Business context and reporting period
The supplied filing is Pacific Ethanol, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018; the filing body does not identify the issuer as Alto Ingredients. Investors should verify the issuer and filing attribution. The company reported nine ethanol facilities with combined annual capacity of 605 million gallons; all nine were operating at quarter-end.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data, gallons, and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $370.4 | $445.4 | $1,181.0 | $1,237.0 |
| Gross profit | $3.8 | $12.1 | $5.9 | $7.9 |
| Gross margin | 1.0% | 2.7% | 0.5% | 0.6% |
| Operating loss | $(5.2) | $3.3 | $(21.3) | $(15.0) |
| Consolidated net loss | $(9.3) | $(0.5) | $(33.4) | $(24.0) |
| Loss attributable to common stockholders | $(7.8) | $(0.5) | $(29.2) | $(22.6) |
| Basic and diluted loss per share | $(0.18) | $(0.01) | $(0.68) | $(0.53) |
| Operating cash flow | Not separately presented for the quarter | $26.1 | $35.0 |
Q3 sales fell 16.8% year over year, while gross profit declined 68.8%. For the nine months, sales decreased 4.5% and gross profit decreased 26.3%. The company attributed weaker consolidated margins mainly to depressed ethanol market conditions and higher delivered corn costs. Production-segment gross loss was $5.0 million in Q3 and $16.5 million for the nine months; marketing-segment gross profit was $8.8 million and $22.4 million, respectively.
Cash and cash equivalents were $56.1 million at September 30, 2018, versus $49.5 million at December 31, 2017. Working capital was $93.2 million, down from $112.5 million, and the current ratio was 1.94 versus 2.24. Nine-month capital expenditures were $10.9 million. Cash increased by $6.6 million over the period after $26.1 million from operations, $10.9 million used in investing, and $8.6 million used in financing.
Debt consisted of $236.8 million in stated borrowings before discounts, financing costs, and the current portion; reported current debt was $20.0 million and long-term debt, net of current portion, was $214.4 million. Credit-facility availability was $5.2 million at Kinergy, $2.0 million at Pekin, and $4.0 million at ICP. Approximately $207.2 million of subsidiary net assets were restricted from transfer to the parent under credit agreements.
Material changes versus comparable periods
- Q3 total gallons sold decreased 15.1% to 212.2 million, mainly reflecting 35.9 million fewer third-party gallons; the average sales price per gallon decreased 5.3% to $1.60.
- For nine months, production gallons sold rose 13.7% to 425.1 million, but third-party gallons sold declined 26.3%; total gallons sold fell 5.2% to 672.3 million.
- Production capacity utilization was 91% in Q3 versus 95% a year earlier; management said production had been reduced to about 90% amid weak margins.
- SG&A was $27.2 million for nine months, up $4.3 million, partly because the prior-year period included a $3.6 million legal-settlement gain. Nine-month interest expense rose $3.7 million to $12.9 million, reflecting acquisition-related borrowings, higher note rates, and accelerated financing-cost amortization.
- Non-designated commodity derivatives produced $4.4 million of losses for the first nine months, compared with $0.8 million of losses in the 2017 period.
Outlook, commentary, risks, and unusual items
- Management described industry margins as compressed by high inventories, U.S.-China trade tariffs that halted U.S. ethanol exports to China, EPA small-refinery exemptions under the Renewable Fuel Standard, and higher freight and corn-basis costs at Western plants.
- Management expected industry conditions to support better margins in 2019, citing potential nationwide year-round E15 sales, international demand, and strong California and Oregon low-carbon fuel premiums. These are expectations, not company earnings guidance.
- Management forecast 2018 SG&A of approximately $36 million and Q4 capital expenditures of approximately $3 million, below prior full-year capex guidance. It expected the Madera solar system to reduce annual utility costs by about $1 million once fully operational, and the Stockton cogeneration system to reduce annual energy costs by up to $4 million when performing at target levels.
- The company expected EPA approval of additional cellulosic pathways; management estimated that approvals for three plants could add about $2 million of annual EBITDA at then-current carbon-market values. This outcome is contingent on regulatory approval and market conditions. Airgas’s adjacent Stockton CO2 plant was expected to begin commercial operations in early 2019.
- The company was evaluating refinancing its $68.9 million parent senior notes, due December 2019. The stated coupon steps to LIBOR plus 11% beginning December 15, 2018. Management said current and anticipated resources should cover requirements for at least 12 months, but continued losses, variable-rate debt, covenant requirements, and restricted subsidiary cash are material considerations.
- Pekin’s working-capital covenant had been amended; management believed the subsidiary was compliant at the report date. The Illinois Attorney General had brought a case alleging permit and water-pollution violations at Pekin; the parties were negotiating, with an interim order allowing operations under agreed thermal limits while a permit amendment was considered. The company was also pursuing a claim against a boiler manufacturer and anticipated continuing litigation expenses.
- Key risks include volatile ethanol, corn, and natural-gas prices; regulatory changes and EPA exemptions; customer concentration; plant and logistics disruptions; debt refinancing and covenant compliance; environmental claims; and the possibility that weak margins lead to further production reductions. Management reported disclosure controls were effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity and whether this Pacific Ethanol filing corresponds to the Alto Ingredients company specified in the request.
- Review the parent notes’ December 2019 maturity, refinancing progress, interest-rate step-up, and available borrowing capacity.
- Track ethanol-to-corn margins, inventory levels, export conditions, EPA RFS decisions, E15 rulemaking, and actual plant utilization.
- Assess Pekin covenant compliance and the status and potential financial impact of the water-permit and boiler-related litigation.
- Verify whether the solar, cogeneration, CO2, and cellulosic-pathway projects achieve the stated operating, cost-saving, and EBITDA expectations.