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2. VARIABLE INTEREST ENTITY.
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Dec. 31, 2011
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| Consolidation, Variable Interest Entity, Policy [Policy Text Block] |
Consolidation
of New PE Holdco – The Company concluded that at
all times since its inception, New PE Holdco has been a VIE
because the owners of New PE Holdco, due to the
Company’s involvement through the contractual
arrangements discussed below, have at all times lacked the
power to direct the activities that most significantly
impacted its economic performance. Some of these activities
include efficient management and operation of the Pacific
Ethanol Plants, sale of ethanol, the procurement of
feedstock, sale of co-products and implementation of risk
management strategies. At the time of its inception, however,
the Company did not have an obligation to absorb losses or
receive benefits that could potentially be significant to New
PE Holdco and, as a result, it was determined that the
Company was not New PE Holdco’s primary beneficiary.
Upon the Company’s purchase of its 20% ownership
interest in New PE Holdco on October 6, 2010, the Company,
through its ownership interest, had an obligation to absorb
losses and receive benefits that could potentially be
significant to New PE Holdco. As a result, the Company then
became the primary beneficiary of New PE Holdco and began
consolidating the financial results of New PE Holdco. The
Company purchased its 20% ownership interest in New PE Holdco
from a number of New PE Holdco’s 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
income (expense), net, in the consolidated statements of
operations for the year ended December 31, 2010. 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 allocated fair value to
both its investment and its noncontrolling interest in the
VIE.
The
following table summarizes the Company’s estimated fair
values of New PE Holdco’s tangible and intangible
assets and liabilities acquired (in thousands):
On
November 29, 2011, the Company purchased an additional 7%
ownership interest in New PE Holdco for $4,502,000 in cash.
On December 19, 2011, the Company purchased another 7%
ownership interest in New PE Holdco for $4,615,000 in cash.
Because the Company has a controlling financial interest in
New PE Holdco, it did not record any gain or loss on these
purchases, but instead reduced the amount of noncontrolling
interest in VIEs on the consolidated balance sheets by an
aggregate $15,585,000 and recorded the difference of
$6,468,000, which represents the fair value of these
purchases above the price paid by the Company, to additional
paid-in capital on the consolidated balance sheets.
Since
the Company’s original purchase of its 20% interest in
New PE Holdco, the Company has recognized approximately
$512,497,000 and $72,827,000 in net sales and $6,226,000 in
net income and $5,727,000 in net losses attributed to New PE
Holdco for the years ended December 31, 2011 and 2010,
respectively. 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 in 2010. For the
year ended December 31, 2010, the Company reported net sales
of $328,332,000 and net income of $73,892,000 attributed to
Pacific Ethanol. 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 of $70,330,000 attributed to Pacific Ethanol. Because
the Plant Owners were consolidated with the Company’s
results for all of 2011, there are no differences with the
Company’s reported results for that year.
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 agreements described below.
Further, creditors of New PE Holdco do not have recourse to
the Company. Since its acquisition, the Company has not
provided any additional support to New PE Holdco beyond the
terms of the agreements described below.
The
Company, directly or through one of its subsidiaries, has
entered into the management and marketing agreements
described below.
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 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. To date, no such bonuses
have been earned by the Company.
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.
The
Company recorded revenues and New PE Holdco recorded costs of
approximately $3,468,000 and $778,000, related to the AMA for
the years ended December 31, 2011 and 2010, respectively,
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 – The Company entered into
separate ethanol marketing agreements with each of the three
Plant Owners whose facilities are operating, which granted it
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 the Company, an amount
is paid to the Company 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, minus (iii) the estimated incentive fee payable to
the Company, 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 was amended to include a marketing fee
collar of not less than $0.015 per gallon and not more than
$0.0225 per gallon.
The
Company recorded revenues and New PE Holdco recorded costs of
approximately $3,708,000 and $623,000 related to the ethanol
marketing agreements for the years ended December 31, 2011
and 2010, respectively, for the period during which New PE
Holdco was consolidated with the Company. These amounts were
eliminated upon consolidation.
Corn
Procurement and Handling Agreements – The
Company 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
the Company 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. The Company also provides 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.
The
Company 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 its 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.
The
Company recorded revenues and New PE Holdco recorded costs of
approximately $2,758,000 and $571,000, related to the corn
procurement and handling agreements for the years ended
December 31, 2011 and 2010, respectively, for the period
during which New PE Holdco was consolidated with the Company.
These amounts were eliminated upon consolidation.
Distillers
Grains Marketing Agreements – The Company
entered into separate distillers grains marketing agreements
with each of the three Plant Owners whose facilities are
operating, which grant the Company the exclusive right to
market, purchase and sell the WDG produced at each facility.
Under the terms of the distillers grains marketing
agreements, within
ten days after a Plant Owner delivers WDG to the
Company, the Plant Owner is 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, 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 the
Company, 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 the Company was
amended to include a collar of not less than $2.00 per ton
and not more than $3.50 per ton.
The
Company recorded revenues and New PE Holdco recorded costs of
approximately $4,797,000 and $700,000, related to the
distillers grain marketing agreements for the years ended
December 31, 2011 and 2010, respectively, for the period
which New PE Holdco was consolidated with the Company. These
amounts were eliminated upon consolidation.
Assets
and Liabilities of New PE Holdco – The carrying
values and classification of assets that are collateral for
the obligations of New PE Holdco at December 31, 2011 were as
follows (in thousands):
Deconsolidation
and Sale of Front Range – The Company purchased
a 42% ownership interest in Front Range on October 17, 2006.
Upon initial acquisition of the 42% interest in Front Range,
the Company determined that it was Front Range’s
primary beneficiary, and from that point consolidated the
financial results of Front Range. 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 the Company did not have the power to
direct the activities of Front Range that most significantly
impacted its economic performance. Some of these activities
included efficient management and operation of its facility,
ethanol sales, procurement of feedstock, sale of co-products
and implementation of risk management strategies. Upon
deconsolidation, the Company removed $62,617,000 of assets
and $18,584,000 of liabilities from the consolidated balance
sheets and recorded a cumulative debit adjustment to retained
earnings of $1,763,000.
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), net 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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