Filing summary
Company identification: The supplied filing is Pacific Ethanol, Inc.’s Form 10-Q for the quarter ended September 30, 2016. It does not identify Alto Ingredients, Inc.; verify that this is the intended filing.
Business context and reporting period
The filing covers the three and nine months ended September 30, 2016. Pacific Ethanol reported two segments: ethanol production and marketing and distribution. Following its July 2015 acquisition of Aventine, it operated eight plants with 515 million gallons of annual production capacity and marketed ethanol from its own plants and third parties. Comparative results are affected by the acquisition: 2015 included Aventine only from July 1 onward.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $417.8 | $380.6 | $1,183.0 | $814.4 |
| Gross profit (loss) | $6.4 | $(7.4) | $25.1 | $(2.1) |
| Gross margin | 1.5% | (1.9)% | 2.1% | (0.3)% |
| Operating income (loss) | $0.4 | $(14.8) | $4.7 | $(18.5) |
| Net loss attributable to Pacific Ethanol | $(3.5) | $(14.7) | $(11.7) | $(18.0) |
| Loss per share | $(0.09) | $(0.36) | $(0.30) | $(0.63) |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $15.0 | $(17.4) |
Q3 total gallons sold increased 15.2% to 243.7 million; production capacity utilization was 96%, versus 87%. Average sales price per gallon fell 3.0% to $1.62. For the nine-month period, total gallons sold rose 40.1% to 683.5 million, while average sales price per gallon fell 3.6% to $1.63. Management attributed increased sales primarily to the inclusion of the acquired Midwest plants and higher volumes.
At September 30, 2016, cash was $40.6 million, current assets $197.2 million, and current liabilities $213.1 million, resulting in negative working capital of $15.9 million and a 0.93 current ratio. Total debt before discounts and costs was $219.0 million: $63.9 million on Kinergy’s operating line and $155.1 million of Pacific Ethanol Central term debt. The term debt was classified as current because it matures September 24, 2017. The Kinergy facility had $11.1 million of stated borrowing availability. Cash declined $12.1 million from year-end 2015.
Material changes and management commentary
- Revenue increased, and gross results improved from a loss to a profit, reflecting improved production crush margins and higher volumes. The nine-month comparison also reflects the acquisition timing.
- Q3 operating income was only $0.4 million; the company nevertheless reported a $3.5 million net loss, including $3.9 million of net interest expense. Nine-month interest expense rose to $16.6 million from $7.2 million, primarily due to the acquired Central plants’ debt.
- Operating cash flow improved to $15.0 million for nine months, but includes $9.5 million of interest added to term debt rather than paid in cash. Capital expenditures were $14.0 million.
- Management said Q3 results were adversely affected by higher beginning inventory valuation, lower trading margins after an intra-quarter ethanol price decline, significant Pekin repair expenses, and noncash hedge mark-to-market adjustments. It reported stronger-than-average Q3 margins in the fourth quarter to date, but provided no quantified earnings or revenue guidance.
- Management described demand, export activity, and regulatory support as favorable and said it was pursuing refinancing of the $155.1 million Central term loan. Its stated belief that resources would meet needs for at least 12 months depends in part on refinancing the loan before its September 2017 maturity.
Outlook, risks, contingencies, and unusual items
- Refinancing and liquidity: The large 2017 maturity, negative working capital, limited line availability, and restrictions on subsidiary cash transfers are key liquidity considerations. Approximately $127.9 million of subsidiary net assets were restricted from transfer to the parent.
- Commodity exposure: Results depend on ethanol and co-product prices relative to corn and natural gas costs. A hypothetical 10% adverse price change was estimated to affect pretax income by $58.8 million for ethanol and $49.4 million for corn; these are sensitivity estimates, not forecasts. All reported long-term debt was variable-rate; a 100-basis-point increase was estimated to reduce nine-month pretax income by about $1.6 million.
- Hedges: Derivatives were not designated as cash-flow hedges. The company recorded $2.2 million of realized gains and $0.5 million of unrealized losses on commodity contracts for the first nine months of 2016.
- Legal matters: The company recorded a $3.3 million aggregate litigation contingency. Western Sugar claims approximately $8.6 million; one claim was dismissed, while three remained for trial, then expected in the first half of 2017. GS CleanTech’s cases were dismissed with prejudice in September 2016; the company said an appeal was possible.
- Projects and potential returns: The company reported first EPA registration for corn-fiber cellulosic ethanol at Stockton, targeting more than 1 million gallons annually and expecting premiums of at least $2 per gallon. These are management expectations. A Madera solar project was financed for up to $10 million over 20 years through property-tax assessments; $1.1 million had been incurred. Stockton cogeneration was expected to save $3–$4 million annually, with commercial operations anticipated in December.
- Other key risks include plant operating interruptions, customer concentration, competition, regulatory changes to renewable-fuel requirements, integration of Aventine, and the company’s history of losses. Management said disclosure controls were effective at a reasonable-assurance level.
Most important facts to verify
- Confirm that this Pacific Ethanol filing, rather than an Alto Ingredients filing, is the intended issuer and period.
- Check the status, terms, and availability of refinancing for the $155.1 million term loan due September 24, 2017, including any subsequent developments.
- Assess whether operating cash generation and the $11.1 million line availability are sufficient given negative working capital and restricted subsidiary assets.
- Validate that improved margins and management’s favorable fourth-quarter commentary translated into sustained cash generation, considering repair costs, trading exposure, and noncash hedge movements.
- Review the Western Sugar case, the recorded litigation reserve, and any appeal or outcome in the GS CleanTech matter.
- Verify project costs, commissioning, regulatory credits, and realized savings or premiums for cellulosic ethanol, solar, and cogeneration initiatives.