Business context and reporting period
Important identity and period note: The supplied filing is Pacific Ethanol, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 18, 2019. It is not identified as an Alto Ingredients filing; the registrant name and ticker shown are Pacific Ethanol, Inc. and PEIX. The filing includes unaudited fourth-quarter results.
Pacific Ethanol produced and marketed ethanol, specialty alcohols and co-products through nine facilities with aggregate annual capacity of 605 million gallons. Aurora East was idled in December 2018. The company reported production and marketing segments.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1,515.4 million | $1,632.3 million |
| Gross profit (loss) and margin | $(15.2) million; (1.0)% | $5.9 million; 0.4% |
| Operating loss | $(51.5) million | $(25.6) million |
| Consolidated net loss | $(67.9) million | $(38.1) million |
| Net loss available to common stockholders; loss per share | $(61.5) million; $(1.42) | $(36.2) million; $(0.85) |
| Cash provided by operating activities | $1.6 million | $36.5 million |
| Cash and cash equivalents at year-end | $26.6 million | $49.5 million |
- Gross margin deterioration reflected lower ethanol prices and higher corn costs. Average ethanol selling price fell 3% to $1.57 per gallon; delivered corn cost rose 2% to $3.91 per bushel.
- Total gallons sold fell 7% to 883 million. Production gallons sold rose 6% to 556 million, while third-party gallons sold declined 23% to 327 million, which management attributed partly to reducing less-profitable sales.
- Production-segment gross loss was $39.0 million, versus $3.0 million gross profit in 2017. Marketing-segment gross profit improved to $23.8 million from $2.9 million.
- Cash used in investing activities was $15.2 million, primarily for plant improvements; cash used in financing activities was $9.3 million. Cash declined $22.9 million during the year.
- Year-end working capital was a deficit of $63.1 million, versus a surplus of $112.5 million in 2017. Current assets were $168.8 million and current liabilities $231.9 million.
- Reported debt principal totaled approximately $233.5 million before debt discounts and financing costs; $146.7 million was classified as current. The filing reported $84.8 million of long-term debt, net of current portion.
- Kinergy had $57.1 million outstanding on its $100 million credit facility and $10.2 million of unused availability. Approximately $190.2 million of subsidiary net assets were restricted from distribution to the parent under financing arrangements.
Material changes, outlook, risks and unusual items
- Management attributed 2018’s weak results to record-low ethanol prices, reduced demand and high inventories, including trade-related loss of China exports and demand effects from EPA small-refinery exemptions. It reported prolonged negative operating margins and lower operating cash flow.
- The company initiated a strategic realignment, expected to be completed over the following six months, focused on potential production-asset sales, debt reduction, improved liquidity, strategic partnerships and capital raising. Management said successful and timely implementation on suitable terms was expected to provide liquidity for at least 12 months; it warned failure could leave insufficient liquidity, force production curtailments or lead to bankruptcy proceedings.
- At December 31, 2018, the company was in violation of financial covenants on approximately $75 million of Pekin facilities. A $3.5 million principal payment remained unpaid after a short forbearance period ending March 11, 2019; at filing, the violations had not been waived and the forbearance had not been extended. The lender could accelerate the debt or foreclose on Pekin assets.
- Approximately $66.9 million of senior secured notes, bearing an 11% rate above the applicable LIBOR floor from December 15, 2018, were due December 15, 2019. They were secured by the parent’s ownership interests in West Coast production assets. The company intended to repay or refinance them as part of its realignment.
- Management expected industry margins to improve in 2019, citing domestic and export demand, possible year-round E15 sales, and premiums for lower-carbon ethanol. These were expectations, not formal financial guidance. Management estimated first-quarter 2019 SG&A expense of $9.0 million.
- Fourth-quarter 2018 net sales were $334.4 million, gross loss $21.0 million, operating loss $30.2 million, and net loss attributable to Pacific Ethanol $32.0 million. Loss available to common stockholders was $32.3 million, or $0.74 per share.
- Cost of goods sold included $4.8 million of larger-than-anticipated repair and maintenance expenses in 2018, down from $10.7 million in 2017. The company also reported a $6.7 million net loss from changes in fair value of commodity derivatives in 2018.
- An Illinois Attorney General action alleged water-pollution and permit violations at Pekin, chiefly involving thermal limits. Proceedings were stayed under an interim order while a permit amendment was under review and initial remedial actions were required. The filing also describes pending boiler-defect litigation and an appeal in the GS CleanTech patent matter.
- The financial statements were audited with an unqualified opinion, and the auditor reported effective internal control over financial reporting. The filing nevertheless describes substantial liquidity risks and possible inability to meet obligations; it does not state that the audit opinion was qualified.
Most important facts for investors to verify
- Confirm the issuer: this filing identifies Pacific Ethanol, Inc., not Alto Ingredients, Inc.
- Determine whether asset sales, capital raising, or strategic partnerships were completed, and whether proceeds were sufficient to address liquidity needs.
- Verify subsequent status of the Pekin covenant defaults, unpaid principal, lender forbearance and potential remedies.
- Confirm repayment or refinancing of the senior secured notes due December 15, 2019, including any collateral or covenant changes.
- Track cash, operating cash flow, working capital, facility utilization and ethanol crush margins, especially given the risk of further production curtailments.
- Assess outcomes and potential costs of the Pekin environmental matter, boiler litigation and GS CleanTech appeal, as well as the company’s concentrated customer exposure.