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VARIABLE INTEREST ENTITY
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Sep. 30, 2011
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Dec. 31, 2010
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| Consolidation, Variable Interest Entity, Policy [Policy Text Block] |
On
October 6, 2010, the Company purchased a 20%
ownership interest in New PE Holdco from a number of
New PE Holdco’s existing equity owners. The
Company concluded that upon its purchase of the 20%
ownership interest in New PE Holdco, a variable
interest entity, the Company became the primary
beneficiary of New PE Holdco and consolidated the
financial results of New PE Holdco. In making this
conclusion, the Company determined that through its
contractual arrangements (discussed below) it had the
power to direct most of its activities that most
significantly impacted New PE Holdco’s economic
performance. Some of these activities included
efficient management and operation of the Pacific
Ethanol Plants, procurement of feedstock, sale of
co-products and implementation of risk management
strategies.
The
carrying values and classification of assets that are
collateral for the obligations of New PE Holdco at
September 30, 2011 were as follows (in
thousands):
The
Company’s acquisition of its ownership interest
in New PE Holdco does not impact the Company’s
rights or obligations under any of the following
agreements. Since its acquisition, the Company has
not provided any additional support to New PE Holdco
beyond the terms of the agreements described below.
Creditors of New PE Holdco do not have recourse to
Pacific Ethanol.
The
Company, directly or through one of its subsidiaries,
has entered into the following management and
marketing agreements:
Asset
Management Agreement – The Company
entered into an Asset Management Agreement
(“AMA”) with the Plant Owners under which
the Company agreed to operate and maintain the
Pacific Ethanol Plants on behalf of the Plant Owners.
These services generally include, but are not limited
to, administering the Plant Owners’ compliance
with their credit agreements and performing billing,
collection, record keeping and other administrative
and ministerial tasks. The Company agreed to supply
all labor and personnel required to perform its
services under the AMA, including the labor and
personnel required to operate and maintain the
production facilities.
The
costs and expenses associated with the
Company’s provision of services under the AMA
are prefunded by the Plant Owners under a preapproved
budget. The Company’s obligation to provide
services is limited to the extent there are
sufficient funds advanced by the Plant Owners to
cover the associated costs and expenses. As
compensation for providing the services under the
AMA, the Company is to be paid $75,000 per month for
each production facility that is operational and
$40,000 per month for each production facility that
is idled.
The
AMA had an initial term of six months and successive
six-month renewal periods at the option of the Plant
Owners. In addition to typical conditions for a party
to terminate the agreement prior to its expiration,
the Company may terminate the AMA, and the Plant
Owners may terminate the AMA with respect to any
facility, at any time by providing at least 60 days
prior notice of such termination. On June 30,
2011, the AMA was amended and extended for one
year.
Ethanol
Marketing Agreements – Kinergy entered
into separate ethanol marketing agreements with each
of the three Plant Owners whose facilities are
operating, which granted Kinergy the exclusive right
to purchase, market and sell the ethanol produced at
those facilities. Under the terms of the ethanol
marketing agreements, within
ten days after delivering ethanol to Kinergy, an
amount is to be paid equal to (i) the estimated
purchase price payable by the third-party purchaser
of the ethanol, minus (ii) the estimated amount of
transportation costs to be incurred by Kinergy, minus
(iii) the estimated incentive fee payable to Kinergy,
which equals 1% of the aggregate third-party purchase
price. Each of the ethanol marketing
agreements had an initial term of one year and
successive one year renewal periods at the option of
the individual Plant Owner. On June 30, 2011, all
ethanol marketing agreements were amended and
extended for one year. In addition, the price to be
paid to Kinergy was amended to include a marketing
fee collar of not less than $0.015 per gallon and not
more than $0.0225 per gallon.
Corn
Procurement and Handling Agreements –
PAP entered into separate corn procurement and
handling agreements with each of the three Plant
Owners whose facilities are operating. Under the
terms of the corn procurement and handling
agreements, each facility appointed PAP as its
exclusive agent to solicit, negotiate, enter into and
administer, on its behalf, corn supply arrangements
to procure the corn necessary to operate its
facility. PAP will also provide grain handling
services including, but not limited to, receiving,
unloading and conveying corn into the
facility’s storage and, in the case of whole
corn delivered, processing and hammering the whole
corn.
PAP
was to receive a fee of $0.50 per ton of corn
delivered to each facility as consideration for its
procurement services and a fee of $1.50 per ton of
corn delivered as consideration for its grain
handling services, each payable monthly. The Company
agreed to enter into an agreement guaranteeing the
performance of PAP’s obligations under the corn
procurement and handling agreement upon the request
of a Plant Owner. Each corn procurement and handling
agreement had an initial term of one year and
successive one year renewal periods at the option of
the individual Plant Owner. On June 30, 2011, all
corn procurement and handling agreements were amended
and extended for one year. In addition, the corn
procurement and handling fee was changed to $0.045
per bushel of corn.
Distillers
Grains Marketing Agreements – PAP
entered into separate distillers grains marketing
agreements with each of the three Plant Owners whose
facilities are operating, which granted PAP the
exclusive right to market, purchase and sell the WDG
produced at the facility. Under the terms of the
distillers grains marketing agreements, within
ten days after a Plant Owner delivers WDG to PAP, the
Plant Owner is to be paid an amount equal to (i) the
estimated purchase price payable by the third-party
purchaser of the WDG, minus (ii) the estimated amount
of transportation costs to be incurred by PAP, minus
(iii) the estimated amount of fees and taxes payable
to governmental authorities in connection with the
tonnage of WDG produced or marketed, minus (iv) the
estimated incentive fee payable to PAP, which equals
the greater of (a) 5% of the aggregate third-party
purchase price, and (b) $2.00 for each ton of WDG
sold in the transaction. Each distillers
grains marketing agreement had an initial term of one
year and successive one year renewal periods at the
option of the individual Plant Owner. On June 30,
2011, all distillers grains marketing agreements were
amended and extended for one year. In addition, the
fee to be paid to PAP was amended to include a collar
of not less than $2.00 per ton and not more than
$3.50 per ton.
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Consolidation
of New PE Holdco – On October 6, 2010, the
Company purchased a 20% ownership interest in New PE
Holdco, a VIE, from a number of New PE Holdco’s
existing equity owners. The Company paid $23,280,000 in
cash for its 20% interest, which was approximately
$1,566,000 below the fair value of New PE Holdco, which
was recognized as a bargain purchase in other expense,
net, in the consolidated statements of operations. The
bargain purchase was determined based on the fair value
of the net assets of New PE Holdco, using a combination
of market data and the income approach.
The
Company concluded that upon its purchase of a 20%
ownership interest in New PE Holdco, the Company became
the primary beneficiary of New PE Holdco and consolidated
the financial results of New PE Holdco. In making this
conclusion, the Company determined that New PE Holdco was
a VIE and the Company, through its contractual
arrangements (discussed below) had the power to direct
most of its activities that most significantly impacted
New PE Holdco’s economic performance. Some of these
activities included efficient management and operation of
the Pacific Ethanol Plants, procurement of feedstock,
sale of co-products and implementation of risk management
strategies.
The
fair value was allocated to both the Company’s
investment and the noncontrolling interests in variable
interest entities. The gain represents the increase in
value of New PE Holdco’s net assets since the
Company negotiated its purchase price under its call
option with owners of New PE Holdco.
The
following summarizes the Company’s estimated fair
values of New PE Holdco’s tangible and intangible
assets and liabilities acquired (in thousands):
Since
the Company’s acquisition of its interest in New PE
Holdco, the Company has recognized approximately
$72,827,000 in net sales and $5,727,000 in net losses
attributed to New PE Holdco. The Company owned the Plant
Owners and consolidated their results for the first half
of 2010, resulting in the Company reporting the results
of the Plant Owners for three of the four fiscal
quarters. For the year ended December 31, 2010, the
Company reported net sales of $328,332,000 and net income
attributed to Pacific Ethanol of $73,892,000. Had the
Company consolidated the results of New PE Holdco for all
of 2010, the Company would have reported net sales of
approximately $383,956,000 and net income attributed to
Pacific Ethanol of $70,330,000. As the Plant Owners were
consolidated into the Company’s results for all of
2009, there is no difference with the Company’s
reported results.
Prior
to the Company’s acquisition of its ownership
interest in New PE Holdco, the Company, directly or
through one of its subsidiaries, had entered into the
management and marketing agreements described
below.
The
Company’s acquisition of its ownership interest in
New PE Holdco does not impact the Company’s rights
or obligations under any of the following agreements.
Creditors of New PE Holdco do not have recourse to
Pacific Ethanol.
Asset
Management Agreement – As contemplated by
the Plan, on the Effective Date, the Company entered into
an Asset Management Agreement (“AMA”) with
the Plant Owners under which the Company agreed to
operate and maintain the Pacific Ethanol Plants on behalf
of the Plant Owners. These services generally include,
but are not limited to, administering the Plant
Owners’ compliance with their credit agreements and
performing billing, collection, record keeping and other
administrative and ministerial tasks. The Company agreed
to supply all labor and personnel required to perform its
services under the AMA, including the labor and personnel
required to operate and maintain the production
facilities.
The
costs and expenses associated with the Company’s
provision of services under the AMA are prefunded by the
Plant Owners under a preapproved budget. The
Company’s obligation to provide services is limited
to the extent there are sufficient funds advanced by the
Plant Owners to cover the associated costs and
expenses.
As
compensation for providing the services under the AMA,
the Company is to be paid $75,000 per month for each
production facility that is operational and $40,000 per
month for each production facility that is idled. In
addition to the monthly fee, if during any six-month
period (measured on September 30 and March 31 of each
year commencing March 31, 2011) a production facility has
annualized earnings before interest, income taxes,
depreciation and amortization (“EBITDA”) per
gallon of operating capacity of $0.20 or more, the
Company will be paid a performance bonus equal to 3% of
the increment by which EBITDA exceeds such amount. The
aggregate performance bonus for all plants is capped at
$2.2 million for each six-month period. The performance
bonus is to be reduced by 25% if all production
facilities then operating do not operate at a minimum
average yield of 2.70 gallons of denatured ethanol per
bushel of corn. In addition, no performance bonus is to
be paid if there is a default or event of default under
the Plant Owners’ credit agreement resulting from
their failure to pay any amounts then due and
owing.
The
AMA also provides the Company with an incentive fee upon
any sale of a production facility to the extent the sales
price is above $0.60 per gallon of annual
capacity.
The
AMA has an initial term of six months and may be extended
for additional six-month periods at the option of the
Plant Owners. In addition to typical conditions for a
party to terminate the agreement prior to its expiration,
the Company may terminate the AMA, and the Plant Owners
may terminate the AMA with respect to any facility, at
any time by providing at least 60 days prior notice of
such termination.
The
Company recorded revenues and New PE Holdco recorded
costs of approximately $778,000, related to the AMA for
the period during which New PE Holdco’s financial
results were consolidated with the Company’s
financial results. As such, these amounts have been
eliminated upon consolidation.
Ethanol
Marketing Agreements – As contemplated by
the Plan, on the Effective Date, Kinergy entered into
separate ethanol marketing agreements with each of the
two Plant Owners whose facilities were then operating,
which granted Kinergy the exclusive right to purchase,
market and sell the ethanol produced at those facilities.
Kinergy has also entered into an ethanol marketing
agreement with the Plant Owner whose facility was
restarted in the fourth quarter of 2010. If the remaining
idled facility becomes operational, it is contemplated
that Kinergy would enter into a substantially identical
ethanol marketing agreement with the applicable Plant
Owner. Under the terms of the ethanol marketing
agreements, within
ten days after delivering ethanol to Kinergy, an amount
is to be paid equal to (i) the estimated purchase price
payable by the third-party purchaser of the ethanol,
minus (ii) the estimated amount of transportation costs
to be incurred by Kinergy, minus (iii) the estimated
incentive fee payable to Kinergy, which equals 1% of the
aggregate third-party purchase price. To
facilitate Kinergy’s ability to pay amounts owing,
the ethanol marketing agreements require that Kinergy
maintain one or more lines of credit of at least $5.0
million in the aggregate. Each of the ethanol marketing
agreements has an initial term of one year and may be
extended for additional one-year periods at the option of
the individual Plant Owner.
The
Company recorded revenues and New PE Holdco recorded
costs of approximately $623,000 related to the ethanol
marketing agreements for the period during which New PE
Holdco was consolidated with the Company. These amounts
were eliminated upon consolidation.
Corn
Procurement and Handling Agreements – As
contemplated by the Plan, on the Effective Date, PAP
entered into separate corn procurement and handling
agreements with each of the two Plant Owners whose
facilities were then operating. Kinergy has also entered
into a corn procurement and handling agreement with the
Plant Owner whose facility was restarted in the fourth
quarter of 2010. If the remaining idled facility becomes
operational, it is contemplated that PAP would enter into
a substantially identical corn procurement and handling
agreement with the applicable Plant Owner. Under the
terms of the corn procurement and handling agreements,
each facility appointed PAP as its exclusive agent to
solicit, negotiate, enter into and administer, on its
behalf, corn supply arrangements to procure the corn
necessary to operate its facility. PAP will also provide
grain handling services including, but not limited to,
receiving, unloading and conveying corn into the
facility’s storage and, in the case of whole corn
delivered, processing and hammering the whole
corn.
PAP
is to receive a fee of $0.50 per ton of corn delivered
to each facility as consideration for its procurement
services and a fee of $1.50 per ton of corn delivered
as consideration for its grain handling services, each
payable monthly. The Company agreed to enter into an
agreement guaranteeing the performance of PAP’s
obligations under the corn procurement and handling
agreement upon the request of a Plant Owner. Each corn
procurement and handling agreement has an initial term
of one year and may be extended for additional one-year
periods at the option of the applicable Plant
Owner.
The
Company recorded revenues and New PE Holdco recorded
costs of approximately $571,000, related to the corn
procurement and handling agreements for the period
during which New PE Holdco was consolidated with the
Company. These amounts were eliminated upon
consolidation.
Distillers
Grains Marketing Agreements – Under the
Plan, on the Effective Date, PAP entered into separate
distillers grains marketing agreements with each of the
two Plant Owners whose facilities were then operating,
which granted PAP the exclusive right to market, purchase
and sell the WDG produced at the facility. Kinergy has
also entered into a distillers grains marketing agreement
with the Plant Owner whose facility was restarted in the
fourth quarter of 2010. If the remaining idled facility
becomes operational, it is contemplated that PAP would
enter into a substantially identical WDG marketing
agreement with the applicable Plant Owner. Under the
terms of the distillers grains marketing agreements,
within
ten days after a Plant Owner delivers WDG to
PAP, the Plant Owner is to be paid an amount equal to (i)
the estimated purchase price payable by the third-party
purchaser of the WDG, minus (ii) the estimated amount of
transportation costs to be incurred by PAP, minus (iii)
the estimated amount of fees and taxes payable to
governmental authorities in connection with the tonnage
of WDG produced or marketed, minus (iv) the estimated
incentive fee payable to PAP, which equals the greater of
(a) 5% of the aggregate third-party purchase price, and
(b) $2.00 for each ton of WDG sold in the transaction.
Within the first five business days of each calendar
month, the parties will reconcile and “true
up” the actual purchase price, transportation
costs, governmental fees and taxes, and incentive fees
for all transactions entered into since the previous
true-up date. Each distillers grains marketing
agreement has an initial term of one year and may be
extended for additional one-year periods at the option of
the applicable Plant Owner.
The
Company recorded revenues and New PE Holdco recorded
costs of approximately $700,000, related to the
distillers grain marketing agreements for the period
which New PE Holdco was consolidated with the Company.
These amounts were eliminated upon consolidation.
Deconsolidation
and Sale of Front Range – On October 17,
2006, the Company entered into a Membership Interest
Purchase Agreement with Eagle Energy, LLC to acquire
Eagle Energy’s 42% ownership interest in Front
Range. Front Range was formed on July 29, 2004 to
construct and operate a 50 million gallon dry mill
ethanol facility in Windsor, Colorado. Front Range began
producing ethanol in June 2006. Upon initial acquisition
of the 42% interest in Front Range, the Company
determined that it was the primary beneficiary, and from
that point consolidated the financial results of Front
Range. Except for the marketing agreement discussed
below, certain contracts and arrangements between the
Company and Front Range have since terminated.
The
Company entered into a marketing agreement with Front
Range on August 19, 2005 that provided the Company with
the exclusive right to act as an agent to market and sell
all of Front Range’s ethanol production. The
marketing agreement was amended on August 9, 2006 to
extend the Company’s relationship with Front Range
to allow the Company to act as a merchant under the
agreement. The marketing agreement was amended again on
October 17, 2006 to provide for a term of six and
one-half years with provisions for annual automatic
renewal thereafter.
Effective
January 1, 2010, the Company determined that it was no
longer the primary beneficiary of Front Range and
deconsolidated the financial results of Front Range. In
making this conclusion, the Company determined that Front
Range continued to be a variable interest entity;
however, the Company did not have the power to direct
most of the activities that most significantly impact the
entity’s economic performance. Some of these
activities included efficient management and operation of
its facility, procurement of feedstock, sale of
co-products and implementation of risk management
strategies. Further, the Company’s maximum exposure
was limited to its investment in Front Range. Upon
deconsolidation, the Company removed $62,617,000 of
assets and $18,584,000 of liabilities from its
consolidated balance sheet and recorded a cumulative
debit adjustment to retained earnings of $1,763,000. The
periods presented in the consolidated financial
statements prior to the effective date of the
deconsolidation continue to include related balances
associated with Front Range.
Effective
January 1, 2010, the Company accounted for its investment
in Front Range under the equity method, with equity
earnings recorded in other income (expense) in the
consolidated statements of operations
Sale
of Front Range – On October 6, 2010, the
Company sold its entire 42% ownership interest in Front
Range for $18,500,000 in cash, resulting in a loss of
$12,146,000.
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