|
ITEM
1.
|
FINANCIAL
STATEMENTS.
|
PACIFIC
ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
ASSETS
|
|
2019
|
|
|
2018
|
|
|
|
|
(unaudited)
|
|
|
|
*
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,751
|
|
|
$
|
26,627
|
|
Accounts receivable, net (net of allowance for doubtful accounts of $38 and $12, respectively)
|
|
|
78,402
|
|
|
|
67,636
|
|
Inventories
|
|
|
62,731
|
|
|
|
57,820
|
|
Prepaid inventory
|
|
|
5,140
|
|
|
|
3,090
|
|
Income tax receivable
|
|
|
612
|
|
|
|
612
|
|
Derivative instruments
|
|
|
1,155
|
|
|
|
1,765
|
|
Other current assets
|
|
|
6,906
|
|
|
|
11,254
|
|
Total current assets
|
|
|
176,697
|
|
|
|
168,804
|
|
Property and equipment, net
|
|
|
472,735
|
|
|
|
482,657
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Right of use operating lease assets, net
|
|
|
41,839
|
|
|
|
—
|
|
Intangible asset
|
|
|
2,678
|
|
|
|
2,678
|
|
Other assets
|
|
|
5,072
|
|
|
|
5,842
|
|
Total other assets
|
|
|
49,589
|
|
|
|
8,520
|
|
Total Assets
|
|
$
|
699,021
|
|
|
$
|
659,981
|
|
*
Amounts
derived from the audited financial statements for the year ended December 31, 2018.
See accompanying notes to consolidated financial
statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except par value)
|
|
March 31,
|
|
|
December 31,
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
2019
|
|
|
2018
|
|
|
|
|
(unaudited)
|
|
|
|
*
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable – trade
|
|
$
|
50,531
|
|
|
$
|
48,176
|
|
Accrued liabilities
|
|
|
22,773
|
|
|
|
23,421
|
|
Current portion – operating leases
|
|
|
7,568
|
|
|
|
—
|
|
Current portion – long-term debt
|
|
|
143,148
|
|
|
|
146,671
|
|
Derivative instruments
|
|
|
5,156
|
|
|
|
6,309
|
|
Other current liabilities
|
|
|
6,993
|
|
|
|
7,282
|
|
Total current liabilities
|
|
|
236,169
|
|
|
|
231,859
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
96,433
|
|
|
|
84,767
|
|
Operating leases, net of current portion
|
|
|
33,091
|
|
|
|
—
|
|
Assessment financing
|
|
|
9,342
|
|
|
|
9,342
|
|
Other liabilities
|
|
|
14,627
|
|
|
|
14,648
|
|
Total Liabilities
|
|
|
389,662
|
|
|
|
340,616
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
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 March 31, 2019 and December 31, 2018;
Series B: 1,581 shares authorized; 927 shares issued and outstanding as of March 31, 2019 and December 31, 2018; liquidation preference of $18,075 as of March 31, 2018
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.001 par value; 300,000 shares authorized; 48,884 and 45,771 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
|
|
|
49
|
|
|
|
46
|
|
Non-voting common stock, $0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of March 31, 2019 and December 31, 2018
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
936,643
|
|
|
|
932,179
|
|
Accumulated other comprehensive loss
|
|
|
(2,459
|
)
|
|
|
(2,459
|
)
|
Accumulated deficit
|
|
|
(643,202
|
)
|
|
|
(630,000
|
)
|
Total Pacific Ethanol, Inc. Stockholders’ Equity
|
|
|
291,032
|
|
|
|
299,767
|
|
Noncontrolling interests
|
|
|
18,327
|
|
|
|
19,598
|
|
Total Stockholders’ Equity
|
|
|
309,359
|
|
|
|
319,365
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
699,021
|
|
|
$
|
659,981
|
|
|
|
*
Amounts
derived from the audited financial statements for the year ended December 31, 2018.
|
See accompanying notes to consolidated
financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited,
in thousands, except per share data)
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
355,803
|
|
|
$
|
400,027
|
|
Cost of goods sold
|
|
|
358,092
|
|
|
|
396,665
|
|
Gross profit (loss)
|
|
|
(2,289
|
)
|
|
|
3,362
|
|
Selling, general and administrative expenses
|
|
|
8,235
|
|
|
|
9,315
|
|
Loss from operations
|
|
|
(10,524
|
)
|
|
|
(5,953
|
)
|
Interest expense, net
|
|
|
(4,736
|
)
|
|
|
(4,505
|
)
|
Other income, net
|
|
|
1,099
|
|
|
|
398
|
|
Loss before benefit for income taxes
|
|
|
(14,161
|
)
|
|
|
(10,060
|
)
|
Benefit for income taxes
|
|
|
—
|
|
|
|
563
|
|
Consolidated net loss
|
|
|
(14,161
|
)
|
|
|
(9,497
|
)
|
Net loss attributed to noncontrolling interests
|
|
|
1,271
|
|
|
|
1,656
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(12,890
|
)
|
|
$
|
(7,841
|
)
|
Preferred stock dividends
|
|
$
|
(312
|
)
|
|
$
|
(312
|
)
|
Net loss available to common stockholders
|
|
$
|
(13,202
|
)
|
|
$
|
(8,153
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.29
|
)
|
|
$
|
(0.19
|
)
|
Weighted-average shares outstanding, basic and diluted
|
|
|
45,517
|
|
|
|
42,912
|
|
See accompanying notes to consolidated
financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
Three Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(14,161
|
)
|
|
$
|
(9,497
|
)
|
Adjustments to reconcile consolidated net loss to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
12,126
|
|
|
|
10,164
|
|
Deferred income taxes
|
|
|
—
|
|
|
|
(563
|
)
|
Amortization of debt discount
|
|
|
178
|
|
|
|
178
|
|
Non-cash compensation
|
|
|
800
|
|
|
|
736
|
|
Amortization of deferred financing fees
|
|
|
135
|
|
|
|
465
|
|
Loss (gain) on derivatives
|
|
|
86
|
|
|
|
462
|
|
Bad debt expense
|
|
|
26
|
|
|
|
47
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(9,970
|
)
|
|
|
6,080
|
|
Inventories
|
|
|
(4,911
|
)
|
|
|
(8,712
|
)
|
Prepaid expenses and other assets
|
|
|
5,117
|
|
|
|
1,370
|
|
Prepaid inventory
|
|
|
(2,050
|
)
|
|
|
(328
|
)
|
Operating leases
|
|
|
(2,676
|
)
|
|
|
—
|
|
Accounts payable and accrued liabilities
|
|
|
273
|
|
|
|
8,508
|
|
Net cash provided by (used in) operating activities
|
|
|
(15,027
|
)
|
|
|
8,910
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(1,112
|
)
|
|
|
(4,357
|
)
|
Net cash used in investing activities
|
|
|
(1,112
|
)
|
|
|
(4,357
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Net proceeds from Kinergy’s line of credit
|
|
|
13,153
|
|
|
|
8,722
|
|
Proceeds from issuance of common stock
|
|
|
3,670
|
|
|
|
—
|
|
Principal payments on borrowings
|
|
|
(5,248
|
)
|
|
|
(5,000
|
)
|
Principal payments on capital leases
|
|
|
—
|
|
|
|
(403
|
)
|
Proceeds from assessment financing
|
|
|
—
|
|
|
|
331
|
|
Preferred stock dividends paid
|
|
|
(312
|
)
|
|
|
(312
|
)
|
Net cash provided by financing activities
|
|
|
11,263
|
|
|
|
3,338
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(4,876
|
)
|
|
|
7,891
|
|
Cash and cash equivalents at beginning of period
|
|
|
26,627
|
|
|
|
49,489
|
|
Cash and cash equivalents at end of period
|
|
$
|
21,751
|
|
|
$
|
57,380
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
4,260
|
|
|
$
|
3,593
|
|
Income taxes received
|
|
$
|
—
|
|
|
$
|
168
|
|
Initial right of use assets and liabilities recorded under ASC 842
|
|
$
|
43,753
|
|
|
$
|
—
|
|
See accompanying notes to consolidated
financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accum.
Other Comprehensive
Income (Loss)
|
|
|
Non-Controlling
Interests
|
|
|
Total
|
|
Balances, January 1, 2019
|
|
|
927
|
|
|
$
|
1
|
|
|
|
45,771
|
|
|
$
|
46
|
|
|
$
|
932,179
|
|
|
$
|
(630,000
|
)
|
|
$
|
(2,459
|
)
|
|
$
|
19,598
|
|
|
$
|
319,365
|
|
Stock-based compensation expense – restricted stock issued to employees and directors,
net of cancellations and tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
797
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
797
|
|
Issuances of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
3,137
|
|
|
|
3
|
|
|
|
3,667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,670
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(312
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(312
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,890
|
)
|
|
|
—
|
|
|
|
(1,271
|
)
|
|
|
(14,161
|
)
|
Balances, March 31, 2019
|
|
|
927
|
|
|
$
|
1
|
|
|
|
48,884
|
|
|
$
|
49
|
|
|
$
|
936,643
|
|
|
$
|
(643,202
|
)
|
|
$
|
(2,459
|
)
|
|
$
|
18,327
|
|
|
$
|
309,359
|
|
Balances, January 1, 2018
|
|
|
927
|
|
|
$
|
1
|
|
|
|
43,986
|
|
|
$
|
44
|
|
|
$
|
927,090
|
|
|
$
|
(568,462
|
)
|
|
$
|
(2,234
|
)
|
|
$
|
27,261
|
|
|
$
|
383,700
|
|
Stock-based compensation expense – restricted stock issued to employees and directors,
net of cancellations and tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
735
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
735
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(312
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(312
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,841
|
)
|
|
|
—
|
|
|
|
(1,656
|
)
|
|
|
(9,497
|
)
|
Balances, March 31, 2018
|
|
|
927
|
|
|
$
|
1
|
|
|
|
43,955
|
|
|
$
|
44
|
|
|
$
|
927,825
|
|
|
$
|
(576,615
|
)
|
|
$
|
(2,234
|
)
|
|
$
|
25,605
|
|
|
$
|
374,626
|
|
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
1.
|
ORGANIZATION
AND
BASIS OF PRESENTATION.
|
Organization
and Business
– The consolidated financial statements include, for all periods presented, the accounts of Pacific
Ethanol, Inc., a Delaware corporation (“Pacific Ethanol”), and its direct and indirect subsidiaries (collectively,
the “Company”), including its subsidiaries, Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”),
Pacific Ag. Products, LLC, a California limited liability company (“PAP”), PE Op Co., a Delaware corporation (“PE
Op Co.”) and all nine of the Company’s ethanol production facilities.
The
Company is a leading producer and marketer of low-carbon renewable fuels in the United States. The Company’s four ethanol
plants in the Western United States (together with their respective holding companies, the “Pacific Ethanol West Plants”)
are located in close proximity to both feed and ethanol customers and thus enjoy unique advantages in efficiency, logistics and
product pricing. The Company’s five ethanol plants in the Midwest (together with their respective holding companies, the
“Pacific Ethanol Central Plants”) are located in the heart of the Corn Belt, benefit from low-cost and abundant feedstock
production and allow for access to many additional domestic markets. In addition, the Company’s ability to load unit trains
from these facilities in the Midwest allows for greater access to international markets.
The
Company has a combined production capacity of 605 million gallons per year, markets, on an annualized basis, nearly 1.0 billion
gallons of ethanol and specialty alcohols, and produces, on an annualized basis, over 3.0 million tons of co-products on a dry
matter basis, such as wet and dry distillers grains, wet and dry corn gluten feed, condensed distillers solubles, corn gluten
meal, corn germ, dried yeast and CO
2
.
As
of March 31, 2019, all but one of the Company’s production facilities, specifically, the Company’s Aurora East facility,
were operating. As market conditions change, the Company may increase, decrease or idle production at one or more operating facilities
or resume operations at any idled facility.
Basis
of Presentation
–
Interim Financial Statements
– The accompanying unaudited consolidated financial
statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim
periods should not be considered indicative of results for a full year. These interim consolidated financial statements should
be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018. 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, 2018, with the exception of new lease accounting, as discussed further below. In
the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement
of the results for interim periods have been included. All significant intercompany accounts and transactions have been eliminated
in consolidation.
Reclassifications
– Certain prior year amounts have been reclassified to conform to the current presentation. Such reclassifications
had no effect on the consolidated net loss, working capital or stockholders’ equity.
Liquidity
– The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The Company and the ethanol industry as a whole experienced significant adverse conditions throughout most of 2018 as a result
of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These factors resulted in
prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. Margins improved
for the first quarter of 2019, and have further improved thus far in the second quarter of 2019
.
In response to the low-margin environment, the Company initiated and expects to complete over the next five months strategic initiatives
focused on the potential sale of certain production assets, a reduction of its debt levels, a strengthening of its cash and liquidity
position, and opportunities for strategic partnerships and capital raising activities, positioning the Company to optimize its
business performance. The most significant challenge to the Company in meeting these objectives would be a continued adverse margin
environment.
In implementing these strategic initiatives, the Company, as of March 31, 2019, had the following available
liquidity and capital resources to achieve its objectives:
|
●
|
Cash of $21.8 million and excess availability under Kinergy’s line of credit of $21.8 million;
|
|
●
|
Nine ethanol production facilities with an aggregate of 605 million gallons of annual production capacity,
of which plant assets representing 355 million gallons of capacity are either unencumbered, or their entire sales proceeds would
be used to repay the Company’s senior secured notes. The Company has engaged an independent third party to help facilitate
the marketing of certain of these assets; and
|
|
●
|
In
excess of $20 million of equity available under the Company’s shelf registration
statement, including under its at-the-market equity program. These funds would first
be required to repay the Company’s senior secured notes.
|
The Company also will continue working with
its lenders to pursue other options to increase liquidity and extend the maturity dates of its debt.
The Company believes that its strategic initiatives will provide sufficient liquidity to meet its anticipated
working capital, debt service and other liquidity needs through the next twelve months.
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 $67,319,000 and $54,820,000 at March 31, 2019 and December 31, 2018, respectively,
were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $38,000 and $12,000
as of March 31, 2019 and December 31, 2018, respectively. The Company recorded a bad debt expense of $26,000 and $47,000 for the
three months ended March 31, 2019 and 2018, respectively. The Company does not have any off-balance sheet credit exposure related
to its customers.
Financial
Instruments
– The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of their fair values because of the short maturity of these items. The Company believes the
carrying value of its long-term debt approximates fair value because the interest rates on these instruments are variable, and
are considered Level 2 fair value measurements.
Recent
Accounting Pronouncements
– In February 2016, the Financial Accounting Standards Board (“FASB”) issued
new guidance on accounting for leases under Accounting Standards Codification 842 (“ASC 842”). Under the new guidance,
lessees are 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.
Lease expense under the new guidance is substantially the same as prior to the adoption. See Note 5 for further information.
Estimates
and Assumptions
– The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates are required as part of determining the allowance for doubtful
accounts, net realizable value of inventory, estimated lives of property and equipment, long-lived asset impairments, valuation
allowances on deferred income taxes and the potential outcome of future tax consequences of events recognized in the Company’s
financial statements or tax returns, and the valuation of assets acquired and liabilities assumed as a result of business combinations.
Actual results and outcomes may materially differ from management’s estimates and assumptions.
The
Company reports its financial and operating performance in two segments: (1) ethanol production, which includes the production
and sale of ethanol, specialty alcohols and co-products, with all of the Company’s production facilities aggregated, and
(2) marketing and distribution, which includes marketing and merchant trading for Company-produced ethanol, specialty alcohols
and co-products and third-party ethanol.
The
following tables set forth certain financial data for the Company’s operating segments (in thousands):
|
|
Three Months Ended March 31,
|
|
Net Sales
|
|
2019
|
|
|
2018
|
|
Production, recorded as gross:
|
|
|
|
|
|
|
Ethanol/alcohol sales
|
|
$
|
179,388
|
|
|
$
|
219,628
|
|
Co-product sales
|
|
|
68,806
|
|
|
|
74,534
|
|
Intersegment sales
|
|
|
364
|
|
|
|
474
|
|
Total production sales
|
|
|
248,558
|
|
|
|
294,636
|
|
|
|
|
|
|
|
|
|
|
Marketing and distribution:
|
|
|
|
|
|
|
|
|
Ethanol/alcohol sales, gross
|
|
$
|
107,154
|
|
|
$
|
105,429
|
|
Ethanol/alcohol sales, net
|
|
|
455
|
|
|
|
436
|
|
Intersegment sales
|
|
|
1,818
|
|
|
|
2,226
|
|
Total marketing and distribution sales
|
|
|
109,427
|
|
|
|
108,091
|
|
|
|
|
|
|
|
|
|
|
Intersegment eliminations
|
|
|
(2,182
|
)
|
|
|
(2,700
|
)
|
Net sales as reported
|
|
$
|
355,803
|
|
|
$
|
400,027
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
258,594
|
|
|
$
|
298,431
|
|
Marketing and distribution
|
|
|
101,829
|
|
|
|
100,932
|
|
Intersegment eliminations
|
|
|
(2,331
|
)
|
|
|
(2,698
|
)
|
Cost of goods sold, as reported
|
|
$
|
358,092
|
|
|
$
|
396,665
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before benefit for income taxes:
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
(17,566
|
)
|
|
$
|
(12,445
|
)
|
Marketing and distribution
|
|
|
6,119
|
|
|
|
5,750
|
|
Corporate activities
|
|
|
(2,714
|
)
|
|
|
(3,365
|
)
|
|
|
$
|
(14,161
|
)
|
|
$
|
(10,060
|
)
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
12,005
|
|
|
$
|
9,932
|
|
Corporate activities
|
|
|
121
|
|
|
|
232
|
|
|
|
$
|
12,126
|
|
|
$
|
10,164
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
1,706
|
|
|
$
|
2,024
|
|
Marketing and distribution
|
|
|
588
|
|
|
|
363
|
|
Corporate activities
|
|
|
2,442
|
|
|
|
2,118
|
|
|
|
$
|
4,736
|
|
|
$
|
4,505
|
|
The
following table sets forth the Company’s total assets by operating segment (in thousands):
|
|
|
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
558,379
|
|
|
$
|
532,790
|
|
Marketing and distribution
|
|
|
123,552
|
|
|
|
112,984
|
|
Corporate assets
|
|
|
17,090
|
|
|
|
14,117
|
|
|
|
$
|
699,021
|
|
|
$
|
659,891
|
|
Inventories
consisted primarily of bulk ethanol, specialty alcohols, corn, co-products, low-carbon and Renewable Identification Number (“RIN”)
credits and unleaded fuel, and are valued at the lower-of-cost-or-net realizable value, with cost determined on a first-in, first-out
basis. Inventory is net of a $223,000 and $2,328,000 valuation adjustment as of March 31, 2019 and December 31, 2018, respectively.
Inventory balances consisted of the following (in thousands):
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Finished goods
|
|
$
|
42,355
|
|
|
$
|
35,778
|
|
Work in progress
|
|
|
7,180
|
|
|
|
6,855
|
|
Raw materials
|
|
|
6,352
|
|
|
|
7,233
|
|
Low-carbon and RIN credits
|
|
|
4,973
|
|
|
|
6,130
|
|
Other
|
|
|
1,871
|
|
|
|
1,824
|
|
Total
|
|
$
|
62,731
|
|
|
$
|
57,820
|
|
The
business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity
prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program
recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility
could have on operating results.
Commodity
Risk
–
Cash Flow Hedges
– The Company uses derivative instruments to protect cash flows from
fluctuations caused by volatility in commodity prices for periods of up to twelve months in order to protect gross profit margins
from potentially adverse effects of market and price volatility on ethanol sale and purchase commitments where the prices are
set at a future date and/or if the contracts specify a floating or index-based price for ethanol. In addition, the Company hedges
anticipated sales of ethanol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives
may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated
transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which
is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of
goods sold. For the three months ended March 31, 2019 and 2018, 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 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 $86,000 and $462,000 as the changes in the fair values of
these contracts for the three months ended March 31, 2019 and 2018, respectively.
Non
Designated Derivative Instruments
– The classification and amounts of the Company’s derivatives not designated
as hedging instruments, and related cash collateral balances, are as follows (in thousands):
|
|
As
of March 31, 2019
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
of Instrument
|
|
Balance
Sheet Location
|
|
|
Fair
Value
|
|
|
Balance
Sheet Location
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral balance
|
|
Other current assets
|
|
$
|
4,409
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Derivative instruments
|
|
$
|
1,155
|
|
|
Derivative instruments
|
|
$
|
5,156
|
|
|
|
As of December 31, 2018
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Instrument
|
|
Balance Sheet Location
|
|
|
Fair
Value
|
|
|
Balance Sheet Location
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral balance
|
|
Other current assets
|
|
$
|
8,479
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Derivative instruments
|
|
$
|
1,765
|
|
|
Derivative instruments
|
|
$
|
6,309
|
|
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 Losses
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2019
|
|
|
2018
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(630
|
)
|
|
$
|
(1,658
|
)
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2019
|
|
|
2018
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
544
|
|
|
$
|
1,196
|
|
As
discussed in Note 1, on January 1, 2019, the Company adopted the provisions of ASC 842 using the prospective transition approach,
which applies the provisions of ASC 842 upon adoption, with no change to prior periods. This adoption resulted in the Company
recognizing initial right of use assets and lease liabilities of $43.8 million. The adoption did not have a significant impact
on the Company’s consolidated statement of operations.
Upon
the initial adoption of ASC 842, the Company elected the following practical expedients allowable under the guidance: not to reassess
whether any expired or existing contracts are or contain leases; not to reassess the lease classification for any expired or existing
leases; not to reassess initial direct costs for any existing leases; not to separately identify lease and nonlease components;
and not to evaluate historical land easements. Additionally, the Company elected the short-term lease exemption policy, applying
the requirements of ASC 842 to only long-term (greater than 1 year) leases.
The
Company leases railcar equipment, office equipment and land for certain of its facilities. Operating lease right of use assets
and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company
uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each
lease in determining the present value of lease payments. For the three months ended March 31, 2019, the Company’s weighted
average discount rate was 6.01%. Operating lease expense is recognized on a straight-line basis over the lease term.
The
Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease
terms of approximately 1 year to 57 years, which may include options to extend the lease when it is reasonably certain the Company
will exercise those options. For the three months ended March 31, 2019, the weighted average remaining lease term was 15.4 years.
The Company does not have lease arrangements with residual value guarantees, sale leaseback terms or material restrictive covenants.
The Company does not have any material finance lease obligations nor sublease agreements.
The
following table summarizes the remaining maturities of the Company’s operating lease liabilities, assuming all land lease
extensions are taken, as of March 31, 2019 (in thousands):
Year Ended:
|
|
|
|
|
2019
|
|
|
$
|
7,497
|
|
2020
|
|
|
|
8,370
|
|
2021
|
|
|
|
5,413
|
|
2022
|
|
|
|
5,240
|
|
2023
|
|
|
|
4,513
|
|
2024-76
|
|
|
|
40,282
|
|
|
|
|
$
|
71,315
|
|
For the three months ended March 31, 2019, the Company recorded operating lease costs of $2,263,000 in cost
of goods sold and $118,000 in selling, general and administrative expenses in the Company’s statements of operations
Long-term
borrowings are summarized as follows (in thousands):
|
|
March
31,
2019
|
|
|
December
31,
2018
|
|
Kinergy line of credit
|
|
$
|
70,209
|
|
|
$
|
57,057
|
|
Pekin term loan
|
|
|
43,000
|
|
|
|
43,000
|
|
Pekin revolving loan
|
|
|
32,000
|
|
|
|
32,000
|
|
ICP term loan
|
|
|
15,000
|
|
|
|
16,500
|
|
ICP revolving loan
|
|
|
18,000
|
|
|
|
18,000
|
|
Parent notes payable
|
|
|
63,200
|
|
|
|
66,948
|
|
|
|
|
241,409
|
|
|
|
233,505
|
|
Less unamortized debt discount
|
|
|
(511
|
)
|
|
|
(690
|
)
|
Less unamortized debt financing costs
|
|
|
(1,317
|
)
|
|
|
(1,377
|
)
|
Less short-term portion
|
|
|
(143,148
|
)
|
|
|
(146,671
|
)
|
Long-term debt
|
|
$
|
96,433
|
|
|
$
|
84,767
|
|
|
|
|
|
|
|
|
|
|
Kinergy Operating
Line of Credit
– On March 27, 2019, Kinergy amended its credit facility to increase, until September 30, 2019 or
earlier on ten days prior notice from the lender, the borrowing base under the credit facility to 90% (increased from 85%) of eligible
accounts receivable,
plus
the lesser of (a) $50,000,000, (b) 80% of eligible inventory (increased from 70%), or (c) 95%
of the estimated recovery value of eligible inventory (increased from 85%). With respect to these additional borrowings, to the
extent outstanding, the additional borrowings will accrue interest at an annual rate equal to the daily three month LIBOR plus
an applicable margin of 4.00%. As of March 31, 2019, Kinergy had additional borrowing availability under its credit facility of
$21,848,000, including $7,532,000 of incremental availability under the aforementioned temporary increase.
Pekin
Term Loan
– On March 30, 2018, Pacific Ethanol Pekin, LLC (“PE Pekin”), one of the Company’s subsidiaries,
amended its term loan facility by reducing the amount of working capital it is required to maintain to not less than $13.0 million
from March 31, 2018 through November 30, 2018 and not less than $16.0 million from December 1, 2018 and continuing at all times
thereafter. In addition, a principal payment in the amount of $3.5 million due for May 2018 was deferred until the maturity date
of the term loan. As of the filing of this report, the Company believes PE Pekin is in compliance with its working capital requirement.
On
March 21, 2019, PE Pekin amended its term and revolving credit facilities by agreeing to increase the interest rate under the
facilities by 125 basis points to an annual rate equal to the 30-day LIBOR plus 5.00%. PE Pekin and its lender also agreed that
it is required to maintain working capital of not less than $15,000,000 from March 21, 2019 through July 15, 2019 and working
capital of not less than $30,000,000 from July 15, 2019 and continuing at all times thereafter.
Under
this amendment, the lenders agreed to temporarily waive financial covenant violations, working capital maintenance violations
and intercompany accounts receivable collections violations that occurred with respect to PE Pekin’s credit agreement. The
lenders also agreed to defer all scheduled principal payments, including further deferral of a principal payment in the amount
of $3,500,000 due on February 20, 2019 which was previously deferred by the parties.
The
waivers and principal deferral expire on July 15, 2019, or earlier in the case of an event of default, at which time the waivers
will become permanent if Pacific Ethanol Central, LLC (“PE Central”), PE Pekin’s parent, has made a contribution
to PE Pekin in an amount equal to $30,000,000,
minus
the then-existing amount of PE Pekin’s working capital,
plus
the amount of any accounts receivable owed by PE Central to PE Pekin,
plus
$12,000,000 (the “PE Central Contribution
Amount”). In addition, if the PE Central Contribution Amount is timely received, the lenders agreed to waive PE Pekin’s
debt service coverage ratio financial covenant for the year ended December 31, 2019. If the PE Central Contribution Amount is
not timely made, then the temporary waivers will automatically expire.
PE
Pekin is also required to pay by July 15, 2019 the aggregate amount of $14,000,000 representing all deferred scheduled principal
payments and all additional scheduled principal payments for the remainder of 2019.
Restrictions
– At March 31, 2019, there were approximately $195.0 million of net assets at the Company’s subsidiaries that
were not available to be transferred to Pacific Ethanol, Inc. in the form of dividends, loans or advances due to restrictions
contained in the credit facilities of the Company’s subsidiaries.
|
7.
|
COMMITMENTS
AND CONTINGENCIES.
|
Sales
Commitments
– At March 31, 2019, 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 241,528,000 gallons of ethanol
as of March 31, 2019 and open fixed-price ethanol sales contracts totaling $80,294,000 as of March 31, 2019. The Company had open
fixed-price co-product sales contracts totaling $31,376,000 and open indexed-price co-product sales contracts for 721,000 tons
as of March 31, 2019. These sales contracts are scheduled to be completed throughout 2019.
Purchase
Commitments
– At March 31, 2019, the Company had indexed-price purchase contracts to purchase 11,442,000 gallons
of ethanol and fixed-price purchase contracts to purchase $5,605,000 of ethanol from its suppliers. The Company had fixed-price
purchase contracts to purchase $16,700,000 of corn from its suppliers as of March 31, 2019. These purchase commitments are scheduled
to be satisfied throughout 2019.
Litigation
– General
–
The Company is subject to various claims and contingencies in the ordinary course of its business,
including those related to litigation, business transactions, employee-related matters, environmental regulations, and others.
When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable
that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss.
If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood
of a potential loss is reasonably possible and the amount involved could be material. While there can be no assurances, the Company
does not expect that any of its pending legal proceedings will have a material impact on the Company’s financial condition
or results of operations.
The
Company sponsors a defined benefit pension plan (the “Retirement Plan”) and a health care and life insurance plan
(the “Postretirement Plan”). The Company assumed the Retirement Plan and the Postretirement Plan as part of its acquisition
of PE Central on July 1, 2015.
The
Retirement Plan is noncontributory, and covers only “grandfathered” unionized employees at the Company’s Pekin,
Illinois facility who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the
employee’s years of service. The Retirement Plan, which is part of a collective bargaining agreement, covers only union
employees hired prior to November 1, 2010.
The
Company uses a December 31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum
annual contribution required by applicable regulations. As of December 31, 2018, the Retirement Plan’s accumulated projected
benefit obligation was $18.7 million, with a fair value of plan assets of $13.3 million. The underfunded amount of $5.4 million
is recorded on the Company’s consolidated balance sheet in other liabilities. For the three months ended March 31, 2019,
the Retirement Plan’s net periodic expense was $94,000, comprised of $190,000 in interest cost and $94,000 in service cost,
partially offset by $190,000 of expected return on plan assets. For the three months ended March 31, 2018, the Retirement Plan’s
net periodic expense was $76,000, comprised of $174,000 in interest cost and $106,000 in service cost, partially offset by $204,000
of expected return on plan assets.
The
Postretirement Plan provides postretirement medical benefits and life insurance to certain “grandfathered” unionized
employees. Employees hired after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement
Plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces
at age 65 from a defined benefit to a defined dollar cap based upon years of service. As of December 31, 2018, the Postretirement
Plan’s accumulated projected benefit obligation was $5.7 million and is recorded on the Company’s consolidated balance
sheet in other liabilities. The Company’s funding policy is to make the minimum annual contribution required by applicable
regulations. For the three months ended March 31, 2019, the Postretirement Plan’s net periodic expense was $102,000, comprised
of $55,000 of interest cost, $17,000 of service cost and $30,000 of amortization expense. For the three months ended March 31,
2018, the Postretirement Plan’s net periodic expense was $81,000, comprised of $46,000 of interest cost, $2,000 of service
cost and $33,000 of amortization expense.
|
9.
|
FAIR
VALUE MEASUREMENTS.
|
The
fair value hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows:
|
●
|
Level
1 – Observable inputs – unadjusted quoted prices in active markets for identical
assets and liabilities;
|
|
●
|
Level
2 – Observable inputs other than quoted prices included in Level 1 that are observable
for the asset or liability through corroboration with market data; and
|
|
●
|
Level 3 – Unobservable inputs – includes amounts derived from valuation models where
one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description
of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the
prior reporting period.
|
Pooled separate accounts
– Pooled separate accounts invest primarily in domestic and international stocks, commercial paper or single mutual funds.
The net asset value is used as a practical expedient to determine fair value for these accounts. Each pooled separate account provides
for redemptions by the Retirement Plan at reported net asset values per share, with little to no advance notice requirement, therefore
these funds are classified within Level 2 of the valuation hierarchy.
Other Derivative Instruments
– The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions
are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs.
The following table summarizes recurring fair value measurements
by level at March 31, 2019 (in thousands):
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments(1)
|
|
$
|
1,155
|
|
|
$
|
1,155
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
1,155
|
|
|
$
|
1,155
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments(6)
|
|
$
|
(5,156
|
)
|
|
$
|
(5,156
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
(5,156
|
)
|
|
$
|
(5,156
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table summarizes recurring
fair value measurements by level at December 31, 2018 (in thousands):
|
|
Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Benefit Plan
Percentage
Allocation
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments(1)
|
|
$
|
1,765
|
|
|
$
|
1,765
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Defined benefit plan assets (pooled separate accounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. Equity(2)
|
|
|
3,621
|
|
|
|
—
|
|
|
|
3,621
|
|
|
|
—
|
|
|
|
27
|
%
|
Small/Mid U.S. Equity(3)
|
|
|
1,844
|
|
|
|
—
|
|
|
|
1,844
|
|
|
|
—
|
|
|
|
14
|
%
|
International Equity(4)
|
|
|
2,106
|
|
|
|
—
|
|
|
|
2,106
|
|
|
|
—
|
|
|
|
16
|
%
|
Fixed Income(5)
|
|
|
5,686
|
|
|
|
—
|
|
|
|
5,686
|
|
|
|
—
|
|
|
|
43
|
%
|
|
|
$
|
15,022
|
|
|
$
|
1,765
|
|
|
$
|
13,257
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
(6,309
|
)
|
|
$
|
(6,309
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
(1)
|
Included in derivative instruments in the consolidated balance sheets.
|
|
(2)
|
This category includes investments in funds comprised of equity securities of large U.S. companies.
The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is
used to value the fund.
|
|
(3)
|
This category includes investments in funds comprised of equity securities of small- and medium-sized
U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying
investments is used to value the fund.
|
|
(4)
|
This category includes investments in funds comprised of equity securities of foreign companies
including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for
the underlying investments is used to value the fund.
|
|
(5)
|
This category includes investments in funds comprised of U.S. and foreign investment-grade fixed
income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed
securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the
market prices for the underlying investments is used to value the fund.
|
|
(6)
|
Included in derivative instruments in the consolidated
balance sheets.
|
The following tables compute basic and
diluted earnings per share (in thousands, except per share data):
|
|
Three Months Ended March 31, 2019
|
|
|
|
Loss
Numerator
|
|
|
Shares Denominator
|
|
|
Per-Share Amount
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(12,890
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(13,202
|
)
|
|
|
45,517
|
|
|
$
|
(0.29
|
)
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
Loss
Numerator
|
|
|
Shares Denominator
|
|
|
Per-Share Amount
|
|
Net loss attributed to Pacific Ethanol, Inc.
|
|
$
|
(7,841
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(8,153
|
)
|
|
|
42,912
|
|
|
$
|
(0.19
|
)
|
There were an aggregate of 635,000 and
912,000 potentially dilutive weighted-average shares from convertible securities outstanding for the three months ended March 31,
2019 and 2018, respectively. These convertible securities were not considered in calculating diluted net loss per share for the
three months ended March 31, 2019 and 2018, as their effect would have been anti-dilutive.
|
11.
|
PARENT COMPANY FINANCIALS.
|
Restricted Net Assets
–
At March 31, 2019, the Company had approximately $195,000,000 of net assets at its subsidiaries that were not available to
be transferred to Pacific Ethanol in the form of dividends, distributions, loans or advances due to restrictions contained in
the credit facilities of these subsidiaries.
Parent company financial statements for the periods covered in this report are set forth below (in thousands):
ASSETS
|
|
March 31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,282
|
|
|
$
|
6,759
|
|
Receivables from subsidiaries
|
|
|
10,378
|
|
|
|
17,156
|
|
Other current assets
|
|
|
1,710
|
|
|
|
1,659
|
|
Total current assets
|
|
|
18,370
|
|
|
|
25,574
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
447
|
|
|
|
522
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
282,132
|
|
|
|
286,666
|
|
Pacific Ethanol West plant receivable
|
|
|
58,766
|
|
|
|
58,766
|
|
Right of use operating lease assets, net
|
|
|
3,444
|
|
|
|
—
|
|
Other assets
|
|
|
1,437
|
|
|
|
1,437
|
|
Total other assets
|
|
|
345,779
|
|
|
|
346,869
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
364,596
|
|
|
$
|
372,965
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
2,950
|
|
|
$
|
2,469
|
|
Accrued PE Op Co. purchase
|
|
|
3,829
|
|
|
|
3,829
|
|
Current portion of long-term debt
|
|
|
62,689
|
|
|
|
66,255
|
|
Other current liabilities
|
|
|
613
|
|
|
|
385
|
|
Total current liabilities
|
|
|
70,081
|
|
|
|
72,938
|
|
|
|
|
|
|
|
|
|
|
Operating leases, net of current portion
|
|
|
3,231
|
|
|
|
—
|
|
Deferred tax liabilities
|
|
|
251
|
|
|
|
251
|
|
Other liabilities
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
73,564
|
|
|
|
73,198
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
1
|
|
|
|
1
|
|
Common and non-voting common stock
|
|
|
49
|
|
|
|
46
|
|
Additional paid-in capital
|
|
|
936,643
|
|
|
|
932,179
|
|
Accumulated other comprehensive loss
|
|
|
(2,459
|
)
|
|
|
(2,459
|
)
|
Accumulated deficit
|
|
|
(643,202
|
)
|
|
|
(630,000
|
)
|
Total Pacific Ethanol, Inc. stockholders’ equity
|
|
|
291,032
|
|
|
|
299,767
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
364,596
|
|
|
$
|
372,965
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Management fees from subsidiaries
|
|
$
|
3,330
|
|
|
$
|
3,078
|
|
Selling, general and administrative expenses
|
|
|
4,729
|
|
|
|
5,376
|
|
Loss from operations
|
|
|
(1,399
|
)
|
|
|
(2,298
|
)
|
Interest income
|
|
|
1,159
|
|
|
|
1,161
|
|
Interest expense
|
|
|
(2,456
|
)
|
|
|
(2,132
|
)
|
Loss before benefit for income taxes
|
|
|
(2,696
|
)
|
|
|
(3,269
|
)
|
Benefit for income taxes
|
|
|
—
|
|
|
|
563
|
|
Loss before equity in losses of subsidiaries
|
|
|
(2,696
|
)
|
|
|
(2,706
|
)
|
Equity in losses of subsidiaries
|
|
|
(10,194
|
)
|
|
|
(5,135
|
)
|
Consolidated net loss
|
|
$
|
(12,890
|
)
|
|
$
|
(7,841
|
)
|
|
|
For
the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,890
|
)
|
|
$
|
(7,841
|
)
|
Adjustments to reconcile net loss to cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Equity in losses of subsidiaries
|
|
|
10,194
|
|
|
|
5,135
|
|
Depreciation
|
|
|
75
|
|
|
|
186
|
|
Deferred income taxes
|
|
|
—
|
|
|
|
563
|
|
Amortization of debt discounts
|
|
|
178
|
|
|
|
179
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivables
|
|
|
1,778
|
|
|
|
(2,673
|
)
|
Other assets
|
|
|
(264
|
)
|
|
|
(937
|
)
|
Accounts payable and accrued expenses
|
|
|
45
|
|
|
|
1,759
|
|
Accounts payable with subsidiaries
|
|
|
797
|
|
|
|
(625
|
)
|
Net cash used in operating activities
|
|
$
|
(87
|
)
|
|
$
|
(4,254
|
)
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
Net cash used in investing activities
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuances of common stock
|
|
$
|
3,670
|
|
|
$
|
—
|
|
Payments on senior notes
|
|
|
(3,748
|
)
|
|
|
—
|
|
Preferred stock dividend payments
|
|
|
(312
|
)
|
|
|
(312
|
)
|
Net cash used in financing activities
|
|
$
|
(390
|
)
|
|
$
|
(312
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(477
|
)
|
|
|
(4,579
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
6,759
|
|
|
|
5,314
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,282
|
|
|
$
|
735
|
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The
following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated
financial statements included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated
financial statements contain forward-looking statements, which generally include the plans and objectives of management for future
operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues
we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking
statements and associated risks may include, relate to or be qualified by other important factors, including:
|
●
|
fluctuations
in the market price of ethanol and its co-products;
|
|
●
|
fluctuations
in the costs of key production input commodities such as corn and natural gas;
|
|
●
|
the
projected growth or contraction in the ethanol and co-product markets in which we operate;
|
|
●
|
our
strategies for expanding, maintaining or contracting our presence in these markets;
|
|
●
|
anticipated
trends in our financial condition and results of operations; and
|
|
●
|
our
ability to distinguish ourselves from our current and future competitors.
|
You
are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or
in the case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or
correct any forward-looking statements, except as required by law.
Any
of the factors described immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission
or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth
in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our
common stock to fluctuate substantially.
Overview
We
are a leading producer and marketer of low-carbon renewable fuels in the United States.
We
operate nine strategically-located production facilities. Four of our plants are in the Western states of California, Oregon and
Idaho, and five of our plants are located in the Midwestern states of Illinois and Nebraska. We are the sixth largest producer
of ethanol in the United States based on annualized volumes. Our plants have a combined production capacity of 605 million gallons
per year. We market all the ethanol, specialty alcohols and co-products produced at our plants as well as ethanol produced by
third parties. On an annualized basis, we market nearly 1.0 billion gallons of ethanol and over 3.0 million tons of co-products
on a dry matter basis. Our business consists of two operating segments: a production segment and a marketing segment.
Our
mission is to be a leading producer and marketer of low-carbon renewable fuels, high-value animal feed and high-quality alcohol
products in the United States. We intend to accomplish this goal in part by investing in our ethanol production and distribution
infrastructure, 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.
All
of our plants, with the exception of our Aurora East facility, are currently operating. As market conditions change, we may increase,
decrease or idle production at one or more operating facilities or resume operations at any idled facility.
Facility
Name
|
|
Facility
Location
|
|
Estimated
Annual
Capacity
(gallons)
|
Magic
Valley
|
|
Burley,
ID
|
|
60,000,000
|
Columbia
|
|
Boardman,
OR
|
|
40,000,000
|
Stockton
|
|
Stockton,
CA
|
|
60,000,000
|
Madera
|
|
Madera,
CA
|
|
40,000,000
|
Aurora
West
|
|
Aurora,
NE
|
|
110,000,000
|
Aurora
East
|
|
Aurora,
NE
|
|
45,000,000
|
Pekin
Wet
|
|
Pekin,
IL
|
|
100,000,000
|
Pekin
Dry
|
|
Pekin,
IL
|
|
60,000,000
|
Pekin
ICP
|
|
Pekin,
IL
|
|
90,000,000
|
We
produce ethanol co-products at our production facilities such as wet distillers grains, or WDG, dried distillers grains with solubles,
or DDGS, wet and dry corn gluten feed, condensed distillers solubles, corn gluten meal, corn germ, corn oil, dried yeast and CO
2
.
Marketing
Segment
We
market ethanol, specialty alcohols and co-products produced by our facilities and market ethanol produced by third parties. We
have extensive customer relationships throughout the Western and Midwestern United States. Our ethanol customers are integrated
oil companies and gasoline marketers who blend ethanol into gasoline. Our customers depend on us to provide a reliable supply
of ethanol, and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively
require ethanol volumes in excess of the supplies we produce at our production facilities. We secure additional ethanol supplies
from third-party plants in California and other third-party suppliers in the Midwest where a majority of ethanol producers are
located. We arrange for transportation, storage and delivery of ethanol purchased by our customers through our agreements with
third-party service providers in the Western United States as well as in the Midwest from a variety of sources.
We
market our distillers grains and other feed co-products to dairies and feedlots, in many cases located near our ethanol plants.
These customers use our feed co-products for livestock as a substitute for corn and other sources of starch and protein. We sell
our corn oil to poultry and biodiesel customers. We do not market co-products from other ethanol producers.
See
“Note 2 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for
financial information about our business segments.
Current Initiatives and Outlook
We believe the ethanol market is emerging
from its cyclical trough in late 2018 when crush margins were at historic lows. Our first quarter 2019 results reflect these improving
market conditions. The sequential improvement in our results over the fourth quarter of 2018 resulted from three primary factors:
improved crush margins, increased sales of higher-margin third-party ethanol compared to our produced ethanol, and our cost-cutting
efforts.
We continue to moderate production in locations
most impacted by high inventory levels. We are also using Kinergy’s marketing platform to source third-party ethanol to help
meet our contractual commitments and support our decision to moderate production. Overall, we are operating at approximately 83%
of production capacity across our plants. The ethanol supply-demand balance is tightening, with seasonal increases in demand and
lower industry ethanol levels resulting in improved production margins. Carbon values in our West Coast markets remain strong,
resulting in robust premiums for our lower-carbon ethanol.
When looking at the overall ethanol industry,
we continue to believe the compelling cost, octane and carbon benefits of ethanol will drive additional demand in 2019 supported
by an expected resolution of trade disputes with China and a final rule from the Environmental Protection Agency, or EPA, facilitating
the year-round use of higher ethanol blends.
A resolution of trade disputes with China
would reopen a large market for United States ethanol as China continues on its path toward 10% ethanol blend rates, which would
require over 4.0 billion gallons of ethanol annually. China’s current domestic production capacity is only 1.0 billion gallons,
therefore the region represents a significant market opportunity for United States ethanol producers.
E15 adoption continues apace, with E15 offered
at more than 1,700 retail stations across 30 states. Pre-blended ethanol is also now available for distribution at more than 100
terminals in the United States. We expect the EPA to finalize a rule by June 1
st
that facilitates the year-round use
of E15, resulting in additional demand this summer and material additional growth in future years.
Wholesale ethanol is trading at a significant
discount to wholesale gasoline which is also driving new domestic and international demand for ethanol. In addition, with prices
for Renewable Identification Numbers, or RINs, at near five-year lows, we see no rationale or legal basis for the EPA’s practice
of granting small refinery exemptions from the Renewable Fuel Standard, or RFS, which has negatively impacted demand and ethanol
margins. Fewer EPA exemptions will support stronger domestic ethanol demand in 2019 and future years.
We are pursuing a number of strategic initiatives
focused on the potential sale of certain production assets, a reduction of our debt levels, a strengthening of our cash and liquidity position, and opportunities for strategic partnerships and capital raising activities, positioning us to optimize
our business performance. Our most significant challenge in meeting these objectives would be a continued adverse margin environment.
We continue to make progress on our plans, however, and in late March, we amended credit and related agreements to provide us with
additional flexibility and liquidity as we continue to pursue our strategic initiatives.
We believe we have excellent production
assets with values well in excess of our near-term liquidity needs. We are also confident in our strong relationships with our
financial and commercial partners and believe we are taking appropriate steps to increase shareholder value to benefit our stakeholders
long-term and to provide greater financial flexibility to execute future strategic initiatives.
We also continue to focus on implementing
initiatives and investing in our assets to reduce costs, both at the operating and corporate levels; further diversifying our
sales through additional high-protein animal feed and high-quality alcohol products; and improving yields and our carbon scores.
Critical
Accounting Policies
The
preparation of our financial statements, which have been prepared in accordance with accounting principles generally accepted
in the United States of America, requires us to make judgments and estimates that may have a significant impact upon the portrayal
of our financial condition and results of operations. We believe that of our significant accounting policies, the following require
estimates and assumptions that require complex, subjective judgments by management that can materially impact the portrayal of
our financial condition and results of operations: revenue recognition; impairment of long-lived assets; valuation of allowance
for deferred taxes; derivative instruments; accounting for business combinations; and allowance for doubtful accounts. These significant
accounting principles are more fully described in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December
31, 2018.
Results
of Operations
The
following selected financial information should be read in conjunction with our consolidated financial statements and notes to
our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” contained in this report.
Certain
performance metrics that we believe are important indicators of our results of operations include:
|
|
Three
Months Ended
March 31,
|
|
|
Percentage
Change
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
Production
gallons sold (in millions)
|
|
|
116.9
|
|
|
|
140.8
|
|
|
|
(17.0
|
)%
|
Third
party gallons sold (in millions)
|
|
|
94.9
|
|
|
|
91.9
|
|
|
|
3.3
|
%
|
Total
gallons sold (in millions)
|
|
|
211.8
|
|
|
|
232.7
|
|
|
|
(9.0
|
)%
|
Total
gallons produced (in millions)
|
|
|
122.5
|
|
|
|
142.1
|
|
|
|
(13.8
|
)%
|
Production
capacity utilization
|
|
|
82
|
%
|
|
|
94
|
%
|
|
|
(12.8
|
)%
|
Average
sales price per gallon
|
|
$
|
1.53
|
|
|
$
|
1.57
|
|
|
|
(2.5
|
)%
|
Corn
cost per bushel—CBOT equivalent
|
|
$
|
3.73
|
|
|
$
|
3.57
|
|
|
|
4.5
|
%
|
Average
basis
(1)
|
|
|
0.38
|
|
|
|
0.27
|
|
|
|
40.7
|
%
|
Delivered
cost of corn
|
|
$
|
4.11
|
|
|
$
|
3.84
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
co-product tons sold (in thousands)
|
|
|
684.1
|
|
|
|
798.0
|
|
|
|
(14.3
|
)%
|
Co-product
revenues as % of delivered cost of corn
(2)
|
|
|
38.8
|
%
|
|
|
37.1
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
CBOT ethanol price per gallon
|
|
$
|
1.32
|
|
|
$
|
1.42
|
|
|
|
(7.0
|
)%
|
Average
CBOT corn price per bushel
|
|
$
|
3.73
|
|
|
$
|
3.66
|
|
|
|
1.9
|
%
|
|
(1)
|
Corn
basis represents the difference between the immediate cash price of delivered corn and
the future price of corn for Chicago delivery.
|
|
(2)
|
Co-product
revenues as a percentage of delivered cost of corn shows our yield based on sales of
co-products, including WDG and corn oil, generated from ethanol we produced.
|
Net
Sales, Cost of Goods Sold and Gross Profit (Loss)
The
following table presents our net sales, cost of goods sold and gross profit (loss) in dollars and gross profit (loss) as a percentage
of net sales (in thousands, except percentages):
|
|
Three
Months Ended
March
31,
|
|
|
Change
in
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
355,803
|
|
|
$
|
400,027
|
|
|
$
|
(44,224
|
)
|
|
|
(11.1
|
)%
|
Cost
of goods sold
|
|
|
358,092
|
|
|
|
396,665
|
|
|
|
(38,573
|
)
|
|
|
(9.7
|
)%
|
Gross
profit (loss)
|
|
$
|
(2,289
|
)
|
|
$
|
3,362
|
|
|
$
|
(5,651
|
)
|
|
|
NM
|
|
Percentage
of net sales
|
|
|
(0.6
|
)%
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
Net
Sales
The
decrease in our net sales for the three months ended March 31, 2019 as compared to the same period in 2018 was due to both a decrease
in our total ethanol gallons sold and a decrease in our average ethanol sales price per gallon.
We sold fewer production
gallons and co-products for the three months ended March 31, 2019 as compared to the same period in 2018. These decreases are
primarily due lower production capacity utilization at our plants in response to a lower ethanol crush margin environment. Our
production capacity utilization declined to 82% for the three months ended March 31, 2019 compared to 94% for the same period
in 2018. Our third-party gallons sold, however, increased over the same period as we continued to focus our third-party ethanol
sales in regions where we have a stronger presence around our own production assets or more favorable margins, as well as to compensate
for lower production levels and meet our contractual commitments.
On
a consolidated basis, our average sales price per gallon decreased 2.5% to $1.53 for the three months ended March 31, 2019 compared
to our average sales price per gallon of $1.57 for the same period in 2018. The average Chicago Board of Trade, or CBOT, ethanol
price per gallon, decreased 7.0% to $1.32 for the three months ended March 31, 2019 compared to an average CBOT sales price per
gallon of $1.42 for the same period in 2018.
Production
Segment
Net
sales of ethanol from our production segment declined by $40.2 million, or 18%, to $179.4 million for the three months ended March
31, 2019 as compared to $219.6 million for the same period in 2018. Our total volume of production ethanol gallons sold declined
by 23.9 million gallons, or 17%, to 116.9 million gallons for the three months ended March 31, 2019 as compared to 140.8 million
gallons for the same period in 2018. Our production segment’s average sales price per gallon declined 2% to $1.53 for the
three months ended March 31, 2019 compared to our production segment’s average sales price per gallon of $1.56 for the same
period in 2018. At our production segment’s average sales price per gallon of $1.53 for the three months ended March 31,
2019, we generated $36.7 million less in net sales from our production segment from the 23.9 million fewer gallons of produced
ethanol sold in the three months ended March 31, 2019 as compared to the same period in 2018. The decline of $0.03 in our production
segment’s average sales price per gallon for the three months ended March 31, 2019 as compared to the same period in 2018
reduced our net sales of ethanol from our production segment by $3.5 million.
Net
sales of co-products declined $5.7 million, or 8%, to $68.8 million for the three months ended March 31, 2019 as compared to $74.5
million for the same period in 2018. Our total volume of co-products sold declined by 113.9 thousand tons, or 14%, to 684.1 thousand
tons for the three months ended March 31, 2019 from 798.0 thousand tons for the same period in 2018 and our average sales price
per ton increased to $100.58 per ton for the three months ended March 31, 2019 from $93.40 per ton for the same period in 2018.
At our average sales price per ton of $100.58 for the three months ended March 31, 2019, we generated $11.4 million less in net
sales from the 113.9 thousand ton decline in co-products sold in the three months ended March 31, 2019 as compared to the same
period in 2018. The increase in our average sales price per ton of $7.18, or 8%, for the three months ended March 31, 2019 as
compared to the same period in 2018 increased our net sales of co-products by $5.7 million.
Marketing
Segment
Net
sales of ethanol from our marketing segment, excluding intersegment sales, increased by $1.7 million, or 2%, to $107.6 million
for the three months ended March 31, 2019 as compared to $105.9 million for the same period in 2018. Our total volume of ethanol
gallons sold by our marketing segment declined by 20.9 million gallons, or 9%, to 211.8 million gallons for the three months ended
March 31, 2019 as compared to 232.7 million gallons for the same period in 2018. As noted above, 23.9 million fewer production
gallons sold, partially offset by 3.0 million additional third party gallons sold, accounted for this decline.
Our
marketing segment’s average sales price per gallon declined 3% to $1.64 for the three months ended March 31, 2019 compared
to our marketing segment’s average sales price per gallon of $1.69 for the same period in 2018.
At
our marketing segment’s average sales price per gallon of $1.64 for the three months ended March 31, 2019, we generated
$4.6 million in additional net sales from our marketing segment from the additional 3.0 million gallons in third-party ethanol
sold in the three months ended March 31, 2019 as compared to the same period in 2018.The decline of $0.05 in our marketing segment’s
average sales price per gallon for the three months ended March 31, 2019 as compared to the same period in 2018 reduced our net
sales from third-party ethanol sold by our marketing segment by $2.9 million.
Cost
of Goods Sold and Gross Profit (Loss)
Our
consolidated gross profit (loss) declined to a gross loss of $2.3 million for the three months ended March 31, 2019 as compared
to a gross profit of $3.4 million for the same period in 2018, representing a negative gross profit margin of 0.6% for the three
months ended March 31, 2019 as compared to a positive gross margin of 0.8% for the same period in 2018. Our consolidated gross
profit (loss) declined primarily due to significantly lower crush margins resulting from lower ethanol prices
and higher corn costs.
Production
Segment
Our
production segment’s gross loss from external sales declined by $6.2 million to a gross loss of $10.0 million for the three
months ended March 31, 2019 as compared to a gross loss of $3.8 million for the same period in 2018. Of this decrease, $8.3 million
is attributable to lower margins, partially offset by $2.0 million in lower gross loss from reduced production volumes for the
three months ended March 31, 2019 as compared to the same period in 2018.
Marketing
Segment
Our
marketing segment’s gross profit improved by $0.6 million to $7.8 million for the three months ended March 31, 2019 as compared
to $7.2 million for the same period in 2018. Of this increase, $0.3 million is attributable to our improved margins per gallon
for the three months ended March 31, 2019 as compared to the same period in 2018 and $0.3 million in higher gross profit is attributable
to the 3.0 million gallon increase in third-party marketing volumes for the three months ended March 31, 2019 as compared to the
same period in 2018.
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
March
31,
|
|
|
Change
in
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollars
|
|
|
Percent
|
|
Selling,
general and administrative expenses
|
|
$
|
8,235
|
|
|
$
|
9,315
|
|
|
$
|
(1,080
|
)
|
|
|
(11.6
|
)%
|
Percentage
of net sales
|
|
|
2.3
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
Our SG&A expenses declined for the three months ended March 31, 2019 as compared to the same period in
2018. The $1.0 million period over period decrease in SG&A expenses is primarily due to a $0.6 million reduction in professional
fees. We anticipate SG&A expenses will total approximately $9.0 million for the second quarter of 2019.
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
March
31,
|
|
|
Change
in
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollars
|
|
|
Percent
|
|
Net
loss available to Common Stockholders
|
|
$
|
13,202
|
|
|
$
|
8,153
|
|
|
$
|
5,049
|
|
|
|
61.9
|
%
|
Percentage
of net sales
|
|
|
3.7
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
The
increase in net loss available to common stockholders is primarily due to our decreased gross profit, as discussed above, for
the three months ended March 31, 2019 as compared to the same period in 2018.
Liquidity
and Capital Resources
During
the three months ended March 31, 2019, we funded our operations primarily from cash on hand and advances from our revolving credit
facilities. These funds were also used to make capital expenditures, capital lease payments and principal payments on term debt.
Both
we and the ethanol industry as a whole experienced significant adverse conditions throughout most of 2018 as a result of industry-wide
record low ethanol prices due to reduced demand and high industry inventory levels primarily related to United States and China
trade disputes and domestic ethanol demand destruction caused by EPA exemptions for small refineries. These factors resulted in
prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses.
In response to these adverse conditions,
we have initiated and expect to complete over the next five months strategic initiatives focused on the potential sale of certain
production assets, a reduction of our debt levels, a strengthening of our cash and liquidity position, and opportunities for strategic
partnerships and capital raising activities, positioning us to optimize our business performance.
Our
most significant challenge in meeting these objectives would be a continued adverse margin environment. We believe we have excellent
production assets with values well in excess of our near term liquidity needs. We are also confident in our strong relationships
with our financial and commercial partners and believe we are taking the appropriate steps to increase our shareholder value to
benefit all of our stakeholders long-term and to provide greater financial flexibility to execute future strategic initiatives.
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 current cash balances, availability under our lines of credit, any cash generated from
operations, net cash proceeds from any sale of production assets and net cash proceeds from any equity sales or debt financing
transactions.
At
March 31, 2019, on a consolidated basis, we had an aggregate of $21.8 million in cash and Kinergy had $21.8 million in excess
availability under its credit facility.
As of March 31, 2019, our current liabilities
of $236.2 exceeded our current assets of $176.7 million, resulting in a working capital deficit of $59.5 million. This working
capital deficit arises from:
|
●
|
Our senior secured notes in the amount of $63.2 million at March 31, 2019, are due on December 15, 2019 and
therefore listed as current liabilities. We believe we are in compliance with the terms of these notes. We intend to repay these
notes on or before their maturity using the net proceeds from the results of our strategic initiatives. See “—Pacific
Ethanol, Inc. Notes Payable” below.
|
|
●
|
Our term loan in the amount of $43.0 million and our revolving loan in the amount of $32.0 million, both associated
with our Pekin facilities, are listed as current liabilities due to a temporary forebearance agreement with our lender. See “—Pekin
Credit Facilities” below.
|
We believe our strategic initiatives, if implemented timely and on suitable terms, will provide sufficient
liquidity to meet our anticipated working capital, debt service and other liquidity needs through at least the next twelve months.
However, if we are unable to timely implement our strategic initiatives, if margins do not improve, or if we are unable to further
defer principal and/or interest payments or extend the maturity date of our debt, we will likely have insufficient liquidity through
the next twelve months, or earlier depending on margins, operating cash flows and lender forbearance. In addition, if margins do
not improve from current levels, we may be forced to curtail our production at one or more of our operating facilities.
See
“Risk Factors”.
Quantitative
Quarter-End Liquidity Status
We
believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial
information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements
included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” contained in this report (dollars in thousands):
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
Change
|
|
Cash
and cash equivalents
|
|
$
|
21,751
|
|
|
$
|
26,627
|
|
|
|
(18.3
|
)%
|
Current
assets
|
|
$
|
176,697
|
|
|
$
|
168,804
|
|
|
|
4.7
|
%
|
Property
and equipment, net
|
|
$
|
472,735
|
|
|
$
|
482,657
|
|
|
|
(2.1
|
)%
|
Current
liabilities
|
|
$
|
236,169
|
|
|
$
|
231,859
|
|
|
|
1.9
|
%
|
Long-term
debt, net of current portion
|
|
$
|
96,433
|
|
|
$
|
84,767
|
|
|
|
13.8
|
%
|
Working
capital deficit
|
|
$
|
(59,472
|
)
|
|
$
|
(63,055
|
)
|
|
|
(5.7
|
)%
|
Working
capital ratio
|
|
|
0.75
|
|
|
|
0.73
|
|
|
|
2.7
|
%
|
Restricted
Net Assets
At
March 31, 2019, we had approximately $195.0 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
Our working capital deficit improved to $59.5 million at March 31, 2019 from a deficit of $63.1 million at
December 31, 2018 as a result of an increase of $7.9 million in current assets, partially offset by an increase of $4.3 million
in current liabilities.
Our
current liabilities increased by $4.3 million at March 31, 2019 as compared to December 31, 2018 primarily due to an increase
in the current portion of our operating leases of $7.6 million as we adopted a new accounting standard. Our current liabilities
include our senior secured notes in the amount of $63.2 million, which are due within one year, and our Pekin credit facilities
in the amount of approximately $75.0 million due to temporary lender forbearance.
Current
assets increased primarily due to an increase of $10.8 million in accounts receivable, due to the timing of collections, and an
increase of $4.9 million in inventories due to the timing of purchases.
Our
cash and cash equivalents declined by $4.9 million at March 31, 2019 as compared to December 31, 2018 primarily due to $15.0 million
in cash used in our operating activities as a result of poor margins, partially offset by $11.3 million in cash provided from
our financing activities from additional borrowings and sales of our common stock.
Cash
used in our Operating Activities
Cash used in our operating activities
increased by $23.9 million for the three months ended March 31, 2019, as compared to the same period in 2018. We used $15.0 million
of cash in our operating activities during the period. Specific factors that contributed to the increase in cash used in our operating
activities include:
|
●
|
an increase of $4.7 million in our consolidated net loss;
|
|
●
|
a decrease of $16.0 million related to accounts receivable primarily due to the timing of collections;
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|
●
|
a decrease of 10.9 million related to accounts payable, accrued liabilities and operating leases due to the
timing of payments and our adoption of a new accounting standard; and
|
|
●
|
a decrease of $1.7 million related to prepaid inventory due to the timing of purchases.
|
These
amounts were partially offset by:
|
●
|
an increase of $2.0 million in depreciation expense;
|
|
●
|
an increase of $3.8 million related to inventories due to the timing of purchases; and
|
|
●
|
an increase of $3.7 million related to prepaid expenses and other assets due to the timing of payments.
|
Cash
used in our Investing Activities
Cash used in our investing activities declined by $3.2 million for the three months ended March 31, 2019 as
compared to the same period in 2018. The decrease in cash used in our investing activities is primarily due to reduced spending
on capital projects during a low margin environment.
Cash
provided by our Financing Activities
Cash provided by our financing activities
increased by $7.9 million for the three months ended March 31, 2019 as compared to the same period in 2018. The increase in cash
provided by our financing activities is primarily due to $4.4 million in increased net borrowings under Kinergy’s line of
credit and $3.7 million in sales of our common stock.
Capital Expenditures
Our capital expenditures totaled $1.1
million for the first quarter of 2019, largely attributable to ongoing repair and maintenance of our facilities. We expect capital
expenditures of $4.0 million for all of 2019, almost solely related to normal repair and maintenance of our facilities.
Kinergy
Operating Line of Credit
Kinergy
maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on August 2,
2022. Interest accrues under the credit facility at a rate equal to (i) the three-month London Interbank Offered Rate (“LIBOR”),
plus (ii) a specified applicable margin ranging from 1.50% to 2.00%, or up to 4.00% for additional borrowings under relaxed borrowing
base credit terms through September 30, 2019. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount
by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month.
Payments that may be made by Kinergy to Pacific Ethanol as reimbursement for management and other services provided by Pacific
Ethanol to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility
also includes the accounts receivable of Pacific Ag. Products, LLC, or PAP, as additional collateral. Payments that may be made
by PAP to Pacific Ethanol as reimbursement for management and other services provided by Pacific Ethanol to PAP are limited under
the terms of the credit facility to $0.5 million per fiscal quarter. PAP, one of our indirect wholly-owned subsidiaries, markets
our co-products and also provides raw material procurement services to our subsidiaries.
For
all monthly periods in which excess borrowing availability falls below a specified level, Kinergy and PAP must collectively maintain
a fixed-charge coverage ratio (calculated as a twelve-month rolling earnings before interest, taxes, depreciation and amortization
(EBITDA) divided by the sum of interest expense, capital expenditures, principal payments of indebtedness, indebtedness from capital
leases and taxes paid during such twelve-month rolling period) of at least 2.0 and are prohibited from incurring certain additional
indebtedness (other than specific intercompany indebtedness). Kinergy’s and PAP’s obligations under the credit facility
are secured by a first-priority security interest in all of their assets in favor of the lender. We believe Kinergy and PAP are
in compliance with this covenant. The following table summarizes Kinergy’s financial covenants and actual results for the
periods presented:
|
|
Three
Months
Ended
March 31,
|
|
|
Years
Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Charge
Coverage Ratio Requirement
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
Actual
|
|
|
16.35
|
|
|
|
7.72
|
|
|
|
19.06
|
|
|
|
2.79
|
|
Excess
|
|
|
14.35
|
|
|
|
5.72
|
|
|
|
17.06
|
|
|
|
0.79
|
|
Pacific
Ethanol has guaranteed all of Kinergy’s obligations under the credit facility. As of March 31, 2019, Kinergy had an outstanding
balance of $70.2 million with additional borrowing availability under the credit facility of $21.8 million.
Pekin
Credit Facilities
On
December 15, 2016, our wholly-owned subsidiary, Pacific Ethanol Pekin, LLC, or PE Pekin, entered into term and revolving credit
facilities. PE Pekin borrowed $64.0 million under a term loan facility that matures on August 20, 2021 and $32.0 million under
a revolving credit facility that matures on February 1, 2022. The PE Pekin credit facilities are secured by a first-priority security
interest in all of PE Pekin’s assets. Interest initially accrued under the PE Pekin credit facilities at an annual rate
equal to the 30-day LIBOR plus 3.75%, payable monthly. PE Pekin is required to make quarterly principal payments in the amount
of $3.5 million on the term loan beginning on May 20, 2017, with the remaining principal balance payable at maturity on August
20, 2021. 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 initial terms of the credit facilities,
PE Pekin was required to maintain not less than $20.0 million in working capital and an annual debt service coverage ratio of
not less than 1.25 to 1.0.
On
August 7, 2017, 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 ended December 31, 2017. PE Pekin’s
actual debt service coverage ratio was 0.17 to 1.00 for the fiscal year ended December 31, 2017, 0.02 in excess of the required
0.15 to 1.00. For the month ended January 31, 2018, PE Pekin was not in compliance with its working capital requirement due to
larger than anticipated repair and maintenance expenses to replace faulty equipment. PE Pekin has received a waiver from its lender
for this noncompliance. Further, the lender decreased PE Pekin’s working capital covenant requirement to $13.0 million for
the month ended February 28, 2018, excluding from the calculation a $3.5 million principal payment previously due in May 2018.
On
March 30, 2018, PE Pekin further amended its term loan facility by reducing the amount of working capital it is required to maintain
to not less than $13.0 million from March 31, 2018 through November 30, 2018 and not less than $16.0 million from December 1,
2018 and continuing at all times thereafter. In addition, a principal payment in the amount of $3.5 million due for May 2018 was
deferred until the maturity date of the term loan.
At
December 31, 2018 and January 31, 2019, PE Pekin experienced certain covenant violations under its term and revolving credit
facilities. In February 2019, PE Pekin reached an agreement with its lender to forbear until March 11, 2019 and to defer a
$3.5 million principal payment until that date.
On
March 21, 2019, PE Pekin amended its term and revolving credit facilities by agreeing to increase the interest rate under
the facilities by 125 basis points to an annual rate equal to the 30-day LIBOR plus 5.00%. PE Pekin and its lender also
agreed that it is required to maintain working capital of not less than $15.0 million from March 21, 2019 through July 15, 2019
and working capital of not less than $30.0 million from July 15, 2019 and continuing at all times thereafter.
Under
this amendment, the lenders agreed to temporarily waive financial covenant violations, working capital maintenance violations
and intercompany accounts receivable collections violations that occurred with respect to the credit agreement. The lenders also
agreed to defer all scheduled principal payments, including further deferral of a principal payment in the amount of $3.5
million due on February 20, 2019 which was previously deferred by the parties.
The
waivers and principal deferral expire on July 15, 2019, or earlier in the case of an event of default, at which time
the waivers will become permanent if PE Pekin’s parent, Pacific Ethanol Central, LLC, or PE Central, has made
a contribution to PE Pekin in an amount equal to $30.0 million,
minus
the then-existing amount of the PE
Pekin’s working capital,
plus
the amount of any accounts receivable owed by PE Central to PE Pekin,
plus
$12.0 million, or the Parent Contribution Amount. In addition, if the Parent Contribution Amount is timely
received, the lenders agreed to waive the PE Pekin’s debt service coverage ratio financial covenant for the year ended
December 31, 2019. If the Parent Contribution Amount is not timely made, then the temporary waivers will automatically
expire.
PE
Pekin is also required to pay by July 15, 2019 the aggregate amount of $14.0 million representing all deferred scheduled
principal payments and all additional scheduled principal payments for the remainder of 2019. As of March 31, 2019, PE Pekin
had no additional borrowing availability under its revolving credit facility.
ICP
Credit Facilities
On
September 15, 2017, ICP entered into term and revolving credit facilities. ICP borrowed $24.0 million under a term loan facility
that matures on September 20, 2021 and $18.0 million under a revolving credit facility that matures on September 1, 2022. The
ICP credit facilities are secured by a first-priority security interest in all of ICP’s assets. Interest accrues under the
ICP credit facilities at an annual rate equal to the 30-day LIBOR plus 3.75%, payable monthly. ICP is required to make quarterly
consecutive principal payments in the amount of $1.5 million. ICP is required to pay monthly in arrears a fee on any unused portion
of the revolving credit facility at a rate of 0.75% per annum. Prepayment of these facilities is subject to a prepayment penalty.
Under the terms of the credit facilities, ICP is required to maintain not less than $8.0 million in working capital and an annual
debt service coverage ratio of not less than 1.5 to 1.0, beginning for the year ended December 31, 2018. As of March 31, 2019,
ICP had no additional borrowing availability under its revolving credit facility.
Pacific
Ethanol, Inc. Notes Payable
On
December 12, 2016, we entered into a Note Purchase Agreement with five accredited investors. On December 15, 2016, under the terms
of the Note Purchase Agreement, we sold $55.0 million in aggregate principal amount of our senior secured notes to the investors
in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold. On June 26, 2017, we entered
into a second Note Purchase Agreement with five accredited investors. On June 30, 2017, under the terms of the second Note Purchase
Agreement, we sold an additional $13.9 million in aggregate principal amount of our senior secured notes to the investors in a
private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold, for a total of $68.9 million in
aggregate principal amount of senior secured notes.
The
notes mature on December 15, 2019. Interest on the notes accrues at an annual rate equal to (i) the greater of 1% and the three-month
LIBOR, plus 7.0% from the closing through December 14, 2017, (ii) the greater of 1% and three-month LIBOR, plus 9% between December
15, 2017 and December 14, 2018, and (iii) the greater of 1% and three-month LIBOR plus 11% between December 15, 2018 and the maturity
date. The interest rate increases by an additional 2% per annum above the interest rate otherwise applicable upon the occurrence
and during the continuance of an event of default until cured. Interest is payable in cash in arrears on the 15th calendar day
of each March, June, September and December. We are required to pay all outstanding principal and any accrued and unpaid interest
on the notes on the maturity date. We may, at our option, prepay the outstanding principal amount of the notes at any time without
premium or penalty. Pacific Ethanol, Inc. issued the notes, which are secured by a first-priority security interest in the equity
interest held by Pacific Ethanol, Inc. in its wholly-owned subsidiary, PE Op. Co., which indirectly owns our plants located on
the West Coast.
We are actively evaluating opportunities to repay or refinance our senior notes in advance of their December
2019 maturity as part of our strategic initiatives.
At-the-Market
Program
We
have established an “at-the-market” equity distribution program under which we may offer and sell shares of common
stock to, or through, sales agents by means of ordinary brokers’ transactions on the NASDAQ, in block transactions, or as
otherwise agreed to between us and the sales agent at prices we deem appropriate. We are under no obligation to offer and sell
shares of common stock under the program. For the three months ended March 31, 2019, we sold 3,137,392 shares of common stock
through our “at-the-market” equity program that resulted in net proceeds of $3,736,251 and fees paid to our sales
agent of $65,838. The net proceeds from these issuances, and future equity issuances, are to be used to repay a portion of our
senior secured notes maturing December 15, 2019.
Effects
of Inflation
The
impact of inflation was not significant to our financial condition or results of operations for the three months ended March 31,
2019 and 2018.