ITEM 1. FINANCIAL STATEMENTS.
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
*
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,673
|
|
|
$
|
52,712
|
|
Accounts receivable, net (net of allowance for doubtful accounts of $311 and $25, respectively)
|
|
|
71,946
|
|
|
|
61,346
|
|
Inventories
|
|
|
65,928
|
|
|
|
60,820
|
|
Prepaid inventory
|
|
|
10,319
|
|
|
|
5,973
|
|
Income tax receivables
|
|
|
6,114
|
|
|
|
10,654
|
|
Derivative instruments
|
|
|
13,299
|
|
|
|
2,081
|
|
Other current assets
|
|
|
4,055
|
|
|
|
4,356
|
|
Total current assets
|
|
|
203,334
|
|
|
|
197,942
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
454,775
|
|
|
|
464,960
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
2,678
|
|
|
|
2,678
|
|
Other assets
|
|
|
4,933
|
|
|
|
9,100
|
|
Total other assets
|
|
|
7,611
|
|
|
|
11,778
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
665,720
|
|
|
$
|
674,680
|
|
_______________
*
Amounts
derived from the audited consolidated financial statements for the year ended December 31, 2015.
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except par value and shares)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
*
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable – trade
|
|
$
|
23,844
|
|
|
$
|
30,520
|
|
Accrued liabilities
|
|
|
15,156
|
|
|
|
10,072
|
|
Current portion – capital leases
|
|
|
4,431
|
|
|
|
4,248
|
|
Current portion – long-term debt
|
|
|
–
|
|
|
|
17,003
|
|
Derivative instruments
|
|
|
12,166
|
|
|
|
1,848
|
|
Accrued PE Op Co. purchase
|
|
|
3,828
|
|
|
|
3,828
|
|
Other current liabilities
|
|
|
6,026
|
|
|
|
5,390
|
|
Total current liabilities
|
|
|
65,451
|
|
|
|
72,909
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
215,041
|
|
|
|
203,861
|
|
Capital leases, net of current portion
|
|
|
1,921
|
|
|
|
4,183
|
|
Warrant liabilities at fair value
|
|
|
257
|
|
|
|
273
|
|
Deferred tax liabilities
|
|
|
1,174
|
|
|
|
1,174
|
|
Other liabilities
|
|
|
18,261
|
|
|
|
20,736
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
302,105
|
|
|
|
303,136
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 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; no shares issued and outstanding as of June 30, 2016 and December 31, 2015;
Series B: 1,580,790 shares authorized; 926,942 shares issued and outstanding as of June 30, 2016 and December 31, 2015; liquidation preference of $18,075 as of June 30, 2016
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.001 par value; 300,000,000 shares authorized; 39,617,328 and 38,974,972 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively
|
|
|
40
|
|
|
|
39
|
|
Non-voting common stock, $0.001 par value; 3,553,000 shares authorized; 3,540,132 shares issued and outstanding as of June 30, 2016 and December 31, 2015
|
|
|
4
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
903,683
|
|
|
|
902,843
|
|
Accumulated other comprehensive income
|
|
|
1,040
|
|
|
|
1,040
|
|
Accumulated deficit
|
|
|
(541,153
|
)
|
|
|
(532,383
|
)
|
Total Stockholders’ Equity
|
|
|
363,615
|
|
|
|
371,544
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
665,720
|
|
|
$
|
674,680
|
|
_______________
*
Amounts derived from the audited consolidated financial statements for the year ended December
31, 2015.
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per
share data)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
422,860
|
|
|
$
|
227,621
|
|
|
$
|
765,233
|
|
|
$
|
433,797
|
|
Cost of goods sold
|
|
|
405,156
|
|
|
|
221,367
|
|
|
|
746,460
|
|
|
|
428,530
|
|
Gross profit
|
|
|
17,704
|
|
|
|
6,254
|
|
|
|
18,773
|
|
|
|
5,267
|
|
Selling, general and administrative expenses
|
|
|
6,148
|
|
|
|
3,993
|
|
|
|
14,465
|
|
|
|
8,898
|
|
Income (loss) from operations
|
|
|
11,556
|
|
|
|
2,261
|
|
|
|
4,308
|
|
|
|
(3,631
|
)
|
Fair value adjustments and warrant inducements
|
|
|
(24
|
)
|
|
|
384
|
|
|
|
16
|
|
|
|
211
|
|
Interest expense, net
|
|
|
(6,536
|
)
|
|
|
(1,005
|
)
|
|
|
(12,769
|
)
|
|
|
(2,020
|
)
|
Other income (expense), net
|
|
|
(155
|
)
|
|
|
(58
|
)
|
|
|
60
|
|
|
|
(187
|
)
|
Income (loss) before provision for income taxes
|
|
|
4,841
|
|
|
|
1,582
|
|
|
|
(8,385
|
)
|
|
|
(5,627
|
)
|
Provision (benefit) for income taxes
|
|
|
(245
|
)
|
|
|
530
|
|
|
|
(245
|
)
|
|
|
(2,170
|
)
|
Consolidated net income (loss)
|
|
|
5,086
|
|
|
|
1,052
|
|
|
|
(8,140
|
)
|
|
|
(3,457
|
)
|
Net (income) loss attributed to noncontrolling interests
|
|
|
–
|
|
|
|
(42
|
)
|
|
|
–
|
|
|
|
87
|
|
Net income (loss) attributed to Pacific Ethanol, Inc.
|
|
$
|
5,086
|
|
|
$
|
1,010
|
|
|
$
|
(8,140
|
)
|
|
$
|
(3,370
|
)
|
Preferred stock dividends
|
|
$
|
(315
|
)
|
|
$
|
(315
|
)
|
|
$
|
(630
|
)
|
|
$
|
(627
|
)
|
Income allocated to participating securities
|
|
$
|
(71
|
)
|
|
$
|
(18
|
)
|
|
$
|
–
|
|
|
$
|
–
|
|
Income (loss) available to common stockholders
|
|
$
|
4,700
|
|
|
$
|
677
|
|
|
$
|
(8,770
|
)
|
|
$
|
(3,997
|
)
|
Net income (loss) per share, basic
|
|
$
|
0.11
|
|
|
$
|
0.03
|
|
|
$
|
(0.21
|
)
|
|
$
|
(0.16
|
)
|
Net income (loss) per share, diluted
|
|
$
|
0.11
|
|
|
$
|
0.03
|
|
|
$
|
(0.21
|
)
|
|
$
|
(0.16
|
)
|
Weighted-average shares outstanding, basic
|
|
|
42,191
|
|
|
|
24,268
|
|
|
|
42,121
|
|
|
|
24,589
|
|
Weighted-average shares outstanding, diluted
|
|
|
42,229
|
|
|
|
24,837
|
|
|
|
42,121
|
|
|
|
24,589
|
|
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(8,140
|
)
|
|
$
|
(3,457
|
)
|
Adjustments to reconcile consolidated net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of intangibles
|
|
|
17,670
|
|
|
|
6,748
|
|
Interest expense added to term debt
|
|
|
9,451
|
|
|
|
–
|
|
Fair value adjustments
|
|
|
(16
|
)
|
|
|
(211
|
)
|
Amortization of debt discount
|
|
|
610
|
|
|
|
99
|
|
Amortization of deferred financing fees
|
|
|
75
|
|
|
|
121
|
|
Non-cash compensation
|
|
|
1,181
|
|
|
|
915
|
|
Loss (gain) on derivative instruments
|
|
|
(809
|
)
|
|
|
477
|
|
Bad debt expense
|
|
|
286
|
|
|
|
3
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(10,886
|
)
|
|
|
6,018
|
|
Inventories
|
|
|
(5,108
|
)
|
|
|
(321
|
)
|
Prepaid expenses and other assets
|
|
|
4,909
|
|
|
|
(1,506
|
)
|
Prepaid inventory
|
|
|
(4,346
|
)
|
|
|
3,581
|
|
Accounts payable and accrued expenses
|
|
|
(3,771
|
)
|
|
|
(1,100
|
)
|
Net cash provided by operating activities
|
|
|
1,106
|
|
|
|
11,367
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(7,485
|
)
|
|
|
(12,166
|
)
|
Proceeds from cash collateralized letters of credit
|
|
|
4,010
|
|
|
|
–
|
|
Net cash used in investing activities
|
|
|
(3,475
|
)
|
|
|
(12,166
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Net proceeds from (payments on) Kinergy’s line of credit
|
|
|
1,042
|
|
|
|
(8,974
|
)
|
Principal payments on borrowings
|
|
|
(17,003
|
)
|
|
|
–
|
|
Payments on capital leases
|
|
|
(2,079
|
)
|
|
|
(2,790
|
)
|
Proceeds from exercise of warrants
|
|
|
–
|
|
|
|
368
|
|
Preferred stock dividends paid
|
|
|
(630
|
)
|
|
|
(627
|
)
|
Net cash used in financing activities
|
|
|
(18,670
|
)
|
|
|
(12,023
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(21,039
|
)
|
|
|
(12,822
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
52,712
|
|
|
|
62,084
|
|
Cash and cash equivalents at end of period
|
|
$
|
31,673
|
|
|
$
|
49,262
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,595
|
|
|
$
|
1,911
|
|
Income tax refunds received
|
|
$
|
4,784
|
|
|
$
|
–
|
|
Noncash financing and investing activities:
|
|
|
|
|
|
|
|
|
Reclass of warrant liability to equity upon warrant exercises
|
|
$
|
–
|
|
|
$
|
72
|
|
Reclass of noncontrolling interests to APIC upon acquisitions of ownership positions in PE Op Co.
|
|
$
|
–
|
|
|
$
|
560
|
|
Accrued payment for ownership positions in PE Op Co.
|
|
$
|
–
|
|
|
$
|
3,828
|
|
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 (collectively,
the “Company”), 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., a
Delaware corporation (“PE Op Co.”).
The Company’s acquisition of Aventine
Renewable Energy Holdings, Inc. (now, Pacific Ethanol Central, LLC, a Delaware limited liability company, “Aventine”)
was consummated on July 1, 2015, and as a result, the Company’s accompanying consolidated financial statements include the
results of Aventine only as of and for the three and six months ended June 30, 2016.
The Company is a leading
producer and marketer of low-carbon renewable fuels in the United States. 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.
These plants produce among the lowest-carbon ethanol produced in the United States due to low energy use in production.
With the addition
of four Midwestern ethanol plants in July 2015 as a result of the Company’s acquisition of Aventine, the Company now has
a combined ethanol production capacity of 515 million gallons per year, markets over 800 million gallons of ethanol, on an annualized
basis, and produces over one million tons of co-products such as wet and dry distillers grains, wet and dry corn gluten feed,
condensed distillers solubles, corn gluten meal, corn germ, distillers yeast and CO
2
, on an annualized basis. The Company’s
four 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.
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
$63,330,000 and $42,049,000 at June 30, 2016 and December 31, 2015, respectively, were used as collateral under Kinergy’s
operating line of credit. The allowance for doubtful accounts was $311,000 and $25,000 as of June 30, 2016 and December 31, 2015,
respectively. The Company recorded a bad debt expense of $30,000 and $286,000 for the three and six months ended June 30, 2016,
respectively, and a bad debt expense of $3,000 for the three and six months ended June 30, 2015. The Company does not have any
off-balance sheet credit exposure related to its customers.
Provision for Income Taxes
– The Company recognized a tax benefit of $0.2 million for the three and six months ended June 30, 2016, as the Company has
finalized certain of its tax returns. The Company recognized a provision of $0.5 million and a benefit of $2.2 million for the
three and six months ended June 30, 2015, respectively, related to losses incurred in 2015 that were able to be carried back to
a prior taxable year. For the three and six months ended June 30, 2016, the Company applied a valuation allowance against the amount
of deferred tax losses from the periods. To the extent the Company believes it can utilize these losses, it will adjust its provision
(benefit) for income taxes accordingly in future periods.
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 recorded its warrants
at fair value. The Company believes the carrying value of its long-term debt approximates fair value because the interest
rates on these instruments are variable.
Reclassifications
–
Certain prior year amounts have been reclassified to conform to the current presentation. Such reclassification had no effect on
the consolidated net loss reported in the consolidated statements of operations.
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, 2019, and for interim
periods beginning after December 15, 2020. Early adoption is permitted. The Company has several operating leases that may be impacted
by this guidance. The Company is currently evaluating the impact of the adoption of this accounting standard on its consolidated
results of operations and financial condition.
In May 2014, the FASB issued new guidance
on the recognition of revenue. The guidance 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 was originally effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period, but has been further deferred one year. The Company’s adoption begins
with the first fiscal quarter of fiscal year 2018. In March and April 2016, the FASB issued further revenue recognition guidance
amending principal vs. agent considerations 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 Company is currently evaluating the impact of the adoption of this accounting standard update on
its consolidated results of operations and financial condition.
In September 2015, the FASB issued new
guidance on simplifying the accounting for measurement-period adjustments. Under the new guidance, an acquirer must recognize adjustments
to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts
are determined. The guidance also requires acquirers to present separately on the face of the statement of operations or disclose
in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous
reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance is
effective for fiscal years beginning after December 31, 2015, applied prospectively. Early adoption is permitted. The Company will
adopt the guidance as to future acquisitions.
In April 2016, the FASB issued new
guidance to reduce the complexity of certain aspects of accounting for employee share-based payment transactions. Currently,
accruals of compensation costs are based on an estimated forfeiture rate. The new guidance allows an entity to make an
entity-wide accounting policy election to either continue using an estimate of forfeitures or account for forfeitures only
when they occur. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods
within those fiscal years. The Company is currently evaluating the impact of the guidance on its consolidated results of
operations and financial condition.
In April 2015, the FASB issued new guidance
on presentation of debt issuance costs. Historically, entities have presented debt issuance costs as an asset. Under the new guidance,
effective for fiscal years beginning after December 31, 2015, debt issuance costs have been reclassified as a deduction to the
carrying amount of the related debt balance. The guidance does not change any of the Company’s other debt recognition or
disclosure. On January 1, 2016, the Company adopted this guidance for all periods presented on the consolidated balance sheets.
The impact of the adoption was a reclassification of other assets to long-term debt, net of current portion of $386,000 and $462,000
as of June 30, 2016 and December 31, 2015, respectively.
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, 2015. 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, 2015, except as noted herein. 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.
Use of Estimates
– 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,
allowance for doubtful accounts, net realizable value of inventory, 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 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 and co-products, with all
eight of the Company’s production facilities aggregated, and (2) marketing and distribution, which includes marketing and
merchant trading for Company-produced ethanol 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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
271,630
|
|
|
$
|
108,960
|
|
|
$
|
500,871
|
|
|
$
|
207,957
|
|
Intersegment net sales
|
|
|
260
|
|
|
|
85
|
|
|
|
523
|
|
|
|
85
|
|
Total production segment sales
|
|
|
271,890
|
|
|
|
109,045
|
|
|
|
501,394
|
|
|
|
208,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
|
151,230
|
|
|
|
118,661
|
|
|
|
264,362
|
|
|
|
225,840
|
|
Intersegment net sales
|
|
|
2,091
|
|
|
|
836
|
|
|
|
3,843
|
|
|
|
1,571
|
|
Total marketing and distribution net sales
|
|
|
153,321
|
|
|
|
119,497
|
|
|
|
268,205
|
|
|
|
227,411
|
|
Intersegment eliminations
|
|
|
(2,351
|
)
|
|
|
(921
|
)
|
|
|
(4,366
|
)
|
|
|
(1,656
|
)
|
Net sales as reported
|
|
$
|
422,860
|
|
|
$
|
227,621
|
|
|
$
|
765,233
|
|
|
$
|
433,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
260,237
|
|
|
$
|
105,623
|
|
|
$
|
496,246
|
|
|
$
|
207,160
|
|
Marketing and distribution
|
|
|
149,521
|
|
|
|
118,522
|
|
|
|
258,819
|
|
|
|
226,581
|
|
Intersegment eliminations
|
|
|
(4,602
|
)
|
|
|
(2,778
|
)
|
|
|
(8,605
|
)
|
|
|
(5,211
|
)
|
Cost of goods sold as reported
|
|
$
|
405,156
|
|
|
$
|
221,367
|
|
|
$
|
746,460
|
|
|
$
|
428,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
794
|
|
|
$
|
1,013
|
|
|
$
|
(16,330
|
)
|
|
$
|
(4,199
|
)
|
Marketing and distribution
|
|
|
2,209
|
|
|
|
(516
|
)
|
|
|
6,178
|
|
|
|
(2,131
|
)
|
Corporate activities
|
|
|
1,838
|
|
|
|
1,085
|
|
|
|
1,767
|
|
|
|
703
|
|
|
|
$
|
4,841
|
|
|
$
|
1,582
|
|
|
$
|
(8,385
|
)
|
|
$
|
(5,627
|
)
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
8,793
|
|
|
$
|
3,206
|
|
|
$
|
17,209
|
|
|
$
|
6,390
|
|
Marketing and distribution
|
|
|
–
|
|
|
|
15
|
|
|
|
3
|
|
|
|
142
|
|
Corporate activities
|
|
|
225
|
|
|
|
119
|
|
|
|
458
|
|
|
|
216
|
|
|
|
$
|
9,018
|
|
|
$
|
3,340
|
|
|
$
|
17,670
|
|
|
$
|
6,748
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
6,180
|
|
|
$
|
922
|
|
|
$
|
12,080
|
|
|
$
|
1,844
|
|
Marketing and distribution
|
|
|
356
|
|
|
|
83
|
|
|
|
689
|
|
|
|
176
|
|
Corporate activities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
6,536
|
|
|
$
|
1,005
|
|
|
$
|
12,769
|
|
|
$
|
2,020
|
|
The following table sets forth the Company’s
total assets by operating segment (in thousands):
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
523,652
|
|
|
$
|
536,013
|
|
Marketing and distribution
|
|
|
130,689
|
|
|
|
107,069
|
|
Corporate assets
|
|
|
11,379
|
|
|
|
31,598
|
|
|
|
$
|
665,720
|
|
|
$
|
674,680
|
|
Inventories consisted primarily of bulk
ethanol, corn, co-products, Low-Carbon Fuel Standard (“LCFS”) 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. Included in inventory is a $1.5 million valuation
adjustment as of June 30, 2016. Inventory balances consisted of the following (in thousands):
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Finished goods
|
|
$
|
35,543
|
|
|
$
|
31,153
|
|
LCFS credits
|
|
|
12,830
|
|
|
|
6,957
|
|
Raw materials
|
|
|
8,678
|
|
|
|
9,891
|
|
Work in progress
|
|
|
7,235
|
|
|
|
11,121
|
|
Other
|
|
|
1,642
|
|
|
|
1,698
|
|
Total
|
|
$
|
65,928
|
|
|
$
|
60,820
|
|
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 six months ended June 30, 2016 and 2015, 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.
Non Designated Derivative Instruments
– The classification and amounts of the Company’s derivatives not designated as hedging instruments are as follows
(in thousands):
|
|
As of June 30, 2016
|
|
|
Assets
|
|
Liabilities
|
Type of Instrument
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Derivative instruments
|
|
$
|
13,299
|
|
Derivative instruments
|
|
$
|
12,166
|
|
|
|
|
$
|
13,299
|
|
|
|
$
|
12,166
|
|
|
As of December 31, 2015
|
|
|
Assets
|
|
Liabilities
|
Type of Instrument
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Derivative instruments
|
|
$
|
2,081
|
|
Derivative instruments
|
|
$
|
1,848
|
|
|
|
|
$
|
2,081
|
|
|
|
$
|
1,848
|
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 June 30,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2016
|
|
|
2015
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(999
|
)
|
|
$
|
264
|
|
|
|
|
|
$
|
(999
|
)
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses)
|
|
|
|
|
Three Months Ended June 30,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2016
|
|
|
2015
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
1,227
|
|
|
$
|
(552
|
)
|
|
|
|
|
$
|
1,227
|
|
|
$
|
(552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Gains (Losses)
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2016
|
|
|
2015
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(91
|
)
|
|
$
|
149
|
|
|
|
|
|
$
|
(91
|
)
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains (Losses)
|
|
|
|
|
|
|
Six Months Ended June 30,
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2016
|
2015
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
900
|
|
|
$
|
(626
|
)
|
|
|
|
|
$
|
900
|
|
|
$
|
(626
|
)
|
Long-term borrowings are summarized as
follows (in thousands):
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Kinergy operating line of credit
|
|
$
|
62,045
|
|
|
$
|
61,003
|
|
Plant term debt
|
|
|
155,070
|
|
|
|
162,622
|
|
|
|
|
217,115
|
|
|
|
223,625
|
|
Less unamortized discount
|
|
|
(1,688
|
)
|
|
|
(2,299
|
)
|
Less unamortized debt financing costs
|
|
|
(386
|
)
|
|
|
(462
|
)
|
Less short-term portion
|
|
|
–
|
|
|
|
(17,003
|
)
|
Long-term debt
|
|
$
|
215,041
|
|
|
$
|
203,861
|
|
Kinergy Operating Line of Credit
– As of June 30, 2016, Kinergy had an available borrowing base under its credit facility of $12,955,000.
Plant Term Debt
—On
February 26, 2016, the Company retired the $17,003,000 outstanding balance of the Pacific Ethanol West Plants’ term debt
by purchasing the lender’s position for cash at par without any prepayment penalty. The purchase increased the amount of
the term debt held by Pacific Ethanol to a combined $58,766,000, which is eliminated upon consolidation. As a result, the Company
has no continuing obligations to any third-party lender under the credit agreements associated with the Pacific Ethanol West Plants’
term debt.
For the three and six months ended June
30, 2016, the Pacific Ethanol Central Plants elected to defer interest payments on their term debt in the aggregate amount of $5,665,000
and $9,451,000, which was added to the outstanding term debt balance.
At June 30, 2016, there were approximately
$135.2 million of net assets of the Company’s subsidiaries that were not available to be transferred to the parent company
in the form of dividends, loans or advances due to restrictions contained in the credit facilities of these subsidiaries.
6.
|
|
COMMON STOCK AND WARRANTS.
|
Stock Incentive
Plan
– In June 2016, the Company’s shareholders approved the adoption of the 2016 Stock Incentive Plan to replace
the expiring 2006 Stock Incentive Plan. The 2016 plan is similar to the 2006 plan and has a total of 1,150,000 shares of common
stock authorized for issuance over the next ten years.
Warrant Exercises
– During the three and six months
ended June 30, 2015, certain holders exercised warrants and received an aggregate of 20,000 and 42,000 shares of the Company’s
common stock upon payment of an aggregate of $177,000 and $368,000 in cash, respectively. There were no warrants exercised during
the three and six months ended June 30, 2016.
Grants of Stock
– In June 2016, the Company granted an aggregate of approximately 95,000 shares of restricted stock to non-employee members
of the Company’s Board of Directors that vest on the earlier of (i) the date of the Company’s 2017 annual meeting of
stockholders, or (ii) July 1, 2017, which had a grant date fair value of $5.44 per share. In June 2016, the Company granted an
aggregate of 253,000 shares of restricted stock to the Company’s executive officers and other eligible employees that vest
in equal amounts on each of April 1, 2017, 2018 and 2019, which had a grant date fair value of $5.44 per share.
7.
|
|
COMMITMENTS AND CONTINGENCIES.
|
Sales Commitments
– At June 30, 2016, the Company had entered into sales contracts with its major customers to sell certain quantities of
ethanol and co-products. The Company had open indexed-price ethanol sales contracts for 261,372,000 gallons as of June 30,
2016 and open fixed-price ethanol sales contracts valued at $10,501,000 as of June 30, 2016. The Company had open fixed-price
co-product sales contracts valued at $38,845,000 as of June 30, 2016 and open indexed-price co-product sales contracts for
10,300 tons as of June 30, 2016. These sales contracts are scheduled to be completed throughout 2016.
Purchase Commitments
–
At June 30, 2016, the Company had indexed-price purchase contracts to purchase 19,802,000 gallons of ethanol and fixed-price purchase
contracts to purchase $17,655,000 of ethanol from its suppliers. The Company had fixed-price purchase contracts to purchase $30,691,000
of corn from its suppliers. These purchase commitments are scheduled to be satisfied throughout 2016.
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.
Pacific Ethanol, Inc., through a subsidiary
acquired in its acquisition of Aventine, became involved in a pending lawsuit with Western Sugar Cooperative (“Western Sugar”)
that pre-dated the Aventine acquisition.
On February 27, 2015, Western
Sugar filed a complaint in the United States District Court for the District of Colorado (Case No. 1:15-cv-00415) naming
Aventine Renewable Energy, Inc. (“ARE, Inc.”), one of Aventine’s subsidiaries, as defendant. Western Sugar
amended its complaint on April 21, 2015. ARE, Inc. purchased surplus sugar through a United States Department of Agriculture
program. Western Sugar was one of the entities that warehoused this sugar for ARE, Inc. The suit alleges that ARE, Inc.
breached its contract with Western Sugar by failing to pay certain penalty rates for the storage of its sugar or
alternatively failing to pay a premium rate for storage. Western Sugar alleges that the penalty rates apply because ARE, Inc.
failed to take timely delivery or otherwise cause timely shipment of the sugar. Western Sugar claims “expectation
damages” in the amount of approximately $8.6 million. ARE, Inc. filed answers to Western Sugar’s complaint and
amended complaint generally denying Western Sugar’s allegations and asserting various defenses. The discovery phase of
the case has just concluded, and the Company has filed a motion for summary judgment, seeking a determination that
Western Sugar’s claims fail as a matter of law.
The Company has evaluated the above case
as well as other pending cases. The Company currently has recorded $3.3 million as a litigation contingency liability with respect
to these cases for amounts that are probable and estimable.
8.
|
|
PENSION AND RETIREMENT BENEFIT PLANS.
|
The Company, through
its acquisition of Aventine, has assumed a defined benefit pension plan (the “Pension Plan”) and a health care and
life insurance plan (the “Postretirement Plan”).
The Pension Plan is
noncontributory, and covers 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 Pension Plan, part
of a collective bargaining agreement, covers only Union employees hired after November 1, 2010. The Company uses a December 31
measurement date for its Pension Plan. The Company’s funding policy is to make the minimum annual contributions that are
required by applicable regulations. As of December 31, 2015, the Pension Plan’s accumulated projected benefit obligation
was $16.6 million, with a fair value of plan assets of $12.6 million. The underfunded amount of $4.0 million is recorded on the
Company’s consolidated balance sheet in other noncurrent liabilities. For the three months ended June 30, 2016, the Pension
Plan’s net periodic expense was $29,000, comprised of $172,000 in interest cost and $56,000 in service cost, partially offset
by $199,000 of expected return on plan assets.
For the six months ended June 30, 2016,
the Pension Plan’s net periodic expense was $58,000, comprised of $344,000 in interest cost and $112,000 in service cost,
partially offset by $398,000 of expected return on plan assets.
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 collar cap based upon years of service. As of December 31, 2015, the Postretirement Plan’s accumulated
projected benefit obligation was $3.6 million and is recorded on the Company’s consolidated balance sheet in other noncurrent
liabilities. The Company’s funding policy is to make the minimum annual contributions that are required by applicable regulations.
For the three months ended June 30, 2016, the Postretirement Plan’s net periodic expense was $47,000, comprised of $35,000
of interest cost and $12,000 of service cost.
For the six months ended June 30, 2016,
the Postretirement Plan’s net periodic expense was $94,000, comprised of $70,000 of interest cost and $24,000 of service
cost.
9.
|
|
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 records its warrants, issued
from 2010 through 2013, at fair value using Level 3 inputs.
Warrants
– The Company’s
warrants are valued using a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions.
Significant assumptions used and related
fair values for the warrants as of June 30, 2016 were as follows:
Original Issuance
|
|
Exercise Price
|
|
|
Volatility
|
|
|
Risk Free Interest Rate
|
|
|
Term (years)
|
|
|
Market Discount
|
|
|
Warrants Outstanding
|
|
|
Fair Value
|
|
07/3/2012
|
|
$
|
6.09
|
|
|
|
50.7%
|
|
|
|
0.45%
|
|
|
|
1.01
|
|
|
|
19.8%
|
|
|
|
211,000
|
|
|
$
|
194,000
|
|
12/13/2011
|
|
$
|
8.43
|
|
|
|
51.9%
|
|
|
|
0.36%
|
|
|
|
0.45
|
|
|
|
13.8%
|
|
|
|
138,000
|
|
|
|
63,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
257,000
|
|
Significant assumptions used and related
fair values for the warrants as of December 31, 2015 were as follows:
Original Issuance
|
|
Exercise Price
|
|
|
Volatility
|
|
|
Risk Free Interest Rate
|
|
|
Term (years)
|
|
|
Market Discount
|
|
|
Warrants Outstanding
|
|
|
Fair Value
|
|
07/3/2012
|
|
$
|
6.09
|
|
|
|
49.1%
|
|
|
|
0.86%
|
|
|
|
1.51
|
|
|
|
22.9%
|
|
|
|
211,000
|
|
|
$
|
200,000
|
|
12/13/2011
|
|
$
|
8.43
|
|
|
|
48.4%
|
|
|
|
0.65%
|
|
|
|
0.95
|
|
|
|
18.3%
|
|
|
|
138,000
|
|
|
|
73,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
273,000
|
|
The estimated fair value of the warrants is affected by the
above underlying inputs. Observable inputs include the values of exercise price, stock price, term and risk-free interest rate.
As separate inputs, an increase (decrease) in either the term or risk free interest rate will result in an increase (decrease)
in the estimated fair value of the warrant.
Unobservable inputs include volatility and market discount.
An increase (decrease) in volatility will result in an increase (decrease) in the estimated warrant value and an increase (decrease)
in the market discount will result in a decrease (increase) in the estimated warrant fair value.
The volatility utilized was a blended average of the Company’s
historical volatility and implied volatilities derived from a selected peer group. The implied volatility component has remained
relatively constant over time given that implied volatility is a forward-looking assumption based on observable trades in public
option markets. Should the Company’s historical volatility increase (decrease) on a go-forward basis, the resulting value
of the warrants would increase (decrease).
The market discount, or a discount for lack of marketability,
is quantified using a Black-Scholes option pricing model, with a primary model input of assumed holding period restriction. As
the assumed holding period increases (decreases), the market discount increases (decreases), conversely impacting the value of
the warrant fair value.
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 June 30, 2016 (in thousands):
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments (1)
|
|
$
|
13,299
|
|
|
$
|
13,299
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
$
|
13,299
|
|
|
$
|
13,299
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants (3)
|
|
$
|
(257
|
)
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
(257
|
)
|
Derivative financial instruments (4)
|
|
|
(12,166
|
)
|
|
|
(12,166
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
(12,423
|
)
|
|
$
|
(12,166
|
)
|
|
$
|
–
|
|
|
$
|
(257
|
)
|
The following table summarizes recurring fair value measurements
by level at December 31, 2015 (in thousands):
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments (1)
|
|
$
|
2,081
|
|
|
$
|
2,081
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Defined benefit plan assets (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(pooled separate accounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. Equity
|
|
|
3,662
|
|
|
|
–
|
|
|
|
3,662
|
|
|
|
–
|
|
Small/Mid U.S. Equity
|
|
|
1,099
|
|
|
|
–
|
|
|
|
1,099
|
|
|
|
–
|
|
International Equity
|
|
|
1,525
|
|
|
|
–
|
|
|
|
1,525
|
|
|
|
–
|
|
Fixed Income
|
|
|
6,281
|
|
|
|
–
|
|
|
|
6,281
|
|
|
|
–
|
|
|
|
$
|
14,648
|
|
|
$
|
2,081
|
|
|
$
|
12,567
|
|
|
$
|
–
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants (3)
|
|
$
|
(273
|
)
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
(273
|
)
|
Derivative financial instruments (4)
|
|
|
(1,848
|
)
|
|
|
(1,848
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
(2,121
|
)
|
|
$
|
(1,848
|
)
|
|
$
|
–
|
|
|
$
|
(273
|
)
|
__________
(1)
|
|
Included
in derivative instruments in the consolidated balance sheets.
|
(2)
|
|
Fair
values of plan assets are determined annually and therefore are not included as of June
30, 2016. For further descriptions of these assets see the Company’s Form 10-K
for the year ended December 31, 2015.
|
(3)
|
|
Included
in warrant liabilities at fair value in the consolidated balance sheets.
|
(4)
|
|
Included
in derivative instruments 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 with respect to its warrants were as follows (in thousands):
Balance, December 31, 2015
|
|
$
|
273
|
|
Adjustments to fair value for the period
|
|
|
(16
|
)
|
Balance, June 30, 2016
|
|
$
|
257
|
|
The following tables compute basic and
diluted earnings per share (in thousands, except per share data):
|
|
Three Months Ended June 30, 2016
|
|
|
|
Income
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net income attributed to Pacific Ethanol
|
|
$
|
5,086
|
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
Less: Income allocated to participating securities
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
4,700
|
|
|
|
42,191
|
|
|
$
|
0.11
|
|
Add: Options
|
|
|
–
|
|
|
|
38
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
4,700
|
|
|
|
42,229
|
|
|
$
|
0.11
|
|
|
|
Three Months Ended June 30, 2015
|
|
|
|
Income
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net income attributed to Pacific Ethanol
|
|
$
|
1,010
|
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
Less: Income allocated to participating securities
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
677
|
|
|
|
24,268
|
|
|
$
|
0.03
|
|
Add: Options
|
|
|
–
|
|
|
|
569
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
677
|
|
|
|
24,837
|
|
|
$
|
0.03
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Pacific Ethanol
|
|
$
|
(8,140
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(630
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(8,770
|
)
|
|
|
42,121
|
|
|
$
|
(0.21
|
)
|
|
|
Six Months Ended June 30, 2015
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Pacific Ethanol
|
|
$
|
(3,370
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(627
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(3,997
|
)
|
|
|
24,589
|
|
|
$
|
(0.16
|
)
|
There were an aggregate of 1,692,000 and
1,621,000 potentially dilutive weighted-average shares from the Company’s warrants and shares of Series B Cumulative Convertible
Preferred Stock outstanding for the three and six months ended June 30, 2016, respectively. These convertible securities were
not considered in calculating diluted net income (loss) per share for the six months ended June 30, 2016, 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 own and operate eight strategically-located
ethanol production facilities. Four of our plants are in the Western states of California, Oregon and Idaho, or the Pacific Ethanol
West plants; and four of our plants are located in the Midwestern states of Illinois and Nebraska, or the Pacific Ethanol Central
plants, acquired in our acquisition of Aventine Renewable Energy Holdings, Inc., or Aventine, on July 1, 2015. Our plants have
a combined ethanol production capacity of 515 million gallons per year. We are the sixth largest producer of ethanol in the United
States based on annualized volumes. We market all the ethanol and co-products produced at our eight plants as well as ethanol produced
by third parties. On an annualized basis, we market over 800 million gallons of ethanol and over 1.5 million tons of ethanol 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 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 and co-products at our
eight production facilities described below. Our Pacific Ethanol West plants are located on the West Coast near their respective
fuel and feed customers, offering significant timing, transportation cost and logistical advantages. Our Pacific Ethanol Central
plants are located in the Midwest 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 the Pacific Ethanol Central plants
allows for greater access to international markets.
|
|
Facility
Name
|
Facility
Location
|
Estimated
Annual
Capacity
(gallons)
|
Pacific Ethanol West
|
{
|
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
|
|
|
|
|
|
Pacific Ethanol Central
|
{
|
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
|
We produce ethanol co-products at our eight
production facilities such as wet distillers grains, or WDG, dry distillers grains with solubles, wet and dry corn gluten feed,
condensed distillers solubles, corn gluten meal, corn germ, corn oil, distillers yeast and CO
2
.
Marketing Segment
We market ethanol and co-products produced
by our eight ethanol production 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 eight 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.
Current Initiatives and Outlook
During the second quarter of 2016, we experienced
improved crush margins, which reflect ethanol and co-product sales prices relative to production inputs such as corn and natural
gas. This improved margin environment was supported by strong gasoline demand in the U.S. market, with gasoline consumption hitting
record highs due in part to lower fuel prices, which promoted growth in ethanol consumption. Further, corn prices have hit near
5-year lows and the new corn crop is expected to have high yields and record ending stocks.
We remain confident in the long-term demand
for ethanol and its co-products, driven by its underlying economic fundamentals as a high-octane, low-carbon renewable fuel, our
ability to execute and create value, and our market position. We are on-track to market more than 800 million gallons of ethanol
in 2016 from our expanded production and marketing platform.
The regulatory environment continues to
support the long-term demand for renewable fuels. Low-Carbon Fuel Standards in California and Oregon require refiners to reduce
the carbon intensity of their fuels in increasing amounts to 10% by 2020 in California and by 2025 in Oregon. We believe this mandate
will require a significant amount of low-carbon fuel to displace gasoline in the California and Oregon fuel supplies. Currently,
we receive a $0.05 per gallon premium over Midwest ethanol on each California production gallon sold into the California market.
We expect to see a comparable premium for low-carbon ethanol we sell into the Oregon market. In addition, the national Renewable
Fuel Standard continues to support the long-term demand for renewable fuels.
The footprint for 15% ethanol blended fuel,
or E15, continues to grow, with a retailer announcing the rollout of E15 at more than 100 stores in the next three years, joining
other retailers in bringing E15 to market.
We believe our production assets in two
distinct markets yield significant benefits, including the ability to spread our commodity and basis price risks across diverse
markets and the potential to benefit from regional pricing opportunities resulting from supply imbalances, logistical constraints
and feedstock availability. This market diversity enabled us to partially mitigate the effects of the poor margin environment we
experienced in the first quarter of 2016. In addition, despite lower distillers grains prices due to reduced demand from China,
our diverse portfolio of high-value co-products, including corn oil which adds over $0.05 per gallon of incremental operating income,
provided strong returns and helped mitigate the poor crush margin cycle experienced during the first quarter.
We have undertaken a number of plant improvement
initiatives to increase operating efficiencies, enhance yields, improve carbon scores and reduce costs to better position us for
sustained profitable operations. We are on schedule to implement an industrial scale membrane system at our Madera facility that
separates water from ethanol during the plant’s dehydration process and begin commercial production in the third quarter.
We expect this technology to increase operating efficiencies, lower production costs and reduce the carbon intensity of ethanol
produced at our Madera facility. In the first quarter we began producing cellulosic ethanol at our Stockton plant and we are working
with our technology provider and the Environmental Protection Agency, or EPA, to qualify this ethanol for special premiums over
conventional ethanol. We are looking for additional regulatory certainty extending California’s Low-Carbon Fuel Standard
beyond 2020 to support the development of additional cellulosic ethanol projects. We are also working on cogeneration technology
at our Stockton plant, which we expect to complete by the end of the third quarter that will convert process waste gas and natural
gas into electricity and steam, lowering air emissions and energy costs. We continue to manage our capital spending, focusing on
projects that present the highest potential value. Based on market conditions and capital resources, we have reduced our capital
improvements budget from $26.0 million to $15.0 million for 2016. We also may finance capital expenditures through low-cost leases
to further reduce our cost of capital, better match our investment profile and the long-term value of our assets, and preserve
and improve our liquidity and capital resources.
Net exports of ethanol continue to be a
positive factor for the industry. U.S. exports of ethanol are on track to exceed 2015 levels, with an expectation of up to one
billion gallons exported in 2016. Ethanol remains the lowest cost and cleanest source of octane to meet the growing demand for
octane worldwide.
Our goals for 2016 include leveraging our
diverse base of production and marketing assets to expand our share of the renewable fuels and ethanol co-product markets; continuing
to implement plant improvement initiatives that generate meaningful near-term returns; pursuing opportunities to further strengthen
our balance sheet by reducing our cost of capital, efficiently managing cash and improving our overall liquidity position; and
further lowering the carbon intensity of our ethanol by modifying existing operations and investing in new technologies such as
co-generation, anaerobic digestion and solar power generation, all of which are directed at expanding our share of the renewable
fuels market and delivering long-term, 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 and conversion features carried at fair value; impairment of
long-lived and intangible 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, 2015.
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
June 30,
|
|
|
Percentage
|
|
|
Six Months Ended
June 30,
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
Variance
|
|
|
2016
|
|
|
2015
|
|
|
Variance
|
|
Production gallons sold (in millions)
|
|
|
122.5
|
|
|
|
47.5
|
|
|
|
157.9%
|
|
|
|
235.4
|
|
|
|
92.1
|
|
|
|
155.6%
|
|
Third party gallons sold (in millions)
|
|
|
110.7
|
|
|
|
93.2
|
|
|
|
18.8%
|
|
|
|
204.4
|
|
|
|
184.3
|
|
|
|
10.9%
|
|
Total gallons sold (in millions)
|
|
|
233.2
|
|
|
|
140.7
|
|
|
|
65.7%
|
|
|
|
439.8
|
|
|
|
276.4
|
|
|
|
59.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price per gallon
|
|
$
|
1.72
|
|
|
$
|
1.76
|
|
|
|
(2.3)%
|
|
|
$
|
1.63
|
|
|
$
|
1.71
|
|
|
|
(4.7)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn cost per bushel – CBOT equivalent
|
|
$
|
3.86
|
|
|
$
|
3.67
|
|
|
|
5.2%
|
|
|
$
|
3.76
|
|
|
$
|
3.77
|
|
|
|
(0.3)%
|
|
Average basis
(1)
|
|
|
0.23
|
|
|
|
0.95
|
|
|
|
(75.8)%
|
|
|
|
0.28
|
|
|
|
0.94
|
|
|
|
(70.2)%
|
|
Delivered cost of corn
|
|
$
|
4.09
|
|
|
$
|
4.62
|
|
|
|
(11.5)%
|
|
|
$
|
4.04
|
|
|
$
|
4.71
|
|
|
|
(14.2)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total co-product tons sold (in thousands)
|
|
|
686.8
|
|
|
|
372.8
|
|
|
|
84.2%
|
|
|
|
1,348.2
|
|
|
|
728.1
|
|
|
|
85.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Co-product
revenues as % of delivered cost of corn
(2)
|
|
|
34.2%
|
|
|
|
32.8%
|
|
|
|
4.3%
|
|
|
|
35.2%
|
|
|
|
33.3%
|
|
|
|
5.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average CBOT ethanol price per gallon
|
|
$
|
1.58
|
|
|
$
|
1.58
|
|
|
|
–%
|
|
|
$
|
1.49
|
|
|
$
|
1.51
|
|
|
|
(1.3)%
|
|
Average CBOT corn price per bushel
|
|
$
|
3.91
|
|
|
$
|
3.66
|
|
|
|
6.8%
|
|
|
$
|
3.77
|
|
|
$
|
3.75
|
|
|
|
(0.5)%
|
|
_______________
|
(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
June 30,
|
|
|
Variance
in
|
|
|
Six
Months Ended
June 30,
|
|
|
Variance
in
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
422,860
|
|
|
$
|
227,621
|
|
|
$
|
195,239
|
|
|
|
85.8%
|
|
|
$
|
765,233
|
|
|
$
|
433,797
|
|
|
$
|
331,436
|
|
|
|
76.4%
|
|
Cost of goods sold
|
|
|
405,156
|
|
|
|
221,367
|
|
|
|
183,789
|
|
|
|
83.0%
|
|
|
|
746,460
|
|
|
|
428,530
|
|
|
|
317,930
|
|
|
|
74.2%
|
|
Gross profit
|
|
$
|
17,704
|
|
|
$
|
6,254
|
|
|
$
|
11,450
|
|
|
|
183.1%
|
|
|
$
|
18,773
|
|
|
$
|
5,267
|
|
|
$
|
13,506
|
|
|
|
256.4%
|
|
Percentage of net sales
|
|
|
4.2%
|
|
|
|
2.7%
|
|
|
|
|
|
|
|
|
|
|
|
2.5%
|
|
|
|
1.2%
|
|
|
|
|
|
|
|
|
|
Net Sales
The increase in our net
sales for the three and six months ended June 30, 2016 as compared to the same periods in 2015 was due to an increase in our total
gallons and co-products sold, partially offset by a decrease in our average sales price per gallon. We increased both production
and third party gallons sold, and our volume of co-products sold, for the three and six months ended June 30, 2016 as compared
to the same period in 2015. The increases in volumes of our production gallons and co-products sold are primarily due to additional
volumes from our new Pacific Ethanol Central plants in the Midwest. In addition, we expanded our customer base and our sales to
a larger national footprint with the addition of regions we cover with our Midwest plants.
Three Months Ended
June 30, 2016
On a consolidated basis,
our average sales price per gallon decreased 2.3% to $1.72 for the three months ended June 30, 2016 compared to our average sales
price per gallon of $1.76 for the same period in 2015. The average Chicago Board of Trade, or CBOT, ethanol price per gallon, remained
flat at $1.58 for the three months ended June 30, 2016 as compared to the average CBOT ethanol price per gallon for the same period
in 2015.
Production Segment
Net sales of ethanol
from our production segment increased by $122.7 million, or 147%, to $206.3 million for the three months ended June 30, 2016 as
compared to $83.6 million for the same period in 2015. Our total volume of production ethanol gallons sold increased by 75.0 million
gallons, or 158%, to 122.5 million gallons for the three months ended June 30, 2016 as compared to 47.5 million gallons for the
same period in 2015. Our production segment’s average sales price per gallon decreased 5.1% to $1.67 for the three months
ended June 30, 2016 compared to our production segment’s average sales price per gallon of $1.76 for the same period in 2015.
Of the additional 75.0 million gallons of ethanol sold in the three months ended June 30, 2016, an aggregate of 76.5 million gallons
were attributable to production at our Midwestern plants which we acquired on July 1, 2015, slightly offset by 1.5 million fewer
gallons produced at our Western plants. At our average sales price per gallon of $1.67 for the three months ended June 30, 2016,
we generated $125.2 million in additional net sales from our production segment from the 75.0 million additional gallons of produced
ethanol sold in the three months ended June 30, 2016 as compared to the same period in 2015. The decline of $0.09 in our average
sales price per gallon for the three months ended June 30, 2016 as compared to the same period in 2015 reduced our net sales of
ethanol from our production segment by $2.5 million.
Net sales of co-products
increased $39.2 million, or 156%, to $64.3 million for the three months ended June 30, 2016 as compared to $25.1 million for the
same period in 2015. Our total volume of co-products sold increased by 0.3 million tons, or 75%, to 0.7 million tons for three
months ended June 30, 2016 from 0.4 million tons for the same period in 2015. At our average sales price per ton of $88.41 for
the three months ended June 30, 2016, we generated $27.8 million in additional net sales from the 0.3 million additional tons of
co-products sold in the three months ended June 30, 2016 as compared to the same period in 2015. In addition, the increase of $22.37,
or 34%, in our average sales price per ton for the three months ended June 30, 2016 as compared to the same period in 2015 increased
net sales of co-products by $11.4 million.
Marketing Segment
Net sales of ethanol from our marketing
segment increased by $31.3 million, or 27%, to $148.3 million for the three months ended June 30, 2016 as compared to $117.0 million
for the same period in 2015. Our total volume of ethanol gallons sold by our marketing segment increased by 92.5 million gallons,
or 66%, to 233.2 million gallons for the three months ended June 30, 2016 as compared to 140.7 million gallons for the same period
in 2015. Our additional production gallons sold accounted for 75.0 million gallons of this increase, as noted above, and our additional
third-party gallons sold accounted for 17.5 million gallons of this increase.
The increase in production gallons sold
by our marketing segment contributed an additional $1.3 million in net sales generated by our marketing segment, which were eliminated
upon consolidation.
Our marketing segment’s average sales
price per gallon remained flat at $1.77 for the three months ended June 30, 2016 compared to the same period in 2015. At our average
sales price per gallon of $1.77 for the three months ended June 30, 2016, we generated $30.8 million in additional net sales from
our marketing segment from the 17.5 million gallons in additional third-party ethanol sold in the three months ended June 30, 2016
as compared to the same period in 2015.
Six Months Ended
June 30, 2016
On a consolidated basis,
our average sales price per gallon decreased 4.7% to $1.63 for the six months ended June 30, 2016 compared to our average sales
price per gallon of $1.71 for the same period in 2015. The average CBOT ethanol price per gallon declined 1.3% to $1.49 for the
six months ended June 30, 2016 compared to an average CBOT ethanol price per gallon of $1.51 for the same period in 2015.
Production Segment
Net sales of ethanol
from our production segment increased by $216.8 million, or 138%, to $373.7 million for the six months ended June 30, 2016 as compared
to $156.9 million for the same period in 2015. Our total volume of production ethanol gallons sold increased by 143.3 million gallons,
or 156%, to 235.4 million gallons for the six months ended June 30, 2016 as compared to 92.1 million gallons for the same period
in 2015. Our production segment’s average sales price per gallon decreased 7.1% to $1.58 for the six months ended June 30,
2016 compared to our production segment’s average sales price per gallon of $1.70 for the same period in 2015. Of the additional
143.3 million gallons of ethanol sold in the six months ended June 30, 2016, an aggregate of 147.2 million gallons were attributable
to production at our Midwestern plants which we acquired on July 1, 2015, slightly offset by 3.9 million fewer gallons produced
at our Western plants. At our average sales price per gallon of $1.58 for the six months ended June 30, 2016, we generated $226.4
million in additional net sales from our production segment from the 143.3 million additional gallons of produced ethanol sold
in the six months ended June 30, 2016 as compared to the same period in 2015. The decline of $0.12 in our average sales price per
gallon for the six months ended June 30, 2016 as compared to the same period in 2015 reduced our net sales of ethanol from our
production segment by $9.6 million.
Net sales of co-products
increased $74.3 million, or 147%, to $124.9 million for the six months ended June 30, 2016 as compared to $50.6 million for the
same period in 2015. Our total volume of co-products sold increased by 0.6 million tons, or 85%, to 1.3 million tons for six months
ended June 30, 2016 from 0.7 million tons for the same period in 2015. At our average sales price per ton of $87.87 for the six
months ended June 30, 2016, we generated $54.5 million in additional net sales from the 0.6 million additional tons of co-products
sold in the six months ended June 30, 2016 as compared to the same period in 2015. In addition, the increase of $20.16, or 30%,
in our average sales price per ton for the six months ended June 30, 2016 as compared to the same period in 2015 increased net
sales of co-products by $19.8 million.
Marketing Segment
Net sales of ethanol from our
marketing segment increased by $35.6 million, or 16%, to $258.1 million for the six months ended June 30, 2016 as compared to
$222.5 million for the same period in 2015. Our total volume of ethanol gallons sold by our marketing segment increased by
163.4 million gallons, or 59%, to 439.9 million gallons for the six months ended June 30, 2016 as compared to 276.5 million
gallons for the same period in 2015. Our additional production gallons sold accounted for 143.3 million gallons of this
increase, as noted above, and our additional third-party gallons sold accounted for 20.1 million gallons of this increase,
slightly offset by a decline of 2.0 million agent gallons.
The increase in production gallons sold
by our marketing segment contributed an additional $2.2 million in net sales generated by our marketing segment, which were eliminated
upon consolidation.
Our marketing segment’s average sales
price per gallon decreased 0.6% to $1.70 for the six months ended June 30, 2016 compared to $1.71 for the same period in 2015.
At our average sales price per gallon of $1.70 for the six months ended June 30, 2016, we generated $37.4 million in additional
net sales from our marketing segment from the 20.1 million gallons in additional third-party ethanol sold in the six months ended
June 30, 2016 as compared to the same period in 2015. However, the decline of $0.01 in our average sales price per gallon for the
six months ended June 30, 2016 as compared to the same period in 2015 reduced our net sales from third party ethanol sold by our
marketing segment by $1.8 million.
Cost of Goods Sold and Gross Profit
Our consolidated gross profit increased
primarily due to higher commodity margins in the three and six months ended June 30, 2016 compared to the same periods in 2015.
Three Months Ended
June 30, 2016
Our consolidated gross profit increased
to $17.7 million for the three months ended June 30, 2016 as compared to $6.3 million for the same period in 2015, representing
a gross margin of 4.2% for the three months ended June 30, 2016 as compared to 2.7% for the same period in 2015.
Production Segment
Our production segment increased our consolidated
gross profit by $8.6 million for the three months ended June 30, 2016 as compared to the same period in 2015. Of this amount, $8.5
million is attributable to the 75.0 million gallon increase in production volumes sold in the three months ended June 30, 2016
as compared to the same period in 2015 and $0.1 million in higher gross profit is attributed to higher production margins in the
three months ended June 30, 2016 as compared to the same period in 2015.
Marketing Segment
Our marketing segment increased our consolidated
gross profit by $2.8 million for the three months ended June 30, 2016 as compared to the same period in 2015. Of this amount, $0.8
million is attributable to additional gross profit from the 17.5 million gallon increase in third-party marketing volumes in the
three months ended June 30, 2016 as compared to the same period in 2015 and $2.0 million in higher gross profit is attributable
to our higher margins per gallon for the three months ended June 30, 2016 as compared to the same period in 2015.
Six Months Ended
June 30, 2016
Our consolidated gross profit increased
to $18.8 million for the six months ended June 30, 2016 as compared to $5.3 million for the same period in 2015, representing a
gross margin of 2.5% for the six months ended June 30, 2016 as compared to 1.2% for the same period in 2015.
Production Segment
Our production segment increased our consolidated
gross profit by $5.0 million for the six months ended June 30, 2016 as compared to the same period in 2015. Of this amount, $6.0
million is attributable to the 143.3 million gallon increase in production volumes sold in the six months ended June 30, 2016 as
compared to the same period in 2015, partially offset by $1.0 million in lower gross profit attributed to slightly lower production
margins in the six months ended June 30, 2016 as compared to the same period in 2015.
Marketing Segment
Our marketing segment increased our consolidated
gross profit by $8.5 million for the six months ended June 30, 2016 as compared to the same period in 2015. Of this amount, $1.3
million is attributable to additional gross profit from the 20.1 million gallon increase in third-party marketing volumes in the
six months ended June 30, 2016 as compared to the same period in 2015 and $7.2 million in higher gross profit is attributable to
our higher margins per gallon for the six months ended June 30, 2016 as compared to the same period in 2015.
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
June 30,
|
|
|
Variance
in
|
|
|
Six
Months Ended
June 30,
|
|
|
Variance
in
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
Selling, general and administrative expenses
|
|
$
|
6,148
|
|
|
$
|
3,993
|
|
|
$
|
2,155
|
|
|
|
54.0%
|
|
|
$
|
14,465
|
|
|
$
|
8,898
|
|
|
$
|
5,567
|
|
|
|
62.6%
|
|
Percentage of net sales
|
|
|
1.5%
|
|
|
|
1.8%
|
|
|
|
|
|
|
|
|
|
|
|
1.9%
|
|
|
|
2.1%
|
|
|
|
|
|
|
|
|
|
Our SG&A expenses increased $2.1 million
to $6.1 million for the three months ended June 30, 2016 as compared to $4.0 million for the same period in 2015, however, SG&A
expenses decreased as a percentage of net sales for the three months ended June 30, 2016 as compared to the same period in 2015.
The increase in SG&A expenses is primarily due to the addition of our Pacific Ethanol Central operations, which were not included
in the prior period results as the Aventine acquisition occurred on July 1, 2015. SG&A expenses were lower than our prior guidance
of $7.5 million in part due to lower professional fees.
Our SG&A expenses increased $5.6 million
to $14.5 million for the six months ended June 30, 2016 as compared to $8.9 million for the same period in 2015. The increase in
SG&A expenses is primarily due to the addition of our Pacific Ethanol Central operations.
At current levels of operation, we expect
our SG&A expenses will be approximately $7.0 million to $7.5 million per quarter through the end of 2016. In addition, we expect
our capital expenditures to average $7.5 million per quarter through 2016.
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
June 30,
|
|
|
Variance in
|
|
|
Six Months Ended
June 30,
|
|
|
Variance in
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
Interest expense, net
|
|
$
|
6,536
|
|
|
$
|
1,005
|
|
|
$
|
5,531
|
|
|
|
550.3%
|
|
|
$
|
12,769
|
|
|
$
|
2,020
|
|
|
$
|
10,749
|
|
|
|
532.1%
|
|
Percentage of net sales
|
|
|
1.5%
|
|
|
|
0.4%
|
|
|
|
|
|
|
|
|
|
|
|
1.7%
|
|
|
|
0.5%
|
|
|
|
|
|
|
|
|
|
Interest expense,
net increased by $5.5 million to $6.5 million for the three months ended June 30, 2016 from $1.0 million for the same period
in 2015. Interest expense, net increased by $10.8 million to $12.8 million for the six months ended June 30, 2016 from $2.0
million for the same period in 2015. The increase in interest expense, net for these periods is primarily related to the
Pacific Ethanol Central plants’ term debt that we assumed, on a consolidated basis, in connection with the Aventine
acquisition.
Provision (Benefit)
for Income Taxes
The following table
presents our provision (benefit) for income taxes in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
June 30,
|
|
|
Variance in
|
|
|
Six Months Ended
June 30,
|
|
|
Variance in
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
Provision (benefit) for income taxes
|
|
$
|
(245)
|
|
|
$
|
530
|
|
|
$
|
775
|
|
|
|
NM
|
|
|
$
|
(245)
|
|
|
$
|
(2,170)
|
|
|
$
|
1,925
|
|
|
|
(88.7)%
|
|
Percentage of net sales
|
|
|
(0.1)%
|
|
|
|
0.2%
|
|
|
|
|
|
|
|
|
|
|
|
-%
|
|
|
|
0.5%
|
|
|
|
|
|
|
|
|
|
For the six months ended
June 30, 2016, we recorded a net loss on both a book and tax basis, and as such did not record a tax provision or benefit due to
the uncertainty of utilizing the losses for 2016. In addition, we finalized our tax returns resulting in a tax benefit of $0.2
million for the three and six months ended June 30, 2016. For the three and six months ended June 30, 2015, we recorded a provision
for income taxes of $0.5 million and a benefit of $2.2 million, respectively, at an estimated effective tax rate of 33.5% and 38.6%,
respectively.
Net Income (Loss)
Available to Common Stockholders
The following table presents
our net income (loss) available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three
Months Ended
June 30,
|
|
|
Variance
in
|
|
|
Six
Months Ended
June 30,
|
|
|
Variance
in
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
2015
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
Net income (loss) available to common stockholders
|
|
$
|
4,700
|
|
|
$
|
677
|
|
|
$
|
4,023
|
|
|
|
594.2%
|
|
|
$
|
(8,770)
|
|
|
$
|
(3,997)
|
|
|
$
|
(4,773)
|
|
|
|
119.4%
|
|
Percentage of net sales
|
|
|
1.1%
|
|
|
|
0.3%
|
|
|
|
|
|
|
|
|
|
|
|
(1.1)%
|
|
|
|
(0.9)%
|
|
|
|
|
|
|
|
|
|
The increase in net income
available to common stockholders for three months ended June 30, 2016, as compared to 2015, is due to improved operating and commodity
margins. The increase in the net loss available to common stockholders for the six months ended June 30, 2016 as compare to 2015,
was due to increased SG&A expenses and interest expense in 2016.
Liquidity and Capital Resources
During the six months ended June 30, 2016,
we funded our operations primarily from cash on hand, cash flow from operations, proceeds from cash collateralized letters of credit
and proceeds from tax refunds. These funds were also used to make capital expenditures, capital lease payments and payments to
fully extinguish our term loan balance associated with the Pacific Ethanol West plants.
Our current available capital resources
consist of cash on hand and amounts available for borrowing under Kinergy’s credit facility. 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 our operations and tax refunds related to prior years.
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.
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):
|
|
|
June
30,
2016
|
|
|
|
December
31,
2015
|
|
|
|
Change
|
|
Cash and cash equivalents
|
|
$
|
31,673
|
|
|
$
|
52,712
|
|
|
|
(40.0)%
|
|
Current assets
|
|
$
|
203,334
|
|
|
$
|
197,942
|
|
|
|
2.7%
|
|
Current liabilities
|
|
$
|
65,451
|
|
|
$
|
72,909
|
|
|
|
(10.2)%
|
|
Long-term debt, net of current portion
|
|
$
|
215,041
|
|
|
$
|
203,861
|
|
|
|
5.5%
|
|
Working capital
|
|
$
|
137,883
|
|
|
$
|
125,033
|
|
|
|
10.3%
|
|
Working capital ratio
|
|
|
3.11
|
|
|
|
2.71
|
|
|
|
14.8%
|
|
Restricted Net Assets
At June 30, 2016, we had approximately $135.2
million of net assets at our subsidiaries that were not available to be transferred to the parent company in the form of dividends,
loans or advances due to restrictions contained in the credit facilities of these subsidiaries.
Change in Working Capital and Cash Flows
Working capital increased to $137.9 million
at June 30, 2016 from $125.0 million at December 31, 2015 as a result of an increase of $5.4 million in current assets and a decrease
of $7.5 million in current liabilities.
Current assets increased primarily due to
an increase of $10.6 million in accounts receivable, $5.1 million in inventory, $4.3 million in prepaid inventory and $11.2 million
in derivative assets, all resulting primarily from our additional Pacific Ethanol Central operations, partially offset by decreases
of $21.0 million in cash and cash equivalents and $4.5 million in income tax receivables.
Our cash and cash equivalents declined by
$21.0 million at June 30, 2016 as compared to December 31, 2015 due to $3.5 million of cash used in our investing activities and
$18.6 million of cash used in our financing activities, partially offset by cash flows from operations of $1.1 million, as discussed
below.
Our current liabilities decreased primarily
due to a decrease of $17.0 million in current portion of long-term debt as we extinguished our Pacific Ethanol West plant debt
and a decrease of $1.6 million in accounts payable and accrued liabilities, partially offset by an increase of $10.3 million in
derivative liabilities due to increased open derivative positions at the end of the quarter.
Cash Provided by our Operating Activities
Cash provided by our operating activities
decreased by $10.3 million for the six months ended June 30, 2016 as compared to the same period in 2015. The decrease in cash
provided by our operating activities is primarily due to a higher net loss caused by reduced margins in the first quarter of 2016
resulting from lower ethanol prices. Additional factors that contributed to the decrease in cash provided by our operating activities
include:
|
·
|
an increase in accounts receivable of $16.9 million primarily due to higher sales volumes attributable to our new Pacific Ethanol
Central operations; and
|
|
·
|
an increase in inventory and prepaid inventory of $12.7 million primarily due to higher sales volumes attributable to our new
Pacific Ethanol Central operations.
|
These amounts were partially offset by:
|
·
|
an increase in depreciation and amortization of $10.9 million due to additional assets subject to depreciation and amortization
from our acquisition of Aventine;
|
|
·
|
a decrease in prepaid expenses and other assets of $6.4 million primarily due to income tax refunds; and
|
|
·
|
interest expense added to term debt of $9.5 million.
|
Cash used in our Investing Activities
Cash used in our investing activities improved
by $8.7 million for the six months ended June 30, 2016 as compared to the same period in 2015. The improvement in cash used in
our investing activities is primarily due to lower spending on capital projects and proceeds from cash collateralized letters of
credit.
Cash used in our Financing Activities
Cash used in our financing activities increased
by $6.6 million for the six months ended June 30, 2016 as compared to the same period in 2015. The increase in cash used in our
financing activities is primarily due to a $17.0 million principal payment on our term debt associated with the Pacific Ethanol
West plants, which was partially offset by a decline of $10.0 million in payments on Kinergy’s line of credit.
Kinergy Operating Line of Credit
Kinergy maintains an operating line of credit
for an aggregate amount of up to $75.0 million. The credit facility expires on December 31, 2020. 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 1.75% to 2.75%. 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. Payments that may be
made by Pacific Ag. Products, LLC, or 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. The
credit facility also includes the accounts receivable of PAP as additional collateral.
For all monthly periods in which excess
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
June 30,
|
|
|
Years
Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio Requirement
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
Actual
|
|
|
16.00
|
|
|
|
10.27
|
|
|
|
10.02
|
|
|
|
17.66
|
|
Excess
|
|
|
14.00
|
|
|
|
8.27
|
|
|
|
8.02
|
|
|
|
15.66
|
|
Pacific Ethanol has guaranteed all of Kinergy’s
obligations under the credit facility. As of June 30, 2016, Kinergy had an outstanding balance of $62.0 million and an available
borrowing base under the credit facility of $75.0 million, representing $13.0 million of excess availability under the credit facility.
Pacific Ethanol Central Term Debt
On July 1, 2015, upon
effectiveness of the Aventine acquisition, Aventine became one of our wholly-owned subsidiaries and, on a consolidated basis,
the combined company became obligated with respect to Aventine’s term loan. Aventine’s creditors under Aventine’s
term loan have recourse solely against Aventine and its subsidiaries and not against Pacific Ethanol, Inc. or its other direct
or indirect subsidiaries.
As of June 30, 2016,
the term loan facility for the Pacific Ethanol Central plants had an outstanding balance of approximately $155.1 million. Interest
on the term loan facility accrues and may be paid in cash at a rate of 10.5% per annum or may be paid in-kind at a rate of 15.0%
per annum by adding the interest to the outstanding principal balance. If we elect to pay interest in-kind, the interest is capitalized
at the end of each quarter. For the three and six months ended June 30, 2016, we elected to defer interest payments on the term
debt in the aggregate amount of $5.7 million and $9.5 million, respectively, which was added to the outstanding loan balance.
The term loan facility matures on September 24, 2017. The term loan facility is secured through a first-priority lien on substantially
all of Aventine’s assets and contains customary financial covenants, and a requirement that Aventine maintain a cash balance
of at least $2.0 million.
We continue to evaluate and pursue opportunities to refinance the term debt for the Pacific Ethanol Central
plants.
Contractual Obligations
There have been no material changes in the
six months ended June 30, 2016 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 2015.
Effects of Inflation
The impact of inflation
was not significant to our financial condition or results of operations for the three and six months ended June 30, 2016 and 2015.