Business context and reporting period
This is a Form 10-Q for the quarter and six months ended June 30, 2016. Important identity discrepancy: the filing is for Pacific Ethanol, Inc., not Alto Ingredients, Inc. Pacific Ethanol reported eight ethanol plants, with combined annual capacity of 515 million gallons, following its July 2015 acquisition of Aventine.
Financial performance and liquidity
Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are converted from thousands to millions.
- Second-quarter revenue: $422.9 million, up 85.8% from $227.6 million a year earlier. Gross profit was $17.7 million versus $6.3 million; gross margin improved to 4.2% from 2.7%.
- Second-quarter earnings: Operating income was $11.6 million, compared with $2.3 million. Net income attributable to Pacific Ethanol was $5.1 million versus $1.0 million; income available to common stockholders was $4.7 million, or $0.11 per share, versus $0.7 million, or $0.03 per share.
- First-half results: Revenue was $765.2 million, up 76.4%; gross profit was $18.8 million versus $5.3 million. The company recorded an operating profit of $4.3 million, but a net loss attributable to Pacific Ethanol of $8.1 million and a loss available to common stockholders of $8.8 million, or $0.21 per share. The prior-year common-stockholder loss was $4.0 million, or $0.16 per share.
- Cash flow: First-half operating cash flow was $1.1 million, down from $11.4 million. Investing used $3.5 million and financing used $18.7 million; cash declined $21.0 million to $31.7 million.
- Debt and liquidity at June 30: Debt before discounts and financing costs was $217.1 million, including $62.0 million on Kinergy’s credit line and $155.1 million of Central plants’ term debt. Balance-sheet long-term debt, net, was $215.0 million. Working capital was $137.9 million and the current ratio was 3.11. Kinergy reported $13.0 million of borrowing availability under its $75 million facility.
- Other metrics: Second-quarter total gallons sold rose 65.7% to 233.2 million; the average sales price per gallon declined 2.3% to $1.72. First-half interest expense rose to $12.8 million from $2.0 million, largely following the Aventine acquisition.
Changes, outlook, and management commentary
- Comparisons are substantially affected by the Aventine acquisition: 2016 results include the acquired Midwestern plants, while 2015 comparative results do not. Management attributed higher revenue chiefly to increased production and sales volumes; improved second-quarter crush margins also lifted gross profit.
- Management said it was on track to market more than 800 million gallons of ethanol in 2016. It cited strong U.S. gasoline demand and low corn prices, while noting that first-quarter margins had been weak and reduced Chinese demand pressured distillers-grains prices.
- The 2016 capital-improvement budget was reduced from $26 million to $15 million. Management expected quarterly SG&A of about $7.0–$7.5 million and capital expenditures averaging about $7.5 million per quarter through year-end. Projects included a Madera membrane system expected to enter commercial production in the third quarter and Stockton cogeneration expected by the end of the third quarter.
- Central plants’ term debt carried a 10.5% cash-pay or 15.0% payment-in-kind rate and matured September 24, 2017. The company elected to defer $9.5 million of first-half interest, adding it to principal, and said it was pursuing refinancing opportunities. Approximately $135.2 million of subsidiary net assets were restricted from transfer to the parent.
- Management believed available resources would meet working-capital and capital-expenditure needs for at least 12 months. This outlook depends on operating cash generation and continued access to financing. All reported long-term debt was variable-rate; management estimated a 100-basis-point rate increase would reduce first-half pretax income by about $1.1 million.
Risks, contingencies, and unusual items
- Results remain sensitive to volatile ethanol, corn, natural-gas, and co-product prices, as well as plant operations, transportation infrastructure, demand, and renewable-fuel regulation. The filing also identifies acquisition-integration, customer-concentration, and refinancing risks.
- The Central term loan’s payment-in-kind interest increases the debt balance. The West plants’ $17.0 million third-party term debt was retired in February 2016 by purchasing the lender’s position at par.
- The company recorded $3.3 million of litigation contingency liabilities. A Western Sugar lawsuit sought approximately $8.6 million; the company denied the claims and had filed a motion for summary judgment.
- Commodity derivatives were not designated for hedge accounting; their fair-value changes were recognized in cost of goods sold. The company reported derivative assets of $13.3 million and liabilities of $12.2 million at quarter-end.
- Disclosure controls were assessed as effective at a reasonable-assurance level, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Confirm the filing entity: this 10-Q names Pacific Ethanol, Inc., despite the request identifying Alto Ingredients, Inc.
- Review Central plants’ $155.1 million term debt, September 2017 maturity, deferred interest, and refinancing progress.
- Assess cash generation and the adequacy of $31.7 million in cash plus $13.0 million of Kinergy borrowing availability, including subsidiary transfer restrictions.
- Separate acquisition-driven volume and revenue growth from changes in underlying prices, margins, and operating performance.
- Monitor the Western Sugar litigation, recorded contingency, commodity exposures, and effects of variable-rate debt.