ITEM 1. FINANCIAL STATEMENTS.
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
ASSETS
|
|
2016
|
|
|
2015
|
|
|
|
|
(unaudited)
|
|
|
|
*
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,639
|
|
|
$
|
52,712
|
|
Accounts receivable, net (net of allowance for doubtful accounts of $350 and $25, respectively)
|
|
|
68,824
|
|
|
|
61,346
|
|
Inventories
|
|
|
64,988
|
|
|
|
60,820
|
|
Prepaid inventory
|
|
|
7,630
|
|
|
|
5,973
|
|
Income tax receivables
|
|
|
6,114
|
|
|
|
10,654
|
|
Derivative instruments
|
|
|
3,242
|
|
|
|
2,081
|
|
Other current assets
|
|
|
5,781
|
|
|
|
4,356
|
|
Total current assets
|
|
|
197,218
|
|
|
|
197,942
|
|
Property and equipment, net
|
|
|
452,478
|
|
|
|
464,960
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
2,678
|
|
|
|
2,678
|
|
Other assets
|
|
|
4,752
|
|
|
|
9,100
|
|
Total other assets
|
|
|
7,430
|
|
|
|
11,778
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
657,126
|
|
|
$
|
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)
|
|
September 30,
|
|
|
December 31,
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
2016
|
|
|
2015
|
|
|
|
|
(unaudited)
|
|
|
|
*
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable – trade
|
|
$
|
26,790
|
|
|
$
|
30,520
|
|
Accrued liabilities
|
|
|
15,107
|
|
|
|
10,072
|
|
Current portion – capital leases
|
|
|
4,525
|
|
|
|
4,248
|
|
Current portion – long-term debt
|
|
|
153,701
|
|
|
|
17,003
|
|
Derivative instruments
|
|
|
3,492
|
|
|
|
1,848
|
|
Accrued PE Op Co. purchase
|
|
|
3,828
|
|
|
|
3,828
|
|
Other current liabilities
|
|
|
5,656
|
|
|
|
5,390
|
|
Total current liabilities
|
|
|
213,099
|
|
|
|
72,909
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
63,552
|
|
|
|
203,861
|
|
Capital leases, net of current portion
|
|
|
754
|
|
|
|
4,183
|
|
Warrant liabilities at fair value
|
|
|
326
|
|
|
|
273
|
|
Deferred tax liabilities
|
|
|
1,174
|
|
|
|
1,174
|
|
Other liabilities
|
|
|
17,739
|
|
|
|
20,736
|
|
Total Liabilities
|
|
|
296,644
|
|
|
|
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 September 30, 2016 and December 31, 2015;
Series B: 1,580,790 shares authorized; 926,942 shares issued and outstanding as of September 30, 2016 and December 31, 2015; liquidation preference of $18,075 as of September 30, 2016
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.001 par value; 300,000,000 shares authorized; 39,634,084 and 38,974,972 shares issued and outstanding as of September 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 September 30, 2016 and December 31, 2015
|
|
|
4
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
904,387
|
|
|
|
902,843
|
|
Accumulated other comprehensive income
|
|
|
1,040
|
|
|
|
1,040
|
|
Accumulated deficit
|
|
|
(544,990
|
)
|
|
|
(532,383
|
)
|
Total Stockholders’ Equity
|
|
|
360,482
|
|
|
|
371,544
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
657,126
|
|
|
$
|
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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
417,806
|
|
|
$
|
380,622
|
|
|
$
|
1,183,039
|
|
|
$
|
814,419
|
|
Cost of goods sold
|
|
|
411,442
|
|
|
|
388,002
|
|
|
|
1,157,902
|
|
|
|
816,532
|
|
Gross profit (loss)
|
|
|
6,364
|
|
|
|
(7,380
|
)
|
|
|
25,137
|
|
|
|
(2,113
|
)
|
Selling, general and administrative expenses
|
|
|
5,971
|
|
|
|
7,446
|
|
|
|
20,436
|
|
|
|
16,344
|
|
Income (loss) from operations
|
|
|
393
|
|
|
|
(14,826
|
)
|
|
|
4,701
|
|
|
|
(18,457
|
)
|
Fair value adjustments
|
|
|
(69
|
)
|
|
|
1,202
|
|
|
|
(53
|
)
|
|
|
1,413
|
|
Interest expense, net
|
|
|
(3,874
|
)
|
|
|
(5,167
|
)
|
|
|
(16,643
|
)
|
|
|
(7,187
|
)
|
Other income, net
|
|
|
32
|
|
|
|
203
|
|
|
|
92
|
|
|
|
16
|
|
Loss before provision (benefit) for income taxes
|
|
|
(3,518
|
)
|
|
|
(18,588
|
)
|
|
|
(11,903
|
)
|
|
|
(24,215
|
)
|
Provision (benefit) for income taxes
|
|
|
–
|
|
|
|
(3,925
|
)
|
|
|
(245
|
)
|
|
|
(6,095
|
)
|
Consolidated net loss
|
|
|
(3,518
|
)
|
|
|
(14,663
|
)
|
|
|
(11,658
|
)
|
|
|
(18,120
|
)
|
Net loss attributed to noncontrolling interests
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
87
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(3,518
|
)
|
|
$
|
(14,663
|
)
|
|
$
|
(11,658
|
)
|
|
$
|
(18,033
|
)
|
Preferred stock dividends
|
|
$
|
(319
|
)
|
|
$
|
(319
|
)
|
|
$
|
(949
|
)
|
|
$
|
(946
|
)
|
Net loss available to common stockholders
|
|
$
|
(3,837
|
)
|
|
$
|
(14,982
|
)
|
|
$
|
(12,607
|
)
|
|
$
|
(18,979
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.63
|
)
|
Weighted-average shares outstanding, basic and diluted
|
|
|
42,226
|
|
|
|
41,861
|
|
|
|
42,156
|
|
|
|
30,170
|
|
See
accompanying notes to consolidated financial statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(11,658
|
)
|
|
$
|
(18,120
|
)
|
Adjustments to reconcile consolidated net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of intangibles
|
|
|
26,526
|
|
|
|
15,103
|
|
Interest expense added to term debt
|
|
|
9,451
|
|
|
|
–
|
|
Deferred income taxes
|
|
|
–
|
|
|
|
(120
|
)
|
Fair value adjustments
|
|
|
53
|
|
|
|
(1,413
|
)
|
Amortization of debt discount
|
|
|
930
|
|
|
|
383
|
|
Amortization of deferred financing fees
|
|
|
97
|
|
|
|
178
|
|
Non-cash compensation
|
|
|
1,888
|
|
|
|
1,465
|
|
Loss (gain) on derivative instruments
|
|
|
(1,669
|
)
|
|
|
1,552
|
|
Bad debt expense (recoveries)
|
|
|
325
|
|
|
|
(357
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,803
|
)
|
|
|
(5,980
|
)
|
Inventories
|
|
|
(4,168
|
)
|
|
|
(205
|
)
|
Prepaid expenses and other assets
|
|
|
5,503
|
|
|
|
(1,399
|
)
|
Prepaid inventory
|
|
|
(1,657
|
)
|
|
|
495
|
|
Accounts payable and accrued expenses
|
|
|
(2,789
|
)
|
|
|
(9,020
|
)
|
Net cash provided by (used in) operating activities
|
|
|
15,029
|
|
|
|
(17,438
|
)
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(14,045
|
)
|
|
|
(17,680
|
)
|
Net cash from Aventine acquisition
|
|
|
–
|
|
|
|
18,756
|
|
Proceeds from (purchases of) cash collateralized letters of credit
|
|
|
4,113
|
|
|
|
(4,574
|
)
|
Net cash used in investing activities
|
|
|
(9,932
|
)
|
|
|
(3,498
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Net proceeds from Kinergy’s line of credit
|
|
|
2,913
|
|
|
|
29,718
|
|
Proceeds from assessment financing
|
|
|
1,020
|
|
|
|
–
|
|
Principal payments on borrowings
|
|
|
(17,003
|
)
|
|
|
(13,833
|
)
|
Payments on capital leases
|
|
|
(3,151
|
)
|
|
|
(3,399
|
)
|
Proceeds from exercise of warrants
|
|
|
–
|
|
|
|
368
|
|
Preferred stock dividends paid
|
|
|
(949
|
)
|
|
|
(946
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(17,170
|
)
|
|
|
11,908
|
|
Net decrease in cash and cash equivalents
|
|
|
(12,073
|
)
|
|
|
(9,028
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
52,712
|
|
|
|
62,084
|
|
Cash and cash equivalents at end of period
|
|
$
|
40,639
|
|
|
$
|
53,056
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
7,256
|
|
|
$
|
6,043
|
|
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 do not include
the results of Aventine for the six months ended June 30, 2015.
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
$54,966,000 and $42,049,000 at September 30, 2016 and December 31, 2015, respectively, were used as collateral under Kinergy’s
operating line of credit. The allowance for doubtful accounts was $350,000 and $25,000 as of September 30, 2016 and December 31,
2015, respectively. The Company recorded a bad debt expense of $39,000 and $325,000 for the three and nine months ended September
30, 2016, respectively, and bad debt recoveries of $360,000 and $357,000 for the three and nine months ended September 30, 2015,
respectively. 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 and $0.2 million for the three and nine months ended September 30, 2016, as
the Company has finalized certain of its tax returns. The Company recognized a benefit of $3.9 million and $6.1 million for the
three and nine months ended September 30, 2015, respectively, related to losses incurred in 2015 that were carried back to a prior
taxable year. For the three and nine months ended September 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 $364,000 and $462,000
as of September 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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
266,299
|
|
|
$
|
248,158
|
|
|
$
|
767,171
|
|
|
$
|
456,114
|
|
Intersegment net sales
|
|
|
306
|
|
|
|
251
|
|
|
|
829
|
|
|
|
336
|
|
Total production segment net sales
|
|
|
266,605
|
|
|
|
248,409
|
|
|
|
768,000
|
|
|
|
456,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
|
151,507
|
|
|
|
132,464
|
|
|
|
415,868
|
|
|
|
358,304
|
|
Intersegment net sales
|
|
|
2,018
|
|
|
|
1,792
|
|
|
|
5,861
|
|
|
|
3,364
|
|
Total marketing and distribution net sales
|
|
|
153,525
|
|
|
|
134,256
|
|
|
|
421,729
|
|
|
|
361,668
|
|
Intersegment eliminations
|
|
|
(2,324
|
)
|
|
|
(2,043
|
)
|
|
|
(6,690
|
)
|
|
|
(3,699
|
)
|
Net sales as reported
|
|
$
|
417,806
|
|
|
$
|
380,622
|
|
|
$
|
1,183,039
|
|
|
$
|
814,419
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
262,964
|
|
|
$
|
261,069
|
|
|
$
|
759,210
|
|
|
$
|
468,229
|
|
Marketing and distribution
|
|
|
153,406
|
|
|
|
130,756
|
|
|
|
412,225
|
|
|
|
357,337
|
|
Intersegment eliminations
|
|
|
(4,928
|
)
|
|
|
(3,823
|
)
|
|
|
(13,533
|
)
|
|
|
(9,034
|
)
|
Cost of goods sold as reported
|
|
$
|
411,442
|
|
|
$
|
388,002
|
|
|
$
|
1,157,902
|
|
|
$
|
816,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
(2,903
|
)
|
|
$
|
(22,154
|
)
|
|
$
|
(19,171
|
)
|
|
$
|
(26,352
|
)
|
Marketing and distribution
|
|
|
(1,524
|
)
|
|
|
1,970
|
|
|
|
4,654
|
|
|
|
(161
|
)
|
Corporate activities
|
|
|
909
|
|
|
|
1,596
|
|
|
|
2,614
|
|
|
|
2,298
|
|
|
|
$
|
(3,518
|
)
|
|
$
|
(18,588
|
)
|
|
$
|
(11,903
|
)
|
|
$
|
(24,215
|
)
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
8,631
|
|
|
$
|
8,195
|
|
|
$
|
25,839
|
|
|
$
|
14,585
|
|
Marketing and distribution
|
|
|
–
|
|
|
|
5
|
|
|
|
3
|
|
|
|
147
|
|
Corporate activities
|
|
|
226
|
|
|
|
155
|
|
|
|
684
|
|
|
|
371
|
|
|
|
$
|
8,857
|
|
|
$
|
8,355
|
|
|
$
|
26,526
|
|
|
$
|
15,103
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
3,521
|
|
|
$
|
4,987
|
|
|
$
|
15,600
|
|
|
$
|
6,831
|
|
Marketing and distribution
|
|
|
353
|
|
|
|
180
|
|
|
|
1,043
|
|
|
|
356
|
|
Corporate activities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
3,874
|
|
|
$
|
5,167
|
|
|
$
|
16,643
|
|
|
$
|
7,187
|
|
The following table sets forth the Company’s
total assets by operating segment (in thousands):
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
512,285
|
|
|
$
|
536,013
|
|
Marketing and distribution
|
|
|
128,895
|
|
|
|
107,069
|
|
Corporate assets
|
|
|
15,946
|
|
|
|
31,598
|
|
|
|
$
|
657,126
|
|
|
$
|
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.
Inventory balances consisted of the following
(in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Finished goods
|
|
$
|
35,410
|
|
|
$
|
31,153
|
|
LCFS credits
|
|
|
11,532
|
|
|
|
6,957
|
|
Raw materials
|
|
|
9,848
|
|
|
|
9,891
|
|
Work in progress
|
|
|
6,481
|
|
|
|
11,121
|
|
Other
|
|
|
1,717
|
|
|
|
1,698
|
|
Total
|
|
$
|
64,988
|
|
|
$
|
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 nine months ended September 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 September 30, 2016
|
|
|
Assets
|
|
Liabilities
|
Type of Instrument
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Derivative instruments
|
|
$
|
3,242
|
|
Derivative instruments
|
|
$
|
3,492
|
|
|
|
|
$
|
3,242
|
|
|
|
$
|
3,492
|
|
|
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 September 30,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2016
|
|
|
2015
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
2,242
|
|
|
$
|
(251
|
)
|
|
|
|
|
$
|
2,242
|
|
|
$
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses
|
|
|
|
|
Three Months Ended September 30,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2016
|
|
|
2015
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(1,383
|
)
|
|
$
|
(824
|
)
|
|
|
|
|
$
|
(1,383
|
)
|
|
$
|
(824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Gains (Losses)
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2016
|
|
|
2015
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
2,152
|
|
|
$
|
(101
|
)
|
|
|
|
|
$
|
2,152
|
|
|
$
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2016
|
2015
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(483
|
)
|
|
$
|
(1,451
|
)
|
|
|
|
|
$
|
(483
|
)
|
|
$
|
(1,451
|
)
|
Long-term borrowings are summarized as
follows (in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Kinergy operating line of credit
|
|
$
|
63,916
|
|
|
$
|
61,003
|
|
Plant term debt
|
|
|
155,070
|
|
|
|
162,622
|
|
|
|
|
218,986
|
|
|
|
223,625
|
|
Less unamortized discount
|
|
|
(1,369
|
)
|
|
|
(2,299
|
)
|
Less unamortized debt financing costs
|
|
|
(364
|
)
|
|
|
(462
|
)
|
Less short-term portion
|
|
|
(153,701
|
)
|
|
|
(17,003
|
)
|
Long-term debt
|
|
$
|
63,552
|
|
|
$
|
203,861
|
|
Kinergy Operating Line of Credit
– As of September 30, 2016, Kinergy had an available borrowing base under its credit facility of $11,084,000.
Plant Term Debt
— As of September 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. For the three months ended September
30, 2016, the Company elected to pay cash. For the nine months ended September 30, 2016, the Company elected to defer interest
payments on the term debt in the aggregate amount of $9.5 million, which was added to the outstanding loan balance.
The term loan facility
matures on September 24, 2017, and as such the Company has reclassified the outstanding balance to current liabilities. The Company
is currently pursuing alternatives to refinance the 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.
At September 30, 2016, there were approximately
$127.9 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.
Capitalized Interest
—
For the three and nine months ended September 30, 2016, the Company capitalized interest of $1.1 million related to its capital
project activity. Of this amount, approximately $0.6 million related to project activity in the prior year, which the Company considered
to be immaterial; therefore, this amount was corrected on a cumulative basis in the current period.
|
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 nine months ended September 30, 2015, certain holders exercised warrants and received an aggregate of 42,000
shares of the Company’s common stock upon payment of an aggregate of $368,000 in cash. There were no warrants exercised during
the three months ended September 30, 2015 and for the three and nine months ended September 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 September 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 236,324,000 gallons as of September 30, 2016 and
open fixed-price ethanol sales contracts valued at $9,540,000 as of September 30, 2016. The Company had open fixed-price co-product
sales contracts valued at $30,797,000 as of September 30, 2016 and open indexed-price co-product sales contracts for 142,000 tons
as of September 30, 2016. These sales contracts are scheduled to be completed throughout 2017.
Purchase Commitments
–
At September 30, 2016, the Company had indexed-price purchase contracts to purchase 20,670,000 gallons of ethanol and fixed-price
purchase contracts to purchase $10,536,000 of ethanol from its suppliers. The Company had fixed-price purchase contracts to purchase
$32,022,000 of corn from its suppliers. These purchase commitments are scheduled to be satisfied throughout 2016. In addition,
in September 2016, the Company signed an agreement to finance and construct a 5 megawatt solar project at its Madera facility.
The amount financed is up to $10.0 million, to be amortized over twenty years as part of the facility’s property tax assessments.
As of September 30, 2016, the Company had incurred $1.1 million in project costs, which is recorded in other liabilities in the
accompanying balance sheet.
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.
The Company has evaluated all outstanding
cases, including the following pending cases, and has recorded an aggregate of $3.3 million as a litigation contingency liability
with respect to its outstanding cases for amounts that are probable and estimable.
Western Sugar Cooperative
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 (“USDA”) program.
Western Sugar was one of the entities that warehoused this sugar for ARE, Inc. The suit alleges that ARE, Inc. breached a contract
with Western Sugar by failing to pay increased rates that it demanded for the storage of ARE, Inc.’s sugar, or alternatively
is due additional payment under Western Sugar’s equitable claims. Western Sugar alleges that its higher rates apply because
ARE, Inc. failed to timely order the sugar for immediate delivery, thereby allowing Western Sugar to set its own storage rates
and avoid the lower USDA contract rate that ARE, Inc. paid. Western Sugar claims damages in the amount of approximately $8.6 million.
ARE, Inc. filed answers to Western Sugar’s complaint and amended the complaint generally denying Western Sugar’s allegations
and asserting various defenses, including that ARE Inc. never entered into a storage contract with Western Sugar, that ARE, Inc.
paid the rate that Western Sugar was due under the governing USDA contract documents, or alternatively that ARE, Inc. paid a reasonable
rate and that Western Sugar’s claimed rates constitute an impermissible penalty. The Company filed a motion for summary judgment
seeking a determination that Western Sugar’s four claims fail as a matter of law. The court granted the motion in part and
dismissed one claim, while finding that disputed factual matters remain for trial on Western Sugar’s other three claims.
A trial date has not yet been scheduled, but is expected in the first half of 2017.
GS CleanTech Corporation
On May 24, 2013, GS CleanTech Corporation
(“GS CleanTech”), filed a suit in the United States District Court for the Eastern District of California, Sacramento
Division (Case No.: 2:13-CV-01042-JAM-AC), naming Pacific Ethanol, Inc. as a defendant. On August 29, 2013, the case was transferred
to the United States District Court for the Southern District of Indiana and made part of the pre-existing multi-district litigation
involving GS CleanTech and multiple defendants. The suit alleged infringement of a patent assigned to GS CleanTech by virtue of
certain corn oil separation technology in use at one or more of the ethanol production facilities in which the Company has an interest,
including Pacific Ethanol Stockton LLC (“PE Stockton”), located in Stockton, California. The complaint sought preliminary
and permanent injunctions against the Company, prohibiting future infringement on the patent owned by GS CleanTech and damages
in an unspecified amount adequate to compensate GS CleanTech for the alleged patent infringement, but in any event no less than
a reasonable royalty for the use made of the inventions of the patent, plus attorneys’ fees. The Company answered the complaint,
counterclaimed that the patent claims at issue, as well as the claims in several related patents, are invalid and unenforceable
and that the Company is not infringing. Pacific Ethanol, Inc. does not itself use any corn oil separation technology and may seek
a dismissal on those grounds.
On March 17 and March 18, 2014, GS CleanTech
filed suit naming as defendants two Company subsidiaries: PE Stockton and Pacific Ethanol Magic Valley, LLC (“PE Magic Valley”).
The claims were similar to those filed against Pacific Ethanol, Inc. in May 2013. These two cases were transferred to the multi-district
litigation division in United States District Court for the Southern District of Indiana, where the case against Pacific Ethanol,
Inc. was pending. Although PE Stockton and PE Magic Valley do separate and market corn oil, Pacific Ethanol, Inc., PE Stockton
and PE Magic Valley strongly disagree that either of the subsidiaries use corn oil separation technology that infringes the patent
owned by GS CleanTech. In a January 16, 2015 decision, the District Court for the Southern District of Indiana ruled in favor of
a stipulated motion for partial summary judgment for Pacific Ethanol, Inc., PE Stockton and PE Magic Valley finding that all of
the GS CleanTech patents in the suit are invalid and, therefore, not infringed. GS CleanTech said it would appeal this decision
when the remaining claim in the suit has been decided. The only remaining claim alleged that GS CleanTech inequitably conducted
itself before the United States Patent and Trademark Office when obtaining the patents at issue.
A trial in the District Court for the Southern
District of Indiana was conducted in October 2015 on that single issue as well as whether GS CleanTech’s behavior during
prosecution of the patents renders this an “exceptional case” which would allow the District Court to award the Defendants
reimbursement of their attorneys’ fees expended for defense of the case.
On September 15, 2016, the District Court
issued an Order finding that GS CleanTech, the inventors and GS CleanTech’s counsel committed inequitable conduct in the
prosecution of the GS CleanTech patents before the United States Patent and Trademark Office. As a result, the District Court issued
a Final Judgment on September 15, 2016 dismissing with prejudice all of GS CleanTech’s cases against the Defendants, including
Pacific Ethanol, Inc., PE Stockton and PE Magic Valley. The District Court’s ruling of inequitable conduct results in
the unenforceability of the GS CleanTech patents against third parties, and also enables the Defendants to pursue reimbursement
of their costs and attorneys’ fees from GS CleanTech and its counsel. The Company believes that GS CleanTech may appeal the
District Court’s rulings as well as its earlier decision that the GS CleanTech patents are invalid.
The Company did not record a provision
for these matters as of December 31, 2015 as the District Court had ruled that all of the GS CleanTech patents in the suit are
invalid and, therefore, not infringed. Further, the Company believes a material adverse ruling on appeal against Pacific Ethanol,
Inc., PE Stockton and/or PE Magic Valley is not probable.
|
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 prior to 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 September 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 nine months ended September 30, 2016, the Pension Plan’s net periodic expense was $87,000,
comprised of $516,000 in interest cost and $168,000 in service cost, partially offset by $597,000 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 September 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 nine months ended September 30, 2016, the Postretirement Plan’s net
periodic expense was $141,000, comprised of $105,000 of interest cost and $36,000 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
in December 2011 and July 2012 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 September 30, 2016 were as follows:
Original Issuance
|
|
Exercise Price
|
|
|
Volatility
|
|
|
Risk Free Interest Rate
|
|
|
Term (years)
|
|
|
Market Discount
|
|
|
Warrants Outstanding
|
|
|
Fair Value
|
|
7/3/2012
|
|
$
|
6.09
|
|
|
|
46.3%
|
|
|
|
0.52%
|
|
|
|
0.76
|
|
|
|
15.7%
|
|
|
|
211,000
|
|
|
$
|
296,000
|
|
12/13/2011
|
|
$
|
8.43
|
|
|
|
37.7%
|
|
|
|
0.25%
|
|
|
|
0.20
|
|
|
|
6.7%
|
|
|
|
138,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
326,000
|
|
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
|
|
7/3/2012
|
|
$
|
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 September 30, 2016 (in thousands):
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments (1)
|
|
$
|
3,242
|
|
|
$
|
3,242
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
$
|
3,242
|
|
|
$
|
3,242
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants (3)
|
|
$
|
(326
|
)
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
(326
|
)
|
Derivative financial instruments (4)
|
|
|
(3,492
|
)
|
|
|
(3,492
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
(3,818
|
)
|
|
$
|
(3,492
|
)
|
|
$
|
–
|
|
|
$
|
(326
|
)
|
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 September
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
|
|
|
53
|
|
Balance, September 30, 2016
|
|
$
|
326
|
|
The following tables compute basic and
diluted earnings per share (in thousands, except per share data):
|
|
Three Months Ended September 30, 2016
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Pacific Ethanol
|
|
$
|
(3,518
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(319
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(3,837
|
)
|
|
|
42,226
|
|
|
$
|
(0.09
|
)
|
|
|
Three Months Ended September 30, 2015
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Pacific Ethanol
|
|
$
|
(14,663
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(319
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(14,982
|
)
|
|
|
41,861
|
|
|
$
|
(0.36
|
)
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Pacific Ethanol
|
|
$
|
(11,658
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(949
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(12,607
|
)
|
|
|
42,156
|
|
|
$
|
(0.30
|
)
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Pacific Ethanol
|
|
$
|
(18,033
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(946
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(18,979
|
)
|
|
|
30,170
|
|
|
$
|
(0.63
|
)
|
There were an aggregate of 731,000 and
679,000 potentially dilutive weighted-average shares from the Company’s warrants and shares of Series B Cumulative Convertible
Preferred Stock outstanding for the three and nine months ended September 30, 2016, respectively. These convertible securities
were not considered in calculating net loss per share for the three and nine months ended September 30, 2016, as their effect would
have been anti-dilutive.
|
11.
|
RELATED PARTY TRANSACTION.
|
During
the three months ended September 30, 2016, the Company entered into a contract to purchase corn from Watermark Farms, Inc., a company
owned jointly by one of the Company’s unaffiliated grain procurement agents and a director of the Company. The total delivered
price of $128,063 is expected to be settled by the end of 2016. At September 30, 2016, there were no amounts payable by the Company
under these arrangements
.
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. The Pacific Ethanol Central plants were 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 third quarter of 2016, we continued
to experience improved crush margins, which reflect ethanol and co-product sales prices relative to production inputs such as corn
and natural gas. Our results in the third quarter, however, were negatively impacted by higher beginning inventory valuation, lower
margins in our ethanol trading business resulting from the intra-quarter drop in ethanol prices, significant repair expenses at
our Pekin facility and non-cash mark-to-market adjustments related to our open hedge positions.
We have increased our production capacity
utilization by approximately ten percent and we are nearing an annual run rate of nearly 1.0 billion total gallons sold from our
expanded production and marketing platform.
Domestic and global demand for ethanol as
a preferred high-octane, low-carbon fuel source continues to be strong. Daily production industry run rates have recently declined
and the number of days of supply on hand recently reached its lowest levels of the year, contributing to a tight supply and demand
balance. Corn prices remain stable, at around $3.50 per bushel, as farmers expect to harvest the largest U.S. corn crop ever, while
ethanol prices have remained firm, supporting an improved margin environment. Fourth quarter margins have thus far been stronger
than average margins in the third quarter.
Net exports of ethanol remain robust and
are on track to exceed 2015 levels, with an expectation of up to 1.0 billion gallons exported in 2016. Ethanol remains the lowest
cost and cleanest source of octane to meet the growing demand for octane worldwide.
The Environmental Protection Agency, or
EPA, recently submitted its final 2017 blending targets for the national Renewable Fuel Standard, proposing to increase conventional
renewable fuel to 14.8 billion gallons in 2017 from 14.3 billion gallons in 2016. The EPA expects blending to rise from 10.1% of
U.S. fuel supplies in 2016 to 10.4% in 2017, demonstrating that the industry is moving beyond the so-called 10% “blend wall”.
In addition, we expect Renewable Identification Number, or RIN, surpluses to decline in 2017, sending price signals to incorporate
higher physical volumes of ethanol into the U.S. fuel supply.
The regulatory environment continues to
support long-term demand for renewable fuels and investments in new technologies that improve carbon scores and generate higher
premiums on the ethanol we produce. 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
$0.08 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.
We see a supportive environment for ethanol
into 2017 given strong ethanol demand and a record corn crop. We also expect domestic ethanol demand to strengthen as E15 expands,
driven by new infrastructure and higher blend levels mandated by the national Renewal Fuel Standard.
We continue to focus on implementing plant
improvement projects to optimize our production, lower our carbon score and produce meaningful near-term returns.
During the third quarter, we received the
first ever approved registration from the EPA for producing cellulosic ethanol from corn fiber at our Stockton plant, qualifying
this ethanol for special premiums over conventional ethanol. We are targeting yield increases of greater than 2% and anticipate
producing over 1.0 million gallons of cellulosic ethanol at this facility annually. Through high-value D3 RINs, carbon credits
under California’s Low Carbon Fuel Standard and the federal Second Generation Biofuel Producer tax credit, we expect to achieve
premiums of at least $2.00 per gallon for this cellulosic ethanol. We are evaluating whether to expand corn fiber cellulosic ethanol
production to our other facilities and 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 contracted to install a five megawatt
solar photovoltaic power system at our Madera plant, the first ever commercial solar power system installed at a U.S. ethanol facility.
We expect the system to lower our operating costs by displacing one-third of the grid electricity currently used. We also recently
initiated start-up of an industrial scale membrane system at our Madera facility that separates water from ethanol during the plant’s
dehydration process. We expect these technologies to increase operating efficiencies, lower production costs and reduce the carbon
intensity of ethanol produced at our Madera facility, further driving premium pricing on ethanol produced at the facility.
We are also working on cogeneration technology
at our Stockton plant that will convert process waste gas and natural gas into electricity and steam, lowering air emissions and
energy costs by an estimated $3.0 million to $4.0 million per year. We expect to begin commercial operations of this technology
in December.
We intend to continue to leverage our diverse
base of production and marketing assets to expand our share of the renewable fuels and ethanol co-product markets. We also intend
to continue to invest in plant improvement initiatives using innovative technologies that generate meaningful near-term returns
by improving plant efficiencies, reducing our carbon score and enhancing our profitability.
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
September 30,
|
|
|
Percentage
|
|
|
Nine
Months Ended
September 30,
|
|
|
Percentage
|
|
|
2016
|
|
|
2015
|
|
|
Variance
|
|
|
2016
|
|
|
2015
|
|
|
Variance
|
Production gallons sold (in millions)
|
|
|
|
|
|
|
125.5
|
|
|
|
109.6
|
|
|
|
14.5%
|
|
|
|
360.9
|
|
|
|
201.7
|
|
|
78.9%
|
Third party gallons sold
(in millions)
|
|
|
|
|
|
|
118.2
|
|
|
|
102.0
|
|
|
|
15.9%
|
|
|
|
322.6
|
|
|
|
286.3
|
|
|
12.7%
|
Total gallons sold (in millions)
|
|
|
|
|
|
|
243.7
|
|
|
|
211.6
|
|
|
|
15.2%
|
|
|
|
683.5
|
|
|
|
488.0
|
|
|
40.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production capacity utilization
|
|
|
|
|
|
|
96%
|
|
|
|
87%
|
|
|
|
10.3%
|
|
|
|
92%
|
|
|
|
90%
|
|
|
2.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price per gallon
|
|
|
|
|
|
$
|
1.62
|
|
|
$
|
1.67
|
|
|
|
(3.0)%
|
|
|
$
|
1.63
|
|
|
$
|
1.69
|
|
|
(3.6)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn cost per bushel – CBOT equivalent
|
|
|
|
|
|
$
|
3.58
|
|
|
$
|
3.83
|
|
|
|
(6.5)%
|
|
|
$
|
3.70
|
|
|
$
|
3.81
|
|
|
(2.9)%
|
Average basis
(1)
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.37
|
|
|
|
(32.4)%
|
|
|
$
|
0.27
|
|
|
$
|
0.62
|
|
|
(56.5)%
|
Delivered cost of corn
|
|
|
|
|
|
$
|
3.83
|
|
|
$
|
4.20
|
|
|
|
(8.8)%
|
|
|
$
|
3.97
|
|
|
$
|
4.43
|
|
|
(10.4)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total co-product tons sold (in thousands)
|
|
|
|
|
|
|
702.1
|
|
|
|
670.0
|
|
|
|
4.8%
|
|
|
|
2,050.3
|
|
|
|
1,398.1
|
|
|
46.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Co-product
revenues as % of delivered cost of corn
(2)
|
|
|
|
|
|
|
35.7%
|
|
|
|
38.0%
|
|
|
|
(6.1)%
|
|
|
|
35.3%
|
|
|
|
35.8%
|
|
|
(1.4)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average CBOT ethanol price per gallon
|
|
|
|
|
|
$
|
1.49
|
|
|
$
|
1.51
|
|
|
|
(1.3)%
|
|
|
$
|
1.49
|
|
|
$
|
1.53
|
|
|
(2.6)%
|
Average CBOT corn price per
bushel
|
|
|
|
|
|
$
|
3.31
|
|
|
$
|
3.83
|
|
|
|
(13.6)%
|
|
|
$
|
3.62
|
|
|
$
|
3.78
|
|
|
(4.2)%
|
__________________________
|
(1)
|
Corn basis represents the difference between the immediate cash price of delivered
corn and the future price of corn for Chicago delivery.
|
|
(2)
|
Co-product revenues as a percentage of delivered cost of corn shows our yield
based on sales of co-products, including WDG and corn oil, generated from ethanol we produced.
|
Net Sales, Cost
of Goods Sold and Gross Profit
The following table
presents our net sales, cost of goods sold and gross profit in dollars and gross profit as a percentage of net sales (in thousands,
except percentages):
|
|
Three
Months Ended
September 30,
|
|
|
Variance
in
|
|
|
Nine
Months Ended
September 30,
|
|
|
Variance
in
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
417,806
|
|
|
$
|
380,622
|
|
|
$
|
37,184
|
|
|
|
9.8%
|
|
|
$
|
1,183,039
|
|
|
$
|
814,419
|
|
|
$
|
368,620
|
|
|
|
45.3%
|
|
Cost of goods sold
|
|
|
411,442
|
|
|
|
388,002
|
|
|
|
23,440
|
|
|
|
6.0%
|
|
|
|
1,157,902
|
|
|
|
816,532
|
|
|
|
341,370
|
|
|
|
41.8%
|
|
Gross profit (loss)
|
|
$
|
6,364
|
|
|
$
|
(7,380
|
)
|
|
$
|
13,744
|
|
|
|
NM
|
|
|
$
|
25,137
|
|
|
$
|
(2,113
|
)
|
|
$
|
27,250
|
|
|
|
NM
|
|
Percentage
of net sales
|
|
|
1.5%
|
|
|
|
(1.9)%
|
|
|
|
|
|
|
|
|
|
|
|
2.1%
|
|
|
|
(0.3)%
|
|
|
|
|
|
|
|
|
|
Net Sales
The increase in our net
sales for the three and nine months ended September 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 nine months ended September 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
September 30, 2016
On a consolidated basis,
our average sales price per gallon decreased 3.0% to $1.62 for the three months ended September 30, 2016 compared to our average
sales price per gallon of $1.67 for the same period in 2015. The average Chicago Board of Trade, or CBOT, ethanol price per gallon,
declined 1.3% to $1.49 for the three months ended September 30, 2016 as compared to the 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 $19.1 million, or 10%, to $201.2 million for the three months ended September 30, 2016
as compared to $182.1 million for the same period in 2015. Our total volume of production ethanol gallons sold increased by 15.9
million gallons, or 15%, to 125.5 million gallons for the three months ended September 30, 2016 as compared to 109.6 million gallons
for the same period in 2015. Our production segment’s average sales price per gallon decreased 3.3% to $1.48 for the three
months ended September 30, 2016 compared to our production segment’s average sales price per gallon of $1.53 for the same
period in 2015. At our production segment’s average sales price per gallon of $1.48 for the three months ended September
30, 2016, we generated $23.5 million in additional net sales from our production segment from the 15.9 million additional gallons
of produced ethanol sold in the three months ended September 30, 2016 as compared to the same period in 2015. The decline of $0.05
in our average sales price per gallon for the three months ended September 30, 2016 as compared to the same period in 2015 reduced
our net sales of ethanol from our production segment by $4.4 million.
Net sales of co-products
decreased $1.1 million, or 2%, to $64.1 million for the three months ended September 30, 2016 as compared to $65.2 million for
the same period in 2015. Our total volume of co-products sold increased by 32.1 thousand tons, or 5%, to 702.1 thousand tons for
three months ended September 30, 2016 from 670.0 thousand tons for the same period in 2015. At our average sales price per ton
of $86.97 for the three months ended September 30, 2016, we generated $2.8 million in additional net sales from the 32.1 thousand
additional tons of co-products sold in the three months ended September 30, 2016 as compared to the same period in 2015. In addition,
the decrease of $6.05, or 7%, in our average sales price per ton for the three months ended September 30, 2016 as compared to the
same period in 2015 reduced net sales of co-products by $3.9 million.
Marketing Segment
Net sales of ethanol from our marketing
segment increased by $16.9 million, or 13%, to $147.9 million for the three months ended September 30, 2016 as compared to $131.0
million for the same period in 2015. Our total volume of ethanol gallons sold by our marketing segment increased by 32.1 million
gallons, or 15%, to 243.7 million gallons for the three months ended September 30, 2016 as compared to 211.6 million gallons for
the same period in 2015. Our additional production gallons sold accounted for 15.9 million gallons of this increase, as noted above,
our additional third-party gallons sold accounted for 14.1 million gallons of this increase, and our additional agent gallons accounted
for 2.1 million gallons of this increase.
The increase in production gallons sold
by our marketing segment contributed an additional $0.2 million in net sales generated by our marketing segment, which were eliminated
upon consolidation.
Our marketing segment’s average sales
price per gallon decreased 4.6% to $1.65 for the three months ended September 30, 2016 as compared to $1.73 for the same period
in 2015. At our average sales price per gallon of $1.65 for the three months ended September 30, 2016, we generated $23.2 million
in additional net sales from our marketing segment from the 14.1 million gallons in additional third-party ethanol sold in the
three months ended September 30, 2016 as compared to the same period in 2015.
Nine Months Ended
September 30, 2016
On a consolidated basis,
our average sales price per gallon decreased 3.6% to $1.63 for the nine months ended September 30, 2016 compared to our average
sales price per gallon of $1.69 for the same period in 2015. The average CBOT ethanol price per gallon declined 2.6% to $1.49 for
the nine months ended September 30, 2016 compared to an average CBOT ethanol price per gallon of $1.53 for the same period in 2015.
Production Segment
Net sales of ethanol
from our production segment increased by $235.9 million, or 70%, to $574.9 million for the nine months ended September 30, 2016
as compared to $339.0 million for the same period in 2015. Our total volume of production ethanol gallons sold increased by 159.2
million gallons, or 79%, to 360.9 million gallons for the nine months ended September 30, 2016 as compared to 201.7 million gallons
for the same period in 2015. Our production segment’s average sales price per gallon decreased 4.2% to $1.58 for the nine
months ended September 30, 2016 compared to our production segment’s average sales price per gallon of $1.65 for the same
period in 2015. Of the additional 159.2 million gallons of ethanol sold in the nine months ended September 30, 2016, an aggregate
of 164.7 million gallons were attributable to production at our Midwestern plants which we acquired on July 1, 2015, slightly offset
by 5.5 million fewer gallons produced at our Western plants. At our production segment’s average sales price per gallon of
$1.58 for the nine months ended September 30, 2016, we generated $251.5 million in additional net sales from our production segment
from the 159.2 million additional gallons of produced ethanol sold in the nine months ended September 30, 2016 as compared to the
same period in 2015. The decline of $0.07 in our average sales price per gallon for the nine months ended September 30, 2016 as
compared to the same period in 2015 reduced our net sales of ethanol from our production segment by $15.6 million.
Net sales of co-products
increased $73.2 million, or 63%, to $189.0 million for the nine months ended September 30, 2016 as compared to $115.8 million for
the same period in 2015. Our total volume of co-products sold increased by 652.2 thousand tons, or 47%, to 2,050.3 thousand tons
for nine months ended September 30, 2016 from 1,398.1 thousand tons for the same period in 2015. At our average sales price per
ton of $87.56 for the nine months ended September 30, 2016, we generated $57.1 million in additional net sales from the 652.2 thousand
additional tons of co-products sold in the nine months ended September 30, 2016 as compared to the same period in 2015. In addition,
the increase of $7.72, or 10%, in our average sales price per ton for the nine months ended September 30, 2016 as compared to the
same period in 2015 increased net sales of co-products by $16.1 million.
Marketing Segment
Net sales of ethanol from our marketing
segment increased by $52.5 million, or 15%, to $406.0 million for the nine months ended September 30, 2016 as compared to $353.5
million for the same period in 2015. Our total volume of ethanol gallons sold by our marketing segment increased by 195.5 million
gallons, or 40%, to 683.5 million gallons for the nine months ended September 30, 2016 as compared to 488.0 million gallons for
the same period in 2015. Our additional production gallons sold accounted for 159.2 million gallons of this increase, as noted
above, and our additional third-party gallons sold accounted for 36.3 million gallons of this increase.
The increase in production gallons sold
by our marketing segment contributed an additional $2.5 million in net sales generated by our marketing segment, which were eliminated
upon consolidation.
Our marketing segment’s average sales
price per gallon decreased 2.3% to $1.68 for the nine months ended September 30, 2016 compared to $1.72 for the same period in
2015. At our average sales price per gallon of $1.68 for the nine months ended September 30, 2016, we generated $60.7 million in
additional net sales from our marketing segment from the 36.3 million gallons in additional third-party ethanol sold in the nine
months ended September 30, 2016 as compared to the same period in 2015. However, the decline of $0.04 in our average sales price
per gallon for the nine months ended September 30, 2016 as compared to the same period in 2015 reduced our net sales from third
party ethanol sold by our marketing segment by $8.2 million.
Cost of Goods Sold and Gross Profit
Our consolidated gross profit increased
primarily due to improved crush margins, which reflect ethanol and co-product sales prices relative to production inputs such as
corn and natural gas, in the three and nine months ended September 30, 2016 compared to the same periods in 2015.
Three Months Ended
September 30, 2016
Our consolidated gross profit increased
to $6.4 million for the three months ended September 30, 2016 as compared to a gross loss of $7.4 million for the same period in
2015, representing a gross margin of 1.5% for the three months ended September 30, 2016 as compared to a gross margin of negative
1.9% for the same period in 2015.
Production Segment
Our production segment increased our consolidated
gross profit by $17.1 million for the three months ended September 30, 2016 as compared to the same period in 2015. Of this amount,
$16.3 million in higher gross profit is attributable to higher production margins in the three months ended September 30, 2016
as compared to the same period in 2015 and $0.8 million is attributable to the 15.9 million gallon increase in production volumes
sold in the three months ended September 30, 2016 as compared to the same period in 2015. In addition, we recorded approximately
$8.7 million in additional cost of goods sold related to purchase accounting adjustments for the three months ended September 30,
2015 associated with the Aventine acquisition. These adjustments did not recur in 2016.
Marketing Segment
Our marketing segment decreased our consolidated
gross profit by $3.4 million for the three months ended September 30, 2016 as compared to the same period in 2015. Of this amount,
$3.4 million in lower gross profit is attributable lower margins per gallon for the three months ended September 30, 2016 as compared
to the same period in 2015, which was only slightly offset by negligible additional gross profit attributable to the 16.2 million
gallon increase in third party marketing volumes in the three months ended September 30, 2016 as compared to the same period in
2015.
Nine Months Ended
September 30, 2016
Our consolidated gross profit increased
to $25.1 million for the nine months ended September 30, 2016 as compared to a gross loss of $2.1 million for the same period in
2015, representing a gross margin of 2.1% for the nine months ended September 30, 2016 as compared to a gross margin of negative
0.3% for the same period in 2015.
Production Segment
Our production segment increased our consolidated
gross profit by $22.1 million for the nine months ended September 30, 2016 as compared to the same period in 2015. Of this amount,
$15.1 million is attributed to higher production margins in the nine months ended September 30, 2016 as compared to the same period
in 2015 and $7.0 million is attributable to the 159.2 million gallon increase in production volumes sold in the nine months ended
September 30, 2016 as compared to the same period in 2015. In addition, we recorded approximately $8.7 million in additional cost
of goods sold related to purchase accounting adjustments for the nine months ended September 30, 2015 associated with the Aventine
acquisition. These adjustments did not recur in 2016.
Marketing Segment
Our marketing segment increased our consolidated
gross profit by $5.2 million for the nine months ended September 30, 2016 as compared to the same period in 2015. Of this amount,
$3.8 million is attributable to additional gross profit from our higher margins per gallon for the nine months ended September
30, 2016 as compared to the same period in 2015 and $1.4 million is attributable to additional gross profit from the 36.3 million
gallon increase in third-party marketing volumes in the nine months ended September 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
September 30,
|
|
|
Variance
in
|
|
|
Nine
Months Ended
September 30,
|
|
|
Variance
in
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
Selling, general and administrative
expenses
|
|
$
|
5,971
|
|
|
$
|
7,446
|
|
|
$
|
(1,475
|
)
|
|
|
(19.8
|
)%
|
|
$
|
20,436
|
|
|
$
|
16,344
|
|
|
$
|
4,092
|
|
|
|
25.0%
|
|
Percentage of net sales
|
|
|
1.4%
|
|
|
|
2.0%
|
|
|
|
|
|
|
|
|
|
|
|
1.7%
|
|
|
|
2.0%
|
|
|
|
|
|
|
|
|
|
Our SG&A expenses decreased $1.4 million
to $6.0 million for the three months ended September 30, 2016 as compared to $7.4 million for the same period in 2015. SG&A
expenses also decreased as a percentage of net sales for the three months ended September 30, 2016 as compared to the same period
in 2015. The decrease in SG&A expenses is primarily due to lower employee salary-related items and lower professional fees.
These reductions are due to the initial integration efforts in the comparable period in 2015, which did not recur for the three
months ended September 30, 2016, related to our Pacific Ethanol Central operations from the Aventine acquisition which occurred
on July 1, 2015. SG&A expenses were lower than our prior guidance of $7.0 million in part due to lower professional fees.
Our SG&A expenses increased $4.1 million
to $20.4 million for the nine months ended September 30, 2016 as compared to $16.3 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 for the entire nine month period
ended September 30, 2016 but which are reflected, however, only in our SG&A expenses for the three month period ended September
30, 2015 as we closed the Aventine acquisition on July 1, 2015.
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
September 30,
|
|
|
Variance
in
|
|
|
Nine
Months Ended
September 30,
|
|
|
Variance
in
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
Interest expense, net
|
|
$
|
3,874
|
|
|
$
|
5,167
|
|
|
$
|
(1,293
|
)
|
|
|
(25.0
|
)%
|
|
$
|
16,643
|
|
|
$
|
7,187
|
|
|
$
|
9,456
|
|
|
|
131.6%
|
|
Percentage of net sales
|
|
|
0.9%
|
|
|
|
1.4%
|
|
|
|
|
|
|
|
|
|
|
|
1.4%
|
|
|
|
0.9%
|
|
|
|
|
|
|
|
|
|
Interest expense, net
decreased by $1.3 million to $3.9 million for the three months ended September 30, 2016 from $5.2 million for the same period in
2015. Interest expense, net increased by $9.4 million to $16.6 million for the nine months ended September 30, 2016 from $7.2 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, partially
offset by capitalized interest of $1.1 million, most of which is attributable to a catch-up accrual for the entire year related
to our large projects in process.
Loss Available
to Common Stockholders
The following table presents
our loss available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three
Months Ended
September 30,
|
|
|
Variance
in
|
|
|
Nine
Months Ended
September 30,
|
|
|
Variance
in
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Dollars
|
|
|
Percent
|
|
Loss available to common stockholders
|
|
$
|
(3,837
|
)
|
|
$
|
(14,982
|
)
|
|
$
|
(11,145
|
)
|
|
|
(74.4)%
|
|
|
$
|
(12,607
|
)
|
|
$
|
(18,979
|
)
|
|
$
|
(6,372
|
)
|
|
|
(33.6)%
|
|
Percentage of net sales
|
|
|
(0.9)%
|
|
|
|
(3.9)%
|
|
|
|
|
|
|
|
|
|
|
|
(1.1)%
|
|
|
|
(2.3)%
|
|
|
|
|
|
|
|
|
|
The improvement in net
loss available to common stockholders for the three and nine months ended September 30, 2016, as compared to 2015, is due to improved
crush margins and lower SG&A expenses in the three months ended September 30, 2016.
Liquidity and Capital Resources
During the nine months ended September 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. We have reclassified $155.1 million of long-term debt to current
liabilities as the maturity date of the debt associated with our Pacific Ethanol Central plants is now within one year. We
are currently pursuing alternatives to refinance this debt and intend to refinance the debt to long-term debt well before
its maturity date in September 2017.
Quantitative Quarter-End
Liquidity Status
We believe that the following
amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in
conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this
report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
contained in this report (dollars in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
Change
|
|
Cash and cash equivalents
|
|
$
|
40,639
|
|
|
$
|
52,712
|
|
|
|
(22.9)%
|
|
Current assets
|
|
$
|
197,218
|
|
|
$
|
197,942
|
|
|
|
(0.4)%
|
|
Current liabilities
|
|
$
|
213,099
|
|
|
$
|
72,909
|
|
|
|
192.3%
|
|
Long-term debt, net of current portion
|
|
$
|
63,552
|
|
|
$
|
203,861
|
|
|
|
(68.8)%
|
|
Working capital
|
|
$
|
(15,881
|
)
|
|
$
|
125,033
|
|
|
|
NM
|
|
Working capital ratio
|
|
|
0.93
|
|
|
|
2.71
|
|
|
|
(65.7)%
|
|
Restricted Net Assets
At September 30, 2016, we had approximately
$127.9 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 decreased to negative $15.9
million at September 30, 2016 from $125.0 million at December 31, 2015 primarily as a result of our reclassification of $155.1
million of long-term debt to current liabilities as the maturity date of the debt associated with our Pacific Ethanol Central plants
is now within one year.
Our cash and cash equivalents declined by
$12.1 million at September 30, 2016 as compared to December 31, 2015 due to $9.9 million of cash used in our investing activities
and $17.2 million of cash used in our financing activities, partially offset by cash flows from operations of $15.0 million, as
discussed below.
Our current liabilities increased by $140.2
million primarily due to our reclassification of the long-term debt associated with our Pacific Ethanol Central plants to current
liabilities, as discussed above, and an increase in derivative instruments of $1.6 million.
Cash Provided by our Operating Activities
Cash provided by our operating activities
increased by $32.5 million for the nine months ended September 30, 2016 as compared to the same period in 2015. The increase in
cash provided by our operating activities is primarily due to a lower net loss resulting from improved margins and the following
additional factors:
|
·
|
an increase in depreciation and amortization of $11.4 million due to additional assets subject to depreciation and amortization
from our acquisition of Aventine;
|
|
·
|
interest expense added to term debt of $9.5 million;
|
|
·
|
a decrease in accounts payable and accrued expenses of $6.2 million primarily due to the timing of payables; and
|
|
·
|
a decrease in prepaid expenses and other assets of $6.9 million primarily due to income tax refunds.
|
These amounts were partially offset by:
|
·
|
an increase in accounts receivable of $1.8 million primarily due to higher sales volumes attributable to our new Pacific Ethanol
Central operations; and
|
|
·
|
an increase in inventory and prepaid inventory of $6.1 million primarily due to higher sales volumes attributable to our new
Pacific Ethanol Central operations.
|
Cash used in our Investing Activities
Cash used in our investing activities increased
by $6.4 million for the nine months ended September 30, 2016 as compared to the same period in 2015. The increase in cash used
in our investing activities is primarily due to net cash of $18.8 million acquired in connection with our acquisition of Aventine
upon closing the transaction for the nine months ended September 30, 2015, which did not recur for the same period in 2016, as
well as $4.1 million in proceeds from cash collateralized letters of credit for the nine months ended September 30, 2016 as compared
to $4.6 million in purchases of cash collateralized letters of credit for the same period in 2015. In addition, we spent $3.6 million
less on capital projects for the nine months ended September 30, 2016 as compared to the same period in 2015.
Cash used in our Financing Activities
Cash used in our financing activities increased
by $29.1 million for the nine months ended September 30, 2016 as compared to the same period in 2015. The increase in cash used
in our financing activities is primarily due to a $26.8 million reduction in proceeds from our Kinergy line of credit and a $17.0
million principal payment on our term debt associated with the Pacific Ethanol West plants.
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
September 30,
|
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio Requirement
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
Actual
|
|
|
9.38
|
|
|
|
12.24
|
|
|
|
10.02
|
|
|
|
17.66
|
|
Excess
|
|
|
7.38
|
|
|
|
10.24
|
|
|
|
8.02
|
|
|
|
15.66
|
|
Pacific Ethanol has guaranteed all of Kinergy’s
obligations under the credit facility. As of September 30, 2016, Kinergy had an outstanding balance of $63.9 million and an available
borrowing base under the credit facility of $75.0 million, representing $11.1 million of excess availability under the credit facility.
Pacific Ethanol Central Term Debt
On July 1, 2015, upon
effectiveness of the Aventine acquisition, each of Aventine’s subsidiaries became our direct or indirect wholly-owned subsidiaries
and, on a consolidated basis, the combined company became obligated with respect to Pacific Ethanol Central’s term loan.
Pacific Ethanol Central’s creditors under its term loan have recourse solely against Pacific Ethanol Central’s assets
and not against Pacific Ethanol, Inc. or its other direct or indirect subsidiaries.
As of September 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 months ended September 30, 2016, we elected to pay in cash the interest payments on the
term debt in the aggregate amount of $4.2 million. The term loan facility matures on September 24, 2017. The term loan facility
is secured through a first-priority lien on substantially all of Pacific Ethanol Central’s assets and contains customary
financial covenants, and a requirement that the Pacific Ethanol Central entities 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
nine months ended September 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 nine months ended September 30, 2016
and 2015.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to various market risks,
including changes in commodity prices and interest rates as discussed below. Market risk is the potential loss arising from adverse
changes in market rates and prices. In the ordinary course of business, we may enter into various types of transactions involving
financial instruments to manage and reduce the impact of changes in commodity prices and interest rates. We do not expect to have
any exposure to foreign currency risk as we conduct all of our transactions in U.S. dollars.
Commodity Risk
We produce ethanol and ethanol co-products.
Our business is sensitive to changes in the prices of each of ethanol and corn. In the ordinary course of business, we may enter
into various types of transactions involving financial instruments to manage and reduce the impact of changes in ethanol and corn
prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
We are subject to market risk with respect
to ethanol pricing. Ethanol prices are sensitive to global and domestic ethanol supply, crude-oil supply and demand; crude-oil
refining capacity; carbon intensity; government regulation; and consumer demand for alternative fuels. Our ethanol sales are priced
using contracts that are either based on a fixed price or an indexed price tied to a specific market, such as CBOT or the Oil Price
Information Service. Under these fixed-priced arrangements, we are exposed to risk of a decrease in the market price of ethanol
between the time the price is fixed and the time the ethanol is sold.
We satisfy our physical corn needs, the
principal raw material used to produce ethanol and ethanol co-products, based on supply-guaranteed contracts with our vendors.
Generally, we determine the purchase price of our corn at the time we begin to grind that day’s needs. Sometimes, we may
also enter into contracts with our vendors to fix a portion of the purchase price of our corn requirements. As such, we are also
subject to market risk with respect to the price of corn. The price of corn is subject to wide fluctuations due to unpredictable
factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international
trade and global supply and demand. Under the fixed-price arrangements, we assume the risk of a decrease in the market price of
corn between the time this price is fixed and the time the corn is utilized.
Ethanol co-products are sensitive to various
demand factors such as numbers of livestock on feed, prices for feed alternatives, and supply factors, primarily production of
ethanol co-products by ethanol plants and other sources.
As noted above, we may attempt to reduce
the market risk associated with fluctuations in the price of ethanol or corn by employing a variety of risk management and hedging
strategies. Strategies include the use of derivative financial instruments such as futures and options executed on the CBOT and/or
the New York Mercantile Exchange, as well as the daily management of physical corn.
These derivatives are not designated for
special hedge accounting treatment, and as such, the changes in the fair values of these contracts are recorded on the balance
sheet and recognized immediately in cost of goods sold. We recognized gains of $2.2 million and losses of $0.1 million related
to settled non-designated hedges as the change in the fair values of these contracts for the nine months ended September 30, 2016
and 2015, respectively.
At September 30, 2016, we prepared a sensitivity
analysis to estimate our exposure to ethanol and corn. Market risk related to these factors was estimated as the potential change
in pre-tax income resulting from a hypothetical 10% adverse change in the prices of our expected ethanol and corn volumes. The
results of this analysis as of September 30, 2016, which may differ materially from actual results, are as follows (in millions):
Commodity
|
|
Nine
Months Ended September 30,
2016
Volume
|
Unit
of
Measure
|
|
Approximate
Adverse
Change to
Pre-Tax
Income
|
|
Ethanol
|
|
|
683.50
|
|
|
Gallons
|
|
$
|
58.8
|
|
Corn
|
|
|
128.9
|
|
|
Bushels
|
|
$
|
49.4
|
|
Interest Rate Risk
We are exposed to market risk from changes
in interest rates. Exposure to interest rate risk results primarily from our indebtedness that bears interest at variable rates.
At September 30, 2016, all of our long-term debt of $219.0 million was variable-rate in nature. Based on a 100 basis point (1.00%)
change in the interest rate on our long-term debt, pre-tax income for the nine months ended September 30, 2016 would be negatively
impacted by approximately $1.6 million.
ITEM 4. CONTROLS AND
PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
We conducted an evaluation
under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls
and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange
Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by
the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company
in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded as of September 30, 2016 that our disclosure controls and procedures were effective at a reasonable assurance
level.
Changes
in Internal Control over Financial Reporting
There has been no change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently
completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Inherent Limitations on the Effectiveness
of Controls
Management does not expect
that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors
and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations
in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will
be detected.
These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or
mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls
may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to legal proceedings, claims
and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability
cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible that the outcome of
those legal proceedings, claims and litigation could adversely affect our quarterly or annual operating results or cash flows when
resolved in a future period. However, based on facts currently available, management believes such matters will not adversely affect
in any material respect our financial position, results of operations or cash flows.
We have evaluated all outstanding cases,
including the following pending cases, and have recorded an aggregate of $3.3 million as a litigation contingency with respect
to our outstanding cases for amounts that are probable and estimable.
Western Sugar Cooperative
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 (“USDA”) program.
Western Sugar was one of the entities that warehoused this sugar for ARE, Inc. The suit alleges that ARE, Inc. breached a contract
with Western Sugar by failing to pay increased rates that it demanded for the storage of ARE, Inc.’s sugar, or alternatively
is due additional payment under Western Sugar’s equitable claims. Western Sugar alleges that its higher rates apply because
ARE, Inc. failed to timely order the sugar for immediate delivery, thereby allowing Western Sugar to set its own storage rates
and avoid the lower USDA contract rate that ARE Inc. paid. Western Sugar claims damages in the amount of approximately $8.6 million.
ARE, Inc. filed answers to Western Sugar’s complaint and amended the complaint generally denying Western Sugar’s allegations
and asserting various defenses, including that ARE, Inc. never entered into a storage contract with Western Sugar, that ARE, Inc.
paid the rate that Western Sugar was due under the governing USDA contract documents, or alternatively that ARE, Inc. paid a reasonable
rate and that Western Sugar’s claimed rates constitute an impermissible penalty. We filed a motion for summary judgment seeking
a determination that Western Sugar’s four claims fail as a matter of law. The court granted the motion in part and dismissed
one claim, while finding that disputed factual matters remain for trial on Western Sugar’s other three claims. A trial date
has not yet been scheduled, but is expected in the first half of 2017.
GS CleanTech Corporation
On May 24, 2013, GS CleanTech Corporation,
or GS CleanTech, filed a suit in the United States District Court for the Eastern District of California, Sacramento Division (Case
No.: 2:13-CV-01042-JAM-AC), naming Pacific Ethanol, Inc. as a defendant. On August 29, 2013, the case was transferred to the United
States District Court for the Southern District of Indiana and made part of the pre-existing multi-district litigation involving
GS CleanTech and multiple defendants. The suit alleged infringement of a patent assigned to GS CleanTech by virtue of certain corn
oil separation technology in use at one or more of the ethanol production facilities in which we have an interest, including Pacific
Ethanol Stockton LLC, or PE Stockton, located in Stockton, California. The complaint sought preliminary and permanent injunctions
against us, prohibiting future infringement on the patent owned by GS CleanTech and damages in an unspecified amount adequate to
compensate GS CleanTech for the alleged patent infringement, but in any event no less than a reasonable royalty for the use made
of the inventions of the patent, plus attorneys’ fees. We answered the complaint, counterclaimed that the patent claims at
issue, as well as the claims in several related patents, are invalid and unenforceable and that we are not infringing. Pacific
Ethanol, Inc. does not itself use any corn oil separation technology and may seek a dismissal on those grounds.
On March 17 and March 18, 2014, GS CleanTech
filed suit naming as defendants two of our subsidiaries: PE Stockton and Pacific Ethanol Magic Valley, LLC, or PE Magic Valley.
The claims were similar to those filed against Pacific Ethanol, Inc. in May 2013. These two cases were transferred to the multi-district
litigation division in United States District Court for the Southern District of Indiana, where the case against us was pending.
Although PE Stockton and PE Magic Valley do separate and market corn oil, Pacific Ethanol, Inc., PE Stockton and PE Magic Valley
strongly disagree that either of the subsidiaries use corn oil separation technology that infringes the patent owned by GS CleanTech.
In a January 16, 2015 decision, the District Court for the Southern District of Indiana ruled in favor of a stipulated motion for
partial summary judgment for Pacific Ethanol, Inc., PE Stockton and PE Magic Valley finding that all of the GS CleanTech patents
in the suit are invalid and, therefore, not infringed. GS CleanTech said it would appeal this decision when the remaining claim
in the suit has been decided. The only remaining claim alleged that GS CleanTech inequitably conducted itself before the United
States Patent and Trademark Office when obtaining the patents at issue.
A trial in the District Court for the Southern
District of Indiana was conducted in October 2015 on that single issue as well as whether GS CleanTech’s behavior during
prosecution of the patents renders this an “exceptional case” which would allow the District Court to award the Defendants
reimbursement of their attorneys’ fees expended for defense of the case.
On September 15, 2016, the District Court
issued an Order finding that GS CleanTech, the inventors and GS CleanTech’s counsel committed inequitable conduct in the
prosecution of the GS CleanTech patents before the United States Patent and Trademark Office. As a result, the District Court issued
a Final Judgment on September 15, 2016 dismissing with prejudice all of GS CleanTech’s cases against the Defendants, including
Pacific Ethanol, Inc., PE Stockton and PE Magic Valley. The District Court’s ruling of inequitable conduct results in
the unenforceability of the GS CleanTech patents against third parties, and also enables the Defendants to pursue reimbursement
of their costs and attorneys’ fees from GS CleanTech and its counsel. We believe that GS CleanTech may appeal the District
Court’s rulings as well as its earlier decision that the GS CleanTech patents are invalid.
We did not record a provision for these
matters as of December 31, 2015, or thereafter, as the District Court had ruled that all of the GS CleanTech patents in the suit
are invalid and, therefore, not infringed. Further, we believe a material adverse ruling on appeal against Pacific Ethanol, Inc.,
PE Stockton and/or PE Magic Valley is not probable.
ITEM
1A. RISK FACTORS.
Before
deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the
other information contained in this Report and in our other filings with the Securities and Exchange Commission, including subsequent
reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known
or unknown risks or uncertainties actually occurs with material adverse effects on Pacific Ethanol, our business, financial condition,
results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock will likely
decline, and you may lose all or part of your investment.
Risks Related to our Business
We have incurred significant losses and negative
operating cash flow in the past and we may incur losses and negative operating cash flow in the future, which may hamper our operations
and impede us from expanding our business.
We have incurred significant losses and
negative operating cash flow in the past. For the nine months ended September 30, 2016 and 2015, we incurred consolidated net losses
of $11.7 million and $18.1 million, respectively. For the year ended December 31, 2015, we incurred consolidated net losses of
approximately $18.9 million and incurred negative operating cash flow of $26.8 million. For 2013 and 2012, we incurred consolidated
net losses of $1.2 million and $43.4 million, respectively, and in 2012 incurred negative operating cash flow of $20.8 million.
We may incur losses and negative operating cash flow in the future. We expect to rely on cash on hand and cash, if any, generated
from our operations and from future financing activities to fund all of the cash requirements of our business. Continued losses
and negative operating cash flow may hamper our operations and impede us from expanding our business.
Our results of operations and our ability to
operate at a profit is largely dependent on managing the costs of corn and natural gas and the prices of ethanol, distillers grains
and other ethanol co-products, all of which are subject to significant volatility and uncertainty.
Our results of operations are highly impacted
by commodity prices, including the cost of corn and natural gas that we must purchase, and the prices of ethanol, distillers grains
and other ethanol co-products that we sell. Prices and supplies are subject to and determined by market and other forces over which
we have no control, such as weather, domestic and global demand, supply shortages, export prices and various governmental policies
in the United States and around the world.
As a result of price volatility of corn,
natural gas, ethanol, distillers grains and other ethanol co-products, our results of operations may fluctuate substantially. In
addition, increases in corn or natural gas prices or decreases in ethanol, distillers grains or other ethanol co-product prices
may make it unprofitable to operate. In fact, some of our marketing activities will likely be unprofitable in a market of generally
declining ethanol prices due to the nature of our business. For example, to satisfy customer demands, we maintain certain quantities
of ethanol inventory for subsequent resale. Moreover, we procure much of our inventory outside the context of a marketing arrangement
and therefore must buy ethanol at a price established at the time of purchase and sell ethanol at an index price established later
at the time of sale that is generally reflective of movements in the market price of ethanol. As a result, our margins for ethanol
sold in these transactions generally decline and may turn negative as the market price of ethanol declines.
No assurance can be given that corn or natural
gas can be purchased at, or near, current or any particular prices or that ethanol, distillers grains or other ethanol co-products
will sell at, or near, current or any particular prices. Consequently, our results of operations and financial position may be
adversely affected by increases in the price of corn or natural gas or decreases in the price of ethanol, distillers grains or
other ethanol co-products.
Over the past several years, the spread
between ethanol and corn prices has fluctuated significantly. Fluctuations are likely to continue to occur. A sustained narrow
spread, whether as a result of sustained high or increased corn prices or sustained low or decreased ethanol prices, would adversely
affect our results of operations and financial position. Further, combined revenues from sales of ethanol, distillers grains and
other ethanol co-products could decline below the marginal cost of production, which may force us to suspend production of ethanol,
distillers grains and ethanol co-products at some or all of our plants.
We may be unable to restructure or repay the
debt associated with our Pacific Ethanol Central plants acquired in the Aventine acquisition in the current aggregate amount of
$155.1 million prior to its September 24, 2017 maturity date. Our inability to timely restructure or repay this debt would result
in material adverse effects on us and certain of our direct and indirect subsidiaries.
As of November 8, 2016, our Pacific Ethanol
Central plants, which we acquired in the Aventine acquisition, had an aggregate of $155.1 million in combined term debt, all of
which is due September 24, 2017. We do not and may not have sufficient funds to repay this indebtedness prior to its maturity date.
If we are unable to timely restructure the debt or raise sufficient capital to repay the debt, the Pacific Ethanol Central plants
will be in default on the debt. Our inability to restructure or repay this debt prior to its maturity would likely have a material
adverse effect on us and certain of our direct and indirect subsidiaries, including the Pacific Ethanol Central plants, and would
likely materially and adversely harm our business, financial condition, results of operations and future prospects.
Increased ethanol production may cause a decline
in ethanol prices or prevent ethanol prices from rising, and may have other negative effects, adversely impacting our results of
operations, cash flows and financial condition.
We believe that the most significant factor
influencing the price of ethanol has been the substantial increase in ethanol production in recent years. According to the Renewable
Fuels Association, domestic ethanol production capacity increased from an annualized rate of 1.5 billion gallons per year in January
1999 to a record 14.8 billion gallons in 2015. In addition, if ethanol production margins improve, we anticipate that owners of
idle ethanol production facilities, many of which may be idled due to poor production margins, will restart operations, thereby
resulting in more abundant ethanol supplies and inventories. Any increase in the demand for ethanol may not be commensurate with
increases in the supply of ethanol, thus leading to lower ethanol prices. Also, demand for ethanol could be impaired due to a number
of factors, including regulatory developments and reduced United States gasoline consumption. Reduced gasoline consumption has
occurred in the past and could occur in the future as a result of increased gasoline or oil prices or other factors such as increased
automobile fuel efficiency. Any of these outcomes could have a material adverse effect on our results of operations, cash flows
and financial condition.
The market price of ethanol is volatile and
subject to large fluctuations, which may cause our profitability or losses to fluctuate significantly.
The market price of ethanol is volatile
and subject to large fluctuations. The market price of ethanol is dependent upon many factors, including the supply of ethanol
and the price of gasoline, which is in turn dependent upon the price of petroleum which is highly volatile and difficult to forecast.
For example, ethanol prices, as reported by the CBOT, ranged from $1.31 to $1.74 per gallon during the first nine months of 2016,
$1.31 to $1.69 per gallon during 2015 and $1.50 to $3.52 per gallon during 2014. Fluctuations in the market price of ethanol may
cause our profitability or losses to fluctuate significantly.
Some of our marketing activities will likely
be unprofitable in a market of generally declining ethanol prices due to the nature of our business.
Some of our marketing activities will likely
be unprofitable in a market of generally declining ethanol prices due to the nature of our business. For example, to satisfy customer
demands, we maintain certain quantities of ethanol inventory for subsequent resale. Moreover, we procure much of our inventory
outside the context of a marketing arrangement and therefore must buy ethanol at a price established at the time of purchase and
sell ethanol at an index price established later at the time of sale that is generally reflective of movements in the market price
of ethanol. As a result, our margins for ethanol sold in these transactions generally decline and may turn negative as the market
price of ethanol declines.
Disruptions in ethanol production infrastructure
may adversely affect our business, results of operations and financial condition.
Our business depends on the continuing availability
of rail, road, port, storage and distribution infrastructure. In particular, due to limited storage capacity at our plants and
other considerations related to production efficiencies, our plants depend on just-in-time delivery of corn. The production of
ethanol also requires a significant and uninterrupted supply of other raw materials and energy, primarily water, electricity and
natural gas. The prices of electricity and natural gas have fluctuated significantly in the past and may fluctuate significantly
in the future. Local water, electricity and gas utilities may not be able to reliably supply the water, electricity and natural
gas that our plants need or may not be able to supply those resources on acceptable terms. Any disruptions in the ethanol production
infrastructure, whether caused by labor difficulties, earthquakes, storms, other natural disasters or human error or malfeasance
or other reasons, could prevent timely deliveries of corn or other raw materials and energy and may require us to halt production
at one or more plants which could have a material adverse effect on our business, results of operations and financial condition.
We may engage in hedging transactions and other
risk mitigation strategies that could harm our results of operations.
In an attempt to partially offset the effects
of volatility of ethanol prices and corn and natural gas costs, we may enter into contracts to fix the price of a portion of our
ethanol production or purchase a portion of our corn or natural gas requirements on a forward basis. In addition, we may engage
in other hedging transactions involving exchange-traded futures contracts for corn, natural gas and unleaded gasoline from time
to time. The financial statement impact of these activities is dependent upon, among other things, the prices involved and our
ability to sell sufficient products to use all of the corn and natural gas for which forward commitments have been made. Hedging
arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults
on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential between the
underlying price in the hedging agreement and the actual prices paid or received by us. As a result, our results of operations
and financial condition may be adversely affected by fluctuations in the price of corn, natural gas, ethanol and unleaded gasoline.
Operational difficulties at our plants could
negatively impact sales volumes and could cause us to incur substantial losses.
Operations at our plants are subject to
labor disruptions, unscheduled downtimes and other operational hazards inherent in the ethanol production industry, including equipment
failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some
of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment
or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance
may not be adequate to fully cover the potential operational hazards described above or we may not be able to renew this insurance
on commercially reasonable terms or at all.
Moreover, our plants may not operate as
planned or expected. All of these facilities are designed to operate at or above a specified production capacity. The operation
of these facilities is and will be, however, subject to various uncertainties. As a result, these facilities may not produce ethanol
and its co-products at expected levels. In the event any of these facilities do not run at their expected capacity levels, our
business, results of operations and financial condition may be materially and adversely affected.
Future demand for ethanol is uncertain and may
be affected by changes to federal mandates, public perception, consumer acceptance and overall consumer demand for transportation
fuel, any of which could negatively affect demand for ethanol and our results of operations.
Although many trade groups, academics and
governmental agencies have supported ethanol as a fuel additive that promotes a cleaner environment, others have criticized ethanol
production as consuming considerably more energy and emitting more greenhouse gases than other biofuels and potentially depleting
water resources. Some studies have suggested that corn-based ethanol is less efficient than ethanol produced from other feedstock
and that it negatively impacts consumers by causing increased prices for dairy, meat and other food generated from livestock that
consume corn. Additionally, ethanol critics contend that corn supplies are redirected from international food markets to domestic
fuel markets. If negative views of corn-based ethanol production gain acceptance, support for existing measures promoting use and
domestic production of corn-based ethanol could decline, leading to reduction or repeal of federal mandates, which could adversely
affect the demand for ethanol. These views could also negatively impact public perception of the ethanol industry and acceptance
of ethanol as an alternative fuel.
There are limited markets for ethanol beyond
those established by federal mandates. Discretionary blending and E85 blending are important secondary markets. Discretionary blending
is often determined by the price of ethanol versus the price of gasoline. In periods when discretionary blending is financially
unattractive, the demand for ethanol may be reduced. Also, the demand for ethanol is affected by the overall demand for transportation
fuel. Demand for transportation fuel is affected by the number of miles traveled by consumers and the fuel economy of vehicles.
Market acceptance of E15 may partially offset the effects of decreases in transportation fuel demand. A reduction in the demand
for ethanol and ethanol co-products may depress the value of our products, erode our margins and reduce our ability to generate
revenue or to operate profitably. Consumer acceptance of E15 and E85 fuels is needed before ethanol can achieve any significant
growth in market share relative to other transportation fuels.
If we fail to integrate successfully the businesses
of Pacific Ethanol and Aventine our results of operations will be adversely affected.
The success of the Aventine acquisition
will depend, in large part, on our ability to realize the anticipated benefits from combining the businesses of Pacific Ethanol
and Aventine. To realize these anticipated benefits, we must successfully integrate the businesses of Pacific Ethanol and Aventine.
This integration has been and will continue to be complex and time-consuming.
The failure to integrate successfully and
to manage successfully the challenges presented by the integration process may result in our failure to achieve some or all of
the anticipated benefits of the acquisition.
Potential difficulties that may be encountered
in the integration process include the following:
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complexities associated with managing the larger, more complex, combined business;
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potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition; and
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performance shortfalls as a result of the diversion of management’s attention caused by integrating Pacific Ethanol’s
and Aventine’s operations.
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Our future results will suffer if we do not
effectively manage our expanded operations.
Our business following the Aventine acquisition
is significantly larger than the individual businesses of Pacific Ethanol and Aventine prior to the acquisition. Our future success
depends, in part, upon our ability to manage our expanded business, which will pose substantial challenges for our management,
including challenges related to the management and monitoring of new operations and associated increased costs and complexity.
We cannot assure you that we will be successful or that we will realize the expected operating efficiencies, annual net operating
synergies, revenue enhancements and other benefits currently anticipated to result from the acquisition.
Our level of indebtedness may make it more
difficult for us to pay or refinance our debts and we may need to divert our cash flow from operations to debt service payments.
Our indebtedness could limit our ability to pursue other strategic opportunities and could increase our vulnerability to adverse
economic and industry conditions.
Our debt service obligations could have
an adverse impact on our earnings and cash flows for as long as the indebtedness is outstanding. Our indebtedness could also have
important consequences to holders of our common stock. For example, it could:
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make it more difficult to pay or refinance our debts as they become due during adverse economic and industry conditions because
any decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled debt payments;
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limit our flexibility to pursue other strategic opportunities or react to changes in our business and the industry in which
we operate and, consequently, place us at a competitive disadvantage to our competitors who have less debt; or
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require a substantial portion of our cash flows from operations to be used for debt service payments, thereby reducing the
availability of our cash flows to fund working capital, capital expenditures, acquisitions, dividend payments and other general
corporate purposes.
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Based upon current levels of operations,
we expect to generate sufficient cash on a consolidated basis to make all principal and interest payments when such payments become
due under our existing credit facilities, indentures and other instruments governing our outstanding indebtedness, but there can
be no assurance that we will be able to repay or refinance such borrowings and obligations.
If Kinergy fails to satisfy its financial covenants
under its credit facility, it may experience a loss or reduction of that facility, which would have a material adverse effect on
our financial condition and results of operations.
We are substantially dependent on Kinergy’s
credit facility to help finance its operations. Kinergy must satisfy monthly financial covenants under its credit facility, including
fixed-charge coverage ratio covenants. Kinergy will be in default under its credit facility if it fails to satisfy any financial
covenant. A default may result in the loss or reduction of the credit facility. The loss of Kinergy’s credit facility, or
a significant reduction in Kinergy’s borrowing capacity under the facility, would result in Kinergy’s inability to
finance a significant portion of its business and would have a material adverse effect on our financial condition and results of
operations.
The United States ethanol industry is highly
dependent upon certain federal and state legislation and regulation and any changes in legislation or regulation could have a
material adverse effect on our results of operations, cash flows and financial condition.
The EPA has implemented the national Renewable
Fuel Standard, or national RFS, pursuant to the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007.
The national RFS program sets annual quotas for the quantity of renewable fuels (such as ethanol) that must be blended into motor
fuels consumed in the United States. The domestic market for ethanol is significantly impacted by federal mandates under the national
RFS program for volumes of renewable fuels (such as ethanol) required to be blended with gasoline. Future demand for ethanol will
be largely dependent upon incentives to blend ethanol into motor fuels, including the relative price of gasoline versus ethanol,
the relative octane value of ethanol, constraints in the ability of vehicles to use higher ethanol blends, the national RFS, and
other applicable environmental requirements. Any significant increase in production capacity above the national RFS minimum requirements
may have an adverse impact on ethanol prices.
Legislation aimed at reducing or eliminating
the renewable fuel use required by the national RFS has been introduced in the United States Congress. On January 21, 2015, the
Leave Ethanol Volumes at Existing Levels (LEVEL) Act
(H.R. 434) was introduced in the House. The bill would amend the national
RFS by decreasing the required volume of renewable fuels in 2015-2022 to 7.5 billion gallons per year. On February 4, 2015, the
RFS Elimination Act
(H.R. 703) was introduced in the House of Representatives. The bill would fully repeal the national
RFS. Also introduced on February 4, 2015, was the
RFS Reform Act
(H.R. 704), which prohibits corn-based ethanol from meeting
the national RFS requirements, caps the amount of ethanol that can be blended into conventional gasoline at 10%, and requires the
EPA to set requirements for cellulosic biofuels at actual production levels. On January 6, 2015, a bill (
H.R. 21
) was introduced
in the House of Representatives to, among other things, vacate any waivers issued under the Clean Air Act to allow the sale of
mid-level ethanol blends for use in motor vehicles. A mid-level ethanol blend is an ethanol-gasoline blend containing 10-20% of
ethanol by volume that is intended to be used in any conventional gasoline-powered motor vehicle or nonroad vehicle or engine.
On February 26, 2015, the
Corn Ethanol Mandate Elimination Act of 2015
(S. 577) was introduced in the Senate. The bill would
eliminate corn ethanol as qualifying as a renewable fuel under the national RFS.
The American Energy Renaissance Act of 2015
(S. 791 and H.R. 1487), which was introduced in the Senate on March 18, 2015 and the House on March 19, 2015, would phase out the
national RFS over a five-year period. The
Renewable Fuel Standard Repeal Act
(S. 1584), which would fully repeal the national
RFS, was introduced in the Senate on June 16, 2015. All of these bills were assigned to a congressional committee, which will consider
them before possibly sending any of them on to the House of Representatives or the Senate as a whole. Our operations could be adversely
impacted if any legislation is enacted that reduces or eliminates the national RFS volume requirements or that reduces or eliminates
corn ethanol as qualifying as a renewable fuel under the national RFS.
Under the provisions of the Clean Air Act,
as amended by the Energy Independence and Security Act of 2007, the EPA has limited authority to waive or reduce the mandated national
RFS requirements, which authority is subject to consultation with the Secretaries of Agriculture and Energy, and based on a determination
that there is inadequate domestic renewable fuel supply or implementation of the applicable requirements would severely harm the
economy or environment of a state, region or the United States. For 2016, the EPA reduced the national RFS from the statutory level
of 15.0 billion gallons to 14.0 billion gallons. We believe that the EPA’s decision to propose cuts to the congressionally
established volumes is based on the EPA’s perception that the nation’s refueling infrastructure is currently unable
to distribute the statutorily-required volumes to consumers. Our results of operations, cash flows and financial condition could
be adversely impacted if the EPA further reduces the national RFS requirements from the statutory levels specified in the national
RFS.
The ethanol production and marketing industry
is extremely competitive. Many of our significant competitors have greater production and financial resources and one or more of
these competitors could use their greater resources to gain market share at our expense. In addition, a number of Kinergy’s
suppliers may circumvent the marketing services we provide, causing our sales and profitability to decline.
The ethanol production and marketing industry
is extremely competitive. Many of our significant competitors in the ethanol production and marketing industry, including Archer
Daniels Midland Company and Valero Energy Corporation, have substantially greater production and/or financial resources. As a result,
our competitors may be able to compete more aggressively and sustain that competition over a longer period of time. Successful
competition will require a continued high level of investment in marketing and customer service and support. Our limited resources
relative to many significant competitors may cause us to fail to anticipate or respond adequately to new developments and other
competitive pressures. This failure could reduce our competitiveness and cause a decline in market share, sales and profitability.
Even if sufficient funds are available, we may not be able to make the modifications and improvements necessary to compete successfully.
We also face increasing competition from
international suppliers. Currently, international suppliers produce ethanol primarily from sugar cane and have cost structures
that are generally substantially lower than our cost structures. Any increase in domestic or foreign competition could cause us
to reduce our prices and take other steps to compete effectively, which could adversely affect our business, financial condition
and results of operations.
In addition, some of our suppliers are potential
competitors and, especially if the price of ethanol reaches historically high levels, they may seek to capture additional profits
by circumventing our marketing services in favor of selling directly to our customers. If one or more of our major suppliers, or
numerous smaller suppliers, circumvent our marketing services, our sales and profitability may decline.
Our ability to utilize net operating loss carryforwards
and certain other tax attributes may be limited.
Federal and state income tax laws impose
restrictions on the utilization of net operating loss, or NOL, and tax credit carryforwards in the event that an “ownership
change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code, or Code. In general, an ownership
change occurs when stockholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOL or other
loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any three-year
period. The annual base limitation under Section 382 of the Code is calculated by multiplying the loss corporation’s value
at the time of the ownership change by the greater of the long-term tax-exempt rate determined by the Internal Revenue Service
in the month of the ownership change or the two preceding months.
As of December 31, 2015, we had $137.6 million
of federal NOLs that are limited in their annual use under Section 382 of the Code. Accordingly, our ability to utilize these NOL
carryforwards may be substantially limited. These limitations could in turn result in increased future tax obligations, which could
have a material adverse effect on our business, financial condition and results of operations.
The high concentration of our sales within
the ethanol production and marketing industry could result in a significant reduction in sales and negatively affect our profitability
if demand for ethanol declines
.
We expect to be completely focused on the
production and marketing of ethanol and its co-products for the foreseeable future. We may be unable to shift our business focus
away from the production and marketing of ethanol to other renewable fuels or competing products. Accordingly, an industry shift
away from ethanol or the emergence of new competing products may reduce the demand for ethanol. A downturn in the demand for ethanol
would likely materially and adversely affect our sales and profitability.
We may be adversely affected by environmental,
health and safety laws, regulations and liabilities
.
We are subject to various federal, state
and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground,
the generation, storage, handling, use, transportation and disposal of hazardous materials and wastes, and the health and safety
of our employees. In addition, some of these laws and regulations require us to operate under permits that are subject to renewal
or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes
to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result
in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns. In addition,
we have made, and expect to make, significant capital expenditures on an ongoing basis to comply with increasingly stringent environmental
laws, regulations and permits.
We may be liable for the investigation and
cleanup of environmental contamination at each of our plants and at off-site locations where we arrange for the disposal of hazardous
substances or wastes. If these substances or wastes have been or are disposed of or released at sites that undergo investigation
and/or remediation by regulatory agencies, we may be responsible under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages
to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury
due to exposure to hazardous or other materials at or from those properties. Some of these matters may require us to expend significant
amounts for investigation, cleanup or other costs.
In addition, new laws, new interpretations
of existing laws, increased governmental enforcement of environmental laws or other developments could require us to make significant
additional expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased
future investments for environmental controls at our plants. Present and future environmental laws and regulations, and interpretations
of those laws and regulations, applicable to our operations, more vigorous enforcement policies and discovery of currently unknown
conditions may require substantial expenditures that could have a material adverse effect on our results of operations and financial
condition.
The hazards and risks associated with producing
and transporting our products (including fires, natural disasters, explosions and abnormal pressures and blowouts) may also result
in personal injury claims or damage to property and third parties. As protection against operating hazards, we maintain insurance
coverage against some, but not all, potential losses. However, we could sustain losses for uninsurable or uninsured risks, or in
amounts in excess of existing insurance coverage. Events that result in significant personal injury or damage to our property or
third parties or other losses that are not fully covered by insurance could have a material adverse effect on our results of operations
and financial condition.
If we are unable to attract or retain key personnel,
our ability to operate effectively may be impaired, which could have a material adverse effect on our business, financial condition
and results of operations.
Our ability to operate our business and
implement strategies depends, in part, on the efforts of our executive officers and other key personnel. Our future success will
depend on, among other factors, our ability to retain our current key personnel and attract and retain qualified future key personnel,
particularly executive management. In addition, the success of the Aventine acquisition will depend in part on our ability to retain
key personnel. It is possible that these personnel might decide not to remain with us now that the acquisition is completed. If
these key personnel terminate their employment, our business activities might be adversely affected and management’s attention
might be diverted from integrating the businesses of Pacific Ethanol and Aventine to recruiting suitable replacement personnel.
We may be unable to locate suitable replacements for any such key personnel or offer employment to potential replacement personnel
on reasonable terms. If we are unable to attract or retain key personnel, our ability to operate effectively may be impaired, which
could have a material adverse effect on our business, financial condition and results of operations.
We depend on a small number of customers for
the majority of our sales. A reduction in business from any of these customers could cause a significant decline in our overall
sales and profitability.
The majority of our sales are generated
from a small number of customers. During 2015, 2014 and 2013, four customers accounted for an aggregate of approximately $538 million,
$659 million and $521 million in net sales, representing 45%, 59% and 58% of our net sales, respectively, for those periods. We
expect that we will continue to depend for the foreseeable future upon a small number of customers for a significant portion of
our sales. Our agreements with these customers generally do not require them to purchase any specified amount of ethanol or dollar
amount of sales or to make any purchases whatsoever. Therefore, in any future period, our sales generated from these customers,
individually or in the aggregate, may not equal or exceed historical levels. If sales to any of these customers cease or decline,
we may be unable to replace these sales with sales to either existing or new customers in a timely manner, or at all. A cessation
or reduction of sales to one or more of these customers could cause a significant decline in our overall sales and profitability.
Our lack of long-term ethanol orders and commitments
by our customers could lead to a rapid decline in our sales and profitability.
We cannot rely on long-term ethanol orders
or commitments by our customers for protection from the negative financial effects of a decline in the demand for ethanol or a
decline in the demand for our marketing services. The limited certainty of ethanol orders can make it difficult for us to forecast
our sales and allocate our resources in a manner consistent with our actual sales. Moreover, our expense levels are based in part
on our expectations of future sales and, if our expectations regarding future sales are inaccurate, we may be unable to reduce
costs in a timely manner to adjust for sales shortfalls. Furthermore, because we depend on a small number of customers for a significant
portion of our sales, the magnitude of the ramifications of these risks is greater than if our sales were less concentrated. As
a result of our lack of long-term ethanol orders and commitments, we may experience a rapid decline in our sales and profitability.
There are limitations on our ability to receive
distributions from our subsidiaries.
We conduct most of our operations through
subsidiaries and are dependent upon dividends or other intercompany transfers of funds from our subsidiaries to generate free cash
flow. Moreover, some of our subsidiaries are limited in their ability to pay dividends or make distributions to us by the terms
of their financing arrangements.
Risks Related to Ownership of our Common
Stock
Our stock price is highly volatile, which could
result in substantial losses for investors purchasing shares of our common stock and in litigation against us.
The market price of our common stock has
fluctuated significantly in the past and may continue to fluctuate significantly in the future. The market price of our common
stock may continue to fluctuate in response to one or more of the following factors, many of which are beyond our control:
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fluctuations in the market prices of ethanol and its co-products;
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the cost of key inputs to the production of ethanol, including corn and natural gas;
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our ability to timely pay or otherwise refinance our outstanding indebtedness;
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the volume and timing of the receipt of orders for ethanol from major customers;
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competitive pricing pressures;
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our ability to timely and cost-effectively produce, sell and deliver ethanol;
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the announcement, introduction and market acceptance of one or more alternatives to ethanol;
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losses resulting from adjustments to the fair values of our outstanding warrants to purchase our common stock;
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changes in market valuations of companies similar to us;
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stock market price and volume fluctuations generally;
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·
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the possibility that the anticipated benefits from our acquisition of Aventine cannot be fully realized in a timely manner
or at all;
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regulatory developments or increased enforcement;
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fluctuations in our quarterly or annual operating results;
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·
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additions or departures of key personnel;
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our ability to obtain any necessary financing;
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our financing activities and future sales of our common stock or other securities; and
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our ability to maintain contracts that are critical to our operations.
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Furthermore, we believe that the economic
conditions in California and other Western states, as well as the United States as a whole, could have a negative impact on our
results of operations. Demand for ethanol could also be adversely affected by a slow-down in the overall demand for oxygenate and
gasoline additive products. The levels of our ethanol production and purchases for resale will be based upon forecasted demand.
Accordingly, any inaccuracy in forecasting anticipated revenues and expenses could adversely affect our business. The failure to
receive anticipated orders or to complete delivery in any quarterly period could adversely affect our results of operations for
that period. Quarterly results are not necessarily indicative of future performance for any particular period, and we may not experience
revenue growth or profitability on a quarterly or an annual basis.
The price at which you purchase shares of
our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your shares
of common stock at or above your purchase price, which may result in substantial losses to you and which may include the complete
loss of your investment. In the past, securities class action litigation has often been brought against a company following periods
of high stock price volatility. We may be the target of similar litigation in the future. Securities litigation could result in
substantial costs and divert management’s attention and our resources away from our business.
Any of the risks described above could have
a material adverse effect on our results of operations or the price of our common stock, or both.
We may incur significant non-cash expenses
in future periods due to adjustments to the fair values of our outstanding warrants. These non-cash expenses may materially and
adversely affect our reported net income or losses and cause our stock price to decline.
From 2010 through 2013, we issued in various
financing transactions warrants to purchase shares of our common stock. The warrants were initially recorded at their fair values,
which are adjusted quarterly, generally resulting in non-cash expenses or income if the market price of our common stock increases
or decreases, respectively, during the period. For example, due to the substantial increase in the market price of our common stock
in the first quarter of 2014 and because the exercise prices of these warrants were, as of March 31, 2014, well below the market
price of our common stock, the fair values of the warrants and the related non-cash expenses were significantly higher in the first
quarter of 2014 than in prior quarterly periods, which resulted in an unusually large non-cash expense for the quarter. These fair
value adjustments will continue in future periods until all of our warrants are exercised or expire. We may incur additional significant
non-cash expenses in future periods due to adjustments to the fair values of our outstanding warrants resulting from increases
in the market price of our common stock during those periods. These non-cash expenses may materially and adversely affect our reported
net income or losses and cause our stock price to decline.
Upon the conversion or exercise of our outstanding
derivative securities, if the resulting shares of common stock are resold into the market, or if a perception exists that a substantial
number of shares may be issued and then resold into the market, the market price of our common stock and the value of your investment
could decline significantly.
We have
preferred stock, non-voting common stock and warrants outstanding that may be converted into or exercised for shares of our common
stock. Sales of a substantial number of shares of our common stock underlying these derivative securities, or even the perception
that these sales could occur, could adversely affect the market price of our common stock. As a result, you could experience a
significant decline in the value of your investment.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Unregistered Sales of Equity Securities
None.
Dividends
Our current and future
debt financing arrangements may limit or prevent cash distributions from our subsidiaries to us, depending upon the achievement
of specified financial and other operating conditions and our ability to properly service our debt, thereby limiting or preventing
us from paying cash dividends.
For each of the three
months ended September 30, 2016 and 2015, we declared and paid in cash an aggregate of $0.3 million in dividends on our Series
B Preferred Stock. We have never declared or paid cash dividends on our common stock and do not currently intend to pay cash dividends
on our common stock in the foreseeable future. We currently anticipate that we will retain any earnings for use in the continued
development of our business. The holders of our outstanding Series B Preferred Stock are entitled to dividends of 7% per annum,
payable quarterly. Accumulated and unpaid dividends in respect of our Series B Preferred Stock must be paid prior to the payment
of any dividends in respect of our common stock.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY
DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
On November 7, 2016, we entered into Amended
and Restated Employment Agreements with each of our executive officers. The material terms of each agreement are described below.
Neil M. Koehler
Our Amended and Restated Employment Agreement
with Neil M. Koehler provides for at-will employment as our President and Chief Executive Officer. Mr. Koehler’s base salary
rate is $461,217 per year. Mr. Koehler is eligible to participate in our short-term incentive plan with a pay-out target of 70%
of his base salary, to be paid based upon performance criteria set by the Compensation Committee of our board of directors.
Upon termination by us without cause or
resignation by Mr. Koehler for good reason, Mr. Koehler is entitled to receive (i) severance equal to eighteen months of his base
salary, (ii) 150% of his total target short-term incentive plan award, (iii) continued health insurance coverage for eighteen months
or, until the earlier effective date of coverage under a subsequent employer’s plan, and (iv) accelerated vesting of 25%
of all shares or options subject to any equity awards granted to Mr. Koehler prior to Mr. Koehler’s termination which are
unvested as of the date of termination.
However, if Mr. Koehler is terminated without
cause or resigns for good reason in anticipation of or twenty-four months after a change in control, Mr. Koehler is entitled to
(a) severance equal to thirty-six months of base salary, (b) 300% of his total target short-term incentive plan award, (c) continued
health insurance coverage for thirty-six months or, until the earlier effective date of coverage under a subsequent employer’s
plan, and (d) accelerated vesting of 100% of all shares or options subject to any equity awards granted to Mr. Koehler prior to
Mr. Koehler’s termination which are unvested as of the date of termination.
If we terminate Mr. Koehler’s employment
upon his disability, Mr. Koehler is entitled to severance equal to twelve months of base salary.
The term “for good reason”
is defined in the Amended and Restated Employment Agreement as (i) the assignment to Mr. Koehler of any duties or responsibilities
that result in the material diminution of Mr. Koehler’s authority, duties or responsibility, (ii) a material reduction by
us in Mr. Koehler’s annual base salary, except to the extent the base salaries of all or our other executive officers are
accordingly reduced, (iii) a relocation of Mr. Koehler’s place of work, or our principal executive offices if Mr. Koehler’s
principal office is at these offices, to a location that increases Mr. Koehler’s daily one-way commute by more than thirty-five
miles, or (iv) any material breach by us of any material provision of the Amended and Restated Employment Agreement.
The term “cause” is defined
in the Amended and Restated Employment Agreement as (i) Mr. Koehler’s indictment or conviction of any felony or of any crime
involving dishonesty, (ii) Mr. Koehler’s participation in any fraud or other act of willful misconduct against us, (iii)
Mr. Koehler’s refusal to comply with any or our lawful directives, (iv) Mr. Koehler’s material breach of his fiduciary,
statutory, contractual, or common law duties to us, or (v) conduct by Mr. Koehler which, in the good faith and reasonable determination
of our board of directors, demonstrates gross unfitness to serve; provided, however, that in the event that any of the foregoing
events is reasonably capable of being cured, we shall, within twenty days after the discovery of the event, provide written notice
to Mr. Koehler describing the nature of the event and Mr. Koehler shall thereafter have ten business days to cure the event.
A “change in control” is deemed
to have occurred if, in a single transaction or series of related transactions (i) any person (as the term is used in Section 13(d)
and 14(d) of the Exchange Act), or persons acting as a group, other than a trustee or fiduciary holding securities under an employee
benefit program, is or becomes a “beneficial owner” (as defined in Rule 13-3 under the Exchange Act), directly or indirectly
of securities of Pacific Ethanol, Inc. representing a majority of the combined voting power of Pacific Ethanol, Inc., (ii) there
is a merger, consolidation or other business combination transaction of Pacific Ethanol, Inc. with or into another corporation,
entity or person, other than a transaction in which the holders of at least a majority of the shares of voting capital stock of
Pacific Ethanol, Inc. outstanding immediately prior to the transaction continue to hold (either by the shares remaining outstanding
or by their being converted into shares of voting capital stock of the surviving entity) a majority of the total voting power represented
by the shares of voting capital stock of Pacific Ethanol, Inc. (or the surviving entity) outstanding immediately after the transaction,
or (iii) all or substantially all of our assets are sold.
Michael D. Kandris
Our Amended and Restated Employment Agreement
with Michael D. Kandris provides for at-will employment as our Chief Operating Officer. Mr. Kandris’s base salary rate is
$330,611 per year. Mr. Kandris is eligible to participate in our short-term incentive plan with a pay-out target of 50% of his
base salary, to be paid based upon performance criteria set by the Compensation Committee of our board of directors.
Upon termination by us without cause or
resignation by Mr. Kandris for good reason, Mr. Kandris is entitled to receive (i) severance equal to twelve months of base salary,
(ii) 100% of his total target short-term incentive plan award, (iii) continued health insurance coverage for eighteen months or,
until the earlier effective date of coverage under a subsequent employer’s plan, and (iv) accelerated vesting of 25% of all
shares or options subject to any equity awards granted to Mr. Kandris prior to Mr. Kandris’s termination which are unvested
as of the date of termination.
However, if Mr. Kandris is terminated without
cause or resigns for good reason in anticipation of or twenty-four months after a change in control, Mr. Kandris is entitled to
(a) severance equal to twenty-four months of base salary, (b) 200% of his total target short-term incentive plan award, (c) continued
health insurance coverage for twenty-four months or, until the earlier effective date of coverage under a subsequent employer’s
plan, and (d) accelerated vesting of 100% of all shares or options subject to any equity awards granted to Mr. Kandris prior to
Mr. Kandris’s termination which are unvested as of the date of termination.
If we terminate Mr. Kandris’s employment
upon his disability, Mr. Kandris is entitled to severance equal to twelve months of base salary.
The meanings given to the terms “cause,”
“good reason” and “change in control” in Mr. Kandris’s Amended and Restated Employment Agreement
are the same as those contained in Mr. Koehler’s Amended and Restated Employment Agreement described above.
Bryon T. McGregor
Our Amended and Restated Employment Agreement
with Bryon T. McGregor provides for at-will employment as our Chief Financial Officer, Vice President and Assistant Secretary.
Mr. McGregor’s base salary rate is $299,710 per year. Mr. McGregor is eligible to participate in our short-term incentive
plan with a pay-out target of 50% of his base salary, to be paid based upon performance criteria set by the Compensation Committee
of our board of directors. All other terms and conditions of Mr. McGregor’s Amended and Restated Employment Agreement are
substantially the same as those contained in Mr. Kandris’s Amended and Restated Employment Agreement described above.
Christopher W. Wright
Our Amended and Restated Employment Agreement
with Christopher W. Wright provides for at-will employment as our Vice President of Administration, General Counsel and Secretary.
Mr. Wright’s base salary rate is $289,410 per year. Mr. Wright is eligible to participate in our short-term incentive plan
with a pay-out target of 50% of his base salary, to be paid based upon performance criteria set by the Compensation Committee of
our board of directors. All other terms and conditions of Mr. Wright’s Amended and Restated Employment Agreement are substantially
the same as those contained in Mr. Kandris’s Amended and Restated Employment Agreement described above.
James R. Sneed
Our Employment Agreement with James R.
Sneed provides for at-will employment as our Vice President, Supply and Trading. Mr. Sneed’s base salary rate is $245,550
per year. Mr. Sneed is eligible to participate in our short-term incentive plan with a pay-out target of 40% of his base salary,
to be paid based upon performance criteria set by the Compensation Committee of our board of directors. All other terms and conditions
of Mr. Sneed’s Amended and Restated Employment Agreement are substantially the same as those contained in Mr. Kandris’s
Amended and Restated Employment Agreement described above.
Paul P. Koehler
Our Employment Agreement with Paul P. Koehler
provides for at-will employment as our Vice President, Commodities and Corporate Development. Mr. Koehler’s base salary rate
is $245,550 per year. Mr. Koehler is eligible to participate in our short-term incentive plan with a pay-out target of 40% of his
base salary, to be paid based upon performance criteria set by the Compensation Committee of our board of directors. All other
terms and conditions of Mr. Koehler’s Amended and Restated Employment Agreement are substantially the same as those contained
in Mr. Kandris’s Amended and Restated Employment Agreement described above.
ITEM 6. EXHIBITS.
Exhibit
Number
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Description
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|
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31.1
|
Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
|
31.2
|
Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
|
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)
|
101.INS
|
XBRL Instance Document (*)
|
101.SCH
|
XBRL Taxonomy Extension Schema (*)
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase (*)
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase (*)
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase (*)
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase (*)
|
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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PACIFIC ETHANOL, INC.
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Dated: November 8, 2016
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By:
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/S/ BRYON T. MCGREGOR
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Bryon T. McGregor
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
EXHIBITS FILED WITH THIS REPORT
Exhibit
Number
|
Description
|
|
|
|
|
31.1
|
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
31.2
|
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
101.INS
|
XBRL Instance Document
|
101.SCH
|
XBRL Taxonomy Extension Schema
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
|
____________________