Pacific Ethanol, Inc. — 2017 Form 10-K
Period: Fiscal year ended December 31, 2017; fourth-quarter results are unaudited. Registrant identity: The supplied filing names Pacific Ethanol, Inc. as registrant, not Alto Ingredients, Inc.; verify the company and filing requested.
Business context
Pacific Ethanol produced ethanol, specialty alcohols and co-products at nine operating plants with combined annual capacity of 605 million gallons, and marketed its own and third-party ethanol. It acquired Illinois Corn Processing (ICP), a 90-million-gallon facility, on July 3, 2017; results include ICP only from that date.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $1,632.3 million | $1,624.8 million |
| Gross profit; gross margin | $5.9 million; 0.4% | $54.4 million; 3.3% |
| Operating income (loss) | ($25.6 million) | $23.5 million |
| Consolidated net income (loss) | ($38.1 million) | $1.5 million |
| Net income (loss) available to common shareholders | ($36.2 million); ($0.85) per share | $0.1 million; $0.00 per share |
| Cash from operations | $36.5 million | $37.2 million |
| Cash and cash equivalents at year-end | $49.5 million | $64.3 million |
| Working capital; current ratio | $112.5 million; 2.24 | $156.4 million; 2.98 |
| Gross debt principal | $244.4 million | $201.9 million |
In Q4 2017, net sales were $395.3 million, gross loss $2.0 million, operating loss $10.6 million, and net loss attributable to Pacific Ethanol $13.3 million. Loss available to common shareholders was $13.6 million, or $0.32 per share.
Annual ethanol sales volume rose 3% to 952.0 million gallons: company-produced volume increased 9% to 527.2 million gallons, while third-party volume declined 3.5% to 424.8 million gallons. Average sales price fell 3% to $1.62 per gallon; delivered corn cost declined 2% to $3.82 per bushel. Management attributed the sharp gross-margin contraction primarily to lower ethanol prices and weaker crush margins. Repair and maintenance costs included $10.7 million of larger-than-anticipated expenses. Interest expense fell to $12.9 million from $22.4 million, primarily following debt refinancing.
Operating cash flow was nearly flat year over year. Investing used $50.4 million, including $29.6 million net cash for ICP and $20.9 million of capital expenditures; financing used $0.8 million. Year-end cash decreased $14.8 million. About $302.9 million of subsidiary net assets was restricted from transfer to the parent under financing agreements.
Outlook, risks and unusual items
- Management expected a stronger 2018, citing improved ethanol supply-demand conditions, stable corn prices, export demand and E15 adoption. It reported margins had improved about $0.15 per gallon from December lows. These are management expectations, not earnings guidance.
- Management expected 2018 SG&A of about $34 million and capital expenditures approximately at the 2017 level, subject to economics and performance. It targeted $4.5 million of annual ICP cost synergies in 2018.
- ICP contributed $75.9 million in net sales and $3.7 million in pretax income in its included 2017 period. The $76.9 million purchase price was funded with $30.0 million cash and $46.9 million in seller notes, subsequently refinanced.
- Planned or ongoing efficiency projects included Stockton cogeneration, Madera solar power and an industrial membrane system. Their anticipated savings and timing are estimates; the solar system was awaiting utility interconnection.
- Liquidity and covenant risks warrant attention. Pekin breached its working-capital requirement for January 2018, received a lender waiver and a temporary covenant reduction. Pacific Aurora was out of compliance with working-capital and debt-service coverage covenants at year-end; the company said it was discussing amendment or termination of that unused facility. Kinergy reported a 2.79 fixed-charge coverage ratio against a 2.00 requirement.
- Parent senior secured notes totaled $68.9 million and mature December 15, 2019; their stated rate steps up from LIBOR plus 7% to plus 9% and then plus 11% over successive periods. Total gross debt principal was $244.4 million, substantially variable-rate; a 1 percentage-point rate increase was estimated to reduce annual pretax income by about $2.4 million.
- Core risks include volatile ethanol, corn and natural-gas prices; thin or negative margins; dependence on regulatory blending mandates and customer demand; customer concentration (three customers represented 33% of 2017 sales); and operational, transport, environmental and financing risks. Federal legislation seeking to reduce or repeal the Renewable Fuel Standard had been introduced.
- An Illinois Attorney General suit filed in January 2018 alleges Pekin facility water-pollution and permit violations, mainly thermal-limit issues, and seeks injunctive relief and statutory damages. The company was negotiating resolution. Management said ordinary-course legal matters were not expected to have a material financial impact, but outcomes remain uncertain.
- The company reported a $3.6 million gain from 2017 settlements of acquired litigation matters. It recorded a $2.7 million inventory valuation adjustment and a $0.3 million tax benefit related to federal tax-rate changes. A valuation allowance limits recognition of deferred tax assets; some NOL use is subject to ownership-change limits.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported disclosure controls effective at year-end. The filing also states that no common-stock dividends were planned in the foreseeable future; Series B preferred stock carries a 7% annual dividend.
Investor verification priorities
- Confirm whether this Pacific Ethanol filing is the intended filing for Alto Ingredients, given the registrant-name discrepancy.
- Review the complete audited statements and debt footnotes for maturities, variable rates, collateral, covenants and available borrowing capacity.
- Track Pekin’s covenant compliance after the waiver and Pacific Aurora’s lender discussions; verify Kinergy’s borrowing availability and covenant headroom.
- Assess whether ethanol margins and cash generation recovered, and whether ICP synergies and the cited efficiency projects delivered their expected benefits.
- Follow the Illinois environmental case and any resulting remediation, penalties or operational restrictions.
- Evaluate customer concentration, RFS and E15 policy developments, and restrictions on subsidiary cash transfers alongside the company’s capital and debt-service needs.