|
ITEM 1.
|
FINANCIAL STATEMENTS.
|
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
*
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
56,923
|
|
|
$
|
68,590
|
|
Accounts receivable, net (net of allowance for doubtful accounts of $18 and $331, respectively)
|
|
|
72,282
|
|
|
|
86,275
|
|
Inventories
|
|
|
71,819
|
|
|
|
60,070
|
|
Prepaid inventory
|
|
|
5,622
|
|
|
|
9,946
|
|
Income tax receivables
|
|
|
129
|
|
|
|
5,730
|
|
Derivative instruments
|
|
|
3,017
|
|
|
|
978
|
|
Other current assets
|
|
|
3,026
|
|
|
|
3,612
|
|
Total current assets
|
|
|
212,818
|
|
|
|
235,201
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
509,369
|
|
|
|
465,190
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
2,678
|
|
|
|
2,678
|
|
Other assets
|
|
|
5,785
|
|
|
|
5,169
|
|
Total other assets
|
|
|
8,463
|
|
|
|
7,847
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
730,650
|
|
|
$
|
708,238
|
|
_______________
*
Amounts
derived from the audited consolidated financial statements for the year ended December 31, 2016.
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except par value)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
*
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable – trade
|
|
$
|
41,178
|
|
|
$
|
37,051
|
|
Accrued liabilities
|
|
|
22,245
|
|
|
|
20,280
|
|
Current portion – capital leases
|
|
|
799
|
|
|
|
794
|
|
Current portion – long-term debt
|
|
|
20,000
|
|
|
|
10,500
|
|
Derivative instruments
|
|
|
2,755
|
|
|
|
4,115
|
|
Accrued PE Op Co. purchase
|
|
|
3,828
|
|
|
|
3,828
|
|
Other current liabilities
|
|
|
1,591
|
|
|
|
2,273
|
|
Total current liabilities
|
|
|
92,396
|
|
|
|
78,841
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
220,304
|
|
|
|
188,028
|
|
Capital leases, net of current portion
|
|
|
134
|
|
|
|
547
|
|
Warrant liabilities at fair value
|
|
|
–
|
|
|
|
651
|
|
Other liabilities
|
|
|
20,915
|
|
|
|
21,910
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
333,749
|
|
|
|
289,977
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Pacific Ethanol, Inc. Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series A: 1,684 shares authorized; no shares issued and outstanding as of September 30, 2017 and December 31, 2016;
|
|
|
–
|
|
|
|
–
|
|
Series B: 1,581 shares authorized; 927 shares issued and outstanding as of September 30, 2017 and December 31, 2016; liquidation preference of $18,075 as of September 30, 2017
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.001 par value; 300,000 shares authorized; 43,971 and 39,772 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
|
|
|
44
|
|
|
|
40
|
|
Non-voting common stock, $0.001 par value; 3,553 shares authorized; 1 and 3,540 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
|
|
|
–
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
926,248
|
|
|
|
922,698
|
|
Accumulated other comprehensive loss
|
|
|
(2,620
|
)
|
|
|
(2,620
|
)
|
Accumulated deficit
|
|
|
(554,858
|
)
|
|
|
(532,233
|
)
|
Total Pacific Ethanol, Inc. Stockholders’ Equity
|
|
|
368,815
|
|
|
|
387,890
|
|
Noncontrolling interests
|
|
|
28,086
|
|
|
|
30,371
|
|
Total Stockholders’ Equity
|
|
|
396,901
|
|
|
|
418,261
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
730,650
|
|
|
$
|
708,238
|
|
_______________
*
Amounts derived from the audited consolidated financial statements for the year ended December 31, 2016.
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
445,442
|
|
|
$
|
417,806
|
|
|
$
|
1,236,984
|
|
|
$
|
1,183,039
|
|
Cost of goods sold
|
|
|
433,377
|
|
|
|
411,442
|
|
|
|
1,229,039
|
|
|
|
1,157,902
|
|
Gross profit
|
|
|
12,065
|
|
|
|
6,364
|
|
|
|
7,945
|
|
|
|
25,137
|
|
Selling, general and administrative expenses
|
|
|
8,720
|
|
|
|
5,971
|
|
|
|
22,932
|
|
|
|
20,436
|
|
Income (loss) from operations
|
|
|
3,345
|
|
|
|
393
|
|
|
|
(14,987
|
)
|
|
|
4,701
|
|
Fair value adjustments
|
|
|
–
|
|
|
|
(69
|
)
|
|
|
473
|
|
|
|
(53
|
)
|
Interest expense, net
|
|
|
(3,826
|
)
|
|
|
(3,874
|
)
|
|
|
(9,157
|
)
|
|
|
(16,643
|
)
|
Other income (expense), net
|
|
|
(60
|
)
|
|
|
32
|
|
|
|
(293
|
)
|
|
|
92
|
|
Loss before provision (benefit) for income taxes
|
|
|
(541
|
)
|
|
|
(3,518
|
)
|
|
|
(23,964
|
)
|
|
|
(11,903
|
)
|
Provision (benefit) for income taxes
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(245
|
)
|
Consolidated net loss
|
|
|
(541
|
)
|
|
|
(3,518
|
)
|
|
|
(23,964
|
)
|
|
|
(11,658
|
)
|
Net loss attributed to noncontrolling interests
|
|
|
339
|
|
|
|
–
|
|
|
|
2,285
|
|
|
|
–
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(202
|
)
|
|
$
|
(3,518
|
)
|
|
$
|
(21,679
|
)
|
|
$
|
(11,658
|
)
|
Preferred stock dividends
|
|
$
|
(319
|
)
|
|
$
|
(319
|
)
|
|
$
|
(946
|
)
|
|
$
|
(949
|
)
|
Net loss available to common stockholders
|
|
$
|
(521
|
)
|
|
$
|
(3,837
|
)
|
|
$
|
(22,625
|
)
|
|
$
|
(12,607
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.30
|
)
|
Weighted-average shares outstanding, basic and diluted
|
|
|
42,475
|
|
|
|
42,226
|
|
|
|
42,358
|
|
|
|
42,156
|
|
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(23,964
|
)
|
|
$
|
(11,658
|
)
|
Adjustments to reconcile consolidated net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of intangibles
|
|
|
28,486
|
|
|
|
26,526
|
|
Interest expense added to term debt
|
|
|
–
|
|
|
|
9,451
|
|
Fair value adjustments
|
|
|
(473
|
)
|
|
|
53
|
|
Amortization of debt discount
|
|
|
454
|
|
|
|
930
|
|
Amortization of deferred financing fees
|
|
|
339
|
|
|
|
97
|
|
Non-cash compensation
|
|
|
2,985
|
|
|
|
1,888
|
|
Loss (gain) on derivative instruments
|
|
|
836
|
|
|
|
(1,669
|
)
|
Bad debt expense
|
|
|
4
|
|
|
|
325
|
|
Changes in operating assets and liabilities, net of effects from acquisition of ICP:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
25,625
|
|
|
|
(7,803
|
)
|
Inventories
|
|
|
(1,891
|
)
|
|
|
(4,168
|
)
|
Prepaid expenses and other assets
|
|
|
2,197
|
|
|
|
5,503
|
|
Prepaid inventory
|
|
|
4,397
|
|
|
|
(1,657
|
)
|
Accounts payable and accrued expenses
|
|
|
(3,995
|
)
|
|
|
(2,789
|
)
|
Net cash provided by operating activities
|
|
|
35,000
|
|
|
|
15,029
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(12,348
|
)
|
|
|
(14,045
|
)
|
Purchase of ICP, net of cash acquired
|
|
|
(28,921
|
)
|
|
|
–
|
|
Proceeds from cash collateralized letters of credit
|
|
|
–
|
|
|
|
4,113
|
|
Net cash used in investing activities
|
|
|
(41,269
|
)
|
|
|
(9,932
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Net (payments) proceeds from Kinergy’s line of credit
|
|
|
(5,889
|
)
|
|
|
2,913
|
|
Proceeds from ICP credit facilities
|
|
|
42,000
|
|
|
|
–
|
|
Proceeds from assessment financing
|
|
|
1,144
|
|
|
|
1,020
|
|
Net proceeds from notes
|
|
|
13,530
|
|
|
|
–
|
|
Payments for debt issuance costs
|
|
|
(924
|
)
|
|
|
–
|
|
Principal payments on borrowings
|
|
|
(54,927
|
)
|
|
|
(17,003
|
)
|
Payments on capital leases
|
|
|
(588
|
)
|
|
|
(3,151
|
)
|
Proceeds from exercise of warrants and options
|
|
|
1,202
|
|
|
|
–
|
|
Preferred stock dividends paid
|
|
|
(946
|
)
|
|
|
(949
|
)
|
Net cash used in financing activities
|
|
|
(5,398
|
)
|
|
|
(17,170
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(11,667
|
)
|
|
|
(12,073
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
68,590
|
|
|
|
52,712
|
|
Cash and cash equivalents at end of period
|
|
$
|
56,923
|
|
|
$
|
40,639
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
8,291
|
|
|
$
|
7,256
|
|
Income tax refunds received
|
|
$
|
5,601
|
|
|
$
|
4,784
|
|
Noncash financing and investing activities:
|
|
|
|
|
|
|
|
|
Issuance of notes payable for acquisition of ICP
|
|
$
|
46,927
|
|
|
$
|
–
|
|
Reclass of warrant liability to equity upon warrant exercises
|
|
$
|
178
|
|
|
$
|
–
|
|
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
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”), PE Op Co., a Delaware corporation (“PE Op
Co.”) and eight of the Company’s ethanol production facilities. The Company’s acquisition of Illinois Corn Processing,
LLC (“ICP”) was consummated on July 3, 2017, and as a result, the Company’s consolidated financial statements
include the results of ICP commencing July 3, 2017 and all other periods presented exclude the results of ICP prior to that date.
See Note 2 – Acquisition of ICP.
On December 15, 2016, the
Company and Aurora Cooperative Elevator Company, a Nebraska cooperative corporation (“ACEC”), closed a transaction
under a contribution agreement under which the Company contributed its Aurora, Nebraska ethanol facilities and ACEC contributed
its Aurora grain elevator and related grain handling assets to Pacific Aurora, LLC (“Pacific Aurora”) in exchange for
equity interests in Pacific Aurora. On December 15, 2016, concurrently with the closing under the contribution agreement, the Company
sold a portion of its equity interest in Pacific Aurora to ACEC. As a result, as of December 15, 2016 and through September 30,
2017, the Company owned 73.93% of Pacific Aurora and ACEC owned 26.07% of Pacific Aurora. The Company consolidates 100% of the
results of Pacific Aurora and records ACEC’s 26.07% equity interest as noncontrolling interests in the accompanying financial
statements.
The Company is a leading
producer and marketer of low-carbon renewable fuels and high-quality alcohol products in the United States. The Company owns and
operates nine production facilities, four in the Western states of California, Oregon and Idaho, and five in the Midwestern states
of Illinois and Nebraska. The Company’s four ethanol plants in the Western United States (together with their respective
holding companies, the “Pacific Ethanol West Plants”) are located in close proximity to both feed and ethanol customers
and thus enjoy unique advantages in efficiency, logistics and product pricing. These plants produce among the lowest-carbon ethanol
produced in the United States due to low energy use in production.
The Company has production
capacity of 605 million gallons per year, markets, on an annualized basis, nearly 1.0 billion gallons of ethanol, and produces,
on an annualized basis, over 2.5 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, dried yeast and CO
2
. The Company’s five ethanol plants
in the Midwest (together with their respective holding companies, the “Pacific Ethanol Central Plants”) are located
in the heart of the Corn Belt, benefit from low-cost and abundant feedstock production and allow for access to many additional
domestic markets. In addition, the Company’s ability to load unit trains from these facilities in the Midwest, and barges
from its Pekin, Illinois plants, allows for greater access to international markets.
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, 2016.
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, 2016. In
the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement
of the results for interim periods have been included. All significant intercompany accounts and transactions have been eliminated
in consolidation.
Accounts Receivable and Allowance for
Doubtful Accounts
– Trade accounts receivable are presented at face value, net of the allowance for doubtful accounts.
The Company sells ethanol to gasoline refining and distribution companies, sells distillers grains and other feed co-products to
dairy operators and animal feedlots and sells corn oil to poultry and biodiesel customers generally without requiring collateral.
The Company maintains an allowance for doubtful
accounts for balances that appear to have specific collection issues. The collection process is based on the age of the invoice
and requires attempted contacts with the customer at specified intervals. If, after a specified number of days, the Company has
been unsuccessful in its collection efforts, a bad debt allowance is recorded for the balance in question. Delinquent accounts
receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The factors considered
in reaching this determination are the apparent financial condition of the customer and the Company’s success in contacting
and negotiating with the customer. If the financial condition of the Company’s customers were to deteriorate, resulting in
an impairment of ability to make payments, additional allowances may be required.
Of the accounts receivable balance, approximately
$57,237,000 and $64,853,000 at September 30, 2017 and December 31, 2016, respectively, were used as collateral under Kinergy’s
operating line of credit. The allowance for doubtful accounts was $18,000 and $331,000 as of September 30, 2017 and December 31,
2016, respectively. The Company recorded a bad debt expense of $2,000 and $39,000 for the three months ended September 30, 2017
and 2016, respectively. The Company recorded a bad debt expense of $4,000 and $325,000 for the nine months ended September 30,
2017 and 2016, respectively. The Company does not have any off-balance sheet credit exposure related to its customers.
Provision for Income Taxes
–
The Company recognized no tax benefit for the three and nine months ended September 30, 2017 due to the uncertainty of using its
tax losses to offset future taxable income. The Company recognized a tax benefit of $0.2 million for the nine months ended September
30, 2016, as the Company has finalized certain of its tax returns. 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, accrued liabilities and accrued PE Op
Co. purchase are reasonable estimates of their fair values because of the short maturity of these items. The Company recorded its
warrant liabilities 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, and are considered Level 2 fair value measurements.
Recent Accounting Pronouncements
– In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on accounting for leases.
Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases)
at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted cash flow basis; and (2) a “right of use” asset, which is an asset that represents the lessee’s
right to use the specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged, with some
minor exceptions. Lessees will no longer be provided with a source of off-balance sheet financing for other than short-term leases.
The standard is effective for public companies for annual reporting periods beginning after December 15, 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 (“ASC
606”) on the recognition of revenue. ASC 606 states that an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period. In March and April 2016, the FASB issued further revenue recognition guidance amending
principal vs. agent considerations regarding whether an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods and services.
The provisions of ASC 606 include a five-step
process by which an entity will determine revenue recognition, depicting the transfer of goods or services to customers in amounts
reflecting the payment to which an entity expects to be entitled in exchange for those goods or services. ASC 606 requires the
Company to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in
the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract;
and (5) recognize revenue when, or as, the Company satisfies the performance obligation.
The Company will adopt ASC 606 on January 1,
2018. The Company is currently in the process of completing an evaluation of the new requirements, under ASC 606, on each of its
major revenue types. The Company’s initial preliminary assessment indicates that ASC 606 will not materially change the way
the Company accounts for its contracts with its customers, which will continue to be recognized at a point in time. The Company
anticipates finalizing its assessment of the financial impact of ASC 606 during the fourth quarter of 2017 and anticipates adopting
the new guidance using the modified retrospective transition method.
In April 2016, the FASB issued new guidance
to reduce the complexity of certain aspects of accounting for employee share-based payment transactions. Prior to adoption of the
standard, accruals of compensation costs were 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. Effective January 1, 2017, the Company elected to discontinue the use of an estimated forfeiture rate and instead
account for actual forfeitures as they occur. The transition guidance requires an adjustment to retained earnings for any cumulative
effect. The impact to the Company upon adoption was determined to be immaterial.
Estimates and Assumptions
–
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Significant estimates are required as part of determining the fair value of warrants, allowance for doubtful accounts,
net realizable value of inventory, estimated lives of property and equipment, long-lived asset impairments, valuation allowances
on deferred income taxes and the potential outcome of future tax consequences of events recognized in the Company’s financial
statements or tax returns, and the valuation of assets acquired and liabilities assumed as a result of business combinations. Actual
results and outcomes may materially differ from management’s estimates and assumptions.
On June 26, 2017, the Company, through its
wholly-owned direct and indirect subsidiaries PE Central, and ICP Merger Sub, LLC, a Delaware limited liability company and a direct
wholly-owned subsidiary of PE Central (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with ICP, Illinois Corn Processing Holdings Inc. (“ICPH”) and MGPI Processing, Inc. (together with
ICPH, the “Sellers”) to acquire 100% of the equity interests of ICP. The acquisition of ICP under the Merger Agreement
was closed on July 3, 2017. At the closing, Merger Sub merged with and into ICP (the “Merger”), and ICP continues as
the surviving corporation of the Merger and as a wholly-owned direct subsidiary of PE Central and a wholly-owned indirect subsidiary
of the Company.
Upon closing and under the terms of the Merger
Agreement, Merger Sub (i) paid to the Sellers $30,000,000 in cash, and (ii) issued to the Sellers secured promissory notes in the
aggregate principal amount of approximately $46,927,000 (the “Seller Notes”). The Seller Notes were secured by a first
priority lien on the assets of ICP and a pledge of the membership interests of ICP.
ICP is a 90 million gallon per year fuel and
industrial alcohol manufacturing, storage and distribution facility adjacent to the Pacific Ethanol Pekin facility and is located
on the Illinois River. ICP produces fuel-grade ethanol, beverage and industrial-grade alcohol, dry distillers grain (DDG) and corn
oil. The facility has direct access to end-markets via barge, rail, and truck, and expands Pacific Ethanol’s domestic and
international distribution channels.
The Company has recognized the following allocation
of the purchase price at fair values. The following fair value allocation for all assets and liabilities is provisional and incomplete
as the Company is in the process of completing its valuation of the assets acquired and liabilities assumed, most significantly
its valuation of property and equipment, sellers notes and any income tax impact. The fair value of property and equipment is based
on the Company’s draft valuations, and represents its best estimates at the time of the filing of this report. The Company
expects to conclude its valuations during the fourth quarter of 2017. Preliminarily, no intangible assets or liabilities have been
estimated due to ICP’s contracts being materially close to market prices. A final valuation may include either an asset or
liability associated with any material out-of-market contract positions. Based upon these assumptions, the preliminary purchase
price consideration allocation is as follows (in thousands):
Cash and equivalents
|
|
$
|
1,079
|
|
Accounts receivable
|
|
|
11,636
|
|
Inventories
|
|
|
9,858
|
|
Other current assets
|
|
|
907
|
|
Total current assets
|
|
|
23,480
|
|
Property and equipment
|
|
|
60,497
|
|
Other assets
|
|
|
328
|
|
Total assets acquired
|
|
$
|
84,305
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
5,683
|
|
Other current liabilities
|
|
|
1,486
|
|
Total current liabilities
|
|
|
7,169
|
|
Other non-current liabilities
|
|
|
209
|
|
Total liabilities assumed
|
|
$
|
7,378
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
76,927
|
|
Estimated goodwill
|
|
$
|
–
|
|
Total purchase price
|
|
$
|
76,927
|
|
The contractual amount due on the accounts
receivable acquired was $11.6 million, all of which is expected to be collectible. Any changes to the initial estimates of the
fair value of the acquired assets and assumed liabilities will be recorded as adjustments to those assets and liabilities and residual
amounts will be allocated to goodwill if the net assets acquired are less than the purchase price. If the net assets acquired exceed
the purchase price, the residual amount will result in a bargain purchase gain.
The following table presents unaudited pro
forma combined financial information assuming the acquisition occurred on January 1, 2016.
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenues – pro forma
|
|
$
|
461,825
|
|
|
$
|
1,315,046
|
|
|
$
|
1,317,243
|
|
Net loss – pro forma
|
|
$
|
(3,302
|
)
|
|
$
|
(27,145
|
)
|
|
$
|
(10,110
|
)
|
Diluted net income (loss) per share – pro forma
|
|
$
|
(0.08
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.24
|
)
|
Diluted weighted-average shares – pro forma
|
|
|
42,226
|
|
|
|
42,358
|
|
|
|
42,156
|
|
For the three and nine months ended September
30, 2017, ICP contributed $38.2 million in net revenues and $1.4 million in pre-tax income. For the three and nine months ended
September 30, 2017, the Company recorded approximately $0.3 million in costs associated with the ICP acquisition. These costs are
reflected in selling, general and administrative expenses on the Company’s consolidated statements of operations.
The Company reports its financial and operating
performance in two segments: (1) ethanol production, which includes the production and sale of ethanol, specialty alcohols and
co-products, with all of the Company’s production facilities aggregated, and (2) marketing and distribution, which includes
marketing and merchant trading for Company-produced ethanol, specialty alcohols and co-products and third-party ethanol.
The following tables set forth certain financial
data for the Company’s operating segments (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to
external customers
|
|
$
|
304,812
|
|
|
$
|
266,299
|
|
|
$
|
804,012
|
|
|
$
|
767,171
|
|
Intersegment
net sales
|
|
|
639
|
|
|
|
306
|
|
|
|
1,138
|
|
|
|
829
|
|
Total
ethanol production net sales
|
|
$
|
305,451
|
|
|
$
|
266,605
|
|
|
$
|
805,150
|
|
|
$
|
768,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
140,630
|
|
|
$
|
151,507
|
|
|
$
|
432,972
|
|
|
$
|
415,868
|
|
Intersegment
net sales
|
|
|
2,334
|
|
|
|
2,018
|
|
|
|
6,135
|
|
|
|
5,861
|
|
Total marketing and distribution
net sales
|
|
|
142,964
|
|
|
|
153,525
|
|
|
|
439,107
|
|
|
|
421,729
|
|
Intersegment
eliminations
|
|
|
(2,973
|
)
|
|
|
(2,324
|
)
|
|
|
(7,273
|
)
|
|
|
(6,690
|
)
|
Net
sales as reported
|
|
$
|
445,442
|
|
|
$
|
417,806
|
|
|
$
|
1,236,984
|
|
|
$
|
1,183,039
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
292,743
|
|
|
$
|
262,964
|
|
|
$
|
797,277
|
|
|
$
|
759,210
|
|
Marketing and distribution
|
|
|
142,303
|
|
|
|
153,406
|
|
|
|
437,110
|
|
|
|
412,225
|
|
Intersegment eliminations
|
|
|
(1,669
|
)
|
|
|
(4,928
|
)
|
|
|
(5,348
|
)
|
|
|
(13,533
|
)
|
Cost of goods sold as reported
|
|
$
|
433,377
|
|
|
$
|
411,442
|
|
|
$
|
1,229,039
|
|
|
$
|
1,157,902
|
|
Income (loss) before provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
2,638
|
|
|
$
|
(2,903
|
)
|
|
$
|
(15,981
|
)
|
|
$
|
(19,171
|
)
|
Marketing and distribution
|
|
|
(757
|
)
|
|
|
(1,524
|
)
|
|
|
(2,043
|
)
|
|
|
4,654
|
|
Corporate activities
|
|
|
(2,422
|
)
|
|
|
909
|
|
|
|
(5,940
|
)
|
|
|
2,614
|
|
|
|
$
|
(541
|
)
|
|
$
|
(3,518
|
)
|
|
$
|
(23,964
|
)
|
|
$
|
(11,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
9,841
|
|
|
$
|
8,631
|
|
|
$
|
27,703
|
|
|
$
|
25,839
|
|
Marketing and distribution
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3
|
|
Corporate activities
|
|
|
238
|
|
|
|
226
|
|
|
|
783
|
|
|
|
684
|
|
|
|
$
|
10,079
|
|
|
$
|
8,857
|
|
|
$
|
28,486
|
|
|
$
|
26,526
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
1,850
|
|
|
$
|
3,521
|
|
|
$
|
4,061
|
|
|
$
|
15,600
|
|
Marketing and distribution
|
|
|
342
|
|
|
|
353
|
|
|
|
952
|
|
|
|
1,043
|
|
Corporate activities
|
|
|
1,634
|
|
|
|
–
|
|
|
|
4,144
|
|
|
|
–
|
|
|
|
$
|
3,826
|
|
|
$
|
3,874
|
|
|
$
|
9,157
|
|
|
$
|
16,643
|
|
The following table sets forth the Company’s
total assets by operating segment (in thousands):
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Ethanol production
|
|
$
|
596,928
|
|
|
$
|
542,688
|
|
Marketing and distribution
|
|
|
129,294
|
|
|
|
146,356
|
|
Corporate assets
|
|
|
4,428
|
|
|
|
19,194
|
|
|
|
$
|
730,650
|
|
|
$
|
708,238
|
|
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
and net realizable value, with cost determined on a first-in, first-out basis.
Inventory balances consisted of the following
(in thousands):
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Finished goods
|
|
$
|
46,314
|
|
|
$
|
33,773
|
|
Work in progress
|
|
|
9,637
|
|
|
|
7,092
|
|
Raw materials
|
|
|
8,401
|
|
|
|
6,571
|
|
LCFS credits
|
|
|
5,892
|
|
|
|
10,926
|
|
Other
|
|
|
1,575
|
|
|
|
1,708
|
|
Total
|
|
$
|
71,819
|
|
|
$
|
60,070
|
|
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 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, 2017 and 2016, the Company did not designate any of its derivatives as cash flow hedges.
Commodity Risk – Non-Designated
Hedges
– The Company uses derivative instruments to lock in prices for certain amounts of corn and ethanol by entering
into exchange-traded forward contracts for those commodities. These derivatives are not designated for special hedge accounting
treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of
goods sold. The Company recognized losses of $483,000 and gains of $859,000 as the changes in the fair values of these contracts
for the three months ended September 30, 2017 and 2016, respectively. The Company recognized losses of $836,000 and gains of $1,669,000
as the changes in the fair values of these contracts for the nine months ended September 30, 2017 and 2016, respectively.
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, 2017
|
|
|
|
Assets
|
|
|
Liabilities
|
|
Type of Instrument
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
Commodity contracts
|
|
Derivative instruments
|
|
$
|
3,017
|
|
|
Derivative instruments
|
|
$
|
2,755
|
|
|
|
As of December 30, 2016
|
|
|
|
Assets
|
|
|
Liabilities
|
|
Type of Instrument
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
Commodity contracts
|
|
Derivative instruments
|
|
$
|
978
|
|
|
Derivative instruments
|
|
$
|
4,115
|
|
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
|
|
2017
|
|
|
2016
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(1,576
|
)
|
|
$
|
2,242
|
|
|
|
|
|
Unrealized Gains (Losses)
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2017
|
|
|
2016
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
1,093
|
|
|
$
|
(1,383
|
)
|
|
|
|
|
Realized Gains (Losses)
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2017
|
|
|
2016
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(4,495
|
)
|
|
$
|
2,152
|
|
|
|
|
|
Unrealized Gains (Losses)
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2017
|
|
|
2016
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
3,659
|
|
|
$
|
(483
|
)
|
Long-term borrowings are summarized as follows
(in thousands):
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Kinergy line of credit
|
|
$
|
43,973
|
|
|
$
|
49,862
|
|
Pekin term loan
|
|
|
57,000
|
|
|
|
64,000
|
|
Pekin revolving loan
|
|
|
32,000
|
|
|
|
32,000
|
|
ICP term loan
|
|
|
24,000
|
|
|
|
–
|
|
ICP revolving loan
|
|
|
18,000
|
|
|
|
–
|
|
Pacific Aurora line of credit
|
|
|
–
|
|
|
|
1,000
|
|
Parent notes payable
|
|
|
68,948
|
|
|
|
55,000
|
|
|
|
|
243,921
|
|
|
|
201,862
|
|
Less unamortized debt discount
|
|
|
(1,590
|
)
|
|
|
(1,626
|
)
|
Less unamortized debt financing costs
|
|
|
(2,027
|
)
|
|
|
(1,708
|
)
|
Less short-term portion
|
|
|
(20,000
|
)
|
|
|
(10,500
|
)
|
Long-term debt
|
|
$
|
220,304
|
|
|
$
|
188,028
|
|
Kinergy Operating Line of Credit
– On August 2, 2017, Kinergy increased its revolving line of credit from $85 million to $100 million. As of September 30,
2017, Kinergy had additional borrowing availability under its credit facility of $22,410,000.
Changes to Pekin Credit Facilities
—
On August 7, 2017, PE Pekin amended its term and revolving credit facilities by agreeing to increase the interest
rate under the facilities by 25 basis points to an annual rate equal to the 30-day LIBOR plus 4.00%. PE Pekin and its lender also
agreed that PE Pekin is required to maintain working capital of not less than $17.5 million from August 31, 2017 through December
31, 2017 and working capital of not less than $20.0 million from January 1, 2018 and continuing at all times thereafter. In addition,
the required Debt Service Coverage Ratio was reduced to 0.15 to 1.00 for the fiscal year ending December 31, 2017.
ICP Credit Facilities
—
On September 15, 2017, ICP, Compeer Financial, PCA (“Lender”), and CoBank, ACB (“Agent”) entered into a
Credit Agreement (“ICP Credit Agreement”). Under the ICP Credit Agreement, the Lender agreed to extend to ICP a term
loan in the amount of $24,000,000 and a revolving loan in an amount of up to $18,000,000.
Under the term loan, ICP is to use the proceeds
of the loan to refinance the Seller Notes. ICP is to make amortizing principal payments in sixteen equal consecutive quarterly
installments of $1,500,000 each until September 20, 2021, at which time the entire remaining balance is due and payable. Interest
on the unpaid principal amount of the term loan accrues at a rate equal to 3.75% plus the one-month LIBOR index rate.
Under the revolving loan, ICP is to use the
proceeds of the revolving term facility to refinance the Seller Notes and for ICP’s working capital needs. The revolving
loan matures on September 1, 2022. The revolving loan gives ICP the right, in ICP’s sole discretion, to permanently reduce
from time to time the revolving term commitment in increments of $500,000 by giving the Agent ten days prior written notice.
The revolving loan requires ICP to pay the
Agent a nonrefundable commitment fee equal to 0.75% per annum multiplied by the average daily positive difference between the amounts
of (i) the revolving term commitment, minus (ii) the aggregate principal amount of all loans outstanding under the revolving loan.
Interest on the unpaid principal amount of the loan accrues, pursuant to ICP’s election of the LIBOR Index Option, at a rate
equal to 3.75% plus the one-month LIBOR index rate.
Under the terms of the credit facilities, ICP
is required to maintain working capital of not less than $8.0 million. In addition, ICP is required to maintain an annual debt
coverage ratio of not less than 1.5 to 1.0 beginning for the year ending December 31, 2018.
Changes to Pacific Aurora Credit Facility
—
On September 1, 2017, Pacific Aurora and its lender agreed that Pacific Aurora is required to maintain working capital
of not less than $18.0 million from September 30, 2017 through February 28, 2018 and working capital of not less than $20.0 million
from March 1, 2018 and continuing at all times thereafter. In addition, the required Debt Service Coverage Ratio was reduced to
0.00 to 1.00 for the fiscal year ending December 31, 2017 and 1.50 to 1.00 for the fiscal year ending December 31, 2018.
Parent Notes Payable
–
On June 26, 2017, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with five accredited
investors (the “Investors”) and a related Consent of Holders and Amendment of Senior Secured Notes with the Investors
and holders of the Company’s senior secured notes issued on December 15, 2016 (“Prior Senior Notes”). On June
30, 2017, under the terms of the Note Purchase Agreement, the Company sold $13,948,000 in aggregate principal amount of its senior
secured notes (the “Senior Notes”) to the Investors in a private offering for aggregate gross proceeds of 97% of the
principal amount of the Senior Notes sold. Upon issuance, the Company recorded $418,000 in unamortized debt discount.
Distribution Restrictions
–
At September 30, 2017, there were $305,660,000 of net assets of the Company’s subsidiaries that were not available to be
transferred to Pacific Ethanol in the form of dividends, loans or advances due to restrictions contained in the credit facilities
of the Company’s subsidiaries.
7.
|
WARRANTS AND STOCK OPTIONS.
|
Warrant and Option
Exercises
– During the nine months ended September 30, 2017, certain holders exercised warrants and options and received
an aggregate of 201,000 shares of the Company’s common stock upon payment of an aggregate of $1,201,000 in cash. There were
no warrants or options exercised during the three months ended September 30, 2017 and the three and nine months ended September
30, 2016. As of September 30, 2017, there were no warrants outstanding for which we account using fair value methodologies; accordingly,
no fair value adjustments will be made in future periods relating to currently outstanding warrants.
8.
|
COMMITMENTS AND CONTINGENCIES.
|
Sales Commitments
– At
September 30, 2017, the Company had entered into sales contracts with its major customers to sell certain quantities of ethanol
and co-products. The Company had open ethanol indexed-price contracts for 224,150,000 gallons of ethanol as of September 30, 2017
and open fixed-price ethanol sales contracts totaling $53,672,000 as of September 30, 2017. The Company had open fixed-price co-product
sales contracts totaling $30,375,000 and open indexed-price co-product sales contracts for 16,000 tons as of September 30, 2017.
These sales contracts are scheduled to be completed through 2018.
Purchase Commitments
–
At September 30, 2017, the Company had indexed-price purchase contracts to purchase 20,050,000 gallons of ethanol and fixed-price
purchase contracts to purchase $9,476,000 of ethanol from its suppliers. The Company had $11,000,000 of fixed-price corn purchase
contracts and basis contracts with its suppliers as of September 30, 2017. These purchase commitments are scheduled to be satisfied
through 2018.
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 impact on the Company’s financial condition or results of operations.
The Company assumed certain legal matters which
were ongoing at July 1, 2015, the date of the Company’s acquisition of Aventine Renewable Energy Holdings, Inc (“PE
Central”). Among them were lawsuits between Aventine Renewable Energy, Inc. (now known as Pacific Ethanol Pekin, LLC, or
“PE Pekin”) and Glacial Lakes Energy, Aberdeen Energy and Redfield Energy, together, the “Defendants,”
in which PE Pekin sought damages for breach of termination agreements that wound down ethanol marketing arrangements between PE
Pekin and each of the Defendants. In February and March 2017, the Company and the Defendants entered into settlement agreements
and the Defendants paid in cash to the Company $3.9 million in final resolution of these matters. The Company did not assign any
value to the claims against the Defendants in its accounting for the Aventine acquisition as of July 1, 2015. The Company recorded
a gain, net of legal fees, of $3.6 million upon receipt of the cash settlement and recognized the gain in selling, general and
administrative expenses in the consolidated statements of operations for the nine months ended September 30, 2017.
9.
|
PENSION AND RETIREMENT BENEFIT PLANS.
|
The Company sponsors a defined
benefit pension plan (the “Retirement Plan”) and a health care and life insurance plan (the “Postretirement Plan”).
The Company assumed the Retirement Plan and the Postretirement Plan as part of its acquisition of PE Central on July 1, 2015.
The Retirement Plan is noncontributory,
and covers only “grandfathered” unionized employees at the Company’s Pekin, Illinois facility who fulfill minimum
age and service requirements. Benefits are based on a prescribed formula based upon the employee’s years of service. The
Retirement Plan, which is part of a collective bargaining agreement, covers only union employees hired prior to November 1, 2010.
The Company uses a December
31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contributions that
are required by applicable regulations. As of December 31, 2016, the Retirement Plan’s accumulated projected benefit obligation
was $18.5 million, with a fair value of plan assets of $12.4 million. The underfunded amount of $6.1 million is recorded on the
Company’s consolidated balance sheet in other noncurrent liabilities.
The Company’s net periodic
Retirement Plan costs are as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
98
|
|
|
$
|
172
|
|
|
$
|
293
|
|
|
$
|
516
|
|
Service cost
|
|
|
188
|
|
|
|
56
|
|
|
|
563
|
|
|
|
168
|
|
Expected return on plan assets
|
|
|
(169
|
)
|
|
|
(199
|
)
|
|
|
(506
|
)
|
|
|
(597
|
)
|
Net periodic expense
|
|
$
|
117
|
|
|
$
|
29
|
|
|
$
|
350
|
|
|
$
|
87
|
|
The Postretirement Plan provides
postretirement medical benefits and life insurance to certain “grandfathered” unionized employees. Employees hired
after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement Plan is contributory, with
contributions required at the same rate as active employees. Benefit eligibility under the plan reduces at age 65 from a defined
benefit to a defined dollar cap based upon years of service. As of December 31, 2016, the Postretirement Plan’s accumulated
projected benefit obligation was $5.4 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.
The Company’s net periodic
Postretirement Plan costs are as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
21
|
|
|
$
|
35
|
|
|
$
|
63
|
|
|
$
|
105
|
|
Service cost
|
|
|
50
|
|
|
|
12
|
|
|
|
150
|
|
|
|
36
|
|
Amortization of (gain) loss
|
|
|
33
|
|
|
|
–
|
|
|
|
99
|
|
|
|
–
|
|
Net periodic expense
|
|
$
|
104
|
|
|
$
|
47
|
|
|
$
|
312
|
|
|
$
|
141
|
|
10.
|
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.
|
Warrants
– The Company’s
warrants were valued using a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions.
The Company recorded its warrants issued in 2012 at fair value and designated them as Level 3 on their issuance dates.
Significant assumptions used and related fair
values for the warrants as of December 31, 2016 were as follows:
Original Issuance
|
|
Exercise
Price
|
|
Volatility
|
|
Risk Free
Interest
Rate
|
|
Term (years)
|
|
Market
Discount
|
|
Warrants
Outstanding
|
|
Fair
Value
|
07/3/2012
|
|
$6.09
|
|
40.9%
|
|
0.62%
|
|
0.50
|
|
11.3%
|
|
211,000
|
|
$651,000
|
Other Derivative Instruments
– The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions
are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs.
The following table summarizes recurring fair value measurements
by level at September 30, 2017 (in thousands):
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
3,017
|
|
|
$
|
3,017
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
$
|
3,017
|
|
|
$
|
3,017
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Derivative instruments
|
|
|
(2,755
|
)
|
|
|
(2,755
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
(2,755
|
)
|
|
$
|
(2,755
|
)
|
|
$
|
–
|
|
|
$
|
–
|
|
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, 2016
|
|
$
|
651
|
|
Exercised warrants
|
|
|
(178
|
)
|
Adjustments to fair value for the period
|
|
|
(473
|
)
|
Balance, September 30, 2017
|
|
$
|
–
|
|
The following tables compute basic and diluted
earnings per share (in thousands, except per share data):
|
|
Three Months Ended September 30, 2017
|
|
|
|
Loss
Numerator
|
|
|
Shares Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Pacific Ethanol
|
|
$
|
(202
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(319
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(521
|
)
|
|
|
42,475
|
|
|
$
|
(0.01
|
)
|
|
|
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
|
)
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Pacific Ethanol
|
|
$
|
(21,679
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(946
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(22,625
|
)
|
|
|
42,358
|
|
|
$
|
(0.53
|
)
|
|
|
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
|
)
|
There were an aggregate of 688,000 and 737,000
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, 2017, respectively. These convertible securities were not
considered in calculating diluted net loss per share for the three and nine months ended September 30, 2017, as their effect would
have been anti-dilutive.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The following discussion
and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements
included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated financial statements
contain forward-looking statements, which generally include the plans and objectives of management for future operations, including
plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and
profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and
associated risks may include, relate to or be qualified by other important factors, including:
|
·
|
fluctuations in the market price of ethanol and its co-products;
|
|
·
|
fluctuations in the costs of key production input commodities such as corn and natural gas;
|
|
·
|
the projected growth or contraction in the ethanol and co-product markets in which we operate;
|
|
·
|
our strategies for expanding, maintaining or contracting our presence in these markets;
|
|
·
|
anticipated trends in our financial condition and results of operations; and
|
|
·
|
our ability to distinguish ourselves from our current and future competitors.
|
You are cautioned not to
place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the case of a document
incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking
statements, except as required by law.
Any of the factors described
immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission or in the “Risk
Factors” section below could cause our financial results, including our net income or loss or growth in net income or loss
to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate
substantially.
Recent Development
On July 3, 2017, we completed
our acquisition of Illinois Corn Processing LLC, or ICP, under the terms of an Agreement and Plan of Merger dated as of June 26,
2017 by and among Pacific Ethanol Central, LLC, ICP Merger Sub, LLC, Illinois Corn Processing Holdings Inc., MGPI Processing, Inc.,
and ICP. ICP is a 90 million gallon per year fuel and industrial alcohol manufacturing, storage and distribution facility located
on the Illinois River adjacent to our facilities in Pekin, Illinois. ICP produces fuel-grade ethanol, beverage and industrial-grade
alcohol, dry distillers grain with solubles, or DDGS, and corn oil. ICP’s facility has direct access to end-markets via barge,
rail and truck. We acquired ICP for $76.9 million, of which $30.0 million was paid in cash and $46.9 million was paid through the
issuance of non-amortizing secured promissory notes, which have been subsequently repaid.
Our acquisition of ICP adds
90 million gallons per year of production capacity, diversifies fuel ethanol production with high-value beverage and industrial
grade alcohol, and expands Pacific Ethanol’s domestic and international distribution channels. Two-thirds of ICP’s
production is currently dedicated to producing high-quality, premium-priced alcohol products for the beverage and industrial markets.
The consolidation of the ICP facility with our two Pekin, Illinois plants is expected to integrate the Pekin site into a unique
combination of technologies and products with a combined operating capacity of 250 million gallons per year. We expect the acquisition
will yield approximately $4.5 million in annual cost savings over the twelve month period following the acquisition, including
economies of scale in purchasing power, managing grain supply and transportation costs for DDG and ethanol. The acquisition is
immediately accretive to earnings. We believe the acquisition will have a continued positive impact on our earnings as ICP’s
beverage and industrial grade alcohol products are priced at a premium to fuel ethanol.
Overview
We are a leading producer and marketer of low-carbon
renewable fuels in the United States.
We own and operate nine strategically-located
production facilities. Four of our plants are in the Western states of California, Oregon and Idaho, and five of our plants are
located in the Midwestern states of Illinois and Nebraska. We are the sixth largest producer of ethanol in the United States based
on annualized volumes. Our plants have a combined production capacity of 605 million gallons per year. We market all the ethanol,
specialty alcohols and co-products produced at our plants as well as ethanol produced by third parties. On an annualized basis,
we market nearly 1.0 billion gallons of ethanol and over 2.5 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, specialty alcohols and co-products
at our production facilities described below. Our plants located on the West Coast are near their respective fuel and feed customers,
offering significant timing, transportation cost and logistical advantages. Our plants located in the Midwest are in the heart
of the Corn Belt, benefit from low-cost and abundant feedstock production and allow for access to many additional domestic markets.
In addition, our ability to load unit trains from our plants located in the Midwest, and barges from our Pekin, Illinois plants,
allows for greater access to international markets.
We wholly-own all of our plants located on the
West Coast and the three plants in Pekin, Illinois. We own approximately 74% of the two plants in Aurora, Nebraska as well as the
grain elevator adjacent to those properties and related grain handling assets, including the outer rail loop, and the real property
on which they are located, through Pacific Aurora, LLC, or Pacific Aurora, an entity owned approximately 26% by Aurora Cooperative
Elevator Company.
Facility
Name
|
|
Facility
Location
|
|
Estimated
Annual Capacity
(gallons)
|
Magic Valley
|
|
Burley, ID
|
|
60,000,000
|
Columbia
|
|
Boardman, OR
|
|
40,000,000
|
Stockton
|
|
Stockton, CA
|
|
60,000,000
|
Madera
|
|
Madera, CA
|
|
40,000,000
|
Aurora West
|
|
Aurora, NE
|
|
110,000,000
|
Aurora East
|
|
Aurora, NE
|
|
45,000,000
|
Pekin Wet
|
|
Pekin, IL
|
|
100,000,000
|
Pekin Dry
|
|
Pekin, IL
|
|
60,000,000
|
Pekin ICP
|
|
Pekin, IL
|
|
90,000,000
|
We produce ethanol co-products at our production
facilities such as wet distillers grains, or WDG, DDGS, wet and dry corn gluten feed, condensed distillers solubles, corn gluten
meal, corn germ, corn oil, dried yeast and CO
2
.
Marketing Segment
We market ethanol, specialty alcohols and co-products
produced by our facilities and market ethanol produced by third parties. We have extensive customer relationships throughout the
Western and Midwestern United States. Our ethanol customers are integrated oil companies and gasoline marketers who blend ethanol
into gasoline. Our customers depend on us to provide a reliable supply of ethanol, and manage the logistics and timing of delivery
with very little effort on their part. Our customers collectively require ethanol volumes in excess of the supplies we produce
at our production facilities. We secure additional ethanol supplies from third-party plants in California and other third-party
suppliers in the Midwest where a majority of ethanol producers are located. We arrange for transportation, storage and delivery
of ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as
well as in the Midwest from a variety of sources.
We market our distillers grains and other feed
co-products to dairies and feedlots, in many cases located near our ethanol plants. These customers use our feed co-products for
livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers.
We do not market co-products from other ethanol producers.
See “Note 3 – Segments” to
our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments.
Outlook
Our results for the third quarter reflect
an improved margin environment and the benefits of our acquisition of ICP. Despite a slow start, margins improved throughout the
quarter with September producing the best financial results driven by higher ethanol sales prices and lower corn costs. Our results
also reflect increased production gallons sold in the third quarter predominately from increased volumes from our recently acquired
ICP facility.
Thus far in the fourth quarter we are off
to a similarly slow start with overall lower production margins compared to the third quarter due to elevated production volumes
and high industry-wide ethanol inventories. However, we expect ethanol demand to remain strong and continue to grow given continued
strong gasoline demand and as domestic markets blend at ethanol levels above 10% and international markets grow to meet carbon
targets and the higher demand for octane. The United States remains the lowest-cost source of ethanol for export and we continue
to expect record ethanol export levels for 2017 and additional export growth in 2018. Ethanol is the lowest-cost source of octane
in the world and, at current prices, ethanol is the lowest-cost source of liquid transportation fuel. Although we are cautious
on the fourth quarter, we believe that the above factors will support an improved ethanol supply and demand balance in 2018.
On the regulatory front, the Environmental
Protection Agency, or EPA, recently renewed its commitment to the renewable fuels program. In a letter to several U.S. Senators
confirming his support for the Renewable Fuel Standard, or RFS, EPA chief Scott Pruitt stated that preliminary analysis suggests
setting final Renewable Volume Obligation, or RVO, levels for 2018 at or above the proposed levels by the statutory deadline of
November 30, 2017; that the EPA would soon finalize a decision to deny the request to change the point of obligation for Renewable
Identification Numbers, or RINs; that the EPA will not pursue regulations amending the RFS to allow ethanol exports to generate
RINs; and that the EPA is exploring its authority to remove artificial barriers to the year-round use of E15 fuel. We are pleased
and encouraged by the EPA’s message and optimistic that the final RVO for 2018 will demonstrate the EPA’s commitment
to growing the renewable fuels market.
Our 3.5 megawatt cogeneration system at
our Stockton plant is on track to reach full capacity in the coming weeks. The system will convert process waste gas and natural
gas into electricity and steam, reducing energy costs by up to $4.0 million per year and lowering air emissions.
We implemented an industrial scale membrane
system at our Madera facility that separates water from ethanol during the plant’s dehydration process. The system is operating
well and we expect a positive impact on energy savings, operating performance and our carbon intensity score. We are realizing
energy savings of a 5% reduction in natural gas costs at the plant. Overall, we estimate the operating efficiencies, energy savings
and carbon premium combined will total approximately $1.0 million annually at current market rates. The membrane system also improves
operations during hot weather, yielding greater output, and it contributes to lowering our carbon intensity score. We have submitted
for a new Low-Carbon Fuel Standard pathway with the California Air Resources Board and we continue to evaluate installation of
membrane systems at our other plants.
We continue to produce cellulosic ethanol
at our Stockton plant and we are on track to begin commercial production of cellulosic ethanol at our Madera plant this quarter.
We have filed for approval from the EPA to produce D3 RINs at our Madera and Magic Valley plants. We expect EPA approval to produce
D3 RINs at both facilities by early 2018, at which point three of our plants will be producing cellulosic ethanol from corn fiber.
Although there are some risks around the market for advanced biofuels and the EPA is reluctant to enhance the statutory targets
through regulation, we believe cellulosic ethanol from corn fiber will continue to spread throughout our production platform and
the industry as a whole.
Also at our Madera facility, we remain on
schedule to begin full-scale operation of our 5 megawatt solar photovoltaic power system in early 2018. We expect the system to
reduce our utility costs by over $1.0 million annually and lower our carbon score.
Our integration of ICP is progressing very
well and we anticipate annualized savings of $4.5 million over the next nine months, predominately from reduced operating and logistical
costs as well as savings due to efficiencies in selling, general and administrative expense items. Our integration of personnel,
and information technology and accounting services is effectively complete. We have begun internalizing logistical and storage
services which we expect will accelerate and result in material benefits to our financial results in the coming quarters.
Our initial budget for capital projects
in 2017 totaled $46.0 million, including $16.0 million in previously announced projects such as the completion of our Stockton
cogeneration system, production of cellulosic ethanol at our Madera facility and our solar project. For the third quarter, we incurred
$6.1 million in capital expenditures, bringing our nine-month total to $12.3 million. We expect that full-year capital expenditures
will be less than $20.0 million. We intend to use the balance of budgeted uncommitted capital expenditure funds for investment
opportunities in projects that produce the highest near-term return. Our capital expenditure budget does not include potential
capital improvement projects at our ICP facilities. We expect to provide information regarding our capital expenditure projects
for these facilities in the coming months.
We plan to continue to leverage our diverse
base of production and marketing assets to advance our position and significantly increase market share as a leading producer and
marketer of low-carbon renewable fuels and high-quality alcohol products in the United States. We also intend to continue to evaluate
and invest in plant improvement and other initiatives to increase production and operating efficiencies, diversify products and
revenues, improve our carbon scores and improve our plant 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 at fair value; impairment of long-lived assets; valuation of allowance for
deferred taxes, derivative instruments, accounting for business combinations and allowance for doubtful accounts. These significant
accounting principles are more fully described in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31,
2016.
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
|
|
|
|
2017
|
|
|
2016
|
|
|
Variance
|
|
|
2017
|
|
|
2016
|
|
|
|
Variance
|
|
Production gallons sold (in millions)
|
|
|
141.8
|
|
|
|
125.5
|
|
|
|
13.0%
|
|
|
|
374.0
|
|
|
|
360.9
|
|
|
|
3.6%
|
|
Third party gallons sold
(in millions)
|
|
|
108.2
|
|
|
|
118.2
|
|
|
|
(8.5)%
|
|
|
|
335.2
|
|
|
|
322.6
|
|
|
|
3.9%
|
|
Total gallons sold (in millions)
|
|
|
250.0
|
|
|
|
243.7
|
|
|
|
2.6%
|
|
|
|
709.2
|
|
|
|
683.5
|
|
|
|
3.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production capacity utilization
|
|
|
93%
|
|
|
|
96%
|
|
|
|
(3.1)%
|
|
|
|
91%
|
|
|
|
92%
|
|
|
|
(1.1)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average ethanol sales price per
gallon
|
|
$
|
1.69
|
|
|
$
|
1.62
|
|
|
|
4.3%
|
|
|
$
|
1.66
|
|
|
$
|
1.63
|
|
|
|
1.8%
|
|
Corn cost per bushel – CBOT equivalent
|
|
$
|
3.69
|
|
|
$
|
3.58
|
|
|
|
3.1%
|
|
|
$
|
3.67
|
|
|
$
|
3.70
|
|
|
|
(0.8)%
|
|
Average basis
(1)
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
|
|
(56.0)%
|
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
|
(22.2)%
|
|
Delivered cost of corn
|
|
$
|
3.80
|
|
|
$
|
3.83
|
|
|
|
(0.8)%
|
|
|
$
|
3.88
|
|
|
$
|
3.97
|
|
|
|
(2.3)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total co-product tons sold (in thousands)
|
|
|
803.4
|
|
|
|
702.1
|
|
|
|
14.4%
|
|
|
|
2,223.2
|
|
|
|
2,050.3
|
|
|
|
8.4%
|
|
Co-product
revenues as % of delivered cost of corn
(2)
|
|
|
34.0%
|
|
|
|
35.7%
|
|
|
|
(4.8)%
|
|
|
|
34.2%
|
|
|
|
35.3%
|
|
|
|
(3.1)%
|
|
Average CBOT ethanol price per gallon
|
|
$
|
1.55
|
|
|
$
|
1.49
|
|
|
|
4.0%
|
|
|
$
|
1.54
|
|
|
$
|
1.49
|
|
|
|
3.4%
|
|
Average CBOT corn price per bushel
|
|
$
|
3.59
|
|
|
$
|
3.31
|
|
|
|
8.5%
|
|
|
$
|
3.64
|
|
|
$
|
3.77
|
|
|
|
3.4%
|
|
______________
|
(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
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
445,442
|
|
|
$
|
417,806
|
|
|
$
|
27,636
|
|
|
|
6.6%
|
|
|
$
|
1,236,984
|
|
|
$
|
1,183,039
|
|
|
$
|
53,945
|
|
|
|
4.6%
|
|
Cost of goods sold
|
|
|
433,377
|
|
|
|
411,442
|
|
|
|
21,935
|
|
|
|
5.3%
|
|
|
|
1,229,039
|
|
|
|
1,157,902
|
|
|
|
71,137
|
|
|
|
6.1%
|
|
Gross profit
|
|
$
|
12,065
|
|
|
$
|
6,364
|
|
|
$
|
5,701
|
|
|
|
89.6%
|
|
|
$
|
7,945
|
|
|
$
|
25,137
|
|
|
$
|
(17,192
|
)
|
|
|
(68.4)%
|
|
Percentage of net sales
|
|
|
2.7%
|
|
|
|
1.5%
|
|
|
|
|
|
|
|
|
|
|
|
0.6%
|
|
|
|
2.1%
|
|
|
|
|
|
|
|
|
|
Net Sales
The increase in our net sales
for the three and nine months ended September 30, 2017 as compared to the same periods in 2016 was primarily due to an increase
in our average sales price per gallon and an increase in our production gallons sold, predominately from increased volumes attributed
to our recently acquired ICP facility.
Three Months Ended
September 30, 2017
On a consolidated basis,
our average sales price per gallon increased 4.3% to $1.69 for the three months ended September 30, 2017 compared to our average
sales price per gallon of $1.62 for the same period in 2016. The average Chicago Board of Trade, or CBOT, ethanol price per gallon,
increased 4.0% to $1.55 for the three months ended September 30, 2017 as compared to the average CBOT ethanol price per gallon
of $1.49 for the same period in 2016.
Production Segment
Net sales of ethanol from
our production segment increased by $33.3 million, or 17%, to $234.5 million for the three months ended September 30, 2017 as compared
to $201.2 million for the same period in 2016. Our total volume of production ethanol gallons sold increased by 16.3 million gallons,
or 13%, to 141.8 million gallons for the three months ended September 30, 2017 as compared to 125.5 million gallons for the same
period in 2016. Our production segment’s average sales price per gallon increased 3.1% to $1.65 for the three months ended
September 30, 2017 compared to our production segment’s average sales price per gallon of $1.60 for the same period in 2016.
At our average sales price per gallon of $1.65 for the three months ended September 30, 2017, we realized additional net sales
of $27.0 million from our production segment from the 16.3 million additional gallons of produced ethanol sold in the three months
ended September 30, 2017 as compared to the same period in 2016. The increase of $0.05 in our average sales price per gallon for
the three months ended September 30, 2017 as compared to the same period in 2016 improved our net sales of ethanol from our production
segment by $6.3 million.
Net sales of co-products
increased $5.3 million, or 8%, to $70.4 million for the three months ended September 30, 2017 as compared to $65.1 million for
the same period in 2016. Our total volume of co-products sold increased by 101.3 thousand tons, or 14%, to 803.4 thousand tons
for three months ended September 30, 2017 from 702.1 thousand tons for the same period in 2016. At our average sales price per
ton of $87.57 for the three months ended September 30, 2017, we generated $8.9 million in additional net sales from the 101.3 thousand
tons of additional co-products sold in the three months ended September 30, 2017 as compared to the same period in 2016. The decrease
of $5.15, or 6%, in our average sales price per ton for the three months ended September 30, 2017 as compared to the same period
in 2016 reduced net sales of co-products by $3.6 million.
Marketing Segment
Net sales of ethanol from our marketing segment
decreased by $10.9 million, or 7%, to $140.6 million for the three months ended September 30, 2017 as compared to $151.5 million
for the same period in 2016. Our total volume of ethanol gallons sold by our marketing segment increased by 6.3 million gallons,
or 3%, to 250.0 million gallons for the three months ended September 30, 2017 as compared to 243.7 million gallons for the same
period in 2016. Our additional production gallons sold accounted for 16.3 million gallons of this increase, partially offset by
a reduction in our third-party gallons sold of 10.0 million gallons.
The increase in production gallons sold by our
marketing segment resulted in an increase of $0.1 million in net sales generated by our marketing segment, which were eliminated
upon consolidation.
Our marketing segment’s average sales
price per gallon increased $0.05, or 3%, to $1.70 for the three months ended September 30, 2017 as compared to $1.65 for the same
period in 2016. At our average sales price per gallon of $1.70 for the three months ended September 30, 2017, we realized a reduction
of $17.0 million in net sales from our marketing segment from the 10.0 million gallons in lower third-party ethanol gallons sold
in the three months ended September 30, 2017 as compared to the same period in 2016. The increase of $0.05 in our average sales
price per gallon for the three months ended September 30, 2017 as compared to the same period in 2016 increased our net sales of
ethanol from our marketing segment by $6.1 million.
Nine Months Ended September
30, 2017
On a consolidated basis,
our average sales price per gallon increased 1.8% to $1.66 for the nine months ended September 30, 2017 compared to our average
sales price per gallon of $1.63 for the same period in 2016. The average CBOT ethanol price per gallon increased 3.4% to $1.54
for the nine months ended September 30, 2017 compared to an average CBOT ethanol price per gallon of $1.49 for the same period
in 2016.
Production Segment
Net sales of ethanol from
our production segment increased by $38.7 million, or 7%, to $613.6 million for the nine months ended September 30, 2017 as compared
to $574.9 million for the same period in 2016. Our total volume of production ethanol gallons sold increased by 13.1 million gallons,
or 4%, to 374.0 million gallons for the nine months ended September 30, 2017 as compared to 360.9 million gallons for the same
period in 2016. Our production segment’s average sales price per gallon increased 3% to $1.64 for the nine months ended September
30, 2017 compared to our production segment’s average sales price per gallon of $1.59 for the same period in 2016. At our
average sales price per gallon of $1.64 for the nine months ended September 30, 2017, we generated $21.5 million in additional
net sales from our production segment from the 13.1 million additional gallons of produced ethanol sold in the nine months ended
September 30, 2017 as compared to the same period in 2016. The increase of $0.05 in our average sales price per gallon for the
nine months ended September 30, 2017 as compared to the same period in 2016 increased our net sales of ethanol from our production
segment by $17.2 million.
Net sales of co-products
decreased $1.8 million, or 1%, to $190.4 million for the nine months ended September 30, 2017 as compared to $192.2 million for
the same period in 2016. Our total volume of co-products sold increased by 172.9 thousand tons, or 8%, to 2,223.2 thousand tons
for the nine months ended September 30, 2017 from 2,050.3 thousand tons for the same period in 2016, however, our average sales
price per ton declined. At our average sales price per ton of $85.66 for the nine months ended September 30, 2017, we generated
$14.8 million in additional net sales from the 172.9 thousand additional tons of co-products sold in the nine months ended September
30, 2017 as compared to the same period in 2016. The decrease of $8.11, or 9%, in our average sales price per ton for the nine
months ended September 30, 2017 as compared to the same period in 2016 decreased net sales of co-products by $16.6 million.
Marketing Segment
Net sales of ethanol from our marketing segment
increased by $17.1 million, or 4%, to $433.0 million for the nine months ended September 30, 2017 as compared to $415.9 million
for the same period in 2016. Our total volume of ethanol gallons sold by our marketing segment increased by 25.6 million gallons,
or 4%, to 709.2 million gallons for the nine months ended September 30, 2017 as compared to 683.6 million gallons for the same
period in 2016. Our additional production gallons sold accounted for 13.1 million gallons of this increase and our additional
third-party gallons sold accounted for 12.5 million gallons of this increase.
Our marketing segment’s average sales
price per gallon decreased $0.01 to $1.67 for the nine months ended September 30, 2017 compared to $1.68 for the same period in
2016. At our average sales price per gallon of $1.67 for the nine months ended September 30, 2017, we generated $20.9 million in
additional net sales from our marketing segment from the 12.5 million gallons in additional third-party ethanol sold in the nine
months ended September 30, 2017 as compared to the same period in 2016. However, the decline of $0.01 in our average sales price
per gallon for the nine months ended September 30, 2017 as compared to the same period in 2016 reduced our net sales from third
party ethanol sold by our marketing segment by $3.8 million.
Cost of Goods Sold and Gross Profit
Our consolidated gross profit increased primarily
due to higher commodity margins in the three and nine months ended September 30, 2017 compared to the same periods in 2016.
Three Months Ended
September 30, 2017
Our consolidated gross profit improved by $5.7
million for the three months ended September 30, 2017 to $12.1 million as compared to $6.4 million for the same period in 2016,
representing a gross margin of 2.7% for the three months ended September 30, 2017 as compared to 1.5% for the same period in 2016.
Production Segment
Our production segment improved our consolidated
gross profit by $5.4 million for the three months ended September 30, 2017 as compared to the same period in 2016, primarily due
to higher production volumes and higher production margins for the three months ended September 30, 2017 as compared to the same
period in 2016.
Marketing Segment
Our marketing segment improved our consolidated
gross profit by $0.3 million for the three months ended September 30, 2017 as compared to the same period in 2016, primarily due
to higher gross profit attributable to our marketing segment’s higher average sales price per gallon for the three months
ended September 30, 2017 as compared to the same period in 2016.
Nine Months Ended September
30, 2017
Our consolidated gross profit declined by $17.2
million to a gross profit of $7.9 million for the nine months ended September 30, 2017 as compared to $25.1 million for the same
period in 2016, representing a gross margin of 0.6% for the nine months ended September 30, 2017 as compared to a gross margin
of 2.1% for the same period in 2016.
Production Segment
Our production segment reduced our consolidated
gross profit by $10.0 million for the nine months ended September 30, 2017 as compared to the same period in 2016, primarily as
a result of lower gross profit attributed to lower production margins in the nine months ended September 30, 2017 as compared to
the same period in 2016.
Marketing Segment
Our marketing segment decreased our consolidated
gross profit by $7.2 million for the nine months ended September 30, 2017 as compared to the same period in 2016, primarily as
a result of lower gross profit attributed to lower marketing margins in the nine months ended September 30, 2017 as compared to
the same period in 2016.
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
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Selling, general and administrative
expenses
|
|
$
|
8,720
|
|
|
$
|
5,971
|
|
|
$
|
2,749
|
|
|
|
46.0%
|
|
|
$
|
22,932
|
|
|
$
|
20,436
|
|
|
$
|
2,496
|
|
|
|
12.2%
|
|
Percentage of net sales
|
|
|
2.0%
|
|
|
|
1.4%
|
|
|
|
|
|
|
|
|
|
|
|
1.9%
|
|
|
|
1.7%
|
|
|
|
|
|
|
|
|
|
Our SG&A expenses increased $2.7 million
to $8.7 million for the three months ended September 30, 2017 as compared to $6.0 million for the same period in 2016. The increase
in SG&A expenses is primarily due to higher employee benefits, non-cash compensation and professional expenses associated with
our ICP acquisition. We anticipate SG&A expenses of approximately $8.0 million for the fourth quarter.
Our SG&A expenses increased $2.5 million
to $22.9 million for the nine months ended September 30, 2017 as compared to $20.4 million for the same period in 2016. The increase
in SG&A expenses is primarily due to higher employee benefits, non-cash compensation and professional expenses associated with
our ICP acquisition, partially offset by $3.6 million in gains associated with legal matters resolved in the first quarter.
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
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Interest expense, net
|
|
$
|
3,826
|
|
|
$
|
3,874
|
|
|
$
|
(48
|
)
|
|
|
(1.2)%
|
|
|
$
|
9,157
|
|
|
$
|
16,643
|
|
|
$
|
(7,486
|
)
|
|
|
(45.0)%
|
|
Percentage of net sales
|
|
|
0.9%
|
|
|
|
0.9%
|
|
|
|
|
|
|
|
|
|
|
|
0.7%
|
|
|
|
1.4%
|
|
|
|
|
|
|
|
|
|
Interest expense, net remained
relatively flat at $3.8 million for the three months ended September 30, 2017 from same period in 2016. Interest expense, net decreased
$7.5 million to $9.2 million for the nine months ended September 30, 2017 from $16.6 million for the same period in 2016. The decrease
in interest expense, net is primarily related to lower average interest rates resulting from the refinancing of our plant debt
in late 2016.
Net Loss Available
to Common Stockholders
The following table presents
our net 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
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Net loss available to common stockholders
|
|
$
|
521
|
|
|
$
|
3,837
|
|
|
$
|
(3,316
|
)
|
|
|
(86.4)%
|
|
|
$
|
22,625
|
|
|
$
|
12,607
|
|
|
$
|
10,018
|
|
|
|
79.5%
|
|
Percentage of net sales
|
|
|
0.1%
|
|
|
|
0.9%
|
|
|
|
|
|
|
|
|
|
|
|
1.8%
|
|
|
|
1.1%
|
|
|
|
|
|
|
|
|
|
The changes in net loss available
to common stockholders, was primarily due to changes in margins, partially offset by lower interest expense for the three and nine
months ended September 30, 2017, as compared to the same period in 2016.
Liquidity and Capital Resources
During the nine months ended September 30, 2017,
we funded our operations primarily from cash on hand, cash generated from our operations, tax refunds related to prior years, proceeds
from term debt and advances under our revolving credit facilities. These funds were also used to make capital expenditures, complete
the ICP acquisition, and make capital lease payments and principal payments on term debt and lines of credit.
Our current available capital resources consist
of cash on hand and amounts available for borrowing under our credit facilities. We expect that our future available capital resources
will consist primarily of our remaining cash balances, amounts available for borrowing, if any, under our credit facilities and
cash generated from our operations.
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 capital requirements for at least the next twelve months.
Quantitative Quarter-End
Liquidity Status
We believe that the following
amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in
conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this
report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
contained in this report (dollars in thousands):
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Change
|
|
Cash and cash equivalents
|
|
$
|
56,923
|
|
|
$
|
68,590
|
|
|
|
(17.0)%
|
|
Current assets
|
|
$
|
212,818
|
|
|
$
|
235,201
|
|
|
|
(9.5)%
|
|
Current liabilities
|
|
$
|
92,396
|
|
|
$
|
78,841
|
|
|
|
17.2%
|
|
Long-term debt, net of current portion
|
|
$
|
220,304
|
|
|
$
|
188,028
|
|
|
|
17.2%
|
|
Working capital
|
|
$
|
120,422
|
|
|
$
|
156,360
|
|
|
|
(23.0)%
|
|
Working capital ratio
|
|
|
2.30
|
|
|
|
2.98
|
|
|
|
(22.8)%
|
|
Restricted Net Assets
At September 30, 2017, we had $305.7 million
of net assets at our subsidiaries that were not available to be transferred to Pacific Ethanol, Inc. in the form of dividends,
loans or advances due to restrictions contained in the credit facilities of our subsidiaries.
Changes in Working Capital and Cash Flows
Working capital decreased to $120.4 million
at September 30, 2017 from $156.4 million at December 31, 2016 as a result of a decrease of $22.4 million in current assets and
an increase of $13.6 million in current liabilities.
Current assets decreased primarily due to decreases
of $11.7 million in cash and cash equivalents, $14.0 million in accounts receivable due to the timing of sales volumes at the end
of the period, $5.6 million in income tax receivables and $4.3 million in prepaid inventory, partially offset by an increase of
$11.7 million in inventories and $2.0 million in derivative instrument assets.
Our cash and cash equivalents decreased by
$11.7 million at September 30, 2017 as compared to December 31, 2016 due to $41.3 million of cash used in our investing activities,
due to our acquisition of ICP and capital projects associated with our plant improvement initiatives, and $5.4 million of cash
used in our financing activities, also primarily driven by our ICP acquisition, partially offset by $35.0 million of cash provided
by our operations.
Our current liabilities increased primarily
due to increases of $9.5 million in the current portion of our term debt and $6.1 million in accounts payable and accrued liabilities,
partially offset by decreases of $1.4 million in derivative instrument liabilities and $0.7 million in other current liabilities.
Cash provided by our Operating Activities
Cash provided by our operating activities increased
by $20.0 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase in cash provided
by our operating activities is primarily due to:
|
·
|
a decrease in accounts receivable of $33.4 million primarily due to the timing of sales volumes at the end of the periods;
|
|
·
|
a decrease in inventories and prepaid inventory of $8.3 million primarily due to the timing of purchases;
|
|
·
|
a decrease in gains from derivative activities of $2.5 million due to market changes; and
|
|
·
|
an increase in noncash compensation of $1.1 million due to stock grant activity in the current period;
|
These amounts were partially offset by:
|
·
|
an increase in consolidated net loss of $12.3 million due to lower margins;
|
|
·
|
a decrease in accounts payable and accrued expenses of $1.2 million resulting primarily from the period-over-period timing
of payments;
|
|
·
|
a decrease in interest expense added to term debt of $9.5 million; and
|
|
·
|
an increase in prepaid expenses of $3.3 million due to the timing of payments.
|
Cash used in our Investing Activities
Cash used in our investing activities increased
by $31.3 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase in cash used
in our investing activities is primarily due to $28.9 million in payments for our ICP acquisition, net of cash acquired in the
acquisition, and proceeds from cash collateralized letters of credit in 2016 in the amount of $4.1 million that did not recur in
2017, partially offset by $1.7 million in lower spending on capital projects associated with our plant improvement initiatives.
Cash used in our Financing Activities
Cash used in our financing activities decreased
by $11.8 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The decrease in cash used
in our financing activities is primarily due to $42.0 million in proceeds from our ICP credit facilities, $13.5 million in proceeds
from our issuance of additional senior notes, $2.6 million in lower capital lease payments and $1.2 million in proceeds from warrant
and option exercises, partially offset by a $37.9 million increase in principal payments on term notes and an $8.8 million increase
in payments on Kinergy’s line of credit.
Kinergy Operating Line of Credit
Kinergy maintains an operating line of credit
for an aggregate amount of up to $100.0 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 1.50% to 2.00%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount
by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month.
Payments that may be made by Kinergy to Pacific Ethanol as reimbursement for management and other services provided by Pacific
Ethanol to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility also
includes the accounts receivable of Pacific Ag. Products, LLC, or PAP, as additional collateral. Payments that may be made by PAP
to Pacific Ethanol as reimbursement for management and other services provided by Pacific Ethanol to PAP are limited under the
terms of the credit facility to $0.5 million per fiscal quarter. PAP, one of our indirect wholly-owned subsidiaries, markets our
co-products and also provides raw material procurement services to our subsidiaries.
For all monthly periods in which excess borrowing
availability falls below a specified level, Kinergy and PAP must collectively maintain a fixed-charge coverage ratio (calculated
as a twelve-month rolling earnings before interest, taxes, depreciation and amortization (EBITDA), subject to certain adjustments,
divided by the sum of interest expense, 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).
For all periods below, Kinergy maintained above the minimum excess availability required; accordingly, the fixed-charge coverage
ratio covenant did not apply.
|
|
Three Months Ended
September 30,
|
|
|
Years Ended
December 31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Charge Coverage Ratio Requirement
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
Actual
|
|
|
3.01
|
|
|
|
9.38
|
|
|
|
7.88
|
|
|
|
10.02
|
|
Excess
|
|
|
1.01
|
|
|
|
7.38
|
|
|
|
5.88
|
|
|
|
8.02
|
|
Pacific Ethanol has guaranteed all of Kinergy’s
obligations under the credit facility. As of September 30, 2017, Kinergy had an outstanding balance of $44.0 million with additional
borrowing availability under the credit facility of $22.4 million.
Pekin Credit Facilities
Pacific Ethanol Pekin, Inc.,
or PE Pekin, has a $60.5 million term loan facility that matures on August 20, 2021 and a $32.0 million revolving credit facility
that matures on February 1, 2022. The PE Pekin credit facilities are secured by a first-priority security interest in all of PE
Pekin’s assets. Interest accrues under the PE Pekin credit facilities at an annual rate equal to the 30-day LIBOR plus 4.00%,
payable monthly. PE Pekin is required to make quarterly principal payments in the amount of $3.5 million on the term loan beginning
on August 20, 2017 and a principal payment of $4.5 million at maturity on August 20, 2021. PE Pekin is required to pay monthly
in arrears a fee on any unused portion of the revolving credit facility at a rate of 0.75% per annum. Prepayment of these facilities
is subject to a prepayment penalty. Under the terms of the credit facilities, PE Pekin is required to maintain working capital
of not less than $17.5 million from August 31, 2017 through December 31, 2017 and working capital of not less than $20.0 million
from January 1, 2018 and continuing at all times thereafter. In addition, PE Pekin is required to maintain an annual debt coverage
ratio of not less than 0.15 to 1.0 for the year ending December 31, 2017 and 1.25 to 1.0 for years thereafter.
Pacific Aurora Credit Facility
Pacific Aurora maintains a revolving credit
facility for up to $30.0 million that matures on February 1, 2022. The credit facility is secured by a first-priority security
interest in all of Pacific Aurora’s assets. Borrowing availability under the credit facility automatically declines by $2.5
million on the first day of each June and December beginning on December 1, 2017 through and including December 1, 2020. Interest
accrues under the Pacific Aurora credit facility at an annual rate equal to the 30-day LIBOR plus 4.0%, payable monthly. Pacific
Aurora is required to pay monthly in arrears a fee on any unused portion of the credit facility at a rate of 0.75% per annum. Prepayment
of the credit facility is subject to a prepayment penalty. Under the terms of the credit facility, Pacific Aurora is required to
maintain not less than $18.0 million in working capital through February 28, 2018, not less than $20.0 million in working capital
after February 28, 2018 and an annual debt coverage ratio of not less than 0.0 to 1.0 for the year ending December 31, 2017 and
1.5 to 1.0 for the year ending December 31, 2018. At September 30, 2017, Pacific Aurora had no amounts outstanding under the credit
facility and $30.0 million available for borrowing under the facility.
ICP Credit Facilities
ICP has a $24.0 million term
loan facility that matures on September 20, 2021 and an $18.0 million revolving credit facility that matures on September 1, 2022.
The ICP credit facilities are secured by a first-priority security interest in all of ICP’s assets. Interest accrues under
the ICP credit facilities at an annual rate equal to the 30-day LIBOR plus 3.75%, payable monthly. ICP is required to make quarterly
principal payments in the amount of $1.5 million on the term loan beginning in December 2017. ICP is required to pay monthly in
arrears a fee on any unused portion of the revolving credit facility at a rate of 0.75% per annum. Under the terms of the credit
facilities, ICP is required to maintain working capital of not less than $8.0 million. In addition, ICP is required to maintain
an annual debt coverage ratio of not less than 1.5 to 1.0 beginning for the year ending December 31, 2018.
Pacific Ethanol, Inc. Notes Payable
We have $68.9 million in aggregate principal
amount of senior secured notes that mature on December 15, 2019. Interest on the notes accrues at an annual rate equal to (i) the
greater of 1% and the three-month LIBOR, plus 7.0% through December 14, 2017, (ii) the greater of 1% and LIBOR, plus 9% between
December 15, 2017 and December 14, 2018, and (iii) the greater of 1% and LIBOR plus 11% between December 15, 2018 and the maturity
date. Interest is payable in cash in arrears on the 15th calendar day of each March, June, September and December beginning on
March 15, 2017. We are required to pay all outstanding principal and any accrued and unpaid interest on the notes on the maturity
date. We may, at our option, prepay the outstanding principal amount of the notes at any time without premium or penalty. Pacific
Ethanol, Inc. issued the notes, which are secured by a first-priority security interest in the equity interest held by Pacific
Ethanol, Inc. in its wholly-owned subsidiary, PE Op. Co., which indirectly owns our plants located on the West Coast.
Pacific Ethanol Central, LLC Notes Payable
We issued $46.9 million in aggregate principal
amount of secured notes that were to mature on January 3, 2019 as part of the purchase price for our acquisition of ICP. On September
15, 2017, we repaid these notes with cash on hand and $42.0 million in proceeds from the ICP credit facilities.
Contractual Obligations
Except for ICP’s credit facilities, as
discussed above, there have been no material changes in the nine months ended September 30, 2017 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 2016.
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, 2017 and
2016.