Pacific Ethanol: Juicy Details From Tuesday's 10-K

Pacific Ethanol (PEIX) gave no information a week ago when it said it would be delaying the report of its fourth quarter and the release of its annual 10-K. When I called the company for more detail while working on my ethanol piece for the Wall Street Journal and MarketWatch, I was told there would be more information Tuesday.

And, boy, was there.

Turns out, according to an NT-10-K SEC filing: There was an “unauthorized deviation” of $3.9 million was taken from the company’s credit line “for the purpose of optimizing our cash position.” (In other words, they robbed Peter to pay Paul.) Unfortunately, by doing that, the company created an automatic violation of “a number” of loan covenants.

Meanwhile, another $3.4 million earmarked for a debt service account related to the construction of two plants never arrived at their designated destination, resulting in an automatic “default of the credit agreement.”

Oh, and according to that credit agreement, the company can only have seven Eurodollar loans outstanding. It has eight. Oops.

The company says it’s hoping to get a waiver from its lenders. If it can’t, it says its auditors will have to formally question the company’s status as a going concern.

But wait, there’s more: Thanks to loopy ethanol economics, the company says it expects to report that revenue last quarter rose 62% to $130.4 million. However (and this is where it gets to be a real bummer), its gross profit margin slumped to 1.3% from 14.6% a year earlier as its loss ballooned to $14.7 million from $3.1 million.

Oh, and almost forgot: The company said the loss includes a non-cash expense of about $4.4 million “from interest rate derivatives related to future periods and approximately $2 million from write-downs of deferred financing fees associated with the company’s suspension of construction” of a plant in California.

That’s what happens when the price of something you sell is considerably less than the cost of making it, especially when you thought it would be the other way around. The business of ethanol, in the end, isn’t really any more complicated than that.

Comments

[britishsteel]

How about the fact that Producing ethanol is driving up the prices of all our food? And it cannot solve more than 10% of our energy needs as a nation? Their are viable solutions to the energy needs of Americans But ethanol and bio fuels are not it, not at the expense of driving up the costs of milk, meat, vegetables and grains. We need to feed ourselves more than anything else. And big oil will never, ever allow anything to stand in the way of their monoply. ethanol is dead in the water and its all hype and no substance. As for solar , it is not viable in the northeast and as long as it remains cost prohibitve and it will never be a viable source of energy. And because thats another monoply , it will never be allowed to become cost effective.

[robert.bohrer]

Ethanol is BS pushed in Congress and the Senate at the behest of the Agricultural lobby. Fuck politicians.

[CharliePeters]

Does corn fuel ethanol policy increase oil use and oil profit?

* Some folks think so

* Clean Air Performance Professionals

[bm1087]

Funny how Brazil manages to fuel 60% of their fuel needs from sugar based ethanol. Corn ethanol, even subsidized, will promote bio-fuel innovation! How fast was the first computer? How high did the first plane fly? It’s only a matter of time before corn derived ethanol is replaced.

For example, here’s a quote from a press release from a startup: "The failure of corn-based ethanol stocks spotlights the contrast between Gulf Ethanol and it competitors. With corn at $5.64 per bushel, we can get cellulose at $45 per ton," noted JT Cloud, Gulf's President. "Our feedstock costs will be about $0.45 per gallon while existing producers' feedstock costs are near $2.00 per gallon. That revolutionizes the economics of ethanol and makes Gulf ethanol a great contrarian play to corn based ethanol stock," he concluded.

So it looks like the news can’t get any worse for corn ethanol, and it just so happens to coincide with the commodity bubble ready to pop. Are we at a bottom? It’s really a shame that guys like Herb loath the industry so much, because our foreign oil policy is a joke.

[e10]

To say that Pacific Ethanol is a fair representation of the business of ethanol is just plain stupid. Why don't you tell the story of the 100 plus successful ethanol plants in the corn belt. VeraSun is getting ready to prove you wrong. Just watch.

[britishsteel]

I will watch and wait for car manufacturers to buck big oil and switch to ethanol only engines. I am not holding my breath and you should not either. By the way how much money they suck out of you?

[Questioncorn]

This is the company that the State of California gave a 15 million dollar tax break, and a grant for $25 million. We need to contact our legislators and say enough subsidizing the already subsidized Pacific Ethanol. Just because Bill Jones has strong ties to the Governor's office should not, in this time of budget crisis, mean that we throw precious dollars in the direction of Pacific Ethanol.

[Questioncorn]

The correct percentage for Brazil's share of ethanol for auto fuel is 40%, not 60%. Their population is much smaller than ours and is considerably more clustered within the large cities. They have excellent petroleum supplies, without which their 40% ethanol for their population would not meet their fuel needs. Cutting down carbon storing rainforests to plant sugarcane does not reduce levels of greenhouse gases. Nor does using what is basically slave labor meet human rights standards. Brazil is incorrectly looked upon as an example. Those who have visited it recently, like Representative Lois Capp, have talked about the poor air quality in the cities as well. This is no panacea, nor is cellulosic looking like it can soon be marketed at a price that makes it affordable to manufacture. Two more years of corn ethanol can certainly negatively impact the dairy farmers, and the cost of other grains which are now in short supply because they are being displaced by water and fertilizer intensive corn. This has the makings of a serious problem for many people on low and fixed incomes. Even in the midwest where corn is king, there are serious impacts of fertilizer runoff into the rivers and down into the Gulf of Mexico where there is an ever growing dead zone because of the corn crop.

[Tim Plaehn]

A couple of comments. Most of the cars and trucks produced by GM will now run on E85.

Only 10% of the corn crop goes into food. The balance is livestock feed and energy. There is 5 cents worth of corn in a box of corn flakes.

A poorly run company like Pacific Ethanol going out of business is only good news for a well run company like VeraSun. All of the gas in the U.S. will be E10 shortly.

[britishsteel]

running on e85 is NOT OIL independence ,and that 10% is impacting the avg Americans cost of living, You work for vera sun? Invest all your money in them? I am watching them they are going to be a short to zero company like peix LOL Better get out now by the time the Dow hits 8,000 they will be worthless and 8000 coming real soon

[Is thisRight]

Very emotional when I saw Mr Greenberg’s article. Then I went to the SEC document.

A more subdue view of the status from the 10K reading:

1/ how come a plant which is producing ethanol is not fully completed? Seems like a trap was set for PEIX long ago and thru Lyles making a loan, PEIX was able to bridge to 2Q08. But yet had to break a few eggs ( eight euro loans instead of seven sounds like a trip wire that went boom!)

2/ $14M of loss in 4Q : since 6.6M is due previously Dec announced Madera plant delay- 4rd plant in construction and due to interest protection ( IF interest goes up on $170M debt, they are protected) so roughly there is another approx $8M of loss . read on…

3/ My guess ( again a guess) is that PEIX had to write down some of its inventory ( about 15m gallon by some 18c/gal ( $2.11 in 3Q to $1.97) so that is about $3M of the 8M… They got a higher price / gal than the industry ( good marketing and RISK MANAGEMENT)...read on

4/ Whatever else they produced and put in storage in 4Q might have cost them another $5-6M of cost without revenue.

Between # 3 and #4 the loss was about $8M.
when added to Number #2 this account for $14M.

NOW for the positive side of the 10K!!!
1/ THEY HAD TO PRODUCE AHEAD OF 1Q06 so they could stock pile for Oregon. That is called build-ahead!! Mr Greenberg, do you know that buil-ahead is an actual STRATEGY in manufacturing?

2/ Since they assume the risk of producing and storage, we know NOW in March 08 that the ethanol gal was selling for $2.2 to $2.30!!! (higher than the $1.97 price in 4Q). So what if their margins was lower for the 4Q period when they had to overproduce in order to build a whole new market in Oregon. I would have like to hear Mr Greenberg if the Oregon market was open for business, or Florida, or NC and they was no stockpiling ahead of time. Be real when you see a loss figure, Mr Greenberg. The number for a growing business is EASILY FORGIVEN IF IT IS AN INVESTMENT TURNED INTO CASH WITHIN 6 MONTHS. How shortsighted we become on Wall St where we go to bed on Friday and wake up on Monday witha whoops… I did it again(by Britney)!

3/ Lyles LLC agrees to buy 3M warrants to buy the shares at $7 per share at any time. AND paid for these warrants in advance. As an outsider looking in, I will take the same bet.

Mr Greenberg, you would never be able to really get your hands durty with dirt, corn, steel, trucks, pumps… You can only read a 10K

[Dr. No]

So much hearsay so little facts.

Issues with covenants and automatic defaults are serious because they indicate cash management issues on the slope to chapter 7/11.

However:
Brtitishsteel is wrong with the connection between corn for fuel and food prices. Food prices go up because of higher beef demand (eats corn) and oil prices (needed for fertilizer and tractors).

BM1087 should less believe in PR hype and go for a treasure hunt to find one (1 only!) succesfully operating cellulosic or gasification/FT type ethanol plant, checkback when you found it and good luck!

Questioncorn needs to figure out where cane is grown (savannah) and where the rain forest is (equator, not savannah). More geography in school could help.

Those concerned with high food prices should eat less meat. 70% of corn goes into burgers the conversion is 1:8 and as 2/3 of Americans are overweight and 1/3 is obese maybe they could shed their weight pass the fat on for biodiesel and lower transportation cost due to lower weight. Then, as in the US we produce and stuff twice as much food into ourselves than what we need, we could also be healthier by eating less and making that less available for fuel. Problem solved: Eat less - its good for you and your tank!

That said, the financial conduct of PEIX isn't very promissing and not understanding commodity risk is the death knell for ethanol plays.

[who noze]

bill gates was an early investor in pacific eth or maybe he was a trader ///