Aventine Renewable Energy Holdings, Inc. Q2 2008 Earnings Call Transcript

Aventine Renewable Energy Holdings, Inc. (AVR)

Q2 2008 Earnings Call Transcript

August 1, 2008 10:00 am ET

Executives

Les Nelson – Director of IR

Ron Miller – President and CEO

Ajay Sabherwal – CFO

Analysts

Brett Hundley – BB&T Capital Markets

Mansi Singhal – Lehman Brothers

Ken Zaslow – BMO Capital Markets

David Woodburn [ph]

Braun Hoster [ph]

Ian Horowitz – Soleil Securities

Chris Shaw – UBS Investment Bank

Joe Gomes – Oppenheimer and Co.

Gary Stromberg – Lehman Brothers

Jeng Ming Lu [ph]

Pavel Molchanov – Raymond James

Eitan Bernstein – Friedman Billings Ramsey

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Aventine Renewable Energy Incorporated earnings conference call. My name is Jacelyn and I will be your operator for today. At this time all listeners will be in a listen-only mode. We will conduct 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. You may proceed, sir.

Les Nelson

Thank you, Jacelyn. Good morning. Thank you for joining us today. This is Les Nelson, Director, External Reporting and Investor Relations. I would like to welcome you to Aventine's conference call discussing our results for the second quarter and six months ended June 30th.

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're going including projected financial results, financial position and business development activities.

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

We refer you to our press release issued last night, which contains a more detailed description of our use of forward-looking statements, which apply to the discussion that follows. The financial details included in the press release and discussed on this call, including a reconciliation of net income excluding losses related to auction rate securities and net income to adjusted EBITDA are available on our Web site at www.aventinerei.com in the Investor Relations section.

I would also like to mention that this conference call is being webcast and is open to analysts. We will start the call with some prepared remarks and then follow with a question-and-answer session for analysts. Please be mindful of others so that everyone may have an opportunity to ask a question.

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

Ron Miller

Thank you, Les. Good morning and welcome to Aventine's conference call discussing our second quarter and six months results for the period ending June 30, 2008. We're 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 $1.9 million or $0.05 per fully diluted share. This loss included an additional $8.5 million loss related to the auction rate securities taken during the quarter. Excluding this loss net income would have been 6.6 million and fully diluted earnings per share would have been $0.16 per share.

Adjusted EBITDA for the quarter totaled $15.5 million. Cash generated from operations this quarter which excludes capital expenditures totaled $12.4 million. This number is net of $15 million interest payment made in the second quarter on our 10% senior and unsecured notes.

For the six months period the loss was 12.7 million and the fully diluted loss per share was $0.30. The six month results include 31.6 million in losses related to auction rate securities. Excluding this loss net income for the first six months would have been 18.9 million and fully diluted earnings per share would have been $0.45 per share.

Cash flow from operations for the first six months excluding capital expenditures totaled $42.3 million. In the quarter we saw continued higher ethanol prices, increased demand and higher commodity spread as rising ethanol prices offset significantly rising corn costs. Ethanol demand remains high as ethanol continues to be significantly cheaper than gasoline in today's energy marketplace.

Transportation and logistics facilities continue to grow and handle the new supplies coming into the marketplace. During the quarter our realized ethanol price increase to $2.50 per gallon from the $2.21 average received in the first quarter. For the first six months of 2008 our ethanol price average $2.36 versus $2.18 for the first six months of 2007. For the quarter the commodity spread increased to $1.29 per gallon from $1.21 per gallon in the first quarter of 2008. Co-product returns as a percentage of corn costs continue to be in excess of 40%.

We continued execute well. Our marketing and purchase resale operations are boosting our overall profitability. Adjusted EBITDA per produced gallon in the second quarter totaled $0.34 and was $0.41 per gallon for the six-month period. We're diligently working to optimize the supply chain inefficiencies in the marketplace and leverage our supply and distribution assets.

Our more complex Pekin wet mill produces 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 costs of operating 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 freight and distribution cost per gallon remains one of the highest in the industry. Our distribution system and customer relationships are integral in our ability to obtain the highest impact prices possible. Our results exemplify this.

Purchases from marketing alliance partners decreased approximately 7% in Q2 versus Q1. Our marketing alliance annualized volume at the end of Q2 was 538 million gallons. With our own equity production, our marketing alliance partner volumes and purchase resale volumes, we distributed approximately 881 million gallons of ethanol on an annualized basis in Q2 '08. Our expectation for 2008 is that another 316 million gallons of annualized marketing alliance partner production will come online. This will bring our total ethanol marketing capacity to approximately 1.2 billion gallons annually by the end of this year.

Going forward, we see many changes in our marketing alliance volumes as a result of economic pressures which may affect market alliance volumes available for distribution. Our new expansion projects in Mount Vernon, Indiana, and Aurora, Nebraska are moving towards completion and we expect production begin in the first quarter of 2009.

We recently entered into a purchase agreement with Nebraska Energy Cooperative, Inc. our minority partner, Nebraska Energy to purchase the 21.6% of NELC that we do not already own. We've agreed to issue 1 million shares of Aventine common stock to acquire the remaining interest. We expect this transaction will close as soon as possible after receiving necessary approvals from the existing unit holders of the Nebraska Energy Cooperative.

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

Ajay Sabherwal

Thank you, Ron, and thanks to everyone for participating in this conference call. I will now take you through our income statement and balance sheet, highlighting the key trends and variances. After that I will share with you some expectations for the remainder of 2008.

Sales in the second quarter reached a record as a result of both volumes of ethanol sold and higher ethanol pricing. Gallons sold in the first quarter totaled 220.3 million gallon versus 211.2 million gallons sold in Q1. Gross ethanol prices in the quarter increased to $2.50 per gallon versus $2.21 per gallon in Q1.

Co-product revenue increased 11% to $37 million in Q2. Co-product returns, defined as co-product revenue divided by gross corn costs, continued to exceed 40%. Higher pricing and volumes for germ, meal, yeast and dried distillers grains contributed to the increase.

Equity production in the second quarter totaled 45.6 million gallons. Marketing alliance gallons purchase were 120.2 million gallons and purchases from other producers increased significantly to 49.1 million gallons. We also decreased ethanol inventory during the quarter by approximately 5.3 million gallons taking advantage of higher ethanol prices towards the end of the quarter.

Our marketing and purchase/resale operations are increasing our overall profitability. Equity production was affected in the quarter by increased costs. Higher ethanol prices were offset by higher costs including corn and energy costs related to the production of ethanol.

Corn costs in the quarter increased by $0.88 to $5.38 per bushel in Q2. However, our average corn cost in Q2 was $0.92 below the average CBOT price of corn of $6.30 per bushel during Q2. The increase in commodity spread express per gallon of ethanol can be broken down as follows. Average ethanol prices increased by $0.29, co-product revenue increased $0.12, offset by a $0.33 increase in corn cost.

Now, conversion costs increase in the second quarter of '08 by $0.11 per gallon, primarily from significantly higher natural gas and denaturing costs and to a lesser degree from lower equity production. Conversion cost in Q2 increased to $0.73 per gallon from $0.62 per gallon in Q1.

One way of comparing our performance to other dry mills is to apply our excess wet mill co-product returns that are generated over and above the 30% industry expectation for a dry mill against the higher conversion costs associated with the more complex wet mill. On this basis, our adjusted conversion cost was $0.52 per gallon, making this adjustment highlight the benefits we receive from having the wet mill and makes a distinction between ourselves and our competitors that have dry mills somewhat more apparent.

Despite record high oil prices we held our freight and distribution costs to $0.20 per gallon in the quarter. Freight and logistics cost per gallon is calculated by taking total such expenses incurred including cost to ship co-products and dividing by the total ethanol gallon sold.

Freight cost continue to be affected by higher fuel surcharges driven by the record high oil prices and from general freight increases associated with moving product along longer supply chains to emerging new markets for example in the Southeast. These additional expenses are incurred to support higher prices on the increased volumes. Our distribution system clearly becomes more efficient as more gallons are moved through the system.

The average inventory cost of $2.28 per gallon at the end of Q2 versus $1.95 at the end of '08 [ph], using our weighted average FIFO approach reflects the effects of higher ethanol prices during the quarter. The economic impact of selling gallons held in inventory that were valued at $1.95 a gallon at the end of Q1 was a positive impact of cost of goods sold of approximately $13.7 million.

SG&A expenses increased $1.2 million or approximately 13.5% to $10.1 million in Q2. Higher legal costs along with higher other personnel fees are the principal reason for this increase.

Adjusted EBITDA decreased 7.6 million from Q1 to Q2. Adjusted EBITDA in Q2 was $15.5 million versus $23.1 million in Q1. Adjusted EBITDA was negatively affected by significant losses on derivative transactions principally losses on short gasoline positions. Adjusted EBITDA in both periods has been adjusted by non-cash items, such as stock compensation expense and losses related to auction rate securities.

Moving down to income statement, interest expense for the third quarter was $1.1 million. Interest expense includes $7.5 million in interest on $300 million of our 10% senior unsecured notes, 0.2 million of amortization of deferred financing fees reduced by interest capitalized during the quarter of $6.6 million.

Other non-operating loss reflects the net loss incurred for the second quarter of '08 on derivative positions totaling $14.1 million. This compares to net income on derivative positions of $1.9 million in Q1. Derivative gains and losses for Q2 are composed of net realized gains on CBOT corn positions of $4.4 million, net realized losses on short gasoline futures positions of $3.9 million, net unrealized losses on CBOT corn positions of 7 million and net unrealized losses on short gasoline position of $7.6 million.

All of our derivative positions required cash settlement on a daily basis without such cash settlement on a derivative contracts cash flow from operations would have been significantly higher. We have recorded net losses under derivative positions now, but we will see associated benefits in future periods. Offsetting our short gasoline positions or forward ethanol sales contracts that are indexed to gasoline. Such contracts are not mark-to-market. Also not mark-to-market are below market forward contracts to purchase corn that are either standalone or taken against short futures position.

Our effective income tax rate excluding the effects of the loss related to auction rate securities was approximately 34%. At this time we do not expect to receive an income tax benefit related to the auction rate securities as we do not expect to have sufficient capital gains to offset the capital loss. As such we have recorded an allowance against the income tax benefit for the loss related to the auction rate securities.

Now a look at the balance sheet at the end of the quarter. Cash and short-term investments at quarter-end were $114.4 million. Cash generated by operations during the second quarter of '08 which excludes capital expenditures was 12.4 million, and for the six months it was 42.3 million. The second quarter cash from operations is net of 15 million interest payment made during the second quarter.

Non-expansion capital spending in Q2 totaled $2.6 million, for the first six months we have spent 5.7 million on non-expansion capital projects. We expect to spend roughly 5 million on non-expansion CapEx for the remainder of '08. Capital spending on expansion projects totaled 60.4 million in Q2 excluding capitalized interest of 6.6 million. For the year we have spent 111.9 million on capital expansion projects excluding capitalized interest of 12 million. We expect to spend approximately 190 million on our capital expansion projects through the first quarter of '09.

The company did not repurchase any stock during Q2. The amount remaining under the authorization to repurchase stock is $45.9 million. During the second quarter, the company raised $97.1 million from the sale of auction rate securities. As a result the company recorded in the second quarter an additional loss of $8.5 million related to auction rate securities bringing the total losses related to auction rate securities to $31.6 million. The company holds no auction rate securities as of June 30, 2008.

As of the end of the quarter the company has available under its existing secured revolving credit facility approximately 131.3 million in borrowing capacity which is net of 21.9 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 Q2 was $245.7 million, comprised of $114.4 million in cash and cash equivalents and $131.3 million available under our existing secured revolving credit facility.

Now let me share with you some expectations for the remainder of '08. As of June 32, we had contracts for delivery of ethanol totaling 184.5 million gallons through December of '08. These contracts are shared for the benefit of the marketing alliance pool as a whole, of which Aventine is a part and are not solely applicable to Aventine.

These commitments were for 30.3 million gallons at an average fixed price of $2.32 per gallon, 35.8 million gallons at an average spread to wholesale gasoline of a negative $0.36 per gallon, based on NYMEX, Chicago and New York Harbor indices; and 118.4 million gallons of spot prices using various flat OPIS and axis indices.

For the third quarter of '08, we had contracts for delivery of ethanol totaling 108.1 million gallons. These commitments were for 16.3 million gallons at an average fixed price of $2.37, 22.8 million gallons at an average spread to wholesale gasoline of negative $0.34 and 69 million gallons at spot prices. Clearly, we continue to remain heavily weighted towards the spot ethanol market for the remainder of '08.

At June 30, we had fixed the price of 18.9 million bushels of corn through December '08 at an average of $5.83 per bushel, which represents approximately 50% of our remaining corn requirements for '08. This net number includes the following derivative positions which are now also detailed in a table in our press release.

Fixed forward physical delivery purchase contracts outstanding covering 24.3 million bushels to December '09 at an average price of $5.92 per bushel. 5.2 million bushels of these positions are for periods beyond '08. None of these forward physical purchase contracts have been marked-to-market.

These forward physical purchases have been partially offset by the sale of CBOT futures positions covering 5.6 million bushels of corn with an average price of $5.90 per bushel. We sometimes do this to lock in the basis differential against forward purchase contracts while letting the prices fluctuate. These short positions are marked-to-market each period with corresponding gains and losses recorded in other non-operating income at the end of each period.

Finally, to partially hedge ourselves against further price increases in corn, we have also purchased long CBOT futures positions totaling 1.4 million bushels of corn with an average price of $5.77 per bushel. These long positions extend through December '08 and are marked-to-market each period with corresponding gains and losses recorded in other non-operating income.

We also had outstanding at the end of the quarter short gasoline positions covering 8.1 million gallons of gasoline for delivery through December '08 at a fixed average price of $2.15 per gallon. We did this to protect some of our gas-related sales contracts from potentially falling gasoline prices. 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.

Our remaining CapEx spending expectations for phase one of our expansion project is estimated to be approximately $190 million excluding capitalized interest. And we expect our remaining non-expansion CapEx to be roughly $5 million. We continue to expect our ongoing SG&A annualized run rate for '08 to be between $35 million and $40 million. This amount includes certain SG&A costs that are recoverable from our marketing alliance partners and includes non-cash stock compensation expense.

Now I would like to turn the call back to Mr. Ron.

Ron Miler

Thank you, Ajay. As we've now navigated our way through one hand what was predicted to be a very tough year for ethanol producers, let's review our progress and where we would see the next six months.

At the end of last year, most were predicting core operating results from ethanol producers as the consensus view was that supply would far exceed demand thereby reducing ethanol prices to a point where the very existence of the ethanol industry will come into question. We, however, viewed this ethanol market as an opportunity to distinguish ourselves from our competitors.

I think the results we have achieved thus far have exceeded expectations for the first half of 2008. Higher ethanol prices and increased demand more than offset rising corn prices and higher energy costs, both in terms of production costs and transportation costs. Higher ethanol prices did not dampen ethanol demand as gasoline prices continued their unprecedented decline. Ethanol today remains a cheaper alternative to more expensive alternative transportation fuels as well as gasoline itself.

Ethanol pricing continues to move in constant with input costs, thereby maintaining commodity spread. The demand remain strong, capacity growth has slowed. Many ethanol producers are now reexamining their current economics of ethanol, not necessarily due to profitability issues, rather more so due to liquidity issues. As a result, you see newly completed plants reduced production capability or not started up operations at all.

These issues continue to bring new product supply into the marketplace at a slower or manageable pace. This has softened the effects of the new capacity build-out thereby allowing demand to absorb new supply without necessarily depressing prices. The marketplace continues – quickly add additional logistics and transportation capabilities to handle the new supply.

Our business decisions continue to be guided by our positive view of the ethanol marketplace. We have said in our Q1 conference call that marketing and distribution will become increasingly more important, and this is where Aventine excels. Our marketing and purchase/resale operations are boosting our overall profitability. We continue to be very positive about the growth and economics of ethanol and we continue in view of the current negative sentiments towards the industry is excessive.

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

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Heather Jones. You may proceed.

Brett Hundley – BB&T Capital Markets

Hey, guys. This is actually Brett Hundley speaking on behalf of Heather. How are you?

Ron Miller

Hi, Brett. How are you doing this morning?

Brett Hundley – BB&T Capital Markets

I'm good. Thank you. Hoping you can help me with our math here. On the purchase of the minority interest in Nebraska, we're coming to roughly a $0.55 to $0.60 per gallon purchase price. Is that correct?

Ron Miller

You can certainly just do the math and say what's our share price times meeting gallons times 21% of the capacity. I'm not sure that's the correct view of – we don’t look at it certainly that way, because we are not paying cash for the investment. What we have is shares of stock, it's roughly equivalent to the overall gallons that we produce per share, it certainly gives the other owners more liquidity than they have in their current investment and reduces in the administrative cost. So, I think you need to think in terms of more of just as it shares the currency, not necessarily dollars and cents.

Brett Hundley – BB&T Capital Markets

Yes. I can understand that. I guess maybe would I was also trying to lead into was, if in fact, these values are coming down, you're seeing some of these liquidity issues that you just mentioned in fact, and is it the fact these values are coming down? I was curious what that might mean as far as the buy versus build decision going forward? And I was curious kind of what your Phase II roles are if you decided to buy versus build, I mean, are you guys substantially prohibited for making moves out of the Phase II expansion into buy rather than build?

Ron Miller

No, not necessarily, I mean, we – it – we have an organic growth plan, we put our Phase II on hold at the point where the marketplace tells us it's time to build that. Certainly, we continue to evaluate opportunities on a buy versus build basis, its simple math. Now, our stocks are traded in a daily market, so, you can see what our values on a given basis on any given day. That doesn’t necessarily equate into what you could acquire an asset for what people are (inaudible) so forth. So, there is always a buy versus build decision. We still have the organic growth plan in place just as we had at the IPO because we are fundamentally bullish on the entire industry over the long-haul, and whatever point it's the marketplace sells at this time to build those plans we will.

Brett Hundley – BB&T Capital Markets

Okay. Thanks. And then I was also curious kind of what you guys are seeing locally around your plans in the corn market, what are you seeing as far as the corn crop progresses year, especially local it to your plan?

Ron Miller

Well, certainly, here in Central Illinois, I have the opportunity driving across Iowa to a recent RAB [ph] meeting. The corn crop and this part of the country looks quite well. It's – and I think we're starting to see, U.S.A reports some expectations of improvement in yield. I had not been seen Nebraska facility, but I've heard from our people that the corn crop seems to be doing quite well. So, round here is we've had good amount of rain at the right time, temperatures have been moderate, we've had very few days up in the 90s and when it been in the 90s it's been lower 90s, and so this is a very favorable weather environment at a critical time which is pollination which is just then occurring.

Brett Hundley – BB&T Capital Markets

Okay. And then lastly, another view point question. From your viewpoint, can you talk some about the possibilities and this ongoing discussion about mandate change, a tariff change, et cetera, kind of what you're seeing and hearing and expecting going forward?

Ron Miller

Well, we have the current waiver request pending. EPA has deferred a couple weeks, so they complete their response. I know there're over 15,000 comments, but we heard the rolling 77 were subsidies, they were, I think a lot of employee letters from people who – companies would like to see a change there that we're seeing. So I don't think those (inaudible) a lot of way. But the subsidy changes need to be addressed certainly. Our industry commented on the need for alternative fuels. We have not seen anything to-date that shakes our fundamental belief that public policy is going to continue to support, growth in ethanol and alternative fuels, this country is shipping $700 billion a year overseas into many areas of the world that are able to fund terrorism and things like that. It certainly affects our balance of payment. So, I think the public policy reality is that we need to continue to grow alternative fuels and in the case of ethanol since we are already here continue to grow that. So, we still remain very positive. The tariff issue is really tied to the excise tax credit. Now, we do have an anomaly right now that the tax credit will change to $0.45 beginning – effectively 2009 and tariff has remained at 54. We've supported the industry position that we take and tariff should be the same amount. So because of there essentially to protect American tax payer from sending – subsidizing (inaudible) ethanol.

Brett Hundley – BB&T Capital Markets

Okay, great. Thanks for the color. I'll pass a while.

Ron Miller

Thank you.

Operator

Your next question comes from the line of Mansi Singhal. You may proceed.

Mansi Singhal – Lehman Brothers

Hi, good morning. This is Mansi Singhal.

Ron Miller

Hi, Mansi.

Mansi Singhal – Lehman Brothers

I guess first question on your volume. It seems that your volumes source from alliance partners were little bit shy of the capacity you had mentioned. Was it because of the profitability and the liquidity issues you were talking about earlier that the lower production and have you seen any improvement in July with the margins coming back?

Ron Miller

Well, it's – it always is a bit of a moving target. We've had – we can get variance from quarter to quarter just on operating issues, and the spring time is the good time to make – take shutdowns if the weather is good, we've had some planned outages. You'd end up always having that issue. At the same time we have new alliance partners coming on, we had one alliance partner whose – we ended the contract and so they left, so it's – I don’t read much into the numbers. We have not – to my knowledge had any failures to deliver because of economics, although I'd tell you the – for mainly the dry mills the economics have been little bit tight in this quarter.

Mansi Singhal – Lehman Brothers

And – I mean your own production was a little bit lower than the first quarter, I mean was that maintenance and should we see that coming back up to the first quarter level?

Ron Miller

Yes. It was more some one-time events we have scheduled maintenances and we had – there was a – it's actually we took a near mess on a tornado and it knocked off our power for a bit, so that was sort of an unplanned event, so ending up with things like that. But, yes, it was sub-schedule and some have schedule (inaudible).

Mansi Singhal – Lehman Brothers

Okay. On your conversion costs, could you help us understand a little bit better the $0.11 quarter-on-quarter increase? I mean in the press release you've mentioned natural gas, denaturing, and lower volumes, can you – is there – break it down between those three regions, so that we can modulate going forward accurately?

Ajay Sabherwal

Let me – Mansi, let me try to help. There – as the press release suggests, we highlighted the key variances. The entire energy complex was higher. So, pricing, financial, gas, denaturing even chemicals was higher. So, that substantially affects conversion costs. Natural gas volumes were also somewhat higher in the quarter versus the prior quarter. We had some maintenance on some of our coal – coal fire boilers. So, both of these factors contributed with the pricing being the more substantial portion. So, if you take that pricing on the entire energy complex between gas and denaturing, and the increased gas usage, you get about a 7.5 cent, and the remaining is the lower production, and one divided by the other is the conversion costs per gallon.

Mansi Singhal – Lehman Brothers

Okay. That's it. Very helpful. Thank you. And just final one from me. Can you be at this stage more specific about the start-up date for your new plant? I mean should we remodeling the beginning of first quarter, the end of first quarter? What are you seeing in your construction schedule?

Ajay Sabherwal

I think we will – for now we will stick to the – during Q1, give ourselves a little bit more time before we get more specific one.

Mansi Singhal – Lehman Brothers

Sure. Thank you.

Ron Miller

Thank you.

Operator

Your next question comes from Ken Zaslow. You may proceed.

Ken Zaslow – BMO Capital Markets

Hi, good morning to everyone.

Ron Miller

Good morning, Ken.

Ken Zaslow – BMO Capital Markets

Couple things. In your press release two interesting comments you wrote were, supply chain inefficiencies in the marketplace – that you're looking to optimize the supply chain inefficiencies in the marketplace, what does that mean?

Ron Miller

Well, we have seen periods of time where the distribution is not necessarily a set up of facility or we've had some real issues, we've also had some downtime on the certain rails, there's some of a temporary situation during some flooding out in Iowa. But, what we've been able to do is work through with our distribution maybe go around bottlenecks and if we have to, we can either buy or exchange product for example, somebody got product on the East Coast, and this product in mid west, we can exchange product with them. So, we have been trying to do that, to try and reduce the impact of some of the infrastructure is still need to be built out. For example, the unit trains – some of the facilities haven't been built out yet, so, we have to work around those.

Ken Zaslow – BMO Capital Markets

And then the second question I have on conversion costs – going back to this conversion costs. I realize energy costs have gone up more this quarter, but they were up substantially last quarter as well and it seems like last quarter I think your year-over-year was up maybe little bit, but not as much. Is there something else in there or was just really then the natural gas prices? Just seems like – you see the natural gas price going up, but it really had a lot bigger jump this quarter than it did last quarter?

Ajay Sabherwal

Ken, that's a valid observation. One other aspect is that you asked – I mean the facts are just as I have spoken, but one other aspect is what price did you buy your natural gas? In Q1, we had in a prior contract at lower prices. In Q2, we were more in the spot, so that two starts to okay.

Ron Miller

And we continue to see general increases in supplies, materials, lot of this is basically energy-related, so, we have seen the energy prices just skyrocket. So, even the – even some of the supplies that we're seeing are – we're seeing more increases.

Ken Zaslow – BMO Capital Markets

And to my last question is on your hedging. How much of the unrealized and realized – I guess the realized there, you realized, but the unrealized gains or losses are actually linked to locking in either corn prices so there is a match to it versus the gasoline short seem not to be matched and maybe taking a more of a preparatory position. How do I think about that?

Ajay Sabherwal

No – Ken, let me help there. And that's one of the reasons – I know there is a lot of moving about there, but that's one of the reasons we put the table that we will continue to fulfill, continue to try and improve the disclosure. Let's start with the gasoline. The gas – we do – we have a marketing alliance. We sell all the pool as you know, various types of contracts, including gas index contracts. We share those contracts with the pool. Now, our proportion of those contracts is what we can choose to hedge by locking in the gas price. So, if you have sold gas index, a certain number of gallons, there is a proportion of it, that apply to us, and it is our choice with that proportion we lock by, for example, shorten gasoline. We could do – we could lock in all of that or a portion thereof. So, to the extent that we lock in a certain number of gallons when that forward contract actually takes place is a perfect match. And the mark-to-market is on the futures contract, not on the forward contract. So, for example, in the month of July, we have seen a major reversal back on those futures contract as gasoline prices have fallen now.

Ken Zaslow – BMO Capital Markets

Right.

Ajay Sabherwal

So, that one is actually pretty much linked on the forward side, and the futures, there is a volatility which we mark-to-market. Now, on the corn side is all of the corn hedging where you got the futures contracts, for example, on the corn, relate only to our production. So we don't do hedges on corn, there is no alliance to do hedges on corn nor has it where, we do it only for our own. And there, yes, there is an element where we could take for example, we could go long futures, and to lock in a certain proportion of our corn price, going forward. So that's how that works. I will say that both – what affected us in Q2 in that non-other – the other operating loss line there, were the – derivative contract, the futures contracts. And in the month of July, we had an offsetting gain of $8.5 million. So there is a lot of volatility in that number which is why we gave all of that details, statistics on that page. And the most important piece, the most important thing we watch is cash flow. Our cash flow for the first six months was $42 million after interest payment. That cash flow would have been considerably higher because we mark, not only do we mark-to-market those futures contracts, we daily settle them. So and as they reverse back or as we get the physical contract come in, that neutralizes. I hope that gives some more data.

Ken Zaslow – BMO Capital Markets

Perfectly clear. Thank you.

Operator

Your next question comes from the line of David Woodburn [ph]. You may proceed.

David Woodburn

Well, congratulations on at least operationally speaking what looks like a pretty great quarter in some tight times in the corn market.

Ron Miller

Thank you.

David Woodburn

I guess just a follow-up to the previous discussion and I'll just ask you, are you thinking about your hedging strategy any differently going forward after hit this particular quarter's income statement so strongly?

Ron Miller

I mean, we are constantly looking at the market place, we have a risk management committee made up of our financial people, myself, our operating people, our managers – our risk managers. And we are constantly looking at the right mix of sales and forward contracts to reduce the volatility or secure a position. And so what you've seen reported is what the committee has done at this point obviously, we have been meeting since July. There are obviously issues around liquidity on – when you do take forward contracts on these daily settlements as we complete our build-out we continue to watch that. We have not had constraint at this stage of the game on liquidity that would have prohibited us for going on and putting on appropriate contracts. So, but it is one of the factors that we look at. But, it's more importantly for us what's a view of the marketplace on corn, if you can lock in margins (inaudible) it's somewhat difficult to lock in margins, because of the fact that the ethanol market tends to be backway dated like oil and the corn market tends to have a carry on it. So, it's hard to go out too far. You also have the – you'll have a view on corn, what's they could approximately look like, what's the expected price next spring to buy, the proper amount of acres in, so this is all factored in, so, liquidity is the only one issue.

David Woodburn

Okay. And then on a broader scale, Ron, you talked a little bit about consolidation in, and even though publicly traded corn ethanol producers maybe trading in a certain price that's not necessarily the price that facilities like that could be acquired. I mean, that your view point is – does that carry through to number of the independents that are out there? And I guess I kind of look at it is maybe the farmers and the cohorts have a little bit longer on investment horizon, investment rationale, then people they just came into the ethanol business just as a shorter-term investment. Do you – I mean do you anticipate whether it's with Aventine or with some of the other larger firms. Do you see the consolidation occurring?

Ron Miller

Well, I think it's inevitable, we'll see some consolidation. This industry is very fragmented and our view of the marketplace is we're selling into what it appears to be from our standpoint, concentrated industry, you got eight or nine major oil companies, we got 100 plants out there. So, I think there will just as you see in any industry as it goes through its life cycle you will see the consolidation at some point is it driven by difficult economics, we saw that happens to the petroleum industry in the late 90s with $10 oil. With this period of time, it'd be appropriate for the ethanol industry to consolidate. It might be obviously having a stronger balance sheet if you can in that process and having a strong team and position the marketplace is very important in that process. I would agree with you. I think the cooperatives are probably difficult to best to consolidate their generally logo plans and owned by logo ownership, there is an inherent benefit for the owners when they sell the corn to the plant. So even if the plant were breakeven they are still making money on their corn and they are getting an value-added piece, they don’t normally give when they sell corn on a long-term basis. So, I don't see a huge incentive for the cooperatives to get out of. I think they do have a long-term view. The newer entrance wanting to get in, and maybe sell for premium and get out as those might be the candidates although selling for premium today is in the current market is probably unlikely. I don't know where you would end up testing, but obviously, if somebody wants to buy everything they can go and start buying our stock and do that. But in certainly, if that were to occur, our prices are going to stay where it is today. So, it's – we haven't seen any major consolidations here in the last several months, and it's hard to say what value they would really be done at.

David Woodburn

Alright. Thanks, Ron.

Operator

Your next question comes from line of Braun Hoster [ph]. You may proceed.

Braun Hoster

Good morning. I just wanted to – Ron, if you could give a pretty good handle on pulse of the market, if you could kind of walk us through your outlook for capacity additions, and of the amount under construction, I think it's in a 3 to 4 billion gallon range, if you indeed expect that to find its way to market, kind of, what kind – and what type of time frame for the rest of this year and in 2009?

Ron Miller

If you look at one of the Web sites, they are vary to the others. You got – I think in the neighborhood of around 13 to 14 billion gallons of capacity when the capacity is complete, there is a bid of a question mark as to when – how fast they all going to get completed and two, even they get completed, how fast do they start up? We are seeing still some plants that have completed construction that are idle. So, capacity and supply base spread out a little bit as some of the people are waiting for the construction loans to expire and have to move into their term loans and obviously, that will drive before. Today, I looked at the last EIU [ph] report and I think we were producing at about a 9.5 half billion gallon rate as of May, and the fact that we were selling a little bit more than that because there's some imports (inaudible) selling about another 100 million above that. On a SD's [ph] rate sort of project that out, we could have (inaudible) 11 to 12 billion gallons of capacity at the end of the year with a potential range average in the neighborhood of all 10 to 10.5 billion gallons actually produced for the calendar year. We will get to the 13 or 14 probably by the end of '09 maybe rolling into some into '010 and so, I think many of them we're seeing production is going to be above the mandate. As far as demand we're seeing I think fairly good response – in fact I saw the other day Chevron announced – they are going to 10% blend, so, most of the oil majors have been telling their customers that they're going to go to E10, across the board, lots of 14 billion gallon demand sort of your regardless of what the RFS is, and we're seeing as markets roll out, that the markets are moving towards 10%. So, I think the –our view that demand will probably keep pace with the supply although I would say right now supply is pushing it or the expectation of the available supply is probably pushing the market. We'll probably be that way for the next kind of 6 to 12 months.

Braun Hoster

Okay. And then also – I was just wondering if you could kind of give us a feel, I know it's (inaudible) replacement costs were estimated to be north of $2 per gallon, that's kind of moving target, I was wondering if you can give us an idea of for a new build today, if you were to enter a contract, what might be look at, what are the replacement costs in today's environment?

Ron Miller

It's hard to say that I don't think they really doing a new one, but sort of some aspect. We did ours around two. Our first numbers is high as 2.25. And, of course, we can expand our facilities at we think a number below that, below the two because some money we're spending upfront – so, in the phase one. But let's assume for a moment, $2 was the average what I would say is still continues to go up somewhat, but I would say labor or maybe it's the manage for the profitability of the construction size, probably coming off a little bit, there is not –there's sort of robust activity right now and I'm sure contractors are looking for opportunities. I think we have some savings there. So, if I had to guess at this point, I'd say around $2 still, it might be able to do a better deal than that if you got it right, but nobody's getting new plants financed and so it's almost an academic discussion.

Braun Hoster

Okay. And then last one from me. With the resolution of the – your auction rate securities and seemingly much more favorable financial position, might we see a more aggressive investments with regards to second generation ethanol and sale assets based, I know you have some partnerships there, I haven't – I’m not sure of any developments plans are – plans under that might be constructed or what might we expect from Aventine on that front?

Ron Miller

Well, we do have one second gen project, that we have been working on and it's not a high dollar project. It's taking our fiber from our wet mill which is a very clean fiber stream and converting it to ethanol. And so, we continue to spend on that, but quite frankly, it's not a big dollar. I don't see as being an R&D company for second gen, but I'm absolutely confident we are going to be producing second gen ethanol when the technology is proven out. Now, with this – with the liquidity issue, (inaudible) maybe work little harder with second gen partner it might, but I'm not in a position to really try to develop a technology. There are lot of big name companies was that are well funded as to – I'm talking about people outside the traditional ethanol industry that are working hard on this. And we certainly have relationships with many of these companies. And when the technology is proven, I'd rather spend money on a proven operating license and spend millions and millions and dollars trying to find the right number, we're just not a – we're not an R&D company.

Braun Hoster

Great. Thank you.

Operator

Your next question comes from Ian Horowitz. You may proceed.

Ian Horowitz – Soleil Securities

Hi, good morning, guys.

Ron Miller

Good morning, Ian.

Ian Horowitz – Soleil Securities

Couple of questions. Ajay, SG&A was up, a little bit sequentially, and in the press release you mentioned some legal fees and some external professional fees, (a) is that primarily due to the Nebraska transaction, and (b) how much of that do you – will continue on through the model?

Ajay Sabherwal

Ian, it was not –I wouldn't say any of that significant piece of it related to the Nebraska transaction. It's a variety of things that mostly to do with the auction rate securities where we're examining a various options and what our views. So, I would say most of – not most, but a significant portion of it probably relates or does relate to that area. You know, legal, professional fees are situation dependent as to what kind of fees we would incur, but I think our guidance on 35 million to 40 million annualized in a whole.

Ian Horowitz – Soleil Securities

Okay. And then do you have – can you give any kind of color on the destination mix for your coproducts whether they are domestic or exports? What percentages are getting exported out?

Ajay Sabherwal

We get our more than a fair share on the export side. We don't take it all the way to Europe or Asia for example. We have folks who pick it up at various ports and take it there. But because in Pekin is on the river system, we do actually benefit substantially from access to the export markets, and get higher prices for the coproducts because of that. I don't actually have this statistics on what – where – what percentage ends up in export market.

Ron Miller

I don't have that either. I can tell you our gluten feed from Pekin is almost exclusive way exported. The corn germ is processed here in the United states, the gluten meal – there is a portion is exported, there is a portion that's domestic probably greater domestic market, but there's distillers grains, out of Pekin, fairly good percentage they gets exported, obviously our distiller grains out it, Nebraska be in envelope plant is probably more domestic, but I just don't have the breakdown either.

Ian Horowitz – Soleil Securities

Okay. And to that same question, were you guys – how affected were you folks with the shutdown, not with the flood, but the recent shutdown with the (inaudible) on the Mississippi?

Ron Miller

It didn't really affect. It was not in our normal line, it was actually south of where we normally ship products. We had virtually no impact on that.

Ian Horowitz – Soleil Securities

Okay. One last question for Ajay. The natural gas probably was – as we talked about here has been an issue for you on the second quarter, but we have seen some – significant decline in the price of natural gas here in the recent weeks. Is there any thought to starting to add a natural gas hedge positions to the derivatives portfolio? Or do you still think of looking at that kind of as an unhedged component?

Ajay Sabherwal

There is not so much derivative, but more physical forward. At the moment, to be a more physical forward than derivative. Now, I will caution we are always buying some gas in the forward market. And gas prices have fallen only in a very sharply only recently. So we did buy some natural gas in the forwards, before the gas prices fell. We'll continue to purchase as gas prices fall in the next quarter or two kind of thing. We don't go much beyond that at any one time.

Ron Miller

Natural gas is part of our risk management review. Every time we hold a meeting we discuss ethanol, gasoline, natural gas, corn, coproducts. So, electricity, coal, all of that it's discussed in.

Ajay Sabherwal

We are net short all the inputs….

Ron Miller

Right.

Ian Horowitz – Soleil Securities

Sure.

Ajay Sabherwal

We are always buying and declines in these prices are obviously above the good for us and the rest of the industry. But you see a tempered effect is we're always buying forward.

Ian Horowitz – Soleil Securities

Right.

Ron Miller

So to-date we have done in the physical markets could we do in the futures market share will be good.

Ian Horowitz – Soleil Securities

Okay. And then also one sort of question for Ajay. So if you look at the two plants you're going to do about 190 million in CapEx, if you – I'm not – this is something assumption, but if you say zero cash flow from operations going forward, it looks like you're fully able to fund this, this expansion with your liquidity and your cash and your line. But then, when I look out and see these plants on line, these commodity prices both from the inputs are as well as here, inventory side, it seems like your working capital demands are going to be significantly increased. So, should we expect to see as we near completion on these projects, some other liquidity lines being put in place to handle those events and they are going to be much larger than they have been in the past, correct?

Ajay Sabherwal

Valid observation. We are continuously looking at all our options. Working capital lines is clearly one of them. Tightening up our working capital is another we see noticed that our inventory was quite tight this quarter. So, we will be opportunistic, the capital markets are also a little bit in this array with capital being somewhat scarce, so, there is a balancing act between all of these, but there is no question. We are continuously examining possibilities in terms of what we can do to increase availability.

Ron Miller

And we do have real money AVL as the working capital needs go up. We – the AVL can expand up to the 200 million. So there is some (inaudible) flux there in our existing AVL rate.

Ian Horowitz – Soleil Securities

Sure. To some degree, but it doesn't – wouldn't cover both plans, would they?

Ajay Sabherwal

Our scenarios, our models just it would. We were funded, but you can never have enough.

Ian Horowitz – Soleil Securities

Okay. And then question for, Ron, I agree with all your numbers. I think, Braun Hoister [ph] asked the question, but I just – I'm not sure I understand how we get from $9.5 to $14 billion gallons of capacity when margins are as tight and operating opportunities – operating is so difficult in this environment, the capital markets are shutdown, and raw material prices, steel prices continue to decline, we hosted a conference call while back, and I said I don't – I think the volume issue is not on whether there is demand for the product, because if you are trading $0.30, $0.36 on the RBUM [ph] there is demand all day long. It's the financing of these projects and the viabilities projects from an MTV standpoint don't seem as interesting or compelling as they have in the past.

Ron Miller

So you're certainly not going to get new plants built in this environment. So no new plants are going to be considered either I think in the equity markets or the debt markets. So it's the facilities that are under construction. And the number is we’ve checked yes, these projects are under construction. Now, there are the other couple of questions. How fast do they actually get built up, the 4 billion or so that’s under construction; is that going to be completed in 2009,2010 or you can push that a little bit, it does as we‘ve seen do plants that get completed start up when they’re completed, are they delayed getting into the marketplace; you know, do people have the money to get them built, but don’t have the money to operate them because they have a liquidity problem, and we’re seeing some of that out there. So perhaps I don’t think they did a good job of what is being built may not be what is actually being produced in this commodity environment and as we're saying right now, we probably have in the neighborhood of half a billion or so of plants that are either shuttered down or haven’t started up. And so that may continue until the marketplace moves out. Now, one of the issues there is also the distribution infrastructure that needs to be built out. Ethanol is a great buy. And as long as we got $125 to $140 oil, there should be all sorts of opportunity for the ethanol industry to sell 14 billion gallons which is roughly an ethane blend across the country. It is limited in certain markets and it will take a while for all of those to get completed. We're seeing infrastructure being built in the Southeast. Here in the Midwest, we have infrastructure already in place. We're seeing faster moves to go to ethane, you know Marathon earlier this year, basically took all their Midwestern terminals to ethane. And so that’s we're starting to view the market as choppy and will probably remain choppy for a while because while this capacity is under construction, you know, when will it get completed and even if it gets completed, when will it start up? So maybe that’s the difference what we're thinking about. And our actual production views are substantially below the construction views.

Ian Horowitz – Soleil Securities

Right. I mean I wasn’t trying to pick a fight I was just–-

Ron Miller

No, no, I think we're sort of understanding on the same pace. I would say our view just apply to me and will be slower as it ramps up than what we're seeing under construction.

Ian Horowitz – Soleil Securities

Okay, okay, great. Thanks guys.

Ajay Sabherwal

Thank you.

Operator

Your next question comes from the line of Chris Shaw. You may proceed.

Chris Shaw – UBS Investment Bank

Good morning guys. How’re you doing?

Ron Miller

We're good.

Chris Shaw – UBS Investment Bank

I missed some of the call so if I go over something just tells me, but I thought your basis at peak like around $0.33 now. I'm just curious, do you know what that maxed out at and do you think it's going to shrink back up with corn prices coming down?

Ajay Sabherwal

Basis, I don’t really recollect the exact number but we have basis now on for $0.50. So it was wider than we've historically seen and typically yes, when corn prices come back down you could see some (inaudible) of that basis.

Chris Shaw – UBS Investment Bank

Okay, and then you think after that DDGS are pretty good at $195 at peak and do you think those are coming back down the corner as well or you think they have a chance to stay up?

Ajay Sabherwal

Again, you know those relationships hold, but as I was mentioning on the corn and on natural gas on DDGS conversely you can’t sell and buy all your commodities on the spot everyday. So there would be some forward sales that protect you for a while from declines for example. That’s for a month or two. So you always have that kind of a lag effect. But yes, you will typically see declines in the DDGS corn prices.

Ron Miller

I mean that’s why we don’t head to that portion of the bushel because they do trend there can always be a lag effect both on the way up and the way down. There's probably a slight benefit in my mind what the export capability at the peak and one of the issues we talked about in the rising food prices are changing dietary habits in the Far East, primarily China and this product plays quite well and fact is it does provide protein and that’s what people are looking for. So animal feeding with higher protein material is a positive. So we might reap a slight benefit because of this change in feeding demand in the Pacific Rim, but other than that, it will tend to follow corn price.

Chris Shaw – UBS Investment Bank

Could you remind me of the products that you sell? I know you sell for a lot of other people as well but like what percent do you sell in the Midwest and what percent do you sell to the Coast, and what percent to the South, the Southeast or something?

Ron Miller

On the ethanol side?

Chris Shaw – UBS Investment Bank

Yes.

Ron Miller

I don’t have the exact breakdown. I know we're a very strong player here in the Midwest with our terminal network system. We also a lot of purchase resale occurs here. On the East Coast, we're probably one of the top three players in the East Coast market. Now the Southeast is an emerging market, I think we've done a pretty good job (inaudible). We're not a big player in the West coast and we're pretty substantial player in the Houston market but (inaudible) I’m going to have to say this by region.

Chris Shaw – UBS Investment Bank

Great, thanks that is helpful.

Operator

Your next question comes from the line of Joe Gomes. You may proceed.

Joe Gomes – Oppenheimer and Co.

Good morning.

Ron Miller

Good morning, Joe.

Joe Gomes – Oppenheimer and Co.

I was wondering if you could give me a little more detail on the transportation cost. You know kind of surprised it didn’t go up at all especially given the ongoing increases in freight rates and in add-ons. I don’t know if it might break out a little bit between the cost of just the freight side versus the cost of the network side and how the efficiency is playing to that.

Ron Miller

Well, it is a combination of factors. One, we have a certain amount of fixed costs in our distribution system, so obviously the more throughput we have, that covers that fixed cost, reduces the per unit impact. Fixed cost can be railcar leases and terminal leases and things like that. We did take advantage of the opportunities in the Midwest that occurred in the second quarter where the Midwest pricing was higher than the coastal pricing in terms of the freight transportation so that had required us to move less by long distance freight and that’s the variable portion, so we saved a little bit there. As you see, we've continued to increase our purchase resale activity and generally our logistics costs are much lower that and most of the time purchase resale is to leverage our facility, so we're not paying that freight. So it’s a combination of increased purchase resale, probably increased concentration sales in the Midwest during the quarter and just more efficient use of our facilities through increased throughput rates by reducing our fixed costs per unit.

Joe Gomes – Oppenheimer and Co.

Okay, thanks. Also, on the minority interest in Nebraska Energy, why don’t you provide a little more detail on that, you know, who approached who on that, would that have any impact on the corn supply to that plant, because I think the rural co-op supplies that plant with its corn.

Ron Miller

I'm somewhat limited of what I can talk about. What we have asked is for is that will be out soon. So I’ll have to defer the first part of your question on that. As far as the corn supply, the agreement with Newark Cooperative is with Nebraska Energy LLC and that entity obviously will continue, so that is a different entity and while Newark Cooperative is a partial owner of NEC, it is a separate arms length transaction with Newark Cooperative. So that should not affect at all the corn supply.

Joe Gomes – Oppenheimer and Co.

Okay. And one last one. Just wondering Ron if you could give us some of the comments or your thoughts on Brazil in the recent WTO negotiations.

Ron Miller

I don’t necessarily have a comment on the WTO. I know that they've been pushing very hard on the tariff issue. That’s going to be somewhat difficult without congressional action and I think you’ve heard the voice of congress in the foreign bill, they didn’t even move it to equalize it with the (inaudible). But – so, I know they're taking this to the WTO. I have no view at this point as to how that’s going to proceed.

Joe Gomes – Oppenheimer and Co.

Okay, thanks.

Operator

Your next question comes from the line of Gary Stromberg. You may proceed.

Gary Stromberg – Lehman Brothers

Hi, just a couple of last questions. Ajay, can you just explain or walk us though working capital requirements for the two plants that are coming on? How many gallons and bushels do you need for each?

Ajay Sabherwal

For us, essentially you look at the outputs and inputs, its ethanol and corn. On the output side we are large marketers of ethanol today. So it is not very different from what it would be for any new plant that we bring up. So typically, we have somewhere in the mid-teens in terms of number of days of supply that we carry in inventory most of which is because the product, not so much that its stored on site, but that it has to be delivered to a particular location, so it is more in transit. On the corn side, we have an arrangement with the cooperative on the one hand and a consolidated grain and barge on the other and we try and as much as possible play in more to just in time kind of concepts with their grain elevators. Now these arrangements also give us some flexibility of taking more ownership of corn if we wish to and in these elevated price environments we would prefer more the just in time than the ownership and the working capital requirements. So that’s how that works. And usually there is, on site, there is no more than a few days, probably less than a week of supply of corn.

Joe Gomes – Oppenheimer and Co.

Okay, thank you. And this is just a follow up. On that last conference call you talked about potentially expanding your credit facility at the LC are getting close to the sublimit of $25 million on the credit facility. Can you just update us on enhancing your liquidity here?

Ajay Sabherwal

Actually those are two separate aspects. Expanding the LC limit even though we're not right now seeking additional LCs. That is potentially less difficult than increasing the size of the credit facility per se. We continue to explore, let me leave it that way. We continue to explore opportunities there, we continue to be in dialogue with our correspondent to the banks here and we have our high yields facility as it does allow us to expand the size of our credit facility, subject of course to borrowing base. So we continue to examine those options and as and when appropriate, if there is a suitable transaction to do of course, we would consider that. Now the key point I just made is borrowing base. Now if ethanol prices and corn prices decline, then our working capital need actually declines. Note that a key part of our working capital is inventory of ethanol and most such ethanol inventory for us comes from our marketing business, not really from our own plants. Our own plants are simply a proportion, and as ethanol prices fall, that inventory requirement actually decreases. So we could go ahead and get a bigger facility, but we couldn’t borrow on it if the borrowing base isn’t there, and as ethanol prices have fallen, that inventory requirement actually diminishes. So its balancing a lot of factors and we continue to examine those options, but I think most of the questions I’ve heard today have said, you know, you’ve got two new plants coming on the inventory, more important for us as much as price of ethanol and how many gallons we carry on behalf of our marketing alliance pool and there, a decline actually helps in sense of working capital requirement.

Joe Gomes – Oppenheimer and Co.

Okay, understood. Thank you.

Operator

Your next question comes from the line of Jeng Ming Lu [ph]. You may proceed.

Jeng Ming Lu

Good morning.

Ron Miller

Good morning.

Jeng Ming Lu

I have a question is how confident that you are about that 300 million balance capacity from your marketing alliance will come online within 2008.

Ron Miller

That’s a confidence probably because of the companies that are involved there's essentially three plants that are all substantial, you know, given one thing or another, two of them start in 2008 and one starts in early 2009 its possible but all these plants are under substantial completion, the construction schedules are on track, so I think confidence is pretty good that it will be up.

Jeng Ming Lu

Okay. My next question is, I would like to have your opinion on what we think of about the trend of ethanol prices for the second half of 2008?

Ron Miller

So you want ethanol prices for the second half of 2008?

Jeng Ming Lu

Yes.

Ron Miller

They’re either going to go up or going to go down. You know what we have is a situation where if you look at ethanol’s value, you can take the price of gasoline, add the tax incentive, which is today's $0.51 a gallon and roughly $0.30 of octane (inaudible) is a 113 octane value and that’s beneficial to refiners and end-markers. So the value is something in the neighborhood of gasoline plus, say, $0.80 a gallon. Today's trading it is probably gasoline’s price minus $0.70 a gallon. So there's sort of no correlation right now to ethanol price and its value. And I believe that this has to do to the fact that we're in a supply push environment and that when we're in a supply push environment, we're going to trade more towards costs and so, if you look at recent price trends, you know this year you’ll see that ethanol probably correlates more to corn than it does to gasoline, and I think that’s just a function of supply demand bounce. So while we're still in a supply push environment, I would watch the corn price and you know look at the curve on that and then try to extrapolate the ethanol price somewhere you know telling cost and perhaps a slight margin and if you're going to have plants operate they're going to pay their interest and things like that, which still leaves that tremendous value opportunity on the demand side because if you look close enough its probably in the neighborhood where we are today and there's roughly $1.50 a gallon spread, which I actually think is pretty beneficial for consumers, but I think most of the stuff is going right through the gasoline pump and right into the pockets of consumers and when we look at a $4.00 gasoline price when for ethanol we’d probably be looking at $4.50 towards $5.00. So I think it’s a good thing from that standpoint. When does ethanol begin to trade more toward its value, I think we're going to have to see the infrastructure build out on the demand side, I think we're going to have to see the plants that are under construction get completed, and actually begin to operate. There's not going to be a wave of new construction after this current wave and so out in the next year, one could look at an opportunity where we might trade more on our value basis. I think the good news from an ethanol standpoint, although I don’t expect all prices to drop, you know in the neighborhood of what, $0.80 a gallon or so, you know, they could drop and wouldn’t affect our price at all, given the current state of the economy.

Jeng Ming Lu

Okay.

Ron Miller

Probably doesn’t answer your question, but I would watch corn for the balance of the year.

Jeng Ming Lu

Yes. In terms of the cost of corn, currently you have 50% of your corn locked at $5.83, but in the current spot market, corn price is around $5.30 I would say. I mean, personally I would believe you're going to have some net profit in the second half of 2008. Is that correct or –?

Ron Miller

Well, the forward curve, you’ve got to continue with the forward curve nearby, I would like at the futurist market, obviously we have in some respects that are on a negative basis as well. I think as corn price comes down, the damage that we had in terms of being substantially below the corn market has evaporated somewhat, but I’m not convinced at this point we're going to have a negative to the market for the balance of the year.

Ajay Sabherwal

Again, there's a remaining 50% that we haven’t purchased.

Ron Miller

Right.

Ajay Sabherwal

And our purchases are for you know, at this point five remaining months. So in a longer term we would like our inputs to be lower cost and yes it is possible that for a percentage we have bought it higher than where the price ends up, but–.

Jeng Ming Lu

Okay, thanks.

Operator

Your next question comes from the line of Pavel Molchanov. You may proceed.

Pavel Molchanov – Raymond James

Hey, good morning, guys. Quick question on biodiesel. Obviously you guys a marketer not a producer but can you just give us an update on what is going on with production capacity (inaudible) capacity utilization in the space?

Ron Miller

In biodiesel? It is not very strong right now. Our position is fairly small. We're just basically are doing some local marketing, but I think that that production is struggled somewhat and that market is not nearly as material or as involved in as the ethanol market.

Pavel Molchanov – Raymond James

Did you see that with concurrent reduction in soybeans along with corn? Do you see any improvement in that as we've seen in the ethanol phase or does it still remain pretty tight?

Ron Miller

We haven’t seen a whole lot of improvement. Obviously the soybean complex is higher to what you're seeing is more the fatty acids and that’s not a market. I think one of the disadvantages we have in biodiesel in the United States is that we're a primarily a gasoline market in the U.S., so diesel itself has lower market penetrations. It is not anything like in Europe where the situation is reverse, so I don’t see a huge penetration by biodiesel and I think that the soybean base biodiesel compared to fatty acid is probably the disadvantage that you're referring to.

Pavel Molchanov – Raymond James

Understood, thanks.

Operator

Your next question comes from the line Eitan Bernstein. You may proceed.

Eitan Bernstein – Friedman Billings Ramsey

Good morning, gentlemen.

Ron Miller

Good morning Eitan, how’re you doing?

Eitan Bernstein – Friedman Billings Ramsey

Great. And you?

Ron Miller

Doing great.

Eitan Bernstein – Friedman Billings Ramsey

Thanks a lot for the additional info on the hedges. That should be very helpful in the future period. And Ron, I completely agree with you on ethanol value not being rocketing not being taken but at the same time the margin capture issue with supply and that seems to me to be the real issue. One question, and this maybe something obvious that I'm missing, the minority interest line item this year seems to be an income add back rather than an expense. Am I missing something?

Ron Miller

No.

Eitan Bernstein – Friedman Billings Ramsey

That’s the 20% obligation to the minority interest holders, shouldn’t that be an expense, if you're consolidating Nebraska at a 100% and then you're back at the 20% outside ownership?

Ajay Sabherwal

Eitan, the numbers are clearly accurate. It would depend on whether that operation with its fully-allocated costs with the cost of the marketing, et cetera, and the hedges was profitable or not.

Eitan Bernstein – Friedman Billings Ramsey

Okay. Okay, and then Ron, just sort of following up on that. You just mentioned potentially setting some administrative costs. Could you put some numbers around that and additionally owning 100% of that, would you have any additional freedom or ability to manage that where you were constrained by minority interest or outside ownership.

Ron Miller

Yes. There's some. For example we have an outside audit that we do there its probably in the neighborhood of couple of hundred thousand dollars so we have to have quarterly meetings and we travel out there so there is some corporate governance and administrative, we have various separate bank accounts and all that made in. So there’s some value there. We've been able to operate the plant without any issues, but there is a super majority rule if we're going to do major CapEx or anything like that where we have to have both parties involved. It’s not been owners to date, but certainly, if we can roll that into the company as a subsidiary or fully-owned it probably provides us with some benefit. If the membership holders like to vote in favor of it I think its great; if they like to vote in non-favor, it is not really a big problem. So it’s a nice thing to have I think from our perspective not a necessary thing to have.

Eitan Bernstein – Friedman Billings Ramsey

Okay, great. And then one more if I could follow up. Obviously you were talking about some of the announcements from the super-majors

Chevron, Exxon moving to ethane. Can you provide some perspective on their posture going forward? Obviously it looks like there's a lot of capacity to come online, but at the same time if these guys are significantly increasing their use are they getting friendlier or at least less bearish in terms of future price expectations?

Ron Miller

Well, I haven’t heard any dates associated with some of the major announcements Chevron, Exxo, and we know that it is practically impossible for them to put dates on there. The areas where companies have existing distribution for example Marathon, or I think was SITCO, they had a date specific as to when they were moving, because they already got the blend facilities in place. I think obviously it is always a buy-sell type of relationship when it comes to price. We're going to try to get as high a price as we can, they're going to try and get as low as price as they can, that’s just normal of course. I think we all understand what the blending economics are, so we know that there is a huge incentive for these customers to blend. What is less clear at times is the pace billed out on blending facilities at the terminals or receiving facilities, particularly if these are proprietary-owned terminals we may not have a clear view on when that terminal is going to be ready or that marketplace is going to be ready. So that throws some uncertainty in the marketplace probably more uncertainty for the seller than the buyer in that particular case, where there is a common carrier terminal we have much clearer knowledge. So what we are saying are certain markets I think we saw and Atlanta’s basically moving over to ethane, Savannah, Georgia is another one we're seeing, very robust activity in the State of Florida. That’s an easy market to supply both by gasoline barrels coming in because you can easily make the sea board, you don’t have to worry about the pipeline gas and we have some offshore ethanol coming in, there's some domestic ethanol coming into Florida, and another sort of unknown is at what point do the refiners shift their production at the refineries to 84 octane from 87. Marathon was very clear when they did theirs, we're shipping to 84, I know when Cliff Cook told a panel we were switching over around 84 and 90. That’s a very clear signal, the others have been less clear as to what they are actually shifting over, because once they shift to 84, they’ve got to have the ethanol to get–.

Eitan Bernstein – Friedman Billings Ramsey

Yes. Okay. Excellent. Thank you very much.

Ron Miller

Thanks, Eitan.

Operator

There are no further questions at this time. I would like to turn the call back to management for closing remarks.

Ajay Sabherwal

Okay. Thanks, Jacelyn. This concludes our conference call for today, and we would like to thank you again for your participation. Thank you and have a good day.

Operator

Thank you for attending this conference. This concludes your presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. U.S.ERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!