Pacific Ethanol, Inc. (the filing does not identify Alto Ingredients, Inc.) — Form 10-Q summary
Reporting period: Quarter ended September 30, 2013; comparisons are with the quarter and nine months ended September 30, 2012, and balance-sheet comparisons with December 31, 2012. Dollar amounts below are in millions unless stated otherwise.
Business context
Pacific Ethanol marketed and produced low-carbon renewable fuels and ethanol co-products in the Western United States. It owned 85% of New PE Holdco, which owned four plants with up to 200 million gallons of annual capacity; three plants were operating and the Madera plant was idled. Total ethanol gallons sold were 104.9 million in Q3 and 306.9 million for the first nine months.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $233.9 | $215.9 | $693.1 | $619.0 |
| Gross profit (loss) | $3.5 | $(2.4) | $11.3 | $(14.8) |
| Gross margin | 1.5% | (1.1)% | 1.6% | (2.4)% |
| Operating income (loss) | $1.0 | $(5.3) | $1.7 | $(24.2) |
| Consolidated net loss | $(5.4) | $(9.7) | $(10.9) | $(33.7) |
| Loss available to common shareholders | $(5.3) | $(6.3) | $(10.3) | $(14.5) |
| Basic and diluted loss per share | $(0.40) | $(0.82) | $(0.91) | $(2.26) |
- Margins and sales: Sales rose 8.3% in Q3 and 12.0% year to date. Gross profit improved substantially, which management attributed mainly to better crush and commodity margins and higher production yields. Q3 total gallons sold fell 2.2%; the nine-month decline was 9.4%, primarily because a third-party marketing arrangement expired. Nine-month average selling price per gallon increased 9.9% to $2.67.
- Expenses: SG&A was $2.5 million in Q3 and $9.6 million year to date. Net interest expense increased to $4.5 million in Q3 and $12.0 million year to date, reflecting higher average debt and debt-discount amortization. Q3 included a $2.6 million loss on extinguishment of debt, principally associated with convertible-note conversions.
- Cash flow: Operating activities generated $4.9 million in the first nine months, versus $11.4 million used in 2012. Investing activities used $3.8 million; financing activities provided $0.5 million. Cash increased by $1.6 million to $9.2 million.
- Balance sheet and liquidity: Current assets were $63.3 million and current liabilities $19.0 million, yielding working capital of $44.2 million and a 3.32 current ratio. Total liabilities were $146.3 million. Debt reported on the balance sheet was $111.0 million, excluding $11.7 million of capital lease liabilities. Kinergy had $19.1 million drawn on its line and $5.5 million of borrowing-base availability; Plant Owners reported $8.0 million of unused availability under a separate facility.
- VIE obligations: Consolidated New PE Holdco assets were $162.4 million; $119.5 million of its liabilities were stated to be without recourse to Pacific Ethanol’s general credit. The filing distinguishes these obligations from parent recourse debt.
Material changes and financing
- Pacific Ethanol’s ownership of New PE Holdco increased from 67% at December 31, 2012 to 85% in 2013. This increased the portion of New PE Holdco’s results attributed to Pacific Ethanol, but did not change consolidated net income or loss.
- The company issued $22.2 million of senior unsecured notes and $14.0 million of subordinated convertible notes during 2013, and received warrant-exercise proceeds. Proceeds funded operations and purchases of Plant Owners’ debt and additional New PE Holdco interests. The senior notes had a 5% stated rate and March 2016 maturity; Plant Owners’ term and revolving debt carried an approximately 13.25% rate at quarter-end and was extended to June 2016.
- Convertible-note installments and conversions caused share issuance and reported extinguishment losses. The company issued 3.6 million shares for $11.6 million of principal and interest through September 30. The Series A notes were retired; Series B principal was $2.5 million at quarter-end and $0.25 million by November 8 after further conversions.
- Capital leases of $12.1 million were recorded for corn-oil separation equipment. Common shares issued and outstanding increased to 14.7 million at September 30 from 9.8 million at year-end 2012; the filing states that a one-for-fifteen reverse split took effect in May 2013.
Outlook, risks and unusual items
- Management said available resources were expected to meet working-capital and capital-expenditure needs for at least 12 months, while warning that weaker crush margins, cash flows or other events could require additional financing. Restarting Madera could require additional capital. No quantified earnings or revenue guidance was provided.
- Management described Q4 as seasonally slow, expected balanced ethanol supply and demand, and anticipated blend rates at least at then-current levels through 2014. It said elevated Q3 corn basis had since returned to normal. Corn-oil production was beginning at Magic Valley and Stockton; the company was assessing deployment at other plants. It also planned to diversify feedstock, including beet sugar.
- Key exposures include volatile ethanol, co-product, corn and natural-gas prices; plant operating and yield performance; debt service and refinancing; and dependence on credit availability. Commodity derivative losses were $1.7 million for the first nine months of 2013.
- GS CleanTech sued over alleged patent infringement related to corn-oil separation technology, seeking injunctions and unspecified damages. The company denied infringement and counterclaimed that the patent claims were invalid. Management did not expect pending proceedings to have a material impact based on facts then available, but noted outcomes were uncertain.
- Preferred stock dividends are 7% annually; $3.7 million of dividends remained accrued and unpaid at quarter-end. Failure to make ongoing cash payments could trigger default under related agreements. The filing also disclosed warrant and convertible-feature fair-value liabilities, which can fluctuate with share price and valuation assumptions.
Important facts for investors to verify
- Confirm the issuer identity: this supplied filing is for Pacific Ethanol, Inc., despite the request naming Alto Ingredients, Inc.
- Review subsequent filings for Series B note repayment/conversions, dilution, and the remaining senior-note balance and any rate step-ups.
- Assess the sustainability of improved gross margins against corn basis, ethanol prices, production volumes, and derivative results.
- Check availability and covenant compliance under Kinergy and Plant Owners’ credit facilities, including cash needs for preferred dividends and any Madera restart.
- Track the GS CleanTech patent case and any effect on corn-oil operations or equipment.