Good day, ladies and gentlemen, and welcome to the Pacific Ethanol Fourth Quarter and Year-to-Date 2013 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. At this time I will now turn the call over to Becky Herrick. Please proceed.

Thank you, operator, and thank you, all, for joining us for the Pacific Ethanol Fourth Quarter and Full Year 2013 Results Conference Call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO. Neil will begin with the review of business highlights. Bryon will provide a summary of the financial and operating results. And then Neil will return to discuss Pacific Ethanol’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.net. If you have any questions, please call LHA at (415) 433-3777. A telephone replay of today's call will be available through March 6, the details of which are included in yesterday’s earnings 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, February 27. And therefore, you are 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 2 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, risk 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 EBITDA as unaudited earnings before interest, taxes, depreciation and amortization, non-cash gain or loss on extinguishments of debt and fair value adjustments and warrant inducements. To support the company’s review of non-GAAP information later on this call, a reconciling table is included in yesterday’s press release. It is now my pleasure to introduce Neil Koehler, President and CEO. Neil?

Thank you, Becky, and thank you all very much for joining us this morning. Our fourth quarter 2013 results cap off a year of strong performance and progress for Pacific Ethanol, as evidenced by several record-setting financial results for both the fourth quarter and full year of 2013. For the fourth quarter, we established records in gross profits at $21.6 million and in adjusted EBITDA, which improved to a record $18.3 million. For the full year 2013, net sales were a record $908.4 million, operating income was a record $18.9 million and adjusted EBITDA was a record $28.6 million. We also paid down $23.7 million of parent and plant debt since the beginning of the fourth quarter, further strengthening our balance sheet. During 2013, we diversified our feedstocks with sorghum, beet sugar and waste wine. We added new revenue streams of corn oil separation and we continued to drive cost efficiencies at the plants. These efforts and a strong market for ethanol translated into significant improvements in revenue, margins, operating income and adjusted EBITDA on a year-over-year basis. The ethanol industry as a whole is supported by strong production margins, driven by a few key factors. Corn prices have remained steady and at lower prices than in previous years. Exports for both distillers grains and ethanol are very strong. Overall, supply and demand in the industry is in balance and ethanol plants are operating at profitable levels. In fact, so far in the first quarter of 2014, we have continued to see sustained high production margins. In light of our progress, we are pleased to announce that we plan to restart production at our Madera, California ethanol facility in the second quarter of 2014. With strong market fundamentals in place, we believe now is the right time to resume production…

Thank you, Neil. During the fourth quarter of 2013, we reported net sales of $215.3 million, up $18.3 million compared to $197 million in the fourth quarter of 2012. Gross profit for the fourth quarter of 2013 was a record $21.6 million, a $26 million improvement over the $4.7 million gross loss in the fourth quarter of 2012. SG&A expenses were $4.4 million. This increased from $2.7 million in the fourth quarter of 2012, reflecting in part year-end compensation expense driven by higher margins and company profitability. Going forward, we expect a quarterly SG&A run rate of approximately $3.5 million. [Audio Gap] $4.6 million improvement over an operating loss of $7.4 million for the same period last year. Interest expense remained flat at $3.7 million when compared to the fourth quarter of 2012. Loss on extinguishments of debt was $1.2 million due to the remaining convertible debt conversions during the quarter. Fair value adjustments for the quarter resulted in a loss of $2.5 million compared to income of $1.6 million during the period -- prior year quarter. The current charge reflects higher warrant valuations due to our higher closing stock price in the fourth quarter compared to the end of the third quarter. Consolidated net income was $9.7 million, compared to a loss of $9.6 million in the fourth quarter of 2012, a $19.3 million improvement. Income available to common stockholders was approximately $8.3 million or $0.54 per diluted share, compared to a net loss of $5.8 million last year. And adjusted EBITDA was a record at $18.3 million, a $20.8 million improvement over the fourth quarter of 2012. For the 12-month period ending December 31, 2013, net sales were a record $908.4 million, up $92.4 million, compared to $816 million for the same period in 2012. Gross profit was…

Thanks, Bryon. Over the last 18 months, we have focused on fortifying our business by implementing plant efficiencies, diversifying our revenue and feedstock, purchasing plant ownership and improving our balance sheet. Throughout 2013, production margins vastly improved and our efforts to recapitalize the company and to increased ownership of the plants to 91% resulted in record profitability in 2013. In 2014, we are focused on the following goals: successfully restarting production at our Madera facility; lowering our cost of capital in reducing debt; installing corn oil separation and yield enhancement technologies at our remaining plants; and working with technology partners and regulators to obtain low carbon pathways to produce advanced biofuels. As always, we will remain focused on improving operating efficiencies at the plants, diversifying revenue and feedstock and reducing the carbon intensity of our ethanol to support sustained profitable growth. Our improved balance sheet provides us with a strong foundation from which to build our market share in this growing market. I'd like now to open the call for questions. Nicholas, would you please begin the Q&A session?

[Operator Instructions] And our first question comes from the line of Jim McCleary with Shardane Capital.

Can you talk a little bit about the Madera startup and the cost? I know that you said it's $7 million, but how much of that it goes through the income statement? And then -- and I know you also said it starts up in Q2, but when would you expect it to be at full-ish capacity?

Thanks, Jim. Of that $7 million, about half of that would be working capital, half of that would be capitalized expenditures. And in terms of startup, what we have said in the past that it takes from go, which we are at, 60 to 90 days to start these plants up. And we're -- we've been able to -- starting the plants up, shutting them down, starting them back up, we have a pretty good track record and know what it takes, and we are able to ramp them up to operating capacity relatively quickly after startup. So that's why we are very comfortable staying in Q2 and hopefully on the earlier end of that than the later.

Great. The coproduct return was very high this quarter relative to prior quarters. Is that a new level or is there something onetime-ish in that?

Well, it's definitely a trend. There's 2 components of that. One is corn oil. So we're aggregating all of our coproduct return. So we've added corn oil. And that clearly, you're diverting some material that sells at one value as distillers grains to a higher value as corn oil. So directionally with 2 of the plants producing corn oil, that definitely increases the coproduct return. The other factor is a market dynamic that, with the very high demand for distillers grains and strong exports to China and elsewhere, we are seeing distillers grains on a relative value to corn improve. We do think that is a trend that will be with us for some time. Feedstocks are very tight. Protein is particularly tight throughout the world. And it's hard to predict these commodity markets but we do see that there is an improving relationship between distillers grain and corn. And it is appropriate since the value of distillers grain really is a premium value to corn. And historically, as the industry has expanded so rapidly, to clear the markets it's sold at a discount. What we're seeing now is that it's selling at and a premium to corn.

But even if the market weren't favorable, the fact that you're moving to corn oil at the other plants would suggest that the coproduct return stays high, is that right?

Correct. It would say directionally higher, yes.

RIght. The inventory increase, that was a function of the beet sugar purchase, is that right?

That is correct.

Okay, great. And then my last one, the average basis has obviously come down sharply. Is there more room for that to decline or are we kind of at a stable level here?

Well, that's an interesting question. Nothing seems very stable in these commodity markets. But yes, we are seeing a basis level, as you can see from our disclosure, something that is closer to normal. Frankly, it is still higher than normal. And I do think it's important to note that while we are seeing some excessively high ethanol bases and making a very nice premium on that, in the recent market, we have seen some corn basis come back into our cost in that the freight movements are constrained on all products including grain. The good news is that we've had no problem sourcing corn. We have of late been paying a bit more in freight premiums, given the very tight logistics, but that has been more than offset by our higher price of ethanol.

And our next question comes from the line of Nathan Weiss with Unit Economics.

So it's looks like you covered the cost side pretty well. We've seen corn prices tick up a little bit here. But it sounds like for the most part, things are relatively flat. On the ethanol side, in terms of products sales price, we've seen -- we look at the LA benchmark quite a bit, which moved from $2.32 a gallon, pretty much in line with what you received in Q4, to $2.96 a gallon today. And we're actually seeing on the screen there are some $3, $3-plus gallons kind of in the upper West Coast. Can you give us any type of guidance just in kind of where you see those prices today? And I know you don't give formal guidance, but if you can say anything about quarter-to-date or current margins and then perhaps what you think is driving it?

Sure. I mean clearly the margins in the industry generally are strong, have continued to be strong. The supply demand is very tight. We really have not done much to build inventory. So given the volume of ethanol that we're selling domestically and internationally, there are relatively low inventory levels. And until those inventory levels can be built in a material way, I think we have a very strong fundamental for sustained production margins -- profitable production margins in the industry. We are getting anecdotal evidence of exports that are being booked all the way through Q2 and even now into Q3. And that's been a real game-changer for the industry. The -- to support those exports and to support the markets where we market out West and we're seeing the same thing on the East Coast and down into the Gulf. With a very constrained rail logistics, we are seeing these basis premiums. And so if you look year-to-date, in a more normalized market, our ethanol price and we feel we're very cost-competitive in an environment where the West Coast ethanol prices are $0.20 to $0.25 higher than Chicago. We saw higher numbers than that in Q4. In 2014 thus far, we've been averaging closer to $0.50. And yesterday, as you noted, a very strong number, close to $3 on the West Coast and the East Coast and that represented a $0.75 premium to Chicago. That's a peak. It's never been that high. So peak margins are called peak for a reason. And so I would think that will moderate. Logistics will be moderated and optimized. But I think that, given the inventory levels, given what is not just weather issue with the railroads, definitely with the demand for all products so strong, the railroads are really struggling to keep up. And this is definitely showing a very strong hand in our model because we're there in those local markets with feed and fuel when that competitive product is having a very difficult time getting to these markets. So we do anticipate for the foreseeable future that there will be better than what we would call more historically a normal basis spread to our markets.

Excellent. A couple other I guess housekeeping questions. You had a $4.3 million SG&A Q4 and I guess that's going to come back down to a roughly $3.5 million run rate. How will that be impacted by Madera once the restart's up and fully operational?

I would say that very little. So we explained the onetime change in the SG&A. But what we have done is -- has built an organization and really worked very hard over the last number of years to be very efficient in what we do and gear up an SG&A that can handle the startup of Madera without any significant addition in SG&A, other than obviously the addition of plant personnel and the management of the plant that all runs through the plant economics. So that's a real benefit here, is that from the marketing organizations, our back-office, that will we need to add a little bit in terms of keeping up with new billing? Sure. But it's going to be really an immaterial increase in SG&A and that's a very positive aspect of the Madera startup.

Very positive. And I guess last question. So looking at on your gallon throughput, or what you can realize in the income statement. So for the first quarter, you're going to show the effects of increasing from 85% ownership to 91%?

That is correct.

And then with the Madera restart, do you imagine you'll be running close to the 40 million gallon of rates level pretty much right away?

Yes. I mean, it's I'll just caveat that with this is a plant has been down for now about 5 years. And we've maintained it in great shape and feel very confident of the startup. We will ease into the production and to the markets to make sure that we optimize efficiencies and optimize values. But as I said earlier, we have found the ability over a month or 2 to get pretty close to those operating numbers. So that is our expectation.

Okay. And I should -- so the resulting increase be another 7% or so -- or sorry, another 25%-or-so effective output once it's fully operational?

Yes. I mean, it's -- $160 million is the operating capacity today, so it adds $40 million to that to get us to that $200 million level. And so we would expect that once we have fully implemented the startup, that particularly in this margin environment, we will be pushing these plants hard and that we will be running at that operating capacity.

Our next question in the queue comes from the line of Katja Jancic with Sidoti & Company. Katja Jancic - Sidoti & Company, LLC: You mentioned that you'll add corn oil production capacity to the remaining facilities. Do you have any time frame as to when you're planning to do that?

Not a specific time frame. We're doing a competitive process now to make sure that we're choosing the right and the best approach, best cost to that. And as I said earlier, that's a 2014 objective for both plants that don't have corn oil today. Katja Jancic - Sidoti & Company, LLC: Regarding the beet sugar, will this be kind of a constant part of your feedstock? Is there an opportunity to buy more of it?

Well, that's really a decision that the federal government will make in terms of new auctions for that sugar. So what we have done with the 270 million pounds that we have procured and running that at the rates we are, is that -- is a steady diet of the sugar through 2014. Beyond that remains to be seen. I would speculate that I would not be surprised, given the current sugar markets, that we would see some additional auctioning of surplus sugar, but that's just mere speculation on my part. Katja Jancic - Sidoti & Company, LLC: Are there any other feedstock that you could use that would further benefit you?

Well, we have been -- when the spreads are right, we use grain sorghum. We're working with farmers in the Midwest but also out here in California, to get more of that grown. It both has a potential cost advantage and a lower carbon footprint, so we're definitely focused on that. I did mention as well that we have a pretty steady stream, albeit small, of waste wine that comes into our Stockton, California facility from time to time. But we're getting calls on other residual materials, being in these large urban areas, there are various forms of waste alcohol and sugar and other fermentable streams that we can access. And we actually have a real focus on making sure that folks know that we're open for business in that regard and that we're trying to continue to expand the base. So we do see additional opportunities, albeit relatively small, on total volume, but every increment helps.

Our next question comes from the line of James Medvedeff with Cowen & Company.

I'm in for Rob, who is traveling. You mentioned -- have you disclosed how much the enhancements at Magic Valley should be able to increase the capacity of that plant?

We've talked generally and there's pretty good just public knowledge out there on what these technologies can do. So in a sort of a ballpark arena, the yield-enhancing technologies that we're employing both in Stockton and at Magic Valley, we expect to give us about a 2% increase in yield and then also potentially a 10% to 15% increase in corn oil yield.

The other question that I have is the target levels for debt reduction. Do you have some goals in mind or is it just kind of use whatever cash doesn't go into working capital kind of goes to debt reduction? Is that the plan?

James, that's really it. We have of the big plant debt, approximately $25 million outstanding in revolver debt, so debts available to pay down without penalty. And so that would -- you would see that continue to be reduced with excess cash flows. And then from there, again, as I mentioned in our prepared comments, that you would -- our focus is in working -- in speaking with lenders and other parties to see what's available and what can be done in the marketplace and if we can do that at a lower cost and extend the maturities, we're going to do that.

Understood. Final question is could you have any high-level comments on the RINS market?

Well, it's...

[indiscernible] in the RINS situation.

We think the RIN market is a key component to driving innovation in this industry and think that there's been a lot of misconceptions that high RIN prices mean high gas prices, which they don't. For every seller of a RIN, there's a buyer of a RIN. We generate a free RIN with every gallon of ethanol that we produce and move to our contracted customers. And you do need a price of RINS, particularly when you get to the advanced biofuel component, that is going to be sufficient to drive new investments with a longer-term investment horizon on technologies that today are more expensive than our conventional corn ethanol production. So the RIN market is a critical component, it's working effectively. Today RINS are modestly priced in around $0.50 a gallon. We think that on -- for advanced biofuels, they will need to increase in value to drive that investment in a way that is going to not only provide new economic development but deliver lots of environmental benefits and energy security benefits. So it's a critical component of the whole RFS program and, unfortunately, commonly misunderstood by the mainstream media.

And then finally on your cellulosic efforts. Given what you just said about the advanced RINS and the B RINS, I assume go along with that and C RINS. How much are you investing in cellulosic? How far are you along and what sort of time frame do you think we might actually see volume -- commercial volume of something like that?

We have taken an approach, a couple-pronged approach. One is to, in a more immediate way, get at the cellulose within the corn fiber. So our partnership with Edeniq in California, they have what they call a pathway enzyme. We mentioned in our remarks that we'll be trialing that this spring. That is -- the elegance of that is the enzymes can be expensive but you pretty much use your existing capital infrastructure. The Cellunators that we have in place not only improve corn ethanol yield on the starch but liberate the fibers for conversion of that cellulose, which there's up to 10% fiber in the corn. If we can get a couple -- 3% of that, we will be producing cellulose ethanol and generating D3 RINS. It is our expectation that we will be doing that this year. We're trialing it and that we would hope that we would have some increment of commercial production in 2014. Again, albeit relatively modest but a very important start. We also announced recently our agreement with Sweetwater, which is larger scale, starting with an additional 3.6 million gallons, where essentially it would be a bolt-on unit. In that case, they are responsible for the financing of that product and we will purchase the sugar from them. We are looking at some other potential initiatives, have other potential partners in conversations that would potentially require some additional capital investment on our part. So we're trying to take a very prudent but proactive and focused approach to this in a way that is relatively capital-investment-light on the front end and will expand as time goes on.

[Operator Instructions] And our next question comes from the line of Harry Cole [ph] with Cole Capital.

Question number one, about exports now, just direct your attention to Slide 9 of your presentation. Exports have clearly taken off here in the U.S. in the past 6-plus months. And I'm trying to get your insight on how much of it is being driven by potentially regulatory changes in countries like India, China, Brazil, where they have increased their blending mandates and therefore the demand for ethanol has improved dramatically? And to what degree are exports very strong in the U.S. because we're now the low-cost producer of ethanol in the world, allowing us obviously to ship overseas and deliver ethanol at prices that are lower than the ethanol which is produced in those local regions?

Right. I think it's a combination of both. So certainly, there have been regulatory initiatives. Certainly in the Philippines, it has a mandate, other countries, India has a mandate to use ethanol. But what we're also seeing is some of the new countries, Tunisia, for example, that became a destination in 2013, are seeing it just for its economic value. And it's not just that the U.S. is the lowest cost exporter of ethanol, which is true, we are the lowest-cost exporter of transportation fuels, period. So if you look at the economics of gasoline, and even before you consider the octane value of the ethanol, ethanol is at such a discount to the global price for oil and gasoline that it is driving its inclusion rates, just as a matter of pure economics, you -- Brazil has typically been more of the exporter to the world. Well, their own demand has grown significantly. They're actually now considering moving up to a 27% inclusion rate. They have had some of their own weather issues and it looks like, given the current cost structure and what is in arbitrage is completely closed to import Brazilian ethanol to the U.S., but also limiting its exports to the rest of the world. That bodes very well for continued strength in the export of U.S. ethanol to global markets. And it's very much a focus of our industry trade missions and the like to continue to expand those markets. Which in some large markets like China are still relatively untapped, that will be the sleeping giant, if China were to start importing a significant amount of ethanol like they are doing with distillers grains today.

Could you just kind of clarify your comment regarding Brazil? What is the current blend -- average blend rate that's used with gasoline in Brazil and you were alluding to the fact that it might be moving even higher towards 27%?

Yes. It's 25% today based upon their own economics of both the sugar cane industry down there and their oil and refining business, that is -- they moved that and they've been as low as -- in the last few years, I think went to as low as 18%. 25% is the current high, and there is some discussion of moving that up. They -- that's the minimum in all of the gasoline, and then what you have is over 95% of the new cars sold in Brazil are flex-fueled, that in all of the pumps, this is really a vision for what the U.S. will become, where you pull into a gasoline station and you can buy gasoline that has a blend of ethanol, in our case, 10% moving to 15%. In the case of Brazil, 25%, may be moving to 27% or you can buy pure ethanol and depending on the economics you choose. And in the last number of months the -- what they call hydrous ethanol down there, the pure form, has been less expensive than the gasoline. And so what you really see is that the actual average consumption of ethanol is higher than that 25% when you layer in that cars are running on pure ethanol. So it is not a formal decision they've made to increase the blend rate but there are discussions underway right now to move in that direction.

And just one follow-up on capital expenditures and free cash flow. What's your expected capital expenditures for 2014?

That's a good question. I mean, our normal run rate is around $3 million to $4 million. That includes for the plants, as Neil had mentioned, if you include additional corn oil and enhanced yield-recovery type technology, then you would increase that. It's running somewhere around, call it $3 million to $5 million, depending on the size and the type of technology that you're using, $3 million to $5 million for each corn oil facility. And then the enhanced yield recovery is another $2 million to $3 million per facility.

The total number you'd think would be about $3 million to $5 million for this year?

Yes. For an ongoing basis and then again, you'd look for -- we'd look to finance the purchase of the corn oil technology.

But yes, your $3 million to $5 million, that's your -- really essentially, your maintenance CapEx. And then all of the other projects stand on their own and they look like they have paybacks that are 2 years or in some cases, significantly less than that. So we evaluate them on a case-by-case basis and finance them accordingly.

What I'm alluding to is obviously, assuming ethanol economics continue to be robust in the industry, which they certainly are right now, you're going to be able to pay off all your remaining plant and corporate debt quickly. Have you given any thought towards what you'll be doing I guess, when your balance sheet is net having cash and how you may or may not invest that money going forward?

We're consistently and constantly evaluating opportunities in that regard. So there are some -- I mentioned that right now, we're taking a capital-light approach to the advanced biofuel technologies. Well, that could shift to actually making larger and more direct investments as we become more comfortable and confident with that technology. We have some opportunities on the downstream side to build out some terminal infrastructure and to augment our marketing business, which is a key component of what we do, the integrated production and marketing model, which we feel has given us a very strong competitive advantage. And then this is an industry that will continue to consolidate and renationalize and there will be opportunities on the M&A front too that could become a use of capital.

What portion would -- and just a guess, but what portion of the ethanol industry's capacity in the U.S. would you say is owned by private holders, farmers, et cetera, who I guess might be more willing sellers than the bigger players?

Well, it's -- you can divide it up in different ways and the farmers have done very well. And then some of the -- they really were the engine of growth in the ethanol industry in the early years. And many of them have paid off their plants and are quite happy. So I wouldn't necessarily say that they'd even be willing sellers, but you probably have a quarter of the industry that is in those sorts of hands. And then you have some of the public companies and the more integrated agricultural processors. And then you still have a spattering of plants that are shut down and in some cases, some assets that are still held by lenders as we get through the final phases of cleaning up what was a pretty disastrous environment out there for the ethanol industry going back to 2012 and before. So it's dynamic. There hasn't been a huge amount of M&A activity of late in the industry, but that could change.

Our next question in the queue comes from the line of Paul Resnik with Uncommon Equities.

It is a delight to ask just a few small questions after so many good questions have already been asked. On the warrants, you don't have anything scheduled for expiration until next March but have you seen any exercising of warrants before expiration going on?

Again, that's going to be a decision. There's lots of holders of those warrants. It is a significant amount of warrants that are out there. It becomes a good opportunity for capital raising. We have roughly 7.5 million shares of warrants at an average strike price at $7.50 that are obviously in the money. We have had lots of inquiries from holders of that. We have had a small amount of warrant exercising, and we would anticipate to see some additional exercises. The way these are valued by investors is going to be different in different cases. And as you point out, a good bulk of them don't expire for a number of years. And so how the holders of those value them and decide when or when not to exercise those warrants, that's really a decision that we will -- they're there and we'll wait for exercises that happen. But certainly, given what has happened with the stock, we would anticipate that we would see some acceleration of warrant exercises.

And this is a question that I bet a lot of people thought would never get asked. Given what's going on with your earnings and prospects for earnings, do you foresee sometime in the not-too-distant future, having put together a provision for tax liabilities?

Yes. We evaluate that on a quarterly basis, and while we're not a taxpayer today, that would be a good problem to have.

I mean, do you think it's conceivable that this could be a line item?

Yes. I mean, Paul, we've got an NOL, but there's only a certain amount that you can use in a period of time, right? There's restrictions on how much is available and so we do evaluation on that. You'll see more detail on that in the K that we file. But again, we assess that on a quarterly basis and there is -- I think, yes, to your point, is -- if you would continue to see the kind of numbers that we've seen, that you would -- it would be something that we'd have to contemplate this year.

On export market, European tariffs, have they been effective in curtailing exports to Europe or...

They have, to a large degree, but not completely. So I mean, each country can kind of evaluate how they implement the E.U. directives in that regard. So it hasn't entirely eliminated exports but reduced them to a very large degree.

And lastly, has there been any on -- I know you try as best you can to source local corn and sorghum. Given the drought in California, has there been any -- has that created any issues for local supply?

A little early to tell. Interestingly -- and you're right, we do source locally, and Stockton, California is one place we've done the best in that regard. We had between 15% and 20% of our corn supply came from the local markets. And for a 6-week period, we were entirely on local corn and that was given the very tightness between all the new crop and some of the earliest crop that was out here in California, it was very helpful. Where the grain is grown in California is in what's called the Delta area, which is right along the river. And a lot of that land is actually below the level of the river. And it has some of the most well-established water rights in California. So we actually anticipate that there will continue to be a fair amount of grain corn that is grown in the Delta region, even with the drought. What you will see is that further south of us and we're already seeing it, there's been significant restrictions on water. There's going to be some significant impact on California agriculture, generally. There is really a potential value for us in that we have no issue with water at our plants. We have wells, we have city connections, and so a modest amount of water overall used in ethanol production. The larger amount of water is in growing the crops. Most of those crops for us are grown in the Midwest and brought to our facilities and they're doing just fine with -- more than fine with their weather, and so we don't anticipate any disruptions there. We feed a wet feed product to the dairies in California and many of them are going to have a hard time growing some of their own alfalfa and corn silage, which is a very significant component of their feed ration. And so we actually believe that the fact that we have this wet distillers grain that we're moving within this 50- to 100-mile radius of our plants is going to be in very strong demand because we essentially are going to deliver not only high-protein feed but water to our customers and they're going to like that this summer.

And our next question is a follow-up from A. J. Strasser with Cooper Creek Partners.

I just had a couple ones. If you could just -- maybe you just give us a sense here, frame it for us. Obviously, California ethanol is always priced higher than Chicago ethanol. But can you just give us a sense there of looking at Q4 and maybe Q1, kind of maybe on a pennies-per-gallon basis? How, kind of, above norm are we? Is it $0.20, $0.30 and how long do you expect it to last?

It is about $0.20, $0.30. I mean if you look at on average, we've had about a $0.50 spread in Q1 so far to Chicago. That is about -- close to $0.30 higher than normal. I would say that we've given about $0.10 to $0.15 of that back in paying a premium on freight to get our corn. So it's important to know that it's not just a net benefit. There is an offset, but we are more than benefited on the ethanol side. How long it lasts? I really can't answer other than just to refer to my earlier remarks, which is we do see this logistical constraint on getting -- whether it's ethanol, whether its feed, whether it's coal, whether it's corn for exports, crude oil from Bakken. I mean, there such a demand on the rail infrastructure today and it's not just weather-related, that has clearly exacerbated the problem and has created some of the peak in that basis spread that we've seen. I really think that this is months to get out from under and in some cases, the better part of 2014. So our expectation is that we will see basis premium to our products, and that's ethanol and feed, for the foreseeable future. Yesterday, it was $0.75 a gallon, it's never been that high. Will it stay at $0.75 a gallon? No, that will correct itself, but we should see a -- what is a positive basis premium as it relates to our business model.

Right. And then just in terms of corn cost, just -- could you kind of all the puts and takes and we're looking kind of Q1 versus Q4, will corn costs be higher or lower, just based on basis and the freight costs that you're explaining?

I would say flat. I mean, it's pretty much flat on average but there's nothing flat about any of these markets. So I mean, from a margin environment as an industry, we started taking a nosedive earlier in the year and it moved up, it moved down, it's moved back up again. So, tremendous volatility on all levels of that. And we've seen less volatility on the price moves of the underlying commodity corn, although it has shown some strength of late, but it's trading in a fairly general range. We have obviously seen some pretty heavy volatility on the basis spreads on ethanol and on the basis spreads of corn, particularly as it relates to the freight market. But I think it's more or less been a flat corn price. The other thing I just note and being as transparent as possible in terms of how we sell ethanol, we do have quite a large volume of ethanol that is sold against these West Coast numbers. We also, particularly as we move further inland into our say, Idaho plant, we do also sell a fair amount of ethanol against other indices, including Chicago. So it's not as if every gallon we sell is tied to these high margins. We have a portfolio approach on how we sell our products and certainly today, we're being very well rewarded for those ethanol basis contracts against L.A. and less so on those tied to Chicago.

And my last question is on your initiative of using sugar for input. How underway was that process and how much of a benefit did we see in the Q4 quarter from that?

In Q4 quarter and that's one reason we didn't really have any specific numbers around it. We did give you a number for January of really showing a $700,000 benefit and that's what we anticipate in this current relationship between corn and sugar going forward. We were not fully utilizing the sugar. We were -- we had some infrastructure that needed to be put in place to handle it. We also had -- because we purchased, which is one reason our inventories are higher. We purchased all the sugar in advance upfront. We also had some storage costs front-loaded as well before we were processing it. So the impact and the benefit in Q4 was really immaterial and it's now in 2014 that we're seeing the financial benefits of the sugar program.

Thank you, and ladies and gentlemen, we are out of time for questions. I would like to turn the call back over to Neil for any closing remarks.

Thanks, Nicholas and thank you everybody for joining us today. We really appreciate your interest in Pacific Ethanol and look forward to speaking with you again soon. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.