Business context and reporting period
This is Pacific Ethanol, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The request identifies Alto Ingredients, Inc., but the filing itself names Pacific Ethanol, Inc.; confirm the intended issuer. The company produces and markets ethanol, specialty alcohols, and related co-products. Its results exclude Illinois Corn Processing, LLC (ICP), acquired on July 3, 2017, after quarter-end.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding 2016 period.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $405.2 | $422.9 | $791.5 | $765.2 |
| Gross profit (loss) | $1.7 | $17.7 | $(4.1) | $18.8 |
| Gross margin | 0.4% | 4.2% | (0.5)% | 2.5% |
| Operating income (loss) | $(7.1) | $11.6 | $(18.3) | $4.3 |
| Net income (loss) attributable to Pacific Ethanol | $(8.8) | $5.1 | $(21.5) | $(8.1) |
| Loss available to common stockholders | $(9.2) | $4.7 | $(22.1) | $(8.8) |
| Basic and diluted earnings (loss) per share | $(0.22) | $0.11 | $(0.52) | $(0.21) |
| Net interest expense | $2.7 | $6.5 | $5.3 | $12.8 |
- Revenue and margins: Q2 sales fell 4.2%, principally from lower average selling prices. First-half sales rose 3.4%, mainly from higher third-party marketing volumes. Weaker commodity margins drove the sharp decline in gross profit; production and marketing both contributed to the first-half deterioration.
- Operating metrics: Total gallons sold increased 1.1% in Q2 and 5.0% for the first half. Production capacity utilization was 95% in Q2 and 93% for the first half, versus 94% and 90%, respectively, in 2016. Co-product sales volumes increased, but lower co-product prices reduced revenue.
- Cash flow: First-half operating cash flow was $15.1 million, compared with $1.1 million in 2016; investing cash outflow was $6.2 million versus $3.5 million; financing cash inflow was $14.0 million versus an outflow of $18.7 million. Cash rose $22.9 million to $91.5 million. Management attributed much of the operating cash flow improvement to working-capital timing, especially lower receivables; it should not be read as equivalent to improved earnings.
- Liquidity: At June 30, cash was $91.5 million, working capital $152.8 million, and the current ratio 3.25. Current assets were $220.8 million and current liabilities $68.0 million. Kinergy had $8.5 million of borrowing availability under its line at quarter-end; Pacific Aurora had $30.0 million available.
- Debt: Debt carrying value was $216.6 million before unamortized discounts and fees, including $14.0 million current and $199.6 million long-term debt reported net of adjustments. Debt increased from $201.9 million at year-end 2016, including $13.9 million of additional senior notes issued in June. The company stated that all $213.6 million of long-term debt was variable-rate; a 100-basis-point rate increase was estimated to reduce first-half pretax income by about $1.1 million.
Material changes, outlook, and risks
- ICP acquisition: Closed July 3 for approximately $76.9 million: $30.0 million cash and $46.9 million in secured seller notes due January 2019. ICP adds 90 million gallons of annual capacity and premium beverage and industrial alcohol production. Management expected about $4.5 million of annual cost savings and described the deal as immediately earnings-accretive; these are expectations, not reported results, and the purchase-price allocation remained preliminary.
- Industry outlook: Management said margins improved in Q2 versus Q1 but remained compressed by elevated industry production and inventories and seasonally weaker demand. It reported better ethanol-corn spreads and production margins early in Q3, with stronger seasonal gasoline demand and falling ethanol inventories. No quantified earnings or revenue guidance was provided.
- Capital plans and projects: The company planned to defer $20 million of its initial $46 million 2017 capital budget because of weak industry margins and a conservative operating approach. Management cited potential annual savings of up to $4 million from Stockton cogeneration, approximately $350,000 from the Madera membrane system, and over $1 million from a planned Madera solar project. These are estimates, not realized savings.
- Covenant and financing developments: PE Pekin was below its $20 million working-capital covenant at June 30; the lender waived the violation on August 7. The amendment raised the interest rate by 25 basis points to 30-day LIBOR plus 4.00% and set a $17.5 million minimum through year-end 2017, returning to $20 million from January 2018. Kinergy’s line was increased from $85 million to $100 million on August 2. Separately, the filing reports Kinergy’s fixed-charge coverage ratio as 1.97 against a 2.00 requirement, but says the covenant did not apply because excess availability remained above its trigger.
- Key risks: Results are highly exposed to volatile ethanol, corn, natural gas, and co-product prices; supply-demand shifts; federal and state renewable-fuel policy; plant operating and transportation disruptions; customer concentration; variable-rate debt and covenant requirements; and integration and realization of expected benefits from ICP. About $271.1 million of subsidiary net assets were restricted from transfer to the parent by credit agreements. Ordinary-course litigation was disclosed; management did not expect pending matters to have a material impact. A $3.9 million settlement received in Q1 produced a $3.6 million net gain recorded in SG&A.
- Controls: Management concluded disclosure controls were effective at a reasonable-assurance level as of June 30, 2017 and reported no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Confirm issuer identity: the supplied filing is for Pacific Ethanol, Inc., not Alto Ingredients, Inc.
- Review subsequent-period results to assess whether Q3 margin improvement persisted and whether positive operating cash flow depended on temporary working-capital movements.
- Verify ICP integration, final purchase-price allocation, financing costs, and whether projected synergies and earnings accretion were achieved.
- Monitor PE Pekin covenant compliance, available borrowing capacity, debt maturities, and interest expense under variable rates.
- Assess the sensitivity of margins and liquidity to ethanol, corn, natural gas, and co-product prices, as well as regulatory changes to renewable-fuel mandates.