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Pacific Ethanol, Inc. (NASDAQ:PEIX)

Q2 2008 Earnings Call Transcript

August 11, 2008 10:00 am ET

Executives

Pacific Ethanol Inc.

Gregory Pettit - Hill & Knowlton

Neil Koehler – CEO and President

Joe Hansen – CFO

Analysts

Joe Gomes - Oppenheimer

JinMing Liu - Ardour Capitals

Michael Cohen - Pacific American Securities

Ian Horowitz - Soleil Securities

Presentation

Operator

Good day ladies and gentlemen and welcome to the second 2008 Pacific Ethanol Inc earnings conference call. My name is Erica and will be coordinator for today (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Gregory Pettit with Hill & Knowlton, please proceed sir.

Gregory Pettit

Good morning, before we get started I would to that there are slides to accompany this conference call available on the companies home page pacificethanol.net and after the call, about an hour or hour and half after the call there will be replays available both web based and telephonic and information on how to access those replays are also available on the company’s home page.

This call contains forward-looking statements, including statements concerning future conditions in the ethanol marketing and production industries, and concerning the company’s future business, financial condition, operating strategies and operational and legal risks. The company uses words like believe, expect, may, will, could, seek, estimate, continue, anticipate, intend, goal, future plan or variations of those terms and other similar expressions including their use in the negative to identify forward-looking statements.

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

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

In addition, none of the events anticipated in the forward-looking statements may actually occur, any of these different outcomes could cause the value of the securities, including the price of the companies common stock to decline substantially expect as required by law, the company undertakes no duties to update any forward-looking statement after the date of this call either to conform any statement to reflect actual results or to reflect the occurrence of unanticipated events, and with that I’d like to turn the call over to CEO and President, Neil Koehler.

Neil Koehler

Thank you Gregory, and welcome everyone to Pacific Ethanol’s investor call to discuss our financial results for the second quarter and year to date for the period ending June 30, 20008. I am joined today by Joseph Hansen our Chief Financial Officer. I will make a few opening remarks followed by Joe walking us through the numbers. After a closing comment or two on the market environment, Joe and I will be available for Q-and-A.

For the second quarter we achieved record sales of $198 million, an increase of 74% compare to $113.8 million in the second quarter of 2007. In the second quarter 2008, we sold a record 66.8 million gallons, a 52% increase compared to the 43.9 million gallons in the second quarter of 2007. We recorded a net loss of $10.5 million after preferred dividends for $0.23 per share. Our gross profit was $0.4 million compare to a $11.1 million in the second quarter of 2007. Gross profit through the first six months of 2008 was $16.1 million compared to $26.5 million in the first six months of 2007.

EBITDA in the quarter was negative, $0.8 million compare to a positive $3.5 million in the second quarter of 2007. EBITDA for the first six months of 2008 was $11.7 million compared to $8.3 million in the first six months of 2007. Rapidly increasing corn and national gas cost in the quarter coupled with a somewhat difficult start up of our Magic Valley Ethanol Facility in Burley, Idaho negatively impacted earnings in the quarter.

Even with the difficult second quarter, we had positive operating performance over the first six months of 2008 in what we all know has been a challenging market environment. We made great progress in the quarter in strengthening our working capital position, we received $32.4 million of new equity into the business in May, and two weeks ago we announced a new $40 million revolving credit facility for Kinergy, our ethanol marking subsidiary. This replaces the smaller Comerica line and provides valuable liquidity to Kinergy as our marketing continuous to grow along side our production.

We are pleased to announce that we recently signed an ethanol market in agreement with Kalgon Renewable Fuels in Pixley, California a 55 million gallon per year facility that began production this month.

We are also please to announce that we have begun commissioning our stock in ethanol facility and continue to be on schedule for a start of this quarter. With the completion of the stocks in plan, we will achieve our goal of owning $220 million gallons of annual operating capacity in 2008. As California refiners begin to increase ethanol brand in California we are well positioned with new supplies of locally produced ethanol to meet the growing demand.

As we add new equity production and marketing gallons from third parties, we continue to expand our distribution capabilities making us a preferred supplier in our markets. We continue to be very focused on lowering costs, improving efficiencies and developing new technology to both enhance corn, ethanol production and extend into next generation ethanol production.

Our SGNA has decline in both absolute dollars and as a percentage of sales. Our industry leading collaboration with pursue dynamics of the UK to improve starch conversion efficiencies is showing progress and testing continues. We are optimistic this technology will resolve in our achieving sustainable yield improvements.

With our cellulose technology partner BioGasol of Denmark respect we expect to finalize our work plan with the DOE in the fourth quarter for our 2.7 million gallon demonstration, cellulose plant located at our Colombia site in Boardman, Oregon. We are committed to our existing strategy of inaugurating cellulose, ethanol production into our point ethanol platform to position us for significant future growth with second generation ethanol technology.

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

Joe Hansen

Thank you Neil. Good morning everyone, slide two contains a list of the items that we will cover during this call. Slide three, is a summary income statement for the second quarter. Our net sales increased to $198 million in Q2, 2008 from $113.8 million in Q2, 2007, a 74% year over year increase.

Year-to-date our net sales increased to $359.5 million from $213 million in the first half of 2007 or an increase of 69%.Slide four shows our net sales in gallons sold. We sold 66.8 million gallons of ethanol in Q2 2008 up 52% from 43.9 million gallons in Q2, 2007 and also up 13% over the prior quarter.

For the first half of the year we sold 126 million gallons of ethanol up 52% from 82.8 million gallons in the first six months of 2007.Our third party purchases and marketing activity represented 52% of our gallons sold in the second quarter and 56% of our gallons sold on a year to date basis.

As we bring our Stockton plant online in Q3, we may see production show some further increase in its share of gallons sold. Over the long run however, we expect that our third party marketing volumes will continue to make up a significant portion of our total ethanol sales.

Going to slide five, we show a disappointing gross profit margin in Q2, of 2008 hurt by significantly higher corn and natural gas costs, erosion in our co-product to return and cost associated with the start up of our Magic Valley Facility. Our gross profit was $0.4 million or 0.2% as a percentage of sales in Q2, 2008 compared to gross profit of $11.1 million or 9.8% as a percentage of sales in Q2, 2007

During the quarter we maintained a positive gross profit on a cash basis in both our product and marketing operations. Note that our gross profit includes our plant’s depreciation expense of approximately $4.1 million for the quarter. For the first half of 2008 we had gross profit of $16.1 million or 4.5% as a percentage of sales compared to gross profit of $26.5 million or 12.4% as a percentage of sales in the first half of 2007.

Returning to the income statement summary on slide three, our SGNA expenses fell slightly in Q2, 2008 and for the first half of the year compared to the same periods a year ago. As we have previously stated we expect our SGNA expenses to continue to decrease on a per gallon and percentage basis relative to sales. We recorded a net loss of $8.3 million in Q2, 2008 compared to net income of $2.2 million in Q2, 2007 primarily due to factors related to the swing in growth profit discussed earlier.

Year-to-date, we have a net loss of $43.5 million compare to net income to of $5.1 million during the same period last year. Recall that our results for the first quarter of this year included a net goodwill impairment charge of $38.6 million, related to the acquisition value of Front Range Energy. Excluding the impact of the goodwill impairment, we had a net loss of $4.9 million for the first six months of the year.

The quarter also included $2.6 million of income from Oregon business energy tax credits, for which our Colombia ethanol plant qualifies. We also recorded a net commodity derivative loss of $0.9 million for the quarter. This figure is comprised of derivative losses of $0.2 million related to hedge positions that settled during the quarter and $0.7 million of unrealized mark-to-market losses on open position that will settle in future periods. In addition, we recorded a non-cash gain of $1 million to reflect the change in the fair value of interest rate hedges against our senior debt facility.

As mentioned in prior periods, this is to record the change in fair value of our interest rate hedges from the end of March. After deducting preferred stock dividends of $1.4 million and a redeemed dividend on preferred stock of $0.8 million, our net loss available to common shareholders is $10.5 million for Q3, 2008 or $0.23 per share.

Year-to-date our net loss available to common share holders is $46.7 million or $1.08 per share of which $38.6 million or $0.89 per share respectively is related to the net good will impairment charge. Going to slide six, EBITDA was negative $0.8 million for the quarter, down from a positive $3.5 million in Q2, 2007 primarily due to compressed gross margins from ethanol production. For the first half of the year, EBITDA was $7 million, up from $8.3 million in the first half of 2007.

On slide seven, we summarize our commodity price performance. Our production gallons increased significantly in Q2, 2008 on both the sequential and year over year basis with the startup of our Magic Valley Plant while third party sales remained steady. Our average selling price of ethanol was $2.55 per gallon during the quarter, up 10% from $2.32 in the same quarter a year ago and also up 11% from $2.30 in Q1, 2008.Year to date our average sales price was $2.43 per gallon up 6% from $2.29 per gallon in the same period last year.

During the second quarter our deliberate cost of corn was $6.73 per bushel, up 59% from $4.23 per bushel in Q2, 2007 and also up 26% from our Q1, 2008 delivered cost of $5.33. Our corn basis average $0.75, giving us a CBOT equivalent corn cost of $5.98 per bushel compared to the average CBOT market price of $6.29 during the quarter. Our lack of fixed price positions in corn at the beginning of the second quarter caused us to absorb virtually all of the increase in the market price of corn.

Corn basis was up $0.64 a year ago, due to rising mileage base rail fuel surcharges, but down slightly from $0.77 in the prior quarter. Year-to-date our delivered corn cost has averaged $6.15 per bushel, up 58% from $3.90 per bushel in the same period a year ago. Our basis averaged $0.76 in the first half of the year versus $0.62 last year.

Our co-product return fell to a disappointing 21.7% in the second quarter, this metric was pressured by significantly rising corn prices during the quarter and as we indicated on our prior call a relatively high ratio of fixed price sales contracts that are in place through the third quarter of this year.

Further although we have a portion of a wet distillers grain sales index the dry distillers grand prices, DDG also fail to keep phase with raising corn prices during the second quarter. Our co-product return in Q2, 2008 is down from 26.5% in Q2, 2007 and 26.4% recorded in the previous quarter. Year-to-date, we realize that co-product return of 23.4%, down from 28.5% in the same period of last year. The net impact of ethanol, corn and co-product metrics resulted in a week production commodity margin of $0.49 per gallon for the quarter.

The production margin is down significantly from $1.10 per gallon in Q2, 2007 and $0.91 per gallon in the prior quarter. Year-to-date our production commodity margin average $0.64 per gallon versus $1.21 per gallon in the same period last year. At quarter end, we had forward fix price ethanol sales contracts with a dollar value of $39.8 million, as well as $43.9 million gallons of forward index based ethanol sales.

Our forward corn purchase commitments consist of $0.4 million of fixed price contracts, as well as 3.8 million bushes of forward index based purchase contracts. Referring to the balance sheet on slide eight, our cash and liquid securities balance of $35 million was down from $51.2 million at the end of the first quarter.

We used cash during the quarter primarily to fund construction of our Stockton Plant, support the working capital needs of our ethanol production facilities and also support our Kinergy division where working capital availability under its line of credit with Comerica was limited. Subsequent to the end of the second quarter, we replaced Kinergy’s $17.5 million Comerica line of credit with a $40 million line of credit with Wachovia, potentially expandable to $45 million providing us with additional working capital flexibility. We are nearing the completion of this phase of our construction program. Our construction loan facility has a remaining availability of $74 million.

Since the end of the second quarter we have contributed an additional $1.6 million in equity, to complete the required equity contribution for our Stockton plant. The third quarter we expect total cash outflow of approximately $50 million, related to the completing construction at the Stockton plant all of which will be funded from existing availability under our senior debt facility. The final $24 million remaining from our debt facility will be drawn upon completion and performance testing of the Stockton plant and will essentially be a return of our equity. That concludes the summary of the financial results for Q2, before we go back to Neil for further comments in the q-&-a I would like to go to slides nine and ten to summarize the status of our operating assets and plants under construction.

Slide nine shows our operating plants consisting of Madera, Columbia, Magic Valley and our 42% ownership in Front Range Energy. Overall our operating plants produced at a rate of about 7% over designed basis during Q2, 2008. As the production margin environment continues to remain very challenging, we have reduced our operating rates closer designed capacity in the third quarter, and will continue to adjust our production rates to match market conditions.

Slide ten, shows the progress of construction at the Stockton plant which is nearing completion.

This concludes my remarks. I will now turn it over to Neil for further discussions before we open up the lines for questions.

Neil Koehler

Thanks Joe. I want to just take a minute to update you on our views of the ethanol market place. Corn prices have declined significantly in the last number of weeks. Ethanol prices have declined as well with all commodity prices, but there has been some margin of improvement in ethanol production economics.

Tight margins and tight credit markets have both slowed the completion of new production capacity and the run rates of some existing capacities. Virtually no new construction has been initiated this year. Very favorable ethanol blending economics continued to increase the demand for ethanol. With a 50% increase in domestic production year-over-year supply is pushing demand which along with high corn prices has contributed to margin compression.

As we move through 2008 into 2009 new plant openings are slowing in the industry while ethanol demand will continue to accelerate. We still believe the production margins will improve significantly as this will be necessary to encourage a new round of production expansion needed to meet future demand. In spite of the negative Propaganda Campaign by the Grocery Manufactures Association, the policy support for ethanol remains solid. We were very encouraged by EPA denial last week of the taxis waver request from the renewal fuel standard.

EPA administrator, Johnson summed it up distinctly in his press conference last week by stating that “The RFS remains an important tool in our ongoing efforts to reduce America’s Greenhouse gas submissions and less in our dependents on foreign oil in aggressive, yet practical ways”, so we agree and stand ready to do our part as a company to deliver increasing supplies of cost competitive low carbon ethanol fuel to the transportation fuel market, and Erica at this time please open up the lines for questions.

Question-and- Answer Session

Operator

(Operator instructions) Our first question comes from the line of Joe Gomes with Oppenheimer please proceed.

Joe Gomes – Oppenheimer

Good Morning

Neil Koehler

Good morning, Joe

Joe Gomes – Oppenheimer

Neil I was wondering it you might be able to provide anymore details on the pursued dynamic tasks, more and above. Just that it looks promising?

Neil Koehler

We like to be fairly circumspect in terms of these sorts of projects until we have more definitive results, but I can say that we have run a first phase of testing that what we ran the equipment continuously for a week’s period of time and we saw yield improvements anywhere from 0% to 12%. If you look across the individual fomenters there were some issues in terms of operations that we are addressing to make sure that we can run the equipment more continual manner and we are working that out now and expect over this quarter to have more definitive results and know exactly how we will be implementing this across, our Boardman Facility and the other ethanol plants.

Joe Gomes – Oppenheimer

Okay, great. In the Burley start up, I think Joe in his comment mentioned that you had a difficult start up there. Could you provide some more detail on that and what kind of impact on volume that might have in the quarter?

Neil Koehler

Sure, we’ve been very fortunate, our first two startups to have very flawless and really incredibly quick and efficient startups. The Magic Valley Facility, we had some equipment issues specifically (inaudible) tank at the front end failed at start up, we had to shut up the plant down and have to fix that. We were fixing it on the fly, it had some impact on yield at Magic Valley, probably cost us overall based on our earlier projections about a half a month’s production at Magic Valley, and also there were some ancillary costs involved in additional chemicals used to overcome some of the front end pumps that we had so that we could continue to run and the logistical cost in terms of hauling ethanol from other areas to cover contractual, so commitments of lost gallons which obviously impacted some profitability in growth margin as well as added cost dealing with the starter-up, I guess it is running efficiently now.

Joe Gomes – Oppenheimer

Okay and one last one. Can you kind of give us an idea of your conversing clause, I know some of the other ethanol guys do that interims of, this was all the other factors of production outside of this the corn?

Neil Koehler

We don’t break that out in specific detail, but I think you know Joe from our business model our conversion costs are pretty efficient due to our using on average about 30% less energy.

Joe Gomes – Oppenheimer

Right

Neil Koehler

Obviously our corn cost is going to be higher, that’s going to be off set by higher product sales, but on the actual variable cost at the production level pretty standard with the exception of our energy cost being lower than, would be typical of the dry mill, dryness distillers grain in the mid West.

Joe Gomes – Oppenheimer

I’ll get back in queue, thanks.

Neil Koehler

Thank you.

Operator

Our next question comes from the line of JinMing Liu with Ardour Capitals. Please proceed.

JinMing Liu - Ardour Capitals

Good morning.

Neil Koehler

Good morning.

JinMing Liu - Ardour Capitals

Can you share a bit of information about forward contracts with corn and ethanol for say third quarter?

Neil Koehler

In our queue that will come out later you will see what positions that we have, but as I think we have stated in our last call, we have very little corn coverage going into the this quarter and we had very little coming into this last quarter. There are conscious decisions in terms of risk management even if you look at the forward curves on the ethanol and corn. It’s very difficult to take fixed price ethanol contracts to be able to forward purchase corn and have a margin that we are, that we think is adequate.

So we have been certainly much more matched, I mean opened to both the ethanol and the corn markets and to the extent that we have fixed priced ethanol purchases we have matched that with or sales, but with purchases on third party and with corn on production side. You’ll see from the numbers that our positions are relatively open as we entered the third quarter.

JinMing Liu - Ardour Capitals

Okay, thanks.

Operator

Our next question comes from the line of Michael Cohen with Pacific American Securities please proceed.

Michael Cohen - Pacific American Securities

Good morning.

Neil Koehler

Good morning.

Michael Cohen - Pacific American Securities

I have a couple of questions about your shift in capital structure, specifically related to the preferred stock. It looks like the Series A preferred came off in the last six months and Series B came on, is that correct?

Neil Koehler

That is correct.

Michael Cohen - Pacific American Securities

Okay, and could you tell me who the owners is of the Series A was, and it looks like the Series B is insiders and I was wondering is there anyone other than insiders who have the Series B?

Neil Koehler

The Series A was Cascade Investments and as you observed they have converted all of that to common share, and that actually had an impact of saving us on dividend payments relative to the Series B, smaller amount of dividend payments overall. The Series B it is exclusively insider’s with the largest bulk of that coming from Lyles United who is affiliated with Lyles the construction company of our plants.

Michael Cohen - Pacific American Securities

I am Series A was exclusively Cascade?

Neil Koehler

That is correct.

Michael Cohen, Pacific American Securities

Okay, thank you very much.

Operator

Our next question comes from the line of Ian Horowitz with Soleil Securities please proceed.

Ian Horowitz - Soleil Securities

Hi good morning guys.

Neil Koehler

Hi Ian

Ian Horowitz - Soleil Securities

Just a couple of questions, the SG&A looks like its down pretty significantly and I know Joe talked about down as a percent of gallons. Is this a dollar amount that we should expect going forward or are we are going to see some reversion back to previous levels of SG&A?

Neil Koehler

We expect SG&A to continue to decrease as a percentage of our overall volume. We are continually focused on SG&A and it’s become a real focus point here within the company to bring those costs significantly down.

Joe Hansen

I would add, Ian that on an absolute basis, you can see it down slightly quarter over the quarter and that we are still in 2008, obviously in the middle of bringing on these new plants. So if you look at the amount of gallons that we produced in the quarter over the overhead, because naturally we have the significant amount of our production that’s not yet online, those numbers per gallon are obviously quite high close to $0.30 a gallon. As we bring in all of our production and hold those dollars constant or even try to drive them down, we will achieve SG&A that is $0.10 a gallon or less and after that is the goal. So that the biggest reduction obviously is on a cent per gallon, but we also do believe that there is more absolute dollars that we can bring out of the SG&A.

Ian Horowitz - Soleil Securities

Great and I mean how are you doing this, bringing out the absolute dollar, so are you laying people off or are you cutting salaries?

Neil Koehler

Its t as much layoff, in fact we have been hiring and in the formative stages of the company when we were growing so rapidly and we had some of the issues around the counting, our professional fees were extremely high. So that has been one key area of reducing SGNA is to limit our professional fees and to some extent replace professionals with our own professionals, outside professionals with those that are hired by the company.

Ian Horowitz - Soleil Securities

Joe can you just do me a favor, you went over the third quarter spends for Stockton, but I didn’t quite. Can you just repeat that please?

Joe Hansen

Sure, what I said was that our construction loan facility has remaining availability of approximately $74 million. During the quarter, during Q2 we contributed an additional $1.6 million in equity and that completed our required equity contribution for Stockton. During the third quarter we expect that the total cash outflow will be about $50 million to complete the construction at the Stockton plant and all of this is going to be funded under our existing senior debt facility. There is the final $24 million remaining from our debt facility will be drawn upon completion of the plant and the performance testing of the plant, and it’s essentially a return of our equity.

Neil Koehler

And Ian that’s an important point, its essentially trapped equity that’s rolled from plant to plant, so as we reach this major milestone of completing these plants that we then are able to return the equity that’s been rolling forward from the final top-off of our loan and that then will be equity of the returns to balance sheet.

Ian Horowitz - Soleil Securities

I get that and any estimates for the second half for maintenance CAPEX?

Neil Koehler

These are new plans. I mean it’s all within the operating budgets of the plan, so there are no major capital projects at our plans.

Ian Horowitz - Soleil Securities

Okay and then one last question and I’ll get back in queue, we’ve seen the co-product correlation appear and both from co-products ethanol as well as co-product to corn, and just wondering if maybe Neal if you could give us some color on, why you think this is going on. I mean the corn moved quite rapidly and so you can see and disconcert earl this sort term, but are there local excuses going on. The requirement is doing, changing there key direction, are they doing their parching decisions a little differently and how are you going to respond to any of these changes?

Neil Koehler

Our biggest problem has been, and these are contracts that will all come up at the end of the third quarter, but we went into about a year ago, fixed price contracts before the price of corn had going up, did not had corn bought against it, a portion of that, so were you typically see the distillers grain, its kind of a natural hedge on corn prices. We’ve got into a mismatch situation that we are addressing by. We want be taking fixed price contracts that are not complicatedly headed against the corn position as we move.

So that’s really a legacy problem that we are working through and then we get to the forth quart that will be a very different situation and that we would expect our co-product return to improve. There also is a natural as corn is on it so quickly and the feeders have been under a lot of pressure and have been very aggressive about looking at alternatives and there has been a fare amount of new suppliers. For distillers grain we have overall seen a relationship between the distillers grain weather it will be dry or wet relative to corn that had certainly declined with the rapidly increasing price of corn.

We have the opportunity with the corn coming off so fast to see some lag on the way down and that also could be a benefit. We really see both market conditions improving the overall co-product return, as well as our specific own issue of working though this fixed prized contracts.

Ian Horowitz - Soleil Securities

Okay, thanks guys I’ll get back in queue.

Operator

(Operator instructions) Our next question comes from the line of Joe Gomes with Oppenheimer. Please proceed.

Joe Gomes – Oppenheimer

What’s a good number for use of shares outstanding going forward?

Neil Koehler

Well the diluted shares for the purpose of the our current is about 46.7 [ph] million shares I believe, that’s weighted average. When you look at on a go forward bases certainly you were to take the preferred shard and assume that they all converted to common, it would be in the 60 million range or so.

Joe Hansen

May be the 50 million, range would be more accurate.

Joe Gomes – Oppenheimer

You’re saying 50 million.

Neil Koehler

If you assume all the, which want happen, so I’m not sure exactly what your trying to get to in the question, but it will increase slightly over the next few quarters but then if you want it to look at the total capitalization of the company and all of the common plus preferred as converted to common, that’s where you would get to, a but above 60.

Joe Gomes – Oppenheimer

I guess the slight increase over the next few quarters.

Neil Koehler

50 would be a good number to use.

Joe Gomes – Oppenheimer

And Neal anything new in the states you guys are operating in the legislator front interims of mandates for bio-fuel or anything new out there?

Neil Koehler

Well, still very solid support, the Oregon mandate which successfully implemented and continues to move forward and be a real success for the state both from a fuel supply and cost and economic and environmental benefits.

The state of Washington is just this year, at the end of this year and as of January 1, implement a 3% requirements that has the through some announces at the state level could be increased to 10%, but we are already seeing the refiners go to 10% blend in the state of Washington, so that has been an increasing market really coincident with Oregon implementing its requirement, Southern Washington, the Vancouver area Pasco those sorts of areas converted to 10%.That was followed here a number of months ago by the Tacoma area. Most of the refiners now are blending 10% ethanol and the expectation is at this for most of Seattle.

So we are seeing some pretty significant growth in the State of Washington. Probably the biggest opportunity is the great State of California where by 2010 all of the refiners to meet the new regulations will be at a 10% blend level from the current 5.7%.So that is the 700 million gallon increase in the demand for ethanol in California between now and 2010.Much as we saw that sort of an orderly transition out of MTB and ethanol, we are expecting to see the same from the 5.7% to 10%.

There are some (inaudible) that will allow refiners to increased flexibility, starting almost immediately to go to a higher level blend of ethanol then the 5.7% and we know of number of our customers who are intending to move in that direction yet this year. So we expect that between now and the end of 2009, that we will see a pretty steady move to higher level blending in California.

From a policy stand point in the state of California the big issue now is the implementation of the low carbon fuel standard, where ethanol is clearly providing the most significant CO2 reduction opportunity to meet the 10% CO2 requirement from transportation fuels that the state is looking for. So we expect that to you know not only back stop the 10% ethanol blending in California, but as we work with EPA and the car manufactures to move to blends above 10%. California to get additional CO2 reductions will be very eager to move beyond the 10% ethanol blend ratio, so we see significant growth over the next number of years in the state of California due to those policy initiatives.

Joe Gomes – Oppenheimer

Thanks for the update Neil, appreciate it.

Operator

There are no further questions; I would now like to turn the call back over to Mr. Koehler for closing remarks.

Neil Koehler

Well thank you all, appreciate everybody interest and support for our company and I appreciate your time today and look forward to updating you on our next quarterly call. Have a good day.

Operator

Thank you for your participation at today’s conference. This concludes the presentation.

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Source: Pacific Ethanol, Inc. Q2 2008 Earnings Call Transcript
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