talking about the addition of 416?

Michael Judd - Greenwich Consultants LLC

Yes, I’m just trying to figure out how to allocate that.

Ronald H. Miller

That will be later in the year. I’d say in the later part.

Michael Judd - Greenwich Consultants LLC

How does the June quarter look? Could you do 150?

Ajay Sabherwal

Oh, yes. We do have…I’m sorry?

Michael Judd - Greenwich Consultants LLC

Could you do 150 in terms of millions of gallons in terms of purchase from partners or is that too much of an increase over the 130 in the March quarter?

Ajay Sabherwal

We don’t want to make an exact estimate from that but there is a significant 100 million gallon plant that’s expected to come on this quarter. So in the main timeframe so that obviously boost the [inaudible].

Michael Judd - Greenwich Consultants LLC

Great. Thanks a lot for the help.

Operator

Your next question comes from the line of Ken Zaslow with BMO Capital Markets.

Ken Zaslow - BMO Capital Markets

Hi, good morning everyone.

Could we talk a little bit about your liquidity? I just want to figure out how this all plays out. In the next three quarters, what I understand you need to have $250 million of cash on hand. It seems like you have about $206 million, so there’s a difference of $44 million or so. This quarter you generated about $25 million in free cash flow. How much of that is the interest and is that a reasonable expectation going forward? How do we think about that in terms of your liquidity issue?

Ajay Sabherwal

Ken, you asked a question on the interest. Interest expense is $30 million a year, with $300 million in bonds of 10%. We pay it semi-annually. The schedule was on up April 1. Even if you allocate it rapidly it would have taken the cash flow down by $7.5 million which will be the rate of over a quarter. So that stands for the interest.

We did have a very strong free cash flow quarter that we are very proud and happy about. There’s no mistake about that. Now, with all that being said, if you look at the projections and liquidity, you’re right about the $250. Add to that, a little bit of maintenance cap ex; add to that the interest expense and also working capital. On the flip side, you have cash on hand, you have available facilities which expand with working capital, and you have cash flow from operations. So that’s the give-and-take and there is a GAAP. Now, that GAAP can be bridged by selling auction rate securities, by getting increased liquidity facilities, by working out arrangements with the single builder, Peter Kiewit Sons, and we’re trying all of those and are reviewing specific proposals and have specifically said we will make progress on these in Q2.

Ken Zaslow - BMO Capital Markets

And then also, you have 42 million gallons of ethanol in inventory. How much of that is rarely marketable and how much do you need to keep because wouldn’t that be a source of cash as well?

Ajay Sabherwal

You’re right, sir. All of it is marketable although there is some amounts that you need to keep the system wet as it were and there’s some in transit and what have you. Now, remember we have an asset based loan which is based on inventory. So, you liquidate all of that inventory. Then you have lower borrowing ability though it’s not a one for one.

Ronald H. Miller

And yes, we do watch that quite closely. We’re running about 17-18 days supply. I think the industry averages about 24 right now. So we try to keep it as efficient and there’s a certain amount that you just need to keep the system wet.

Ken Zaslow - BMO Capital Markets

And how much is that?

Ronald H. Miller

It’s probably 14 or 15 days. We’re running pretty close to it when you think about the long supply lines getting into the Southeast or the Northeast, the tank bottoms, things like that. You’re going to need 14 or 15 days.

Ken Zaslow - BMO Capital Markets

Okay, so that isn’t a source of cash? I’m just trying to figure out what’s the gap between what you owe and what you’ll be able to come up with the cash without…it sounds like you’re close to getting some debt alignment or some sort of extension. But a debt, to me, is more of a safety valve. I’m trying to figure out how close are you really to be able to do this under your regular operations that we know? Sounds like it’s pretty tight but it looks like it’s more or less very close, maybe a couple million dollars one way or the other way. But it looks like even if you didn’t get a safety valve, you’ll be able to pull this off.

Ajay Sabherwal

Ken, you’re making legitimate remarks and questions but I will tell you that you can tighten on new [inaudible] but there’s limited potential for that given the longer supply lines. It’s probably a couple of three days as it were if you could get there and you wouldn’t get the full benefit of it is the main point because we get a borrowing base of 70% of the inventory. So if you reduce inventory you do reduce that borrowing base. You do get some but not all of it back because of that borrowing base equation.

Ken Zaslow - BMO Capital Markets

Okay and then just a separate question, the Farm Bill. What’s your take on how it’s going to play out with the tariff changing and the credit in the US changing, and will that affect discretionary ethanol?

Ronald H. Miller

If I had to bet right now, and it is still a little bit slowed because there continues to be disagreement between Congress and the President on the overall bill but on the pieces that relate to ethanol, current proposal is to adjust the VTEC from 51 down to 45 to pay for various sales and projects and other things. And then reduce at the same time the tariff from 54 down to 45. All along, we’ve said the secondary tariff is simply a means to protect the American taxpayer because the imported ethanol gets the same tax incentive that US ethanol gets. And the US ethanol industry through its support of the agriculture corn market and the taxes that we generate. Generate about $9 billion of savings and income to the US Treasury and that tax is in concentration last year about $3 billion. So the US Government was a net gainer of about $6 billion. You get none of that economic benefit from imported ethanol. So, we had a quart of history that sort of separated between 54 and 51 so reducing it to 45, balancing the incentive to us makes sense. And I believe there is, as far as the extension of the tariff to harmonize that with the currently VTEC.

Now does that have any impact at all on the price of ethanol? No, it doesn’t because we’re currently selling ethanol at a price below gasoline price so the refiner’s the one who’s actually getting that. But quite honestly, it’s consumers that are getting it and so I think what this will result in is maybe slightly higher gasoline prices of consumers.

There have been several studies out, I think Merrill Lynch had one, indicated the amount of ethanol in the marketplace is saving about 15% on gasoline price and so consumers today are saving roughly $0.50 a gallon because ethanol is there. So, it will not have any effect on us but it could result in slightly higher gasoline prices. And this is significant. I think this is a story that the need to continue to get out because as you’re looking at the integrated companies, the areas that seem to be suffering a little bit probably are on the downstream side and that’s because ethanol’s in the marketplace. I think I like to say it’s competition works.

Ken Zaslow - BMO Capital Markets

Great. Thank you.

Operator

Your next question comes from the line of Mansi Singhal with Lehman Brothers.

Mansi Singhal - Lehman Brothers

Good morning. Congratulations on a good quarter.

Coming back to the liquidity situation. In the press release, you mentioned that you’re evaluating differencing values. Could you elaborate on that a little bit and if you had to choose at the end of the day between delaying the construction of the plant and selling the auction rate securities at a big discount, which option would you prefer more or rather, which would be the less unfavorable option between the two?

And also regarding the materials penalties you talked about, remind me. If I remember correctly from the last conference call, you had said that those penalties will be less than $10 million. Is that correct?

Ajay Sabherwal

Mansi, those are good questions. We can’t make those judgments about specifics because you said that make a choice between selling at a big discount and delaying a project. To our minds, those are both book end and it depends on what you define as big on the discounts. For example, what our principle efforts are around is raising additional liquidity. Debt financing, for example. We’re also working very closely with our builder, Peter Kiewit Sons, who is a tremendous partner for us. So, we’re working on solutions down the middle as it were. With both of the options you mentioned as book end, neither of those options are what we consider good options, selling at a huge discount or delaying the expansion. But, still, to close the deal in these difficult credit markets, you have to lay out all possibilities.

In the case of the materials penalties, let’s make a distinction. Actually, penalties related to our EPC contracts are no longer really even applicable because we’ve already paid so much. The EPC contract works in a way that if you pay a certain amount then there’s no penalty beyond that. So that goes to your prior point. However, we have obligations to build with. For example, the Ports of Indiana was another very, very good partner and a very reliable partner for us. But there are penalties that we much present in terms of full disclosure.

Mansi Singhal - Lehman Brothers

Okay, a couple of modeling questions for me. What was the interest income from areas included in the first quarter and second, what percentage utilization did your facilities run at in the first quarter?

Ajay Sabherwal

Again, Mansi, we’re not providing that specific level of detail. We provide a lot of disclosures but those two were not. On the percentage utilization, we’ve given you our amount we produced and you know our name plate capacity. Candidly, one divided by the other is the capacity utilization.

Mansi Singhal - Lehman Brothers

Was there any maintenance in the first quarter?

Ajay Sabherwal

There’s always maintenance. And yes, there was some scheduled maintenance as well.

Ronald H. Miller

I think you’ll also remember our nameplate capacity’s based 5% denaturing and with current economic picture of ethanol selling below gasoline price, we, and I think most of the industry, is blending at 2% denature, which is the middling level.

Mansi Singhal - Lehman Brothers

Thank you.

Operator

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

Heather Jones - BB&T Capital Markets

Good morning. Congratulations on that quarter.

Had a few questions. One, on the corn, your forward purchases, is those from local farmers or did you just buy futures on the CBOT?

Ronald H. Miller

As we outlined in our comments there, we have two forms of futures contracts. It’s the physical that we buy that we short the futures market. Again, that is bought from the local markets, from the farmers or primarily through the elevators. And then we had another segment which is about, I think, 6 million bushels or so, that is bought on the futures market and we’re along in that essentially because we’re taking a view on the marketplace and/or covering some fixed price contracts. So it is a combination of both.

Heather Jones - BB&T Capital Markets

So on your fixed price contracts, are you trying to start locking in both the corn cost side and the fixed price ethanol side? Or did I misunderstand what you were saying?

Ronald H. Miller

Usually, what we would do in the near term in the fixed price contracts, as you can see, primarily run through the second quarter. I think we’ve got a little bit in the latter part of the year. So those we will either use fixed price corn purchases that we have not hedged. And we’re confidently doing that but those are very short period of time. Or more likely, what we will do is do a futures hedge to cover that contract.

Now, as we have indicated, the market really has shifted in the last year or so, more towards the spot market. So we’re seeing less opportunities to do fixed price contracts at what we would consider reasonable numbers. There’s still a certain amount of gasoline index contracts but that’s smaller than it used to be and so primarily the outputs are being more and more priced on the spot market because both buyers and sellers are very comfortable with the price transparency. So, the rest of it that we would hedge beyond that, the small amount of fixed that we have, is essentially based on our view of where we see the market’s going.

Heather Jones - BB&T Capital Markets

Okay, and then as far as your view on corn cost. I understand that farmers can make up a lot of time or planning, etc. but the weather delays have now become either more severe than last year. So, two questions: 1) If you could comment to that, and 2) Are you adding further long positions in corn at this time, or do you believe that corn prices have gotten too high.

Ronald H. Miller

I think we’re giving more guidance on what we’re doing in the second quarter, in terms what we’ve actually done on futures prices but it’s something we continue to look at obviously and the market at $6. If we have a short growing season, we could see continued increases in price. I will tell you it’s our belief too that the $6 price does have some weather volatility built into it. It always does this time of year because until the crop is in the ground, there’s always speculation that we may see a shorter crop.

We’re sitting here on May 2^nd. I’m not overly concerned yet because we’re behind the curve. We can easily make it up if we end up with a couple of decent weeks of weather. I’ve seen years where we planted corn as late as June 1^st. You need to get the shorter hybrids like you see up north in Minnesota and everything else to get the crop in. So it’s not at the point where I’m staying awake at night but I would sure love to see some dry weather for a couple of weeks. And these farmers, once they start planting can put a lot of corn in the ground.

Heather Jones - BB&T Capital Markets

Okay, and then my final question is a lot of negative PR is now extended to a more global basis and I believe there were some congressional panel debate yesterday about the impact of ethanol fuel prices. And it seems that there is a lot of misinformation in these debates but the point is they’re very public. So I’m wondering if you could speak to what the ethanol industry is working to do to begin to counter it because so far it’s been quiet and it seems to have really negatively impact the public perception of the benefits of ethanol.

Ronald H. Miller

I couldn’t agree with you more. In fact, I gave a talk last week. I think the industry has been slow to react. I think I’m a little frustrated and I’ve shared that with the industry but I can tell you there is another team that’s going to be on the field. This is a very, I think, well constructed program to blame ethanol for a lot of problems that we have nothing to do with: rice, riots…we have actually no impact on the amount of rice. 40% of the rice crop in India rots because you can’t get it to market. Some of these areas, rice prices were so cheap, they quit producing their own rice and now they’ll go back and producing their own rice now that the prices are higher.

There are several reasons why food prices are higher and the biggest one is $115 oil. It drives production costs up. There’s no way a farmer can produce $2 corn. They couldn’t produce $2 corn without massive subsidies. A few years back when oil was $30 a barrel. So, to expect a farmer to roll back commodity prices with 450 diesel fuels and all the input fertilizer costs that they have is ridiculous. And in fact, in real terms, $6 corn is a fraction of its all time high in terms of inflation adjusted cost where oil is at its all time high.

I think the message that you’re going to start hearing, and it will become quite public in the next month here, are that what causes food prices to gone up. Primarily, four or five things: One is the price of oil and by far that’s the largest impact; the change in dietary habits in China. They’re essentially moving the entire population in North America from the rural communities to the city and these people want protein. They want to change their diets and there’s a lot of need there for food; two droughts back to back on wheat in Australia. Fortunately now we’re seeing a good crop and that drove the wheat complex up; the cheap US dollar. All commodities, oil and corn, for export are priced in US dollar; and yes, biofuels does have a role in that because we have increased demand.

But we talked about food prices. Let’s talk a little bit about who gets what. The farmer gets roughly about $0.20 of the food dollar and other people off farms get $0.80 to the food dollar. For example, a $2.69 loaf of bread, the farmer gets $0.22. Beer, $4.06 a six pack; farmer gets $0.11. Soda, $1.49 retail; farmer gets $0.07. And the one I like the best, Corn Flakes, $5.05 on Corn Flakes and the farmer gets $0.16. So, there’s a lot beyond the commodities themselves that drive up food prices and you’re going to see that debate becoming very public.

Now, in terms of what we do, I think there is a perception out there that we just chew up the entire corn kernel for energy and that’s not true. We make as much food as we make energy. And so, the fact that we’re concentrating the protein and the oil and fiber and the only stream that we’re taking out of the corn kernel is the carbohydrates stream. And the world is essentially long carbohydrates anyway that it’s not a food versus fuel. It’s a food and fuel, and there are many things that are happening to increase the amount of food that’s in the world.

Heather Jones - BB&T Capital Markets

All that, it sounds great but it’s going to be like a public media campaign. Is it basically going to attempt to at least counter these arguments in the same areas, same field that they’re coming and attacking ethanol?

Ronald H. Miller

Yes, you’ll see all forms of media. You’ll see public interviews; you’ll see newspaper ads; you’ll see quite a bit of media covering this as we have with the other side.

Heather Jones - BB&T Capital Markets

Okay, thank you and congratulations again.

Operator

Your next question comes from the line of Eitan Bernstein with FBR.

Eitan Bernstein - Friedman Billings Ramsey

Morning gentlemen. Congratulations on a very good quarter and my compliments on really improving the level of disclosures. That’s much appreciated.

Now, most of my specific questions have already been answered but I’d like to focus in a little bit on the theme of investor confidence. First off, Ron, you were saying obviously the market over time has sort of migrated much more to a spots market. Given where the spot market is today though, are you seeing improved margin pricing a little bit further out on the curve that maybe you could lock in some forward sales and give the investors more confidence that the margins will be there 6-9 months out?

Ronald H. Miller

Generally, what we’re seeing is where we would like to lock spot prices in for better margins. Our customers are somewhat reluctant to where they want to lock in prices below the current spot market. We’re reluctant too. And so, I think the market is generally defaulting towards the spot market and that’s simply a fact of life now. I will tell you that there may be a growing shift back towards a supply security mode as we saw in 2006 when the market in the RFG areas shifted from MTB to ethanol and there was an opportunity there to lock in some deals at better than spot market because people were concerned about supply. That is not developed yet in the conventional market. The new RFS is relatively new and it was primarily discretionary market up to that point. This fundamental shift, refiners milling from conventional gasoline to CBOB may enhance the prospect of buyers and sellers trying to work out supply arrangements that are perhaps fixed and beneficial to both. But I haven’t seen that develop yet.

We develop fixed prices but it would be below margins that we would find acceptable.

Eitan Bernstein - Friedman Billings Ramsey

Okay, and then just with a follow on and focusing a little bit more on liquidity. Any color you could provide obviously. There’s a lack of liquidity right now and that’s part of the reasons for taking down the price on the ARS valuation but can you clarify or put more color. Is it that you can’t sell it or you can’t sell it at a price where you’d want? But if push came to shove in terms of funding operations that you could monetize those assets to some degree and sort of get through the bailed out phase and into next year?

Ajay Sabherwal

Eitan, there is limited liquidity. It’s a problem that doesn’t relate only to us. It transcends to many corporations with student loan auction rate securities. We did not receive the bids were few and far between. They were for smaller amounts versus relative to the 127.2. They ranged from higher than where we marked and lower than where we marked. So it’s difficult to ascribe any debt to that market. Clearly, at some price you can sell, I would presume in any marketplace. But the prices that are out there today are not what we like. There’s also a changing situation here and Senator Kennedy has proposed a bill in Congress and Senate, which has gotten approved, which may or may not increase liquidity for existing bonds. It might be more focused with new student loan issuances. But there’s a lot of regulatory change there too.

And our primary focus is to increase loans, working with our builders but all other options remain but those might require significant discounts to there.

Eitan Bernstein - Friedman Billings Ramsey

Great. I appreciate the comments and thanks again.

Operator

Your next question comes from the line of Chris Shaw with UBS.

Chris Shaw - UBS Investment Bank

Good morning, guys. How’re you doing?

I’m actually curious where you buy your beer for $4 a six pack. We can’t get that cheap over here in New York right now. I tell you.

Ronald H. Miller

It is great living in the Midwest. Probably private label too.

Chris Shaw - UBS Investment Bank

Actually, I was curious about your characterization earlier of ethanol spot now moving with corn. I guess I don’t look at the correlations that closely but maybe you can give me an idea of why you think that’s happening and/or just maybe some color on that.

Ronald H. Miller

Well, I think the prime reason it’s able to happen is that ethanol is being significantly underpriced to its value in part due to, I think, this perception of over supply coming on and that kept the market somewhat depressed, and the rapid ramp in oil prices. We just have not been able to keep pace with it. So, at least it seems for the last nine months or so, we’ve become decoupled from gasoline prices but as we began seeing corn prices move up, the marketplace tend to move up. And that’s because I think because of the spot nature of the business, sellers can choose to sell or not sell. Or put it in another way, if they could sell and make some money or cover their interest payments, they’re liable to do it. But if they can’t, they are liable to shut down. And so, I think what we’ve seen is an underpinning of the spot price based upon the corn price. Now, obviously some producers have hedged. Some haven’t hedged. Those that haven’t hedged are feeling the pain probably a little more than those that have hedged. And so they’re going to try to push the price up. And because it’s still a great buy for the refiners, it hasn’t hurt demand.

I think the time being that if you see oil prices come down, it has variable impact on ethanol because we’re still trading under the value. I think a phenomenon that we need to watch is how fast do these customers convert to CBOB where they need the ethanol, in which markets, where’s the infrastructure set up? And what we said this year is we kind of think the marketplace will be a little choppy. We’ll see large chunks of demand. For example, the marathon announcement. We saw one the other day bout Cisco was doing the same thing. These actions create large chunks of demand. The same time, we’ll have 2-3 of the [inaudible] plants come online that will create a chop in supply. So you could see the ethanol price sort of trading in relation to corn price, sort of balance with the supply and demand. If a chunk of demand comes on, we’ll see the spot go up, chunk of supply goes on, and we could see a demand. I think once the market stabilized with supply coming on at a much slower pace or relatively flat, and with demand build out with the CBOBs and ethanol going pretty much nationwide, then I think you run the opportunity of seeing ethanol going back to a more traditional relationship with gasoline. But for the moment, incredibly high oil prices have sort of decoupled ethanol from oil and it’s more coupled towards corn.

Chris Shaw - UBS Investment Bank

All right. I mean it sounds like the ethanol producers actually have some pricing power, actually trying to pass through corn costs or achieve greater value for it. Is it a concerted effort, you think, on a producer’s part?

Ronald H. Miller

Well, I think it’s necessary. I think there’s pricing power to avoid shutdown. So that’s what you’re seeing in the spot market as corn has gone up, ethanol’s gone up. I think there’s a lack of pricing power on the ethanol industry because it is so much more fragmented than the oil industry that we’re selling into. You got what we would view, I’m sure it’s a highly concentrated customer base in the major oil. Now, they would make the argument that they’re not concentrated because they’re competing globally with large national oil companies. So I respect their view and I’m just talking about our perspective.

So what we have is a very, in fact, if you check the concentration numbers on this industry, they’re very low. And so, I think it creates, perhaps, an imbalance where the buyer still have probably more pricing power than the sellers do. But certainly, the sellers have pricing power to stay in business because the product’s value is so much higher than its going price.

Chris Shaw - UBS Investment Bank

I was just curious. The reason you increase inventory this quarter, was that somewhat trying to wait out the market or achieve higher pricing or being a little more selective or is that just filling pipelines and stuff?

Ronald H. Miller

Well, it’s a little both. I mean, that will vary from quarter to quarter, just sort of depending upon when a unit train is sold. So we’ll have some volume variance. Traditionally, the winter quarter is a low gasoline demand quarter so it’s not unusual for us to build inventory in the first quarter. Now, that we’re moving in towards the summer driving season, refiner demand will pick up particularly as they’re switching gasoline grades for the summertime. And so, it’s a little bit of timing of sales. Probably a little bit of pipeline build just simply because we’re moving into the Southeast and just the normal seasonal variances we see.

Chris Shaw - UBS Investment Bank

Okay, great. Thanks a lot.

Operator

Your next question comes from the line of Maryana Kushnir with Nomura Asset Management.

Maryana Kushnir – Nomura Asset Management

Hi, I have a few questions. First of all, regarding cap ex, I just wanted to clarify. It’s $250 million, would that be sufficient to finish construction of the plant?

Ronald H. Miller

Yes.

Maryana Kushnir – Nomura Asset Management

Okay, because initially I think you gave guidance that that would be spent through first quarter ’09. So now you’re saying you spend basically more in ’08.

Ajay Sabherwal

Maryana, between first quarter in Q1, depending on weather, depending on timing of cash payments, there could be some fluidity on that, but $250 million is our guidance for the rest of the year.

Maryana Kushnir – Nomura Asset Management

But if you indeed spend that then the cap ex should decrease significantly starting first quarter ’09. Correct?

Ajay Sabherwal

Yes.

Maryana Kushnir – Nomura Asset Management

Okay, then on the revolver. Do you still have that option to include PP&E piece in the borrowing phase?

Ajay Sabherwal

Yes.

Maryana Kushnir – Nomura Asset Management

And how much would that be?

Ajay Sabherwal

Right now, the number we gave you include the PP&E. The PP&E is included in that. It starts at $50 million and then it amortizes every quarter down by about, I think, $1.8 million a quarter. I think there’s around $46 million in there now.

Maryana Kushnir – Nomura Asset Management

So it’s already included in it?

Ajay Sabherwal

Yes, it is.

Maryana Kushnir – Nomura Asset Management

Okay, because I was under the impression that it wasn’t included before and you could add an incremental.

Ajay Sabherwal

I think a couple of quarters back, we got that changed. Now, the creditor revolver grows as inventory and receivables grow. The current credit revolver is at $200 million of which based on the borrowing base, we have $130 million in change.

Maryana Kushnir – Nomura Asset Management

Okay, and then could you comment on the facts of governor’s request to waive 50% of [inaudible] and also there was something in the press about someone putting together legislation to propose to freeze at current levels?

Ronald H. Miller

Yes, the second piece of legislation that’s being proposed is by Kay Bailey Hutchinson. It’s a proposal to stage. Quite honestly, we really don’t expect to see much of the Congress this year, an election year and particularly the sort of a contested nature of the election that we’re seeing. It’s difficult for Congress to do much more than give appropriations bills passed. The Farm Bill may be an exception to that because they’ve been working on it for two years but we really don’t expect to see anything happen this year with regard to that and that’s, I think, probably prevailing view in Congress.

The Texas governor’s view is somewhat misguided and I think, again, as we start talking about the benefits of ethanol versus the food costs, I think these benefits have become really inherent. What you have is a coalition of folks primarily led by the grocery people who are concerned about their costs going up. There are certain other groups like pork and chicken who have lived for years of $2 corn. And are now seeing corn prices higher and they’re upset. Now again, most of that has to do with energy inputs but that message isn’t getting out.

Livestock producers are a little bit of a split crowd and I think this is what we’re seeing with the Texas governor’s situation where it’s the livestock producers in Texas are very unhappy about the price of corn going up because they feed primarily corn and so they are lobbying very hard to get some relief on corn prices. And even if Texas were to waive value, it would have adversely no impact on corn prices. It would have a significant impact on gasoline prices which is helping another consistency in the state, the oil and gas industry.

The view of Texas livestock producers is different than the view of the Northern Midwest livestock producers who have large amounts of distiller grains available to feed their animals and they’re actually saving money doing that. So you have a view that the food that they’re able to get in the Midwest from the distiller grains make them very pro-ethanol so it is a mixed message. Also, it’s kind of ironic, cattle rangers for years have also benefited from subsidized material input in corn as well. The $2 corn is the same thing as the chicken and pork producers have benefited. So, I think when the full story comes out that consumers are saving $0.50 a gallon with ethanol blend and if you take ethanol out of Texas, it’ll have no impact at all on corn. I doubt it gets much traction. Also, the EPA is somewhat limited in its ability to grant waivers. Price is not a reason for granting a waiver. Supply concerns or economic disruptions have to be the primary and what they’re proposing, I think, it will be difficult for EPA to grant the waiver.

Maryana Kushnir – Nomura Asset Management

Okay, and also I just wanted to follow up. You were talking about farm bill and proposed reduction and subsidy, reduction and tariff. And regarding reduction of subsidy, or perhaps even complete removal of subsidy, I didn’t quite understand why that would not have impact on you because, for instance, let’s say gasoline prices determined by slight demand in gasoline market. And then if ethanol has to continue to trade at a discount to invite demand from new markets then basically the price would have to drop by how many cents the subsidy’s decreasing. Wouldn’t that logic make sense?

Ronald H. Miller

Well, first off, we don’t get the subsidy. The refiners do. So it’s calculated in the value that the refiners see and if you’re in a discretionary market, the $0.51 that they’re getting the tax credit definitely benefits. But there’s also the value of ethanol as it relates to gasoline and if you look today, price of gasoline’s roughly $3 a gallon in a wholesale market. The tax credit is $0.51 per gallon and ethanol’s octane value is worth about $0.30 a gallon. And so ethanol’s theoretical octane value is about $3.80 a gallon and the price is $2.50. So, if you take $0.06 off of that, it drops to $3.74 and the ethanol price is still $2.50. So, in a high oil price environment, it’s not as necessary as it was historically when we had a low priced oil environment.

So, as long as carbohydrate energy is cheaper then petroleum energy, then an adjustment there doesn’t affect us directly. Now, it does affect the consumer because, again, I don’t believe the oil companies are holding on to $0.51. I think the marketplace is getting this and so what we’re seeing is in a reduction of the incentive is probably going to be in the form of higher gasoline prices. I sort of chuckle a little bit when I see presidential candidates talking about an $0.185 a gallon tax holiday on the federal excise tax which I think undermines our road structure in this country and they’re already getting a $0.50 a gallon holiday because of ethanol being in the marketplace. So, I think as we think through this, what is the appropriate incentive level given where we expect future prices to be both on oil and both on carbohydrates? And so a move from $0.51 to $0.45 will have minimal effect on us.

Maryana Kushnir – Nomura Asset Management

Okay, thank you.

Operator

Your next question comes from the line of Joe Gomes with Oppenheimer.

Joseph Gomes - Oppenheimer and Co.

Good morning. Good quarter, guys.

Most of my questions have already been answered but just a couple of real quick ones. On the distribution system, any changes from last quarter in your assets there, number of terminals that are open, things of that nature?

Ronald H. Miller

A little. We continue to grow though as we’re opening up some new terminals. We’ve been opening up here in the Midwest. Missouri is part of their 10% plan. We now have system up and operating. Oklahoma is starting to move more aggressively so we have some terminals there. We’re still working on some hubs in Florida and in the Gulf Coast. I think the total count now is, and it does fluctuate to about 54, and I think we have 500. And again, that will move up and down. There will be some terminals that aren’t as efficient as we may have eliminated them and we’re continuing to open up hubs and terminals on the East Coast and Southeast.

Joseph Gomes - Oppenheimer and Co.

Okay, and also wonder if you might be able to just provide a little bit more color on the marketing alliances. You say in your release that the amount available for distribution might be impacted by economic pressure. Are you saying that some of your alliance partners are either delaying new construction or some of them might be in the possibility of shutting down? Could you add some color there?

Ronald H. Miller

We haven’t seen any shutdown. Some of the smaller, more inefficient ones, higher cost with the corn price, if they have not hedged, I think are feeling a little more pressure if not a huge volume for us. I think the biggest impact has been the delay in new construction and again, how much of this is real and how much of this were sort of high expectations of getting into the market more quickly? I think it’s a little of both. There have been delays in steel arrival, things like that, and quite frankly, people aren’t working as hard as they were. They’re not staying overtime because the margins have been thin. So, it’s a little both. We’re constantly looking to bring in new alliance partners. During the last fourth quarter, we picked up an operating plant. We’re continuing to do that. So yes, we could see some change in the mix but I think it’s mostly impacted by delays of alliance partners coming on.

Joseph Gomes - Oppenheimer and Co.

Okay, thanks.

Operator

Your next question comes from the line of Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James

Thanks very much. Two quick questions for Ron. First, you mentioned that ethanol demand is robust and certainly there are many data points to support that but ethanol’s still trading $0.30 below gasoline. What do you tribute the continued negative spreads and when do you think it will turn positive?

Ronald H. Miller

Well, I think there’s still a perception out there that we have a massive amount of supply coming on and we do have large amounts of supply coming on. I think the marketplace is beginning to try to figure out how fast that is actually coming on. In the public companies we’ve seen a couple of delays. The private guys are hard to figure out. In fact, that you see construction going on but I think one of the reasons we’ve been remaining depressed is that there is expectation of supply coming on. So customers anticipating at or somewhat reluctant to contract heavily or stick more hand amount in the spot market. I also think that the fact that we’re somewhat fragmented more than our customer base has kept the price down.

How soon that rectifies is a bit of an open question. This year, in the 27 years I’ve been in the business, I think it’s been harder to forecast because we do have a large structural change happening in our industry and in the motor fuel marketplace. On the downside of price, we have supply coming on but on the upside we have all sorts of demand coming on. And the announcements on new demand are just coming forth. I saw the Cisco announcement I think last week, the marathon announcements a couple of months ago or Exxon was not that long ago. And also we have, not only the announcements, that all companies are going to switch and targeting more than 10%. We’ll also have the issue of making sure the distribution is in place and that average has speeded up but it’s not complete. And so I think we have so many moving parts that it’s difficult for the marketplace to show broader margins in the marketplace in the near term.

Now, does that change in the latter part of this year? Do we have to wait until 2009? I can’t tell you. I still think ’08 is going to be choppy. I think we’ll have some periods of stronger spot prices and we’ll have some periods of weaker spot prices as the supply and demand chunks come on. I think once we sort of smooth this out, we get E10s are moving into the Southeast and the plant’s new builds slow down, then I think you’ll see a more balanced margin environment for us.

Pavel Molchanov - Raymond James

That helps. And second question regarding Adam King specifically. As the industry moves towards commercialization of cellulose, like recognizing but it’s a multi-year process, are you making any strategic considerations or analysis internally to, for example, potentially retrofit some of your plants or at least begin to think about that?

Ronald H. Miller

We have had an ongoing project at our Beacon wet mill to convert the fiber to ethanol and we spent a lot of time and effort on that. We have a particular focus there. We think we have a unique opportunity because we have a very clean fiber stream without any protein or oil. In fact, only thing attached to it is a little bit of the starch which is the reason the wet mill yield tends to be a little lower. So we have a very good way of, we think, of adding about 15% capacity through the sales of project there.

We are talking to various people about technology. We’re not an R&D company but for example, we do have a couple of patents pending on this fiber project but we’re not a major R&D cellulose company. We do believe that we will be producing ethanol from cellulose at some point. So as the technology proves out, we can either partner up then. We can either license the technology. And I think rather than retrofit our facilities because I still see corn based ethanol as being a large component of the ethanol industry. Particularly when you talk to the folks in Montana or pioneers, they talk about hybrid increases that we’re going to see in corn over the next 20 years. Corn as ethanol’s supply is going to remain robust. That said, we’re going to need more than corn to achieve the targets that robust. That said, we’re going to need more than corn to achieve the targets that have been laid out and so I would see the opportunity for cellulosing plants bolted on to existing corn plants. We could put a cellulose facility here in Pekin where we have a lot of infrastructure already in place. And so I do see them being integrated into existing corn based plants and I don’t see a need to retrofit technology. I think we see a need to incorporate the technology.

Pavel Molchanov - Raymond James

Okay, got it. Good quarter and thanks very much.

Operator

Your final question comes from the line of Judd [Nuffbaum] with Redwood Capital.

Judd [Nuffbaum] – Redwood Capital

Hi, good morning. I was wondering if you could comment on what you’re seeing out Brazil these days given Brazilians have not had the same amount of cost pressures that corn based US producers have and I’m wondering if the higher ethanol prices are going to do a track meaningful amounts of Brazilian imports.

Ronald H. Miller

We haven’t seen it yet but I think we’re getting close. We’ve heard imports went up around $2.60, $2.70. We’ll probably see some imports, I think, as the Florida market develops. We’ll start seeing a few more imports. We see sort of the traditional ongoing amount coming in from the Caribbean basin and Brazil has had a good sugar crop. I think the thing to remember about Brazil is it does tend to be a seasonal production. Sugar cane has to be processed within 24 hours after it leaves the fields and its sugar content varies with the seasons. So if they produce large amounts of ethanol in a short period of time and then a lot of it are plants now. Fortunately for Brazil they have both the northern crop and the southern crop. So they end up with sort of a year round presence but there are periods of time when they’re not producing ethanol and the first quarter is sort of one of those periods. So there’s not a lot of interest. There is increasing interest now that they’re producing. I do think we’ll see some imports. I don’t see it as really detracting from the corn base market and they should be able to land it near with the duty without a lot of difficulties. So I think we’ll see some. Whether we see as much as we’ve seen in the past years, I tend to doubt. Their peak year was 2006. I don’t think we’ll see near that because of the domestic spike that’s coming on.

Judd [Nuffbaum] – Redwood Capital

Thanks, and if we look out three or four years to a potential future landscape where perhaps the tariff and the subsidies are norm to there, once the industry is more mature, and should we continue to have $5 plus corn? How do you see the Brazilians fitting into the landscape in terms of domestic ethanol consumption? I guess the question revolves around the fact that they do seem to have a structural cost advantage.

Ronald H. Miller

Well, they do and they don’t. There have been some years where pressure has gone up because the crops were bad and so from a processing standpoint, they start with sugar where we have to go through a couple steps to get sugar. They also don’t produce bi-products where which we do produce. Food products, which as you can see this quarter, are particularly valuable to us. The burning of the gas: We burn typically natural gas and we’re both probably continuing to make improvements.

I don’t think the cost advantage, particularly with infrastructure issues in Brazil versus standing in the middle of the cornfield, are all that huge but they are there. Do I think Brazilian ethanol will be in the United States? Yes, I think they will be servicing both the markets. Very difficult to see it coming here and penetrating the Midwest. I think inland markets probably tend to favor the Midwestern producers and so while there’ll be some Brazilian ethanol in the coastal areas, even without the kind of environment that you’re talking in, and keep in mind, we’re going towards a 20% ethanol in gasoline environment, 20-22%. There is a certain [inaudible] for advanced biofuels which do include too sure, so there will be some in the for sure base but there’s a strong need for corn based ethanol. I see it sort of growing together.

Judd [Nuffbaum] – Redwood Capital

Thanks. And then just one other question on the financial front with respect to liquidity. I guess a couple of things. One is can you share with us how we should think about what the working capital requirement will be, both from ramping up your alliance partners, although I suspect that’s not a huge working capital requirement on a net basis but also from bringing up your own new capacity? Will that be in order of magnitude $60 million dollar type working capital requirement? And secondly, a related question: If you did choose to sell your auction rate securities in the low 80’s or roughly the best guess of where they might actually trade, in light of the working capital requirements, given your current plans, do you think you’d have enough liquidity absent released from the banks or do you think you really need a plug from the banks or some other fancy source?

Ajay Sabherwal

Those are very specific questions and you probably have your own model there. What I would say is our working capital, you’ve seen the AP days and inventory days and the assumptions you’ve essentially make are a continuation of that, with new volumes coming in as they come in. So I won’t go into a specific dollar number like you mentioned but that’s the way we project that out.

Clearly, liquidating the ARS in the manner that you described would go a long way towards, if not entirely or more so, in plugging the gap, depending on what you expect cash flows to be in the next year and so and so forth. But there is not a liquid market for these so we need to examine all alternatives and we’re doing so.

Judd [Nuffbaum] – Redwood Capital

Okay, thank you.

Operator

I would now like to turn the presentation back over to Mr. Nelson for closing remarks.

Les Nelson

Thank you, Stacy.

We’ve gone on here for a while now and realized that there may be some additional questions. So if anybody else has any questions that we didn’t answer on the conference call, please feel free to call our Investor Relations number if you have any additional questions.

This concludes our conference call for today. We would like to thank you all for your participation. Thank you.

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