Ladies and gentlemen, thank you for standing by. And welcome to the Pacific Ethanol, Inc., Third Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen only-mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our first speaker for today's conference, Ms. Becky Harrick. You may begin.

Thank you, Andrew, and thank you all for joining us today for the Pacific Ethanol third quarter 2014 results conference call. On the call today are Neil Koehler, President and CEO, and Bryon McGregor, CFO. Neil will begin with a review of business highlights. Bryon will provide summary of the financial and operating results. And then Neil will return to discuss the company's outlook and open the call for questions. Pacific Ethanol issued a press release yesterday providing details of the company's quarterly results. The company also prepared a presentation for today's call that is available on the company's website at pacificethanol.com. If you have any questions, please call LHA at 415-433-3777. A telephonic replay of today's call will be available through November 6, the details of which are included in yesterday's earnings press release. A webcast replay will also be available at Pacific Ethanol's website. Please note that information in this call speaks only as of today, October 30th, and therefore you're advised that time-sensitive information may no longer be accurate at the time of any replay. Please refer to the company's Safe Harbor statement on slide two of the presentation available online, which says that some of the comments in this presentation constitute forward-looking statements and considerations that involve a number of risks and uncertainties. The actual future results of Pacific Ethanol could differ materially from those statements. Factors that could cause or contribute to such differences include, but are not limited to, events, risks, and other factors previously and from time-to-time disclosed in Pacific Ethanol's filings with the SEC. Except as required by applicable law, the company assumes no obligation to update any forward-looking statements. Also, please note that the company uses financial measures not in accordance with Generally Accepted Accounting Principles, commonly known as GAAP. To monitor the financial performance of operations, non-GAAP financial measures should be viewed in addition to and not as an alternative for the reported financial results as determined in accordance with GAAP. The company defines adjusted net income or loss as unaudited earnings before fair value adjustments and warrant inducements, and gain or loss on extinguishment of debt. Adjusted EBITDA is defined by the company as unaudited net income or loss attributed to Pacific Ethanol before interest, provision for income taxes, depreciation and amortization, fair value adjustments and warrant inducements, and non-cash gain or loss on extinguishment of debt. To support the company's review of non-GAAP information later in this call, reconciling tables are included in yesterday's press release. It is now my pleasure to introduce Neil Koehler, President and CEO.

Thanks, Becky. And thanks, everyone, for joining us this morning. 2014 is on pace to be a record year for Pacific Ethanol. For the third quarter of 2014, we had net sales of $275.6 million. We sold a record 133.7 million gallons of ethanol. We had gross profit of $18 million. Net income was $3.7 million or $0.15 per share. Adjusted net income was $8.1 million or $0.33 per share and adjusted EBITDA was $15.5 million. Among our highlights for the first nine months of the year, we sold a record 378.6 million gallons of ethanol and our gross profit was $90 million. Over the last 12 months, our adjusted EBITDA was $96.9 million. In our last call, we discussed our plans to invest up to $16 million in plant improvement projects to further reinforce our market position. These initiatives are focused on improving efficiencies, diversifying feedstock, and expanding our advanced biofuel projects. We're in the middle of several projects at each of our facilities that will further add value to our operations. We believe these plant improvement initiatives will lead to an annual EBITDA improvement of approximately $0.06 to $0.07 per gallon, representing a contribution of approximately $12 million to $14 million to our annual operating income. In addition, we took action to further diversify our revenue streams as we recently announced an agreement with Kodiak Carbonic to sell the CO2 generated from our Columbia plant. Kodiak is constructing a liquefaction and dry ice processing plant adjacent to our facility from which it expects to purchase up to 200 tons of CO2 per day to sell to food processing and beverage producers. We expect the CO2 plant to begin operations next year and to contribute $0.01 to $0.02 per gallon in operating income annually for the Columbia plant. Corn…

Thank you, Neil. During the third quarter of 2014, we reported net sales of $276 million, up 18% compared to $234 million in the third quarter of 2013. Gross profit was $18 million this quarter, which compares to $3.5 million in the third quarter of last year. SG&A expenses were $4.4 million compared to $2.5 million in the third quarter of 2013. We're committed to controlling our SG&A and targeting approximately $4 million to $4.5 million quarterly going forward. This quarter's operating income was $13.6 million. We increased operating income by $12.6 million on a year-over-year basis. We recorded a $4.4 million expense in fair value adjustments and warrant inducements for the quarter, comprised of $1.5 million in warrant inducements in July, as well as $2.9 million for warrant exercised adjustments at an average stock price of $19 per share, or $4 per share over the closing stock price on June 30th. An increase in the market price per share of our common stock over the prior quarter results in higher fair value -- fair values and a corresponding expense, which is locked in upon exercise of the warrants. As of October 29th, our warrant balance totaled just under 1 million shares at a weighted average exercised price of $8 per share. Interest expense, net was lower than expected at $1.1 million. This compares to $4.5 million in interest expense net in the third quarter of 2013 and $400,000 below our guidance of $1.5 million per quarter. Our effective tax rate for the quarter was 40% and we expect it to remain at similar rates in future quarters. Net income available to common stockholders was $3.7 million or $0.15 per diluted share. This compares to a net loss of $5.3 million or $0.40 per diluted share in the year ago…

Thanks, Bryon. We're very pleased with the company's performance this quarter and year-to-date. We remain very encouraged by the outlook for the industry and our company. We're reinvesting in our production business to initiatives in focused in on improving efficiencies, diversifying feedstock, creating new revenue streams, and furthering our advanced biofuels initiatives. We continue to generate strong cash flows and improve our balance sheet through retiring debt when advantageous to do so. We believe we are very well situated to improve our long-term profitability and expand our share of the renewable fuels market. Operator, with that, we can begin the Q&A session.

Certainly. (Operator Instructions) And our first question or comment comes from the line of Eric Stine with Craig-Hallum. And your line is now open.

Good morning guys. It is Aaron Spychalla on for Eric Stine. Thanks for taking the questions.

Good morning Aaron.

Maybe starting on transportation costs for corn, can you talk about what you saw towards the end of the quarter and maybe what you're seeing so far into 4Q? It seems like those costs might have eased a little bit, but how should we think about that here going forward?

Sure. Generally, as we've seen this year on the rail logistics have been fairly constrained. That has given us a significant benefit on average over the year. With our ethanol basis, it has run higher than that average number, Chicago over to L.A., where we price a good majority of our ethanol. On corn, generally, it's been a little more stable throughout the year, but as you alluded to at the end of the quarter with the onset of the harvest in soybeans and corn, we have seen increase in our delivered basis to the West Coast. There has been a premium on the freight that trades in the secondary market and that did impact our corn basis late in the quarter and early this. We did see corn basis get as high as almost $2 a gallon -- I'm sorry $2 a bushel delivered to the Western United States. But over the last couple of weeks, as the bean harvest is now almost complete and we're moving to corn, we're seeing a significant relaxation of those pressures and prices, to where we're seeing basis get back to more normal and expected relationships.

Okay. Good. Thanks for the color. And then a good quarter considering the price volatility that we saw, but could you maybe touch on the trading business, presuming that business might have been slightly negative on the quarter, again kind of making the quarter performance look even that much better? Can you just kind of talk through that a little bit? And now with prices stabilizing here quarter-to-date is that something we should think about as getting back to that kind of flat to slightly profitable run rate?

Sure. We don't break out those earnings separately, but what I can say and we've said before is that that is a very profitable business for us and a very important part of our strategy in terms of our market share and market position. What you do find in that business is that there is price risk in a very volatile market on the ethanol that we purchase from third-parties and have inventory that's both in transit and in terminals in our destination markets. And so what we did see in the third quarter was over the quarter, and really most of that coming in the last month of the quarter, a $0.50, $0.60 drop in the price of ethanol. So, there clearly was an impact on the trading business. We did have a write-down of inventory at the end of the quarter and now, since the quarter ended, we've seen actually prices coming back up and so that's a benefit. So, the way we think about it is, on average, it is a very predictable, stable business that makes a couple of pennies a gallon on a gross profit basis with some significant volatility within shorter periods of time.

Okay, sounds good again. Congrats on the quarter and nice job.

Thanks Aaron.

And our next question or comment comes from the line of Jeff Osborne with Cowen and Company. Your line is now open.

Thank you. Good morning. Couple questions; I was wondering, Neil, you mentioned the basis is kind of returning to closer to expected relationship levels. Is that, in your mind, kind of the $1.25, $1.50 level? Or just maybe give a little bit more clarity as to where you are now and any expectations for change to the quarter would be helpful.

Sure. I mean if you look at that tariff rates for corn from Group 3, Nebraska, which is really what drives the pricing for us that depending on our plan is anywhere from $1 a bushel to $1.25. What we're also seeing is that the basis in the Midwest as the crop comes in that we can buy corn at something under Chicago. So, normalized would be more in that $1 to $1.25 rather than the $1.25 to $1.50 that you mentioned. We're still seeing some slight premiums on freight. That could be with us through the quarter. We would expect certainly by Q1 of 2015 that to get back to freight trading at parity, if not even some discounts. We also now are seeing an offset on that Chicago/LA ethanol basis which, in the quarter was averaged about $0.20, which is more than normal level. Given the freight premiums we were seeing, that then didn't offset the -- being higher and we are seeing that now. Yesterday, we were at $0.27. So, we're also seeing some offset of any corn premiums we are paying by a higher ethanol basis today.

Okay, great to hear. And then, as that kind of all flows through, how do we think about EBITDA per gallon trends through the quarter? And maybe just reflect on kind of the cadence of that metric through the third quarter. But then, more importantly, how do we think about it for the fourth quarter?

Well, we do not offer any specific guidance on margins. I think what is pretty well understood is that we do a limited amount of forward hedging of our margins and that we're more impacted by the spot market. And if you just look at industry average-type margin environments, again, albeit with a lot of volatility even day-to-day, we're in that $0.30 per gallon margin environment today. That is less than we averaged through most of 2014. We actually saw that at lower levels at the last quarter end of and the beginning. And we've seen a nice uptick here in the last week or two which we expect to continue. We saw the inventory reports out yesterday from the DOE and the inventories were down 5% to levels that were the lowest that they have been since May of this year. And that was also remarkable in that production was up 5%. We've seen draws in inventory where you'd expect it given the very significant increase in exports we have experienced here of late out of the Gulf and off the East Coast. So, we see a very snug supply/demand balance. We did see a little length coming out of the Labor Day weekend in the industry and that seems to have lifted the acceleration of exports, tightened up quite a bit. So, we're bullish on margins going forward in the fourth quarter and into next year.

Great to hear, just two other quick ones. Bryon, I may have missed it, did you give the CapEx figure for the quarter? And then if you can put that in perspective on the broader $16 million and initiatives that you talked about on the last call, how you expect that to flow through over the fourth quarter and the first half of 2015 just so we can model the cash flow burn from a CapEx perspective would be helpful.

Sure Jeff. As I mentioned, I think went through it fairly quickly, but of the $16 million, we spent approximately $2 million. So we've got -- and as we've talked about half of that $16 million would consist of the two corn oil facilities. So, we would expect somewhere around 3 to 3.5 -- well, let's put it this way, I would expect somewhere over the next three to six months to have spent most of that $16 million.

Okay.

And then I would add that we have -- just our maintenance CapEx is approximately $1 million per plant per year. So, that $16 million would be -- on top of that would be the maintenance CapEx.

I understand. And then, the last question is, can you just update us on the -- how you're tracking in terms of yield per bushel? I think in the past you're around 2.74 or 2.75. Just are you getting any greater throughput through the average of the four plants with some of the initiatives that you have?

Yes, we are. We're definitely seeing that and have certainly been closer to the 2.8 level.

Okay, perfect. Thank you.

And our next question or comment comes from the line of Katja Jancic with Sidoti & Company. Your line is now open. Katja Jancic - Sidoti & Company, LLC: Hi, thank you for taking my call.

Good morning. Katja Jancic - Sidoti & Company, LLC: Neil, you mentioned that you expect the exports to continue to grow, especially next year. What are your expectations? How much of ethanol do you think we can export and which markets?

Good question. We're seeing exports go to quite a number of countries. Canada is our largest export market. The Philippines has been a large market. We're seeing increases in India, and we're even some small amounts of ethanol that we're exporting to China. We see that as a huge opportunity over the next couple of years. Brazil continues with their drought and smaller harvest and growing demand and looking to going to higher level of blends, particularly in their inner harvest period to become a large destination, sometimes the second or third largest for U.S. exports. We're seeing a fair amount into the Middle East for octane. We're seeing a number of countries initiate programs to lower CO2 emissions and ethanol is the single most effective way to do that. Plus, you have the economics with ethanol on a forward curve, trading anywhere from $0.40 to $0.60 to $0.75 less than gasoline. There is just a very compelling economic rationale for the exports and given the high octane nature of the fuel to be able to buy that at a discount gasoline. The -- if we're on a run rate right now in Q4 that feels about 1 billion gallons a year, we would expect that next year that becomes a baseline. We're seeing -- not with our company, because our model is all about selling within 100 miles of our plants. That's our highest value proposition, but the industry overall is seeing bookings on exports to go out a number of quarters. So, a greater forward commitment on exports than I think the industry has ever seen and that bodes well. The capacity is there to do more from an infrastructure standpoint. I think arguably, if these relationships stay the same, the bigger issue will be just the amount of ethanol that we can produce. We have domestic demand at close to 13.5 billion gallons and inching up with the introduction of E15. And if you add 1 billion gallons, you're at 14.5 billion, that's pretty much the capacity of the industry to produce right now. So, could we do 1.2 billion? That's possible and it might happen. So, we're very optimistic on the export picture. Katja Jancic - Sidoti & Company, LLC: You also mentioned that the amount for E15 is increasing. Can you comment more on that?

On E15? Katja Jancic - Sidoti & Company, LLC: Yes.

Yes. There's still a very limited number of stations. I think we're up to about 100 stations in the United States that are offering E15, but we have seen quite a bit of growing interest in the industry. It's very focused on this. It becomes a very important part of growing the domestic demand for ethanol and we're seeing initiatives with a number of retailers that are interested. The industry is doing its part to help on capital improvements to make those upgrades, fairly simple upgrades, but still cost of bit of money to be able to distribute the product. The EPA has clearly given the green light for what amounts to two-thirds of the vehicles and closer to 80% of the vehicles miles traveled to be suitable. And we're optimistic that it will be an incremental growth in 2015 and will accelerate significantly in 2016. Katja Jancic - Sidoti & Company, LLC: Now, with the decline in the oil prices, does that raise any concerns at all?

It doesn't today because what we had was -- when ethanol was -- when oil was at $100 and ethanol was trading at closer to $1 discount, now with oil at $80, we're still trading at a $0.40, $0.50 discount, even in the near months and greater as you go out on the curve. So, we're still seeing -- for a product that frankly has a value that is higher than wholesale gasoline to be still selling at such a discount, it seems like oil prices have stabilized in and around the $80 number and many expect that to go back. But it would take a much lower price of oil to create any concerns, from our perspective, on the value proposition and the margin opportunities with ethanol producers today. Katja Jancic - Sidoti & Company, LLC: Okay. That's all for me. Thank you.

Thank you.

And our next or comment comes from the line of Craig Irwin with ROTH Capital. Your line is now open.

Good morning gentlemen and congratulations on a strong quarter.

Thanks Craig.

First question I wanted to ask was about corn oil. I noticed it was about nickel a gallon, just over nickel a gallon. There seems to be some headwind there for improved performance. I was wondering if maybe you could update us on how far along you are in maybe adjusting the grind or any adjustments that you make to Stockton and Magic Valley to optimize that. And then, if you could again update us on whether or not Madera and Columbia are going to be brought online for corn oil production in the fourth quarter or after the fourth quarter, and the timeline for us to see the financial benefit from that.

Sure. The projects at the Boardman and the Madera facility are in process now. And what we have guided in our prepared remarks was that those projects would be online in the first quarter of 2015. So they will make a contribution, not this quarter, but next quarter, and we're excited about bringing that online. There is opportunity. We are always working on trying to optimize the corn oil production through fine-tuning the equipment, the use of an additive, as well as the work that we've done on the front end to increase the grind and to be able to liberate more of that corn oil. So, we are on an incremental basis seen some opportunities to increase that and increase the contribution to operating income. The price spot on that is that corn oil is actually particular out west with some of the rail logistics on getting -- computing corn oil out here, has maintained a pretty solid value relative to corn even with the recent declines in corn prices, corn oil has not come down at that kind of rate. So we are seeing a better relationship between corn oil and price point.

Great. Now, when I look at some of your public competitors, they’ve often had close to $0.07 a gallon. Now I know a number of them started a couple of years earlier than you, but is that something that, over the next few quarters, is probably more achievable out of the corn oil production? Or is there something fundamentally different where we should expect different performance based on the type of plants and location?

No, we are able to achieve industry standard, if not, a little better we believe as we move forward and implement the new systems. The $0.05 is a pretty conservative number. I think we more historically said between $0.05 and $0.07 and that moves with both the performance of the equipment in those markets. But, now, we do believe that we should be at industry standard if not slightly better than performance on our corn oil systems.

Great. Thank you. My next question was about the CO2 dry ice project at the Columbia facility. Can you maybe give us a little bit more details on the timeline for that to come online and how this project started, whether or not it's possible you could do something similar to your other plants in the future? And whether or not this could potentially impact your carbon footprint calculation for the plant, something that obviously goes into EPA's RIN eligibility criteria as you could maybe move into a new category under the best of scenarios.

Sure. The CO2 is very sensitive to freight, that’s what actually makes our plants being fairly close to some large CO2 markets attractive. What made Boardman particularly attractive is that we are part of a whole food processing complex that is in there at the Port of Morrow. There is a number of users locally of CO2 and we are matching to that local market. And with Kodiak, they are coming in there and capitalizing equipment essentially it’s a royalty over the fence. They are the ones that than produced the product and we will sell for local distribution and the production of the dry ice and the compressed gas. Because it gets used in operations where that CO2, in the case of dry ice, for instance, that CO2 still ends up being released from the atmosphere, so was been released from manors now, it's going to be released through the near-term use of dry ice. So in that application there actually is not a net benefit on the carbon. We would need to sequester that in some other more permanent way, looking ADM has a project where they are taking CO2 from their facility and injecting it into wells, that sort of thing. Here is potentially the opportunity which is more advanced technology to convert this CO2 into plastics or some other more permanent fixture where you have shown that you can capture that carbon. So there maybe opportunities and we certainly are looking at that. But right now the immediate opportunity is in these more conventional applications and we are looking at the opportunity to do that at more of our other facilities as well.

Great. My next question is about the 3 million warrants that struck since June 30th -- 3 million, give or take. Can you share with us what the activity was, maybe, at the back end of the quarter and since the end of the quarter? Whether or not this sort of coincided with the more significant volatility in your stock or if this was sort of evenly-paced over the last several months?

Certain portion of it occurred at the beginning of the quarter, thus the high price for the warrants and the adjustments for the warrant exercises, at the average price of $19 per share. As I mentioned in the -- on the call, that may have caused some confusion. Normally, if there were no exercises of the warrants than if we carried that same balance of warrants from beginning a quarter, end of quarter, you would adjust between your ending price last quarter and the ending price this quarter, which would actually translate into a positive gain. That being said, we did have exercises. We have the inducement and between those things, the average at a higher price, thus translated into a -- an adjustment, an impairment for that. We had little bit of exercises after the end of the quarter and it's not quite as compelling when your -- when the stock is traded off as much as it has. But, in any cases that’s where we -- so when we announced -- or in my prepared comments I mentioned that we are just under a 1 million shares now or a 1 million warrants.

Okay. A last question is more of a big picture question. Neil, you said many times in your prepared comments that you are optimistic about some pretty robust exports in 2015 and that you see continued strength in exports in the fourth quarter. It doesn't sound like anything is fundamentally changed for 2015. If anything, maybe the industry will be tighter than where it was in 2014. But that coincides with the long expected seasonal swing in inventories exiting in the summer driving season. Everybody expected this. It happens every year. But we saw a really exaggerated move in your public market valuation. Can you help us understand whether or not the same dynamics that really benefited you in the first couple of quarters of this year have potential to deliver similar positive results in 2015? And if you could maybe give us some guideposts as far as what to look for out there that would indicate that we really do see some pretty exciting results, again, from Pacific Ethanol over the next string of quarters.

Sure. I mean, generally, as we mentioned, we are bullish on the supply/demand balance being very tight and that contributing to strong margins for the industry overall. We did see the seasonal change. You're right. There was quite a change in not only our equity valuation, but other ethanol stocks in our humble view. That was a bit of overreaction and we are seeing strengthening in the overall environment. One of the issues we had on the exports was that the spot price of ethanol, given a very strong and tight supply/demand, the near price was very high and so it did slowdown the booking of future exports, because you get more money in the sport market than sell out forward. And so when we saw that significant price drop and it was particularly in the near month in September, that’s what really brought on a lot of new export interest. So that the market being efficient and making sure that we had enough exports priced in to keep a tight supply demand balance and that’s what we see going forward. In our particular situation, what really benefited us last year other than just a very efficient operating platform of plants, but -- was a high ethanol basis that was caused by rail logistic challenges that were not just weather related, but related to the railroads generally continuing to be overwhelmed by the amount of business that they have to manage. And that is still the case. So, when the market got little soft, we saw that basis come in as folks were trying to move additional amounts of ethanol both export and the U.S. version of export which is out to the large markets on the coast that has already started to expand. We have an issue with new railroad regulations. It should be finalized by the end of this year and will have an impact, we believe, even in 2015, which could tighten up the rail situation; even more could raise the price of moving ethanol by rail. Remember, that we do not move any of the ethanol we produce by rail, that all comes by truck. So the $1,000, $2,000 a car lease rates that are common, if you are looking for incremental rolling stock in ethanol, plus the cost to retrofit the cars, plus the impact on the railroad who may see that velocity decrease in the movement of flammables. All of that is going to raise the price of moving ethanol from Midwest to our market and we will be the net beneficiary of that and that those are costs that we avoid. So we are there to benefit from those higher values. So in terms of what you might look for? Pay attention to what we are seeing on corn basis and what you were seeing in terms of the ethanol basis from the Midwest, Chicago to the Western markets and off the L.A. postings.

Thanks again for taking my questions.

You’re welcome.

And our next question or comment from the line of Nathan Weiss with Unit Economics. Your line is now open.

Good morning.

Good morning.

A couple of quick questions. First, on the $0.06 to $0.07 in margin improvement, is that entirely a result of the $16 million CapEx program or does that include additional projects?

I'm not sure I understood the question, Nathan, could you repeat that?

So, you mentioned a $0.06 to $0.07 per gallon margin improvement.

Yeah, got it. Yes, that is a result principally of the $16 million spend.

That is a pretty good return. Are there additional projects above and beyond?

Sure. I mean if you look at some of the things we mentioned that are not part of that $16 million, whether it be the -- looking at a potential to add fermentation capacity which would both incrementally increase overall production. We now have a permit at our Idaho facility to produce up to 70 million gallons. So looking at what it takes to at incremental capacity to do that and also improve yields by having longer fermentation times. Certainly, the co-generation projects that I mentioned, become higher capital, but also have some significant return by lowering our energy cost and improving our carbon scores. The anaerobic digestion, that could be $10 million, $12 million project in any one of our plants that could also have a very significant benefit in terms of reducing cost and carbon, adding premium value to the ethanol that we sell. So, yes, we are -- the initial round where incremental projects that had a very attractive return profile. I mean we're looking at returns that are in the 18-month to three-year maximum type returns and really most of them are in that less than two year type category. And now we also are evaluating these higher cost projects that also have a very attractive return.

Very good. Now, the EPA has recently talked about potentially qualifying a plant -- have 100% of the output of cellulosic ethanol if 25% of the feedstock qualifies. Have you looked at that and could that be a potential for one of your plants?

Yeah, we are evaluating what exactly that means and certainly where we talked about in Idaho where we feel we have the best, sort of, uniform and high-volume source of cellulose feedstocks and wheat straw that we would look at that opportunity. 25% is still a pretty aggressive number for any of our plants, but we certainly are evaluating all opportunities.

What type of margin impact would you estimate that would have?

Well, the challenge -- I mean, the margin impact is hard to characterize now, because we are still fine-tuning not only that technology that we use, but the price and that’s the real challenge with cellulosic ethanol is that the capital cost are so high we are mitigating that by looking at bolting on and being able to integrate and use some of our existing capital base. But you are still talking about if corn ethanol is $2 a gallon, so you construct -- you are looking at capital cost of $5 to $10 a gallon on that cellulosic ethanol. So you need a pretty high added value to justify that and that’s where it’s a little frustrating with what the EPA has done to kind of take some of that certainty out of how much cellulosic ethanol is going to be required. We think that they will continue to move in the direction of making that a clear picture. We also have the added advantage where the picture in California is actually extremely clear that carbon prices are going to go up, credit prices are going to go up and we believe will result in premiums of pricing for cellulosic ethanol, particularly in California of upwards of a $1 a gallon, which would then justify those higher capital costs. So we are encouraged. It's just a little premature to say what kind of margin advantage we would have. Certainly, we are not going to endeavor to spend that kind of capital unless we are very confident that it's going to a significant margin improvement.

Okay. And then, last question. Have you got your hands in any of the new corn crop and been able to evaluate kernel size and potential yield impact going forward?

Yes, we are starting to finally see new corn delivered to our facilities. Kernel size is great. The starch content is very good. We are actually seeing some increases in corn oil production as well. So, I mean, we were definitely getting some of the bottom of the bins there late in the quarter and early this before the new crop which is just in last week or two has started to work its way into the pipeline and into our plans and directionally it looks very good.

Great. Thank you.

You’re welcome Nathan.

Our next question or comment comes from the line of Jim McGillery with Chardon. Your line is now open.

Yeah. Thanks and good morning. Can you just give us an update on that Madera plant, how it is operating, and anything incremental on that plant?

Sure. And if you look at our overall production, we were running about 93% of capacity, so frankly little less than we saw the prior quarter and there have been some impacts the new plant, when we restart a plant, certainly have been working out kinks. So it was not running at full capacity in the quarter, but it pretty close to that now. So plant is great. Its efficiencies are great. Its yields are great. We are excited about the corn oil and it is operating extremely well.

That’s great. Thank you.

You’re welcome.

And our next question or comment comes from the line of Aria Cole with Cole Capital. And your line is now open.

Yes, thank you. A quick question on distillers' dry grain. Earlier in 2014, when the Chinese were involved, what portion of demand was being purchased by them? And can you give us an update now on the current status of any purchases by China and when something might be expected?

Sure. So, again, our own model is all wet distillers grain, sold in our local dairy and cattle feed markets. But certainly from an overall industry standpoint, the Chinese have been an important part of the picture in the last year. About the middle of the year, before the Chinese slowdown exports 15% to even close 20% of total dry distillers grain was going to China and that is now -- there is some existing business that’s being finished up. But that has slowed to a trickle and that absolutely had a fairly impact on distillers grain pricing in both directions. When the Chinese where highly demanding the product we saw distillers grain on a relative to corn basis moved to 130% even a 140% the value of corn. Since the Chinese have stopped demanding as much we are now seeing more historically normal relationships where distillers' grain is selling at a discount to corn, 80%, 90% and we anticipate that -- you can see it in our co-product return and everyone in the industry. It took a lower price to essentially regain both domestic markets that had been priced out and also to encourage other exports and we are seeing an increase in the exports to other markets. And we are seeing an increase in domestic use, which is keeping that market well supplied and supply/demand balance, but at a lower level. It's -- the Chinese situation is interesting. There is a lot of talk about GMO and in our view its related more to their own very large stockpiles of domestic grains, particularly corn and now with the global supply being so plenty and priced so attractively, I think they are working down their existing stocks and while we don’t anticipate it any time soon, I think the China will be back at some point as a buyer distillers grain. It is the lowest cost source of protein feed in the world today and that makes is attractive for all markets including China.

And just to follow up, if we -- if you just kind of compare the gross margin dollars you are earning on your wet distillers grain, what is the difference in the environment where the Chinese are involved in the market versus when they are not today? What is the net differential in terms of profit impact for you?

Well, I mean, it's all integrated. So, I mean, there is a contribution that you get from selling distillers grains and contribution from ethanol. And so we really saw in -- earlier in the year when distillers' grain prices came off rather significantly, ethanol prices really picked the slack and you really didn’t see a negative margin impact to the industry. So it's really more what is the overall supply/demand of products and where then is the contribution coming from. So it's hard to isolate because of the integration of the products in the production process. I can say that if you look at a metric that we provide, which is the co-product return, if you held everything constant for every 1% change in our co-product return has an impact of about $0.02 per gallon.

Got it. And then one final question; it might be difficult to answer. But, clearly, your Kinergy trading business makes good profits, some over time. How would one try and go about trying to place a value on that business? People understand on the -- how to value your ethanol facilities much more easily. But how do you place a value on the Kinergy business?

Well, that’s we -- we obviously think it’s a very important part of our value on our value proposition not only in EBITDA it generates to the overall company, but to the strategy of are being able to always be selling upfront of our production and growing our markets and becoming a very relevant supplier in the seven Western states that we currently market and have very significant market share. So it has real enterprise value there. Trading companies -- typically if you take EBITDA and if we say we essentially can earn about $0.02 a gallon over -- what now is a run rate of over 500 million gallons. Take whatever multiple, I think trading companies -- three, four, five multiples plus the cash that’s included in that business. So that’s not something that we spend a lot of time thinking about in terms of that specific valuation. It's more the significant added value that it brings to our overall enterprise valuation.

Understood. Great. Well, thank you and best luck going forward.

Appreciated.

And our next question or comment comes from the line of George Noble with Noble Partners. Your line is now open.

Hey, Neil. Congratulations on the quarter.

Thanks George.

I wanted to ask you a question I have asked you in the past about capital allocation. You mentioned a few minutes earlier, you said you thought the market was a bit of an overreaction on the stock price. Had you been in a position to repurchase stock, do you think you would have been in the market buying stock?

That’s hard speculating. I mean, I think we've clearly identified our current focus on spending capital. We do anticipate that the margin environment will continue to be very healthy. We will continue to generate strong cash flows. So in terms of capital allocation. I think we've a pretty good guide on how we are spending that capital today. We also think it's important to maintain a strong cash balances to deal with the volatility, the seasonal volatility that we do experience in this industry. From that would we consider both stock buyback and dividend as a potential use of capital, certainly that would be something we would consider as well as the cash continues to flow.

Do you have to buy up the remaining minority interest in some of your plants before you can buy back stock?

No.

No. Okay. So, given the implied valuation of your capacity right now, why wouldn't you think about buying back stock when you drive these sorts of levels? I mean, it seems to me an investment in your own company is a pretty economical thing to do at current levels. What am I missing?

Well, it’s a fair question. I don’t know that you are missing anything other than at this point in time. We have certainly made the capital allocation choice that spending capital on these very attractive returns at our plants from a both generating margin today and margins in the future and enterprise valuation, is our best investment in capital. As we move forward, we will continue to evaluate all other opportunities to spend our capital including a potential share buyback program.

You don’t…

And George we actually -- we evaluate that on an ongoing basis, it's not like something that a new idea and it certainly -- as you think about a company its certainly part of a good capital management program. So we appreciate the questions and it's something we look at every day.

Do you need a Board authorization? You don't have an authorization in place, do you?

We do not yet.

That something that you are going to try to get in place?

Considering all options when we have a Board decision on that we certainly would let the market know.

I think that will go a heck of a long way towards putting a more appropriate valuation on your equity. I don't think it would require a tremendous amount of money for you spend either, if you just had an authorization in place and send a message to market by making some purchases I think will go a long way. It wouldn't take a lot of money.

Appreciate the perspective.

Thank you.

Thank you, George.

Thanks George.

And I'm showing no further questions or comments at this time and I would like to turn the call back over to Mr. Neil Koehler for any closing remarks.

Well, I just want to again thank everybody for joining us today. We are very proud with the results for the quarter and the company's performance year-to-date and we really appreciate the continued support at Pacific Ethanol. And we look forward to speaking with all soon. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's conference. You may now disconnect.