UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended June 30,
2008
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ______ to _______
Commission
File Number: 000-21467
PACIFIC
ETHANOL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction
of
incorporation or organization)
|
41-2170618
(I.R.S.
Employer
Identification
No.)
|
|
|
400
Capitol Mall, Suite 2060, Sacramento, California
(Address of principal
executive offices)
|
95814
(zip
code)
|
(916)
403-2123
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o
|
Accelerated
filer x
|
|
|
Non-accelerated
filer o (Do not check if a smaller
reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As of
August 8, 2008, there were 57,877,896 shares of Pacific Ethanol, Inc. common
stock, $0.001 par value per share, outstanding.
PART
I
FINANCIAL
INFORMATION
|
|
Page
|
Item
1.
|
Financial
Statements.
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2008 (unaudited) and December 31,
2007
|
F-1
|
|
|
|
|
Consolidated
Statements of Operations for the Three and Six Months Ended June 30, 2008
and 2007 (unaudited)
|
F-3
|
|
|
|
|
Consolidated
Statements of Comprehensive Income (Loss) for the Three and Six Months
Ended June 30, 2008 and 2007 (unaudited)
|
F-4
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007
(unaudited)
|
F-5
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
F-6
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
2
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
14
|
|
|
|
Item
4.
|
Controls
and Procedures.
|
17
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
18
|
|
PART
II
|
|
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings.
|
18
|
|
|
|
Item
1A.
|
Risk
Factors.
|
18
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
18
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities.
|
19
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
19
|
|
|
|
Item
5.
|
Other
Information.
|
20
|
|
|
|
Item
6.
|
Exhibits.
|
20
|
|
|
|
Signatures
|
|
22
|
Exhibits
Filed with this Report
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
|
|
June
30,
|
|
|
December
31,
|
|
ASSETS
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
*
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
19,102 |
|
|
$ |
5,707 |
|
Investments
in marketable securities
|
|
|
7,555 |
|
|
|
19,353 |
|
Accounts
receivable, net (including $0 and $7 as
of
June 30, 2008 and December 31, 2007,
respectively,
from a related party)
|
|
|
35,804 |
|
|
|
28,034 |
|
Restricted
cash
|
|
|
8,349 |
|
|
|
780 |
|
Inventories
|
|
|
38,486 |
|
|
|
18,540 |
|
Prepaid
expenses
|
|
|
1,378 |
|
|
|
1,498 |
|
Prepaid
inventory
|
|
|
5,474 |
|
|
|
3,038 |
|
Derivative
instruments
|
|
|
147 |
|
|
|
1,613 |
|
Other
current assets
|
|
|
3,779 |
|
|
|
3,630 |
|
Total
current assets
|
|
|
120,074 |
|
|
|
82,193 |
|
Property
and equipment, net
|
|
|
560,860 |
|
|
|
468,704 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
— |
|
|
|
88,168 |
|
Intangible
assets, net
|
|
|
5,934 |
|
|
|
6,324 |
|
Other
assets
|
|
|
9,125 |
|
|
|
6,211 |
|
Total
other assets
|
|
|
15,059 |
|
|
|
100,703 |
|
Total
Assets
|
|
$ |
695,993 |
|
|
$ |
651,600 |
|
_______________
* Amounts
derived from the audited financial statements for the year ended December 31,
2007.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(in
thousands, except par value and shares)
|
|
June
30,
|
|
|
December
31,
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
*
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable – trade
|
|
$ |
17,622 |
|
|
$ |
22,641 |
|
Accrued
liabilities
|
|
|
9,633 |
|
|
|
8,526 |
|
Accounts
payable and accrued liabilities – construction-related
|
|
|
47,128 |
|
|
|
55,203 |
|
Contract
retentions
|
|
|
3,426 |
|
|
|
5,358 |
|
Other
liabilities – related parties
|
|
|
255 |
|
|
|
900 |
|
Current
portion – notes payable
|
|
|
43,800 |
|
|
|
11,098 |
|
Short-term
note payable
|
|
|
3,000 |
|
|
|
6,000 |
|
Derivative
instruments
|
|
|
10,240 |
|
|
|
10,353 |
|
Total
current liabilities
|
|
|
135,104 |
|
|
|
120,079 |
|
|
|
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
|
194,614 |
|
|
|
151,188 |
|
Other
liabilities
|
|
|
2,822 |
|
|
|
1,965 |
|
Total
Liabilities
|
|
|
332,540 |
|
|
|
273,232 |
|
Commitments
and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Noncontrolling
interest in variable interest entity
|
|
|
49,957 |
|
|
|
96,082 |
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 10,000,000 shares authorized; Series A: 7,000,000
shares authorized; 0 and 5,315,625 shares issued and outstanding as of
June 30, 2008 and December 31, 2007, respectively;
|
|
|
— |
|
|
|
5 |
|
Series
B: 3,000,000 shares authorized; 2,346,152 and 0 shares issued and
outstanding as of June 30, 2008 and December 31, 2007,
respectively
|
|
|
2 |
|
|
|
— |
|
Common
stock, $0.001 par value; 100,000,000 shares authorized; 57,877,896 and
40,606,214 shares issued and outstanding as of June 30, 2008 and
December 31, 2007, respectively
|
|
|
58 |
|
|
|
41 |
|
Additional
paid-in capital
|
|
|
477,382 |
|
|
|
402,932 |
|
Accumulated
other comprehensive income (loss)
|
|
|
1,097 |
|
|
|
(2,383 |
) |
Accumulated
deficit
|
|
|
(165,043 |
) |
|
|
(118,309 |
) |
Total
stockholders’ equity
|
|
|
313,496 |
|
|
|
282,286 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
695,993 |
|
|
$ |
651,600 |
|
_______________
* Amounts
derived from the audited financial statements for the year ended December 31,
2007.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited,
in thousands, except per share data)
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
197,974 |
|
|
$ |
113,763 |
|
|
$ |
359,509 |
|
|
$ |
213,005 |
|
Cost
of goods sold
|
|
|
197,531 |
|
|
|
102,642 |
|
|
|
343,408 |
|
|
|
186,543 |
|
Gross
profit
|
|
|
443 |
|
|
|
11,121 |
|
|
|
16,101 |
|
|
|
26,462 |
|
Selling,
general and administrative expenses
|
|
|
7,678 |
|
|
|
8,320 |
|
|
|
17,544 |
|
|
|
17,822 |
|
Goodwill
impairment
|
|
|
— |
|
|
|
— |
|
|
|
87,047 |
|
|
|
— |
|
Income
(loss) from operations
|
|
|
(7,235 |
) |
|
|
2,801 |
|
|
|
(88,490 |
) |
|
|
8,640 |
|
Other
income (expense), net
|
|
|
889 |
|
|
|
1,235 |
|
|
|
(1,410 |
) |
|
|
1,310 |
|
Income
(loss) before noncontrolling interest in variable interest
entity
|
|
|
(6,346 |
) |
|
|
4,036 |
|
|
|
(89,900 |
) |
|
|
9,950 |
|
Noncontrolling
interest in variable interest entity
|
|
|
(1,987 |
) |
|
|
(1,880 |
) |
|
|
46,416 |
|
|
|
(4,819 |
) |
Net
income (loss) before provision for income taxes
|
|
|
(8,333 |
) |
|
|
2,156 |
|
|
|
(43,484 |
) |
|
|
5,131 |
|
Provision
for income taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
income (loss)
|
|
$ |
(8,333 |
) |
|
$ |
2,156 |
|
|
$ |
(43,484 |
) |
|
$ |
5,131 |
|
Preferred
stock dividends
|
|
$ |
(1,388 |
) |
|
$ |
(1,050 |
) |
|
$ |
(2,489 |
) |
|
$ |
(2,100 |
) |
Deemed
dividend on preferred stock
|
|
|
(761 |
) |
|
|
— |
|
|
|
(761 |
) |
|
|
— |
|
Income
(loss) available to common stockholders
|
|
$ |
(10,482 |
) |
|
$ |
1,106 |
|
|
$ |
(46,734 |
) |
|
$ |
3,031 |
|
Net
income (loss) per share, basic
|
|
$ |
(0.23 |
) |
|
$ |
0.03 |
|
|
$ |
(1.08 |
) |
|
$ |
0.08 |
|
Net
income (loss) per share, diluted
|
|
$ |
(0.23 |
) |
|
$ |
0.03 |
|
|
$ |
(1.08 |
) |
|
$ |
0.08 |
|
Weighted-average
shares outstanding, basic
|
|
|
46,455 |
|
|
|
39,894 |
|
|
|
43,254 |
|
|
|
39,784 |
|
Weighted-average
shares outstanding, diluted
|
|
|
46,455 |
|
|
|
40,273 |
|
|
|
43,254 |
|
|
|
40,256 |
|
See accompanying notes to consolidated financial
statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited,
in thousands)
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(8,333 |
) |
|
$ |
2,156 |
|
|
$ |
(43,484 |
) |
|
$ |
5,131 |
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in the fair value of
derivatives
|
|
|
4,029 |
|
|
|
(973 |
) |
|
|
3,480 |
|
|
|
(1,731 |
) |
Comprehensive
income (loss)
|
|
$ |
(4,304 |
) |
|
$ |
1,183 |
|
|
$ |
(40,004 |
) |
|
$ |
3,400 |
|
See accompanying notes to consolidated financial
statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited,
in thousands)
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(43,484 |
) |
|
$ |
5,131 |
|
Adjustments
to reconcile net income (loss) to
cash
(used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Goodwill
impairment
|
|
|
87,047 |
|
|
|
— |
|
Depreciation
and amortization of intangibles
|
|
|
10,832 |
|
|
|
9,176 |
|
(Gain)
loss on disposal of equipment
|
|
|
(78 |
) |
|
|
84 |
|
Amortization
of deferred financing fees
|
|
|
918 |
|
|
|
1,857 |
|
Non-cash
compensation and consulting expense
|
|
|
1,456 |
|
|
|
1,214 |
|
Loss
on derivatives
|
|
|
4,832 |
|
|
|
844 |
|
Noncontrolling
interest in variable interest entity
|
|
|
(46,416 |
) |
|
|
4,819 |
|
Bad
debt expense
|
|
|
62 |
|
|
|
48 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(7,832 |
) |
|
|
10,094 |
|
Restricted
cash
|
|
|
(7,569 |
) |
|
|
(908 |
) |
Inventories
|
|
|
(19,946 |
) |
|
|
(12,196 |
) |
Prepaid
expenses and other assets
|
|
|
(2,941 |
) |
|
|
(1,953 |
) |
Prepaid
inventory
|
|
|
(2,436 |
) |
|
|
(1,725 |
) |
Accounts
payable and accrued expenses
|
|
|
(10,032 |
) |
|
|
(3,872 |
) |
Accounts
payable, and accrued expenses-related party
|
|
|
(645 |
) |
|
|
(5,315 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(36,232 |
) |
|
|
7,298 |
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(103,692 |
) |
|
|
(89,728 |
) |
Proceeds
from sales of available-for-sale investments
|
|
|
11,798 |
|
|
|
24,313 |
|
Proceeds
from sale of equipment
|
|
|
206 |
|
|
|
10 |
|
Increase
in restricted cash designated for construction projects
|
|
|
— |
|
|
|
(11,814 |
) |
Net
cash used in investing activities
|
|
|
(91,688 |
) |
|
|
(77,219 |
) |
Financing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from borrowing
|
|
|
81,891 |
|
|
|
81,500 |
|
Net
proceeds from issuance of preferred stock and warrants
|
|
|
45,473 |
|
|
|
— |
|
Net
proceeds from issuance of common stock and warrants
|
|
|
26,694 |
|
|
|
— |
|
Proceeds
from exercise of warrants and stock options
|
|
|
— |
|
|
|
1,792 |
|
Principal
payments paid on borrowings
|
|
|
(8,799 |
) |
|
|
(6,978 |
) |
Cash
paid for debt issuance costs
|
|
|
(838 |
) |
|
|
(9,988 |
) |
Preferred
share dividend paid
|
|
|
(2,489 |
) |
|
|
(2,100 |
) |
Dividend
paid to noncontrolling interests
|
|
|
(617 |
) |
|
|
(2,429 |
) |
Net
cash provided by financing activities
|
|
|
141,315 |
|
|
|
61,797 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
13,395 |
|
|
|
(8,124 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
5,707 |
|
|
|
44,053 |
|
Cash
and cash equivalents at end of period
|
|
$ |
19,102 |
|
|
$ |
35,929 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Interest
paid ($7,072 and $3,262 capitalized)
|
|
$ |
8,271 |
|
|
$ |
3,688 |
|
Non-Cash
Financing and Investing activities:
|
|
|
|
|
|
|
|
|
Accrued
additions to property and equipment
|
|
$ |
8,075 |
|
|
$ |
16,146 |
|
Transfer
of deposit to property and equipment
|
|
$ |
— |
|
|
$ |
8,977 |
|
Capital
lease
|
|
$ |
37 |
|
|
$ |
203 |
|
Par
value of common stock issued for conversion of preferred
stock
|
|
$ |
11 |
|
|
$ |
— |
|
Deemed
dividend on preferred stock
|
|
$ |
761 |
|
|
$ |
— |
|
See accompanying notes to consolidated financial
statements.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
AND BASIS OF PRESENTATION.
Organization
and Business – The consolidated financial statements include the accounts
of Pacific Ethanol, Inc., a Delaware corporation, and all of its wholly-owned
subsidiaries, including Pacific Ethanol California, Inc., a California
corporation, Kinergy Marketing LLC, an Oregon limited liability company
(“Kinergy”) and the consolidated financial statements of Front Range Energy,
LLC, a Colorado limited liability company (“Front Range”), a variable interest
entity of which Pacific Ethanol, Inc. owns 42% (collectively, the
“Company”).
The
Company produces and sells ethanol and its co-products, including wet distillers
grain (“WDG”), and provides transportation, storage and delivery of ethanol
through third-party service providers in the Western United States, primarily in
California, Nevada, Arizona, Oregon, Colorado, Idaho and Washington. The Company
sells ethanol to gasoline refining and distribution companies and WDG to dairy
operators and animal feed distributors. The Company produces its ethanol and
co-products through its three ethanol plants. Its Madera plant, located in
Madera, California, with annual production capacity of up to 40 million gallons,
has been in operation since October 2006. Its Columbia plant, located in
Boardman, Oregon, with annual production capacity of up to 40 million gallons,
has been in operation since September 2007. And its Magic Valley plant, located
in Burley, Idaho, with annual production capacity of up to 60 million gallons,
has been in operation since April 2008. In addition, the Company owns a 42%
interest in Front Range, which owns a plant located in Windsor, Colorado, with
annual production capacity of up to 50 million gallons. The Company is
constructing its Stockton plant, located in Stockton, California, which is
expected to commence operations in the third quarter of 2008.
On June
11, 2008, the Company appointed Michael D. Kandris as a member of its Board of
Directors.
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 of America 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, 2007. Except as disclosed in Note 2 below, 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, 2007. 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
of prior year’s data have been made to conform to 2008
classifications.
2. NEW
ACCOUNTING STANDARDS.
In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles that are presented in
conformity with generally accepted accounting principles in the United States.
SFAS No. 162 is effective 60 days following the Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company
does not believe SFAS No. 162 will have a material impact on its consolidated
financial statements.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In March
2008, the FASB issued SFAS No. 161, Disclosure about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133. SFAS No. 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (i) how and why an entity uses derivative instruments, (ii)
how derivative instruments and related hedged items are accounted for under SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities, and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company is currently evaluating the impact SFAS No. 161 may have
on its consolidated financial statements.
On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements,
which is further discussed in Note 12.
On
January 1, 2008, the Company also adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits an entity to
irrevocably elect fair value on a contract-by-contract basis as the initial and
subsequent measurement attribute for many financial assets and liabilities and
certain other items including insurance contracts. Entities electing the fair
value option would be required to recognize changes in fair value in earnings
and to expense upfront costs and fees associated with the item for which the
fair value option is elected. The adoption of SFAS No. 159 did not have a
material impact on the Company’s financial position, results of operations or
cash flows for the three and six months ended June 30, 2008.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. MARKETABLE
SECURITIES.
The
Company’s marketable securities consisted of short-term marketable securities
with carrying values of $7,555,000 and $19,353,000 as of June 30, 2008 and
December 31, 2007, respectively. As of June 30, 2008 and December 31, 2007,
there were no gross unrealized gains or losses for these securities.
4. INVENTORIES.
Inventories
consisted primarily of bulk ethanol, unleaded fuel and corn, and are valued at
the lower-of-cost-or-market, with cost determined on a first-in, first-out
basis. Inventory balances consisted of the following (in
thousands):
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
20,550 |
|
|
$ |
3,647 |
|
Work
in progress
|
|
|
3,566 |
|
|
|
1,809 |
|
Finished
goods
|
|
|
13,056 |
|
|
|
12,064 |
|
Other
|
|
|
1,314 |
|
|
|
1,020 |
|
Total
|
|
$ |
38,486 |
|
|
$ |
18,540 |
|
5. GOODWILL
AND OTHER INTANGIBLE ASSETS.
During
the six months ended June 30, 2008, the Company adjusted its goodwill associated
with its acquisition of ownership interests in Front Range resulting in a
decrease of goodwill of $1,121,000. Additionally, the Company performed its
annual review of impairment of goodwill in accordance with SFAS No.
142, Goodwill and Other
Intangible Assets, as of March 31, 2008. The Company’s annual review
estimated the fair value of its single reporting unit to be below its carrying
value. As a result, the Company recognized an impairment charge on its remaining
goodwill of $87,047,000, reducing its goodwill balance to zero.
6. DEBT.
Long-term
borrowings are summarized in the table below (in thousands):
|
|
|
|
|
|
|
Plant
construction term loans, due 2015
|
|
$ |
161,538 |
|
|
$ |
92,308 |
|
Plant
construction lines of credit, due 2009
|
|
|
14,200 |
|
|
|
9,200 |
|
Operating
line of credit, due 2011
|
|
|
13,877 |
|
|
|
6,217 |
|
Notes
payable to related party, due 2009
|
|
|
30,000 |
|
|
|
30,000 |
|
Swap
note, due 2011
|
|
|
15,688 |
|
|
|
16,370 |
|
Variable
rate note, due 2011
|
|
|
1,847 |
|
|
|
6,930 |
|
Water
rights capital lease obligations
|
|
|
1,264 |
|
|
|
1,261 |
|
|
|
|
238,414 |
|
|
|
162,286 |
|
Less
short-term portion
|
|
|
(43,800 |
) |
|
|
(11,098 |
) |
Long-term
debt
|
|
$ |
194,614 |
|
|
$ |
151,188 |
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Plant Construction Term Loans & Lines of
Credit - During
the three and six months ended June 30, 2008, the Company completed construction
of its Magic Valley plant and continued construction efforts of its Stockton
plant, resulting in increased draws on the Company’s existing construction term
loans and construction lines of credit of an additional $69,230,000 and
$5,000,000, respectively.
In March
2008, the Company became aware of various events or circumstances which
constituted defaults under its credit agreement. These events or circumstances
included the existence of material weaknesses in the Company’s internal control
over financial reporting as of December 31, 2007, cash management activities
that violated covenants in its credit agreement, failure to maintain adequate
amounts in a designated debt service reserve account, the existence of a number
of Eurodollar loans in excess of the maximum number permitted under the
Company’s credit agreement, and the Company’s failure to pay all remaining
project costs on its Madera and Columbia plants by certain stipulated deadlines.
On March 26, 2008, the Company obtained waivers from its lenders as to these
defaults and was required to pay the lenders a consent fee in an aggregate
amount of $521,000. In addition to the waivers, the Company’s lenders agreed to
amend the credit agreement. These amendments include an increase in the
frequency with which the Company is to deposit certain revenues into a
restricted account each month, an increase of allowable Eurodollar loans from a
maximum of seven to a maximum of ten, and the Company was required to pay all
remaining project costs on its Madera and Columbia plants by May 16, 2008. As of
June 30, 2008, the Company believed it was in compliance with its
covenants.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Comerica Operating Line of
Credit - Kinergy
was party to a Loan and Security Agreement (“Loan Agreement”) dated as of August
17, 2007 with Comerica Bank, as amended by a First Amendment to Loan and
Security Agreement dated as of August 29, 2007 and as further amended by a
Forbearance Agreement and Release (“Forbearance Agreement”) dated as of May 12,
2008 and an amendment to the Forbearance Agreement dated as of June 1, 2008,
(collectively, the “Loan Documents”). The Loan Documents provided for a
$17,500,000 credit facility. Borrowings under the credit facility accrued
interest at the Prime Rate of interest, as published in The Wall Street Journal, plus
2.50%. Kinergy’s borrowing base under the credit facility, which, subject to the
credit limit of $17,500,000, determined the amounts available for borrowing
thereunder, was calculated by reference to eligible accounts receivable and
eligible inventory. Amounts available for borrowings by reference to eligible
inventory were limited to an aggregate of $7,600,000. Kinergy was permitted to
obtain letters of credit under the Loan Documents subject to a sublimit of
$6,000,000 in outstanding letters of credit. Kinergy’s financial covenants under
the Loan Documents were to maintain (i) a ratio of current assets to current
liabilities of at least 1.25:1.00, (ii) working capital of at least $12,000,000,
(iii) tangible effective net worth of at least $2,900,000, and (iv) debt to
tangible effective net worth of no greater than 9.00:1.00. As of June 30, 2008,
the Company believed it was in compliance with its covenants.
On May
13, 2008, Kinergy and the Company entered into the Forbearance Agreement and on
June 1, 2008, they entered into an amendment to the Forbearance Agreement, which
provided for modifications of certain terms in the Loan Agreement. The
Forbearance Agreement identified certain existing defaults under the Loan
Agreement and provided that Comerica Bank would forbear for a period of time
(the “Forbearance Period”) commencing on May 12, 2008 and ending on the earlier
to occur of (i) August 15, 2008, and (ii) the date that any new default occurs
under the Loan Documents, from exercising its rights and remedies under the Loan
Documents and under applicable law. Under the Forbearance Agreement, Kinergy was
required to provide to Comerica Bank by June 30, 2008, a refinancing term sheet
reasonably satisfactory to Comerica Bank from a third party lender for the
refinancing of the amounts owed under the credit facility, which the Company
provided to Comerica Bank by June 30, 2008. Kinergy was also required to remit
all cash proceeds from its operations to its operating accounts with Comerica
Bank and all such proceeds are to be applied in accordance with the Loan
Agreement. Kinergy was also required to cause its cumulative net loss for the
period from April 1, 2008 through August 15, 2008 not to exceed $1,000,000
(excluding non-cash gains or losses on hedges and other derivatives). Kinergy’s
obligations to Comerica Bank were secured by substantially all of its assets,
subject to certain customary exclusions and permitted liens, and were guaranteed
by the Company. As of June 30, 2008, the Company had complied with these
requirements. In addition, Kinergy paid Comerica Bank a forbearance fee of
$100,000.
Kinergy’s
credit facility with Comerica Bank was terminated upon consummation of Kinergy’s
new credit facility with Wachovia Bank, as described below.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
New Wachovia Operating Line of
Credit - On July
28, 2008, Kinergy entered into a Loan and Security Agreement dated July 28,
2008 with the parties thereto from time to time as Lenders (“Lenders”), Wachovia
Capital Finance Corporation (Western) (“Agent”) and Wachovia Bank, National
Association (the “Loan Agreement”). Kinergy initially used the proceeds from the
closing of the credit facility to repay all amounts outstanding under its credit
facility with Comerica Bank, described above and to pay certain closing
fees.
The Loan
Agreement provides for a credit facility in an aggregate amount of up to
$40,000,000 based on Kinergy’s eligible accounts receivable and inventory
levels, subject to any reserves established by Agent. Kinergy may also obtain
letters of credit under the credit facility, subject to a letter of credit
sublimit of $10,000,000. The credit facility is subject to certain other
sublimits, including as to inventory loan limits. Kinergy may request an
increase in the amount of the facility in increments of not less than
$2,500,000, up to a maximum aggregate credit limit of $45,000,000, but Lenders
have no obligation to agree to any such request.
Kinergy
may borrow under the credit facility based upon (i) a rate equal to (a) the
London Interbank Offered Rate (LIBOR), divided by 0.90 (subject to change based
upon the reserve percentage in effect from time to time under Regulation D of
the Board of Governors of the Federal Reserve System), plus (b) 2.00% to 2.50%
depending on the amount of Kinergy’s EBITDA for a specified period, or (ii) a
rate equal to (a) the greater of the prime rate published by Wachovia Bank from
time to time, or the federal funds rate then in effect plus 0.50%, plus (b)
0.00% to 0.25% depending on the amount of Kinergy’s EBITDA for a specified
period. In addition, Kinergy is required to pay an unused line fee at a rate
equal to 0.375% as well as other customary fees and expenses associated with the
credit facility and issuances of letters of credit.
Kinergy’s
obligations under the Loan Agreement are secured by a first-priority security
interest in all of its assets in favor of Agent and Lenders.
The Loan
Agreement also contains restrictions on distributions of funds from Kinergy to
the Company. In addition, the Loan Agreement contains a single financial
covenant requiring that Kinergy generate EBITDA in specified amounts during 2008
and 2009. For subsequent periods, the minimum EBITDA covenant amounts are to be
determined based upon financial projections to be delivered by Kinergy and shall
be mutually agreed upon by Kinergy and Agent.
The
credit facility matures on July 28, 2011, unless sooner terminated. Kinergy is
permitted to terminate the credit facility early upon ten days prior written
notice. Agent and Lenders may terminate the credit facility early at any time on
or after an event of default has occurred and is continuing. In the event the
credit facility is for any reason terminated prior to the maturity date, Kinergy
will be required to pay an early termination fee ranging from 0.50% to 1.00% of
the maximum credit, based on the date of termination if the credit facility is
terminated on or before July 29, 2010. Kinergy paid customary closing fees,
including a closing fee of 0.50% of the maximum credit, or $200,000, to Lenders,
and $150,000 in legal fees to legal counsel to Agent and Lenders.
On July
28, 2008, the Company entered into a Guarantee dated July 28, 2008 in favor of
Agent for and on behalf of Lenders. The Guarantee provides for the unconditional
guarantee by the Company of, and the Company agreed to be liable for, the
payment and performance when due of Kinergy’s obligations under the Loan
Agreement.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Notes Payable to Related
Party
- - In November 2007, Pacific Ethanol Imperial, LLC (“PEI Imperial”), an
indirect subsidiary of the Company, borrowed $15,000,000 from Lyles United, LLC
under a Secured Promissory Note containing customary terms and conditions. The
loan accrues interest at a rate equal to the Prime Rate of interest as reported
from time to time in The Wall
Street Journal, plus 2.00%, computed on the basis of a 360-day year of
twelve 30-day months. The loan was due 90-days after issuance or, if extended at
the option of PEI Imperial, 365-days after the end of such 90-day period. This
loan was extended by PEI Imperial and is due February 25, 2009. The Secured
Promissory Note provided that if the loan was extended, the Company was to issue
a warrant to purchase 100,000 shares of the Company’s common stock at an
exercise price of $8.00 per share. The Company issued this warrant
simultaneously with the closing of the issuance of the Company’s Series B
Preferred Stock on March 27, 2008. The warrant is exercisable at any time during
the 18-month period after the date of issuance. The loan is secured by
substantially all of the assets of PEI Imperial pursuant to a Security Agreement
dated November 28, 2007 by and between PEI Imperial and Lyles United, LLC that
contains customary terms and conditions and an Amendment No. 1 to Security
Agreement dated December 27, 2007 by and between PEI Imperial and Lyles United,
LLC (collectively, the “Security Agreement”). The Company has guaranteed the
repayment of the loan pursuant to an Unconditional Guaranty dated November 28,
2007 containing customary terms and conditions. In connection with the loan, PEI
Imperial entered into a Letter Agreement dated November 28, 2007 with Lyles
United, LLC under which PEI Imperial committed to award the primary construction
and mechanical contract to Lyles United, LLC or one of its affiliates for the
construction of the Company’s Imperial Valley project, located in the Imperial
Valley, near Calipatria, California (the “Project”), conditioned upon PEI
Imperial electing, in its sole discretion, to proceed with the Project and Lyles
United, LLC or its affiliate having all necessary licenses and being otherwise
ready, willing and able to perform the primary construction and mechanical
contract. In the event the foregoing conditions are satisfied and PEI Imperial
awards such contract to a party other than Lyles United, LLC or one of its
affiliates, PEI Imperial will be required to pay to Lyles United, LLC, as
liquidated damages, an amount equal to $5,000,000.
In
December 2007, PEI Imperial borrowed an additional $15,000,000 from Lyles
United, LLC under a second Secured Promissory Note containing customary terms
and conditions. The loan accrues interest at a rate equal to the Prime Rate of
interest as reported from time to time in The Wall Street Journal, plus
4.00%, computed on the basis of a 360-day year of twelve 30-day months. The loan
was due on March 31, 2008, but was extended at the option of PEI Imperial, to
March 31, 2009. As a result of the extension, the interest rate increased by
2.00% to the rate indicated above. The loan is secured by substantially all of
the assets of PEI Imperial pursuant to the Security Agreement. The Company has
guaranteed the repayment of the loan pursuant to an Unconditional Guaranty dated
December 27, 2007 containing customary terms and conditions.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. COMMON
AND PREFERRED STOCK.
Issuance
of Common Stock and Warrants – On May 22, 2008, the Company entered into
a Placement Agent Agreement with Lazard Capital Markets LLC (the “Placement
Agent”), relating to the sale by the Company of an aggregate of 6,000,000 shares
of common stock and warrants to purchase an aggregate of 3,000,000 shares of
common stock at an exercise price of $7.10 per share of common stock for an
aggregate purchase price of $28,500,000. The warrants are exercisable at any
time during the period commencing on the date that is six months and one day
from the date of the warrants and ending five years from the date of the
warrants. On May 29, 2008, the Company consummated the offering. Upon issuance,
the Company recorded $26,694,000, net of issuance costs, in stockholders’
equity.
Full
Conversion of Series A Preferred Stock – During the three months ended
June 30, 2008, Cascade Investment, L.L.C. (“Cascade”), the sole holder of the
Company’s Series A Cumulative Redeemable Convertible Preferred Stock (“Series A
Preferred Stock”), converted all of its Series A Preferred Stock into shares of
the Company’s common stock. In the aggregate, Cascade converted 5,315,625 shares
of Series A Preferred Stock into 10,631,250 shares of the Company’s common
stock. Accordingly, as of June 30, 2008, no shares of Series A Preferred Stock
were outstanding.
Securities
Purchase Agreement and Warrant – On March 18, 2008, the Company entered
into a Securities Purchase Agreement (the “Purchase Agreement”) with Lyles
United, LLC. The Purchase Agreement provided for the sale by the Company and the
purchase by Lyles United, LLC of (i) 2,051,282 shares of the Company’s Series B
Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”), all of
which are initially convertible into an aggregate of 6,153,846 shares of the
Company’s common stock based on an initial three-for-one conversion ratio, and
(ii) a warrant to purchase an aggregate of 3,076,923 shares of the Company’s
common stock at an exercise price of $7.00 per share. On March 27, 2008, the
Company consummated the purchase and sale of the Series B Preferred Stock. Upon
issuance, the Company recorded $39,728,000, net of issuance costs, in
stockholders’ equity. The warrant is exercisable at any time during the period
commencing on the date that is six months and one day from the date of the
warrant and ending ten years from the date of the warrant.
Additional
Issue of Series B Preferred Stock – On May 20, 2008, the Company entered
into a Securities Purchase Agreement (the “May Purchase Agreement”) with Neil M.
Koehler, Bill Jones, Paul P. Koehler and Thomas D. Koehler (the “May
Purchasers”). The May Purchase Agreement provided for the sale by the Company
and the purchase by the May Purchasers of (i) an aggregate of 294,870 shares of
the Company’s Series B Preferred Stock, all of which are initially convertible
into an aggregate of 884,610 shares of the Company’s common stock based on an
initial three-for-one conversion ratio, and (ii) warrants to purchase an
aggregate of 442,305 shares of the Company’s common stock at an exercise price
of $7.00 per share. On May 22, 2008, the Company consummated the purchase and
sale under the May Purchase Agreement. Upon issuance, the Company recorded
$5,745,000, net of issuance costs, in stockholders’ equity. The warrants are
exercisable at any time during the period commencing on the date that is six
months and one day from the date of the warrants and ending ten years from the
date of the warrants.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Deemed
Dividend on Preferred Stock – In accordance with EITF Issue No. 98-5,
Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, and EITF Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, the Series B Preferred Stock issued to
the May Purchasers is considered to have an embedded beneficial conversion
feature because the conversion price (as adjusted for the value allocated to the
warrants) was less than the fair value of the Company’s common stock at the
issuance date. The Company has recorded a deemed dividend on preferred stock of
$761,000 for the three months ended June 30, 2008. These non-cash dividends are
to reflect the implied economic value to the preferred stockholder of being able
to convert its shares into common stock at a price (as adjusted for the value
allocated to the warrants) which was in excess of the fair value of the Series B
Preferred Stock at the time of issuance. The fair value allocated to the Series
B Preferred Stock together with the original conversion terms (as adjusted for
the value allocated to the warrants) were used to calculate the value of the
deemed dividend on the Series B Preferred Stock on the date of
issuance.
The fair
value was calculated using the difference between the conversion price of the
Series B Preferred Stock into shares of common stock, adjusted for the value
allocated to the warrants, of $4.79 per share and the fair market value of the
Company’s common stock of $5.65 on the date of issuance of the Series B
Preferred Stock. These amounts have been charged to accumulated deficit with the
offsetting credit to additional paid-in-capital. The Company has treated the
deemed dividend on preferred stock as a reconciling item on the consolidated
statements of operations to adjust its reported net loss, together with any
preferred stock dividends recorded during the applicable period, to loss
available to common stockholders in the consolidated statements of
operations.
Certificate
of Designations – The Certificate of
Designations, Powers, Preferences and Rights of the Series B Cumulative
Convertible Preferred Stock (the “Certificate of Designations”) provides for
3,000,000 shares of preferred stock to be designated as Series B Cumulative
Convertible Preferred Stock. The Series B Preferred Stock ranks senior in
liquidation and dividend preferences to the Company’s common stock. Holders of
Series B Preferred Stock are entitled to quarterly cumulative dividends payable
in arrears in cash in an amount equal to 7.00% per annum of the purchase price
per share of the Series B Preferred Stock; however, subject to the provisions of
the Letter Agreement described below, such dividends may, at the option of the
Company, be paid in additional shares of Series B Preferred Stock based
initially on liquidation value of the Series B Preferred Stock. The holders of
Series B Preferred Stock have a liquidation preference over the holders of the
Company’s common stock initially equivalent to $19.50 per share of the Series B
Preferred Stock plus any accrued and unpaid dividends on the Series B Preferred
Stock. A liquidation will be deemed to occur upon the happening of customary
events, including the transfer of all or substantially all of the capital stock
or assets of the Company or a merger, consolidation, share exchange,
reorganization or other transaction or series of related transaction, unless
holders of 66 2/3% of the Series B Preferred Stock vote affirmatively in favor
of or otherwise consent that such transaction shall not be treated as a
liquidation. The Company believes that such liquidation events are within its
control and therefore, in accordance with Emerging Issues Task Force Issue D-98,
Classification and Measurement
of Redeemable Securities, the Company has classified the Series B
Preferred Stock in shareholders’ equity.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
holders of the Series B Preferred Stock have conversion rights initially
equivalent to three shares of common stock for each share of Series B Preferred
Stock. The conversion ratio is subject to customary antidilution adjustments. In
addition, antidilution adjustments are to occur in the event that the Company
issues equity securities at a price equivalent to less than $6.50 per share,
including derivative securities convertible into equity securities (on an
as-converted or as-exercised basis). The shares of Series B Preferred Stock are
also subject to forced conversion upon the occurrence of a transaction that
would result in an internal rate of return to the holders of the Series B
Preferred Stock of 25% or more. The forced conversion is to be based upon the
conversion ratio as last adjusted. Accrued but unpaid dividends on the Series B
Preferred Stock are to be paid in cash upon any conversion of the Series B
Preferred Stock.
The
holders of Series B Preferred Stock vote together as a single class with the
holders of the Company’s common stock on all actions to be taken by the
Company’s stockholders. Each share of Series B Preferred Stock
entitles the holder to the number of votes equal to the number of shares of
common stock into which each share of Series B Preferred Stock is convertible on
all matters to be voted on by the stockholders of the Company. Notwithstanding
the foregoing, the holders of Series B Preferred Stock are afforded numerous
customary protective provisions with respect to certain actions that may only be
approved by holders of a majority of the shares of Series B Preferred
Stock.
As long
as 50% of the shares of Series B Preferred Stock remain outstanding, the holders
of the Series B Preferred Stock are afforded preemptive rights with respect to
certain securities offered by the Company.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Registration
Rights Agreement – In connection with the closing of the sale of its
Series B Preferred Stock, the Company entered into a Registration Rights
Agreement with Lyles United, LLC. The Registration Rights Agreement is to be
effective until the holders of the Series B Preferred Stock, and their
affiliates, as a group, own less than 10% of the Series B Preferred Stock issued
under the Purchase Agreement, including common stock into which such Series B
Preferred Stock has been converted (the “Termination Date”). The Registration
Rights Agreement provides that holders of a majority of the Series B Preferred
Stock, including common stock into which such Series B Preferred Stock has been
converted, may demand and cause the Company, at any time after the first
anniversary of the Closing, to register on their behalf the shares of common
stock issued, issuable or that may be issuable upon conversion of the Series B
Preferred Stock and as payment of dividends thereon, and upon exercise of the
related warrant as well as upon exercise of a warrant to purchase 100,000 shares
of the Company’s common stock at an exercise price of $8.00 per share and issued
in connection with the extension of the maturity date of an unrelated loan
(collectively, the “Registrable Securities”). The Company is required to keep
such registration statement effective until such time as all of the Registrable
Securities are sold or until such holders may avail themselves of Rule 144 for
sales of Registrable Securities without registration under the Securities Act of
1933, as amended. The holders are entitled to two demand registrations on Form
S-1 and unlimited demand registrations on Form S-3; provided, however, that the
Company is not obligated to effect more than one demand registration on Form S-3
in any calendar year. In addition to the demand registration rights afforded the
holders under the Registration Rights Agreement, the holders are entitled to
unlimited “piggyback” registration rights. These rights entitle the holders who
so elect to be included in registration statements to be filed by the Company
with respect to other registrations of equity securities. The Company is
responsible for all costs of registration, plus reasonable fees of one legal
counsel for the holders, which fees are not to exceed $25,000 per registration.
The Registration Rights Agreement includes customary representations and
warranties on the part of both the Company and Lyles United, LLC and other
customary terms and conditions.
Ancillary
Agreements – In connection with
the closing of the above mentioned sales of its Series B Preferred Stock, the
Company entered into Letter Agreements with Lyles United, LLC and the May
Purchasers under which the Company expressly waived its rights under the
Certificate of Designations to make dividend payments in additional shares of
Series B Preferred Stock in lieu of cash dividend payments without the prior
written consent of Lyles United, LLC and the May Purchasers.
8. STOCK-BASED
COMPENSATION.
Total
stock-based compensation expense related to SFAS No. 123 (Revised 2004),
Share-Based Payments,
included in wages, salaries and related costs was $909,000 and $545,000 for the
three months ended June 30, 2008 and 2007, respectively, and $1,456,000 and
$1,214,000 for the six months ended June 30, 2008, respectively. These
compensation expenses were charged to selling, general and administrative
expenses. As of June 30, 2008, $7,135,000 of compensation cost attributable to
future services related to plan awards that are probable of being achieved had
not yet been recognized.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. INCOME
(LOSS) PER SHARE.
The
following table computes basic and diluted income (loss) per share (in
thousands, except per share data):
|
|
Three
Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(8,333 |
) |
|
|
|
|
|
|
Less:
Preferred stock dividends
|
|
|
(1,388 |
) |
|
|
|
|
|
|
Less: Deemed
dividend on preferred stock
|
|
|
(761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share:
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
|
(10,482 |
) |
|
|
46,455 |
|
|
$ |
(0.23 |
) |
Effect
of outstanding restricted shares
|
|
|
|
|
|
|
— |
|
|
|
|
|
Effect
of outstanding warrants and options
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders, including assumed
conversions
|
|
$ |
(10,482 |
) |
|
|
46,455 |
|
|
$ |
(0.23 |
) |
|
|
Three
Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,156 |
|
|
|
|
|
|
|
Less: Preferred
stock dividends
|
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
|
1,106 |
|
|
|
39,894 |
|
|
$ |
0.03 |
|
Effect
of outstanding restricted shares
|
|
|
|
|
|
|
227 |
|
|
|
|
|
Effect
of outstanding warrants and options
|
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders, including assumed
conversions
|
|
$ |
1,106 |
|
|
|
40,273 |
|
|
$ |
0.03 |
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Six
Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(43,484 |
) |
|
|
|
|
|
|
Less:
Preferred stock dividends
|
|
|
(2,489 |
) |
|
|
|
|
|
|
Less: Deemed
dividend on preferred stock
|
|
|
(761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share:
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
|
(46,734 |
) |
|
|
43,254 |
|
|
$ |
(1.08 |
) |
Effect
of outstanding restricted shares
|
|
|
|
|
|
|
— |
|
|
|
|
|
Effect
of outstanding warrants and options
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders, including assumed
conversions
|
|
$ |
(46,734 |
) |
|
|
43,254 |
|
|
$ |
(1.08 |
) |
|
|
|
|
|
|
Six
Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,131 |
|
|
|
|
|
|
|
Less: Preferred
stock dividends
|
|
|
(2,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
|
3,031 |
|
|
|
39,784 |
|
|
$ |
0.08 |
|
Effect
of outstanding restricted shares
|
|
|
|
|
|
|
252 |
|
|
|
|
|
Effect
of outstanding warrants and options
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders, including assumed
conversions
|
|
$ |
3,031 |
|
|
|
40,256 |
|
|
$ |
0.08 |
|
There
were an aggregate of 18,864,000 and 18,290,000 of potentially dilutive
weighted-average shares outstanding from stock options, common stock warrants
and convertible preferred stock for the three and six months ended of June 30,
2008, respectively, and an aggregate of 10,500,000 of potentially dilutive
weighted-average shares outstanding from convertible preferred stock for the
three and six months ended June 30, 2007. These options, warrants and
convertible preferred stock were not considered in calculating diluted income
(loss) per share for these periods, as their effect would be
anti-dilutive.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. COMMITMENTS
AND CONTINGENCIES.
Purchase
Commitments – At June 30, 2008, the Company had purchase contracts with
its suppliers to purchase certain quantities of ethanol, corn, natural gas and
denaturant. Outstanding balances on fixed-price contracts for the
purchases of materials are indicated below and volumes indicated in the
indexed-price portion of the table are additional purchase commitments at
publicly-indexed sales prices determined by market prices in effect on their
respective transaction dates (in thousands):
|
|
|
|
Ethanol
|
|
$ |
23,324 |
|
Corn
|
|
|
403 |
|
Natural
gas
|
|
|
1,369 |
|
Total
|
|
$ |
25,096 |
|
|
|
Indexed-Price
Contracts
(Volume)
|
|
Ethanol
(gallons)
|
|
|
5,299 |
|
Corn
(bushels)
|
|
|
3,796 |
|
Denaturant
(gallons)
|
|
|
584 |
|
Sales
Commitments – At June 30, 2008, the Company had entered into sales
contracts with customers to sell certain quantities of ethanol, WDG and
syrup. The volumes indicated in the indexed-price contracts portion
of the table are additional committed sales and will be sold at publicly-indexed
sales prices determined by market prices in effect on their respective
transaction dates (in thousands):
|
|
|
|
Ethanol
|
|
$ |
39,836 |
|
WDG
|
|
|
10,894 |
|
Syrup
|
|
|
2,806 |
|
Total
|
|
$ |
53,536 |
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Indexed-Price
Contracts
(Volume)
|
|
Ethanol
(gallons)
|
|
|
43,940 |
|
WDG
(tons)
|
|
|
46 |
|
Syrup
(tons)
|
|
|
5 |
|
Litigation
– General – The
Company is subject to legal proceedings, claims and litigation arising in the
ordinary course of business. While the amounts claimed may be substantial, the
ultimate liability cannot presently be determined because of considerable
uncertainties that exist. Therefore, it is possible that the outcome of those
legal proceedings, claims and litigation could adversely affect the Company’s
quarterly or annual operating results or cash flows when resolved in a future
period. However, based on facts currently available, management believes that
such matters will not adversely affect the Company’s financial position, results
of operations or cash flows.
11. DERIVATIVES/HEDGES.
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 are designated and
documented as SFAS No. 133 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 other income
(expense).
For the
three months ended June 30, 2008 and 2007, gains from ineffectiveness in the
amount of $0 and $17,000, respectively, were recorded in cost of goods sold and
effective gains in the amount of $0 and $369,000, respectively, were recorded in
cost of goods sold. For the six months ended June 30, 2008 and 2007, a loss from
ineffectiveness in the amount of $1,033,000 and a gain of $159,000,
respectively, were recorded in cost of goods sold and effective gains in the
amount of $5,277,000 and $244,000, respectively, were recorded in cost of goods
sold. The notional balances remaining on these derivatives as of June 30, 2008
and December 31, 2007 were $0 and $2,427,000, respectively.
Commodity
Risk – Non-Designated Hedges – As part of the Company’s risk management
strategy, it uses forward contracts on corn, crude oil and reformulated
blendstock for oxygenate blending gasoline to lock in prices for certain amounts
of corn, denaturant and ethanol, respectively. These derivatives are not
designated under SFAS No. 133 for special hedge accounting treatment. The
changes in fair value of these contracts are recorded on the balance sheet and
recognized immediately in cost of goods sold.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the
three months ended June 30, 2008 and 2007, the Company recognized losses of
$918,000 (of which $166,000 is related to settled non-designated hedges) and
$2,988,000 as the change in the fair value of these contracts, respectively. For
the six months ended June 30, 2008 and 2007, the Company recognized losses of
$2,934,000 (of which $1,101,000 is related to settled non-designated hedges) and
$3,247,000 as the change in the fair value of these contracts, respectively. The
notional balances remaining on these contracts as of June 30, 2008 and December
31, 2007 were $29,603,000 and $29,999,000, respectively.
Interest
Rate Risk – As part of the Company’s interest rate risk management
strategy, the Company uses derivative instruments to minimize significant
unanticipated income fluctuations that may arise from rising variable interest
rate costs associated with existing and anticipated borrowings. To meet these
objectives the Company purchased interest rate caps and swaps. The rate for
notional balances of interest rate caps ranging from $4,268,000 to $20,304,000
is 5.50%-6.00% per annum. The rate for notional balances of interest rate swaps
ranging from $543,000 to $63,219,000 is 5.01%-8.16% per annum. These derivatives
are designated and documented as SFAS No. 133 cash flow hedges and effectiveness
is evaluated by assessing the probability of anticipated interest expense and
regressing the historical value of the rates against the historical value in the
existing and anticipated debt. Ineffectiveness, reflecting the degree to which
the derivative does not offset the underlying exposure, is recognized
immediately in other income (expense). For the three months ended June 30, 2008
and 2007, losses from effectiveness in the amount of $25,000 and $92,000, gains
from ineffectiveness in the amount of $102,000 and $611,000, and gains from
undesignated hedges in the amount of $897,000 and $0 were recorded in other
income (expense), respectively. For the six months ended June 30, 2008 and 2007,
losses from effectiveness in the amount of $51,000 and $105,000, gains from
ineffectiveness in the amount of $182,000 and $633,000, and losses from
undesignated hedges in the amount of $4,149,000 and $0 were recorded in other
income (expense), respectively. The losses for the six months ended June 30,
2008 resulted primarily from the Company’s suspension of construction of its
Imperial Valley project.
Accumulated
Other Comprehensive Income (Loss) – Accumulated other
comprehensive income (loss) relative to derivatives was as follows (in
thousands):
|
|
Commodity
Derivatives
|
|
|
Interest
Rate Derivatives
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2008
|
|
$ |
(455 |
) |
|
$ |
(1,928 |
) |
Net
changes
|
|
|
— |
|
|
|
3,076 |
|
Amount
reclassified to cost of goods sold
|
|
|
455 |
|
|
|
— |
|
Amount
reclassified to other income (expense)
|
|
|
— |
|
|
|
(51 |
) |
Ending
balance, June 30, 2008
|
|
$ |
— |
|
|
$ |
1,097 |
|
—————
*Calculated
on a pretax basis
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
estimated fair values of the Company’s derivatives, representing net assets
(liabilities) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
futures
|
|
$ |
(2,010 |
) |
|
$ |
(1,649 |
) |
Interest
rate swaps/caps
|
|
|
(8,083 |
) |
|
|
(7,091 |
) |
Total
|
|
$ |
(10,093 |
) |
|
$ |
(8,740 |
) |
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. FAIR
VALUE MEASUREMENTS.
On
January 1, 2008, the Company adopted SFAS No. 157, which defines a single
definition of fair value, together with a framework for measuring it, and
requires additional disclosure about the use of fair value to measure assets and
liabilities. SFAS No. 157 is applicable whenever another accounting
pronouncement requires or permits assets and liabilities to be measured at fair
value, but does not require any new fair value measurement. The SFAS No. 157
requirements for certain nonfinancial assets and liabilities have been deferred
until the first quarter of 2009 in accordance with FASB Staff Position 157-2.
The adoption of SFAS No. 157 did not have a material impact on the Company’s
financial position, results of operations or cash flows.
The fair
value hierarchy established by SFAS No. 157 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.
|
In
accordance with SFAS No. 157, the Company has classified its investments in
marketable securities and derivative instruments into these levels depending on
the inputs used to determine their fair values. The Company’s investments in
marketable securities consist of money market funds which are based on quoted
prices and are designated as Level 1. The Company’s derivative instruments
consist of commodity positions and interest rate caps and swaps. The fair value
of the commodity positions are based on quoted prices on the commodity exchanges
and are designated as Level 1 and the fair value of the interest rate caps and
swaps are based on quoted prices on similar assets or liabilities in active
markets and discounts to reflect potential credit risk to lenders and are
designated as Level 2.
The
following table summarizes fair value measurements by level at June 30, 2008 (in
thousands):
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in marketable securities
|
|
$ |
7,555 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,555 |
|
Interest
rate caps and swaps
|
|
|
- |
|
|
|
129 |
|
|
|
- |
|
|
|
129 |
|
Commodity
derivative assets
|
|
|
18 |
|
|
|
- |
|
|
|
- |
|
|
|
18 |
|
Total
Assets
|
|
$ |
7,573 |
|
|
$ |
129 |
|
|
$ |
- |
|
|
$ |
7,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
derivative liabilities
|
|
$ |
2,028 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,028 |
|
Interest
rate caps and swaps
|
|
|
- |
|
|
|
8,212 |
|
|
|
- |
|
|
|
8,212 |
|
Total
Liabilities
|
|
$ |
2,028 |
|
|
$ |
8,212 |
|
|
$ |
- |
|
|
$ |
10,240 |
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. RELATED
PARTY TRANSACTIONS.
During
the three and six months ended June 30, 2008, the Company sold $1,675,000 and
$33,500, respectively, of its business energy tax credits to certain employees
of the Company on the same terms and conditions as others to whom the Company
sold credits.
During
the six months ended June 30, 2008, the Company contracted with a company for
certain transportation services for its products. A new member of the Company’s
Board of Directors is a senior officer of the transportation company. As a
consequence, the transportation company is deemed a related party from the date
of such director’s election. During the period which the board member served on
the Company’s Board of Directors, the Company purchased $579,000 of
transportation services and as of June 30, 2008, had $255,000 of outstanding
accounts payable to the vendor.
As
discussed in Note 7, on March 27, 2008, the Company consummated the sale of its
Series B Preferred Stock with Lyles United, LLC. In addition, as of June 30,
2008, the Company had notes payable of $30,000,000, construction-related
accounts payable of $13,825,000 and contract retentions of $2,124,000 to Lyles
United, LLC.
As
discussed in Note 7, on May 22, 2008, the Company consummated the sale of
additional shares of its Series B Preferred Stock to Neil M. Koehler, Bill
Jones, Paul P. Koehler and Thomas D. Koehler.
14. SUBSEQUENT
EVENT.
New Wachovia Operating Line
of Credit
- - As discussed in Note 6, on July 28, 2008, Kinergy entered into a new
operating line of credit with Wachovia Bank to replace its then current
agreement with Comerica Bank.
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, without limitation:
·
|
fluctuations
in the market price of ethanol and its
co-products;
|
|
·
|
the
projected growth or contraction in the ethanol and co-product markets in
which we operate;
|
|
·
|
our
strategies for expanding, maintaining or contracting our presence in these
markets;
|
|
·
|
our
ability to successfully develop, finance, construct and operate our
planned ethanol plants;
|
|
·
|
anticipated
trends in our financial condition and results of operations;
and
|
|
·
|
our
ability to distinguish ourselves from our current and future
competitors.
|
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 in the “Risk Factors” section of our
Annual Report on Form 10-K for the year ended December 31, 2007, 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
Our
primary goal is to be the leading marketer and producer of low carbon renewable
fuels in the Western United States.
We
produce and sell ethanol and its co-products, including wet distillers grain, or
WDG, and provide transportation, storage and delivery of ethanol through
third-party service providers in the Western United States, primarily in
California, Nevada, Arizona, Oregon, Colorado, Idaho and Washington. We have
extensive customer relationships throughout the Western United States and
extensive supplier relationships throughout the Western and Midwestern United
States.
We own
and operate three ethanol plants. Our Madera plant, located in Madera,
California, has an annual production capacity of up to 40 million gallons and
has been in operation since October 2006. Our Columbia plant, located in
Boardman, Oregon, has an annual production capacity of up to 40 million gallons
and has been in operation since September 2007. Our Magic Valley plant, located
in Burley, Idaho, has an annual production capacity of up to 60 million gallons
and has been in operation since April 2008. In addition, we own a 42% interest
in Front Range Energy, LLC, or Front Range, which owns a plant located in
Windsor, Colorado with annual production capacity of up to 50 million gallons.
We are constructing our Stockton plant, located in Stockton, California, which
is expected to commence operations in the third quarter of 2008. We also intend
to either construct or acquire additional ethanol production facilities as
financial resources and business prospects make the construction or acquisition
of these facilities advisable.
We intend
to reach our goal to be the leading marketer and producer of low carbon
renewable fuels in the Western United States in part by expanding our
relationships with customers and third-party ethanol producers to market higher
volumes of ethanol, by expanding our relationships with animal feed distributors
and end users to build local markets for WDG, the primary co-product of our
ethanol production, and by expanding the market for ethanol by continuing to
work with state governments to encourage the adoption of policies and standards
that promote ethanol as a fuel additive and transportation fuel. In addition, we
intend to expand our annual production capacity to 220 million gallons in 2008,
upon completion of our Stockton plant, and 420 million gallons of annual
production capacity in 2010, through new construction or acquisition of
additional ethanol plants. We also intend to expand
our distribution infrastructure by increasing our ability to provide
transportation, storage and related logistical services to our customers
throughout the Western United States.
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;
consolidation of variable interest entities; impairment of intangible and
long-lived assets; stock-based compensation; derivative instruments and hedging
activities; allowance for doubtful accounts; and costs of start-up
activities. 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, 2007.
Results
of Operations
The
following selected financial data should be read in conjunction with our
consolidated financial statements and notes to our consolidated financial
statements included elsewhere in this report, and the other sections of
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contained in this report.
Certain
performance metrics that we believe are important indicators of our results of
operations include:
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
Six
Months Ended June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gallons
sold (in millions)
|
|
|
66.8 |
|
|
|
43.9 |
|
|
|
52.2 |
% |
|
|
126.0 |
|
|
|
82.8 |
|
|
|
52.2 |
% |
Average
sales price per gallon
|
|
$ |
2.55 |
|
|
$ |
2.32 |
|
|
|
10.0 |
% |
|
$ |
2.43 |
|
|
$ |
2.29 |
|
|
|
6.1 |
% |
Corn
cost per bushel—CBOT equivalent (1)
|
|
$ |
5.98 |
|
|
$ |
3.59 |
|
|
|
66.6 |
% |
|
$ |
5.39 |
|
|
$ |
3.28 |
|
|
|
64.3 |
% |
Co-product
revenues as % of delivered cost of corn
|
|
|
21.7 |
% |
|
|
26.5 |
% |
|
|
(18.1 |
)% |
|
|
23.4 |
% |
|
|
28.5 |
% |
|
|
(17.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
CBOT ethanol price per gallon
|
|
$ |
2.57 |
|
|
$ |
2.11 |
|
|
|
21.8 |
% |
|
$ |
2.43 |
|
|
$ |
2.13 |
|
|
|
14.1 |
% |
Average
CBOT corn price per bushel
|
|
$ |
6.29 |
|
|
$ |
3.71 |
|
|
|
69.5 |
% |
|
$ |
5.75 |
|
|
$ |
3.86 |
|
|
|
49.0 |
% |
_____________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We
exclude transportation—or “basis”—costs in our corn costs to calculate a
Chicago Board of Trade, or CBOT, equivalent price to compare our corn
costs to average CBOT corn prices.
|
Net
Sales, Cost of Goods Sold and Gross Profit
The
following table presents our net sales, cost of goods sold and gross profit in
dollars and gross profit as a percentage of net sales (in thousands, except
percentages):
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
Six
Months Ended June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
197,974 |
|
|
$ |
113,763 |
|
|
$ |
84,211 |
|
|
|
74 |
% |
|
$ |
359,509 |
|
|
$ |
213,005 |
|
|
$ |
146,504 |
|
|
|
69 |
% |
Cost
of goods sold
|
|
|
197,531 |
|
|
|
102,642 |
|
|
|
94,889 |
|
|
|
92 |
% |
|
|
343,408 |
|
|
|
186,543 |
|
|
|
156,865 |
|
|
|
84 |
% |
Gross
profit
|
|
$ |
443 |
|
|
$ |
11,121 |
|
|
$ |
(10,678 |
) |
|
|
(96 |
)% |
|
$ |
16,101 |
|
|
$ |
26,462 |
|
|
$ |
(10,361 |
) |
|
|
(39 |
)% |
Percentage of net
sales
|
|
|
0.2 |
% |
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
4.5 |
% |
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
Net
Sales
The
increase in our net sales for the three months ended June 30, 2008 as compared
to the same period in 2007 was primarily due to a substantial increase in sales
volume, coupled with higher average sales prices.
Total
volume of ethanol sold increased by 22.9 million gallons, or 52%, to 66.8
million gallons for the three months ended June 30, 2008 as compared to 43.9
million gallons in the same period in 2007. The substantial increase in sales
volume is primarily due to a full quarter’s production from our Columbia plant,
which commenced operations in September 2007, and two months of production from
our Magic Valley plant, which commenced operations in April 2008. Further we
experienced increased sales volume under our third-party ethanol marketing
agreements.
Our
average sales price per gallon increased 10% to $2.55 for the three months ended
June 30, 2008 from an average sales price per gallon of $2.32 for the three
months ended June 30, 2007. The average CBOT price per gallon increased 22% to
$2.57 for the three months ended June 30, 2008 from an average CBOT price per
gallon of $2.11 for the three months ended June 30, 2007. Our average sales
price per gallon did not increase as much as the average CBOT price per gallon
due to our higher proportion of fixed-price contracts during a period of rising
ethanol prices.
The
increase in our net sales for the six months ended June 30, 2008 as compared to
the same period in 2007 was primarily due to a substantial increase in sales
volume, coupled with higher average sales prices.
Total
volume of ethanol sold increased by 43.2 million gallons, or 52%, to 126.0
million gallons for the six months ended June 30, 2008 as compared to 82.8
million gallons in the same period in 2007. The substantial increase in sales
volume is also primarily due to production from our Columbia and Magic Valley
plants, as well as increased sales volume under our third-party ethanol
marketing agreements.
Our
average sales price per gallon increased 6% to $2.43 for the six months ended
June 30, 2008 from an average sales price per gallon of $2.29 for the six months
ended June 30, 2007. The average CBOT price per gallon for the same period
increased 14% to $2.43 for the six months ended June 30, 2008 from an average
CBOT price per gallon of $2.13 for the six months ended June 30, 2007. Our
average sales price per gallon did not increase along with the average CBOT
price per gallon for the six months ended June 30, 2008 due to our higher
proportion of fixed-price contracts during a period of rising ethanol
prices.
Cost
of Goods Sold and Gross Profit
Corn is
the single largest component of the cost of our ethanol production. Average corn
prices increased 67% and 64% for the three and six months ended June 30, 2008,
respectively, as compared to the same periods in 2007. Overall, the price of
corn had a much larger impact on our production costs per gallon due to the
higher proportion of sales from production of our own ethanol for the three and
six months ended June 30, 2008 as compared to the same period in 2007. Although
a large proportion of our sales volume results from the marketing and sale of
ethanol produced by third parties, production of our own ethanol is growing
rapidly and we expect that our production will continue to grow as new
facilities commence operations. Our purchase and sale prices of ethanol produced
by third parties typically fluctuate closely with market prices. As a result,
our average cost of ethanol purchased from third parties increased in-line with
the overall increase in our average sales price per gallon.
The
increase in our cost of goods sold for the three months ended June 30, 2008 as
compared to the same period in 2007 was predominantly due to increased sales
volume from our own production and increased corn costs associated with our own
production which contributed to higher costs per gallon. Our gross margin
declined to less than 1.0% for the three months ended June 30, 2008 from 9.8% in
the same period in 2007 primarily due to increased corn costs, which were
partially offset by lower losses on derivatives.
Derivative losses were $918,000 for
the three months ended June 30, 2008 as compared to losses of $2,602,000 for the
same period in 2007. These losses resulted from derivatives that we entered
during the three months ended June 30, 2008. Of these losses, $166,000 was
related to settled non-designated positions.
The
increase in our cost of goods sold for the six months ended June 30, 2008 as
compared to the same period in 2007 was predominantly due to increased sales
volume from our own production and increased corn costs associated with our own
production which contributed to higher costs per gallon. Our gross margin
declined to 4.5% for the six months ended June 30, 2008 from 12.4% in the same
period in 2007 primarily due to increased corn costs.
Derivative losses were $2,934,000 for
the six months ended June 30, 2008 as compared to $2,844,000 for the same period
in 2007. These losses resulted from derivatives that we entered in order to lock
in margins during the six months ended June 30, 2008. Of these losses,
$1,101,000 was related to settled non-designated positions at June 30,
2008.
Selling,
General and Administrative Expenses
The
following table presents our selling, general and administrative expenses in
dollars and as a percentage of net sales (in thousands, except
percentages):
|
Three
Months Ended June 30,
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$ |
7,678 |
|
|
$ |
8,320 |
|
|
$ |
(642 |
) |
|
|
(8)% |
|
|
$ |
17,544 |
|
|
$ |
17,822 |
|
|
$ |
(278 |
) |
|
|
(2)% |
|
Percentage
of net sales
|
|
|
3.9% |
|
|
|
7.3% |
|
|
|
|
|
|
|
|
|
|
|
4.9% |
|
|
|
8.4% |
|
|
|
|
|
|
|
|
|
Our
selling, general and administrative expenses, or SG&A, decreased
significantly as a percentage of net sales for the three and six months ended
June 30, 2008 due to our significant sales growth and cost
controls.
SG&A
decreased $642,000 to $7,678,000 for the three months ended June 30, 2008 as
compared to $8,320,000 for the same period in 2007. The decrease in the dollar
amount of SG&A is primarily due to the following factor:
·
|
amortization
of intangible assets resulting from our acquisition of our 42% ownership
interest in Front Range decreased by $1,463,000, as we have fully
amortized a significant portion of the intangible assets associated with
the acquisition; amortization of intangible assets was $50,000 and
$1,513,000 for the three months ended June 30, 2008 and 2007,
respectively.
|
Partially
offsetting the foregoing decrease were the following increases:
·
|
payroll
and benefits increased by $679,000 due to increased administrative staff;
and
|
·
|
derivative
commissions increased $423,000 due to significant trades during the
quarter.
|
Our
SG&A decreased $278,000 to $17,544,000 for the six months ended June 30,
2008 as compared to $17,822,000 for the same period in 2007. The decrease in the
dollar amount of SG&A is primarily due to the following
factors:
·
|
amortization
of intangible assets resulting from our acquisition of our 42% ownership
interest in Front Range decreased by $2,925,000, as we have fully
amortized a significant portion of the intangible assets associated with
the acquisition; amortization of intangible assets was $100,000 and
$3,025,000 for the six months ended June 30, 2008 and 2007, respectively;
and
|
·
|
accounting
and consulting fees associated with finance decreased by
$979,000.
|
Partially
offsetting the foregoing decreases were the following increases:
·
|
payroll
and benefits increased by $1,421,000, due to increased administrative
staff;
|
·
|
derivative
commissions increased $1,381,000 due to significant trades during the
period; and
|
·
|
professional
fees increased $796,000 due to greater business development activities
during the period.
|
Goodwill
Impairment
The
following table presents our goodwill impairment in dollars and as a percentage
of net sales (in thousands, except percentages):
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
impairment
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
—% |
|
|
$ |
87,047 |
|
|
$ |
— |
|
|
$ |
87,047 |
|
|
|
* |
|
Percentage of net
sales
|
|
|
–% |
|
|
|
–% |
|
|
|
|
|
|
|
|
|
|
|
24.2% |
|
|
|
–% |
|
|
|
|
|
|
|
|
|
*
Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets, requires us to test goodwill for impairment at least annually. In
accordance with SFAS No. 142, we conducted an impairment test of goodwill as of
March 31, 2008. As a result, we recorded a non-cash impairment charge of
$87,047,000, requiring us to write-off our entire goodwill balances from our
previous acquisitions of Kinergy Marketing LLC, or Kinergy, and Front Range. The
impairment charge will not result in future cash expenditures.
Other
Income (Expense), net
The
following table presents our other income (expense), net in dollars and as a
percentage of net sales (in thousands, except percentages):
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
$ |
889 |
|
|
$ |
1,235 |
|
|
$ |
(346 |
) |
|
|
(28)% |
|
|
$ |
(1,410 |
) |
|
$ |
1,310 |
|
|
$ |
(2,720 |
) |
|
|
(208)% |
|
Percentage
of net sales
|
|
|
0.4% |
|
|
|
1.1% |
|
|
|
|
|
|
|
|
|
|
|
(0.4)% |
|
|
|
0.6% |
|
|
|
|
|
|
|
|
|
Other
income (expense) decreased by $346,000 to other income of $889,000 for the three
months ended June 30, 2008 from $1,235,000 in the same period in 2007. The
decrease in other income (expense) is primarily due to the following
factors:
·
|
increased
interest expense of $1,563,000, as we complete our ethanol plants, we can
no longer capitalize interest expense upon each plant achieving operating
status; and
|
·
|
decreased
interest income of $1,520,000 due to construction activity over the past
year; during the three months ended June 30, 2007, we had significant
interest-earning restricted cash balances from remaining funds received in
connection with the sale of our Series A Preferred
Stock.
|
These
items were partially offset by:
·
|
increased
other income of $2,633,000 related to sales of our business energy tax
credits sold as pass through investments to interested purchasers;
and
|
·
|
increased
mark-to-market gains of $391,000 from our interest rate hedges which
required that we mark-to-market our ineffective
positions.
|
Other
income (expense) decreased by $2,720,000 to other expense of $1,410,000 for the
six months ended June 30, 2008 from other income of $1,310,000 in the same
period in 2007. The decrease in other income (expense) is primarily due to the
following factors:
·
|
increased
mark-to-market losses of $4,564,000 from our interest rate hedges which
required that we mark-to-market our ineffective positions in a declining
interest rate environment; the ineffectiveness related to our interest
rate swaps and primarily resulted from the suspension of construction of
our Imperial Valley project in the fourth quarter of
2007;
|
·
|
decreased
interest income of $3,097,000 due to cash used for construction activities
over the period;
|
·
|
increased
interest expense of $1,851,000; and
|
·
|
increased
bank fees of $696,000 primarily related to our obtaining waivers for our
construction financing debt, due to non compliance at the end of 2007 and
a requirement that we pay additional bank fees to obtain such waivers
during the six months ended June 30,
2008.
|
These
items were partially offset by:
·
|
increased
other income of $7,015,000 related to sales of our business energy tax
credits sold as pass through investments to interested purchasers;
and
|
·
|
decreased
finance cost amortization of $720,000 related to our prior financing
arrangements, which were replaced by our current financing arrangements,
requiring accelerated amortization on the prior financing
arrangements.
|
Noncontrolling
Interest in Variable Interest Entity
The
following table presents the noncontrolling interest in variable interest entity
in dollars and as a percentage of net sales (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interest in
variable
interest entity
|
|
$ |
(1,987 |
) |
|
$ |
(1,880 |
) |
|
$ |
(107 |
) |
|
|
(6)% |
|
|
$ |
46,416 |
|
|
$ |
(4,819 |
) |
|
$ |
51,235 |
|
|
|
1,063% |
|
Percentage
of net sales
|
|
|
(1.0)% |
|
|
|
(1.7)% |
|
|
|
|
|
|
|
|
|
|
|
12.9% |
|
|
|
(2.3)% |
|
|
|
|
|
|
|
|
|
Noncontrolling
interest in variable interest entity relates to the consolidated treatment of
Front Range, a variable interest entity, and represents the noncontrolling
interest of others in the earnings of Front Range. We consolidate the entire
income statement of Front Range for the period covered. However, because we own
only 42% of Front Range, we must reduce our net income or increase our net loss
for the noncontrolling interest, which is the 58% ownership interest that we do
not own. For the three months ended June 30, 2008, this amount decreased by
$107,000 from the same period in 2007, primarily due to increased earnings by
Front Range. For the six months ended June 30, 2008, this amount increased by
$51,235,000 from the same period in 2007, primarily due to goodwill impairment
associated with amounts recorded in the original acquisition of our interests in
Front Range.
Net
Income (Loss)
The
following table presents our net income (loss) in dollars and as a percentage of
net sales (in thousands, except percentages):
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(8,333 |
) |
|
$ |
2,156 |
|
|
$ |
(10,489 |
) |
|
|
487% |
|
|
$ |
(43,484 |
) |
|
$ |
5,131 |
|
|
$ |
(48,615 |
) |
|
|
(947)% |
|
Percentage
of net sales
|
|
|
(4.2)% |
|
|
|
1.9% |
|
|
|
|
|
|
|
|
|
|
|
(12.1)% |
|
|
|
2.4% |
|
|
|
|
|
|
|
|
|
Net
income (loss) decreased during the three months ended June 30, 2008 as compared
to the same period in 2007, primarily due to lower gross margins, as discussed
above.
Net
income (loss) decreased during the six months ended June 30, 2008 as compared to
the same period in 2007, primarily due to lower gross margins, goodwill
impairment and a decrease in our other income, which amounts were partially
offset by an increase in noncontrolling interest in variable interest entity, as
discussed above.
Preferred
Stock Dividends, Deemed Dividend on Preferred Stock and Income Available to
Common Stockholders
The
following table presents the preferred stock dividends for our Series A and B
Preferred Stock, or Preferred Stock, our deemed dividend on preferred stock and
our income available to common stockholders, each in dollars and as a percentage
of net sales (in thousands, except percentages):
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
$ |
(1,388 |
) |
|
$ |
(1,050 |
) |
|
$ |
(338 |
) |
|
|
32% |
|
|
$ |
(2,489 |
) |
|
$ |
(2,100 |
) |
|
$ |
(389 |
) |
|
|
19% |
|
Percentage
of net sales
|
|
|
(0.7)% |
|
|
|
(0.9)% |
|
|
|
|
|
|
|
|
|
|
|
(0.7)% |
|
|
|
(1.0)% |
|
|
|
|
|
|
|
|
|
Deemed
dividend on preferred stock
|
|
$ |
(761 |
) |
|
$ |
— |
|
|
$ |
(761 |
) |
|
|
* |
|
|
$ |
(761 |
) |
|
$ |
— |
|
|
$ |
(761 |
) |
|
|
* |
|
Percentage
of net sales
|
|
|
(0.4)% |
|
|
|
—% |
|
|
|
|
|
|
|
|
|
|
|
(0.2)% |
|
|
|
—% |
|
|
|
|
|
|
|
|
|
Income
(loss) available to
common stock-holders
|
|
$ |
(10,482 |
) |
|
$ |
1,106 |
|
|
$ |
(11,588 |
) |
|
|
(1,048 |
)% |
|
$ |
(46,734 |
) |
|
$ |
3,031 |
|
|
$ |
(49,765 |
) |
|
|
(1,642)% |
|
Percentage
of net sales
|
|
|
(5.3)% |
|
|
|
1.0% |
|
|
|
|
|
|
|
|
|
|
|
(13.0)% |
|
|
|
1.4% |
|
|
|
|
|
|
|
|
|
*
Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
our Series A and B Preferred Stock are entitled to quarterly cumulative
dividends payable in arrears in an amount equal to 5% and 7% per annum,
respectively, of the purchase price per share of the Preferred Stock. We
declared and paid cash dividends on our Series A Preferred Stock in the
aggregate amount of $646,000 and $1,050,000, for the three months ended June 30,
2008 and 2007, respectively. We declared and paid cash dividends on our Series A
Preferred Stock in the aggregate amount of $1,708,000 and $2,100,000, for the
six months ended June 30, 2008 and 2007, respectively. We declared and paid cash
dividends on our Series B Preferred Stock in the aggregate amount of $742,000
and $781,000 for the three and six months ended June 30, 2008, respectively. We
did not pay any dividends on our Series B Preferred Stock in 2007, as shares of
our Series B Preferred Stock were first issued on March 27, 2008.
During
the three months ended June 30, 2008, the holder of our Series A Preferred Stock
converted all of its shares of Series A Preferred Stock into shares of our
common stock. As a result, at June 30, 2008, there were no outstanding shares of
Series A Preferred Stock.
During
the three months ended June 30, 2008, we recorded a deemed dividend on preferred
stock of $761,000 in connection with our subsequent issuance of shares of Series
B Preferred Stock. This non-cash dividend reflects the implied economic value to
the preferred stockholder of being able to convert the shares into common stock
at a price (as adjusted for the value allocated to the warrants) which was in
excess of the fair value of the Series B Preferred Stock at the time of
issuance. The fair value was calculated using the difference between the
conversion price of the Series B Preferred Stock into shares of common stock,
adjusted for the value allocated to the warrants, of $4.79 per share and the
fair market value of our common stock of $5.65 on the date of issuance of the
Series B Preferred Stock. The deemed dividend on preferred stock is a
reconciling item and adjusts our reported net loss, together with the preferred
stock dividends discussed above, to loss available to common
stockholders.
Liquidity
and Capital Resources
Overview
During
the quarter ended June 30, 2008, we funded our operations primarily from cash on
hand, proceeds from our sales of common stock, additional Series B Preferred
Stock and related warrants to purchase common stock, revenues from operations
and borrowings on our credit facilities.
During
the quarter, we sold 6,000,000 shares of common stock and warrants to purchase
3,000,000 shares of common stock at an exercise price of $7.10 per share for an
aggregate purchase price of $28.5 million. We also sold 294,870 shares of our
Series B Preferred Stock, initially convertible into an aggregate of 884,610
shares of our common stock, and warrants to purchase 442,305 shares of our
common stock at an exercise price of $7.00 per share for an aggregate purchase
price of $5.75 million. During the quarter, as part of our plant construction
financing program, we received loan proceeds of $33.4 million upon the
completion of our Magic Valley plant.
On July
28, 2008, we replaced Kinergy’s operating line of credit with Comerica Bank with
a new three-year revolving line of credit with Wachovia Bank. The new credit
facility provides up to $40.0 million of working capital. In connection with the
closing of the new credit facility, Kinergy distributed $5.75 million to us in
satisfaction of certain intercompany liabilities. The new credit facility
provides Kinergy with available financing in significantly greater amounts than
amounts previously available under its credit facility with Comerica
Bank.
Current and Prospective Capital
Needs
Our
business has been growing rapidly amidst significantly elevated commodity prices
and slim operating margins. As a result, our working capital requirements have
increased considerably. However, with the proceeds from our recent equity
financings and greater financing available under our new credit facility with
Wachovia Bank, we believe that current and future capital resources, revenues
generated from operations and other existing sources of liquidity, including
available loan proceeds under our existing debt facility, will be adequate to
fund our operations through 2008.
We
believe that our new credit facility with Wachovia Bank will provide us with
increased flexibility to finance Kinergy’s operating activities. Proceeds from
this facility are restricted to fund only Kinergy’s operations. In addition,
Kinergy is restricted from making distributions or other payments to us, except
for paying certain selling, general and administrative expenses and hedging
expenses attributable to Kinergy’s operations.
In order
to reach our goal of 220 million gallons of annual production capacity in 2008,
we still must finish construction of our Stockton plant, which we expect to
complete in the third quarter of 2008. As of June 30, 2008, with the exception
of $1.6 million, which was paid in early July, we had contributed the necessary
equity funds from our working capital. The remaining funds necessary to complete
our Stockton plant of $50.0 million are to come from proceeds of our debt
facility.
We are
required to repay two loans in the aggregate amount of $30.0 million in the
first quarter of 2009. Further, we have aggregate accrued liabilities of $20.0
million related to our suspended Imperial Valley project, which we expect we
will be required to pay through the first quarter of 2009. Although it is
conceivable that cash flows from our operations and other sources of liquidity
will provide adequate funds for us to repay these obligations, it is highly
likely that we will require new sources of financing to fund their repayments.
We may also be forced to seek to restructure the payment or other terms of these
obligations, to give us more liquidity and/or working capital. We cannot assure
you that we would be able to successfully restructure the payment or other terms
of these obligations. In addition, we will require substantial additional
financing to reach our goal of 420 million gallons of annual production capacity
in 2010, which we plan to reach through the construction or acquisition of
additional ethanol production facilities.
Our
failure to raise sufficient capital when needed may have a material adverse
effect on our results of operations, liquidity and cash flows and may restrict
our growth and hinder our ability to compete. Our failure to raise sufficient
capital when needed may also result in our inability to fund our operations. If
commodity prices increase, if ethanol production margins deteriorate from
current levels, if we reduce or cease individual plant operations, if we
experience construction cost overruns at our Stockton plant, if our capital
requirements or cash flows otherwise vary materially and adversely from our
current projections, or if other adverse unforeseen circumstances occur, then
our working capital and current and future expected capital resources and other
sources of liquidity may be inadequate to meet our capital expenditure
requirements or fund our operations, or both.
Bank Credit
Facility
On July
28, 2008, Kinergy entered into a Loan and Security Agreement dated July 28,
2008 with the parties thereto from time to time as Lenders, or Lenders, Wachovia
Capital Finance Corporation (Western), or Agent, and Wachovia Bank, National
Association, referred to as the Loan Agreement. Kinergy initially used the
proceeds from the closing of the credit facility to repay all amounts
outstanding under its credit facility with Comerica Bank and to pay certain
closing fees. The Loan Agreement provides for a credit facility in an aggregate
amount of up to $40.0 million based on Kinergy’s eligible accounts receivable
and inventory levels, subject to any reserves established by Agent and certain
sublimits. The credit facility matures on July 28, 2011.
Kinergy
may borrow under the credit facility based upon (i) a rate equal to (a) the
London Interbank Offered Rate, or LIBOR, divided by 0.90 (subject to change
based upon the reserve percentage in effect from time to time under Regulation D
of the Board of Governors of the Federal Reserve System), plus (b) 2.00% to
2.50% depending on the amount of Kinergy’s EBITDA for a specified period, or
(ii) a rate equal to (a) the greater of the prime rate published by Wachovia
Bank from time to time, or the federal funds rate then in effect plus 0.50%,
plus (b) 0.00% to 0.25% depending on the amount of Kinergy’s EBITDA for a
specified period. In addition, Kinergy is required to pay an unused line fee at
a rate equal to 0.375% as well as other customary fees and expenses associated
with the credit facility and issuances of letters of credit.
Kinergy’s
obligations under the Loan Agreement are secured by a first-priority security
interest in all of its assets in favor of Agent and Lenders.
The Loan
Agreement also contains restrictions on distributions of funds from Kinergy to
us. In addition, the Loan Agreement contains a single financial covenant
requiring that Kinergy generate EBITDA in specified amounts during 2008 and
2009. For subsequent periods, the minimum EBITDA covenant amounts are to be
determined based upon financial projections to be delivered by Kinergy and are
to be mutually agreed upon by Kinergy and Agent.
On July
28, 2008, we entered into a Guarantee dated July 28, 2008 in favor of Agent for
and on behalf of Lenders. The Guarantee provides for the unconditional guarantee
by us of, and we agreed to be liable for, the payment and performance when due
of Kinergy’s obligations under the Loan Agreement.
Quantitative Quarter-End Liquidity
Status
We
believe that the following amounts provide insight into our liquidity and
capital resources. The following selected financial data 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
120,074 |
|
|
$ |
82,193 |
|
|
|
46.1% |
|
Current
liabilities
|
|
$ |
135,104 |
|
|
$ |
120,079 |
|
|
|
12.5% |
|
Property
and equipment, net
|
|
$ |
560,860 |
|
|
$ |
468,704 |
|
|
|
19.7% |
|
Notes
payable, net of current portion
|
|
$ |
194,614 |
|
|
$ |
151,188 |
|
|
|
28.7% |
|
Working
capital
|
|
$ |
(15,030 |
) |
|
$ |
(37,886 |
) |
|
|
60.3% |
|
Working
capital ratio
|
|
|
0.89 |
|
|
|
0.68 |
|
|
|
30.9% |
|
Change
in Working Capital and Cash Flows
Working
capital deficit decreased to $15,030,000 at June 30, 2008 from $37,886,000 at
December 31, 2007 as a result of an increase in current assets of
$37,881,000, which was partially offset by an increase in current liabilities of
$15,025,000.
Current
assets increased primarily due to an increase in inventories of $19,946,000,
primarily due to our Magic Valley plant beginning operations in the second
quarter, an increase in accounts receivable of $7,770,000, primarily due to
higher sales volume near the end of the quarter from increased production, an
increase in restricted cash of $7,569,000, primarily due to funding certain
reserve accounts required under our debt facility and hedging reserve balance
requirements.
Current
liabilities increased primarily due to an increase in current portion – notes
payable of $32,702,000, primarily due to increased borrowing on our
plant construction financing and increased amounts coming due within one year of
an aggregate of $30,000,000 ($15,000,000 due in February 2009 and $15,000,000
due in March 2009). These increases were partially offset by decreases in
construction-related accounts payable and accrued liabilities of $8,075,000,
trade accounts payable of $5,019,000 and a decrease in a short-term note payable
of $3,000,000, as we paid down a portion of the note per its terms.
The
decrease in working capital was primarily due to increased short- and long-term
financing, which increased the current portion of our debt. Although cash and
investments remained flat, we obtained $72,167,000 in proceeds from both common
and preferred stock offerings to further fund operations and plant
construction.
Cash used
in our operating activities of $36,232,000 resulted primarily from a net loss of
$43,484,000, noncontrolling interests of $46,416,000, an increase in inventories
of $19,946,000, an increase in restricted cash of $7,569,000, an increase in
accounts receivable of $7,832,000, an increase in prepaid expenses and other
assets of $2,941,000, an increase in prepaid inventory of $2,436,000, and a
decrease in non-construction-related accounts payable and accrued expenses of
$10,032,000, which were partially offset by goodwill impairment of $87,047,000,
depreciation and amortization of intangible assets of $10,832,000 and derivative
losses of $4,832,000.
Cash used
in our investing activities of $91,688,000 resulted from purchases of additional
property and equipment of $103,692,000, which was partially offset by proceeds
from sales of marketable securities of $11,798,000.
Cash
provided by our financing activities of $141,315,000 resulted primarily from
proceeds from debt financing and lines of credit of $81,891,000, net proceeds
from our Series B Preferred Stock issuances of $45,473,000, net proceeds from
our common stock issuances of $26,694,000, which were partially offset by
principal payments on borrowings of $8,799,000 and preferred stock dividends
paid of $2,489,000.
Changes
in Other Assets and Liabilities
Goodwill
decreased to $0 at June 30, 2008 from $88,168,000 at December 31, 2007 as a
result of an adjustment to our purchase price of our interests in Front Range of
$1,121,000 and our impairment charge from our annual impairment test of
$87,047,000.
Property
and equipment, net, increased to $560,860,000 at June 30, 2008 from $468,704,000
at December 31, 2007 primarily as a result of the construction of our ethanol
production facilities.
Notes
payable, net of current portion, increased to $194,614,000 at June 30, 2008 from
$151,188,000 at December 31, 2007 primarily as a result of loan proceeds used
for construction activities at our ethanol plants under
construction.
The
impact of inflation was not significant to our financial condition or results of
operations for the three months ended June 30, 2008 and 2007.
Impact
of New Accounting Pronouncements
The
disclosure requirements and impacts of new accounting pronouncements are
described in “Note 2—New Accounting Standards” of the Notes to Consolidated
Financial Statements contained elsewhere in this report.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
We are
exposed to various market risks, including changes in commodity prices and
interest rates. Market risk is the potential loss arising from adverse changes
in market rates and prices. In the ordinary course of business, we enter into
various types of transactions involving financial instruments to manage and
reduce the impact of changes in commodity prices and interest rates. We do not
enter into derivatives or other financial instruments for trading or speculative
purposes.
Commodity Risk – Cash Flow Hedges
We use
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 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, we hedge anticipated sales of ethanol to minimize our
exposure to the potentially adverse effects of price volatility. These
derivatives are designated and documented as Statement of Financial Accounting
Standards (“SFAS”) No. 133, Accounting for Derivative
Instruments and Hedging Activities, cash flow hedges and effectiveness is
evaluated by assessing the probability of the anticipated transactions and
regressing commodity futures prices against our 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 other income
(expense).
For the
three months ended June 30, 2008 and 2007, gains from ineffectiveness in the
amount of $0 and $17,000, respectively, were recorded in cost of goods sold and
effective gains in the amount of $0 and $369,000, respectively, were recorded in
cost of goods sold. For the six months ended June 30, 2008 and 2007, a loss from
ineffectiveness in the amount of $1,033,000 and a gain of $159,000,
respectively, were recorded in cost of goods sold and effective gains in the
amount of $5,277,000 and $244,000, respectively, were recorded in cost of goods
sold. The notional balances remaining on these derivatives as of June 30, 2008
and December 31, 2007 were $0 and $2,427,000, respectively.
Commodity Risk – Non-Designated
Derivatives
As part
of our risk management strategy, we use forward contracts on corn, crude oil and
reformulated blendstock for oxygenate blending gasoline to lock in prices for
certain amounts of corn, denaturant and ethanol, respectively. These derivatives
are not designated under SFAS No. 133 for special hedge accounting treatment.
The changes in fair value of these contracts are recorded on the balance sheet
and recognized immediately in cost of goods sold.
For the
three months ended June 30, 2008 and 2007, we recognized losses of $918,000 (of
which $166,000 is related to settled non-designated hedges) and $2,988,000 as
the change in the fair value of these contracts, respectively. For the six
months ended June 30, 2008 and 2007, we recognized losses of $2,934,000 (of
which $1,101,000 is related to settled non-designated hedges) and $3,247,000 as
the change in the fair value of these contracts, respectively. The notional
balances remaining on these contracts as of June 30, 2008 and December 31, 2007
were $29,603,000 and $29,999,000, respectively.
Interest
Rate Risk
As part
of our interest rate risk management strategy, we use derivative instruments to
minimize significant unanticipated income fluctuations that may arise from
rising variable interest rate costs associated with existing and anticipated
borrowings. To meet these objectives we purchased interest rate caps and swaps.
The rate for notional balances of interest rate caps ranging from $4,268,000 to
$20,304,000 is 5.50%-6.00% per annum. The rate for notional balances of interest
rate swaps ranging from $543,000 to $63,219,000 is 5.01%-8.16% per annum. These
derivatives are designated and documented as SFAS No. 133 cash flow hedges and
effectiveness is evaluated by assessing the probability of anticipated interest
expense and regressing the historical value of the rates against the historical
value in the existing and anticipated debt. Ineffectiveness, reflecting the
degree to which the derivative does not offset the underlying exposure, is
recognized immediately in other income (expense). For the three months ended
June 30, 2008 and 2007, losses from effectiveness in the amount of $25,000 and
$92,000, gains from ineffectiveness in the amount of $102,000 and $611,000, and
gains from undesignated hedges in the amount of $897,000 and $0 were recorded in
other income (expense), respectively. For the six months ended June 30, 2008 and
2007, losses from effectiveness in the amount of $51,000 and $105,000, gains
from ineffectiveness in the amount of $182,000 and $633,000, and losses from
undesignated hedges in the amount of $4,149,000 and $0 were recorded in other
income (expense), respectively. The losses for the six months ended June 30,
2008 resulted primarily from our suspension of construction of our Imperial
Valley project.
We
marked all of our derivative instruments to fair value at each period end,
except for those derivative contracts which qualified for the normal purchase
and sale exemption pursuant to SFAS No. 133. According to our designation of the
derivative, changes in the fair value of derivatives are reflected in other
income, net or accumulated other comprehensive income (loss).
Accumulated
Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) relative to derivatives was as follows (in
thousands):
|
|
Commodity
Derivatives
|
|
|
Interest
Rate Derivatives
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2008
|
|
$ |
(455 |
) |
|
$ |
(1,928 |
) |
Net
changes
|
|
|
— |
|
|
|
3,076 |
|
Amount
reclassified to cost of goods sold
|
|
|
455 |
|
|
|
— |
|
Amount
reclassified to other income (expense)
|
|
|
— |
|
|
|
(51 |
) |
Ending
balance, June 30, 2008
|
|
$ |
— |
|
|
$ |
1,097 |
|
—————
*Calculated
on a pretax basis
The
estimated fair values of our derivatives, representing net assets (liabilities)
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
futures
|
|
$ |
(2,010 |
) |
|
$ |
(1,649 |
) |
Interest
rate swaps/caps
|
|
|
(8,083 |
) |
|
|
(7,091 |
) |
Total
|
|
$ |
(10,093 |
) |
|
$ |
(8,740 |
) |
Material
Limitations
The
disclosures with respect to the above noted risks do not take into account the
underlying commitments or anticipated transactions. If the underlying items were
included in the analysis, the gains or losses on the futures contracts may be
offset. Actual results will be determined by a number of factors that are not
generally under our control and could vary significantly from the factors
disclosed.
We are
exposed to credit losses in the event of nonperformance by counterparties on the
above instruments, as well as credit or performance risk with respect to our
hedged customers’ commitments. Although nonperformance is possible, we do not
anticipate nonperformance by any of these parties.
ITEM
4.
|
CONTROLS
AND PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer of
the effectiveness of the design and operation of our disclosure controls and
procedures. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (“Exchange Act”), means controls and other procedures of a company that
are designed to ensure that information required to be disclosed by the company
in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission’s rules and forms. Disclosure controls and
procedures also include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded as of June 30,
2008 that our disclosure controls and procedures were not effective at the
reasonable assurance level due to the two material weaknesses relating to our
internal control over financial reporting previously reported in our Annual
Report on Form 10-K for the year ended December 31, 2007.
Management
concluded as of December 31, 2007 in our Annual Report on Form 10-K, or Annual
Report, for the year then ended, that our internal control over financial
reporting was not effective. You should refer to management’s discussion under
“Item 9A—Controls and Procedures” in our Annual Report for a complete
description of the criteria applied by management and the factors upon which
management concluded that our internal control over financial reporting was not
then effective.
In our
Annual Report, management identified two material weaknesses in our internal
control over financial reporting. During the quarter ended March 31, 2008, we
implemented a variety of changes to our internal control over financial
reporting intended to remediate these material weaknesses. We intend to test our
updated controls and report on the results of our testing in our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008.
Changes
in Internal Control over Financial Reporting
There
were no changes during the most recently completed fiscal quarter that have
materially affected or are reasonably likely to materially affect, our internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
u