Pacific Ethanol, Inc. — Q1 2013 Form 10-Q
Registrant note: The supplied filing is for Pacific Ethanol, Inc., not Alto Ingredients, Inc. It reports the three months ended March 31, 2013; financial statement amounts are in thousands of dollars unless otherwise stated. Share and per-share figures reflect a one-for-fifteen reverse stock split effected May 14, 2013.
Business context and reporting period
Pacific Ethanol markets and produces low-carbon renewable fuels in the Western United States, including ethanol and co-products such as wet distillers grain. It consolidated New PE Holdco, which owns four ethanol plants with aggregate annual capacity of up to 200 million gallons. Three plants were operating and the Madera plant was idled at quarter-end. Pacific Ethanol’s ownership of New PE Holdco increased from 67% at December 31, 2012 to 83% at March 31, 2013.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $225.5 million | $197.7 million; up 14.0% |
| Cost of goods sold | $224.6 million | $205.2 million |
| Gross profit (loss) | $0.8 million; approximately 0.4% of sales | $(7.5) million; (3.8)% of sales |
| Operating loss | $(3.2) million | $(10.9) million |
| Consolidated net loss | $(6.6) million | $(14.0) million |
| Net loss attributed to Pacific Ethanol | $(5.5) million | $(5.0) million |
| Net loss available to common stockholders; loss per share | $(5.8) million; $(0.57) | $(5.3) million; $(0.92) |
| Net cash used in operating activities | $(6.5) million | $(2.8) million |
| Cash and cash equivalents at quarter-end | $4.2 million | $7.6 million at December 31, 2012 |
| Working capital; current ratio | $42.3 million; 2.82 | $45.0 million; 4.63 at December 31, 2012 |
| Total liabilities; reported debt, net of discounts and parent-purchased plant debt | $153.3 million; $122.3 million | $142.1 million; $121.3 million at December 31, 2012 |
Net cash used in investing activities was $1.9 million, including $1.6 million to acquire additional New PE Holdco interests. Financing activities provided $5.0 million. Trade and other current liabilities increased, while cash declined by $3.4 million during the quarter.
Material changes versus the prior comparable period
- Sales rose despite total ethanol gallons sold declining 12.3% to 100.7 million. The average sales price increased 11.1% to $2.60 per gallon; third-party gallons sold fell 17.7%.
- Management attributed the improved gross result to stronger crush and commodity margins. Corn cost per bushel (CBOT equivalent) rose 10.7% to $7.16, while co-product revenue as a percentage of delivered corn cost improved to 28.1% from 24.5%.
- Consolidated net loss narrowed by 53%, but the loss attributed to Pacific Ethanol increased, mainly because its New PE Holdco ownership share rose. The company reported Q1 2013 loss available to common stockholders of $5.8 million; it stated that at an 83% New PE Holdco interest in both comparison periods, Q1 2012 common loss would have been $12.0 million.
- SG&A increased 18.6% to $4.0 million; interest expense rose 19.7% to $3.5 million, primarily reflecting higher debt balances. The quarter also included a $0.8 million gain on extinguishment of debt and warrant exercise inducement expense.
Liquidity, debt, outlook, and risks
- Management said resources should cover working capital and capital expenditure needs for at least twelve months, subject to closing capital-raising agreements to address plant debt due June 25, 2013. That transaction required stockholder approval. The filing provides no earnings or revenue guidance.
- The Plant Owners had up to $103.6 million of combined term and revolving debt. $4.0 million was due June 25, 2013, while up to $15.0 million was due June 25, 2015 and $89.6 million was due June 30, 2016. The company warned that failure to extend, restructure, or repay the $4.0 million could trigger default and cross-default, potentially accelerating the other debt and materially harming the company and subsidiaries.
- Pacific Ethanol raised gross proceeds of $31.0 million in Q1 through senior notes, subordinated convertible notes, and warrant exercises. The January senior notes were issued at 5% interest and mature in 2016; the March Series A notes were $6.0 million, bear 5% interest, and mature in 2014 unless converted or redeemed earlier. The Series A terms permit conversion at market-sensitive prices, creating potential share dilution.
- Plant Owners’ debt generally bears floating interest at LIBOR or prime plus 10%; the rate was approximately 13.25% at quarter-end. Plant creditors do not have recourse to Pacific Ethanol, though the company guarantees Kinergy’s separate credit facility.
- Additional risks include volatile ethanol, corn and co-product prices; customer credit and collection exposure; financing and refinancing needs; and the possibility of plant idling. Management reported ordinary-course legal claims and did not expect a material financial impact based on information then available, while noting outcomes remain uncertain.
- Management reported disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2013; no material quarter changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether stockholders approved and the company completed the financing or restructuring needed to meet the June 25, 2013 plant debt maturity, and whether any default or cross-default occurred.
- Subsequent debt balances, cash availability, and borrowing-base capacity; quarter-end cash was $4.2 million and Kinergy had $7.9 million of borrowing-base availability.
- Actual operating cash flow and working-capital trends, given $6.5 million of operating cash use and rising receivables and prepaid inventory.
- The dilution and cash-payment consequences of Series A conversion/installment terms, warrants, and subsequent share issuances; the filing reports 386,000 shares issued for $1.447 million of Series A principal and interest from April 1 through May 14.
- Whether plant operations, ethanol volumes, and margins improved or deteriorated after quarter-end, including the status of the idled Madera facility.