|
ITEM
1.
|
FINANCIAL
STATEMENTS.
|
PACIFIC
ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
ASSETS
|
|
2018
|
|
|
2017
|
|
|
|
|
(unaudited)
|
|
|
|
*
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
56,093
|
|
|
$
|
49,489
|
|
Accounts receivable, net (net of allowance for doubtful accounts of $11 and $19, respectively)
|
|
|
67,644
|
|
|
|
80,344
|
|
Inventories
|
|
|
54,766
|
|
|
|
61,550
|
|
Prepaid inventory
|
|
|
1,442
|
|
|
|
3,281
|
|
Derivative instruments
|
|
|
1,954
|
|
|
|
998
|
|
Other current assets
|
|
|
10,367
|
|
|
|
7,584
|
|
Total current assets
|
|
|
192,266
|
|
|
|
203,246
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
488,591
|
|
|
|
508,352
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
2,678
|
|
|
|
2,678
|
|
Other assets
|
|
|
5,012
|
|
|
|
6,020
|
|
Total other assets
|
|
|
7,690
|
|
|
|
8,698
|
|
Total Assets
|
|
$
|
688,547
|
|
|
$
|
720,296
|
|
*
Amounts
derived from the audited consolidated financial statements for the year ended December 31, 2017.
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except par value)
|
|
September 30,
|
|
|
December 31,
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
2018
|
|
|
2017
|
|
|
|
|
(unaudited)
|
|
|
|
*
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable – trade
|
|
$
|
44,774
|
|
|
$
|
39,738
|
|
Accrued liabilities
|
|
|
20,885
|
|
|
|
21,673
|
|
Current portion – capital leases
|
|
|
45
|
|
|
|
592
|
|
Current portion – long-term debt
|
|
|
20,000
|
|
|
|
20,000
|
|
Derivative instruments
|
|
|
6,385
|
|
|
|
2,307
|
|
Other current liabilities
|
|
|
6,931
|
|
|
|
6,396
|
|
Total current liabilities
|
|
|
99,020
|
|
|
|
90,706
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
214,419
|
|
|
|
221,091
|
|
Capital leases, net of current portion
|
|
|
89
|
|
|
|
123
|
|
Other liabilities
|
|
|
23,497
|
|
|
|
24,676
|
|
Total Liabilities
|
|
|
337,025
|
|
|
|
336,596
|
|
Commitments and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Pacific Ethanol, Inc. Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000 shares authorized; Series A: 1,684 shares
authorized; no shares issued and outstanding as of September 30, 2018 and December 31, 2017; Series B: 1,581 shares
authorized; 927 shares issued and outstanding as of September 30, 2018 and December 31, 2017; liquidation preference of
$18,075 as of September 30, 2018
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.001 par value; 300,000 shares authorized; 44,946 and 43,985 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
|
|
|
45
|
|
|
|
44
|
|
Non-voting common stock, $0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
929,262
|
|
|
|
927,090
|
|
Accumulated other comprehensive loss
|
|
|
(2,234
|
)
|
|
|
(2,234
|
)
|
Accumulated deficit
|
|
|
(597,671
|
)
|
|
|
(568,462
|
)
|
Total Pacific Ethanol, Inc. Stockholders’ Equity
|
|
|
329,403
|
|
|
|
356,439
|
|
Noncontrolling interests
|
|
|
22,119
|
|
|
|
27,261
|
|
Total Stockholders’ Equity
|
|
|
351,522
|
|
|
|
383,700
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
688,547
|
|
|
$
|
720,296
|
|
*
Amounts derived
from the audited consolidated financial statements for the year ended December 31, 2017.
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited,
in thousands, except per share data)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
370,407
|
|
|
$
|
445,442
|
|
|
$
|
1,180,956
|
|
|
$
|
1,236,984
|
|
Cost of goods sold
|
|
|
366,639
|
|
|
|
433,377
|
|
|
|
1,175,099
|
|
|
|
1,229,039
|
|
Gross profit
|
|
|
3,768
|
|
|
|
12,065
|
|
|
|
5,857
|
|
|
|
7,945
|
|
Selling, general and administrative expenses
|
|
|
8,970
|
|
|
|
8,720
|
|
|
|
27,183
|
|
|
|
22,932
|
|
Income (loss) from operations
|
|
|
(5,202
|
)
|
|
|
3,345
|
|
|
|
(21,326
|
)
|
|
|
(14,987
|
)
|
Fair value adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
473
|
|
Interest expense
|
|
|
(4,193
|
)
|
|
|
(3,826
|
)
|
|
|
(12,875
|
)
|
|
|
(9,157
|
)
|
Other income (expense), net
|
|
|
91
|
|
|
|
(60
|
)
|
|
|
233
|
|
|
|
(293
|
)
|
Loss before benefit for income taxes
|
|
|
(9,304
|
)
|
|
|
(541
|
)
|
|
|
(33,968
|
)
|
|
|
(23,964
|
)
|
Benefit for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
563
|
|
|
|
—
|
|
Consolidated net loss
|
|
|
(9,304
|
)
|
|
|
(541
|
)
|
|
|
(33,405
|
)
|
|
|
(23,964
|
)
|
Net loss attributed to noncontrolling interests
|
|
|
1,790
|
|
|
|
339
|
|
|
|
5,142
|
|
|
|
2,285
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(7,514
|
)
|
|
$
|
(202
|
)
|
|
$
|
(28,263
|
)
|
|
$
|
(21,679
|
)
|
Preferred stock dividends
|
|
$
|
(319
|
)
|
|
$
|
(319
|
)
|
|
$
|
(946
|
)
|
|
$
|
(946
|
)
|
Loss available to common stockholders
|
|
$
|
(7,833
|
)
|
|
$
|
(521
|
)
|
|
$
|
(29,209
|
)
|
|
$
|
(22,625
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(0.53
|
)
|
Weighted-average shares outstanding, basic and diluted
|
|
|
43,299
|
|
|
|
42,475
|
|
|
|
43,171
|
|
|
|
42,358
|
|
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(33,405
|
)
|
|
$
|
(23,964
|
)
|
Adjustments to reconcile consolidated net loss to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
30,635
|
|
|
|
28,486
|
|
Deferred income taxes
|
|
|
(563
|
)
|
|
|
—
|
|
Fair value adjustments
|
|
|
—
|
|
|
|
(473
|
)
|
Amortization of debt discount
|
|
|
539
|
|
|
|
454
|
|
Amortization of deferred financing fees
|
|
|
754
|
|
|
|
339
|
|
Non-cash compensation
|
|
|
2,579
|
|
|
|
2,985
|
|
Loss on derivative instruments
|
|
|
4,362
|
|
|
|
836
|
|
Bad debt expense
|
|
|
44
|
|
|
|
4
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
12,656
|
|
|
|
25,625
|
|
Inventories
|
|
|
6,784
|
|
|
|
(1,891
|
)
|
Prepaid expenses and other assets
|
|
|
(2,454
|
)
|
|
|
2,197
|
|
Prepaid inventory
|
|
|
1,839
|
|
|
|
4,397
|
|
Accounts payable and accrued expenses
|
|
|
2,307
|
|
|
|
(3,995
|
)
|
Net cash provided by operating activities
|
|
|
26,077
|
|
|
|
35,000
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(10,874
|
)
|
|
|
(12,348
|
)
|
Purchase of ICP, net of cash acquired
|
|
|
—
|
|
|
|
(28,921
|
)
|
Net cash used in investing activities
|
|
|
(10,874
|
)
|
|
|
(41,269
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Net proceeds from (payments on) Kinergy’s line of credit
|
|
|
9,880
|
|
|
|
(5,889
|
)
|
Proceeds from ICP credit facilities
|
|
|
—
|
|
|
|
42,000
|
|
Proceeds from assessment financing
|
|
|
728
|
|
|
|
1,144
|
|
Proceeds from notes
|
|
|
—
|
|
|
|
13,530
|
|
Payments for debt issuance costs
|
|
|
—
|
|
|
|
(924
|
)
|
Principal payments on borrowings
|
|
|
(17,500
|
)
|
|
|
(54,927
|
)
|
Payments on capital leases
|
|
|
(761
|
)
|
|
|
(588
|
)
|
Proceeds from exercise of warrants and options
|
|
|
—
|
|
|
|
1,202
|
|
Preferred stock dividends paid
|
|
|
(946
|
)
|
|
|
(946
|
)
|
Net cash used in financing activities
|
|
|
(8,599
|
)
|
|
|
(5,398
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,604
|
|
|
|
(11,667
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
49,489
|
|
|
|
68,590
|
|
Cash and cash equivalents at end of period
|
|
$
|
56,093
|
|
|
$
|
56,923
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
11,299
|
|
|
$
|
8,291
|
|
Income tax refunds received
|
|
$
|
743
|
|
|
$
|
5,601
|
|
Noncash financing and investing activities:
|
|
|
|
|
|
|
|
|
Issuance of notes payable for acquisition of ICP
|
|
$
|
—
|
|
|
$
|
46,927
|
|
Reclass of warrant liability to equity upon warrant exercises
|
|
$
|
—
|
|
|
$
|
178
|
|
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-In Capital
|
|
|
Accumulated
Deficit
|
|
|
Accum.
Other Comprehensive Income
(Loss)
|
|
|
Non-Controlling
Interests
|
|
|
Total
|
|
Balances,
January 1, 2018
|
|
|
927
|
|
|
$
|
1
|
|
|
|
43,986
|
|
|
$
|
44
|
|
|
$
|
927,090
|
|
|
$
|
(568,462
|
)
|
|
$
|
(2,234
|
)
|
|
$
|
27,261
|
|
|
$
|
383,700
|
|
Stock-based compensation expense – restricted
stock issued to employees and directors, net of cancellations and tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
735
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
735
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(312
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(312
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,841
|
)
|
|
|
—
|
|
|
|
(1,656
|
)
|
|
|
(9,497
|
)
|
Balances,
March 31, 2018
|
|
|
927
|
|
|
$
|
1
|
|
|
|
43,955
|
|
|
$
|
44
|
|
|
$
|
927,825
|
|
|
$
|
(576,615
|
)
|
|
$
|
(2,234
|
)
|
|
$
|
25,605
|
|
|
$
|
374,626
|
|
Stock-based compensation expense – restricted
stock and options to employees and directors, net of cancellations and tax
|
|
|
—
|
|
|
|
—
|
|
|
|
1,006
|
|
|
|
1
|
|
|
|
553
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
554
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(315
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(315
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,908
|
)
|
|
|
—
|
|
|
|
(1,696
|
)
|
|
|
(14,604
|
)
|
Balances,
June 30, 2018
|
|
|
927
|
|
|
$
|
1
|
|
|
|
44,961
|
|
|
$
|
45
|
|
|
$
|
928,378
|
|
|
$
|
(589,838
|
)
|
|
$
|
(2,234
|
)
|
|
$
|
23,909
|
|
|
$
|
360,261
|
|
Stock-based compensation expense – restricted
stock and options to employees and directors, net of cancellations and tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
884
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
884
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(319
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(319
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,514
|
)
|
|
|
—
|
|
|
|
(1,790
|
)
|
|
|
(9,304
|
)
|
Balances,
September 30, 2018
|
|
|
927
|
|
|
$
|
1
|
|
|
|
44,947
|
|
|
$
|
45
|
|
|
$
|
929,262
|
|
|
$
|
(597,671
|
)
|
|
$
|
(2,234
|
)
|
|
$
|
22,119
|
|
|
$
|
351,522
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-In Capital
|
|
|
Accumulated
Deficit
|
|
|
Accum.
Other Comprehensive
Income
(Loss)
|
|
|
Non-Controlling
Interests
|
|
|
Total
|
|
Balances,
January 1, 2017
|
|
|
927
|
|
|
$
|
1
|
|
|
|
43,312
|
|
|
$
|
44
|
|
|
$
|
922,698
|
|
|
$
|
(532,233
|
)
|
|
$
|
(2,620
|
)
|
|
$
|
30,371
|
|
|
$
|
418,261
|
|
Stock-based compensation expense – restricted
stock issued to employees and directors, net of cancellations and tax
|
|
|
—
|
|
|
|
—
|
|
|
|
505
|
|
|
|
—
|
|
|
|
1,220
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,220
|
|
Option exercise
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
37
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(312
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(312
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,636
|
)
|
|
|
—
|
|
|
|
(849
|
)
|
|
|
(13,485
|
)
|
Balances,
March 31, 2017
|
|
|
927
|
|
|
$
|
1
|
|
|
|
43,827
|
|
|
$
|
44
|
|
|
$
|
923,955
|
|
|
$
|
(545,181
|
)
|
|
$
|
(2,620
|
)
|
|
$
|
29,522
|
|
|
$
|
405,721
|
|
Stock-based compensation expense – restricted
stock and options to employees and directors, net of cancellations and tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
—
|
|
|
|
127
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
127
|
|
Warrant exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
120
|
|
|
|
—
|
|
|
|
829
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
829
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(315
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(315
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,841
|
)
|
|
|
—
|
|
|
|
(1,097
|
)
|
|
|
(9,938
|
)
|
|
|
|
927
|
|
|
$
|
1
|
|
|
|
43,910
|
|
|
$
|
44
|
|
|
$
|
924,911
|
|
|
$
|
(554,337
|
)
|
|
$
|
(2,620
|
)
|
|
$
|
28,425
|
|
|
$
|
396,424
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-In Capital
|
|
|
Accumulated
Deficit
|
|
|
Accum.
Other Comprehensive
Income
(Loss)
|
|
|
Non-Controlling
Interests
|
|
|
Total
|
|
Balances,
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense – restricted
stock and options to employees and directors, net of cancellations and tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
825
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
825
|
|
Warrant exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
|
|
—
|
|
|
|
512
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
512
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(319
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(319
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(202
|
)
|
|
|
—
|
|
|
|
(339
|
)
|
|
|
(541
|
)
|
Balances,
September 30, 2017
|
|
|
927
|
|
|
$
|
1
|
|
|
|
43,972
|
|
|
$
|
44
|
|
|
$
|
926,248
|
|
|
$
|
(554,858
|
)
|
|
$
|
(2,620
|
)
|
|
$
|
28,086
|
|
|
$
|
396,901
|
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
1.
|
ORGANIZATION
AND
BASIS OF PRESENTATION.
|
Organization
and Business
– The consolidated financial statements include, for all periods presented, the accounts of Pacific
Ethanol, Inc., a Delaware corporation (“Pacific Ethanol”), and its direct and indirect subsidiaries (collectively,
the “Company”), including its subsidiaries, Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”),
Pacific Ag. Products, LLC, a California limited liability company (“PAP”), PE Op Co., a Delaware corporation (“PE
Op Co.”) and all nine of the Company’s ethanol production facilities.
The
Company’s acquisition of Illinois Corn Processing, LLC (“ICP”) was consummated on July 3, 2017, and as a result,
the Company’s accompanying consolidated financial statements include the results of ICP since that date.
The
Company is a leading producer and marketer of low-carbon renewable fuels in the United States. The Company has a combined production
capacity of 605 million gallons per year, markets, on an annualized basis, nearly 1.0 billion gallons of ethanol and specialty
alcohols, and produces, on an annualized basis, over 3.0 million tons of co-products on a dry matter basis, such as wet and dry
distillers grains, wet and dry corn gluten feed, condensed distillers solubles, corn gluten meal, corn germ, dried yeast and CO
2
.
The
Company owns and operates nine production facilities, four in the Western states of California, Oregon and Idaho, and five in
the Midwestern states of Illinois and Nebraska.
The
Company’s four ethanol plants in the Western United States (together with their respective holding companies, the “Pacific
Ethanol West Plants”) are located in close proximity to both feed and ethanol customers and thus enjoy unique advantages
in efficiency, logistics and product pricing.
The
Company’s five ethanol plants in the Midwest (together with their respective holding companies, the “Pacific Ethanol
Central Plants”) are located in the heart of the Corn Belt, benefit from low-cost and abundant feedstock production and
allow for access to many additional domestic markets. In addition, the Company’s ability to load unit trains from these
facilities in the Midwest allows for greater access to international markets.
As
of September 30, 2018, all nine facilities were operating. As market conditions change, the Company may increase, decrease or
idle production at one or more operational facilities or resume operations at any idled facility.
Basis
of Presentation
–
Interim Financial Statements
– The accompanying unaudited consolidated financial
statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim periods
should not be considered indicative of results for a full year. These interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2017. The accounting policies used in preparing these consolidated financial statements
are the same as those described in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form
10-K for the year ended December 31, 2017, with the exception of revenue recognition, as discussed further below. In the opinion
of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results
for interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation.
Accounts
Receivable and Allowance for Doubtful Accounts
– Trade accounts receivable are presented at face value, net of the
allowance for doubtful accounts. The Company sells ethanol to gasoline refining and distribution companies, sells distillers grains
and other feed co-products to dairy operators and animal feedlots and sells corn oil to poultry and biodiesel customers generally
without requiring collateral.
The
Company maintains an allowance for doubtful accounts for balances that appear to have specific collection issues. The collection
process is based on the age of the invoice and requires attempted contacts with the customer at specified intervals. If, after
a specified number of days, the Company has been unsuccessful in its collection efforts, a bad debt allowance is recorded for
the balance in question. Delinquent accounts receivable are charged against the allowance for doubtful accounts once uncollectibility
has been determined. The factors considered in reaching this determination are the apparent financial condition of the customer
and the Company’s success in contacting and negotiating with the customer. If the financial condition of the Company’s
customers were to deteriorate, resulting in an impairment of ability to make payments, additional allowances may be required.
Of
the accounts receivable balance, approximately $52,693,000 and $64,501,000 at September 30, 2018 and December 31, 2017, respectively,
were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $11,000 and $19,000
as of September 30, 2018 and December 31, 2017, respectively. The Company recorded a bad debt recovery of $1,000 and bad debt
expense of $2,000 for the three months ended September 30, 2018 and 2017, respectively. The Company recorded a bad debt expense
of $44,000 and $4,000 for the nine months ended September 30, 2018 and 2017, respectively. The Company does not have any off-balance
sheet credit exposure related to its customers.
Benefit
for Income Taxes
– The Company recognized a tax benefit of $563,000 for the nine months ended September 30, 2018
due to the Company’s reduction of its deferred tax asset valuation allowance due to the taxable losses incurred during the
period. Under the Tax Cuts and Jobs Act enacted on December 22, 2017, losses incurred after 2017 can be carried forward indefinitely.
The Company does not expect additional tax benefits to be recognized during 2018 due to this provision. The Company recognized
no tax benefit for the three months ended September 30, 2018 and the three and nine months ended September 30, 2017 due to the
uncertainty of using its tax losses to offset future taxable income. To the extent the Company believes it can utilize its tax
losses, the Company will adjust its benefit for income taxes accordingly in future periods.
Comprehensive
Loss
– The Company’s accumulated other comprehensive loss relates to the Company’s pension plans. For
the three and nine months ended September 30, 2018 and 2017, the Company’s consolidated loss and comprehensive loss were
substantially the same amount.
Financial
Instruments
– The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of their fair values because of the short maturity of these items. The Company believes the
carrying value of its long-term debt approximates fair value because the interest rates on these instruments are variable, and
are considered Level 2 fair value measurements.
Recent
Accounting Pronouncements
– In February 2016, the Financial Accounting Standards Board (“FASB”) issued
new guidance on accounting for leases. Under the new guidance, lessees will be required to recognize the following for all leases
(with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation
to make lease payments arising from a lease, measured on a discounted cash flow basis; and (2) a “right of use” asset,
which is an asset that represents the lessee’s right to use the specified asset for the lease term. Under the new guidance,
lessor accounting is largely unchanged, with some minor exceptions. Lessees will no longer be provided with a source of off-balance
sheet financing for other than short-term leases. The standard is effective for public companies for annual reporting periods
beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects that upon adoption
of this accounting standard, right of use assets and lease obligations will be recognized in its consolidated balance sheets in
amounts that will be material.
In
May 2014, the FASB issued new guidance on the recognition of revenue (“ASC 606”). ASC 606 states that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual reporting
periods beginning after December 15, 2017, including interim periods within that reporting period. In March and April 2016, the
FASB issued further revenue recognition guidance amending principal vs. agent considerations regarding whether an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods and services.
The
provisions of ASC 606 include a five-step process by which an entity will determine revenue recognition, depicting the transfer
of goods or services to customers in amounts reflecting the payment to which an entity expects to be entitled in exchange for
those goods or services. ASC 606 requires the Company to apply the following steps: (1) identify the contract with the customer;
(2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price
to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies the performance obligation.
Effective
January 1, 2018, the Company adopted ASC 606 using the modified retrospective method for all of its contracts. Following the adoption
of ASC 606, the Company continues to recognize revenue at a point-in-time when control of goods transfers to the customer. This
is consistent with the Company’s previous revenue recognition accounting policy under which the Company recognized revenue
when title and risk of loss pass to the customer and collectability was reasonably assured. In addition, ASU 606 did not impact
the Company’s presentation of revenue on a gross or net basis.
The
Company recognizes revenue primarily from sales of ethanol and its related co-products.
The
Company has nine ethanol production facilities from which it produces and sells ethanol to its customers through Kinergy. Kinergy
enters into sales contracts with ethanol customers under exclusive intercompany ethanol sales agreements with each of the Company’s
nine ethanol plants. Kinergy also acts as a principal when it purchases third party ethanol which it resells to its customers.
Finally, Kinergy has exclusive sales agreements with other third-party owned ethanol plants under which it sells their ethanol
production for a fee plus the costs to deliver the ethanol to Kinergy’s customers. These sales are referred to as third-party
agent sales. Revenue from these third-party agent sales is recorded on a net basis, with Kinergy recognizing its predetermined
fees and any associated delivery costs.
The
Company has nine ethanol production facilities from which it produces and sells co-products to its customers through PAP. PAP
enters into sales contracts with co-product customers under exclusive intercompany co-product sales agreements with each of the
Company’s nine ethanol plants.
The
Company recognizes revenue from sales of ethanol and co-products at the point in time when the customer obtains control of such
products, which typically occurs upon delivery depending on the terms of the underlying contracts. In some instances, the Company
enters into contracts with customers that contain multiple performance obligations to deliver volumes of ethanol or co-products
over a contractual period of less than 12 months. The Company allocates the transaction price to each performance obligation identified
in the contract based on relative standalone selling prices and recognizes the related revenue as control of each individual product
is transferred to the customer in satisfaction of the corresponding performance obligations.
When
the Company is the agent, the supplier controls the products before they are transferred to the customer because the supplier
is primarily responsible for fulfilling the promise to provide the product, has inventory risk before the product has been transferred
to a customer and has discretion in establishing the price for the product. When the Company is the principal, the Company controls
the products before they are transferred to the customer because the Company is primarily responsible for fulfilling the promise
to provide the products, has inventory risk before the product has been transferred to a customer and has discretion in establishing
the price for the product.
The
Company accounts for shipping and handling costs relating to contracts with customers as costs to fulfill its promise to transfer
its products. Accordingly, the costs are classified as a component of cost of goods sold. See Note 2 for the Company’s revenue
by type of contracts.
Estimates
and Assumptions
– The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates are required as part of determining the allowance for doubtful
accounts, net realizable value of inventory, estimated lives of property and equipment, long-lived asset impairments, valuation
allowances on deferred income taxes and the potential outcome of future tax consequences of events recognized in the Company’s
financial statements or tax returns, and the valuation of assets acquired and liabilities assumed as a result of business combinations.
Actual results and outcomes may materially differ from management’s estimates and assumptions.
The
Company reports its financial and operating performance in two segments: (1) ethanol production, which includes the production
and sale of ethanol, specialty alcohols and co-products, with all of the Company’s production facilities aggregated, and
(2) marketing and distribution, which includes marketing and merchant trading for Company-produced ethanol, specialty alcohols
and co-products and third-party ethanol.
The
following tables set forth certain financial data for the Company’s operating segments (in thousands):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production,
recorded as gross:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol/alcohol
sales
|
|
$
|
216,788
|
|
|
$
|
236,326
|
|
|
$
|
670,304
|
|
|
$
|
618,438
|
|
Co-product
sales
|
|
|
73,259
|
|
|
|
68,487
|
|
|
|
226,307
|
|
|
|
185,574
|
|
Intersegment
sales
|
|
|
518
|
|
|
|
639
|
|
|
|
1,531
|
|
|
|
1,138
|
|
Total
production sales
|
|
|
290,565
|
|
|
|
305,452
|
|
|
|
898,142
|
|
|
|
805,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol/alcohol
sales, gross
|
|
$
|
79,877
|
|
|
$
|
140,208
|
|
|
$
|
282,940
|
|
|
$
|
431,733
|
|
Ethanol/alcohol
sales, net
|
|
|
483
|
|
|
|
421
|
|
|
|
1,405
|
|
|
|
1,239
|
|
Intersegment
sales
|
|
|
2,201
|
|
|
|
2,334
|
|
|
|
6,757
|
|
|
|
6,135
|
|
Total
marketing sales
|
|
|
82,561
|
|
|
|
142,963
|
|
|
|
291,102
|
|
|
|
439,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
eliminations
|
|
|
(2,719
|
)
|
|
|
(2,973
|
)
|
|
|
(8,288
|
)
|
|
|
(7,273
|
)
|
Net
sales as reported
|
|
$
|
370,407
|
|
|
$
|
445,442
|
|
|
$
|
1,180,956
|
|
|
$
|
1,236,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
295,574
|
|
|
$
|
294,047
|
|
|
$
|
914,638
|
|
|
$
|
799,203
|
|
Marketing
and distribution
|
|
|
73,784
|
|
|
|
142,303
|
|
|
|
268,917
|
|
|
|
437,109
|
|
Intersegment
eliminations
|
|
|
(2,719
|
)
|
|
|
(2,973
|
)
|
|
|
(8,456
|
)
|
|
|
(7,273
|
)
|
Cost
of goods sold as reported
|
|
$
|
366,639
|
|
|
$
|
433,377
|
|
|
$
|
1,175,099
|
|
|
$
|
1,229,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before benefit for income taxes
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
(15,571
|
)
|
|
$
|
2,638
|
|
|
$
|
(45,355
|
)
|
|
$
|
(15,981
|
)
|
Marketing
and distribution
|
|
|
7,416
|
|
|
|
(757
|
)
|
|
|
18,095
|
|
|
|
(2,043
|
)
|
Corporate
activities
|
|
|
(1,149
|
)
|
|
|
(2,422
|
)
|
|
|
(6,708
|
)
|
|
|
(5,940
|
)
|
|
|
$
|
(9,304
|
)
|
|
$
|
(541
|
)
|
|
$
|
(33,968
|
)
|
|
$
|
(23,964
|
)
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
10,040
|
|
|
$
|
9,841
|
|
|
$
|
30,017
|
|
|
$
|
27,703
|
|
Corporate
activities
|
|
|
177
|
|
|
|
237
|
|
|
|
618
|
|
|
|
783
|
|
|
|
$
|
10,217
|
|
|
$
|
10,078
|
|
|
$
|
30,635
|
|
|
$
|
28,486
|
|
Interest
expense
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
1,692
|
|
|
$
|
1,850
|
|
|
$
|
5,416
|
|
|
$
|
4,061
|
|
Marketing
and distribution
|
|
|
344
|
|
|
|
342
|
|
|
|
1,042
|
|
|
|
953
|
|
Corporate
activities
|
|
|
2,157
|
|
|
|
1,634
|
|
|
|
6,417
|
|
|
|
4,143
|
|
|
|
$
|
4,193
|
|
|
$
|
3,826
|
|
|
$
|
12,875
|
|
|
$
|
9,157
|
|
The
following table sets forth the Company’s total assets by operating segment (in thousands):
|
|
|
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
545,360
|
|
|
$
|
583,696
|
|
Marketing
and distribution
|
|
|
139,165
|
|
|
|
127,242
|
|
Corporate
assets
|
|
|
4,022
|
|
|
|
9,358
|
|
|
|
$
|
688,547
|
|
|
$
|
720,296
|
|
Inventories
consisted primarily of bulk ethanol, specialty alcohols, corn, co-products, low-carbon and Renewable Identification Number (“RIN”)
credits and unleaded fuel, and are valued at the lower-of-cost-or-net realizable value, with cost determined on a first-in, first-out
basis. Inventory is net of valuation adjustments of $1,513,000 and $2,678,000 as of September 30, 2018 and December 31, 2017,
respectively. Inventory balances consisted of the following (in thousands):
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Finished
goods
|
|
$
|
33,525
|
|
|
$
|
35,652
|
|
Work
in progress
|
|
|
7,753
|
|
|
|
8,807
|
|
Raw
materials
|
|
|
7,260
|
|
|
|
7,601
|
|
Low-carbon
and RIN credits
|
|
|
4,585
|
|
|
|
7,952
|
|
Other
|
|
|
1,643
|
|
|
|
1,538
|
|
Total
|
|
$
|
54,766
|
|
|
$
|
61,550
|
|
The
business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity
prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program
recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility
could have on operating results.
Commodity
Risk
–
Cash Flow Hedges
– The Company uses derivative instruments to protect cash flows from
fluctuations caused by volatility in commodity prices for periods of up to twelve months in order to protect gross profit margins
from potentially adverse effects of market and price volatility on ethanol sale and purchase commitments where the prices are
set at a future date and/or if the contracts specify a floating or index-based price for ethanol. In addition, the Company hedges
anticipated sales of ethanol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives
may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated
transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which
is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of
goods sold. For the three and nine months ended September 30, 2018 and 2017, the Company did not designate any of its derivatives
as cash flow hedges.
Commodity
Risk – Non-Designated Hedges
– The Company uses derivative instruments to lock in prices for certain amounts
of corn and ethanol by entering into exchange-traded forward contracts for those commodities. These derivatives are not designated
for special hedge accounting treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized
immediately in cost of goods sold. The Company recognized losses of $991,000 and $483,000 as the changes in the fair values of
these contracts for the three months ended September 30, 2018 and 2017, respectively. The Company recognized losses of $4,362,000
and $836,000 as the changes in the fair values of these contracts for the nine months ended September 30, 2018 and 2017, respectively.
Non
Designated Derivative Instruments
– The classification and amounts of the Company’s derivatives not designated
as hedging instruments, and related cash collateral balances, are as follows (in thousands):
|
|
As
of September 30, 2018
|
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
|
Type
of Instrument
|
|
Balance
Sheet Location
|
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
|
|
Fair
Value
|
|
Cash
collateral balance
|
|
Other
current assets
|
|
$
|
7,752
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
Derivative
instruments
|
|
$
|
1,954
|
|
Derivative
instruments
|
|
|
$
|
6,385
|
|
|
|
As
of December 31, 2017
|
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
|
Type
of Instrument
|
|
Balance
Sheet Location
|
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
|
|
Fair
Value
|
|
Cash
collateral balance
|
|
Other
current assets
|
|
$
|
3,813
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
Derivative
instruments
|
|
$
|
998
|
|
Derivative
instruments
|
|
|
$
|
2,307
|
|
The
classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments
are as follows (in thousands):
|
|
|
|
|
Realized
Gains (Losses)
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
Type
of Instrument
|
|
Statements
of Operations Location
|
|
|
2018
|
|
|
2017
|
|
Commodity
contracts
|
|
Cost
of goods sold
|
|
$
|
916
|
|
$
|
(1,576
|
)
|
|
|
|
|
|
Unrealized
Gains (Losses)
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
Type
of Instrument
|
|
Statements
of Operations Location
|
|
|
2018
|
|
|
2017
|
|
Commodity
contracts
|
|
Cost
of goods sold
|
|
$
|
(1,907
|
)
|
$
|
1,093
|
|
|
|
|
|
|
Realized
Losses
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
Type
of Instrument
|
|
Statements
of Operations Location
|
|
|
2018
|
|
|
2017
|
|
Commodity
contracts
|
|
Cost
of goods sold
|
|
$
|
(1,241
|
)
|
$
|
(4,495
|
)
|
|
|
|
|
|
Unrealized
Gains (Losses)
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
Type
of Instrument
|
|
Statements
of Operations Location
|
|
|
2018
|
|
|
2017
|
|
Commodity
contracts
|
|
Cost
of goods sold
|
|
$
|
(3,121
|
)
|
$
|
3,659
|
|
Long-term
borrowings are summarized as follows (in thousands):
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Kinergy
line of credit
|
|
$
|
59,357
|
|
|
$
|
49,477
|
|
Pekin
term loan
|
|
|
46,500
|
|
|
|
53,500
|
|
Pekin
revolving loan
|
|
|
30,000
|
|
|
|
32,000
|
|
ICP
term loan
|
|
|
18,000
|
|
|
|
22,500
|
|
ICP
revolving loan
|
|
|
14,000
|
|
|
|
18,000
|
|
Parent
notes payable
|
|
|
68,948
|
|
|
|
68,948
|
|
|
|
|
236,805
|
|
|
|
244,425
|
|
Less
unamortized debt discount
|
|
|
(870
|
)
|
|
|
(1,409
|
)
|
Less
unamortized debt financing costs
|
|
|
(1,516
|
)
|
|
|
(1,925
|
)
|
Less
short-term portion
|
|
|
(20,000
|
)
|
|
|
(20,000
|
)
|
Long-term
debt
|
|
$
|
214,419
|
|
|
$
|
221,091
|
|
|
|
|
|
|
|
|
|
|
Operating
Lines of Credit
– As of September 30, 2018, Kinergy, Pekin and ICP had additional borrowing availability under their
credit facilities of $5,233,000, $2,000,000 and $4,000,000, respectively.
Pekin
Term Loan
– On March 30, 2018, Pacific Ethanol Pekin, LLC (“PE Pekin”), one of the Company’s subsidiaries,
amended its term loan facility by reducing the amount of working capital it is required to maintain to not less than $13.0 million
from March 31, 2018 through November 30, 2018 and not less than $16.0 million from December 1, 2018 and continuing at all times
thereafter. In addition, a principal payment in the amount of $3.5 million due for May 2018 was deferred until the maturity date
of the term loan. As of the filing of this report, the Company believes PE Pekin is in compliance with its working capital requirement.
Pacific
Aurora Line of Credit
– On March 30, 2018, Pacific Aurora, LLC, a majority owned subsidiary of the Company, terminated
its revolving credit facility, which was unused during the three months ended March 31, 2018. As a result, the Company fully amortized
its deferred financing fees of $0.3 million during the nine months ended September 30, 2018.
Distribution
Restrictions
– At September 30, 2018, there were approximately $207.2 million of net assets at the Company’s
subsidiaries that were not available to be transferred to Pacific Ethanol, Inc. in the form of dividends, loans or advances due
to restrictions contained in the credit facilities of the Company’s subsidiaries.
|
6.
|
COMMITMENTS
AND CONTINGENCIES.
|
Sales
Commitments
– At September 30, 2018, the Company had entered into sales contracts with its major customers to sell
certain quantities of ethanol and co-products. The Company had open ethanol indexed-price contracts for 199,732,000 gallons of
ethanol as of September 30, 2018 and open fixed-price ethanol sales contracts totaling $74,502,000 as of September 30, 2018. The
Company had open fixed-price co-product sales contracts totaling $53,365,000 and open indexed-price co-product sales contracts
for 736,000 tons as of September 30, 2018. These sales contracts are scheduled to be completed over the next twelve months.
Purchase
Commitments
– At September 30, 2018, the Company had indexed-price purchase contracts to purchase 9,329,000 gallons
of ethanol and fixed-price purchase contracts to purchase $5,614,000 of ethanol from its suppliers. The Company had fixed-price
purchase contracts to purchase $13,038,000 of corn from its suppliers as of September 30, 2018. These purchase commitments are
scheduled to be satisfied over the next twelve months.
Property
Tax Assessment
– In September 2016, the Company signed an agreement to finance and construct a 5 megawatt solar
project at its Madera facility. The amount financed is for up to $10,000,000, to be amortized over twenty years as part of the
facility’s property tax assessments. As of September 30, 2018, the Company had incurred approximately $9,600,000 in project
costs, which is recorded in construction in progress and in other liabilities in the accompanying consolidated balance sheets.
The Company expects to pay approximately an additional $900,000 per year in connection with its property tax payments, which includes
an interest component based upon a 5.6% interest rate on the outstanding balance of the assessment.
Litigation
– General
–
The Company is subject to various claims and contingencies in the ordinary course of its business,
including those related to litigation, business transactions, employee-related matters, environmental regulations and others.
When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable
that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss.
If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood
of a potential loss is reasonably possible and the amount involved could be material. While there can be no assurances, the Company
does not expect that any of its pending legal proceedings will have a material impact on the Company’s financial condition
or results of operations.
The
Company assumed certain legal matters which were ongoing at July 1, 2015, the date of the Company’s acquisition of Aventine
Renewable Energy Holdings, Inc. (“PE Central”). Among them were lawsuits between Aventine Renewable Energy, Inc. (now
known as Pacific Ethanol Pekin, LLC) and Glacial Lakes Energy, Aberdeen Energy and Redfield Energy, together, the “Defendants,”
in which PE Pekin sought damages for breach of termination agreements that wound down ethanol marketing arrangements between PE
Pekin and each of the Defendants. In February and March 2017, the Company and the Defendants entered into settlement agreements
and the Defendants paid in cash to the Company $3.9 million in final resolution of these matters. The Company did not assign any
value to the claims against the Defendants in its accounting for the PE Central acquisition as of July 1, 2015. The Company recorded
a gain, net of legal fees, of $3.6 million upon receipt of the cash settlement and recognized the gain as a reduction to selling,
general and administrative expenses in the consolidated statements of operations for the nine months ended September 30, 2017.
|
7.
|
PENSION
AND RETIREMENT BENEFIT PLANS.
|
The
Company sponsors a defined benefit pension plan (the “Retirement Plan”) and a health care and life insurance plan
(the “Postretirement Plan”). The Company assumed the Retirement Plan and the Postretirement Plan as part of its acquisition
of PE Central on July 1, 2015.
The
Retirement Plan is noncontributory, and covers only “grandfathered” unionized employees at the Company’s Pekin,
Illinois facility who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the
employee’s years of service. The Retirement Plan, which is part of a collective bargaining agreement, covers only union
employees hired prior to November 1, 2010.
The
Company uses a December 31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum
annual contribution required by applicable regulations. As of December 31, 2017, the Retirement Plan’s accumulated projected
benefit obligation was $19.7 million, with a fair value of plan assets of $14.0 million. The underfunded amount of $5.7 million
is recorded on the Company’s consolidated balance sheet in other liabilities.
Of
the net periodic expense for the Retirement Plan and Postretirement Plan, the Company recognizes the service cost component in
cost of goods sold and the interest cost, expected return on plan assets and amortization of gain (loss) in other income (expense),
net.
The
Company’s net periodic Retirement Plan costs are as follows (in thousands):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
174
|
|
|
$
|
98
|
|
|
$
|
522
|
|
|
$
|
293
|
|
Service
cost
|
|
|
106
|
|
|
|
188
|
|
|
|
318
|
|
|
|
563
|
|
Expected
return on plan assets
|
|
|
(204
|
)
|
|
|
(169
|
)
|
|
|
(612
|
)
|
|
|
(506
|
)
|
Net
periodic expense
|
|
$
|
76
|
|
|
$
|
117
|
|
|
$
|
228
|
|
|
$
|
350
|
|
The
Postretirement Plan provides postretirement medical benefits and life insurance to certain “grandfathered” unionized
employees. Employees hired after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement
Plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces
at age 65 from a defined benefit to a defined dollar cap based upon years of service. As of December 31, 2017, the Postretirement
Plan’s accumulated projected benefit obligation was $5.6 million and is recorded on the Company’s consolidated balance
sheet in other liabilities. The Company’s funding policy is to make the minimum annual contribution required by applicable
regulations.
The
Company’s net periodic Postretirement Plan costs are as follows (in thousands):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
46
|
|
|
$
|
21
|
|
|
$
|
138
|
|
|
$
|
63
|
|
Service
cost
|
|
|
2
|
|
|
|
50
|
|
|
|
6
|
|
|
|
150
|
|
Amortization
of (gain) loss
|
|
|
33
|
|
|
|
33
|
|
|
|
99
|
|
|
|
99
|
|
Net
periodic expense
|
|
$
|
81
|
|
|
$
|
104
|
|
|
$
|
243
|
|
|
$
|
312
|
|
8. FAIR
VALUE MEASUREMENTS.
The
fair value hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows:
|
●
|
Level
1 – Observable inputs – unadjusted quoted prices in active markets for identical
assets and liabilities;
|
|
●
|
Level
2 – Observable inputs other than quoted prices included in Level 1 that are observable
for the asset or liability through corroboration with market data; and
|
|
●
|
Level
3 – Unobservable inputs – includes amounts derived from valuation models
where one or more significant inputs are unobservable. For fair value measurements using
significant unobservable inputs, a description of the inputs and the information used
to develop the inputs is required along with a reconciliation of Level 3 values from
the prior reporting period.
|
Pooled
separate accounts
– Pooled separate accounts invest primarily in domestic and international stocks, commercial paper
or single mutual funds. The net asset value is used as a practical expedient to determine fair value for these accounts. Each
pooled separate account provides for redemptions by the Retirement Plan at reported net asset values per share, with little to
no advance notice requirement, therefore these funds are classified within Level 2 of the valuation hierarchy.
Other
Derivative Instruments
– The Company’s other derivative instruments consist of commodity positions. The fair
values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs.
The
following table summarizes recurring fair value measurements by level at September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments
|
|
$
|
1,954
|
|
|
$
|
1,954
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments
|
|
$
|
(6,385
|
)
|
|
$
|
(6,385
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
The
following tables compute basic and diluted earnings per share (in thousands, except per share data):
|
|
Three
Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net
loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(7,514
|
)
|
|
|
|
|
|
|
|
|
Less:
Preferred stock dividends
|
|
|
(319
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$
|
(7,833
|
)
|
|
|
43,299
|
|
|
$
|
(0.18
|
)
|
|
|
Three
Months Ended September 30, 2017
|
|
|
|
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net
loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(202
|
)
|
|
|
|
|
|
|
|
|
Less:
Preferred stock dividends
|
|
|
(319
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$
|
(521
|
)
|
|
|
42,475
|
|
|
$
|
(0.01
|
)
|
|
|
Nine
Months Ended September 30, 2018
|
|
|
|
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net
loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(28,263
|
)
|
|
|
|
|
|
|
|
|
Less:
Preferred stock dividends
|
|
|
(946
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$
|
(29,209
|
)
|
|
|
43,171
|
|
|
$
|
(0.68
|
)
|
|
|
Nine
Months Ended September 30, 2017
|
|
|
|
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net
loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(21,679
|
)
|
|
|
|
|
|
|
|
|
Less:
Preferred stock dividends
|
|
|
(946
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$
|
(22,625
|
)
|
|
|
42,358
|
|
|
$
|
(0.53
|
)
|
There
were an aggregate of 425,000 and 635,000 potentially dilutive weighted-average shares from convertible securities outstanding
for the three and nine months ended September 30, 2018, respectively. These convertible securities were not considered in calculating
diluted net loss per share for the three and nine months ended September 30, 2018, as their effect would have been anti-dilutive.
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The
following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated
financial statements included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated
financial statements contain forward-looking statements, which generally include the plans and objectives of management for future
operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues
we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking
statements and associated risks may include, relate to or be qualified by other important factors, including:
|
●
|
fluctuations
in the market price of ethanol and its co-products;
|
|
●
|
fluctuations
in the costs of key production input commodities such as corn and natural gas;
|
|
●
|
the
projected growth or contraction in the ethanol and co-product markets in which we operate;
|
|
●
|
our
strategies for expanding, maintaining or contracting our presence in these markets;
|
|
●
|
anticipated
trends in our financial condition and results of operations; and
|
|
●
|
our
ability to distinguish ourselves from our current and future competitors.
|
You
are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or
in the case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or
correct any forward-looking statements, except as required by law.
Any
of the factors described immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission
or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth
in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our
common stock to fluctuate substantially.
Overview
We
are a leading producer and marketer of low-carbon renewable fuels in the United States.
We
operate nine strategically-located production facilities. Four of our plants are in the Western states of California, Oregon and
Idaho, and five of our plants are located in the Midwestern states of Illinois and Nebraska. We are the sixth largest producer
of ethanol in the United States based on annualized volumes. Our plants have a combined production capacity of 605 million gallons
per year. We market all the ethanol, specialty alcohols and co-products produced at our plants as well as ethanol produced by
third parties. On an annualized basis, we market nearly 1.0 billion gallons of ethanol and over 3.0 million tons of co-products
on a dry matter basis. Our business consists of two operating segments: a production segment and a marketing segment.
Our
mission is to advance our position and significantly increase our market share as a leading producer and marketer of low-carbon
renewable fuels and high-quality alcohol products in the United States. We intend to accomplish this goal in part by expanding
our ethanol production capacity and distribution infrastructure, accretive acquisitions, lowering the carbon intensity of our
ethanol, extending our marketing business into new regional and international markets, and implementing new technologies to promote
higher production yields and greater efficiencies.
Production
Segment
We
produce ethanol, specialty alcohols and co-products at our production facilities described below. Our plants located on the West
Coast are near their respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages.
Our plants located in the Midwest are in the heart of the Corn Belt, benefit from low-cost and abundant feedstock production and
allow for access to many additional domestic markets. In addition, our ability to load unit trains from our plants located in
the Midwest, and barges from our Pekin, Illinois plants, allows for greater access to international markets.
We
wholly-own all of our plants located on the West Coast and the three plants in Pekin, Illinois. We own approximately 74% of the
two plants in Aurora, Nebraska as well as the grain elevator adjacent to those properties and related grain handling assets, including
the outer rail loop, and the real property on which they are located, through Pacific Aurora, LLC, or Pacific Aurora, an entity
owned approximately 26% by Aurora Cooperative Elevator Company.
Facility
Name
|
Facility
Location
|
Estimated
Annual
Capacity
(gallons)
|
Magic
Valley
|
Burley,
ID
|
60,000,000
|
Columbia
|
Boardman,
OR
|
40,000,000
|
Stockton
|
Stockton,
CA
|
60,000,000
|
Madera
|
Madera,
CA
|
40,000,000
|
Aurora
West
|
Aurora,
NE
|
110,000,000
|
Aurora
East
|
Aurora,
NE
|
45,000,000
|
Pekin
Wet
|
Pekin,
IL
|
100,000,000
|
Pekin
Dry
|
Pekin,
IL
|
60,000,000
|
Pekin
ICP
|
Pekin,
IL
|
90,000,000
|
We
produce ethanol co-products at our production facilities such as wet distillers grains, or WDG, dried distillers grains with solubles,
or DDGS, wet and dry corn gluten feed, condensed distillers solubles, corn gluten meal, corn germ, corn oil, dried yeast and CO
2
.
Marketing
Segment
We
market ethanol, specialty alcohols and co-products produced by our facilities and market ethanol produced by third parties. We
have extensive customer relationships throughout the Western and Midwestern United States. Our ethanol customers are integrated
oil companies and gasoline marketers who blend ethanol into gasoline. Our customers depend on us to provide a reliable supply
of ethanol, and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively
require ethanol volumes in excess of the supplies we produce at our production facilities. We secure additional ethanol supplies
from third-party plants in California and other third-party suppliers in the Midwest where a majority of ethanol producers are
located. We arrange for transportation, storage and delivery of ethanol purchased by our customers through our agreements with
third-party service providers in the Western United States as well as in the Midwest from a variety of sources.
We
market our distillers grains and other feed co-products to dairies and feedlots, in many cases located near our ethanol plants.
These customers use our feed co-products for livestock as a substitute for corn and other sources of starch and protein. We sell
our corn oil to poultry and biodiesel customers. We do not market co-products from other ethanol producers.
See
“Note 2 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for
financial information about our business segments.
Outlook
Our
results for the third quarter and first nine months of 2018 reflect a compressed margin environment primarily resulting from high
industry-wide inventory levels. High inventory levels resulted in part from escalating trade positioning between the United States
and China, which resulted in early April in additional tariffs placed on United States ethanol shipped to China, halting United
States ethanol exports to China. In addition, the Environmental Protection Agency’s, or EPA’s, continued practice
of granting small refinery exemptions from the Renewable Fuel Standard, or RFS, negatively impacted ethanol margins. Higher corn
freight costs and resulting corn basis costs into our Western facilities also reduced our production margins. We have reduced
our production levels and are running at approximately 90% operating capacity across our portfolio of production assets.
Industry
fundamentals remain strong and should support better margins in 2019. Ethanol remains a low-cost, high-value, low-carbon renewable
fuel and source of octane. Moreover, blending ethanol into gasoline reduces the price of gasoline to consumers. We believe these
compelling blend economics will drive higher domestic and international blend rates and result in an improved margin environment.
At
President Trump’s direction, the EPA commenced a formal rulemaking process, with an expected completion by summer 2019,
to allow year-round sales of E15 nationwide. This is a significant industry growth opportunity that could result in up to 7.0
billion gallons of additional annual ethanol demand based on the current market for gasoline. Although the roll-out of commercial
E15 availability will take time, year-round availability provides an important growth path for the United States ethanol industry
and we expect sales of E15 to grow materially in 2019 given the cost and environmental advantages of higher ethanol blends. Following
the President’s announcement, two large fuel retail chains announced large expansion plans for E15 distribution and we expect
to hear additional similar announcements soon.
With
RIN prices trading near five-year lows, we see no rationale for the EPA to grant additional small refinery economic hardship exemptions.
We are actively engaged, including through industry trade associations, with the EPA to be more judicious in granting these exemptions
and, when granted, to reallocate those gallons to all other obligated parties.
International
demand for ethanol set records in 2017 and remains on pace to exceed those records in 2018, with approximately 30 countries having
renewable fuel standards or targets. United States ethanol exports from January through August 2018 reached 1.20 billion gallons,
up substantially from the same period in 2017 and on pace to significantly exceed the 1.37 billion gallons exported for all of
2017. More countries are importing ethanol from the United States as it represents a low-cost source of high-octane and low-carbon
transportation fuel.
The
Trump administration recently acted to preserve tariff-free treatment for ethanol exported to Canada and Mexico. Canada represents
the second-largest export market while Mexico, a small export market for the United States, is poised to increase ethanol use
as a cost-effective and environmentally favorable substitute for MTBE. United States ethanol exports to both countries reflect
year-over-year growth thus far in 2018.
Prior
to the halt of United States exports to China, China had returned earlier in the year as a significant buyer of United States-sourced
ethanol, supporting its announced 10% blending requirement by 2020. If China continues to pursue this goal, even while rapidly
increasing its own domestic ethanol production, it will require significant ethanol imports, ultimately supporting the continued
growth in overall international demand for ethanol. We expect total United States exports for 2018 to reach a record high of between
1.60 and 1.70 billion gallons, which represents around a 20% increase from 2017 levels, and we expect additional export growth
in 2019.
Carbon
values in our California and Oregon markets remain strong, resulting in robust premiums for our lower-carbon ethanol. This week,
California carbon prices reached record highs of more than $190 per metric ton.
Leading
oil and gas companies continue to invest in ethanol assets. Recently, Valero Renewable Fuels Company announced the purchase of
three ethanol plants, demonstrating a positive long-term view of ethanol. In addition, the acquisition provides an updated indication
of the value of ethanol production assets.
We
continue to focus on implementing initiatives and investing in our assets to reduce costs, improve yields and carbon scores, and
build long-term value. We are engaged in several plant-level capital projects with near-term paybacks.
We
completed our 5.0-megawatt solar photovoltaic power system at our Madera facility. The system is operating at a 3.5-megawatt level
and we anticipate full 5.0-megawatt production by year-end, once PG&E, our electricity provider, has completed its final upgrades
to its adjacent substation. We expect the system to reduce our utility costs by approximately $1.0 million annually and lower
our carbon score.
Our
3.5-megawatt cogeneration system at our Stockton plant is now fully installed. We are currently engaged in start-up operations
and anticipate the system will be at target performance by year-end. The system converts process waste gas and natural gas into
electricity and steam, reducing energy costs by up to $4.0 million per year and lowering carbon and nitrogen oxide emissions.
Airgas
continues to construct a liquid CO
2
production plant adjacent to our Stockton facility. We expect commercial operations
will commence in early 2019 and that we will begin generating revenues from this arrangement in the first quarter.
During
the third quarter, we received a new cellulosic ethanol pathway from the California Air Resources Board for cellulosic ethanol
produced at our Stockton plant. We continue to generate D3 RINs and await final EPA approval of our cellulosic ethanol pathways
for our Madera and Magic Valley plants. These pathways will add to our premium pricing for cellulosic ethanol and once approved,
production from these three plants will generate additional combined EBITDA of $2.0 million annually based on the current carbon
market, of which our Stockton plant is expected to generate approximately $0.5 million of incremental EBITDA.
Our
capital expenditures for the third quarter totaled $3.5 million and were primarily related to plant improvement initiatives. Our
cumulative capital expenditures through the third quarter were $10.9 million. In light of weak market conditions, we have adjusted
a number of capital projects and expect to limit our fourth quarter capital expenditures to approximately $3.0 million, well below
our prior full-year guidance.
Our
focus is on delivering additional value by leveraging our diverse base of existing production and marketing assets to capitalize
on positive macro trends. Our strategy is built around our strategically-located bio-refineries, which enable us to serve multiple
markets; the diversity of our production, geography, technology, feedstocks and logistics, which helps us mitigate exposure to
commodity price risks within fuel markets; and our focus on evaluating and investing in plant improvement and other initiatives
to increase production and operating efficiencies and yields. We are also focused on reducing costs at both the corporate and
operating levels, further diversifying our sales through additional high-protein feed and alcohol products, and undertaking new
initiatives to lower our carbon scores for our valuable low-carbon fuel markets.
Critical
Accounting Policies
The
preparation of our financial statements, which have been prepared in accordance with accounting principles generally accepted
in the United States of America, requires us to make judgments and estimates that may have a significant impact upon the portrayal
of our financial condition and results of operations. We believe that of our significant accounting policies, the following require
estimates and assumptions that require complex, subjective judgments by management that can materially impact the portrayal of
our financial condition and results of operations: revenue recognition; impairment of long-lived assets; valuation of allowance
for deferred taxes; derivative instruments; accounting for business combinations; and allowance for doubtful accounts. These significant
accounting principles are more fully described in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December
31, 2017.
Results
of Operations
The
following selected financial information should be read in conjunction with our consolidated financial statements and notes to
our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” contained in this report.
Certain
performance metrics that we believe are important indicators of our results of operations include:
|
|
Three
Months Ended
September
30,
|
|
|
Percentage
|
|
|
Nine
Months Ended
September
30,
|
|
|
Percentage
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
Production
gallons sold (in millions)
|
|
|
139.9
|
|
|
|
141.8
|
|
|
|
(1.3
|
)%
|
|
|
425.1
|
|
|
|
374.0
|
|
|
|
13.7
|
%
|
Third
party gallons sold (in millions)
|
|
|
72.3
|
|
|
|
108.2
|
|
|
|
(33.2
|
)%
|
|
|
247.2
|
|
|
|
335.2
|
|
|
|
(26.3
|
)%
|
Total
gallons sold (in millions)
|
|
|
212.2
|
|
|
|
250.0
|
|
|
|
(15.1
|
)%
|
|
|
672.3
|
|
|
|
709.2
|
|
|
|
(5.2
|
)%
|
Total
gallons produced (in millions)
|
|
|
138.7
|
|
|
|
145.5
|
|
|
|
(4.7
|
)%
|
|
|
424.1
|
|
|
|
385.1
|
|
|
|
10.1
|
%
|
Production
capacity utilization
|
|
|
91
|
%
|
|
|
95
|
%
|
|
|
(4.2
|
)%
|
|
|
94
|
%
|
|
|
94
|
%
|
|
|
—
|
%
|
Average
sales price per gallon
|
|
$
|
1.60
|
|
|
$
|
1.69
|
|
|
|
(5.3
|
)%
|
|
$
|
1.61
|
|
|
$
|
1.66
|
|
|
|
(3.0
|
)%
|
Corn
cost per bushel – CBOT equivalent
|
|
$
|
3.63
|
|
|
$
|
3.69
|
|
|
|
(1.6
|
)%
|
|
$
|
3.67
|
|
|
$
|
3.67
|
|
|
|
—
|
%
|
Average
basis
(1)
|
|
$
|
0.21
|
|
|
$
|
0.11
|
|
|
|
90.9
|
%
|
|
$
|
0.26
|
|
|
$
|
0.21
|
|
|
|
23.8
|
%
|
Delivered
cost of corn
|
|
$
|
3.84
|
|
|
$
|
3.80
|
|
|
|
1.1
|
%
|
|
$
|
3.93
|
|
|
$
|
3.88
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
co-product tons sold (in thousands)
|
|
|
773.2
|
|
|
|
803.4
|
|
|
|
(3.8
|
)%
|
|
|
2,365.2
|
|
|
|
2,223.2
|
|
|
|
6.4
|
%
|
Co-product
revenues as % of delivered cost of corn
(2)
|
|
|
35.8
|
%
|
|
|
34.0
|
%
|
|
|
5.3
|
%
|
|
|
36.2
|
%
|
|
|
34.2
|
%
|
|
|
5.8
|
%
|
Average
CBOT ethanol price per gallon
|
|
$
|
1.35
|
|
|
$
|
1.55
|
|
|
|
(12.9
|
)%
|
|
$
|
1.41
|
|
|
$
|
1.54
|
|
|
|
(8.4
|
)%
|
Average
CBOT corn price per bushel
|
|
$
|
3.53
|
|
|
$
|
3.59
|
|
|
|
(1.7
|
)%
|
|
$
|
3.68
|
|
|
$
|
3.64
|
|
|
|
1.1
|
%
|
|
(1)
|
Corn
basis represents the difference between the immediate cash price of delivered corn and
the future price of corn for Chicago delivery.
|
|
(2)
|
Co-product
revenues as a percentage of delivered cost of corn shows our yield based on sales of
co-products, including WDG and corn oil, generated from ethanol we produced.
|
Net
Sales, Cost of Goods Sold and Gross Profit
The
following table presents our net sales, cost of goods sold and gross profit in dollars and gross profit as a percentage of net
sales (in thousands, except percentages):
|
|
Three
Months Ended September 30,
|
|
|
Variance
in
|
|
|
Nine
Months Ended
September
30,
|
|
|
Variance
in
|
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
370,407
|
|
|
$
|
445,442
|
|
|
$
|
(75,035
|
)
|
|
|
(16.8
|
)%
|
|
$
|
1,180,956
|
|
|
$
|
1,236,984
|
|
|
$
|
(56,028
|
)
|
|
|
(4.5
|
)%
|
Cost
of goods sold
|
|
|
366,639
|
|
|
|
433,377
|
|
|
|
(66,738
|
)
|
|
|
(15.4
|
)%
|
|
|
1,175,099
|
|
|
|
1,229,039
|
|
|
|
(53,940
|
)
|
|
|
(4.4
|
)%
|
Gross
profit
|
|
$
|
3,768
|
|
|
$
|
12,065
|
|
|
$
|
(8,297
|
)
|
|
|
(68.8
|
)%
|
|
$
|
5,857
|
|
|
$
|
7,945
|
|
|
$
|
(2,088
|
)
|
|
|
(26.3
|
)%
|
Percentage
of net sales
|
|
|
1.0
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
Net
Sales
The
decrease in our net sales for the three and nine months ended September 30, 2018 as compared to the same period in 2017 was primarily
due to a decrease in our third party gallons sold as well as a decrease in our average sales price per gallon. We sold fewer third
party gallons as we deliberately focused our third party ethanol sales in regions where we have either a stronger presence around
our own production assets or more favorable margins.
Three
Months Ended September 30, 2018
On
a consolidated basis, our average sales price per gallon declined $0.09, or 5%, to $1.60 for the three months ended September
30, 2018 as compared to $1.69 for the same period in 2017. The average Chicago Board of Trade, or CBOT, ethanol price per gallon,
however, declined 13% to $1.35 for the three months ended September 30, 2018 compared to an average CBOT ethanol price per gallon
of $1.55 for the same period in 2017.
Production
Segment
Net
sales of ethanol from our production segment declined by $19.5 million, or 8%, to $216.8 million for the three months ended September
30, 2018 as compared to $236.3 million for the same period in 2017. Our total volume of production ethanol gallons sold declined
by 1.9 million gallons, or 1%, to 139.9 million gallons for the three months ended September 30, 2018 as compared to 141.8 million
gallons for the same period in 2017. Our production segment’s average sales price per gallon declined 7% to $1.53 for the
three months ended September 30, 2018 compared to our production segment’s average sales price per gallon of $1.65 for the
same period in 2017. At our production segment’s average sales price per gallon of $1.53 for the three months ended September
30, 2018, we realized $2.9 million less in net sales from our production segment from the 1.9 million fewer gallons of produced
ethanol sold in the three months ended September 30, 2018 as compared to the same period in 2017. The decline of $0.12 in our
production segment’s average sales price per gallon for the three months ended September 30, 2018 as compared to the same
period in 2017 reduced our net sales of ethanol from our production segment by $16.6 million.
Net
sales of co-products increased $4.8 million, or 7%, to $73.3 million for the three months ended September 30, 2018 as compared
to $68.5 million for the same period in 2017. Our total volume of co-products sold declined by 30.2 thousand tons, or 4%, to 773.2
thousand tons for three months ended September 30, 2018 from 803.4 thousand tons for the same period in 2017, and our average
sales price per ton increased to $94.75 for the three months ended September 30, 2018 from $85.25 for the same period in 2017.
The increase of $9.50, or 11%, in our average sales price per ton for the three months ended September 30, 2018 as compared to
the same period in 2017 increased net sales of co-products by $7.6 million, however, at our average sales price per ton of $94.75
for the three months ended September 30, 2018, we realized $2.8 million less in net sales from the 30.2 thousand ton decline in
co-products sold in the three months ended September 30, 2018 as compared to the same period in 2017.
Marketing
Segment
Net
sales of ethanol from our marketing segment declined by $60.3 million, or 43%, to $79.9 million for the three months ended September
30, 2018 as compared to $140.2 million for the same period in 2017. Our total volume of ethanol gallons sold by our marketing
segment declined by 37.8 million gallons, or 15%, to 212.2 million gallons for the three months ended September 30, 2018 as compared
to 250.0 million gallons for the same period in 2017. Of these amounts, our marketing segment sold 35.9 million fewer third party
gallons and 1.9 million fewer production gallons.
The
decline in production gallons sold by our marketing segment resulted in a decline of $0.1 million in net sales generated by our
marketing segment, which were eliminated upon consolidation.
Our
marketing segment’s average sales price per gallon increased $0.02, or 1%, to $1.72 for the three months ended September
30, 2018 as compared to $1.70 for the same period in 2017. At our marketing segment’s average sales price per gallon of
$1.72 for the three months ended September 30, 2018, we realized $64.9 million less in net sales from our marketing segment from
the 37.8 million fewer gallons sold in the three months ended September 30, 2018 as compared to the same period in 2017. The increase
of $0.02 in our marketing segment’s average sales price per gallon for the three months ended September 30, 2018 as compared
to the same period in 2017 increased our net sales from ethanol sold by our marketing segment by $4.6 million.
Nine
Months Ended September 30, 2018
On
a consolidated basis, our average sales price per gallon declined $0.05, or 3%, to $1.61 for the nine months ended September 30,
2018 compared to our average sales price per gallon of $1.66 for the same period in 2017. The average CBOT ethanol price per gallon
declined 8% to $1.41 for the nine months ended September 30, 2018 compared to an average CBOT ethanol price per gallon of $1.54
for the same period in 2017.
Production
Segment
Net
sales of ethanol from our production segment increased by $51.9 million, or 8%, to $670.3 million for the nine months ended September
30, 2018 as compared to $618.4 million for the same period in 2017. Our total volume of production ethanol gallons sold increased
by 51.1 million gallons, or 14%, to 425.1 million gallons for the nine months ended September 30, 2018 as compared to 374.0 million
gallons for the same period in 2017. Our production segment’s average sales price per gallon declined 5% to $1.56 for the
nine months ended September 30, 2018 compared to our production segment’s average sales price per gallon of $1.64 for the
same period in 2017. At our production segment’s average sales price per gallon of $1.56 for the nine months ended September
30, 2018, we generated $80.0 million in additional net sales from our production segment from the 51.1 million additional gallons
of produced ethanol sold in the nine months ended September 30, 2018 as compared to the same period in 2017. The decline of $0.08
in our production segment’s average sales price per gallon for the nine months ended September 30, 2018 as compared to the
same period in 2017 reduced our net sales of ethanol from our production segment by $28.1 million.
Net
sales of co-products increased $40.7 million, or 22%, to $226.3 million for the nine months ended September 30, 2018 as compared
to $185.6 million for the same period in 2017. Our total volume of co-products sold increased by 142.0 thousand tons, or 6%, to
2,365.2 thousand tons for nine months ended September 30, 2018 from 2,223.2 thousand tons for the same period in 2017, and our
average sales price per ton increased to $95.68 for the nine months ended September 30, 2018 from $83.47 for the same period in
2017. At our average sales price per ton of $95.68 for the nine months ended September 30, 2018, we generated $13.6 million in
additional net sales from the 142.0 thousand tons of additional co-products sold in the nine months ended September 30, 2018 as
compared to the same period in 2017. The increase of $12.21, or 15%, in our average sales price per ton for the nine months ended
September 30, 2018 as compared to the same period in 2017 increased net sales of co-products by $27.1 million.
Marketing
Segment
Net
sales of ethanol from our marketing segment declined by $148.8 million, or 34%, to $282.9 million for the nine months ended September
30, 2018 as compared to $431.7 million for the same period in 2017. Our total volume of ethanol gallons sold by our marketing
segment declined by 36.9 million gallons, or 5%, to 672.3 million gallons for the nine months ended September 30, 2018 as compared
to 709.2 million gallons for the same period in 2017. Of these amounts, we sold 88.0 million fewer third party gallons, which
was partially offset by 51.1 million additional production gallons sold by our marketing segment.
The
increase in production gallons sold by our marketing segment resulted in an increase of $0.6 million in net sales generated by
our marketing segment, which were eliminated upon consolidation.
Our
marketing segment’s average sales price per gallon declined $0.13, or 8%, to $1.54 for the nine months ended September 30,
2018 as compared to $1.67 for the same period in 2017. At our marketing segment’s average sales price per gallon of $1.54
for the nine months ended September 30, 2018, we realized $56.8 million less in net sales from our marketing segment from the
36.9 million fewer gallons sold in the nine months ended September 30, 2018 as compared to the same period in 2017. Further, the
decline of $0.13 in our marketing segment’s average sales price per gallon for the nine months ended September 30, 2018
as compared to the same period in 2017 reduced our net sales from ethanol sold by our marketing segment by $91.4 million.
Cost
of Goods Sold and Gross Profit
Our
consolidated gross profit declined primarily due to lower commodity margins in the three and nine months ended September 30, 2018
compared to the same periods in 2017. Higher corn freight costs and resulting corn basis costs compressed production margins.
In addition, ethanol margins were negatively impacted by the EPA’s continued practice of granting small refinery exemptions
from the Renewable Fuel Standard and trade tariffs that have halted United States ethanol exports to China, resulting in higher
industry-wide inventory levels which further pressured margins.
Three
Months Ended September 30, 2018
Our
consolidated gross profit declined to $3.8 million for the three months ended September 30, 2018 as compared to $12.1 million
for the same period in 2017, representing a gross margin of 1.0% for the three months ended September 30, 2018 as compared to
2.7% for the same period in 2017.
Production
Segment
Our
production segment’s gross profit from external sales declined by $16.4 million to a gross loss of $5.0 million for the
three months ended September 30, 2018 as compared to a gross profit of $11.4 million for the same period in 2017. Of this decline,
$16.5 million is attributable to our production segment’s lower margins for the three months ended September 30, 2018 as
compared to the same period in 2017, partially offset by $0.1 million attributable to lower production volumes at negative production
margins for the three months ended September 30, 2018 as compared to the same period in 2017.
Marketing
Segment
Our
marketing segment’s gross profit improved by $8.1 million to $8.8 million for the three months ended September 30, 2018
as compared to $0.7 million for the same period in 2017. Of this increase, $16.1 million is attributable to our marketing segment’s
improved margins per gallon for the three months ended September 30, 2018 as compared to the same period in 2017, partially offset
by $8.0 million in lower gross profit attributable to the 35.9 million gallon reduction in third-party marketing volumes for the
three months ended September 30, 2018 as compared to the same period in 2017.
Nine
Months Ended September 30, 2018
Our
consolidated gross profit declined to $5.9 million for the nine months ended September 30, 2018 as compared to $7.9 million for
the same period in 2017, representing a gross margin of 0.5% for the nine months ended September 30, 2018 as compared to 0.6%
for the same period in 2017.
Production
Segment
Our
production segment’s gross profit from external sales declined by $22.4 million to a gross loss of $16.5 million for the
nine months ended September 30, 2018 as compared to a gross profit of $5.9 million for the same period in 2017. Of this decline,
$20.4 million is attributable to our production segment’s lower margins for the nine months ended September 30, 2018 as
compared to the same period in 2017, and $2.0 million is attributable to increased production volumes at negative production margins
for the nine months ended September 30, 2018 as compared to the same period in 2017.
Gross
profit generated by our production segment was negatively impacted by $4.1 million in higher than expected repairs and maintenance
expense at our Pekin, Illinois wet mill facility for the nine months ended September 30, 2018. We have experienced larger than
anticipated expenses since the second half of 2015 related initially to the repair, and then replacement, of two package boilers
that failed shortly prior to our acquisition of our Midwest assets in 2015. We have resolved these boiler issues, which totaled
$11.0 million in 2017, and anticipate that wet mill boiler expenses associated with these issues will be eliminated going forward.
We continue to pursue a claim against the boiler manufacturer which will result, however, in ongoing litigation expenses.
Marketing
Segment
Our
marketing segment’s gross profit improved by $20.4 million to $22.4 million for the nine months ended September 30, 2018
as compared to $2.0 million for the same period in 2017. Of this increase, $28.3 million is attributable to our marketing segment’s
improved margins for the nine months ended September 30, 2018 as compared to the same period in 2017, partially offset by $7.9
million in lower gross profit attributable to the 88.0 million gallon reduction in marketing volumes for the nine months ended
September 30, 2018 as compared to the same period in 2017.
Selling,
General and Administrative Expenses
The
following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net
sales (in thousands, except percentages):
|
|
Three
Months Ended September 30,
|
|
|
Variance
in
|
|
|
Nine
Months Ended September 30,
|
|
|
Variance
in
|
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
Selling,
general and administrative expenses
|
|
$
|
8,970
|
|
|
$
|
8,720
|
|
|
$
|
250
|
|
|
|
2.9
|
%
|
|
$
|
27,183
|
|
|
$
|
22,932
|
|
|
$
|
4,251
|
|
|
|
18.5
|
%
|
Percentage
of net sales
|
|
|
2.4
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
2.3
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
Our
SG&A expenses remained relatively flat for the three months ended September 30, 2018 as compared to the same period in 2017.
Our
SG&A expenses increased $4.3 million to $27.2 million for the nine months ended September 30, 2018 as compared to $22.9 million
for the same period in 2017. The increase in SG&A expenses is primarily due to $3.6 million in one-time gains associated with
legal matters resolved in the prior year that reduced our SG&A expenses for 2017. In addition, our SG&A expenses for the
nine months ended September 30, 2018 include expenses related to the operation of our ICP facility that were only present for
the three months ended September 30, 2017 as the acquisition occurred on July 3, 2017. We anticipate SG&A expenses will total
approximately $36.0 million for all of 2018.
Interest
Expense
The
following table presents our interest expense in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three
Months Ended September 30,
|
|
|
Variance
in
|
|
|
Nine
Months Ended September 30,
|
|
|
Variance
in
|
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
Interest
expense
|
|
$
|
4,193
|
|
|
$
|
3,826
|
|
|
$
|
367
|
|
|
|
9.6
|
%
|
|
$
|
12,875
|
|
|
$
|
9,157
|
|
|
$
|
3,718
|
|
|
|
40.6
|
%
|
Percentage
of net sales
|
|
|
1.1
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
1.1
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
Interest
expense increased $0.4 million to $4.2 million for the three months ended September 30, 2018 from $3.8 million for the same period
in 2017. Interest expense increased $3.7 million to $12.9 million for the nine months ended September 30, 2018 from $9.2 million
for the same period in 2017. The increase in interest expense is primarily due to additional borrowings related to our acquisition
of ICP as of July 3, 2017, and higher interest rates on our senior notes, which increased in accordance with the note terms. In
addition, during the nine months ended September 30, 2018, we realized higher interest expense of $0.3 million due to accelerated
amortization of deferred financing costs associated with our termination of Pacific Aurora’s line of credit.
Loss
Available to Common Stockholders
The
following table presents our loss available to common stockholders in dollars and as a percentage of net sales (in thousands,
except percentages):
|
|
Three
Months Ended September 30,
|
|
|
Variance
in
|
|
|
Nine
Months Ended September 30,
|
|
|
Variance
in
|
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
Loss
available to common stockholders
|
|
$
|
7,833
|
|
|
$
|
521
|
|
|
$
|
7,312
|
|
|
|
1,403.5
|
%
|
|
$
|
29,209
|
|
|
$
|
22,625
|
|
|
$
|
6,584
|
|
|
|
29.1
|
%
|
Percentage
of net sales
|
|
|
2.1
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
2.5
|
%
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
The
increase in loss available to common stockholders is primarily due to lower margins and higher interest expense for the three
and nine months ended September 30, 2018 as compared to the same periods in 2017.
Liquidity
and Capital Resources
During
the nine months ended September 30, 2018, we funded our operations primarily from cash on hand, cash generated from our operations
and advances from our revolving credit facilities. These funds were also used to make capital expenditures, capital lease payments
and principal payments on term and revolving debt.
Our
current available capital resources consist of cash on hand and amounts available for borrowing under our credit facilities. We
expect that our future available capital resources will consist primarily of our remaining cash balances, cash generated from
our operations, and amounts available for borrowing, if any, under our credit facilities.
We
believe that current and future available capital resources, including cash generated from our operations, and other existing
sources of liquidity, including our credit facilities, will be adequate to meet our anticipated capital requirements for at least
the next twelve months.
Quantitative
Quarter-End Liquidity Status
We
believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial
information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements
included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” contained in this report (dollars in thousands):
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
Change
|
|
Cash
and cash equivalents
|
|
$
|
56,093
|
|
|
$
|
49,489
|
|
|
|
13.3
|
%
|
Current
assets
|
|
$
|
192,266
|
|
|
$
|
203,246
|
|
|
|
(5.4
|
)%
|
Property
and equipment, net
|
|
$
|
488,591
|
|
|
$
|
508,352
|
|
|
|
(3.9
|
)%
|
Current
liabilities
|
|
$
|
99,020
|
|
|
$
|
90,706
|
|
|
|
9.2
|
%
|
Long-term
debt, net of current portion
|
|
$
|
214,419
|
|
|
$
|
221,091
|
|
|
|
(3.0
|
)%
|
Working
capital
|
|
$
|
93,246
|
|
|
$
|
112,540
|
|
|
|
(17.1
|
)%
|
Working
capital ratio
|
|
|
1.94
|
|
|
|
2.24
|
|
|
|
(13.4
|
)%
|
Restricted
Net Assets
At
September 30, 2018, we had approximately $207.2 million of net assets at our subsidiaries that were not available to be transferred
to Pacific Ethanol, Inc. in the form of dividends, loans or advances due to restrictions contained in the credit facilities of
our subsidiaries.
Changes
in Working Capital and Cash Flows
Working
capital decreased to $93.2 million at September 30, 2018 from $112.5 million at December 31, 2017 as a result of a decrease of
$11.0 million in current assets and an increase of $8.3 million in current liabilities.
Current
assets decreased primarily due to decreases of $12.7 million in accounts receivable, $6.8 million in inventories, $1.8 million
in prepaid inventory, partially offset by increases of $6.6 million in cash and cash equivalents, $2.8 million in other current
assets and $1.0 million in derivative instruments. Our cash and cash equivalents increased by $6.6 million at September 30, 2018
as compared to December 31, 2017 due to $26.1 million of cash provided by our operations, partially offset by $10.9 million of
cash used in our investing activities and $8.6 million of cash used in our financing activities.
Our
current liabilities increased primarily due to increases of $4.2 million in accounts payable and accrued liabilities and $4.1
million in derivative instruments.
Cash
provided by our Operating Activities
Cash
provided by our operating activities declined by $8.9 million for the nine months ended September 30, 2018, as compared to the
same period in 2018. We generated $26.1 million in cash from our operating activities during the period. Specific factors that
contributed to the decrease in cash provided by our operating activities include:
|
●
|
a
decrease related to net loss of $9.4 million;
|
|
●
|
a
decrease related to accounts receivable of $13.0 million primarily due to the timing
of collections;
|
|
●
|
a
decrease related to prepaid expenses and other assets of $4.7 million due to changes
in restricted cash collateral derivative balances; due to changes in period end positions and
|
|
●
|
a
decrease related to prepaid inventory of $2.6 million due to the timing of purchases.
|
These
amounts were partially offset by:
|
●
|
an
increase related to inventories of $8.7 million due to the timing of sales;
|
|
●
|
an
increase related to accounts payable and accrued expenses of $6.3 million due to the
timing of payments;
|
|
●
|
an
increase in depreciation expense of $2.1 million related to our ICP facilities; and
|
|
●
|
an
increase related to higher losses on derivative instruments of $3.5 million due to changes
in fair value of positions during the period.
|
Cash
used in our Investing Activities
Cash
used in our investing activities decreased by $30.4 million for the nine months ended September 30, 2018 as compared to the same
period in 2017. The decrease in cash used in our investing activities is primarily due to our purchase of ICP in the 2017 period.
Cash
used in our Financing Activities
Cash
used in our financing activities increased by $3.2 million for the nine months ended September 30, 2018 as compared to the
same period in 2017. The increase in cash used in our financing activities is primarily due to increased net payments on term
and revolving loans, including higher interest expense. For the third quarter of 2018, we focused on reducing our total debt,
with $23.7 million paid in the quarter through a combination of term loan repayments and reduced usage of revolving credit facilities.
Kinergy
Operating Line of Credit
Kinergy
maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on August 2,
2022. Interest accrues under the credit facility at a rate equal to (i) the three-month London Interbank Offered Rate (“LIBOR”),
plus (ii) a specified applicable margin ranging from 1.50% to 2.00%. The credit facility’s monthly unused line fee is 0.25%
to 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance during the
immediately preceding month. Payments that may be made by Kinergy to Pacific Ethanol as reimbursement for management and other
services provided by Pacific Ethanol to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal
quarter. The credit facility also includes the accounts receivable of Pacific Ag. Products, LLC, or PAP, as additional collateral.
Payments that may be made by PAP to Pacific Ethanol as reimbursement for management and other services provided by Pacific Ethanol
to PAP are limited under the terms of the credit facility to $0.5 million per fiscal quarter. PAP, one of our indirect wholly-owned
subsidiaries, markets our co-products and also provides raw material procurement services to our subsidiaries.
For
all monthly periods in which excess borrowing availability falls below a specified level, Kinergy and PAP must collectively maintain
a fixed-charge coverage ratio (calculated as a twelve-month rolling earnings before interest, taxes, depreciation and amortization
(EBITDA) divided by the sum of interest expense, capital expenditures, principal payments of indebtedness, indebtedness from capital
leases and taxes paid during such twelve-month rolling period) of at least 2.0 and are prohibited from incurring certain additional
indebtedness (other than specific intercompany indebtedness). Kinergy’s and PAP’s obligations under the credit facility
are secured by a first-priority security interest in all of their assets in favor of the lender. Kinergy and PAP believe they
are in compliance with this covenant. The following table summarizes Kinergy’s financial covenants and actual results for
the periods presented (dollars in thousands):
|
|
Three
Months Ended
September 30,
|
|
|
Years
Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Charge
Coverage Ratio Requirement
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
Actual
|
|
|
18.77
|
|
|
|
3.01
|
|
|
|
2.79
|
|
|
|
7.88
|
|
Excess
|
|
|
16.77
|
|
|
|
1.01
|
|
|
|
0.79
|
|
|
|
5.88
|
|
For
all periods presented above, Kinergy maintained more than the minimum excess borrowing availability required; accordingly, the
fixed-charge coverage ratio requirement did not apply.
Pacific
Ethanol has guaranteed all of Kinergy’s obligations under the credit facility. As of September 30, 2018, Kinergy had an
outstanding balance of $59.4 million with additional borrowing availability under the credit facility of $5.2 million.
Pekin
Credit Facilities
On
December 15, 2016, our wholly-owned subsidiary, Pacific Ethanol Pekin, LLC, or Pekin, entered into term and revolving credit facilities.
Pekin borrowed $64.0 million under a term loan facility that matures on August 20, 2021 and $32.0 million under a revolving credit
facility that matures on February 1, 2022. The Pekin credit facilities are secured by a first-priority security interest in all
of Pekin’s assets. Interest initially accrued under the Pekin credit facilities at an annual rate equal to the 30-day LIBOR
plus 3.75%, payable monthly. Pekin is required to make quarterly principal payments in the amount of $3.5 million on the term
loan beginning on May 20, 2017, with the remaining principal balance payable at maturity on August 20, 2021. Pekin is required
to pay monthly in arrears a fee on any unused portion of the revolving credit facility at a rate of 0.75% per annum. Prepayment
of these facilities is subject to a prepayment penalty. Under the initial terms of the credit facilities, Pekin was required to
maintain not less than $20.0 million in working capital and an annual debt service coverage ratio of not less than 1.25 to 1.0.
On
August 7, 2017, Pekin amended its term and revolving credit facilities by agreeing to increase the interest rate under the facilities
by 25 basis points to an annual rate equal to the 30-day LIBOR plus 4.00%. Pekin and its lender also agreed that Pekin is required
to maintain working capital of not less than $17.5 million from August 31, 2017 through December 31, 2017 and working capital
of not less than $20.0 million from January 1, 2018 and continuing at all times thereafter. In addition, the required debt service
coverage ratio was reduced to 0.15 to 1.00 for the fiscal year ended December 31, 2017. Pekin’s actual debt service coverage
ratio was 0.17 to 1.00 for the fiscal year ended December 31, 2017, 0.02 in excess of the required 0.15 to 1.00. For the month
ended January 31, 2018, Pekin was not in compliance with its working capital requirement due to larger than anticipated repair
and maintenance related expenses to replace faulty equipment. Pekin has received a waiver from its lender for this noncompliance.
Further, the lender decreased Pekin’s working capital covenant requirement to $13.0 million for the month ended February
28, 2018, excluding from the calculation a $3.5 million principal payment previously due in May 2018.
On
March 30, 2018, Pekin further amended its term loan facility by reducing the amount of working capital it is required to maintain
to not less than $13.0 million from March 31, 2018 through November 30, 2018 and not less than $16.0 million from December 1,
2018 and continuing at all times thereafter. In addition, a principal payment in the amount of $3.5 million due for May 2018 was
deferred until the maturity date of the term loan. As of the filing of this report, we believe Pekin is in compliance with its
working capital requirement.
As
of September 30, 2018, Pekin had additional borrowing availability under its revolving credit facility of $2.0 million.
ICP
Credit Facilities
On
September 15, 2017, ICP entered into term and revolving credit facilities. ICP borrowed $24.0 million under a term loan facility
that matures on September 20, 2021 and $18.0 million under a revolving credit facility that matures on September 1, 2022. The
ICP credit facilities are secured by a first-priority security interest in all of ICP’s assets. Interest accrues under the
ICP credit facilities at an annual rate equal to the 30-day LIBOR plus 3.75%, payable monthly. ICP is required to make quarterly
consecutive principal payments in the amount of $1.5 million. ICP is required to pay monthly in arrears a fee on any unused portion
of the revolving credit facility at a rate of 0.75% per annum. Prepayment of these facilities is subject to a prepayment penalty.
Under the terms of the credit facilities, ICP is required to maintain not less than $8.0 million in working capital and an annual
debt service coverage ratio of not less than 1.5 to 1.0, beginning for the year ended December 31, 2018.
As
of September 30, 2018, ICP had additional borrowing availability under its revolving credit facility of $4.0 million.
Pacific
Ethanol, Inc. Notes Payable
On
December 12, 2016, we entered into a Note Purchase Agreement with five accredited investors. On December 15, 2016, under the terms
of the Note Purchase Agreement, we sold $55.0 million in aggregate principal amount of our senior secured notes to the investors
in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold. On June 26, 2017, we entered
into a second Note Purchase Agreement with five accredited investors. On June 30, 2017, under the terms of the second Note Purchase
Agreement, we sold an additional $13.9 million in aggregate principal amount of our senior secured notes to the investors in a
private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold, for a total of $68.9 million in
aggregate principal amount of senior secured notes.
The
notes mature on December 15, 2019. Interest on the notes accrues at an annual rate equal to (i) the greater of 1% and the three-month
LIBOR, plus 7.0% from the closing through December 14, 2017, (ii) the greater of 1% and three-month LIBOR, plus 9% between December
15, 2017 and December 14, 2018, and (iii) the greater of 1% and three-month LIBOR plus 11% between December 15, 2018 and the maturity
date. The interest rate increases by an additional 2% per annum above the interest rate otherwise applicable upon the occurrence
and during the continuance of an event of default until cured. Interest is payable in cash in arrears on the 15th calendar day
of each March, June, September and December. We are required to pay all outstanding principal and any accrued and unpaid interest
on the notes on the maturity date. We may, at our option, prepay the outstanding principal amount of the notes at any time without
premium or penalty. Pacific Ethanol, Inc. issued the notes, which are secured by a first-priority security interest in the equity
interest held by Pacific Ethanol, Inc. in its wholly-owned subsidiary, PE Op. Co., which indirectly owns our plants located on
the West Coast.
We are actively evaluating
opportunities to refinance our senior notes well in advance of their December 2019 maturity.
Contractual
Obligations
There
have been no material changes in the nine months ended September 30, 2018 to the amounts presented in the table under the “Contractual
Obligations” section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operation” of our Annual Report on Form 10-K for 2017.
Effects
of Inflation
The
impact of inflation was not significant to our financial condition or results of operations for the three and nine months ended
September 30, 2018 and 2017.