ITEM 1. FINANCIAL STATEMENTS.
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(unaudited)
|
|
|
*
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,846
|
|
|
$
|
5,151
|
|
Accounts receivable, net (net of allowance for doubtful accounts of $14 and $187, respectively)
|
|
|
51,426
|
|
|
|
35,296
|
|
Inventories
|
|
|
28,297
|
|
|
|
23,386
|
|
Prepaid inventory
|
|
|
9,341
|
|
|
|
12,315
|
|
Other current assets
|
|
|
2,877
|
|
|
|
3,229
|
|
Total current assets
|
|
|
99,787
|
|
|
|
79,377
|
|
Property and equipment, net
|
|
|
153,973
|
|
|
|
155,194
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
3,141
|
|
|
|
3,260
|
|
Other assets
|
|
|
3,106
|
|
|
|
3,218
|
|
Total other assets
|
|
|
6,247
|
|
|
|
6,478
|
|
Total Assets
|
|
$
|
260,007
|
|
|
$
|
241,049
|
|
_______________
*
Amounts
derived from the audited financial statements for the year ended December 31, 2013.
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except par value and shares)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(unaudited)
|
|
|
*
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable – trade
|
|
$
|
16,110
|
|
|
$
|
11,071
|
|
Accrued liabilities
|
|
|
8,062
|
|
|
|
5,851
|
|
Current portion – capital leases
|
|
|
4,517
|
|
|
|
4,830
|
|
Current portion – long-term debt due to a related party
|
|
|
–
|
|
|
|
750
|
|
Accrued preferred dividends
|
|
|
3,657
|
|
|
|
–
|
|
Other current liabilities
|
|
|
3,353
|
|
|
|
5,714
|
|
Total current liabilities
|
|
|
35,699
|
|
|
|
28,216
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
71,645
|
|
|
|
98,408
|
|
Accrued preferred dividends
|
|
|
–
|
|
|
|
3,657
|
|
Capital leases, net of current portion
|
|
|
5,299
|
|
|
|
6,041
|
|
Warrant liabilities at fair value
|
|
|
32,679
|
|
|
|
8,215
|
|
Other liabilities
|
|
|
5,086
|
|
|
|
1,611
|
|
Total Liabilities
|
|
|
150,408
|
|
|
|
146,148
|
|
Commitments and Contingencies (Notes 5 and 7)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Pacific Ethanol, Inc. Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized; Series A: 1,684,375 shares authorized; 0 shares issued and outstanding as of March 31, 2014 and December 31, 2013; Series B: 1,580,790 shares authorized; 926,942 shares issued and outstanding as of March 31, 2014 and December 31, 2013; liquidation preference of $21,733 as of March 31, 2014
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.001 par value; 300,000,000 shares authorized; 18,014,034 and 16,126,287 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively
|
|
|
18
|
|
|
|
16
|
|
Additional paid-in capital
|
|
|
645,382
|
|
|
|
621,557
|
|
Accumulated deficit
|
|
|
(543,494
|
)
|
|
|
(532,356
|
)
|
Total Pacific Ethanol, Inc. Stockholders’ Equity
|
|
|
101,907
|
|
|
|
89,218
|
|
Noncontrolling interest
|
|
|
7,692
|
|
|
|
5,683
|
|
Total Stockholders’ Equity
|
|
|
109,599
|
|
|
|
94,901
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
260,007
|
|
|
$
|
241,049
|
|
_______________
*
Amounts derived from the audited financial statements for the year ended December 31, 2013.
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per
share data)
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Net sales
|
|
$
|
254,543
|
|
|
$
|
225,459
|
|
Cost of goods sold
|
|
|
215,998
|
|
|
|
224,613
|
|
Gross profit
|
|
|
38,545
|
|
|
|
846
|
|
Selling, general and administrative expenses
|
|
|
3,670
|
|
|
|
4,005
|
|
Income (loss) from operations
|
|
|
34,875
|
|
|
|
(3,159
|
)
|
Fair value adjustments
|
|
|
(35,844
|
)
|
|
|
(692
|
)
|
Interest expense, net
|
|
|
(4,351
|
)
|
|
|
(3,481
|
)
|
Gain on extinguishment of debt
|
|
|
–
|
|
|
|
817
|
|
Other expense, net
|
|
|
(227
|
)
|
|
|
(87
|
)
|
Loss before provision for income taxes
|
|
|
(5,547
|
)
|
|
|
(6,602
|
)
|
Provision for income taxes
|
|
|
(3,270
|
)
|
|
|
–
|
|
Consolidated net loss
|
|
|
(8,817
|
)
|
|
|
(6,602
|
)
|
Net (income) loss attributed to noncontrolling interest
|
|
|
(2,009
|
)
|
|
|
1,148
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(10,826
|
)
|
|
$
|
(5,454
|
)
|
Preferred stock dividends
|
|
$
|
(312
|
)
|
|
$
|
(312
|
)
|
Net loss attributed to common stockholders
|
|
$
|
(11,138
|
)
|
|
$
|
(5,766
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.69
|
)
|
|
$
|
(0.57
|
)
|
Weighted-average shares outstanding, basic and diluted
|
|
|
16,181
|
|
|
|
10,060
|
|
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(8,817
|
)
|
|
$
|
(6,602
|
)
|
Adjustments to reconcile consolidated net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Fair value adjustments
|
|
|
35,844
|
|
|
|
(94
|
)
|
Depreciation and amortization of intangibles
|
|
|
3,173
|
|
|
|
2,974
|
|
Deferred income taxes
|
|
|
3,270
|
|
|
|
–
|
|
Amortization of debt discount
|
|
|
1,557
|
|
|
|
225
|
|
Non-cash compensation
|
|
|
367
|
|
|
|
630
|
|
Amortization of deferred financing fees
|
|
|
112
|
|
|
|
108
|
|
Inventory valuation
|
|
|
97
|
|
|
|
–
|
|
Loss (gain) on derivatives
|
|
|
(70
|
)
|
|
|
5
|
|
Bad debt expense
|
|
|
(34
|
)
|
|
|
208
|
|
Interest expense added to Plant Owners’ debt
|
|
|
–
|
|
|
|
2,276
|
|
Gain on extinguishment of debt
|
|
|
–
|
|
|
|
(817
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(16,096
|
)
|
|
|
(6,326
|
)
|
Inventories
|
|
|
(5,008
|
)
|
|
|
(1,300
|
)
|
Prepaid expenses and other assets
|
|
|
82
|
|
|
|
53
|
|
Prepaid inventory
|
|
|
2,974
|
|
|
|
(4,222
|
)
|
Accounts payable and accrued expenses
|
|
|
5,425
|
|
|
|
6,428
|
|
Net cash provided by (used in) operating activities
|
|
|
22,876
|
|
|
|
(6,454
|
)
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(1,833
|
)
|
|
|
(309
|
)
|
Purchases of PE Op Co. ownership interests
|
|
|
–
|
|
|
|
(1,639
|
)
|
Net cash used in investing activities
|
|
|
(1,833
|
)
|
|
|
(1,948
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
12,130
|
|
|
|
2,064
|
|
Net proceeds from Kinergy’s line of credit
|
|
|
4,065
|
|
|
|
847
|
|
Principal payments on Plant Owners’ borrowings
|
|
|
(19,378
|
)
|
|
|
(3,500
|
)
|
Principal payments on senior notes
|
|
|
(13,007
|
)
|
|
|
(1,880
|
)
|
Principal payments on capital leases
|
|
|
(1,096
|
)
|
|
|
–
|
|
Principal payments on related party note
|
|
|
(750
|
)
|
|
|
–
|
|
Proceeds from senior notes
|
|
|
–
|
|
|
|
22,192
|
|
Proceeds from Series A Convertible Notes
|
|
|
–
|
|
|
|
6,000
|
|
Proceeds from Plant Owners’ borrowings
|
|
|
–
|
|
|
|
4,000
|
|
Parent purchases of Plant Owners’ debt
|
|
|
–
|
|
|
|
(23,357
|
)
|
Debt issuance costs
|
|
|
–
|
|
|
|
(1,044
|
)
|
Preferred stock dividends paid
|
|
|
(312
|
)
|
|
|
(312
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(18,348
|
)
|
|
|
5,010
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,695
|
|
|
|
(3,392
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
5,151
|
|
|
|
7,586
|
|
Cash and cash equivalents at end of period
|
|
$
|
7,846
|
|
|
$
|
4,194
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,712
|
|
|
$
|
737
|
|
Noncash financing and investing activities:
|
|
|
|
|
|
|
|
|
Reclass of warrant liability to equity upon warrant exercises
|
|
$
|
11,377
|
|
|
$
|
260
|
|
Reclass of noncontrolling interest to APIC upon acquisitions
|
|
$
|
–
|
|
|
$
|
8,161
|
|
Discount on senior and convertible debt
|
|
$
|
–
|
|
|
$
|
4,940
|
|
Preferred stock dividends paid in common stock
|
|
$
|
–
|
|
|
$
|
732
|
|
See accompanying notes to consolidated financial
statements.
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, including
its wholly-owned subsidiaries, Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”), Pacific
Ag. Products, LLC, a California limited liability company (“PAP”) and PE Op Co. (“PE Op Co.,”
formerly, New PE Holdco LLC), which owns the Plant Owners (as defined below) (collectively, the “Company”).
The Company is the leading
producer and marketer of low-carbon renewable fuels in the Western United States. The Company also sells ethanol co-products, including
wet distillers grain (“WDG”), a nutritious animal feed, and corn oil. Serving integrated oil companies and gasoline
marketers who blend ethanol into gasoline, the Company provides transportation, storage and delivery of ethanol through third-party
service providers in the Western United States, primarily in California, Arizona, Nevada, Utah, Oregon, Colorado, Idaho and Washington.
The Company had a 91% and an 83% ownership interest in PE Op Co., the owner of four ethanol production
facilities, as of March 31, 2014 and 2013, respectively. The facilities are near their respective fuel and feed customers, offering
significant timing, transportation cost and logistical advantages. The Company sells ethanol produced by the Pacific Ethanol Plants
(as defined below) and unrelated third parties to gasoline refining and distribution companies, sells its WDG to dairy operators
and animal feed distributors and sells its corn oil to poultry and biodiesel customers.
The Company manages the
production and operation of four ethanol production facilities, namely, Pacific Ethanol Madera LLC, Pacific Ethanol Columbia, LLC,
Pacific Ethanol Stockton LLC and Pacific Ethanol Magic Valley, LLC (collectively, the “Pacific Ethanol Plants”) and
their holding company, Pacific Ethanol Holding Co. LLC (“PEHC,” and together with the Pacific Ethanol Plants, the “Plant
Owners”). PEHC is a wholly-owned subsidiary of PE Op Co. These four facilities have an aggregate annual ethanol production
capacity of up to 200 million gallons. As of March 31, 2014, three of the facilities were operating and one of the facilities was
in the process of restarting production, scheduled for the second quarter of 2014. On April 30, 2014, the previously idled facility
commenced producing ethanol. 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.
Reverse Stock Split
–
On May 14, 2013, the Company effected a one-for-fifteen reverse stock split. All share and per share information has been restated
to retroactively show the effect of this stock split.
Liquidity
– During
the three months ended March 31, 2014, the Company funded its operations primarily from cash provided by operations, proceeds from
warrant exercises and borrowings under its credit facilities.
The Company’s current available capital
resources consist of cash on hand and amounts available for borrowing under Kinergy’s credit facility. In addition, the Plant
Owners have credit facilities for use in the operations of the Pacific Ethanol Plants. The Company expects that its future available
capital resources will consist primarily of its remaining cash balances, cash flow from operations, if any, amounts available for
borrowing, if any, under Kinergy’s credit facility, cash generated from Kinergy’s ethanol marketing business, fees
paid under the asset management agreement relating to the Company’s operation of the Pacific Ethanol Plants, cash proceeds
from warrant exercises and distributions, if any, in respect of the Company’s ownership interest in PE Op Co.
The Company believes that current and future
available capital resources, revenues generated from operations, and other existing sources of liquidity, including its credit
facilities, will be adequate to meet its anticipated working capital and capital expenditure requirements for at least the next
twelve months. If, however, the Company’s capital requirements or cash flow vary materially from its current projections,
if crush and commodity margins, which reflect ethanol and co-product sales prices relative to ethanol production inputs such as
corn and natural gas, decline in any material respect, or if other unforeseen circumstances occur, the Company may require additional
financing. The Company’s failure to raise capital if and when needed could restrict its growth or hinder its ability to compete.
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 WDG to dairy operators and animal feed
distributors 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
$33,044,000 and $27,487,000 at March 31, 2014 and December 31, 2013, respectively, were used as collateral under Kinergy’s
operating line of credit. The allowance for doubtful accounts was $14,000 and $187,000 as of March 31, 2014 and December 31, 2013,
respectively. The Company recorded a recovery of $34,000 and bad debt expense of $208,000 for the three months ended March 31,
2014 and 2013, respectively. The Company does not have any off-balance sheet credit exposure related to its customers.
Provision for Income Taxes
– For the three months ended March 31, 2014, although the Company incurred a net loss for the period, it generated income
subject to income tax as a result of the nontax-deductible nature of its fair value adjustments for the period. As a result, the
Company applied its net operating loss carryforwards to its potential taxable income and recorded a deferred provision for income
taxes of $11.3 million, eliminating any need for a current tax provision or liability. Further, the Company reversed $8.0 million
of its valuation allowance against its net tax assets, resulting in a benefit to its provision for income taxes with a net $3.3
million provision for income taxes for the period. Further, on April 1, 2014, New PE Holdco LLC was converted from a limited liability
company to a C-Corporation and changed its name to PE Op Co.
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, 2013. 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, 2013. 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.
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the United States 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 fair value of warrants and conversion features, allowance for doubtful accounts,
estimated lives of property and equipment and intangibles, 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. Actual results and outcomes may materially differ from management’s estimates and assumptions.
|
2.
|
PACIFIC ETHANOL PLANTS.
|
Consolidation of PE Op Co.
– The Company concluded that since PE Op Co.’s inception, through the point the Company became a 91% owner, PE Op Co.
was a variable interest entity because the other owners of PE Op Co., due to the Company’s involvement through its contractual
arrangements, at all times lacked the power to direct the activities that most significantly impacted its economic performance.
However, since the Company’s recent acquisition bringing its ownership interest in PE Op Co. to 91%, the Company has obtained
sufficient control both by way of agreements as well as based on structural control of PE Op Co., such that PE Op Co. is no longer
considered a variable interest entity, and as such the Company will consolidate PE Op Co. under the voting rights model.
Noncontrolling interest increased from
$5,683,000 at December 31, 2013 to $7,692,000 at March 31, 2014 due to net income attributed to noncontrolling interest of $2,009,000
for the three months ended March 31, 2014.
The Company’s acquisition of its
ownership interest in PE Op Co. does not impact the Company’s rights or obligations under any of its contractual arrangements.
Further, creditors of PE Op Co. do not have recourse to the Company. Since its acquisition, the Company has not provided any additional
support to PE Op Co. beyond the terms of its contractual arrangements.
Inventories consisted primarily of bulk
ethanol and unleaded fuel, and are valued at the lower-of-cost-or-market, with cost determined on a first-in, first-out basis.
Inventory balances consisted of the following (in thousands):
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Finished goods
|
|
$
|
16,920
|
|
|
$
|
10,287
|
|
Raw materials
|
|
|
7,280
|
|
|
|
9,418
|
|
Work in progress
|
|
|
3,152
|
|
|
|
2,766
|
|
Other
|
|
|
945
|
|
|
|
915
|
|
Total
|
|
$
|
28,297
|
|
|
$
|
23,386
|
|
The business and activities of the Company
expose it to a variety of market risks, including risks related to changes in commodity prices and interest rates. 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
months ended March 31, 2014 and 2013, 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 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 gains of $70,000 and losses of $5,000 as the change in the fair value of these contracts for the three months
ended March 31, 2014 and 2013, respectively.
Non Designated Derivative Instruments
– 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 March 31,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2014
|
|
|
2013
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
84
|
|
|
$
|
(73
|
)
|
|
|
|
|
Unrealized
Gains (Losses)
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2014
|
|
|
2013
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(14
|
)
|
|
$
|
68
|
|
Long-term borrowings are summarized as
follows (in thousands):
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Kinergy operating line of credit
|
|
$
|
23,107
|
|
|
$
|
19,042
|
|
Senior unsecured notes
|
|
|
977
|
|
|
|
13,984
|
|
Plant Owners’ term debt and accrued interest
|
|
|
58,766
|
|
|
|
58,766
|
|
Plant Owners’ lines of credit and accrued interest
|
|
|
16,000
|
|
|
|
35,378
|
|
Note payable to related party
|
|
|
–
|
|
|
|
750
|
|
|
|
|
98,850
|
|
|
|
127,920
|
|
Less: Parent purchased Plant Owners’ term debt
|
|
|
(27,088
|
)
|
|
|
(27,088
|
)
|
Total Consolidated Debt
|
|
|
71,762
|
|
|
|
100,832
|
|
Less: Unamortized discount on senior unsecured notes
|
|
|
(117
|
)
|
|
|
(1,674
|
)
|
|
|
|
71,645
|
|
|
|
99,158
|
|
Less short-term portion
|
|
|
–
|
|
|
|
(750
|
)
|
Long-term debt
|
|
$
|
71,645
|
|
|
$
|
98,408
|
|
Kinergy Operating Line of Credit
– For the three months ended March 31, 2014, Kinergy borrowed net $4,065,000 on its working capital line of credit. As of
March 31, 2014, Kinergy had an available borrowing base under the credit facility of $6,893,000.
Senior Unsecured
Notes
– For the three months ended March 31, 2014, the Company paid in cash $13,007,000 on its senior unsecured notes.
In April 2014, the Company fully retired the outstanding senior unsecured notes.
Plant Owners’
Term Debt and Operating Lines of Credit
– The Plant Owners’ debt as of March 31, 2014 consisted of a $32,487,000
tranche A-1 term loan and a $26,279,000 tranche A-2 term loan. Pacific Ethanol, Inc., holds a combined $27,088,000 of these term
loans, which are eliminated in consolidation. The Plant Owners’ availability under their revolving lines of credit was $50,378,000,
which was subsequently reduced to $35,000,000, as discussed below. The term debt requires monthly interest payments at a floating
rate equal to the three-month LIBOR or the Prime Rate of interest, at the Plant Owners’ election, plus 10.0%. The revolving
credit facilities require monthly interest payments at a floating rate equal to the three-month LIBOR or the Prime Rate of interest,
at the Plant Owners’ election, plus 10.0% and 4.5% for the $20,000,000 and $15,000,000 facilities, respectively. At March
31, 2014, the average interest rate was approximately 11.0%. Repayments of principal are based on available free cash flow of
the Plant Owners, until maturity, when all principal amounts are due.
For the three months
ended March 31, 2014, the Company paid in cash $19,378,000 on its revolving credit facilities. As of April 25, 2014, the outstanding
principal balance on these revolving credit facilities was fully repaid, with an aggregate of $35,000,000 of availability.
Debt Modifications
– On April 1, 2014, the Company entered into amendments to its credit facilities and term loan arrangements to achieve
the following changes:
|
·
|
Adjust the terms of the credit agreements to take into account a restart of the Company’s
Madera, California facility;
|
|
·
|
Reduce the Company’s revolving credit facility from $35,000,000 to $20,000,000 while increasing
the maximum amount of the term loan outstanding to $65,766,000, allowing the Company to immediately borrow an additional $7,000,000.
The additional $7,000,000 in borrowings was subject to an original issue discount of 6.25%, representing loan fees payable to the
lenders, resulting in net proceeds from the additional borrowings of approximately $6,600,000. The Company intends to use the net
proceeds of the additional loan for transaction expenses and expenses associated with restarting operations at the Company’s
Madera, California facility;
|
|
·
|
Increase to $24,000,000 from $14,000,000 the level of permitted indebtedness, including capital
lease liabilities that may be incurred for yield enhancing equipment or processing and separation equipment for corn oil and corn
syrup at the Company’s ethanol production facilities; and
|
|
·
|
Maintain the Company’s new revolving credit facility at $15,000,000 but allow the Company
to terminate in whole or permanently reduce in part in $1,000,000 increments the lenders’ aggregate commitment.
|
Note Payable to Related Party
– The Company repaid in cash its note payable to its Chief Executive Officer totaling $750,000 on March 31, 2014.
|
6.
|
COMMON STOCK AND WARRANTS.
|
Warrant exercises
– During the three months ended March 31, 2014 and 2013, certain holders exercised warrants and received an aggregate of
1,888,000 and 279,000 shares of the Company’s common stock upon payment of an aggregate of $12,130,000 and $2,064,000 in
cash, respectively. During the three months ended March 31, 2013, the Company paid $785,800 in cash to the warrant holders as an
inducement for such exercises and recorded an expense of approximately $785,800. Also, in March 2013, a holder exercised warrants
on a cashless basis and received 11,356 shares of the Company’s common stock. There were no cashless exercises for the three
months ended March 31, 2014.
Equity offering
– In April 2014, the Company issued 1,750,000 shares of its common stock in a public offering for net proceeds of $26,000,000.
|
7.
|
COMMITMENTS AND CONTINGENCIES.
|
Sales Commitments
–
At March 31, 2014, the Company had entered into sales contracts with its major customers to sell certain quantities of ethanol,
WDG, corn oil and syrup. The Company had open ethanol indexed-price contracts for 146,017,000 gallons of ethanol as of March 31,
2014. The Company had open WDG and syrup fixed-price sales contracts valued at $396,000, open corn oil sales contracts valued at
$213,000, and open indexed-price sales contracts for 452 tons of WDG and syrup and 1,779,000 pounds of corn oil as of March 31,
2014. These sales contracts are scheduled to be completed throughout 2014.
Purchase Commitments
–
At March 31, 2014, the Company had fixed-price purchase contracts with its suppliers to purchase $21,642,000 of ethanol and indexed-price
contracts to purchase 22,745,000 gallons of ethanol. These contracts are scheduled to be satisfied throughout the remainder of
2014.
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, 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 financial impact on the Company’s operating results.
On May 24, 2013, GS CleanTech Corporation
(“GS CleanTech”), filed a suit in the United States District Court for the Eastern District of California, Sacramento
Division (Case No.: 2:13-CV-01042-JAM-AC), naming Pacific Ethanol, Inc. as a defendant. On August 29, 2013, the case was transferred
to the United States District Court for the Southern District of Indiana and made part of the pre-existing multi-district litigation
involving GS CleanTech and multiple defendants. The suit alleges infringement of a patent assigned to GS CleanTech by virtue of
certain corn oil separation technology in use at one or more of the ethanol production facilities in which the Company has an interest,
including Pacific Ethanol Stockton LLC (“PE Stockton”), located in Stockton, California. The complaint seeks preliminary
and permanent injunctions against the Company, prohibiting future infringement on the patent owned by GS CleanTech and damages
in an unspecified amount adequate to compensate GS CleanTech for the alleged patent infringement, but in any event no less than
a reasonable royalty for the use made of the inventions of the patent, plus attorney’s fees. The Company has since answered
the complaint and counterclaimed that the patent claims at issue, as well as the claims in several related patents, are invalid
and unenforceable and that the Company is not infringing. Pacific Ethanol, Inc. does not itself use any corn oil separation technology
and may seek a dismissal on those grounds.
On March 17 and March 18, 2014, GS CleanTech
filed suit naming as defendants two Company subsidiaries: PE Stockton and Pacific Ethanol Magic Valley, LLC (“PE Magic Valley”).
The claims are similar to those filed against Pacific Ethanol, Inc. in May 2013. These two cases, currently pending in the United
States District Court for the Eastern District of California and United States District Court for the Eastern District of Idaho,
respectively, will be transferred to the multi-district litigation division in United States District Court for the Southern District
of Indiana, where the case against Pacific Ethanol, Inc. is pending, in accordance with a Conditional Transfer Order issued by
the Judicial Panel on Multidistrict Litigation on March 27, 2014. Although PE Stockton and PE Magic Valley do separate and market
corn oil, the Company, PE Stockton and PE Magic Valley strongly disagree that either of the subsidiaries use corn oil separation
technology that infringes the patent owned by GS CleanTech. The Company, PE Stockton and PE Magic Valley expect to mount vigorous
defenses that include noninfringement, unenforceability, and invalidity of each of the patents at issue.
|
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.
|
The Company recorded its warrants issued
from 2010 through 2013 at fair value and designated them as Level 3 on their issuance dates.
Warrants
– Except for
the warrants issued September 26, 2012, the Company’s warrants have been valued using a Monte Carlo Binomial Lattice-Based
valuation methodology, adjusted for marketability restrictions. The warrants issued September 26, 2012, did not contain any anti-dilution
protection features and as a result, the warrants were valued using the Black-Scholes Valuation Model. Of the various inputs used,
the volatility and the current price of the Company’s common stock most significantly impact the fair value adjustments of
the warrants. As the price of the Company’s common stock increases or decreases quarter-over-quarter, the valuation of the
warrants will increase or decrease, respectively. As the estimated volatility of the Company’s common stock increases or
decreases quarter-over quarter, the valuation of the warrants will increase or decrease, respectively. These changes may result
in significantly higher or lower fair value measurements from period to period.
Significant assumptions used and related
fair values for the Company’s warrants as of March 31, 2014 were as follows:
Original Issuance
|
|
Exercise Price
|
|
|
Volatility
|
|
|
Risk-Free Interest Rate
|
|
|
Term (years)
|
|
|
Discount for marketability restrictions
|
|
|
Warrants Outstanding
|
|
|
Fair Value
|
|
03/28/2013
|
|
$
|
7.59
|
|
|
|
56.4%
|
|
|
|
0.13%
|
|
|
|
1.00
|
|
|
|
22.1%
|
|
|
|
788,000
|
|
|
$
|
5,098,000
|
|
06/21/2013
|
|
$
|
7.59
|
|
|
|
55.4%
|
|
|
|
0.13%
|
|
|
|
1.24
|
|
|
|
24.2%
|
|
|
|
1,051,000
|
|
|
|
6,703,000
|
|
01/11/2013
|
|
$
|
6.32
|
|
|
|
60.6%
|
|
|
|
1.32%
|
|
|
|
3.79
|
|
|
|
41.0%
|
|
|
|
813,000
|
|
|
|
5,343,000
|
|
09/26/2012
|
|
$
|
8.85
|
|
|
|
54.6%
|
|
|
|
0.29%
|
|
|
|
1.49
|
|
|
|
40.6%
|
|
|
|
1,639,000
|
|
|
|
7,382,000
|
|
07/3/2012
|
|
$
|
6.09
|
|
|
|
60.2%
|
|
|
|
0.90%
|
|
|
|
3.26
|
|
|
|
39.3%
|
|
|
|
976,000
|
|
|
|
6,462,000
|
|
12/13/2011
|
|
$
|
8.43
|
|
|
|
60.8%
|
|
|
|
0.90%
|
|
|
|
2.71
|
|
|
|
36.6%
|
|
|
|
281,000
|
|
|
|
1,691,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,679,000
|
|
Significant assumptions used and related
fair values for the Company’s warrants as of December 31, 2013 were as follows:
Original Issuance
|
|
Exercise Price
|
|
|
Volatility
|
|
|
Risk-Free Interest Rate
|
|
|
Term (years)
|
|
|
Discount for marketability restrictions
|
|
|
Warrants Outstanding
|
|
|
Fair Value
|
|
03/28/2013
|
|
$
|
7.59
|
|
|
|
52.4%
|
|
|
|
0.13%
|
|
|
|
1.20
|
|
|
|
22.7%
|
|
|
|
788,000
|
|
|
$
|
495,000
|
|
06/21/2013
|
|
$
|
7.59
|
|
|
|
52.4%
|
|
|
|
0.13%
|
|
|
|
1.24
|
|
|
|
22.7%
|
|
|
|
1,051,000
|
|
|
|
660,000
|
|
01/11/2013
|
|
$
|
6.32
|
|
|
|
63.3%
|
|
|
|
1.27%
|
|
|
|
4.03
|
|
|
|
43.8%
|
|
|
|
1,709,000
|
|
|
|
2,892,000
|
|
09/26/2012
|
|
$
|
8.85
|
|
|
|
58.5%
|
|
|
|
0.38%
|
|
|
|
1.74
|
|
|
|
42.3%
|
|
|
|
1,771,000
|
|
|
|
702,000
|
|
07/3/2012
|
|
$
|
6.09
|
|
|
|
61.2%
|
|
|
|
1.27%
|
|
|
|
3.51
|
|
|
|
40.2%
|
|
|
|
1,812,000
|
|
|
|
3,008,000
|
|
07/3/2012
|
|
$
|
5.47
|
|
|
|
52.8%
|
|
|
|
0.01%
|
|
|
|
0.01
|
|
|
|
42.3%
|
|
|
|
804,000
|
|
|
|
3,000
|
|
12/13/2011
|
|
$
|
8.43
|
|
|
|
60.4%
|
|
|
|
0.78%
|
|
|
|
2.95
|
|
|
|
37.9%
|
|
|
|
306,000
|
|
|
|
455,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,215,000
|
|
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 fair value measurements by level
at March 31, 2014 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
(1)
|
|
$
|
388
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
388
|
|
Total Assets
|
|
$
|
388
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
(2)
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
32,679
|
|
|
$
|
32,679
|
|
Commodity contracts
(3)
|
|
|
301
|
|
|
|
–
|
|
|
|
–
|
|
|
|
301
|
|
Total Liabilities
|
|
$
|
301
|
|
|
$
|
–
|
|
|
$
|
32,679
|
|
|
$
|
32,980
|
|
__________
(1) Included in other current assets
in the consolidated balance sheets.
(2) Included in warrant liabilities
at fair value in the consolidated balance sheets.
(3) Included in other current liabilities
in the consolidated balance sheets.
The following table summarizes fair value measurements by level
at December 31, 2013 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
(1)
|
|
$
|
961
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
961
|
|
Total Assets
|
|
$
|
961
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
(2)
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
8,215
|
|
|
$
|
8,215
|
|
Commodity contracts
(3)
|
|
|
859
|
|
|
|
–
|
|
|
|
–
|
|
|
|
859
|
|
Total Liabilities
|
|
$
|
859
|
|
|
$
|
–
|
|
|
$
|
8,215
|
|
|
$
|
9,074
|
|
__________
(1) Included in other current assets
in the consolidated balance sheets.
(2) Included in warrant liabilities
at fair value in the consolidated balance sheets.
(3) Included in accrued liabilities
in the consolidated balance sheets.
For fair value measurements using significant
unobservable inputs (Level 3), 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. The changes in the Company’s fair value of its Level
3 inputs were as follows (in thousands):
|
|
Warrants
|
|
Balance, December 31, 2013
|
|
$
|
8,215
|
|
Adjustments to fair value for the period
|
|
|
35,844
|
|
Exercises of warrants
|
|
|
(11,377
|
)
|
Expiration of warrants
|
|
|
(3
|
)
|
Balance, March 31, 2014
|
|
$
|
32,679
|
|
The following tables compute basic and
diluted earnings per share (in thousands, except per share data):
|
|
Three Months Ended March 31, 2014
|
|
|
|
Loss
Numerator
|
|
|
Shares Denominator
|
|
|
Per-Share Amount
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(10,826
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributed to common stockholders
|
|
$
|
(11,138
|
)
|
|
|
16,181
|
|
|
$
|
(0.69
|
)
|
|
|
Three Months Ended March 31, 2013
|
|
|
|
Loss
Numerator
|
|
|
Shares Denominator
|
|
|
Per-Share Amount
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(5,454
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributed to common stockholders
|
|
$
|
(5,766
|
)
|
|
|
10,060
|
|
|
$
|
(0.57
|
)
|
There were an aggregate of 2,301,000 and
427,000 potentially dilutive weighted-average shares from convertible securities outstanding as of March 31, 2014 and 2013, respectively.
These convertible securities were not considered in calculating diluted net loss per share for the three months ended March 31,
2014 and 2013, as their effect would have been anti-dilutive. In April 2014, the Company issued 1,750,000 shares of its common
stock in a public offering.
10.
|
RELATED PARTY TRANSACTIONS.
|
Preferred Dividends
–
The Company had accrued and unpaid dividends in respect of its Series B Preferred Stock of $3,657,000 as of March 31, 2014 and
December 31, 2013.
Note Payable to Related Party
– The Company had a note payable to its Chief Executive Officer totaling $750,000 which was due on March 31, 2014. On March
31, 2014, the Company paid in cash the outstanding balance of the note payable.
Warrant Exercises
–
From April 1, 2014 through May 8, 2014, certain holders exercised warrants on a cash or cashless basis for an aggregate of
145,000 and 493,000 shares of the Company’s common stock, respectively, for aggregate cash payments of $883,000.
A summary as of May 8, 2014 of outstanding warrants, which
the Company recorded at fair value, with a weighted-average exercise price of $7.57, is as follows:
Issuance Date
|
|
Expiration Date
|
|
Exercise Price
|
|
Warrants Outstanding
|
|
06/21/2013
|
|
06/21/2015
|
|
$7.59
|
|
|
1,051,000
|
|
03/28/2013
|
|
03/28/2015
|
|
$7.59
|
|
|
296,000
|
|
01/11/2013
|
|
01/11/2018
|
|
$6.32
|
|
|
813,000
|
|
09/26/2012
|
|
09/26/2015
|
|
$8.85
|
|
|
1,639,000
|
|
07/3/2012
|
|
07/03/2017
|
|
$6.09
|
|
|
830,000
|
|
12/13/2011
|
|
12/13/2016
|
|
$8.43
|
|
|
281,000
|
|
|
|
|
|
|
|
|
4,910,000
|
|
Equity Offering
– In
April 2014, the Company issued 1,750,000 shares of its common stock in a public offering for net proceeds of $26,000,000.
Payments on Senior Unsecured Notes
– In April 2014, the Company fully retired its senior unsecured notes by paying in cash the outstanding principal amount
and all accrued and unpaid interest.
Payments on Plant Owners’ Revolving
Credit Facility
– From April 1, 2014 through April 25, 2014, the Company made $16,000,000 in principal payments on
its revolving lines of credit. As of May 9, 2014, the outstanding principal balance on these revolving lines of credit was $0,
with $35,000,000 of availability.
Debt Modifications
–
On April 1, 2014, the Company entered into amendments to its credit facilities and term loan arrangements as discussed in detail
in Note 5.
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;
|
|
·
|
our ability to successfully manage and operate third party ethanol production facilities;
|
|
·
|
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 or of our Annual Report on Form 10-K for the year ended December 31, 2013 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 the leading producer and marketer
of low-carbon renewable fuels in the Western United States.
We market all the ethanol produced by four
ethanol production facilities located in California, Idaho and Oregon, or the Pacific Ethanol Plants, all the ethanol produced
by two other ethanol producers in the Western United States and ethanol purchased from other third-party suppliers throughout the
United States. We market ethanol through our subsidiary Kinergy Marketing LLC, or Kinergy. We also market ethanol co-products,
including wet distillers grains, or WDG, and corn oil, for the Pacific Ethanol Plants.
We have extensive customer relationships
throughout the Western United States. Our ethanol customers are integrated oil companies and gasoline marketers who blend ethanol
into gasoline. 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, primarily in California, Arizona, Nevada, Utah, Oregon, Colorado,
Idaho and Washington. Our WDG customers are dairies and feedlots located near the Pacific Ethanol Plants. Our corn oil is sold
to poultry and biodiesel customers.
We have extensive supplier relationships
throughout the Western and Midwestern United States. In some cases, we have marketing agreements with suppliers to market all of
the output of their facilities.
We hold a 91% ownership interest in PE Op
Co. (formerly, New PE Holdco LLC), the owner of each of the plant holding companies, or the Plant Owners, that collectively own
the Pacific Ethanol Plants. We operate and maintain the Pacific Ethanol Plants under the terms of an asset management agreement
with PE Op Co. and the Plant Owners, including supplying all goods and materials necessary to operate and maintain each Pacific
Ethanol Plant. In operating the Pacific Ethanol Plants, we direct the production process to obtain optimal production yields, lower
costs by leveraging our infrastructure, enter into risk management agreements such as insurance policies and manage commodity risk
practices.
We market ethanol and its co-products, including
WDG and corn oil, produced by the Pacific Ethanol Plants under the terms of separate marketing agreements with the Plant Owners.
The marketing agreements provide us with the absolute discretion to solicit, negotiate, administer (including payment collection),
enforce and execute ethanol and co-product sales agreements with any third party.
The Pacific Ethanol Plants are comprised
of the four facilities described immediately below and have an aggregate annual production capacity of up to 200 million gallons.
We commenced production at our Madera, California facility on April 30, 2014 and expect to reach full capacity in the second quarter
of 2014.
Facility Name
|
|
Facility
Location
|
|
Estimated
Annual Capacity
(gallons)
|
|
Current
Operating Status
|
Magic Valley
|
|
Burley, ID
|
|
60,000,000
|
|
Operating
|
Columbia
|
|
Boardman, OR
|
|
40,000,000
|
|
Operating
|
Stockton
|
|
Stockton, CA
|
|
60,000,000
|
|
Operating
|
Madera
|
|
Madera, CA
|
|
40,000,000
|
|
Operating
|
We earn fees as follows under our asset
management and other agreements with PE Op Co. and the Plant Owners:
|
·
|
ethanol marketing fees of approximately 1% of the net sales price, but not less than $0.015 per gallon and not more than $0.0225 per gallon;
|
|
·
|
corn procurement and handling fees of $0.045 per bushel;
|
|
·
|
WDG, syrup and corn oil fees of 5% of the third-party purchase price, excluding freight, but not less than $2.00 per ton and not more than $3.50 per ton; and
|
|
·
|
asset management fees of $75,000 per month for each operating facility and $40,000 per month for each idled facility.
|
We intend to advance our position as the
leading producer and marketer of low-carbon renewable fuels in the Western United States, in part by expanding production at our
Madera, California facility to its full production capacity, expanding
our relationships with customers and third-party ethanol producers to market higher volumes of ethanol and by expanding the market
for ethanol by continuing to work with state governments to encourage the adoption of policies and standards that promote ethanol
as a fuel additive and transportation fuel. Further, we may seek to provide management services for other third-party ethanol production
facilities in the Western United States.
Recent Developments and Outlook
Our
ownership interest in the Pacific Ethanol Plants is now at 91%. Although current production margins have contracted since
their peak near the end of the first quarter, the Pacific Ethanol Plants are currently operating profitably and
contributing positively to our overall financial position. We expect a balanced supply and demand for ethanol over the coming
months, in part due to the continued rebuilding of inventories and stronger demand for exports from the United States, and
ethanol blend rates at least at current levels through the balance of 2014. We also expect our co-product returns as a
percentage of our cost of corn to continue around current levels during the coming months.
Ethanol prices in the Western United States
have typically been $0.20 per gallon higher than in the Midwest due to the freight costs of delivering ethanol from Midwest production
facilities. From October 2013 through April 2014, however, ethanol prices in the Western United States have averaged $0.40 per
gallon higher than ethanol prices in the Midwest due to rail logistics challenges and weather conditions which constrained the
flow of ethanol and co-products from the Midwest to the markets in which we operate.
From 2010 through 2013, we issued in various
financing transactions warrants to purchase shares of our common stock. The warrants were initially recorded at their fair values,
which are adjusted quarterly, generally resulting in non-cash expenses or income if the market price of our common stock increases
or decreases, respectively, during the period. Due to the substantial increase in the market price of our common stock in the first
quarter of 2014 and because the exercise prices of these warrants were, as of March 31, 2014, well below the market price of our
common stock, the fair values of the warrants and the related non-cash expenses were significantly higher in the first quarter
of 2014 than in prior quarterly periods, which resulted in an unusually large non-cash expense for the quarter. These fair value
adjustments will continue in future periods until all of our warrants are exercised or expire. These adjustments will generally
reduce our net income or increase our net loss if the market price of our common stock increases on a quarter over quarter basis.
Conversely, the adjustments will generally increase our net income or reduce our net loss if the market price of our common stock
declines on a quarter over quarter basis.
We began producing
and selling corn oil at our Magic Valley and Stockton facilities in June 2013 and October 2013, respectively, allowing us to diversify
our revenue and providing immediate incremental gross profit. We are currently producing corn oil in meaningful amounts at both
facilities and have, as one of our 2014 objectives, the implementation of corn oil production technology at the remaining two
Pacific Ethanol Plants.
We continue to focus on increasing operating
efficiencies and improving yields at the Pacific Ethanol Plants. To this end, we installed yield-enhancing Cellunators
TM
technology at our Stockton facility, allowing us to increase yields by increasing available starch for conversion. This technology
also may allow us to produce cellulosic corn ethanol.
The regulatory environment continues to
support the long-term demand for renewable fuels. California’s Low-Carbon Fuel Standard requires refiners to reduce the carbon
intensity of their fuels by 10% between 2011 and 2020, which we believe is an aggressive requirement that will necessitate a significant
amount of low-carbon fuel to displace gasoline in the California fuel supply. We continue to reduce energy use at the Pacific Ethanol
Plants to lower the carbon intensity of our ethanol. We believe that we have a significant advantage in the marketplace because
we produce among the lowest-carbon ethanol commercially produced in the United States which enables us to capture a premium for
ethanol we produce.
We also continue to diversify our feedstock
by using a blend of corn, sorghum and beet sugar, which reduces feedstock costs and reduces the carbon output of ethanol we produce.
Using beet sugar as feedstock, we were able to reduce our material costs by approximately $1.4 million during the quarter. We expect
to continue to use beet sugar throughout 2014 at levels approximating 15% of total feedstock at our Magic Valley and Columbia facilities.
The United States Department of Agriculture anticipates a record 2013-2014 corn crop, but we are uncertain how the new crop will
affect our ethanol production and intend to operate the Pacific Ethanol Plants with flexibility in anticipation of the new crop.
Our strategic goals for 2014 include further
improving operating efficiencies at the Pacific Ethanol Plants; continuing to diversify our revenue and feedstock, including through
the implementation of corn oil production technology at two Pacific Ethanol Plants; and continuing to increase the value of our
produced ethanol by further reducing its carbon intensity, all of which are directed at supporting sustained profitable growth.
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; warrants carried at fair value and conversion features; impairment of long-lived and intangible
assets; 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, 2013.
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
March 31,
|
|
|
Percentage
|
|
|
|
2014
|
|
|
2013
|
|
|
Variance
|
|
Production gallons sold (in millions)
|
|
|
39.8
|
|
|
|
35.3
|
|
|
|
12.7%
|
|
Third party gallons sold (in millions)
|
|
|
73.0
|
|
|
|
65.4
|
|
|
|
11.6%
|
|
Total gallons sold (in millions)
|
|
|
112.8
|
|
|
|
100.7
|
|
|
|
12.0%
|
|
Average sales price per gallon
|
|
$
|
2.70
|
|
|
$
|
2.60
|
|
|
|
3.8%
|
|
Corn cost per bushel—CBOT equivalent
|
|
$
|
4.48
|
|
|
$
|
7.16
|
|
|
|
(37.4%
|
)
|
Average basis
(1)
|
|
|
1.28
|
|
|
|
1.19
|
|
|
|
7.6%
|
|
Delivered cost of corn
|
|
$
|
5.76
|
|
|
$
|
8.35
|
|
|
|
(31.0%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Co-product revenues as % of delivered cost of corn
(2)
|
|
|
34.6%
|
|
|
|
28.1%
|
|
|
|
23.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average CBOT ethanol price per gallon
|
|
$
|
2.20
|
|
|
$
|
2.41
|
|
|
|
(8.7%
|
)
|
Average CBOT corn price per bushel
|
|
$
|
4.52
|
|
|
$
|
7.16
|
|
|
|
(36.9%
|
)
|
________________
|
(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
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
254,543
|
|
|
$
|
225,459
|
|
|
$
|
29,084
|
|
|
|
12.9%
|
|
Cost of goods sold
|
|
|
215,998
|
|
|
|
224,613
|
|
|
|
(8,615
|
)
|
|
|
(3.8%
|
)
|
Gross profit
|
|
$
|
38,545
|
|
|
$
|
846
|
|
|
$
|
37,699
|
|
|
|
NM
|
|
Percentage of net sales
|
|
|
15.1%
|
|
|
|
0.3%
|
|
|
|
|
|
|
|
|
|
Net Sales
The increase in our net sales for the three
months ended March 31, 2014 as compared to the same period in 2013 was due to increases in our total gallons sold and our average
sales price per gallon.
Total volume of ethanol gallons sold increased
by 12.1 million gallons, or 12.0%, to 112.8 million gallons for the three months ended March 31, 2014 as compared to 100.7 million
gallons for the same period in 2013. We increased both production and third party gallons sold for the three months ended March
31, 2014 as compared to the same period in 2013. The increases in our production gallons and third party gallons sold are primarily
due to increased production rates at the Pacific Ethanol Plants and third party supplier plants, respectively. We and our third
party suppliers increased production rates due to higher industry-wide corn crush margins resulting from lower corn costs and higher
ethanol prices due to tighter ethanol supply relative to demand.
Our
average sales price per gallon increased 3.8% to $2.70 for the three months ended March 31, 2014 from an average sales price
per gallon of $2.60 for the same period in 2013. The average Chicago Board of Trade, or CBOT, ethanol price per gallon
decreased 8.7% to $2.20 for the three months ended March 31, 2014 from an average CBOT ethanol price per gallon of $2.41 for
the same period in 2013. This disparity between our ethanol sales price per gallon and the CBOT average reflects both the
additional basis costs for West Coast delivery of ethanol as well as the premiums we receive by selling lower carbon
intensity ethanol in the Western United States. Ethanol prices in the Western United States were also higher than ethanol
prices in the Midwest due to rail logistics challenges and weather conditions which constrained the flow of ethanol and
co-products from the Midwest to the markets in which we operate.
Cost of Goods Sold and Gross Profit
Our gross profit improved significantly
to a gross profit of $38.5 million for the three months ended March 31, 2014 from a gross profit of $0.8 million for the same period
in 2013. Our gross margin also increased significantly to 15.1% for the three months ended March 31, 2014 from 0.3% for the same
period in 2013. Our gross profit and gross margin increased primarily due to significantly improved crush and commodity margins
realized at the Pacific Ethanol Plants, predominantly related to lower corn costs and tighter ethanol supply relative to demand
as well as higher ethanol prices in the Western United States due to rail logistics challenges and weather conditions which constrained
the flow of ethanol and co-products from the Midwest to the markets in which we operate. Crush and commodity margins reflect ethanol
and co-product sales prices relative to ethanol production inputs such as corn and natural gas.
Selling, General
and Administrative Expenses
The following table presents our selling,
general and administrative expenses, or SG&A, in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
Selling, general
and administrative expenses
|
|
$
|
3,670
|
|
|
$
|
4,005
|
|
|
$
|
(335
|
)
|
|
|
(8.4%
|
)
|
Percentage of net sales
|
|
|
1.4%
|
|
|
|
1.8%
|
|
|
|
|
|
|
|
|
|
Our SG&A decreased in both absolute
dollars and as a percentage of net sales for the three months ended March 31, 2014 as compared to the same period in 2013. The
$0.3 million period over period decrease in SG&A is primarily due to the following factors:
|
·
|
a decrease in professional fees of $0.3 million due to non-capitalized expenses incurred for the three months ended March 31, 2013 associated with the issuance of our senior unsecured notes in January 2013;
|
|
·
|
a decrease in bad debt expense of $0.2 million due to recoveries of bad debt in the current quarter; and
|
|
·
|
a decrease in noncash compensation expenses of $0.3 million due to fewer restricted stock awards to our employees and members of our board of directors for the period.
|
These decreases were partially offset by
an increase in payroll-related costs of $0.4 million due to higher compensation resulting from our continued profitable results
and related general annual pay increases.
Fair Value Adjustments
The following table presents our fair value
adjustments in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
Fair value adjustments
|
|
$
|
35,844
|
|
|
$
|
692
|
|
|
$
|
35,152
|
|
|
|
NM
|
|
Percentage of net sales
|
|
|
14.1%
|
|
|
|
0.3%
|
|
|
|
|
|
|
|
|
|
We issued certain warrants in various financing
transactions from 2010 through 2013. These warrants were initially recorded at fair value and are adjusted quarterly. As a result
of quarterly adjustments to their fair values, we recorded an expense of $35.8 million and $0.7 million for the three months ended
March 31, 2014 and 2013, respectively. This change in fair value is primarily due to the increased number of warrants issued in
the three months ended March 31, 2013 and the substantial increase in the market price of our common stock from December 31, 2013
to March 31, 2014 and because the exercise prices of these warrants were, as of March 31, 2014, well below the market price of
our common stock. At December 31, 2013, the market price of our common stock was $5.09 per share and our outstanding warrants had
a weighted-average exercise price of $7.27 per share. At March 31, 2014, the market price of our common stock had increased to
$15.58 per share, and our outstanding warrants were in-the-money and had significant intrinsic value.
These fair value adjustments will continue
in future periods until all of our warrants are exercised or expire. These adjustments will generally reduce our net income or
increase our net loss if the market price of our common stock increases on a quarter over quarter basis. Conversely, the adjustments
will generally increase our net income or reduce our net loss if the market price of our common stock declines on a quarter over
quarter basis.
Interest Expense,
net
The following table presents our interest
expense, net in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
Interest expense, net
|
|
$
|
4,351
|
|
|
$
|
3,481
|
|
|
$
|
870
|
|
|
|
25.0%
|
|
Percentage of net sales
|
|
|
1.7%
|
|
|
|
1.5%
|
|
|
|
|
|
|
|
|
|
Interest expense, net increased $0.9 million
to $4.4 million for the three months ended March 31, 2014 from $3.5 million for the same period in 2013. The $0.9 million increase
in interest expense, net is primarily due to increased amortization of debt discount due to our early retirement of a significant
amount of our senior unsecured notes. We used the proceeds from exercises during the quarter of certain of our outstanding warrants
to retire the senior unsecured notes earlier than originally projected.
Gain on Extinguishment
of Debt
The following table presents our gain on
extinguishment of debt, net in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
Gain on extinguishment of debt
|
|
$
|
–
|
|
|
$
|
817
|
|
|
$
|
(817
|
)
|
|
|
NM
|
|
Percentage of net sales
|
|
|
–
%
|
|
|
|
0.4%
|
|
|
|
|
|
|
|
|
|
In March 2013, we extinguished
certain PE Op Co. debt by paying $0.8 million in cash less than the amount of the debt, and as such, recorded a gain on extinguishment
of debt in an equivalent amount.
Other Expense,
net
The following table presents our other
expense, net in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
Other expense, net
|
|
$
|
227
|
|
|
$
|
87
|
|
|
$
|
140
|
|
|
|
160.9%
|
|
Percentage of net sales
|
|
|
0.1%
|
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
Other expense, net increased
by $0.1 million to $0.2 million for the three months ended March 31, 2014 from $0.1 million for the same period in 2013. The $0.1
million increase in other expense, net is primarily due to an increase in bank fees.
Provision for
Income Taxes
The following table presents our provision
for income taxes in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
Provision for income taxes
|
|
$
|
3,270
|
|
|
$
|
–
|
|
|
$
|
3,270
|
|
|
|
NM
|
|
Percentage of net sales
|
|
|
1.3%
|
|
|
|
–
%
|
|
|
|
|
|
|
|
|
|
For the three months ended March
31, 2014, although we incurred a net loss for the period, we generated income subject to income tax as a result of
the nontax-deductible nature of our fair value adjustments. We did, however apply our net operating loss carryforwards to
our potential taxable income and as a result, we recorded a deferred provision for income taxes of $11.3 million, eliminating
any need for a current tax provision or liability. Further, we reversed $8.0 million of our valuation allowance against our
net tax assets, resulting in a benefit to our provision for income taxes. Our remaining net operating loss carryforwards may
be limited on an annual basis for the remainder of the year.
Net (Income) Loss Attributed to Noncontrolling
Interest
The following table presents the portion
of our net (income) loss attributed to noncontrolling interest in dollars and as a percentage of net sales (in thousands, except
percentages):
|
|
Three Months Ended
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
Net (income) loss attributed to noncontrolling interest
|
|
$
|
(2,009
|
)
|
|
$
|
1,148
|
|
|
$
|
(3,157
|
)
|
|
|
NM
|
|
Percentage of net sales
|
|
|
(0.8%
|
)
|
|
|
0.5%
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributed to noncontrolling
interest relates to our consolidated treatment of PE Op Co., of which we are a 91% owner. For the three months ended March 31,
2014 and 2013, we consolidated the entire income statement of PE Op Co. However, because we owned only 91% and 83% of PE Op Co.
for the three months ended March 31, 2014 and 2013, respectively, we reduced our consolidated net income (loss) for the noncontrolling
interest, which was the ownership interest that we did not own.
Net Loss Attributed
to Pacific Ethanol, Inc.
The following table presents our net loss
attributed to Pacific Ethanol, Inc. in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
10,826
|
|
|
$
|
5,454
|
|
|
$
|
5,372
|
|
|
|
98.5%
|
|
Percentage of net sales
|
|
|
4.3%
|
|
|
|
2.4%
|
|
|
|
|
|
|
|
|
|
The increase in net loss attributed to Pacific
Ethanol, Inc. was primarily due to our fair value adjustments during the period, which offset the impact of our increased ownership
interest in PE Op Co. Our increased ownership interest in PE Op Co. resulted in higher operating income due to significantly improved
commodity margins.
Preferred Stock
Dividends and Net Loss Attributed to Common Stockholders
The following table presents our preferred
stock dividends for our Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock, in dollars and as a percentage
of net sales, and our net loss attributed to common stockholders in dollars and as a percentage of net sales (in thousands, except
percentages):
|
|
Three Months Ended
March 31,
|
|
|
Variance in
|
|
|
|
2014
|
|
|
2013
|
|
|
Dollars
|
|
|
Percent
|
|
Preferred stock dividends
|
|
$
|
312
|
|
|
$
|
312
|
|
|
$
|
–
|
|
|
|
–
|
|
Percentage of net sales
|
|
|
0.1%
|
|
|
|
0.1%
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders
|
|
$
|
11,138
|
|
|
$
|
5,766
|
|
|
$
|
5,372
|
|
|
|
93.2%
|
|
Percentage of net sales
|
|
|
4.4%
|
|
|
|
2.6%
|
|
|
|
|
|
|
|
|
|
Shares of our Series B Preferred Stock are
entitled to quarterly cumulative dividends payable in arrears in an amount equal to 7% per annum of the purchase price per share
of the Series B Preferred Stock. We accrued and paid cash dividends on our Series B Preferred Stock in the aggregate amount of
$0.3 million for the three months ended March 31, 2014 and 2013.
Liquidity and Capital Resources
During the three months ended March 31,
2014, we funded our operations primarily from cash flow from operations, cash on hand, proceeds from warrant exercises and borrowings
under our credit facilities. These funds were used to fund our operations and make debt payments of an aggregate of $34.2 million.
In addition, we raised net proceeds of $26.0 million through the sale of our common stock in a public offering in April 2014.
Our current available capital resources
consist of cash on hand and amounts available for borrowing under Kinergy’s credit facility. In addition, the Plant Owners
have credit facilities for use in the operations of the Pacific Ethanol Plants. We expect that our future available capital resources
will consist primarily of our remaining cash balances, amounts available for borrowing, if any, under Kinergy’s credit facility,
cash generated from Kinergy’s ethanol marketing business, fees paid under our asset management agreement relating to our
operation of the Pacific Ethanol Plants, proceeds from warrant exercises and dividends, if any, in respect of our ownership interest
in PE Op Co.
We believe that current and future available
capital resources, revenues generated from operations, and other existing sources of liquidity, including our credit facilities,
will be adequate to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months.
If, however, our capital requirements or cash flow vary materially from our current projections, if crush and commodity margins,
which reflect ethanol and co-product sales prices relative to ethanol production inputs such as corn and natural gas, decline in
any material respect, or if other unforeseen circumstances occur, we may require additional financing. Our failure to raise capital,
if and when needed, could restrict our growth or hinder our ability to compete.
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):
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
Variance
|
|
Cash and cash equivalents
|
|
$
|
7,846
|
|
|
$
|
5,151
|
|
|
|
52.3%
|
|
Current assets
|
|
$
|
99,787
|
|
|
$
|
79,377
|
|
|
|
25.7%
|
|
Current liabilities
|
|
$
|
35,699
|
|
|
$
|
28,216
|
|
|
|
26.5%
|
|
Notes payable, current portion
|
|
$
|
–
|
|
|
$
|
750
|
|
|
|
(100.0)%
|
|
Notes payable, noncurrent portion
|
|
$
|
71,645
|
|
|
$
|
98,408
|
|
|
|
(27.2)%
|
|
Working capital
|
|
$
|
64,088
|
|
|
$
|
51,161
|
|
|
|
25.3%
|
|
Working capital ratio
|
|
|
2.80
|
|
|
|
2.81
|
|
|
|
(0.4)%
|
|
Change in Working Capital and Cash Flows
Working capital increased to $64.1 million
at March 31, 2014 from $51.2 million at December 31, 2013 as a result of an increase in current assets of $20.4 million,
which was partially offset by an increase in current liabilities of $7.5 million.
Current assets increased primarily due to
an increase in accounts receivable of $16.1 million predominantly due to a higher volume of production gallons sold at higher ethanol
sales prices, an increase in inventories of $4.9 million, and an increase in cash and cash equivalents of $2.7 million, which were
partially offset by decreases in prepaid inventory of $3.0 million and other current assets of $0.4 million. Current liabilities
increased primarily due to increases in trade accounts payable of $5.0 million resulting from higher sales volumes, a reclassification
from noncurrent liabilities of $3.7 million of accrued preferred dividends, which were partially offset by a decrease in other
current liabilities of $2.4 million.
Cash provided by operating activities of
$22.9 million resulted primarily from non-cash fair value adjustments of $35.8 million, increases in accounts payable and accrued
expenses of $5.4 million due to higher sales volumes, changes in deferred income taxes of $3.3 million, depreciation and amortization
of $3.2 million, decreases in prepaid inventory of $3.0 million and amortization of debt discount of $1.6 million, which were partially
offset by our consolidated net loss of $8.8 million and increases in accounts receivable of $16.1 million and inventories of $5.0
million due to higher sales volumes.
Cash used in our investing activities of
$1.8 million resulted from additions to property and equipment.
Cash used in financing activities of $18.3
million resulted from repayments of our senior unsecured notes and the Plant Owners’ borrowings of $32.4 million and our
related party note payable of $0.8 million, principal payments on capital leases of $1.1 million and cash payment of dividends
in respect of our Series B Preferred Stock of $0.3 million, which were partially offset by the proceeds from exercises of our warrants
in the aggregate amount of $12.1 million and net proceeds from borrowings under Kinergy’s line of credit of $4.1 million.
Kinergy Operating Line of Credit
Kinergy maintains an operating line of credit
for an aggregate amount of up to $30.0 million, with an optional accordion feature for up to an additional $10.0 million. The credit
facility expires on December 31, 2015. 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 between 2.25% and 3.25%. The credit
facility’s monthly unused line fee is 0.50% of the amount by which the maximum credit under the facility exceeds the average
daily principal balance. 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 $1.0 million per fiscal quarter in
2014 and $1.1 million per fiscal quarter in 2015.
The credit facility also includes the accounts
receivable of Pacific Ag. Products, LLC, or PAP, one of our indirect wholly-owned subsidiaries, 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 the extent that quarterly payments would result in PAP recording less than
$0.1 million of net income in the quarter.
Kinergy and PAP are collectively
required to generate aggregate earnings before interest, taxes, depreciation and amortization, or EBITDA, of $0.5 million, measured
at the end of each calendar month, for each three calendar month period and EBITDA of $1.3 million, measured at the end of
each calendar month, for each six calendar month period. Further, for all monthly periods, Kinergy and PAP must collectively
maintain a fixed-charge coverage ratio (calculated as a twelve-month rolling 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 any additional indebtedness (other than
specific intercompany indebtedness) or making any capital expenditures in excess of $0.1 million absent the lender’s
prior consent. Kinergy 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.
The following table summarizes Kinergy’s
financial covenants and actual results for the periods presented (dollars in thousands):
|
|
Three Months Ended
March 31,
|
|
|
Years Ended
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Requirement – Three Months
|
|
$
|
500
|
|
|
$
|
450
|
|
|
$
|
450
|
|
|
$
|
450
|
|
Actual
|
|
$
|
8,216
|
|
|
$
|
2,765
|
|
|
$
|
3,252
|
|
|
$
|
1,165
|
|
Excess
|
|
$
|
7,716
|
|
|
$
|
2,315
|
|
|
$
|
2,802
|
|
|
$
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Requirement – Six Months
|
|
$
|
1,300
|
|
|
$
|
1,100
|
|
|
$
|
1,100
|
|
|
$
|
1,100
|
|
Actual
|
|
$
|
11,468
|
|
|
$
|
3,930
|
|
|
$
|
4,131
|
|
|
$
|
3,282
|
|
Excess
|
|
$
|
10,168
|
|
|
$
|
2,830
|
|
|
$
|
3,031
|
|
|
$
|
2,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio Requirement
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
Actual
|
|
|
13.56
|
|
|
|
17.84
|
|
|
|
8.64
|
|
|
|
8.84
|
|
Excess
|
|
|
11.56
|
|
|
|
15.84
|
|
|
|
6.64
|
|
|
|
6.84
|
|
Pacific Ethanol has guaranteed all of Kinergy’s
obligations under the credit facility. As of March 31, 2014, Kinergy had an available borrowing base under the credit facility
of $6.9 million and an outstanding balance of $23.1 million.
Plant Owners’ Term Debt and
Operating Lines of Credit
The Plant Owners’ debt as of March
31, 2014 consisted of a $32.5 million tranche A-1 term loan and a $26.3 million tranche A-2 term loan. Pacific Ethanol, Inc. holds
$27.1 million of these term loans, which are eliminated in consolidation. The Plant Owners’ availability under their revolving
lines of credit was $50.4 million, which was subsequently reduced to $35.0 million. The term debt requires monthly interest payments
at a floating rate equal to the three-month LIBOR or the Prime Rate of interest, at the Plant Owners’ election, plus 10.0%.
The revolving credit facilities require monthly interest payments at a floating rate equal to the three-month LIBOR or the Prime
Rate of interest, at the Plant Owners’ election, plus 10.0% and 4.5% for the $20.0 million and $15.0 million facilities,
respectively. At March 31, 2014, the average interest rate was approximately 11.00%. Repayments of principal are based on available
free cash flow of the Plant Owners, until maturity, when all principal amounts are due.
Since April 1, 2014, we made $16.0 million
in principal payments in cash under the revolving credit facility, resulting in an outstanding balance of $0 million as of April
25, 2014, with aggregate borrowing availability of $35.0 million.
All of the term loans and revolving credit
facilities represent permanent financing and are secured by a perfected, first-priority security interest in all of the assets,
including inventories and all rights, title and interest in all tangible and intangible assets, of the Plant Owners. The Plant
Owners’ creditors do not have recourse to Pacific Ethanol, Inc.
Pacific Ethanol Debt
Senior Unsecured Notes
On January 11, 2013 we issued and sold $22.2
million in aggregate principal amount of senior unsecured notes, or January 2013 Notes, and warrants to purchase an aggregate of
1.7 million shares of our common stock for aggregate net proceeds of $22.1 million. The warrants have an exercise price of $6.32
per share and expire in January 2018.
If we issue equity or equity-linked securities,
receive interest from any purchased and outstanding Plant Owners’ term debt, conduct certain sales of assets or incur certain
indebtedness, then we will be obligated to prepay the January notes using all net cash proceeds from the transaction, provided
that any net proceeds received in connection with an equity-linked issuance must be used to either prepay the notes or purchase
certain outstanding debt issued by the Plant Owners. Interest on the notes is payable in cash in arrears on the fifteenth day of
each month beginning on March 15, 2013. Subject to the satisfaction of certain equity conditions, at our option, we may elect to
pay interest due and payable in shares of our common stock, provided that the interest rate applicable to any outstanding amounts
we pay in shares of common stock will increase by 2% per annum from the then applicable interest rate for the period for which
such interest is paid. The number of shares to be issued for any particular interest payment equals the quotient of (x) the amount
of interest payable (assuming payment in shares), divided by (y) the product of (i) the weighted average price of our common stock
for the thirty trading days immediately preceding (but excluding) the payment due date, and (ii) 0.95. During 2013, we made principal
payments in cash on our January 2013 Notes in the aggregate amount of $6.2 million. In addition, we issued 0.5 million shares of
our common stock as a $2.0 million principal payment.
The January 2013 Notes mature on March 30,
2016 and bear interest at a rate of 5% per annum, subject to adjustment. Payments due under the January 2013 Notes rank senior
to all of our other indebtedness, including the indebtedness of our subsidiaries, other than certain permitted senior indebtedness.
As of March 31, 2014, the aggregate outstanding
principal balance of the January 2013 Notes was $1.0 million. As of the filing of this report, we have fully repaid the remaining
principal balance on these notes.
Note Payable to Related Party
We repaid in cash a note payable to our
Chief Executive Officer totaling $0.8 million on March 31, 2014.
Effects of Inflation
The impact of inflation was not significant
to our financial condition or results of operations for the three months ended March 31, 2014 and 2013.
Impact of New Accounting Pronouncements
None.