Investor call highlights Pacific Ethanol, Aventine merger

By Susanne Retka Schill | January 08, 2015

Pacific Ethanol Inc. CEO Neil Koehler answered questions about its recently announced merger with Aventine Renewable Energy Holdings Inc., as well as current market conditions for ethanol and renewable identification numbers (RINs), in a Jan. 7 investor call.

The definitive merger agreement was announced Dec. 31 and is expected to close in the second quarter, Koehler said. In his remarks prior to the question and answer section, Koehler said the newly expanded company will be the first company to combine the destination plant model, of which Pacific Ethanol was the first, with the origin plant model, represented by Aventine with its four operating plants in Nebraska and Illinois.

Aventine’s Pekin, Illinois, location will give Pacific Ethanol access to new markets in the East and Southeast plus export opportunities, he pointed out, while the Nebraska plants will “support sales to our existing customer base.” The Nebraska location also brings opportunities to move product south through Texas and the Gulf and into exports. Pacific Ethanol, which sells all of its ethanol and wet distillers grains regionally from plants in California and Idaho, has not exported in the past, Koehler said.

The merged companies will have a combined annual production capacity of 515 MMgy and an ethanol marketing volume of 800 MMgy, including the plants to which Pacific Ethanol provides marketing services. Koehler said they expect to achieve some economies of scale, and would provide more insight on that in future investor calls.

In the question and answer period, Koehler was asked about Aventine’s long-idled 38 MMgy Canton, Illinois, facility that was not mentioned in the presentation. “It is on the balance sheet, but is not operating today.” Koehler said, “So being conservative, we did not include it our metrics. It would take CAPEX to get it up and running, and we will be evaluating that.”

Koehler also pointed out that Aventine’s wet mill in Pekin, Illinois, with its diverse list of coproducts, provides a certain level of stability and high coproduct return.  “Despite all the issues Aventine had with its bankruptcy that wet mill never shut down,” he said. “That asset has been running continuously through a lot of turmoil in the industry.”

Koehler fielded several questions on current market conditions during the investor question period. When asked about the impact of current low gasoline prices on the ethanol industry, he explained that the lower prices has increased gasoline demand. “We’re not aware of any oil company with plans other than blending 10 percent,” he said, adding that current projections for an increase in gasoline demand in 2015 will bring an increased ethanol demand of between 300 million to 400 million gallons.

When asked about the threat to the renewable fuel standard (RFS), and the possibility of alternatives to ethanol gaining ground for octane blending, Koehler explained that while refiners can manufacture their own octane enhancers, it reduces the yield in other products, plus ethanol remains the most economical octane enhancer and helps with meeting tailpipe emission standards. “As an octane enhancer, ethanol is still the most competitive octane in the market.” The challenges to the RFS will not have as much of an impact on the existing ethanol industry, he suggested, but rather hurts the drive towards more advanced biofuels and higher ethanol blends.

Koehler was also asked about the recent climb in RINs prices, the renewable identification numbers used to demonstrate compliance with the RFS. After several weeks of trading in the 60 cent range, prices recently jumped to over 80 cents per RIN, with one type even being reported at just over $1. “That is a very good, and perplexing question,” he said. “It caught folks by surprise. With plentiful supplies of ethanol and the price of ethanol, it wouldn’t seem to support higher RINs.” Several factors may be in play, one being that obligated parties, who take compliance very significantly, are uncertain about what the U.S. EPA will set for final volumes, and thus are covering their positions in case they are set at statutory levels. The RINs market is very thinly traded, he added, so it could simply be a bump from year-end balancing.  “Also, there are speculators in the market, and being very thinly traded, it could run prices up.”

Addressing the grain market, he explained that corn prices can be volatile between now and when planting intentions become clearer. “It is a little surprising that corn prices have been hanging around $4 a bushel. The corn supply in the U.S. and world is the highest we’ve seen in many years. There is significantly more downside potential on corn prices than upside.”