Business context and reporting period
Issuer discrepancy: The supplied filing is Pacific Ethanol, Inc.’s Form 10-Q for the quarter ended March 31, 2017—not an Alto Ingredients, Inc. filing. Pacific Ethanol operated eight ethanol plants with 515 million gallons of annual production capacity and marketed its own and third-party ethanol and co-products. It consolidated Pacific Aurora, in which it owned 73.93%.
Financial results and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $386.3 | $342.4; up 12.8% |
| Gross profit (loss) / margin | $(5.8) / (1.5)% | $1.1 / 0.3% |
| Operating loss | $(11.2) | $(7.2) |
| Consolidated net loss | $(13.5) | $(13.2) |
| Net loss available to common stockholders | $(12.9); $(0.31) per share | $(13.5); $(0.32) per share |
| Cash from (used in) operating activities | $12.1 | $(5.2) |
| Capital expenditures | $4.1 | $5.0 |
At March 31, cash was $73.7; working capital was $141.3 and the current ratio was 2.96. Total borrowings were $199.5 gross, including $14.0 current debt; reported long-term debt, net of current portion and discounts/costs, was $182.4. Debt was variable-rate. Kinergy had $24.9 of additional line availability and Pacific Aurora had $30.0 available, subject to facility terms. Approximately $280.0 of subsidiary net assets were restricted from transfer to the parent.
Material changes versus the prior period
- Sales rose on higher ethanol volumes and prices: gallons sold increased 9.5% to 226.2 million, while average sales price per gallon rose 5.9% to $1.62.
- Despite sales growth, gross results turned to a loss, primarily from sharply falling ethanol prices that compressed marketing margins and higher plant repair and maintenance costs. Pekin wet mill repairs included $4.0 of scheduled work and $1.6 of unanticipated work.
- SG&A fell 34.5% to $5.5, partly reflecting a nonrecurring $3.6 net gain from legal settlements. Net interest expense declined to $2.6 from $6.2, mainly following late-2016 refinancing.
- Operating cash flow improved by $17.3 year over year, with working-capital movements—particularly receivables—material to the change. Cash increased $5.1 during the quarter.
Outlook, commentary and risks
Management said margins improved into Q2, while ethanol prices and margins remained volatile. It expected production utilization in coming quarters at or around Q1’s 92% and said it anticipated performing well financially through the balance of 2017. Management projected SG&A averaging about $7.5 per quarter through year-end and set an initial 2017 capital-project budget of $46.0, including about $6.0 for remaining Pekin repairs; spending may be adjusted to market conditions and resources.
Key projects include Stockton cogeneration, for which management expected 50% capacity by the end of Q2 and full capacity by the end of Q3, and a planned Madera solar system targeted for early 2018. Management estimated potential annual utility-cost reductions of up to $4.0 from Stockton cogeneration and over $1.0 from Madera solar. It also expected cellulosic ethanol and associated D3 RIN benefits to begin contributing at Stockton in Q2; Madera commercial production was anticipated in the second half of 2017, subject to EPA qualification. These are management expectations, not assured outcomes.
Principal risks include volatile ethanol, corn, natural gas and co-product prices; operational disruptions and maintenance; dependence on a small number of customers; variable-rate debt, covenants and scheduled amortization; restricted subsidiary cash; and changes to renewable-fuel mandates and other regulation. A hypothetical 10% adverse commodity-price move was estimated to reduce pretax income by approximately $16.1 for ethanol and $18.7 for corn. A 100-basis-point interest-rate increase was estimated to reduce quarterly pretax income by about $0.5. Management stated that available resources should cover anticipated capital needs for at least 12 months, but future results depend on operating performance and financing availability.
Unusual items include the $3.9 cash settlement of acquired litigation claims, generating a $3.6 net gain recorded in SG&A. The company recognized no income-tax benefit on its losses because of uncertainty about realizing tax attributes. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the issuer: the filing identifies Pacific Ethanol, Inc., not Alto Ingredients, Inc.
- Assess whether gross margins recovered after the Q1 marketing-margin decline and elevated repair costs.
- Review debt maturities, variable-rate exposure, covenant compliance and actual availability of subsidiary credit facilities.
- Track execution, funding and realized returns for the $46.0 capital budget and the Stockton, Madera and cellulosic projects.
- Separate recurring operating performance from the one-time legal settlement gain and assess the working-capital contribution to operating cash flow.
- Monitor commodity-price, customer-concentration and renewable-fuel-policy risks, as well as restrictions on transferring subsidiary assets to the parent.