Business context and reporting period
Pacific Ethanol, Inc. (the filing’s registrant name) filed this unaudited Form 10-Q for the quarter ended March 31, 2012. It markets and produces low-carbon fuels in the Western United States, including ethanol and distillers grains, and provides related logistics services. Its four plants had annual capacity of up to 200 million gallons; three were operating and the Madera plant was idled. Pacific Ethanol owned 34% of New PE Holdco, which it consolidated as a variable interest entity (VIE).
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $197.7 million | $173.1 million; up 14.2% |
| Gross profit (loss) | $(7.5) million; margin (3.8)% | $2.6 million; margin 1.5% |
| Operating loss | $(10.9) million | $(1.6) million |
| Consolidated net loss | $(14.0) million | $(4.7) million |
| Net loss attributed to Pacific Ethanol | $(5.0) million | Net income of $18,000 |
| Net loss available to common stockholders / diluted loss per share | $(5.3) million / $(0.06) | $(294,000) / $(0.02) |
| Cash from operations | $(2.8) million | $(5.9) million |
| Capital expenditures / investing cash flow | $0.9 million / $(0.9) million | $0.3 million / $(0.3) million |
| Cash at quarter-end | $5.0 million | $8.9 million at Dec. 31, 2011 |
At March 31, 2012, total assets were $221.6 million, current assets $58.2 million, current liabilities $12.1 million, working capital $46.1 million, and total liabilities $116.3 million. Long-term debt, net of current portion, was $93.7 million, plus $0.75 million current debt. Series B preferred dividends accrued and unpaid totaled $7.3 million. The working-capital ratio was 4.81, down from 7.43 at year-end.
Material changes versus the prior comparable period
- Sales volume rose 35.7% to 114.8 million gallons, driven by third-party volumes up 66.7% to 79.5 million gallons; production gallons sold fell 4.3% to 35.3 million.
- Average sales price declined 7.5% to $2.34 per gallon. Management attributed the gross-margin deterioration mainly to production costs, particularly corn costs relative to ethanol prices, and the absence of approximately $1.5 million in California producer incentive proceeds received in Q1 2011.
- SG&A fell 19.3% to $3.4 million. Net interest expense decreased 20.0% to $2.9 million, primarily following retirement of senior convertible notes in November 2011.
- Cash declined $3.9 million during the quarter. Operating cash use improved year over year, but the company remained loss-making and operating cash flow was negative.
Outlook, risks, contingencies and unusual items
- Management believed available capital resources, operating revenues and credit facilities would cover anticipated working-capital and capital-expenditure needs for at least 12 months, while cautioning that materially different cash needs or unforeseen events could require additional financing.
- Management intended to restart Madera when market conditions permitted and with New PE Holdco approval; no specific restart date or financial guidance was provided.
- Kinergy’s credit facility was extended in May 2012, with maturity on December 31, 2015. The filing gives inconsistent descriptions of the facility’s size: the debt note states up to $40 million including an optional $10 million accordion, while MD&A states $30 million plus an optional $10 million accordion. At quarter-end, the borrowing base available was $15.5 million and the balance was $14.5 million.
- New PE Holdco term loans and revolving facility mature in June 2013; management said it expected the Plant Owners to seek refinancing. New PE Holdco had $28.0 million outstanding and $6.2 million unused availability at quarter-end.
- Kinergy and PAP were subject to EBITDA and fixed-charge coverage covenants under the amended facility. Reported Q1 2012 actuals exceeded the stated then-applicable requirements; future covenant requirements increase, and the company guaranteed Kinergy’s obligations.
- Commodity price and interest-rate exposures, customer credit risk, plant operating conditions, ethanol-market changes, and access to financing are material risks. The company used commodity derivatives but designated none as cash-flow hedges in either comparison period.
- Ordinary-course litigation and claims were disclosed. Management did not expect pending proceedings to have a material impact based on currently available facts, but the filing notes outcomes remain uncertain. The company reported effective disclosure controls at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Resolve the inconsistent reported size of Kinergy’s renewed credit facility and review its borrowing-base availability, collateral, and covenant terms.
- Assess whether ethanol and co-product pricing can recover margins, given the sharp shift from positive to negative gross margin and management’s stated cost pressures.
- Monitor liquidity and refinancing: quarter-end cash was $5.0 million, operating cash flow was negative, and New PE Holdco debt matures in June 2013.
- Distinguish consolidated VIE amounts from obligations of Pacific Ethanol itself: New PE Holdco’s creditors had no recourse to the parent, and its assets and liabilities were included in consolidation.
- Track the idled Madera plant, plant utilization, third-party marketing volumes, preferred-dividend arrears, and any material developments in legal claims.