Business context and reporting period
Pacific Ethanol, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2018. The filing does not identify Alto Ingredients, Inc. as the registrant; verify that this is the intended company. Pacific Ethanol operated nine ethanol facilities with combined annual capacity of 605 million gallons and reported production and marketing segments. Results include Illinois Corn Processing (ICP), acquired in July 2017, for the full quarter, limiting year-over-year comparability.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $400.0 | $386.3; up 3.5% |
| Gross profit (loss) | $3.4; 0.8% margin | $(5.8); (1.5%) margin |
| Operating loss | $(6.0) | $(11.2) |
| Consolidated net loss | $(9.5) | $(13.5) |
| Net loss available to common stockholders | $(8.2); $(0.19) per share | $(12.9); $(0.31) per share |
| Interest expense | $4.5 | $2.6; up 70.8% |
| Operating cash flow | $8.9 | $12.1 |
| Capital expenditures | $4.4 | $4.1 |
Cash and cash equivalents were $57.4 million at March 31, 2018, versus $49.5 million at year-end 2017. Working capital was $118.7 million and the current ratio was 2.24. Total debt principal before unamortized discounts and financing costs was $248.1 million, including $16.5 million classified as current; long-term debt net of current portion was reported at $228.6 million. Kinergy’s line of credit had $19.7 million of additional availability. About $204.3 million of subsidiary net assets were restricted from transfer to the parent under credit agreements.
Material changes versus the prior comparable period
- Sales increased as production ethanol gallons sold rose 22.4% to 140.8 million, while third-party gallons sold fell 17.4% to 91.9 million. Total gallons sold rose 2.9% to 232.7 million; production capacity utilization increased to 94% from 92%.
- Average sales price per gallon declined 3.1% to $1.57. Delivered corn cost fell 2.3% to $3.84 per bushel, while co-product revenue increased 27% to $74.6 million.
- Gross profit improved by $9.1 million, reflecting higher-margin products and better California carbon credit values. Production still recorded a gross loss, including $2.6 million of higher-than-expected Pekin wet-mill repair and maintenance costs.
- SG&A increased 70.9% to $9.3 million, primarily because Q1 2017 included a $3.6 million net legal settlement gain that reduced expenses; Q1 2018 also included ICP costs.
- Interest expense rose $1.9 million, attributed to ICP-related borrowing, higher senior-note rates and accelerated financing-cost amortization. Operating cash flow declined $3.2 million, while financing cash flow benefited from increased Kinergy line borrowings.
Outlook, commentary and risks
- Management said production margins improved year over year and sequentially, but remained compressed amid historically high ethanol inventories in early March. It reported subsequent inventory declines and margin improvement into Q2, and expressed optimism about peak-season demand; this is commentary, not a quantified earnings forecast.
- Management expected approximately $34 million of SG&A for 2018, targeted $4.5 million in annualized ICP cost synergies during 2018, and expected 2018 capital expenditures to approximate the 2017 level, subject to industry conditions and performance.
- The Stockton cogeneration system had not reached full commercial operation; management cited potential annual energy savings of up to $4 million once operational. A Madera solar project was expected to begin full electricity production in Q3 2018, with expected annual utility savings above $1 million. An adjacent Stockton CO2 plant was expected to begin production in Q4 2018.
- Cellulosic ethanol production continued at Stockton but was paused at Madera and Magic Valley pending EPA pathway approvals. Management anticipated resolution but gave no firm timing.
- Pekin had previously missed a working-capital covenant, received a waiver, and amended its term loan on March 30, 2018: the covenant minimum was reduced to $13 million through November 2018 and $16 million thereafter, and a $3.5 million May principal payment was deferred to maturity. Management believed Pekin was compliant as of the filing.
- Key risks include volatile ethanol, corn and natural-gas prices; high industry inventory and margin pressure; variable-rate debt and covenant compliance; reliance on customer demand and regulatory blending mandates; and operational, transportation and environmental disruptions. A hypothetical 10% adverse commodity-price move was estimated to reduce quarterly pretax income by $22.1 million for ethanol and $17.9 million for corn; a 100-basis-point rate increase was estimated to reduce quarterly pretax income by about $0.6 million.
- The company reported ordinary-course legal claims and said pending proceedings were not expected to have a material impact, while acknowledging outcomes could adversely affect future results or cash flows. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for Pacific Ethanol, Inc., not Alto Ingredients, Inc.
- Review debt maturities, variable-rate exposure, subsidiary restrictions, borrowing availability and ongoing compliance with facility covenants.
- Assess whether margin improvement persists and whether commodity prices, inventories and co-product values support profitable production.
- Track delivery of ICP’s stated $4.5 million annualized synergy target and resolution of Pekin boiler costs and operating issues.
- Verify commissioning and expected savings or revenue from the Stockton cogeneration, Madera solar and Stockton CO2 projects, and the timing of EPA pathway approvals.