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Pacific Ethanol, Inc. (PEIX) Is “One To Watch”

|Includes: Pacific Ethanol, Inc. (PEIX)

Pacific Ethanol has rapidly established a leading position in the Western U.S. producing and marketing renewable ethanol that is classified by the California Air Resource Board as having the lowest carbon intensity of any domestically produced, commercially available transportation fuel. The July 19 closing of a $20M deal to acquire 33% more ownership interest in New PE Holdco LLC, the owner of the four ethanol plants that make up the company's production footprint, has roundly strengthened PEIX's leadership position in a thriving ethanol space and given the company serious control over direct strategic investment. The company has two wholly-owned subsidiaries, the Oregon-based Kinergy Marketing, LLC, which has built up a tightly-knit ethanol sales/distribution network, and the California-based Pacific Ag. Products, LLC, which supplies high-quality secondary wet distillers grain (WDG) from the plants for feed to the dairy and beef cattle industry.

With some 67% ownership of the four ethanol plants, each located in key markets (Columbia plant in Boardman, OR; Magic Valley plant in Burley, ID; Madera, CA plant; Stockton, CA plant), PEIX holds the largest ownership position in ideally located infrastructure that benefits organically from the company's strategy for shortening the process loop between inputs and outputs. Lowering overall transport costs, whether it comes to inputs, or outputs like ethanol and WDG, has helped PEIX establish a firm edge against competitors.

PEIX has a unique model compared to other ethanol sector operators called the "destination model". By localizing production capacity alongside the customer base geographically, the company is not only able to use less natural gas than other ethanol plants, but fetch top dollar for the WDG output that would otherwise be dried for shipping if it were produced in the Midwest. All of the rich nutrients left over after the fermentation process (including rich fats and minerals, as well as other key vitamins/proteins), contained in the heavily concentrated WDG, make for a superbly digestible, palatable feed characterized by producing higher milk yields and optimal feed conversion in beef cattle. A predictable-quality, materially consistent WDG product is a godsend for the huge number of livestock producers in the Western U.S. and dry distillers grains simply cannot stack up to the nutritional content of the company's product.

Kinergy has similar benefits, with a demand-rich consumer market for ethanol that far surpasses regional production capacity, including the company's roughly 200M gallons/year output. The company has been able to engage in extensive purchasing as well as marketing/sales. Leveraging their superior logistical capacity and management capability, with an established reputation for outstanding service, Kinergy has managed to assemble an impressive portfolio of relationships with both suppliers and the major/unbranded oil companies that distribute gasoline to retail customers. Six marketing agreements between Kinergy and production facilities in the Western U.S. have been established just to augment the throughput envelope in order to keep up with regional demand.

PEIX share price jumped up recently from drought-induced lows of July and August, as the new EPA guidance has clearly shown strong support for the industry, with the direct final rule from September's publication mandating some 1.28B gallons of bio-diesel products go into the 2013 diesel fuel market. This announcement has energized the industry in general and bolstered confidence supremely at well-positioned operators like Pacific Ethanol.

Kinergy is showing growing market share retention and growth outside its traditional envelope and is even expanding east of its primary market, everything west of and including Oregon, Washington, Idaho, Utah, Colorado, and Arizona. Ongoing efforts to upgrade to the latest technologies at the plants is allowing PEIX to secure an increasingly larger slice of the growing market for ethanol, again driven in part by overwhelming Energy Independence and Security Act legislation mandates requiring that the amount of ethanol (as well as other advanced and cellulosic-based biofuels) more than triple within only a decade to 36B gallons per year.

The initiative to embrace corn oil separation technology by installing pertinent hardware, first at the Magic Valley plant this year and eventually at the others (target date for complete roll out is late Q1 2013), via a turn-key installation contract with ICM Inc., using their patented Advanced Oil Separation System™, shows how PEIX is constantly growing through innovation. It is this constant will to adapt along with rising demand and the complexities of the industry that has allowed PEIX shareholders to flourish. With an anticipated 12M lbs of corn oil per year coming out of the Magic Valley plant alone, PEIX should be generating as much as $4.5M in revenue ($0.07/gallon) per year off this high value product from just that one plant starting in Q1.

For more information on Pacific Ethanol, Inc., please visit the company's website at:

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