Good day, ladies and gentlemen. Welcome to the Pacific Ethanol Second Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn conference over to your host, Ms. Becky Herrick of LHA. You may begin.

Thank you, operator, and thank you, everyone, for joining us today for the Pacific Ethanol Second Quarter 2012 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, and then Bryon will provide details on the company's quarterly financial and operating results. Then, Neil will return to discuss Pacific Ethanol's vision and open the call for questions. Pacific Ethanol issued a press release this afternoon that provides details of the company's quarterly financial and operating results. The company also prepared a presentation for today's conference call available for download at www.pacificethanol.net. If you have any questions, please call LHA at (415) 433-3777. A telephone replay of today's call will be available until 11:59 p.m. Eastern Time on August 21, 2012, the details of which are included in today's 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, August 14, 2012, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Before we begin, I will review the company's Safe Harbor statement. Management's comments today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Information about potential factors that could affect the company's financial results is available in the company's risk factors as updated in the company's SEC filings. With the exception of historical information, the matters discussed in this conference call, including without limitation, the ability of Pacific Ethanol to continue as the leading marketer and producer of low-carbon renewable fuels in the Western United States; the ability of Pacific Ethanol to improve in the outcomes of various aspects of its…

Thanks, Becky, and thank you all for joining us today to discuss our quarterly results. During the second quarter, we made significant progress in our efforts to position Pacific Ethanol as an industry leader in the production and marketing of ethanol and its co-products. We achieved several of the 2012 strategic objectives we laid out at the beginning of the year. First, on July 3, we completed a public equity offering for $11.3 million in net proceeds to finance the purchase of additional ownership interest in the Pacific Ethanol plants and provide additional working capital. Then on July 13, we increased our ownership in the plants by 33% at attractive valuations compared to a placement cost and market valuations and at a discount to our last purchase price. Now our combined 67% ownership in the plants provides us with more control over the strategic direction of the plants. We believe the long-term outlook for ethanol fundamentally supports our consolidation of plant ownership. Also, on July 13, we amended the credit agreement at the plant level. The amendment gives us more favorable terms on a portion of our plant debt and provides additional liquidity for plant operations. Looking ahead, we are evaluating additional opportunities to improve the terms of the remaining plant debt. As announced in early June, we further diversified our revenue stream in our production business. We contracted for the implementation of corn oil separation at our Magic Valley plant. Corn oil is a high-value co-product. The Magic Valley plant is expected to produce approximately 12 million pounds of corn oil per year, which at current prices would contribute as much as $4.5 million or $0.07 per gallon of operating income annually. Equipment procurement and construction are underway, and we anticipate corn oil separation will begin generating revenue in…

Thank you, Neil. For the second quarter of 2012, we reported net sales of $205 million compared to $215 million in the second quarter of 2011. Net sales were down slightly due to the average sales price per gallon decreasing 18% from the same quarter last year. Total gallons sold increased 16% to 117 million gallons in the second quarter of 2012 compared to 101 million gallons in the same quarter in the prior year. Gross loss for the second quarter of 2012 was $4.9 million compared to gross profit of $1.3 million in the second quarter of 2011. The decrease in gross profit is attributable to the unfavorable commodity margin environment impacting plant operations and volatile ethanol prices negatively affecting trading activities. As mentioned previously, we reduced production levels to optimize production efficiencies, and we increased hedging activities to minimize price volatility risk. SG&A expenses were $3.1 million in the second quarter of 2012 compared to $4.1 million in the second quarter of 2011. The year-over-year decrease in SG&A expenses was primarily due to a reduction in stock-based compensation expense and reduced professional fees. In addition, we expect SG&A to decline in future quarters. Our 67% ownership interest in the Pacific Ethanol plants enables us to further reduce our overhead costs and more efficiently use our existing staff and resources to manage the plants and reduce overhead redundancies. Loss available to common stockholders for the second quarter of 2012 was $2.9 million or $0.03 per share compared to income available to common stockholders of $0.4 million or $0.03 per share in the second quarter of 2011. Adjusted EBITDA, which excludes fair value adjustments, was negative $1.5 million in the second quarter of 2012 compared to adjusted EBITDA of positive $1.2 million in the second quarter of 2011. For the…

Thanks, Bryon. Pacific Ethanol and the ethanol industry have experienced historically low margins in this last quarter. Although the poor market conditions have negatively impacted the company, the actions we have taken over the past 2 years in strengthening the balance sheet, reducing costs, expanding and improving liquidity and reinvesting in core assets has allowed us to weather this storm and provided a means to take advantage of improving margins. We believe in the future of the ethanol industry, and we continue to execute on our goals despite the near-term challenges. We remain committed to implementing plant improvements that increase yields, reduce costs and increase revenue, evaluating strategies to reduce our carbon intensity and to produce advanced biofuels using local feedstocks within our existing facilities. Lastly, our well-established ethanol and feed marketing businesses, which enhance our ability to maintain consistent operations at the Pacific Ethanol plants during periods of depressed operating margins and realizing the value of our asset management business, which continues to provide steady cash flow to the parent company, is mostly insulated from depressed operating margins and commodity price volatility. We believe the actions that we have undertaken have improved our ability to benefit from our forecasted recovery in the market during the third and fourth quarters. We are focused on executing on objectives that will benefit the company and our shareholders in the long term. We look forward to keeping you updated on our progress. With that, Mimi, I would like to open the call for questions.

[Operator Instructions] Our first question comes from Ian Gilson of Zacks Investment.

Could you go through again for me your comments about the 12 million gallon per year of corn oil? Is that on total plants or just on the one plant you're going to open?

That would be on the one plant. But it would be, as we implemented the other plants, based on the size of those facilities in stock, and it will be comparable in the 40 million gallon plants. It would be proportionally lower.

Okay. How much corn oil do you get out of a bushel of corn?

We are using relatively conservative numbers in and around 0.5 pounds per bushel. We're seeing in the industry that numbers are achieving 0.6, even a little bit higher than that. But a good conservative number to use is 0.5 pounds of oil per bushel.

Okay. Looking at the mix between internally generated ethanol and your third-party revenue, I presume that is primarily the Kinergy revenue?

Yes, Kinergy markets all of the ethanol, and it sources that ethanol from a combination of the Pacific Ethanol plants, other marketing agreements, 3 in particular and then trading business purchasing ethanol, primarily from the Midwest and railcars.

Okay. Given the fact that industry -- there are plants that are closing, do you have an assured supply to maintain that level of third-party gallons?

We do. This is a fairly liquid market, and yes, production is declined, as well as the demand for ethanol in response to the corn situation. We're certainly proud of the fact that we've been able to maintain and even grow our sales even with what has been a declining market. We have many ways to source that third-party ethanol and feel that we have a very resilient system for providing ethanol to our markets.

Okay. And then you have -- you also have brought back some production from the second quarter levels at the moment?

Yes, we did. In the second quarter, if you look at our publicly available numbers on a sales basis, we were about 7% less than a capacity of the 3 operating plants. You throw in the Madera plant that's not operating on our full 200 million gallons of capacity, we're running at about a 75% level of capacity.

You're running Madera under any capacity or...

No, Madera is currently not running.

Okay, okay, that's what I thought. That's what I thought. So what do you do if corn stays at the current price level? I presume you're paying close to the market, possibly some future hedging. But I can't see that there's as much cash flow out of a bushel of corn at the current price relationships.

That is correct. This has been a very challenging margin environment. We have sources of liquidity that have allowed us to operate in this market and will continue to allow us to operate in this market. That being said, we look at the levels of production against our expected results and have been calibrating the production levels at the plants accordingly. In the case of dropping back on production a bit, we've been able to source that demand. It continues to be in our market by acquiring additional third-party ethanol. We'll continue to do that as well. It is our expectation that since this is a condition that certainly has been hurting all ethanol producers and given that the demand for the product is still strong that ethanol pricing, even with these high input prices, is trading at a very steep discount, about $0.40 a gallon to gasoline, that the market will continue to demand ethanol, albeit less than some of our peak levels and that, at the inventories I've been following, we expect the margins to improve.

Okay. Your inventories, are they primarily all ethanol but stored and in transit?

That is correct.

They're about the same level for year end, aren't they?

Bryon, you have that number? It could be, we run pretty consistent inventories.

$16,300?

Yes. I mean, Ian, one of the things to keep in mind is you have to consider inventories both at the plant and then inventories that you purchased through a third party for your trading activity. So that would be approximately the same, right? You're fulfilling the obligations under the Kinergy trading activity and you saw that volume, that number of gallons sold to continue to be -- to grow a little bit. But the plant production is also -- we don't split out those 2 numbers but...

Yes. So what is paid inventory?

That would be product that is purchased -- third-party ethanol purchased Midwest that requires prepayment rather than on terms.

Okay, then that was down from $9,000 to $6,000?

That's correct. So you will see -- right, that's correct.

Our next question comes from Paul Resnik of [indiscernible].

I was just wondering, what is the cost of implementing corn oil separation at a plant roughly?

Yes, Paul. The cost is relatively modest to the payback, and we've been able to do it on a vendor-financed way so that we pay back that the cost of that equipment over the sales of the corn oil, and we expect a payback of less than a year.

Excellent. I was just wondering, interesting things always happen in California. What's the current state of the implementation of the California Low Carbon Fuel Standard?

The Low Carbon Fuel Standard is very much in place. There continues to be some legal activity. But what had been a temporary injunction to not implement the program was stayed, and the program is very much back in force. That continues to provide a couple of cents premium for our product, and certainly, all indications are is that we go into another doubling of that requirement of carbon reductions next year, and the compliance schedule continues to slope up pretty steeply that those values will become greater. Well, companies are taking it very seriously. They have a very keen interest in staying aligned with the ethanol that we market since we market all of the lowest carbon ethanol produced in California through Kinergy from the Pacific Ethanol plants and the 2 other marketing agreements. OPIS has recently started to post both a dollars per ton and a cents per carbon point. So we're seeing more price discovery, more activity around trading of credits. We expect that to ramp up as well in 2013. We continue to believe that the ability of Pacific Ethanol to produce and market the lowest carbon ethanol produced in the United States and to California is a key competitive advantage.

Excellent. Now as I read Assembly Bill 523 and how it affects CEPIP, that doesn't change anything through July 1, 2013. I was wondering whether -- that being the case, I was wondering whether CEPIP was really functioning now and whether that provided any benefit to you.

Currently, it's not. CEPIP was funded once, and we received support in our Stockton plant and it was very key in the start-up of that facility. I will tell you that there was a public hearing. You can go look at the record on that at the Energy Commission we were presenting, as well as other corn ethanol companies in California in advanced biofuels and academics having a workshop to determine if CEPIP should be, in fact, be refunded, and the workshop went very well. It's politics and policy, and we'll see how it plays out. But there is certainly an in-play right now of the possibility that CEPIP would receive some additional funding.

Okay. So the law is in place but the funding isn't.

That's correct.

Got you. Okay, I guess that -- with regard -- I have a question. How long, if you decide start up the Madera plant? I mean, what would a ramp-up period take?

It would take 60 to 90 days.

60 to 90 days. And as far as corn oil at the other 2 facilities, do you have any general idea about when next year that could happen?

Well, as we said in our script prepared remarks here that we want to have those contracts in place by the beginning of next year and to be implemented as soon thereafter. So that definitely is an initiative for 2013 with an objective to have that be in the first half of the year. So that by the time we're through 2013, we have corn oil at all of our operating facilities.

[Operator Instructions] And I'm showing no questions in the queue at this time. I'll hand the call back to Neil Koehler for closing remarks.

Thank you. Thank you all for participating in the call. Thank you for your ongoing support of Pacific Ethanol, and we will speak with you next quarter. Have a nice afternoon.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.