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Executives

Todd Becker – President, Chief Executive Officer and Director

Jerry Peters – Chief Financial Officer & Treasurer

Jeffrey S. Briggs – Chief Operating Officer

Jim Stark, Vice President – Investor and Media Relations

Analysts

Brent Rystrom – Feltl & Company

Laurence Alexander – Jefferies & Co.

Patrick Jobin – Credit Suisse

Matthew Farwell – Imperial Capital, LLC

Michael Cox – Piper Jaffray

Farha Aslam – Stephens, Inc

Craig Irwin – Wedbush Securities

Ian Horowitz – Topeka Capital

A.J. Strasser – Cooper Creek Partners

Green Plains Renewable Energy Inc. (GPRE) Q3 2012 Earnings Call October 31, 2012 11:00 AM ET

Operator

Good day and welcome to the Green Plains Third Quarter 2012 Financial Results Conference Call. Today’s call will be recorded.

And now at this time, I’ll turn the call over to your host Mr. Jim Stark. Please go ahead sir.

Jim Stark

Thanks, Jake. Welcome to our third quarter 2012 earnings call today. On the call this morning are Todd Becker, our President and Chief Executive Officer; Jerry Peters, our Chief Financial Officer; Jeff Briggs our Chief Operating Officer; and Steve Bleyl, our Executive Vice President of Ethanol Marketing. We are here to discuss our quarterly financial results and recent developments for Green Plains Renewable Energy.

There is a slide presentation for you to follow along with as we go through our comments today. You can find this presentation on our website at www.gpreinc.com. It’s on the Investor page under the Events and Presentations link.

Our comments today will contain forward-looking statements, which are any statements made that are not historical facts. These forward-looking statements are based on the current expectations of Green Plains’ management team, and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, Green Plains’ actual result could differ materially from management’s expectations. Please refer to page 2 of the website presentation and our 10-K and other periodic SEC filings for information about factors that could cause different outcomes. The information presented today is time sensitive and is accurate only at this time. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Green Plains will not be reviewing or updating this material.

Now I’d like to turn the call over to Todd Becker.

Todd Becker

Thanks Jim, and thanks everybody for joining our call this morning. We have a lot of interesting news to talk about, so let's get started. First a quick run down on the third quarter. Our risk managers and traders were diligently in the quarter to produce a positive EBITDA per gallon in our ethanol production segment. Well, that doesn’t sound like much when you consider the margin environment during this defensive quarters a good performance by the team and shows the ability of our overall asset base to perform during cyclical swing as compared to our peers.

In fact the average daily spot platform crush was a negative $0.14 per gallon for the third quarter, compared to a positive $0.02 a gallon crush we were able to achieve. Our industry group often reports some margin including corn oil, but as you know we break this out temporarily. If you take this in to considerations, our margins would have been high single-digits.

Our non-ethanol segments were significant contributor to the third quarter overall performance, generating a record $20.8 million in operating income. The components was follows; $7.8 million from corn oil production, $7.2 million from our marketing and distribution segment, which was up significantly which was up significantly over last year primarily as a result of our railcar program and $5.8 million from our non-ethanol operating income came from agro businesses, which are strong quarter as a result of the early harvest this year.

The early harvest were influent to seasonal earnings pattern of agribusiness where we anticipate the fourth quarter results Where we anticipate the four quarter results to be more tempered with harvest income accelerated in the third quarter, basically the quarters will flip-flop positions this year.

On a consolidated level, our revenues in the third quarter of 2012 were $947 million. As we reported, a net loss of $1 million or $0.03 a share that is a $6.5 million improvement over the loss in the second quarter of 2012 and sets this up for solid finish to the year with a profitable fourth quarter, and now a profitable last half expected from ongoing operations.

We produced 161 million gallons of ethanol in the third quarter, down about 13% from last year. The lower production level is a result of slowing a few of our plants. Those decisions vary from plant and region to region for Green Plains. Our data tells us to keep running all at this time albeit some of our plants at a lower rate.

Our ethanol yield in the quarter was 2.84 gallons per bushel of corn, and we had a slight uptick in our yield on corn oil 2.66 pounds per bushel. We are still assessing new crop processing yields and expect some variation next year, no more as the fourth quarter progresses.

We hit our goal for railcars redeployed to transport crude oil in the third quarter to over 500 cars. We expect that run rate to remain for the next three quarters as the majority of our agreements we entered into on a railcars for a year. We are working to extend some of those current agreements, but even if some of them expire there is good interest from other parties to step in for another year or so after that.

We are approximately 60% locked for ethanol margins in the current quarter at profitable levels and even though the early harvest accelerated operating income from our agribusiness segment into the third quarter, I'm confident to say that our ongoing operations will return to profitability at the net income line in the fourth quarter. The program started late last year as we saw some good margins on the curve, and we were able to buy physical corn needed to walk them away.

We have continued to nimble away at locking in margins and while there is considerable volatile in ethanol margins, we are still projecting a good recovery for the company in the fourth quarter. I’ll get into the current margin environment for ethanol and industry trends later in the call.

Now I’d like to spend a few minutes and talk about our announcement on Monday to sell majority of the assets of our agribusiness segment. We are in the process of selling 12 of our 15 grain elevators to The Andersons Inc. When we close this transaction later this quarter, we will add more than $100 million in cash to our balance sheet and reduce our debt by nearly $115 million.

I want to be very clear concerning our motivation for this transaction. While the balance sheet effects are significant, this transaction is not a retransmit or a defensive strategy for the company.

We believe the transaction represents an opportunity for our shareholders to realize value for these high quality assets. I also want to be very clear that we by no means should the sale of these assets be taken as our exit in the U.S. agribusiness industry. Post closing, we will still have nearly 6 million bushels of grain storage at elevators in Iowa, Missouri and Nebraska. We have expansion projects later for two of these sites so we will continue to invest in growing this business.

In addition, we have a 11 million of bushels of storage at our ethanol plants. We have expanded our storage capacity at our Bluffton, Riga and Otter Tail ethanol plants between 750,000 and 1 million bushels at each location this year. These were flat storage facilities at each of these locations that were built for under $1 per bushel. This will give us the ability to take advantage of local harvest corn and to carry the commercial grain elevators often earned.

We would like to find additional opportunities to rapidly expand storage capacities at or near our ethanol plants over the next several years with a goal to double or possibly triple our current capacities. Today, in total, we have 18 million bushels of storage capacity against our 250 million bushels of demand. If we can triple that capacity, we think we can duplicate most of the grain handling earnings of the assets we are selling but at a reduced cost both capital and operating.

When considering this, we felt that in line origination will provide more value to our shareholders over the long term versus assets that don’t really support our origination fully. We will also continue to seek on investment opportunities for acquisitions for other elevators in the Corn Belt as well, but we will focus on locations that support our internal demand. While we sold two clusters of assets, we are still able to broadly acquire assets that fit our supply chain and expect to do so. Our acquisition strategy remains driven by location, price and timing.

Now, I’m going to turn the call over to Jerry and he’ll discuss our liquidity and financials in more detail, then I'll come back on the call to discuss forward ethanol margins, where we stand on industry fundamentals and the BioProcess Algae business.

Jerry Peters

Thanks, Todd. Good morning everyone. Looking at the consolidated income statement for the third quarter of 2012, our revenues were $947 million for the quarter, down 1% when compared to the third quarter of 2011. The decrease is mainly due to lower average prices for ethanol and corn oil sold and lower volumes of distillers grains sold.

Total ethanol volumes sold were up slightly due to an increase in open market purchases in our marketing and distribution segment. Ethanol volumes sold from our ethanol plants were down just over 23 million gallons compared to the third quarter of 2011 as a result of our decision to slow our production down in the quarter due to margins. We experienced a 10.2% increase in the average cost per of bushel of corn in the third quarter of 2012 compared to 2011.

But if you take a look at slide 5, we generated operating income before depreciation of $0.02 per gallon compared to $0.17 per gallon realized in the third quarter of 2011. The $0.02 per gallon in the third quarter was a slight improvement over the first and second quarters of 2012. With better margins and our plant maintenance shutdowns completed, we anticipate our fourth quarter production rate to be closer to about 92% or 93% of our expected operating capacity.

Corn oil production revenue and operating income were down slightly from the third quarter of 2011, but 17% reduction in average price offset by 13% increase in pounds produced in the quarter compared to last year. Increase in corn oil production year-over-year is attributable to improving our corn oil yield per bushel to 0.66 pounds compared to 0.50 pounds in 2011.

Agribusiness segment revenues were up $32 million or 22% over last year, driven mainly by higher grain prices in 2012. Operating income for the segment more than doubled from the 2011 third quarter from what is normally a seasonal low for this business.

The summer’s drought resulted in an increase in commodity prices and an early harvest season. This has caused some of our first handle grain margins to be realized in the third quarter rather than in the fourth quarter into the normal seasonal pattern. The marketing and distribution segment also had a strong quarter with operating income of $7.2 million compared to $1.9 million last year.

Our railcar initiative provided a nice addition to operating income for this business segment and we realized good margins with open market purchases and our program to our arbitrage our internal commodity flows.

To summarize, our consolidated operating income decreased by approximately $20.4 million compared to the third quarter of 2011. But that is net of an improvement in our non-ethanol operating income of nearly $8 million.

Earnings before interest, income taxes, depreciation and amortization or EBITDA was $21.7 million for the third quarter of 2012, which was a $10 million improvement over the second quarter. On a trailing 12 month basis, EBITDA totaled approximately $80 million.

Our liquidity has remained strong with a total cash position as of September 30 of nearly $160 million on the balance sheet. We continue to pay down our long-term debt with a net reduction during the quarter of approximately $12.8 million.

As of September 30, our total ethanol plant debt was $411 million or $0.56 per gallon, that's the lowest mark in our history and based on our current complement of ethanol plants, which is the plant debt dropped to about $0.48 per gallon by the end of 2013. Capital expenditures were approximately $9.5 million for the third quarter with the Birmingham project representing the majority of those expenditures.

As you saw in our announcement from Monday and as Todd mentioned earlier in the call, we will add approximately $104 million in cash to the balance sheet once we complete the sale of the 12 grain elevators. We will also eliminate more than $110 million in debt both term and revolvers. From an earnings perspective, we anticipate booking a pretax gain of approximately $46 million from the transaction for about $0.80 per share after tax in the fourth quarter when we close the sale. So we expect to finish 2012 with a very strong balance sheet.

In summary, we had an improved third quarter compared to the first half of the year and look forward to closing out 2012 on a positive note. Now, I’ll turn the call back over to Todd.

Todd Becker

Thanks, Jerry. Construction of our 96-car unit train terminal in Birmingham is nearly complete. We expect the first delivery of ethanol into the terminal in late November. We continue to evaluate similar opportunities in other markets as we believe the opportunity to upgrade to other BlendStar facilities to unit train receivers could provide additional income for the company.

Construction of the three of the five acres of BioProcess Algae Phase III project is complete. We exceeded all four of the new Grower Harvester reactors and we anticipate first harvest next week and soon we will be delivering Algae to our first customer, a subsidiary of Bioceutica. These new reactors are 12 times larger than the initial outdoor reactors build back in Phase II.

We are excited about the prospects of BioProcess Algae and we continue to work on expanding our strategic relationships with other customers in coming months. If Phase III meets our expectations we will move quickly on the next build out of 40 acres to 50 acres in Shenandoah hopefully sometimes in 2013. There are two basic metrics we are focusing on for Algae production at this point. The first is the capital cost per acre and the second is the EBITDA per ton of production.

As we have indicated in the past, the reactors have a capability to produce 40 tons to 50 tons per acre per year of biomass and that continues to be the case. With that in mind, one way to look at this opportunity is a 40 acre to 50 acre farm producing 40 tons to 50 tons per acre of product based on target economics could potentially service all of our ethanol plant debt at that specific plant. We view this as another potential source of non-ethanol operating income that could further de-risk our platform and will keep you informed as we continue to make progress on our build-outs over the next couple of months.

With this quarter's performance, we have reached over $63 million in operating income from our non-ethanol segment over the last 12 months. Looking forward, we expect to continue to earn over $60 million of non-ethanol operating income with our railcar program, our Birmingham terminal, and our grain storage expansions able to offset the earning streams from the agribusiness segment that we are selling. This was a very important factor in our decision to sell this asset.

I want to talk little bit about the ethanol industry. The common period for the renewable fuel standard waiver request has ended, and a decision from the EPA is to be made and announcement by the middle of November. It is our belief that EPA will not grant a waiver to the RFS for several reasons already mentioned in previous calls. Things like ethanol has not caused economic harm, the drought has; ethanol is still cheaper than gasoline; reduced run rate, and reduced corn consumption is already happening. And finally obligated parties have approximately 3 billion gallons of RINs available to meet their obligation under the Renewable Fuel Standard without a waiver from the EPA.

U.S. ethanol exports totaled 534 million gallons for the first eight months of 2012, but we have seen larger imports of sugarcane ethanol into the U.S. market to take advantage of the arbitrage on the advanced biofuel RIN or the D5 RIN.

Over the last two months, 147 million gallons of cane ethanol has been imported into Florida for a total of 230 million gallons imported in 2012. We are hopeful that Brazil will increase their ethanol back to 25% of their country’s gasoline, which should hopefully take-up any excess supply that’s available from Brazil.

So while we expect to be profitable in the last half of 2012 as a company, what does that mean for 2013? As usual, the forward curve does not give us much visibility to margins going forward. So we have to look at the current market conditions and extrapolate what could change.

First of all, the mandated schedule increased in 2013. The industry is currently running well below that mandate, and the only buffer of a rapid stock draw is the Brazilian imports I’ve outlined. Our best intelligence says, import should slow between December through June and increase in Q3 of next year again. In addition to current industry run rate of approximately 800,000 barrels per day of production, stocks could get tighter and stable on 19 million barrels, which could lead to some further regional tightness.

All of this could help the overall forward curve. So the question is whether all the oil production would come back online or whether more will come off. That is a hard one to answer. In the last nine months, it has been the longest period of compressed margin in industry's history. The plants that have gone down completely could have working capital or corn origination constraints compared to previous cycles. The plants have slowed may be more reluctant to ramp up as this could start the cycle all over again, so hopefully some discipline will be remaining at this point.

There was an announcement a couple of weeks ago of an ethanol plant purchase by one big refinery company already invested in the industry. When you do the math, the valuation of that trade was somewhere between $1.30 and $1.40 per gallon before working capital of operating capacity. The plant is a quality plant located in the Corn Belt, an identical technology, in some cases identical in size to six of the plants that we own. If you equate that owe gallon valuation to our assets, our stock certainly will be higher than today based on 740 million gallon of production.

In terms of some of the parts, the sale we announced will effectively monetize our agribusiness value that we calculated at approximately $4 a share. Once closed, this transaction should take our cash balance to over $8.50 per share. The sale will also result in a major delevering of the balance sheet. Our company will be in the strongest financial position it has never been in.

Our non-ethanol operating income will continue to provide a great buffer during the cyclical downturn we are experiencing. We will continue to be a growth company, expanding brand origination near our production assets and opportunistically looking acquisitions along the whole value chain. Our commitment to creating shareholder value is unwavering and hopefully our actions demonstrate that commitment to you.

With that, I’ll end my comments and we’ll open up the call for our question-and-answer session. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And we will hear first from Farha Aslam.

Farha Aslam - Stephens, Inc

Hi, can you guys hear me?

Todd Becker

Yes, we can.

Farha Aslam - Stephens, Inc

Great. Thanks. First question is on the ethanol group and balancing that with your corn oil. In the quarter, it looks like you definitely balanced production in ethanol with what you earned in corn oil extraction. Could you just share with us your strategy going forward, if you see a negative quarter, is that how you’re going to try and run the two segments?

Todd Becker

Yeah, what we do is, we actually look at – we do a variable cost analysis literally every day, and so corn oil is part of that cost analysis. So we – based on that, we never really saw a time because of the earnings from corn oil that we needed to slowdown any further or shutdown our plants. While we reported separately, we do take it into consideration in our decisions we make to a slow or shutdown our production.

Farha Aslam - Stephens, Inc

And so kind of going forward, if we see negative ethanol margins, but can we assume that you're going to slow down to the degree that corn oil offsets that?

Todd Becker

Well, we may not slowdown. It just depends on that related to variable cost related to corn oil. So, yes, and we look at all of that, but it doesn't actually mean that we slowdown in a negative environment.

Farha Aslam - Stephens, Inc

Okay. And then on the rail, your earnings were above our expectations, could you just share with us again some more detail on exactly how you're thinking about rail and what the earnings potential of that business is?

Todd Becker

Yes. So basically we put it about 500 cars in a program. As we indicated on the last call, lease rates were north of $3,000 per car per month over a year basis. Our average cost per cars are significantly lower than that. So we expect that over the full 12 year period of a lease, the expected return for us will be somewhere between $12 million and $14 million in that year and potentially going on into the second year.

Farha Aslam - Stephens, Inc

So, we can think as $12 million to $15 million of EBIT, is that EBIT or EBITDA and then for the next one to two years out of that segment.

Todd Becker

Yeah, that’s both EBIT and EBITDA, but since these railcar released that’s all net of the railcar cost.

Farha Aslam - Stephens, Inc

And then my final question is, going forward, how should we think about the earnings potential of your agribusiness segment given that you’ve sold off a portion, but it sounds like you are expanding other areas of that business? What is the EBITDA annually that we should factor into our model?

Todd Becker

Yes, the remaining EBITDA in that segment will be somewhere between based on the assets that are remaining. We think we are somewhere between $1 million and $2 million a year with the expansion that we will put in place. And then from there, anything above that will just be further acquisitions or expansions or retooling that group. But again, we are limited by the agreement we made with The Andersons on where we are going to operate which is in our filing, but if it’s in line with our ethanol production, we are fully free to fill that origination base.

Farha Aslam - Stephens, Inc

Okay, great. Thank you very much.

Todd Becker

Thank you.

Operator

We will now take a question from Brent Rystrom with Feltl & Company.

Brent Rystrom – Feltl & Company

Good morning. Thank you and congratulations, good job on a tough environment.

Todd Becker

Thanks, Brent.

Brent Rystrom – Feltl & Company

Looking just real simply, Todd, when you think of next year, from my perspective I think you have – you got maybe the end game and the risk kind of coming here and I would think the two that I kind of view from a model perspective will be the bidding for acres period in January, March where everybody is bidding commodities higher to get acreage commitment. And then looking at just the final mid to late summer corn supply, can you give me your thoughts on how you might look at that relative to the model next year and then just quick thoughts on what you're thinking right now about those two type grains?

Todd Becker

Yeah, so first thing we always look at is the Wednesday EIA report to kind of base some of our decisions we make and I'll bring that back to how we think about the two questions that you asked. So what we look at right now is that relationship between ethanol and RBOB still remains at a discount. And so when we look at that, we then equate that to the 19 million barrels of storage that's in place in ethanol against the 800,000 barrels of production per day and we start all our analysis based on that.

So we look at that when we say that the relationship between ethanol and RBOB looks potentially cheap relative for next year based on any kind of rapid stocks draw. So when we fight for acres, which I’m pretty sure that fight probably started already, when we kind of see the way that beans are acting, the way that corn is staying firm in this low $7 range against low $15 beans you can kind of see that fight is already happening.

And while we certainly believe that we will see kind of what is a normal pattern in the planting fight, it's going to be hard for corn just to decide it's going to go $8 or $9 to buy bushels from our standpoint, because again as we talk about transfer of ownership, it is very difficult at those levels and that’s where you start to reach levels against current prices were a lot of these sectors go negative on the margin.

And so we think the fight is already started, we think our values are already showing that based on current corn prices and current soy prices. The late summer corn supply if we have an early harvest could be somewhat subsided. If we have a late harvest, we will be somewhat of an issue in those last kind of August and Sept periods, and that’s really going to be the probably the most volatile period in any of the commodities that we trade only because we will be – and probably if we have a big corn crop coming, it will probably be translated end of your corn basis, and the end of your corn spreads, more than it will be translated in the overall flat price. If we have weather problem and then it’s going to be a whole game changer at that point as well.

Brent Rystrom – Feltl & Company

In theory, your old crop could actually work quite well with new crop corn reflects rebounding yield?

Todd Becker

Yeah, absolutely. And then add that in to the fact that the first six months we could see some pretty good stocks drop, so it will be the job of the ethanol market to actually give the producer margin if that actually happens. But we’ve got to wait and see if that actually happens.

Brent Rystrom – Feltl & Company

Great. And then last week, Bungee had made some comments about how surprised they were at the limited amount of – on the protein side of the industry. Are you seeing any issues with that in your regions at all?

Todd Becker

I missed half of the question, the limited amount of what?

Brent Rystrom – Feltl & Company

Bungee was saying that they saw protein demand was surprisingly strong. They haven’t seen price rationing or demand destruction might they would have expected and their green and oil seed operation. And I’m just curious if you’ve seen a reflection of that particularly Iowa and then Nebraska or is that really not much of an issue?

Todd Becker

We’ve seen the same thing. I mean you start right with China and then kind of make us way back to the U.S., I mean we just haven’t seen a drop off from that perspective in soy complex.

Brent Rystrom – Feltl & Company

And then I had question, but it was talking to couple of grain elevator guys down in Nebraska, they were seeing that they are starting to see a little bit of a shift, because of that big EGT facility out in Longview, Oregon shipping lots and lots of beans but also corn going to Asia from there. Has that had any influence particularly in the Western part of your operations?

Todd Becker

I mean we're very small in the bean side. I mean we handle some beans at harvest at all of our grain elevators, but in general that impact that doesn't affect us a lot.

Brent Rystrom – Feltl & Company

Okay. And one final question for you. In the previous questions asked, what was – in relation to that, what was the trailing 12 months EBITDA of the agribusiness assets that are being sold?

Todd Becker

Well, trailing 12 months, you have two harvest quarters in there. So while we can certainly look at that our run rate that we've been talking about over the last year or so is $15 million to $16 million annual run rate capability of the assets as of today. The trailing 12 will show stronger mainly because of two harvest quarters...

Brent Rystrom – Feltl & Company

But have you harvest (inaudible).

Todd Becker

Yeah. Trailing 12 will be higher than that actually because of that strong third quarter.

Brent Rystrom – Feltl & Company

Understood. Thanks guys.

Todd Becker

Thank you.

Operator

And we will hear next from Laurence Alexander with Jefferies.

Laurence Alexander – Jefferies & Co.

Good morning.

Todd Becker

Good morning, Alex.

Laurence Alexander – Jefferies & Co.

Two questions. First on the uses of cash, will you be actively reducing the debt level at the plant level or will you just be keeping the cash at the corporate level for additional M&A?

Todd Becker

We will be keeping the cash at the corporate level, mainly because again structure of our debt at the plant level is still unchanged. It's project finance debt, non-recourse to the parent, 5% or so interest rate, and so and we really we only have one maturity in 2013 that we are focused on right now. So from that standpoint, our cost of funds remain at the lower end of the range or we probably wouldn't change that very much. And then having more a buildup of funds at corporate will both drive our ability to manage the business who also drive our ability to look at other opportunities for growth, that’s correct.

Laurence Alexander – Jefferies & Co.

And then on the Algae side, at what point will you have a confirmation on actual process economics, and can you give an update on how the discussions have been going with other potential partners in the refining industry?

Todd Becker

As we kind of move through this last bit of opening here, we’ll know a lot more of our process economics and what markets we can service. We still believe we can service everybody from fish meal through the high-value of Omega-3s profitability. We just want to verify that, make any last minute design changes in terms of the bigger reactors that you can see pictures on our website, but they are very, very minor at this point.

Our discussions with customers along – there is three distinct ideas that we think about this. The first one is around the carbon emitters that are looking for a chance to – or a tool where they can reduce their carbon emissions, and this is one of them. We have several discussions going on there, again that’s driven around that cost per acre of CapEx and how far we can reduce that depending on what markets they are trying to service, we are in several discussions with them.

We are also in several discussions with nutraceutical/pharmaceutical food and feed type companies around what can we give them, how much volume, what’s the cost of it. Part of the issue is that we are actually prepared to give them volume and lot of these guys are prepared for us to take the volumes. So because we produce at a high quantity at a lower cost than what they have seen before, now they’ve got a figure out and they get it into the products at a increased pace. And then it look like also co-location opportunities with other admitters, non-refining based emitters that have CO2 that they like to mitigate, and then it’s the co-location on our own ethanol plants, which is what we’re focused on.

We view this – really what is come down to as we view this as a bolt-on technology almost like corn oil at this point, where we can take those 40 acres to 50 acres, take the 40 tons to 50 tons per acre, use the economics that we feel are achievable and potentially have that project pay to debt at that plant to full ethanol debt, where we can get to a point where we are producing ethanol almost for CO2, but that we can use that CO2 to grow and harvest algae and the EBITDAs per ton on that would drive EBITDA per gallon similar enough to hopefully pay our ethanol debt. That's what we are focused on today, that's what we're trying to get to, that’s our end game.

Laurence Alexander – Jefferies & Co.

And then lastly in terms of the incremental purchase improvements, the fine grind technology roll out, can you give an update there and if you’re seeing the gains that you expected?

Todd Becker

Yeah, Jeff, we have one plant running and one plant starting. Jeff, maybe talk a little bit about that. And again we’re making sure, we’re being very thoughtful about our investment in this, and so we want to – we did it at, and Jeff can talk about it, the different types of plants we are deploying this at.

Jeff Briggs

Right, first of all, that was actually one of our lower yielding plants, and we did see some improvements at that location. Commensurate with that, we also slowed down our plant to optimize yield both on corn oil and ethanol yields in the current margin environment. And so on the out growth of that, we are actually taking into one of our higher yielding plants, and we want to see the results that plants at the current run rates as well before we actually embark on a full-blown capital expenditure on the fine grind project as well. And so that – as we speak that capital expenditure is going on and we hope to have some results early result of that by the end of Q4, and then some clarity certainly into Q1.

Laurence Alexander – Jefferies & Co.

Thank you.

Todd Becker

Thanks a lot.

Operator

Patrick Jobin with Credit Suisse has the next question.

Patrick Jobin – Credit Suisse

Hi, good morning guys. Congrats on the strong quarter again.

Todd Becker

Thank you.

Patrick Jobin – Credit Suisse

I guess could you walk us through your CapEx outlook. I guess doubling the 18 million bushels of storage and some of the other initiatives kind of what you are thinking about for 2013? That's the first question.

Todd Becker

I think what we wanted to do is test the theory of growing origination at or near our ethanol plants directly in line with the process. And so we took three of our sites, one in Minnesota, one in Indiana, one in Michigan, and we put somewhere between 750 to 1 million bushels of flat storage at each of those sites at a cost of about $0.60 per bushel. And we want to test the fact can an ethanol plant fill a pile, cover it put it away and potentially earn the carry or the first hand of margin.

And so we've seen confirmation of that, and so when we look at now those the plants that we’re focused on, those among all of the others, we believe that we can redeploy capital at a significant reduced cost to operating at commercial grinding company, but more in line with the origination and being able to put away more harvest directly at our plant and earn that.

So when we look at, we have 16 million of storage external at small grain segment which will be remaining after the sale, we have 11 at the plants. We like to double or triple that at a cost of sub $1 per gallon and with the opportunity then to – over the next couple of years kind of re-grow the earnings from that we’ve going to lose from our agribusiness segment and kind of get those back through the CapEx in the ethanol segment with a lot larger storage capacity. Does that makes sense?

Patrick Jobin – Credit Suisse

Yes. And then sort of 16 million of non-ethanol production, operating income you are targeting for next year. You mentioned 1 million to 2 million of the remaining agribusiness and in addition that would include some of the onsite storage that you are…

Todd Becker

In that number, not yet, no. Basically when we look at it, we look at it as the corn oil. The marketing and distribution segment, the rail-car leasing which is in that marketing and distribution segment and then our small agribusiness segment that will be remaining. As well as at BlendStar increases, well that’s within marketing and distribution as well. That should get us to around the $16 million mark. Any investment at our ethanol plant and expanded grain storage is not included in those numbers.

Patrick Jobin – Credit Suisse

Okay, gotcha. And then lastly on the BioProcess Algae, I didn’t hear the CapEx number per acre, do you have a sense of where that will shake out and kind of what milestone you need to see before you try to build that the next phase.

Todd Becker

We are not disclosing it right now, but we’ve always said that at 500,000 per acre and below is when we would start to see the ability to expand that rapidly and use that CapEx against the EBITDA achieved on the per ton rate against the algae. And we are tracking towards those type of numbers and once we get to that as when you make the decision on the roll out. So while we don’t want to give the number, we have not given the number out yet but we are tracking in that range or lower.

Patrick Jobin – Credit Suisse

Got it. Thank you.

Operator

And we’ll now move to Craig Irwin with Wedbush Securities.

Unidentified Analyst

Hi, this is David for Craig. He is dealing with Sandy right now. Thanks for taking my question. Most of my questions have been answered, but I was hoping you could give us a little detail on to plant slowdown in the quarter. In the past, you’ve given us details that's a number of plants and then roughly the percentages slowdown for the bad margin time, so you could give us details of those?

Todd Becker

Yeah, I think Jerry mentioned in his comments that will be running somewhere between 92% and 93% of total capacity this quarter for the fourth quarter.

Unidentified Analyst

And can you – what about in Q3 please?

Jerry Peters

Yeah, Q3 total production was about $161 million gallons, and we had slowdown capacity at three of our – actually four of our plants I believe, and have been running the other plants at close to full capacity. Jeff you maybe want to explain.

Jeffrey Briggs

And additionally, we take a significant maintenance outage at one of the locations as well, which wouldn't actually show up and kind of the run rate that would be a chunk that wouldn't be repeatable in terms of the run rate.

Unidentified Analyst

Okay, thank you.

Todd Becker

Thanks.

Operator

Next question now will come from Ian Horowitz with Topeka Capital Markets.

Ian Horowitz – Topeka Capital Markets

Good morning everyone.

Todd Becker

Hey, Ian.

Ian Horowitz – Topeka Capital Markets

Just a quick question, a lot of the stuffs been answered, but Todd can you just go over little bit more in detail of the logic behind the transaction seems like we have a pretty good – even as you said pretty good mark of the other week on ethanol capacity very similar to Green Plains capacity, and when you look at the two businesses, it just seems like some significant uncertainty around your volatility I guess around cash flows for ethanol whereas from a secular standpoint, which seems to me the storage capacity agribusiness would be a much more steady cash flow play overtime. Can you guys give me a little bit of – and it seems like you could have replicated the financial impact, but it’s just selling one rather than over 80% of the agribusiness capacity?

Todd Becker

Well, I mean what we've always done is look at sum of the parts of our business. And so one thing to keep in mind and what I’ve indicated is that, while the agribusiness segment certainly was a good earning component in our business, it didn't provide a lot of origination for ethanol plants. And so when we looked at that, we said is there a better formula for us to maximize our ability and understanding of the U.S. grain markets while potentially achieving value for our shareholders.

And so when we look at our agribusiness, we knew that we had something unique, we knew that there is a scarcity value of assets and we knew that we build a very, very good base business there, but it would be hard for us to take that from where we grown it so fast over the last several years to where it is today at 40 million bushes to take it to 80 million bushes let's say. And so our growth is going to slowdown pretty rapidly yet, selling in to a company that can then put it into a bigger platform, there is obviously rationale for that and achieving the value for our shareholders.

So when we look at the value we were able to get, the cash we put on the balance sheet, the debt that we were able to payoff overall, because of our reduced working capital lines and our reduced overall term loans, we looked at that overall and it's over $200 million swing on our balance sheet roughly $200 million swing on our balance sheet, which we looked at that as a very favorable transaction for our shareholders. And so while we certainly won't have the $15 million of earnings or EBITDA any more, we will have a significantly stronger position overall as a company in fact the most healthiest we are financially since the beginning of time.

So we weighed all those as well as we did replace some of those earnings with the rail-car income over the next couple of years with very little capital investment. And now our strategy of redeploying some of that capital at a much reduced per bushel cost to put in line with our ethanol plants and actually we believe will earn potentially the same amount of earnings that these have earned in the past with a significant lower capital cost. And so we’ve put all that into a formula.

We also took into consideration the employees and the stakeholders in that business, and we probably would not have sold it to just anybody. When we met with The Andersons we knew that our employees and these assets would be in good hands. Some of these assets were brought from family businesses and we made commitments to them that we would make sure that we would take care of these stakeholders and we felt The Andersons were the right party to do that. And so from a lot of different reasons, both financial, moral and ethical we felt like this was the right transaction to make.

Ian Horowitz – Topeka Capital Markets

Okay, great. And then just one last question around it and I apologize you run over it earlier but kind of crazy here. Did you sell the – was the business sold at a profit if so are there any details around the profit and will this still be sheltered under NOLs.

Jerry Peters

The gain we expect to report is about $46 million pretax from the transaction. Actually we haven’t talked about tax situation but we have a fairly low basis in the assets. So we we’ll have a pretty considerable tax gain to report, but fortunately we have a large amount of NOLs to offset that. So net-net-net, we don't expect a lot of cash taxes resulting from this.

Ian Horowitz – Topeka Capital Markets

Okay, great. All right, thanks a lot.

Todd Becker

Yes, thank you.

Operator

And now we will hear from Matt Farwell with Imperial Capital.

Matthew Farwell – Imperial Capital, LLC

Hey, good morning. Congratulations again.

Todd Becker

Thanks.

Matthew Farwell – Imperial Capital, LLC

So I’m wondering do you foresee any decline in corporate overhead as a result of the sale of the agribusiness assets or is that going to be steady as previous quarters?

Todd Becker

Yeah, we actually didn't have a large corporate staff supporting this business. And so, with that said, we don't expect a large decrease in our corporate overhead numbers.

Matthew Farwell – Imperial Capital, LLC

Okay. The other question is regarding liquidity, I know you had mentioned some other options that the company may be pursuing to expand liquidity profile are those still on the table or do you feel that with the new cash from the balance sheet and all of the revolver capacity that your liquidity at present is sufficient?

Todd Becker

Yeah, I mean with the sale of the asset base in grain and the injection of the cash on the balance sheet, reduction of the overall debt on the balance sheet, what it leaves us with is the term debt, but the ethanol plants are convertible debt and then some revolving debt in our marketing segment.

With that, I would say we're in pretty good shape against the cash held across the whole company, which would be increasing in that $240 million to $250 million range. And so with that type of liquidity based on the ability of our non-ethanol operating income right at this point, we think we are adequately equipped to handle the current market on our balance sheet, while we still have additional levers to pull. I think we still remain invested in our risk management programs to the tune of $30 million to $50 million depending on the day, which can be easily converted into cash. So we have other liquidity levers, but at this point, we don’t really feel like any of them need to get pulled.

Matthew Farwell – Imperial Capital, LLC

Would you ever consider buying back the convert or paying it off?

Todd Becker

At this point, we’re going to adjust cash into the balance sheet. Let it ferment there for a while, and we will do what’s best for our shareholders, but we also want to see what the forward curve looks like before we make any decisions on anything other than growth opportunities around the company.

Matthew Farwell – Imperial Capital, LLC

I guess last question is could you finally comment on this recent transaction by Koch. This is their third transaction well in excess of your valuation really your stock is one of the cheapest ways to acquire ethanol assets, why do we continue to see these transactions and how can we rationalize that to the current trading levels of your stock?

Todd Becker

We ask ourselves that as well. Good assets in good locations with good technology are not for sale, in any kind of excess form. These are hard assets to buy, hard to replace, there is a scarcity of right location right technology asset and Koch, whatever decision they make are probably based on those facts. When we look at our price and our asset base, we have similar assets. We have some that our same technology maybe smaller assets, we think most of our locations have similar economics to that plant, it's just might have, it's a little different make up. But we have some very specific plants that are exactly almost carbon copies of that plant that traded. So rationale behind our current stock price, we sometimes fluctuate with the ethanol crush, not based on value of the asset or book value and that something again something we based by monetizing the grain business equity, I think it shows our shareholders very serious about getting them value for the overall asset base with $8.50 or so cash on the balance sheet against where our stock is today, doesn't give us a lot of credit for ethanol plants.

And at that point we’ll just wait and see as the market changes, so as the curve changes, so does our stock. And for the right or wrong reasons that’s the way our stock trades today is today, but ultimately over the longtime we feel like everything we are doing today, the cash we’re building on the balance sheet, the debt we're paying down, the ability to sell the sale of the grain assets, the expansion of the grain storage around our ethanol plants, the Algae venture, the expansion of Birmingham, we'll all add value at ultimately would be realized by our shareholders. But it is frustrating, yes.

Matthew Farwell – Imperial Capital, LLC

Excellent work. Congratulations again.

Todd Becker

Thanks.

Operator

And we’ll hear from now Chris Cook – Zazove. Go ahead.

Chris Cook – Zazove

Yeah, just one quick question, should we expect ethanol yields to decline as the quality of the corn, this year’s corn crop works its way to the system – yield of 2.84, I think it was in the quarter?

Todd Becker

Yeah, we've seen a little bit of degradation at some of our plants, some of our plants are holding steady made a lot of investments to get all the excess alcohol that we can get out of the starch to the corn kernel as well as we're seeing better enzyme performance. So overall some of that as we saw quality decline this year is being taken up by that, but yeah, overall I think the yields are coming down a bit, but not to the tune in that we've seen early in the days of the industry to more towards 280 to 282 range, but again that's very early to say. We have some plants that are actually performing better, and some plants that are actually performing worse. It really just depends on the profit of corn we are at and the quality that’s coming in.

So I think it's little early to say it's going to be anything more than maybe a 0.5% type of decline, maybe up to 1%, but not enough that it's going to throw off anything that we're doing.

Chris Cook – Zazove

Thanks.

Todd Becker

Thank you.

Operator

Moving on to Michael Cox with Piper Jaffray.

Michael Cox – Piper Jaffray

Hey guys, congratulations on the asset sale. Great move for you guys.

Todd Becker

Thank you.

Michael Cox – Piper Jaffray

My first question, I agree with you that this waiver for the RFS seems highly unlikely, but I’d be curious on you what it would mean to your industry if it was approved?

Todd Becker

Well, as we said, even if upon approval it still, you don't need it from an octane standpoint, and it would be very hard to replace that octane very easily at the price that we're trading against gasoline. So from that perspective, that is something that we don't see a huge decline in demand from that.

Secondly, when you look at what the refiners are producing, they’re still producing 84 octane is working well farm, they using ethanol as their base blend stock. So they are making more money, and it's not just because they need 113, because 113 to figure out, what to do with 113 octane as they blend stock. We’re still at $0.31 a gallon under gas for all of 2013 and 2014, and 2015 I think we're still a big discount to gasoline. So if there was a waiver, I don't know they would have a very big impact to demand obviously it would be an interesting thing to watch, but again we don't anticipate that will happen.

Michael Cox – Piper Jaffray

Okay. That makes sense. And a separate question of waiver related, I guess to some extent, two parts on your subsidiary level debt, is the corn oil extraction included in any debt to EBITDA calculations on the sub debt? And second if we were to see a similar type of margin environment continue throughout the fourth quarter here into Q1, at what level will some of your waivers of cash infusion to cover any sort of covenant shortfalls – at what point will those start to kick in?

Jerry Peters

Michael, our cash flow from corn oil is all outside of the debt facilities down at the plant levels. The benefits of the lenders at the plant level receive is they’re reimbursed for the value of the distillers grain that by weight becomes corn oil. So those cash flows come unencumbered up to the parent company level. And I'm not sure I understood the second part of your question.

Michael Cox – Piper Jaffray

I guess I'm curious as to what level of margin environment over the next quarter or two would trigger some of the waivers you have in place for your debt covenants to infuse cash to offset any sort of tripping of those covenants?

Jerry Peters

Again our debt service is about $0.10 a gallon, and it varies a little bit by plant, but generally speaking across the platform it’s about $0.10 per gallon and of course that's before considering the cash flow from corn oil. So what has happened in recent quarters has been any shortfall in the ethanol cash flow is short up with corporate cash, and a good amount of that corporate cash had been sourced from corn oil. So I think going forward if we see margins north of $0.10, then our cash flow is directly supported by ethanol operations and corn oil is fully unencumbered going into the parent company.

Michael Cox – Piper Jaffray

Okay, that's helpful. Thanks.

Operator

And we have time for one final question. That question will come from A.J. Strasser with Cooper Creek Partners.

A.J. Strasser – Cooper Creek Partners

Hi guys its A. J. Thanks for taking my question. Congratulations on a solid quarter. Can you, Todd, maybe just give us a little color on how we should think about your ability to manage ethanol EBITDA per gallon margin in the fourth quarter? Obviously you have a bunch of current hedges or equivalent in place, but absence that may be you can kind of the fact you able to do $0.02 per gallon in Q3, which is pretty impressive, if you look to Q4 what kind of margins are you look to be getting?

Todd Becker

We haven't given any specific guidance on the margin that we expect in the fourth quarter except to say that by our actions earlier in the year when margins in late last year when margins we’re in the high-teens or 20s to mid-20s we lock in up a way to dampen the negative margins that we're seeing today. So with that standpoint, all we have really have left to do, and every day we’re doing is finished the quarter out, and if we finish the quarter out even at the current margin levels we will remain profitable as a company, and we start off plenty of buffer even from there if margins went further or got lower we would still have plenty of room to still be profitable in the fourth quarter.

So by doing what we did earlier in the year and assured us what is probably going to be profitable last half and what will be a profitable last half and a profitable fourth quarter, now withstanding any obviously production issues that could happen or any outside influence that we don't know about. But in general, everything we did allowed us to get there. And I would say that part of our ability to do that is by having the strong cash balance and strong balance sheet, and now we even have a stronger cash balance and a stronger balance sheet which then just continues to support our hedging programs.

And even in the third quarter, we came into third quarter pretty well uncovered, as we indicated on our last earnings call and we saw minutes, hours, and days of the ability to a lock the quarter away and not days, weeks and months. And so when we saw that, we had to move very quickly in the tunes of 30 million or 40 million gallons a day, and that happened on several days over the quarter and then locked it all away with what we do. So these are sometimes not weeks and months, but sometimes for hours and days.

A.J. Strasser – Cooper Creek Partners

Great. And I just had a follow-up question if I can on the algae initiatives, I thought you said that you thought at some point you would be able to service the ethanol that which by math wouldn't be about $75 million of EBITDA. Is that am I thinking about that right and then at what point, how many years down the line do you expect it to be doing that run rate?

Jerry Peters

Yes. We'll focus on Shenandoah first, and Shenandoah is the 70 million gallon plant with sub $0.10 a gallon – that's one of our lowest debt plants. And so when we think about the 40 acres to 50 acres against 40 tons to 50 tons per acre, that would and based on the CapEx that we have indicated getting below that level, serving the higher value of Algae markets, would then allow us to take that EBITDA and service our ethanol debt with it. If we are the owner of that solely, our partners may want to invest in that as well, but if we solely invest in that ourselves and own that then we think the economics would support that, if we go – and that was the only way we go through with it. So we are working very closely with all of our shareholders of that venture trying achieve those type of things, and once we build that that out I think people understand the value of what we've been doing in Algae.

A.J. Strasser – Cooper Creek Partners

Thanks for taking my question.

Todd Becker

Okay, thank you.

Operator

And now we'll conclude our question-and-answer session for today. I'll turn the call back over to Todd Becker for any additional or closing remarks.

Todd Becker

Thanks a lot, thank you everybody for coming on to the call obviously we had a lot of exciting things happen during the quarter, and actually after the quarter was over. As you can see we are continually working on bringing value to our shareholders by doing all the things that we’ve committed to do and we are ending this quarter and end of the year with the strongest position we've ever been in from a financial perspective looking forward to 2013 and what awaits for us then. So we appreciate your support and we'll talk to you next quarter. Thanks, bye.

Operator

And ladies and gentlemen, now we'll conclude your conference for today. We do thank you for your participation.

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